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exam2_answerkey - L l_fi 5'36 ORIQINM KEY 3,51ng...

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Unformatted text preview: L;.. l_fi \ 5'36 ORIQINM. KEY 3,51ng 5i "’1 ”'WFQMCSBQOB pea: El .) The aggregate demand curve represents total spending in the economy. It slopes o ward due to income and substitution effects E12.) When an reporter states that the high price of gas has reduced the demand, (s)he ' a correct economic statement. 3.) Rggylation Q was price ceiling on interest rates that banks and thrifts could pay depositors on their accounts. Initially it was set below the equilibrium and had no real impact on the market, however, over time the market equilibrium changed so that the ' ceiling caused a shortage of funds in the deposit institutions. 4.) An optimal exchange rate policy for an industrialized country would be to fix its e ange rate to that of its major trading partner in order to promote trade. 5.) The Keynesian range of the AS curve reflects the fact that equilibriums in this range are far below full employment output. This range can be altered by changing all-p, l0 de/ egulation. ’_ S 6.) It is only with equilibriums in the Keynesian and Classical ranges of AS that m etary and fiscal policy will clearly be complementary. Multiple Choice (Zpts ea): 1.) Over the Iastfl years most states have enacted significant new taxes that they have levied on tobacco products: _a_.” Resulting in a decrease in supply 13 ' Resulting in lower quantity demanded C. Resulting in lower demand .I d. All of the above ' AandB only @On average the price elasticity of demand for Fat Tire beer (a western micro-brew) in e US is 10.5%. Recently western beer makers lowered the average price of a case of beer by 10% in order to be better positioned against greater competition from imported beer, especially that coming from Europe. g? 41 -. ‘7 a."-.This was the right move by the industry as it will lead to an increase in _ P \L’K revenues and profitability I00 *1! ' \ b. This was the right move by the industry as it will lead to a 50% increase in l E §£ the volume of sales. .. ®This was the wrong move for the industry as it will lead tolower total ‘ My; revenues and declining profits d. This was the wrong move by the industry because the cross-price elasticity between domestic and imported wine is We. Pm . 3.) In measuring the sensitivity of demand, the: . a. Price and income elasticities refer to movements along the demand curve; other elasticities refer to shifts of the entire demand curve. b. Price and cross-price elasticities analyze movements along the demand curve; other elasticities refer to shifts of the entire demand curve. c. Income and cross-price elasticities refer to movements along the demand e; price elasticity refers to shifts of the entire demand curve. dime elasticity refers to movements along the demand curve; income and cross-price elasticities refer to shifts of the entire demand curve. 6. Income elasticity refers to movements along the demand curve; other elasticities refer to shifts of the entire demand curve. * re, Woo *‘ AV. “pans 4.) I) If AD is shifting from AD] to AD2, the economy is moving into a recession, cyclical unemployment is rising and expansionary macroeconomic policies are appropriate. 11) If the current equilibrium of the economy is at the intersection of ADOand AS 1 , then the economy is at full employment and a peak in the business cycle where inflationary pressure is building. a .I is true, II is false b. I is false, II is true c. 0th I and II are true . Both I and II are false 5.) Over the last year, real income in the US has fallen by 5%. Over the same period, train ridership has risen by approximately 9%. From this information: a. It is clear that train travel is a normal good. 13 b. It is clear that the demand curve for train travel is shifting to the right. t is clear that train travel is an inferior good. . It is clear that the price of train travel has risen. 