Download Review Questions for Midterm #1

Review Questions for Midterm #1
Intermediate Macroeconomics
ECO 241 / Waters
The first covers the material for Chapters 1-5 and part of 6. There will be
True/False, multiple choice and essay / problem questions. The latter will be
inspired by the review questions below.
1) Jane’s Computers buys 100 monitors for $50 each from Don, and pays its
employees $10,000 to build computers. The store then sells the 100
computer/monitor combinations for $200 each. What is the contribution to
GDP of the computer/monitor combinations? Explain how the combination
would be broken down using the three different approaches to calculating
GDP.
2) A northerly country produces tuna steaks and snowboards. They
produced the following quantities at the following prices in the last two
years.
Tuna steaks
2005
Quantity
Price
800
$20
2006
Quantity
Price
1000
$30
Snowboards
600
500
$40
$140
a) Using 2005 as the base year, what is the % increase in real GDP?
b) Using the GDP deflator, what is the inflation rate for the year?
3) Given the following information about the macro-economy, find the
equilibrium level of output Y*. If government spending falls by $50, how
does Y* change? Show on a graph of the expenditure function with the
equilibrium condition.
Autonomous consumption = $300
MPC = 0.75
Investment = $100
Taxes = $100
Government spending = $150
What is savings both before and after the change in spending?
2a) 0%, 2b) 150%; 3) Y*=1900, Y*’=1700, S*=150, S*’=200; 4) Y*=1433, i*=23%
4) The investment in problem 3 is given by I = 100 – 500i where i is the
interest rate, find an equation for the IS relation.
Let real money demand and supply be the following
(M/P)D = Y – 1000i
(M/P)S = 1200
Find the LM relation and the equilibrium output and interest rate given by
the two relations.
5) The Federal Reserve just lowered interest rates. Show their action on a
graph showing the supply and demand for real money and show the effect on
an IS-LM graph. What is the effect on equilibrium output?
6) Due to fears about a possible recession, autonomous consumption falls.
Show the change on a graph of the expenditure function and an IS-LM
graph.
7) Leading into the Great Depression, there was a stock market crash
reducing the wealth of many people and the Federal Reserve responded with
a policy change that lowered the money supply. Show the change in
equilibrium output on an IS-LM graph showing both changes.
8) Using an IS-LM graph show the “crowding out” effect of an increase in
government spending. Would this be an argument for or against the current
stimulus proposals?
9) Which of the following is a shift and which is a movement along the
curve on the IS-LM graph?
a) A loss of confidence causes consumers to reduce their spending.
b) An increase in income causes an increase in money demand
pushing up interest rates.
c) The price level falls causing a reduction in money demand and a
corresponding fall in interest rates.
d) The interest rate rises leading to a reduction in investment
spending.
10) A law passes making it easier for workers to unionize. Write the
equation for wage and price setting and use a graph to show and explain the
effect on the natural rate of unemployment.
2a) 0%, 2b) 150%; 3) Y*=1900, Y*’=1700, S*=150, S*’=200; 4) Y*=1433, i*=23%