ECON 1120 – INTRO MACRO – Fall-2013 –October 17, 2013
PRELIM #1 (Regular)
PRINT YOUR NAME:
____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER:
____________________________
Check YOUR TA’s NAME:
_____________TA = Naoko Iida (Friday sections)
_____________TA = Donghwee Kwon (Tuesday sections)
_____________TA = Jongrim Ha (Thursday sections)
_____________TA = Bryce Little (Wednesday sections)
INSTRUCTIONS:
 There are two parts in this exam.
o Part I: 16 multiple choice questions @ 3 points each (48 points)
o Part II: 4 short essay questions (52 points)
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ANSWER ALL QUESTIONS. TOTAL POINTS=100. TOTAL TIME=90 minutes.
Prelim1 score weights 25% of final grade.
You will have five bluebooks. Please number each bluebook from 1 to 5.
Write your ID, name and section TA on the front page of each book.
Please write down your answers in different bluebooks with following order.
o Part I (Multiple choice questions) in bluebook 1
o Question 1 in Part II (Short essay) in bluebook 2
o Question 2 in Part II (Short essay) in bluebook 3
o Question 3 in Part II (News essay) in bluebook 4
o Question 4 in Part II (News essay) in bluebook 5
Read all questions carefully.
Write legibly and remember to label all graphs and axes in diagrams
EXAM TAKING POLICY:
 NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need
to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have,
raise your hand and wait for the proctor to come to you. Only one person can be out of the examination
room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.
 NO CELL PHONES. NO CALCULATORS. NO INTERNET-ACCESSIBLE DEVICES.
 NO BOOKS. NO NOTES. NO HELP SHEETS.
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AGAIN, please….
PRINT YOUR NAME:
____________________________________ Your C.U. Netid: _____________
YOUR C.U. STUDENT NUMBER:
____________________________
Check YOUR TA’s NAME:
_____________TA = Naoko Iida (Friday sections)
_____________TA = Donghwee Kwon (Tuesday sections)
_____________TA = Jongrim Ha (Thursday sections)
_____________TA = Bryce Little (Wednesday sections)
GRADING
Part I: ________/48
Part II Question 1: ________/13
Part II Question 2: ________/13
Part II Question 3: ________/13
Part II Question 4: ________/13
TOTAL:
___________/100
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Part I:
Multiple Choice Questions.
1. Which topic is macroeconomists least interested in?
A) Sovereign debt
B) Prices of individual goods
C) Aggregate unemployment
D) National income
E) All of the above
2. What causes the production possibilities curve to shift inward?
A) Advances in technology
B) New energy sources found
C) Investment in human capital
D) Decreases in the labor force
E) All of the above
3. The government considers imposing a price ceiling on a good. Choose the correct
explanation.
A) The government thinks the market price is too low
B) It is also effective when the ceiling is set above the natural market equilibrium
C) When properly imposed, consumers will purchase less of the good
D) For the price that the ceiling is set at, there will be excess supply
E) None of the above
4. Suppose that the market demand for good A is perfectly elastic. Which statement is true?
A) When the price of a complement increases, the demand for good A decreases.
B) A decrease in the price of one substitute good causes an increase in demand for good A.
C) When the input prices go up, the equilibrium price remains the same.
D) When the input prices go up, the equilibrium quantity decreases.
E) All of the above
5. Moving against the direction of its long-run trend over the past two quarters, the level of
aggregate output declined. The current state of the economy can best be described as being in
a(n) _______. Prior to this, the economy was in a(n) _________.
A) Depression; Recession
B) Expansion; Depression
C) Recession; Expansion
D) Depression; Expansion
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6. A student had to pay some unexpected taxes, and in a desperate attempt to raise money ended
up selling her laptop informally to a friend. The value of the laptop she sold to her friend is:
A) Added to GDP.
B) Added to nominal GDP.
C) Added to real GDP.
D) None of the above.
Table 1.
for Questions 7 and 8
Good
Quantity Consumed
2011 Price
2012 Price
Hair Spray
5 cans
$1.50/can
$1.00/can
Gasoline
20 gallons
$4.00/gallon
$4.10/gallon
7. Suppose CPI is computed using only two goods: hair spray and gasoline. To compute the
level of the CPI index, a government agency uses the quantities and prices given above.
From 2011 to 2012, the level of CPI is:
A) Increasing.
B) Decreasing.
C) Constant.
D) Not determined by given information.
8. Given your answer to the last question, the trend of the price level can best be described as:
A) Inflation
B) Deflation
C) Hyperinflation
D) No Change
9. In which of the following situations can we expect the demand of money to shift up?
A) A decrease in money supply
B) A increase in price level
C) A decrease in income
D) A tax increase
E) None of the above
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10. Assume an economy is completely represented by the following equations: C=200 +0.8Y d
(, where Y d stands for disposable income), I = 150, G = 200, T = 200. In this economy, the
government spending multiplier is __________ and the tax multiplier is ________________.
