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Multiple Choice Answer Sheet Instructions: Remove this page from the attached pages. Fill in your name, and then circle opposite each number which of five possible answers you feel is the correct answer. Return this sheet with your exam books at the end of the exam. Name ____________________________________________________ T.A.’s Name ________________________________________________ CIRCLE THE CORRECT ANSWER 1. a b c d e 2. a b c d e 3. a b c d e 4. a b c d e 5. a b c d e 6. a b c d e 7. a b c d e 8. a b c d e 9. a b c d e 10. a b c d e 11. a b c d e 12. a b c d e 13. a b c d e 14. a b c d e 15. a b c d e 16. a b c d e 17. a b c d e 18. a b c d e 19. a b c d e 20. a b c d e 2 Your Name: _____________________________________________________ IF YOU ARE A GRADUATING SENIOR, CHECK THIS BOX WITH A BIG X: Econ 102 - Wissink - S05 - FINAL B - May 17, 2005 Exam RULES... There are three sections in this exam. ANSWER ALL QUESTIONS. TOTAL POINTS = 200 Part I: 20 multiple choice questions (4.5 points each) Part II: 3 short essay questions (15, 15, 16 points respectively) Part III: 2 problems (32 points each) Answer Part II and Part III in SEPARATE bluebooks WRITE YOUR NAME AND TA NAME (OR SECTION #) IN EACH OF THE BLUEBOOKS AND IN THE MULTIPLE CHOICE ANSWER SHEET. ONLY SIMPLE non-graphing calculators are allowed. NO GRAPHING CALCULATORS. Write legibly and remember to label all graphs. NO QUESTIONS WILL BE ANSWERED DURING THE EXAM So please do not ask any. Write any concerns you have with a question on the exam before you turn it in. Total time for test is 2.5 hours GOOD LUCK! and have a great summer vacation. Thanks for a great class. 3 PART I: 20 Multiple Choice Questions (4.5 points each) - CIRCLE the best answer on the multiple choice answer sheet provided. 1. The period in the business cycle from a peak to a trough is called A. a contraction, recession, or slump. B. an expansion or boom. C. a growth period. D. a deep depression E. the trend line. 2. Early Macroeconomic theory, which emphasized the theories of Keynes and de-emphasized the Classical theory, developed as the result of the failure of A. economic theory to explain the simultaneous increases in inflation and unemployment during the 1970s. B. fine tuning during the 1960s. C. the Classical model to explain the prolonged existence of high unemployment during the Great Depression. D. the economy to grow at a rapid rate during the 1950s. E. monetary and fiscal policy. 3. As the economy nears Y-full capacity, the short-run aggregate supply curve A. becomes flatter. B. becomes steeper. C. shifts to the right. D. shifts to the left. E. becomes positively sloped. 4. If the economy is operating at Ypotential, an increase in the money supply will initially lead to A. stagflation. B. a sustained inflation. C. demand-pull inflation. D. cost-push inflation. E. deflation. 4 5. Which of the following situations would be an example of cyclical unemployment? A. A woman reenters the labor force now that all her children are enrolled in school. B. A teacher loses his job as his school converts to computer-assisted, self-paced instruction that does not require as many classroom teachers. C. An assembly-line worker in an automobile factory is laid off because foreign competition forces the domestic automobile sector to contract and his employer, among others, shuts down. D. An assembly-line worker in an automobile factory is laid off because a reduction in aggregate income led to a big decline in the demand for new cars. E. Professor Wissink becomes unemployed because she is an old lady and too tired to work any longer. 6. Assume that there is a significant decrease in the number of laborers covered by labor contracts that set wages for a lengthy predetermined period of time. That is to say, assume wages can now adjust more rapidly to changing economic conditions. In an economy operating at Ypotential, this will tend to A. decrease the effectiveness of both monetary and fiscal policy. B. increase the effectiveness of both monetary and fiscal policy. C. increase the effectiveness of fiscal policy, but decrease the effectiveness of monetary policy. D. have no impact on the effectiveness of either monetary or fiscal policy. E. increase the effectiveness of monetary policy, but decrease the effectiveness of fiscal policy. 7. Assume a simple frugal economy where the aggregate consumption function (in billions) is: C = 400 + .5Y and planned investment, I, is $125 billion. If aggregate income, Y, is $1000 billion, A. unplanned changes in inventories will be zero. B. there will be an unplanned rise in inventory. C. aggregate output will tend to decrease. D. aggregate output will tend to increase. E. the economy is in equilibrium, so there is no tendency for aggregate output to change. 8. Which one of the following is always true: A. MPC + APC = 1 B. MPC + MPS = 1 C. APC < MPC D. MPC + MPS = Y E. APC < APS 5 9. What is the initial round of events (in order) that results from an open market purchase of securities from 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 increases, the interest rate decreases, planned investment increases, aggregate desired expenditures increase, and equilibrium output increases. E. Money supply increases, the interest rate increases, planned investment decreases, aggregate output decreases, and the money demand remains unchanged. 