ECON 301 Intermediate Macroeconomics Study Guide Test 1 Definitions 1. Inflation rate 2. Investment 3. Net exports 4. Fiscal contraction/ expansion 5. Monetary contraction/ expansion 6. Expected pres ent discounted value 7. (Nominal, Real) Interest Rate 8. (Nominal, Real) Exchange Rate 9. Appreciation/Depreciation (nominal, real) 10. Uncovered interest parity condition Short Answer Questions: True, False, or Uncertain? EXPLAIN 1. Between June 2000 and June 2002, US headline inflation fell from 3.7% to 1.1%. This fall in prices made goods and services more affordable to American consumers. 2. The IS curve is downward sloping because goods market equilibrium implies that an increase in taxes leads to a lower level of output. 3. A high marginal propensity to consume increases the output effect of any expansion in autonomous spending. 4. The income tax is an automatic stabilizer. 5. The demand for money does not depend on the interest rate because only bonds earn interest. 6. As long as inflation remains roughly constant, the movements in the real interest rate are roughly equal to the movements in the nominal interest rate. 7. A rational investor should never pay a positive price for a stock that will never pay dividends. 8. Interest parity means that interest rates must be the same across countries. 9. If the dollar is expected to appreciate against the yen, interest parity implies that the US nominal interest rate will be greater than the Japanese nominal interest rate. 10. A real appreciation means that domestic goods become less expensive relative to foreign go ods. 11. Changes in autonomous expenditure have a smaller effect on output in an open economy than in a closed economy. 12. The only way a country can eliminate a trade surplus is through a real appreciation. 13. If the trade deficit is equal to zero, the closed‐economy demand for goods and the open‐economy demand for goods are equal. Long Problems 1. Consider a closed economy characterized by the following equations for consumption, investment, government spending, income taxes, and money demand. 󰇛󰇜      Remember to bring the Homework Journal Goods market equilibrium is characterized by the eq uality of output and the sum of the components of aggregate spending (C+I+G) and money market equilibrium is characterized by the equality of money demand and money supply. a. Derive the IS curve (solving for Y); b. Derive the LM curve (solving for i) c. Solve for equilibrium output. d. Solve for the equilibrium interest rate. 2. Using the results from (1), suppose business confidence rises, leading to a rise in exogenous investment, . Explain in words, graphs, and equations, as fully as you can, what will happen to output, the interest rate, and consumption. 3. Using the results from (1), suppose that following the introduction of ATMs, people feel a less urgent desire to hold cash. Exogenous money demand decreases (m0). Explain in words, graphs, and equations, as fully as you can, what will happen to output, the interest rate, and consumption. 4. Suppose that we hear that the Central Bank is planning a monetary contraction for two years from now. What will happen to future interest rates? Future dividends? The present value of expected profits? Stock prices? Investment in capital goods today? Unemployment today? Use this formula to think through your answer. $ $󰇛1󰇜󰇛$󰇜󰇛1󰇜󰇛1󰇜󰇛$󰇜󰇛1󰇜󰇛1󰇜󰇛1󰇜 5. Using words and the graphs of chapter 19 (the open‐economy goods ‐market graph + net export graph), explain what happens to income and net exports as a consequence of a. A foreign recession; b. An increase in domestic consumer confidence; c. An appreciation of the currency. 6. Using words and the graphs of chapter 20 (the open‐economy IS‐LM graph + interest‐parity condition graph), explain what happens to income, the interest rate, and the exchange rate as a consequence of a. A foreign recession; b. An increase in domestic consumer confidence; c. A monetary expansion.