BA 101B - Mid-term1_Spring2004_Answers

BA 101B - Mid-term1_Spring2004_Answers - Name: _ANSWERS_...

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Spring 2004 (IS-LM-BP & DAD-SAS 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 #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 April 13, 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 axes, 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 and then green. Do NOT open this test until instructed to do so.
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Spring 2004 (IS-LM-BP & DAD-SAS Exam) 2 1. International Trade and Finance . (30 points.) Congratulations! You have just been appointed Chief Economic Advisor to the President of Funlandia. Funlandia is an open economy with a fixed exchange rate and large foreign exchange reserves. The government is committed to maintaining the fixed exchange rate. The economy is characterized by relatively immobile capital flows (this means that the BP curve is steeper than the LM curve). The economy has achieved both internal and external balance although the unemployment rate is well above its natural rate. The President has asked you to demonstrate the effects of various policy options for returning the economy to full employment. a. Use an IS-LM-BP model to clearly show and provide a brief economic explanation of how the government would use fiscal policy alone to move the economy to its potential level. i. At the new level of output and interest rates, is the private balance of payments is surplus or deficit? Explain. ii. What actions will the government have to undertake to maintain a fixed exchange rate? iii. How long can the government maintain this policy? Explain. Expansionary fiscal policy will shift the IS curve right from IS0 to IS1. This will increase Y from Y0 to Yn and r from r0 to r1. Although a higher r will increase capital inflows, higher Y increases imports by more so that the balance of payments falls into deficit. To maintain a fixed exchange rate, the central bank will have to sell its foreign exchange reserves in order to buy up the excess supply of its own currency. The government can maintain this policy for as long as they have foreign
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BA 101B - Mid-term1_Spring2004_Answers - Name: _ANSWERS_...

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