Econ 201 Second exams. Prof. Twomey, UMD
[This file contains no multiple choice questions from the exams more recent than Summer, 2008]Econ 201 Exam #2a Winter, 2014 Prof. Twomey Student Name: ______________Please answer on these sheets. If any question is unclear, please ask for an explanation. For the multiple choice questions, circle the letter corresponding to your answer. The multiple choice questions are worth three points apiece; weights vary on the questions in the second part. Time: the entire class. Good luck.Part II (a) Answer on these sheets, using the back of the last sheet if you need space..Identify the following with a sentence or at most two: (16 points)Paradox of thriftPPIC) MalthusNatural rate of unemployment(10 points) An economic issue with an international dimension is summarized by the term economic convergence. Describe briefly what is hypothesized.Why might this be expected to occur?What is the textbook’s judgment about whether or not this hypothesis is supported by the data.3a). Fill in the blanks in the following table (13 points)YearNominal GDPReal GDPPrice Index13,0004,00025,000 9536,0006,00010048,0007,000510,000130610,000150What is the percentage rate of growth of real GDP between years 2 and 3? _____________What is the rate of inflation between years 5 and 6?_____________________Which year is the base year? ___________3b. Identify two widely accepted weaknesses in the general practice of using (real) GDP as an indicator of a country’s welfare.(10 pints) A major issue in the U.S. is the impact of government deficits. Economists have an analytical tool to discuss this, called the market for loanable funds. Draw a graph of this model, being sure to label each axis. Use that graph for a before-and-after analysis of the impacts on relevant macro variables of an increase of government spending, leading to a deficit, financed by domestic borrowing.The median on this exam was 65; the high was 100.Econ 201 Exam #2b Winter, 2014 Prof. Twomey Student Name: _______Part II B. Answer on these sheets, using the back of the last sheet if you need space.Identify the following with a sentence or at most two: (16 points)Real interest rateLabor force participation rateCOLADiscouraged worker(10 points) The textbook reports the standard economic analysis that there three sources of long term growth for economies. Identify those sources, explaining each very briefly. Which one is thought to be most important, empirically? How might government policy influence each one, if at all? Explain briefly.(10 pints) A major issue in the U.S. is the impact of government deficits, and it is generally known that if the other party were to do well in elections, they would lower spending and perhaps raise taxes, lowering the deficit. Economists have an analytical tool to discuss this, called the market for loanable funds. Draw a graph of this model, being sure to label each axis. Use that graph for a before-and-after analysis of the impacts on relevant macro variables of a decrease of government spending, reducing to a deficit, lowering the government’s domestic borrowing.Fill in the blanks in the following table (13 points)YearNominal GDPReal GDPPrice Index160080029009531,0001,00010041,2001,12051,50013061,600150What is the percentage rate of growth of real GDP between years 2 and 3? _____________What is the rate of inflation between years 5 and 6?_____________________Which year is the base year? ___________b. One of the standard types of unemployment is described in our text as resulting from more people looking for jobs than are available, at the current wage rate. Which type is this?This leads to a discussion of why wages don’t fall to reduce or eliminate that employment. There are several different reasons given for why this does not occur. Identify and explain briefly two of them.The median on this exam was 63; the high was 91.Econ 201 Exam #2 Fall, 2013 Professor Twomey Student Name: ____________The exam consists of two parts; multiple choice questions, valued at three points apiece, and the other questions, whose values are indicated separately. For the multiple choice questions, please circle the letter corresponding to your answer. Please ask for clarification of any unclear question. Good luck!Part II. Answer on these sheets, ask the professor for more sheets if you need more space.(16 points) Identify the following with a sentence or at most two:a) Frictional unemploymentb) Total factor productivityc) Fisher effectd) COLA(11 points) a. The textbook has a lengthy discussion of the factors that contribute to economic growth. Identify and explain real briefly three different factors.b. Suppose a new government wanted to stimulate economic growth in their country. Identify and explain briefly three different actions that government could take, which would have that effect.Recently, in the United States we have witnessed sharp debates about the federal government’s deficit. Use the loanable funds theory to predict what would happen to interest rates if the government were to reduce spending in order to balance the budget, and illustrate your argument with a graph. (10 points)4 a. Fill in the blanks in the following table (12 points)YearNominal GDPReal GDPPrice Index16,000 8,0002 9,000 95310,00010,000100412,00011,200515,000130616,000150What is the percentage rate of growth of real GDP between years 2 and 3? _____________What is the rate of inflation between periods 5 and 6?_____________________Which year is the base year? ___________b. Identify two widely accepted weaknesses in the general practice of using (real) GDP as an indicator of a country’s welfare.The median on this exam was ; the high was .Econ 201 Fall, 2012 Exam #2 Professor Twomey Part II. Answer on these sheets, using the back side of the last sheet if you need more space.1. (16 points) Identify the following with a sentence or at most two:Crowding outShoe leather costsBusiness cycle troughHousing bubble2. (13 points) As discussed in the textbook, different groups (socio-economic-demographic) are negatively affected by inflation, and by unemployment.a. Identify three specific groups that are hurt by unemployment.b. Who tends to be hurt when there is a sudden surge in inflation?c. Which of the types of unemployment is said to occur because of rigid nominal wages?Identify three causes that have been suggested as leading to rigidity of nominal wages.3. (10 points) Suppose that the upcoming presidential contest were to result in the election of a candidate whose major economic philosophy could be described as “Whoopee!” meaning, “Let’s Party,” or in more technical terms, let’s all consume everything we can - people should reduce their savings.Draw a graph of the loanable funds market, being sure to label each axis.Explain and show on that graph how a decrease in savings would affect the major economic variables.In particular, does business investment increase or decrease?4 a. Fill in the blanks in the following table (10 points)YearNominal GDPReal GDPPrice Index18,00010,000212,000 95314,00014,000100417,00016,200518,000130620,000150What is the percentage rate of growth of real GDP between years 2 and 3? _____________What is the rate of inflation between periods 5 and 6?_____________________Which year is the base year? ___________The median on this exam was 62; the high was 90.Econ 201 Exam #2 Summer, 2012 Professor Twomey Student Name: _______________________Part II. Answer on the back of the last sheet if you need more space.Identify the following with a sentence or at most two: (16 points)Real rate of interestMalthusian pessimismEast Asian MiracleNatural rate of unemployment2 . a. Fill in the blanks in the following table (11 points)YearNominal GDPReal GDPPrice Index14,0004,30024,5009535,0005,00010045,6005,20056,00013066,000150What is the rate of growth of real GDP between periods 2 and 3? _____________What is the rate of inflation between periods 5 and 6?________Which year is the base year? ___________(11 points) a. In addition to seasonal unemployment, economists distinguish three types of unemployment. Identify each, and state what sorts of government policies, if any, might be suggested to reduce them.Economists devote much energy to explaining fluctuations in GDP (more precisely, Real GDP, or better yet, Real GDP per person). Nevertheless, there are several criticisms of the use of GDP as an indicator of welfare. Identify three, and explain each briefly.(11 points) Economists spend significant effort at trying to understand who gets hurt when unemployment rises, and who gets hurt when inflation rises. With regard to unemployment, identify two socio-economic groups that tend to experience above average increases in unemployment, when the national average rises.With regard to inflation, give two examples of economic groups that get hurt when inflation occurs – especially when it is ‘unexpected’ inflation. Identify two of these costs, and explain each one briefly.The median on this exam was 71; the high was 95.Econ 201 Exam #2 Fall, 2011 Professor Twomey Student Name: _______________Part II Answer on the back of the last sheet if you need more space.Identify the following with a sentence or at most two: (16 points)Labor Force Participation RateIndexingMalthusian pessimismEfficiency wage2 a. Fill in the blanks in the following table (10 points)YearNominal GDPReal GDPPrice Index14805202560953580580100465060058001306700170What is the rate of growth of real GDP between periods 2 and 3? _____________What is the rate of inflation between periods 5 and 6?________Which year is the base year? ___________3. (10 points) a. What are the principal economic factors leading to sustained economic growth?b. The textbook speaks of economic convergence. What is meant by that term? c. With regards to the economic factors identified above in part (a), which of them should lead to convergence?What is the textbook’s conclusion about the extent to which convergence is occurring today?4. (13 points)a. In addition to seasonal unemployment, economists tend to speak of three other types of unemployment. Identify and explain real briefly each one.What is meant by the natural rate of unemployment, and how does it relate to the three types of unemployment identified above?Draw a graph of the loanable funds market, being careful to label each axis. For both supply and demand, identify one or more economic variables that affect each curve.In terms of the loanable funds market, how would a cut in personal taxes – leading to a larger deficit – affect the economy? Explain and illustrate your answer in the graph above.The median on this exam was 69; the high was 96. Econ 201 Winter, 2012 Exam #2b Student Name: __________________________ The exam consists of two parts; multiple choice questions, valued at three points apiece, and the other questions, whose value is indicated separately. For the multiple choice questions, please circle the letter corresponding to your answer. Please ask for clarification of any unclear question. Time: the entire class. Good luck.Part ii. Use the back of the last sheet if you need more space.1 Identify the following with a sentence or at most two: (16 points)Convergence hypothesisValue addedShoe leather costEfficiency wage2. (11 points) a. The textbook distinguishes three different types of unemployment – beyond seasonal unemployment. Identify those three, explaining each one briefly. What is meant by the ‘natural rate of unemployment, and how does it relate to the three types you’ve discussed above?Finally, what is meant by discouraged workers, and explain how this classification relates to the three you discussed above.3. (11 points) Draw a graph of the market for loanable funds, being sure to identify the labels on each axis. The loanable funds model is used to illustrate the argument of crowding out. Explain what is meant by ‘crowding out’, and illustrate it on the graph.4. a. Fill in the blanks in the following table (11 points)YearNominal GDPReal GDPPrice Index14,2007,00027,5009538,0008,00010048,5008,170512,000130612,000150What is the rate of growth of real GDP between periods 2 and 3? _____________What is the rate of inflation between periods 5 and 6?________Which year is the base year? ___________The median on this exam was 71; the high was 93.Econ 201 Winter, 2011 Exam #2 Professor Twomey Student Name: _______________Part II. Answer on the back of the last sheet, if you need more space.Identify the following with a sentence or at most two: (16points)Labor Force Participation RateThomas MalthusIndexingFisher Effect2a. (13 points) The economic analysis of the cost of inflation distinguishes between that which is expected, and that which is not – a shock. For the former type (expected inflation), identify and explain briefly three costs of inflation.b. Economists distinguish between different types of unemployment. In addition to seasonal unemployment, identify and describe briefly three types of unemployment.c. What is meant by the natural rate of unemployment? In terms of the above types of unemployment, what are the two main components of the natural rate? 3. (10 points) Fill in the blanks in the Table.YearNominal GDPReal GDPPrice Index14,6009525,0005,00010036,0005,50047,00013058,000170615,000175What is the rate of growth of real GDP between periods 2 and 3? _____________What is the rate of inflation between years 5 and 6?________c. Which year is the base year? ___________Identify and describe briefly two criticisms of the use of GDP as an indicator of a country’s well-being.4. (10 points) What is meant by the term convergence? Why do economists expect convergence to occur?Give a couple of examples where convergence is occurring, and a couple where it is not.There are many explanations for why convergence is not occurring. Identify two, explaining them very briefly.The median on this exam was 59; the high was 84.Econ 201a Exam#2 Fall, 2010 Professor Twomey Student Name: ______________Part II Use the back of the last sheet if you need more room.Identify the following with a sentence or at most two (16 points):Efficiency wageConvergence hypothesisValue added(two of the three) costs of inflationA. (10 points) Draw a graph of the market for loanable funds, being sure to label each axis.b. On two separate graphs, indicate what will be the effects of (i) a decrease in the government deficit due to an increase in taxes, and (ii) an increase in foreign lending to the US, due to favorable changes overseas. (10 points)a. What is meant by the natural rate of unemployment?b. How would the following be expected to change the natural rate of unemployment? Explain each one briefly.The government reduces the time during which an unemployed worker can receive benefitsMore teenagers focus on their studies, and do not look for jobs until after collegeGreater access to the Internet leads both potential employers and potential employees to use the Internet to list and find jobUnion membership declineFill in the blanks in the table (10 points)YearNominal GDPReal GDPPrice Index17,0009528,0008,00010039,0008,500412,00013059,000170620,000175What is the rate of growth of real GDP between periods 2 and 3? _____________What is the rate of inflation between periods 5 and 6?________c. Which year is the base year? ___________Identify and describe briefly two criticisms of the use of GDP as an indicator of a country’s well-being.The median on this exam was 74. The high was 92.Econ 201b Exam #2 Fall, 2010 Professor Twomey StudentPart II Use the back of the last sheet if you need more space.Identify the following with a sentence or at most two (16 points)Natural rate of unemploymentFisher effectGDP deflatorTotal factor productivityFill in the blanks in the table (13 points)YearNominal GDPReal GDPPrice Index13,0009524,0004,00010035,0004,50048,00013058,000170615,000175What is the rate of growth of real GDP between periods 2 and 3? _____________What is the rate of inflation between years 5 and 6?