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Unformatted text preview: 14.02 Principles of Macroeconomics Quiz #3, Answers Name: _________________________________________ Signature: _________________________________________ Date : _________________________________________ Read all questions carefully and completely before beginning the exam. There are four sections and ten pages – make sure you do them all. The quiz has a total of 100 points. Show your work on all questions if you want to receive partial credit. If your answer involves a graph, please label all curves and axes clearly; if we can’t read the graph you will loose points on your answer. No notes, calculators or books may be used during the quiz. You have 2 hours to complete the quiz. There are no blue books, you must respond in the space allotted to each question. Part I (Short Questions, 2 points each, 10 points total) 1. What is an automatic stabilizer? It is something that diminishes automatically the volatility of the economy. It diminishes the multiplier so that shocks do not deviate the economy very far from normal growth levels and hence from the natural level of unemployment. This is the case of progressive tax schemes or unemployment benefit systems 2. What is the money multiplier? The increase in the money supply resulting from a onedollar increase in central bank money. This proportion is equal to (c+ θ (1c))1 where c is the proportion of money held in currency by individuals and θ is the ratio of reserves to deposits held by banks. 3. What is Walras’ Law? What role does it play in the way we construct the ISLM? The finding that if all but one of the conditions for general market clearing hold, then the final one must hold as well; this result follow because households’ budget constraints must be satisfied. When we construct the IS LM model we assume an economy with a bonds market, a money market and a goods market. The IS represents equilibrium in the goods market. The LM represents equilibrium in the money market. If household’s budget constraints hold, then we know that the bonds market must clear and the ISLM will represent macroeconomic equilibrium. 4. What is Okun’s Law? How do we incorporate it into the general model of inflation and unemployment? Okun’s law is the observed relation between GDP growth and the change in the unemployment rate. We use Okun’s law to close the macroeconomic model composed of the Phillips curve (relating unemployment and inflation) and the aggregate demand (relates gdp growth with inflation). 5. What is the Fischer hypothesis? The proposition that in the medium run an increase in inflation is reflected in an identical increase in the nominal interest, leaving the real interest rate unchanged. Part II (TrueFalseUncertain, 5 points each, 40 point total) Explain your answer, use graphs if possible and show calculations if necessary....
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This note was uploaded on 05/08/2010 for the course EEWQ 3123213 taught by Professor Smith during the Spring '10 term at Acadia.
 Spring '10
 Smith

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