Econ 201 Prof Shea FINAL EXAM Fall 2011 DIRECTIONS read each question carefully and choose the best answer Fill in your answers on the bubble sheet Answer all questions there is no extra penalty for guessing wrong You may write on the exam there is a piece of scratch paper on the back which you may detach You may ask questions during the exam by raising your hand Questions 1 through 4 concern a Keynesian economy with the following parameters C 100 0 7 DI I 100 X 30 M 80 G 120 TR 100 t 0 2 1 Equilibrium output equals roughly a 607 c 841 b 773 d 1000 2 The equilibrium budget surplus or deficit is roughly a a surplus of 34 6 b a deficit of 20 c a deficit of 35 4 d a deficit of 65 4 a at least 70 b at least 100 c less than 125 d less than 159 3 Suppose that the government increases TR by 100 Suppose there is partial crowding out in the credit market Then the most precise thing we can say about the resulting impact on the economy is that equilibrium output will rise by 4 Suppose government spending rises by some amount X holding other fiscal policy parameters TR and t fixed Without doing the algebra we can be confident that the budget deficit a will not change b will rise by less than X c will rise by exactly X d will rise by more than X Questions 5 through 8 refer to the following pictures of the AD AS model NOTE Picture a shows an AD curve shifting to the right Picture b shows an AD curve shifting to the left Picture c shows an AS curve shifting to the right Picture d shows an AS curve shifting to the left 5 Which picture above shows the impact of a slack labor market a A b B c C d D 6 Which picture above shows the impact of tight monetary policy a A b B c C d D 7 Which picture above shows the impact of a weaker dollar a A b B c C d D 8 Which picture above shows the impact of an increase in the supply of oil a A 9 Which of the following transactions would directly increase US GDP d D b B c C a A French person travels to the US and eats at McDonald s b I travel to Paris and eat at a nice restaurant c I buy a second hand used exercise bicycle from a friend d I get a 1 million salary from Capital One Bank for writing funny TV commercials 10 Keynesian fiscal policy in a recession is aimed at reducing the rate of 11 Suppose Argentina has a trend growth rate of REAL GDP of 3 percent a trend inflation rate of 2 percent and a trend population growth rate of 1 percent Suppose that China has a trend growth rate of NOMINAL GDP of 10 percent a trend inflation rate of 5 percent and a trend population growth rate of 2 percent Suppose living standards are currently equal in the two countries Assuming these trends continue then in 70 years living standards in China will be 12 Which of the following would imply that the official CPI inflation rate understates the true increase in the cost of living for the typical US household I The quality of health care is rising over time and the price of health care used to compute the CPI does not adjust for quality change II the elderly use health care more than other households and the relative price of health care is rising over time a cyclical unemployment b structural unemployment c frictional unemployment d all of the above a 50 percent higher than in Argentina b twice as high as in Argentina c four times as high as in Argentina d eight times as high as in Argentina a I but not II b II but not I c both I and II d neither I nor II Questions 13 through 15 use the following information Suppose that following a reduction in interest rates purchases of computers rise by 200 Shortly thereafter we observe that disposable income of computer workers and shareholders rises by 160 while tax revenues of the government rise by 40 Next we observe an increase in spending by computer workers and shareholders of 96 while saving by computer workers and shareholders increases by 64 13 Roughly what will be the eventual increase in equilibrium output due to the initial increase in demand for computers a 192 b 325 c 385 d 417 a 48 c 80 b 52 d 86 67 14 Suppose the government wants to increase equilibrium output by exactly 100 in the economy described above One way of doing this would be to increase transfer payments by 15 Suppose the government increases purchases of goods and services by 100 in the economy described above What will happen to the budget deficit as a result of this increase in purchases of goods and services a the deficit will rise by 61 54 b the deficit will rise by 58 33 c the deficit will rise by 23 08 d cannot be determined from the information given 16 The currency of the United Kingdom UK is called the pound Suppose that initially the exchange rate between the pound and the Euro is 1 pound 1 5 Euros Then suppose that the exchange rate becomes 1 pound 1 3 Euros Which of the following is true a The pound has depreciated against the Euro and this will increase the UK s net exports b The pound has depreciated against the Euro and this will reduce the UK s net exports c The pound has appreciated against the Euro and this will increase the UK s net exports d The pound has appreciated against the Euro and this will reduce the UK s net exports 17 Suppose you are a borrower and suppose that the world is best described by the AD AS model All else equal what sort of stabilization policies would you like the government to follow just considering their impact on inflation a The government should let the economy s self correction mechanism work both during booms and recessions b The government should actively intervene to return the economy to full employment both during booms and recessions c The government should actively intervene to return the economy to full employment during a recession while the government let the economy s self correction mechanism work during a boom d The government should let the economy s self correction mechanism work during a recession but should actively intervene to return the economy to full employment during a boom 18 Which of the following best describes how the process of crowding out works in the credit market following an increase in the budget deficit a supply of credit shifts in interest rates rise investment falls b demand for credit shifts out interest rates rise investment falls c supply of credit shifts out interest rates fall …
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