Econ 1120 – INTRO MACRO – Spring-2012 –March 1, 2012
REGULAR-UP PRELIM #1 (Thursday)
PRINT YOUR NAME:
____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER:
____________________________
Check YOUR TA’s NAME:
_____________TA = Xinli Wang (Monday sections)
_____________TA = Wei Quan (Tuesday sections)
_____________TA = Lingwen Zheng (Wednesday sections)
_____________TA = Minwook Kang (Wednesday sections)
_____________TA = Liyuan Cui (Thursday sections)
INSTRUCTIONS:
There are two sections in this exam
 Part I: 15 multiple choice questions @ 3 points each
 Part II: 3 short answer question (22 points) + 2 Newspaper Article questions (33 points)
 ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes.
 Prelim1 score weights 30% of final grade.
 Please number each exam book from 1 to 6 and write your ID, name and section TA on the front page of
each book.

Please write down your answers in different exam books with following order.
o Multiple choice questions in exam book1.
o Short Essay 1 in exam book2
o Short Essay 2 in exam book3
o Short Essay 3 in exam book4
o Long Essay 1 in exam book5
o Long Essay 2 in exam book6
1
AGAIN, please….
PRINT YOUR NAME:
____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER:
____________________________
_____________TA = Xinli Wang (Monday sections)
_____________TA = Wei Quan (Tuesday sections)
_____________TA = Lingwen Zheng (Wednesday sections)
_____________TA = Minwook Kang (Wednesday sections)
_____________TA = Liyuan Cui (Thursday sections)
GRADING---------------------------------------------------------------------------------------------------------________/45 (mc)______/8(short essay 1) ______/8(short essay 2) ______/6(short essay 3)
________/20(long essay 2)________/13(long essay 2)
TOTAL: ___________/100
--------------------------------------------------------------------------------------------------------------------------
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Part I:
Multiple Choice.
1. When government sets floor price higher than the market equilibrium price, the policy is
______, and consumer surplus is _____
a) effective, maximized
b) effective; not maximized
c) not effective; not maximized
d) not effective; maximized
e) none of the above
2. In a closed economy with government, which of the following condition needs to be satisfied
when the economy is at equilibrium?
a) Y=AE = C+I+G-T
b) S+T=I+G
c) S+G = T+I
d) AE = C+I+G = Yd = Y-T
e) None of above
3. When the Federal Reserve wants to decrease the money supply in the economy, it can apply
which of the following policies?
I. decreasing the required reserve ratio
II. increasing the required reserve ratio
III. decreasing the discount rate
IV. increasing the discount rate
V. through an open market operation, by purchasing bonds from the public
VI. through open market operation, by selling bonds to the public
a)
b)
c)
d)
e)
I or IV or V
II or III or VI
I or III or V
II or IV or VI
None of the above
4. When aggregate output(income) is to the right of the equilibrium level of GDP
a)
b)
c)
d)
Y>(Planned) AE and there will be an unplanned rise in inventories
Y<(Planned) AE and there will be an unplanned fall in inventories
Y>(Planned) AE and there will be an unplanned fall in inventories
Y<(Planned) AE and there will be an unplanned rise in inventories
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5. A used car company, The Car-Max, purchased a used car for $10,000 in January, 2012 and
sold it to Bob for $12,000 in March, 2012. How much of value is added in 2012 GDP
through the sale of the car to Bob?
a) $0
b) $2,000
c) $10,000
d) $12,000
6. An economy experiences inflation and a decrease in real GDP at the same time. What is
happening to nominal GDP?
a) Stay the same.
b) Goes up
c) Goes down
d) Could go up or down
7. Suppose pizza and beer are complements. What can we conclude?
a) An increase in the price of pizza will cause increase in the demand for beer.
b) An increase in the price of pizza will cause decrease in the demand for beer.
c) An increase in the price of pizza will cause increase in the supply for beer.
a) An increase in the price of pizza will cause increase in the supply for beer.
