9:51 { EC12Midterm1sP2.. Q Midterm Exam 1 Macroeconomic Theory EC12 Tufts University March 13, 2024 Prof. Fusillo Instructions: The following questions constitute your first EC12 midterm exam. You have until 10:00 PM Thursday March 14" to complete them. You may use whatever materials you deem appropriate, but you must work alone. When done, scan and upload your answers to Canvas as if it is a homework assignment. Please write clearly. Be concise in your answers. Points will be deducted for irrelevant information. 1) What is the Keynesian rationale for government intervention in the free market and what makes them believe that such intervention can be \"effective and useful\"? How would a classicalist counter Keynes' thinking? (10 points) 2) Please answer the following as True, False or Uncertain and justify your answer. a) A decrease in taxes while government spending remains fixed will lead to an economy-wide decrease in interest rates. (5 points) b) If government policy to restrict capital flows to other countries (meaning it limits the purchase by its own citizens of foreign assets) is abandoned, domestic investment will increase. (5 points) c) In a country where the external sector is balanced, the National Income Identity indicates that if the same country consistently runs a budget surplus it will have higher levels of investment. (5 points) d) Suppose there are two countries A and B each with the same level of capital and labor and each producing output under classical assumptions according to Y = K\"N~%), Waorkers in the country with the higher return to capital will have the highest level of income. (5 points) e) If the local new car dealership cuts prices to reduce its inventory, GDP will fall. (5 points) 3) Consider the loanable funds market for an economy in the short-run. Sketch and explain as fully as you can the following series of events. Pay particular attention to what constitutes a change in supply versus a change in demand. a) The government engages in deficit spending, but the central bank fully accommodates. b) The central bank undertakes expansionary open market operations. (5 points) c) The central bank refuses to accommodate the government's budget deficit. (5 points) d) Households suddenly decide that inflation will decelerate during the foreseeable future. (5 points) 4) You are asked to provide an analysis of three countries' economic growth X, Y and Z, each with the same production function and each operating at their unigue steady states, The Table below summarizes their key economic growth statistics: Country Depreciation Rate Savings Rate | Population Marginal Product of Capital Growth X 4% 30% 4% 8% Y 4% 20% 3% 12% Z 4% 30% 1% 3% i (o= (ol T To Do Notifications Inbox