14.02 QUIZ ONE: PRINCIPLES OF MACROECONOMICS
STOP!! READ INSTRUCTIONS FIRST.
Read all questions carefully and completely before beginning the exam. There are 5 pages, and 4 sections of the quiz – make sure you do them all.
Show your work on all questions in order to receive partial credit.
If your answer includes a graph, label all curves and axes clearly; if we can’t read the graph, you will lose points on your answer.
The quiz is worth a total of 80 points.
Please use two blue books, one for Part I & II, and one for Part III & IV. Write your name, TA name, and section or recitation time on each book. Also, return your signed copy of the quiz to the TA’s when you complete the test.
No notes, calculators, or books may be used during the quiz.
You will have 2 hours to complete the quiz. Good luck!
PART I: TRUE OR FALSE? (2 points per question, 30 points total)
Explain your answer briefly, in one or two sentences.
PART II: MULTIPLE CHOICE (3 points per question, 18 points total)
Clearly indicate the letter of your answer, and explain your choice in a few sentences.
Consider the following model economy for questions 1 and 2:
C = c0 + c1(Y-T)
I = d0 + d1Y – d2i
G = 50
T = 50
X = x1(Yforeign)
M = m0 + m1Y,
0< c1 < 1
0< d1 < 1
0< m1 < 1
(a) c1 only
(b) c1 and c0
(c) d1 and c1
(d) d1, c1, and m1
(e) d0 and c0
(a) cut taxes (T) by 10.
(b) raise government spending (G) by 10.
(c) encourage consumers to save, thus increasing the marginal propensity to save.
(d) have the Federal Reserve raise interest rates.
(e) put tariffs on exports.
Multiple Choice Continued on Next Page
Multiple Choice Continued
(a) increased autonomous consumption.
(b) increased government transfer payments.
(c) a larger fiscal multiplier.
(d) construction of new domestic infrastructure.
(e) an influx of low-skilled labor into the economy.
(a) the effect on output is positive and the effect on interest rates is ambiguous.
(b) the effect on output is negative and the effect on interest rates is ambiguous.
(c) the effect on output is ambiguous and the effect on interest rates is negative.
(d) the effect on output is ambiguous and the effect on interest rates is positive.
(e) the effect on output is positive and the effect on interest rates is negative.
(a) An increase in government expenditures.
(b) An increase in the money supply.
(c) An increase in voluntary unemployment.
(d) An increase in involuntary unemployment.
(e) An increase in the markup of prices over costs.
(j) none of the above
PART III: LONG QUESTION ONE (17 points)
Build a basic model of an economy from the following description:
n On average, buy $190 of new equipment each year
n They reduce purchases by $10 for each 1 percentage point interest rates exceed 5%, and raise them symmetrically for lower interest rates. (Hint: r, the interest rate, enters the equations as a whole number like 4,5, or 6 and not .04, .05, .06.)
n Receive all gross income (GDP) in the economy as either wages or dividends.
n Pay 30% of gross income in taxes.
n Receive 10% of GDP as transfer payments from the government such as social security benefits (which aren't taxed).
n Spend 75% of their after-tax income on consumer goods.
n 1/6 of their consumer purchases are imports.
n The Government buys $200 in goods.
n No taxes other than income taxes are collected.
Foreign Buyers and Sellers
n Imports as noted above.
n $100 in exports are made each year.
PART IV: LONG QUESTION TWO (15 points)
Fill in the blanks for 1 and 2, and give a short answer for 3. (Elaborate on your answer as necessary to resolve any unintended ambiguity about which you are concerned—none is intended.)
1. (3 points)The IS Curve created above describes equilibrium pairs of ________ and ________that correspond to balance in the______________________ market, given assumptions for ______ policy.
2. (3 points) The LM Curve, in contrast, describes equilibrium pairs of the same variables with respect to the______________________ market, given assumed values for the ____________ and the ____________.
3. (9 points) Explain concisely (that is, in approximately 40 words or less) the very basic demand concepts that interact to create the expected slope of the LM curve.