________c. Which year is the base year? ___________Identify and describe briefly two criticisms of the use of GDP as an indicator of a country’s well-being.3a. (10 points) In addition to seasonal unemployment, identify and describe briefly the three types of unemployment.Which type of unemployment is affected by the minimum wage? Explain briefly.Which type might be affected by an improvement in job information? Explain briefly.4a. Draw a graph of the market for loanable funds, being careful to label each axis.b. Suppose the government cuts taxes, without changing any other policy. How might this be expected to affect the market for loanable funds? Explain and illustrate your answer with another graphYour answer to the above question involved a shift of one of the curves in the market for loanable funds.For the other curve, identify TWO separate factors that might make it shift to the RIGHT.The median on this exam was 69. The high was 94.Econ 201? Exam #2? Summer, 2010.? Professor Twomey? Student Name:______________The multiple choice questions are worth three points each. The weight of the questions in the second part is indicated below. Please circle the letter corresponding to your answer on the multiple choice questions. If a question is unclear, please ask for clarification. Class will resume at 1:00 pm.Part II. (Use the back page if you need more space).Identify the following with a sentence or at most two (16 points):Efficient market hyptothesisEast Asian MiracleThomas MalthusEfficiency wage?The deficit of the US federal government is currently at a very high level, when compared to GDP, at least in terms of peacetime. There is much pressure in the political system for a reduction of that deficit. In terms of the analysis based on the model of the market for loanable funds, what would be the impact of a reduction of that deficit (by increasing taxes or decreasing expenditures), on the interest rate and domestic investment. Explain, illustrating your answer with the appropriate graph. (10 points)3 a. Fill in the blanks in the table?? (10 points)YearNominal GDPReal GDPPrice Index17,0009527,5007,50010039,0008,000412,000130510,000170620,000175What is the rate of growth of real GDP between periods 2 and 3? _____________What is the rate of inflation between periods? ?????????? 5 and 6?________iii.? Which year is the base year in this table? ___________b. Two of the major focuses of efforts at measurement in macroeconomics are GDP and unemployment. Unfortunately, neither is perfect. Identify and discuss briefly two valid criticisms of the measurement and/or interpretation of our measures of GDP and unemployment in the US.4 (10 points) a. The accompanying diagram shows mortgage interest rates and inflation during 1990-2005 in the economy of Albernia. When would home mortgages have been especially attractive, and why?b. The accompanying diagram shows the inflation rate in the United Kingdom from 1980 to 2007.What would you predict would have happened to unemployment between 1980 and 1985, and why?An American economist would first start to analyze that experience based on what is known about our country.In the US, which social groups get helped or hurt by the change in unemployment that you described above?[missing a question here, it would seem]The median on this exam was 71; the high was 85.Econ 201 Exam #2a? Winter, 2010Part II. Answer on the spaces provided; the professor has extra sheets if necessary.Identify the following with a sentence or at most two: (16 points)Real interest rate?East Asian miracle?Shoe leather cost of inflationNeo-Mathusian concerns?10 points. Fill in the blanks in the table. (If you didn't bring a calculator, leave the answer in the form of? 6/3)?PeriodNominalRealPriceGDPGDPIndex1400450____________25005001003580____________1044___________6001105780____________1206800750____________b) What is the rate of inflation between period? 4 and period 5? ________c) What is the rate of growth of real income between Period 1 and period 2?________10 points? Draw a graph of the loanable funds market, being sure to label each axis. Explain and illustrate on your graph what happens to equilibrium if the government decides to cut its expenditures.? In this case, what happens to business investments?4,? (13 points) a. What is meant by the Convergence Hypothesis? What reason(s) do its proponents offer to suggest it may be true?b. Identify two weaknesses of the way the U.S. measures unemployment.Econ 201b?? Exam #2?? Winter, 2010???? Professor Twomey???? Student Name: ___________The multiple choice questions are valued at three points apiece. Please circle the letter corresponding to the answer you select. The weights for the questions in the second part are indicated below. If any question is unclear, please ask for clarification. Time: the entire class. Good luck!Part II. Answer on these sheets; the professor has extra paper if you need it.Identify the following with a sentence or at most two: (16 points). Natural Rate of Unemployment?Convergence Hypothesis?Fisher effect?Shoe leather cost of inflation2. 10 points.? Fill in the blanks in the table.? (If you didn't bring a calculator, leave the answer in the form of? 6/3) PeriodNominalRealPriceGDPGDPIndex140,00048,800____________250,00050,000100355,000____________1044___________6,000110570,000____________120685,00080,800____________b) What is the rate of inflation between period? 4 and period 5? ___________c) What is the rate of growth of real GDP between Period 1 and period 2?________(10 points)? Draw a graph of the loanable funds market, being sure to label each axis. Explain and show on that graph what happens to equilibrium when people decide to lower their savings. Finally, what happens to business investments in that new situation? (13 points). A. Identify two things the government can do to increase growth, and two (different) things the government can do that discourage growth.B. According to the analysis in our textbook, what is the relationship between structural unemployment and the minimum wage? Econ 201???? Exam #2????? Summer, 2009???? Prof. Twomey?????? Student Name: _________The exam consists of two parts: multiple choice and short answers. The multiple choice questions are worth three points apiece, and the weights of the other questions are indicated below. Please answer on these sheets, using the back of the last page if necessary. I have extra sheets for scratch paper, if you need them. For the multiple choice questions, circle the letter that corresponds to your answer. Please ask for clarification of any unclear question. Time: one hour. Good luck.Part IIIdentify the following with a sentence or at most two: (16 points)COLAEfficiency WageValue Addedd. Labor force participation rate2.? (10 points) Beyond seasonal unemployment, identify and explain briefly the three major types of? unemployment.What is the natural rate of unemployment, and how does it relate to the types you have identified above??(10 points) Fill in the blanks in the table.PeriodNominalGDPRealGDPGDPDeflator1400952500500100380065049001505800170Which period is the base period? ________b. What is the rate of inflation between period 4 and period 5? ___________3. (13 points)? The textbook discusses three major factors determining the long-term growth in productivity.? Identify and discuss them briefly. Many people might think that having natural resources is important for economic growth, but our book very clearly downplays this factor. Why?Identify what is meant by infrastructure and property rights, and discuss briefly their roles in promoting economic growth. The high on this exam was 94. The median on this exam was 72. Econ 201a ?????????????Exam #2??????????? Winter, 2008???????? Professor TwomeyPlease PRINT your name on the BACK of the last sheet. Answer on these sheets, using the backsides if necessary. The questions are equally weighted.? Be sure to label each axis on your graphs! If any question is unclear, please ask for a clarification.Time: the entire class.Identifications: Identify the following with a sentence or at most two:Legal tenderStandardized budgetExcess ReservesMenu costsFederal Funds Rate 2a. (20 points) a. Suppose that the required reserve ratio is 5%, and the banking system currently has $35 billion in excess reserves. What is the maximum amount of new deposits that might be created, if all those reserves were to be lent out?b. Identify and explain briefly the three defining functions of money.c. What is meant by near monies? How are they important? Give one example of a near money.3.. The explanation for the difference between the short run and long run AS curve is downward inflexibility of wages and prices.? Identify and explain two reasons that are given for this inflexibility.Although the textbook’s analysis suggests that the main variable affecting investment is interest rates, there are several others that affect investment. Identify and explain briefly two of them.In discussing the national debt, the textbook identifies several “false concerns.” One of them is that (in the US) the national debt can cause bankruptcy. Explain the book’s position that this argument is false.One of the valid concerns about deficits is ‘crowding out.’ What is meant by this term, and describe the scenario in which a deficit causes crowding out.b. An important part of the new perspective called supply side economics, is the ‘Laffer Curve.’ Explain – and illustrate with a graph – what this curve is about, and how that relates to current economic policy.5a. Consider a situation where the government increases its expenditures by $150 billion, and the marginal propensity to consume is 0.8.? In a simple world where prices are fixed, what would be the impact of this new spending on real GDP? Illustrate your answer with an AS-AD graph.The textbook describes the Federal Reserve as a ‘quasi-public’ (and therefore quasi-private) bank. What reasons are given to support this judgement?The high on this exam was 100; the median was 68Econ 201b????????????? Exam #2??????????? Winter, 2008???????? Professor TwomeyPlease PRINT your name on the BACK of the last sheet. Answer on these sheets, using the backsides if necessary. The questions are equally weighted. Be sure to label each axis on your graphs! If any question is unclear, please ask for a clarification.Time: the entire class.Identifications: Identify the following with a sentence or at most two: (20 points)Near moneyEfficiency wagec. Ratchet effectStandardized budgete. Federal Funds Rate2a. What is meant by the Federal Open Market Committee (FOMC)? Its members are drawn from two groups: identify these groups, and their role in filling the FOMC. One of the valid concerns about deficits is called ‘crowding out.’ What is meant by this term, and describe the scenario in which a deficit causes crowding out.3a. Suppose that the banking system currently has $70 billion in excess reserves. If the required reserve ratio is 0.1, what is the maximum amount by which the money supply could increase, if those excess reserves were to be used up?One of the arguments against using countercyclical fiscal policy is the problem of timing, and the existence of lags.? Explain this position.One of the testbook’s ‘false concerns’ with respect to federal deficits, is that they put a burden on future generations. Explain the book’s position.4a. An important part of the new perspective called supply side economics, is the ‘Laffer Curve.’ Explain – and illustrate with a graph – what this curve is about, and how that relates to current economic policy debates.b. What? is meant by cost push inflation? Explain this, illustrating with a graph.5. The major economic factor determining consumption spending is disposable income. Identify two other factors, and explain why they affect consumption. (no graph necessary)b. Suppose businesses increase investment spending by $65 billion. In a simple world where prices are fixed and the marginal propensity to consume is 0.75, what will be the impact on GDP? Illustrate your answer with an AS-AD graph.The high on this exam was 86; the median was 51Econ 201? Introductory Macroeconomics? Exam #2a??? Winter, 2007?????????? Prof. TwomeyPlease PRINT your names on the BACK of the LAST SHEET. If you need more space, use the backs of these sheets. If you are not sure of what is being asked, please request clarification. Questions are equally weighted. Time: the entire class.? Good luck!Identify the following with a sentence or at most twoBoard of Governors of the Federal ReserveWealth effectBanker’s bankLegal TenderFull employment budget2a. The textbook states that interest rates are a major determinant of private sector investment. Identify three other determinants of private sector investment (no graph needed).b. In its discussion of budget issues, the textbook states “An annually balanced budget is not economically neutral; the pursuit of such a policy may intensify the business cycle not dampen it.” Explain the reason behind this position.3a.? Among the criticisms the textbook gives of discretionary fiscal policies, there is that of timing lags. Identify the three types of timing lags. b. Economists have traditionally described three identifying functions of money. Name and explain very briefly each one.c. Consider a national economy characterized by the consumption function C = 3800 + 0.75 DI, where C stands for consumption, and DI for disposable income.What is the value of the multiplier?If private sector investment falls by 400, what will be the impact on Disposable Income?In the textbook’s discussion of issues relating to government deficits and the national debt, the book asserts that bankruptcy is not a valid issue. Explain the book’s argument.Also in the discussion of the debt, a valid criticism of government deficits is called “crowding out.” Explain what is meant by this term (no graph necessary).5a.? Explain how each of the following will affect the consumption and saving schedules, or the investment schedule, other things equal (graphs not necessary).An increase in the real interest rateAn increase in the Federal personal income taxThe development of a cheaper method of manufacturing computer chips.5b.? What effects would each of the following have on aggregate supply or aggregate demand? In each case use a graph to show the expected effects on the equilibrium price level and the level of real output. Assume other things remain constant.A major increase in Federal government spending on health care.Workers experience increases in productivity, but do not ask for higher wages, due to fears of foreign competition.???????? iii. Fast growing countries such as China and India decide to open their markets to more consumer goods from the U.S.The median on this exam was 71. The high was 98.Econ 201? Introductory Macroeconomics? Exam #2b??? Winter, 2007?????????? Prof. TwomeyPlease PRINT your names on the BACK of the LAST SHEET. If you need more space, use the backs of these sheets. If you are not sure of what is being asked, please request clarification. Questions are equally weighted. Time: the entire class.? Good luck!Identify the following with a sentence or at most two:Built-in stabilizerOpen Market CommitteeNear-moniesLeading indicatorsQuasi-public bank2a. The textbook lists seven functions of the Federal Reserve, one of which is controlling the money supply. List and explain very briefly three different ones.b. There are two major components (reasons for) the demand for money. Identify each one, and indicate on separate graphs how they vary with the interest rate.3a.? One of the major justifications for presuming that the short run aggregate supply curve might have a positive slop, (and thus not be vertical)? is the assertion that prices and nominal wages might be sticky, that is, inflexible in a downward direction. Identify and explain briefly two different justifications for this assertion.b. Explain how the following will affect the consumption and savings schedules, or the investment schedule, other thing equal: (graphs helpful, but not required)i) a sharp, sustained increase in stock pricesii) An increase in the Federal personal income taxiii) A sizeable increase in the retirement age for collecting social security benefits.4. Both in the textbook and in the class lecture there were several reasons given for why the US federal budget moved from a situation of surplus under President Clinton, to deficit under President Bush. Identify and explain briefly three different reasons.5a.? Consider an economy characterized by the consumption function C = 600 + 0.8 Y, where C is consumption spending and Y is disposable income. What is the value of the multiplier?If the private sector businesses increase their investment spending by $25 billion, what will be the change in disposable income?b. What effects would each of the following have on aggregate demand or aggregate supply? In each case, use a graph to show the expect effects on the equilibrium price level and the level of real output.The complete disintegration of OPEC, causing oil prices to fall by one half.A 10 percent increase in labor productivity.A reduction in interest rates.The median on this exam was 68. The high was 96Econ 201b????????????????? Exam #2?????????????? Fall, 2006????? Professor TwomeyPlease PRINT your name on the BACK of the LAST SHEET. Use the backs of these sheets if you need more space. The points for each questions are indicated. Please ask for clarification if a question is unclear.? Time: the entire class.? Good luck!Identify the following with a sentence or at most two: (20 points)Progressive tax systemToken moneyPolitical business cycleWealth effectLegal tender??????? (20 points) Identify and explain briefly the three defining functions of money.b. If the marginal propensity to save is 0.25, and investment drops by $50 billion, by how much will equilibrium income change?3. (10 points). The book states (page 326, if you’re interested) “An annually balanced budget may intensify the business cycle.” What is the explanation for this statement?