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Unformatted text preview: Economics 420  Fall 2010 Mike Aguilar
Intermediate Theory: Money, Income & Employment UNC at Chapel Hill Student Name: PID: ' . Recitation Number: _I. " l__
TA’s Name: A 4 5 " r
Midterm Exam: 10/07/10  Multiple Choice questions: — There are 7 multiple choice questions on this exam, each worth 10 points.
~ Place your answers to these questions on your scantron, — Be sure to ﬁll in your name, PID and section number on the scantron. You can ﬁll in the
section number of your recitation in the space labeled "Sequence Number” as 4206x173. For
example, if you are in recitation 601, you would bubble in 420601. A list of recitation section
numbers is listed below. I will deduct 2 points if this information is not bubbled in properly. — Appeals: If you believe there is no correct answer, or multiple correct answers, for a particular
question, explain your reasoning on the back of this page. I will not accept appeals unless this
argument is written on the back of this page during the exam time. 0 Essay question: — There is one essay question on this exam worth 30 points. — There may be more than one correct solution, so please show all of your work and state your
assumptions carefully. A correct answer without any justiﬁcation will not reciei/e credit. 0 The honor code is in eﬂect. Recitation # Day Time TA 601 Mon 02:00pm Attar
602 Mon 03:00pm Perez
603 Wed 10:00am Perez
604 Wed 1 1:00am Perez
605 Fri 12:00pm Gonzalez
606 Fri 01:00pm Gonzalez
607 Mon 12:00pm Attar
608 Mon 1:00pm Attar 611 Hi 12:00pm Gonzalez 1. Consider a simple economy with one type of good (pens). In Q1‘10, 400 pens were produced, 350
of which were sold directly to the public at $2 each. You may assume the remaining items were
put into inventory. The only input to the production process was labor, which cost a total of $X.
In Q2‘10, economic output totaled $778273, and grew at a q/q annualized rate equivalent to the
s.a.a.r achieved by the U.S. economy in Q2‘10 (you should have memorized this number from the
MacroJournal). Find total labor costs (X) in this economy during Q1‘10. Hint: To compute the
annualized rate of ngbetween quarterly variables, use the following: [(QZ/Ql)4 — 1] X 100. A. X = 1.5
B. X = 75 _.—.
.. f... .\  li. .I \. p ,_ r;
C. X = 775 :1 (I: E) a" . '\‘ 3‘
D. X = 600 ‘ ‘ _." __.‘ ,4 x" "{va , L “a
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Salas 3Tb Q Q : 7 7S m; ‘0 C400 Page 3 2. Consider a Classical economy whose production function is given by Y = a(N — b)2 + c, where
a = —1,b = 45, c = 2025. Suppose the equilibrium amount of labor currently is 50. As the amount
of labor rises beyond 50, which of the following is true? A. The amount of production will rise, the AS will shift rightward, and prices will fall.
B. The amount of production will fall, the AS will shift rightward, and prices will fall.
C. The amount of production will fall, the AS will shift leftward, and prices will rise. D. The amount of production will rise, the AS will shift leftward, and prices will rise. Page 4 3. Consider 3. Classical economy, characterized by the following:
0 Public Savings 2 0
o C=a+b(Y—T)+cr
o S=So+31(Y—T)+82T Suppose there is a positive shock to the investment function (i.e. more investment for a given interest
rate). You are a banker, Who gets paid by the vglgme of loanable funds transacted. Which would you prefer?
A. Household savings to be highly sensitive to changes in the interest rate. B. Household consumption to be entirely insensitive to changes in the interest rate.
C. Aggregate income (Y) to be small, regardless of the interest rate. D. Household autonomous savings (30) to be small, regardless of the interest rate. Page 5 44 Consider 21 Classical economy described as follows: I = i0 — 1'11“, C = a + b0(Y — T) — blr, with
G and T ﬁxed, and where all parameters are positive constants. Suppose some supply side factors
push the AS rightward. The savings curve will shift to the __, and the equilibrium interest rate will
change by __. . b —1
ﬂiee, 3571A}!  _ b —1
B. r1ght,l.—l°3_TlAY ' . 1
’3’ left, MbIAY  , l—b
D. right, maxAY .1 5. Imagine a Keynesian economy in recession. The consumption function is given as C 2 (1+ b(Y — T).
The marginal propensity to consume is equal to 0.7 in this economy, and the government plans
tmprease its spendjuglnggder to raise output, as measured by the Keynesianﬁoss, by $1,000.
However, a lastminute consumer survey estimates that autonomous private consumption (i.e. a)
is going to decrease by $150 due to distorted expectations. In light of this change in consumer
attitudes, how much of a total change in government expenditures should be implemented to meet
the targeted increase of $1, 000? Hint: The government spending must meet two objectives: overcome
the consumer shock and increase output. Analyze these separately, then combine. A. $300.
B. $150.
C. $450 D. $1,000. , r‘t Yb) ‘1 ‘ K 4 i "I
,a I f! l, P'
”‘I _ ~
’ ' ‘0 '
f x; I ,r I
IJJJ {9.2; lﬂl \ f'ﬂ 5') [K Page 7 6. Consider an economy that is well described by a Keynesian model with the following: consumption
is given by C = a + b(Y — T), I = i0 —i1'r, L(7‘,Y) = co + c1Y — 621‘. Which of the following would
shift the AD curve leftward? A. o rising \/
. M rising 9" . (QC
,.,e.’ c1 falling 3CD i D. 62 rising M? W a’bk'liLD ~—*'
’ \
\ _l‘tJ
’7‘“ I; 7. Consider a Keynesian economy with the following speciﬁcation: AD Y = (20 + OIP
SRAS Y=§7+9(P—P5)+v
Price Expectations Pf = woP;_1 + w1P¢_2 where all parameters for the SRAS are as presented in class, the weights in the Price Expectations formula are positive, and a0 and 011 are constants whose sign you should be able to determine from
the standard shape of an AD curve. How does a increase in last period’s price level impact the equilibrium price level today?
A. rise by woAP¢_1.
B. rise by gig/3PM.
c. fall by by %:“QAPt_1.
D. fall by EDE‘APFI. Page 9 26.5 8. Essay: The US. economy has been experiencing a surge in invesgrn‘ewmya Let us analyze the
potential Short Run impact of the shock within the Classical and Keynesian models. Suppose the
economy, in both models, is characterized by the standard speciﬁcations in all markets, along with
the Consumption function C = a + b0(Y — T) thy", Where bl = 0. (Please state your assumptions carefull y n$l of” (a For the Classical model, )
l%,{ 0 Discuss and illustrate graphically the impact of this s
tion function, loanable funds, and AS/AD space. 0 Detail what happens to public, private and national savings. (b) For the Keynesian model, {3 0 Discuss and illustrate graphically the impact oft 's shock upon the money market, Key
nesian Cross, IS/LM, and AS/AD space. ck upon the labor market, produc . : 3— atleAFﬁ—T ; Gm.— (bﬁhT r 51%
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 Fall '08
 Hill
 Macroeconomics, Keynesian economics, classical economy

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