Exam 2 Sample Questions

Exam 2 Sample Questions - Exam 2 Sample Questions Identify...

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Exam 2 Sample Questions Identify and explain the significance of: Inventory adjustment mechanism a. GDP gap b. Excess Reserves c. Three types of unemployment d. inventory adjustment mechanism e. Quantity theory of money f. Frictional unemployment g. effects of unanticipated inflation on creditors h. Three functions of money i. Default risk j. Consumer Wealth k. how inflation affects creditors 1. Use the Quantity Theory of Money to explain inflation. 2. If you were a member of the Federal Reserve Board of Governors, what three policies would you suggest to combat inflation? Why? Explain carefully . 3. Using money and bond market diagrams, illustrate and briefly explain effects the effects of your suggested open market operation. 4. Assume : (a ) the economy is initially in equilibrium at noninflationary full-employment GDP (*Y) (b ) due to terrorist attacks, the consumption function shifts downward by $100 billion and (c ) the marginal propensity to consume is 0.8. Using a Keynesian total expenditure (TE)/aggregate supply (AS K ) diagram, illustrate and explain the probable macroeconomic effects of the decline in consumer spending. 5. How big a tax cut would be needed to restore full-employment under the circumstances outline above? Show your calculations.
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6. First, use the Quantity Theory of Money and the standard assumption of constant velocity to explain the hyper inflation experienced by the Confederate states during the American Civil War. Now, suppose that velocity is not necessarily constant . How do you think velocity may have changed due to the extremely high wartime inflation? Why? Would the change in velocity tend to reduce or intensify the inflationary pressure in the economy? Why? 7. Suppose that the Fed’s policy objective is to keep the nominal interest rate (i) constant. How would a Fed with this policy objective respond to an increase in money demand? Why? Illustrate your answer with diagrams of the money and bond markets. 8. Suppose that there is an initial GDP gap of $20 billion. Now suppose that MPC = .8 and government spending (G) is increased by $2 billion and at the same time taxes (T) are decreased by $2 billion. Will this combination of policies restore noninflationary full-employment GDP (Y*)? Why or why not? Show your calculations and illustrate your answer graphically. 9. Assume: (a) the economy is initially in equilibrium at noninflationary full-employment GDP (Y*) (b) government spending (G) is cut by $8 billion (c) taxes (T) are cut by $10 billion and (d) the marginal propensity to consume (MPC) = 0.8 9a Using your knowledge of the government spending and tax multipliers, calculate the change in Y caused by the decrease in government spending then calculate the change in Y caused by the decrease in taxes. 9b
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This note was uploaded on 09/26/2011 for the course ECON 1113 taught by Professor Clark during the Fall '08 term at The University of Oklahoma.

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Exam 2 Sample Questions - Exam 2 Sample Questions Identify...

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