102A: Macroeconomics Summer 2013 Exam 2

Please write the answer to the following questions on the answer packet provided. 1) The labor supply curve is based on the decision of: A) workers on how many hours to work and how much to enjoy as leisure. B) firms on how many workers to hire. C) firms on how many goods and services to produce. D) workers on how much income to spend. 2) If the price of airline tickets rises during holidays, what will happen in the labor market for flight attendants? A) Demand for flight attends increases and the equilibrium wages paid to flight attendants falls. B) Demand for flight attends increases and the equilibrium wages paid to flight attendants rises. C) Demand for flight attends decreases and the equilibrium wages paid to flight attendants falls. D) Demand for flight attends decreases and the equilibrium wages paid to flight attendants rises. 3) When constructing a production function between labor and output, which of the following is held constant? A) the stock of labor B) the stock of capital C) the level of technology D) B and C are both correct. 4) Using the rule of 70, if the GDP per capita growth rate in the United States is 3.5 percent, standards of living double every A) B) C) D) 20 years. 24.5 years. 35 years. 70 years.

5) Nations with low levels of GDP per capita may converge to richer nations if A) nations with high levels of income experience a continuously increasing growth rate. B) nations with lower levels of income grow more quickly than those with higher levels of income. C) nations with lower levels of income spend less on investment. D) nations with lower levels of income grow more slowly than those with higher levels of income. 6) Suppose the growth rate of GDP in the United States is 4.2 percent. If 2.9 percent and 1.3 percent of GDP growth are due, respectively, to capital and labor growth, the amount resulting from technological progress is A) 0 percent. B) 1.3 percent. C) 2.9 percent. D) 4.2 percent.

102A: Macroeconomics Summer 2013 Exam 2

7) The process by which monopoly profits leads to technological progress in known as A) imperfect competition. B) destructive creation. C) creative destruction. D) economies of scale. 8) In an open economy, a country can accelerate growth by: A) increasing the trade deficit and importing investment goods. B) increasing the trade deficit and exporting investment goods. C) decreasing the trade deficit and importing investment goods. D) increasing the trade deficit and importing consumption goods. 9) Larger markets are likely to promote faster technological innovation because: A) the larger the market, the harder it is to break a monopoly. B) the larger the market, the larger the profits that can be made. C) larger markets generate diseconomies of scale. D) the larger the market, the less likely unauthorized copying would be.

10) The aggregate demand curve slopes downward because at a higher price level: A) the purchasing power of consumers' assets declines and consumption increases. B) producers can get more for what they produce, and they increase production. C) the purchasing power of consumers' wealth declines and consumption decreases. D) the purchasing power of consumers' wealth increases and consumption increases. 11) An increase in the price level results in a decline in aggregate demand because higher prices will cause the nominal interest rates to increase and GDP to drop. This effect is called the: A) wealth effect. B) income effect. C) interest rate effect. D) trade effect. 12) According to the international effect explanation of the downward slope of the AD curve, a lower price level in the U.S. economy causes: A) U.S. imports to increase and U.S. exports to decrease. B) U.S. imports and U.S. exports to decrease. C) U.S. imports to decrease and U.S. exports to increase. D) U.S. imports and U.S. exports to increase. 13) An increase in government expenditure has a multiplier effect on aggregate demand due to: A) the fact that the marginal propensity to consume is larger than one. B) the additional spending by consumers stimulated by the actual government expenditure. C) the autonomous nature of private consumption expenditure. D) the negative slope of the consumption function.

102A: Macroeconomics Summer 2013 Exam 2

14) If the marginal propensity to consume is 0.2, the value of the multiplier is: A) 5. B) 1.25. C) 2. D) 0.8. 15) In the short run, an increase in the price of a major input such as oil will: A) decrease the price level and increase the level of output. B) increase the price level and increase the level of output. C) increase the price level and decrease the level of output. D) decrease both the price level and the level of output. 16) Which of the following would cause the long-run aggregate supply curve to shift to the right? A) higher energy prices B) an increase in taxes C) increases in government regulation D) an increase in the labor supply 17) In the short-run, an increase in the money supply will cause output: A) not to change. B) to decrease. C) to increase. D) to fluctuate up and then down. 18) Which of the following will not cause the price level to increase in the long-run? A) a decrease in the money supply B) a decrease in income taxes C) an increase in government spending D) a decrease in the interest rates 19) Which of the following is an example of a contractionary fiscal policy? A) increasing the money supply B) decreasing the money supply C) increasing taxes D) decreasing taxes 20) If the government wants to reduce unemployment, government spending should be ________ and/or taxes should be ________. A) increased; increased B) decreased; decreased C) decreased; increased D) increased; decreased 21) Expansionary fiscal policy shifts the: A) the aggregate demand curve to the left. B) the short run aggregate supply curve to the right. C) the short run aggregate supply curve to the left. D) the aggregate demand curve to the right.

