Download STUDY QUESTIONS FOR EXAM 1

Macroeconomics:
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STUDY QUESTIONS FOR EXAM 1, SPRING 2007
Question(s)
1
1 a, b, e, f, 2-6
1-3, 4 a-c, 5 a-c
1 b-f, 2, 4
Chapter 2:
1. See the “economy” presented on the back of your syllabus and calculate the value of GDP using three alternative
approaches.
2. Define nominal, real, employed, unemployed, labor force, labor force participation rate, discouraged workers,
inflation, and distinguish between the GDP deflator and the CPI.
3. Why do economists care about unemployment? Inflation?
4. Summarize the date on pages 214-15. What is the relevance to our study of macroeconomics? Should increasing
GDP be a national goal for the United States? Provide your strongest case for “yes” and for “no.”
5. Review the histories depicted in the figures on pages 26, 27, and 29. Notice the extreme values.
6. What determines GDP in the short, medium, and long runs? Respond to this from the perspective of Kunstler. That
is, does he agree or disagree, and why?
Chapter 3:
7. Describe the three types of investment, and the difference between government “spending” and “transfers.”
8. Consumption function: Mathematical statement of it; graph; and the name, definition, and mathematical expression
of the slope. What is Keynes’ “fundamental psychological law,” and how does it relate to this function? What makes
C shift up or down? How is consumer confidence measured?
9. Assume the economy is closed, and solve for the intercept and slope of Z.
10. Graph our T function. Is this an “income tax”?
11. Solve for the equilibrium value of Y. What does that indicate about the value of the multiplier?
12. Study the presentation on pages 54 and 55 to understand the workings of the multiplier and to obtain the value of the
multiplier. Repeat the exercise with $5 billion (instead of $1 billion). Repeat again for $X billion. Repeat again for a
decrease of $X.
13. Define fiscal policy. If c1 = .75 and G decreases by $100, what happens to equilibrium Y? Illustrate with the
Keynesian cross. If T decreases by $100, what is the effect of just this change in taxes? On a separate graph show
this impact. Why is the impact of G bigger? Nowdetermine the impact of making both changes simultaneously.
Graph this scenario.
14. What is fiscal policy? Who makes it? If c1 = .5 and policy makers would like for GDP to increase by $100 billion,
what should they do with G? According to pages 60-1, why doesn’t real world fiscal policy work so neatly? Which of
these assertions by Blanchard is illustrated by your handout, “Bush Budget …”? Elaborate.
15. According to pages 56-7, where did the forecasters make mistakes? What was their error?
16. State the two expressions for the equilibrium in the goods market. Derive one from the other as we did in class.
17. Relate the three graphs from a previous handout to the appropriate questions from this chapter.
18. In the goods market model, what are our assumptions, and which are the endogenous and exogenous variables?
Chapter 4:
19. State our equation for money demand and explain the relationships that are specified. Graph Md and relate the
graph to the equation.
20. Define M1. For our model, how are we defining money? In what two general ways do we distinguish money from
bonds?
21. Graph the money market out of equilibrium and explain the process of obtaining the equilibrium.
22. Show the effects of increasing the supply of money.
23. In this model for the financial market, which variable is endogenous and which are exogenous?
24. Pages 70-1: Given our money demand function, what do we expect to be the relationship between the interest rate
and velocity? Explain. Has this expectation been met? Discuss. In what empirical sense is our model for money
demand supported?
25. What are open market operations? Who makes them? Why? What is a bond? What is monetary policy?
26. Review the mandate and structure of the Fed on pages 545-6.
STUDY QUESTIONS FOR EXAM 2, SPRING 2007
Chapter 5
1.
From page 89, what was the contribution of each of the economists named?
2.
Provide our new investment function and corresponding Z function. Why is Z upward sloping?
3.
What makes Z shift? When Z shifts, by how much does Y change?
4.
Graphically derive the IS curve. What do points along the IS represent?
5.
Why does IS shift? Illustrate graphically.
6.
How big is the shift in IS?
7.
Begin with the equation for money demand, and derive the financial market EQ condition.
8.
Graph the financial market EQ.
9.
What makes money demand shift? What is the consequence?
10.
Graphically derive LM. What do points along the LM represent?
11.
12.
13.
14.
15.
16.
Why does LM shift? Illustrate graphically.
Graph IS and LM together.
Illustrate with the IS/LM model the consequences of changing M, G, and T. Explain the adjustment to the new
equilibrium, and whether or not there is crowding out.
Recession of 2001: Cause? Policy responses? Impact of policies? Graphically illustrate. What is the view of
“most” economists concerning the tax cuts?
Describe the policy mix and its results during the Clinton administration.
According to Blanchard, how well does IS/LM “fit the facts”? Summarize his evidence on 109.
Page 111: #1, 2 and 4. Here are some partial answers:
2a.
You’ve done this before: Y = 1/(1-c1) (c0 – c1T + I + G)
b.
Y = 1/(1-c1- b1 ) (c0 – c1T + b0 – b2i + G)
c.
Y = 1/[1 – c1 – b1 + (b2d1/d2)] {c0 – c1T +b0 + [b2 (M/P)]/d2 + G}
4a.
b.
c.
d.
e.
Y = 1100 – 2000i
i = Y/4000 - 1/5
Y = 1000
i = 1/20 = 5%
C = 400
I = 350
G = 250
Y = 1040
i = 3%
C = 410
I = 380
Y = 1200
i = 10%
C = 450
I = 350
f.
g.
You will have additional study questions covering the rest of the material for this exam.