Midterm2AnswerKey

Midterm2AnswerKey - Econ 2202 — Midterm II v Spring 2009...

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Unformatted text preview: Econ 2202 — Midterm II v Spring 2009 - Marouia Khraiche ~ NAME: W Multiple choice (2 pts each) i. The condition, M R8153: m w’ describes the representative consumer’s , while the condition M R803: w i + 7‘ describes the representative consumer’s A) investment decision, current period work-leisure decision. 13) consumption—savings decision, investment decision. ,. ) current period work—leisure decision, future period workdeisure decision. future period work-leisure decision, consumptionwsavings decision. 2. Labor demand depends on the interest rate because A} household savings depend on the interest rate. 8') firms discount future profits. \ C} of Ricardian equivalence. Labor demand actually does not depend on the interest rate. 3. A temporary increase in government spending that leads to only a smali decline in lifetime wealth likely shifts e aggregate demand curve to the right by more than the rightward shift in aggregate supply. )' right by iess than the rightward shift in aggregate suppiy. C} ieft by more than the leftward shift in aggregate supply. D) left by iess than the leftward shift in aggregate suppiy. 4. In response to a permanent increase in government spending, the permanent income hypothesis wouid suggest that, to a first approximation, consumption demand should Albe- unaffected. B) fall byiess than the increase in government spending. g}; fall exactly as much as the increase in government spending. fall by more than the increase in government spending. {Y 5.. When drawn against the current wage, the current labor supply shifts to the right if A future taxes decrease. Cling} current taxes increase. WC) firms malice more profits. D) total factor productivity increases. 6. in response to a temporary increase in government spending, the representative consumer consumes A) more and takes more leisure. B) more and takes less leisure. less and takes more leisure. 0) | ® less and takes less leisure. 7. The response of output foliowing a natural disaster inciudes A an increase in aggregate demand and an increase in aggregate suppiy. . B, an increase in aggregate demand and a decrease in aggregate supply. 0) a decrease in aggregate demand and an increase in aggregate supply. D) a decrease in aggregate demand and a decrease in aggregate supply. \ 8. The marginal propensity to consume is A varies around one, the lag of consumption is sm‘ailer than one,the.low relative volatility of consumption - is equal to one, procyciicaiity of consumption ,D) is smaller than one, procyclicality of consumption and it heips explaining the stylized tact that ? 9. Next period’s capital is equal to current—period investment A) pins the amount of current period depreciation. plus the amount of current capital left over after depreciation. ‘0‘) minus the amount of current capital left over after depreciation. D) minus the award; of current period depreciation. 10. When drawn against the current real wage, the labor demand curve is A) upward sloping because marginal product of iabor rises with quantity of labor employed. l3) upward sloping because marginal product of labor declines with quantity of labor employed. @downward sloping because marginal product of labor declines with quantity of labor employed: downward sloping because marginal product of labor rises with quantity of labor employed. ll. . o marginal cost of investment for the firm is equal to . 13) “1. e) *MPKI. n) Mp5“ 12. When drawn against real interest rate, optimal investment schedule shifts to the right if A) current total factor productivity 2 increases. - B Current total factor productivity z decreases. C) future total factor productivity z’ increases. future total factor productivity 2’ decreases. 13. When drawn against the real interest rate, the optimal investment schedule shifts to the right if the ) current capital stock K increases. ‘ r current capital stock K decreasas. 0) future capital stock K ’ increases. D) future capital stock K’ increases. 14. If the interest rate goes up, what happens to the investment demand curve? A) It shifts to the right. 13) It shift to the left. @It stays put. D) We cannot tell. 15. Output suppiy is increasing in the interest rate because A) labor demand is increasing in the interest rate. B labor demand is decreasing in the interest rate. labor supply is increasing in the interest rate. D) labor supply is decreasing in the interest rate. 16. The equilibrium effects of a prospective future increase in total factor productivity include A) an increase in the real wage and an increase in the real interest rate. 13) an increase in the real wage and a decrease in the real interest rate. a decrease in the real wage and an increase in the real interest rate. )‘ a decrease in the real wage and a decrease in the real interest rate. 17. In general equilibrium { A‘ supply equals demand for all goods in all periods. supply equate demand for most goods in all periods. C) supply equals demand in present value, but not in all periods. D) prices are exogenous. 18. Buying an item with cash would be an exampie of money’s role as a medium of exchange. B) store of value. 0) unit of account. D) none of the above 19. The Fisher relationship may be described by the following equation in which R is the nominal rate of interest, 1' is the real rate of interest, and i is the inflation rate. 20. The real return on money is A) 0. @‘l: :3) WR. 22. The cesh-in—edvance assumption means A) money needs to be printed before it can be used. ® some goods require currency to be purchased. C)’"honseholds obtain labor income at the start of the period. D) households obtain money transfers from the government at the start of the period. 