102A: Macroeconomics Summer 2013 Exam 2

22) The length of time that the U.S. Treasury Department takes to print and mail tax rebate checks to help the economy out of a recession is part of the: A) inside lag. B) outside lag. C) identification lag. D) inside-outside lag.

Figure 10.2 23) Refer to Figure 10.2 to answer the question below. Suppose the economy is currently at point A. Which of the following policies would bring the economy to point C? A) a correctly timed tax cut B) an ill-timed tax cut C) a correctly timed tax increase D) an ill-timed tax increase 24) The discretionary spending component of federal spending includes all programs that: A) Congress authorizes on an annual basis. B) Congress authorizes on a monthly basis. C) is made mandatory by the president of the US. D) is authorized by prior law. 25) The largest category of federal spending is: A) discretionary spending. B) entitlements and mandatory spending. C) net interest. D) none of the above

102A: Macroeconomics Summer 2013 Exam 2

26) Supply-side economists look at the effects of taxes on: A) aggregate demand. B) aggregate supply. C) aggregate supply and aggregate demand. D) a firm's supply curve. 27) An increase in the federal budget deficit during a recession serves as an automatic economic stabilizer because: A) increased transfer payments from unemployment insurance partly offset the fall in household income. B) lower personal income translates into a lower tax load and so consumption spending declines slightly less. C) lower corporate profits translate into a lower tax load and so investment spending declines slightly less. D) All of the above are correct. 28) During the 1930s, politicians did not use fiscal policy to counter the Great Depression because: A) the adherence to the gold standard prevented the necessary increase in the money supply. B) the Federal Reserve system opposed the idea. C) they feared the consequences of government budget deficits. D) they were concerned about the ensuing increase in interest rates. 29) The Kennedy administration was not concerned about the possible negative effect of large tax cuts because: A) the tax cuts were initially designed to be temporary. B) the assassination of President Kennedy became a much more serious issue. C) the ensuing federal deficit would disappear as government programs would be cut too. D) the ensuing federal deficit was projected to disappear as higher tax revenues would follow from faster GDP growth. 30) The permanent income view of consumption spending postulate that households base their spending on: A) their average long-run income. B) their highest level of income. C) their current income. D) future income. 31) The tax cuts enacted during the first term of President Reagan were designed primarily to: A) decrease aggregate demand. B) increase aggregate demand. C) increase the supply of output. D) decrease the supply of output. 32) Dena won $1,000 at a bingo game. She deposits her $1,000 winnings into a savings account so that she can use the money next year to pay for her tuition. This is an example of money serving as a (an): A) unit of account. B) medium of exchange. C) store of value. D) investment good.

102A: Macroeconomics Summer 2013 Exam 2

33) Which of the following is an example of a fiat money? A) a$20 bill B) cigarettes C) gold D) jewelry 34) Currency held by the public + demand deposits + travelers checks + other checkable deposits =: A) M3. B) M2 - M1. C) M3 - M1. D) M1. 35) Suppose the required reserve ratio is 10%. A $10 million deposit allows commercial banks to create a maximum total of ________ in deposits. A) $10 million B) $1 million C) $11 million D) $100 million 36) Which of the following is a function of the Federal Reserve? A) to act as a lender of last resort B) conduct monetary policy C) supply currency to the economy D) All of the above are correct. 37) All else constant, if the GDP in an economy increases then: A) demand for money increases. B) demand for money decreases. C) the quantity demanded for money increases. D) the quantity demanded for money decreases. 38) The ________ the interest rate, the ________ the opportunity cost of holding money, and the ________ money people will want to hold. A) lower; higher; less B) lower; lower; less C) higher; higher; more D) higher, higher, less 39) Though a powerful tool, the reserve requirement is seldomly used by the Fed to control the money supply because: A) it causes significant disruptions in the banking system. B) using the reserve requirement can be inflationary. C) it takes a long time for the policy to be implemented. D) it is very difficult for the Fed to monitor the reserve requirement.

