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Fall, 2009 Exam #1 not available.
Econ 301 Intermediate Macroeconomics Exam #2 Fall, 2009 Professor Twomey

Please PRINT your name on the BACK of the last sheet. You will lose credit if it appears anywhere else.

Answer on these sheets, using the flip sides if necessary. Please ask for clarification if any question is ambiguous. BE SURE TO LABEL EACH AXIS on your graphs. Time: the entire class. Good luck.


  1. Identify the following with a sentence or at most two (20 points)

  1. Subprime borrowers

  2. Pigou Effect

  3. Okun’s Law

  4. Federal Funds Rate

  5. Liquidity Trap




  1. (10 points) Employment rates –however measured – are lower in Europe than in the U.S. Identify and discuss briefly three potential explanations.




  1. (20 points) Consider the Mundell-Fleming model of a small open economy. Suppose the country reduces government expenditures. For both situations of fixed exchange rates and flexible exchange rates, explain and illustrate (separate graphs) how this will affect output, domestic interest rates, prices, and net exports.




  1. Two easy questions for five points.

  1. What is meant by the term ‘monetary transmission mechanism,’ and what is this mechanism in the IS-LM model?

  2. What is meant by ‘leading indicator?’ Give three examples.




  1. (15 points) Explain rigorously, and illustrate with a graph, the impact on the LM curve of an increase in the demand for money, caused, let’s say, because of a change in government regulation.




  1. (15 points) a. Explain and draw a graph of the textbook story of the short run and long run impacts that occur when the economy experiences an increase in aggregate demand. What is the key consideration of the transition from short run to long run equilibrium?

  1. Government response to macroeconomic shocks can either be accommodative or not (non-intervention). With regard to non-accommodative response, what important macroeconomic difference is there in terms of the source of the shock, from the demand side or the supply side? (Assume the shock is permanent). Graph optional.




  1. (15 points). Suppose that, due to some political event, a country’s risk premium declines. Explain and illustrate with a graph what will happen to that country’s exchange rate.

The high on this exam was 100; the median was 72.
Econ 301Intermediate Macroeconomics Final Exam Fall, 2009 Professor Twomey

Please PRINT your name on the back of the last sheet. You will LOSE CREDIT if it appears anywhere else. Answer on these sheets, using the backsides if you need space. Please ask for clarification if any question is unclear. Good luck!



  1. Identify the following with a sentence or at most two: (20 points)

  1. Sacrifice ratio

  2. Time inconsistency

  3. Efficient market hypothesis

  4. Tobin’s q

  5. Imperfect information model




  1. (20 points) Will an open market purchase lead to an increase or a decrease in the money supply? If the currency ratio is 40% and the required reserve ratio is 5%, by how much does an open market purchase of $50 billion change the money supply?

How should the introduction and increased usage of credit and debit cards affect the money multiplier? Explain briefly.

Suppose that financial regulation has led to a reduction in the number of bank branches in our society. By itself (i.e., ignoring other basic factors that may have contributed to that regulation or that reduction), how will this reduction in bank branches affect the money supply? Explain briefly.




  1. (10 points) Demographers predict that the fraction of the population that is elderly (retired) will increase over the next 20 years. What does the life-cycle hypothesis predict will be the influence of this the demographic change on the national saving rate? Explain briefly.




  1. (10 points) Suppose that, in an election year, the opposition candidate campaigns on a platform of instituting an investment tax credit, the year after the election. If this candidate has a decent chance of winning, what impact will that promise have on investment during the current year? Explain briefly.




  1. (10 points) Explain whether borrowing constraints increase or decrease the potency of fiscal policy to influence aggregate demand, in each of these cases:

  1. A temporary tax cut

  2. An announcement of a future tax cut

  1. Suppose that the economy is initially at long run full employment equilibrium. Then the government unexpectedly increased Federal spending, without raising taxes, thereby causing a deficit.

