1. Fill in the table below. The current wage is $100 and the price of output (Q) is $30. Each box is worth 1/2 of a point. Enter whole numbers only (no commas, no decimals, no dollar signs) and if a vaiue is negative, be sure to enter the negative sign.
2. Use the table from question 1 to complete the next six questions. Enter the correct values in the boxes below. Enter only whole numbers (no commas, no decimals, no dollar signs).
This profit maximizing firm will hire___workers.
3. This profit maximizing firm will produce___units of output.
4. This firm's maximum profit equals___
5. Now suppose that the wage rises to $130. You will need to recalculate the values from the table, given this new wage, to answer the questions below.
This profit maximizing firm will now hire___workers.
6. This profit maximizing firm will now produce___units of output.
7. Suppose the initial conditions of the economy are characterized by the following equations. In this problem, we assume that prices are fixed at 1 (the price index is 100 and when we deflate, we use 1.00) so that nominal wealth equals real wealth.
1) C = a0 + a1 (Y-T) + a2 (WSM) + a3 (WRE) + a4 (CC) + a5 (r)
1') C = a0 + a1 (Y-500) + a2 (10,000) + a3 (15,000) + a4 (100) + a5 (2)
2) I =b0 + b1AS + b2CF + b3 (r)
2') I = b0 + b1(200) + b2 (2400) + b3 (2)
3) G = G
3') G = 700
4) X-M = X-M
4') X-M = -300
Where: a0 = 100, a1 = .90, a2 = .04, a3 = .08, a4 = .8, a5 = -100, b0 = 500, b1 = .5, b2 = .5, b3 = -100
Derive an expression for the consumption function and graph it on your exam sheet. Show all work.
8. Derive an expression for the aggregate expenditure curve and graph it on your exam sheet labeling this initial equilibrium output as point A. Also, add this point A to your consumption function. Show all work. Draw an aggregate demand and an aggregate supply curve in the right hand graph on your exam sheet identifying this initial point as point A.
NOTE: We are holding the price level fixed at 100 in this problem. Also, note that you that you cannot derive an expression for the aggregate demand curve, just draw it with a negative slope going through point A.
9. We now let G rise to 1000 as the Federal Government (fiscal policy) authorities are not happy with the level of GDP. Solve for the new equilibrium output and label as point B on all three of your diagrams. Please be sure to label your diagrams completely and show all work.
10. What is the government spending multiplier in this problem and what does this government spending multiplier depend on?
11. Pretend you are in charge of conducting monetary policy at the New York Fed and you have the following initial conditions. Initial Conditions
rr/D = .10
C = 900 b
D = 1800 b
ER = 0
M = C + D
Given the above information (show all work on your exam sheet):
i) Calculate the MB.
ii) Calculate the money multiplier (mm).
iii) What is the money supply (use MS = mm x MB)?
12. If Rd = 240 - 30 iff, given the information above, what is the market clearing federal funds rate? Assume that this is the target for the federal funds rate. Show all work. NOTE: To calculate the market clearing federal funds rate, you first need Rs. Rs is made up of required reserves and excess reserves. Here ER=0 so to find Rs, take the value for rr/D and multiply it by the value for D. Then you will be able to solve for the market clearing federal funds rate.
In the space on your exam sheet, draw a reserve market diagram depicting exactly what is going on here! Label the equilibrium point as point A.
13. Suppose that due to whatever reason, reserve demand changes and you forecast the reserve demand to now be Rd = 270 - 30 iff. In order to keep the federal funds rate at target, what must the open market desk do? Be specific and show this development in your picture on your exam sheet (label the new equilibrium as point B).
14. Suppose the alternative, that the open market desk does nothing different, that is, they hold the amount of reserves constant. What happens in the reserve market? What is the market clearing fed funds rate now? Label this development, that is, the new equilibrium as point C. Be sure to show all work. 10. Upload your exam sheet for Part 2 here.
15. Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
A) an increase in interest rates
B) a decrease in disposable income
C) a decrease in expected profits for firms
D) an increase in net exports
16. An increase in the price level causes 0
A) the money demand curve to shift to the left.
B) the money demand curve to shift to the right.
C) a movement up along the money demand curve.
D) a movement down along the money demand curve.
17. If the economy is slipping into a recession, which of the following would be an appropriate fiscal policy?
A) an increase in the money supply and a decrease in interest rates
B) a decrease in government purchases
C) a decrease in taxes
D) a decrease in oil prices
18. "The distribution of income should be left to the market" is an example of a positive economic statement.
A) True
B) False
19. An increase in population shifts the production possibility frontier inwards over time.
A) True
B) False
20. Using "chain-weighted" prices to calculate real GDP remedies the distortions causes by changes in relative prices over time.
A) True
B) False
21. Unemployment caused by a business cycle recession is called cyclical unemployment.
A) True
B) False
22. Households will supply labor as long as the wage they receive is equal to or less than the value of their leisure time.
A) True
B) False
23. The sensitivity parameter in the consumption function that measures how sensitive consumption is to changes in consumer confidence is referred to as the marginal propensity to consume.
A) True
B) False
24. Assuming that natural gas for firm X is an important input to the production process, an increase in the availability of natural gas that lowers the price of natural gas, will result in a leftward shift of firm X's supply curve.
A) True
B) False
25. If the money multiplier is 3 and the monetary base is $100 billion, then the money supply equals $300 billion.
A) True
B) False
26. If the Fed conducts open market sales then the price of bonds should increase.
A) True
B) False
27. If aggregate expenditures exceed aggregate income then inventories will rise and firms will eventually lay off workers.
A) True
B) False
28. If firms and workers had perfect foresight as to inflation so that actual = expected inflation at all times, then the Phillips curve would be vertical and thus, there would be no trade between unemployment and inflation, even in the short run.
A) True
B) False
29. Goods market equilibrium in an open economy requires that savings equals investment plus the current account.
A) True
B) False