Download Economics 101

873996062
Econ 1120-INTRODUCTORY MACROECONOMICS
PRELIM #2-Wissink-S2015-April 9
CLEARLY PRINT YOUR NAME: ______________________________________________________________
YOUR NetId:______________________ YOUR STUDENT NUMBER:________________________________
INSTRUCTIONS and EXAM TAKING POLICY:
There are two sections in this exam. Answer all questions.
Part I: 14 multiple choice questions @ 3 points each
Part II: 3 problems @ 19, 19 and 20
TOTAL POINTS = 100, TOTAL TIME = 90 minutes.
NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you
need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have,
raise your hand and wait for the proctor to come to you. Only one person can be out of the examination
room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.
NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.
NO GRAPHING CALCULATORS.
NO BOOKS. NO NOTES. NO HELP SHEETS.
NO TALKING TO EACH OTHER.
CIRCLE the SECTION you regularly attend (that is where you will pick up your prelim)
DIS #
TA
Meeting Times
250, 251
Ye, Lei (Sandy)
Mondays 01:25-03:20
252, 253
Kwon, Donghwee
Wednesdays 02:30-04:25
254, 255
Lamachhane, Sujan
Fridays 09:05-11:00
256, 257
Zhang, Xingtong
Fridays 01:25-03:20
One more time, please…
CLEARLY PRINT YOUR NAME: ______________________________________________________________
YOUR NetId: ___________________________
YOUR STUDENT NUMBER: ___________________________________
GRADING
MC (out 42 points)=___________________
Q1 (out of 19 points)=_________________
Q2 (out of 19 points)=_________________
Q3 (out of 20 points)=_________________
TOTAL SCORE: _____________________
873996062
Part I: Multiple Choice. Do them ALL.
CIRCLE the letter for your answer.
_____________________________________________
1. Which one of the following is always TRUE? Note: the
notation refers to marginal and average propensity to consume
(MPC and APC) and marginal and average propensity to save
(MPS and APS) and aggregate output (Y).
A.
B.
C.
D.
E.
MPC + APC = 1
MPC + MPS = 1
APC < MPC
MPC + MPS = Y
APC < APS
2. Refer to the table for all the information you need on a simple
frugal economy with no government or international sector. At an
aggregate output level of $100 billion, the unplanned change in
inventory is
A.
B.
C.
D.
E.
-$20 billion.
-$80 billion.
-$60 billion.
$120 billion.
$20 billion.
3. Consider a simple frugal governed economy with no
international sector and only one marginal propensity, the marginal
propensity to consume, which equals 0.9. If equilibrium output Y*
rises by $100 billion due to an increase in government spending,
the increase in government spending must have been
A.
B.
C.
D.
E.
$100 billion.
$90 billion.
$50 billion.
$10 billion.
$1 billion.
Aggregate Output (Y)
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Aggregate Consumption
$2,000
$2,800
$3,600
$4,400
$5,200
$6,000
Desired Investment
$1,600
$1,600
$1,600
$1,600
$1,600
$1,600
4. Consider the economy referred to in the table above and assume
there is no government and no foreign trade in the model. Ignore
the money market. If the economy is in equilibrium, and planned
investment increases by $200, then Y* will
A.
B.
C.
D.
E.
increase by $200.
decrease by $200.
increase by $1,000.
decrease by $1,000.
increase by $250.
5 Consider an economy completely described by the following
two equations: S = -400 + 0.2Y and Id = 3,000.
The “paradox of thrift” applied to this economy suggests that
A. an exogenous increase in subsistence consumption will make it
so that, in equilibrium, people actually consume less.
B. an exogenous decrease in subsistence consumption will make it
so that, in equilibrium, people actually save less.
C. an exogenous decrease in subsistence consumption will make it
so that, in equilibrium, people save the same amount.
D. an exogenous increase in desired investment leads to less
saving in equilibrium.
E. an exogenous increase in desired investment leads to less
consumption in equilibrium.
6. Banks hold no excess reserves and the required reserve ratio is
10%. If the FED buys up $10 million in bonds from the public, but
the public deposits only $8 million of the money received into
commercial banks (and keeps the other $2 million as cash), then
the maximum resulting increase in the money supply from this
open market purchase will be:
A.
B.
C.
D.
E.
$8 million
$80 million.
$10 million.
$100 million.
$82 million.
7. The economy of Greenspan is in equilibrium and can be
completely described by the table. If its full employment output,
YFE, is equal to $3,000 then
Greenspan’s Economy (note that YFE = $3,000)
$Y
$C
$T
$Id
0
1,050
100
50
1,000
1,550
100
50
2,000
2,050
100
50
3,000
2,550
100
50
4,000
3,050
100
50
5,000
3,550
100
50
6,000
4,050
100
50
G
900
900
900
900
900
900
900
A. the economy of Greenspan must always equilibrate at
Y=$3,000.
