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Purdue ECON 35200 - Final Exam

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Econ 352 Fall 2008Final Exam: Form 2Instructor: Kanda NaknoiDec 15, 20088:00-10:00am1The total scores is 90 points. However, its weight in the course grade is 45 percent.Part One (50 points)Instruction: Answer the following questions using analytical frameworks. Depict appro-priate diagrams as required.1. (10 points: economic growth) Suppose the p opulation growth in a closed economyis n, the rate of technological progress is g and the rate of depreciation of capital isδ.(a) (5 points) Suppose the marginal product of capital is higher than δ + n + g .Is consumption per effective unit of labor higher or lower than the golden rulestate? What kind of policy would you suggest as a way to bring the economyto the golden rule? Demonstrate your answer with an appropriate diagram.Label the axes and variable names clearly.(b) (5 points) Calculate the growth rate of consumption expenditure in the goldenrule. In light of the endogenous growth theory, is it possible to increase thegrowth rate of consumption expenditure in the golden rule? If yes, how?2. (10 points: short-run fluctuations) Suppose the Europeans change their preferencesand permanently reduce their order of new airplanes from Boeing, the U.S. airplaneproducer.(a) (5 points) Suppose the U.S. government and the Fed do not attempt to stabilizethe U.S. economy. How does the price adjust in the short run and in the longrun? Explain using the AS-AD framework.(b) (5 points) How would you suggest the U.S. government or the Fed to stabi-lize the U.S. economy? Explain using the IS-LM diagram with the realisticassumption that the U.S. is a large and open economy.3. (10 points: exchange rate regimes) Hong Kong is a small open economy of whichcurrency has been fixed against the U.S. dollar. In 2003, the outbreak of SevereAcute Respiratory Syndrome (SARS) caused a sharp drop in the number of touristsand business travelers to China and Hong Kong for several months.(a) (5 points) Illustrate the effects of the SARS outbreak on Hong Kong using theIS-LM diagram. Did money supply of Hong Kong rise or fall? How about theforeign exchange reserves?(b) (5 points) Suppose the central bank or the Hong Kong Monetary Authorityconsidered a one time adjustment of its exchange rate to stabilize the economy.2Would you recommend an appreciation or a depreciation of the Hong Kongdollar? Why? Explain using the IS-LM diagram.4. (10 points: inflation and unemployment)(a) (5 points) Explain the concept of “the short-run tradeoff between inflation andunemployment” using the Phillips curve diagram. How is that related to therational expectations hypothesis?(b) (5 points) Explain the concept of “time inconsistency problem of monetarypolicy.” How is it related to the short-run tradeoff between inflation and un-employment?5. (10 points: consumption theory) Assume that a consumer has the following prefer-ence, U(C1, C2) = ln(C1) + ln(C2)/(1 + r), where C1is the 1st period consumption,C2is the 2nd period consumption and r is the real interest rate. Suppose that theconsumer’s income in two periods is (Y1, Y2) = (3, 2). Suppose the real interest raterises from 4 to 8 percent.(a) (5 points) Does the 1st period consumption rise or fall as a result of rising realinterest rate? How about the 2nd period consumption? Explain the patternof consumption before and after the real interest rate rises using a diagram.Label the axes and variable names clearly.(b) (5 points) Based on your answer in Part (a), draw a diagram to depict savingas a function of the real interest rate? Is the saving curve upward sloping ordownward sloping?Part Two (50 points)Instruction: In the scantron answer sheet, mark the test form as ”2.” Answer whether thefollowing statements are true or false. If you answer true, mark ”A” in the answer sheet.Mark ”B” otherwise. Note that you must use pencil no. 2. (1 point each)1. A temporary monetary expansion in a closed economy creates inflation.2. A temporary monetary expansion in a small-open economy creates inflation.3. A temporary monetary expansion in a small-open economy reduces its trade balance.4. A temporary fiscal expansion in a large-open economy has a crowding-out effect onthe domestic investment.5. A temporary fiscal expansion in a large-open economy has a crowding-out effect onthe consumption.36. A temporary fiscal expansion in a large-open economy reduces the national savings.7. A temporary fiscal expansion in a closed economy reduces the national savings.8. A temporary fiscal expansion in a small-open economy reduces the investment ex-penditure.9. A rise in job separation rate has no impacts on the natural rate of unemployment.10. In a closed economy, an increase in the rate population growth rate increases thelong-run per capita income because it increases employment and output.11. In a closed economy, a reduction in the saving rate increases the long-run per capitaincome because that stimulates consumption and aggregate demand.12. An improvement in pro ductivity of labor increases the marginal product of capital.13. An increase in the rate of population growth reduces the marginal product of capital.14. When the marginal product of c apital is lower than the break-even investment rate,the economy is converging to the golden rule.15. Under a flexible exchange rate system, a temporary tax cut causes the real exchangerate to appreciate.16. Under a flexible exchange rate system, a temporary interest rate cut causes the realexchange rate to appreciate.17. Under a fixed exchange rate system, a temporary reduction in import tariffs de-creases the foreign exchange reserves.18. Under a fixed exchange rate system, a temporary fiscal expansion increases theforeign exchange reserves.19. Inflation tax is the cause of the time inconsistency problem of monetary policy.20. Inflation tax hurts all households since it is a form of taxation.21. Bubble or overheating of an economy can be driven by both supply and demandshocks.22. The central bank can stabilize overheating of an economy by reducing money supplyand shifting the aggregate demand curve to the right.23. The government can stabilize overheating of an economy by reducing the governmentexpenditure and shifting the aggregate demand curve to the left.424. A fall in productivity shifts the short-run aggregate supply curve to the right.25. When wages are sticky and go ods prices are flexible, the short-run aggregate s upplyrises when the price level rises.26. When wages and goods prices are


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Purdue ECON 35200 - Final Exam

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