Document1
Econ 1120 - INTRODUCTORY MACROECONOMICS
Makeup PRELIM #2 – Wissink – Fall 2016 – November 4
________________________________________
Your LAST (FAMILY) NAME
____________________________________
Your First (given) name
Your NetId:_________________ Your Student Number:________________________________
Instructions and Exam Taking Policy:
There are two sections in this exam. Answer all questions.
Part I: 14 multiple choice/fill in the blank questions @ 3.5 points each
Part II: 2 problems @ 20 points and 31 points
Total Points = 100, Total Time = 90 minutes.
NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you
need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have,
raise your hand and wait for the proctor to come to you. Only one person can be out of the examination
room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.
NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.
NO GRAPHING CALCULATORS.
NO BOOKS. NO NOTES. NO HELP SHEETS.
NO TALKING TO EACH OTHER.
Check the TA’s name for the section you regularly attend (that is, where you will pick up
your prelim):
One more time, please…
_____________________________________
Your LAST (FAMILY) NAME
_________________________________
Your First (given) name
Your NetId:_________________ Your Student Number:________________________________
GRADING
MC/FIB (out 49 points) =___________________
Q1 (out of 20 points) =__________________
Q2 (out of 31 points) =__________________
TOTAL SCORE: =_____________________
Document1
Part I: Multiple Choice and Fill-In-The-Blank Questions. Do them ALL.
Circle the letter for your answer or fill in the answer in the blank provided.
1. Which one of the following is always TRUE? Note: the notation
refers to marginal and average propensity to consume (MPC and APC)
and marginal and average propensity to save (MPS and APS) and
aggregate output (Y).
A.
B.
C.
D.
E.
MPC + APC = 1
MPC + MPS = 1
APC < MPC
MPC + MPS = Y
APC < APS
2. Refer to the table for all the information you need on a simple frugal
economy with no government or international sector. At an aggregate
output level of $200 billion, which one of the following statements is
true?
A.
B.
C.
D.
E.
Desired leakages equal desired injections.
Planned investment is greater than actual investment.
Actual saving does not equal actual investment.
There are unplanned accumulations of inventory.
Saving is zero.
3. Consider a simple frugal governed economy with no international
sector and only one marginal propensity, the marginal propensity to
consume, which equals 0.9. If equilibrium output Y* rises by $100
billion due to an increase in government spending, the increase in
government spending must have been
A.
B.
C.
D.
E.
$100 billion.
$90 billion.
$50 billion.
$10 billion.
$1 billion.
Aggregate Output (Y)
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Aggregate Consumption
$2,000
$2,800
$3,600
$4,400
$5,200
$6,000
Desired Investment
$1,600
$1,600
$1,600
$1,600
$1,600
$1,600
4. Consider the economy referred to in the table above and assume
there is no government and no foreign trade in the model. Ignore the
money market. If the economy is in equilibrium, and planned
investment increases by $200, then Y* will
A.
B.
C.
D.
E.
increase by $200.
decrease by $200.
increase by $1,000.
decrease by $1,000.
increase by $250.
5 Consider an economy completely described by the following two
equations: S = -400 + 0.2Y and Id = 3,000.
The “paradox of thrift” applied to this economy suggests that
A. an exogenous increase in subsistence consumption will make it so
that, in equilibrium, people actually consume less.
B. an exogenous decrease in subsistence consumption will make it so
that, in equilibrium, people actually save less.
C. an exogenous decrease in subsistence consumption will make it so
that, in equilibrium, people save the same amount.
D. an exogenous increase in desired investment leads to less saving in
equilibrium.
E. an exogenous increase in desired investment leads to less
consumption in equilibrium.
6. Banks hold no excess reserves and the required reserve ratio is 10%.
If the FED buys up $10 million in bonds from the public, but the public
deposits only $8 million of the money received into commercial banks
(and keeps the other $2 million as cash), then the maximum resulting
increase in the money supply from this open market purchase will be:
A.
B.
C.
D.
E.
$8 million
$80 million.
$10 million.
$100 million.
$82 million.
7. The economy of Greenspan is in equilibrium and can be completely
described by the table. If its full employment output, YFE, is equal to
$3,000 then
$Y
0
1,000
2,000
3,000
4,000
5,000
6,000
Greenspan’s Economy (note that YFE = $3,000)
$C
$T
$Id
1,050
100
50
1,550
100
50
2,050
100
50
2,550
100
50
3,050
100
50
3,550
100
50
4,050
100
50
G
900
900
900
900
900
900
900
A. the economy of Greenspan must always equilibrate at Y=$3,000.
B. the economy of Greenspan is currently experiencing higher
unemployment than is consistent with full employment.
C. the economy of Greenspan will have inflationary pressures.
D. the economy of Greenspan is running a budget surplus.
E. the economy of Greenspan must be experiencing unplanned
accumulation of inventories.
8. Referring back to the information about Greenspan, if Greenspan
were to increase taxes so that T=$1,100 and simultaneously increase
government expenditures so that G=$1,100
A. the economy would be unchanged.
B. the economy would experience a severe jump in inflationary
pressure.
