Final Exam 120 minutes Econ 1102 30 Principles of Macroeconomics Justin Barnette December 19 2007 Name On the following pages please show all of your work If you need more space use the back of the page Clearly state the location of your work answers Clearly highlight circle solutions Fully label all graphs Read each question carefully and be sure to answer all parts of every question When in doubt write the formula for the solution The formula alone is worth half the points for each part of the question There should be 13 pages including this cover sheet 1 Question 1 20 Points Match the following terms with the correct definition number from the last page of the exam You can go ahead and tear off the last page of the exam Balance of Payments Deficit M1 Capital Account Balance National Debt Crowding Out Nominal GDP Current Account Balance Open Market Operations Cyclical Unemployment Phillips Curve Floating Exchange Rates Real GDP per capita Frictional Unemployment Recession Gross Domestic Product GDP Stagflation Inflation Structural Budget Deficit Intermediate Good Velocity 2 Question 2 10 Points Calculate the missing information 2004 is the base year Years CPI Inflation Rate 2004 Cost of the basket of goods a typical consumer consumes in the economy 2005 104 2006 108 8 600 Question 3 10 Points Suppose you have the following initial information for an economy Assume that the deficit grows at 5 per year Complete the following Year Real GDP 2004 10000 2005 10200 2006 10400 2007 10600 Debt s Deficit s 2500 500 3 Question 4 26 points Consider the following data for a small country for the years 2001 and 2002 2001 US 2002 US Consumption 18 375 19 031 Taxes 3 938 4 069 Transfer Payments 2 625 2 691 Investment 1840 2100 Government Spending 15 488 15 881 Imports 2100 2100 Exports 788 1050 CPI 197 230 Population 1 185 1 444 Solve for the following values showing all your work a Gross Domestic Product in 2001 and 2002 b GDP per capita in 2001 and 2002 c What is National Income in 2001 and 2002 4 d What is Disposable Income in 2001 and 2002 e Determine the marginal propensity to consume f Government deficit in 2001 and 2002 g Growth rate for the economy in 2002 h Determine the size of the economy after growing at the 2002 growth rate for 8 years 5 Question 5 28 points a Draw the market for money and the market for the US economy in a recessionary gap Be sure to clearly label that the equilibrium and the axes in each picture b Suppose the central bank would like to speed up the economy s recovery What would they do c Show the central bank s decision in the money market d Show how the central bank s decision would affect aggregate demand in part a Label this AD2 What causes this to happen e Draw the exchange rate market for US dollars Again be sure to label the axes correctly f Would the dollar appreciate or depreciate due to the central bank s decision g Show this in your graph for part e 6 h Show how the dollar appreciation depreciation would affect aggregate demand in part a Label this AD3 What causes this to happen i What happens to GDP j What happens to the price level k What happens to unemployment How does this compare to the inflation Did the central bank sacrifice one for the other Is there a trade off between inflation and unemployment l How can the government increase GDP using fiscal policy 7 Question 6 6 Points The following are the labor market statistics of the country of ANYWHERE Population 68 000 Under 16 11 000 Over 16 and Worked one hour or more in previous week 46 000 Searched for work during the previous four weeks 2 240 Did not work in previous week but would have taken a job if one were offered 2 000 a How large is ANYWHERE s labor force b What is ANYWHERE s unemployment rate c How many discouraged workers live in ANYWHERE Question 7 8 Points a Whenever people like Tom s disposable income rises by 1000 his consumption rises by 900 What is his marginal propensity to consume b Suppose an economy is made up of people like Tom and people like Jerry Jerry has a marginal propensity to consume of 0 95 Suppose the government is looking to increase the economy s GDP through transfers Should the government transfer money from Tom to Jerry or from Jerry to Tom Why will this help 8 Question 8 14 points Consider an economy with two states Illinois and Wisconsin The economy only produces two goods cheese and corn Both Illinois and Wisconsin have 40 hours to work Carefully read below for details on how Illinois and Wisconsin produce these two goods It takes Illinois 8 hours to produce one unit of cheese and 4 hours to produce a unit of corn It takes Wisconsin 5 hours to produce one unit of cheese and 10 hours to produce a unit of corn a Fill in the following table computing the opportunity cost of production of each good for each agent be sure to include units Cheese Corn Illinois Wisconsin b Who has the absolute advantage in the production of corn Why c Who has the absolute advantage in the production of cheese Why d Who has the comparative advantage in the production of cheese Why e Consider the price of cheese in terms of corn What is the highest price at which cheese can be traded that would make both states better off 9 Question 9 14 Points Given the following Income Expenditure 4 500 4 525 4 625 4 638 4 750 4 750 4 875 4 863 5 000 4 975 a Calculate the multiplier when expenditures increase by 25 b Fill in the following Price Original Level Aggregate Demand Aggregate Demand after 25 increase in expenditure Aggregate Supply 90 4 825 4 352 95 4 788 4 547 100 4 750 4 750 105 4 713 4 963 110 4 675 5 185 c Calculate the multiplier from the table in part b when expenditure increase by 25 d Discuss the significance of this result in one or two sentences 10 Question 10 6 points a If the Federal Reserve Bank increases the amount of reserves by 50 billion what happens to the money supply in the US if the required reserve ratio is 12 b What happens to money supply if the required reserve ratio is 15 Question 12 8 points Suppose you have the following information for an economy Complete the following Year Real GDP Price Level M1 2004 8000 100 2005 8200 115 2006 8900 2007 125 Velocity 60000 15 70000 16 75000 17 11 Bonus Questions Derive the aggregate demand curve 8 Points From question 8 derive a scenario where both states clearly gain from trade 7 Points 12 1 demonstrates higher inflation rates are associated with lower unemployment rates 2 rates determined in free markets by the law of