Explain how this will affect real GDP, unemployment, inflation, and interest rates, using the three graphical techniques of IS-LM, AD-AS, and the Philips curve. (20 points)
7 (10 points) What is meant by inflation targeting, by the Taylor rule, and how do these two concepts differ between each other?
The high on this exam was 97; the median was 81.
Econ 301 Fall, 2008 Exam #1 Prof. Twomey

Please PRINT your name on the BACK of the last sheet. Write your answers on these sheets, using the backsides if you need more space. Questions are equally weighted. Please ask for clarification if the question is unclear. Be sure to label each axis on your graphs. Time: the full class. Good luck.



  1. Identify the following with a sentence or at most two:

  1. Official settlements balance

  2. User cost of capital

  3. stagflation

  4. Marginal revenue product of labor

  5. Tobin’s q




  1. Explain briefly what is meant by Ricardian equivalence, and what would be the diametrically opposite situation, where Ricardian equivalence is not at all true.

Consider an economy with no foreign trade (a closed economy) where full employment is always true, and suppose that its government decided to raise taxes. For the two situations where Ricardian equivalence is true, and where it is not, explain how this tax increase would affect the real interest rate and the levels of national saving and investment. Illustrate your answer with a graph.

3a. Suppose that under a new law all businesses must pay a tax equal to ten percent of their sales revenue. Assume that this tax is not passed on to consumers, but that indeed the prices consumers pay after the tax is imposed are the same as before. What is the effect of this tax on labor demand? If the labor supply is unchanged, what will be the effect of the tax on the level of employment, and the real wage? Illustrate your answer with a graph.

b. Suppose a country loses much of its capital stock to a war.

i) What effects should this have on the country’s current employment, output, and real wage? Explain briefly (graph not required).

ii). What effect will the loss of capital have on the level of desired investment?

3a. Illustrate with an S-I graph the situation of a small open economy which has been borrowing

on the international market for some time.


  1. Suppose that technological change raises the expected future marginal product of capital.

Explain and illustrate on your graph how that change would be expected to affect the country’s

equilibrium level of domestic savings, investment, interest rate and current account.




  1. Consider now a ‘before and after’ case where in the ‘before’ case the country is populated by

a large number of middle aged working people, but in the ‘after’ case it has a large number of

retired people. What will be the difference in this country’s saving, investment, interest rate,

and current account?. Illustrate with a separate graph.
5a. How would each of the following affect the current level of full employment? Explain each answer briefly.

i) Many new immigrants enter the country.

ii) New teaching techniques improve the educational performance of high school seniors.

b) Consider the country of Strangeville, where production consists of only three items. The quantities produced and prices, in year 1 and year 2, are given below.

What is the value of nominal GDP in the two periods?

Year 1 _______________ Year 2 _______________

Taking year 1 as the base year, what is the value of the price index in year 2? ____________

What was the amount of inflation between year 1 and year 2? ______________



What is the value of real GDP in year 2? _____________

Year 1




























Product

Quantity




Price



















Potatoes

15

tons

$20/ton




Alligators

5

animals

$40/animal




Slingshots

600

packages

$0.75/package



















Year 2




























Potatoes

20

tons

$30/ton




Alligators

8

animals

$50/animal




Slingshots

400

packages

$1/package



The high on this exam was 93: median on this exam was 68.


Economics 301Exam #2 Fall, 2008 Professor Twomey

Please PRINT your name on the BACK of the last sheet. Write on these sheets, using the backsides if you need space. Be sure to label each axis on your graphs. The weight of each question is indicated. If a question is unclear, please ask for clarification. Time: the entire class. Good luck.



  1. Identify the following with a sentence or at most two: (20 points)

  1. Income elasticity of the demand for money

  2. Real balances

  3. Coincident variables

  4. Open market operations

  5. The (three identifying) functions of money




  1. (15 points) Using an IS-LM model (assuming prices constant, and ignoring changes in the labor market), explain and illustrate with a graph how a decrease in government expenditures will affect the real interest rate and real GDP.