(10 points) The data in the book indicate that between 1990 and 1991 the actual budget deficit (as a percentage of GDP) grew more rapidly than the full employment budget deficit. What could explain this fact?(10 points) If the required? reserve ratio is 0.10, and for some reason the economy has $30 billion in excess reserves, what is the maximum amount by which demand deposits can increase?(10 points) In its discussion of the advisability of countercyclical fiscal policy, the book points to three different lags in the execution of this policy. Explain each one briefly.(20 points) What effects would each of the following have on aggregate demand or aggregate supply? (or both?) In each case use a graph to show the expected effects on the equilibrium price level and the level of real output. Assume all other things remain constant.The newly elected Congress passes a reduction in personal income tax rates.Due to bad weather in Japan, that country decides to purchase more US riceInterest rates fallDue to improved educational institutions, there is a sizable increase in labor productivity without a corresponding increase in nominal wages.The newly elected Congress passes very tight environmental regulations. The median on this exam was 65. the High was 93Econ 201???? Exam #2????????? Fall, 2005??????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if necessary. Questions are equally weighted. Be sure to label the axes on the graphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Functional financeb) Prime ratec) Expected rate of returnd) Wealth effecte) (Social security is basically a) "pay as you go plan"2. A simplified description of monetary policy at the Federal Reserve under Alan Greenspan is that they are currently reducing the money supply. In principle, there are three tools that the Fed can use to pursue this goal. Identify each of those three tools, and state what the Fed would have to do to them (increase or decrease, etc.) to achieve its goal of a reduction in the quantity of money.In the AS-AD framework, describe and draw a graph of the impact of a reduction of the money supply on prices and output.3a. Besides interest rates, what are two other macroeconomic variables that affect private sector investment?? For each of them, state what would have to happen to them to increase investment.b. It is traditional to analyze the demand for money in terms of two components. Identify those two components, and state what macroeconomic variable will affect them.4a. In its discussion of the national debt, the textbook speaks of some "false concerns" - the most important of which is that the current large debt threatens the government with bankruptcy. The textbook then goes on to discuss several concerns that it considers valid or substantive issues. Identify two of them, explaining each briefly.b. In a situation where the MPC is 0.75, suppose the government decided to increase expenditures by $50 billion. Using the simple multiplier, by how much would this change real GDP, and in what direction? Illustrate your answer with a graph.5.Let's discuss discretionary/countercyclical monetary and fiscal policy. One of the objections to the use of either of these tools is the existence of lags, of which there are usually listed three examples. Identify and describe these lags.For these three types of lags, which would be the same for monetary and fiscal, and which would be different-and why?What is meant by "political business cylces?" Would this be the same for both monetary and fiscal policy? Explain briefly.The median on this exam was 46; the high was 75.Econ 201?? Exam #2a??????????????? Winter, 2005?????????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if necessary. Questions are equally weighted. Be sure to label the axes on the graphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Wealth effectb) Legal Tenderc) Political business cycled) Fractional reserve banking systeme) Cyclically balanced budget2a. Consider an economy characterized by the consumption function? C = 5,000 + 0.80xDI, where C is consumption expenditure, and DI is disposable income. In this economy, by how much would income change if investment expenditures were to fall by $3 billion? b. Would the following cause a shift of the consumption function, or a movement along that curve? Explain each answer briefly-graph optional.i) As a result of the discovery of accounting irregularities, there is a sudden drop in the stock market.ii) An increase in the income of the European Union countries leads to a greater demand for US output.iii) Declining state funding for education convinces the population of the need to save more3a.? Economists distinguish two relatively distinct components of the demand for money. Identify those two components, illustrate them on a graph, and identify one macroeconomic variable that affects each component. b. What is the Open Market Committee? How are its members determined? What is their basic role in the financial system?c. Identify and explain briefly the three defining functions of money.4a. Explain and show on a graph what would be the impact on interest rates if the Fed lowered the supply of money.b. Suppose an initial situation of the commercial banking system having an excess of reserves of $600 million, in a context of a required reserve ratio of 0.25 . If all the banks decided to eliminate their excess reserves at the same time (hardly realistic assumption, but useful for exam purposes), by how much would the quantity of money change, and in what direction?What would also be the direction of the effect on:? i) the amount of creditii) the rate of interestiii) the level of investment5. Explain illustrating each answer with a separate graph, how the following will affect either AS or AD, and therefore prices and real output.a) The government decides to spend more on defenseb) There is a devaluation of the dollarc) The government decides to raise income taxesd) The price of oil fallsf) The quantity of money fallsThe median on this exam was 61; the high was 78.Econ 201????? Exam #2b?????? Winter, 2005??????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if necessary. Questions are equally weighted. Be sure to label the axes on the graphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Menu costsb) Employment Act of 1946c) Federal Funds Ratd) Marginal propensity to savee) Near monies2a. Consider an economy characterized by the consumption function? C = 250 + 0.75·DI, where C is consumption expenditure, and DI is disposable income. In this economy, by how much would income change if investment expenditures were to rise by $7 billion? b. What is meant by the term crowding out? Explain, illustrating your answer with a graph.c. Identify two factors that have contributed to the increase in the federal government's deficit under President Bush.3a.? Economists distinguish two relatively distinct components of the demand for money. Identify those two components, illustrate them on a graph, and identify one macroeconomic variable that affects each component. b. What is the Open Market Committee? How are its members determined? What is their basic role in the financial system?c. Identify and explain briefly the three defining functions of money.4a. Explain and show on a graph what would be the impact on interest rates if the Fed lowered the supply of money.b. Suppose an initial situation of the commercial banking system having an excess of reserves of $600 million, in a context of a required reserve ratio of 0.25 . If all the banks decided to eliminate their excess reserves at the same time (hardly realistic assumption, but useful for exam purposes), by how much would the quantity of money change, and in what direction?What would also be the direction of the effect on:? iv) the amount of creditv) the rate of interestvi) the level of investment5. Explain illustrating each answer with a separate graph, how the following will affect either AS or AD, and therefore prices and real output.a) A recession in Europe leads them to import less from the USb) There is a revaluation of the dollarc) The price of oil risesd) The government decides to lower income taxese) New discoveries in biotechnology leads companies to expand investmentsThe median on this exam was 68; the high was 96.Econ 201?? Exam #2 Fall, 2004?????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on thesesheets, using the flip sides if necessary. Questions are equallyweighted. Be sure to label the axes on the graphs. If any question isunclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Menu costsb) Full employment budgetc) Political business cycled) Expected rate of returne) Cyclically balanced budget2. The U.S. federal government's budget situation has shifted from asignificant surplus at the end of President Clinton's term, to a largedeficit today. Identify and explain briefly three distinct reasons forthis change.3a. In the textbook, and in class, much attention was given to who ishurt by inflation, especially unexpected inflation. Turn that discussionaround, and identify two economic groups who are helped by inflation.Discuss briefly.b. What is meant by the term crowding out? Explain briefly.4a. Identify and explain with a pair of graphs, the difference between"cost push" and "demand pull" inflation.b) For each of cost push and demand pull, identify one economic factorthat can cause that type of inflation to occur.c). Consider an economy in which the marginal propensity to consume is0.75, and where a newly elected president decides to increase governmentexpenditures by $300 billion. By how much will gross national productchange, and will that be an increase or a decrease?5. Should the following be expected to affect Aggregate Supply orAggregate Demand? In which direction? Explain each answer briefly,illustrating your answer with a simple graph.? In cases where it isAggregate Demand that is affected, indicate which component of spending(consumption, exports, etc.) is affected. If you believe that both curvesare affected, explain why.A. The Federal Reserve raises interest ratesB. The price of imported oil falls.C. A foreign automobile producer develops a new engine that makes theircars much more attractive to US buyers.D. Labor unrest and widespread union activity leads to a ten percentincrease in yearly wages; much higher than the growth in laborproductivity.E. A newly elected president decides to balance the budget byacross-the-board spending cuts.The median on this exam was 72; the high was 100.Econ 201a? Exam #2??? Winter, 2004??????? Professor Twomey?? Please PRINT your name on the BACK of the last sheet. Please indicatethere if you are in the 1:25 class. Answer on these sheets, using the flipsides if necessary. Questions are equally weighted. Be sure to label theaxes on the graphs. If any question is unclear, please ask for aclarification.? Good luck!??????????????????????????????????????? 1. Identify the following with a sentence or at most two:a) Functional financeb) Built-in stabilizerc) Asset demandd) Prime ratee) Regressive tax2a. Identify and explain briefly the three defining functions of money. b. Economists distinguish two major factors that determine the demand formoney. Identify those two factors, draw each on a graph, and explain whateconomic variable causes them to change.c. State the equation of exchange, and identify its components.? 3a. Suppose the MPC is 0.9 and that investment falls by $20 billion. Byhow much, and in what direction, will real GDP change? Illustrate youranswer with a graph.b. If the required reserve ratio is 0.33 and the Fed engages in an openmarket sale of $60 billion, by how, and in what direction, will the moneysupply change?c. The question of the advisability of tax cuts is currently highlydebated. State very briefly one reason why one could argue that a tax cutwould expand aggregate demand, and one reason for stating that a tax cutwould expand aggregate supply.4a. How does an expansionary monetary policy affect the economy? On threeparallel graphs, indicate the effects on interest rates, investment,aggregate demand, and prices and output.b. The fiscal position of the U.S. government has moved from a sizeablesurplus a few years ago, to a deficit today. Our textbook discussesseveral macroeconomic concerns of such a shift. One is called crowdingout. Explain what is meant by crowding outIdentify another "valid" criticism of deficits, and explain it briefly5. What effects would each of the following have on aggregate demand oraggregate supply. Explain each answer briefly, illustrating it with agraph.a. There is an increase in the world price of oilb. Changing business practices lead to an increase in labor productivityc. The government decides to increase the amount of payments to recipientsof Social Securityd. The government decides to reduce air pollution by charging firms forthe amount of smoke they emit into the atmosphere.e. There is a decrease on cigarette taxes. The median on this exam was 62; the high was 93.Econ 201b???????? Exam #2??????? Winter, 2004?????????????? Professor TwomeyPlease PRINT your name on the BACK of the last sheet. Please indicatethere if you are in the 9:55 class. Answer on these sheets, using the flipsides if necessary. Questions are equally weighted. Be sure to label theaxes on the graphs. If any question is unclear, please ask for aclarification.? Good luck!1. Identify the following with a sentence or at most two:a) Full employment deficitb) Currency drainc) Regressive taxd) Open Market Committeee) Marginal propensity to save2a. What is meant by the velocity of money? Is velocity stable? Why mightthat question be important?b. The U.S. federal government's fiscal situation has seen a shift from asizeable surplus five years ago to a large deficit today.? Identify threeprincipal causes of that change.3a. Identify the three ways the Fed can change the quantity of money; ineach case, what would the Fed do to cause the money supply to increase?b. Suppose the Fed engages in contractionary monetary policy. Explain andillustrate with three graphs how that will affect interest rates,investment, aggregate demand, prices and output4a. If the MPC is 0.8 and investment increases by $30 billion, by how muchwill real GDP change? Illustrate your answer with a graph.b. If the required reserve ratio is 0.1 and the Fed engages in an openmarket purchase of $40 billion, by how much and in what direction will themoney supply change?c. What is meant by crowding out?? 5. Explain how each of the following will affect the consumption andsavings schedules, or the investment schedule [if it's both, just answerfor one], and then how that will affect aggregate demand. Illustrate eachanswer with graphs.a. There is a decline in (real) interest ratesb. There is a sharp, sustained decline in stock pricesc. Engineers discover a cheaper method of manufacturing computer chips.d. There is a decrease in the Federal Income tax.e. There is a sizeable increase in the age at which one can receive SocialSecurity BenefitsThe median on this exam was 71; the high was 96 Econ 201 Exam #2 Fall, 2003 Professor Twomey Please PRINT your name on the BACK of the last sheet. Answer onthese sheets, using the flip sides if necessary. Questions are equallyweighted. Be sure to label the axes on the graphs. If any question isunclear, please ask for a clarification.? Good luck! 1. Identify the following with a sentence or at most two:a) Efficiency wages b) Board of Governors c) Legal Tender d) Automatic Stabilizers e) Real Interest Rate 2a. Suppose the economy is characterized by the following consumptionfunction; C = 60 + 0.8 x Y, where C is consumption, there are no taxes,and Y is real income or real GDP. Suppose an initial situation fullemployment with no inflation. Then private sector investment falls by $60billion. According to the simple multiplier model, by how much does realGDP change? Draw a graph illustrating the before and after equilibriumpoints.Such a change might be eliminated by countercyclical fiscal policy. Whatwould the government do? There are several criticisms of ountercyclicalfiscal policy; one of them relates to the issue of timing. Identify anddiscuss real briefly two examples of the factors people cite, of howtiming considerations make countercyclical policy less attractive.3a. Identify the three tools of monetary policy For one of those tools,identify a change, and describe how that change will affect the quantityof money. Then illustrate that change on a graph, being careful to labelthe axes.B. Suppose Continental Bank has a required reserve ratio of 20 percent,has reserves of $22 million, loans of $78 million, and checkable depositsof $100 million. What is the maximum amount of new loans that Continental Bank can make?? If Continental makes those loans, by how much has the supply of money changed?? After that has happened, and all the checks have been cleared, etc.,what will be Continental's balance sheet? 