Unformatted text preview: Economics 100B
University of California, Santa Cruz Professor K. Kletzer
Fall 2008 Sample Midterm II
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
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
A1) An increase in the savings rate reduces GDP growth in the short run but raises GDP growth in
the medium run.
A2) A permanent rise in productivity growth raises interest rates and output in the short run and
A3) A country with a high population growth rate will have a lower long-run growth rate than
countries with low population growth rates.
A4) Okun’s Law implies that if the unemployment rate is above the natural rate, the growth rate of
real GDP is below the medium-run growth rate. Part B (30%) Answer each of the following 2 questions.
B1) Explain how a decrease in the growth rate of the money supply affects GDP growth,
unemployment and inflation in the short run and in the medium run.
B2) Use equations and graphs to explain how GDP growth, unemployment and inflation adjust
from the short run to the medium run when the Fed permanently reduces the growth rate of the
Part C (25%) Answer each part of the following question. You should use both words and graphs
in your answer; equations can be helpful.
C) The productivity growth rate for the US rose in the 1990s.
Suppose the rise in the productivity growth rate was not expected in the short run. Explain
how output growth, inflation and unemployment respond to the rise in productivity growth in the
short run. How does the economy adjust to the medium run if expected growth continues to lag
behind actual growth? How does the medium run change if expected productivity growth catches up
to actual productivity growth? ...
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