A)
B)
C)
D)
E)
1.25, 0.25
5, 4
1, -1
1.25, -0.25
5, -4
11. If consumption only depends on income, then, all else equal, a higher saving rate would
A) decrease MPC, and increase the multiplier so that changes in planned investment
have a larger impact on equilibrium output
B) increase MPC, and increase the multiplier so that changes in planned investment
have a larger impact on equilibrium output
C) increase MPC, and decrease the multiplier so that changes in planned investment
have a smaller impact on equilibrium output
D) decrease MPC, and decrease the multiplier so that changes in planned investment
have a smaller impact on equilibrium output
E) None of the above is correct
will
will
will
will
12. Which one of the following is NOT included in what the U.S. government defines as M1?
A) Currency in circulation
B) Checkable deposits
C) Demand deposits
D) Savings accounts
E) Traveler’s checks
13. Which of the following factors can lead to a decrease in the equilibrium interest rate level?
I.
II.
III.
IV.
V.
VI.
A)
B)
C)
D)
The Fed decreases the required reserve ratio.
The Fed increases the required reserve ratio.
The Fed sells securities in the open market.
The Fed purchases of securities in the open market.
People’s income and wealth decreases.
Price level increases.
II, III, and V.
I, IV and VI.
II, III and VI.
I, IV and V.
14. The Fed wants to increase the money supply. In which answer do both listed options have
the potential to work?
A) The Fed sells securities to the public & lowers the required reserve ratio.
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B)
C)
D)
E)
The Fed sells securities to the public & raises the required reserve ratio.
The Fed buys securities from the public & raises the required reserve ratio.
The Fed buys securities from the public & lowers the required reserve ratio.
The Fed sells securities to the public & lowers the discount rate.
15. Suppose now oil price increases and at the same time the Fed raises the required reserve ratio.
Which of the following is most likely to happen?
A) Money demand curve shifts to the left and money supply shifts to the left.
B) Money demand curve shifts to the left and money supply shifts to the right.
C) Money demand curve is unaffected and money supply shifts to the left.
D) Money demand curve is unaffected and money supply shifts to the right.
E) Money demand curve shifts to the right and money supply shifts to the right.
16. Which of the followings well describe what happens to aggregate expenditure and output
when the interest rate rises?
A) 𝑟 ↑ → 𝐼 ↑ → 𝐴𝐸 ↑ → 𝑌 ↑
B) 𝑟 ↑ → 𝐼 ↓ → 𝐴𝐸 ↑ → 𝑌 ↑
C) 𝑟 ↑ → 𝐼 ↑ → 𝐴𝐸 ↓ → 𝑌 ↓
D) 𝑟 ↑ → 𝐼 ↓ → 𝐴𝐸 ↓ → 𝑌 ↓
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Part II: Essay Questions
Question 1 (13 points)
a) What does GDP measure?
The total market value of all final goods and services produced within a given
period by factors of production located within a country
b) Briefly describe one of the two approaches to measuring GDP.
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Income approach: a method of computing GDP that measures the
income–wages, rents, interest, and profits–received by all factors of
production in producing final goods and services.
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Expenditure approach: a method of computing GDP that measures the total
amount spend on all final goods and services during a given period.
c) What is the difference between nominal GDP and real GDP?
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Nominal GDP is measured in current dollars.
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Real GDP is nominal GDP adjusted for price changes.
d) Describe a situation where the nominal economy is growing, but the real
economy is not.
Price levels increase over time, but the real value of all final goods is not
increasing over time.
Question 2 (13 points)
Assume that the following set of equations completely describes an open economy. All
values are in the million dollars.
Goods Market
Y = 34,250
C =
T =
I =
G =
EX =
IM =
2,900 + 0.8Yd, (Yd = disposable income = Y-T)
500
2,500
1,000
1,200
350
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a) Calculate Aggregate Expenditure.
Answer 1:
AEd = C + I + G + (EX – IM)
= 2900 + 0.8(Y-500) + 2500 + 1000 + 1200 – (350)
= 6850 + 0.8Y = 34,250
Answer 2:
By the equilibrium condition, AEd = Y. Thus AEd=34,250
b) What is the government (expenditure) multiplier? And what is the value of federal
deficit or surplus?
K (G) = 1/(1-mpc)=1/0.8= 5
[G-T] = -500, there is a Federal deficit of $500
c) What is the Leakages and Injections condition for equilibrium?
Ix + S + T = Ex + I + G
d) What are savings in this economy?
S = Ex + I + G – T –Ix = 3,850
Question 3 (13 points)
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The Supplemental Nutrition Assistance Program (SNAP) and Women, Infants and
Children (WIC) are two different public health and nutrition programs funded by
the federal government. SNAP and WIC assist low-income families and their
children to purchase healthy foods. The following is the detailed explanation of the
programs.
