0 S90 C A As Econ 201 MIDTERM EXAM 2 Spring 2009 DIRECTIONS Read each answer carefully and choose the best answer Fill out your answers on the bubble sheet using a pencil Answer all questions there is no penalty for guessing You may write on the exam also the last page is scratch paper You may ask questions during the exam by raising your hand Questions 1 through 3 use the following information Suppose in 2008 a household s disposable income is 55 000 and consumption is 49 000 Suppose in 2009 the household s disposable income is 60 000 and consumption is 53 250 Suppose the household s autonomous consumption and marginal propensity to consume are unchanged between 2008 and 2009 cid 9 i PKx Of 1 Autonomous consumption for this household 2 At what level of disposable income would this household have zero saving L cid 9 O cid 9 ZZc O lcc 3 Suppose on January 1 2010 this household has 6000 in wealth Suj5ose this household has 63 000 in disposable income in 2010 Assuming this household s autonomous consumption and marginal propensity to consume don t change in 2010 what will the household s wealth be on January 1 20119 b 3250 cid 9 c 4250 d 6000 a zero b 337 5 c 12750 cid 9 a 7200 b 9450 cid 9 13200 cid 9 d 17450 54 s3to 4 Suppose the economy goes into a recession following a series of bank failures Which of the following explanations for the recession would make sense according to the Classical model I the bank failures disrupted the financial industry s normal function of making loans and processing payments reducing productivity in the financial sector II the bank failures made shareholders and depositors feel tess wealthy which reduced their consumption spending cid 9 c cCc i cid 9 c2a7 I but not II II but not I c both I and II d neither i nor ii cid 9 c i pcctic 5 cid 9 OG6O D rcL cid 9 cid 9 cid 9 5 According to the Keynesian model all of the following recent developments could explain the current US recession EXCEPT cid 9 S cid 9 co sVo c of rjA VyA q c a The US stock market has declined shSly cid 9 av nter H e prices in the US have declined sharply Iouse prices in Europe have declined sharply 6 Which of the following is important to explaining why there is a multiplier in the Keynesian model a When demand goes up firms can raise their prices and still sell the same amount of output b When governments get more tax revenue they tend to increase their spending c When output rises in other countries the US can export more to those countries boosting our net exports and aggregate demand OWhen firms sell more output they pay their workers and shareholders more Questions 7 through 9 use the following information Suppose initially one Canadian dollar is worth 1 5 Euros Then suppose that the exchange rate changes so that the Canadian dollar is worth 1 3 Euros 7 Which of the following is true I The Canadian dollar has depreciated against the Euro II the Euro has appreciated against the Canadian dollar u j 1eo2 cid 9 rCoql a I but not II b II but not I jthI and H cid 9 d neither I nor II 8 Assuming there are no other shocks which of the following will DECREASE as a result of this change in the exchange rate L A cid 9 s4 o V V 1 cid 9 Europe 9 Who will be the happiest about the change in exchange rates a Canadianp cid 9 output cid 9 b Canadji1titput ropean d All of the above T A Canadian student wanting to travel to Paris France c A German car manufacturej w1T iicg to sell cars in Canada AqA Canadian store wanting to import wine from France German student wanting to PIo Vancouver Canada Questions 10 and 11 use the picture below Draw a picture with two production possibilities frontiers one shifted out relative to the other Points A and B are on the same inner PPF with point A located to the northwest up and to the left of point B Point C is on the outer PPF located directly north above of point A 10 Suppose that a cultural preference shift in the US causes a growing number of young people to choose to spend two years traveling around the world after finishing college rather than taking ajob right away In terms of the picture above the classical model would represent this cultural preference shift as a move from point to B cid 9 b B to A cid 9 c C to A cid 9 d C to B cid 9 11 Suppose that political tensions ease in the Middle East and that this increases the cid 9 world s supply of oil Suppose this causes a boom in the economy but has no impact on the amount people work or the unemployment rate In terms of the picture above the classical model would represent this as a move from bAar a AtoB b BtoA cid 9 c BtoC toC cS cid 9 rtu 12 Which of the following descriptions of the inflation tax is correct oa he inflation tax refers to the fact that cash becomes less valuable during periods of high inflation b The inflation tax refers to the fact that government tax revenues tend to rise faster than wages and incomes during periods of high inflation c The inflation tax refers to the fact that borrowers gain at the expense of lenders during periods of high inflation d The inflation tax refers to the fact that people have to spend more time searching for low prices and going to the bank during periods of high inflation V A 0 AO CL J r P 0 cid 9 cid 9 c41 tO Questions 13 through 16 use the following information Suppose the US is a Keynesian economy with the following parameters C200 0 7DI 1 150 X30 M80 G 120 TR 60 t 0 2 13 Equilibrium output for the US is roughly or exactly a 825 cid 9 1050 cid 9 c 1091 cid 9 d 1277 14 At the level of equilibrium output from question 13 the US government s budget deficit or surplus will be cid 9 Q cid 9 Q cid 9 Q cid 9 LV a a deficit of 90 b a deficit of 15 surplus of 3d d a surplus of 38 15 Suppose the government wants to increase US output by 300 Which of the following policies will increase US output by exactly 3009 Rcrease government purchases of goods and services by 132 c increase government purchases of goods and services by 168 d increase transfer payments by 168 cid 9 crease transfer payments by 132 cid 9 o o cid 9 oo CJvt on 16 Suppose the US government adopts the policy you found in question 15 Which of the following will NOT increase …
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