Download final exam sample from s2005

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 ________________________________________________
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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.
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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.
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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
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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.
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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,
%
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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.
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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.
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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.
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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.
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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?
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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.
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Introductory Macroeconomics LATE FINAL – Spring 2005 - WISSINK
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May 17, 2005
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