BA 101B - Exam2_Fall2003_Answers

BA 101B - Exam2_Fall2003_Answers - Name: _ ANSWERS_ (Last...

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1 Name: ____ ANSWERS _______ (Last name, first name) SID: _____________________ Lecture (1 or 2): _____________________ UGBA 101B Macroeconomic Analysis for Business Decisions Dr. Steven Wood Spring 2003 EXAM #2 Please sign the following oath: The answers on this test are entirely my own work. I neither gave nor received any aid while taking this test. I will not discuss the questions on this test until after 5:00 p.m. on March 18, 2003. ______________________ Signature Any test turned in without a signature indicating that you have taken this oath will be assigned a grade of zero. Graph Instructions When drawing diagrams, the following rules apply: a. Completely, clearly and accurately label all axis, lines, curves, and equilibrium points. b. The original diagram and equilibrium points must be drawn in black. c. The first shift of any line and the new equilibrium points must be drawn in red. d. Any subsequent shifts in curves and new equilibrium points must be drawn in another color, preferably blue or green. Do NOT open this test until instructed to do so.
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2 1. IS-LM Model. For each of the following scenarios, use an IS-LM model to clearly show the effects on equilibrium income and interest rates. Also provide an economic explanation for what is happening to income, interest rates, consumption and investment. (45 points.) a. After the invention of a new high-speed computer chip, business firms decide to significantly upgrade their computer networks. The decision by businesses to upgrade their computer systems is an exogenous increase in investment. This shifts the IS curve to the right, from IS0 to IS1, and raises Ye by a multiplied amount, from Y0 to Y1. As Y increases, so does Md, which now exceeds the fixed Ms, so r rises, from r0 to r1. The increase in r crowds out some I and a small amount of C and NX. However, on balance, both C and I increase, C because of the increase in Y and I because of the exogenous increase in I. Y0 Y1 Y r r1 r0 IS0 IS1 LM0
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3 b. After several waves of massive credit card fraud, the frequency with which people make transactions in cash increases significantly. The decision to make more transactions in cash is an exogenous increase in Md. This shifts the LM curve to the left, from LM0 to LM1. Because Md exceeds a fixed MS, r increases from r0 to r1. Higher r crowds out some I and a small amount of C and NX so Y decreases by a multiplied amount, from Y0
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BA 101B - Exam2_Fall2003_Answers - Name: _ ANSWERS_ (Last...

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