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MIT 14 02 - Quiz 2

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1 14.02 PRINCIPLES OF MACROECONOMICS Spring 2002- QUIZ TWO STOP!! READ INSTRUCTIONS FIRST. Read all questions carefully and completely before beginning the exam. There are 9 pages, and 4 sections of the quiz – make sure you do them all. Show your work on all questions in order to receive partial credit. If your answer includes a graph, label all curves and axes clearly; if we can’t read the graph, you will lose points on your answer. The quiz is worth a total of 70 points. No notes, calculators, or books may be used during the quiz. You will have 2 hours to complete the quiz. No blue books; use the blanket in this sheet. Please, check your recitation:  Samer 09  Tobias Adrian 11  Samer 10  Jonathan Zinman 13  Samer 11  Jonathan Zinman 14  Samer 12  Manuel Amador 15 Name April 11, 2002 First Name Last Name MIT ID# Signature Date Good luck!Good luck!Good luck!Good luck!2PART I: TRUE OR FALSE? (3 points per question, 24 points total) Answer True/False and explain briefly why true or false. (2 points for correct T or F answer plus 1 added point for reasonable, brief, one sentence explanation of why True or False, or for a directional (“greater” or “lower”) correction if a magnitude is discussed) 1. Through a typical business cycle, we expect that each 1% increase in GDP will be associated with a 1% change in business investment Answer: ________________________________________________________________ ________________________________________________________________ 2. In the long run, a fiscal expansion has no effect on investment. Answer: ________________________________________________________________ ________________________________________________________________ 3. Current income has no impact on consumption decisions. Answer: ________________________________________________________________ ________________________________________________________________ 4. Consumption must remain unchanged if current income and future expected labor income are unchanged. Answer: ________________________________________________________________ ________________________________________________________________ 5. Okun’s law states that if the growth rate of potential GDP exceeds actual GDP growth by one percent for a year, then the unemployment rate goes down by 0.5%. Answer: ________________________________________________________________ ________________________________________________________________ 6. A primary mechanism behind the price inflation – unemployment tradeoff is that when unemployment goes down, workers demand higher wages, which increases the cost of production of firms, and leads to higher prices. Answer: ________________________________________________________________ ________________________________________________________________37. In spite of possible J-curve phenomena, a real depreciation always causes real exports of the depreciating country to decrease. Answer: ________________________________________________________________ ________________________________________________________________ 8. If the interest parity condition holds between countries A and B, as well as between countries B and C, then it also holds between countries A and C. Answer: ________________________________________________________________ ________________________________________________________________4PART II: MULTIPLE CHOICE (4 points per question, 28 points total) Clearly indicate the letter of your answer, and explain your choice in a few sentences. 1. If the central bank sells bonds to shrink the money supply and the government decreases spending then (in the short run): A. Investment will increase while the production may rise or fall B. Production will decrease, and investment may rise or fall C. Investment and production will definitely increase. D. Investment and production will definitely decrease. E. None of the above Answer: ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ 2. If the equilibrium output indicated by IS-LM is above the level consistent with NAIRU, all of the following are true, except (Be sure to think through the differences between movements along curves and movements of curves): A. This is not a sustainable IS-LM solution B. Inflation will rise, shifting the prior LM to the left C. The LM will shift to the left, thereby implying that AD is also shifting to the left D. Unemployment is below the NAIRU, so wages are rising Answer: ________________________________________________________________ ________________________________________________________________ ________________________________________________________________53. Which of the following is NOT a primary, direct determinant of aggregate consumption? A. Taxes B. Imports C. Real interest rates D. Demographics E. Expectations Answer: ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ 4. Samantha makes $30,000 per year and can invest wealth at 5% (real) per year. She believes that she will receive a one-time bonus of $15,000 next year, but expects that this bonus will have no affect on her future labor income. Assume that Samantha would like to consume the same amount each year for the rest of her life, which she expects to last 50 years. The permanent income theory of consumption implies that she should: A. Increase her consumption by $15,000 this year B. Temporarily increase her consumption by $15,000 this or next year C. Increase her yearly consumption by approximately $300 or slightly more, starting this year D. Increase her yearly consumption by approximately $300 or slightly less, starting next year E. Increase her saving by $15,000 next year Answer: ________________________________________________________________ ________________________________________________________________ ________________________________________________________________65. Assume the one-year interest rate in the U.S. is 5% higher than the interest rate in Japan. This implies that A. The market expects the dollar to depreciate by 5% in the next year B. The market expects the dollar to appreciate by 5% in the


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MIT 14 02 - Quiz 2

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