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M2 S1 - PRINCIPLES OF MACROECONOMICS MIDTERM#2 SAMPLE#1...

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PRINCIPLES OF MACROECONOMICS MIDTERM #2, SAMPLE #1: ANSWERS Duration – 1 hour Aids Allowed: Non-programmable calculators only Time Allowed : 50 minutes The total marks in this test are 50. The test is divided into two parts: Part I - problem format - is worth 40 marks (40 of the total mark of 50) Part II - multiple choice- is worth 10 marks (10 of the total mark of 50) (5 multiple choice questions worth 2 marks each) Show your work where applicable . Please use pen instead of pencil . Print your name and student number clearly on the front of the exam and on any loose pages. Name: . (Family Name) (Given Name) Student # : . There are 5 pages to the exam. - 1/5 -

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Principles of Macroeconomics: Midterm #2, Sample #1 Answers Part I: Place your answers (and work where necessary) in the space provided. Clearly label all axes, curves, and points. 1. Equilibrium GDP (no Net Tax function) (14 marks) An economy has no taxes and no transfer payments . The expenditure equations are: Consumption = 1,500 + 0.8Yd Investment = 1,800 Government Spending = 2,400 Exports = 2,700 Imports = 600 + 0.1Y a) What is the equation for Aggregate Expenditure? (2 marks) 1 mark: correct autonomous part = 7,800 1 mark: correct induced part = 0.7Y i.e. 2 marks for AE = 7,800 + 0.7Y b) What is equilibrium income? (2 marks) 1 mark: set-up of some sort: Y = 7,800 + 0.7Y or Y = 7,800/(1 – 0.7) 1 mark: correct answer Y = 26,000 (no partial marks since they can check from c)) c) Calculate each of Consumption and Imports at equilibrium. (2 marks) 1 mark: C = 22,300 from 1,500 + 0.8(26,000) 1 mark: IM = 3,200 from 600 + 0.1(26,000) Both must be correct since they can check that C + I + G + X - IM = Y d) Draw a graph showing your Aggregate Expenditure function and equilibrium Income. Be sure to completely label your diagram. (2 marks) 1 mark: positively sloped AE with 7,800 intercept 1 mark: Y = 26,000 at intersection 45 degree and AE e) What is the recessionary gap if potential GDP is 28,400? (1 mark) 1 mark: = 2,400 from 28,400 – 26,000 f) What is the change in inventories if GDP is 28,400? (2 marks) 1 mark: AE = 27,680 from 7,800 + 0.7 (28,400) 1 mark: change in Inventories = +720 from 28,400 – 27,680 (can’t be negative) g) What is the change in equilibrium income if the Exports decrease by 90? (1 mark)
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M2 S1 - PRINCIPLES OF MACROECONOMICS MIDTERM#2 SAMPLE#1...

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