Spring 2007 (IS – LM – BP and DAD – SAS Models) Econ 100B 1 of 12Name: ________ANSWERS__________ SID : ____________________________ Discussion Section: ________________ Economic 100B Macroeconomic Analysis Professor Steven Wood Spring 2007 Exam #3 ANSWERS Please sign the following oath: The answers on this test are entirely my own work. I neither gave nor received any aid while taking this test. I will not discuss the questions on this test until after 3:30 p.m. on May 11, 2007. ______________________ Signature Any test turned in without a signature indicating that you have taken this oath will be assigned a grade of zero. Graph Instructions When drawing diagrams, the following rules apply: a. Completely, clearly and accurately label all axis, lines, curves, and equilibrium points. b. The original diagram and equilibrium points MUST be drawn in black or pencil. c. The first shift of any curve(s) or line(s) and the new equilibrium points MUST be drawn in red. d. The second shift of any curve(s) or line(s) and new equilibrium points MUST be drawn in blue. e. The third shift of any curve(s) or line(s) and new equilibrium points MUST be drawn in green. Do NOT open this test until instructed to do so. Good Luck!Spring 2007 (IS – LM – BP and DAD – SAS Models) Econ 100B 2 of 12 This page intentionally left blank.Spring 2007 (IS – LM – BP and DAD – SAS Models) Econ 100B 3 of 12A. Multiple Choice Questions. Mark the letter corresponding to the best answer in the assigned space at the bottom of the page. (3 points each; total of 30 points.) 1. Since 1980, globalization has increased enormously. This would suggest all of the following are more valid today than in 1980 EXCEPT: a. Relative capital mobility is a better description of the world than relative capital immobility. b. Differences in real interest rates across countries are lower. c. Some countries have large amounts of foreign reserves. d. When governments run budget deficits, interest rates now rise more. e. Capital account deficits and surpluses are larger in magnitude. 2. In the Mundell-Fleming model with flexible exchange rates, all of the following are true EXCEPT: a. A fiscal expansion leads to an exchange rate appreciation. b. Monetary policy has no effect on output. c. A fiscal expansion has no effect on output. d. Prices are fixed. e. Ultimately, fiscal policy has no effect on interest rates. 3. Suppose we have flexible exchange rates and the current account is +50. Then the capital account: a. Is -50. b. Is indeterminate. c. Depends on the level of sterilization. d. Depends on the balance of payments. e. Depends on the amount of foreign exchange reserve accumulation. 4. A number of countries in Europe have adopted a single currency, the Euro. One potential drawback of a single currency for these countries is: a. Fiscal expansions are no longer effective. b. They no longer have control over interest rates. c. Their exchange rates will now be more volatile, therefore reducing trade. d. Capital account deficits will increase. e. None of the above. 5. Consider a new theory: high interest rates increase the debt burden of firms, thus lowering investment. In the DAD – SAS model, this new effect would: a. Steepen the DAD curve b. Flatten the DAD curve c. Rotate the SAS curve upwards d. Rotate the SAS curve downwards e. None of the above. __d__ __b__ __a__ __b__ __b__ 1 2 3 4 5Spring 2007 (IS – LM – BP and DAD – SAS Models) Econ 100B 4 of 126. Research indicates that aggregate social welfare depends inversely on (i.e., is negatively related to) the levels both of unemployment and inflation; both are equally disliked. If output is at potential, then a central banker maximizing long-run welfare would: a. Lower interest rates to increase output. b. Do nothing. c. Permanently increase the rate of money growth to attain higher output growth. d. Raise interest rates to lower output. e. Increase the money supply. 7. According to the “learning by doing” model, increases in economic activity permanently increase productivity. If unemployment is at the NAIRU and the government increases expenditure, then—compared to the usual model—in the long run: a. Output will be lower than before. b. Output will be higher than before. c. Inflation will be lower than before. d. a. and c. e. b. and c. 8. Wages in an economy increase with the capital stock. Now suppose that high inflation reduces the savings rate. If unemployment is at the NAIRU, an increase in the money supply would: a. Increase inflation in the long run according to the DAD – SAS model. b. Lower wages in the long run according to the Solow model. c. Raise wages in the long run according to the Solow model. d. a. and b. e. a. and c. 9. Suppose that country A and country B both have positive output ratios, that their aggregate demand curves are similarly responsive to inflation, and that their aggregate supply curves are similarly responsive to output gaps. Now, if country A has a higher output ratio than country B, then: a. Inflation is higher in country A. b. Inflation is increasing more quickly in country A. c. Inflation is falling faster in country A. d. Inflation in lower in country A. e. None of the above. 10. According to the permanent income hypothesis, consumption today depends on future income. If output is at potential and a new forecast predicts higher income growth in five years then, an inflation stabilizing central bank would: a. Raise interest rates today. b. Lower interest rates today. c. Raise interest rates in five years time. d. Lower interest rates in five years time. e. None of the above. __d__ __e__ __d__ __b__ __a__ 6 7 8 9 10Spring 2007 (IS – LM – BP and DAD – SAS Models) Econ 100B 5 of 12B. IS – LM - BP Model and DAD – SAS Model Problems. Answer BOTH of the following questions based on the standard models developed in class. (35 points each; total of 70 points.) 1. China’s economy has been experiencing an investment and export boom that has pulled the unemployment rate well below the NAIRU. The country also has a substantial current account surplus, a significant capital account surplus, a fixed exchange