PRACTICE FINAL EXAM2

PRACTICE FINAL EXAM2 - ECON 202 001 / 002 Drexel University...

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ECON 202 – 001 / 002 Drexel University SAMPLE FINAL EXAM Professor: María Pía Olivero NAME: _______________________________________________ Question 1: a) What are the three types of tools that a government can use to conduct contractionary fiscal policy? b) What are the three types of tools that a central bank can use to conduct expansionary monetary policy? ANSWER: a) - Lower G - Raise income taxes - Raise corporate taxes b) – Open market purchases of government bonds. - Lower reserves requirements for banks. - Lower the discount rate. Question 2: Describe what happens in a closed economy when income taxes are raised. Please focus on both short run and long run effects. ANSWER: An increase in income taxes lowers disposable income (2 pts) and lowers consumption (1 pt). In that way, it lowers AD (1pt) and GDP (1pt). Money demand falls because GDP and prices have fallen (2 pts). The interest rate goes down and
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investment increases as a result (the opposite of “crowding out” effect) (2 points). AS shifts out the long run (1 pt).
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This note was uploaded on 05/16/2011 for the course ECON 202 taught by Professor Iforget during the Spring '08 term at Drexel.

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PRACTICE FINAL EXAM2 - ECON 202 001 / 002 Drexel University...

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