- Food stamps were renamed the Supplemental Nutrition Assistance Program
(SNAP) in 2008. It is a nutrition assistance program designed to help low-income
individuals and families buy and consume nutritious foods (Goods N).
- Women, Infants, and Children (WIC) pays for essential items like milk, eggs and
baby formula (Goods E). WIC benefits are distributed as specially designed
checks which can be used for a limited list of foods.
On March 1, President Obama signed the Budget Control Act of 2011 to resolve
the debt-ceiling crisis. It is an order required by law to set into motion the
automatic federal government spending cuts known as the “Sequester”. Most
mandatory programs like Medicaid and low-income targeted programs like SNAP
were exempt from the Sequester. However WIC is subject to cuts. This means
that each recipient receives less benefit.
a) Our friend John got approved for the WIC program last January. Explain changes
in his demands for essential items (Goods E) over time. Please use the graph.
(Hints: Describe his demand in chronological order: 1) Before he applies for the
program, 2) after he gets an approval letter and starts receiving benefits, and 3)
when the Sequester takes effect.)
As his disposable income changes, the shift of a demand curve takes place.
Suppose that he has a demand function (D1). The enrollment in the WIC program
shifts the demand curve to the right from D1 to D2. Now consider what would
happen when the budget cuts take place. Due to a reduction in benefit levels, his
demand curve shift back to the left. Note that D3 is still above D1 because he is
still receiving benefits.
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$/unit
D2
D3
D1
Q
b) Some low-income families can only receive SNAP benefits. What is the impact of
sequestration (or budget cuts) on their demands for nutritious foods (Goods N)
when all other factors are being equal?
SNAP program remains unaffected. Since there is no change in family income,
demands for goods N do not change as well.
c) Parents don’t tent to change the amount of food their children need. Explain this
in terms of price elasticity of demand.
The statement says that parents rarely change their consumption level as prices
change, which implies the price elasticity of necessary goods is inelastic.
d) Many suppliers of essential items (Goods E) are worried about their future income.
Thus, they decide to supply Goods E less and start producing new products. Show
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graphically the effect of the Sequester and suppliers’ movement on the market
equilibrium.
This movement causes a decrease in the supply of goods E: it moves the supply
curve to the left from S1 to S2. As we discussed in part (A), demands for goods E
shift left. So, equilibrium quantity decreases. On the other hand, change in price is
indeterminate. If the demand curve shifts leftward by more than the supply curve
shifts leftward, the price level decreases and vice versa.
$/unit
S2
D1
S1
D2
Q
Question 4 (13 points)
http://www.nytimes.com/2013/09/19/business/economy/fed-in-surprise-move-postpones-r
etreat-from-stimulus-campaign.html
In Surprise, Fed Decides to Maintain Pace of Stimulus
WASHINGTON — It turns out that the Federal Reserve is not quite ready to let go
of its extra efforts to help the economy grow.
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All summer, Federal Reserve officials said flattering things about the economy’s
performance: how strong it looked, how well it was recovering, how eager they
were to step back and watch it walk on its own.
But, in a reversal that stunned economists and investors on Wall Street, the Fed
said on Wednesday that it would postpone any retreat from its monetary stimulus
campaign for at least another month and quite possibly until next year. The Fed’s
chairman, Ben S. Bernanke, emphasized that economic conditions were
improving. But he said that the Fed still feared a turn for the worse.
He noted that Congressional Republicans and the White House were hurtling
toward an impasse over government spending. That was reinforced on
Wednesday, when House leaders said they would seek to pass a federal budget
stripping all financing for President Obama’s signature health care law, increasing
the chances of a government shutdown.
And the Fed undermined its own efforts when it declared in June that it intended to
begin a retreat by the end of the year, causing investors to immediately begin to
demand higher interest rates on mortgage loans and other financial products, a
trend that the Fed said Wednesday was threatening to slow the economy.
“We have been overoptimistic,” Mr. Bernanke said at a news conference
Wednesday. The Fed, he said, is “avoiding a tightening until we can be
comfortable that the economy is in fact growing the way that we want it to be
growing.”
a) What is expected to happen to the economy if the Fed retreats from its monetary
stimulus campaign?
For full credit, you need to draw 3 panel diagrams of
“money market”, “investment market” and “aggregate expenditure and aggregate
output” to illustrate your answer.
Withdrawal from the monetary stimulus campaign means the reduction of the
level of money supply.
This will result in a rise in interest rate, a decrease in
investment, the downward shift of the AE curve, and a decrease in aggregate
output.
b) According to Bernanke, the Fed would postpone the retreat from its monetary
stimulus policy “until we can be comfortable that the economy is in fact growing
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the way that we want it to be growing.” This indicates that the increase in output
associated with their monetary policy was small.
Explain what is likely to have
contributed to this result
The investment was not very responsible to interest rate. That is, the interest
rate-investment curve was steep. The investment did not increase that much
with the decrease in interest rate.
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