Econ 170: Contemporary Economics Spring 2008 Exam 2 / Section F: SOLUTIONS

Transcription

1 Econ 170: Contemporary Economics Spring 2008 Exam 2 / Section F: SOLUTIONS 1. List and briefly describe the three main indicators of macroeconomic performance. Real GDP (output): Level of output produced in an economy in a given time period, measured in real dollars. Unemployment: Number of people 16 and older who are actively looking for jobs but are not employed. Inflation: Increase in the average price level in a given time period. 2. Explain the Classical view of the macroeconomy, and how it differs from the Keynesian view. Classical view: flexible wages, flexible prices. Market will self-adjust to any shocks or disturbances. Say s law: Supply creates its own demand. Just get the prices right and employment and output will adjust. Basically ended with Great Depression could not explain persistent low output with high unemployment and low prices and wages. Keynesian View: Need policy to adjust to market shocks and disturbances. Believes increased demand will stimulate supply of more output. 1

2 3. Unemployment Year 1 Year 10 Population 145 million 165 million Labor force 75 million 95 million Number employed 60 million 80 million 3a. What is the unemployment rate in Year 10? A) 84.2 percent. B) 57.6 percent. C) 48.5 percent. D) 15.8 percent. 3b. What is the number of unemployed in Year 1? A) 85 million. B) 70 million. C) 15 million. D) 10 million. 3c. Name and briefly describe the four types of unemployment. Seasonal: temporary due to seasonal shifts / changes Frictional: in between jobs / job searches Structural: skills mismatch Cyclical: due to business cycle (recession) 3d. Explain why the optimal level of unemployment is not zero. Inflation-unemployment tradeoff. Idle resources like unemployment keep prices down. As an economy moves closer to their production possibilities frontier, resources are utilized and prices are driven up. Zero unemployment would result in high inflation. Another reason is that some types of unemployment are productive (seasonal, frictional). 2

3 4. Inflation (please show your work for full credit) 4a. Ana's nominal annual income in 2005 was $60,000. Suppose that the rate of inflation is constant at 10 percent. To keep Ana's real income constant, her nominal income in the year 2006 should be: A) $60,000. B) $54,000. C) $66,000. D) $70,000. 4b. If the CPI is 126 in Year X, then it costs in Year X to buy the same market basket that cost in the base period. A) $100; $126. B) $126; $100. C) $26; $100. D) $100; $26. 4c. If a market basket of goods cost $100 in the base year and $143 in a later year, then average prices have increased by: A) 243 percent. B) 143 percent. C) 70 percent. D) 43 percent. 3

4 5. Fiscal policy AD 3 AD 2 AD 1 AS PRICE LEVEL (average price) P 1 P 2 e b d c a Q F REAL OUTPUT (trillions of dollars per year) 5a. Assuming aggregate demand is represented by AD 3, the economy confronts a real GDP gap of: A) Zero. B) $400 billion. C) $520 billion. D) $560 billion. 5b. Assume aggregate demand is represented by AD 1. Which of the following could cause a shift to AD 2? A) A decrease in government spending on goods and services. B) An increase in taxes. C) A decrease in consumer spending. D) All of the above. 5c. Assume aggregate demand is represented by AD 3. Which of the following could cause a shift to AD 2? A) An increase in government spending on goods and services. B) An increase in taxes. C) A decrease in consumer confidence. D) A decrease in investment spending. 5d. Assume aggregate demand is represented by AD 2. Which of the following could cause a shift to AD 1? A) A decrease in government spending on goods and services. B) A decrease in taxes. C) A decrease in investment spending. D) All of the above. 4

5 6. Fiscal policy: government spending (please show your work for full credit) 6a. If the marginal propensity to save is 0.2 and government spending is raised by $4 billion, then total aggregate spending will rise by: A) $5 billion per year. B) $8 billion per year. C) $20 billion per year. D) $80 billion per year. 6b. Assume an MPC of The change in total spending for the economy as a result of a $20 billion new government spending injection would be: A) $80 billion. B) $27 billion. C) $22 billion. D) $15 billion. 7. Fiscal policy: tax cuts (please show your work for full credit) 7a. A tax cut of $5 million with an MPC of 0.60 will cause a cumulative change in spending equal to: A) A decrease of $12.5 million. C) An increase of $12.5 million. B) A decrease of $7.5 million. D) An increase of $7.5 million. 7b. If the MPC = 0.8, a $5 billion tax decrease will eventually increase total spending by: A) $40 million. B) $25 billion. C) $20 billion. D) $5 billion. 5

6 8. Banks and lending power (please show your work for full credit) 8a. Suppose a bank has $200,000 in deposits and a minimum reserve requirement of 15 percent. Then required reserves are: A) $3,000. B) $30,000. C) $200,000. D) $330,000. 8b. If excess reserves are $30,000, demand deposits are $500,000, and the minimum reserve requirement is 10 percent, then total reserves are: A) $20,000. B) $30,000. C) $50,000. D) $80,000. 8c. Suppose a bank has $2,000,000 million in deposits, a minimum reserve requirement of 10 percent, and bank reserves of $250,000. Then the bank has excess reserves of: A) $50,000. B) $250,000. C) $450,000. D) $1,550,000. 8d. Suppose a bank has $100,000 in deposits, a minimum reserve requirement of 5 percent, and bank reserves of $12,000. Then it can make new loans in the amount of: A) $12,000. B) $7,000. C) $5,000. D) $2,000. 8e. Initially a bank has a minimum reserve requirement of 20 percent and no excess reserves. If $20,000 is deposited in the bank, then the bank can, ceteris paribus: A) Lend $20,000. C) Hold $20,000 less in excess reserves. B) Lend $16,000. D) Reduce its required reserves by $20,000. 6

7 9. Money multiplier (please show your work for full credit) 9a. If the banking system has a required reserve ratio of 20 percent, then the money multiplier is: A) 0.2. B) 0.8. C) D) b. If total reserves for a bank are $10,000, excess reserves are zero, and demand deposits are $100,000, then the money multiplier must be: A) 5. B) 10. C) 15. D) 20. 9c. Suppose the entire banking system has $70,000 in excess reserves and a required reserve ratio of 25 percent. The deposit-creation potential of the banking system is: A) $2,800. B) $70,000. C) $280,000. D) $1,750,000. 9d. Suppose Shelby finds $20,000 under a bed and deposits it in her checking account. If the required reserve ratio is 25 percent, this deposit has the potential of increasing the money supply by: A) $2,500. B) $10,000. C) $60,000. D) $50,000. 7