Econ 251 – Principles of Macroeconomics.
Exam #2A, Spring 2017
Name:
Clearly state all assumptions made in your analysis. All graphs must be labeled and legible. Good luck!
Points off total score: _____
Write any notes for yourself here
1. The “Troubles” is one of the common names for the conflict in Northern Ireland starting in 1969. The peace process began in 1994 with the Irish Republic Army ceasefire and continued with the Good Friday (Belfast) Agreement in 1998. Using an aggregate supply/demand framework, show how peace and political stability affected real GDP, price level, and unemployment in the short run in Northern Ireland by answering the following:
a. How does this affect Northern Ireland’s investment expenditures? Show using an investment expenditure graph.
b. Does peace and political stability lead to a movement along or shift of the investment expenditures curve?
Movement Along Shift (Circle one.)
- Why is it a movement along or a shift of the investment expenditures curve?
Δ in real GDP Δ in nonreal GDP Δin PL Δ in nonPL (Circle one.)
- How will this affect AE and AD? PL and RGDP? Show using an AE graph and an AD graph.
- Does peace and political stability lead to a movement along or shift of the AE curve?
Movement Shift (Circle one.)
- Why is it a movement along or a shift of the AE curve?
Δ in real GDP Δ in nonreal GDP Δin PL Δ in nonPL (Circle one.)
- Does peace and political stability lead to a movement along or shift of the AD curve?
Movement Shift (Circle one.)
- Why is it a movement along or a shift of the AD curve?
Δ in real GDP Δ in nonreal GDP Δin PL Δ in nonPL (Circle one.)
- Does this lead to a reduction or rise in unemployment?
Reduction Rise (Circle one.)
2. Answer ONE of the following two questions. Also identify which question you are answering.
- The Minnesota Super Bowl Host Committee estimated (two years ago) that the Twin Cities metro area will reap $338 million in economic activity from the 2018 game. Economic research now suggests that millennials who are entering their prime spending years, and who count as America’s largest living generation, will spend a smaller percentage of additional dollar of income than previous generations at the same stage of life. Given this new research, does the expected estimated benefit of hosting the Super Bowl rise, fall, or remain the same? Explain. (1-2 sentences)
- “Billionaire Warren Buffet said rich people should pay more in taxes and Bush-era tax cuts for top earners should be allowed to expire at the end of December: “If anything, taxes for lower and middle class, and maybe even the upper middle class, should even probably be cut further,” Buffet said during an episode of ABC’s “This Week with Christine Amanpour” Provide a macroeconomic explanation to support Warren Buffett’s assertion to reduce taxes on poor and middle class over the rich. (1-2 sentences)
___
3. Suppose the U.S. economy is characterized by the following:
· Consumption function is characterized by C = 500 + .5(Y) where Y = real gdp
· I* = $250 autonomous planned investment expenditures.
· Closed economy [i.e., (X-M) = 0].
· No government (i.e., G=R=T =0).
· Prices are held constant.
a) What is mpc? Just give a numerical answer. No work necessary.
b) What is mps? Just give a numerical answer. No work necessary.
Hint: If you cannot figure out what MPC equals, then make up a value for MPC so you
can demonstrate to me that you know how to calculate MPS.
c) Fill in the blanks
Real GDP(Agg. Income / C / S / C+I*
(Agg. Exp.) / Inventory
Adjustment / I* / Actual
Investment
1000 / 500
d) Bonus: Equilibrium RGDP would occur where ______. (I am looking for word and not a numerical answer. There are two possible answers.)
4. Long Run Analysis –Fill in the blank.
The European Commission forecasts Italian growth at 0.9% this year, the slowest in the euro zone. The overall unemployment rate is 12.4%, while the youth unemployment rate is 38%, the highest in the EU.
- Given the above information, is Italy operating below or above its potential output? ______
- Given your answer to (a), the Central Bank of Italy will ______to help the economy move back to long run equilibrium.
Raise Taxes Lower Taxes Raise Interest Rates Lower Interest Rates
Higher Nominal Wages Lower Nominal Wages (Circle one.)
- Given your answer to (a), the President of Italy will ______to help the economy move back to long run equilibrium.
Raise Taxes Lower Taxes Raise Interest Rates Lower Interest Rates
Higher Nominal Wages Lower Nominal Wages (Circle one.)
- Given your answer to (a), the market would self-correct by agreeing to ______and this will move the Italian economy back to potential output on its own.
Raise Taxes Lower Taxes Raise Interest Rates Lower Interest Rates
Higher Nominal Wages Lower Nominal Wages (Circle one.)
5. While out with friends waiting for the “All You Can Eat Fish Fry” at Groveland Tap, we saw a Pac-Man machine, a video game from our childhood. The machine still had a sticker reflecting the original price per game (25 cents), but now it costs you $1 to play. We were in shock how much it cost today and of course, I pulled out my cellphone to look up the CPI. Yes, my friends are used to this!
Is it more expensive or less expensive in real terms to play Pac-Man today? Assume CPI1980 =79 and CPI2017 =244. Show work.
6. Last January, the European Commission has called on Italy to reduce its 2017 deficit by around €3.4bn ($3.64bn) to avoid potential sanctions for breaking European Union spending rules. Let suppose that Italy reduces its government spending by €3.4bn in order to be in compliant with EU rules. How much will Italy’s real GDP change by in the short run if mpc is .75?
