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202 Quiz 2 discussion F 10

# 202 Quiz 2 discussion F 10 - ECO 202 Lyons Quiz Two...

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ECO 202, Lyons Quiz Two discussion sheet, Nov 18th page 1 of 3 Part I (Multiple choice; 60 points): Your correct responses are indicated by a check mark; where yours are incorrect the proper choice is indicated by a circle in green around the letter for that answer. Several MC questions are discussed below. In Okunland, which operates according to Okun’s Law, real GDP is \$1,880 billion, potential GDP is \$2,000 billion, and the natural unemployment rate is 5.0%. What is the actual rate of unemployment in Okunland? •) 8% GDP is 120/2000 (6%) less than potential GDP, a recessionary gap, which means that actual unemployment is greater than normal unemployment. By Okun’s law/rule, (in %) cyclical unemployment is half the output gap (in %), or 3%. Summing the natural rate of 5% and the cyclical rate of 3% yields actual unemployment rate = 8.0 %. The amount of money in the United States is determined by: •) the combined behavior of commercial banks and the public, and actions of the Federal Reserve. Total money in the economy is determined by the Fed (availability of currency and reserves to the public), by the public (how much money people hold as currency rather than deposits), and by the banks (how much do they wish to hold as excess reserves). If planned aggregate expenditure (PAE) in an economy is 2,000 + 0.8Y and potential output (Y*) is 11,000, then the economy can be moved to its potential by an increase in planned investment of •) 200 First, you must find actual Y by solving PAE = Y. given the PAE above, Y is 10,000. [The income-­૒ expenditure multiplier is (1/(1-­૒0.8))=5; Y= 5•2,000.] The output gap is then -­૒1,000. Additional

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