http://www-personal.umd.umich.edu/~mtwomey/econhelp/201files/201ex2.docx
[This file contains no multiple choice questions from the exams more recent
than Summer, 2008]
Econ 201 Exam #2a Winter, 2014 Prof. Twomey Student Name:
______________
Please answer on these sheets. If any question is unclear, please ask for an explanation. For the
multiple choice questions, circle the letter corresponding to your answer. The multiple choice
questions are worth three points apiece; weights vary on the questions in the second part. Time: the
entire class. Good luck.
Part II (a) Answer on these sheets, using the back of the last sheet if you need space..
1. Identify the following with a sentence or at most two: (16 points)
A) Paradox of thrift
B) PPI
C) Malthus
D) Natural rate of unemployment
2.
(10 points) An economic issue with an international dimension is summarized by the term
economic convergence. Describe briefly what is hypothesized.
Why might this be expected to occur?
What is the textbook’s judgment about whether or not this hypothesis is supported by the data.
3a). Fill in the blanks in the following table (13 points)
What is the percentage rate of growth of real GDP
Year Nominal
Real GDP Price
between years 2 and 3? _____________
GDP
Index
1
3,000
4,000
2
5,000
95
What is the rate of inflation between years 5 and 6?
3
6,000
6,000
100
4
8,000
7,000
_____________________
5
10,000
130
6
10,000
150
Which year is the base year? ___________
3b. Identify two widely accepted weaknesses in the general practice of using (real) GDP as an
indicator of a country’s welfare.
4.
(10 pints) A major issue in the U.S. is the impact of government deficits. Economists have an
analytical tool to discuss this, called the market for loanable funds. Draw a graph of this model,
being sure to label each axis. Use that graph for a before-and-after analysis of the impacts on
relevant macro variables of an increase of government spending, leading to a deficit, financed by
domestic borrowing.
The median on this exam was 65; the high was 100.
Econ 201 Exam #2b Winter, 2014 Prof. Twomey Student Name: _______
Part II B. Answer on these sheets, using the back of the last sheet if you need space.
1.
a)
b)
c)
d)
Identify the following with a sentence or at most two: (16 points)
Real interest rate
Labor force participation rate
COLA
Discouraged worker
2.
(10 points) The textbook reports the standard economic analysis that there three sources of long
term growth for economies. Identify those sources, explaining each very briefly. Which one is
thought to be most important, empirically? How might government policy influence each one, if
at all? Explain briefly.
3.
(10 pints) A major issue in the U.S. is the impact of government deficits, and it is generally
known that if the other party were to do well in elections, they would lower spending and
perhaps raise taxes, lowering the deficit. Economists have an analytical tool to discuss this,
called the market for loanable funds. Draw a graph of this model, being sure to label each
axis. Use that graph for a before-and-after analysis of the impacts on relevant macro
variables of a decrease of government spending, reducing to a deficit, lowering the
government’s domestic borrowing.
4. Fill in the blanks in the following table (13 points)
What is the percentage rate of growth of real GDP
Year Nominal
Real GDP
Price
between years 2 and 3? _____________
GDP
Index
1
600
800
2
3
4
5
6
1,000
1,200
1,500
900
1,000
1,120
1,600
95
100
130
150
What is the rate of inflation between years 5 and 6?
_____________________
Which year is the base year? ___________
b. One of the standard types of unemployment is described in our text as resulting from more
people looking for jobs than are available, at the current wage rate. Which type is this?
This leads to a discussion of why wages don’t fall to reduce or eliminate that employment. There are
several different reasons given for why this does not occur. Identify and explain briefly two of them.
The median on this exam was 63; the high was 91.
Econ 201 Exam #2 Fall, 2013 Professor Twomey Student Name:
____________
The exam consists of two parts; multiple choice questions, valued at three points apiece, and the
other questions, whose values are indicated separately. For the multiple choice questions, please
circle the letter corresponding to your answer. Please ask for clarification of any unclear question.
Good luck!
Part II. Answer on these sheets, ask the professor for more sheets if you need more space.
1. (16 points) Identify the following with a sentence or at most two:
a) Frictional unemployment
b) Total factor productivity
c) Fisher effect
d) COLA
2.
(11 points) a. The textbook has a lengthy discussion of the factors that contribute to
economic growth. Identify and explain real briefly three different factors.
b. Suppose a new government wanted to stimulate economic growth in their country. Identify and
explain briefly three different actions that government could take, which would have that effect.
3. Recently, in the United States we have witnessed sharp debates about the federal government’s
deficit. Use the loanable funds theory to predict what would happen to interest rates if the
government were to reduce spending in order to balance the budget, and illustrate your argument
with a graph. (10 points)
4 a. Fill in the blanks in the following table (12 points)
Year Nominal
GDP
1
6,000
2
3
4
10,000
12,000
Real
GDP
8,000
9,000
10,000
11,200
Price
Index
95
100
5
6
15,000
16,000
130
150
What is the percentage rate of growth of real
GDP between years 2 and 3? _____________
What is the rate of inflation between periods 5 and 6?
_____________________
Which year is the base year? ___________
b. Identify two widely accepted weaknesses in the general practice of using (real) GDP as an
indicator of a country’s welfare.
The median on this exam was ; the high was .
Econ 201 Fall, 2012 Exam #2 Professor Twomey
Part II. Answer on these sheets, using the back side of the last sheet if you need more space.
1. (16 points) Identify the following with a sentence or at most two:
a. Crowding out
b. Shoe leather costs
c. Business cycle trough
d. Housing bubble
2. (13 points) As discussed in the textbook, different groups (socio-economic-demographic) are
negatively affected by inflation, and by unemployment.
a. Identify three specific groups that are hurt by unemployment.
b. Who tends to be hurt when there is a sudden surge in inflation?
c. Which of the types of unemployment is said to occur because of rigid nominal wages?
Identify three causes that have been suggested as leading to rigidity of nominal wages.
3. (10 points) Suppose that the upcoming presidential contest were to result in the election of a
candidate whose major economic philosophy could be described as “Whoopee!” meaning, “Let’s
Party,” or in more technical terms, let’s all consume everything we can - people should reduce their
savings.
Draw a graph of the loanable funds market, being sure to label each axis.
Explain and show on that graph how a decrease in savings would affect the major economic
variables.
In particular, does business investment increase or decrease?
4 a. Fill in the blanks in the following table (10 points)
Year Nominal
GDP
1
8,000
2
3
4
5
6
14,000
17,000
18,000
Real
GDP
10,000
Price
Index
12,000
14,000
16,200
95
100
20,000
130
150
What is the percentage rate of growth of real
GDP between years 2 and 3?
_____________
What is the rate of inflation between periods 5
and 6?
_____________________
Which year is the base year? ___________
The median on this exam was 62; the high was 90.
Econ 201 Exam #2 Summer, 2012 Professor Twomey Student Name:
_______________________
Part II. Answer on the back of the last sheet if you need more space.
1. Identify the following with a sentence or at most two: (16 points)
a) Real rate of interest
b) Malthusian pessimism
c) East Asian Miracle
d) Natural rate of unemployment
2 . a. Fill in the blanks in the following table (11 points)
b. What is the rate of growth of real GDP
Year Nominal
Real GDP Price
GDP
Index
between periods 2 and 3? _____________
1
4,000
4,300
2
3
4
5
6
5,000
5,600
6,000
4,500
5,000
5,200
6,000
95
100
130
150
c. What is the rate of inflation between
periods
5 and 6?________
Which year is the base year? ___________
3.
b.
(11 points) a. In addition to seasonal unemployment, economists distinguish three types of
unemployment. Identify each, and state what sorts of government policies, if any, might be
suggested to reduce them.
Economists devote much energy to explaining fluctuations in GDP (more precisely, Real GDP,
or better yet, Real GDP per person). Nevertheless, there are several criticisms of the use of
GDP as an indicator of welfare. Identify three, and explain each briefly.
(11 points) Economists spend significant effort at trying to understand who gets hurt
when unemployment rises, and who gets hurt when inflation rises. With regard to
unemployment, identify two socio-economic groups that tend to experience above
average increases in unemployment, when the national average rises.
With regard to inflation, give two examples of economic groups that get hurt when
inflation occurs – especially when it is ‘unexpected’ inflation. Identify two of these costs,
and explain each one briefly.
4.
The median on this exam was 71; the high was 95.
Econ 201 Exam #2 Fall, 2011 Professor Twomey Student Name:
_______________
Part II Answer on the back of the last sheet if you need more space.
1.
Identify the following with a sentence or at most two: (16 points)
a.
b.
c.
d.
Labor Force Participation Rate
Indexing
Malthusian pessimism
Efficiency wage
2 a. Fill in the blanks in the following table (10 points)
Year Nominal
Real GDP Price
d. What is the rate of growth of real GDP
GDP
Index
between periods 2 and 3? _____________
1
480
520
2
3
4
5
6
580
650
800
560
580
600
700
f.
95
100
130
170
e. What is the rate of inflation between
periods
5 and 6?________
Which year is the base year? ___________
3. (10 points) a. What are the principal economic factors leading to sustained economic growth?
b. The textbook speaks of economic convergence. What is meant by that term?
c. With regards to the economic factors identified above in part (a), which of them should lead to
convergence?
What is the textbook’s conclusion about the extent to which convergence is occurring today?
4. (13 points)a. In addition to seasonal unemployment, economists tend to speak of three other types
of unemployment. Identify and explain real briefly each one.
b. What is meant by the natural rate of unemployment, and how does it relate to the three
types of unemployment identified above?
c. Draw a graph of the loanable funds market, being careful to label each axis. For both
supply and demand, identify one or more economic variables that affect each curve.
d. In terms of the loanable funds market, how would a cut in personal taxes – leading to a
larger deficit – affect the economy? Explain and illustrate your answer in the graph above.
The median on this exam was 69; the high was 96.
Econ 201 Winter, 2012 Exam #2b Student Name:
__________________________
The exam consists of two parts; multiple choice questions, valued at three points apiece, and the
other questions, whose value is indicated separately. For the multiple choice questions, please circle
the letter corresponding to your answer. Please ask for clarification of any unclear question. Time:
the entire class. Good luck.
Part ii. Use the back of the last sheet if you need more space.
1 Identify the following with a sentence or at most two: (16 points)
a. Convergence hypothesis
b. Value added
c. Shoe leather cost
d. Efficiency wage
2. (11 points) a. The textbook distinguishes three different types of unemployment –
beyond seasonal unemployment. Identify those three, explaining each one briefly.
What is meant by the ‘natural rate of unemployment, and how does it relate to the three
types you’ve discussed above?
Finally, what is meant by discouraged workers, and explain how this classification relates
to the three you discussed above.
3. (11 points) Draw a graph of the market for loanable funds, being sure to identify the
labels on each axis.
The loanable funds model is used to illustrate
the argument of crowding out. Explain what
is meant by ‘crowding out’, and illustrate it
on the graph.
4. a. Fill in the blanks in the following table (11 points)
Year
Nominal
GDP
4,200
1
2
3
4
5
6
8,000
8,500
12,000
Real GDP
7,000
7,500
95
8,000
8,170
100
12,000
i.
g. What is the rate of growth of real GDP
between
periods 2 and 3? _____________
Price
Index
130
150
h. What is the rate of inflation between
periods
5 and 6?________
Which year is the base year? ___________
The median on this exam was 71; the high was 93.
Econ 201 Winter, 2011 Exam #2 Professor Twomey Student Name:
_______________
Part II. Answer on the back of the last sheet, if you need more space.
Identify the following with a sentence or at most two: (16points)
a. Labor Force Participation Rate
b. Thomas Malthus
c. Indexing
d. Fisher Effect
2a. (13 points) The economic analysis of the cost of inflation distinguishes between that which is
expected, and that which is not – a shock. For the former type (expected inflation), identify and
explain briefly three costs of inflation.
b. Economists distinguish between different types of unemployment. In addition to seasonal
unemployment, identify and describe briefly three types of unemployment.
c. What is meant by the natural rate of unemployment?
d. In terms of the above types of unemployment, what are the two main components of the natural
rate?
3. (10 points) Fill in the blanks in the Table.
Year Nominal
Real GDP Price
GDP
Index
1
4,600
95
2
5,000
5,000
100
a. What is the rate of growth of real GDP between
periods 2 and 3? _____________
b. What is the rate of inflation between years
3
6,000
5,500
5 and 6?________
4
7,000
130
5
8,000
170
6
15,000
175 c. Which year is the base year? ___________
Identify and describe briefly two criticisms of the use of GDP as an indicator of a country’s wellbeing.
4. (10 points) What is meant by the term convergence?
Why do economists expect convergence to occur?
Give a couple of examples where convergence is occurring, and a couple where it is not.
There are many explanations for why convergence is not occurring. Identify two, explaining them
very briefly.
The median on this exam was 59; the high was 84.
Econ 201a Exam#2 Fall, 2010 Professor Twomey
______________
Student Name:
Part II Use the back of the last sheet if you need more room.
1. Identify the following with a sentence or at most two (16 points):
a) Efficiency wage
b) Convergence hypothesis
c) Value added
d) (two of the three) costs of inflation
2. A. (10 points) Draw a graph of the market for loanable funds, being sure to label each axis.
b. On two separate graphs, indicate what will be the effects of (i) a decrease in the government
deficit due to an increase in taxes, and (ii) an increase in foreign lending to the US, due to favorable
changes overseas.
3. (10 points)a. What is meant by the natural rate of unemployment?
b. How would the following be expected to change the natural rate of unemployment? Explain each
one briefly.
i)
The government reduces the time during which an unemployed worker can receive
benefits
ii)
More teenagers focus on their studies, and do not look for jobs until after college
iii)
Greater access to the Internet leads both potential employers and potential employees to
use the Internet to list and find job
iv)
Union membership decline
4. Fill in the blanks in the table (10 points)
Year Nominal
Real GDP Price
GDP
Index
1
7,000
95
2
8,000
8,000
100
3
9,000
8,500
4
12,000
130
5
9,000
170
6
20,000
175
c. What is the rate of growth of real GDP between
periods 2 and 3? _____________
d. What is the rate of inflation between periods
5 and 6?________
c. Which year is the base year? ___________
Identify and describe briefly two criticisms of the use of GDP as an indicator of a country’s wellbeing.
