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Econ 100b

Created 4/30/1996
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Midterm

Part I. Multiple Choice (15 minutes; 30% of exam)

1. The broadest measure of the economy's price level, the GDP deflator, is calculated by:

a. Dividing nominal GDP by real GDP
b. Multiplying nominal GDP by real GDP
c. Substracting real GDP from nominal GDP
d. Adding real GDP to nominal GDP


2. In the national income accounts, investment does NOT necessarily include:

a. The purchase of new plants and machinery by businesses.
b. The purchase of new houses by families and by landlords.
c. The purchase of stocks on the New York Stock Exchange
d. Increases in businesses' inventories of goods.


3. All of the following statements about national savings are true EXCEPT:

a. National saving is the sum of private and public saving
b. National saving is equal to private saving minus the government deficit.
c. National saving is the total amount of savings deposits in banks.
d. National saving is equal to investment at the equilibrium interest rate.

4. When economists say "money", they mean:

a. The stock of assets that can be used to pay for purchases of goods and services.
b. The number of dollars in the hands of the public.
c. A store of value, a unit of account, and a medium of exchange.
d. All of the above.


5. The money supply necessarily increases when:

a. There is an increase in government purchases.
b. The Federal Reserve buys Treasury bonds from the public.
c. A private citizen buys a bond issued by General Motors
d. Silicon Graphics sells stock to the public, and uses the proceeds to buy a new factory.


6. During periods of unexpected inflation, lenders are hurt while borrowers gain because:

a. The ex-post real interest rate is higher than the ex-ante real interest rate.
b. The ex-post real interest rate is lower than the ex-ante real interest rate.
c. The real interest rate falls.
d. The nominal interest rate falls.


7. At the intersection of the IS and LM curves:

a. Actual expenditure is equal to planned expenditure.
b. The real money supply is equal to real money demand.
c. The levels of Y and r satisfy goods-market and money-market equilibrium conditions.
d. All of the above.


8. If people suddenly wish to hold more money at any given interest rate:

a. The money demand curve will shift out and to the right.
b. The LM curve will shift upward and to the left.
c. Unless countervailing steps are taken, real incomes will fall.
d. All of the above.


9. If investment is very sensitively dependent on the interest rate:

a. The IS curve is steep.
b. The IS curve is flat.
c. The LM curve is steep.
d. The LM curve is flat.


10. According to the Phillips curve, the inflation rate depends on:

a. Expected inflation and the level of aggregate demand relative to potential output.
b. The money supply and the real interest rate.
c. The stocks of labor and capital on hand for use in production.
d. Menu costs and staggered wage and price setting.



Part II. Short answers (15 minutes; 30% of exam; about 3 sentences on each)

Identify and briefly discuss each of the following concepts:

1. "Inside lags" and "outside lags" in the making of macroeconomic policy.

2. Automatic stabilizers and the sensitivity of GDP to shocks to spending.

3. The policy rule that the Federal Reserve should try to keep the rate of growth of the moneys upply very stable.

4. Based on the discussion in the textbook and in class, do you think the Great Depression was caused primarily by a monetary shock to the LM curve or a spending shock to the IS curve? Why?


Part III: Debt-Deflation and the Great Depression (20 minutes; 40% of exam)

a. Suppose the economy has the following determinants of aggregate demand (with all numbers in billions):

Derive this economy's IS curve, that is, solve for Y as a function of r given the values of the other parameters and variables.

b. Suppose r=5; what is the value of Y? What is the value of Y if r = 10? What is the value of Y if r = 0?

c. Suppose that the Phillips curve in the economy is such that:


At what value should the Federal Reserve set the real interest rate r so as to maintain a stable price level--to set the inflation rate p = 0?

d. Suppose that everyone in the economy expects inflation to be -10%--that is, everyone expects prices to fall, expects deflation. And suppose the Federal Reserve does everything it can to stimulate the economy and expand the money supply, and pushes the nominal interest rate i down to zero. Recalling that

r = i - E(p)

the real interest rate [r] is equal to the nominal interest rate [i] minus expectations of inflation [E(p)]:



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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/