I/F;yalr'2 Sample QuestionsItlentify and explain the significance of:I Inventory adjustuent mechanismaGDP ruo,*I.y 0,. t|ffi;Y-'"f , wl^'+w Y+b. Excess Reserves v I---TvX 24'a'+VO'Tl* ca'-n {t** o-x- EF, 'f t'*"l"a l*Lt! rd'*c. Thre loyment aa* 2r^LbB ,-lh,tr almL P"'$|a4 a Ms.l)-tLt7iu.L, f ;c,t*^n'1-, offu' rnL -d. inventory adjustnent mechanisme. Quantif theory of moneYf. Frictional unemplolmentg. eflects ofunanticipated inflation on creditorsh. Three functions of moneYo * a- 1"^gcljo^ t;r,ff'D aa o- u'v'fr t'"*Y@ u u sfroa'1-of va/4^'- 'i. Default riskj. ConsumerWealthk. how inflation affects creditorsDo ]- WaAaP'f___+ q4 k4 @ L\n + ,ry- 4 l"^j,ffi 3.\ 'usi"g money andbondmar\et *TT:, ^ :"1,iT9!*"n: effects of"ffi- .roo.suggestedoqenlarketoperatio:r. S'-^r- 0,l' }} l" )a -+,Pto"^ulTFto)fu^,L& fof, ALL,*l-J"-J"c@ Assume: (a) the economy is inilially in equilibrium nl lsninflationary firll-emplolment GDP:Y) @) due to terorist attacks, the consumption firnction shifts downward by $100 biilion and (E)b marginal propensity to consume is 0.8. Using a Keynesian total expenditure (TB)laggregate, illustrate and explain the probable macroeconomic effects of ttre decline inAC = - Ipo ' t'' -LY= -J'o'g- a!=-fe'o-S? ,. = ldJ- | '.., t--lto restore full-employrirent ftddr the circumstances 1 Y", Ylto restore full-employrhent Sddr the circumstan= o.k' ^tlc o..I= -ii6c-= -#s =-z( oY=I ofMoneytoexprain ^"o,",fffiJ;:[:l;"!iks ,:[?7," ;^lth>,IZ. the Federal Reserve Board of_Governors, what three policies wouldAsr.Ti+J1LX-l.,w4,l-4" )ac+soa^e U Ln+iw & afd.='aTf c6: I*/u,t: fl3l lr,'(t'o.''.Ln't),,rn- Ac= $ thl,>,,o". _) f t* lfr,r\#.r^'^ &,tf(16,0e,&* ) .ey )Y j""^4"* Dfr,.,+rv%F;^*. h^"1 W, ^{ nfl^"+ @ a-l_ tua^r+?_ ^42AA&-T^'-''-t"*tr' fz*aatt * g^- P,l-'uA k7rr*t* r/g. N,lnr,*,an'frs .PiA W grob-'Eorr,--r^. *4 o-*yt .orclt++your answer with diagfams of the money and bond markets. . i /.i\ ^ t3 looNr l4o! re*-+n- rzyti+ru-d' D L*tt* olia,eu*q- rfr't' td ^V^. !, u --v-'a--3 .Lur.^or tlol ro*.+w- tz|'t^'vr^tl\ (, rwarnda/\ I . """- 0 I _ ll __*4*r, F"!r'${ GDP gap of $)o billion. Now suppose that MPC : .s ,oar). a *-qa:; ,,4,r(J,")""/ *-ry government spending (G) is increased by $2 billion and at the same time taxes (T) are decreased aG = f5 &,Vzv-)- AA = -S l,;-tDna7 = -io-ll&te:n9a Using your knowledge of the government spending and tax multiplie in government spending then calculate the ch- t- h,tlc - r-e-k -{= Mq ) oA=- 8,,i = -4o|ttl^Wtal Expenditure (TB)laggregate supply (A56)S io Sz billion. Will this combination of policies restore noninflationary full-emplolment GDP aT : -l i hbtew 'ff*)? Why or why not? Show your calculations and illustrate your answer graphicatly. I'PC: o, t ' ,r,.tri*-,r*=*r=>J--1o h'cl**(Y*) O) government spending (G) is cut by $8 billion (c) taxes (T) are cut by $10 billion and (d\ t" " '-.' '-lrf.. -..-;-ot ^.n-pncifrr fn .nncrrmp fl\r{PC): O *' - Uthe marginal propensity to consume (MPC) : 0.8ev4L(J)laggegate wlthclrawals diagram (W), illustrate and briefly explain the combined effects of the - iot'$'-: 1 gulterest rates. When the market crash wiped out consumer wealth n 1929. however. the Fedreacted bv raising interest rates. Many economists believe this credit "tightening" made the | _--7,tax cuts. Wh experiencing after these t\'. eDP k"? .banees? + o' M: "^ ^r+l re*tv*#ffJ"Tffi:lJJ ; " ilr'' ruTT:Tn #1T:T:: ;li+#ffi t{ Wverall-economic activity.u"o*o.r"." $ 1W,(aC(oBs- | ,/ I - ^- _1.