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Principals of Macroeconomics
Midterm #2, Sample #1: Answers
Duration  1 hour
Aids Allowed
Nonprogrammable 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 6 pages
to the exam.
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View Full DocumentMidterm Test #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 (Consumption and Investment) (12 marks)
An economy has no government or foreign sector
.
The equations for expenditure are:
C (Consumption) = 8,700 + 0.64Y
I (Investment) = 2,400 + 0.16Y
a)What is the equation for Aggregate Expenditure? (2 marks)
1 mark:
the
11,100 part of the equation Y = 11,100 + 0.8Y
1 mark: the 0.8Y part of the equation Y = 11,100 + 0.8Y
b) What is equilibrium income? (2 marks)
1 mark: setup
Y = 11,100 + 0.8Y or Y = 11,100/0.8Y
1 mark: answer = 55,500
c) Draw a graph showing your Aggregate Expenditure function and equilibrium
income.
Be sure to completely label your diagram. (3 marks)
1 mark: positively sloped AE with 11,100
intercept
1 mark: 45 degree (or AE = Y) line
1 mark: equilibrium at 55,500 where 45 degree line intersects AE
e) What is the change in inventories if income is 50,000? (2 marks)
1 mark: AE = 11,100 + 0.8*50,000 = 51,100
1 mark:
Change in Inventories = 50,000 – 51,100 = 1,100 (must be negative)
(Give marks if students find 50,000/5 = 10,000 and determine
∆
INV as 10,000 – 11,100)
f) What is the change in equilibrium income if autonomous investment decreases
by  80? (1 mark)
1 mark: = 80/(1 0.8) = 400 (must not be positive)
h) Return to the original equilibrium income.
Suppose that potential Income is 60,000.
How much must Investment change
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 Spring '08
 Noordeh
 Macroeconomics

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