Econ 1120 – INTRO MACRO – Fall-2011 –November 3, 2011
REGULAR PRELIM #2 (Thursday)
PRINT YOUR NAME: ______Your C.U. Netid: ______
YOUR C.U. STUDENT NUMBER: ______
Check YOUR TA’s NAME:
______TA = Minwook Kang (Tuesday sections)
______TA = Mirinda Lee Martin (Wednesday sections)
______TA = Lingwen Zheng (Thursday sections)
______TA = Yu Zhang (Friday sections)
INSTRUCTIONS:
There are two sections in this exam
· Part I: 15 multiple choice questions @ 3 points each
· Part II: 2 short answer questions (17 points) + 2 Newspaper Article questions (19 points for each)
· ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes.
· Prelim2 score weights 27.5% of final grade.
AGAIN, please….
PRINT YOUR NAME: ______Your C.U. Netid: ______
YOUR C.U. STUDENT NUMBER: ______
______TA = Minwook Kang (Tuesday sections)
______TA = Mirinda Lee Martin (Wednesday sections)
______TA = Lingwen Zheng (Thursday sections)
______TA = Yu Zhang (Friday sections)
GRADING------
____/45 (mc)____/9(short essay 1) ____/8(short essay 1)____/19 (long essay 1)____/19 (long essay 2)
TOTAL: ______/100
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1
Part I: Multiple Choice.
[1]. Read the following scenario and answer the following 3 questions:
In July 2011 data collected about the second quarter of 2011 indicates that the economy is in a recession. The Fed’s economists reach a consensus in October 2011 as to what the best course of action to restore full employment would be. The corrective policy is implemented at the end of October 2011. The economy only registers the full impact of the policy in May 2012.
1. The time period between July 2011 and October 2011 is defined as ______and the time period between October 2011 and May 2012 is defined as ______.
a) response lag; implementation lag
b) implementation lag; response lag
c) recognition lag; response lag
d) recognition lag; implementation lag
2. Which of the following policies could the Fed’s economists recommend?
I. FOMC (Federal Open Market Committee) should buy back securities
II. The Fed should decrease the supply of the US Dollar
III. The discount rate should be decreased
IV. The treasury should increase taxes
a) I, II and IV
b) I, II and III
c) I and III
d) I only.
3. Assume that the economists in the Fed are amazing and that they implement monetary policy that is just enough to offset the recessionary gap of July 2011 and move the economy to full employment, though the full effect isn’t felt until May 2012. Assume also that in March 2012 there is an unexpected drop in oil prices which lowers input prices. In this event, policy implemented by the Fed will result in an equilibrium which is:
a) at full employment
b) below full employment
c) above full employment
d) in line with the NAIRU
4. Under the classical view of the labor market, suppose the equilibrium wage level is $5.05. Then the Congress passes a minimum wage law requiring the wages should be no lower than $4.75. What will happen in the labor market?
a) Minimum wage is a price floor, therefore it will create a positive unemployment rate.
b) Minimum wage is a price ceiling, therefore it will create a shortage in labor market.
c) Minimum wage is a price floor, however, the policy here will not create unemployment since it is not binding.
d) Minimum wage is a price ceiling, however, the policy here will not create unemployment since it is not binding.
e) None of the above
5. An increase in the required reserve ratio will cause the _____ curve to shift _____ and an increase in government spending will cause the _____ curve to shift _____.
a) aggregate demand; left; aggregate supply; right
b) aggregate demand; not at all; aggregate supply; right
c) aggregate demand; left; aggregate demand; right
d) aggregate demand; not at all; aggregate demand; right
e) none of the above
6. Assume the economy currently has high unemployment (above the natural rate of unemployment) and the factories have excess capacity. If the Fed increases the money supply, then in the short run we can expect to see
a) a large increase in real GDP and a small increase in the overall price level
b) a small increase in real GDP and a large increase in the overall price level
c) a small increase in real GDP and a small decrease in the overall price level
d) a small decrease in real GDP and a small increase in the overall price level
7. Which of the following statement is true?
a) A negative cost shock leads to inflation and an increase in the output at the same time.
b) A negative cost shock leads to stagflation, and it is always a good idea to engage in contractionary (monetary or fiscal) policy to counteract this.
c) A negative cost shock leads to stagflation, the government and the Fed can engage in expansionary policy to counteract the inflation and decrease in output at the same time, so the government and the Fed should always implement expansionary policy under this situation
d) A negative cost shock leads to stagflation, the government and the Fed can engage in expansionary policy to counteract the downward trend in output yet it tends to cause even higher inflation, thus it is ambiguous whether it is a good idea to implement expansionary policy under a situation like this.
8. If an individual receives an increase in their wage and we observe that they cut back their hours of work and increase their hours of leisure, we can conclude that:
a) the income effect and the substitution effect acted in opposite directions and the income effect dominated
b) the income effect and the substitution effect acted in opposite directions and the substitution effect dominated
c) the income effect and the substitution effect acted in the same direction
d) None of the above
9. Suppose that at the current interest rate, there is an excess supply of money. Given this information, we know that there will be pressure for
a) bond prices to decrease and the interest rate to increase.
b) bond prices to decrease and the interest rate to decrease.
c) bond prices to increase and the interest rate to increase.
d) bond prices to increase and the interest rate to decrease.
e) the money demand function to shift to the right.