Explain briefly (no graph nor equation necessary) how the change in government spending will in turn affect:

  1. Personal savings

  2. National Savings

  3. The government deficit

  4. Private sector investment

e. The supply of money


  1. (20 points) Draw a graph of equilibrium in the money market.

In terms of this graph, on what two variables does the demand for money depend?

Identify (don’t explain) two other variables that affect money demand.

Explain briefly why financial deregulation might cause instability in the demand for money.

Define the LM curve. Using another graph of the money market, derive and explain rigorously

why the LM curve has a positive slope.

What is the key equation of the quantity theory of money? Compare the quantity theory approach to that of the demand for money function used above, in terms of assumptions and predictions.



  1. (15 points) Our textbook has a discussion of the post-1973 slowdown in productivity growth, and of the more recent productivity increase, or surge. What is meant by productivity?

Identify and explain briefly two explanations for the post 1973-slowdown.

Identify and explain briefly at least one explanation for the recent increase.



  1. (10 points) In the discussion of business cycles, two terms are used, pro-cyclical and counter-cyclical. Explain briefly the distinction between these two terms.

Empirically, are the following variables pro-cyclical or counter-cyclical?

  1. Unemployment

b. Industrial production

    1. Growth of the money supply

d. Labor productivity



  1. (20 points) Using the aggregate supply / aggregate demand analysis, explain and show on a graph how an increase in the quantity of money will affect – both short run and long run – the level of prices and the level of real output.

In addition, explain (graph optional) how that increase in the quantity of money will affect, in both the short run and in the long run:

  1. The real interest rate

  2. Consumption

  3. The government deficit

  4. Employment

The high on this exam was 89; the median was 63.
Econ 301 Fall, 2007 Exam #1 Professor Twomey

Please print your name on the BACK of the LAST sheet. Answer on these sheets, using the backs if you need more space. Questions are equally weighted. Ask for clarification if a question is unclear. Time: the entire class. Good luck!




  1. Identify the following with a sentence or at most two (20 points):

    1. Loanable funds

    2. Real exchange rate

    3. Classical dichotomy

    4. Quantity theory

    5. Cobb-Douglas production function

  2. (20 points) Consider a classical model of an economy without foreign trade. From an initial situation of equilibrium, the government raises expenditures by $100 billion.

      1. Explain and illustrate with a graph, what happens to the real interest rate.

Suppose the marginal propensity to consume is 0.8, what is the magnitude and direction of change in the following?

    1. Investment

    2. Private saving

    3. Public saving

    4. Private consumption

3aSuppose a small closed economy where the classical assumptions apply. In addition, the velocity of money is rising by a steady one percent a year, nominal interest rates are seven percent, and real GDP grows by 4 percent annually. The central bank determines the growth of the money supply at seven percent a year. What is the rate of inflation, and what is the real interest rate?

b. Identify two costs of expected inflation, and one cost of unexpected inflation.

c. Identify the three defining functions of money.




  1. Consider now the classical model of a small open economy. Suppose taxes increase in this country. What is the direction of change (if any) to: (illustrate the general situation with one graph).

  1. domestic personal savings

  2. domestic business investment

  3. real wages

  4. The government deficit

  5. Domestic real interest rate

  6. Net exports

  7. Capital inflows




  1. Consider again the case of a small open economy in the classical world. Draw a graph illustrating the determination of the equilibrium real exchange rate, identifying the lines of the graph.

How will the following affect the equilibrium real exchange rate? Explain briefly.

    1. The country’s government decides to lower spending, without changing taxes.

    2. World real interest rates rise.

c. The country’s inhabitants decide to save less for the future.
The median on this exam was 64; the high was 100.

Econ 301 Fall, 2007 Exam #2 Professor Twomey

Please PRINT your name on the BACK of the LAST SHEET. You can use the backs of these pages if you need space. The weight of each question is indicated. Please ask for clarification if a question is unclear. Also, be sure to label the axes on your graphs. Time: the whole class. Good luck!


