Practice Midterm 2 Econ 1102 Name 1 RP 1 RP for writing name as it appears on onestop Section 1 RP 1 RP for section enrolled in TA Name 1RP 1RP for correct TA name NO programmable calculators NO cell phones NO notes NO collaboration with other students Time limit 50 minutes Each page may have has its own directions Follow the directions carefully Clearly indicate which question you are answering Replacement points are added to score of the page on which they are earned The only exception is the 3RP given for Name Section and TA Name these are added to your total score For full credit graphs must be completely LABELED and math work shown Be sure to justify your answers clearly and precisely for full credit Rambling incoherent or illegible responses shall be penalized even if correct Points are rewarded for answers consistent with those your instructor would give to the same question This exam is 8 pages including this front page numbered 1 8 2 3 4 5 RP Total PAGE 1 QUESTIONS 25 pts 13 RP 1 4 pt What are the four components of aggregate demand 2 3 pts What is crowding out and how is it caused by expansionary fiscal policy 3 2 5 pts Define Fiscal Policy 4 2 5 pts What is the official name for the paper currency used in the USA Is it commodity or fiat currency Explain 5 2 5 pts Define Fractional Reserve Banking 6 2 5 pts What is the differentiates between short run and long run aggregate supply 7 6 pt 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 affected countries the loss of life damage to roads and buildings the inflow of monetary aid and inflow of goods aid 8 2 pts Define Expansionary Fiscal Policy 9 2 5 RP Economic investment 10 2 5 RP Financial investment 11 8 RP What is money Define any terms you use 1102 Practice Midterm 2 Page 2 of 6 PAGE 2 QUESTION 25 pts 8 RP 12 2 pts Draw an AD AS diagram that shows an economy in AD AS equilibrium For the following four questions show how the AD SR AS or the LR AS line would shift your diagram above Assume you start at equilibrium unless stated otherwise 13 2 pt The government decides to build more roads and highways 14 2 pt Show how the economy returns from 13 to an AD AS equilibrium without government intervention 15 2 pt There is a sudden decrease in oil prices 16 2 pt Show how the economy returns from 15 to an AD AS equilibrium if the central bank uses monetary policy 17 2 pt What event could cause a decrease in the LR AS 18 8 pts Using the money market loanable fund and AD AS diagram show how expansionary monetary policy can end a recession 19 2 pts Define Monetary Neutrality 20 3 pts What are the cons of commodity money 21 3 RP 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 Today s policy action combined with those taken earlier should help to promote moderate growth over time and to mitigate the risks to economic activity 22 5 RP List 5 costs of inflation 1102 Practice Midterm 2 Page 3 of 6 PAGE 3 QUESTIONS 25 pts 23 8 pt Gina has 100 to spend today She could a Spend 100 on a 1 year Tbill that pays 3 real interest b 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 Buy a really good coffee machine that she could sell for 105 a year from now Which option would give her the highest expected yield a year from now Use the data from Econland to answer the remaining questions 24 5 pts What is CPI inflation from 1982 to 2000 25 3 pts Suppose someone earns 5000 in 1982 and 5768 in 2000 Are they richer or poorer in 2000 26 2 pt Suppose someone in Econland saves 2500 in 1982 by putting burying money in their back yard How much is that money worth in nominal terms in 2000 27 2 pts Suppose someone in Econland invests 2500 in 1982 and earn a nominal interest rate of 20 from 1982 to 2000 What is the real interest rate they earn 28 3 pts What is the Money Supply in Econland in 2008 29 2 pts What is the velocity of money in Econland in 2008 1102 Practice Midterm 2 Page 4 of 6 PAGE 4 QUESTIONS 25 pts 30 3 pts How much does Initial Spending in the Output Market need to change to return the Econland to equilibrium Consider the following four plans separately You may use your answers from earlier questions 31 4pts If the Government decides to change government purchases what will the new level of government purchases be 32 4 pts If the Government decides to change taxes what will the new level of taxes be 33 6 pts If the Central Bank decides to implement monetary policy what will the new level of the money supply be You may use your answer from question 28 34 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 35 4 pts If the Central Bank decides to change the reserve requirement what will the new reserve requirement be Round your answer to 2 decimals 1102 Practice Midterm 2 Page 5 of 6 Econland s Economic Data Market Basket 4 Loaves of Bread 7 gallons of gas Year Loaves of Bread Produced Nominal Price of Bread Base Year 1982 Units of Gas Produced Nominal Price of Gas 1982 120 3 25 30 1 00 2000 140 3 50 25 1 20 Econland in 2008 RGDP 4000 Natural Rate of Output 4500 Money Demand 2500 10000i Loanable Funds Demand 1000 10000i Initial Deposits 100 MPC 0 8 Reserve Ratio 0 05 Government Purchases 200 Price Level 2 00 Tax Revenue 200 1102 Practice Midterm 2 Page 6 of 6
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