Economics 102: Final Exam December 15, 2007

Transcription

1 Economics 102: Final Exam December 15, 2007 Instructions: This exam has seven short answer problems. Each problem is worth 10 points for a total of 70. Answer all of the questions. I recommend putting boxes around your final answers for any mathematical calculations that you do. Also be sure and show your work. Round all of your answers to the nearest tenth. You may use the back of the exam to write your answer. Partial credit will be given. You are allowed to use a calculator for this exam. Name:

2 1. (10 points) Answer parts a through e using the following table: Year Price of Tuna Quantity of Tuna Price of Salmon Quantity of Salmon 2006 $5 125 $ a. Calculate nominal GDP, Real GDP and the GDP deflator in each of the three years (use 2006 as your base year). Also calculate inflation for 2007 and 2008 using the GDP deflator. b. Assume the market basket has the quantities from Calculate CPI for all years, and inflation for 2007 and c. Using the quantities from 2007 as your market basket, calculate CPI for all years and inflation for 2007 and d. Compare your answers from parts b and c. What potential measurement problem with CPI is shown here? Answer carefully! e. Calculate GDP for 2007 and 2008 using the chain-weighted method.

3 2. (10 points) These are actual numbers from the Bureau of Labor Statistics for 2007: Men over 16 years of age Population: million Labor Force Participation Rate: 73.2% Employment Rate: 95.3% a. What is the size of the labor force for this group? What is the # of people employed and the # unemployed? What is the unemployment rate for this group of people? Women over 16 years of age Labor Force Participation Rate: 59.3% # not in the Labor Force: 48.9 million # of Employed: 68.1 million b. What is the total population size for this group? What is the size of the labor force and the # of people unemployed? What is the unemployment rate? c. For each of the statistics (population, LFPR, unemployment rate) explain whether they are the same or different between men and women. Then explain why they are either the same of different.

4 3. (10 Points) Assume that the economy starts in long run equilibrium. a. Sketch the initial AS/AD graph and the initial aggregate expenditure graph. Be sure to carefully label everything. b. Carefully explain the mechanism by which the aggregate expenditure graph reaches equilibrium. You may use a graph if you want to, but it is not required. c. Due to gridlock in Congress the annual budget bill does not get passed. This forces the government to reduce spending. Show the effect this would have on the aggregate expenditure graph and the AS/AD graph in the short run. Explain everything carefully! (Note you should have 3 AE curves on your graph.) d. Show on a graph the long run effects on both the AE graph and the AS/AD graph. In your explanation be sure to comment on the Keynesian multiplier.

5 4. (10 points) Assume that the economy is currently in a recession. This means the economy does not start in long run equilibrium. a. Draw the initial AS/AD graph for this economy. Be sure to indicate the current equilibrium point. b. Assume the government does nothing. Show how the economy will return to long run equilibrium. Be sure to explain your graph. c. Assume the Fed wants to get the economy out of recession as quickly as possible, how would the Fed do this? Show the effect the Fed s action would have on the economy. Explain in detail. d. The response in part b is equivalent to the Fed having a fixed rule. The response in part c is equivalent to the Fed having a feedback rule. Use what you have found in parts b and c to explain the pros and cons of fixed rules and feedback rules.

6 5. Suppose that the economy initially has $15,000 in deposits, and there are no excess reserves. a. If the money multiplier is 6, what is the total money supply, assuming there is no cash being held? What is the required reserve ratio? What is the amount of loans outstanding in the banking system? What is the amount of reserves in the economy? b. How much does the money supply increase when the Fed adds $750 in new reserves? Show the new balance sheet for the economy. c. Show what the balance sheet of this economy would look like if the Fed cut the money supply in half using open market operations. d. Show what the balance sheet of this economy would look like if the Fed cut the money supply in half by changing the required reserve ratio. e. Explain the mechanism by which the Fed s use of open market operations affects GDP. It may help to use an AS/AD graph to illustrate your answer.

7 6. Assume in a closed economy you know the following: Y = $1,200,000 T = $150,000 I = $250,000 Public savings is negative and equals 30% of GDP. a. Calculate Total Savings, Private Savings, Consumption, and Government spending. b. Suppose that the government passes a bill that lowers taxes on consumers by $100,000. Assume that the marginal propensity to consume is Discuss what would happen to Private savings, Public savings, Total savings, Investment, Consumption, and Government purchases. Your answer should contain numbers. c. Show how this change would affect the market for loanable funds. d. If the Fed wanted to counteract the change made by the government, list three changes that the Fed could make to accomplish this.

8 7. You see an ad for a brand new car in the newspaper. This gets you thinking about when you graduate from college three years from now. You want to be able to purchase a car, and your parents have promised you $10,000 as a graduation gift, but tell you they are willing to give you $9,000 today instead. You currently have $1,300 in your bank account earning a paltry 3% interest rate. a. What is the highest price car that you could buy when you graduate? Which of your parent s two options should you take? Show your work! b. You see an announcement in the paper that the Federal Reserve has lowered the discount rate in response to a crisis in the credit markets. Explain using words and graphs the effects this would have on the money market and the AS/AD market. c. Is this good or bad news for you car buying prospects? Explain. d. Your recently graduated friend is a stock broker. He promises you that he can earn you a 9% interest rate if you invest your money with him. Which of your parent s options should you take now? How expensive a car could you purchase in this scenario? e. Your father tells you that he paid $2,250 for his first car in With a little research you find that CPI in 1965 was 31.5 and CPI today is Who s first car was more expensive, yours or your father s?