  1. Identify the following with a sentence or at most two (20 points)

  1. Structural unemployment

  2. Impossible trinity

  3. Okun’s Law

  4. Efficiency wage

  5. Risk premium

2. (10 points) There is debate about what a reduction in the supply of money will do to interest rates. What is the standard answer from the IS-LM model (graph optional)?

What is meant by the Fisher effect, and how might it modify the above answer? Explain briefly.


  1. In a small open economy with a flat aggregate supply curve and with flexible exchange rates, how will an increase in taxes affect the following variables? Draw one graph to illustrate the answer. (20 points)

i Real income

ii. Private Sector Investment

iii. Private Sector Consumption

iv. the real interest rate

v. the nominal exchange rate

vi. The price level

vii. Government spending

vii. The government deficit




  1. (10 points) There has been much discussion about differences in unemployment rates between the U.S. and Europe. Identify and discuss three different factors that have been proposed to explain why US rates are lower.

5. Explain and illustrate - on parallel graphs – how protectionism, what our text calls import restrictions – will affect unemployment, under fixed exchange rates and under flexible exchange rates. (15 points)


6. (10 points) Our textbook uses the IS-LM framework to discuss several explanations for the Great Depression of the 1930s. Two of them might be labeled the spending hypothesis, and the monetary hypothesis. Explain each of these briefly – no graph necessary.
7. (15 points) Consider how the goals of the Fed might affect its response to shocks to the economy. Let’s identify Fed B as being solely interested in avoiding inflation, and Fed G as being focused on output and employment. Explain and illustrate with (the closed economy version of IS-LM) how would each of these Feds might respond to:

    1. An exogenous decrease in the demand for money, due to the introduction of electronic payments

    2. An decrease in federal government expenditures due to the election of a fiscal conservative as president.

The median on this exam was 68; the high was 97.


Econ 301 Intermediate Macroeconomics Exam #3 Fall, 2007 Professor Twomey

Please PRINT your name on the BACK of the last sheet. Answer on these sheets, using the backsides if needed. Please ask for clarification of any unclear question. Questions are equally weighted. Time: whatever it takes, which should be less than 1 1/2 hours. Good luck!



  1. Identify the following with a sentence or at most two

  1. Volcker disinflation

  2. High powered money

  3. Inventories as a factor of production

  4. Transitory income

  5. Inside lag

2a. Consider an economy where the ratio of cash to demand deposits is 0.1, and the required reserve ratio is 0.05. What is the size of the money multiplier?

If the Fed lowers the required reserve ratio to 0.04, what happens to the money multiplier?

b. The Baumol-Tobin model of cash management analyzes the costs and benefits –tradeoff- of holding cash. What economic factors give rise to the cost, and to the benefit?

c. The textbook analyzes the ‘Demise of the Monetary Aggregates.’ What is meant by this phrase, and what is the major reason for it to occur?

- How might the demise of monetary aggregates affect the major result of the Baumol-Tobin model? Explain briefly.


3.Explain briefly, and illustrate with a graph, what is meant by the ‘life cycle hypothesis’.

In this model, if the level of consumption is supposed to be constant over time, why isn’t the saving rate?

What is meant by the term savings constraint, and how might it affect the predictions of this model? On what socio-economic group(s) might these constraints be expected to have the biggest impact?

Empirical studies show that the MPC of elderly people is rather low. How does this finding affect the prediction of the life-cycle model?


4a. It is an election year, and the economy is in a recession. The opposition candidate campaigns on a platform of passing an investment tax credit, which would be effective the next year (after she takes office). What impact does this campaign promise have on economic conditions during the current year?

b. Our textbook provides some data that is consistent with the statement that inventory investment is equal to one sixth of the increase of income. Would the following be expected to increase or decrease that fraction (1/6):



  1. interest rates rise

  2. the economy shifts from producing industrial products to the production of services

  3. successful macroeconomic policy lowers cyclical fluctuations of the national economy

c. Suppose Tobin’s q has been rising the last year and a half. What would be the corresponding prediction about investment?
5a. What is meant by the ‘sacrifice ratio’?

