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Econ 1120 - INTRODUCTORY MACROECONOMICSPRELIM #2 – Wissink - S2016 – April 14________________________________________ ____________________________________Your LAST (FAMILY) NAME Your First (given) nameYour NetId:_________________ Your Student Number:________________________________Instructions and Exam Taking Policy:There are two sections in this exam. Answer all questions.Part I: 14 multiple choice questions @ 3 points eachPart II: 3 problems @ 19, 19, and 20 points eachTotal Points = 100, Total Time = 90 minutes.NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.NO GRAPHING CALCULATORS.NO BOOKS. NO NOTES. NO HELP SHEETS.NO TALKING TO EACH OTHER.Check the TA’s name for the section you regularly attend (that is, where you will pick up your prelim): DIS #TAMeeting TimesLocation250, 251Qilu YuM 8:00am-9:55amRockefeller 103252, 253Jose LopesW 2:30pm-4:25pmBaker Lab 119254, 255Sujan LamichhaneF 9:05am-11:00amGoldwin Smith G64256, 257Nobu KanazawaF 1:25pm-3:20pmRockefeller 102One more time, please…_____________________________________ _________________________________Your LAST (FAMILY) NAME Your First (given) nameYour NetId:_________________ Your Student Number:________________________________GRADINGMC (out 42 points) =___________________Q1 (out of 19 points) =__________________Q2 (out of 19 points) =__________________Q2 (out of 20 points) =__________________TOTAL SCORE: =_____________________left0Part I: Multiple Choice. Do them ALL. Circle the letter for your answer.020000Part I: Multiple Choice. Do them ALL. Circle the letter for your answer.. For a simple frugal economy with no government and no international trade, which one of the following statements is false?At every level of aggregate output/income (Y), aggregate desired expenditure equals consumption plus desired investment.At every level of aggregate output/income (Y), aggregate output/income (Y) equals aggregate desired expenditure.At every level of aggregate output/income (Y), aggregate output/income (Y) equals consumption plus saving.Saving is a leakage out of the spending stream.If planned investment is exactly equal to saving, then aggregate desired expenditure is exactly equal to aggregate output/income (Y).. Suppose that the Norwegian economy can be characterized completely by the following equations: C = 100 + .8Yd; G = 500; T = 200; Id = 200. The equilibrium level of output for the Norwegian economy isA. 2,850.B. 3,200.C. 4,000.D. 4,800.E. 5,000. Given the Norwegian model above, at the equilibrium level of output in Norway, saving equalsA. 630. B. 1,660. C. 850. D. 500. E. 0. The absolute value of the tax multiplier is smaller than the government expenditure multiplierbecause the federal government is bigger than the internal revenue service.because the immediate impact of an increase in government expenditures adds fully into aggregate desired expenditures.because people only pay their taxes on April 15.because the immediate impact of a decrease in taxes adds fully into aggregate desired expenditures.because our tax system is progressive.. Refer to the table above for a closed economy. At an output level of $2,400 billion, there is a tendency for aggregate output(income)to fall.to increase.to remain constant.to either increase or decrease.to increase at an increasing rate.Aggregate Output (Y)ConsumptionDesired Investment$3,000$2,000$1,600$4,000$2,800$1,600$5,000$3,600$1,600$6,000$4,400$1,600$7,000$5,200$1,600$8,000$6,000$1,600. Refer to the table above and assume there is no government and no foreign trade in the model. If the economy is in equilibrium, and desired investment increases by $100, then Y* willincrease by $100.decrease by $100.increase by $500.decrease by $500.increase by $125.. Suppose the required reserve ratio is 10%. A $75 million cash deposit into checking accounts at commercial banks of currency currently held by people will allow commercial banks to potentially create at most$675,000 in new money supply.$6.75 million in new money supply.$750 million in new money supply.$675 million in new money supply.$75 million in new money supply.. Consider Mistrustville. Its Fed has set its required reserve ratio, rrr, at 15%. Suppose that when people in Mistrustville buy securities from their Fed they pay for them with currency they keep at home under their mattresses, since they do not trust the commercial banks. As compared to an economy where everyone keeps all their money as demand deposits in commercial banks, and thus pays their central bank with their checking accounts, the odd behavior of people in Mistrustville will tend tocreate inflationary pressures.make monetary policy less effective.make monetary policy more effective.make fiscal policy less effective.make fiscal policy more effective.. Susan offers you the following promissory note today: “I Susan Soprano, promise to give you $1,000 two years from today.” Suppose the current market interest rate is 4%. Which one of the following is true?Susan’s promise is worth less than $1000 today.Susan’s promise is worth $1000 today.Susan’s promise would be worth more today if the market interest rate were 6% rather than 4%.Susan’s promise would be worth more today if you received the $1000 three years from today rather than one year from today.Susan’s promise is worth more than $1040 today.. Assume there are no leakages from the banking system and that all commercial banks are fully loaned up. The required reserve ratio is 16%. If The Fed sells $5 million worth of government securities to the public, the change in the money supply will be+31.25 million-$16 million.-$31.25 million.-$80 million.