6.) Most modern economies choose to float their exchange rate: a. Because the exchange rate serves as a shock absorber between the domestic economy and external shocks. b. Because their governments want the ability to design monetary policy that is specific to domestic market conditions 0. Because exchange rate risks can now be handled through the exercise of ivative products such as options d. l of the above e. A and B only 7.) Economic growth a. Will shift AD to the right. ’0. will shift As to the right. c. can be the result of increase I d tivity. w; the above e. B and C only. d human capital accumulation which boosts ”$7,421... 11. momma; 1_.1m1'=2. ..1 From the graphs above, pick the graph that best depicts the impact of the scenarios cu lined on the market demand, supply and equilibrium: 8.) Every month the government surveys producers and consumers and publishes eir findings in the Consumer Confidence and Producer Confidence surveys. This past month consumer confidence and producer confidence declined markedly. Which graph depicts the impact of these events on the housing market. 4/ DL 415 - 1 )2 9 ) During the last year, US interest rates have fallen in an effort to ward off a recession. Which graphic depicts the expected impact of this on the value of the dollar holding all else constant? 4, pit-f“? QF 1%”; 4-0 6‘: PW“ 41 5 10.) Over the last two months the prices of steel have plummeted due to the continuing the global downturn. Which graph depicts the impact of this on the market for new durable goods holdjggitll else constant? {I 19,, 9419 C 11.) Technological change has been rapid and pervasive in the delivery of movies via the intemet and other avenues such as Netflixs. Meanwhile, due to continuing uncertainly and pessimism consumers are staying at home more. Which graph depicts the impact of these factors on the movie rental market? 44') 4\ § %12.) It is Wthat in the coming year the US economy will move into a cession and oil prices will stay quite high by historical standards. Which graph depicts the impact or this event on the market for domestic air travel? 4,0 7&6 iShort Answer/Essay: f 1.) In class we spoke briefly about govemment’s spending and revenue streams. Chili? a.) Approximately what percentage of federal overnment revenue is generated from taxes on individuals? 25 - 3 a 2 b.) We also spoke about the fact that interest on the debt now accounts for ‘ d. List 3 problems that are currently associated with America’ s curre pro_ essive \ .— system0 10.1.1511 .1 I11 lav) @ a 311“ .1 a.» Wflflflnm “wt-PW? Int-15h swam 1| 3. J t It .’ .CDZUZIL T? e.) Whati the theoretical' stification for adop -."afla1(p rtional) incom- tax? geilflgm L2 fig. [2 fl] [fiflbfih J) % 319*? 1.5513 2.) Considering the informatin g eaned from “Where Does the Money Go?” a.) What are the 3 major risks on the horizon which complicate the issue of I 1i Wifb government deficit spending and the entitlement commitments of Social Security e. ) In the book they point out that by 2040 all of the govemme t budget will be consumed by Social Security, Medicare/Medicaid and debt without changes to the current budget. This means there will be no money for non-defense discretionary spending List 3 spending to r s that are exampl s of no defense discretionary spending. ‘ I US... til! . ‘- . . 51A 1 A 0 1. Elli dammit/m - .1 1 ‘mnmmm... a .‘ t +0 1.... WFJZM - s “A 3.) Using what on know abo demand and e14: - ci explain why revenues for all of the I US oil companies have bee at record 'ghs eye: the las JWMBEIVNMMWMM 1 1h 1 m5!!!) 4.) this 3 'tion we have been developing the theory and implications of trade A. )i. We have discussed the fact that as trade began the guiding principles were based on the concept of mercantilism What are the 3 key p ciples which underpi the .g (JR mercantilistic philosophy? ‘ 1 3 2X! )5; E $> EAflA I)!“ I S .011 /¥mm&4o 60—001 361%! @MWWM Wdug um ./ Quota-Wm ‘0'me aw: muégfi ‘ Lr‘a‘ F'— ’5“) ,#.Ju WHOM '5 1/5,, laimi'uMQ Ell" 'm. I'MEM’ :1 ii. Whativ darnentally wrong With thls theory. 