Econ 251 – Principles of Macroeconomics. Exam #2, Fall 2011 Name:Points off total score: _____Write any notes for yourself here1. Stock markets around the world fell after the European commission president warned that the crisis in the eurozone was threatening to engulf Italy and Spain. U.S. stocks sank more than 3%.a. How does the drop in the U.S. stock market affect the US’s consumption expenditures? Show using a consumption expenditure graph.b. Does this lead to a movement along or shift of the Consumption expenditures curve?Movement Along Shift (Circle one.)c. Why is it a movement along or a shift of the Consumption expenditures curve?Δ in real GDP Δ in nonreal GDP Δin PL Δ in nonPL (Circle one.)d. How will this affect AE and AD? Show using an AE graph and an AD graph.e. Does the drop in the U.S. stock market lead to a movement along or shift of the AE curve?Movement Shift (Circle one.)f. Why is it a movement along or a shift of the AE curve?Δ in real GDP Δ in nonreal GDP Δin PL Δ in nonPL (Circle one.)g. Does the lead to a movement along or shift of the AD curve?Movement Shift (Circle one.)h. Why is it a movement along or a shift of the AD curve?Δ in real GDP Δ in nonreal GDP Δin PL Δ in nonPL (Circle one.)2. Answer ONE of the following two questions. Also identify which question you are answering.a. “The Faribault Woolen Mills is weaving its way back from oblivion one thread and one American employee at a time. [In 1865], the Faribault Woolen Mills opened for business, shipping its products all over the world.” The factory continued operating until 2009 when it became bankrupted by poor management and a weak economy. It has now reopened and expects to have 200 employees working for them by next year. (Source: CNBC 11/6/11) Explain why one should expect more than 200 jobs to be generated in Faribault next year from opening up this mill.b. The Vikings website claims that in 1999 the team had a direct fiscal impact to the state of Minnesota of over $11 million through the payment of income taxes on players and staff, sales taxes, property taxes and admissions taxes. But they also claim that the team generates on average $85 million in economic activity each year. Explain how these two statements are consistent with each other using macroeconomic concepts discussed in lecture. ____ 3. Answer TWO of the four questions. Also identify which questions you are answering.a. If the government is considering decreasing taxes to stimulate the economy, does it matter if the MPC is .25 or .33? Explain.b. Describe Germany’s approach to maintaining potential output and provide a rationale for their approach.c. Suppose Congress introduces an amendment to balance the budget annually. Identify 1 problem this will introduce for policymakers. What if they introduce a cyclically balanced budget instead? Identify 1 problem.d. Based on the excerpt you read about India’s economy, answer:- What has India's inflation rate been over the past year? - How has India's central bank responded to these price level increases? Be specific. - Identify 1 reason why price levels have been increasing in India.________4. Long Run Analysis –Fill in the blank.a. If the economy is producing below potential out, the Federal Reserve will ______ to help the economy moveback to long run equilibrium.Raise Taxes Lower Taxes Raise Interest Rates Lower Interest Rates Higher Nominal Wages Lower Nominal Wages (circle one)b. According to Keynes if the economy is producing below potential out, the President should _______to help the economy move back to long run equilibrium.Raise Taxes Lower Taxes Raise Interest Rates Lower Interest Rates Higher Nominal Wages Lower Nominal Wages (circle one)c. According to Classicalism if the economy is producing below potential out, workers will agree to ______ to help the economy move back to potential output on its own.Raise Taxes Lower Taxes Raise Interest Rates Lower Interest Rates Higher Nominal Wages Lower Nominal Wages (circle one)5. Natural Rate of Unemployment:a. Suppose the economy currently has a frictional unemployment rate of 2%, structural unemployment of 2 percent, seasonal unemployment of .5 percent, and cyclical unemployment of 2 percent. Then what is the natural rate of unemployment? b. Where is the economy operating relative to its potential GDP?Above Below At Potential Output (circle one)c. What happens to the natural rate of unemployment and potential GDP if cyclical unemployment rises to 3 percent with other types of unemployment unchanged from part (a)? Unemployment: Rise Fall Remains the same (circle one)Potential RGDP: Rise Fall Remains the same (circle one)d. What happens to the natural rate of unemployment and potential GDP if structural unemployment falls to 1.5 with other types of unemployment unchanged from part (a) Unemployment: Rise Fall Remains the same (circle one)Potential RGDP: Rise Fall Remains the same (circle one)(bonus) Suppose the price of gasoline rises from its current level to $8 per gallon. How will this affect Saudi Arabia’s potential output? Explain why. (Recall oil production accounts for over 45% of its real GDP.) (1-2 sentences)6. Suppose the Joint Select Committee on Deficit Reduction, colloquially referred to as the Supercommittee, comes to an agreement to decreases government spending and taxes each by $500 billion to avoid increasing the federal debt further. Assume mpc is .75What effect will lowering G and T each by $500 have on real GDP in the short run? (Show work for full credit.)7. Suppose the Supercommitte agrees instead to lower government spending by $500, but households feel that the committee’s actions are insufficient to deal with our debt problems, reducing their confidence and ultimately decreasingconsumer spending by $100 billion. Assume mpc =.75. What effect will decreasing C by $100 and decreasing G by $500 have on real GDP in the short run? (Show work for full credit.)8. Suppose the U.S. Environmental Protection Agency EPA decrees that corporations must upgrade or replace their machinery in order to reduce their emissions of sulfur dioxide. The EPA