Solutions_to_Midterm_2_Review_V2

# Solutions_to_Midterm_2_Review_V2 - Output should increase...

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Solutions to Midterm 2 Review, Econ 3, Spring 2009 (Bauer) Multiple choice 1. D 6. C 11. D 16. B 2. B 7. A 12. A 17. B 3. D 8. D 13. B 18. C 4. D 9. C 14. B 19. B 5. C 10. C (use Y- Y*=output gap not Y*-Y) 15. D 20. D is closest but no right answer should be 3,333 Question 1 a. flow, wealth b. 10,000*(1+r)^2 + 1000*(1+r) - 12,000 = 0 c. monthly inflation is m=(1.03)^(1/12)-1 so the answer is: 11,750 + sum(i=0 to 36) 250*[(1+.015-m)^i] d. life-cycle theory Question 2 a. stock price = bond price dividends = coupon future price = principal principal paid at maturity b. Open market purchase: Buy bonds to increase supply of reserves c. The risk premium increases d. Increase loans so that assets=liabilities Question 3 a. FOMC: Governors of the Fed, New York Fed president, 4 other presidents b. Recessionary.

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Unformatted text preview: Output should increase by Okun's law c. It hasn't been, potential isn't affected d. Cyclical Question 4 a. MPC = 1/2; IE=1/(1-(1/2))=2 b. Unplanned investment (I_u) which is the intercept, \$2 tr. c. The intercept of PAE line and 45 deg line given by 2+1/2Y=Y so Y=4. So potential output is \$6 tr. d. C and I_p are autonomous expenditure. Since IE Multiplier is 2, must increase autonomous expenditure by \$1 tr Question 5 a. Output will decrease increase , so they may lose value as investment falters. b. \$1 bb * 1/(1/5) = \$5 c. Fed’s commitment to fight inflation / a monetary policy rule d. Giving money – increasing the money supply drives down interest rates; the money demand curve is downward-sloping...
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Solutions_to_Midterm_2_Review_V2 - Output should increase...

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