7. Explain the long-long run effect (if any) on potential output. Choose ONE question to answer.
- The quality of the infrastructure (e.g., roads, rail lines, airports) in the southern part of Italy is poorer than in the northern part. Given the difference in quality of the infrastructure, which part of Italy (north or south) has a higher potential output? Explain the macroeconomic reasoning behind your answer.
- Research published in 2015 Economic Journal determined that the mafia is responsible for a 20 percent downturn of economic output in southern Italy. Explain why potential output in southern Italy is lower because of the presence of the mafia in southern Italy.
8. The Sung period in China (A.D. 960-1270) was one of considerable technological sophistication; its inventions included paper, waterwheels, water clocks, gunpowder, and possibly the compass. But, during the Sung period, there was a social system that inhibited entrepreneurship. Commerce and industry was considered low-status activities, not fit for an educated person. In addition, the emperor had the right to seize his subjects’ property and take control of their business ventures. Not surprisingly, medieval China did not develop a dynamic entrepreneurial class. Explain how the lack of a dynamic entrepreneurial class impacted the macro economy.
8. The unemployment benefits that the U.S. provides is an example of ______.
Discretionary Fiscal Policy Automatic Stabilizers (Circle one.)
9. ______is/are meant to address short term problems.
Discretionary Fiscal Policy Automatic Stabilizers (Circle one.)
10. Who has a higher MPC? Rich Poor (Circle one.)
11. Circle the bolded word that completes the sentence below.
If the price level falls, then (real or nominal) wages increase in the short run.
12. For a long run equilibrium, expected price level must equal ______. (Fill in the appropriate word in the blank.
13. Answer ONE of the following set of questions.
A. In lecture on Monday, we discussed the letter Economists will send to US elected officials urging them to modernize our immigration system in a way that maximizes the opportunity immigration can bring. Identify 2 benefits immigrants generate for the economy (as discussed in lecture) and provide a macroeconomic rationale for each example.
B. While searching the web for current nominal GDP figures, I came across this blog.
“The economy is worse than you thought. It is bad enough that the economy sucks. This situation is made worse by easily discoverable distortions in official government statistics which downplay how much it sucks. (It's suckiness?)
Mike Shedlock alerted us to such a distortion … It seems that if you apply the Bureau of Labor Statistics official CPI-deflator to nominal GDP, instead of the BEA's own deflator, the United States is in recession right now. ...”
Critically evaluate this blogger’s argument.
14. Imports is an example of ______.
Leakage Injection (Circle one.)
15. Government expenditures is an example of ______.
Leakage Injection (Circle one.)
16. Circle the bolded word that completes the economics joke below.
How many (Classical or Keynesian) economists does it take to change a light bulb?
Answer: None. If it really needed to be changed, market forces would have caused it to happen.
17. Identify the relevant economic term(s) being discussed in each passage (1-2 words)
______As discussed in class, economic research suggests that millennials who are entering their prime spending years, and who count as America’s largest living generation, spend a smaller percentage of additional dollar of income than previous generations at the same stage of life.
______“Estimates of Super Bowl impacts from previous years vary markedly, with the greatest outlier being $719 million brought in by Phoenix in 2015 (including $295 million in direct spending and the rest in “ripple effect” impacts). New York reported some $600 million in 2014. Then there’s Dallas, which was hammered by a winter storm in 2011. The city brought in a disappointing $200 million.” (Source: Star Tribune 4/12/16)
“Pay for full-time faculty members [not adjusted for inflation] rose 2.6percent this academic year over last, according to “Visualizing Change,” the American Association of University Professors’ Annual Report on the Economic Status of the Profession. But professors shouldn't get too excited: adjusted for inflation, that amounts to just 0.5percent.” (Source: Inside Higher Ed April 11, 2017)
This implies that the professors’ ______rose by 2.6%, while their ______rose only by 0.5%. (Fill in blank with economic words.)
18. Who is the head of the Federal Reserve? ______
19. Mexican gas prices rose 20 percent in January 2017. The higher oil prices will have what impact on Mexico’s LRAS? (Note: Unlike for Saudi Arabia, the production of gasoline is not a large percentage of the Mexican economy.)
Increase Decrease Remains the same (Circle one.)
20. Answer all of the questions in terms of its impact on the US economy. Assume mpc is .9.
Given change in Autonomous AE / Direction of shift or movement in AE (Circle one.) / Direction of shift or movement in AD (Circle one.) / Size of shift/ movement of C / Size of shift/ movement of AD / Size of Δ in RGPIncrease of 5b in C b/c of rise in U.S. real GDP / Shift Up AE
/Shift Down AE
/Movement Along AE to left/
Movement Along AE to Right / Shift Right AD/
Shift Left AD/
Movement Along AD to left/
Movement Along AD to Right
Increase in C b/c of rise in U.S. consumer expectations / Shift Up AE
/Shift Down AE
/Movement Along AE to left/
Movement Along AE to Right / Shift Right AD/
Shift Left AD/
Movement Along AD to left/
Movement Along AD to Right
Increase in NX b/c the U.S. GDP price index drops / Shift Up AE
/Shift Down AE
/Movement Along AE to left/
Movement Along AE to Right / Shift Right AD/
Shift Left AD/
Movement Along AD to left/
Movement Along AD to Right
Decrease in NX because of drop in foreign RGDP / Shift Up AE
/Shift Down AE
/Movement Along AE to left/
Movement Along AE to Right / Shift Right AD/
Shift Left AD/
Movement Along AD to left/
Movement Along AD to Right
If you need to restart this chart, come see me for another copy.