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Unformatted text preview: Econ 1, Fall 2010 Your name: ____________________ University of California, Berkeley GSIs name: ____________________ Section #: ____________________ Page 1 of 4 Practice Midterm NOTE: To ensure proper grading, write your answers in the area indicated. Suppose that it is December 2008 and you are Berkeley Professor Christina D. Romer, called to Chicago to audition for a cabinet-level post in Barack Obamas forthcoming administration and to advise him on the proper size of the economic stimulus program. Your forecast is that were 2010 to be a normal business-cycle time that the level of GDP in 2010 would be $15.5 trillion/year. You are conducting your analysis in the income- expenditure framework where: Y = C + I + G + NX , C = c o + c y Y. You believe that c y = .5. You project that NX will be on trend during the recessionthat imports will fall as U.S. purchasers shrink their spending, but exports will fall by about as much because there is a recession in the rest of the world as well. You project that there will be little change from trend in consumer confidence c o . You project that there will be three years2009, 2010, and 2011during which the economy will be depressed. And you project that even with U.S. Treasury and Federal Reserve support for financial markets to increase the supply of and reduce the demand for safe assets, that the scramble for safety will cause financial and non-financial businesses to shrink their business investment spending by $375 billion/year as they cut back spending on risky assets and try to move their portfolios into safer asset vehicles. You are asked to advise the president-elect on what the government should do to its level of safer asset vehicles....
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This note was uploaded on 10/04/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.
- Fall '08