B. the economy of Greenspan is currently experiencing higher
unemployment than is consistent with full employment.
C. the economy of Greenspan will have inflationary pressures.
D. the economy of Greenspan is running a budget surplus.
E. the economy of Greenspan must be experiencing unplanned
accumulation of inventories.
8. Referring back to the information about Greenspan, if
Greenspan were to increase taxes so that T=$1,100 and
simultaneously increase government expenditures so that
G=$1,100
A. the economy would be unchanged.
B. the economy would experience a severe jump in inflationary
pressure.
C. the value of Y* would decrease by $600.
D. the economy would get to full employment Y.
E. the value of Y* would increase by $1100.
9. Assume there is no leakage from the banking system and that
all commercial banks are fully loaned up. The required reserve
ratio is 16%. If the Fed sells $5 million worth of government
securities to the public, the change in the money supply will be
A.
B.
C.
D.
E.
+31.25 million.
-$16 million.
-$31.25 million.
-$80 million.
+$80 million.
10. Jamee Diamond offers you the following risk free promissory
note today: “I Jamee Diamond promise to give you $2,000 two
years from today.” Suppose the current market interest rate is 2%.
Suppose there is no inflation.
A. Jamee’s promise is worth less than $2,000 today.
B. Jamee’s promise is worth exactly $2,000 today.
C. Jamee’s promise would be worth more today if the market
interest rate were 6% rather than 2%.
D. Jamee’s promise would be worth more today if you received
the $2,000 three years from today rather than two years from
today.
E. Jamee’s promise is worth $1,961 today.
11. Consider our model of an economy where there is a “goods
and services market” and a “money market” where money demand
depends on the interest rate and aggregate output. Suppose the
desired investment curve is very sensitive (that means flat) with
respect to the interest rate. In such an economy
A.
B.
C.
D.
the fiscal policy crowding-out effect is small.
the fiscal policy crowding-out effect is large.
monetary policy is extremely ineffective.
reducing the money supply will have a big impact on Y*,
whereas increasing the money supply has very little impact on
Y*.
E. there is no feedback effect with either monetary or fiscal
policy.
12. Assuming money demand depends on all three variables we
introduced, what is the chain of events that results from a Federal
Reserve Bank open market sale of securities to the public?
A. Aggregate output decreases, demand for money decreases, the
interest rate decreases, planned investment increases, and
aggregate output increases.
B. Money supply decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
C. Money demand decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
D. Money supply decreases, the interest rate decreases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
E. Money supply decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and the
money demand remains unchanged.
13. Consider the money market in the graph.
Firms and households will attempt to reduce their
holdings of money by buying bonds
A.
B.
C.
D.
E.
at any interest rates less than 3%.
at an interest rate equal to 3%.
at an interest rate equal to 5%.
at any interest rate greater than 5%.
only at interest rates greater than 8%.
14. Which one of the following pairs of events will definitely lead
to a decrease in the equilibrium interest rate in the money market?
A. The sale of government securities by the Federal Reserve to the
public and an increase in the price level.
B. A decrease in the Federal Reserve’s discount rate and an
increase in the level of aggregate output.
C. The purchase of government securities from the public by the
Federal Reserve and a decrease in the price level.
D. A decrease in the Federal Reserve’s required reserve ratio and
an increase in the level of aggregate output.
E. All of the above.
873996062
Part II: Make sure you read and do ALL parts of each question. Show as much work as
possible. TRY to get started on every question. Show us something. Write legibly and
remember to label all graphs and axes in diagrams.
1. Illustrated below is everything you need to know about the T-accounts for The FED, the
consolidated Commercial Banks, and one citizen (of many) named Leroy J. Gibbs in a very small
economy which uses the dollar($) as its currency. Assume the following: the required reserve ratio
is 5%, all loan activity in the economy is handled via demand deposits, all demand deposits stay in
the banking system, and banks operate with zero excess reserves.
Initial Position
The Federal Reserve Bank(FED)
Assets
Liabilities+
Net Worth
Securities=$1,000 $45=Reserves
Commercial Banks
Assets
Liabilities+
Net Worth
Reserves=$45 $900=DDp
$300=Currency Loans=$855
$0=Net
Worth
Gibbs
Liabilities+
Net Worth
DDGibbs=$15
$0=Debts
Assets
Securities=$50 $105=Net
Worth
$655=Net
Worth
CashGibbs=$40
Final Position
Federal Reserve Bank
Assets
Liabilities+
Net Worth
Commercial Banks
Assets
Liabilities+
Net Worth
Assets
Liabilities+
Net Worth
Securities=
=Reserves
Reserves=
DDGibbs=
$0=Debts
=Currency
Loans=
Securities=
$105=Net
Worth
$655=Net Worth
=DDp
$0=Net
Worth
Gibbs
CashGibbs=
a. What is the initial value of the money supply, M1?
b. Suppose the FED decides to BUY UP all of Gibbs’ securities. Assume that Gibbs gets paid for
his securities with a demand deposit that he leaves in the banking system. In the end, after all
loans are made and loans are spent and monies deposited back into the commercial banking
system, by how much will the money supply have changed, and in what direction, as a
consequence of the FED’s open market operation with Gibbs?
c. Fill in all the missing values in the T-accounts.
d. Identify two realistic changes to the assumptions made in this question that would reduce the
impact of the FED’s open market operation with Gibbs.
