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EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 NAME(Please Print):__________________________________________________________ Instructions: Please answer ALL of the Questions from 1 to 34 Below. You may use your text or lecture notes, but you must not work with another econ student, past or present. You must submit your exam by 6:00 pm on the due date of the exam, which is Tuesday, May 12. Chapter 14 1.Over the past two decades, the United States has a.generally had, or been very near to a trade balance. b. had trade deficits in about as many years as it has trade surpluses. c. persistently had a trade deficit. d. persistently had a trade surplus. 2. In the open-economy macroeconomic model, the market for loanable funds identity can be written as a. S = I b. S = NCO c. S = I + NCO d. S + I = NCO Figure 1. 1 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 3. Refer to Figure 1 above. Which of the following shifts show the effects of an import quota? a. shifting the middle supply curve in panel c to the one to its left. b. shifting the demand curve from the right to the left in panel c. c. shifting the demand curve from the left to the right in panel c. d. None of the above is correct. 4. Refer to Figure 1 above. If the interest rate were initially at r2 and an import quota were imposed, the interest rate would a. stay at r2. b. decrease because supply would shift right. c. increase because supply would shift left. d. decrease because demand would shift left. 5. Refer to Figure 1 abvove. If the economy were initially in equilibrium at r2 and E3 and the government removed import quotas, the exchange rate would a. appreciate to E4. b. appreciate to E2. c. depreciate to E1. d. depreciate to E2. 6. Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate? (3 points) Chapter 15 7. Aggregate demand shifts to the left if the money supply decreases. (True or False) 2 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 8. Which of the following adjusts to bring aggregate supply and demand into balance? a. the price level and real output b. the real rate of interest and the money supply c. government expenditures and taxes d. the saving rate and net exports 9. Other things the same, the aggregate quantity of goods demanded decreases if a. real wealth falls. b. the interest rate rises. c. the dollar appreciates. d. All of the above are correct. 10. State at least 4 variables besides real GDP tend to decline during recessions? Given the definition of real GDP, argue that declines in these variables are to be expected. (5 points) 11. Make a list of at least 5 things that would shift the aggregate demand curve to the right. (5 Points) 3 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 Figure 2. 12. Refer to Figure 2 above. An increase in the money supply would move the economy from C to a. B in the short run and the long run. b. D in the short run and the long run. c. B in the short run and A in the long run. d. D in the short run and C in the long run. 13. Refer to Figure 2 above. If the economy is at A and there is a fall in aggregate demand, in the short run the economy a. stays at A. b. moves to B. c. moves to C. d. moves to D. 14. During recessions which type of spending falls? a. consumption and investment b. investment but not consumption c. consumption but not investment d. neither consumption nor investment 4 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 Chapter 16 15. According to the theory of liquidity preference, the money supply a. and money demand are positively related to the interest rate. b. and money demand are negatively related to the interest rate. c. is negatively related to the interest rate while money demand is positively related to the interest rate. d. is independent of the interest rate, while money demand is negatively related to the interest rate. 16. The multiplier is computed as MPC/(1 - MPC). (True or False) Figure 3 17. In Figure 3 above, which of the following sequences shows the logic of the interest rate effect? a. 1, 2, 3, 4 b. 1, 4, 3, 2 c. 3, 4, 2, 1 d. 3, 2, 1, 4 5 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 18. Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates? a. U.S. citizens decide to hold more foreign bonds. b. people choose to hold more currency. c. You decide to purchase a new oven for your cookie factory. d. All of the above are correct. 19. What is the difference between monetary policy and fiscal policy? (2 points) 20. Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve to the right by $10 billion? (3 points) 21. When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate demand curve shifts to the right. (True or False) Chapter 17 22. The misery index is calculated as the a. inflation rate plus the unemployment rate. b. unemployment rate minus the inflation rate. c. actual inflation rate minus the expected inflation rate. d. natural unemployment rate plus the long-run inflation rate. 6 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 23. In the long run, a. the natural rate of unemployment depends primarily on the level of aggregate demand. b. inflation depends primarily upon the money supply growth rate. c. there is a tradeoff between the inflation rate and the natural rate of unemployment. d. All of the above are correct. 