Econ 1120 – INTRO MACRO – Spring-2012 –March 1, 2012



Econ 1120 – INTRO MACRO – Spring-2012 –March 1, 2012REGULAR-UP PRELIM #1 (Thursday)PRINT YOUR NAME: ____________________________________ Your C.U. Netid: _____________YOUR C.U. STUDENT NUMBER: ____________________________Check YOUR TA’s NAME: _____________TA = Xinli Wang (Monday sections) _____________TA = Wei Quan (Tuesday sections)_____________TA = Lingwen Zheng (Wednesday sections)_____________TA = Minwook Kang (Wednesday sections)_____________TA = Liyuan Cui (Thursday sections)INSTRUCTIONS:There are two sections in this examPart I: 15 multiple choice questions @ 3 points eachPart II: 3 short answer question (22 points) + 2 Newspaper Article questions (33 points)ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes.Prelim1 score weights 30% of final grade. Please number each exam book from 1 to 6 and write your ID, name and section TA on the front page of each book.Please write down your answers in different exam books with following order.Multiple choice questions in exam book1.Short Essay 1 in exam book2Short Essay 2 in exam book3Short Essay 3 in exam book4Long Essay 1 in exam book5Long Essay 2 in exam book6AGAIN, please….PRINT YOUR NAME: ____________________________________ Your C.U. Netid: _____________YOUR C.U. STUDENT NUMBER: _________________________________________TA = Xinli Wang (Monday sections) _____________TA = Wei Quan (Tuesday sections)_____________TA = Lingwen Zheng (Wednesday sections)_____________TA = Minwook Kang (Wednesday sections)_____________TA = Liyuan Cui (Thursday sections)GRADING----------------------------------------------------------------------------------------------------------________/45 (mc)______/8(short essay 1) ______/8(short essay 2) ______/6(short essay 3) ________/20(long essay 2)________/13(long essay 2) TOTAL: ___________/100 --------------------------------------------------------------------------------------------------------------------------Part I: Multiple Choice. When government sets floor price higher than the market equilibrium price, the policy is ______, and consumer surplus is _____effective, maximizedeffective; not maximizednot effective; not maximizednot effective; maximizednone of the aboveIn a closed economy with government, which of the following condition needs to be satisfied when the economy is at equilibrium?Y=AE = C+I+G-TS+T=I+GS+G = T+I AE = C+I+G = Yd = Y-TNone of aboveWhen the Federal Reserve wants to decrease the money supply in the economy, it can apply which of the following policies?decreasing the required reserve ratioincreasing the required reserve ratiodecreasing the discount rateincreasing the discount rate through an open market operation, by purchasing bonds from the public through open market operation, by selling bonds to the public I or IV or V II or III or VI I or III or VII or IV or VI None of the above When aggregate output(income) is to the right of the equilibrium level of GDPY>(Planned) AE and there will be an unplanned rise in inventoriesY<(Planned) AE and there will be an unplanned fall in inventories Y>(Planned) AE and there will be an unplanned fall in inventories Y<(Planned) AE and there will be an unplanned rise in inventories A used car company, The Car-Max, purchased a used car for $10,000 in January, 2012 and sold it to Bob for $12,000 in March, 2012. How much of value is added in 2012 GDP through the sale of the car to Bob?$0$2,000$10,000$12,000An economy experiences inflation and a decrease in real GDP at the same time. What is happening to nominal GDP?Stay the same. Goes upGoes downCould go up or downSuppose pizza and beer are complements. What can we conclude?An increase in the price of pizza will cause increase in the demand for beer.An increase in the price of pizza will cause decrease in the demand for beer.An increase in the price of pizza will cause increase in the supply for beer.An increase in the price of pizza will cause increase in the supply for beer.For companies which have stocks traded at NYSE, New York Stock Exchange, what types of firms are they shares of?proprietorshippartnershipcorporationparastatalAny of the aboveNone of the above The value of output produced by Nike’s company in Indonesia is part of ____. The profits of the company which are repatriated to the US on the other hand are part of US ____ but not US ____Indonesia’s GDP; GNP; GDPIndonesia’s GDP; GDP; GNPUS GDP; GNP; GDPUS GNP; GNP; GDPWho are included in the number of unemployed people in the US? the inmates in the jail of San Franciscomy neighbor, who was fired a few days ago and is trying to find a new job the 19 year old son of a farmer who helps his father on a farm but does not receive a wageA full time student at CornellNone of aboveFor an economy to produce an output combination beyond its current PPF, the economy must discover a new resource.produce more of one good and less of another.waste less resources.reduce its inputs.improve production technologyI or V II or IIII or IIII or IVNone of the above The equilibrium price of apple will certainly increase if?the supply of apple decreases and the demand for apple decreases the supply of apple increases and the demand for apple decreasesthe supply of apple decreases and the demand for apple increasesthe supply of apple increases and the demand for apple increasesSuppose the consumption function were defined as: C = 500 + 0.75(Y-T). What is the tax increasing