4a. According to supply side economists, how does a cut in business taxesaffect aggregate supply? Explain and illustrate on a graph.b. The book describes three ranges of the Aggregate Supply curve. Draw theAS curve, illustrating these three ranges. On which range of the AS curve might it make most sense (to Keynesian ADeconomists) to raise expenditures in order to boost employment?5. What effects would each of the following have on our aggregate demandor aggregate supply. In each case, draw a graph of the before and aftersituations.A. There suddenly arises a widespread fear of depression on the part ofconsumersB. Good harvests in Russia leads them to buy less wheat from the U.S.C. There is a major cut in Federal spending for health care in the USD. There is a complete disintegration of OPEC, causing oil prices to fallby half.E. Due to improved education and greater use of computers, there is anincrease in US labor productivityF. Fed monetary policy causes US interest rates to fall.The median on this exam was 60; the high was 96/Econ 201?????? Exam #2??? Winter, 2003???????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using theflip sides if necessary. Questions are equally weighted. Be sure to label the axes on thegraphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Robert Malthusb) Inflation taxc) Monetary Based) Ricardo-Barro effecte) Disposable Income??????????????????? 2. One important theme in the textbook's discussion of economic growth hasto do with economic convergence. What is meant by this? Why might weexpect this to occur? Where is this economic convergence occurring, and where not?What policies are suggested for governments to help convergence occur?3A. In the United States today, which of the following items is includedin the money supply? Explain brieflyi) The balance on your visa cardii) The coins inside public telephonesiii) The amount of loans taken out by college studentsiv) the value of IBM stockv) U.S. government securities (bonds)B Sara has $5,000 in a Citibank time deposit account. She withdraws $1,000from the time deposit account, keeps $50 in cash, and deposits the rest inher checking account at Citibank. Considering these actions alone, whatare the changes in M1? and M2?4a. Consider an economy characterized by the consumption function: Consumption =? 3000 + 0.75 Income.? What is the value of the multiplier? Suppose that private sectorinvestment increases? by $15 billion. What would be the resultant change in national income? b. What is meant by crowding out? Explain it, illustrating with a graph.5a. Consider an economy where the cash ratio (currency drain) is 20%, andthe required reserve ratio is 10%. What would be the effect on the moneysupply of an open market purchase of $400 million?B. According to our model of the money market, explain and show on a graphhow the change in money you describe above would affect the nominal rateof interest.C. What is the quantity theory of money, and what important conclusionabout the functioning of the macro-economy is drawn by monetarists fromthis theory?The median on this exam was 50; the high was 87Econ 201a??????????????? Exam #2???????????????????? Fall, 2002?????????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using theflip sides if necessary. Questions are equally weighted. Be sure to label the axes on thegraphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Monetary baseb) Open Market Committeec) Stagflationd) Property rightse) Automatic Stabilizer2a.? Suppose that the required reserve ratio is five percent, and thatthe currency drain is 20 percent. If the Fed makes an open market sale of$50 million,–i What is the change in the monetary base?ii By how much (and in which direction) does the quantity of money change?–iii Draw a graph illustrating what impact this action should have oninterest rates.b) What is the quantity theory of money? What important assumptions domonetarists make when using it? What major macroeconomic conclusion domonetarists draw from it? 3a. Explain and contrast what the CLASSICAL and the NEW GROWTH theoriespredict about the short and long run effects of an increase of savings andinvestment. (Graph optional)b. As the book says,which of these two growth theories best fits the facts? Explain briefly c.List three actions (policies) that governments can take to encourageeconomic growth, explaining each one real briefly. 4a. A central issue determining how well the economy functions is theslope of the short run aggregate supply (AS) curve. Keynesians argue thatit is not vertical.? Identify one reason that is suggested as to why itmight not be vertical, and explain why that factor would cause the AScurve not to be vertical.b. Consider now the extreme Keynesian world where the AS curve iscompletely flat, and that there is considerable unemployment. Suppose themarginal propensity to consume is 0.8, and that private sector investmentrises by $20 billion. By how much does real GDP rise?? -- In thissituation, what happens to prices and unemployment? 5.? Earlier this weekthe Federal Reserve reduced the federal funds rate to 1.25 percent, thelowest level since 1961. --What is the macroeconomic goal of this action?Explain and illustrate on a graph. The newspaper article that wasdistributed in class stated that if this monetary action is unsuccessfulin achieving its goal, then the government would need to use fiscal policyto achieve these ends. Explain briefly what changes in fiscal policy wouldhave the same effect as this reduction in interest rates. -- Another consideration our government policymakers might have toconsider is what the article described as "a big shock like a spike in oilprices related to a war with Iraq."? Explain and illustrate on a graphwhat would the impact on the U.S. economy of a sharp increase in the priceof oil.The median on this exam was 67, the high was 92.Econ 201b? Exam #2??????? Fall, 2002?????????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using theflip sides if necessary. Questions are equally weighted. Be sure to label the axes on thegraphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Fiat moneyb) Board of Governorsc) Classical theory of population growthd) Prime ratee) Inflationary gap2a. Suppose that the currency drain (currency ratio) is 10 percent and therequired reserve ratio is one percent. If the Fed buys $200 million ofsecurities on the open market, what will be the ultimate change in thequantity of money, both in sign and in magnitude?b. Illustrate that change on a graph of the supply and demand for money.c. How would that change affect prices and output? Explain and illustratewith a graph. 3a. Suppose the MPC is 0.8, and that private investment increases by $300million. According to standard Keynesian analysis, what will be theresultant change in output?b. Will the following be expected to affect aggregate supply (AS) oraggregate demand (AD), and would they move it to the left or to the right?Explain your answer real briefly–i Russia has a good harvest, and so it stops buying US wheat–i The minimum wage is eliminatediii Due to new tax breaks, private sector investment risesiv The Fed raises interest rates–v Due to fears of a potential war, the stock market declines. 4a. In speaking of long term growth, our textbook discusses the issue ofeconomic convergence. What is meant by this term?b. Why might this process be expected to occur?c. Where has convergence been occurring, and where has it failed to happen?d. Identify and explain briefly two policies that might encourage convergence.5. The attached excerpts are from a newspaper article in yesterday's NewYork Times, on economic policy, and specifically the issue of a tax cut.A. President Bush speaks about stimulating the economy by a tax cut. Wehave two different versions of how a cut in the government's tax rateswill affect the economy; these are commonly referred to as supply side anddemand side.? Explain and illustrate on two separate graphs, what each ofthose schools predict about the effects of a tax cut.B. The article mentions several tax cuts. Do these seem to be designed toaffect aggregate supply or demand? Explain brieflyC. Explain briefly how the following two factors should be expected toaffect the government's budget: a slowdown in the economy, and a cut intax rates.D. Explain what is meant by the worry that the Federal Reserve "hadexhausted its tools for fighting potential deflation in prices or wasclose to losing the ability to revive the economy."The median on this exam was 67, the median was 92Econ 201??? Exam #2a??????? Winter, 2002?????????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if necessary. Questions are equally weighted. Be sure to label the axes on the graphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Autonomous expenditureb) Monetary Basec) Property rightsd) Board of Governorse) Liquid Asset2a. Consider a simple Keynesian economy which is experiencing someunemployment. Suppose some bright young economist measures the economy'sMPC to be 0.75. What is the size of the expenditure multiplier?B.? If private sector investment were to rise by $50 billion, what wouldbe the resulting overall change in equilibrium real GDP?c. Illustrate this change with a graph either income/expenditure or AS-AD.Be sure to label the axes, and to indicate clearly the "before" and the "after" situations.3a. One of the most important issues in economics is the long term growthof the country. Our textbook contrasts the approach of the first school ofeconomists, called classical or Malthusian, with the more recentneo-classical and new growth schools.? What is the essential differencesbetween the analyses of the classical and the neo-classical schools, interms of the economic factors they consider and the predictions they make?b.? Considering the neo-classical and new growth schools together, whatgovernment policies might they recommend to stimulate economic growth?c. Draw a graph that illustrates the growth in labor productivity thatwould result from following these? policies. Be sure to label the axes!4a. What are the three defining functions of money? Explain each one realbriefly.b. The textbook mentions several harmful effects of inflation, its"costs." Identify and discuss two of them.c. The equation of exchange is an important tool of any economist'sanalytical toolbox. State the equation, identifying each of itscomponents.d. What is the most important conclusion that economists derive from theequation of exchange?5a. Consider a situation where the required reserve ratio is 0.2 and thepublic generally keeps one quarter of its money as cash.? What is the size of the money multiplier?? If the Fed engages in an open market purchase of $100 billion, what willbe the overall effect on the money supply?? How will this action affect the rate of interest in the short run?Illustrate with a graph.? It has been asserted that technological changes have been changing thefinancial system. One such change is the increased ease with which peoplecan make transactions using credit cards. How will the increased use ofcredit cards affect the supply and demand for money, and the interestrate? Explain and illustrate with a graph.The median on this exam was 62, the high was 95Econ 201??????????????????????? Exam #2b????????????? Winter, 2002?????????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if necessary. Questions are equally weighted. Be sure to label the axes on the graphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) New Growth Theoryb) Induced expenditurec) Say's Lawd) Open Market Committeee) Double coincidence of wants2a. Consider a simple Keynesian economy where the marginal propensity toconsume is 9/10. What is the size of the expenditure multiplier?b. What happens to equilibrium income if autonomous expenditures rise by$20 billion?c. Illustrate this change on a graph, either of the income/expenditure, orAS-AD. Whichever one, be sure to label the axes!3a. Suppose the Fed engages in an open market purchase of $40 billion.? Does this increase or decrease the monetary base?b. Suppose that, in the above situation, the required reserve ratio is1/4, and that the public keeps 2/3 of its money in bank deposits, and onethird in cash.? What will be the change in the money supply?? Draw a graph of the supply and demand for money, illustrating the (shortterm) change in the interest rate.? According to your analysis, will the Fed's open market purchase lead toan expansion or a contraction of the aggregate economy? Explain briefly;no graph necessary.4a. What are the three policy tools of the Fed? For each one, indicatewhat action would be necessary to increase the money supply. b. Animportant part of monetary analysis is the money demand. Draw a graph ofthe demand for money, indicating clearly the labels on the axes c. How would each of the following would move the demand for money(illustrate each with a graph):? - an increase in the price level? - greater use of credit cardsd. What is the formula for the equation for exchange? Identify each of itscomponents.5a. Our textbook draws a strong distinction between the classical schoolof economists and the neo-classical school, in terms of their analysis ofeconomic growth. Explain that basic distinction (graphs not necessary).b. What is the reason in the neo-classical growth theory that leads to theprediction that national levels of real GDP and national growth rates willconverge?c. Identify and explain briefly two government policies that might speedeconomic growth. The median on this exam was 60, the high was 92Econ 201????? Exam #2a??????? Fall, 2001????