What is the essential difference between ‘rational expectations’ and ‘adaptive expectations?

In which case would we expect the sacrifice ratio to be larger: if expectations were rational or if expectations were adaptive? Explain.

b. What is inflation targeting?


What are the differences between inflation targeting and Taylor’s rule?

c. With the ultimate goal of getting good policy here in the U.S., two suggestions have been made; have the Central Bank follow a rule, or give the Fed political independence. Are these the same recommendations? If not, how are they different, and which one would be more beneficial? Explain your answer briefly.


The median on this exam was 69; the high was 96.
Econn 301 Exam #1 Fall, 2005 Professor Twomey

Please write your name on the back of the last sheet. Answer on these sheets, using the flip sides as necessary. Please ask for clarification of any question that is unclear. Time: the entire class. Good luck!



  1. Identify the following with a sentence or at most two (20 points):

    1. Okun’s Law

    2. Constant returns to scale

    3. Shoe leather costs

    4. Law of one price

e. Classical dichotomy
2. (20 pts.) Consider the classical model of a closed economy.

Suppose that taxes are increased. Draw a graph illustrating the effects on the macroeconomy,

and explain in a few words the effects on:

The real interest rate

Real GDP

The price level

Consumption

The government deficit

Real wages

Private Sector Investment

National Savings

Employment

Nominal interest rate
3 (20 points) a. If the velocity of money is constant and the nominal money stock increases at 10 % per year, while real GDP grows by 4 % per year, what is the level of inflation?

In that situation, if the real rate of interest is 3%, what is the nominal rate of interest

b. Fill in the blanks in the accompanying table:

What is the base year?

What is the rate of inflation between periods 4 and 5?
4a (15 points). Suppose that an increase in consumer confidence raises consumers’ expectations of future income and thus the amount they want to consume today. In a closed economy, how would this change in consumption affect the level of investment, and the real interest rate? Illustrate your answer with a graph.

B (5 points). The textbook has a brief discussion of the issue of whether of not the Consumer Price Index (CPI) overstates inflation.

What reasons are mentioned to motivate this hypothesis

Why might this be important?

What is the book’s verdict?
5 (15 points) i. Consider now a situation of a small open economy. Suppose that the country lowered tariffs, and its imports increased. What would be the impact of this change on the real exchange rate? Illustrate with another graph. Will overseas tourist travel by people of this country now be more expensive, or less expensive?

(5 points) ii. There is an important issue of the distributional impact of unexpected inflation--who is better off, and who is worse off.

In the following sets of pairs of economic groups, indicate who might be hurt by unexpected inflation, and why they might be hurt.


  1. borrowers or lenders

  1. Workers with or without COLAs

  2. Home mortgage holders with or without flexible rate mortgage loans.

  3. A low-skilled worker whose job does not require much training, or a high skilled worker whose

position requires seniority in a firm.
The median on this exam was 68. The high was 87

Econ 301 Exam #2 Fall, 2005 Professor Twomey

Please PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if necessary. The weights of the questions are indicated. Please ask for clarification of any question that is unclear. Time: the entire class.


  1. Identify the following with a sentence or at most two: (20 points)

  1. IS* curve

  2. Theory of liquidity preference

c. Discouraged workers

    1. Monetary transmission mechanism

    2. Efficiency wage

2. (15 points) Consider a standard short run version of the closed economy IS-LM model. Suppose that political events lead business decision makers to become less optimistic about the economy, and they reduce desired investment. Explain and illustrate on the IS-LM graph how this will effect the economy.

b. Explain very briefly how this will affect:

i. Personal Consumption

ii. Government’s tax revenue

iii. prices

iv. the quantity of money

v. real GDP


3. Our textbook contains the phrase “accommodating an adverse supply shock. “ What is a supply shock, what does it mean for it to be “adverse,” and what are the arguments for and against “accommodating” an adverse shock. Illustrate your answer with a graph. (10 points)
4. Use the Keynesian cross diagram to illustrate that the spending multiplier associated with an increase in government spending is greater than one. (10 points)
5.Suppose that Congress passes legislation making it more difficult for firms to fire workers (e.g. requiring severance pay to dismissed workers). Will this increase or decrease the rate of job separation? Considering the effect of this impact by itself, (that is ignoring the effect on job search), how will this change affect the natural rate of unemployment? Explain briefly. (10 points)
6. (15 points) What is meant by the “Small Open Economy” model? What are its key assumptions?