-$26.25 million.. Consider the typical model of an economy where there is a goods and services market and a money market. Suppose the desired investment curve is very interest rate sensitive. In such an economythe fiscal policy crowding-out effect is small.the fiscal policy crowding-out effect is large.monetary policy is extremely ineffective.reducing the money supply will have a big impact on Y*, whereas increasing the money supply has very little impact on Y*.there is no feedback effect with either monetary or fiscal policy.35794951905000. Refer to the figure on the right: _____________ , ceteris paribus, will likely decrease the equilibrium interest rate without changing equilibrium money holdings.An increase in money demandA decrease in money supplyAn increase in aggregate YA decrease in aggregate YAn increase in money supply. Refer to the figure for the previous question: If the interest rate is currently above 5%there is excess money supply, so people will sell bonds, which will lower the price of bonds and increase the interest rate.there is excess money supply, so people will buy bonds, which will increase the price of bonds and lower the interest rate.there is excess money demand, so people will buy bonds, which will increase the price of bonds and lower the interest rate.there is excess money supply, so people will buy bonds, which will increase the price of bonds and increase the interest rate.there is excess money supply, so people will sell bonds, which will increase the price of bonds and lower the interest rate.. Assuming the fixed price model presented in class with a money market and goods and services market, which one of the following pairs of policy events will definitely lead to a decrease in the equilibrium interest rate?The Federal Reserve purchases government securities from the public and the Federal Reserve increases the required reserve ratio on demand deposits.The Federal Reserve increases the discount rate and Congress increases government expenditures.The Federal Reserve purchases government securities from the public and Congress decreases government expenditures.The Federal Reserve sells government securities to the public and Congress increases net taxes.The Federal Reserve purchases government securities from the public and Congress decreases net taxes.Keep going….0457200Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.020000Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.1. Suppose an economy completely described the following equations:Note: Yd refers to disposable income and there is no money market or inflation.What is the definition for aggregate desired expenditure, AEd?What is the expression for aggregate desired expenditure, AEd, given this model?Derive the expression for equilibrium output/income Y*, given this model.What are the expressions for the Government expenditure multiplier, KG, and the Tax multiplier, KT, and the Balanced Budget multiplier, KBB, given this model?Graph the “Keynesian Cross” diagram to represent this equilibrium.In your diagram show how a decrease in subsistence consumption impacts the equilibrium.Discuss this result in context of the “Paradox of Thrift”.Answers:Answers:2. Assume the following balance sheets for The Federal Reserve, ALL Commercial Banks and Jane Q. Public. Assume that the required reserve ratio equals 5% and that once money enters the banking system as Demand Deposits it stays in the banking system, as do all loans and all monies received when loans are used to make purchases. Also assume that all commercial banks operate with zero in excess reserves and all commercial banks keep all their reserves at The Fed.Federal Reserve (The Fed)ALL Commercial BanksJane Q. PublicAssetsLiabilities+Net WorthAssetsLiabilities+Net WorthAssetsLiabilities+Net WorthSecurities$125$45ReservesReserves$ 45$900DDepositsDDeposits$20$ 0Debts$80Currency in circulationLoans$855Securities$50$70Net WorthWhat is the current value of the money supply?Now…Consider what happens when The Fed buys $10 worth of government securities from Jane Q. Public. Assume The Fed writes Jane Q. Public a check for $10; Jane immediately turns over her government securities to The Fed and takes the $10 check and deposits it into her local commercial bank.Fill in the balance sheets below for how things look immediately after these transactions.Federal Reserve (The Fed)ALL Commercial BanksJane Q. PublicAssetsLiabilities+Net WorthAssetsLiabilities+Net WorthAssetsLiabilities+Net WorthSecuritiesReservesReservesDDepositsDDepositsDebtsCurrency in circ.LoansSecuritiesNet WorthFill in the balance sheets below for how things look at the final equilibrium position, assuming all commercial banks are operating with zero in excess reserves and there are no leakages out of the banking system.Federal Reserve (The Fed)ALL Commercial BanksJane Q. PublicAssetsLiabilities+Net WorthAssetsLiabilities+Net WorthAssetsLiabilities+Net WorthSecuritiesReservesReservesDDepositsDDepositsDebtsCurrency in circ.LoansSecuritiesNet WorthWhat has happened to the money supply, and by how much, as a consequence of The Fed’s Open Market operation?Identify two qualitatively different changes to the description of this economy which would decrease the efficacy of The Fed’s Open Market Operation. Briefly defend your position.3. Suppose the following information for the economy of C?te d’Ivy which uses the dollar ($) as its currency. Currently Y*=$30,000 and YFE=$20,000. The investment multiplier is 5. The desired investment function is Id=20,000-20,000r where r is the interest rate (in decimal form). Money supply is completely determined by The Fed. Assume all banks operate at zero excess reserves and that all money stays in the banking system as demand deposits of the public.Assume the following money market equations:Money demand = MD = 10,000 – 18,000rTotal Reserves of the entire commercial banking system = 230The required reserve ratio for the commercial banking system = rrr = 5%. = .05What is the current value of the money supply?Given the money supply, what is the current equilibrium interest rate?Given the current equilibrium interest rate, how much is Id?If the monetary authorities (The Fed) want to get the economy to YFE, by how much and in what direction would investment need to change via monetary policy?In order to achieve full employment output, should The Fed buy or sell securities?How many dollars of securities should The Fed either buy or sell (based on your answer above)?What is one reality wrinkle that could make The Fed’s impact on the economy weaker than this model predicts?Answers:Answers: ................
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