Fall 2008 (Exam #3) Econ 100B Page 1 of 9 Name: _________ANSWERS__________ SID: _____________________________ Discussion Section: _________________ GSI: _____________________________ Economic 100B Macroeconomic Analysis Professor Steven Wood Fall 2008 Exam #3 ANSWERS Please sign the following oath: The answers on this test are entirely my own work. I neither gave nor received any aid while taking this test. I will not discuss the questions on this test until after 3:30 p.m. on December 20, 2008. __________________________________ Signature Any test turned in without a signature indicating that you have taken this oath will be assigned a grade of zero. Graph Instructions When drawing diagrams, the following rules apply: 1. Completely, clearly and accurately label all axes, lines, curves, and equilibrium points. 2. The original diagram and any equilibrium points MUST be drawn in black or pencil. 3. The first change in any variable, curve, or line and any new equilibrium points MUST be drawn in red. 4. The second change in any variable, curve, or line and any new equilibrium points MUST be drawn in blue. 5. The third change in any variable, curve, or line and any new equilibrium points MUST be drawn in green. Do NOT open this test until instructed to do so. Good Luck!Fall 2008 (Exam #3) Econ 100B Page 2 of 9 This page intentionally left blank.Fall 2008 (Exam #3) Econ 100B Page 3 of 9 A. Multiple Choice Questions. Circle the letter corresponding to the best answer. (3 points each; total of 30 points.) 1. The Phillips curve is the relation between inflation and unemployment that holds for a given natural rate of unemployment and a: a. Given rate of inflation. b. Given expected rate of inflation. c. Given level of unemployment. d. Given expected level of unemployment. 2. Under an assumption of monetary neutrality, a change in the growth rate of the nominal money supply has: a. No effect on the inflation rate. b. A less than proportional effect on the inflation rate. c. A proportional effect on the inflation rate. d. A more than proportional effect on the inflation rate. 3. Suppose that the economy is initially at its full-employment output level. Subsequently, a decrease in the money supply combined with an increase in the government’s structural budget balance would have all of the following effects EXCEPT: a. Inflation will be lower in the long run. b. The real interest rate will be lower in the long run. c. Investment will be higher in the long run. d. Unemployment will be higher in the long run. 4. Suppose that the central bank adopts an inflation target, i.e., it commits to keeping inflation at a fixed rate and doing whatever is necessary to prevent deviations from that target. If inflation is currently at its target value and there is a favorable productivity shock, then the central bank should: a. Increase the money supply. b. Reduce the money supply. c. Increase government purchases. d. Decrease government purchases. 5. According to real business cycle theory, prices are completely flexible. This, if this theory is correct, a large fiscal expansion would: a. Have no effect on inflation. b. Not shift the DAD curve. c. Have no effect on output. d. Have no effect on real interest rates.Fall 2008 (Exam #3) Econ 100B Page 4 of 9 6. For a given real exchange rate, a nominal appreciation of the domestic currency will result from: a. An increase in the prices of foreign goods or an increase in the prices of domestic goods. b. A decrease in the prices of foreign goods or an increase in the prices of domestic goods. c. An increase in the prices of foreign goods or a decrease in the prices of domestic goods. d. A decrease in the prices of foreign goods or a decrease in the prices of domestic goods. 7. Suppose the euro/yen exchange rate falls while the dollar/yen exchange rate rises. What happens to the price of goods imported into Japan? a. European goods become more expensive while U.S. goods become cheaper. b. European goods become cheaper while U.S. goods become more expensive. c. Both European and U.S. goods become more expensive. d. Both European and U.S. goods become cheaper. 8. Suppose that the Japanese real interest rate declines relative to the U.K. real interest rate. Then, the U.K exchange rate _______ and U.K. net exports _______. a. Increases; increase. b. Increases; decrease. c. Decreases; increase. d. Decreases; decrease. 9. Suppose that the Federal Reserve has just purchased bonds in the domestic financial markets through open market operations. In the short-run Keynesian model, this would cause foreign economic activity to _______ and the foreign real interest rate to _______: a. Increase; increase. b. Increase; decrease. c. Decrease; increase. d. Decrease; decrease. 10. You have just noticed that the dollar has appreciated substantially and you suspect that the U.S. government was behind this change. Which of the following would have caused the largest appreciation in the real exchange rate? a. An increase in the money supply. b. A decrease in the money supply. c. An increase in government purchases. d. A decrease in tax rates.Fall 2008 (Exam #3) Econ 100B Page 5 of 9 B. Answer BOTH of the following questions in the space provided. (35 points each, total of 70 points.) 1. DAD-SRAS Model. Suppose that in 2007 the economy could be described by the Keynesian model, that it was in general equilibrium with an inflation rate of 3%, and that Ricardian equivalence does not hold. Assume that the adjustment process to long-term equilibrium takes 4 years, that demand shocks have a larger effect on output than any inflation or supply shocks, and that any long-run supply shock effect on full-employment output is larger than any