multiplier?43-3-4None of aboveWhen your aunt attended Cornell in 1985, she paid $500 per month for rent. Coincidentally, you now live in the same apartment in which she lived, and pay $1100 for rent. Suppose that the CPI in 1985 was 110, and in 2012 is 220:It cannot be determined from the information givenIn real terms, you're paying less than your auntIn real terms, you're paying the same amountIn real terms, you're paying more than your aunt 15. Suppose the marginal propensity to save is 0.1. What is the balanced budget multiplier?0.91019None of above.Part II: Short Essays (22 points)1. Unemployment in Michigan (8 points)Michigan's incredible shrinking workforceBy Tami Luhby @CNNMoney February 24, 2012: 4:00 PM ETNEW YORK (CNNMoney) -- As the presidential race moves to Michigan for next week's primary, a lot of focus is on the state's economy -- one of the hardest-hit by the recession.But things are changing in the Great Lakes State. After leading the nation in unemployment for four years, Michigan has finally dropped out of the Top 10. State unemployment slid to 9.3% in December, only a touch higher than the national rate, and a sharp decline from the 14.1% rate that Michigan hit in the fall of 2009.And last year was the first time the state added any jobs since the turn of the 21st Century.Sounds great, huh? Well, hold the applause.The main reason Michigan's unemployment rate is falling is because its labor force is shrinking fast, economists said. The state has lost 4.6% of its workforce since the recovery began in mid-2009, according to Donald Grimes, senior research specialist at the University of Michigan.2011 was a rocking year for American automakers, the lifeblood of Michigan's economy. It was the first time since 2004 that all three major U.S. automakers were profitable at the same time. And it came only two years after two of them declared bankruptcy and had to be bailed out by the federal government. How to save U.S. manufacturing jobs"After a horrendous decade, Michigan is walking in the right direction," said Charles Ballard, economics professor at Michigan State University.Since the recession ended in mid-2009, some 94,200 jobs have been created. And the number of unemployed has fallen by 239,200. This has helped to bring the unemployment rate down to its lowest level since the fall of 2008.One reason Michigan's unemployment rate is falling is because people are leaving the workforce in droves. Nearly 224,000 residents have dropped out since the recovery began, either because they have left the state, retired, returned to school or are too discouraged to look.While the ravaged state has definitely been losing residents, that's not the whole story. The population lost only 94,000 people over the past two years.Another explanation could be the fact that Michigan has more Baby Boomers than other states. When older workers lose their jobs, it's harder for them to find new ones. So these folks might have left the workforce in favor of collecting disability or starting their retirement earlier than planned, Grimes said.Also, Michigan entered the recession earlier than other states, so more jobless have likely exhausted their unemployment benefits. Since the unemployed have to be actively looking for work to collect benefits, it's not uncommon for discouraged people to stop searching when the checks stop coming. "You want the unemployment rate to fall because people are getting jobs," he said.And while the addition of 94,200 jobs is certainly a plus, it only puts a tiny dent in the overall job loss since 2000, which exceeds 850,000 positions, Grimes said."We're picking up some of those jobs, but we still have a long way to go," he said.?First Published: February 24, 2012: 5:36 AM ETThe article cites several reasons for the drop in unemployment in the state of Michigan. Answer the following questions about how we might categorize these different kinds of unemployment (2 points each)The drop in unemployment since the end of the recession in 2009 is called what?The drop in unemployment due to the shrinkage of the labor force as workers give up or leave the state might well reflect another kind of unemployment - What should we call that?Can we expect the unemployment rate to reach zero? Why or why not?Name one policy that might improve Michigan’s performance in one of these types of unemployment and explain how it could do so.2. Demand and Supply (8 points)Following paragraph is cited from the article, Linsanity Doubling Ticket Price, from the Forbes on Feb. 20. Please apply what you learned in the course to analyze what happened in basketball ticket market.The latest Linsanity numbers are in – those tracking ticket prices on the secondary market at?Madison?Square Garden and other arenas around the NBA.According to , which aggregates online ticket prices from various sources, the average price Knicks fans are paying online for a game at the Garden has shot to $313.54, up from $229.72 on February 3, the day before Lin’s improbable run began. The Knicks’ President’s Day matinee with the New Jersey Nets is going for $601.89, on average, 92% above the season average so far (though that season average is obviously growing as the season moves ahead with Lin as the headline act). The minimum price to get into the building for the Nets’ game: $149.The following graph is the demand curve of tickets for 2012 season at Madison Square Garden before