Final Examination
May 6, 2004

 

Directions: do all work on the exam itself, answering the question in the space provided.  If you require extra space, use the back of the exam, indicating that you have done so.  Each problem has the indicated weight.

Name:

 

1-1          

1-2

1-3

1-4

 

1-5

1-6

1-7

1-8

2-1

2-2

3

 

 

 

First Part (5 point questions)

For the following statements, indicate whether they are TRUE or FALSE and explain why. 

 

1.               If the money supply is increased, interest rates will increase.

2.               An individual who expects to live for four time periods and who has a consumption demand function like that we studied in class expects to earn $100,000 in period 2 and $200,000 in period 3 of his life (and zero in periods 1 and 4).  The earnings are stated in real dollars.  His value of ξ is 1/3.  The nominal interest rate is 125% and the expected rate of inflation is 50%.  His demand for money in period 1 is $10,000.  (Hint: disagree and give me the right number).

 

 

 

 

 

 

 

3.               If people have a bequest motive, then it does not matter whether government programs are paid for immediately or by borrowing, no matter what kind of taxation is used to pay for the programs

4.               Paradoxically, a policy of eliminating income inequality will reduce economic growth because it will reduce the number of individuals with funds to invest in new businesses.

 

 

 

 

 

 

 

 

5.               The Y and M curves measure the demand for output and money respectively.

6.               The Washington Post reports that the budget deficit will be $100 billion less than expected.  Assuming that this report is true (and this is an assumption) and that the government does not cut taxes or increase spending in response, this means a higher value of z

 

 

 

 

 

 

 

 

 

7.               New research reveals a production function more accurate than the Cobb-Douglas.  (That is, the new function does a better job of fitting the facts)

8.               If a nation eliminated all monopolies, there would be higher economic freedom..

 

Second Part (20 point questions)

1.                  For each of the following events, what will be the impact on the US trade deficit? Explain your answer. It is not enough to guess the right answers: you must explain why these are the correct answers. I want to see a well-labeled and well-explained graph of the demand for loans.  Note: in all of these questions, you may assume that the only nominal assets and liabilities in the US, Europe and the UK are $, €, and £.

1.      Europeans are suddenly hit with a desire to visit the United States and see our scenic wonders..

2.      French vineyards go on a month-long strike, effectively running this years production of wine.

 

 

 

 

 

 

 

 

 

 

3.      The government repeals the tax on wage income, replacing it by a tax on consumption expenditures that raises the same amount of money.

4.      The government announces plans to spend $10,000,000 this year to build a monument to Irving Fisher, to be paid for with a temporary one year tax on wage incomes

 

 

 

 

 

 

 

 

 

 

5.      People want to doubles the amount of money the hold (formally, ξ doubles).  The Federal Reserve System responds by open market operations to double the money supply.

 

 

 

 

 

 

 

 

6.      Much of the underdeveloped world shakes off its lethargy, leading to a significant rise in the world-wide demand for loans.

2.                  For each of the following situations, draw the impact on the Y and M curves for the United States and tell me the impacts on the price level and the interest rate.  I have drawn the initial Y and M curves for you.  Explain your reasoning.

Remember: these are the Y and M curves for the United States

 

The government announces plans to spend $10,000,000 this year to build a monument to Irving Fisher, to be paid for with freshly printed dollar bills.  (You may treat this as a useless project if you can name two major contributions Fisher made to macroeconomics

 

 

 

 

 

 

 

 

 

Russians, who hold significant numbers of US dollars, decides to hold euros instead.  Greenspan responds by open market operations which cut the monetary base by an exact offset.  (That is, if Russians turn in $X, MB declines by $X)

 

 

 

 

 

 

Santa Claus repeats the Christmas Eve Caper in the United States.  BUT, confused by perhaps too much Christmas Spirits, he gives everyone X Euros for each X dollars they hold.

 

 

 

 

 

 

 

Santa Claus repeats the Christmas Eve Caper in the United Kingdom.  BUT definitely confused by Christmas Spirits, he gives everyone X dollars for each X pounds they hold.

 

 

 

 

 

 

The government announces plans to raise the tax rate on wage income by 5%, the proceeds to be used to pay for things that people are already consuming. 

 

 

 

 

 

Marihuana is legalized in the United States, and it now becomes possible to purchase it at the local grocery store.  (Hint: concentrate on the effects on money demand)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Part (20 points)

The attached article summarizes the results of the May 4, 2004 FOMC meeting.  Using what you learned in this course, analyze.  Note: it is important you show you ability to use the intellectual apparatus developed here for your analysis.  A sophisticated statement, no matter how logical, that does not show mastery of the apparatus used here, will get marked down.  I.e., I expect to see graphs and the like.

 

The statement follows several blank pages where you can write your answer.