22. Without the cash-in—advance constraint, money would not be held by households in the intertemporal model with money because A) it is not in the utility function. its return is too high. @ its return is too low. D) We cannot tell. 23 be current demand for money increases when ) current real income increases. B) future real income decreases. C) the nominal rate of interest increases. D) none of the above. 24. The money supply is vertical because A) prices are indeterminate. 13) prices have no reai impact. Q?) the money supply is set by policy. D) prices are counter—cyclical. ‘25. If an increase in the level of the money supply results in a proportionate increase in prices with no effect on any real variebies, we say that ) the Fisher relationship holds. Q5 money is neutrai. C) money is affecting reai variabies. D) money is the most preferred store of value. short answer questions: You must show ALL your work to receive credit 1. Take a real intertemporaj model with investment where consumers make choices over leisure and labor in the current and future period and also make choices over consumption in the current and future period. (a) Suppose that the government imposes a regulation that impedes the regular operation of a business. Assume that the government imposes a more environmentally friendly restriction on production. Also assume that this will not lead to an incxeese in government expencilture. The only effect is that the firms will not be as productive as they wrote with the same inputs in order to comply with the new regulation. This could be modeled as a decrease in total factor productivity (Le. temporary decrease in z), graph the changes in the labor and goods market. (Check for changes in labor déifiEfic-i curve (fiEphed against wage), iebor suppiy, output supply, output demand) W i - b e ’” / Y wk} “(1) s ’ C2)!- \ l .r/ // 5. V l ,2" \ t, » N (r2, 3 i ‘ \. ‘x r” / i ’ ‘iZ’P a, W. 3‘: \ if” / l A ) l r ,7 \\K a “N “9:1 w m “A: \k H. “32. x” /i ‘\ M“ l Me»... if ‘4 / s. h I m“ /’ ,’ ‘ a i \ , . \ f l i u. WWW WWW “WM-MM“ (b) As a result of this new regulation that decreased total factor productivity, do the following variables increase or decrease?(Assume the effect of interest rates on labor supply is email) I i. Equilibrium output \L ii. Equilibrium employment ’ M iii. Equilibrium interest rate ll\ iv. Equilibrium wages \l/ (0) Now, suppose that next period a new technologicai breakthrough wiil make production more enviromnentally friendly. In this case firms can produce at a. higher productivity and still comply with the new regulation. This can be modeled as an increase in future totai factor productivity {i.e. increase in z’), graph the changes in the labor and goods market. {Check for changes in labor demand curve (graphed against'wage), labor supply1 output supply, output demand) (d) As a result of this expected future breakthrough in technology that increased future total factor productivity, (lo the following variables increase or decrease?(Assume the efiect of interest rates on labor suppiy is small) 5 f i. Equilibrium output /]\ ‘ (D ( ii. Equiiibrium empioyment ’[\ iii. Equilibrium interest rate 4“ O z iv. Equiiibrium wages 3L (e) Now, suppose the tweet/rents events took place at the same time. The government imposed a new regulation requiring “cleaner” production and it was expected that next period technology will help make firm’s production “cleaner”, meaning that firm’s productivity will increase despite the. regulation. EXPLAIN IN DETAIL the following, i. What would have to happen for equilibrium output to end up higher? % mull?" . ii. What would have to happen for equilibtium employment to end up higher? om .ny 1.; New To NW 5 ’ xix “.— MW?" fl.— _ b, ' . ‘ ' n J‘U l‘l’lf/‘xt jar N +0 wad MKA/l/ W obi/WW mg wit; 5mm 3:; M mmfi-v. fiwmlie/r‘ ILM ‘ 0% mega in N {3 {a}. we; we {fiver-m eh sewing: m 33' iii. (EXTRA CREDIT) What’s the moral of the story, compare the changes in productivities, output and investment in both periods, is one offsetting the other? (especially in (1e)) 2. Now take a monetary version of the previous model. Assume that money supply is exogenous. (a) Consider the changes in part {£e) of the previous question. What must hold for money demand to increase? (Hint: think of the two variables that determine real money demand) I ' 156’ ’ \ A . 7“ I fl Y of“? {a} m g" " «mg? M a: 5;; W Hp 7’? owe/lo 4W 6 fly...” of \1/ W M £3 we mam/1 «Mm W. W of“ Hi) (10) Show graphéeally the efiects of the change in (23) on the money market. HS (C) Do the following variables increase or decrease? i. Price ievel % ii. Quantity of money in the economy (d) Given the change in the price level you mentioned in (2(c)i). What does that say about the behavior of prices (are they countercyclicel, acyclical or procycéicai) in the mode}. How can you tell? 5! ow 61/; WW 5 Pl/ “73> P to: é—e’EMWThfloMj (e) Assume that the central bank has a goal to keep inflation to zero. What Would the central bank do to realize that goal in light of the changes in (b). 7NM5 Dal/vim 9% Mg we) see BL (33 (1') What are the effect of the central banks action in (2e) on the following variables i. Real interest rate ii. Nominal interest rate If 1 iii. Real output W111, I iv. Nominal output What is this effect of money on the above variable-e called (what is this property of money called)? NMMMJ 01C. memwj ' 3. Equilibrium real interest rate (r) is determined in the output market such that output demand and output supply are equal. Equilibrium real "wage (w) is determined in the labor market such that labor demanded equals la‘oor supfiiied. Price level is determined in the money market such that money demanded equals money suppiy. (a) The remaining equilibrium quantity is nominal interest rate. How would you use the other prices to determine R. Q a m. 3""- + l Nymm, l 5‘53; HM /. C. flotilla/l . . 1“ filafifi ‘ or (1 #3 == Qwficwfi {13) Hour would you cietermine the rest of the nominal variables? mLLLlWZin/j_ M ...
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Midterm2AnswerKey - Econ 2202 — Midterm II v Spring 2009...

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