The median on this exam was 74. The high was 92.
Econ 201b Exam #2
Fall, 2010
Professor Twomey Student
Part II Use the back of the last sheet if you need more space.
1. Identify the following with a sentence or at most two (16 points)
a) Natural rate of unemployment
b) Fisher effect
c) GDP deflator
d) Total factor productivity
2.
Fill in the blanks in the table (13 points)
Year
Nominal
GDP
Real GDP
Price
Index
1
2
3
4
5
6
4,000
5,000
8,000
3,000
4,000
4,500
8,000
15,000
95
100
130
170
175
e. What is the rate of growth of real GDP between
periods 2 and 3? _____________
f. What is the rate of inflation between years
5 and 6?________
c. Which year is the base year? ___________
d.
Identify and describe briefly two criticisms of the use of GDP as an indicator of a country’s
well-being.
3a. (10 points) In addition to seasonal unemployment, identify and describe briefly the three types of
unemployment.
Which type of unemployment is affected by the minimum wage? Explain briefly.
Which type might be affected by an improvement in job information? Explain briefly.
4a. Draw a graph of the market for loanable funds, being careful to label each axis.
b. Suppose the government cuts taxes, without changing any other policy. How might this be
expected to affect the market for loanable funds? Explain and illustrate your answer with another
graph
c. Your answer to the above question involved a shift of one of the curves in the market for
loanable funds.
For the other curve, identify TWO separate factors that might make it shift to the RIGHT.
The median on this exam was 69. The high was 94.
Econ 201 Exam #2 Summer, 2010. Professor Twomey Student
Name:______________
The multiple choice questions are worth three points each. The weight of the questions in the second
part is indicated below. Please circle the letter corresponding to your answer on the multiple choice
questions. If a question is unclear, please ask for clarification. Class will resume at 1:00 pm.
Part II. (Use the back page if you need more space).
1. Identify the following with a sentence or at most two (16 points):
Efficient market hyptothesis
East Asian Miracle
Thomas Malthus
Efficiency wage
The deficit of the US federal government is currently at a very high level, when compared to
GDP, at least in terms of peacetime. There is much pressure in the political system for a
reduction of that deficit. In terms of the analysis based on the model of the market for
loanable funds, what would be the impact of a reduction of that deficit (by increasing taxes
or decreasing expenditures), on the interest rate and domestic investment. Explain,
illustrating your answer with the appropriate graph. (10 points)
3 a. Fill in the blanks in the table (10 points)
Year
1
2
3
4
5
6
Nominal
GDP
7,500
9,000
12,000
Real GDP
7,000
7,500
8,000
Price
Index
95
100
What is the rate of growth of real GDP between
periods 2 and 3? _____________
What is the rate of inflation between periods
5 and 6?________
iii. Which year is the base year in this table?
___________
130
170
20,000
175
b. Two of the major focuses of efforts at measurement in macroeconomics are GDP and
unemployment. Unfortunately, neither is perfect. Identify and discuss briefly two valid criticisms of
the measurement and/or interpretation of our measures of GDP and unemployment in the US.
4 (10 points) a. The accompanying diagram shows mortgage interest rates and inflation during
1990-2005 in the economy of Albernia. When would home mortgages have been especially
attractive, and why?
b. The accompanying diagram shows the inflation rate in the United Kingdom from 1980 to
2007.
What would you predict would have happened to unemployment between 1980 and 1985, and
why?
An American economist would first start to analyze that experience based on what is known about
our country.
In the US, which social groups get helped or hurt by the change in unemployment that you described
above?
10,000
[missing a question here, it would seem]
The median on this exam was 71; the high was 85.
Econ 201 Exam #2a Winter, 2010
Part II. Answer on the spaces provided; the professor has extra sheets if necessary.
Identify the following with a sentence or at most two: (16 points)
Real interest rate
East Asian miracle
Shoe leather cost of inflation
Neo-Mathusian concerns
10 points. Fill in the blanks in the table. (If you didn't bring a calculator, leave the answer in the form
of 6/3)
Period
Nominal
Real
Price
GDP
GDP
Index
1
400
450
____________
2
500
500
100
3
580
____________
104
4
___________
600
110
5
780
____________
120
6
800
750
____________
b) What is the rate of inflation between period 4 and period 5? ________
c) What is the rate of growth of real income between Period 1 and period 2?________
10 points Draw a graph of the loanable funds market, being sure to label each axis. Explain and
illustrate on your graph what happens to equilibrium if the government decides to cut its
expenditures. In this case, what happens to business investments?
4, (13 points) a. What is meant by the Convergence Hypothesis? What reason(s) do its proponents
offer to suggest it may be true?
b. Identify two weaknesses of the way the U.S. measures unemployment.
Econ 201b Exam #2 Winter, 2010
___________
Professor Twomey
Student Name:
The multiple choice questions are valued at three points apiece. Please circle the letter corresponding
to the answer you select. The weights for the questions in the second part are indicated below. If any
question is unclear, please ask for clarification. Time: the entire class. Good luck!
Part II. Answer on these sheets; the professor has extra paper if you need it.
Identify the following with a sentence or at most two: (16 points)
. Natural Rate of Unemployment
Convergence Hypothesis
Fisher effect
Shoe leather cost of inflation
2. 10 points. Fill in the blanks in the table. (If you didn't bring a calculator, leave the answer in the
form of 6/3)
Period Nominal
Real
Price
GDP
GDP
Index
1
40,000
48,800
____________
2
50,000
50,000
100
3
55,000
____________
104
4
___________
6,000
110
5
70,000
____________
120
6
85,000
80,800
____________
b) What is the rate of inflation between period 4 and period 5?
___________
c) What is the rate of growth of real GDP between Period 1 and period 2?________
(10 points) Draw a graph of the loanable funds market, being sure to label each axis. Explain and
show on that graph what happens to equilibrium when people decide to lower their savings.
Finally, what happens to business investments in that new situation?
(13 points). A. Identify two things the government can do to increase growth, and two (different)
things the government can do that discourage growth.
B. According to the analysis in our textbook, what is the relationship between structural
unemployment and the minimum wage?
Econ 201
Exam #2
Summer, 2009
Prof. Twomey
Student Name: _________
The exam consists of two parts: multiple choice and short answers. The multiple choice questions
are worth three points apiece, and the weights of the other questions are indicated below. Please
answer on these sheets, using the back of the last page if necessary. I have extra sheets for scratch
paper, if you need them. For the multiple choice questions, circle the letter that corresponds to
your answer. Please ask for clarification of any unclear question. Time: one hour. Good luck.
Part II
Identify the following with a sentence or at most two: (16 points)
COLA
Efficiency Wage
Value Added
d. Labor force participation rate
2. (10 points) Beyond seasonal unemployment, identify and explain briefly the three
major types of unemployment.
What is the natural rate of unemployment, and how does it relate to the types you have
identified above?
(10 points) Fill in the blanks in the table.
Period Nominal
GDP
Real
GDP
GDP
Deflator
1
400
95
2
500
500
100
3
800
650
4
900
150
5
800
170
Which period is the base period? ________
b. What is the rate of inflation between period 4 and period 5? ___________
3. (13 points) The textbook discusses three major factors determining the long-term
growth in productivity. Identify and discuss them briefly.
Many people might think that having natural resources is important for economic growth,
but our book very clearly downplays this factor. Why?
Identify what is meant by infrastructure and property rights, and discuss briefly their roles
in promoting economic growth.
The high on this exam was 94. The median on this exam was 72.
Econ 201a
Exam #2
Winter,
2008
Professor Twomey
Please PRINT your name on the BACK of the last sheet. Answer on
these sheets, using the backsides if necessary. The questions are
equally weighted. Be sure to label each axis on your graphs! If
any question is unclear, please ask for a clarification.
Time: the entire class.
1. Identifications: Identify the following with a sentence or at
most two:
Legal tender
Standardized budget
Excess Reserves
Menu costs
Federal Funds Rate
2a. (20 points) a. Suppose that the required reserve ratio is 5%,
and the banking system currently has $35 billion in excess
reserves. What is the maximum amount of new deposits that might be
created, if all those reserves were to be lent out?
b. Identify and explain briefly the three defining functions of
money.
c. What is meant by near monies? How are they important? Give one
example of a near money.
3.. The explanation for the difference between the short run and
long run AS curve is downward inflexibility of wages and
prices. Identify and explain two reasons that are given for
this inflexibility.
b. Although the textbook’s analysis suggests that the main
variable affecting investment is interest rates, there
are several others that affect investment. Identify and
explain briefly two of them.
c. In discussing the national debt, the textbook
identifies several “false concerns.” One of them is
that (in the US) the national debt can cause
bankruptcy. Explain the book’s position that this
argument is false.
One of the valid concerns about deficits is ‘crowding out.’ What is
meant by this term, and describe the scenario in which a deficit
causes crowding out.
b. An important part of the new perspective called supply side
economics, is the ‘Laffer Curve.’ Explain – and illustrate with a
graph – what this curve is about, and how that relates to current
economic policy.
5a. Consider a situation where the government increases its
expenditures by $150 billion, and the marginal propensity to
consume is 0.8. In a simple world where prices are fixed, what
would be the impact of this new spending on real GDP? Illustrate
your answer with an AS-AD graph.
b. The textbook describes the Federal Reserve as a ‘quasipublic’ (and therefore quasi-private) bank. What reasons are
given to support this judgement?
The high on this exam was 100; the median was 68
Econ 201b
Exam #2
Winter,
2008
Professor Twomey
Please PRINT your name on the BACK of the last sheet. Answer on
these sheets, using the backsides if necessary. The questions are
equally weighted. Be sure to label each axis on your graphs! If any
question is unclear, please ask for a clarification.
Time: the entire class.
1. Identifications: Identify the following with a sentence or at
most two: (20 points)
a. Near money
b. Efficiency wage
c. Ratchet effect
Standardized budget
e. Federal Funds Rate
2a. What is meant by the Federal Open Market Committee (FOMC)? Its
members are drawn from two groups: identify these groups, and their
role in filling the FOMC.
b. One of the valid concerns about deficits is called ‘crowding
out.’ What is meant by this term, and describe the scenario
in which a deficit causes crowding out.
3a. Suppose that the banking system currently has $70 billion in
excess reserves. If the required reserve ratio is 0.1, what is
the maximum amount by which the money supply could increase, if
those excess reserves were to be used up?
One of the arguments against using countercyclical fiscal policy is
the problem of timing, and the existence of lags. Explain this
position.
One of the testbook’s ‘false concerns’ with respect to federal
deficits, is that they put a burden on future generations.
Explain the book’s position.
4a. An important part of the new perspective called supply side
economics, is the ‘Laffer Curve.’ Explain – and illustrate with a
graph – what this curve is about, and how that relates to current
economic policy debates.
b. What is meant by cost push inflation? Explain this,
illustrating with a graph.
5. The major economic factor determining consumption spending is
disposable income. Identify two other factors, and explain why they
affect consumption. (no graph necessary)
b. Suppose businesses increase investment spending by $65 billion.
In a simple world where prices are fixed and the marginal
propensity to consume is 0.75, what will be the impact on GDP?
Illustrate your answer with an AS-AD graph.
The high on this exam was 86; the median was 51
Econ 201 Introductory Macroeconomics Exam #2a
Winter,
2007
Prof. Twomey
Please PRINT your names on the BACK of the LAST SHEET. If you need
more space, use the backs of these sheets. If you are not sure of
what is being asked, please request clarification. Questions are
equally weighted. Time: the entire class. Good luck!
Identify the following with a sentence or at most two
Board of Governors of the Federal Reserve
Wealth effect
Banker’s bank
Legal Tender
Full employment budget
2a. The textbook states that interest rates are a major determinant
of private sector investment. Identify three other determinants of
private sector investment (no graph needed).
b. In its discussion of budget issues, the textbook states “An
annually balanced budget is not economically neutral; the pursuit
of such a policy may intensify the business cycle not dampen it.”
Explain the reason behind this position.
3a. Among the criticisms the textbook gives of discretionary
fiscal policies, there is that of timing lags. Identify the three
types of timing lags.
b. Economists have traditionally described three identifying
functions of money. Name and explain very briefly each one.
c. Consider a national economy characterized by the consumption
function C = 3800 + 0.75 DI, where C stands for consumption, and DI
for disposable income.
What is the value of the multiplier?
If private sector investment falls by 400, what will be the impact
on Disposable Income?
In the textbook’s discussion of issues relating to government
deficits and the national debt, the book asserts that
bankruptcy is not a valid issue. Explain the book’s argument.
Also in the discussion of the debt, a valid criticism of government
deficits is called “crowding out.” Explain what is meant by this
term (no graph necessary).
5a. Explain how each of the following will affect the consumption
and saving schedules, or the investment schedule, other things
equal (graphs not necessary).
An increase in the real interest rate
An increase in the Federal personal income tax
The development of a cheaper method of manufacturing computer
chips.
5b. What effects would each of the following have on aggregate
supply or aggregate demand? In each case use a graph to show the
expected effects on the equilibrium price level and the level of
real output. Assume other things remain constant.
A major increase in Federal government spending on health care.
Workers experience increases in productivity, but do not ask for
higher wages, due to fears of foreign competition.
iii. Fast growing countries such as China and India decide to open
their markets to more consumer goods from the U.S.
The median on this exam was 71. The high was 98.
Econ 201 Introductory Macroeconomics Exam #2b
Winter,
2007
Prof. Twomey
Please PRINT your names on the BACK of the LAST SHEET. If you need
more space, use the backs of these sheets. If you are not sure of
what is being asked, please request clarification. Questions are
equally weighted. Time: the entire class. Good luck!
1. Identify the following with a sentence or at most two:
Built-in stabilizer
Open Market Committee
Near-monies
Leading indicators
Quasi-public bank
2a. The textbook lists seven functions of the Federal Reserve, one
of which is controlling the money supply. List and explain very
briefly three different ones.
b. There are two major components (reasons for) the demand for
money. Identify each one, and indicate on separate graphs how they
vary with the interest rate.