24. In the short run, policy that changes aggregate demand changes a. both unemployment and the price level. b. neither unemployment nor the price level. c. only unemployment. d. only the price level. Figure 4. 25. Refer to Figure 4 above. If the economy starts at c (left graph) and 1(right graph), then in the short run, an increase in government expenditures moves the economy to a. b and 2. b. b and 3. c. d and 3. d. None of the above is correct. 26 . Refer to Figure 4 above. If the economy starts at c (left graph) and 1(right graph), then in the short run, a decrease in aggregate demand moves the economy to a. a and 2. b. d and 3. c. e and 3. d. None of the above is correct. 7 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 27. If macroeconomic policy expands aggregate demand, unemployment will fall and inflation will rise in the short run. (True or False) 28. Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? (2 points) Chapter 18 29. President George W. Bush and congress cut taxes and raised government expenditures in 2003. According to the aggregate supply and aggregate demand model a. both the tax cut and the increase in government expenditures would tend to increase output. b. only the tax cut would tend to increase output. c. only the increase in government expenditures would tend to increase output. d. neither the tax cut nor the increase in government expenditures would tend to increase output. 30. If the unemployment rate rises, which policies would be appropriate to reduce it? a. increase the money supply, increase taxes b. increase the money supply, cut taxes c. decrease the money supply, increase taxes d. decrease the money supply, cut taxes 31. Explain the main arguments in favor of economic stabilization. (2 points) 8 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 32. Which of the programs below would transfer wealth from the young to the old? a. Taxes are raised to provide better education. b. Taxes are raised to improve government infrastructure such as roads and bridges. c. Taxes are raised to provide more generous Social Security benefits. d. None of the above transfer wealth form the young to the old. 33. Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time. Which of the following, at least in theory, could explain why some countries would continue to have high inflation? a. High inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation. b. Inflation reduction works best when it is unexpected, and people in high inflation countries would quickly anticipate any change in monetary policy. c. In a country where inflation has been high for a long time, people are likely to have found ways to limit the costs. d. All of the above are correct. 34. A consumption tax is a tax strictly on spending, while an income tax is a tax on salary paid for work. You are contemplating a run for the presidency in 2012 and some of your economic advisors have argued that you should campaign to replace the income tax with a consumption tax. What argument for a consumption tax might they put forward to you? ( 2 points) CONGRATULATIONS! HAVE A GREAT SUMMER! 9 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 PART B. EXTRA CREDIT (TOTAL =16 POINTS). You are not obligated to do this section. EC1. Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out or accelerator effects. a. What is the combined effects of these changes? Why is the combined change not equal to zero? Hint: Calculate the Multiplier and apply it to obtain a multiplier effect (2 Points). b. Using the IS-LM framework, sketch a graph that would indicate the fiscal policy initiative's impact on equilibrium interest (r) and income (Y) and suggest what, if any, monetary policy could the Federal Reserve implement to accommodate the government expenditure increase. (2 points for graph and 2 points for monetary policy suggestion) 10 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 EC2. Fill in the table below with the direction of the variables that change in response to the events in the first column. (1 Point per column for total of 5 Points) Event (1st Column) U.S. real interest rate U.S. domestic investment U.S. net capital outflow U.S. real exchange rate of domestic currency U.S. trade balance U.S. government budget deficit increases U.S. imposes import quotas capital flight from the United States EC3. Economist John Taylor has suggested that the Fed use the following rule for chosing its target for the federal funds interest rate (r): r 2% 1 / 2( y y*) / y * 1 / 2( *) Where is the average of the inflation rate over the past year, y is real GDP as recently measured, y* is an estimate of the natural rate of output, and * is the Fed's goal for inflation. a. Explain the logic that might lie behind this rule for setting interest rates. Would you support the Fed's use of this rule? (3 Points) 11 EC 201-Principles of Macroeconomics Due Tuesday, 05/12/20 at 6pm Final Exam-Spring 2020 b. Some economists advocate such a rule for monetary policy but believe and y should be the forecasts of future values of inflation and output. What are the advantages of using forecasts instead of actual values? What are the disadvanages? (2 Points) 12