C. the value of Y* would decrease by $600.
D. the economy would get to full employment Y.
E. the value of Y* would increase by $1100.
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
A.
B.
C.
D.
E.
+31.25 million.
-$16 million.
-$31.25 million.
-$80 million.
+$80 million.
10. Jamee Diamond offers you the following risk free promissory note
today: “I Jamee Diamond promise to give you $2,000 two years from
today.” Suppose the current annual market interest rate is 2%.
Suppose there is no inflation.
A. Jamee’s promise is worth less than $2,000 today.
B. Jamee’s promise is worth exactly $2,000 today.
C. Jamee’s promise would be worth more today if the market interest
rate were 6% rather than 2%.
D. Jamee’s promise would be worth more today if you received the
$2,000 three years from today rather than two years from today.
E. Jamee’s promise is worth $1,961 today.
11. Consider our model of an economy where there is a “goods and
services market” and a “money market” where money demand depends
on the interest rate and aggregate output. Suppose the desired
investment curve is very sensitive (that means flat) with respect to the
interest rate. In such an economy
A.
B.
C.
D.
the fiscal policy crowding-out effect is small.
the fiscal policy crowding-out effect is large.
monetary policy is extremely ineffective.
reducing the money supply will have a big impact on Y*, whereas
increasing the money supply has very little impact on Y*.
E. there is no feedback effect with either monetary or fiscal policy.
12. Assuming money demand depends on all three variables we
introduced, what is the chain of events that results from a Federal
Reserve Bank open market sale of securities to the public?
A. Aggregate output decreases, demand for money decreases, the
interest rate decreases, planned investment increases, and aggregate
output increases.
B. Money supply decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
C. Money demand decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
D. Money supply decreases, the interest rate decreases, planned
investment decreases, aggregate output decreases, and money
demand decreases.
E. Money supply decreases, the interest rate increases, planned
investment decreases, aggregate output decreases, and the money
demand remains unchanged.
13. Consider the money market in the graph.
Firms and households will attempt to reduce their
holdings of money by buying bonds
A.
B.
C.
D.
E.
at any interest rates less than 3%.
at an interest rate equal to 3%.
at an interest rate equal to 5%.
at any interest rate greater than 5%.
only at interest rates greater than 8%.
14. Which one of the following pairs of events will definitely lead to a
decrease in the equilibrium interest rate in the money market?
A. The sale of government securities by the Federal Reserve to the
public and an increase in the price level.
B. A decrease in the Federal Reserve’s discount rate and an increase in
the level of aggregate output.
C. The purchase of government securities from the public by the
Federal Reserve and a decrease in the price level.
D. A decrease in the Federal Reserve’s required reserve ratio and an
increase in the level of aggregate output.
E. All of the above.
Document1
Part II: Make sure you read and do ALL parts of each question. Show as much work as
possible. TRY to get started on every question. Show us something. Write legibly and
remember to label all graphs and axes in diagrams.
1. Illustrated below is everything you need to know about the T-accounts for the Fed, the consolidated
Commercial Banks, and one citizen (of many) named Leroy J. Gibbs in a very small economy which uses
the dollar($) as its currency. Assume the following: the required reserve ratio is 5%, all loan activity in
the economy is handled via demand deposits, all demand deposits stay in the banking system, and banks
operate with zero excess reserves.
Initial Position
The Federal Reserve Bank(Fed)
Assets
Liabilities+
Net Worth
Securities=$1,000 $45=Reserves
Commercial Banks
Assets
Liabilities+
Net Worth
Reserves=$45 $900=DDp
$300=Currency Loans=$855
$0=Net
Worth
Gibbs
Assets
Liabilities+
Net Worth
DDGibbs=$15
$0=Debts
Securities=$50 $105=Net
Worth
$655=Net
Worth
CashGibbs=$40
Final Position
Federal Reserve Bank(Fed)
Assets
Liabilities+
Net Worth
Commercial Banks
Assets
Liabilities+
Net Worth
Assets
Liabilities+
Net Worth
Securities=
=Reserves
Reserves=
DDGibbs=
$0=Debts
=Currency
Loans=
Securities=
$105=Net
Worth
$655=Net Worth
=DDp
$0=Net
Worth
Gibbs
CashGibbs=
a. What is the initial value of the money supply, M1?
b. Suppose the Fed decides to buy all of Gibbs’ securities. Assume that Gibbs gets paid for his securities
with a demand deposit that he leaves in the banking system. In the end, after all loans are made and
loans are spent and monies deposited back into the commercial banking system, by how much will the
money supply have changed, and in what direction, as a consequence of the Fed’s open market
operation with Gibbs?
c. Fill in all the missing values in the T-accounts.
d. Identify two realistic changes to the assumptions made in this question that would reduce the impact
of the Fed’s open market operation with Gibbs.
ANSWERS
2. Suppose that the following set of equations describe ALL the relevant information about the island
nation, Isle d'Trump. Assume the fiat currency is called the dollar and its symbol is $.









