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Midterm04 - G = 0 = TX Investors always want to invest $200...

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1 Professor McClelland Monday, October 25, 2004 Econ 102 Midterm Exam Note: Total time – 50 minutes Answer both Part A and Part B Part A and Part B are of equal value USE TWO EXAM BOOKS, ONE FOR PART A AND THE OTHER FOR PART B. ON EACH EXAM BOOK PRINT YOUR NAME AND YOUR TA'S NAME. Part A (25 minutes) Below are 4 pairs of concepts or ideas. Explain briefly (that is, in no more than one or two sentences) EACH member of a pair, and then explain the relationship between the two. (1) demand curve for grape juice AND substitutes for grape juice. (2) production possibilities frontier (or curve) AND capital (meaning one of the four factors of production). (3) value added AND the double counting problem in calculating gross domestic product. (4) countercyclical fiscal policy AND the Keynesian assumption about “sticky” wages. OVER
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2 PART B (25 minutes) FOR ANY QUESTIONS REQUIRING CALCULATIONS, SHOW ALL YOUR WORK. In the economy of Yaleland, which has neither exports nor imports, there is no government spending and no taxes (and tenuous law and order), or
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Unformatted text preview: G = 0 = TX. Investors always want to invest $200 million, or (a) What are the three types of investment? (b) The people of Yaleland are extremely cautious, and as a result, the marginal propensity to consume is zero (that is, MPC = 0.) Explain in words what this means. (c) If the equilibrium level of national income (Y) is $500 million, what does the consumption function look like? That is, what is its algebraic form. (Using geometry is not necessary.) (d) At this level of equilibrium income of $500 million, considerable unemployment exists. Accordingly, the ruling dictator decides to increase government spending by $150 million. (i) What is the value of the Keynesian multiplier for any change in government spending? (ii) What is the new equilibrium level of national income? Using a circular flow diagram, explain why this is an equilibrium level. (iii) At this new equilibrium (your answer to (ii)), how much is being invested in inventories?...
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