10. Assume the oil supply curve and oil demand curve to both be “typically shaped.” If new oil deposits are discovered in the Gulf of Mexico and the demand for oil products does not change, then the equilibrium price: A. and quantity will rise. B. and quantity will fall. C. will fall and quantity will rise. D. will rise and quantity will fall. E. will rise and quantity will rise. 11. Banks hold no excess reserves and the required reserve ratio is 10%. If the Federal Reserve purchases $10 million in bonds from the public, but the public deposits only $8 million of the money received into commercial banks (keeping $2 million in cash), then the maximum resulting increase in the money supply from this open market purchase will be: A. $8 million. B. $80 million. C. $10 million. D. $100 million. E. $82 million. 6 12. Refer to the figure below that illustrates short run and long run Phillips Curves. Assume that Uo is the NAIRU. Which combination of events could move the economy from Point A to Point E, and then from Point E to Point C? A. A contractionary monetary policy followed by a leftward shift in the SR-AS curve. B. A contractionary monetary policy followed by a rightward shift in the SR-AS curve. C. An expansionary fiscal policy followed by a leftward shift in the SR-AS curve. D. An expansionary fiscal policy followed by a rightward shift in the SR-AS curve. E. A contractionary monetary policy followed by a contractionary fiscal policy. LRPC Inflation rate, % 5 4 D B A C 3 SRPC2 E SRPC1 SRPC3 Uo Unemployment Rate, % 13. A negative balance of trade indicates: A. a country exports more than it imports. B. a country imports more than it exports. C. a country’s imports necessarily increased while its exports decreased. D. a country’s trade has increased on average. E. a country gives more to foreign countries in aid then it receives from them in aid. 14. If the dollar price of a pound rises and if US prices are held constant, _____________-made goods and services appear _____________ expensive to ________________ buyers. A. British; less; U.S. B. U.S.; more; British C. British; more; U.S. D. U.S.; no less; British E. British; no more; U.S. 7 15. Which of the following individuals is considered unemployed: A. a former secretary, out of work for a year, who stopped looking for work a year ago. B. a part-time hairdresser who is looking for a second job to augment her income. C. a previously working mother who quit her job to take care of her children because the costs of day care where so high. D. an autoworker temporarily laid off, who is searching for a new job while waiting to be called back to work. E. a 14-year-old who just lost his paper route, but is looking for another paper route. 16. If an unplanned drop in inventories occurs, then aggregate desired expenditures: A. exceeded total output created, causing firms to increase output. B. exceeded total output created, causing firms to reduce output. C. was less than total output created, causing firms to increase output. D. was less than total output created, causing firms to reduce output. E. will shift up and to the right. 17. Which of the following will shift the aggregate demand curve furthest in and to the left: A. a tax cut of $50 billion. B. a tax increase of $50 billions. C. an increase in government spending of $50 billion. D. a decrease in government spending of $50 billion. E. a cut in taxes of $50 billion combined with a cut in government spending of $50 billion 18. Suppose investment is independent of the interest rate (i.e. planned investment is exogenous). For this economy, an increase in government expenditure will cause A. no change in the interest rate. B. no change in the money demand as income increases. C. no shift in the AE curve. D. an increase in output and a reduction in investment. E. no crowding-out effect. 19. Consider fiscal policy with flexible exchange rates. Assume that the economy is above full employment and the fiscal authorities decide to raise taxes. Which one of the following is true? A. This results in an increase in inflationary pressures. B. A relatively lower interest rate in the U.S. means a higher foreign demand for U.S. securities. C. The Phillips curve shifts out and to the right. D. A cheaper dollar reinforces the effect of the tax increase on output. E. A cheaper dollar weakens the effect of the tax increase on output. 8 20. If the Federal Reserve expands the money supply to combat a recession when observed/actual unemployment is well above the natural rate of unemployment, the most likely result is: A. lower cyclical and structural unemployment and no inflation. B. lower cyclical and structural unemployment and no increase in the rate of inflation. C. lower cyclical unemployment and no inflation. D. lower structural unemployment and no inflation. E. lower cyclical unemployment and no increase in the rate of inflation. PART II: 3 Short Essay Questions (15, 15, and 16 points, respectively). 