Um-d econ 301 Exams
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interest rate targeting more or less desirable when the demand for money is unstable? Explain, illustrating with a graph. -Several commentators believe that the demand for money in the U.S. has indeed been rather unstable during the last couple of decades. What are some of the possible explanations for this? 5a. If a country has a floating exchange rate and the money supply is decreased, how should that affect prices, interest rates, and the exchange rate? Explain and illustrate with a graph or two. b. [No macro course is complete without the following question]. According to the scheme of Denison, what have been the major sources of growth in the U.S. economy during the twentieth century, and what are their relative order of importance? -It can be argued that Denison's results go contrary to some generally accepted wisdom about what government policy can do to strengthen growth. Identify a policy that could be associated with Denison's results, and explain briefly how it differs from conventional wisdom. The median on this exam was 68; the high was 96
these sheets, using the backs if necessary. Questions are equally weighted. Ask for clarification if the question is unclear. Good luck.
a) auction market b) depreciation c) transactions motive d) endogenous variable e). Mention two limitations on the use of GDP as an indicator of national welfare. 2. Consider the standard Keynesian model, in which prices are assumed constant. Suppose that investment was equal to 200, government expenditure was equal to 175, net taxes were fixed at 100, and consumption (C) was given by the consumption function C = 50 + 0.8 YD, where YD is disposable income, and Y is GNP. a. What is the level of equilibrium income (Y)? b) What is the value of the government expenditure multiplier (Y/G)?
c) Suppose that investment declined from 200 to 160. What wold be the new level of equilibrium income? 3. Consider "the demand" side of the classical model, composed of the loanable funds market and the equation of exchange. Let's apply that to today's U.S. economy, where there is a high deficit (being financed by bond sales) and we're at relatively full employment. Suppose we elect an honest politician who fulfills the campaign promise of reducing the deficit. How would this affect: (explain each answer briefly with an equation or graph) The quantity of money The level of prices (or the rate of inflation) The nominal rate of interest The level of real GDP 4. Let us turn now to the classical analysis of aggregate supply, and labor supply. On what economic variables does the demand for labor depend? Select one of those variables, and illustrate with a graph how an increase in that variable will shift the labor demand curve. b. Suppose the public's taste changes in such a way that leisure comes to be more desirable relative to commodities. How would we expect such a change to affect output, employment, and the real wage in the classical model? Explain, illustrating your answer with a graph. 5. Define the LM curve. Does the LM curve slope up or down? Derive this result, explaining your answer with a graph. Is the LM curve steeper or flatter if the demand for money is steep? State the answer, don't bother with a derivation. How does an increase in the money supply affect the LM curve? Illustrate your answer with a graph, but, again, don't go through the derivation. What is meant by the liquidity trap? Illustrate the situation with a graph. What important policy conclusion is derived when there is a liquidity trap? median was 44; high was 100 Econ 301 Fall, 1996 Exam #2 Professor Twomey Please PRINT your name on the BACK of the LAST sheet. Answer on these sheets, using the backs if necessary. Questions are equally weighted. If a question is unclear, please ask for clarification. Good luck! 1. Identify the following with a sentence or at most two: a) Hysteresis b) liquidity trap c) Natural rate of unemployment d) rational expectations e) New classical policy ineffectiveness postulate
monetarists more generally) to the effect that the federal government's deficits, and fiscal policy more generally, do not significantly affect output, prices, or employment, unless accompanied by a change in the quantity of money. Explain this position, illustrating your answer with a graph. 3a. In the Keynesian model, what happens to real wages in a recession? Explain your answer, illustrating with a graph. b. Using parallel graphs of the labor market and aggregate supply and demand, show the effect of an increase in expected prices, according to the standard analysis common to modern Keynesians and monetarists. 4. At the end of the inflationary decade of the 1970s, the Federal Reserve is widely perceived to have moved to a much more restrictive monetary policy. Using the Phillips curve analysis, show how a monetarist would predict how this would impact inflation and unemployment. How, if at all, might the analysis of this policy shift be different for a member of the rational expectations school? What lessons about monetary policy does the textbook draw from the Fed's experience? 5a. Although it has been said that "A rose is a rose is a rose," the parallel statement has not been made about monetarism. State and explain briefly our textbook's four characteristics propositions of monetarism. b. One way of illustrating at least part of the monetarist position is a simple IS-LM analysis of the effects of an increase in the quantity of money. Explain and show with a graph how an increase in the money supply would affect prices, output, interest rates in a model with expected prices temporarily assumed fixed. Include the real balance effect.
