Name:
Section Number or TA Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
November 5, 2009
PART I : Multiple Choice, 10 points (each question is worth ½ point).
1. If there is a(n)________ in the number of discouraged workers in the economy from the pool of
unemployed workers, then all else equal the unemployment rate will _______.
A. Increase, increase
B. Increase, decrease
C. Decrease, decrease
D. Increase, not change
E. None of the above
Answer: B
2. If there is downward rigidity of the wage rate, then a recession will cause
A. a lower equilibrium quantity of labor at a lower equilibrium wage.
B. a lower equilibrium quantity of labor at the same wage.
C. the same equilibrium quantity of labor at a lower equilibrium wage.
D. a lower equilibrium quantity at a higher equilibrium wage.
Answer: B
3. Which of the following statements is FALSE?
A. The unemployment rate among teenagers is typically higher than the unemployment
rate in the overall population.
B. The unemployment rate in Europe is typically lower than the unemployment rate in the
United States.
C. The female labor force participation rate is typically lower than the male labor force
participation rate.
D. The Phillips Curve shows that inflation and unemployment are negatively correlated.
E. None of the above
F. All of the above
Answer: B
4. Implementation lags for fiscal policy
A. Are longer than those for monetary policy
B. Are shorter than those for monetary policy
C. About the same as those for monetary policy
Answer: A
5. If the U.S. were to pass legislation that would make it easier for people to immigrate to the U.S.
from foreign countries, this would cause
A. The short-run aggregate supply curve to become nearly vertical at all levels of output
B. The short-run aggregate supply curve to shift to the left
C. The short-run aggregate supply curve to become flatter
D. The short-run aggregate supply curve to shift to the right
Answer: D
Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
Section Number or TA Name:
November 5, 2009
6. Refer to the information about Phillips Curves provided in Figure 1 below to answer the
question that follows.
LRPC
%
D
5
B
4
A
3
C
SRPC2
E
SRPC1
SRPC3
0
U2
U0
U1
U
Refer to the figure 1. Which combinations of events could move the economy from point A to
point E, and then from point E to point C?
A. A contractionary monetary policy followed by a leftward shift in the AS curve
B. A contractionary monetary policy followed by a rightward shift in the AS curve
C. An expansionary fiscal policy followed by a leftward shift in the AS curve
D. An expansionary fiscal policy followed by a rightward shift in the AS curve
Answer: B
7. While targeting the deficit, which of the following is likely to occur after a negative aggregate
demand shock?
A. AD
Y
T
deficit
G
AD
Y
B. AD
Y
T
deficit
G
AD
Y
C. AD
Y
T
deficit
G
AD
D. AD
Y
T
deficit
G
AD
Y
Y
E. None of the above
Answer: E
8. In the short run, expansionary policy
A. is never effective.
B. is most effective when the economy is operating near full utilization.
C. is most effective when the economy is operating at low utilization.
D. has the same positive effect regardless of the level of utilization in the economy.
Name:
Section Number or TA Name:
Answer: C
Second Prelim
ECON 1120 – Professor Steven Kyle
November 5, 2009
9. In the long run a New Classical economist believes
A. expansionary monetary policy increases output
B. contractionary monetary policy decreases prices
C. contractionary monetary policy decreases output
D. all of the above
E. none of the above
Answer: B
10. If the aggregate supply curve is vertical in the long run, then
A. High inflation leads to high unemployment
B. Low inflation leads to low unemployment
C. Low inflation leads to high output
D. The inflation rate has no effect on the unemployment rate
Answer: D
11. Due to fighting in the Badlands, it has become more difficult to collect Saffron. However, at the
same time, interest for the spice has grown. The likely impact is
A. A decrease in output, and an ambiguous effect on price.
B. An increase in output, and an ambiguous effect on price.
C. An ambiguous effect on output, and a decrease in price.
D. None of the above.
Answer: D
12. The normal range for a company’s price/earnings ratio is
A. Below 10.
B. Between 15 and 20.
C. Between 30 and 35.
D. Above 50.
Answer: B
13. Currency is included in
A. Both M1 and M2.
B. M1 only.
C. M2 only.
D. Neither M1 nor M2.
Answer: A
14. When commercial banks lend money, the loans appear as ___________ on the bank’s balance
sheet.
A. A liability
B. An asset
C. retained earnings
D. all of the above
Answer: B
Name:
Section Number or TA Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
November 5, 2009
15. A decrease in consumer or investment spending is called a(n)
A. Negative demand shock.
B. Automatic stabalizer
C. Non-automatic stabalizer
D. Positive demand shock.
Answer: A
16. A decrease in government purchases shifts the _____ curve to the _____.
A. Aggregate demand, left
B. Aggregate supply, left
C. Aggregate demand, right
D. Aggregate supply, right
Answer: A
17. Each of the following will make the aggregate demand curve shift to the right except
A. A tax cut.
B. A decrease in the required reserve ratio.
C. An increase in government spending.
D. An open market sale of securities by the Fed.
E. All of the above.
Answer: D
18. A national child care program is enacted, requiring employers to provide free child care services.
This program ______ labor force participation, and _____ unemployment.
