Exam #4 Time: 1h 15m / Date: 18 July 2013
Name ______ / Instructor: Brian B. Young
The value of this exam is 100 points plus 10 points for the Bonus Question. / Please show your work where appropriate!
Multiple Choices
5 points each
1) When a movement up along the short-run aggregate supply curve occurs, there is also a
a.movement down along the short-run Phillips curve.
b.movement up along the short-run Phillips curve.
c.rightward shift of the short-run Phillips curve.
d.leftward shift of the short-run Phillips curve.
2) Unplanned inventories increase when
a.real GDP is less than aggregate planned expenditure.
b.actual aggregate expenditure is greater than aggregate planned expenditure.
c.actual aggregate expenditure is equal to GDP.
d.aggregate planned expenditure is less than GDP.
3) Which of the following is true?
a.Monetary policy is subject to long law-making time lags.
b.Monetary policy does not require a good estimate of potential GDP.
c.Monetary policy is not subject to forecasting error.
d.Monetary policy can be enacted more quickly than fiscal policy.
4) An economy has neither imports nor income taxes. The MPC is 0.67 and real GDP is $150 billion. The government increases expenditures by $4 billion. The government expenditure multiplier is about ____ and the change in real GDP from the increase in government expenditures is about ____ billion.
a.4; $16
b.3; $12
c.5; $20
d.3; $9
5) A balanced budget would require that when real GDP is contracting rapidly,
a. the government raise taxes or cut expenditures. This would increase the magnitude of economic fluctuations.
b. the government raise taxes or cut expenditures. This would decrease the magnitude of economic fluctuations.
c. the government cut taxes or raise expenditures. This would increase the magnitude of economic fluctuations.
d. the government cut taxes or raise expenditures. This would decrease the magnitude of economic fluctuations
6) Ignoring any supply-side effects, suppose the government is considering cutting taxes by $100 billion or increasing government purchases by $100 billion. Then
a.both policies would increase aggregate demand by the same amount.
b.both policies would increase aggregate demand but the tax cut has a smaller effect.
c.both policies would increase aggregate demand but the increase in government purchases has a smaller effect.
d.the tax cut would decrease aggregate demand and the increase in government purchases would increase aggregate demand
7) An increase in the price level shifts the
a.AD curve leftward.
b.AD curve rightward.
c.AE curve downward.
d.AE curve upward.
8) Which of the following is an example of a liquidity trap?
a.The government increases spending and crowds out private investment.
b.Private spending is very sensitive to a change in the interest rate.
c.A change in the quantity of money does not change the interest rate.
d.Government spending does not increase the demand for money or aggregate demand.
9) Keynesians maintain that fluctuations in
a.the money stock are the main source of economic fluctuations.
b.aggregate demand combined with sticky wages are the main source of economic fluctuations.
c.aggregate supply combined with sticky prices are the main source of economic fluctuations.
d.aggregate demand and aggregate supply with flexible prices are the main source of economic fluctuations
10) Monetarists maintain that fluctuations in
a.the money stock are the main source of economic fluctuations.
b.aggregate demand combined with sticky wages are the main source of economic fluctuations.
c.aggregate supply combined with sticky prices are the main source of economic fluctuations.
d.aggregate demand and aggregate supply with flexible prices are the main source of economic fluctuations
11) The Quantity Theory of Money and the Natural Rate Hypothesis both assume that
- in the long run, we are all dead.
- money is neutral in the long run.
- wages are sticky.
- capital flows to its highest return.
Problems
15 points each
1)
You are given the following information about an economy: 1) at full employment, the unemployment rate is 5.5% and real output is $900 billion; and 2) the following table applies:
State: / 1 / 2 / 3Inflation rate: / 5% / 2.5% / 1%
Unemployment rate: / 3% / 5.5% / 8%
Real output: / $930 billion / $900 billion / $850 billion
Assuming the price level in Period 0 was 150, graphically show the economy’s long-run and short-run Phillips Curve and corresponding long-run and short-run aggregate supply curves in Period 1. Also, please label the axes for full credit.
Phillips Curves Aggregate Supply
2)
You are given information about an economy that, at equilibrium expenditures, the following table applies
State: / 1 / 2 / 3Price level: / 157.5 / 153.75 / 151.5
Real output: / $850 billion / $900 billion / $950 billion
Further, assume that the slope of the AE curves is 0.5. Graphically depict this situation in the Aggregate Expenditure model and, then, derive three points on the AD curve. Also, please label both the axes and all three of your AE curves for full credit.
Aggregate Expenditure Aggregate Demand
45°
3) Comment knowledgeably on the following statement. “If crowding out is a significant problem, a stimulative monetary policy is preferred to deficit spending, whereas, if we are in a liquidity trap, deficit spending (i.e. fiscal policy) is preferred to monetary policy.”
Bonus Question
10 points
Write a short essay contrasting the types of fiscal policy you would recommend in each of the following situations:
- The economy appears to be on the precipice of a deep recession and policy makers need to boost aggregate demand (AD) as quickly as possible.
- The economy’s long-run economic growth rate has slowed to an anemic level and policy makers need to revive growth by shifting LRAS to the right.
Justify your answers by mentioning such topics as automatic stabilizers, infrastructure, education, tax rates, consumption v. investment, marginal propensities to consume for various income brackets, and the values of relevant multipliers.
If you feel as though you did not fully comprehend all the topics we covered in this course, remember…“If you understood what I said, I must have misspoken.”
--- Federal Reserve Chairman Alan Greenspan, 1993.
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