sample midterm 2

sample midterm 2 - ECON 202 Prof. Olivero SAMPLE EXAM 2...

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ECON 202 – Prof. Olivero SAMPLE EXAM 2 Question 1: Explain what will happen to AD, AS, equilibrium GDP and the equilibrium price level as a result of the following events. In each case explain why AD and/or AS move. a. US relative prices fall relative to Indian prices. ANSWER: US exports to India increase because they become more competitive as US prices fall relative to Indian prices, American imports from India fall they are now more costly relative to US goods. Net exports increase and AD increases. Nothing happens to AS. GDP and P both increase as a result. b. For exogenous reasons (whatever those might be), the world interest rate falls and this makes the domestic interest rate in the US fall too. ANSWER: Increase in C because agents face lower incentives to save and also because the cost of borrowing to finance consumption falls. Increase in I because of lower cost of borrowing for businesses in the economy. AD increases. Nothing happens to AS. Increase in GDP and P as a result. c. The exchange rate between the dollar and the Euro rises. ANSWER: Increase in US exports to Europe because this increase in the exchange rate makes US exports cheaper and more affordable for Europeans, fall in US imports from Europe because these are now more costly. Increase in net exports. Increase in AD. AS stays unchanged. GDP and P increase as a result. d. There is a generalized increase in costs of production due to a peak in the world price of oil. As a result, the generalized cost of living also increases. ANSWER:
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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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sample midterm 2 - ECON 202 Prof. Olivero SAMPLE EXAM 2...

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