ANSWERS
2. Suppose that the following set of equations describe ALL the relevant information about the island
nation, Isle d'Yellin. Assume the fiat currency is the dollar and its symbol is $.









Consumption function: C = 6,500 + 0.75Yd (where Yd = disposable income)
Desired Investment function: Id = 700
Government expenditures function: G = 800
Tax function: T = 200 + 0.50Y
Export function: EX = 400
Import function: IM = 200
The full employment level of national income is YFull employment = 15,000
The money market can be safely ignored for now.
Inflation is assumed to be non-existent.
a.
b.
c.
d.
Determine the equilibrium level of national output(income), Y*. Show your work.
Determine the value of the government expenditure multiplier. Show some work.
Sketch the equilibrium position in a “Keynesian Cross” diagram. You must label your graph.
How could the government use fiscal policy via “G” to achieve full employment national
output(income)? Be specific with your answer – that is, state by how much and in what direction
G changes. Show your work.
e. Sketch this fiscal policy in the “Keynesian Cross” diagram you already constructed.
ANSWERS
ANSWERS
3. Suppose the following information for the economy of Bensylvania which uses the dollar ($) as its
currency. Currently Y*=$300,000 and YFE=$312,000. The investment multiplier is 4. The desired
investment function is Id=10,000-10,000r where r is the interest rate (in decimal form). Money
supply is completely determined by the FED. Assume all banks operate at zero excess reserves and
that all money stays in the banking system.
Assume the following money market equations:



Money demand = MD = 10,000 - 9,000r
Money supply = MS = 4,600
The required reserve ratio for the banking system = rrr = 5%. = .05
a. Given the money supply, what is the current equilibrium interest rate?
b. Given the current equilibrium interest rate, how much is Id?
c. If the monetary authorities (the FED) want to get the economy to YFE, by how much and in what
direction would investment need to change via monetary policy?
d. In order to achieve full employment output, should the FED buy or sell securities?
e. How many dollars of securities should the FED either buy or sell (based on your answer above)?
f. What is one reality wrinkle that could make the FED’s impact on the economy weaker than this
model predicts?
ANSWERS
ANSWERS
ECON 1120 S2015 PRELIM 2 ANSWERS
1. B.
2. B. Consumption + Desired investment = $180, but only $100 worth of stuff was currently made, so there is $80 of
unplanned depletion of inventory.
3. D. If mpc=0.9 then the government multiplier is 1/(1-.9)=10. So ∆Y*=Kg∆G  100=10∆G  ∆G=10.
4. C. The marginal propensity to consume can be calculated as follows: when output increases from 3000 to 4000,
consumption increases from 2000 to 2800. Therefore, the mpc is (2800-2000)/(4000-3000)=0.8. In turn, the multiplier is
1/(1-0.8)=5. Therefore, Y* increases by 200*5=1000.
5. C.
6. E. So there is only +2mil for the cash part and then the +8mil that goes into the banking system becomes +80mil since
the money multiplier is 10. So added together you get +82 million.
7. C. Note that Y* is currently at Y*=4000. So Greenspan is producing more than YFE, so it is in an inflationary gap.
8. C. The government multiplier is 2. The tax multiplier is -1. Current Y*=$4000. The change in G is +200. This
increases Y* by +400. The change in taxes is +1000 and this changes Y* by -1000. So the net is -600.
9. C. Selling securities will decrease the money supply. The amount is equal to -5/.16=-31.25.
10. A. A classic example of the time value of money. The promise will worth less than $2000. So B and E are
incorrect. If the interest rate is higher, or the time to maturity is longer, the promise will worth even less. Therefore, C
and D are incorrect.
11 B. The crowding-out effect is bigger when investment is sensitive to interest rate. Therefore, B is correct but A is
incorrect. Monetary policy influences the economy through the interest rate. Therefore, the fact that investment curve is
sensitive to interest rate is good news for monetary policy.
12 B.
13. D. Above r*=5% these is excess supply of money, so people will attempt to get rid of money by buying bonds,
driving the price of bonds up and the interest rate down.
14. C.