a) real money balances
b) auction market
c) direct crowding out
d) supply shock
e) liquidity trap
2. In a standard IS-LM model (with upward sloping aggregate
supply curve), assume that the government increases its
expenditures, financing this with bond sales. What happens to:
a) prices
b) interest rates
c) real output
d) consumption
e) investment
f) the money supply
g) the deficit
3a. What determines the slope of the LM curve? Explain,
illustrating with a graph.
b. In what sense is the situation in which the LM is vertical a
"classical case?"
c. What is monetary accommodation? Illustrate with a graph.
4a. Consider the Keynesian theory of aggregate supply in which
money wages are variable. How does an increase in expected
prices affect the labor market and the aggregate supply schedule.
Explain, illustrating with a graph for each market.
b. Why is the aggregate demand curve downward sloping? Explain,
illustrating with a graph.
5. What is Friedman's constant growth rate rule?
Which of the following strengthen the case for implementing that
rule, and which worsen it? Explain briefly.
a. A stable or an unstable velocity of money
b a steep or a flat IS curve
c a stable or an unstable demand for money
d. accurate or inaccurate forecasts of the main economy
aggregates
The median on this exam was 60. The high was 94
Econ 301 Exam #3 Fall, 1994 Professor Twomey
Please PRINT your name on the BACK of the LAST sheet. Answer on
both sides of these sheets, as necessary. Ask for clarification
of any unclear question. Questions are equally weighted. Good
luck.
1. Identify the following with a sentence or at most two:
a) natural rate
b) policy ineffectiveness postulate
c) hysteresis
d) transitory income
e) efficiency wage
2. State and explain briefly three components of the user cost of
capital.
How will government fiscal (or monetary) policy affect each of
those three components, if at all? Explain briefly.
What is the difference between intendedand unintended inventory
accumulation, and why might it be important?
3a). Explain and illustrate with a graph (or two) how the
predictions would differ between a Keynesian and a New Classical
Economist, as to what would happen be the short term effect in
the labor market if there were an expected increase in the money
supply.
According to our text, with which - if any - of these two visions
would a monetarist agree, and why?
4a). Show on a graph how, according to the Life Cycle Hypothesis,
a person's savings would be expected to change over time.
Explain briefly how that relationship would change if:
a) social security programs were eliminated
b) there were a stock market crash during the person's middle age
c) the person were poor and did not have good access to capital
markets as a youth
5) In the text we studied two new orientations in macroeconomics,
called real business cycle and new keynesian. The following are
some factors which, according to one (or both) theory(ies), will
affect output and employment. For each one, identify which model,
state how the factor would affect output and employment, and
explain the reasoning used by the particular school. Sometimes
graphs help in these explanations.
i) There is a decline in unionization in the economy's labor
force
ii) due to a cultural change, people value leisure more, and
consumption less, than was previously the case.
iii) there is a technology shock caused by bad weather
iv) production technology changes such that it is easier to
verify if a worker is loafing on the job
v) the personal income tax is reduced
Econ 301 Final Exam Fall, 1994 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. Questions
are equally weighted; if any question is unclear, please ask for
clarification. Use the backs of these sheets if you need space.
Time: unlimited - about one hour.
1. Identify the following with a sentence or at most two:
a) endogenous growth
b) Partisan Theory
c) Open Market Desk
d) Ricardian equivalence
e) Structural Deficit
2. Suppose the Federal Reserve is using an interest rate as an
intermediate target, while real income is the ultimate policy
target, and there is an autonomous drop in business investment
that the Federal Reserve had not predicted. Use the IS-LM model
to show the effects of the shock. Would income have been
affected more or less if the Federal Reserve were using a money
stock target?
3a. The textbook discussed in detail two theoretical
interpretations of the demand for money; the Inventory Theoretic
Approach and Tobin's portfolio diversification. Without using
graphs or fancy formulas, what are the major factors each theory
utilizes to explain the demand for money?
b. What is meant by instability of the demand for money in the
U.S. economy during the 1970s and 1980s, and which of the factors
discussed above in the first part of this question are felt to be
most important in explaining that instability?
4a. The public choice view of policy making denies that officials
make their decisions with a disinterested view of what is best
for the economy as a whole, and assert that the officials are
simply vote maximizers. Bad policies, it is argued, result from
bad votes. Identify and discuss three versions of the types of
voter behavior which lead to this result. Is this version of
voters consistent with rational expectations view of us as
economic decision makers?
b. Explain the concept of the money multiplier. What are the
major economic factors which determine its size?
5. In the textbook's discussion of supply side economics, major
attention is focused on the role of taxes. Explain (and
illustrate with a graph) the argument that taxes reduce each of
savings and investment.
Is the focus on savings and investment in agreement with the
findings of Denison on the major sources of economic growth for
the United States? Explain.
Identify one other economic variable that Supply Siders feel is
important for growth of the economy, and that they believe is
significantly hindered by taxes which are "too high."
Explain the link between taxes and this factor.
The median on this exam was 56; the high was 94.
ECON 301 Fall, 1992 Exam #1 Professor Twomey
Please PRINT your name on the BACK of the last sheet. Answer on
these sheets, using the backs if necessary. Ask for clarification of
any unclear question. Questions are equally weighted. Time: 1 hour.
Good luck.
1. Identify the following with a sentence or at most two:
a). twin deficits
b) capital account
c) natural rate of unemployment
d) distinguish between induced and autonomous taxes
e) distinguish between exogenous and endogenous variables
2a. Define crowding out.
Answer with a graph and a short explanation:
b) When is there more crowding out, with a steep aggregate supply
curve, or
a flat one?
c) Is crowding out greater if the LM is steep or flat?
d) Is crowding out greater if the wealth effect on the demand for
money is
large or small?