Linsanity. Please draw the supply curve for the tickets of this season. What is elasticity for supply curve? (4 points)DemandQuantity of tickets of Madison Square Gardenfor 2012 seasonPrice229.72Please use the demand and supply diagram to explain the increase of average ticket price from $229.72 to $313.54. If government sets a pricing ceiling at 229.72, what you expect to happen on the market? (4 points)3. Fiscal Policy (6 points)The following paragraphs are selected from President Mr. Barack Obama’s “Rose Garden Speech on Economic Growth and Debt Reduction” (delivered 19 September 2011). Please read them carefully, and use what we have learned in Macroeconomics to answer the following questions.Good morning, everybody.?Please have a seat.A week ago today, I sent Congress the American Jobs Act.? It’s a plan that will lead to new jobs for teachers, for construction workers, for veterans, and for the unemployed.? It will cut taxes for every small business owner and virtually every working man and woman in America.? And the proposals in this jobs bill are the kinds that have been supported by Democrats and Republicans in the past.? So there shouldn’t be any reason for Congress to drag its feet.? They should pass it right away.? I'm ready to sign a bill.? I've got the pens all ready.………………………………..In the speech, Mr. Obama mentioned one major tool of fiscal policy to lead to new jobs and promote economic growth. What is it? (3 points)According Macroeconomic theory, there is a multiplier effect. Imagine an economy with government, what is the tax multiplier? Suppose that MPC=0.8, how do you calculate the value of the tax multiplier (please also include the sign, not just the absolute value)? (3 points)Part III: Long Essay (33 points)1. Banking System and Money Creation (20 points)Please read the following newspaper article and answer the questions below. “China’s Central Bank Hits Brake on Hot Economy” by Keith Bradsher, published on February 12th 2010 on New York Times. (Retrieved from )“HONG KONG — As most countries agonize over how to keep their barely reviving economies growing, China is already looking to slam on the brakes.China’s central bank moved late Friday to reduce lending to companies and individuals by requiring large commercial banks to increase the amount of cash they park with the central bank. The move, which came earlier than most economists had expected, was meant to slow China’s breakneck economy and inflation.It was the second time in a month that the central bank had directed the country’s banks to increase reserves. In spite of the earlier edict, which took effect on Jan. 18, banks actually lent more money in January than in the previous three months combined, illustrating just how hard it is for Beijing to modulate its rapidly expanding economy.……The central bank pushed up the reserve ratio by half a percentage point, to 16.5 percent, for large banks, and 14.5 percent for small banks, effective Feb. 25. Small financial institutions that mainly lend to farmers, like rural credit cooperatives, are temporarily exempted from the increase to make sure they can provide loans for spring planting.”a) Please describe what will happen when the reserve ratio is increased. What is going to occur in China’s money market? Depict in a graph. (5 points)b) Suppose there is one big bank called Bank of China and one small bank called Bank of Beijing, and suppose there are three individuals Mr. A, Mr. B. and Mr. C. Mr. A has a checking account with Bank of China and Mr. B has a checking account with Bank of Beijing. Mr. C prefers putting all his money under his mattress. Now further suppose both of these two bank start with nothing on their balance sheets. Now suppose the central bank buys a bond worth of ￥1000, from Mr. A, and Mr. A deposits the ￥1000 RMB in cash that he receives in his checking account in the Bank of China. After that Bank of China loans to Mr. B who also puts the money into his checking account at the Bank of Beijing, and then Bank of Beijing loans the money out to Mr. C. Please use 20% required reserve ratio, instead of 16.5% and 14.5% specified in the article, with zero excess reserves for both banks to fill out the final T-Accounts for the two banks. (10 points) Bank of China Assets_________________________LiabilityTotal Reserves____ Demand deposits_____Loans_________Total__________ Total ______________ Bank of Beijing Assets_________________________LiabilityTotal Reserves____ Demand deposits_____Loans_________Total__________ Total ______________c) Please calculate the money creation due to the initial deposit of Mr. A using the balance sheets. (Assume that both banks hold zero excess reserves.) (5 points)2. Government Deficit (13 points)The following paragraphs are selected from President Mr. Barack Obama’s “Address to the Nation on the Dangers of Default” (delivered 25 July 2011). Please read them carefully, and use what we have learned to answer the following questions.The first approach says, let’s live within our means by making serious, historic cuts in government spending.? Let’s cut domestic spending to the lowest level it’s been since Dwight Eisenhower was President.? Let’s cut defense spending at the Pentagon by hundreds of billions of dollars.? Let’s cut out waste and fraud in health care programs like Medicare -- and at the same time, let’s make modest adjustments so that Medicare is still there for future generations.? Finally, let’s ask the wealthiest Americans and biggest corporations to give up some of their breaks in the tax code and special deductions.This balanced approach asks everyone to give a little without requiring anyone to sacrifice too much.? It would reduce the deficit by around $4 trillion and put us on a path to pay down our debt.? And the cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right now.What is a budget deficit? (3 points)According to Mr. Obama, what can government do to reduce the deficit? (3 points)In the speech, Mr. Obama emphasized that “the cuts wouldn’t happen so abruptly that they’d be a drag on our economy”. This implies that the cuts may be a drag to the economy if they are not conducted properly. Consider a simple model of the economy:C=10+0.8*(Y-T)AE≡C+I+GSuppose that the Congress passes a law to increase the government spending on education by 100 billion dollars and to increase taxes by 100 billion dollars at the same time by eliminating inappropriate tax loopholes. What is the effect on the equilibrium output? (7 points)Answer:Short Essay 1:(a)The drop in unemployment is due to the end of recession; therefore this unemployment can be categorized as cyclical unemployment, which happens owing to business cycle.(b)The drop in unemployment is due to labor market dynamic, for example more baby boomers in the city, so that it can be considered as structure unemployment.(c )It is impossible that unemployment rate can reach 0, because labor market is not highly flexible. Labor training and moving have costs and time such that structure unemployment always exists. It is very difficult to fit labor market instantly into economy structure, as economy structure changes over time.(d)For cyclical unemployment, government can use fiscal policy, for example increasing government spending, to create job and reduce cyclical unemployment.Short Essay 2:DemandQuantity of tickets of Madison Square Gardenfor 2012 seasonPrice229.72SupplyThe supply curve is perfectly inelastic. DemandQuantity of tickets of Madison Square Gardenfor 2012 seasonPrice229.72Supply313.54Q*First, the supply is fixed because seats are fixed. (say Q*)Demand curve shifts to right owing to Linsanity, and eq. averaged price increases to 313.54. If government set a price ceiling at 229.72, we will expect there is a excessive demand and shortage happens. In the reality, it is commonly to see following things.First people wait in the long line, but there is significant portion of people who can’t get tickets. We probably will see black market where people willing to pay higher price make transaction with people having access to the tickets.Short Essay 3:1. Reducing taxes.2. The multiplier is defined as the ratio of the change in the equilibrium level of output to an exogenous change in the taxes.3.The tax multiplier ≡ - MPC/(1-MPC)= - 4.Long Essay 1:(a)When China’s central bank increases the required reserve ratio, money supply in China’s money market will shift to the left (or money supply decreases) and as a result, equilibrium interest rate in China’s money market will go up. (This is a contractionary monetary policy meant to decrease GDP. )rMs1Ms0MdMr1r0(b) Bank of China Assets_________________________LiabilityTotal Reserves1000 Demand deposits__1000___Loans_____0____Total__1000_____ Total _____1000______Assets_________________________LiabilityTotal Reserves 200_ Demand deposits__1000___Loans____800_____Total___1000_____ Total ________1000______Because Total reserve = required reserve (because we assume excess reserve is always zero) and for large banks the rrr = 20% thus total reserve for Bank of China is 1000*20% = 200(We give full credit to student as long as students answer with the third T-account table)Bank of China’s loan of 800 dollars goes to Mr. B as assumed, and he will deposit the amount in his own checking account with Bank of Beijing Bank of Beijing Assets_________________________LiabilityTotal Reserves 800 Demand deposits__800___Loans_____0____Total__800_____ Total _____800______Assets_________________________LiabilityTotal Reserves 160_ Demand deposits__800___Loans__640____Total___800_____ Total ________800______Then again, because Total reserve = required reserve (because we assume excess reserve is always zero) and for small banks the rrr = 20% thus total reserve for Bank of Beijing is 800*20% =160Now the money creation because of the very initial demand deposit in this hypothetical situation is (c )1000+800+640 = 2440Long essay 2a.What is budget deficit? (Hints: consider government spending and taxes.)The budget deficit is equal to the difference between what the government spends and what it collects in taxes, i.e., G-T. When G exceeds T, the government must borrow from the public to finance its deficit.b. According to Mr. Obama, what can government do to reduce the deficit?Reduce the government spending and increase taxes.c. Suppose that the goods market is in equilibrium. Suppose that the Congress passes a law to cut the government spending on military equipment by 100 billion dollars and to increase taxes by 100 billion dollars at the same time by eliminating inappropriate tax loopholes. What is the effect on the equilibrium output?In this case, the multiplier ≡1.Changes in equilibrium output=1*(100)=100. Therefore, the equilibrium output would increase by 100 billion dollars. ................
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