8. For companies which have stocks traded at NYSE, New York Stock Exchange, what types of
firms are they shares of?
a) proprietorship
b) partnership
c) corporation
d) parastatal
e) Any of the above
f) None of the above
9. The value of output produced by Nike’s company in Indonesia is part of ____. The profits of
the company which are repatriated to the US on the other hand are part of US ____ but not
US ____
a) Indonesia’s GDP; GNP; GDP
b) Indonesia’s GDP; GDP; GNP
c) US GDP; GNP; GDP
d) US GNP; GNP; GDP
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10. Who are included in the number of unemployed people in the US?
a)
b)
c)
d)
e)
the inmates in the jail of San Francisco
my neighbor, who was fired a few days ago and is trying to find a new job
the 19 year old son of a farmer who helps his father on a farm but does not receive a
wage
A full time student at Cornell
None of above
11. For an economy to produce an output combination beyond its current PPF, the economy must
I. discover a new resource.
II. produce more of one good and less of another.
III. waste less resources.
IV. reduce its inputs.
V. improve production technology
a)
b)
c)
d)
e)
I or V
II or III
I or II
II or IV
None of the above
12. The equilibrium price of apple will certainly increase if?
a) the supply of apple decreases and the demand for apple decreases
b) the supply of apple increases and the demand for apple decreases
c) the supply of apple decreases and the demand for apple increases
d) the supply of apple increases and the demand for apple increases
13. Suppose the consumption function were defined as: C = 500 + 0.75(Y-T). What is the tax
increasing multiplier?
a) 4
b) 3
c) -3
d) -4
e) None of above
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14. When your aunt attended Cornell in 1985, she paid $500 per month for rent.
Coincidentally, you now live in the same apartment in which she lived, and pay $1100 for
rent. Suppose that the CPI in 1985 was 110, and in 2012 is 220:
a) It cannot be determined from the information given
b) In real terms, you're paying less than your aunt
c) In real terms, you're paying the same amount
d) In real terms, you're paying more than your aunt
15. Suppose the marginal propensity to save is 0.1. What is the balanced budget multiplier?
a) 0.9
b) 10
c) 1
d) 9
e) None of above.
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Part II: Short Essays (22 points)
1. Unemployment in Michigan (8 points)
Michigan's incredible shrinking workforce
By Tami Luhby @CNNMoney February 24, 2012: 4:00 PM ET
NEW YORK (CNNMoney) -- As the presidential race moves to Michigan for next week's
primary, a lot of focus is on the state's economy -- one of the hardest-hit by the recession.
But things are changing in the Great Lakes State.
After leading the nation in
unemployment for four years, Michigan has finally dropped out of the Top 10. State
unemployment slid to 9.3% in December, only a touch higher than the national rate, and
a sharp decline from the 14.1% rate that Michigan hit in the fall of 2009.
And last year was the first time the state added any jobs since the turn of the 21st
Century.
Sounds great, huh? Well, hold the applause.
The main reason Michigan's unemployment rate is falling is because its labor force is
shrinking fast, economists said. The state has lost 4.6% of its workforce since the
recovery began in mid-2009, according to Donald Grimes, senior research specialist at
the University of Michigan.
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2011 was a rocking year for American automakers, the lifeblood of Michigan's economy.
It was the first time since 2004 that all three major U.S. automakers were profitable at the
same time. And it came only two years after two of them declared bankruptcy and had to
be bailed out by the federal government.
How to save U.S. manufacturing jobs
"After a horrendous decade, Michigan is walking in the right direction," said Charles
Ballard, economics professor at Michigan State University.
Since the recession ended in mid-2009, some 94,200 jobs have been created. And the
number of unemployed has fallen by 239,200. This has helped to bring the
unemployment rate down to its lowest level since the fall of 2008.
One reason Michigan's unemployment rate is falling is because people are leaving the
workforce in droves. Nearly 224,000 residents have dropped out since the recovery
began, either because they have left the state, retired, returned to school or are too
discouraged to look.
While the ravaged state has definitely been losing residents, that's not the whole story.
