Macroeconomics – Test 2 /’07 Name:
Please answer the questions 1-10 in order on your own paper.
Answer the remaining questions on the exam.
See the back and front of each page. Label all axes.
1. a. Over the long run, what has been the rate of growth in US GDP?
b. Simply list the four factors which, according to mainstream economists, determine the long run growth of a nation’s GDP. (6)
2. a. Explain the tradeoff in the Keynesian model.
b. How does NAIRU relate to this tradeoff? (12)
3. a. Define “stagflation.”
b. When did the US experience stagflation?
c. Briefly describe one possible Keynesian policy response to stagflation and the expected result of this policy. (A graph is not required; 10)
4. Graph the AD/AS model. (6)
5. Oil is currently selling at record high prices.
a. According to the AD/AS model of the US economy, how do we expect the economy to be affected?
b. Illustrate with an AD/AS graph. (5)
6. Graph the Keynesian cross. (6)
7. The dollar is currently weakening.
a. Briefly explain how this is handled by the Keynesian cross model of the US economy, i.e., if there is a shift, why the shift?
b. Illustrate with a graph of the Keynesian cross.
c. Based on the graph, what do we expect to happen to the US economy? (5)
8. a. What is the current state of consumer confidence in the US?
b. Briefly explain how this is handled by the Keynesian cross model of the US economy, i.e., if there is a shift, why the shift?
c. Illustrate with a graph of the Keynesian cross.
d. Based on the graph, what do we expect to happen to the US economy? (7)
9. a. Define GDP.
b. What does Paul Krugman, in his article, “A flood of discontent,” imply concerning using the GDP as an indicator of how well the economy is performing? Briefly explain.
c. What does GPI stand for?
d. See the attached article on China’s “green GDP” account. The article does not explicitly mention the GPI, but is their “green GDP” essentially the same as the GPI? Explain your answer. (10)
10. Use the circular flow model and/or our chart to illustrate the multiplier. Explain what you have presented. (10)
Answer the remaining questions on the exam in the space provided.
11. If autonomous spending decreases by $5 billion, and if the MPC = .9, what will happen to equilibrium GDP? Show your work. (5)
12. The dollars in a savings account are
_____ income
_____ wealth
_____ both income and wealth
_____ neither income nor wealth
13. Mark one or more of the following that must be true for nominal GDP to increase. (2)
_____ Real GDP must increase.
_____ Actual production must increase.
_____ The price level must increase.
_____ Either the price level or real GDP must increase.
_____ Both the price level and actual production must increase.
Short answers:
What is one example of a “rule of the game”?
Provide one example of why, at any given level of income, the nation might consume less.
Provide one example of what (according to our model) could make investment increase.
Provide one example of what economists view to be a “cost” of unemployment.
Our simplifying assumption that “government spending is autonomous” implies that government spending does not change. True, False, or Uncertain? If “uncertain,” briefly explain.
At all points along the 45 degree line, leakages are equal to injections.
True
False
Uncertain.
If uncertain, explain.
What type of unemployment increases during recessions and decreases during expansions?
What type of unemployment occurs because job seekers and employers need time to find each other?
Does the CPI capture the effect on consumer prices of the weakening US dollar?
Yes
No
Indeterminate
If “indeterminate,” explain.
What is one example of a coincident economic indicator?
Does the Consumer Confidence Survey include a question concerning whether or not a vacation is planned within the following six months?
Yes
No
Questions vary, so sometimes yes and sometimes no.
What is one example of an injection?
Honor code:
1. Four major foci of macroeconomics?
2. For Keynes, what determines the level of the nation’s output in the short run? What is the policy implication of his theory? That is, what role should the government play in the economy? What year, and with what act, did this role become codified?
3. Explain the tradeoff in the Keynesian model. (A correct response includes AD, output, unemployment, and inflation.) What does NAIRU stand for? How does it relate to the tradeoff and to the unemployment rate that is deemed desirable by policy makers?
From chapter 5 and our discussion of the chapter:
4. Why do macroeconomists like growth?
5. Definitions: business cycle, depression, recession, inflation, aggregate output, aggregate demand, price level, real GDP, federal budget deficit, stagflation, government debt
6. Define and give an example of leading economic indicators, coincident indicators, and lagging indicators. From the Consumer Confidence Index webpage: Answer the previously distributed questions.
7. What are McEachern’s four “economic eras”? What (according to him) happened to the price level and the GDP level in each? What two factors were behind the period of stagflation? Be familiar with his “short history of the US economy” (pp. 99-103).
8. Supply-siders versus Keynesians: the effects of a tax cut, focus on long run versus short run, laissez faire versus active government stabilization policy, focus on demand management. Relate the Krugman article, “A Flood of Discontent,” to the demand-side effects and the supply-side effects of a tax cut.
