Final Exam – Econ 304 – Chuderewicz – Fall 2017



THIS WILL BE GREAT PRACTICE FOR EXAM #2 – YOU WILL GET THESE QUESTIONS AND PROBABLY A FEW MORE – I WILL CLARIFY THE FRIDAY BEFORE THE EXAM – EXAM #2 IS ON WEDNESDAY NIGHT, NOVEMBER 6 FROM 8 – 10 PM.

IF AN ACE IS DRAWN - DO THE STAGFLATION OF THE 1970s

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IF A TWO IS DRAWN - DO THE NEW ECONOMY OF THE 1990s

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IF A THREE IS DRAWN - DO THE GREAT RECESSION OF THE 2000s

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a) (80 points total: 40 points for correct and completely labeled graphs, 40 points for explaining the movements from point A to point B and so on: Stagflation has points A,B,C,D, New economy has points A and B, Great Recession has Points A,B,C

In the space below, depict the episode that was chosen by the card flip (Stagflation, New Economy, or Great Recession) on the 4 graphs as we did in class - the MP curve on top left, the IS curve on top right, the AS - AD curve on bottom right, and the Phillps curve on bottom left (template provided). Label the relevant points from the appropriate diagram on the previous page. Make sure you completely label all graphs including all the relevant shift variables.

write your explanation from point to point referring to all your graphs in the space below: Please explain in as much detail as possible use and refer to temporary points Z like we do/did in class. If there are shifts in the respective diagram(s), discuss those first and the movement along the relevant curve second.

Explain the movement from A to B on your AS /AD diagram.

Explain the movement from A to B on your IS diagram.

Explain the movement from A to B on your MP diagram.

Explain the movement from A to B on your Phillip's Curve diagram.

Explain the movement from B to C on your AS /AD diagram.

Explain the movement from B to C on your IS diagram.

Explain the movement from B to C on your MP diagram.

Explain the movement from B to C on your Phillip's Curve diagram.

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Explain the movement from C to D on your AS /AD diagram.

Explain the movement from C to D on your IS diagram.

Explain the movement from C to D on your MP diagram.

Explain the movement from C to D on your Phillip's Curve diagram.

b)(20 points total: 10 for graph and 10 for explanation) Using the episode chosen with the card flip, depict the points above on the two period consumption model. In your explanation, explain exactly why consumption changes the way it does from each point to each point. Be sure to refer to why the budget constraint changes the way it does!

c)(20 points total: 10 for graph and 10 for explanation) Now depict the chosen episode and the associated points using the UC/MPK diagram. Be sure to explain exactly why the profit maximizing K* changes the way it does (or doesn't) as we move from Point to Point. What are the implications on investment? Explain using the equation that connect K* with investment. Please explain in as much detail as possible use and refer to temporary points Z like we do/did in class. If there are shifts in the respective diagram(s), discuss those first and the movement along the relevant curve second.

d)(20 points total: 10 for graph and 10 for explanation) Now depict the chosen episode and the associated points using the closed economy S = I diagram. Be sure to explain exactly why the curves change the way they do including all the relevant shift variables. Again, be sure to explain the intuition and we move from point to point and how and why we get back to the closed economy equilibrium (explain how the goods market clears using the equation Y = C + I + G + NX Please explain in as much detail as possible use and refer to temporary points Z like we do/did in class. If there are shifts in the respective diagram(s), discuss those first and the movement along the relevant curve second.

Part e), the last part of this question depends on the card flip:

If Ace, Stagflation, do e) Part Ace (Stagflation), if Two, do e) Part Two (New Economy), if Three, do e) Part Three (Great Recession)

e) Part Ace (Stagflation) (20 points) Using a production function and labor market diagram (please draw vertically with production function up top), explain why we move from point A to point B in the stagflation episode. Explain in detail what happens in the labor market and how the labor market clears exactly. With regard to the production function, name two reasons why output changed the way it did.

e) Part Two (New Economy) (20 points) Using a production function and labor market diagram (please draw vertically with production function up top), explain why we move from point A to point B in the New Economy Episode. Explain in detail what happens in the labor market and how the labor market clears exactly. With regard to the production function, name two reasons why output changed the way it did.

e) Part Three (Great Recession) (20 points) We discussed the perplexing reality of a flat SR Phillips curve during this period. We noted that after the Bernanke Fed took the 'date' off of their forward guidance they replaced it with "at least as long as the unemployment rate remains above 6 1/2 percent." This forward guidance didn't work so well ... why? Use the example we used in class. .

Referring to the article How Long Can the Great Jobs Picture Continue? The Fed Thinks Indefinitely and the graphic below, explain why the Phillips curve is currently flat. In order to support your answer, explain the theory as to why the Phillips curve is supposed to have a negative slope.

From the article:

There is plenty of debate about why the Phillips curve has flattened and inflation is less sticky. Fed officials tend to credit themselves for making clear they will hold inflation near 2% no matter what. That encourages workers and firms to plan on 2% inflation, an expectation that becomes self-fulfilling.

Use the expression for the Phillips Curve to explain 1) why workers and firms expectations of 2% become self fulfilling and 2) Given the excerpt, what is the value of ω and why?

Finally, explain how the articles titled Pause Interest-Rate Hikes to Help the Labor Force Grow and How Retiring Baby Boomers Hinder U.S. Wage Growth, support the idea that the current short-run Phillips curve is indeed flat! Complete your explanation of why the Phillips curve is flat using the efficiency wage theory - that is, explain why real wages are sticky, they don't fall when the economy weakens and they don't rise when the economy gets stronger.

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USE THE SPACE BELOW AND ON THE NEXT PAGE FOR YOUR ANSWER

SECOND QUESTION – DO ONLY ONE OF THE FOLLOWING TWO QUESTIONS, FOUR OR FIVE, DEPENDING ON THE CARD FLIP.

FOUR: Do this question if a four is flipped (80 points- 40 for graphs and 40 for explanation) We discussed the period often referred to as the 'heyday' of the Keynesians during the 1960's. From the article: (12/31/1965) "We are all Keynesians Now" we discussed the following excerpt:

Labor Secretary Willard Wirtz argues that the Government should continue pushing and stimulating the economy, even at the risk of some inflation, in order to bring unemployment down to 3%.

The relevant Phillip's curve graphic is below:

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Please use the template below to depicts points A, B, and C on the four diagrams. . Make sure you completely label all graphs including all the relevant shift variables.

FIVE: Do this question if a five is flipped (80 points- 40 for graphs and 40 for explanation) We discussed the Volcker dis-inflation during the 1980's.

The relevant Phillip's curve graphic is below:

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Please use the template below to depicts points A, B, and C on the four diagrams. . Make sure you completely label all graphs including all the relevant shift variables.

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write your explanation from point to point referring to all your graphs in the space below: Please explain in as much detail as possible use and refer to temporary points Z like we do/did in class. If there are shifts in the respective diagram(s), discuss those first and the movement along the relevant curve second.

Explain the movement from A to B on your AS /AD diagram.

Explain the movement from A to B on your IS diagram.

Explain the movement from A to B on your MP diagram.

Explain the movement from A to B on your Phillip's Curve diagram.

Explain the movement from B to C on your AS /AD diagram.

Explain the movement from B to C on your IS diagram.

Explain the movement from B to C on your MP diagram.

Explain the movement from B to C on your Phillip's Curve diagram.

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