Consumption function: C = 100 + 0.75Yd (where Yd = disposable income)
Desired Investment function: Id = 75
Government expenditures function: G = 500
Tax function: T = 100 + 0.5Y
Export function: EX = 500
Import function: IM = 200
The full employment level of national income is YFull employment = $2,240
The money market can be safely ignored for now.
Inflation is assumed to be non-existent.
a. Determine the equilibrium level of national output(income), Y*. Show your work.
b. Sketch the equilibrium position in a “Keynesian Cross” diagram.
c. How could the government use fiscal policy via “G” to achieve full employment national
output(income)? Be specific with your answer – that is state by how much and in what direction G
changes. Show your work.
d. Sketch this in the diagram you already constructed.
Suppose you now recognize there is a money market. Money supply is completely determined by the
Fed. Money demand depends only on the interest rate and desired investment depends only on the
interest rate in the typical ways. Assume all banks operate at zero excess reserves and that all money
stays in the banking system. Assume there is no currency in circulation.
Assume the following money market equations:



Money demand = MD = 10,000 - 9,000r
Money supply = MS = 8,200
Required reserve ratio for the banking system = rrr = 5%.
e. Given the money supply, what is the current equilibrium interest rate? (Assume Id=75 at this interest
rate.)
f. If the monetary authorities want to get the economy to YFull employment, by how much and in what
direction would investment need to change via monetary policy?
g. Suppose this new desired amount of investment occurs at an interest rate = 15%. If the government
(i.e., the Fed) wanted to use monetary policy instead of fiscal policy to attain the full employment
level of national income, what would the money supply need to be?
h. Should the Fed buy or sell government securities to the public?
i. Exactly how many dollars in securities?
Answers
Answers
Econ 1120 Fall 2016 Makeup PRELIM 2 Answers
1. B. MPC + MPS = 1 and APC + APS = 1 are always true.
2. B. Consumption + Desired investment = $260, but only $200 worth of stuff was currently made, so there is $60 of
unplanned depletion of inventory. Actual investment (-40) always equals actual saving (-40). Actual investment is SMALLER
than planned investment (-40<20). Leakages do not equal injections.
3. D. If MPC=0.9 then the government multiplier is 1/(1-.9)=10. So ∆Y*=Kg∆G  100=10∆G  ∆G=10.
4. C. The marginal propensity to consume can be calculated as follows: when output increases from 3000 to 4000,
consumption increases from 2000 to 2800. Therefore, the MPC is (2800-2000)/(4000-3000)=0.8. In turn, the multiplier is
1/(1-0.8)=5. Therefore, Y* increases by 200*5=1000.
5. C. Suppose the economy is closed and there is no government. Then S = Y – C. Exogenous decrease in subsistence
consumption implies upward shift of the saving curve. However, since 𝐼 𝑑 = $3000 is fixed, in equilibrium people save the
same amount but have less income and less consumption. (A) makes the saving curve shift downward and people consume
more. (D) and (E) Exogenous increase in desired investment leads people to save and consume more.
6. E. So there is only +2mil for the cash part and then the +8mil that goes into the banking system becomes +80mil since the
money multiplier is 10. So added together you get +82 million.
7. C. Note that Y* is currently at Y*=4000. So Greenspan is producing more than Y FE, so it is in an inflationary gap.
8. C. The government multiplier is 2. The tax multiplier is -1. Current Y*=$4000. The change in G is +200. This increases
Y* by +400. The change in taxes is +1000 and this changes Y* by -1000. So the net is -600.
9. C. Selling securities will decrease the money supply. The amount is equal to -5/.16=-31.25.
10. A. A classic example of the time value of money. The promise will worth less than $2000. So B and E are incorrect. If
the interest rate is higher, or the time to maturity is longer, the promise will worth even less. Therefore, C and D are incorrect.
11 B. The crowding-out effect is bigger when investment is sensitive to interest rate. Therefore, B is correct but A is
incorrect. Monetary policy influences the economy through the interest rate. Therefore, the fact that investment curve is
sensitive to interest rate is good news for monetary policy.
12 B. Suppose money demand depends on interest rate, price level, and income level. If the Fed sells government securities to
the public, money supply decreases and interest rate rises. Consequently, cost of investment becomes higher so that planned
investment declines. Since Y = C + I + G (if the economy is closed) Y will also decrease and at the end money demand will
decrease because income level falls.
13. D. Above r*=5% these is excess supply of money, so people will attempt to get rid of money by buying bonds, driving the
price of bonds up and the interest rate down.
14. C. (A) Money supply increases but money demand rises as well so that direction of the equilibrium interest rate change is
uncertain. (B) Again, money supply increases but money demand increases as well due to the rise in income. (C) Money
supply increases while money demand falls so that the equilibrium interest rate clearly declines. (D) Money supply shifts to
the right but money demand shifts to the left the equilibrium interest rate can either rise or fall.