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f07 ec51 exam 2 ver 2

# f07 ec51 exam 2 ver 2 - EXAM TWO Annoying Version NAME...

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Economics 51D 24 October 2007 EXAM TWO Annoying Version NAME: _________________________________________ Instructions: This exam is worth 200 points. You have 75 minutes. There are two parts to the exam: multiple choice and problems. Place your answers to the multiple choice problems on the multiple choice answer sheet provided. No credit will be given for multiple choice answers circled on this exam. The problems are to be worked on the space provided. PROBLEM PTS POSSIBLE SCORE 1 50 2 50 3 50 4 - 13 50 TOTAL 200 1

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PART ONE: Problems. Work each of the problems in the space provided. Make sure that you do everything the question asks. 1. Suppose that the Congress reaches a compromise to cut taxes by \$225 billion but government spending must also be cut by \$150 billion. Taxes are all lump-sum taxes. Suppose that the autonomous level of consumption is \$60 billion, and the marginal propensity to consume is .89. The autonomous level of imports is \$50 billion and the marginal propensity to import is .07. Before the above bill passed, the economy was in short-run, medium-run and long-run equilibrium with G = T = \$600 billion , I = \$900 billion, and X = \$400 billion. A. (10 points) What is the level of GDP before the changes in taxes and spending? Write down the formulas you use and show your calculations. 2
B. (20 points) Ignoring any crowding-out effects, show and explain the effects of the above change in spending and taxes on medium-run and long-run equilibrium prices and GDP. Be as specific as you can about the magnitudes of curve shifts and other changes. 3

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C. (20 points) Now include crowding-out type effects in your answer, if there are any, and compare the equilibrium you find to your answer in Part B. Again, be as specific as you can. 4
behind recent monetary policy actions, and their consequences for the economy. For example, a very important factor in US monetary policy in the years 2001-2004 was the following problem: … a technology stock and investment plunge and the Sept. 11 terrorist attacks pushed the economy into recession in 2001…. even by mid-2003, job creation and business investment were still anemic, and the inflation rate was slipping toward 1%. The Fed began to study Japan's unhappy bout with deflation -- generally declining prices. "Even though we perceive the risks [of deflation] as minor, the potential consequences are very substantial and could be quite negative," Mr. Greenspan said in May 2003. (15 points) Show and explain what Greenspan was worried about—that is, what was the

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f07 ec51 exam 2 ver 2 - EXAM TWO Annoying Version NAME...

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