## [answered] Macroeconomics BADM 613 Final Exam Macroeconomics (BADM 613

• In the figure below, suppose D1 and S1 indicate initial conditions in the market for kitchen cabinets. Which of the following would tend to cause the supply curve to shift from S1 to S2?
• the invention of "folding" plates and cups that take up substantially less storage space in the kitchen.
• a decrease in consumer income
• a decrease in the price of wood, a resource used to produce kitchen cabinets
• an increase in the price of steel hinges, a resource used to produce kitchen cabinets

• A politician was recently quoted as saying, "Our country can only reach full employment by raising the minimum wage, which would cause the demand for products to increase . . . and eventually cause production to expand." His analysis overlooks the fact that
• full employment can only be reached by increasing wages for all type of jobs, not only jobs that pay the minimum wage.
• minimum wage legislation increases costs of production (and thus product prices) and creates an excess supply (unemployment) of unskilled labor.
• It is not low wages that create unemployment; automation is the prime cause of unemployment.
• minimum wage legislation may increase the employment of low-skilled workers, but this will be offset by an equal reduction in the employment of skilled workers.

.

Macroeconomics BADM 613 Final Exam

Macroeconomics (BADM 613) Summer 2016

Name:

General Instructions

Be sure to save a copy of this exam for your records.

Be sure to attempt all parts of all questions.

Show your work and formulas. Explain your answers fully. Macroeconomics BADM 613 Question 1 of 7 (24 points: each part is worth 3 points)

1.1. Suppose that consumption increases by \$10 billion, welfare payments decline by \$2.5

billion, imports rise by \$2 billion, and inventories fall by \$4 billion. By how much should

measured-GDP change (in billions)? (show your work)

1.2. Suppose, at the beginning of 2008 there were 200 million people in the labor force and

unemployment rate was 5%. During the year 5 million new people entered the labor force,

but only 2 million got a job. During the same period, due to the severity of the recession, a

total of 1 million people quit looking for a job. Compute the number of unemployed and

unemployment rate at the end of 2008? (show your work)

1.3. Using the data below, compute the compound annual growth rate in real gross domestic

product from Q-4 2013 to Q-3 2015. (show your work) 1.4. Below is a hypothetical data on the annual disposable income and consumption of an

average American. Based on this information, compute the marginal propensity to consume

(MPC) of an average American. (show your work) 1.5. At the end of 2015, your company, which was located in Pittsburgh, PA needed to calculate

what your salary would be in 2016. Suppose your company agreed to a contract to increase

or decrease your nominal wage in 2016 based on the 2015 inflation rate, where the 2015

inflation rate is measured by the percent change in the CPI-U All-Items for Pittsburgh from

2014 to 2015. If your nominal wage was \$75,000 in 2015, what would be your nominal

wage in 2016? Hint: you need to figure out the CPI-Us on your own. (Show your work!) Macroeconomics BADM 613 1.6. In the figure below, suppose D1 and S1 indicate initial conditions in the market for kitchen

cabinets. Which of the following would tend to cause the supply curve to shift from S1 to

S2?

a. the invention of &quot;folding&quot; plates and cups that take up substantially less storage space in

the kitchen.

b. a decrease in consumer income

c. a decrease in the price of wood, a resource used to produce kitchen cabinets

d. an increase in the price of steel hinges, a resource used to produce kitchen cabinets 1.7. A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of

plywood rose significantly. The events suggest that

a. a decrease in the supply of plywood caused the price of plywood to rise.

b. an increase in the supply of plywood caused the price of plywood to rise.

c. a decrease in the demand for plywood caused the price of plywood to rise.

d. an increase in the demand for plywood caused the price of plywood to rise.

1.8. A politician was recently quoted as saying, &quot;Our country can only reach full employment by

raising the minimum wage, which would cause the demand for products to increase . . . and

eventually cause production to expand.&quot; His analysis overlooks the fact that

a. full employment can only be reached by increasing wages for all type of jobs, not only

jobs that pay the minimum wage.

b. minimum wage legislation increases costs of production (and thus product prices) and

creates an excess supply (unemployment) of unskilled labor.

c. It is not low wages that create unemployment; automation is the prime cause of

unemployment.

d. minimum wage legislation may increase the employment of low-skilled workers, but this

will be offset by an equal reduction in the employment of skilled workers. Macroeconomics BADM 613 Question 2 of 7 (5 points)

2. List the five major components of GDP. For each component, give one specific real-world

example of the type of spending that would be included. Question 3 of 7 (10 points, 2 points for each multiple choice question)

3.1. If the rest of the world economy falls into a deep recession, other things constant:

a. That will have no impact on U.S. growth.

b. U.S. exports will fall.

c. U.S. imports will fall.