10. The life-cycle theory of consumption says
a) that all wealth should be consumed during the life-cycle because you only live once.
b) that households make lifetime consumption decisions based on their expectations of lifetime income.
c) that households consume an amount less than their incomes during their prime working years and an amount greater than their incomes during their early working years and after they have retired.
d) that households consume an amount equal to their disposable income (salary minus taxes) during their working years and then use money received from the government as their only consumption after they have retired.
e) Both b and c
f) Both b and d
11. Which of the following will break down the negative relationship between the unemployment rate and the inflation rate as predicted by the conventional short run Phillips Curve?
a) Demand-pull inflation
b) Cost-push inflation
c) The negative relationship between the unemployment rate and the inflation rate never breaks down
d) None of the above
12. In thinking about the reading focused on Social Security, what does the implicit rate of return that individual workers receive refer to?
a) It is the interest rate that the saved contributions of individual workers receive each year as the funds are invested until the individual worker begins receiving payments when they retire or become disabled.
b) It is a rate of return that is based on the prevailing rates of interest in the market.
c) It is the rate that the Social Security trust funds earn on their assets.
d) It is the interest rate that workers would (hypothetically) have to earn on their contributions to pay exactly for all the benefits they and their families will receive over the course of their lives.
13. Consider the money market and assume money supply is vertical and money demand is downward sloping. Suppose the public suddenly decides to change its preferences and hold more money balances than before, no longer trusting bond and equity markets as much as they used to. At the same time, suppose the Fed engages in an open market operation and buys up securities from the public. As a consequence,
a) r* must increase, and M* must increase.
b) r* might increase or might decrease, and M* must increase.
c) r* must not change, and M* must not change.
d) r* must decrease, and M* must increase.
e) r* must increase, and M* might increase or might decrease.
14. Social security can be considered as a(n):
a) Pay-as-you-go system
b) Defined-benefit pension
c) Defined-contribution pension
d) Individual savings account for retirement
e) Both a and b
f) Both c and d
15. If the very long-run aggregate supply curve is vertical, then the multiplier effect of a change in net taxes on aggregate output, in the very long run,
a) depends on the price level
b) is one
c) is zero
d) is infinitely large
1
Part II: Short Answer questions. 17 points
1. Life-cycle theory of consumption (9 points)
John Jacob Jingleheimer Schmidt, often called JJ by his friends, is 35 years old. He has $60,000 in assets (wealth) and has no debts or liabilities. He recently visited a psychic and discovered that he will work at his present job at a local hardware store until he can retire at 65 years old and then will live for 10 more years, during which he earns nothing, before he dies. His salary each year for the rest of his time working at the hardware store is $20,000. (There are no taxes.) He wants to distribute his consumption over the rest of his life in such a way that he consumes the same amount each year. He cannot consume in total more than his current wealth plus the sum of his income for the rest of his working life (the next 30 years). In planning for his future, JJ has decided that he would like to leave each of his two children an inheritance of $10,000. Assume that the rate of interest is zero.
a) How much will JJ consume this year and next year? How did you arrive at your answer? (3 points)
b) Suppose that JJ wins a small stakes lottery for $40,000 the day after making his above plan. (Thus, his income in this year is $60,000; but in all succeeding years, his income is $20,000.) By how much does his consumption increase this year and next year? (2 points)
c) Now suppose that JJ did not actually win the lottery. Instead, he is told that when he retires from his job at the hardware store at age 65, he will get a lump sum payment of $40,000 from a secret trust fund established by his long lost Uncle Louie. Plot on a graph JJ’s income, consumption, and wealth from the time he is 35 until he is 75 years old. How much does JJ consume this year and next year? (4 points)
2. School of economic thought (8 points)
Suppose there is a major recession in the United States which causes output and employment to go down and economists from different schools of thought are asked what new policies the government should announce to make the situation better.
a) What would a Keynesian economist tell them to do and why? (4 points)
b) What would a new classical economist tell them to do and why? (4 points)
Part III: Long Answer questions (Newspaper Analysis)
1. “Labor Market and Sticky Wage” (19 points)
According to the article, Ford Contract on Edge, from the WSJ on Oct. 15, please answer the following questions.
DETROIT—Ford MotorCo.'s tentative labor agreement gained support Friday after workers at two assembly plants and a transmission factory endorsed the accord, shifting toward approval after several rejections. …
The Flat Rock, Mich., plant stands to gain new production and a more secure future from approval. The endorsements represented important wins after several Ford plants in Illinois and Michigan had rejected the four-year agreement. Workers at a pair of Ohio engine plants and a Michigan transmission factory also supported the contract. …
"I was going to vote 'yes' for the new guys, but I'm going to vote 'no,'" said Richard Royal, a 50-year Ford veteran. "The salaried [employees] get bonuses, stock options. We didn't get anything for cost of living."
But Vincent Williams, a 17-year veteran, said he approved of the deal. "The whole country is going through a rough time. We're blessed to have any bonus at all." …
A defeat would be a "calamity" for the UAW and the U.S. labor movement given America's disenchantment with unions, said Gary Chaison, a labor professor at Clark University in Worcester, Mass. UAW workers would be seen turning down a contract that pays each worker a $6,000 signing bonus plus $1,500 in payments over the next four years to cover the cost of inflation, all at a time when jobs are scarce, he said.