2006_prelim1_ANS_(2 March version)

# 2006_prelim1_ANS_(2 March version) - 1 C 2 B 3 A 4 B 5 A 6...

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Unformatted text preview: 1. C 2. B 3. A 4. B 5. A 6. D 7. D 8. C 9. A 10. B 11.A 12. A 13. A 14. A 15. B 16. B 17. investment 18. delta I/(1 minus MPC) = delta I/(MPS) 19. S + T + Im = I +G + Exp 20. the multiple by which deposits can increase for every dollar increase in reserves or 1/REQUIRED RESERVE RATIO PART 2 1. Answer: A is the minimum amount required to sustain life. B is the MPC, or the fraction of an increase (change) in income that is consumed. Graphically, A is the intercept of the consumption function while B is the slope 2. Answer: See Figure 8.8 in the book page 149. The red line is the planned aggregate expenditure, in this case I + C. The 45 degree line represents where AE equals Y (equilibrium 1). So the intersection of the red line with the 45 degree line is the equilibrium point (Y = I + C). This is a stable equilibrium, which means that if one is outside of equilibrium, one will automatically move back to equilibrium. The unplanned inventory reductions occur on the left. This happens when planned aggregate expenditure exceeds aggregate output. Firms will response by increasing output, increasing output implies increasing income, increasing consumption and the new equilibrium will have a Y higher than before (equilibrium 2). ***SEE SHEET FOR GRAPH 3. Answer: Budget deficit is defined as G - T. When this is positive we speak of a budget surplus (thus it is measured on a national budget and in a certain time period, one year). When the government runs a deficit it must borrow to finance it. To borrow the government sells securities to the public. They can sell both to individuals as institutions, foreign and national. 4. Answer: the crowding-out effect refers to the tendency of an increase in government spending to cause reductions in private investment due to increases in the interest rate. Thus an increase in G increases Y (first panel). This increases the demand for money, which increases the interest rate in the money market. This will decreases investment (private investment). Note that this will lower the Y again in a second round effect, but this is not part of the definition of crowding out. ***SEE SHEET FOR GRAPH PART 3 1. Answer: nominal GDP is GDP measured in current dollars MINUS all components of the GDP valued at their current prices. Nominal GDP adjusted for price changes is called real GDP. The procedure to obtain the real GDP is as follows: pick a base year and use the prices in that base year as weights to calculate the real GDP. See Table 6.6 page 111. The difference between nominal and real GDP becomes important in countries experiencing high inflation. 2.1. Answer: deflation is a decrease in the overall price level 2.2. Answer: Any event which shifts the supply of oil to the right (such as the discovery of a new oil track) and any event which shifts the demand of energy inwards. 2.3. Answer: The Federal Reserve does not like inflation because high inflation has a negative impact on the economy. Negative impacts include: uncertainty for investors who will stay away, people allocation large amounts of their time in trying to avoid the impacts of inflation (economy operates under the production efficient level) 3. Answer: The Federal Reserve can increase the money supply in the economy in three different ways (open market operations, decrease required reserve ratio for banks, and decrease the discount rate). The money supply curve will shift to the right, and the equilibrium rate of interest falls (S2). Planned investment spending increases from I to I (which is a component of planned aggregate expenditure), the planned aggregate expenditure curve shifts ups and raises output. This in its turn increases the demand for money which prevents the interest rates from falling too deep (D2). Note that we could continue a few more rounds like this. ...
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## This note was uploaded on 04/03/2008 for the course ECON 1120 taught by Professor Wissink during the Spring '05 term at Cornell.

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