Principles of Macroeconomics 2013 Fall Midterm 2 Name Answer Key Recitation 2 pts Exam Version T2A 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 Illegible answers will receive no credit 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 You must stay seated for the last 10 minutes of the exam 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 The following WILL BE CONSIDERED CHEATING Having a programmable calculator e g TI 83 out Having your cell phone out Having any notes out Collaborating 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 Spring 2013 2013 Fall Midterm 2 Name Answer Key All Instructors THIS PAGE INTENTIONALLY BLANK Part I 23 points Answer all questions in this part 3pts 1 Give a definition of business cycles What is meant by a recession in the context of business cycles Solution The recurring increases and decreases in the level of economic activity over periods of years A recession is the phase in a business cycle in which the RGDP income and employment decrease 4pts 2 Define exactly two of the following five terms Note You will not get extra points for defining additional terms a 2 pts Contractionary monetary policy Solution Monetary policy that decreases money supply raises interest rates and contracts aggregate demand b 2 pts Financial investment Solution Buying or building an asset in expectation of earning financial gain new factories and homes but also old buildings plus stocks bonds and other financial assets c 2 pts Diversification Solution The strategy of owning many different investments as a means to reduce overall risk to the portfolio d 2 pts National savings Solution The total income that remains in the economy after paying for consumption and government purchases e 2 pts Commodity money Solution A commodity with intrinsic value i e cigarettes gold etc 4pts 3 Answer both parts of this question a 2 pts What is monetary neutrality Solution Monetary neutrality is the proposition that changes in the money supply do not affect real variables b 2 pts What does the Phillips curve show Solution Phillips curve is the curve that shows the short run tradeoff between inflation and unemployment 6pts 4 Name any two tools of monetary policy and explain how they work in the case of contractionary monetary policy Solution Any two of the following three with do 1 Reserve Ratio increase reserve ratio this decreases the amount of loans banks can give out 2 Open Market Operations Sell TBills this decreases the initial deposit in the economy 3 Discount Rate Increase discount rate discourages banks to take loans which also decreases the amount of loans that banks can give out Macro 2013 Fall Midterm 2 2pts Stocks in Coca cola A new factory A new bridge All of the above 6 Tax on investment is a policy that decreases the incentive to invest If it is implemented it has the following impacts a 4 b c d e 2pts Name Answer Key 5 Which of the following is both financial investment and economic investment a b 4 c d 2pts Page 2 of 5 Interest rates go down and the quantity of loanable funds traded go down Interest rates go up and quantity of loanable funds traded go up Interest rates go up and quantity of loanable funds traded go down Interest rates go down and quantity of loanable funds traded go up None of the above 7 Which of the following are not functions performed by the Fed Circle all that apply a 4 b c 4 d Setting income tax rates Setting the reserve ratio Deciding government expenditure Lending money to banks Part II 25 points Answer all questions in this part 2pts 1 AD AS Equilibrium Draw an AD AS diagram that shows an economy in a recession Solution INSERT ANSWER HERE 10pts 2 For the following questions show how AD or SRAS would shift Draw a new graph for each part and show the original and new state a 2 pts Assume you start in long run equilibrium A virus in corn US is exporting to other countries has been discovered to be harmful for livestock and people There is an export ban for US Solution 1pt for AD 1pt for left b 2 pts Assume you start in long run equilibrium Unions start a strike Solution SRAS shifts up c 2 pts Assume you start in long run equilibrium House prices collapse along with consumer wealth Solution AD shifts left d 2 pts Show how the economy in part C would come back to long run equilibrium using fiscal policy Solution AD shifts right e 2 pts Show how the economy in part C would come back to long run equilibrium using monetary policy Solution AD shifts right 5pts 3 Answer both parts of this question a 2 pts Define the quantity theory of money Solution The quantity of money available determines price levels Also acceptable Changes in money supply changes in prices inflation Macro 2013 Fall Midterm 2 Page 3 of 5 Name Answer Key b 3 pts There are studies that show the velocity of money went down during the Great Depression Did this make the deflation problem better or worse In other words assuming at the start of the Depression velocity was constant would this contribute to decline of prices or would it counteract the fall in prices and help raise them Solution It makes the deflationary tendencies worse A decline in velocity will decrease the price level compared to the case where it does not move Why Explain using appropriate theory and or equations 3pts 4 Give one advantage of commodity money Solution Limits the governments ability to conduct irresponsibly inflationary economic policies Money will have some inherent value 5pts 5 Answer both parts of
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