Midterm: Macroeconomics and Government
EC301 Open-Book Midterm Exam (Weight 110 points)
1. (7 points) How are presidential election outcomes related to the performance of the economy?
2. (7 points) Discuss the difference between Microeconomics and Macroeconomics.
3. (10 points) Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all.” Do you agree? Why or why not? Explain: “Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero.”
4. (7 points) What are the major factors that have affected U.S. household consumption since the recession in 2001?
5. (7 points) Briefly explain how the following would shift the IS function to the right.
a. A change to lump-sum taxation (Specify whether increase or decrease is needed to shift IS curve to the right.)
b. A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.)
6. (7 points) Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.
a. MS.
b. MD (money demand).
c. P (price index).
7. (7 points) By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67?
8. (10 points) Suppose that private sector spending is highly sensitive to a change in interest rate. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering real GDP
9. (10 points) Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government
1. (7 points) How are presidential election outcomes related to the performance of the economy?
2. (7 points) Discuss the difference between Microeconomics and Macroeconomics.
3. (10 points) Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all.” Do you agree? Why or why not? Explain: “Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero.”
4. (7 points) What are the major factors that have affected U.S. household consumption since the recession in 2001?
5. (7 points) Briefly explain how the following would shift the IS function to the right.
a. A change to lump-sum taxation (Specify whether increase or decrease is needed to shift IS curve to the right.)
b. A change to government spending (Specify whether increase or decrease is needed to shift IS curve to the right.)
6. (7 points) Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.
a. MS.
b. MD (money demand).
c. P (price index).
7. (7 points) By how much will GDP change if firms increase their investment by $8 billion and the MPC is .80? If the MPC is .67?
8. (10 points) Suppose that private sector spending is highly sensitive to a change in interest rate. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering real GDP
9. (10 points) Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government