Final Exam Sample Questions 1 Use competitive supply demand diagrams and brief verbal explanations to analyze a The economic incidence of a 1 00 per unit excise tax legally imposed on the sellers of a luxury good with a before tax price of 50 00 b The effects on price quantities and total revenue of minimum wage law imposed in a resource market with highly elastic labor demand c The effects on price quantity and total revenue of technological progress and rising incomes d a lunatic puts cyanide in randomly selected Extra Strength Tylenol bottles e an unseasonable frost destroys half the California and Florida orange crops f stock speculators both buyers and sellers expect higher future stock prices 2 Suppose the economy is initially in equilibrium at less than full employment Using planned total expenditure Planned TE Keynesian aggregate supply ASK and real aggregate supply ASR diagrams and brief verbal descriptions explain how policymakers attempts to restore full employment and an adverse supply shock can lead to stagflation 3 First identify the underlined terms then explain the relationship between the terms a marginal tax rates and Reagan Administration supply side economic policies b the Monetarist view of money demand and velocity c Animal spirits and Investment Demand d the Quantity Theory of Money and inflation e a 5 unemployment rate and full employment f the monetarist view of money demand and velocity g excess reserves and changes in the money supply 4 Assuming no change in the money supply MS and adopting a monetarist view of Money demand MD and investment demand MEI explain how an increase in Government spending G that is financed by Treasury bond sales deficit financing would lead to a large crowding out of private investment I Use diagrams of the bond money investment and national income Y Nominal GDP markets to illustrate your answer 5 Suppose the Federal Reserve Fed wanted to eliminate the crowding out caused by a government budget deficit What monetary policy could the Fed undertake to achieve this objective How would such a policy work Use diagrams of the bond and money markets to illustrate your answer 20 points 6 How is unemployment measured What are the three types of unemployment What are the economic and non economic costs of unemployment 20 points 7 What are the major economic effects of inflation 15 points 8 American prosperity in the 1920s was based in part on two factors 1 a growing money supply made available by an accommodating Federal Reserve System and 2 widespread and prolonged investor optimism about future business conditions Use bond market money market investment market and national income or nominal GDP diagrams to illustrate the operation of these two factors during the 1920s Clearly explain what your diagrams are showing 9 Discuss the Reagan Administration supply side economic policies designed to combat stagflation Did these policies work 10 Keynesian economists tend to minimize the importance of the so called crowding out problem What is the crowding out problem Using money market investment market and national income or nominal GDP diagrams that are consistent with the Keynesian view of the macro economy show why the Keynesians generally believe that crowding out is not a major problem 30 points 11 Consider the following Some Clinton Administration officials have urged the Federal Reserve Fed to lower interest rates in an attempt to increase real output growth above its current annual rate of about 3 These officials claim that real growth will accelerate while inflation remains at its current rate of about 2 Fed Chairman Alan Greenspan has rejected the Administration s proposal arguing that such an expansionary monetary policy would simply result in higher inflation while real output growth remains the same a Use the Quantity Theory of Money to analyze the Administrations and Chairman Greenspan s contentions b If the Fed decided to lower interest rates what open market operations would they use Illustrate the expansionary open market operations using supply demand diagrams of the bond and money markets 12 Suppose the Oklahoma state legislature grants a 10 per credit hour excise subsidy to the University of Oklahoma Use a competitive supply demand diagram of the OU educational services market to illustrate the legal and economic incidence of this subsidy 13 In 1992 Congress passed a per unit excise tax on yachts Although legally the tax was to be collected from yacht suppliers the law was intended to make the rich yacht buyers pay more of the tax burden The tax was repealed in 1993 in response to the vigorous protests of yacht manufacturers and their workers Use a competitive supply demand diagram of the yacht market and your knowledge of economic tax incidence to explain these events 14 First use the Quantity Theory of Money and the standard assumption of constant velocity to explain the hyperinflation experienced by the Confederate states during the American Civil War Now suppose that velocity is not necessarily constant How do you think velocity may have changed due to the extremely high wartime inflation Why Would this change in velocity tend to reduce or intensify the inflationary pressures in the economy Why 15 Use bond money investment and nominal GDP Y diagrams and brief verbal descriptions to explain the short run effects of an increase in government spending G that is deficit financed by the Treasury selling bonds 25 points 16 Use a production possibilities curve PPC diagram and brief verbal descriptions to analyze the long run effects of a deficit financed increase in government spending 17 If the Federal Reserve Fed wanted to counteract the rise in interest rates caused by a deficit financed increase in government spending what open market operations would they undertake Use diagrams of the bond money and investment markets to show how this monetary policy would work 20 points