1. Justify, qualify, or repudiate the following two statements: “If the MPC for a society is zero, this means that households would save everything and spend nothing. Furthermore, it means that fiscal policy has no effect on the economy since the government expenditure multiplier will be zero.” 2. Justify, qualify, or repudiate the following statements: “Macroeconomic theory is inconsistent. Macroeconomists advocate for higher savings to promote growth; while they also advocate for higher consumption spending from the public. Since I either can save or consume these claims are contradictory and hence make no sense.” Use appropriate diagrams in your answer. 3. Assume that the U.S. and Japan both have a system of flexible exchange rates. Consider the market for Japanese yen. Discuss and illustrate graphically the simple effects of each of the following three situations on the relative value of the yen to the dollar. Consider (a), (b) and (c) separately. a. Interest rates are now relatively higher in Japan. b. Increased pressure by special interest groups in the U.S. for U.S. citizens to buy American produced products and increased success by U.S. vacation advertisers to get Japanese citizens to spend their vacations in the U.S. c. More rapid inflation in the U.S. than in Japan. 9 Part III: Longer Problems. Do BOTH. Each one is worth 32 points. Read each problem carefully and answer all questions. Show as much work as possible given time limitations. Partial credit will be given when appropriate, so if you have trouble with numerical solutions draw the pictures anyway, they are certainly worth something, especially if they are drawn correctly. 1. Suppose that the following set of equations describe all the relevant information about the island nation, Itsanicehere. C = 200+.9Yd I = 700 - 2,000r G = 300 T = 300 EX = 0 (exports) IM = 0 (imports) MD = 1,000 - 500r MS = 925 The full employment level of national income is YFull employment = 6,500. The required reserve ratio on demand deposits is 10%; all banks in the economy are members of the island's federal reserve system; all money is held as demand deposits; and all banks want zero in excess reserves. Inflation is assumed to be non-existent. a. Determine the equilibrium interest rate from the money market equations, r*. b. Determine the equilibrium level of national income, Y*. c. Calculate the multiplier for government spending: give its formula and numerical value. d. What is the equation for and value of the money multiplier? e. How could the government use fiscal policy to achieve full employment national income? Show at least two policy options. Be specific with respect to the values and directions of the policy tools you suggest. f. Instead of using fiscal policy, how could the Fed use monetary policy via open market operations to achieve full employment national income? Be specific with respect to the value and direction of the Fed’s open market operations. g. In general, as Itsanicehere gets closer and closer to YFull employment how realistic is the no-inflation assumption? Using the AD and AS model, what is the likely additional consequence of your fiscal policy suggestion if we must consider inflation realistically? 1 0 2. Assume an economy has two labor markets - unskilled and skilled - and that the supply and demand conditions in each labor market are as follows: Unskilled Workers Skilled Workers Salary per worker per year (thousand $) Supply of workers per year (thousands) Demand for workers per year (thousands) Salary per worker per year (thousand $) Supply of workers per year (thousands) Demand for workers per year (thousands) 5 10 180 10 20 140 10 30 120 20 60 120 15 60 60 30 100 100 20 90 0 40 140 80 25 120 0 50 180 60 a. For each market, using a supply-and-demand diagram, show the equilibrium price (the salary per worker per year) and the equilibrium quantity. b. Assume that the government sets a floor price of $10,000 per year in the unskilled labor market and a floor price of $20,000 per year in the skilled labor market. (No company can pay less than this minimum wage.) What is the impact of these two floor prices on the equilibrium price and quantity in each labor market? Use diagrams to illustrate your answer. c. After seeing the effect of this policy (described in (b) above), the economic advisors decide to change the minimum wage in each market to $20,000 per year in the unskilled labor market and to $40,000 per year in the skilled labor market. Show the impact of these two floor prices on the equilibrium price and quantity in each labor market. Again, use diagrams to illustrate your answer. What will happen to the observed unemployment in this country? d. In view of this level of unemployment (your answer to (c)), the government decides to introduce a new program offering an unemployment compensation of $10,000 per year to any unemployed worker. To receive this unemployment benefit, a worker (a) must have been employed before the floor price was introduced, and (b) became unemployed because the floor price was introduced. Estimate the number of workers that will receive unemployment compensation AND the cost of this program to the government. 1 1 Introductory Macroeconomics LATE FINAL – Spring 2005 - WISSINK Answers May 17, 2005 1 A. 2 C. 3 B. 4 C. 5 D. 6 A. 7 D. 8 B. 9 D. 10 C. 11 E. 12 B. 13 B. 14 C. 15 D. 16 A. 17 D. 18 E. 19 E. 20 E. 1 2