Economics 301 Intermediate Macroeconomics Exam #1 Fall, 2013 Prof. Twomey Please print your names on the back of the last sheet. Answer on these sheets, using the backs of the sheets if you need extra space. The weight of each question is indicated. Please ask for clarification if any question is unclear. Time: the entire class. 1) Identify the following with a sentence or at most two (20 points): a. Endogenous variable
b. Classical dichotomy
c. National income accounts identity
d. (Distinguish between) Employment rate and the Labor Force Participation Rate e. Fisher effect
2. (20 points) Consider the standard closed economy full employment model that we have studied – sometimes called the loanable funds model. Draw a graph illustrating the determination of the real rate of interest, as described by that model. Be sure to identify the names of each axis, and label the curves. Explain and illustrate on that graph what happens in the macro-economy if the level of government spending falls. - In that circumstance, what happens to: (explain real briefly) Real GDP
The real interest rate
Private sector Investment
The government’s Deficit
If in a slightly different world, private savings positively responds to increases in interest rates; will the effect on consumption be bigger or smaller?
3. (10 points) An economy initially has a monetary base of 1,000 one dollar bills. Calculate the money supply in each scenario: a. All money Is held as currency
b. All money is held as demand deposits.
Banks hold 20 % of deposits in reserves.
c. People hold equal amounts of currency and demand deposits. Banks hold 20% of deposits as reserves.
4. (10 points) Suppose a country has a money demand function (M/P)d = kY, where ‘k’ is a constant parameter. The money supply grows at 15% per year, and real income grows by 5% per year. a) What is the average annual inflation rate?
b. How would inflation be different if real income growth were higher? Explain briefly. c. Suppose that instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain briefly.
5. (10 points) Should each of the following events be expected to increase or decrease real GDP. In each case, do you think economic well-being will change in the same direction as real GDP? Why or why not? I. A major power-outage forces Las Vegas to dis-continue gambling operations for a month. II. The discovery of a new, easy-to-grow (and environmentally neutral) strain of wheat increases farm harvests. III. Improved labor-management relations reduces the frequency of labor strikes. IV. More high school students drop out of school to take jobs mowing lawns.
6. (10 points) What are the three functions of money? Which of these functions do the following satisfy, and which not? a. A credit card
b. A subway token
c. A painting by Rembrandt
7. (10 points) Suppose UM-D engineers develop a method of producing automobile engines that are much more efficient, and that this new method is adopted by U.S. automobile manufacturers, who build new factories to utilize it. a. How will this affect the country’s demand for investments? b. Explain, and show on a graph, how this will affect the real rate of interest, and the national level of saving.
8. (10 points) Explain how each of the following will affect the monetary base, the money multiplier, and the money supply. a. The Federal Reserve decreases the interest rate it pays banks for holding reserves b. Rumors about a computer virus attack on ATMs increase the amount of money that that people hold as currency, rather than demand deposits. c. The Federal Reserve sells bonds in open market operations.
The median on this exam was 65; the high was 88.
Econ 301 Exam #2 Fall, 2013 Professor Twomey Please print your...
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