Download Economics 101

148080949
Econ 1120-INTRODUCTORY MACROECONOMICS
Make-Up PRELIM #2-Wissink-S2015-April 10
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: 15 multiple choice questions @ 3.3 points each
Part II: 2 problems @ 20 and 30 points each
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.
“X” 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 of 50 points)=___________________
Q1 (out of 20 points)=_________________
Q2 (out of 30 points)=_________________
TOTAL SCORE: _____________________
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Part I: Multiple Choice. Do them ALL.
CIRCLE the letter for your answer.
_____________________________________________
1. Assume a “simple frugal un-governed closed economy” where
the consumption function (in billions) is: C = 500 + 0.6Y and
desired investment, Id, is $100 billion. If current aggregate
output/income is Y = $1,200 billion, we can conclude that
A.
B.
C.
D.
E.
undesired changes in inventories will be zero.
there will be an undesired rise in inventory.
there will be an undesired fall in inventory.
aggregate output/income will tend to fall.
the economy is in equilibrium, so there is no tendency for
aggregate output to change.
2. In a model of a simple frugal governed open economy, which
one of the following would cause the entire consumption function
to shift up?
A.
B.
C.
D.
E.
A rise in the marginal propensity to consume.
A cut in the exogenous component of the tax function.
A fall in income.
An increase in government expenditures.
None of the above.
3. The economy of Frant can be characterized completely by the
following equations: C = 100 + 0.8Yd;
G = 500; T = 200; Id = 200. The equilibrium level of output for the
economy is
A.
B.
C.
D.
E.
2,850.
3,200.
4,000.
4,800.
5,000.
4. Given the model above, at the equilibrium level of output
Frant’s saving equals
A.
B.
C.
D.
E.
630.
1,660.
850.
500.
200.
5. Assume an economy is in equilibrium at an output level of
$1,600 billion. If government purchases suddenly decrease by
$200 billion, then at the original output level there is
A.
B.
C.
D.
an unplanned increase in inventories.
an unplanned inventory change of zero.
an unplanned decrease in inventories.
either an unplanned increase or decrease in inventories
depending on the value of the MPC.
E. an inflationary gap.
6. The economy of Ivyland is in equilibrium and can be
completely described by the table. If full employment output, YFE,
is equal to $4,000 then
$Y
0
1000
2000
3000
4000
5000
6000
IVYLAND (note that YFE = $4,000)
$C
$T
$Id
1050
100
50
1550
100
50
2050
100
50
2550
100
50
3050
100
50
3550
100
50
4050
100
50
G
400
400
400
400
400
400
400
A. the economy of Ivyland must always equilibrate at Y=$4,000.
B. the economy of Ivyland is currently experiencing higher
unemployment than is consistent with full employment.
C. the economy of Ivyland will have inflationary pressures.
D. the economy of Ivyland is running a budget surplus.
E. the economy of Ivyland must be experiencing unplanned
accumulation of inventories.
7. Referring back to the information about Ivyland, if Ivyland
were to simultaneously increase taxes to equal $1,100 and increase
government expenditures to equal $1,400
A.
B.
C.
D.
E.
the economy would be unchanged.
the economy would experience severe inflationary pressure.
the economy would increase its projected deficit.
the economy would get to full employment Y.
the investment multiplier would change.
8. Suppose the following set of equations define the economy of
Macroville. Consumption=Cbar+cYd, where Yd is disposable
income; Taxes=Tbar+tY, Investment desired=Ibar, Government
expenditures=Gbar, Exports=Xbar, Imports=Fbar. The investment
multiplier for Macroville is
A.
B.
C.
D.
E.
1/(1-c).
1/(1-c+t).
1/(1-c+ct).
1/(1-c-ct).
–c/(1-c+ct).
9. Which one of the following is NOT included in what the U.S.
government defines as M1?
A.
B.
C.
D.
E.
currency in circulation
checkable deposits
demand deposits
savings accounts
travelers checks
10. Banks hold no excess reserves and the required reserve ratio is
10%. If the FED buys up $10 million in securities from the public,
but the public deposits only $8 million of the money received into
commercial banking checking accounts (and keeps the other $2
million as cash), then the maximum resulting increase in the
money supply from this open market operation will be
A.
B.
C.
D.
E.
$8 million.
$80 million.
$10 million.
$100 million.
$82 million.
11. Suppose the required reserve ratio, rrr, is 15%. Suppose that
when people in the particular economy of Mistrustville buy
securities from the central bank they pay for them with dollars they
keep at home under their mattresses, since they do not trust the
commercial bankers. As compared to an economy where everyone
keeps all their money as demand deposits in commercial banks and
thus pays the Fed with their checking account money, the odd
behavior of people in Mistrustville will tend to
A.
B.
C.
D.
E.
create inflationary pressures.
make monetary policy less effective.
make monetary policy more effective.
make fiscal policy less effective.
make fiscal policy more effective.
12. The Fed wants to DECREASE the money supply. In which
answer below do both listed options have the potential to work,
even if the Fed rarely uses them?
A. The Fed sells securities to the public & lowers the required
reserve ratio.
B. The Fed sells securities to the public & raises the required
reserve ratio.
C. The Fed buys securities from the public & raises the required
reserve ratio.
D. The Fed buys securities from the public & lowers the required
reserve ratio.
E. The Fed buys securities from the public & lowers the discount
rate.
13. 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.
14. 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 insensitive (that means steep)
with respect to the interest rate. In such an economy
A.
B.
C.
D.
the fiscal policy crowding-out effect is small.
the monetary policy crowding-out effect is small.
monetary policy is extremely effective.