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on thesesheets, using the flip sides if necessary. Questions are equallyweighted. Be sure to label the axes on the graphs. If any question isunclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Monetary baseb) Malthusian (or Doomsday) theory (or model)c) Discount rated) Currency Draine) Business cycle turning points2a.Using a simple Keynesian model with fixed prices, suppose that themarginal propensity to consume is 0.6 and that investment falls by $50billion. What is the impact on real GDP? Illustrate this with an AS-ADgraph.b. Our textbook discusses several factors that determine economicgrowth, and then applies this message to explain why many third worldcountries have not grown. Identify and explain briefly three suchfactors that are could be used to explain the lack of growth in thirdworld countries in Africa and elsewhere.3a. A bank has the following deposits and assets: $320 in checkabledeposits, $896 in savings deposits, $840 in small time deposits, $990in loans to businesses, $400 in outstanding credit card balances, $634in government securities, $2 in currency and $30 in its reserveaccount at the Fed. Calculate the bank's:? i total deposits iiDeposits that are part of M1 iii Deposits that are part of M2 iv Loansv. Reservesb. If the required reserve ratio on checking accounts is 10%, what isthe bank's position in terms? of excess reserves?c. What is the quantity theory of money, and what is its mostimportant prediction (or implication)?4. The textbook mentions the standard distinction between autonomousand induced economic variables. What is meant by this distinction?Mention four economic variables, and explain whether each isautonomous or induced.b. Our textbook mentions three variables (besides interest rates) thataffect the demand for money. Identify two of them, and for each one,explain how an "increase" in them would affect the demand for money.Illustrate each example with a simple graph.5. Consider the situation of the United States today, withunemployment rising. If the Federal Reserve wished to counteract therecession, should it engage in open market operations or open marketpurchases? Suppose that there were no cash in the U.S. economy, that therequired reserve ratio were 10%, and that the Fed did the open marketoperation of the type you mentioned above, to the amount of $40billion. What would be the change in the money supply?? Illustrate theimpact of this change in the money supply on the interest rate, usingthe appropriate graph. Is this a procyclical policy, or countercyclical?Finally, and independent of the above discussion, the textbookmentions several "costs" of inflation. Identify two of these costs,and explain each one briefly.The median on this exam was 61. The high was 90.Econ 201????? Exam #2b??????????? Fall, 2001???????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on thesesheets, using the flip sides if necessary. Questions are equallyweighted. Be sure to label the axes on the graphs. If any question isunclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Say's Lawb) Board of Governorsc) Fiat moneyd) Federal Funds ratee) Autonomous expenditure 2a. What are the three functions of money that are used to determinewhat should be considered as money? Explain each one briefly.b. What is the discount rate?? What happens to the money supply if the discount rate is raised?Explain briefly.c. Identify two implications of the fact that there are (at least) twomajor different estimates of the? quantity of money.3a. Consider a situation where in the U.S. economy the marginalpropensity to consume is 0.8.? For this question, ignore the effectsof taxes and imports. What would be the impact on the level of realGDP of a decline in investment of $300 billion? Illustrate this changeon an AD-AS graph, using the Keynesian assumption that prices areconstant. What would be the impact of the decline in investment onunemployment? Explain briefly.4a The textbook mentions four "costs" of inflation. Identify andexplain briefly two of them.b. In the textbook's discussion of economic growth, there is emphasison the need for protection of property rights.? What are propertyrights, and what is the argument that their protection will encourageeconomic growth?? c. Our book discusses the fact that some countries have experienced aconvergence in income level towards that of the U.S., while othershave not. Name a couple of countries or regions that are converging,and two that are not.d. Explain briefly the central idea of the "doomsday" or Malthusiangrowth model.? 5a. Suppose the FED engages in an open market purchase of $40 billion,in a simplified situation of the required reserve ratio equals 1/4, and there is no cash.? ?What will be the ultimate impact on the money supply? Using our graph of money supply and money demand, show and explainhow this change will? affect the interest rate. Finally, how will this open market purchase affect aggregate supplyor aggregate demand.? Illustrate your answer on a graph.B. If people find it advantageous to use their credit cards more, whatwill be the impact on the either the supply or demand for money, andhence of the interest rate? Explain and illustrate on a graph.The median on this exam was 58; the high was 84.Econ 201?? Exam #2??????????? Winter, 2001???????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on thesesheets, using the flip sides if necessary. Questions are equally weighted.Be sure to label the axes on the graphs. If any question is unclear,please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Real business cycleb) Legal tenderc) Line item vetod) Transactions demande) Natural rate hypothesis2.The Federal Reserve has recently lowered interest rates.? What is themain goal of these moves? Explain, using a series of graphs, the cause andeffect chain that illustrates how the change in interest rates eventuallybrings about the desired macroeconomic goal3a. One of the major components of the economic policies of theAdministration of President Reagan is associated with an analysis known asthe Laffer curve. Explain the key policy proposal of Mr. Laffer.? Draw agraph of the Laffer curve, and use it to illustrate that idea.??????? b. Consider an economy where the require reserve ratio is 25percent, where the total of demand deposits is $600 billion, and where thebanking system's outstanding loans and securities sum up to $450 billion.By how much does the quantity of money change, if the Fed engages in anopen market sale of $20 billion???????? After all the effects have worked themselves out, what are thecomponents of the new balance sheet of the banking system?4a. What is the key equation used by the Monetarist School? Identify andexplain briefly each of its components.??????? b) This country's leading monetarist, Milton Friedman, hasadvocated a simple rule to guide monetary policy. Identify that rule, andexplain the asserted advantages of following it.??????? c) An important contemporary issue is the independence of thecentral bank. State one argument in favor of central bank independence,and one argument against it.5. Draw a graph of the Phillips curve, being especially careful toidentify the axes. In what sense does the Phillips curve represent orillustrate a "tradeoff."??????? Would the following be expected to shift the Phillips curve, or tocause a movement along it. Explain each answer, illustrating it with agraph, showing before and after positions.a) The newly elected president lowers taxes.b) The world price of oil rises dramaticallyc) Weakness in the Japanese economy leads them to buy less from the U.S.d) Bad weather causes the harvest to declinee) The Fed engages in tight monetary policy The median on this exam was 58; the high was 98.Econ 201??? Exam #2??????? Fall, 2000?????????????????? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer on thesesheets, using the flip sides if necessary. Questions are equally weighted.Be sure to label the axes on the graphs. If any question is unclear,please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Cyclical asymmetryb) Board of Governorsc) Distinguish between near money and fiat moneyd) distinguish between the federal funds rate and the prime ratee) [??]2. One of the major economic policies of President Reagan was inspired bythe argument associated with the so-called Laffer Curve. Draw a graph ofthat curve, and explain what important policy is derived from it. b. TheLaffer curve is an important supply side proposition. What would be twoother policies associated with the supply side school?3a. What are the two (main) components of the demand for money? On whatmacroeconomic variable does each one depend?b. What are the three major ways the Fed can control the money supply?c. Suppose Bank A has the following simplified balance sheet, and that therequired reserve ratio is 20%.????????? Assets?????????????? LiabilitiesReserves $22,000?????????????? Demand Deposits$100,000 Securities? & Loans???? $78,000i) What is the maximum amount of new loans which this bank can make? ii) After it makes those loans, what is the new balance sheet of the bank?iii) after making those loans, has the money supply changed?If no, why not?? If yes, by how much?3. ?4a. Draw a graph of the Phillips curve (being doubly sure to label theaxes) and explain how it illustrates a so-called tradeoff. b. Would thefollowing be expected to move along the Phillips curve, or shift theentire curve? Illustrate each answer with a simple graph, illustratingwith an arrow in what direction the movement/shift occurs. i) Thegovernment decides to spend more money on road repairs ii) The price ofoil falls due to events in the Middle East iii) Japan increases itsimports of rice from the U.S. iv) The Fed decides to tighten the moneysupply.5. Suppose the Federal Reserve sells bonds worth $50 billion to thebanking system, in a situation where the required reserve ratio is 1/4. a)After this action has worked itself out, has there been an increase ordecrease the money supply, and by how much? b) By how much has eachcomponent of the balance sheet of the banks changed? c) According to thetransmission mechanism described by the Keynesian model, how will thischange interest rates, investment, and aggregate demand? Illustrate youranswer with the appropriate graphs.The median on this exam was 77; the high was 95Econ 201 Exam #2 Winter, 2000???? Professor Twomey Please PRINT your name on the back of the last sheet. Answer on thesesheets, using the flip sides if necessary. Questions are equally weighted.Be sure to label the axes on the graphs. If any question is unclear,please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Board of Governorsb) Cyclical asymmetryc) Prime rated) Rational expectationse) Entitlement Programs2. Consider the situation of an economy with a required reserve ratio of1/6. The total reserves of the banking system are $50 billion, its totalloans and securities are $250 billion, and total deposits are $300billion. Now, suppose the central bank engages in an open market purchaseof $10 billion. a) What will be the impact on the quantity of money? b) What will be the new balance sheet of the banking system? c) How will this affect: (graphs optional)???? Interest rates???? Aggregate Demand???? Prices???? Employment. 3. Will the following be expected to cause the economy tomove along the Phillips curve, or will they result in a shift of thePhillips curve? Identify each answer as a shift of AD or AS, andillustrate each answer with a graph.? A) Computer advances make the entire economy more productive, b) The newly elected president decides to spend more on defense.? c) Financial crisis in Asia lowers our exports to those countries.? d) Oil exporting countries act together to raise the price of oil.4. What is meant by the Laffer curve? What important policy prescriptionis/was derived from the Laffer curve? Explain it briefly. Beyond theissues related to the Laffer curve, the textbook has a discussion of theeconomic goals of President Reagan, in terms of his supply side policies.Identify two other goals, and state whether or not his supply sidepolicies were successful in attaining those goals. 5. Define the deficit and the debt, and state how they are related. Whathave been the major factors during the twentieth century, leading to anincrease in the debt relative to GDP? Since the Depression, when was theratio of debt/GDP smallest? The textbook discusses several aspects to thegeneral debate about whether or not the debt is inherently good or bad forthe country. In particular, it separates issues critical of the debt intovalid and invalid arguments.? Identify and explain briefly two validarguments about how the debt can be harmful for the country.The median on this exam was 60, the high was 79Econ 201 Exam #2 Fall, 1999 Professor Twomey Please PRINT your name on theback of the last sheet. Answer on these sheets, using the flip sides ifnecessary. Questions are equally weighted. Be sure to label the axes onthe graphs. If any question is unclear, please ask for a clarification.? Good luck!1. Identify the following with a sentence or at most two:a) Natural Rate Hypothesisb) Federal Funds Ratec) Bankers' Banksd) Fiat Moneye) Entitlement Programs2a. Draw a graph of the Phillips curve, being sure to label the axes.b. According to the standard Phillips curve analysis, how will each?? of the following affect the economy? Explain briefly, illustrating?? each answer with a Phillips curve.??? - The Fed increases interest rates??? - The price of oil falls??? - A new trade pact with China leads to more U.S. exports??? - Good weather results in bountiful agricultural harvests.3a. State the "equation of exchange," identifying each of its components.b. On the basis of the equation of exchange, noted monetarist MiltonFriedman has proposed a certain rule for guiding the macroeconomy. What isthat rule?? What are its supposed advantages?c. Suppose the required reserve ratio is 25 percent, and that the FederalReserve engages in an open market purchase of ten billion dollars. By howmuch will this change the money supply?4a. One of what the textbook considers valid arguments against governmentdeficits that result in increases in the national debt is that theseresult in "crowding out." What is meant by crowding out? Why is itsomething to be avoided? If you can, illustrate it with a graph. Identifyand explain briefly (that is, no graphs) another of these so-called validarguments against government deficits and higher national debt. Thetextbook considers it invalid to argue against the national debt,according to the claim that "we have to pay it back." Why might this be aninvalid argument? In the history of the U.S. economy during the twentiethcentury, when has the ratio of debt/GDP been the highest? What has beenthe trend of that ratio during the last two decades?5. Suppose Continental Bank has the following simplified balance sheet,Assets Liabilities that the reserve ratio is 20 percent. (Data in billion$.)? Reserves 22 Deposits 100???????????????????????????????????????????????????????????????????????????????????????????????????????? Loans and What is the maximum amount of new loans this bank can make?? ecurities 78? Show what the Bank's new balance sheet would like after making this loan.As a result of making this loan, has the money supply changed??? If so, why and by how much? If not, why not?What are the two components to the demand for money? ?????Illustrate this with a graph? For each component of the demand for money, identify a major macroeconomic variable thatdetermines it.??? How might the following affect the demand for money? That is, how will thischange the graph drawn above?? Expanded use of credit cards???????? A general increase in prices, raising nominal GDP.The median on this exam was 61; high was 80.Econ 201???? Exam #2a????? Fall, 1998? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer onthese sheets, using the flip sides if necessary.Questions are equally weighted. Be sure to label the axes on thegraphs. If any question is unclear, please askfor a clarification. 1. Identify the following with a sentence or at most two:a) Rational expectationsb) (Friedman's) monetary growth rulec) Near moniesd) Board of Governorse) Federal funds rate2. Consider a situation where the required reserve ratio is 20%.What is the value of the money multiplier?- Now, assume the (simplified) balance sheet of the commercialbank system has total reserves of $40 billion,total deposits of $200 billion, and loans and securities totaling$160 billion. Suppose the Fed engages in an open market sale of $5 billion. By how much doesthat change the money supply? - What would be the new consolidated balance sheet of thecommercial banking system, after all the changeshad worked themselves out?3i??? a. What is the Phillips curve? Illustrate it with ??????????a graph, being sure to label the axes. ??????b. What would be two factors that would cause a movement upalong (northwest) the Phillips curve?? ????????????No graph necessary????? c. What would be two factors that would cause the entirePhillips curve to move outwards (north east)?ii.?? a.? One of the book's "false issues" about the nationaldebt is that the U.S. government might go bankrupt. Identify and explain real briefly two ofthe textbook's arguments against that? position.ii.?? b. One of the textbook's valid reasons for concern aboutdeficits and the debt is crowding out. Identifythat term, and explain what it means (no graphs necessary).4a. Identify and distinguish between the asset and transactionsdemand for money. Draw a graph of each one.b. What are the three instruments available to the Fed to controlthe money supply? Explain each real briefly.c. What is meant by the velocity of money? Explain real briefly.5. Last Tuesday the Federal Reserve decided to lower the interestrates by increasing the money supply.a. According to the standard textbook (Keynesian) transmissionmechanism, how will this affect AggregateDemand, and inflation? Explain your answer, illustrating it withthe appropriate graphs.b. This action is an example of discretionary monetary policy.There has been much discussion about theadvisability of the Fed having and exercising such discretionarypolicy.Real briefly, what are two arguments in favor of having thatdiscretion, and two arguments against the Fed having such discretionary policy. The median on this exam was 63; high was 98Econ 201??? Exam #2b????? Fall, 1998?? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer onthese sheets, using the flip sides if necessary.Questions are equally weighted. Be sure to label the axes on thegraphs. If any question is unclear, please askfor a clarification. 1. Identify the following with a sentence or at most two:a) Stagflationb) Open Market Committeec) Real Business Cycled) Token moneye) Entitlement2a. What is the equation of exchange? Write out the formula, andidentify its components.How does this equation relate to monetarism? What policyconclusion do monetarists derive from it?According to monetarists, what is the major cause ofmacroeconomic instability? In particular, what is theirexplanation of the severity of the Depression of the 1930s?3a. What are the three defining characteristics of money? Explaineach one real briefly.b. What is the formula for the money multiplier? If the Fedengages in an open market sale of $50 billion, byhow much does the money supply change?c. How will the following be expected to change the moneymultiplier (in? the "real world"). Explain eachanswer briefly.????? an increased use of credit cards, causing people to keepless cash????? banks turn more cautious in their lending, because of fearof the Asian banking crisis4a. Define the Phillips curve, and illustrate it with a graph(being sure to label the axes!)b. In what sense does the original version of the Phillips curvedepict a tradeoff?c. Would the following be expected to move the economy along thePhillips curve, or cause a shift of it?Explain each answer, illustrating each one with a graph showingthe movement.? i. The price of oil falls ?ii. Government expenditures rise? iii. The Ni¤o current causes bad harvests? iv. Voters elect a President with a reputation??? of big spending, leading to an increase in ??inflationary expectations.5a.? Last Tuesday the Federal Reserve announced a new policy,leading to a decline in interest rates.a. According to the standard textbook (Keynesian) transmissionmechanism, how will this affect AggregateDemand and inflation? Explain your answer, illustrating it withthe appropriate graphs.b. What economic problems is this action supposed to counteract?c. Is this consistent with Friedman's monetary growth rule? Explain. The median on this exam was 76; high was 98Econ 201?? Exam #2?? Winter, 1998? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer onthese sheets, using the flip sides if necessary. Questions areequally weighted. Be sure to label the axes on the graphs. If anyquestion is unclear, please ask for a clarification. 1. Identify the following with a sentence or at most two:a) Stagflationb) Entitlement Programc) Near moneyd) Federal Funds Ratee) Friedman's monetary rule2a. Our textbook discusses five functions (major tasks) that theFederal Reserve Banks perform in our country. List and explainbriefly four of them.b. What are the three defining characteristics or functions ofmoney?c. What was the Savings and Loan crisis? Identify and discussbriefly three causes.3. Evaluate the following potential arguments against governmentdeficits, and the national debt:a) Most of our national debt is foreign owned, and hence the U.S.can be pressured by other countriesb) Deficits and the national debt are not a problem, because thenational government can never go bankruptc) Deficits financed by increasing the national debt alsoincrease the money supply, which is usually inflationaryd) Government deficits are often accompanied by crowding oute) Deficits and the national debt are bad, because either we (the???? current generation) will have to pay it off, or our children???? will4. Economists generally believe that there were several factorswhich caused the Phillips curve to move out in the 1970s. Listand explain three factors-What might be two factors causing the Phillips Curve to moveinwards during the last half decade or so?-How will the following factors cause a move along the Phillipscurve? Illustrate with a graph - Economic crisis in Asia lowers demand for U.S. export products - In an attempt to balance the budget, the government spendsless and taxes more - In an attempt to stimulate the economy, the Federal Reservecauses interest rates to fall5a. The Third Bank of Michigan has reserves of $20,000 and demanddeposits of $100,000. The reserve ratio is 20 percent. Householdsthen deposit $5,000 in currency into the bank, which is added asreserves. How much excess reserves does the bank now have?b. Suppose again an initial situation in which the Third Bank ofMichigan has reserves of $20,000 and demand deposits of $100,000,and that the reserve ratio is 20%.? The bank now sells $5,000 insecurities to the Federal Reserve Bank, receiving a $5,000increase in reserves in return. How much excess reserves does theThird Bank have?c. State the equation of exchange, identify and explain itscomponents. The economic behavior of one of these components issubject to considerable debate; which component, and what is thedebate about?The median on this exam was 67; the high was 94Econ 201??? Exam #2a??? Fall, 1997? Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer onthese sheets, using the flip sides if necessary. Be sure to labeleach axis on the graphs. Questions are equally weighted. If anyquestion is unclear, please ask for a clarification. Time: 1hour.? Good luck!1. Identify the following with a sentence or at most two:a) Prime rateb) stagflationc) Near moniesd) Entitlement programe) Depository Institution Deregulation and Monetary Control Act(DIDMCA)2. Suppose the Federal Reserve wished to reduce the money supplyto fight inflation. a) What are three actions they could take that would lower themoney supply?b) Explain and illustrate how the change in the money supplywould affect certain macroeconomic variables, and eventuallyaffect prices and output. That is, draw the graphs that show theKeynesian version of the monetary transmission mechanism. 3a. Consider first the case of an individual bank, Bank C, whose(simplified) balance sheet is as follows, with a required reserveratio of 20%.? ???????? Assets????? Liabilities??????? What is the amount ofBank C's excess ?????????????????????????????????????????????reserves?Reserves 22,000? Deposits100,000??????? Securities?????????????????????????????????? Indicate what thenew balance sheet & Loans 78,000 Net Worth????? 0???????????? will be when thosereserves are???????????????????????????????????????????? out.b. Now consider a different situation. The required reserve ratiois 25%, and the Fed purchases $50,000 of bonds from the bankingsystem.? By how much does this eventually change each componentof the balance sheet of the banking system?? ?????By how much does this action eventually change the moneysupply? 4a. It is generally accepted that the U.S. economy underwent aseries of supply shocks in the 1970s. Illustrate a supply shockon an AS-AD graph. Identify and explain briefly three examples ofsupply shocks from the 1970s.? b. The Phillips curve istraditionally considered to illustrate a trade-off betweeninflation and employment, if only in the short run. The textbookmentioned some ways that have been proposed of improving thattrade-off, which the book puts into two categories, market andnon-market policies. Discuss briefly one example of each type.5. In the early 1980s, President Reagan instituted major taxcuts, as the keystone of his program journalistically known asReaganomics. a) Explain briefly three goals of that policy, and why supplysiders felt that this untraditional program might reach thosegoals.b) How well did the economy perform in terms of those goals?c) What was the Savings and Loan crisis?? Discuss briefly threecauses.???? median on this exam was 63 high was 98Econ 201??? Exam #2b Fall, 1997 Professor TwomeyPlease PRINT your name on the back of the last sheet. Answer onthese sheets, using the flip sides if necessary. Be sure to labeleach axis.? Questions are equally weighted. If any question isunclear, please ask for a clarification. Time: until 3:00.? Goodluck!1. Identify the following with a sentence or at most two:a) Incomes policyb) Near moniesc) Open Market Committeed) Federal funds ratee) Rational expectations2a. Draw the Laffer curve, and explain what important policyrecommendation is based on it.b. One of the major issues in macroeconomics is the importance ofthe national debt. The textbook addresses this by referring to"false" and "valid" issues. Identify and explain briefly two ofeach.3. Here comes the banking question. It has two parts; the firstconcerns an individual bank, and the second relates to thebanking system.a). Consider Bank Z, with the following balance sheet (in billiondollars), in a situation with the required reserve ratio is 0.10.???????? Assets????? Liabilities??????? Suppose Jane deposits acheck for $20.Reserves???? 40? Deposits??? 400??????? After the check has beencleared, andLoans &???????????????? ?????????????????????other actions takento eliminate Securities?????????? 360Net Worth0?????????????? excessreserves, what will the new???????????????????????????????????????????? balance sheet be?b). Take a different situation. The (simplified) balance sheetfor the commercial banking system is as follows, with therequired reserve ratio of 25%. (Again, data in billion dollars).???????? Assets????? Liabilities??????? Suppose the Fed engagesin an open???????????????????????????????????????????? market purchase of$60 billion.Reserves?? 2000? Deposits?? 8000Loans &???????????????????????????????? By how much will thiseventually change? Securities???????? 6000???????????????????????? the moneysupply???????????????????????????????????????? When the money supply???????????????????????????????????????????? process has entirely???????????????????????????????????????????? worked itself out,???????????????????????????????????????????? what will be the new???????????????????????????????????????? ????consolidated balance???????????????????????????????????????????? sheet for the???????????????????????????????????????????? commercial banks?4a. What are the three defining characteristics of money?b. What are the three ways the Federal Reserve can affect thequantity of money?c. In referring to monetary policy, what is meant by the "targetdilemma?" Illustrate it with a graph.5a. What is meant by the velocity of money?b. Some people assert that the velocity of money is constant.Explain why the constancy of the velocity of money might beimportant????? Is it constant? Explain.The monetarist, Milton Friedman, has advocated a constant growthrate rule. Explain what this is, and why it might be important.???? Is this being followed in the U.S. today? Explain.The median on this exam was 72; high was 92Econ 201? Exam #2 Winter 1997? Professor TwomeyPlease PRINT your name on the BACK of the last sheet. Answer onthese sheets, using the flip sides if necessary. Questions areequally weighted. If any question is unclear, please ask for clarification. Time: until 2:50 p.m.1. Identify the following with a sentence or at most two:a) Moral Hazardb) Cyclical Asymmetryc) Entitlement Programsd) Adaptive Expectationse) Prime Rate2. If the banking system has reserves totaling $200 billion, andthe required reserve ratio is 1/4, what is the maximum amount ofdeposits the system can support?If the Federal Reserve engages in an open market sale of $10billion, how will this change the balance sheet of the bankingsystem? By how much will the money supply change?Given the change in the money supply from the previous question,what would we expect would happen to the economy's overall levelof prices, output, and employment? Illustrate with a graph ofaggregate supply and aggregate demand.3. What were the major components of the set of economic policiesknown as Reaganomics?According to the textbook, were these policies successful? Why?Explain briefly.Our textbook discusses the issue of the national debt, suggestingthat there are both "false issues" and valid ones. Explain anddiscuss briefly two of each.4. Last week the Federal Reserve announced that it was going toraise interest rates by shrinking the money supply. Using a graphof the Phillips curve, indicate and explain briefly how thismight be expected to affect unemployment and inflation, in theshort and the long run.What is meant by Friedman?s monetary growth rule, and how wouldit differ, in design and in goals, from what the Fed did lastweek?5a. What are the two main components of the demand for money?b. What are the three ways the Federal Reserve can affect thequantity of money?c. Why can?t the Fed target both interest rates and the moneysupply at the same time?d. What is meant by the Laffer curve? What important governmentpolicy is derived from it??? The median on this exam was 56 the high was 86Economics 201?????? Exam #2????????? Fall, 1996???????????? Professor TwomeyPlease PRINT your name on the BACK of the last sheet. Write onthese sheets, using the backs if you need space. Questions are equallyweighted. Please ask for clarification if you do not understand the question.? Goodluck!1. Identify the following with a sentence or at most two:a) Federal Funds Rateb) Entitlement Programsc) Token Moneyd) Depository Institutions Deregulation and Monetary Control Acte) Fractional Reserve System2a. What are the two major components of the demand for money,and on whicheconomic variable(s) does each one depend?b. Assume that Jones deposits $500 in currency into her demanddeposit at thelocal bank. A half hour later Smith negotiates a loan for $750,which is taken in cash. On the basis of these two transactions, what hashappened to the quantity of money?c. What are the three defining characteristics, or functions, ofmoney?3a. Identify and discuss briefly Milton Friedman's views on theadvisability of discretionary policy, both monetary and fiscal.b. What is meant by crowding out; what are its causes and whatare its effects? What would the government have to do in order to reduceor eliminate it?4a. Suppose the Fed engages in an open market sale of $5 billion,in a context in which the required reserve ratio is 10%. By how much, and inwhat direction, is the total economy's quantity of money affected?What are the changes in the various components of the aggregate balance sheetof the commercial banks?b. According to the Keynesian school, how will this action by theFed affect interest rates, prices, investment and real GDP? Explain,illustrating your answer with graphs. 5a. What is the Laffer curve? What is the analysis associatedwith it, and how does it differ from standard ideas about how the economy works?b. Identify two other supply side type policies which PresidentReagan implemented.c. During the early years of President Reagan's first term inoffice, the rate of inflation dropped significantly, and the rate of unemploymentshot up and then fell back. Why did this happen? Illustrate your answer witha graph. median was 63; high was 93Econ 201? Winter, 1996??? Exam #2???? 