The population lost only 94,000 people over the past two years.
Another explanation could be the fact that Michigan has more Baby Boomers than other
states. When older workers lose their jobs, it's harder for them to find new ones. So these
folks might have left the workforce in favor of collecting disability or starting their
retirement earlier than planned, Grimes said.
Also, Michigan entered the recession earlier than other states, so more jobless have
likely exhausted their unemployment benefits. Since the unemployed have to be actively
looking for work to collect benefits, it's not uncommon for discouraged people to stop
searching when the checks stop coming.
"You want the unemployment rate to fall because people are getting jobs," he said.
And while the addition of 94,200 jobs is certainly a plus, it only puts a tiny dent in the
overall job loss since 2000, which exceeds 850,000 positions, Grimes said.
"We're picking up some of those jobs, but we still have a long way to go," he said.
First Published: February 24, 2012: 5:36 AM ET
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The article cites several reasons for the drop in unemployment in the state of
Michigan. Answer the following questions about how we might categorize these
different kinds of unemployment (2 points each)
a) The drop in unemployment since the end of the recession in 2009 is called what?
b) The drop in unemployment due to the shrinkage of the labor force as workers give up
or leave the state might well reflect another kind of unemployment - What should
we call that?
c) Can we expect the unemployment rate to reach zero? Why or why not?
d) Name one policy that might improve Michigan’s performance in one of these types of
unemployment and explain how it could do so.
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2. Demand and Supply (8 points)
Following paragraph is cited from the article, Linsanity Doubling Ticket Price, from the
Forbes on Feb. 20. Please apply what you learned in the course to analyze what happened
in basketball ticket market.
The latest Linsanity numbers are in – those tracking ticket prices on the secondary
market at Madison Square Garden and other arenas around the NBA.
According to TiqIQ.com, which aggregates online ticket prices from various
sources, the average price Knicks fans are paying online for a game at the Garden
has shot to $313.54, up from $229.72 on February 3, the day before Lin’s
improbable run began. The Knicks’ President’s Day matinee with the New Jersey Nets
is going for $601.89, on average, 92% above the season average so far (though that
season average is obviously growing as the season moves ahead with Lin as the
headline act). The minimum price to get into the building for the Nets’ game: $149.
a) The following graph is the demand curve of tickets for 2012 season at Madison
Square Garden before Linsanity. Please draw the supply curve for the tickets of this
season. What is elasticity for supply curve? (4 points)
b) Please use the demand and supply diagram to explain the increase of average ticket
price from $229.72 to $313.54. If government sets a pricing ceiling at 229.72, what
you expect to happen on the market? (4 points)
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3. Fiscal Policy (6 points)
The following paragraphs are selected from President Mr. Barack Obama’s “Rose
Garden Speech on Economic Growth and Debt Reduction” (delivered 19 September
2011). Please read them carefully, and use what we have learned in Macroeconomics to
answer the following questions.
Good morning, everybody. Please have a seat.
A week ago today, I sent Congress the American Jobs Act. It’s a plan that will lead to
new jobs for teachers, for construction workers, for veterans, and for the unemployed. It
will cut taxes for every small business owner and virtually every working man and woman
in America. And the proposals in this jobs bill are the kinds that have been supported by
Democrats and Republicans in the past. So there shouldn’t be any reason for Congress
to drag its feet. They should pass it right away. I'm ready to sign a bill. I've got the
pens all ready.
………………………………..
a)
In the speech, Mr. Obama mentioned one major tool of fiscal policy to lead to new
jobs and promote economic growth. What is it? (3 points)
b)
According Macroeconomic theory, there is a multiplier effect. Imagine an economy
with government, what is the tax multiplier? Suppose that MPC=0.8, how do you
calculate the value of the tax multiplier (please also include the sign, not just the
absolute value)? (3 points)
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Part III: Long Essay (33 points)
1. Banking System and Money Creation (20 points)
Please read the following newspaper article and answer the questions below.
