100 Economics Key for Final Exam
Spring 2006
Question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Answer B A E D A C B D B D E A D A B B B D D C A D D C D
Notes (2 points each for a total of 70 points)
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Question 26 27 28 29 30 31 32 33 34 35
Answer C B A B A B C D C B
Notes
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Economics 100 Key for Final Exam 36. Consider the following data for the income-expenditure model (15 points):
Spring 2006
The consumption function is C = 500 + 0.50* Y so that C = 500 , MPC = 0.50 and T = 0.
Other autonomous expenditure I P + G + NX is 2500. Potential real GDP is Y* = 8000. a. On the graph below, plot and label the PAE line, the Y = PAE line, and the potential real GDP Y* line using the data above. Indicate the short-run equilibrium level of real GDP (Yeq) with dotted lines.
10,000 9,000 8,000 planned aggregate expenditures (PAE)
potential GDP
Y = PAE
PAE line
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
real GDP (Y )
b. The recessionary gap is defined as ( Y * - Y eq ), which is 2000 in this example. c. Suppose that Congress decides to eliminate the recessionary gap using fiscal policy. The recessionary gap is 2,000 and the multiplier is 2. Congress would have to increase government spending (G) by (2000/2) = 1000 to eliminate the recessionary gap. c. Suppose that the Federal Reserve decides to eliminate the recessionary gap using monetary policy. The Federal Reserve would have to conduct an open market purchase to eliminate the recessionary gap. An open market purchase is where Federal the Reserve buys or purchases government bonds and gives the commercial banks reserves in exchange. In the money market graph, an open market purchase would increase the money supply and thus lower the nominal exchange rate i. The diagram is the same as in problem set #5.
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37. The following question asks you to use the inflation adjustment and aggregate supply model (15 points). a. Using the graph below, draw an aggregate demand (AD) curve, short-run aggregate supply curve (SRAS), and long-run aggregate supply curve (LRAS) where the initial short-run equilibrium is real GDP (Yeq) at 8,000; inflation rate () at 6.00% and potential real GDP (Y*) is at 8,000.
inflation rate ()
LRAS
SR 6.0% 4.0% LR
SRAS
AD AD'
6,000 8,000 Real GDP (Y)
b. Suppose the economy experiences an decrease in consumer spending (C) of 2000. In the graph above, the AD curve would shift to the left by 2000. The new short-run equilibrium would be a dot `' at SR where real GDP (Yeq) = 6,000 and inflation rate () = 6.00%. c. If there is no policy response, the new long-run equilibrium in the graph above is a dot `' at LR where real GDP (Yeq) = potential real GDP (Y*) = 8,000 and inflation rate () = 4.00%. d. In parts b and c, the goal of full-employment is missed e. If both macroeconomic goals are to be achieved, Congress should decrease taxes (T) in response to the decrease in consumer spending (C). f. If both macroeconomic goals are to be achieved, the Federal Reserve should decrease the nominal short-term interest rate (ishort-term) in response to the decrease in consumer spending (C).
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