9:30 class?????????? Professor TwomeyPlease PRINT your name on the BACK of the LAST sheet. Answer onthese sheets, using the backs if necessary. Be sure to label carefully yourgraphs. Questions are equally weighted. If a question is unclear, pleaseask for? an explanation. Good luck!1. Identify the following with a sentence or at most two:? a) Entitlement Program? b) Rational Expectations? c) Moral Hazard? d) Near Monies? e) Federal Funds Rate2. Our textbook discusses several causes for the supply shockswhich occurred in the 1970s. Give three different examples, explain thembriefly, and then show on an AD-AS graph how these affect output and prices. What is discretionary fiscal policy, and can/should it be used tocombat stagflation? Explain.3a. Consider an economy where the required reserve ratio is 20%.Suppose the central bank engages in an open market sale of $40 billion. Byhow much does each of the components of the banking system's balance sheetchange?? By how much does the money supply change?b. What is meant by the "velocity" of money?? Is velocity stable? Why might it matter?4a. Identify and explain briefly the two components of the demandfor money.b. In terms of monetary policy, what is meant by the "targetdilemma?"c. What is meant by the phrase "Savings and Loan Crisis?" Stateand explain briefly two causes of it.5. Our textbook mentioned four major orientations, or components,of the economic policies followed by President Reagan, which aresummarized by the term "Reaganomics.? a) Identify and describe briefly three of them, explaining howthey were expected to affect the economy.? b) for TWO of those policies, what is the textbook's evaluationof their success? median was 55. High was 98Econ 201?? Exam #2 Spring,1996 Professor TwomeyPlease PRINT your name on the BACK of the LAST SHEET. Answer onthe backs of these sheets if you need the space. Please ask for clarificationif any question is unclear. Remember to label your graphs. Time: an easyhour.1. Identify the following with a sentence or at most two:? a) Discount Rate????? ??b) stagflation? c) entitlement program? d)adaptive expectations? e) target dilemma2. Draw a Phillips curve, being careful to label the axes.Identify and discuss briefly one factor which will affect the national economyfrom the supply side, and one which will affect it from the demand side.Illustrate the effects of each change on a separate graph of the Phillipscurve. b. Consider an individual bank which has a require reserve ratioof 1/5. Its reserves are $4 million, its deposits are $20 million. How does adeposit of $200,000 affect its balance sheet, after all excess reserves areeliminated? Indicate the before and after balance sheets.3a.? Explain Milton Friedman?s proposal of a monetary growthrule. Identify and explain briefly? two advantages and two disadvantages. b. Explain the textbook?s argument that it is incorrect to arguethat the federal government should have a balanced budget-- just asindividuals should.c. Now, identify and explain two criticisms of governmentdeficits which the text argues are valid.4. If the required reserve ratio is 1/4, by how much will an openmarket sale of $3 billion affect the banking system?s reserves, loans (to theprivate sector) and the economy?s overall supply of money?Illustrate how this change in the money supply will affectprices, output, and employment in the economy, according to the AD analysis ofthe Keynesian school.5. Explain and illustrate the Laffer curve.With regard to budget issues, explain the argument which claimsthat a balanced budget amendment will make the economy more unstable.Let?s talk about President Reagan?s policies.? Which type of taxes were lowered more significantly during histerm, business taxes or personal taxes?It has been argued that monetary policy was more important thanfiscal policy during the early years of his term. Why so?According to the textbook, did Reagan?s policies stimulatesavings? Did they result in people working harder? Explain. ???Econ 201? Winter, 1996? Exam #2???? 12:30 class? Professor TwomeyPlease PRINT your name on the BACK of the LAST sheet. Answer onthese sheets, using the backs if necessary. Be sure to label yourgraphs. Questions are equally weighted. If a question is unclear, pleaseask for an explanation. Good luck!1. Identify the following with a sentence or at most two:? a) Line item veto? b) Measure of value? c) Fiat money? d) Tax wedge? e) Equation of exchange2. Draw a Phillips curve, being ?careful to label the axesWill the following move the economy along the Phillips curve, or causea shift in the whole curve? Explain? each one briefly: (graphs are helpful)i) An increase in the money supplyii) A decrease in the price of oiliii) Uncertainty over upcoming electionsleads businesses to cut investmentiv) Government spending is cut.3a. What is meant by the term Laffer curve? What important policyis derived from it? Why is this issue important for the U.S. today?b. What is meant by the term "crowding out?"? Why might it beimportant for the U.S. today? Explain. 4a. What is meant by the term "monetary rule" (or "monetarygrowth rule")?What is the supposed advantage of following this rule?? What is acriticism of it? Has it been followed in the U.S.?b. Suppose the Federal Reserve engages in an open market sale ofsecurities. Explain using how this is supposed to affect theeconomy according to the Keynesian school (or what the textbook refers toas the "mainstream interpretation"). Graphs would be helpful.If the Fed wished to get the same effect on the money supply,would it increase or decrease the required reserve ratio5. Describe briefly, perhaps using a graph, how the size of thiscountry's national debt has grown relative to GDP.Explain and evaluate each of the following statements:? a) A national debt is like a debt of the left hand to theright hand; ??b) The least likely problem arising from a large public debt isthat the Federal government will go bankrupt;? c) The basic cause of our growing public debt is a lack ofpolitical courage;? d) The social security reserves are not being reserved. Theyare being spent, masking the real deficit.Median on this exam was 55 (or 60?) High was 95Econ 201? Exam #2??? Fall, 1993?????? Professor TwomeyPlease PRINT your name on the BACK of the LAST SHEET. Answer yourquestions on these sheets, using the backs if necessary. Questions are equally weighted.? Please ask for clarification of any ambiguousquestion.? Good luck.1. Identify the following with a sentence or at most two:a) Incomes policiesb) moral hazard problemc) Board of Governorsd) tax wedgee) asset demand for money2. What is the Phillips curve? Illustrate it on a graph, beingsure to label the axes.b) Will the following cause a movement along the Phillips curve,or a shift of the whole curve?? Explain each briefly, illustrating with agraph:i An increase in the price of oilii Workers believe that the recently elected president willsuccessfully fight inflationiii The Fed unexpectedly increases the money supply3. What is the national debt?? i In the last decade, has it been rising or falling?? ii Do government deficits always increase the debt? Explain.? iii What is crowding out, and how does it relate to the debateabout the debt?? iv Should the importance of government debt be judged in thesame way? that we evaluate the size of the debt of a private firmsuch as AT&T? Explain4. Suppose the required reserve ratio is 1/5, and that thecommercial banks as a group have deposits totaling $2000 billion, reserves of $400billion, and outstanding loans of $1600 billion.a) What does the consolidated balance sheet of the banks looklike? b) Now, suppose the Fed engages in an open market purchase of $40billion.i) After all the effects occur, what will be the new consolidatedbalance sheet?ii) By how much will the money supply change, and in whichdirection?iii) How will this affect investment, output and employment,according to the standard Keynesian analysis? Illustrate with an AS-AD graph.5. At right is a graph (from an intermediate econ textbook)of two different versions of velocity.a) What is velocity?b) What is the difference between velocity of M1 and thatof M2?c) Why is it important to know if the velocity ofmoney is constant? That is, what theory would be valid, if it were?Explain briefly.d) How does all this relate to Friedman's monetary growth rule?The median on this exam was 62; high was 93.ECON 201? Spring, 1993? Exam #2?????????? Professor TwomeyPlease PRINT your name on the BACK of the LAST sheet.? You willLOSE CREDIT if it appears anywhere else.? Use the backs of these sheets ifnecessary.? Questions are equally weighted. Ask for clarification of anyunclear question. Time: one hour.? Good luck.1. Identify the following with a sentence or at most two:a) tight money policyb) natural rate hypothesisc) Federal funds rated) productivity declinee) fiat money2. What is the "monetary rule" also called the "constant growthrate rule?" What are its advantages and disadvantage?? Is it more beneficialin a world where velocity is stable, or in one where it is unstable? Explain3. Suppose an economy has been operating normally for a period oftime, with a "medium" level of inflation at 5-7 percent, but no excessunemployment.? Then, an avowed inflation fighting president iselected, who promises to reduce inflation quickly to zero, by tight monetaryand fiscal policy. a) first, draw a Phillips curve of the economy before theelection, being careful to label the axes, and to indicate where in the graph theeconomy is operating.b) Describe what would happen to the economy after the election,in the short and medium terms, using separate graphs for both the"rational expectations" and "adaptive expectations" models.4a. Suppose the required reserve ratio is 1/4, and that there isan open market sale of $20 billion.? What will happen to the moneysupply?b) What will happen to aggregate demand? Show on a graph whatwould happen to prices and output.c) What would the Fed have to do the discount rate and to therequired reserve ratio, in order to achieve the same effect?5. In terms of the attached article:a) show on a graph of aggregate supply and demand, (or, if youprefer, a Phillips curve), where -it is asserted- the FED thinks theeconomy currently is operatingb) Is this an activist FED or one following a strict monetaristrule?c)The economic plan of President Clinton that the FED presumablydoes not want to "derail" is the plan which will lower the deficit byraising taxes and lowering (some) expenditures.? Why would the FED wish to see sucha plan passed? Is that consistent with our textbook's economics? Explain. Economics 201??? Exam #2? Spring, 1994? Prof. TwomeyPlease PRINT your name on the BACK of the LAST sheet. Nnswer onthese sheets, using the back sides if necessary. Questions are equallyweighted. Ask for clarification of any ambiguous question.? Good Luck.1. Identify the following with a sentence or at most two:a) Federal Funds Rateb) Incomes policyc) Rational expectationsd) Asset Demande) moral hazard problem2. Suppose the banking system has 600 billion dollars indeposits, 200 billion in reserves, and 400 billion in loans and governmentsecurities, in a situation where the required reserve ratio is 1/3.a) Now, suppose the Fed engages in an open market purchase of 5billion. What will happen to the (aggregated) balance sheet of the bankingsystem?b) By how much has the money supply changed?c) If businesses are pessimistic and do not wish to borrow, willthe money supply change by more or less that in part b)? Explain.3a. What is the monetary growth rule? State and explain brieflyone advantage and one disadvantage of following it.b. Why can't the Federal Reserve target the money supply andinterest rates at the same time?? Explain, and illustrate with a graph.4i. Does a government deficit always increase the money supply?Explain. ii. Does a government deficit always lead to inflation? Explainiii. What is crowding out?? Does its occurrence strengthen orweaken the case for discretionary fiscal policy?? Explain.5. Draw a graph of the Phillips curve, being sure to label theaxes. a) In what way does the Phillips curve represent a trade-off?b) Would the following lead to a movement along the Phillipscurve, or a shift of the whole curve?? Explain each answer, illustrating eachanswer with a graph. i) A new party wins election to Congress, leading people toexpect that government spending will increase rapidly in the near future. ii) Bad harvests worldwide lead to lower agricultural production iii) The perception of increased competition from abroad leadsworkers and businesspeople to moderate their demands for wage and priceincreases. iv). The Federal Reserve initiates a contractionary monetarypolicy.? v). A new law is passed which lowers income taxes.The median on this exam was 69; high was 87.? Economics 201??? Exam #2???? Winter, 1993 Prof. TwomeyPlease PRINT your name on the BACK of the LAST sheet.Answer on these sheets, using the back sides if necessary.Questions are equally weighted. Ask for clarification of any ambiguousquestion.? Good Luck.1. Identify the following with a sentence or at most two:a) Prime rateb) Equation of exchangec) Rational expectationsd) Asset Demande) moral hazard problem2. Suppose the required reserve ratio is 1/4, and the FederalReserve engages in an open market purchase of one billion dollars. a) By how much will this purchase eventually change each item ofthe banking system's balance sheets? Indicate with an appropriate "T"account.b) How will this affect the country's money supply?c) How will this affect aggregate demand and prices?? Explain,and illustrate with a graph.3a. What is the monetary growth rule? State and explain brieflyone advantage and one disadvantage of following it.b. Why can't the Federal Reserve target the money supply andinterest rates at the same time?? Explain, and illustrate with a graph.4ai. Does a government deficit always increase the money supply?Explain.? aii. Does a government deficit always lead to inflation?Explainb. State and explain briefly three causes for the Savings andLoan Crisis5. Suppose the money supply is decreased.? a. According to the Keynesian theory, how will this affect pricesand output?Explain your answer and illustrate it with a graph.? Indicatewhat special economic assumptions, if any, are being used.b. According to the monetarists, how will this affect prices andoutput? Explain your answer, and illustrate it with a graph.? Indicatewhat special economic assumptions, if any, are being used.The median on this exam was 54; high was 85.Economics 201? 10:30 Class?? Exam #2?? Fall, 1992??? Prof. TwomeyPlease PRINT your name on the back of the last sheet.? Ask forclarification of any ambiguous question.? Time: 1 hour.Questions are equally weighted.? Good Luck.1. Identify the following with a sentence or at most two:a) Moral hazzardb) Depository Institutions Deregulation and Monetary Control Act?? of 1980c) fiat moneyd) Federal funds ratee) Asset Demand2a). Consider an individual bank with an initial balance sheetcomposed of demand deposits of $500 million, reserves of $100 million, andloans of $400 million.? The required reserve ratio is 1/5.? A depositorwithdraws $2 million.? Indicate the balance sheet before the depositor's withdrawal,and after all adjustments to it have taken place2b). Returning to the original balance sheet, if the requiredreserve ratio is changed to 1/6, what volume of loans can be lent out? Indicate the ultimate composition of the balance sheet.3. Monetarism and rational expectations theory are two economicapproaches, or models, which have in common a dislike forgovernment intervention.A) Name one specific economic aspect they have in common, and oneway in which they differ.B).? What does a proponent of rational expectations believe willhappen to the economy if the government announces in advance a policy tolower inflation?? Explain, and illustrate with a graph.4. Suppose the required reserve ratio is one fourth, and that theFed engages in an open market sale worth $300 million.? How will thischange the balance sheet of the banking system?What does it do to the money supply?How will this change affect interest rates and aggregate demand?Illustrate each change on a separate graph. Econ 201? 12:30 Class Exam #2?? Winter, 1994??? Prof. TwomeyPlease PRINT your name on the BACK of the LAST Sheet. Time: 1hour. Answer on the backs of these sheets if necessary.? Ask for clarificationof any unclear question. Questions are equally weighted.1) Identify the following with a sentence or at most two:a) Net worthb) Ricardian Equivalence theoremc) Incomes policyd) moral hazard probleme) Federal Funds Rate2. Draw a graph of the Laffer curve, being sure to label theaxes.? Where on the Laffer curve did Mr. Laffer assert the US is located? What isthe major argument that he was wrong? How did his position differ from thatof more traditional economists, classical or Keynesian?3a. In discussing debates about fiscal policy and deficitspending, the book states: "Keynesians do acknowledge that a deficit financed bycreating new money will have a greater stimulus than one finance byborrowing." (p. 313). Explain this position.b) Is the velocity of money stable?? Does it matter? Explain.4a. Suppose Jones deposits $100 in a bank whose required reserveratio is 1/5.? After the bank has made all the relevant adjustments, byhow much will the components of its balance sheet change?b. In discussing rational expectations theory, the book assertsthat its followers are less worried about potential unemployment if thegovernment announces and carries out contractionary policies. What is thelogic behind this position? 