Download Midterm 3

ECO 302b
Intermediate Macro
Spring 2012
Midterm 3
Part I: Answer completely in the spaces provided, or use the back of the page. (30
points total). Show your work. Answers that appear like miracles out of nowhere may
not be given credit.
1.
An economy is described by the following equations:
Desired Consumption
Desired Investment
Government Purchases
Taxes
Desired Imports
Desired Exports
Exchange Rate:
Real Money Demand
Real Money Supply
Full-employment output
Foreign Income
Foreign real interest rate
Cd = 40 + 0.6(Y – T) - 200r
Id = 60 – 800r
G = 35
T = 30
IMP = 0.1∙Y +10∙e
EXP = 40 – 10∙e +0.2∙(Y#)
e = 2 + 40∙(r – r#)
L = 0.5Y - 200r
M/P = 300/P
YFE = 200
Y# = 100
r# = .05
Assume that expected inflation is zero so that money demand depends directly on the
real interest rate.
a.
Write the equation that describes the desired national savings line as a function
of the real interest rate r. (Assume that Y = 200.)
b.
Write the equation that describes the desired Foreign Lending line as a
function of the real interest rate r. (Assume that Y = 200).
c.
Write the equation that describes the desired net exports line as a function of
the real interest rate r. (Assume that Y = 200 and that Y# = 100.)
d.
Plot (with reasonable accuracy) on a graph the desired foreign lending and
desired net export lines. What (approximately) will be the interest rate and current
account balance if the product market is in equilibrium when Y = 200?
e.
What is the equation for the open economy IS curve at given levels of
Government Purchases, Investment, etc? (Hint: the equation will give combinations of
Y and r where the open economy product market could be in equilibrium, so the
equation should look like: Y = (some constant) +/-- (some coefficient) x r
2.
Keynesian economic theory states that in the short run, prices in product
markets and wages in labor markets do not adjust fast enough to guarantee general
equilibrium at full-employment. The quantity of output produced and labor employed
varies instead.
Give 2 examples of theories which help explain why prices in these markets might not
adjust quickly, and explain briefly how these theories result in slow-to-adjust prices
and wages.
Part II:
Select the best answer for each of the following questions and mark it
clearly on the page. (3 points each)
1.
A shift to the left of desired domestic investment causes the desired national
savings and desired investment curves to intersect at a lower real interest rate. If this is
an open economy, this would also cause:
a.
right.
b.
left.
c.
d.
e.
the desired foreign lending (savings minus investment) curve to shift to the
the desired foreign lending (savings minus investment) curve to shift to the
the desired net exports line to shift to the right.
the desired net exports line to shift the left.
the short-run aggregate supply curve to shift to the right.
2.
Compared to effect it would have in a floating exchange rate economy, the use
of expansionary fiscal policy in an open economy with fixed exchange rates would
produce a ____ shift in the AD curve because __________.
a.
bigger
b.
smaller
exports
c.
smaller
exports
d.
bigger
exports
e.
bigger
depreciation of the domestic currency will increase net exports
the appreciation of the domestic currency will increase net
the depreciation of the domestic currency will increase net
the appreciation of the domestic currency will increase net
there will be no appreciation of the domestic currency
3.
The desired net exports line in a floating exchange rate economy is ______
because a rise in domestic real interest rates causes:
a.
vertical
no change in net exports
b.
upward-sloping
higher foreign incomes increases demand for domestic
products
c.
horizontal
any change in the real interest rate would trigger an
infinite change in net exports.
d.
upward-sloping
higher domestic income will stimulate exports.
e.
downward-sloping
higher domestic interest rates stimulate appreciation of
the domestic currency and lower net exports.
4.
If country A has an open economy and floating exchange rates, it’s use of
expansionary fiscal policy will (for a given level of country A’s income) cause in
country B:
a.
b.
c.
d.
e.
a shift to the right of the LM curve and a shift to the right of the AD curve.
a shift to the left of the IS curve and a shift to the left of the AD curve.
a shift to the right of the IS curve and a shift to the right of the AD curve.
a shift to the left of the FL line and a shift to the left of the AD curve.
a shift to the left of the NX line and a shift to the right of the AD curve.
Productivity
(effort) 100%
Wage
5.
Above is the degree of effort (or productivity) a typical employee might offer
according to the wage paid. The employer would try to select the wage level where:
a.
the employee’s effort is maximized.
b.
the employee’s effort begins to rise above zero.
c.
the slope of the effort curve is maximized.
d.
the employer gets the maximum amount of productivity per dollar spent on
wages.
e.
the chance that the employee will quit is minimized.
6.
At lunch hour, all McDonald’s employees are busy cooking and selling
hamburgers. Before and after lunch, the employees are cleaning the dining area, restocking the storeroom, filling out accounting reports, etc. These other activities are a
necessary part of the process of serving hamburgers to customers, but do not need to
be done at exactly the same moment the customer is in the restaurant. An economist
measuring labor productivity of McDonald’s employees would measure hamburgersserved-per-hour of labor. The economist thinks the lunch hour rush of customers is
like a business cycle boom. According to this analysis, labor productivity in
McDonald’s will be:
a.
b.
c.
d.
e.
pro-cyclical.
leading.
counter-cyclical.
lagging.
the cause of lunch hour.
7.
American auto assembly workers are represented by a labor union, which also
represents workers at companies that supply parts used by the auto industry. When an
auto company purchases parts from a non-union company that offers lower prices
(because it pays lower wages), these parts are often lost, damaged, misplaced,
installed incorrectly, etc. when the autos are assembled. This phenomenon is an
example of ____ theory.
a.
b.
c.
d.
e.
implicit contract
insider-outsider
reverse causation
misperceptions
menu cost
Profits
Π*
Π1
P1
P*
P2
Price
8.