3a. One of the major justifications for presuming that the short
run aggregate supply curve might have a positive slop, (and thus
not be vertical) is the assertion that prices and nominal wages
might be sticky, that is, inflexible in a downward direction.
Identify and explain briefly two different justifications for this
assertion.
b. Explain how the following will affect the consumption and
savings schedules, or the investment schedule, other thing equal:
(graphs helpful, but not required)
i) a sharp, sustained increase in stock prices
ii) An increase in the Federal personal income tax
iii) A sizeable increase in the retirement age for collecting
social security benefits.
4. Both in the textbook and in the class lecture there were several
reasons given for why the US federal budget moved from a situation
of surplus under President Clinton, to deficit under President
Bush. Identify and explain briefly three different reasons.
5a. Consider an economy characterized by the consumption function
C = 600 + 0.8 Y, where C is consumption spending and Y is
disposable income. What is the value of the multiplier?
If the private sector businesses increase their investment spending
by $25 billion, what will be the change in disposable income?
b. What effects would each of the following have on aggregate
demand or aggregate supply? In each case, use a graph to show the
expect effects on the equilibrium price level and the level of real
output.
The complete disintegration of OPEC, causing oil prices to
fall by one half.
A 10 percent increase in labor productivity.
c. A reduction in interest rates.
The median on this exam was 68. The high was 96
Econ 201b
Exam #2
Fall,
2006
Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Use the backs
of these sheets if you need more space. The points for each
questions are indicated. Please ask for clarification if a question
is unclear. Time: the entire class. Good luck!
Identify the following with a sentence or at most two: (20 points)
Progressive tax system
Token money
Political business cycle
Wealth effect
Legal tender
(20 points) Identify and explain briefly the three defining
functions of money.
b. If the marginal propensity to save is 0.25, and investment drops
by $50 billion, by how much will equilibrium income change?
3. (10 points). The book states (page 326, if you’re interested)
“An annually balanced budget may intensify the business cycle.”
What is the explanation for this statement?
(10 points) The data in the book indicate that
between 1990 and 1991 the actual budget
deficit (as a percentage of GDP) grew
more rapidly than the full employment
budget deficit. What could explain this
fact?
(10 points) If the required reserve ratio is
0.10, and for some reason the economy
has $30 billion in excess reserves, what
is the maximum amount by which demand
deposits can increase?
(10 points) In its discussion of the
advisability of countercyclical fiscal
policy, the book points to three
different lags in the execution of this
policy. Explain each one briefly.
7. (20 points) What effects would each of
the following have on aggregate demand
or aggregate supply? (or both?) In each
case use a graph to show the expected
effects on the equilibrium price level
and the level of real output. Assume all
other things remain constant.
a. The newly elected Congress passes a
reduction in personal income tax rates.
b. Due to bad weather in Japan, that
country decides to purchase more US rice
c. Interest rates fall
d. Due to improved educational
institutions, there is a sizable
increase in labor productivity without a
corresponding increase in nominal wages.
e. The newly elected Congress passes very
tight environmental regulations.
The median on this exam was 65. the High was 93
Econ 201
Exam #2
Fall, 2005
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using
the flip sides if necessary. Questions are equally weighted. Be
sure to label the
axes on the graphs. If any question is unclear, please ask for a
clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Functional finance
b) Prime rate
c) Expected rate of return
d) Wealth effect
e) (Social security is basically a) "pay as you go plan"
2. A simplified description of monetary policy at the Federal
Reserve under Alan
Greenspan is that they are currently reducing the money supply. In
principle, there are
three tools that the Fed can use to pursue this goal. Identify
each of those three tools,
and state what the Fed would have to do to them (increase or
decrease, etc.) to achieve
its goal of a reduction in the quantity of money.
In the AS-AD framework, describe and draw a graph of the impact of
a reduction of the
money supply on prices and output.
3a. Besides interest rates, what are two other macroeconomic
variables that affect
private sector investment? For each of them, state what would have
to happen to them
to increase investment.
b. It is traditional to analyze the demand for money in terms of
two components. Identify
those two components, and state what macroeconomic variable will
affect them.
4a. In its discussion of the national debt, the textbook speaks of
some "false concerns"
- the most important of which is that the current large debt
threatens the government
with bankruptcy. The textbook then goes on to discuss several
concerns that it considers
valid or substantive issues. Identify two of them, explaining each
briefly.
b. In a situation where the MPC is 0.75, suppose the government
decided to increase
expenditures by $50 billion. Using the simple multiplier, by how
much would this change
real GDP, and in what direction? Illustrate your answer with a
graph.
5.Let's discuss discretionary/countercyclical monetary and fiscal
policy.
One of the objections to the use of either of these tools is the
existence of lags,
of which there are usually listed three examples. Identify and
describe these lags.
For these three types of lags, which would be the same for monetary
and fiscal, and which
would be different-and why?
What is meant by "political business cylces?" Would this be the
same for both monetary
and fiscal policy? Explain briefly.
The median on this exam was 46; the high was 75.
Econ 201
2005
Exam #2a
Winter,
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary. Questions are
equally weighted. Be sure to label the axes on the graphs. If any
question is unclear, please ask for a clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Wealth effect
b) Legal Tender
c) Political business cycle
d) Fractional reserve banking system
e) Cyclically balanced budget
2a. Consider an economy characterized by the consumption
function C = 5,000 + 0.80xDI,
where C is consumption expenditure, and DI is disposable income. In
this economy, by how
much would income change if investment expenditures were to fall by
$3 billion?
b. Would the following cause a shift of the consumption function,
or a movement along
that curve? Explain each answer briefly-graph optional.
i) As a result of the discovery of accounting irregularities, there
is a sudden drop in
the stock market.
ii) An increase in the income of the European Union countries leads
to a greater demand
for US output.
iii) Declining state funding for education convinces the population
of the need to save
more
3a. Economists distinguish two relatively distinct components of
the demand for money.
Identify those two components, illustrate them on a graph, and
identify one macroeconomic
variable that affects each component.
b. What is the Open Market Committee? How are its members
determined? What is their basic
role in the financial system?
c. Identify and explain briefly the three defining functions of
money.
4a. Explain and show on a graph what would be the impact on
interest rates if the Fed
lowered the supply of money.
b. Suppose an initial situation of the commercial banking system
having an excess of
reserves of $600 million, in a context of a required reserve ratio
of 0.25 . If all the
banks decided to eliminate their excess reserves at the same time
(hardly realistic
assumption, but useful for exam purposes), by how much would the
quantity of money
change, and in what direction?
What would also be the direction of the effect on:
i) the amount of credit
ii) the rate of interest
iii) the level of investment
5. Explain illustrating each answer with a separate graph, how the
following will
affect either AS or AD, and therefore prices and real output.
a) The government decides to spend more on defense
b) There is a devaluation of the dollar
c) The government decides to raise income taxes
d) The price of oil falls
f) The quantity of money falls
The median on this exam was 61; the high was 78.
Econ 201
Exam #2b
Winter, 2005
Professor
Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary. Questions are
equally weighted. Be sure to label the axes on the graphs. If any
question is unclear, please ask for a clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Menu costs
b) Employment Act of 1946
c) Federal Funds Rat
d) Marginal propensity to save
e) Near monies
2a. Consider an economy characterized by the consumption
function C = 250 + 0.75·DI,
where C is consumption expenditure, and DI is disposable income.
In this economy, by
how much would income change if investment expenditures were to
rise by $7 billion?
b. What is meant by the term crowding out? Explain, illustrating
your answer with a graph.
c. Identify two factors that have contributed to the increase in
the federal government's
deficit under President Bush.
3a. Economists distinguish two relatively distinct components of
the demand for money.
Identify those two components, illustrate them on a graph, and
identify one macroeconomic
variable that affects each component.
b. What is the Open Market Committee? How are its members
determined? What is their basic
role in the financial system?
c. Identify and explain briefly the three defining functions of
money.
4a. Explain and show on a graph what would be the impact on
interest rates if the Fed
lowered the supply of money.
b. Suppose an initial situation of the commercial banking system
having an excess of
reserves of $600 million, in a context of a required reserve ratio
of 0.25 . If all the
banks decided to eliminate their excess reserves at the same time
(hardly realistic
assumption, but useful for exam purposes), by how much would the
quantity of money
change, and in what direction?
What would also be the direction of the effect on:
iv) the amount of credit
v) the rate of interest
vi) the level of investment
5. Explain illustrating each answer with a separate graph, how the
following will
affect either AS or AD, and therefore prices and real output.
a) A recession in Europe leads them to import less from the US
b) There is a revaluation of the dollar
c) The price of oil rises
d) The government decides to lower income taxes
e) New discoveries in biotechnology leads companies to expand
investments
The median on this exam was 68; the high was 96.
Econ 201
Exam #2 Fall, 2004
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these
sheets, using the flip sides if necessary. Questions are equally
weighted. Be sure to label the axes on the graphs. If any question
is
unclear, please ask for a clarification. Good luck!
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Menu costs
Full employment budget
Political business cycle
Expected rate of return
Cyclically balanced budget
2. The U.S. federal government's budget situation has shifted from
a
significant surplus at the end of President Clinton's term, to a
large
deficit today. Identify and explain briefly three distinct reasons
for
this change.
3a. In the textbook, and in class, much attention was given to who
is
hurt by inflation, especially unexpected inflation. Turn that
discussion
around, and identify two economic groups who are helped by
inflation.
Discuss briefly.
b. What is meant by the term crowding out? Explain briefly.
4a. Identify and explain with a pair of graphs, the difference
between
"cost push" and "demand pull" inflation.
b) For each of cost push and demand pull, identify one economic
factor
that can cause that type of inflation to occur.
c). Consider an economy in which the marginal propensity to consume
is
0.75, and where a newly elected president decides to increase
government
expenditures by $300 billion. By how much will gross national
product
change, and will that be an increase or a decrease?
5. Should the following be expected to affect Aggregate Supply or
Aggregate Demand? In which direction? Explain each answer briefly,
illustrating your answer with a simple graph. In cases where it is
Aggregate Demand that is affected, indicate which component of
spending
(consumption, exports, etc.) is affected. If you believe that both
curves
are affected, explain why.
A. The Federal Reserve raises interest rates
B. The price of imported oil falls.
C. A foreign automobile producer develops a new engine that makes
their
cars much more attractive to US buyers.
D. Labor unrest and widespread union activity leads to a ten
percent
increase in yearly wages; much higher than the growth in labor
productivity.
E. A newly elected president decides to balance the budget by
across-the-board spending cuts.
The median on this exam was 72; the high was 100.
Econ 201a Exam #2
Winter, 2004
Professor Twomey
Please PRINT your name on the BACK of the last sheet. Please
indicate
there if you are in the 1:25 class. Answer on these sheets, using
the flip
sides if necessary. Questions are equally weighted. Be sure to
label the
axes on the graphs. If any question is unclear, please ask for a
clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Functional finance
b) Built-in stabilizer
c) Asset demand
d) Prime rate
e) Regressive tax
2a. Identify and explain briefly the three defining functions of
money.
b. Economists distinguish two major factors that determine the
demand for
money. Identify those two factors, draw each on a graph, and
explain what
economic variable causes them to change.
c. State the equation of exchange, and identify its components.
3a. Suppose the MPC is 0.9 and that investment falls by $20
billion. By
how much, and in what direction, will real GDP change? Illustrate
your
answer with a graph.
b. If the required reserve ratio is 0.33 and the Fed engages in an
open
market sale of $60 billion, by how, and in what direction, will the
money
supply change?
c. The question of the advisability of tax cuts is currently highly
debated. State very briefly one reason why one could argue that a
tax cut
would expand aggregate demand, and one reason for stating that a
tax cut
would expand aggregate supply.
4a. How does an expansionary monetary policy affect the economy? On
three
parallel graphs, indicate the effects on interest rates,
investment,
aggregate demand, and prices and output.
b. The fiscal position of the U.S. government has moved from a
sizeable
surplus a few years ago, to a deficit today. Our textbook discusses
several macroeconomic concerns of such a shift. One is called
crowding
out.
Explain what is meant by crowding out
Identify another "valid" criticism of deficits, and explain it
briefly
5. What effects would each of the following have on aggregate
demand or
aggregate supply. Explain each answer briefly, illustrating it with
a
graph.
a. There is an increase in the world price of oil
b. Changing business practices lead to an increase in labor
productivity
c. The government decides to increase the amount of payments to
recipients
of Social Security
d. The government decides to reduce air pollution by charging firms
for
the amount of smoke they emit into the atmosphere.
e. There is a decrease on cigarette taxes.
The median on this exam was 62; the high was 93.
Econ 201b
Exam #2
Winter,
2004
Professor Twomey
Please PRINT your name on the BACK of the last sheet. Please
indicate
there if you are in the 9:55 class. Answer on these sheets, using
the flip
sides if necessary. Questions are equally weighted. Be sure to
label the
axes on the graphs. If any question is unclear, please ask for a
clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Full employment deficit
b) Currency drain
c) Regressive tax
d) Open Market Committee
e) Marginal propensity to save
2a. What is meant by the velocity of money? Is velocity stable? Why
might
that question be important?
b. The U.S. federal government's fiscal situation has seen a shift
from a
sizeable surplus five years ago to a large deficit today. Identify
three
principal causes of that change.
3a. Identify the three ways the Fed can change the quantity of
money; in
each case, what would the Fed do to cause the money supply to
increase?
b. Suppose the Fed engages in contractionary monetary policy.
Explain and
illustrate with three graphs how that will affect interest rates,
investment, aggregate demand, prices and output
4a. If the MPC is 0.8 and investment increases by $30 billion, by
how much
will real GDP change? Illustrate your answer with a graph.
b. If the required reserve ratio is 0.1 and the Fed engages in an
open
market purchase of $40 billion, by how much and in what direction
will the
money supply change?
c. What is meant by crowding out?
