Final 2006

# Final 2006 - Spring 2006 Name Circle one 10:10 section...

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Spring 2006 Name: __________________________ Circle one: 10:10 section, 11:10 section 1/8 Principles of Macroeconomics Final Exam This exam is intended to last two hours. Be sure to label all your curves and axes. If you have any questions during the course of the exam, feel free to ask me. Good luck! The Kingdom of Tonga (formerly known as the Friendly Islands) is a tiny archipelago in the South Pacific. The National Reserve Bank of Tonga, the Kingdom’s central bank, recently reported the following macroeconomic data: Autonomous Consumption (a) \$4 million Investment (I) \$17 million Government Spending (G) \$51 million Taxes (T) \$40 million Marginal Propensity to Consume (MPC) 0.80 As you can see from the table, the people of Tonga do not engage in international trade (i.e., X = M = 0). 1) Assuming that a, I, G, T, and MPC do not vary with income, calculate Tonga’s macro-equilibrium real GDP. Be sure to show your work. [8 points] 2) Suppose the Tongan Prime Minister is sure that he will be defeated in the November elections if real GDP doesn’t increase by at least \$10 million. Given that the King of Tonga long ago declared that price and wages cannot change, how many military transport aircraft would the Prime Minister have to convince the Tonga Defense Services to purchase to achieve this increase in output, assuming the aircraft cost \$1 million each? Again, show your work. [8 points]

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2/8 3) By how much would the Prime Minister need to increase subsidy payments to Tongan squash farmers to achieve the same \$10 million increase in real GDP, assuming the subsidy payments are not tied to squash production? Again, show your work. [8 points] 4) The King of Tonga, sitting safely upon his throne in Nuku’alofa, has no fear of being voted out of office and thus has the luxury of being fiscally conservative. No great fan of the Prime Minister, he says that he will give his approval to the Prime Minister’s expansionary fiscal policy plans only if
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## This note was uploaded on 05/13/2010 for the course ECON 323 taught by Professor Jakes during the Spring '10 term at Alcorn State.

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Final 2006 - Spring 2006 Name Circle one 10:10 section...

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