Spring2010MT2 - Name Banner Economics 304 Spring 2010...

This preview shows page 1 out of 6 pages.

Unformatted text preview: Name: Banner #: Economics 304, Spring 2010 Midterm 2 Please put all papers away. No calculators, no cell phones, no computers: nothing electronic is allowed. The exam is scheduled for 80 minutes. There are 85 points total on the exam. Part 1: Definitions (3 points each) 1) Automatic Stabilizers: 2) Monetary Neutrality: 3) Laffer Curve: 4) Yield curve: 5) Monetarism: 1 Part 2: Long Question on AS-AD Model I- (40 points total) Comparative Statics of a Decrease in Animal Spirits(SP) (25 points) Show what our AS-AD model predicts will happen to the variables in the table below in both the short-run (SR) and long-run (LR) in response to a decrease in SP. Show all of your work. No points will be awarded for unjustified answers. Use back of page if necessary. All graphs should be fully labeled. P Y r C I W/P N SR LR 2 II- Business Cycle and Policy Implications of Changes in SP (5 points each) a) How does your previous answer compare to what happens during an average US recession? What does this tell you about whether changes in animal spirits (SP) are likely to be a source of US recessions? b) How does your answer to a decrease in SP match up with the modern business cycle facts? What does this tell you about whether changes in animal spirits (SP) are likely sources of business cycle fluctuations overall? c) Suppose that monetary policy-makers want to stabilize both prices and output. Discuss whether monetary policy-makers can, in theory, achieve these objectives after a decrease in SP. How would your answer change if the shock to the economy was an increase in μ? 3 Part 3: Short but Important Questions (5 points each) a) How did we assess the validity of our AS-AD model in class? How well did the model do? b) Why did Milton Friedman argue that inflation was always and everywhere a monetary phenomenon? c) Derive the Fisher equation, starting from the following relationship between nominal and real 1 / 1 . interest rates: 1 4 d) List and discuss two possible solutions to the time inconsistency problem. e) What is the evidence supporting the view that the Fed has caused most of the recessions in the U.S. since World War II? f) What are the sources of the projected long-run budget deficits for the U.S. Federal government? 5 Equations for Midterm 2: National Income Accounting Identity: Private Saving: Government Saving: Aggregate Saving: , Aggregate Consumption Function: , Aggregate Investment Function: , Aggregate Savings Function: , , , , Money Demand: IS Curve: , , , , , LM Curve: , , Aggregate Demand Curve: , , , , , Marginal Product of Capital: Marginal Revenue: 1 Marginal Product of Labor: Marginal Cost of Production: Labor Demand: Labor Supply: / Natural Level of Output: 1 Unemployment Rate: Natural Rate of Unemployment: / 1 Short-Run Aggregate Supply Curve: , , , , Long-Run Aggregate Supply Curve: , , , 6 / ...
View Full Document

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture