Economics 2020, Accelerated, Fall, 2002



Economics 2020, Accelerated, Fall, 2002

Dr. Alston, Second Midterm, Chapters 23-26

AVAILABLE AS PRACTICE EXAM FOR COLORADO COLLEGE STUDENTS, SUMMER, 2004

1a. (15 points) Use the following graphing panels to illustrate the derivation of the LRAS curve.

1a. In panel (a) show the labor market (assume the initial supply of labor (S1) is perfectly inelastic with respect to the real wage. In panel (b) show a typical economy-wide production function. In panel (c) show the LRAS curve which is derived from panel(s) (a) and (b).

1b. Next show the impact of an increase in the supply of labor (i.e., from S1 to S2) in panel (a) and use this information to show the relevant changes that take place in panels (b) and (c).

Label all axes and curves accurately and explain in words under each diagram what the exhibit shows.

1b. Explain and illustrate the impact of a technological change that increases the economy's output at each level of labor input in the long run, using properly labeled diagrams similar to those in Problem 1a.

2. (5 pts) Per capita real GDP in France grew at an annual rate of 1.9 percent in 1996-1997, while per capita real GDP in the Republic of Korea grew at an annual rate of 3.8 percent.

2a. Compute the doubling times. Show your work.

2b. Per capita real GDP was $21,860 in France in 1997, $13,500 in Korea. Assuming the same growth rates continue, what will the respective levels of per capita real GDP be in these countries in 2035? Show your work.

3. (10 pts) (a) Explain in words the equation of exchange and the meaning of each of its components. (b) Explain its relationship (and the meaning of) the quantity theory of money. (c) Explain the relationship between the equation of exchange and the demand for money. (d) Finally, explain why the quantity theory of money is less useful in analyzing the short run than the long run.

4. We know that in March, 2001 the U.S. economy entered a recessionary gap and that the Fed responded with an expansionary monetary policy (which included a series of actions that continued right up until last week (Wednesday, November 6, 2002). (Assume for purposes of this analysis that all of the Fed's actions over the past year are combined into one (1) policy action.) Present the results of the Fed's action in a 5-panel graph. In panel (a) show the initial situation in the labor market. In panel (b) show how the Fed's policy affects the money market and interest rates. In panel (c) show how the Fed's policy affects the bond market and bond prices. In panel (d) show how the market for U.S. dollars and the exchange rate will be affected. In panel (e) first show the initial situation, using the model of aggregate demand and aggregate supply. Second, in panel (e) incorporate the developments into your analysis of aggregate demand and aggregate supply, and show how the Fed's policy will affect real GDP and the price level in the short run.

LABEL ALL CURVES AND AXES CORRECTLY AND USE SUBSCRIPT 1 TO SHOW INITIAL POSITION OF EACH CURVE AND SUBSCRIPT 2 TO SHOW THE "NEW" CURVE (AS APPROPRIATE) IN EACH GRAPH.

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