5. Explain how each of the following will affect the consumption
and
savings schedules, or the investment schedule [if it's both, just
answer
for one], and then how that will affect aggregate demand.
Illustrate each
answer with graphs.
a. There is a decline in (real) interest rates
b. There is a sharp, sustained decline in stock prices
c. Engineers discover a cheaper method of manufacturing computer
chips.
d. There is a decrease in the Federal Income tax.
e. There is a sizeable increase in the age at which one can receive
Social
Security Benefits
The median on this exam was 71; the high was 96
Econ 201 Exam #2 Fall, 2003 Professor Twomey
Please PRINT your name on the BACK of the last sheet. Answer on
these sheets, using the flip sides if necessary. Questions are
equally
weighted. Be sure to label the axes on the graphs. If any question
is
unclear, please ask for a clarification. Good luck!
1. Identify the following with a sentence or at most two:
a)
b)
c)
d)
e)
Efficiency wages
Board of Governors
Legal Tender
Automatic Stabilizers
Real Interest Rate
2a. Suppose the economy is characterized by the following
consumption
function; C = 60 + 0.8 x Y, where C is consumption, there are no
taxes,
and Y is real income or real GDP. Suppose an initial situation full
employment with no inflation. Then private sector investment falls
by $60
billion. According to the simple multiplier model, by how much does
real
GDP change? Draw a graph illustrating the before and after
equilibrium
points.
Such a change might be eliminated by countercyclical fiscal policy.
What
would the government do? There are several criticisms of
ountercyclical
fiscal policy; one of them relates to the issue of timing. Identify
and
discuss real briefly two examples of the factors people cite, of
how
timing considerations make countercyclical policy less attractive.
3a. Identify the three tools of monetary policy For one of those
tools,
identify a change, and describe how that change will affect the
quantity
of money. Then illustrate that change on a graph, being careful to
label
the axes.
B. Suppose Continental Bank has a required reserve ratio of 20
percent,
has reserves of $22 million, loans of $78 million, and checkable
deposits
of $100 million.
What is the maximum amount of new loans that Continental Bank can
make?
If Continental makes those loans, by how much has the supply of
money changed?
After that has happened, and all the checks have been cleared,
etc.,
what will be Continental's balance sheet?
4a. According to supply side economists, how does a cut in business
taxes
affect aggregate supply? Explain and illustrate on a graph.
b. The book describes three ranges of the Aggregate Supply curve.
Draw the
AS curve, illustrating these three ranges.
On which range of the AS curve might it make most sense (to
Keynesian AD
economists) to raise expenditures in order to boost employment?
5. What effects would each of the following have on our aggregate
demand
or aggregate supply. In each case, draw a graph of the before and
after
situations.
A. There suddenly arises a widespread fear of depression on the
part of
consumers
B. Good harvests in Russia leads them to buy less wheat from the
U.S.
C. There is a major cut in Federal spending for health care in the
US
D. There is a complete disintegration of OPEC, causing oil prices
to fall
by half.
E. Due to improved education and greater use of computers, there is
an
increase in US labor productivity
F. Fed monetary policy causes US interest rates to fall.
The median on this exam was 60; the high was 96/
Econ 201
Exam #2
Winter, 2003
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the
flip sides if necessary. Questions are equally weighted. Be sure to
label the axes on the
graphs. If any question is unclear, please ask for a
clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Robert Malthus
b) Inflation tax
c) Monetary Base
d) Ricardo-Barro effect
e) Disposable Income
2. One important theme in the textbook's discussion of economic
growth has
to do with economic convergence. What is meant by this? Why might
we
expect this to occur?
Where is this economic convergence occurring, and where not?
What policies are suggested for governments to help convergence
occur?
3A. In the United States today, which of the following items is
included
in the money supply? Explain briefly
i) The balance on your visa card
ii) The coins inside public telephones
iii) The amount of loans taken out by college students
iv) the value of IBM stock
v) U.S. government securities (bonds)
B Sara has $5,000 in a Citibank time deposit account. She withdraws
$1,000
from the time deposit account, keeps $50 in cash, and deposits the
rest in
her checking account at Citibank. Considering these actions alone,
what
are the changes in M1 and M2?
4a. Consider an economy characterized by the consumption function:
Consumption =
3000 + 0.75 Income.
What is the value of the multiplier? Suppose that private sector
investment increases by $15 billion. What would be the resultant
change in
national income?
b. What is meant by crowding out? Explain it, illustrating with a
graph.
5a. Consider an economy where the cash ratio (currency drain) is
20%, and
the required reserve ratio is 10%. What would be the effect on the
money
supply of an open market purchase of $400 million?
B. According to our model of the money market, explain and show on
a graph
how the change in money you describe above would affect the nominal
rate
of interest.
C. What is the quantity theory of money, and what important
conclusion
about the functioning of the macro-economy is drawn by monetarists
from
this theory?
The median on this exam was 50; the high was 87
Econ 201a
Exam #2
Fall,
2002
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the
flip sides if necessary. Questions are equally weighted. Be sure to
label the axes on the
graphs. If any question is unclear, please ask for a
clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Monetary base
b) Open Market Committee
c) Stagflation
d) Property rights
e) Automatic Stabilizer
2a. Suppose that the required reserve ratio is five percent, and
that
the currency drain is 20 percent. If the Fed makes an open market
sale of
$50 million,
–i What is the change in the monetary base?
ii By how much (and in which direction) does the quantity of money
change?
–iii Draw a graph illustrating what impact this action should have
on
interest rates.
b) What is the quantity theory of money? What important assumptions
do
monetarists make when using it? What major macroeconomic conclusion
do
monetarists draw from it?
3a. Explain and contrast what the CLASSICAL and the NEW GROWTH
theories
predict about the short and long run effects of an increase of
savings and
investment. (Graph optional)
b. As the book says,
which of these two growth theories best fits the facts? Explain
briefly
c.List three actions (policies) that governments can take to
encourage
economic growth, explaining each one real briefly.
4a. A central issue determining how well the economy functions is
the
slope of the short run aggregate supply (AS) curve. Keynesians
argue that
it is not vertical. Identify one reason that is suggested as to
why it
might not be vertical, and explain why that factor would cause the
AS
curve not to be vertical.
b. Consider now the extreme Keynesian world where the AS curve is
completely flat, and that there is considerable unemployment.
Suppose the
marginal propensity to consume is 0.8, and that private sector
investment
rises by $20 billion. By how much does real GDP rise? -- In this
situation, what happens to prices and unemployment?
5. Earlier this week
the Federal Reserve reduced the federal funds rate to 1.25 percent,
the
lowest level since 1961. --What is the macroeconomic goal of this
action?
Explain and illustrate on a graph. The newspaper article that was
distributed in class stated that if this monetary action is
unsuccessful
in achieving its goal, then the government would need to use fiscal
policy
to achieve these ends. Explain briefly what changes in fiscal
policy would
have the same effect as this reduction in interest rates.
-- Another consideration our government policymakers might have to
consider is what the article described as "a big shock like a spike
in oil
prices related to a war with Iraq." Explain and illustrate on a
graph
what would the impact on the U.S. economy of a sharp increase in
the price
of oil.
The median on this exam was 67, the high was 92.
Econ 201b
Twomey
Exam #2
Fall, 2002
Professor
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the
flip sides if necessary. Questions are equally weighted. Be sure to
label the axes on the
graphs. If any question is unclear, please ask for a
clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Fiat money
b) Board of Governors
c) Classical theory of population growth
d) Prime rate
e) Inflationary gap
2a. Suppose that the currency drain (currency ratio) is 10 percent
and the
required reserve ratio is one percent. If the Fed buys $200 million
of
securities on the open market, what will be the ultimate change in
the
quantity of money, both in sign and in magnitude?
b. Illustrate that change on a graph of the supply and demand for
money.
c. How would that change affect prices and output? Explain and
illustrate
with a graph.
3a. Suppose the MPC is 0.8, and that private investment increases
by $300
million. According to standard Keynesian analysis, what will be the
resultant change in output?
b. Will the following be expected to affect aggregate supply (AS)
or
aggregate demand (AD), and would they move it to the left or to the
right?
Explain your answer real briefly
–i Russia has a good harvest, and so it stops buying US wheat
–i The minimum wage is eliminated
iii Due to new tax breaks, private sector investment rises
iv The Fed raises interest rates
–v Due to fears of a potential war, the stock market declines.
4a. In speaking of long term growth, our textbook discusses the
issue of
economic convergence. What is meant by this term?
b. Why might this process be expected to occur?
c. Where has convergence been occurring, and where has it failed to
happen?
d. Identify and explain briefly two policies that might encourage
convergence.
5. The attached excerpts are from a newspaper article in
yesterday's New
York Times, on economic policy, and specifically the issue of a tax
cut.
A. President Bush speaks about stimulating the economy by a tax
cut. We
have two different versions of how a cut in the government's tax
rates
will affect the economy; these are commonly referred to as supply
side and
demand side. Explain and illustrate on two separate graphs, what
each of
those schools predict about the effects of a tax cut.
B. The article mentions several tax cuts. Do these seem to be
designed to
affect aggregate supply or demand? Explain briefly
C. Explain briefly how the following two factors should be expected
to
affect the government's budget: a slowdown in the economy, and a
cut in
tax rates.
D. Explain what is meant by the worry that the Federal Reserve "had
exhausted its tools for fighting potential deflation in prices or
was
close to losing the ability to revive the economy."
The median on this exam was 67, the median was 92
Econ 201
Exam #2a
Winter,
2002
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary. Questions are
equally weighted. Be sure to label the axes on the graphs. If any
question is unclear, please ask for a clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Autonomous expenditure
b) Monetary Base
c) Property rights
d) Board of Governors
e) Liquid Asset
2a. Consider a simple Keynesian economy which is experiencing some
unemployment. Suppose some bright young economist measures the
economy's
MPC to be 0.75. What is the size of the expenditure multiplier?
B. If private sector investment were to rise by $50 billion, what
would
be the resulting overall change in equilibrium real GDP?
c. Illustrate this change with a graph either income/expenditure or
AS-AD.
Be sure to label the axes, and to indicate clearly the "before" and
the "after" situations.
3a. One of the most important issues in economics is the long term
growth
of the country. Our textbook contrasts the approach of the first
school of
economists, called classical or Malthusian, with the more recent
neo-classical and new growth schools. What is the essential
differences
between the analyses of the classical and the neo-classical
schools, in
terms of the economic factors they consider and the predictions
they make?
b. Considering the neo-classical and new growth schools together,
what
government policies might they recommend to stimulate economic
growth?
c. Draw a graph that illustrates the growth in labor productivity
that
would result from following these policies. Be sure to label the
axes!
4a. What are the three defining functions of money? Explain each
one real
briefly.
b. The textbook mentions several harmful effects of inflation, its
"costs." Identify and discuss two of them.
c. The equation of exchange is an important tool of any economist's
analytical toolbox. State the equation, identifying each of its
components.
d. What is the most important conclusion that economists derive
from the
equation of exchange?
5a. Consider a situation where the required reserve ratio is 0.2
and the
public generally keeps one quarter of its money as cash.
What is the size of the money multiplier?
If the Fed engages in an open market purchase of $100 billion,
what will
be the overall effect on the money supply?
How will this action affect the rate of interest in the short
run?
Illustrate with a graph.
It has been asserted that technological changes have been
changing the
financial system. One such change is the increased ease with which
people
can make transactions using credit cards. How will the increased
use of
credit cards affect the supply and demand for money, and the
interest
rate? Explain and illustrate with a graph.
The median on this exam was 62, the high was 95
Econ 201
Exam #2b
Winter,
2002
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary. Questions are
equally weighted. Be sure to label the axes on the graphs. If any
question is unclear, please ask for a clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) New Growth Theory
b) Induced expenditure
c) Say's Law
d) Open Market Committee
e) Double coincidence of wants
2a. Consider a simple Keynesian economy where the marginal
propensity to
consume is 9/10. What is the size of the expenditure multiplier?
b. What happens to equilibrium income if autonomous expenditures
rise by
$20 billion?
c. Illustrate this change on a graph, either of the
income/expenditure, or
AS-AD. Whichever one, be sure to label the axes!
3a. Suppose the Fed engages in an open market purchase of $40
billion.
Does this increase or decrease the monetary base?
b. Suppose that, in the above situation, the required reserve ratio
is
1/4, and that the public keeps 2/3 of its money in bank deposits,
and one
third in cash. What will be the change in the money supply?
Draw a graph of the supply and demand for money, illustrating the
(short
term) change in the interest rate.
According to your analysis, will the Fed's open market purchase
lead to
an expansion or a contraction of the aggregate economy? Explain
briefly;
no graph necessary.
4a. What are the three policy tools of the Fed? For each one,
indicate
what action would be necessary to increase the money supply.
b. Animportant part of monetary analysis is the money demand. Draw
a graph of
the demand for money, indicating clearly the labels on the axes
c. How would each of the following would move the demand for money
(illustrate each with a graph):
- an increase in the price level
- greater use of credit cards
d. What is the formula for the equation for exchange? Identify each
of its
components.
5a. Our textbook draws a strong distinction between the classical
school
of economists and the neo-classical school, in terms of their
analysis of
economic growth. Explain that basic distinction (graphs not
necessary).
b. What is the reason in the neo-classical growth theory that leads
to the
prediction that national levels of real GDP and national growth
rates will
converge?
c. Identify and explain briefly two government policies that might
speed
economic growth.
The median on this exam was 60, the high was 92
Econ 201
Twomey
Exam #2a
Fall, 2001
Professor
Please PRINT your name on the back of the last sheet. Answer on
these
sheets, using the flip sides if necessary. Questions are equally
weighted. Be sure to label the axes on the graphs. If any question
is
unclear, please ask for a clarification.
Good luck!
