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Unformatted text preview: Economics 100B
University of California, Santa Cruz Professor K. Kletzer
Fall 2008 Sample Midterm
Instructions: Do all three parts. Graphs are useful for illustrating and explaining your answer, but you must use
words to fully explain what you are showing in a graph. A graph by itself is not an answer.
Part A (45%) Choose any 3 of the following 4 statements. For each one you choose, state whether it is true,
false or ambiguous and explain why. You must provide an explanation to receive any credit.
A1) An increase in the money supply raises GDP in the short run and in the medium run.
A2) An income tax cut raises investment and GDP in the short run but has no effect on investment or GDP in
the medium run.
A3) In transition from the short run to the medium run, a fiscal expansion reduces unemployment and increases
A4) An oil price shock raises unemployment in the short run but not in the medium run.
Part B (25%) Answer each part. This question uses the following IS-LM model from your problem sets: Y=C+I+G
C = c0 + c1 (1-t)Y
I = b1 Y - b2 i
M/P = d1Y - d2 i
B1) Show how the short-run effect of G on Y depends on the parameter d2. You may answer using algebra or a
combination of algebra and a graph.
B2) Explain why the parameter d2 matters for how much an increase in G raises Y in the short run. Part C (30%) Answer the following question. You should use both words and graphs in your answer; equations
can be helpful.
C1) Explain how an increase in government expenditure affects output, unemployment, the interest rate and
investment in the short run and in the medium run. If the economy begins in recession, how does an increase in
government expenditure affect the adjustment of the economy to the medium run? In your answer, explain how
unemployment, inflation and the growth rate of output respond to the increase in government expenditure. ...
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