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Introductory Macroeconomics

by: Dr. Shawn Emmerich

Introductory Macroeconomics ECON 1120

Marketplace > Cornell University > Economcs > ECON 1120 > Introductory Macroeconomics
Dr. Shawn Emmerich
GPA 3.84
Introductory Macroeconomics

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Introductory Macroeconomics
Class Notes
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This 11 page Class Notes was uploaded by Dr. Shawn Emmerich on Saturday September 26, 2015. The Class Notes belongs to ECON 1120 at Cornell University taught by Staff in Fall 2015. Since its upload, it has received 13 views. For similar materials see Introductory Macroeconomics in Economcs at Cornell University.


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Date Created: 09/26/15
CConverterlnputS eD4fK8nhidoc Econ 1120 Wissink S09 MAKEUP PRELIM 2 April 10 2009 YOUR NAME Your CU Netid YOUR CU STUDENT NUMBER Check YOUR TA s NAME Lona Mondays Fernanda Thursdays Jin Tuesdays Jiyoun Anji Fridays INSTRUCTIONS There are three sections in this exam 0 Part I 12 multiple choice questions 3 points each 0 Part II 2 problems 19 points each 0 Part III 1 problem 26 points ANSWER ALL QUESTIONS ON EXAM TOTAL POINTS 100 TOTAL TIME 90 minutes HINTS o Read all questions carefully 0 Write legibly and remember to label all graphs and axes in diagrams NO QUESTIONS CAN BE ASKED DURING THE EXAM If you need to use the restroom quietly bring your exam papers up to the TA proctoring and they will hold your materials while you are out at the restroom ONLY SIMPLE FUNCTION LOW TECH CALCULATORS ARE ALLOWED NO CELL PHONES OR GRAPHING CALCULATORS ARE ALLOWED NO DEVICES THAT HAVE CALCULATOR quotappsquot AS WELL AS OTHER FUNCTIONS ARE ALLOWED EITHER NO BOOKS NO NOTES NO HELP SHEET S NO TALKING TO EACH OTHER NO ASKING THE PROCTORS ANY QUESTIONS GOOD LUCK CConverterlnputSeD4fK8nhidoc Multiple Choice Circle the best answer Do them ALL 1 If the consumption function for the economy is C 500 06Yd then the saving function S is A S 500 06Yd B S 500 06Yd C S 500 04Yd D S 500 04Yd E S 500 06Yd 2 If current aggregate outputincome is greater than desired aggregate expenditure there will be A an unplanned change in saving B an unplanned increase in inventories C an unplanned decrease in inventories D no change in inventories E a planned increase in inventories 3 Assume an economy in which all balances stay in the commercial banking system and that the required reserve ratio is 40 If the Fed wants to increase the money supply by 600 it should A increase the required reserve ratio B sell 240 worth of government securities C buy 240 worth of government securities D buy 600 worth of government securities E buy 359 worth of government securities 4 If the interest rate is higher than normal speculators will tend to hold onto A bonds instead of money because they expect the interest rate to fall and when it does they will be in a position to sell bonds to people at a nice high price B bonds instead of money because the opportunity cost of money is low C money instead of bonds because the brokerage fees and other costs of buying bonds are high when the interest rate is low D money instead of bonds because there is a speculation motive for holding a larger amount of money E cash instead of bonds because they will want to buy bonds in the future CConverterlnputS eD4fK8nhidoc 5 When the money demand function depends positively on aggregate outputincome as compared to when we assume it does not depend on aggregate outputincome at all we can conclude that expansionary scal policy will have more ef cacy expansionary scal policy will result in some crowding out of private investment the ef cacy of monetary policy is increased expansionary scal policy is predicted to decrease interest rates the money multiplier is reduced WUOW 6 Suppose that at the current interest rate there is an excess supply of money Given this information we know that there will be pressure for A bond prices to decrease and the interest rate to increase B bond prices to decrease and the interest rate to decrease C bond prices to increase and the interest rate to increase D bond prices to increase and the interest rate to decrease E the money demand function to shift to the right 7 Expansionary monetary policy is LESS effective when the is high and when the money demand function is very MPCmarginal propensity to consume MPSmarginal propensity to save APCaverage propensity to consume A MPS steep B MPS at C MPS unlikely to shift when Y changes D MPC at E APC steep Reserves 8 Refer to the table above for HSBC Bank The required reserve ratio is 25 If HSBC is just meeting its reserve requirement and has no excess reserves its loans equal A 900 B 1000 C 600 D 1800 E none ofthe above c COnV wehlnpuMSeDMKthi doc 9 Assume there is no leakage from the banking system and that all commercial banks are fully loaned up The required reserve ratio is 16 If the Fed sells 5 million worth of government securities to the public the change in the money supply will be 5051 10 5051 3125 million 16 million 3l25 million 80 million 80 million Mquot 1200 0 4 D 8 0 Money M s mummy Refer to the gure above At an interest rate of 3 typical households are satis ed with the amount of money they are 01 ng will attempt to increase both their holdings of money and their holdings of bonds will attempt to reduce their holdings of money by buying bonds will attempt to consume less will attempt to increase their holdings of money by selling bonds 11 Consider a simple frugal economy with no government and no international sector Assume that both consumption and desired investment increase when aggregate outputincome increases Assume that the marginal propensity to consume equals 060 and the marginal propensity to invest equals 020 In this economy the paradox of thrif