1. Identify the following with a sentence or at most two:
a) Monetary base
b) Malthusian (or Doomsday) theory (or model)
c) Discount rate
d) Currency Drain
e) Business cycle turning points
2a.Using a simple Keynesian model with fixed prices, suppose that
the
marginal propensity to consume is 0.6 and that investment falls by
$50
billion. What is the impact on real GDP? Illustrate this with an
AS-AD
graph.
b. Our textbook discusses several factors that determine economic
growth, and then applies this message to explain why many third
world
countries have not grown. Identify and explain briefly three such
factors that are could be used to explain the lack of growth in
third
world countries in Africa and elsewhere.
3a. A bank has the following deposits and assets: $320 in checkable
deposits, $896 in savings deposits, $840 in small time deposits,
$990
in loans to businesses, $400 in outstanding credit card balances,
$634
in government securities, $2 in currency and $30 in its reserve
account at the Fed. Calculate the bank's: i total deposits ii
Deposits that are part of M1 iii Deposits that are part of M2 iv
Loans
v. Reserves
b. If the required reserve ratio on checking accounts is 10%, what
is
the bank's position in terms of excess reserves?
c. What is the quantity theory of money, and what is its most
important prediction (or implication)?
4. The textbook mentions the standard distinction between
autonomous
and induced economic variables. What is meant by this distinction?
Mention four economic variables, and explain whether each is
autonomous or induced.
b. Our textbook mentions three variables (besides interest rates)
that
affect the demand for money. Identify two of them, and for each
one,
explain how an "increase" in them would affect the demand for
money.
Illustrate each example with a simple graph.
5. Consider the situation of the United States today, with
unemployment rising. If the Federal Reserve wished to counteract
the
recession, should it engage in open market operations or open
market
purchases?
Suppose that there were no cash in the U.S. economy, that the
required reserve ratio were 10%, and that the Fed did the open
market
operation of the type you mentioned above, to the amount of $40
billion. What would be the change in the money supply? Illustrate
the
impact of this change in the money supply on the interest rate,
using
the appropriate graph. Is this a procyclical policy, or
countercyclical?
Finally, and independent of the above discussion, the textbook
mentions several "costs" of inflation. Identify two of these costs,
and explain each one briefly.
The median on this exam was 61. The high was 90.
Econ 201
Exam #2b
Fall, 2001
Professor
Twomey
Please PRINT your name on the back of the last sheet. Answer on
these
sheets, using the flip sides if necessary. Questions are equally
weighted. Be sure to label the axes on the graphs. If any question
is
unclear, please ask for a clarification. Good luck!
1. Identify the following with a sentence or at most two:
a) Say's Law
b) Board of Governors
c) Fiat money
d) Federal Funds rate
e) Autonomous expenditure
2a. What are the three functions of money that are used to
determine
what should be considered as money? Explain each one briefly.
b. What is the discount rate? What happens to the money supply if
the discount rate is raised?
Explain briefly.
c. Identify two implications of the fact that there are (at least)
two
major different estimates of the quantity of money.
3a. Consider a situation where in the U.S. economy the marginal
propensity to consume is 0.8. For this question, ignore the
effects
of taxes and imports. What would be the impact on the level of real
GDP of a decline in investment of $300 billion? Illustrate this
change
on an AD-AS graph, using the Keynesian assumption that prices are
constant. What would be the impact of the decline in investment on
unemployment? Explain briefly.
4a The textbook mentions four "costs" of inflation. Identify and
explain briefly two of them.
b. In the textbook's discussion of economic growth, there is
emphasis
on the need for protection of property rights. What are property
rights, and what is the argument that their protection will
encourage
economic growth?
c. Our book discusses the fact that some countries have
experienced a
convergence in income level towards that of the U.S., while others
have not. Name a couple of countries or regions that are
converging,
and two that are not.
d. Explain briefly the central idea of the "doomsday" or Malthusian
growth model.
5a. Suppose the FED engages in an open market purchase of $40
billion,
in a simplified situation of the required reserve ratio equals 1/4,
and there is no cash.
What will be the ultimate impact on the money supply?
Using our graph of money supply and money demand, show and explain
how this change will affect the interest rate.
Finally, how will this open market purchase affect aggregate
supply
or aggregate demand. Illustrate your answer on a graph.
B. If people find it advantageous to use their credit cards more,
what
will be the impact on the either the supply or demand for money,
and
hence of the interest rate? Explain and illustrate on a graph.
The median on this exam was 58; the high was 84.
Econ 201
Exam #2
Winter, 2001
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these
sheets, using the flip sides if necessary. Questions are equally
weighted.
Be sure to label the axes on the graphs. If any question is
unclear,
please ask for a clarification. Good luck!
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Real business cycle
Legal tender
Line item veto
Transactions demand
Natural rate hypothesis
2.The Federal Reserve has recently lowered interest rates. What is
the
main goal of these moves? Explain, using a series of graphs, the
cause and
effect chain that illustrates how the change in interest rates
eventually
brings about the desired macroeconomic goal
3a. One of the major components of the economic policies of the
Administration of President Reagan is associated with an analysis
known as
the Laffer curve. Explain the key policy proposal of Mr.
Laffer. Draw a
graph of the Laffer curve, and use it to illustrate that idea.
b. Consider an economy where the require reserve ratio is
25
percent, where the total of demand deposits is $600 billion, and
where the
banking system's outstanding loans and securities sum up to $450
billion.
By how much does the quantity of money change, if the Fed engages
in an
open market sale of $20 billion?
After all the effects have worked themselves out, what are
the
components of the new balance sheet of the banking system?
4a. What is the key equation used by the Monetarist School?
Identify and
explain briefly each of its components.
b) This country's leading monetarist, Milton Friedman, has
advocated a simple rule to guide monetary policy. Identify that
rule, and
explain the asserted advantages of following it.
c) An important contemporary issue is the independence of
the
central bank. State one argument in favor of central bank
independence,
and one argument against it.
5. Draw a graph of the Phillips curve, being especially careful to
identify the axes. In what sense does the Phillips curve represent
or
illustrate a "tradeoff."
Would the following be expected to shift the Phillips
curve, or to
cause a movement along it. Explain each answer, illustrating it
with a
graph, showing before and after positions.
a) The newly elected president lowers taxes.
b) The world price of oil rises dramatically
c) Weakness in the Japanese economy leads them to buy less from the
U.S.
d) Bad weather causes the harvest to decline
e) The Fed engages in tight monetary policy
The median on this exam was 58; the high was 98.
Econ 201
Twomey
Exam #2
Fall, 2000
Professor
Please PRINT your name on the back of the last sheet. Answer on
these
sheets, using the flip sides if necessary. Questions are equally
weighted.
Be sure to label the axes on the graphs. If any question is
unclear,
please ask for a clarification. Good luck!
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Cyclical asymmetry
Board of Governors
Distinguish between near money and fiat money
distinguish between the federal funds rate and the prime rate
[??]
2. One of the major economic policies of President Reagan was
inspired by
the argument associated with the so-called Laffer Curve. Draw a
graph of
that curve, and explain what important policy is derived from it.
b. The
Laffer curve is an important supply side proposition. What would be
two
other policies associated with the supply side school?
3a. What are the two (main) components of the demand for money? On
what
macroeconomic variable does each one depend?
b. What are the three major ways the Fed can control the money
supply?
c. Suppose Bank A has the following simplified balance sheet, and
that the
required reserve ratio is 20%.
Assets
Liabilities
Reserves $22,000
Demand Deposits$100,000
Securities
& Loans
$78,000
i) What is the maximum amount of new loans which this bank can
make?
ii) After it makes those loans, what is the new balance sheet of
the bank?
iii) after making those loans, has the money supply changed?
If no, why not? If yes, by how much?
3. ?
4a. Draw a graph of the Phillips curve (being doubly sure to label
the
axes) and explain how it illustrates a so-called tradeoff. b. Would
the
following be expected to move along the Phillips curve, or shift
the
entire curve? Illustrate each answer with a simple graph,
illustrating
with an arrow in what direction the movement/shift occurs. i) The
government decides to spend more money on road repairs ii) The
price of
oil falls due to events in the Middle East iii) Japan increases its
imports of rice from the U.S. iv) The Fed decides to tighten the
money
supply.
5. Suppose the Federal Reserve sells bonds worth $50 billion to the
banking system, in a situation where the required reserve ratio is
1/4. a)
After this action has worked itself out, has there been an increase
or
decrease the money supply, and by how much? b) By how much has each
component of the balance sheet of the banks changed? c) According
to the
transmission mechanism described by the Keynesian model, how will
this
change interest rates, investment, and aggregate demand? Illustrate
your
answer with the appropriate graphs.
The median on this exam was 77; the high was 95
Econ 201 Exam #2 Winter, 2000
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these
sheets, using the flip sides if necessary. Questions are equally
weighted.
Be sure to label the axes on the graphs. If any question is
unclear,
please ask for a clarification. Good luck!
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Board of Governors
Cyclical asymmetry
Prime rate
Rational expectations
Entitlement Programs
2. Consider the situation of an economy with a required reserve
ratio of
1/6. The total reserves of the banking system are $50 billion, its
total
loans and securities are $250 billion, and total deposits are $300
billion. Now, suppose the central bank engages in an open market
purchase
of $10 billion.
a) What will be the impact on the quantity of money?
b) What will be the new balance sheet of the banking system?
c) How will this affect: (graphs optional)
Interest rates
Aggregate Demand
Prices
Employment.
3. Will the following be expected to cause the economy to
move along the Phillips curve, or will they result in a shift of
the
Phillips curve? Identify each answer as a shift of AD or AS, and
illustrate each answer with a graph.
A) Computer advances make the entire economy more productive,
b) The newly elected president decides to spend more on defense.
c) Financial crisis in Asia lowers our exports to those countries.
d) Oil exporting countries act together to raise the price of oil.
4. What is meant by the Laffer curve? What important policy
prescription
is/was derived from the Laffer curve? Explain it briefly. Beyond
the
issues related to the Laffer curve, the textbook has a discussion
of the
economic goals of President Reagan, in terms of his supply side
policies.
Identify two other goals, and state whether or not his supply side
policies were successful in attaining those goals.
5. Define the deficit and the debt, and state how they are related.
What
have been the major factors during the twentieth century, leading
to an
increase in the debt relative to GDP? Since the Depression, when
was the
ratio of debt/GDP smallest? The textbook discusses several aspects
to the
general debate about whether or not the debt is inherently good or
bad for
the country. In particular, it separates issues critical of the
debt into
valid and invalid arguments. Identify and explain briefly two
valid
arguments about how the debt can be harmful for the country.
The median on this exam was 60, the high was 79
Econ 201 Exam #2 Fall, 1999 Professor Twomey
Please PRINT your name on the
back of the last sheet. Answer on these sheets, using the flip
sides if
necessary. Questions are equally weighted. Be sure to label the
axes on
the graphs. If any question is unclear, please ask for a
clarification.
Good luck!
1. Identify the following with a sentence or at most two:
a)
b)
c)
d)
e)
Natural Rate Hypothesis
Federal Funds Rate
Bankers' Banks
Fiat Money
Entitlement Programs
2a. Draw a graph of the Phillips curve, being sure to label the
axes.
b. According to the standard Phillips curve analysis, how will each
of the following affect the economy? Explain briefly,
illustrating
each answer with a Phillips curve.
- The Fed increases interest rates
- The price of oil falls
- A new trade pact with China leads to more U.S. exports
- Good weather results in bountiful agricultural harvests.
3a. State the "equation of exchange," identifying each of its
components.
b. On the basis of the equation of exchange, noted monetarist
Milton
Friedman has proposed a certain rule for guiding the macroeconomy.
What is
that rule? What are its supposed advantages?
c. Suppose the required reserve ratio is 25 percent, and that the
Federal
Reserve engages in an open market purchase of ten billion dollars.
By how
much will this change the money supply?
4a. One of what the textbook considers valid arguments against
government
deficits that result in increases in the national debt is that
these
result in "crowding out." What is meant by crowding out? Why is it
something to be avoided? If you can, illustrate it with a graph.
Identify
and explain briefly (that is, no graphs) another of these so-called
valid
arguments against government deficits and higher national debt. The
textbook considers it invalid to argue against the national debt,
according to the claim that "we have to pay it back." Why might
this be an
invalid argument? In the history of the U.S. economy during the
twentieth
century, when has the ratio of debt/GDP been the highest? What has
been
the trend of that ratio during the last two decades?
5. Suppose Continental Bank has the following simplified balance
sheet,
Assets Liabilities that the reserve ratio is 20 percent. (Data in
billion
$.) Reserves 22 Deposits 100
Loans and What is the maximum amount of new loans this bank can
make?
ecurities 78
Show what the Bank's new balance sheet would like after making this
loan.
As a result of making this loan, has the money supply changed?
If so, why and by how much? If not, why not?
What are the two components to the demand for money?
Illustrate this with a graph
For each component of the demand for money, identify a major
macroeconomic variable that
determines it.
How might the following affect the demand for
money? That is, how will this
change the graph drawn above? Expanded use of credit cards
A general increase in prices, raising nominal GDP.
The median on this exam was 61; high was 80.
Econ 201
Exam #2a
Fall, 1998
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary.
Questions are equally weighted. Be sure to label the axes on the
graphs. If any question is unclear, please ask
for a clarification.
1. Identify the following with a sentence or at most two:
a) Rational expectations
b) (Friedman's) monetary growth rule
c) Near monies
d) Board of Governors
e) Federal funds rate
2. Consider a situation where the required reserve ratio is 20%.
What is the value of the money multiplier?
- Now, assume the (simplified) balance sheet of the commercial
bank system has total reserves of $40 billion,
total deposits of $200 billion, and loans and securities totaling
$160 billion. Suppose the Fed engages in an open market sale of $5
billion. By how much does
that change the money supply?
- What would be the new consolidated balance sheet of the
commercial banking system, after all the changes
had worked themselves out?
3i
a. What is the Phillips curve? Illustrate it with
a graph, being sure to label the axes.
b. What would be two factors that would cause a movement up
along (northwest) the Phillips curve?
No graph necessary
c. What would be two factors that would cause the entire
Phillips curve to move outwards (north east)?
ii.
a. One of the book's "false issues" about the national
debt is that the U.S. government might go bankrupt.