In this model, what would be the short term effects on the major macroeconomic variables if a country were to increase its exports as the result of successful negotiations for a Free Trade Agreement? (ignore potential effect on imports). Illustrate with a graph.


7. (10 points) The essence of our vision of the process of passing from the short run to the long run is that prices will change, thereby changing other variables in the economy. Suppose that for some reason AD has increased and the economy finds itself with excess production. Explain what happens as prices increase, to bring the economy back to full employment. Illustrate with a graph or two.
8. (10 points) Consider the issue of how the goals of the Fed might influence its response to shocks. Suppose Fed A cares only about keeping the price level stable, and Fed B cares only about keeping output and employment at their natural rates. Explain and illustrate with a graph how each Fed would respond to an exogenous decline in the demand for money, caused by the expansion of the use of electronic payments systems.
The median on this exam was 78. The high was 94.

Econ 301 Exam #3 Fall, 2005 Professor Twomey

Please PRINT your name on the back of the last sheet. Answer on these sheets, using the flip sides if necessary. The questions are equally weighted. Please ask for clarification of any question that is unclear. Time: ninety minutes. Good luck.


  1. Identify the following with a sentence or at most two: (20 points)

      1. Time inconsistency

      2. Lucas Critique

      3. Near Money

      4. Sticky Price Model

      5. Tobin’s q

2a. In the standard money supply model, if the reserve deposit ratio is 0.10, and the currency deposit ratio is 0.5, by how much will an open market purchase of $5 billion affect the money supply?

Illustrate the impact on the national economy of that change in the money supply, using either an AD-AS framework, or some version of the IS-LM model.

b. For the last couple of decades, the US economy has undergone a process of financial deregulation, inspired partly by technological change, and partly by an ideological preference for free markets. It is often the case that microeconomists believe that greater reliance on free markets increases stability. Has that happened with the demand for money? Explain.


3. Short answers.

  1. What is meant by the “sacrifice ratio?”

Explain the theoretical position that claims this will be higher in slow deflations.

  1. What is the difference between the “Taylor Rule” and the “zero inflation rule?”

The argument is made that the actions of the Fed under Alan Greenspan have fairly closely duplicated the Taylor rule. What might be some considerations in favor of following a rule as devised by Taylor, versus a discretionary system under which “Greenspan rules.”

  1. The textbook’s discussion of government debt discusses three measurement problems: measurement, capital assets, and uncounted liabilities. Explain briefly each one.

4 i. The standard story in the first part of our textbook is that the effect of an increase in taxes would be to lower private sector consumption, by some multiplier—call it “z”. How do the following considerations change our prediction of the size of the multiplier “z”:



    1. People’s expectations are forward looking (perhaps “rational”) instead of regressive

    2. Ricardian equivalence holds

    3. Banking inefficiencies cause there to be a borrowing constraint for many people

ii). Economists who study consumption of elderly (retired) people have found that the elderly do not save as much as the life cycle model predicts. Identify and explain briefly two standard explanations of this finding.
5a. In addition to economic factors like interest rates, economists argue that demographic factors in a society also affect investment. Explain briefly.

b. Our textbook identifies four reasons why firms hold inventories. Identify and explain two of them.



  1. State the basic formula of the accelerator model, identifying each variable

  2. Should the instability associated with the accelerator be bigger or smaller if: (and why?)

  3. i) the main productive sector of the economy shifts from manufacturing to services

ii) It takes longer than one year to build/produce the capital (or inventory)

iii) Uncertainty in the economy declines, due to better government policy.

The median on this exam was 65. The high was 94.


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