would be that 5051 an exogenous desire to save more would result in the same amount of saving in equilibrium an exogenous desire to save less would result in the same amount of saving in equilibrium an exogenous desire to save more would result in less saving in equilibrium an exogenous desire to save more would result in more saving in equilibrium an exogenous desire to save less would result in less saving in equilibrium c COnV me lnpu seDllCKSrAhl doc All Numbers are in 59 Billion Output Consumption et Investment Government Income Spending Taxes Spending Spending 6 50 00 1200 000 50 200 200 800 1500 50 200 200 2400 2000 50 200 200 3000 2500 50 200 200 12 Refer to the table At an output level of 2400 billion there is a tendency for aggregate outputincome to fall to increase to remain constant to either increase or decrease to increase at an increasing rate 5051 CConverterInputS eD4fK8nhidoc keep going Part 11 Problems 1 and 2 1 Illustrated below is everything you need to know about the Taccounts for the FED the consolidated Commercial Banks and one citizen Sheeza Ivestor The required reserve ratio is 10 All values are in Billions of Dollars Currency in public circulation is 200 All loan activity in the economy is handled via demand deposits and all demand deposits stay in the banking system a What is the value of the initial money supply Ml b If the Fed decided to BUY 50 worth of securities from Sheeza by the FINAL position how much will the money supply change and in what direction c Assume that Sheeza gets paid for her securities with a demand deposit that she leaves in the banking system Assume commercial banks do all their adjusting to meet required reserves by adjusting the amount of loans they hold What are the nal values for all the question marks in the Taccounts below Assets Assets Assets FINAL Position Federal Reserve Bank I C 39 39 Banks I Sheeza Investor Assets LiabilitiesNet Assets LiabilitiesNet Assets LiabilitiesNet Worth Worth Worth F39 F I Securities290 I 90Reserves 3934 8nhidoc lReserves 3DDp 4DDSheeza 0Debts 200Currency 2Loans 5Securities 65Net Worth 2 In the small Kingdom of Dorr the monetary authorities known as The MAD disagree with the scal authorities Dorr s Parliament about what constitutes the appropriate economic policy for Dorr s economy in the year 2009 In palticular the scal authorities have decided to raise taxes and this disturbs and concerns The MAD for they fear the economy will be thrown into a recession Assume Dorr is an economy where the goods amp services market and the money market interact in the typical ways described in lecture In particular assume that money demand depends on both r and Y Assume that the price level in Dorr will be unaltered by the combined shenanigans of the scal and monetary authorities a If the monetary guys disagree with the scal guys and try to negate the effect of their taX increase what do you predict The MAD will do b Explain to the King of Dorr what the consequences of these joint policies will be on equilibrium aggregate outputincome consumption interest rate and investment Use causal arrows in your explanation Graphs are not required as long as your arrow analysis and commentary are correct You can include graphs however if you d like to ANSWER SPACE CConverterlnputSeD4fK8nhidoc PART III Problem 3 3 Read the problem carefully and answer all questions Show as much work as possible given time limitations Partial credit will be given when appropriate so if you have trouble with numerical solutions draw the pictures anyway since they might be worth something especially if they are drawn correctly Suppose that the following set of equations describe ALL the relevant information about the island nation Makeupville Assume the fiat currency is called the dollar and its symbol is 09 Consumption function C 20000 075Yd where Yd disposable income Desired Investment function Id 4000 Government expenditures function G 8000 01Y where Y income Tax function T 5000 Export function EX l000 Import function IM 100 024Yd where Yd disposable income The full employment level of national income is YFull employment 60000 The money market can be safely ignored for now In ation is assumed to be nonexistent Set up THIS model with letters instead of the number values and determine any TWO multipliers of your choice Using the number values given determine the equilibrium level of national 0utputinc0me Y How could the government use fiscal policy to achieve full employment national 0utputinc0me Be specific with respect to the values and directions of the policy you suggest Only one policy suggestion is required Suppose now you recognize that there is a money market and that investment depends on the interest rate in the typical way and money demand depends only on the interest rate In particular assume rm rump Desired Investment Id 9000 7 50000r where r is the interest rate Money demand MD 10000 9000r Money supply MS 9100 Assume that the required reserve ratio for the banking system is 10 What is the equilibrium interest rate What is the level of investment at that interest rate If the government wanted to use monetary policy instead of fiscal policy to attain the full employment level of national income by how much should the overall MS change Should the government buy or sell bonds How many dollars worth If it turned out that the money demand function depended on Y in the way we introduced in class and the Fed wants to get the economy to YFull Employment would the Fed need to increase or decrease the value of its open market operation Brie y defend your position CC0nverterInputS eD4fK8nhid0c ANS WER S PACE CC0nverterInputSeD4fK8nhidoc more answer space for question 3 CC0nverterInputSeD4fK8nhidoc ANSWERS TO ALL THE MULTIPLE CHOICE QUESTIONS oooqcxmgwm 00gtOUUUUUUUDgtOUUO


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