EC301 Open-Book Midterm Exam (Weight 110 points)
1. (7 points) How are presidential election outcomes related to the performance of the economy? 2. (7 points) Discuss the difference between Microeconomics and Macroeconomics. 3. (10 points) Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all.” Do you agree? Why or why not? Explain: “Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero.” 4. (7 points) What are the major factors that have affected U.S. household consumption since the recession in 2001? 5. (7 points) Briefly explain how the following would shift the IS function to the right. a.
A change to lump-sum taxation (Specify whether increase or decrease is needed to shift IS curve to the right.) b.
A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.) 6. (7 points) Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over. a. MS.
b. MD (money demand).
c. P (price index).
7. (7 points) By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67? 8. (10 points) Suppose that private sector spending is highly sensitive to a change in interest rate. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering real GDP 9. (10 points) Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal. 10. (7 points) What are government’s fiscal policy options for ending severe demand-pull inflation? Use the aggregate demand-aggregate supply model to show the impact of these policies on the price level. Which of these fiscal policy options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large? 11. (10 points) Explain why relatively flat as opposite relatively steep labor demand curves are more consistent with the empirical observation that there are relatively minor changes in the real wage rate over the course of the business cycle. 12. (7 points) Is sustainable long-run equilibrium always reached when the AD and SAS curves intersect? Why or why not? 13. (7 points) If the equilibrium real wage remains constant, what happens to the nominal wage when the actual inflation rate exceeds the expected inflation rate? 14. (7 points) “In the steady state, the government benefits from inflation.” Explain.
Studies have proven that presidential election outcomes are definitely related to the performance of the economy. The winning presidential party retains the office of presidency while personal income grows at a faster, higher rate than the long-term rate. The incumbent presidential party will be voted out of office when income grows at a rate lower than the long term rate. Question 2.
Microeconomics meaning small, is a branch of economics that studies the behavior of individual households and firms by making decisions on the allocation of limited resources. Normally, it applies to markets where goods or services are bought and sold. Macroeconomics...
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