The graph above shows how a firm’s profits respond to a change in the firm’s
price. Suppose the firm’s “perfect” price is P*. The firm chooses not to change prices
as long as its current price is between P1 and P2. This suggests that the firm’s menu
cost is:
a.
b.
c.
d.
e.
the distance from P1 to P2.
the distance from P1 to P*.
the distance from π* to 0.
the slope of the profit curve at P*.
the difference between π* and π1.
9.
Keynesians believe that the ____ market can remain in disequilibrium for a
prolonged period of time, so business cycle movements can be caused by shifts in
_____.
a.
b.
c.
d.
e.
labor
product
labor
product
asset
AS
AD
AD
AS
AD
10.
If country A has an open economy and floating exchange rates, it’s use of
expansionary monetary policy will (for a given level of country A’s income) cause in
country B:
a.
b.
c.
d.
e.
a shift to the right of the LM curve and a shift to the right of the AD curve.
a shift to the left of the IS curve and a shift to the left of the AD curve.
a shift to the right of the IS curve and a shift to the right of the AD curve.
a shift to the left of the FL line and a shift to the left of the AD curve.
a shift to the left of the NX line and a shift to the right of the AD curve.
11.
The unemployment rate falls when increases to AD occur that are a surprise to
everyone in the economy. Increases in AD created by the government in order to
manage the economy create inflation but not lower unemployment. This outcome is
best explained if wages are set according to:
a.
b.
c.
d.
e.
Misperceptions Theory (with rational expectations)
Insider – Outsider Theory.
Menu-Cost Theory.
Keynesian Business Cycle Theory
Reverse Causation Theory
12.
The Phillips Curve relationship between inflation and unemployment is what
would result if the SRAS were _____ and the AD curve was _____.
a.
b.
c.
d.
e.
upward-sloping and stable
upward-sloping and unstable
vertical and unstable
vertical and stable
horizontal and stable
unstable
stable
stable
unstable
unstable
13.
“Stagflation” is the name given to the phenomenon of the 1970’s when
unemployment was rising even as inflation was rising. Using SRAS – AD analysis,
stagflation occurs if:
a.
b.
c.
d.
e.
the SRAS shifts to the left faster than AD shifts to the right.
the SRAS shifts to the left at the same as AD shifts to the left.
the SRAS shifts to right at the same time AD shifts to the left.
the SRAS is constant while the AD shifts to the left.
the SRAS shifts to right at the same time AD shifts to the right.
14.
The _____ theory explains why there might still be involuntary unemployment
even when the labor market is in “equilibrium” (no tendency for wages to either rise
or fall).
a.
b.
c.
d.
e.
implicit contract
efficiency wage
menu cost
quantity
reverse causation
15.
Increases in the money supply occur:
(i)
(ii)
(iii)
before the Christmas shopping season
in the USA before presidential elections
during the gold standard era, following big gold discoveries.
Which theory states that the increase in the money supply will cause an increase in
economic activity only in case (iii)?
a.
b.
c.
d.
e.
Keynesian theory.
Standard market-clearing (classical) model.
Reverse causation theory.
menu-cost theory.
Misperceptions theory with rational expectations.
16.
The “reverse causation” argument is useful to ____ economists because it
helps explain why _______.
a.
b.
c.
d.
e.
Keynesian
classical
classical
Keynesian
Keynesian
average labor productivity is counter-cyclical
money supply growth is leading and pro-cyclical
stock prices are leading variables
real wages are pro-cyclical
unemployment is a lagging variable
17.
Both classical and Keynesian economists agree that the long-run Phillips
Curve is:
a.
b.
c.
d.
e.
unstable.
dependant on expected inflation
downward-sloping
vertical over the natural rate of unemployment
upward-sloping
18.
The fact that _____ is a leading and pro-cyclical variable is not explained by
the Keynesian theory. The fact that _____ is a leading and pro-cyclical variable is not
explained by the real business cycle (market-clearing model) theory.
a.
b.
c.
d.
e.
unemployment rate
money supply growth
residential investment
business fixed investment
none of the above.
inflation
average labor productivity
stock prices
employment
Output
YE
YR
O
NR NE
Labor
19.
Above is a production function diagram showing how much labor is used and
how much output is produced when the economy both before and after a shift of the
economy’s aggregate production function. If the real wage paid to workers is the
marginal product of labor, then the diagram above shows that a business cycle
expansion caused by the shift of the aggregate production function should have _____
employment, _____ average labor productivity, and _____ real wage.
a.
b.
c.
d.
e.
pro-cyclical
pro-cyclical
pro-cyclical
counter-cyclical
counter-cyclical
pro-cyclical
counter-cyclical
pro-cyclical
counter-cyclical
pro-cyclical
pro-cyclical
counter-cyclical
counter-cyclical
pro-cyclical
counter-cyclical
20.
For a big country, most domestic output is consumed domestically, and most
domestic employment is related to production of goods for the home market. For a
small country, a large share of output is exported, and a lot of the country’s
consumption is of imported goods. Variations in the exchange rate are ____ disruptive
to a small country’s economy, so it is likely to choose to use a ____ exchange rate.
a.
b.
c.
d.
e.
more
fixed
more
floating
less
fixed
less
floating
none of the above.
Part III. Extra Credit (1 point each). Do not waste time on these until you are
finished with the rest of the exam!
1.
Show how the shape below can be divided into 2 identical shapes with one cut.
2.
Who are these guys?
Match the photo with the name:
Dominque Strauss Kahn
Andrew Abel
Dean Croushore
Bernie Madoff
Ben Bernanke
.
3.
Mark with a check the names of the guys who are the authors of your textbook
for this semester.