Economics 301 Exam #3 Fall, 1996 Professor Twomey Please PRINT your name on the BACK of the last sheet. Write on these sheets, using the backs if you need space. Questions are equally weighted. Ask for clarification if you do not understand the question. Good luck! 1. Identify the following with a sentence or at most two: a) Efficiency wage b) Representative Agent c) User cost of capital d) Monetary Base e) Service flow from consumer durables 2a. Distinguish between job leavers and job losers, and indicate why that difference might be important for macroeconomics. b. What is the difference between intended and unintended inventory accumulation, and why is it important for macroeconomics? c. According to the life cycle hypothesis, what happens to the ratio of consumption to accumulated savings, during our working lives? Explain real briefly. 3a. Consider an economy where there is no cash, the required reserve ratio is 1/4, and the Fed engages in an open market purchase of $50 billion. How will this affect each of the components of the balance sheet of the banking system, and by how much will the quantity of money change? b. According to the life cycle/permanent income hypothesis, how will each of the following affect consumption (or, savings). Explain your answer real briefly. i) Just before the election, the President (up for re-election) declares a reduction in personal income taxes ii) Greater stability in the financial markets increases investor confidence, resulting in greater investment in the stock market, and significantly higher stock prices. iii) Social security taxes are raised to adjust for the aging of the baby boom generation. iv) The Fed imposes a low ceiling on interest rates for loans and deposits in banks.
monetarists and Keynesians has it that monetary and fiscal variables interacted through some version of IS-LM to affect aggregate demand, while aggregate supply was a function of price expectations, and the economy tends to full employment. How does that story get altered or revised by: Real business cycle theory New Keynesian analysis. 5a. The inventory theoretic view of the demand for money argues that a small number of major economic variables affect the number of times an individual will go to the bank to buy and sell bonds. This approach is summarized by a graph with curves of marginal cost and marginal revenue. What variables affect those curves of marginal cost and marginal revenue? Indicate how increases in those variables will move the respective curves.
towards risk, show the major graph of the equilibrium determination of the demand for money, and then show and explain how an increase in the rate of interest will affect that equilibrium.
Econ 301 Final Exam Fall, 1996 Professor Twomey Please PRINT your name on the BACK of the LAST SHEET. Answer on these sheets, using the backs if necessary. Questions are equally weighted. Please ask for clarification if you do not understand the question. Good luck! 1. Identify the following with a sentence or at most two: a) Target zone proposal b) collective rationality c) Ricardian equivalence d) Endogenous technological change e) Reduction in U.S. official reserve assets
exchange rates. What is being insulated from what? How does this work? You may optionally illustrate your answer with a graph. Is this insulation good or bad? Explain. 3. Define the BP curve, and explain why it has the slope usually attributed to it. In a fixed exchange rate world, in which prices are constant so that we can follow the textbook and only consider demand effects, what are the impacts of an increase in government expenditures on interest rates, output, the current account, the capital account, and the balance of payments? Explain, illustrating your answer with a graph. 4. Consider now a world of floating exchange rates and imperfect capital mobility, and analyze, verbally and with a graph, the impact of an increase in the money supply on interest rates, real output, the current account and the capital account. What happened to the average exchange rate of the U.S. dollar during the early 1980's? Is this consistent with the analysis in the first part of this question? Explain.