3-: .5. I if as.) 11!: may“ _: 2-1-5 ”fin-A‘félm 605,; I'E'MWBEIWMIFIJ I A B.)i. Consider the following output table for the US, exico and Canada: b 1 a US 0 ‘3 Mexico Canada ' " mil Palm Pilots ' 100,000 m 25,000 45,000 1.33 foi— Timber 40,000 52.“), 20,000 60,000 . 75' Tequila 50,000 100,000 0 Is thisacase of compar ive or abso te advantage or each country an how do you know? a; s 1.1" e u“ _ *‘*"'% gpl‘ .. ...,. .. .mnmm D C.) i.Considering only the US and Canada and timber and palm pilot what is the range ‘ fiofthe terms oftrade for timber? a5 fig :7 I 17 g [:2 Egg ii. If the world trading price is 2 palm pilots or 1 unit of timber qu the gains from 2 6 %/ tra e Pfor each 5(201.11-1f5ymain terms of their export good. (show your work) 1 3k 50115339ch Pp D 7E9; {(Mjfiflfi; Cwmdo— Mariam/Um 3% fl? gum/£95 "i. Is this consist nt w1th th importanc of beig unim-ortant? Ex am ml)” ' @U; “11 001.11-;51 :WW 3 awaren .. 1 we EMI— inflamm “m - - F. mamnmnm.mm. _1 s 1. .u . 15!}?! 5.) During this section we ha : :- so spent a significant amount of time developing 1mm” I“ 1‘!) exchange rate theory and using it as an application of demand and supply analysis. 5"." w. "‘ 1 A.) List the 2 theories of exchange rate detennination and indicate the equation that ._ --.- ._ y, .1 underpins each, how it relates to the components in the balance of payment and whether a"! [m it is a lon run or short run explanation for xchange— rate adjus - ts. , | I .. 0 ' e =- ‘ ._II n B.) The government of the UAE (United Arab Emirates) has chosen to fix its exchange rate to the US dollar in order to promote the region as a financial center in the Arab world- especially Dubai. Initially the fix was at the market rate. However over time the value of the dollar has been falling globally. The result of the dollar decline coupled with the unwillingness of the UAE government to adjust the fixed rate has been that the Dirham (the local currency) has become undervalued relative to the Euro. Graphically and verbally explain the impact of this on the balance of paymau, money supp rates, spending and price levels in the UAE economy. ‘g p'l'C—g Euro rice of C ‘4 er Q€>Q$ Jamal - mm ”b irham .,. uh? C.) If the central banks of all the major trading nations (e.g. the US, Europe, China) jointly cut interest rates in an effort to buck up the global financial system discuss the ng we. wwmw * «come chum ad: on CUA Wm: time D.) i.0ver the last year, the rate of US productivity growth has stalled. In fact, in the last quarter output per hour fell 2.2 %. Using exchange rate theory, graphically and verbally work through the impact of this event alone on the Euro dollar exchange rate holding all else constant. 10 Pb . ujustment in the doll price 0? the I ‘ l L . I - . . " ' J ' 3 1A ‘ ' ... fi .3 sleuth, vorhM'mk . sfil-MMMEmimuqnfiq-dfiflllo I g - «g / " mmummmmm - QMM’DJv Ff .‘ the last section of our discussion of demand and supply "e lope th ‘ é ' framework for aggregate demand and aggregate supply in order to better understand the macroeconomy. In section 1 we discussed deflation and developed an understanding that all deflation is not bad. In fact, in the US economy during a few years in the 19905 we experienced deflation of the good kind. During this period the government also moved quite heavily towards deregulation of a wide array of markets. Using AD/AS framework show this graphically and discuss the impact of this phenomenon on the labor markets, spending, output and the price level in the new equilibrium. ‘3 p‘l‘ b 5601 deLo ' W“%&WAQB VI) ( EC: 1.) Using what you know about aggregate demand A graphical y and verbally explain what is currently happening to the economy and why. (Spts) i 2.)List 3 real sector signals beyond what is happening to the unemployment rate that L. 0.. . - . . . , gaimamymmmimmri‘i 4.) As has been reported in a number of papers, Icelan is a small economy currently on the brink of bankruptcy due to its large external debt and failing financial sector. In an effort to shore up the economy, the government has moved to fix the value of the kronur - ue this effort ...
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