Identify and explain real briefly two of
the textbook's arguments against that position.
ii.
b. One of the textbook's valid reasons for concern about
deficits and the debt is crowding out. Identify
that term, and explain what it means (no graphs necessary).
4a. Identify and distinguish between the asset and transactions
demand for money. Draw a graph of each one.
b. What are the three instruments available to the Fed to control
the money supply? Explain each real briefly.
c. What is meant by the velocity of money? Explain real briefly.
5. Last Tuesday the Federal Reserve decided to lower the interest
rates by increasing the money supply.
a. According to the standard textbook (Keynesian) transmission
mechanism, how will this affect Aggregate
Demand, and inflation? Explain your answer, illustrating it with
the appropriate graphs.
b. This action is an example of discretionary monetary policy.
There has been much discussion about the
advisability of the Fed having and exercising such discretionary
policy.
Real briefly, what are two arguments in favor of having that
discretion, and two arguments against the Fed having such
discretionary policy.
The median on this exam was 63; high was 98
Econ 201
Exam #2b
Fall, 1998
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary.
Questions are equally weighted. Be sure to label the axes on the
graphs. If any question is unclear, please ask
for a clarification.
1. Identify the following with a sentence or at most two:
a) Stagflation
b) Open Market Committee
c) Real Business Cycle
d) Token money
e) Entitlement
2a. What is the equation of exchange? Write out the formula, and
identify its components.
How does this equation relate to monetarism? What policy
conclusion do monetarists derive from it?
According to monetarists, what is the major cause of
macroeconomic instability? In particular, what is their
explanation of the severity of the Depression of the 1930s?
3a. What are the three defining characteristics of money? Explain
each one real briefly.
b. What is the formula for the money multiplier? If the Fed
engages in an open market sale of $50 billion, by
how much does the money supply change?
c. How will the following be expected to change the money
multiplier (in the "real world"). Explain each
answer briefly.
an increased use of credit cards, causing people to keep
less cash
banks turn more cautious in their lending, because of fear
of the Asian banking crisis
4a. Define the Phillips curve, and illustrate it with a graph
(being sure to label the axes!)
b. In what sense does the original version of the Phillips curve
depict a tradeoff?
c. Would the following be expected to move the economy along the
Phillips curve, or cause a shift of it?
Explain each answer, illustrating each one with a graph showing
the movement.
i. The price of oil falls
ii. Government expenditures rise
iii. The Ni¤o current causes bad harvests
iv. Voters elect a President with a reputation
of big spending, leading to an increase in
inflationary expectations.
5a. Last Tuesday the Federal Reserve announced a new policy,
leading to a decline in interest rates.
a. According to the standard textbook (Keynesian) transmission
mechanism, how will this affect Aggregate
Demand and inflation? Explain your answer, illustrating it with
the appropriate graphs.
b. What economic problems is this action supposed to counteract?
c. Is this consistent with Friedman's monetary growth rule?
Explain.
The median on this exam was 76; high was 98
Econ 201
Exam #2
Winter, 1998
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary. Questions are
equally weighted. Be sure to label the axes on the graphs. If any
question is unclear, please ask for a clarification.
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Stagflation
Entitlement Program
Near money
Federal Funds Rate
Friedman's monetary rule
2a. Our
Federal
briefly
b. What
money?
c. What
briefly
textbook discusses five functions (major tasks) that the
Reserve Banks perform in our country. List and explain
four of them.
are the three defining characteristics or functions of
was the Savings and Loan crisis? Identify and discuss
three causes.
3. Evaluate the following potential arguments against government
deficits, and the national debt:
a) Most of our national debt is foreign owned, and hence the U.S.
can be pressured by other countries
b) Deficits and the national debt are not a problem, because the
national government can never go bankrupt
c) Deficits financed by increasing the national debt also
increase the money supply, which is usually inflationary
d) Government deficits are often accompanied by crowding out
e) Deficits and the national debt are bad, because either we (the
current generation) will have to pay it off, or our children
will
4. Economists generally believe that there were several factors
which caused the Phillips curve to move out in the 1970s. List
and explain three factors
-What might be two factors causing the Phillips Curve to move
inwards during the last half decade or so?
-How will the following factors cause a move along the Phillips
curve? Illustrate with a graph
- Economic crisis in Asia lowers demand for U.S. export products
- In an attempt to balance the budget, the government spends
less and taxes more
- In an attempt to stimulate the economy, the Federal Reserve
causes interest rates to fall
5a. The Third Bank of Michigan has reserves of $20,000 and demand
deposits of $100,000. The reserve ratio is 20 percent. Households
then deposit $5,000 in currency into the bank, which is added as
reserves. How much excess reserves does the bank now have?
b. Suppose again an initial situation in which the Third Bank of
Michigan has reserves of $20,000 and demand deposits of $100,000,
and that the reserve ratio is 20%. The bank now sells $5,000 in
securities to the Federal Reserve Bank, receiving a $5,000
increase in reserves in return. How much excess reserves does the
Third Bank have?
c. State the equation of exchange, identify and explain its
components. The economic behavior of one of these components is
subject to considerable debate; which component, and what is the
debate about?
The median on this exam was 67; the high was 94
Econ 201
Exam #2a
Fall, 1997 Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary. Be sure to label
each axis on the graphs. Questions are equally weighted. If any
question is unclear, please ask for a clarification. Time: 1
hour. Good luck!
1. Identify the following with a sentence or at most two:
a) Prime rate
b) stagflation
c) Near monies
d) Entitlement program
e) Depository Institution Deregulation and Monetary Control Act
(DIDMCA)
2. Suppose the Federal Reserve wished to reduce the money supply
to fight inflation.
a) What are three actions they could take that would lower the
money supply?
b) Explain and illustrate how the change in the money supply
would affect certain macroeconomic variables, and eventually
affect prices and output. That is, draw the graphs that show the
Keynesian version of the monetary transmission mechanism.
3a. Consider first the case of an individual bank, Bank C, whose
(simplified) balance sheet is as follows, with a required reserve
ratio of 20%.
Assets
Bank C's excess
Liabilities
What is the amount of
reserves?
Reserves 22,000 Deposits100,000
Securities
new balance sheet
& Loans 78,000 Net Worth
0
reserves are
Indicate what the
will be when those
out.
b. Now consider a different situation. The required reserve ratio
is 25%, and the Fed purchases $50,000 of bonds from the banking
system. By how much does this eventually change each component
of the balance sheet of the banking system?
By how much does this action eventually change the money
supply?
4a. It is generally accepted that the U.S. economy underwent a
series of supply shocks in the 1970s. Illustrate a supply shock
on an AS-AD graph. Identify and explain briefly three examples of
supply shocks from the 1970s. b. The Phillips curve is
traditionally considered to illustrate a trade-off between
inflation and employment, if only in the short run. The textbook
mentioned some ways that have been proposed of improving that
trade-off, which the book puts into two categories, market and
non-market policies. Discuss briefly one example of each type.
5. In the early 1980s, President Reagan instituted major tax
cuts, as the keystone of his program journalistically known as
Reaganomics.
a) Explain briefly three goals of that policy, and why supply
siders felt that this untraditional program might reach those
goals.
b) How well did the economy perform in terms of those goals?
c) What was the Savings and Loan crisis? Discuss briefly three
causes.
median on this exam was 63 high was 98
Econ 201
Exam #2b Fall, 1997 Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the flip sides if necessary. Be sure to label
each axis. Questions are equally weighted. If any question is
unclear, please ask for a clarification. Time: until 3:00. Good
luck!
1. Identify the following with a sentence or at most two:
a) Incomes policy
b) Near monies
c) Open Market Committee
d) Federal funds rate
e) Rational expectations
2a. Draw the Laffer curve, and explain what important policy
recommendation is based on it.
b. One of the major issues in macroeconomics is the importance of
the national debt. The textbook addresses this by referring to
"false" and "valid" issues. Identify and explain briefly two of
each.
3. Here comes the banking question. It has two parts; the first
concerns an individual bank, and the second relates to the
banking system.
a). Consider Bank Z, with the following balance sheet (in billion
dollars), in a situation with the required reserve ratio is 0.10.
Assets
Liabilities
Suppose Jane deposits a
check for $20.
Reserves
40 Deposits
400
After the check has been
cleared, and
Loans &
other actions taken
to eliminate
Securities
360Net Worth0
excess
reserves, what will the new
balance sheet be?
b). Take a different situation. The (simplified) balance sheet
for the commercial banking system is as follows, with the
required reserve ratio of 25%. (Again, data in billion dollars).
Assets
Liabilities
Suppose the Fed engages
in an open
market purchase of
$60 billion.
Reserves
2000 Deposits
8000
Loans &
By how much will this
eventually change
Securities
6000
the money
supply?
When the money supply
process has entirely
worked itself out,
what will be the new
consolidated balance
sheet for the
commercial banks?
4a. What are the three defining characteristics of money?
b. What are the three ways the Federal Reserve can affect the
quantity of money?
c. In referring to monetary policy, what is meant by the "target
dilemma?" Illustrate it with a graph.
5a. What is meant by the velocity of money?
b. Some people assert that the velocity of money is constant.
Explain why the constancy of the velocity of money might be
important?
Is it constant? Explain.
The monetarist, Milton Friedman, has advocated a constant growth
rate rule. Explain what this is, and why it might be important.
Is this being followed in the U.S. today? Explain.
The median on this exam was 72; high was 92
Econ 201
Exam #2 Winter 1997
Professor Twomey
Please PRINT your name on the BACK of the last sheet. Answer on
these sheets, using the flip sides if necessary. Questions are
equally weighted. If any question is unclear, please ask for
clarification. Time: until 2:50 p.m.
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Moral Hazard
Cyclical Asymmetry
Entitlement Programs
Adaptive Expectations
Prime Rate
2. If the banking system has reserves totaling $200 billion, and
the required reserve ratio is 1/4, what is the maximum amount of
deposits the system can support?
If the Federal Reserve engages in an open market sale of $10
billion, how will this change the balance sheet of the banking
system? By how much will the money supply change?
Given the change in the money supply from the previous question,
what would we expect would happen to the economy's overall level
of prices, output, and employment? Illustrate with a graph of
aggregate supply and aggregate demand.
3. What were the major components of the set of economic policies
known as Reaganomics?
According to the textbook, were these policies successful? Why?
Explain briefly.
Our textbook discusses the issue of the national debt, suggesting
that there are both "false issues" and valid ones. Explain and
discuss briefly two of each.
4. Last week the Federal Reserve announced that it was going to
raise interest rates by shrinking the money supply. Using a graph
of the Phillips curve, indicate and explain briefly how this
might be expected to affect unemployment and inflation, in the
short and the long run.
What is meant by Friedmanþs monetary growth rule, and how would
it differ, in design and in goals, from what the Fed did last
week?
5a. What are the two main components of the demand for money?
b. What are the three ways the Federal Reserve can affect the
quantity of money?
c. Why canþt the Fed target both interest rates and the money
supply at the same time?
d. What is meant by the Laffer curve? What important government
policy is derived from it?
The median on this exam was 56 the high was 86
Economics 201
Professor Twomey
Exam #2
Fall, 1996
Please PRINT your name on the BACK of the last sheet. Write on
these sheets, using the backs if you need space. Questions are
equally
weighted. Please ask for clarification if you do not understand the
question. Good
luck!
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Federal Funds Rate
Entitlement Programs
Token Money
Depository Institutions Deregulation and Monetary Control Act
Fractional Reserve System
2a. What are the two major components of the demand for money,
and on which
economic variable(s) does each one depend?
b. Assume that Jones deposits $500 in currency into her demand
deposit at the
local bank. A half hour later Smith negotiates a loan for $750,
which is taken in cash. On the basis of these two transactions,
what has
happened to the quantity of money?
c. What are the three defining characteristics, or functions, of
money?
3a. Identify and discuss briefly Milton Friedman's views on the
advisability of discretionary policy, both monetary and fiscal.
b. What is meant by crowding out; what are its causes and what
are its effects? What would the government have to do in order to
reduce
or eliminate it?
4a. Suppose the Fed engages in an open market sale of $5 billion,
in a context in which the required reserve ratio is 10%. By how
much, and in
what direction, is the total economy's quantity of money affected?
What are the changes in the various components of the aggregate
balance sheet
of the commercial banks?
b. According to the Keynesian school, how will this action by the
Fed affect interest rates, prices, investment and real GDP?
Explain,
illustrating your answer with graphs.
5a. What is the Laffer curve? What is the analysis associated
with it, and how does it differ from standard ideas about how the
economy works?
b. Identify two other supply side type policies which President
Reagan implemented.
c. During the early years of President Reagan's first term in
office, the rate of inflation dropped significantly, and the rate
of unemployment
shot up and then fell back. Why did this happen? Illustrate your
answer with
a graph.
median was 63; high was 93
Econ 201 Winter, 1996
Professor Twomey
Exam #2
9:30 class
Please PRINT your name on the BACK of the LAST sheet. Answer on
these sheets, using the backs if necessary. Be sure to label
carefully your
graphs. Questions are equally weighted. If a question is unclear,
please
ask for an explanation. Good luck!
1. Identify the following with a sentence or at most two:
a) Entitlement Program
b) Rational Expectations
c) Moral Hazard
d) Near Monies
e) Federal Funds Rate
2. Our textbook discusses several causes for the supply shocks
which occurred in the 1970s. Give three different examples, explain
them
briefly, and then show on an AD-AS graph how these affect output
and prices.
What is discretionary fiscal policy, and can/should it be used to
combat stagflation? Explain.
3a. Consider an economy where the required reserve ratio is 20%.
Suppose the central bank engages in an open market sale of $40
billion. By
how much does each of the components of the banking system's
balance sheet
change? By how much does the money supply change?
b. What is meant by the "velocity" of money?
Is velocity stable? Why might it matter?
4a. Identify and explain briefly the two components of the demand
for money.
b. In terms of monetary policy, what is meant by the "target
dilemma?"
c. What is meant by the phrase "Savings and Loan Crisis?" State
and explain briefly two causes of it.