“China’s Central Bank Hits Brake on Hot Economy” by Keith Bradsher, published on
February 12th 2010 on New York Times.
(Retrieved from http://www.nytimes.com/2010/02/13/business/global/13yuan.html)
“HONG KONG — As most countries agonize over how to keep their barely reviving
economies growing, China is already looking to slam on the brakes.
China’s central bank moved late Friday to reduce lending to companies and individuals
by requiring large commercial banks to increase the amount of cash they park with the
central bank. The move, which came earlier than most economists had expected, was
meant to slow China’s breakneck economy and inflation.
It was the second time in a month that the central bank had directed the country’s banks
to increase reserves. In spite of the earlier edict, which took effect on Jan. 18, banks
actually lent more money in January than in the previous three months combined,
illustrating just how hard it is for Beijing to modulate its rapidly expanding economy.
……
The central bank pushed up the reserve ratio by half a percentage point, to 16.5 percent,
for large banks, and 14.5 percent for small banks, effective Feb. 25. Small financial
institutions that mainly lend to farmers, like rural credit cooperatives, are temporarily
exempted from the increase to make sure they can provide loans for spring planting.”
a) Please describe what will happen when the reserve ratio is increased. What is going to
occur in China’s money market? Depict in a graph. (5 points)
b) Suppose there is one big bank called Bank of China and one small bank called
Bank of Beijing, and suppose there are three individuals Mr. A, Mr. B. and Mr. C. Mr. A
has a checking account with Bank of China and Mr. B has a checking account with Bank
of Beijing. Mr. C prefers putting all his money under his mattress. Now further suppose
both of these two bank start with nothing on their balance sheets.
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Now suppose the central bank buys a bond worth of ￥1000, from Mr. A, and Mr. A
deposits the ￥1000 RMB in cash that he receives in his checking account in the Bank of
China. After that Bank of China loans to Mr. B who also puts the money into his
checking account at the Bank of Beijing, and then Bank of Beijing loans the money out to
Mr. C. Please use 20% required reserve ratio, instead of 16.5% and 14.5% specified in
the article, with zero excess reserves for both banks to fill out the final T-Accounts for
the two banks. (10 points)
Bank of China
Assets_________________________Liability
Total Reserves____
Demand deposits_____
Loans_________
Total__________
Total ______________
Bank of Beijing
Assets_________________________Liability
Total Reserves____
Demand deposits_____
Loans_________
Total__________
Total ______________
c) Please calculate the money creation due to the initial deposit of Mr. A using the
balance sheets. (Assume that both banks hold zero excess reserves.) (5 points)
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2. Government Deficit (13 points)
The following paragraphs are selected from President Mr. Barack Obama’s “Address to
the Nation on the Dangers of Default” (delivered 25 July 2011). Please read them
carefully, and use what we have learned to answer the following questions.
The first approach says, let’s live within our means by making serious, historic cuts in
government spending. Let’s cut domestic spending to the lowest level it’s been since
Dwight Eisenhower was President. Let’s cut defense spending at the Pentagon by
hundreds of billions of dollars. Let’s cut out waste and fraud in health care programs like
Medicare -- and at the same time, let’s make modest adjustments so that Medicare is still
there for future generations. Finally, let’s ask the wealthiest Americans and biggest
corporations to give up some of their breaks in the tax code and special deductions.
This balanced approach asks everyone to give a little without requiring anyone to
sacrifice too much. It would reduce the deficit by around $4 trillion and put us on a path
to pay down our debt. And the cuts wouldn’t happen so abruptly that they’d be a drag on
our economy, or prevent us from helping small businesses and middle-class families get
back on their feet right now.
a)
What is a budget deficit? (3 points)
b)
According to Mr. Obama, what can government do to reduce the deficit? (3 points)
c)
In the speech, Mr. Obama emphasized that “the cuts wouldn’t happen so abruptly
that they’d be a drag on our economy”. This implies that the cuts may be a drag to
the economy if they are not conducted properly. Consider a simple model of the
economy:
C=10+0.8*(Y-T)
AE≡C+I+G
Suppose that the Congress passes a law to increase the government spending on
education by 100 billion dollars and to increase taxes by 100 billion dollars at the same
time by eliminating inappropriate tax loopholes. What is the effect on the equilibrium
output? (7 points)
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Answer:
Short Essay 1:
(a)
The drop in unemployment is due to the end of recession; therefore this unemployment
can be categorized as cyclical unemployment, which happens owing to business cycle.
