Name Score 100 Macroeconomics Problem Set 3 Due Sunday March 15 by 11 00 pm Please type your answers to multiple choice questions in the following table For the short answer questions please type the answers in the spaces provided below each question Save the file with the name aaa bbb PS3 doc where aaa is your first name and bbb is your last name Submit the file by emailing it to MSPEMacro gmail com Please include Problem Set 3 in the subject line of your email Late submissions will lose all points for the problem set Answer Form for Multiple Choice Questions Question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Answer Part A Multiple Choice Questions Choose only one most satisfactory answer for each question 4 points each 1 The aggregate preferred expenditure curve D shifts down when a a b c d the nominal interest rate declines the domestic aggregate price level declines the foreign aggregate price level declines net taxes collected by the government declines all of the above 2 You are an IT management specialist and three jobs in three different companies have been offered to you You find the salaries and work environments of all three positions equally attractive However you are concerned about job stability which depends on the profitability of the company You prefer the job that is more likely to be maintained in the coming year The first company produces a product that is mainly for export e g an international MBA program that holds classes in other countries but it is based in the U S and staffed by U S faculty The second one offers products that are used only in investment projects e g a construction company The third company operates only in the domestic market for non durable consumer products e g a domestic restaurant chain If things were to continue as in the past year all three companies would be equally profitable next year and offer you the same job security However you expect some changes In particular you believe that the government is likely to increase its expenditures next year You examine the Fed s policies and conclude that it will reduce the money supply and thus raise the interest rates with the net effect of the two policies keeping the aggregate real income of the economy constant Under this scenario given other things remain the same which job is likely to become relatively more secure next year Macroeconomics Problem Set 3 1 a e f g The consumer good company job The export company job The investment good company job Both the jobs in the export and investment goods companies will definitely be relatively more secure than the consumer good company job h Both the jobs in the export and consumer goods companies will definitely be relatively more secure than the investment good company job 3 The Korean economy experienced a high rate of growth in 2006 The economists working for the opposition politicians want to know out what factors may have contributed to that income increase They know that the LM curve did not shift during that year and that the markets for money and for goods and services were both in equilibrium at all times Which one of the following factors could have caused the increase in income in this situation a i j k l An increase in the expected rate of inflation A temporary increase in the domestic price level A temporary decrease in the domestic nominal interest rate A temporary increase in net taxes received by the government All of the above 4 Your company has a subsidiary in Malaysia and is contemplating an expansion of its operations there but the company is concerned about the macroeconomic conditions in the country The managers learn that a couple of the Central Bank of Malaysia has decided to lower its discount rate temporarily to help out some banks that are experiencing difficulties In the short run when prices are sticky but the exchange rate is allowed to vary in a flexible way this policy will a m n o p raise the equilibrium aggregate real income in Malaysia cause a depreciation of the nominal exchange rate in Malaysia cause a decline in the interest rates in Malaysia all of the above only a and c 5 In the short run when prices are sticky and the goods market is in equilibrium income rises as the interest rate declines because a q r s t investment expenditure rises imports decline exports rise all of the above none of the above 6 Which of the following factors shifts the IS curve to the left a u v w An increase in government expenditure An increase in the real income of the rest of the world An increase in the aggregate price level An increase in the expected rate of inflation Macroeconomics Problem Set 3 2 x None of the above 7 China is a major export market for Brazil Recently news media reported that the Chinese economy has slowed down What impact this event must have had on the IS curve of the Brazilian economy a y z aa The IS curve could not have been affected The IS curve must have shifted to the left The IS curve must have shifted to the right The impact on the IS curve cannot be predicted The following six questions are based on the article Currencies The weak shall inherit the earth published by The Economist on October 6 2012 It can be viewed through UIUC Library Online Resources For your convenience these articles are copied below 8 According to the article Currencies The weak shall inherit the earth countries have come to prefer having weaker currencies because a bb cc dd ee in recent years many weak and unstable currencies are in fashion a weak currency helps exporters gain market share a weak currency is a sign of market confidence in the country s economic policies a weak currency can help keep inflation low a weak currency can help raise the inflation rate 9 According to the article Currencies The weak shall inherit the earth raising the value of a country s currency tends to more difficult than lowering it because to prop up the currency a the central bank may have to print and inject large amounts of the domestic currency into the economy ff the central banks of other countries may try to follow similar policies triggering a currency war or even a trade war gg the central bank has to use its foreign reserves which are limited and could be exhausted leaving the currency defenseless hh the central bank must be willing to lower the interest rate and risk increased inflation 10 The article Currencies The weak shall inherit the earth mentions that the recent expansionary monetary policies or quantitative easing QE in some