Question A.

1. During a period of contractionary monetary policy,

a)the price level is increased, which leads to an increase in the money supply.

b)the price level is decreased ,which leads to a decrease in the money supply.

c)the rate of growth of the money supply is increased, leading to an increase in the price level.

d)the rate of growth of the money supply is reduced, leading to a decrease in the price level.

2. An increase in the money supply will affect aggregate demand

a) only if the increase in the money supply causes interest rates to rise.

b) only if the increase in the money supply causes people to buy less goods and services.

c )only if the increase in the money supply causes people to increase their saving.3. It has been observed that a change in monetary policy in the United States

a)impacts net exports.

b)has little or no effect on foreign markets.

c)leads to corresponding changes in other countries.

d)has only short run influences.

4.Suppose the Fed increases the money supply. As a result of this, people go out and spend more money on consumer goods, increasing aggregate spending. This is known as a(n)

a)direct effect of monetary policy.

b)indirect effect of monetary policy.

c)direct effect of fiscal policy.

d)indirect effect of fiscal policy.

5.

What happens when the Fed aims to change interest rates?

a)It asks Congress to legislate new interest rates.

b)It buys or sells government bonds on the open market to achieve the desired rate.

c)It buys or sells dollars on the foreign exchange market to achieve the desired rate.

d)It announces a new discount interest rate.

6.An expansionary monetary policy results in lower interest rates, which in turn

a)increases foreign demand for U.S. financial instruments, raising the international price of the dollar and reducing net exports.

b)increases the foreign demand for U.S. financial instruments, lowering the international price of the dollar and decreasing net exports.

c)reduces the international price of the dollar and increases net exports.

d)reduces the foreign demand for U.S. financial instruments and reduce net exports.

7.One result of a contractionary monetary policy would be

a)a decline in the price level.

b) an increase in the money supply.

c) an increase in business investment.

d)

lower interest rates.

8.According to the interest-rate-based transmission mechanism for monetary policy, an increase in the money supply will cause the

a) interest rate to fall, causing planned real investment spending to rise and leading to a decrease in aggregate demand.

b) interest rate to rise, causing planned real investment spending to rise and leading to a decrease in aggregate demand.

c) interest rate to fall, causing planned real investment spending to rise and leading to an increase in aggregate demand.

d) interest rate to fall, causing planned real investment spending to fall and leading to an increase in aggregate demand.

9.

If the economy is underutilizing its economic resources, the Fed should

a)discourage investment spending.

b)expand the money supply to increase aggregate demand.

c)decrease aggregate supply.

d)contract the money supply to decrease aggregate demand.

Question B.

1. Supreme Cola is a supplier of fountain equipment to restaurants, bars and cafeterias. The fountain equipment is manufactured at their York PA plant site. A national distribution center (DC) for the fountain equipment is also maintained adjacent to the plant. Supreme has one common platform design to which they add various features and accessories to create 10 different product options. The lead time for manufacturing and delivering a batch of products to the distribution center is 2 weeks. They review inventory and order weekly. For product ACola, Supreme uses a Normal distribution with mean 100 and standard deviation 20 to model weekly demand. Demands across weeks are independent. ACola sells for $15,000 and they enjoy a 50% gross margin. The annual holding cost for inventory in the DC is 25% of the product's cost. In the event that a customer order cannot be filled from the warehouse due to an out-of-stock situation, Supreme expedites the manufacture and delivery of the item. It estimates that such expediting increases their cost by $770 per unit.

a. What order upto level should Supreme choose to minimize their inventory for ACola while achieving at least a 99.25% in-stock probability?

b. Supreme uses an order up-to policy with a base stock level equal to 250 for ACola. What is the probability that Supreme will have more than 150 units on order of that product at the start of any given week?

2. An industrial company requires argon gas cylinders for its work. Weekly demand is normally distributed with a mean of 35 and a standard deviation of 15. Demands are independent across weeks. Orders are placed weekly and the lead time to receive an order is 1 week. They want to hold enough cylinders to ensure a 97% in-stock probability. If they use an order up-to model, what base stock level should they implement? (Do not round to an integer value, i.e., leave your response in decimal form.)

3. Radio Shack sells a 32GB flash drive. Weekly demand for the 32GB flash drive in one of their stores is normally distributed with a mean of 3 and a standard deviation of 0.5. The store places orders weekly and there is a one week lead time to receive orders.

a. On average, how many units will the store have on order?

b. Suppose they operate with a base stock level of 7. What in-stock probability would they achieve?

4. A large toy company Mttel currently allows toy retailers to place orders with delivery in 4 weeks. The Gigantic Pocket Monster (Gipokmon) is a new toy that Mttel has introduced. Demand per week for the toy at one of their stores is estimated to be normally distributed with a mean of 25 units and standard deviation of 5 units. Assume TOYS-are-MINE uses the order-up-to model to plan orders and deliveries to this store.

a. Suppose TOYS-are-MINE uses an order-up-to level of 20. After receiving their delivery for this week, they have 2 units on-hand. Last week's order was for 5 units. How many units will they order this week?

b. Again, suppose they use an order-up-to level of 20 for this store. On average, how many units will this store have on-order?

c. Suppose an order-up-to level of 140 is established. What is the resulting in-stock probability?

d. Suppose an order-up-to level of 130 is established. What would be the expected end-of-period on-hand inventory of Gipokmons?

Part ii.

Answer the following questions.

Part 1: Set up the Consumer's optimization problem, and find their first-order conditions. In particular, find an expression for the relationship between the real wage and the marginal rate of substitution between consumption and leisure. Part 2: Set up the Firm's optimization problem, and find its first-order conditions. In particular, find an expression for the relationship between the real wage and the marginal product of labor. Part 3: Is the competitive equilibram for this economy Pareto Efficient? Why or why not? (For this particular question, you don't need to be algebraically rigorous. A conceptual or graphical explanation will suffice.) Part 4: Now suppose that instead of a lump-sum tax, the government raises revenue through an advalorem tax on labor at rate 7. So the consumer's budget constraint becomes CS (1 -T)WN s + 7 and the government revenue becomes TwNs. How does this change the first-order conditions? Is the competitive equilibrium in this new economy Pareto Efficient? Why or why not? (A conceptual or graphical explanation will again suffice.) Part 5: (2 points extra credit. Answer the questions about Pareto Efficiency in parts 3 and 4 by setting up a Social Planner's Problem for this economy.)Consider an economy with a representative consumer, a representative firm, and a government. Both firm and consumer are price-takers. There is an initial stock of capital which is owned by the firm. . The consumer can work up to h hours at an hourly real wage of w. Their preferences are represented by the utility function U(C, 1) = In(C) + In(1) . The consumer also pays a lump sum tax equivalent to the value of T units of consumption good. The consumer's budget constraint is therefore: CS WN s +T - T where No = h - l is the amount of labor the consumer chooses to supply, T is the amount of tax paid, and i is the profit of the firm. The consumer treats both T and as given. . The firm operates using a CRS technology that uses labor and capital to produce. Total output is Y = zF(K, Na) = zKN)-" , where No is the labor demanded by the firm, K is an exogenously given stock of capital which the firm owns, and the exponent o is some constant between 0 and 1. The firm must pay w for each unit of labor. The firm seeks to maximize profits, choosing labor demand. . The government has an exogenously given amount of spending, G, which must be funded. The only tax they collect is a lump sum tax on the consumer, T