(b)
The drop in unemployment is due to labor market dynamic, for example more baby
boomers in the city, so that it can be considered as structure unemployment.
(c )
It is impossible that unemployment rate can reach 0, because labor market is not highly
flexible. Labor training and moving have costs and time such that structure
unemployment always exists. It is very difficult to fit labor market instantly into economy
structure, as economy structure changes over time
(d)
For cyclical unemployment, government can use fiscal policy, for example increasing
government spending, to create job and reduce cyclical unemployment.
Short Essay 2:
The supply curve is perfectly inelastic.
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First, the supply is fixed because seats are fixed. (say Q*)
Demand curve shifts to right owing to Linsanity, and eq. averaged price increases to
313.54. If government set a price ceiling at 229.72, we will expect there is a excessive
demand and shortage happens. In the reality, it is commonly to see following things.
First people wait in the long line, but there is significant portion of people who can’t get
tickets. We probably will see black market where people willing to pay higher price make
transaction with people having access to the tickets.
Short Essay 3:
1. Reducing taxes.
2. The multiplier is defined as the ratio of the change in the equilibrium level of output to
an exogenous change in the taxes.
3.The tax multiplier ≡ - MPC/(1-MPC)= - 4.
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Long Essay 1:
(a)
When China’s central bank increases the required reserve ratio, money supply in China’s
money market will shift to the left (or money supply decreases) and as a result,
equilibrium interest rate in China’s money market will go up. (This is a contractionary
monetary policy meant to decrease GDP. )
r
Ms1
Ms0
r1
r0
Md
M
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(b)
Bank of China
Assets_________________________Liability
Total Reserves1000
Demand deposits__1000___
Loans_____0____
Total__1000_____
Total _____1000______
Assets_________________________Liability
Total Reserves 200_
Demand deposits__1000___
Loans____800_____
Total___1000_____
Total ________1000______
Because Total reserve = required reserve (because we assume excess reserve is always
zero) and for large banks the rrr = 20% thus total reserve for Bank of China is 1000*20%
= 200
(We give full credit to student as long as students answer with the third T-account
table)
Bank of China’s loan of 800 dollars goes to Mr. B as assumed, and he will deposit the
amount in his own checking account with Bank of Beijing
Bank of Beijing
Assets_________________________Liability
Total Reserves 800
Demand deposits__800___
Loans_____0____
Total__800_____
Total _____800______
Assets_________________________Liability
Total Reserves 160_
Demand deposits__800___
Loans__640____
Total___800_____
Total ________800______
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Then again, because Total reserve = required reserve (because we assume excess reserve
is always zero) and for small banks the rrr = 20% thus total reserve for Bank of Beijing is
800*20% =160
Now the money creation because of the very initial demand deposit in this hypothetical
situation is
(c )
1000+800+640 = 2440
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Long essay 2
a.What is budget deficit? (Hints: consider government spending and taxes.)
The budget deficit is equal to the difference between what the government spends and
what it collects in taxes, i.e., G-T. When G exceeds T, the government must borrow from
the public to finance its deficit.
b. According to Mr. Obama, what can government do to reduce the deficit?
Reduce the government spending and increase taxes.
c. Suppose that the goods market is in equilibrium. Suppose that the Congress passes a
law to cut the government spending on military equipment by 100 billion dollars and to
increase taxes by 100 billion dollars at the same time by eliminating inappropriate tax
loopholes. What is the effect on the equilibrium output?
In this case, the multiplier ≡1.
Changes in equilibrium output=1*(100)=100. Therefore, the equilibrium output would
increase by 100 billion dollars.
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