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Spring 2004 (IS-LM Exam) 1 Name: _____ ANSWERS ______ (Last name, first name) SID: ____________________ Lecture (1 or 2): ____________________ UGBA 101B Macroeconomic Analysis for Business Decisions Dr. Steven Wood Spring 2004 Exam #1 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 2, 2004. ______________________ 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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Spring 2004 (IS-LM Exam) 2 1. Okun’s Law, the Phillips Curve, and the Sacrifice Ratio . (25 points.) a. What is Okun’s Law or Rule of Thumb? Okun’s Rule of Thumb is the inverse relationship between the unemployment rate and output growth (relative to potential). [ For each percentage point increase in the unemployment rate, there will be a 2 percentage point decrease in GDP growth (relative to potential). ] b. What is the Phillips curve? The Phillips curve is the inverse relationship between the unemployment rate and inflation. c. What is the major drawback to using the Phillips curve for policy purposes? The major drawback to using the Phillips curve for policy purposes is that it can be unstable, shifting if there are supply shocks. This instability indicates that there is not a consistent trade-off between inflation and unemployment.
Spring 2004 (IS-LM Exam) 3 d. What does the sacrifice ratio measure? The sacrifice ratio measures the incremental output growth lost relative to potential for each percentage point reduction in the inflation rate. [ The cumulative percent deviation of economic output from potential

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