3. In the text, as well as in class, we contrasted the IS-LM
analyis of a closed economy, which does not engage in foreign trade, with that
of a small open economy with a fixed exchange rate. In which case will
monetary policy be more effective? Show with a pair of graphs.
4a. If Consumption = 100 + 0.9Disposable Income and Taxes = 25 + 0.25Income, What
is the value of the multiplier? By how much does income change if government
expenditures increase by 50?
b. Here's a hard one. The normal derivation of the
IS curve derives its having a slope because of the Marginal Efficiency of
Investment curve, in which investment declines as interest rates rise. One thing
which hasn't been mentioned, yet, is that savings might depend on interest rates,
in which case so will consumption and, finally, the IS curve. Will the
incorporation of the effect of interest rates on saving make the IS curve steeper
or flatter?
5. The textbook has a long discussion about what happened to real
income and interest rates in the US economy during three periods of
contractionary monetary policy.
a) First of all, show what the standard IS-LM analysis says
should happen.
b) If there is a vertical aggregate supply curve, how will that
affect the standard analysis? Show on a graph.
c) The book goes into the details of how the real interest rate
changed in those three episodes. What is the real interest rate, why are we
interested in it, and what should happen to it if there is a
contractionary monetary policy?
Econ 301 Exam #2 Fall, 1992 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. You will
lose credit if your name appears anywhere else.
Answer on these sheets, using the backsides if necessary. Ask
for clarification of any ambiguous question. Time: 1 hour.
1. (20 points) Identify the following with a sentence or at most
two:
a) Nominal GNP targeting
b) discouraged workers
c) equation of exchange
d) golden rule
e) feedback policy
2. (15 points) If the economy is characterized by supply shocks,
will real wages be pro-cyclical or countercyclical? Explain, illustrating
with parallel graphs of aggregate supply and demand, and the labor
market.
3a.(10 points) What is the "Solow residual" and why is it
important? Give one reason why it may be overestimated, and one why it might be
underestimated?
b. (10 points) What is overshooting, and why might it be
important?
4. Under what circumstances does monetary targeting stabilize the
economy better than interest rate targeting? (15 points)
5. (15 points) Does an unaticipated change in aggregate demand
cause stagflation? Explain, illustrating your answer with a graph.
6. (15 points) The textbook devoted most of Chapter 9 to a
microeconomic based theory of unemployment, which departs from modeling
separately job losers and job gainers.
a) State and explain very briefly two factors which affect job
losses?
b) How do price expectations fit into this model?
c) State and explain very briefly two advantages to this strategy
of explaining unemployment, versus a Phillips curve approach which
would be based on some version of rational or adaptive expectations.
The median on this exam was 65.
Econ 301 Final Exam Fall, 1992 Professor Twomey
Please PRINT your name on the BACK of the LAST SHEET. You will
lose credit if your name appears anywhere else.
Answer on these sheets, using the backsides if necessary. Ask
for clarification of any ambiguous question. Time: 1 hour.
1. (20 points) Identify the following with a sentence or at most two:
a) Real exchange rate
b) Ricardo Barro hypothesis (theorem)
c) Tobin's q
d) Transitory Income
e) J curve
2. What is the life cycle hypothesis? Explain it, and then
present two predictions derived from it, which are relevant for government
policy.
3. Why might floating exchange rates isolate a country from
disturbances caused from overseas? Explain, using a graph if necessary.
b) Is this isolating effect, if true, beneficial or harmful?
Explain.
4. The textbook has a lengthy discussion comparing changes in the
velocity of money with changes in interest rates. Some emphasis is placed
on differing ways of defining money.
a) What is the theoretical prediction of how the velocity of
money should vary with interest rates?
b) Which definition of money is it whose velocity performs most
closely to this prediction?
c) Very briefly, what is the book's explanation of why the other
definitions do not perform as well?
5a. Describe briefly what is meant by the investment accelerator.
b. What practical policy implications does this model predict?
c. How will the accelerator change if:
a) The capital output ratio rises?
b) Real world lags are taken into account
c) The desired capital output ratio is sensitive to interest
rate changes?
The median on this exam was 67.
Econ 301 Final Exam Fall, 1995 Professor Twomey
Please PRINT your name on the back of the last sheet. You will
lose credit if it appears anywhere else. Questions are equally
weighted. Ask for clarification if you are unsure of what is
being asked. Time: whatever you need - about an hour. Good luck!
1). Identifications:
a. SDR
b. voter myopia
c. Ricardian equivalence
d. accommodative monetary policy
e. public choice view
2. Suppose that the Federal Reserve is using an interest rate as
an intermediate target, while real income is the ultimate policy
target, and there is an autonomous drop in business investment
that the Fed had not predicted. use the IS-LM model to show the
effects of the shock. Would income have been affected more or
less if the Federal Reserve were using a money stock target?
Explain.
3a. Does an increase in the deficit always lead to an increase in
interest rates? Explain.
b. If the MPC is 0.8 and the marginal tax rate is 0.2, what is
the value of the multiplier?
If a new tax law raises the marginal tax rate to 0.3, what
happens to aggregate demand? What happens to the multiplier?
Explain briefly.
4.Suppose a country with a fixed exchange rate has a balance of
payments surplus. What specific monetary and fiscal policies
would eliminate that surplus? Explain briefly.
b. What is the difference between internal and external balance,
and why isn't the optimal level of income the same in both?
5. Now, suppose a country is on a flexible exchange rate system.
What will happen to the equilibrium exchange rate (appreciate or
depreciate) if that country engages in a tight monetary policy?
Explain your answer with a graph of the market for foreign
exchange, being careful to label the two axes.
b. Why might a floating exchange rate provide "insulation"? In
what cases might this be desirable, and when not? Explain each
answer.
median was 49. High was 82
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