5.??? With respect to the attached article, from a recent issueof the Wall St. Journal:? a) Explain and draw a graph of what is happening in the moneymarket. ??b) Explain and illustrate on a graph of the Phillips curve what"analysts"?? guess that the Open Market Committee thinks is the economy'scurrent?? position, and where the Fed wants the economy to go.? c) What's the big deal about making a statement? How does thiscompare to Friedman's monetary growth rate rule?? d) Is this a process of open market purchases or sales?The median on this exam was 68; the high was 95Econ 201? 1:30 Class Exam #2?? Winter, 1994??? Prof. TwomeyPlease PRINT your name on the BACK of the LAST Sheet. Time: 1hour. Answer on the backs of these sheets if necessary.? Ask for clarificationof any unclear question. Questions are equally weighted.1) Identify the following with a sentence or at most two:a) fiat moneyb) tax wedgec) Gramm Rudman Hollings Act (1985)d) Run on a banke) Incomes policies2. Suppose the banking system has 600 billion dollars indeposits, 200 billion in reserves, and 400 billion in loans and governmentsecurities, in a situation where the required reserve ratio is 1/3.a)Now, suppose the Fed engages in an open market purchase of 5billion. What will happen to the (aggregated) balance sheet of the bankingsystem?b) By how much has the money supply changed?c) If businesses are pessimistic and do not wish to borrow, willthe money supply change by more or less that in part b)? Explain.3. Draw a graph of the Phillips curve, being sure to label theaxes.? In what way does the Phillips curve represent a trade-off?b) Would the following lead to a movement along the Phillipscurve, or a shift of the whole curve? Illustrate and explain each answer.? i) A new party wins election to Congress, leading people toexpect that government spending will increase rapidly in the near future.? ii) Bad harvests worldwide lead to lower agricultural production? iii) The perception of increased competition from abroad leadsworkers and businesspeople to moderate their demands for wage and priceincreases.4a. What are the three functions of money.? Suppose that, insteadof having paper currency (or gold coins), we used some other item forexchange, such as cigarettes or coffee beans. How well would this new "money"perform each of these three functions?b. Define crowding out, discuss whether it relates to aggregatesupply or aggregate demand.5.In terms of the attached article from the New York Times, March18, 1994:? a) Explain and illustrate on a graph where the Fed thinks theeconomy is?? going, and what it intends to do about it? b) Explain and illustrate this process in terms of the moneymarket? c) What is the Federal Open Market Committee?? d) Why is there a difference between the growth rates of M1,M2, and M3?? e) What is the difference between required reserves and excess? reserves?The median on this exam was 74; the high was 91.Economics 201? 12:30 Class?? Exam #2?? Fall, 1992??? Prof. TwomeyPlease PRINT your name on the back of the last sheet.? Ask forclarification of any ambiguous question.? Time: 1 hour.Questions are equally weighted.? Good luck.1. Identify the following with a sentence or at most two:a) Prime rateb) crowding outc) fractional reserve systemd) transactions demande) Near monies2a. Why can't the Fed target interest rates and the money supplyat the same time? Illustrate with a graph.b. State three factors which contributed to the Savings and LoanCrisis.????? ?3a. Suppose an individual commercial bank initially has depositsworth $20 million, resrves worth $4 million, and outstanding loans totaling$16 million.The required reserve ratio is 1/5.Then someone deposits $1 million. Indicate what the balance sheet of the bank originally lookslike, and what it will ultimately look like after all its adjustments have taken place.3b. What is meant by a monetary rule?? Is such a thing good or ad for aneconomy? Explain 4. Suppose the required reserve ratio is one fourth, and that theFed engages in an open market purchase worth $500 million.? How willthis change the balance sheet of the banking system?What does it do to the money supply?How will this change affect interest rates and aggregate demand?Illustrate each change on a separate graph. Econ 201?? Winter, 1995??? Exam #2?? 9:30 Class? Professor TwomeyPlease PRINT your name on the BACK of the LAST PAGE. Use thebacks of the sheets if you need space.? Please ask for clarification of anyambiguous question. All questions are weighted equally. Remember to labelthe axes on your graphs. Good luck!1. Identify the following with a sentence or at most two:a) Target dilemmab) natural rate hypothesisc) functional financed) incomes policye) moral hazard2a. What is meant by the distinction between policy rules anddiscretion? What is the monetary growth rule? Discuss One argument in favorof using it, and one against using it.? Is our country currently followingit?b. What is meant by the Savings and Loan crisis? Discuss brieflythree reasons why it occurred.3a. Suppose that the required reserve ratio is 1/5, that thetotal amount of deposits in the commercial banks is $100 billion, and thatthere are $20 billion in reserves. What is the balance sheet of the bankingsystem?b. Now, suppose that the Fed engages in an open market sale of$10 billion. By how much does that affect the money supply, and how does itaffect the balance sheet of the banking system?c. Evaluate briefly the following arguments about the nationaldebt:? i) It will have to be paid off during your lifetime? ii) it isn't important because we owe it to ourselves? iii) financing it by borrowing raises interest rates? iv) it isn't important because we can always print up dollarbills to pay it off4a. Define and illustrate with a graph what is meant by thePhillips curve.b) In what sense does the Phillips curve illustrate a trade-off?c) Suppose the economy is in the situation it was when Reaganbecame president, that is, high (for us) inflation and a normal amountof unemployment. Suppose the government was to announce that tolower inflation it would reduce its expenditures. There are twointerpretations as to how that would affect the economy, referred to as rationaland adaptive expectations. Explain the difference between thoseapproaches, and illustrate each one on a graph.5. With respect to the attached note, taken from yesterday's WallSt. ournal:a) Recognizing that home purchases are an example of investment,illustrate with a pair of graphs what current monetary policy is doing tointerest rates and investment.b) Relate the above answer to the conversation about the economyslowing down, illustrating your answer with an AS-AD graph.c) Why would this help the stock and bond market?? The median on this exam was 56.Econ 201?? Winter, 1995? Exam #2?? 12:30 Class? Professor TwomeyPlease PRINT your name on the BACK of the LAST PAGE. Use thebacks of the sheets if you need space.? Please ask for clarification of anyambiguous question. All questions are weighted equally. Remember to labelthe axes on your graphs. Good luck!1. Identify the following with a sentence or at most two:a) prime rateb) net export effectc) fractional reserve systemd) new classical economicse) tax wedge2. The textbook presents a lengthy discussion of the debate onKeynesians versus monetarists.? Discuss: (a) two differences between thesegroups which are basically theoretical; b) two differences between the two groups in terms of policiesthey feel the government should follow.3. Explain briefly, and show (for each one) on a graph, how thefollowing will either move along the Phillips curve, or move the whole curve:a) the price of oil fallsb) government defense expenditure suddenly increasesc) a freeze in Brazil ruins their coffee crop, and so they can'tbuy as many products from the USd) the government lowers personal income taxese) the minimum wage is raised to $6.00 per hour.4a. What are the main functions of the Federal Reserve System?b. What are the two main components of the demand for money?Illustrate them on two graphs.c. Suppose the required reserve ratio is 25%, that the totalamount of deposits in commercial banks is $200 billion, and that there are$50 billion in bank reserves. What is the banking system's balance sheet? Now, suppose that the Fed engages in a $10 billion open market purchase.? Byhow much does this affect the money supply, and what would be the newconsolidated balance sheet of the banks?5. With regard to the attached article, taken from yesterday'sNew York Times, a major point is that the Fed was unlikely to raiseinterest rates because the economy was slowing.a) Explain and show on a graph (either AS-AD, or Phillips curve)what it means to be "slowing down" as opposed to be "heating up."b) Explain and show with some graphs how higher interest rateswould lower inflation.c) What could the representative from the Center for CommunityChange mean when he says that the Board of Governors is more attentiveto the banking system's interests than to the interests of workingAmericans? Explain.the median on this exam was 61.Econ 201??????? Exam #2?? Fall, 1994? ProfessorTwomeyPlease PRINT your name on the BACK of the LAST SHEET. If you needspace, write on the backsides of these sheets. Ask for clarification ofany unclear question.? Questions are equally weighted.1) Identify the following with a sentence or at most two:a) Laffer curveb) asset demandc) discount (interest) rated) moral hazard probleme) tax wedge2. In contrast with the Keynesians, the Monetarists have a modelof the macroeconomy which is summarized by a simple equation.? What isthat equation? Explain each of its components.-The unofficial leader of the Monetarists, Milton Friedman, hasproposed what is called the monetary rule, or the monetary growth rule. Explain what this is, and what are its alleged benefits.-Aside from the specific details of the monetary rule, give twoissues of government policy on which Monetarists and Keynesians disagree.3a. There are three main functions of money, which are used todefine what financial instruments are money.? Identify and explain brieflythose three functions.b. The Federal Reserve (the Fed) is a unique institution in ourcountry. What is meant by:- the independence of the Fed- the Fed is a quasi-public institution- the Fed is the bankers' bank4. Suppose we have a situation in which the require reserve ratiois 1/4, and there are no excess reserves in the banking system. What is the value of the money multiplier?If the Fed engages in an open market purchase of ten milliondollars, by how much does the country's money supply change?What would be the change in the consolidated balance sheet of thebanks?In order to get the same change in the money supply, would theFed increase or reduce the required reserve ratio?If people suddenly decided not to deposit all their new cash, butinstead to keep some excess cash, would that make the money supply bigger orsmaller?5. In terms of the attached excerpts from an article from Wednesday's Free Press:a) Explain why raising interest rates would lower inflation.Illustrate your argument with a Phillips curve or an AS-AD graph.b) Show the Keynesian argument about how this will affectinvestment in housing, in plant and equipment (by businesses) and others.c) There is opposition to the Fed's action, both on the part ofthe unions- AFL-CIO, and from the National Association of Manufacturers, abusiness group. Explain why each group might oppose an increase ininterest rates.Econ 201?? Exam #2???????? Fall, 1995? Professor TwomeyPlease PRINT your name on the BACK of the LAST sheet; it shouldnot appear anywhere else.? Questions are equally? weighted. Use the backs ofthese sheets if you need more space. Please ask for clarification ifthe question is unclear. Good luck.1. Identify the following with a sentence or at most two:a) prime interest rateb) Laffer curvec) medium of exchanged) stagflatione) fractional reserve system2a. Draw a Phillips curve, being sure to label the axes. Explainwhat is meant when people say the Phillips curve represents a "tradeoff."b) The United States in 1980 had about 13.5% inflation, but anearly 'normal' level of unemployment. Today we have only 2.5% inflation. Manypeople think that this improvement was due to government monetary and fiscalpolicy.? What sorts of monetary and fiscal policy would be needed?c) Illustrate those policies, and the path we would have expectedthe U.S. economy to follow, in terms of a Phillips curve.3a. What are some of the major functions of the Federal Reserve?b. What backs money; that is, what gives our paper currency somevalue?c. State and explain very briefly three (different) policyrecommendations of Supply Side economists.4a) Consider a single bank, which has deposits equal to tenmillion, reserves of two million, and outstanding loans and securities ofeight million, in a situation where the required reserve ratio is 20%.Suppose someone deposits a check in the bank of $500,000. Show the bank'sinitial and final balance sheet, after it regains zero excess reserves.b) Now consider a different example, concerning the nationalbanking system. The required reserve ratio is 1/4. The Fed engages in an openmarket purchase of $30 million. How will that affect the bankingsystem's balance sheet, and the money supply?c) What is meant by the velocity of money? Is it constant? Whymight it matter?? Explain.5a. What are the two major components of the demand for money? b. Show on a graph the determination of the equilibrium rate ofinterest.c. How might the following affect the demand for money, andtherefore the equilibrium interest rate? Illustrate each with a graph.? a) The expanded use of credit cards? b) an increase in nominal GDPThe median on this exam was 75. The high was 98Econ 201??? Exam #2? Spring, 1995? Professor TwomeyPlease PRINT your name on the back of the last sheet.? Answer onthese sheets, using the backsides if you need space. Please ask forclarification of any unclear question. Time: an easy hour. Good luck!1. Identify the following with a sentence or at most two:? a) fiat money? b) Federal Funds Rate? c) stagflation? d) Functional Finance? e) Tax wedge2a. What are the major functions of the Federal Reserve?? b. How or in what way is the Federal Reserve a uniqueinstitution in the U.S.?? b. Why does a central bank represent a centralization ofeconomic power? In what ways was the design of the Fed an attempt to counterthis? Was it successful? 3a. What is crowding out?? Explain and illustrate it with agraph. b. How is crowding out related to deficit spending? Is this goodor bad, in the sense does it make deficits more attractive or moreunattractive? Explain.c. The Fed is currently employing a tight monetary policy. Howshould this affect interest rates and prices?d. Is Friedman's constant money growth rate rule consistent withthis policy? Explain briefly.4a. Consider a single bank, in a situation with a requiredreserve ratio of 1/3. Jones deposits $600. How will that eventually change eachcomponent of the bank's balance sheet? b. Suppose that the required reserve ratio is 1/5. If the Fedengages in an open market sale of $300 billion, how will that change eachcomponent of the balance sheet of the entire banking system? By how much does themoney supply change?c. If the Fed were to increase the require reserve ratio, howwould that affect interest rates, investment, and national GDP andinvestment?? Illustrate your answer with graphs.5. Define a Phillips curve, and illustrate it with a graph.Consider an initial situation in which unemployment is at its"natural" rate, (around 5.5%), and inflation is about 4%. Indicate this point ona graph of the Phillips curve.Suppose now that the government agrees to balance the budget, bya combination of lower spending and higher taxes. Ignore supplyside effects on work effort, etc. According to demand side analysis, how willthe deficit reduction affect inflation and unemployment in the short run andthe long run? Explain, illustrating with a graph.How might the difference between rational expectations andadaptive expectations affect your answer to the above question?The median on this exam was 73. The high was 82. ................
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