A. may increase or decrease, may increase or decrease
B. may increase or decrease, may increase or decrease
C. will increase, will increase or decrease
D. will decrease, will decrease
Answer: C
19. Which of the following is NOT true of the US Social Security system?
A. Most retirees depend on SS for all or most of their income
B. Social security checks will be completely unfunded once the trust fund runs out
C. Social security doesn’t help increase the national savings rate
D. Social security payments are automatically increased when prices increase
Answer: B
20. Since 2000, the percentage of Americans with employer provided health care coverage has
________, while health care costs as a share of employee compensation has _______.
Decreased, increased
Name:
Section Number or TA Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
November 5, 2009
PART II : Short Answer, 12 points (each question is worth 3 points).
1. Define the recognition lag, the implementation lag, and the response lag.
Answer: Recognition lag: time it takes to recognize the existence of a boom or a slump.
Implementation lag: time that it takes to put a desired policy into effect once economists and
policy makers recognize that the economy is in a boom or a slump.
Response lag: the time that it takes for the economy to adjust to the new conditions after a new
policy is implemented; the lag that occurs because of the operation of the economy itself.
2. Briefly describe and graphically illustrate the Philips curve.
Answer : See the textbook
Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
November 5, 2009
Section Number or TA Name:
3. Derive the aggregate demand curve using the three panel graph illustrating the goods market,
money market and investment and focusing on the investment linkage between money market
and goods market.
Answer:
Ms
AE
r
M
Panel 1
Y
I
Panel 2
Panel 3
4 . Briefly describe the effects of taxes and transfers on household consumption and labor
supply. You can assume that the substitution effect dominates when describing the labor supply
decision, and that output prices remain constant.
Answer:
We know from the consumption function that increases (decreases) in taxes have a negative
(positive) effect on consumption, and increases (decreases) in transfer payments have a positive
(negative) effect on consumption. For the labor supply decision, an increase in taxes decreases
the real wage, causing workers to substitute towards leisure. Therefore, the substitution effect
causes workers to work less. Decreases in the real wage also decrease real income, causing
workers to consume less of everything, including leisure. Therefore, the income effect causes
workers to work less. Since the substitution effect dominates, the result from an increase in
taxes is a decrease in labor supply. Similar reasoning would show that labor supply increases
Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
Section Number or TA Name:
November 5, 2009
from a decrease in taxes. When transfers are increased (decreased), there is a pure income
effect since wages do not change, and workers consumer more of everything, including leisure.
Therefore, increases (decreases) in transfers result in decreases (increases) in labor supply.
Part III. Read the following excerpt from an article from the business section of the New York
Times on July 11th, 2008 and answer the following questions. Use graphs where appropriate.
Oil Shocks
The head of the Organization of the Petroleum Exporting Countries
warned on Thursday that oil prices would experience an “unlimited”
increase in the event of a military conflict involving Iran because the
group’s members would be unable to make up the lost production.
“We really cannot replace Iran’s production — it’s not feasible to replace
it,” Abdalla Salem el-Badri, the OPEC secretary general, said in an
interview.
Iran, the second-largest producing country in OPEC after Saudi Arabia,
produces about four million barrels of oil a day out of the daily worldwide
production of close to 87 million barrels.
The country has been locked in a long dispute with Western nations over
its nuclear ambitions.
In recent weeks, the price of oil has risen higher on speculation that Israel
could be preparing an attack on the country’s nuclear facilities. The saber
rattling intensified this week with missile tests by Iran.
That has further unnerved oil markets because of concerns that any
conflict with Iran could disrupt oil shipments from the gulf. In New York,
crude oil climbed $5.60, to $141.65 a barrel. – James K.
1. Using an aggregate supply and demand diagram, explain what effect an attack on Iran would
have on the price level and output level in the U.S. economy in the short run.
Name:
Section Number or TA Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
November 5, 2009
The price level rises and output falls.
2. Suppose that the Federal Reserve wished to keep the price level at pre-conflict levels. Explain
using a three-panel diagram and an aggregate supply and demand diagram how the Fed could
accomplish this.
Name:
Section Number or TA Name:
Second Prelim
ECON 1120 – Professor Steven Kyle
November 5, 2009
3. After the Fed engages in the monetary policy prescribed in the last question, what will be the
overall effect on the money supply, the money demand, the interest rate, investment, output,
the price level, and aggregate demand.
Money supply falls, interest rate rises, investment falls, output falls, the price level falls,
aggregate demand falls, money demand falls