What happens to that growth rate, and per capita income levels, when savings rates fall? Explain, illustrating with a graph. b. What is Dennison's analysis of the sources of growth in the U.S. economy during the period 1929-1980? Is this analysis consistent with: i) The traditional Keynesian/classical emphasis on investment ii) The supply side vision of the importance of taxes and government regulation
Questions are equally weighted. Use the backs of the sheets if necessary. If a question is unclear, please ask for an explanation. Be sure and label the axes of your graphs.
a) rate of return line b) unplanned investment c) natural employment deficit d) fiscal policy e) real money balances 2. Derive (explain rigorously and illustrate with a graph) how and
why a decrease in government expenditures moves the IS curve. 3. If the supply of money increases, what happens to interest rates, investment, and the level of real income? What happens to the level of Savings, and the level of net exports? Explain your answer, illustrating it with (at least) an IS-LM graph. 4. Suppose some international political development leads to an improvement in business outlook and confidence of entrepreneurs in the US, making them want to invest more. Will this have a greater effect on our national output if the LM curve is steep, or if it is flat? Explain. What is crowding out? How can the monetary authority reduce or eliminate it? Explain and illustrate with a graph. 5. Before 1983, the government often had a budget deficit, but the
economy as a whole experienced a foreign trade surplus. After 1983, both the government budget and foreign trade account were running deficits. What does this imply about the relative sizes of private saving and private domestic investment in the periods before and after 1983? Explain. Conceptually, what is the difference between/among exogenous variables, endogenous variables, and parameters?
Econ 301 Exam #2 Fall, 1993 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. Good Luck!
a) Large open economy b) Natural rate hypothesis c) Policy ineffectiveness proposition d) LAS line e) Real business cycle 2. Assume nominal wages are rigid, in the (original) Keynesian model. Explain and show with parallel graphs, what happens in the labor market and the aggregate goods market, when aggregate demand falls, say because of a decline in the money supply. 3a). What is the relationship between a country's interest rate and
its foreign exchange rate? Explain, using a graph. 3b). Explain briefly why perfect capital mobility and fixed exchange rates combine to make monetary policy ineffective.
differences between new classical models, and new Keynesian models. According to whichever of the above named theories is appropriate (new Classical or new Keynesian), would the existence of each of the following be expected to make business downswings shorter or longer? Explain briefly. a) Multi-year contracts (instead of single year ones) b) Governments always discuss major policies much in advance of implementing them c) Absence of full COLA protection d) A lifetime employment system, such as Japan is supposed to have.
the money supply contracts. According to the IS-LM-BP model, explain and show on a graph(s) how that will affect: a) Output b) investment c) consumption d) exports e) prices f) the exchange rate The median on this exam was 57; the high was 94. Econ 301 Exam #3 Fall, 1993 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 don't understand the question. Good luck. 1) Identify the following with a sentence or at most two: a) Laffer curve b) expectations augmented Phillips curve c) seignorage d) Okun's Law e) Fisher effect 2a. Mention two measurement problems associated with discussions of the importance of the government's deficit. b. Reagan's tax cuts were supported by supply-side arguments. Give
two such arguments, explaining them briefly. c. What is Barro-Ricardian equivalency theorem, and what implication does it have on the link between deficits and saving? 3. The word structuralism arises twice in discussions of unemployment. a. Apparently, there has been a rise in the natural rate of unemployment in Europe. There are two explanations for this; structuralist and hysteresis. Explain each of them. b. Two of the major categories of unemployment are frictional (or turnover) and structural (or mismatch). For each of the two types, state and explain briefly two government policies which might reduce it. 4a. Define multifactor productivity. b. Give three specific, different potential explanations of the productivity slowdown, mentioning how government policy might affect them. 5a. What are the two ways of financing a government deficit. Under