- r.11h. I K"ipore initially that velocity (V) is cons+L^+.,^l^^:e, /\n :-^-^^-^^ Tf +L^ -^l;^,, ^'l.,;^^+:-,^uF,T Qumtrviicu.lo p'.,'.-t'/"^tl a @ -l - +i.\Uwzo{-?^ ToDM-<octs oTinflatlbn?= Be s lainthe effects ofinflation on debtors and creditors.c=Yd-C-Ft"De-Fb,.r" lt)tw*r,L m,O SiL &^A" 'i-+ri" >y'"'v""''l!*', " Yff rJw2)A-)t, i*oL va.Lu.'r,f u4- t++e w;+,f**L n- ""La]ff+ L"wo-WaLr*'rt* Wzofrr.Ytrto7A u44"t; ;FaLrrI- ;^f la*tvg relutc*,c,roo[,tana I 1r-+r,fut) ^* i'ryc-7'ta,tQ,O \L'*,"o-s,^fnur<.'a^4--t,ho: S"tJ"t).1,-,, V'Jt'- 9otT't Mo'1t'- -_ J--L*6r-r-XoJ= I"*g'tX, -)*?l\*cfl\recentlyproposed a $25 billion tax cut. CongressionalDemocrats recently proposed a $50 billion increase in govemment spending.no^minal cDP CYl.o.l .ao-a],= -4 - t-ad')-io-o.6={-xIo- }d,o aY= aY-r*t aYS = [n* TIoat firll-employment (: Y'), what = )&o SttLtortarguing that such expansionary monetary sult intrigheroutput gowth remains the same." P t 7"44,4&"; I ," ,l:o,l4a Use the Quantrty Theory of Money to analyze the Administration's and ChairmanGreenspan's contentions. cn"^+fo-a, t^Mtt T.^A > {o4 r, r^firt,>"| ' v . l;".=)p14b If the Fed decides to lower interest rates, what open market operations would they use?IIllustate these "expansionary" open market operations using supply/demand diagrams of themoneyandbondmarkets. ir ***-*' Wa'a irir-+oAt ",FoLr.r-ro[c 8 lnr.tor-*--"y= oy-*+oya @ .o,,, suppose *" """# ffi;:l"#"* #"K,;"-"^rnSmacroeconomic problem will these policies qeate? V/hy? Y" >\a => ;tf&nD"t fu€' of ['ifta"-u* n13c Using a Keynesian aggregate injections (J)/aggregate withdrawals (W) diagram, illustatethe combined effects of these policies.14. Consider the following: "Some Clinton Adminishation officials have urged the FederalReserve (Fed) to lower interest rates in an affempt to increase the growth rate of real oueut.These officials claim that real grouth will accelerate while inflation leanins at its current rate(about3o/o per year). Fed Chairman Alan Greenspan has rejected the Administration's proposalsYe-=Y'- "f,'j+Tuppose that government spending (G) and taxes (T) are increased by the same amount. Show L \ | ?- f*it/Pc trt'zP%urknowledgeof thegovernmentspendin (mc)andtax(mrax)multipliersinpredictingtn"fl -\ -= a6-lt4Pc'at effectsofthisequalincreaseinGandTon ominalgrossdomesticproduct(Y). Whqt,if"ov, btV L\) - Artc-' macroeconomicprob]gmwou$resultfromthesepolicychangqs? Why? MIC | - l---l---{rvv uurvu. l\vw ruPPu)e ul4llYlr\J -.o .1utt klxcs (IJ iale AeCreASeQ Oy DfUU OIIIIOIIWIUI€ 4f l-p{^;A TEthe sante time government spending (G) is decreasedby $100 billion. Iill this combination of Ipolicies restore noninflationary GDP at Y*? Show ail of your calculations and illustrate youranswer with a Keynesian TE/aggregate supply (ASd diagram which also shows injection (I) andwithdrawals (W). (Hinf calculate the effects of the govemment spending cut and the tax cut on5tr| '*1 - ll4uruEuullu.trtuploute[lwoul(]reSUItIromInesepOXCyCnanFeS/ W.ny/ rr]A | |