ans_practice_final

ans_practice_final - ECON110B Summer II 2007 Professor Dong...

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1 ECON110B Summer II 2007 Professor Dong Heon Kim Answer key for the Practice Final PART A: Multiple Choice 1. a: 2. a; 3. a; 4. a; 5. d; 6. d; 7. c; 8. d; 9. c; 10. c; 11. b; 12. a PART B: CONCEPT AND KNOWLEDGE B1 Briefly explain following terminologies: B1.a . Rational expectations: People optimally use all the available information to forecast the future. In other words, people use the information they have in the best possible way to forecast the future. B1.b . Uncovered interest parity condition The domestic interest rate must be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency. B1.c . Marshall-Lerner condition The condition under which a real depreciation leads to an increase in net exports. B.2 . “When account is taken of its effect on expectations, the decrease in government spending need not lead to a decrease in output.” Explain this statement. In response to the announcement of the deficit reduction as the result of the decrease in government spending, there are three factors shifting the IS curve. i) Current government spending (G) goes down, leading the IS curve to shift to the left. At a given interest rate, the decrease in government spending leads to a decrease in total spending, and so, a decrease in output. This is the standard effect of a reduction in government spending
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ans_practice_final - ECON110B Summer II 2007 Professor Dong...

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