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.
15. A policy mix of expansionary monetary and contractionary
fiscal policies will lead to the following predictions on
C=consumption, Y=income, r=interest rate, I=investment:
A.
B.
C.
D.
E.
Y and C increase; r and I decrease.
Y increases, C decreases, r is uncertain and I is uncertain.
Y and C are uncertain; r decreases and I increases.
Y and C decrease; r and I increase.
Y and r increase; C and I decrease.
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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 Eddy in a very small economy
which uses the dollar($) as its currency. The required reserve ratio is 4%. All loan activity in the
economy is handled via demand deposits and all demand deposits stay in the banking system.
Assume that commercial banks hold zero excess reserves.
Initial Position
Federal Reserve Bank(FED)
Assets
Liabilities+
Net Worth
Securities=$4000 $80=Reserves
All Commercial Banks
Eddy
Assets
Liabilities+ Assets
Liabilities+
Net Worth
Net Worth
Reserves=$80 $2000=DDp DDEddy=$150
$0=Debts
$500=Currency Loans=$1920
$0=Net
Worth
Securities=$50 $240=Net
Worth
$3420=Net
Worth
CashEddy=$40
FINAL Position
Federal Reserve Bank
Assets
Liabilities+
Net Worth
All Commercial Banks
Assets
Liabilities+
Net Worth
Assets
Liabilities+
Net Worth
Securities=
=Reserves
Reserves=
DDEddy=
$0=Debts
=Currency
Loans=
Securities=
$240=Net
Worth
$3420=Net
Worth
=DDp
$0=Net
Worth
Eddy
CashEddy=
a. What is the current value of the money supply, M1?
b. The FED decides to SELL $25 worth of securities to Eddy. Assume that Eddy pays for his
securities with his checking account. In the end, by how much will the money supply have
changed and in what direction as a consequence of this open market operation?
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?
Answers
2. Suppose that the following set of equations describe ALL the relevant information about the island
nation, Isle d'Thatcher. Assume the fiat currency is called the dollar and its symbol is $.









Consumption function: C = 3,000 + 0.90Yd (where Yd = disposable income)
Desired Investment function: Id = 75
Government expenditures function: G = 200
Tax function: T = 500 + 0.225Y
Export function: EX = 400
Import function: IM = 200
The full employment level of national income is YFull employment = 10,660
The money market can be safely ignored for now.
Inflation is assumed to be non-existent.
a. Determine the equilibrium level of national output(income), Y*. Show your work.
b. Sketch the equilibrium position in a “Keynesian Cross” diagram.
c. 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.
d. Sketch this in the diagram you already constructed.
Suppose you now recognize there is a money market. Money supply is completely determined by the
FED. Money demand depends only on the interest rate and desired investment depends only on the
interest rate in the typical ways. 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 = 8,200
Required reserve ratio for the banking system = rrr = 5%.
e. Given the money supply, what is the current equilibrium interest rate? (Assume Id=75 at this
interest rate.)
f. If the monetary authorities want to get the economy to YFull employment, by how much and in what
direction would investment need to change via monetary policy?
g. Suppose this new desired amount of investment occurs at an interest rate = 15%. If the
government (i.e., the Fed) wanted to use monetary policy instead of fiscal policy to attain the full
employment level of national income, what would the money supply need to be?
h. Should the Fed buy or sell government securities to the public?
i. Exactly how many dollars in securities?
Answers
Answers
Wissink ECON 1120 S2015 PRELIM 2 MAKEUP Answers
1. C.
2. B.
3. B. Set Y=C+I+G
=100+0.8Yd+200+500
=100+0.8(Y-T)+200+500
=100+0.8(Y-200)+200+500
=640+0.8Y
So 0.2Y=6400
Y=3200
4. D. S=Y-T-C=3200- 200-100-0.8*(3200-200)=500.
5. A. The fall in G decreases aggregated desired expenditure. Originally, aggregated desired expenditure is equal to Y.
Now the desired expenditure is smaller. Therefore, there will be an unplanned/undesired increase in inventory.
6. B.
7. D. The balanced budget multiplier is 1. Current Y*=$3000. You need to get to Y FE=$4000. So the needed change in
Y*=1000. To get this with a balanced budget policy you would both increase T and increase G by $1000.
8. C. Y=C+I+G+X-F
=C’’+cYd+I+G+X-F
=C’’+c(Y-T)+I+G+X-F
= C’’+c(Y-T’’-tY)+I+G+X-F
=cY-ctY+ C’’-cT’’+I+G+X-F
Therefore (1-c+ct)Y=C’’-cT’’+I+G+X-F
Y=1/(1-c+ct)( C’’-cT’’+I+G+X-F)
So investment multiplier is equal to 1/(1-c+ct) because 1 dollar increase of I will change Y by 1/(1-c+ct)
9. D. Savings accounts are not liquid enough to be counted in M1. They are however counted in M2.
10. E.
11. B.
12. B
13. B.
14. A. The fiscal policy crowding-out effect is small when investment is insensitive to interest rate. We don’t talk about
any monetary crowding out effect. If the investment curve is steep, then monetary policy (either expansionary or
contractionary) is weak, since the change in the interest rate that comes from changing the money supply has very little
impact on investment and so very little impact on Y*.
15. C. The expansionary monetary policy tends to increase Y and C while decreasing r and increasing I. The
contractionary fiscal policy will decrease both Y and C and decrease r leading to an increase in I. Putting it together we
know r will fall, I will rise and the jury is out on Y and C.