FinalAnswers 1999 - Department of Economics University of...

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Department of Economics Professor: Ken Train University of California, Berkeley Head TA: Roger Studley Fall Semester, 1999 ECONOMICS 1 Final Examination December 9, 5-8pm If all economists were laid end to end, they still wouldn’t reach a conclusion. – George Bernard Shaw (attributed) Please fill in the information below: Your Name: Suggested Answers Your SID#: (Please do not distribute to students!) GSI’s Name: ** Note: Suggested points may be given in [brackets]. Section Days/Time: ** You do not have to adhere to the suggested points. This exam is designed for 2 hours and 30 minutes. (You will be allowed the full three hours to work on it.) There are a total of 150 points, 8 questions, and 12 pages (including this cover sheet). The suggested times to spend on each question are in parentheses. Answer the questions in the space provided. (NO BLUE BOOKS.) If you need extra room to answer questions, use the backs of the pages. Calculators are not permitted. You may leave early if you finish prior to 8:45. Otherwise, so as not to disturb your classmates, please remain seated until 9pm. When time is called, stop writing immediately and pass your exam down the row to your GSI. Good luck! J >>> D O NOT TURN THE PAGE UNTIL YOU ARE TOLD TO BEGIN THE EXAM . <<<
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Page 2 of 12 Question 1: 22 Total Points (20 Minutes) Consider a closed economy, one that allows no imports or exports. Suppose we know the following: Consumption (C) equals: 300 + 0.8 × (Y – T) Taxes (T) are: 1000 Planned investment spending by firms (I) equals: 650 – (1000 × r) The interest rate (r) is: 0.15 (or, equivalently, 15%) Government expenditure (G) is: 600 a) [3 points.] In the economy, as in this model, planned investment (I) depends on the interest rate (r). Explain how and why. They’re inversely related. [1] When r is low firms can borrow more money (since the cost of borrowing is less) and finance more projects. Hence I rises. [2] b) [4 points.] Solve the model for the equilibrium level of income. [Assume that r and P do not change.] Y = AE Y = C + I + G + (X – M) Y = [300 + 0.8 · (Y – 1000)] + [650 – (1000 · 0.15)] + 600 + 0 Y = 0.8Y + 600 Y = 3000 c) [3 points.] What is the value of the government spending (or investment, or consumption) multiplier? [Maintain the assumption that r and P do not change.] The government spending multiplier is 1/(1-MPC) = 1/(1.0–0.8) = 5. ( All spending multipliers (but not the tax multiplier) in this model have this value.)
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Page 3 of 12 Question 1 (continued): d) [4 points.] Now suppose a World Trade Agreement is reached. This agreement (i) opens the economy to international trade and (ii) sets fixed exchange rates for the currencies of each country. Furthermore suppose that under this agreement: Exports are: 900 Imports are: 0.3Y Solve the model for the new equilibrium level of income. Y = AE
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This note was uploaded on 04/01/2008 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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FinalAnswers 1999 - Department of Economics University of...

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