5. Our textbook mentioned four major orientations, or components,
of the economic policies followed by President Reagan, which are
summarized by the term "Reaganomics.
a) Identify and describe briefly three of them, explaining how
they were expected to affect the economy.
b) for TWO of those policies, what is the textbook's evaluation
of their success?
median was 55. High was 98
Econ 201
Exam #2 Spring,1996 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Answer on
the backs of these sheets if you need the space. Please ask for
clarification
if any question is unclear. Remember to label your graphs. Time: an
easy
hour.
1. Identify the following with a sentence or at most two:
a) Discount Rate
b) stagflation
c) entitlement program
d)adaptive expectations
e) target dilemma
2. Draw a Phillips curve, being careful to label the axes.
Identify and discuss briefly one factor which will affect the
national economy
from the supply side, and one which will affect it from the demand
side.
Illustrate the effects of each change on a separate graph of the
Phillips
curve.
b. Consider an individual bank which has a require reserve ratio
of 1/5. Its reserves are $4 million, its deposits are $20 million.
How does a
deposit of $200,000 affect its balance sheet, after all excess
reserves are
eliminated? Indicate the before and after balance sheets.
3a. Explain Milton Friedmanþs proposal of a monetary growth
rule. Identify and explain briefly two advantages and two
disadvantages.
b. Explain the textbookþs argument that it is incorrect to argue
that the federal government should have a balanced budget-- just as
individuals should.
c. Now, identify and explain two criticisms of government
deficits which the text argues are valid.
4. If the required reserve ratio is 1/4, by how much will an open
market sale of $3 billion affect the banking systemþs reserves,
loans (to the
private sector) and the economyþs overall supply of money?
Illustrate how this change in the money supply will affect
prices, output, and employment in the economy, according to the AD
analysis of
the Keynesian school.
5. Explain and illustrate the Laffer curve.
With regard to budget issues, explain the argument which claims
that a balanced budget amendment will make the economy more
unstable.
Letþs talk about President Reaganþs policies.
Which type of taxes were lowered more significantly during his
term, business taxes or personal taxes?
It has been argued that monetary policy was more important than
fiscal policy during the early years of his term. Why so?
According to the textbook, did Reaganþs policies stimulate
savings? Did they result in people working harder? Explain.
Econ 201 Winter, 1996 Exam #2
12:30 class Professor
Twomey
Please PRINT your name on the BACK of the LAST sheet. Answer on
these sheets, using the backs if necessary. Be sure to label your
graphs. Questions are equally weighted. If a question is unclear,
please
ask for an explanation. Good luck!
1. Identify the following with a sentence or at most two:
a) Line item veto
b) Measure of value
c) Fiat money
d) Tax wedge
e) Equation of exchange
2. Draw a Phillips curve, being careful to label the axes
Will the following move the economy along the Phillips curve, or
cause
a shift in the whole curve? Explain each one briefly: (graphs are
helpful)
i) An increase in the money supply
ii) A decrease in the price of oil
iii) Uncertainty over upcoming elections
leads businesses to cut investment
iv) Government spending is cut.
3a. What is meant by the term Laffer curve? What important policy
is derived from it? Why is this issue important for the U.S. today?
b. What is meant by the term "crowding out?" Why might it be
important for the U.S. today? Explain.
4a. What is meant by the term "monetary rule" (or "monetary
growth rule")?
What is the supposed advantage of following this rule? What is a
criticism of it? Has it been followed in the U.S.?
b. Suppose the Federal Reserve engages in an open market sale of
securities. Explain using how this is supposed to affect the
economy according to the Keynesian school (or what the textbook
refers to
as the "mainstream interpretation"). Graphs would be helpful.
If the Fed wished to get the same effect on the money supply,
would it increase or decrease the required reserve ratio
5. Describe briefly, perhaps using a graph, how the size of this
country's national debt has grown relative to GDP.
Explain and evaluate each of the following statements:
a) A national debt is like a debt of the left hand to the
right hand;
b) The least likely problem arising from a large public debt is
that the Federal government will go bankrupt;
c) The basic cause of our growing public debt is a lack of
political courage;
d) The social security reserves are not being reserved. They
are being spent, masking the real deficit.
Median on this exam was 55 (or 60?) High was 95
Econ 201 Exam #2
Fall, 1993
Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Answer your
questions on these sheets, using the backs if necessary.
Questions are equally weighted. Please ask for clarification of
any ambiguous
question. Good luck.
1. Identify the following with a sentence or at most two:
a) Incomes policies
b) moral hazard problem
c) Board of Governors
d) tax wedge
e) asset demand for money
2. What is the Phillips curve? Illustrate it on a graph, being
sure to label the axes.
b) Will the following cause a movement along the Phillips curve,
or a shift of the whole curve? Explain each briefly, illustrating
with a
graph:
i An increase in the price of oil
ii Workers believe that the recently elected president will
successfully fight inflation
iii The Fed unexpectedly increases the money supply
3. What is the national debt?
i In the last decade, has it been rising or falling?
ii Do government deficits always increase the debt? Explain.
iii What is crowding out, and how does it relate to the debate
about the debt?
iv Should the importance of government debt be judged in the
same way that we evaluate the size of the debt of a private firm
such as AT&T? Explain
4. Suppose the required reserve ratio is 1/5, and that the
commercial banks as a group have deposits totaling $2000 billion,
reserves of $400
billion, and outstanding loans of $1600 billion.
a) What does the consolidated balance sheet of the banks look
like?
b) Now, suppose the Fed engages in an open market purchase of $40
billion.
i) After all the effects occur, what will be the new consolidated
balance sheet?
ii) By how much will the money supply change, and in which
direction?
iii) How will this affect investment, output and employment,
according to the standard Keynesian analysis? Illustrate with an
AS-AD graph.
5. At right is a graph (from an intermediate econ textbook)
of two different versions of velocity.
a) What is velocity?
b) What is the difference between velocity of M1 and that
of M2?
c) Why is it important to know if the velocity of
money is constant? That is, what theory would be valid, if it were?
Explain briefly.
d) How does all this relate to Friedman's monetary growth rule?
The median on this exam was 62; high was 93.
ECON 201
Spring, 1993
Exam #2
Professor Twomey
Please PRINT your name on the BACK of the LAST sheet. You will
LOSE CREDIT if it appears anywhere else. Use the backs of these
sheets if
necessary. Questions are equally weighted. Ask for clarification
of any
unclear question. Time: one hour. Good luck.
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
tight money policy
natural rate hypothesis
Federal funds rate
productivity decline
fiat money
2. What is the "monetary rule" also called the "constant growth
rate rule?" What are its advantages and disadvantage? Is it more
beneficial
in a world where velocity is stable, or in one where it is
unstable? Explain
3. Suppose an economy has been operating normally for a period of
time, with a "medium" level of inflation at 5-7 percent, but no
excess
unemployment. Then, an avowed inflation fighting president is
elected, who promises to reduce inflation quickly to zero, by tight
monetary
and fiscal policy.
a) first, draw a Phillips curve of the economy before the
election, being careful to label the axes, and to indicate where in
the graph the
economy is operating.
b) Describe what would happen to the economy after the election,
in the short and medium terms, using separate graphs for both the
"rational expectations" and "adaptive expectations" models.
4a. Suppose the required reserve ratio is 1/4, and that there is
an open market sale of $20 billion. What will happen to the money
supply?
b) What will happen to aggregate demand? Show on a graph what
would happen to prices and output.
c) What would the Fed have to do the discount rate and to the
required reserve ratio, in order to achieve the same effect?
5. In terms of the attached article:
a) show on a graph of aggregate supply and demand, (or, if you
prefer, a Phillips curve), where -it is asserted- the FED thinks
the
economy currently is operating
b) Is this an activist FED or one following a strict monetarist
rule?
c)The economic plan of President Clinton that the FED presumably
does not want to "derail" is the plan which will lower the deficit
by
raising taxes and lowering (some) expenditures. Why would the FED
wish to see such
a plan passed? Is that consistent with our textbook's economics?
Explain.
Economics 201
Exam #2
Spring, 1994
Prof. Twomey
Please PRINT your name on the BACK of the LAST sheet. Nnswer on
these sheets, using the back sides if necessary. Questions are
equally
weighted. Ask for clarification of any ambiguous question. Good
Luck.
1. Identify the following with a sentence or at most two:
a)
b)
c)
d)
e)
Federal Funds Rate
Incomes policy
Rational expectations
Asset Demand
moral hazard problem
2. Suppose the banking system has 600 billion dollars in
deposits, 200 billion in reserves, and 400 billion in loans and
government
securities, in a situation where the required reserve ratio is 1/3.
a) Now, suppose the Fed engages in an open market purchase of 5
billion. What will happen to the (aggregated) balance sheet of the
banking
system?
b) By how much has the money supply changed?
c) If businesses are pessimistic and do not wish to borrow, will
the money supply change by more or less that in part b)? Explain.
3a. What is the monetary growth rule? State and explain briefly
one advantage and one disadvantage of following it.
b. Why can't the Federal Reserve target the money supply and
interest rates at the same time? Explain, and illustrate with a
graph.
4i. Does a government deficit always increase the money supply?
Explain.
ii. Does a government deficit always lead to inflation? Explain
iii. What is crowding out? Does its occurrence strengthen or
weaken the case for discretionary fiscal policy? Explain.
5. Draw a graph of the Phillips curve, being sure to label the
axes.
a) In what way does the Phillips curve represent a trade-off?
b) Would the following lead to a movement along the Phillips
curve, or a shift of the whole curve? Explain each answer,
illustrating each
answer with a graph.
i) A new party wins election to Congress, leading people to
expect that government spending will increase rapidly in the near
future.
ii) Bad harvests worldwide lead to lower agricultural production
iii) The perception of increased competition from abroad leads
workers and businesspeople to moderate their demands for wage and
price
increases.
iv). The Federal Reserve initiates a contractionary monetary
policy.
v). A new law is passed which lowers income taxes.
The median on this exam was 69; high was 87.
Economics 201
Exam #2
Winter, 1993 Prof. Twomey
Please PRINT your name on the BACK of the LAST sheet.
Answer on these sheets, using the back sides if necessary.
Questions are equally weighted. Ask for clarification of any
ambiguous
question. Good Luck.
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Prime rate
Equation of exchange
Rational expectations
Asset Demand
moral hazard problem
2. Suppose the required reserve ratio is 1/4, and the Federal
Reserve engages in an open market purchase of one billion dollars.
a) By how much will this purchase eventually change each item of
the banking system's balance sheets? Indicate with an appropriate
"T"
account.
b) How will this affect the country's money supply?
c) How will this affect aggregate demand and prices? Explain,
and illustrate with a graph.
3a. What is the monetary growth rule? State and explain briefly
one advantage and one disadvantage of following it.
b. Why can't the Federal Reserve target the money supply and
interest rates at the same time? Explain, and illustrate with a
graph.
4ai. Does a government deficit always increase the money supply?
Explain.
aii. Does a government deficit always lead to inflation?
Explain
b. State and explain briefly three causes for the Savings and
Loan Crisis
5. Suppose the money supply is decreased.
a. According to the Keynesian theory, how will this affect prices
and output?
Explain your answer and illustrate it with a graph. Indicate
what special economic assumptions, if any, are being used.
b. According to the monetarists, how will this affect prices and
output? Explain your answer, and illustrate it with a
graph. Indicate
what special economic assumptions, if any, are being used.
The median on this exam was 54; high was 85.
Economics 201
10:30 Class
Exam #2
Fall, 1992
Prof. Twomey
Please PRINT your name on the back of the last sheet. Ask for
clarification of any ambiguous question. Time: 1 hour.
Questions are equally weighted. Good Luck.
1. Identify the following with a sentence or at most two:
a) Moral hazzard
b) Depository Institutions Deregulation and Monetary Control Act
of 1980
c) fiat money
d) Federal funds rate
e) Asset Demand
2a). Consider an individual bank with an initial balance sheet
composed of demand deposits of $500 million, reserves of $100
million, and
loans of $400 million. The required reserve ratio is 1/5. A
depositor
withdraws $2 million.
Indicate the balance sheet before the depositor's withdrawal,
and after all adjustments to it have taken place
2b). Returning to the original balance sheet, if the required
reserve ratio is changed to 1/6, what volume of loans can be lent
out?
Indicate the ultimate composition of the balance sheet.
3. Monetarism and rational expectations theory are two economic
approaches, or models, which have in common a dislike for
government intervention.
A) Name one specific economic aspect they have in common, and one
way in which they differ.
B). What does a proponent of rational expectations believe will
happen to the economy if the government announces in advance a
policy to
lower inflation? Explain, and illustrate with a graph.
4. Suppose the required reserve ratio is one fourth, and that the
Fed engages in an open market sale worth $300 million. How will
this
change the balance sheet of the banking system?
What does it do to the money supply?
How will this change affect interest rates and aggregate demand?
Illustrate each change on a separate graph.
Econ 201
12:30 Class Exam #2
Winter, 1994
Prof. Twomey
Please PRINT your name on the BACK of the LAST Sheet. Time: 1
hour. Answer on the backs of these sheets if necessary. Ask for
clarification
of any unclear question. Questions are equally weighted.
1)
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Net worth
Ricardian Equivalence theorem
Incomes policy
moral hazard problem
Federal Funds Rate
2. Draw a graph of the Laffer curve, being sure to label the
axes. Where on the Laffer curve did Mr. Laffer assert the US is
located? What is
the major argument that he was wrong? How did his position differ
from that
of more traditional economists, classical or Keynesian?
3a. In discussing debates about fiscal policy and deficit
spending, the book states: "Keynesians do acknowledge that a
deficit financed by
creating new money will have a greater stimulus than one finance by
borrowing." (p. 313). Explain this position.
b) Is the velocity of money stable? Does it matter? Explain.
4a. Suppose Jones deposits $100 in a bank whose required reserve
ratio is 1/5. After the bank has made all the relevant
adjustments, by
how much will the components of its balance sheet change?
b. In discussing rational expectations theory, the book asserts
that its followers are less worried about potential unemployment if
the
government announces and carries out contractionary policies. What
is the
logic behind this position?
