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Midterm2answers 2007 - Department of Economics University...

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Department of Economics Professor Kenneth Train University of California, Berkeley Fall 2007 ECONOMICS 1 SECOND MIDTERM EXAMINATION OUTLINE SOLUTIONS – NOT FOR DISTRIBUTION November 21, 2007 INSTRUCTIONS 1. Please fill in the information below: Your Name: Your SID #: Your GSI’s Name: Your Section Day/Time: 2. This exam ends at 12:58. 3. If you finish early, please remain in your seat so that you do not disturb others. 4. When time is called, stop writing and pass your exam to the aisle. Please stay in your seat until all of the exams are collected. 5. There is a total of 100 points, five questions and nine pages, including this coversheet. Points for each question are in parentheses. 6. Answer the questions in the space provided. NO BLUE BOOKS. If you need extra room to answer the questions, use the backs of the pages. 7. Calculators are not permitted. Do not turn the page until you are told to begin the exam. Page 1 of 9
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Question 1. (20 points) True, False or Uncertain. Decide whether the following are true, false, or uncertain. Your grade is determined by your explanation; an answer without an explanation receives no credit. a) (5 points) A decrease in the money supply lowers aggregate output. TRUE. When the Fed lowers the money supply, this causes interest rates to rise. The increase in interest rates reduces consumption and investment, which causes aggregate output to be lower. b) (5 points) If a public good cannot be paid for through user fees, then it should not be provided. FALSE. A public good should be provided if the public’s total willingness to pay exceeds the cost of providing the good. User fees extract less than people’s willingness to pay,
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