Principles of Macroeconomics 2013 Fall Midterm 2 Name Answer Key Recitation 2 pts Exam Version T2MU 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 According to economists who believe in real business cycles what is the cause of business cycles Solution The recurring increases and decreases in the level of economic activity over periods of years Fluctuations occur because of shocks changes to real factors of production 4pts 2 Define exactly two of the following five terms Note You will not get extra points for defining additional terms a 2 pts Fiat Money Solution Money without intrinsic value but is money by government decree b 2 pts Open market operations Solution Buying and selling of government securities by a Central Bank for the purpose of carrying out monetary policy c 2 pts Contractionary Fiscal Policy Solution A decrease in government purchases or an increase in taxes or a combination for the purpose of decreasing aggregate demand to the full employment rate d 2 pts Economic investment Solution Payments for new additions to the nation s capital stock whether public new roads and bridges or private new factories homes and equipment e 2 pts Consumer Price Index Solution A measure of the overall cost of the goods and services used by a typical consumer 4pts 3 Answer both parts of this question a 2 pts What is crowding out Solution Crowding out is the decrease in investment that results from decrease in public savings expansionary fiscal policy b 2 pts How is crowding out caused by expansionary fiscal policy Solution With expansionary fiscal policy the public savings decreases therefore the supply of loanable funds decreases This results in a higher interest rate and a lower demand for loans in the new equilibrium in the loanble funds market full credit if explained with diagrams 6pts 4 What is money Define any terms that you use Give an example of money and an example of nonmoney Solution Money Anything that performs the following functions 1 Medium of Exchange An item that buyers give sellers when they want to purchase goods and services 2 Unit of Account The measure people use to post prices and record debts 3 Store of Value An item that people can use to transfer purchasing power from present to the future Money currency cigarettes gold Non money gift cards credit cards Macro 2013 Fall Midterm 2 2pts A new bridge A new factory Stocks in Target All of the above 6 Tax on savings is a policy that decreases the incentive to save If it is implemented it has the following impacts a b c 4 d e 2pts Name Answer Key 5 Which of the following is a financial investment but not an economic investment a b c 4 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 functions performed by the Fed Circle all that apply a b 4 c d 4 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 expansion producing over capacity Solution INSERT ANSWER HERE 10pts 2 Using the money market loanable fund and AD AS diagram show the effects of Central Bank buying government bonds from public Solution INSERT SOLUTION 5pts 3 There are studies that claim internet increased the velocity of money What happens if velocity of money increases assuming Money Supply and Real Gross Domestic Product stay constant Make sure to explain your answer using the appropriate theory and or equations Solution Prices increase 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 this question a 2 pts What is an automatic stabilizer Solution Changes in fiscal policy that stimulate AD when the economy goes into a recession or slows AD when economy goes into a boom without policy makers having to take any deliberate action Any reasonable explanation b 3 pts Would a balanced budget proposition act as an automatic stabilizer fiscal policy or not Explain Solution A balanced budget proposal is the opposite of automatic stabilizer It will make recessions worse by cutting the government expenditure Macro 2013 Fall Midterm 2 Page 3 of 5 Name Answer Key Part III 25 points Answer all questions in this part 2pts 1 Who suffers from unexpected inflation Note being unaffected is not suffering a 4 b c 4 d 3pts 2 Inflation last year was 4 people expect the Fed to target inflation at 2 Which inflation rate s will lead to lower unemployment this year A B C 4 D 4 10pts
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