what conditions will financing the deficit be inflationary. b. What are the primary determinants of who wins and who loses from an unanticipated inflation? c. "In the steady state, the government benefits from inflation." Explain and comment. The median on this exam was 74; the high was 100. Econ 301 Fall 1993 Exam #4 Professor Twomey Please PRINT your name on the BACK of the last sheet. You will lose credit if it appears anywhere else. Time - about an hour. Questions are equally weighted; use the backs of these sheets if necessary. Please ask for clarification of any unclear question. 1. Identify the following with a sentence or at most two: a) Time inconsistency b) Tobin's q c) Regulation Q d) cross section e) High powered money 2. State and explain Friedman's Constant Growth Rate Rule (CGRR). Whether or not this is a good recommendation has been subject to much debate. How do the following affect the advisability of the CGRR, and why? - Unstable demand for money - apparently random variations in the public's holdings of cash to deposits - financial deregulation 3. In discussing the permanent income hypothesis, the following formula appears, where C is this year's level of consumption, Y is this year's income, Yp-1 is last year's estimate of permanent income, and k and j are fractions, with k being the marginal propensity to consume: C= kYp-1 + kj(Y-Yp-1). a) Explain, illustrating in terms of the formula, what is meant by transitory income, and how and why its marginal propensity to consume would be different from that of permanent income ai) What is the explanation for the textbook saying that this formula reflects a process of adaptive expectations? b. One of the major implications of the Permanent Income/Life Cycle
Hypotheses is that the private sector will be relatively stable, not needing an activist government policy. How do the following aspects affect that judgement, and why? bi) The fact that we spend one third of our income on consumer durables bii) The common practice of bequeathing wealth to children 4a) Explain what happens when the Fed conducts an open market purchase of $200 billion in bonds. What happens to the balance sheets of the commercial banks? What is the ultimate effect on the
level of high-powered money and on the money supply? b) The book argues that financial deregulation has changed the slope of the IS curve. As a theoretical matter, would deregulation make the curve steeper or flatter, and why?
investment tends to be quite unstable. Do the following factors tend to make investment more or less stable, and why? a) a permanent decline in real interest rates b) Lags in finishing an investment project c) an increase in the capital output ratio, caused, for example, by technological change. 5b). In the real world, why are the levels of investment and interest rates (real or nominal) often observed to move together, and not in opposite directions?
Econ 301 Exam #1 Fall, 1994 Professor Twomey Please PRINT your name on the BACK of the LAST sheet. Questions are equally weighted. Answer on the backs of these sheets if you need more space. Ask for clarification if the question is unclear. Time: 50 minutes. Good luck. 1. Identify or explain the following with a sentence or at most two:
a) autonomous components of aggregate demand b) Cambridge 'k' c) names of three classical economists d) noninterventionist policy e) three ("real" or "supply") factors determining output and employment in the classical model 2. A standard policy proposal of people who do not like government intervention is that the government's deficit be balanced. We currently have a large deficit, financed by debt (borrowing). According to the textbook's version of the classical model of loanable funds, how would reduction of the deficit affect savings, investment, employment and the real wage? Explain and illustrate your answer with one or two graphs. 3a. What is meant by unintended inventory accumulation, and what is the basic explanation of this phenomenon? 3b. In a Keynesian model with a marginal propensity to consume of 0.75, if government expenditures increase by $10 billion, by how much does output increase? If taxes are constant, by how much would savings change? 4. Suppose we live in a world of downwardly rigid nominal wages. Assume the money supply declines. Explain briefly, illustrating with a graph, what happens to: Aggregate demand Prices
Employment Output
Real wages. 5. Supply siders don't like taxes. One tax which we are already in a position to analyze theoretically is the personal income tax. Explain, illustrating with graphs, the supply side analysis of the impact of increasing the personal income tax, on: employment, real wages, prices, and output. The median on this exam was 55; the high was 95 Econ 301 Exam #2 Fall, 1994 Professor Twomey Please PRINT your name on the back of the LAST sheet. Questions are equally weighted. If the question is not clear, ask for an explanation. Use the backs of these sheets if necessary. Good luck.
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