Principles of Macroeconomics 2013 Midterm 1 Name Answer Key Recitation 2 pts Exam Version T1O Time Limit 60 minutes Guidelines READ THEM Exams written in pencil will not be regraded You must write in ink if you might want a regrade in the future You are allowed to detach and keep the last page We will not grade the last page so do not put any workings answers on it Each page may have its own directions Follow directions carefully Where required clearly indicate which question you are answering For full credit answers must be clearly justified Graphs must be completely LABELED and math work shown Do not write too much One sentence per point is a good estimate but is NOT a rule i e do not complain if you write one sentence for a one point question and do not get full marks For questions with choice if you answer more than the required number clearly indicate which questions you want graded Otherwise the answers will be graded in order up to the required number You will not get the grades from the best answers Partial marks for multiple choice are possible During the exam you may NOT Use a programmable calculator e g TI 83 Have your cell phone out Have any notes out Collaborate with other students This exam is 5 pages not including this front page numbered 1 5 Good luck Exam Record Part1 23 points Part2 25 points Part3 25 points Part4 25 points Correct Section 2 points Total 100 points Principles of Macroeconomics Fall 2013 2013 Midterm 1 Name Answer Key All Instructors Part I 23 points Answer all questions in this part 6pts 1 Define all of the following terms a 2 pts The Wealth Effect Solution If the money supply is fixed increases in the price level tend to decrease the real value of financial assests lowers real wealth which lowers consumer spending b 2 pts Frictional Unemployment Solution Type of unemployment caused by workers taking their time searching for a job that mathces their skill and tastes c 2 pts Normative Claims Solution Normative claims attempt to describe the world as it should be 2pts 2 The study of which of the following would not be considered part of macroeconomics Circle only one answer a b 4 c d e 10pts 2pts 3 Answer both parts of this question a 5 pts Give three benefits of a market economy and explain them Solution Any three of the following with explanation Extensive Private property rights freedom of enterprise and choice self interest as the primary motivating force competition markets and prices active but limited government b 5 pts Explain how a command economy deals with the three benefits you mentioned above and why it isn t necessarily worse Solution Any three of the following with explanation Public property rights limited enterprise soietal benefit as driving force limited competition command prices active government 4 Which factor has the largest effect on the economic growth of a developed country a 4 b c d e 3pts inflation individual consumers unemployment economic growth none of the above technology capital labour natural resources it depends on the developed country 5 Assume Saudi Arabia decides to invest 200 billion for infrastructure improvements in each of the following countries Ethiopia United States China Rank these countries in terms of the impact of this investment on GDP growth from lowest to highest a b c d e 4 f Ethiopia United States China Ethiopia China United States China United States Ethiopia China Ethiopia United States United States China Ethiopia United States Ethiopia China Macro 2013 Midterm1 Page 2 of 5 Name Answer Key Part II 25 points Answer all questions in this part 8pts 1 The production possibilities frontier a 4 pts Using the data provided on the last b 2 pts Draw the impact in a new graph of page draw the Econland PPF in 2010 placing a drought that reduces the amount of wheat gasoline on the x axis available to bread factories Solution Solution c 2 pts In your answer for part a draw and label the points that represent the following situations 1 Inefficient 2 Infeasible not doable production Solution 1 should be inside the PPF 2 should be outside the PPF 5pts 2 AD AS equilibrium a 3 pts Draw an AD AS diagram that shows an b 2 pts Show the short run impact of a sudden decrease in the interest rate economy in AD AS equilibrium Solution Solution 3pts 3 When a government wants to balance its budget with the least harm to GDP the multiplier effect tells us that which policy will be most effective Select only one a b c 4 d e 3pts 4 Which of the following is an explanation for why AD is downward sloping Circle all that apply a 4 b c d 4 3pts an increase in government spending a decrease in government spending an increase in taxes a decrease in taxes none of the above Interest Rate Effect Sticky Wages Substitution Effect Wealth Effect 5 Give a brief explanation of one of your answer s from question 4 Solution Any reasonable definiton They receive points for this even if they have an incorrect answer to the previous question 3pts 6 Which of the following workers are structurally unemployed Circle all that apply a b 4 c 4 d An amusement park employee in January A cassette tape manufacturer A screenwriter unable to move to Hollywood A biomedical engineer looking for the right medical device company Macro 2013 Midterm1 Page 3 of 5 Name Answer Key Part III 25 points Answer all questions in this part 2pts 1 Define Economic Growth Solution An increase in RGDP per capita 6pts 2 Draw and Label a flow diagram with three agents Government Households and Firms and two markets factor and output Circle the components that make up GDP It is important that you dont add unnecessary items to diagram You may assume that all households own shares in firms Solution Please refer to flow diagrams on lecture notes We dont want extra items on the diagram rest of the world and financial markets that are not indicated on the question 2pts 3 Suppose we have an economy in which GDP equals 10 000 Government spending equals 2 000 and Imports equal 3 000 Then which of the following may be true Circle all that apply a b 4 c d 4 e Exports 3 000 Consumption 0 Investment 0 Exports 4 000 Consumption 6 000 Investment 1 000 Exports 1 000 Consumption 11 000 Investment 1 000 Exports 0 Consumption 9 000 Investment 2 000 none of the above 2pts 4 Consider two countries A and B with the same GDP and fiscal policy Assume A s Marginal Propensity to Consume MPC henceforth is 0 75 and B s MPC is 0 5 Assume the government decides to increase spending by 800 with
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