9. Graph the aggregate demand and aggregate supply curves. Why is AD downward sloping? (The one reason we reviewed in class is sufficient.) Use the graph to illustrate stagflation. Use the graph to illustrate the two possible Keynesian responses to stagflation, and the good news and the bad news of each of those two responses. Which of those two Keynesian responses was the actual policy response, and what were the results?
10. What has been the average growth in GDP in the US since 1930? What four factors do mainstream economists point to as the major contributors to long-term growth in GDP? What essential factor do they take for granted? Define “potential output” and relate is to this discussion.
11. Define Gross Domestic Product. Name and explain the two methods for estimating the GDP.
12. These questions concern the expenditure approach: Why do we subtract imports? We have refined our understanding of investment since the first exam, so what are the three categories of “investment”? What government outlays are included in and which are excluded from “government spending”? Why these inclusions and exclusions? Which category of spending is largest? Which is most volatile?
13. For McEachern, what are the limitations of GDP as a measure of a nation’s prosperity? (pp. 138-139) Explain each. From Affluenza, provide four specific examples of how GDP is adjusted to obtain the GPI. What does GPI stand for? Which in your view is the better indicator of the performance of the economy? Explain why you picked the one you did and rejected the other. Relate the Krugman article to this discussion.
14. McEachern p. 147: #1, 2, 7 8, 9; pp. 148-9: 17, 18
15. Definitions: Inflation rate, price index, nominal, real, current dollars, constant dollars, purchasing power, COLA
16. Interpret Exhibit 6 (p. 166), and reconcile the information in the top panel with that in the bottom panel. What has been the level of inflation in recent years in the US?
17. What does CPI seek to measure? How is it constructed? How is the information obtained? See pp. 143-44 to explain three problems with the CPI and how the BLS has responded. By how much does/did the CPI overstate inflation? Who (all) does this matter to, and why?
18. What happened to the CPI-U in September? What category did the most to pull up consumer prices? What category did the most to hold down consumer prices?
19. If a bank seeks a 2 percent real return on a loan and expects the inflation rate to be 5 percent, what nominal rate will it charge? If the expectation proves wrong and the actual rate of inflation ended up being 6 percent, is the bank hurt or helped? Is the borrower hurt or helped? Explain.
20. What does inflation do to the real value of savings? Explain. What does inflation do to the purchasing power of savings? Explain.
21. What is demand-pull inflation?
Chapter 6
22. Define productivity. What factors enhance labor productivity? Is this related more closely to the long run trend of GDP growth or to the short run fluctuations?
23. Explain the two “costs” of unemployment. How is unemployment measured?
24. McEachern pp. 154-163: Define adult population, labor force, unemployed, employed, unemployment rate, outside the labor force, discouraged workers, labor force participation rates (for men and women, and how they have changed), types of unemployment, and “full employment.” Relate McEachern’s definition of “full employment” to the NAIRU. Are they the same?
Additional office hour on Monday, 11/5, 1:30-3:00
Clarification of #6 on the previous handout - The “previously distributed questions” concerning the Consumer Confidence Index webpage were: Who was surveyed? What are the five broad categories of questions that are on the survey? What is the current state of consumer confidence?
26. Name three sources of income. Provide three example of HH wealth.
27. Write the consumption function. Graph it. What is meant by autonomous consumption? Show it on the graph. What is the equation for the consumption function? What four factors are held constant along the consumption function?
28. Slope of the CNSP function: name, interpretation/definition, mathematical expression
29. Why do we move along the consumption function? At any given level of income, why might the nation consume more? Illustrate with a graph. At any given level of income, why might the nation consume less? Illustrate with a graph.
30. What does it mean to say that investment is autonomous? Graph our simple investment function.
31. How is the level of investment determined? Graph and fully explain the graph. Explain why investment may increase. Why might it decrease? (This information is in your notes from earlier in the semester.)
32. Graph our government spending function. What assumption does it reflect? How is the level of government spending determined?
33. Graph our simplified net export function. For any given level of US income, why might net exports increase? Explain, and illustrate with a graph. Repeat for a decrease in net exports.
34. Construct our aggregate expenditures (AE) function. (I’ve been calling is “total spending.” What nine changes make it shift up? What makes it shift down?
35. Construct the Keynesian cross and explain the 45 degree line. What output level will result? Explain the adjustment process from above and below that output level, including the role that inventories play.
36. How might it be undesirable to be at the equilibrium? How does the prediction of this model differ from that of the classical model?
37. According to Keynes, why was output so low during the 1930s? What solution did he promote? Illustrate with the Keynesian cross.
38. Use the circular flow model and our chart to explain the multiplier effect.
39. What makes the size of the multiplier larger? Explain or illustrate.
over
Use the following information from the CPI webpage to help answer # 18 of the previous handout.