5.
With respect to the attached article, from a recent issue
of the Wall St. Journal:
a) Explain and draw a graph of what is happening in the money
market.
b) Explain and illustrate on a graph of the Phillips curve what
"analysts"
guess that the Open Market Committee thinks is the
economy's
current
position, and where the Fed wants the economy to go.
c) What's the big deal about making a statement? How does this
compare to Friedman's monetary growth rate rule?
d) Is this a process of open market purchases or sales?
The median on this exam was 68; the high was 95
Econ 201 1:30 Class Exam #2
Winter, 1994
Prof. Twomey
Please PRINT your name on the BACK of the LAST Sheet. Time: 1
hour. Answer on the backs of these sheets if necessary. Ask for
clarification
of any unclear question. Questions are equally weighted.
1)
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
fiat money
tax wedge
Gramm Rudman Hollings Act (1985)
Run on a bank
Incomes policies
2. Suppose the banking system has 600 billion dollars in
deposits, 200 billion in reserves, and 400 billion in loans and
government
securities, in a situation where the required reserve ratio is 1/3.
a)Now, suppose the Fed engages in an open market purchase of 5
billion. What will happen to the (aggregated) balance sheet of the
banking
system?
b) By how much has the money supply changed?
c) If businesses are pessimistic and do not wish to borrow, will
the money supply change by more or less that in part b)? Explain.
3. Draw a graph of the Phillips curve, being sure to label the
axes. In what way does the Phillips curve represent a trade-off?
b) Would the following lead to a movement along the Phillips
curve, or a shift of the whole curve? Illustrate and explain each
answer.
i) A new party wins election to Congress, leading people to
expect that government spending will increase rapidly in the near
future.
ii) Bad harvests worldwide lead to lower agricultural production
iii) The perception of increased competition from abroad leads
workers and businesspeople to moderate their demands for wage and
price
increases.
4a. What are the three functions of money. Suppose that, instead
of having paper currency (or gold coins), we used some other item
for
exchange, such as cigarettes or coffee beans. How well would this
new "money"
perform each of these three functions?
b. Define crowding out, discuss whether it relates to aggregate
supply or aggregate demand.
5.In terms of the attached article from the New York Times, March
18, 1994:
a) Explain and illustrate on a graph where the Fed thinks the
economy is
going, and what it intends to do about it
b) Explain and illustrate this process in terms of the money
market
c) What is the Federal Open Market Committee?
d) Why is there a difference between the growth rates of M1,
M2, and M3?
e) What is the difference between required reserves and excess
reserves?
The median on this exam was 74; the high was 91.
Economics 201
12:30 Class
Exam #2
Fall, 1992
Prof. Twomey
Please PRINT your name on the back of the last sheet. Ask for
clarification of any ambiguous question. Time: 1 hour.
Questions are equally weighted. Good luck.
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Prime rate
crowding out
fractional reserve system
transactions demand
Near monies
2a. Why can't the Fed target interest rates and the money supply
at the same time? Illustrate with a graph.
b. State three factors which contributed to the Savings and Loan
Crisis.
3a. Suppose an individual commercial bank initially has deposits
worth $20 million, resrves worth $4 million, and outstanding loans
totaling
$16 million.The required reserve ratio is 1/5.
Then someone deposits $1 million. Indicate what the balance sheet
of the bank originally looks
like, and what it will ultimately look like after all its
adjustments have taken place.
3b. What is meant by a monetary rule? Is such a thing good or ad
for an
economy? Explain
4. Suppose the required reserve ratio is one fourth, and that the
Fed engages in an open market purchase worth $500 million. How
will
this change the balance sheet of the banking system?
What does it do to the money supply?
How will this change affect interest rates and aggregate demand?
Illustrate each change on a separate graph.
Econ 201
Winter, 1995
Exam #2
9:30 Class
Professor Twomey
Please PRINT your name on the BACK of the LAST PAGE. Use the
backs of the sheets if you need space. Please ask for
clarification of any
ambiguous question. All questions are weighted equally. Remember to
label
the axes on your graphs. Good luck!
1.
a)
b)
c)
d)
e)
Identify the following with a sentence or at most two:
Target dilemma
natural rate hypothesis
functional finance
incomes policy
moral hazard
2a. What is meant by the distinction between policy rules and
discretion?
What is the monetary growth rule? Discuss One argument in favor
of using it, and one against using it. Is our country currently
following
it?
b. What is meant by the Savings and Loan crisis? Discuss briefly
three reasons why it occurred.
3a. Suppose that the required reserve ratio is 1/5, that the
total amount of deposits in the commercial banks is $100 billion,
and that
there are $20 billion in reserves. What is the balance sheet of the
banking
system?
b. Now, suppose that the Fed engages in an open market sale of
$10 billion. By how much does that affect the money supply, and how
does it
affect the balance sheet of the banking system?
c. Evaluate briefly the following arguments about the national
debt:
i) It will have to be paid off during your lifetime
ii) it isn't important because we owe it to ourselves
iii) financing it by borrowing raises interest rates
iv) it isn't important because we can always print up dollar
bills to pay it off
4a. Define and illustrate with a graph what is meant by the
Phillips curve.
b) In what sense does the Phillips curve illustrate a trade-off?
c) Suppose the economy is in the situation it was when Reagan
became president, that is, high (for us) inflation and a normal
amount
of unemployment. Suppose the government was to announce that to
lower inflation it would reduce its expenditures. There are two
interpretations as to how that would affect the economy, referred
to as rational
and adaptive expectations. Explain the difference between those
approaches, and illustrate each one on a graph.
5. With respect to the attached note, taken from yesterday's Wall
St. ournal:
a) Recognizing that home purchases are an example of investment,
illustrate with a pair of graphs what current monetary policy is
doing to
interest rates and investment.
b) Relate the above answer to the conversation about the economy
slowing down, illustrating your answer with an AS-AD graph.
c) Why would this help the stock and bond market?
The median on this exam was 56.
Econ 201
Winter, 1995
Exam #2
12:30 Class
Professor Twomey
Please PRINT your name on the BACK of the LAST PAGE. Use the
backs of the sheets if you need space. Please ask for
clarification of any
ambiguous question. All questions are weighted equally. Remember to
label
the axes on your graphs. Good luck!
1. Identify the following with a sentence or at most two:
a) prime rate
b) net export effect
c) fractional reserve system
d) new classical economics
e) tax wedge
2. The textbook presents a lengthy discussion of the debate on
Keynesians versus monetarists. Discuss: (a) two differences
between these
groups which are basically theoretical;
b) two differences between the two groups in terms of policies
they feel the government should follow.
3. Explain briefly, and show (for each one) on a graph, how the
following will either move along the Phillips curve, or move the
whole curve:
a) the price of oil falls
b) government defense expenditure suddenly increases
c) a freeze in Brazil ruins their coffee crop, and so they can't
buy as many products from the US
d) the government lowers personal income taxes
e) the minimum wage is raised to $6.00 per hour.
4a. What are the main functions of the Federal Reserve System?
b. What are the two main components of the demand for money?
Illustrate them on two graphs.
c. Suppose the required reserve ratio is 25%, that the total
amount of deposits in commercial banks is $200 billion, and that
there are
$50 billion in bank reserves. What is the banking system's balance
sheet?
Now, suppose that the Fed engages in a $10 billion open market
purchase. By
how much does this affect the money supply, and what would be the
new
consolidated balance sheet of the banks?
5. With regard to the attached article, taken from yesterday's
New York Times, a major point is that the Fed was unlikely to raise
interest rates because the economy was slowing.
a) Explain and show on a graph (either AS-AD, or Phillips curve)
what it means to be "slowing down" as opposed to be "heating up."
b) Explain and show with some graphs how higher interest rates
would lower inflation.
c) What could the representative from the Center for Community
Change mean when he says that the Board of Governors is more
attentive
to the banking system's interests than to the interests of working
Americans? Explain.
the median on this exam was 61.
Econ 201
Exam #2
Fall, 1994
ProfessorTwomey
Please PRINT your name on the BACK of the LAST SHEET. If you need
space, write on the backsides of these sheets. Ask for
clarification of
any unclear question. Questions are equally weighted.
1) Identify the following with a sentence or at most two:
a) Laffer curve
b) asset demand
c) discount (interest) rate
d) moral hazard problem
e) tax wedge
2. In contrast with the Keynesians, the Monetarists have a model
of the macroeconomy which is summarized by a simple equation. What
is
that equation? Explain each of its components.
-The unofficial leader of the Monetarists, Milton Friedman, has
proposed what is called the monetary rule, or the monetary growth
rule.
Explain what this is, and what are its alleged benefits.
-Aside from the specific details of the monetary rule, give two
issues of government policy on which Monetarists and Keynesians
disagree.
3a. There are three main functions of money, which are used to
define what financial instruments are money. Identify and explain
briefly
those three functions.
b. The Federal Reserve (the Fed) is a unique institution in our
country. What is meant by:
- the independence of the Fed
- the Fed is a quasi-public institution
- the Fed is the bankers' bank
4. Suppose we have a situation in which the require reserve ratio
is 1/4, and there are no excess reserves in the banking system.
What is the value of the money multiplier?
If the Fed engages in an open market purchase of ten million
dollars, by how much does the country's money supply change?
What would be the change in the consolidated balance sheet of the
banks?
In order to get the same change in the money supply, would the
Fed increase or reduce the required reserve ratio?
If people suddenly decided not to deposit all their new cash, but
instead to keep some excess cash, would that make the money supply
bigger or
smaller?
5. In terms of the attached excerpts from an article from
Wednesday's Free Press:
a) Explain why raising interest rates would lower inflation.
Illustrate your argument with a Phillips curve or an AS-AD graph.
b) Show the Keynesian argument about how this will affect
investment in housing, in plant and equipment (by businesses) and
others.
c) There is opposition to the Fed's action, both on the part of
the unions- AFL-CIO, and from the National Association of
Manufacturers, a
business group. Explain why each group might oppose an increase in
interest rates.
Econ 201
Exam #2
Fall, 1995
Professor Twomey
Please PRINT your name on the BACK of the LAST sheet; it should
not appear anywhere else. Questions are equally weighted. Use the
backs of
these sheets if you need more space. Please ask for clarification
if
the question is unclear. Good luck.
1. Identify the following with a sentence or at most two:
a) prime interest rate
b) Laffer curve
c) medium of exchange
d) stagflation
e) fractional reserve system
2a. Draw a Phillips curve, being sure to label the axes. Explain
what is meant when people say the Phillips curve represents a
"tradeoff."
b) The United States in 1980 had about 13.5% inflation, but a
nearly 'normal' level of unemployment. Today we have only 2.5%
inflation. Many
people think that this improvement was due to government monetary
and fiscal
policy. What sorts of monetary and fiscal policy would be needed?
c) Illustrate those policies, and the path we would have expected
the U.S. economy to follow, in terms of a Phillips curve.
3a. What are some of the major functions of the Federal Reserve?
b. What backs money; that is, what gives our paper currency some
value?
c. State and explain very briefly three (different) policy
recommendations of Supply Side economists.
4a) Consider a single bank, which has deposits equal to ten
million, reserves of two million, and outstanding loans and
securities of
eight million, in a situation where the required reserve ratio is
20%.
Suppose someone deposits a check in the bank of $500,000. Show the
bank's
initial and final balance sheet, after it regains zero excess
reserves.
b) Now consider a different example, concerning the national
banking system. The required reserve ratio is 1/4. The Fed engages
in an open
market purchase of $30 million. How will that affect the banking
system's balance sheet, and the money supply?
c) What is meant by the velocity of money? Is it constant? Why
might it matter? Explain.
5a. What are the two major components of the demand for money?
b. Show on a graph the determination of the equilibrium rate of
interest.
c. How might the following affect the demand for money, and
therefore the equilibrium interest rate? Illustrate each with a
graph.
a) The expanded use of credit cards
b) an increase in nominal GDP
The median on this exam was 75. The high was 98
Econ 201
Exam #2
Spring, 1995
Professor Twomey
Please PRINT your name on the back of the last sheet. Answer on
these sheets, using the backsides if you need space. Please ask for
clarification of any unclear question. Time: an easy hour. Good
luck!
1. Identify the following with a sentence or at most two:
a) fiat money
b) Federal Funds Rate
c) stagflation
d) Functional Finance
e) Tax wedge
2a. What are the major functions of the Federal Reserve?
b. How or in what way is the Federal Reserve a unique
institution in the U.S.?
b. Why does a central bank represent a centralization of
economic power? In what ways was the design of the Fed an attempt
to counter
this? Was it successful?
3a. What is crowding out? Explain and illustrate it with a
graph.
b. How is crowding out related to deficit spending? Is this good
or bad, in the sense does it make deficits more attractive or more
unattractive? Explain.
c. The Fed is currently employing a tight monetary policy. How
should this affect interest rates and prices?
d. Is Friedman's constant money growth rate rule consistent with
this policy? Explain briefly.
4a. Consider a single bank, in a situation with a required
reserve ratio of 1/3. Jones deposits $600. How will that eventually
change each
component of the bank's balance sheet?
b. Suppose that the required reserve ratio is 1/5. If the Fed
engages in an open market sale of $300 billion, how will that
change each
component of the balance sheet of the entire banking system? By how
much does the
money supply change?
c. If the Fed were to increase the require reserve ratio, how
would that affect interest rates, investment, and national GDP and
investment? Illustrate your answer with graphs.
5. Define a Phillips curve, and illustrate it with a graph.
Consider an initial situation in which unemployment is at its
"natural" rate, (around 5.5%), and inflation is about 4%. Indicate
this point on
a graph of the Phillips curve.
Suppose now that the government agrees to balance the budget, by
a combination of lower spending and higher taxes. Ignore supply
side effects on work effort, etc. According to demand side
analysis, how will
the deficit reduction affect inflation and unemployment in the
short run and
the long run? Explain, illustrating with a graph.
How might the difference between rational expectations and
adaptive expectations affect your answer to the above question?
The median on this exam was 73. The high was 82.