102A: Macroeconomics Summer 2013 Exam 2

40) Assume that total deposits in the banking system are $200 million. If the required reserve ratio is increased, then the money supply will: A) decrease. B) increase. C) not change because there was no change in deposits. D) not change because the required reserve ratio has no impact on the money supply. 41) If the quantity of money demanded is less than the quantity of money supplied, then the interest rate will: A) change in an uncertain direction. B) rise. C) remain constant. D) fall. 42) Which of the following would cause an increase in GDP? A) an open market purchase B) an open market sale C) a higher discount rate D) a higher required reserve ratio 43) If the Fed reduces the money supply to reduce inflation: A) the interest rate will increase, and U.S. exports will fall and U.S. imports will rise. B) the interest rate will increase, and U.S. exports will rise and U.S. imports will fall. C) the interest rate will increase, and both U.S. exports and U.S. imports will rise. D) the interest rate will increase, and both U.S. exports and U.S. imports will fall. 44) If left alone, the recession experienced by an economy will cause the short-run A) aggregate supply curve to shift downward until the equilibrium GDP is back at full employment. B) aggregate supply curve to shift upward until the equilibrium GDP is back at full employment. C) aggregate demand curve to shift downward until the equilibrium GDP is back at full employment. D) aggregate demand curve to shift upward until the equilibrium GDP is back at full employment. 45) When the economy is in a liquidity trap, one way to get the economy out of a recession is to: A) expand the money supply. B) contract the money supply. C) increase government expenditures. D) increase taxes. 46) You want to make a 5% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 6%. You should charge a nominal interest rate of: A) 1%. B) 11%. C) -1%. D) -11%. 47) The Phillips curve depicts the relationship between: A) output and the price level.

102A: Macroeconomics Summer 2013 Exam 2

B) aggregate demand and aggregate expenditures. C) inflation and unemployment. D) money supply and interest rate. 48) If the Fed is credible or believable in its desire to fight inflation, it can deter the private sector: A) from lowering real wages. B) from taking aggressive actions that drive up prices. C) from taking aggressive actions that drive prices down. D) from developing rational expectations about inflation. 49) Suppose that the money supply is $150 billion and nominal GDP is $600 billion. The velocity of money is: A) 4. B) 3. C) 2. D) 5. 50) Today, most economists agree with the monetarists that, in the long run, inflation is caused by A) growth in the money supply. B) people's expectations. C) government borrowing. D) high taxes.

102A: Macroeconomics Summer 2013 Exam 2

II. Read the Feds press release from November 2001 to answer questions 1- 10. Federal Reserve Press Release Release Date: November 6, 2001 For immediate release The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 1-1/2 percent. Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity. For the foreseeable future, then, the Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness. Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate. In taking the discount rate action, the Federal Reserve Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Richmond.

1. Based on the information given above, is the economy most likely overheated or in a recession? What information in the press release indicates this? 2. Draw an AD-SRAS-LRAS model to illustrate where y0 is relative to yp. 3. What kind of open market operation should the Fed employ? 4. Draw a Md-Ms model that illustrates the Feds policy stated in the press release. 5. How does this policy affect 1) interest rate 2) investments 3) net exports? Elaborate on the logic you used to determine the changes in these variables (either using text or graphs). 6. In the long run, what would happen to real interest rate? Explain. 7. How will this policy affect the aggregate demand curve? Draw an AD-AS model to illustrate this. 8. Given the state of the economy at this time, should fiscal policy be contractionary or expansionary? 9. What should the government do in regards to government spending and taxes? 10. If this economy is left alone (no implementation of fiscal or monetary policy), what would happen to price level and real output in the long run? Illustrate your answer using an AD-SRAS-LRAS model.

102A: Macroeconomics Summer 2013 Exam 2

II. Given the following information, answer questions 1 - 6 Nominal GDP = 25 trillion CPI 2012/CPI 2010 = 1.01 Real interest rate = 3% Expected inflation rate = 1.5% Money supply = $3 trillion 1. 2. 3. 4. 5. 6. What is real GDP? What is the velocity of money? On average how many days is a dollar held before its turned over? If you are a loan provider, what should you set as your nominal interest rate? Since inflation is only 1%, would you expect the unemployment rate to increase or decrease? Why? Draw a graph illustrating the relationship that economist William Phillips observed between inflation and unemployment? Provide one possible explanation for why this relationship exists.

III. Lets say you are invited to an emerging economy to advise the President there on factors that influence economic growth. You are expected to give her an overview on what factors she should keep in mind as she develops the growth strategy for her country. What are some points you bring up? Your answer does not have to be in paragraph form (depending on your preference). Bulleted points are fine as long as you are clear. Your response will be graded based on breadth of concepts, level of detail, and accuracy. IV. Bonus question We saw in class that countries in which the central bank has greater independence and discipline generally have lower inflation rate. Provide one explanation for this phenomenon using the example of union workers bargaining up their wages. Include a AD-AS graph in your explanation.