FinalAnswers 2008 - Department of Economics University of...

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Page 1 of 12 Department of Economics Professor Kenneth Train University of California, Berkeley Fall 2008 ECONOMICS 1 FINAL EXAMINATION December 15, 2008 INSTRUCTIONS ANSWER KEY – DO NOT DISTRIBUTE 1. Please fill in the information below: Student’s Name: _____________________________________ SID #: ____________________________________________ GSI’s Name: ________________________________________ Section Number (Day/Time):___________________________ 2. This exam starts ends at 8:00pm. 3. If you finish before 7:45pm, turn in your exam to your GSI and leave quietly. 4. If you finish after 7:45pm, please remain in your seat until the end of the exam so that you do not disturb others. 5. When time is called, please stop writing and turn in your exam. 6. There is a total of 200 points, 8 questions, and 14 pages (including this cover sheet) points for each question are in parenthesis. 7. NO BLUE BOOKS NEEDED . Please answer the questions in the space provided. If you need extra room to answer the questions, use the backs of the pages. 8. Calculators are not permitted. 9. Good Luck and Happy Holidays! DO NOT TURN THE PAGE UNTIL YOU ARE TOLD TO BEGIN THE EXAM
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Question 1: TRUE, FALSE, UNCERTAIN. (28 points) For each question decide whether the statement is false, true or uncertain. Your grade is determined by your explanation; an answer without an explanation receives no credit. Use graphs when needed to complement your answer. a) (4 points) Monetary policy is especially effective when the economy is in a liquidity trap. FALSE: In a liquidity trap, the economy is so bad that firms do not invest more and consumers do not spend more even when interest rates are lowered. So monetary policy is not effective when the economy is in a liquidity trap. b) (4 points) When two countries have mutual absolute advantages, both countries will benefit from trade. TRUE: Each county will produce more of the good for which they have the absolute advantage and trade to get the good for which they do not have the absolute advantage. (Additional answers that count for something: Any two countries will benefit from trade. This is true even if one country can produce ALL goods more cheaply. Each country increases production of the good for which it has a comparative advantage and decreases production of good for which it has a comparative disadvantage.) c) (4 points) Consider the exchange rate Colombian peso/ US dollar. When the Colombian peso depreciates, the US economy is being hurt. TRUE: When the peso depreciates against the dollar, the dollar appreciates against the peso. Appreciation of dollar hurts US economy, by reducing exports and increasing imports. d) (4 points) Trade increases the effect of both fiscal and monetary policy. FALSE:
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FinalAnswers 2008 - Department of Economics University of...

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