Principles of Macroeconomics Midterm 2 Name Section Exam Number Exam Version T2B Time Limit 50 minutes Guidelines Write your name in the indicated place on the top of every page Each page may have its own directions Follow directions carefully Clearly indicate which question you are answering Bonus points are added to your total grade 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 You may detach the last page 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 8 pages not including this front page numbered 1 8 Good luck Exam Record Part1 25 points Part2 25 points Part3 25 points Part4 25 points Total 100 points Principles of Macroeconomics Fall 2012 Midterm 2 Name Arun Kandanchatha Part I 25 points Answer all questions in this part 4pts 1 What are four components of aggregate demand 3pts 2 What is crowding out and how is it caused by expansionary fiscal policy 2pts ea 3 Define exactly three of the following five terms a Fiscal Policy b Fractional Reserve Banking c Expansionary Fiscal Policy d Economic investment e Financial investment 2pts 4 What is the official name for the paper currency used in the USA Is it commodity or fiat currency Explain 15 pts Macro Midterm2 Page 2 of 8 3pts 5 What di erentiates short run and long run aggregate supply 7pts ea 6 Answer exactly one of the following two questions Name a In 2004 an undersea earthquake in the Indian Ocean generated a large tsunami Explain how each of the following changes the price level in the a ected countries the loss of life damage to roads and buildings the inflow of monetary aid and inflow of goods aid b What is money Define any terms you use 17 pts Macro Midterm2 Page 3 of 8 Name Part II 25 points Answer all questions in this part 2pts 10pts 1 Draw an AD AS diagram that shows an economy in LR AD AS equilibrium 2 For the following questions show how the AD SR AS or the SR AD line would shift your diagram above Assume you start at equilibrium unless stated otherwise a 2 pts The government decides to build more roads and highways b 2 pts Show how the economy returns from the previous question to a LR AD AS equilibrium without government intervention c 2 pts There is a sudden decrease in oil prices d 2 pts Show how the economy returns from the previous equstion to an extended AD AS equilibrium if the central bank uses monetary policy e 2 pts What event could cause a decrease in the LR AS 12 pts Macro Midterm2 Page 4 of 8 Name 8pts 3 Using the money market loanable funds and AD AS diagram show how expansionary monetary policy can end a recession 2pts 4 Define Monetary Neutrality 3pts ea 5 Answer exactly one of the following two questions a What are the cons of commodity money b Consider the following FOMC statement Is the Fed using expansionary or contractionary monetary policy or neither Is actual output above or below potential output The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent Financial markets remain under considerable stress and credit has tightened further for some businesses and households Moreover recent information indicates a deepening of the housing contraction as well as some softening in labor markets The Committee expects inflation to moderate in coming quarters but it will be necessary to continue to monitor inflation developments carefully Todays policy action combined with those taken earlier should help to promote moderate growth over time and to mitigate the risks to economic activity 6 5RP List 5 costs of inflation 16 pts Macro Midterm2 Page 5 of 8 Name Part III 25 points Answer all questions in this part 8pts 1 Calculate the 1 year expected return for each of the following a 3 pts Spend 100 on a 1 year Tbill that pays 3 real interest b 3 pts Buy 100 of stocks in a company BigBubble for a year There is a 40 chance that BigBubble collapses and she loses all her money a 30 chance that it gives her a 2 real return and a 30 chance that it gives her a 5 real return c 2 pts Buy a really good co ee machine for 100 that she could sell for 105 a year from now 12pts 2 Use the data from Econland to answer the remaining questions a 5 pts What is the CPI inflation from 1982 to 2000 b 3 pts Suppose someone has 5000 in wealth in 1982 and 5768 in wealth in 2000 Are they richer or poorer in 2000 c 2 pts Suppose someone in Econland saves 2500 in 1982 by burying money in their backyard How much is that money worth in nominal terms in 2000 d 2 pts Suppose someone in econland invests 2500 in 1982 and earns a nominal interst rate of 20 from 1982 to 2000 What is the real interest rate they earn 5pts 3 Use the data from Econland to answer the remaining questions a 3 pts What is the Money Supply in Econland in 2008 b 2 pts What is the velocity of money in Econland in 2008 25 pts Macro Midterm2 Page 6 of 8 Name Part IV 25 points Answer all questions in this part Use the data on the last page 3pts 1 How much does Initial Spending in the output Market need to change to return Econland to equilibrium 8pts 2 Consider the following two plans separately You may use your answers from earlier questions a 4 pts If the government decides to change government purchases what will the new level of government purchases be b 4 pts If the government decides to change taxes what will the new level of taxes be 6pts 3 If the Central Bank decides to implement monetary policy w hat will the new level of the money supply be You may use your answers from earlier questions 8pts 4 Consider the following two plans separately You may use your answers from earlier questions a 4 pts If the Central Bank decides to use OMO to return the economy to equilibrium what value of bonds will the fed buy sell to close the GDP gap Note You must indicate whether the Fed is buying or selling 21 pts Macro Midterm2 Page 7 of 8 Name b 4 pts If the Central bank decides to change the reserve requirement what will the new reserve requirement be Round your answer to two decimal points 4 pts Macro Midterm2 Page 8 of 8 Name Market Basket 4 loaves of bread 7 gallons of gas Base …
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