d. U.S. exports will rise. 3.2. If the U.S. dollar depreciates against the Euro, other things constant:

a. U.S. exports to the Euro area will fall.

b. U.S. exports to the Euro area will rise.

c. U.S. exports to Japan will fall.

d. U.S. imports from the Euro area will rise. 3.3. Suppose, last year?s unemployment rate was 5.00%. This year labor force rose by 2.5

percent, while the number of people unemployed rose by 5.0 percent. What is the

unemployment rate this year?

a. It can?t be determined; we need information on the number of employed.

b. 7.50%

c. 5.12%

d. 2.50% 3.4. On average during March 2011, one Euro cost 1.40 U.S. dollars. The Ratskeller

Restaurant in Munich Germany charged 4.30 Euros for a 0.5 liter glass of Franziskaner

Hefeweizen Biere during March 2011. What was the cost of 1.0 liter glass of that beer in

U.S. dollars?

a. U.S.\$ 3.01

b. U.S.\$ 8.12

c. U.S.\$ 6.02

d. U.S.\$ 12.04 3.5. Refer to the figure below. Which of the four graphs represents the market for peanut

butter after a major hurricane hits the peanut-growing regions?

a. A

b. B

c. C

d. D Macroeconomics BADM 613 Question 4 of 7 (16 points) 4. According to the Congressional Budget Office, the U.S. federal government spent \$400

billion in stimulus funds during 2010. This was a major increase in government spending and

all of that spending was financed by borrowing. Assume there was no change in monetary

policy. Assume that a \$1.00 increase in disposable income generates a \$0.63 increase in

consumption spending, other things constant. (show your work)

4.1.

4.2.

4.3. Calculate the expenditure multiplier.

Calculate the expected change in GDP generated by the increase in government

spending during 2010.

Is the change in GDP that you calculated in 4.2 greater than, less than, or equal to the

increase in government spending? Fully explain the process which generates this result. Macroeconomics 4.4. BADM 613 Explain why the change in GDP calculated in 4.2 might be an optimistic estimate of the

impact of the increase in government spending. (Hint: how might the increase in

government spending affect the other components of GDP?) For questions 5 to 7, you have the option to do it either on this Word file or on

the power-point file: (i.e. use BADM613_Final_Q#5_7.pptx). Macroeconomics BADM 613 Question 5 of 7 (20 points)

5. Assume the Federal Open Market Committee (FOMC) reduces the target for the federal

funds rate from 2.5% to 2.0%.

5.1. List the tools the U.S. monetary policy has? Identify, which monetary policy tool would

the FOMC use (under normal circumstances)? What, specifically, would the FOMC do

with that tool to reduce interest rates? 5.2. Assume that the change in the federal funds rate causes similar changes to longer-term

interest rates. What components of GDP would be affected by the change in interest

rates and why? Be sure to discuss the direction of change. Will these components rise or

fall? 5.3. Show and explain what would happen in the short-run and long-run to U.S. real GDP and

the aggregate price level, using our AD-AS framework. Explain which curves shift and

why. Label curves clearly. Identify the new equilibrium in the short-run and the long-run.

Assume that the change in the federal funds rate successfully reduce real interest rates

and that the change in real interest rates is unanticipated Price Level LRAS SRAS P100 AD

YF Real GDP Macroeconomics BADM 613 Question 6 of 7 (12 points)

Suppose the research center within the Department of Commerce of the US government was

able to confirm that the US economy is operating way below the optimum level (as shown in the

graph below). Suppose you are the US government (NOT the Federal Bank) and you don?t want

to wait until the long-run impact, which will lead the market economy to eventually fix itself,

kicks in as it may take forever, what policy would you like to make to help the US economy to

grow (assume the congress will approve your policy). Using the AD-AS theory, show and

EXPLAIN the expected effect of this policy. Keep in mind, in this case the US policy bypasses the

long-run impact, thus you don?t need to identify the long run impact. Other things are assumed

constant. Explain which curves shift and why. Label curves clearly. Identify the new equilibrium.

Price Level LRAS SRAS P100 AD

Y0 YF Real GDP Macroeconomics BADM 613 Question 7 of 7 (13 points)

The graph below represents the equilibrium AD-AS in the US economy. Suppose two events

occur at the same time. First, the Federal Bank just decided to impose a policy to increase the

target for the Federal Funds rate by one percentage point. Second, a new oil reserve was just

found in the US and its immediate production has already increased the supply of oil in the US

by 15% on average. Research found that at the current rate of production, this new oil reserve

will last for a long time.

Using the AD-AS theory, show and EXPLAIN the short run and long run effect of these two

events on the US economy. Other things are assumed constant. Explain which curves shift and

why. Label curves clearly. Identify the new equilibrium in the short-run and the long-run.

Price Level LRAS SRAS P100 AD

YF Real GDP

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