ECON 1 - Principles of Macroeconomics Drake University, Fall 2012 William M. Boal

EXAMINATION 4

### Version A

I. Multiple choice [1 pt each: 16 pts total]

(1)c. (2)b. (3)c. (4)d. (5)b. (6)d. (7)a. (8)a. (9)b. (10)c.
(11)b. (12)g. (13)c. (14)c. (15)a. (16)b.

II. Problems

(1) [Keynesian cross, Keynesian multipliers: 12 pts]

1. \$15 trillion.
2. up.
3. \$1 trillion.
4. increase.
5. \$1.5 trillion.
6. 1.5 (= Δ GDP / Δ G).

(2) [Consumption function: 8 pts]

1. 0.4.
2. 0.375.
3. 1.6.
4. \$192 billion.
5. \$75 billion.
6. 0.6.
7. \$200 billion.
8. \$120 billion.

(3) [Monetary policy: 8 pts]

1. 2 percent.
2. 5 percent.
3. up.
4. left.

(4) [How business cycles begin: 20 pts] Full credit requires accurate graphs.

1. down, left, recession.
2. up, right, boom.
3. up, right, boom.
4. down, left, recession.

1. \$15 trillion.
2. equal.
3. \$16.5 trillion.
4. 2 percent.
5. less.
6. \$15 trillion.
7. 8 percent.
8. equal.

(6) [Fiscal policy, tax rates: 4 pts]

1. 3.7 percent (= total tax / income).
2. 10 percent (= Δ tax / Δ income).

(7) [Fiscal policy: 8 pts]

1. boom.
2. surplus.
3. \$200 billion.
4. balanced budget.
5. \$0 billion.

(8) [Monetary policy: 8 pts]

1. decrease.
2. 1.5 percentage points.
3. increase.
4. \$0.2 trillion.

III. Critical thinking [4 pts]

(1) If there is a recession in the United States, GDP in Mexico will decrease. A country's imports depend positively on its GDP. So if U.S. GDP decreases, then U.S. imports from Mexico (that is, Mexico's exports to the U.S.) will decrease. Now Mexico's net exports are its exports minus its imports. Mexico's imports are unaffected by U.S. GDP, so its net exports will decrease. Mexico's GDP is the sum of Mexico's consumption, investment, government purchases and net exports, so Mexico's GDP will also decrease.

(2) One should disagree with this claim. Whatever federal spending not paid for by taxes is not financed by creating money--it is financed by borrowing. So the federal deficit does not cause the money supply to increase, and therefore the deficit does not contribute to inflation. The federal deficit does however add to the national debt.

### Version B

I. Multiple choice [1 pt each: 16 pts total]

(1)e. (2)a. (3)e. (4)c. (5)d. (6)c. (7)b. (8)b. (9)c. (10)b.
(11)c. (12)b. (13)d. (14)d. (15)b. (16)c.

II. Problems

(1) [Keynesian cross, Keynesian multipliers: 12 pts]

1. \$16.5 trillion.
2. up.
3. \$0.5 trillion.
4. increase.
5. \$1 trillion.
6. 2 (= Δ GDP / Δ G).

(2) [Consumption function: 8 pts]

1. 0.65.
2. 0.60.
3. 2.5.
4. \$300 billion.
5. \$48 billion.
6. 1.5.
7. \$80 billion.
8. \$120 billion.

(3) [Monetary policy: 8 pts]

1. 1.5 percent.
2. 3.5 percent.
3. down.
4. right.

(4) [How business cycles begin: 20 pts] Full credit requires accurate graphs.

1. up, right, boom.
2. up, right, boom.
3. down, left, recession.
4. down, left, recession.

1. \$16 trillion.
2. equal.
3. \$15 trillion.
4. 5 percent.
5. greater.
6. \$16 trillion.
7. 1 percent.
8. equal.

(6) [Fiscal policy, tax rates: 4 pts]

1. 5.8 percent (= total tax / income).
2. 15 percent (= Δ tax / Δ income).

(7) [Fiscal policy: 8 pts]

1. recession.
2. deficit.
3. \$200 billion.
4. surplus budget.
5. \$100 billion.

(8) [Monetary policy: 8 pts]

1. increase.
2. 1 percentage points.
3. increase.
4. \$0.1 trillion.

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice [1 pt each: 16 pts total]

(1)b. (2)a. (3)b. (4)d. (5)f. (6)d. (7)c. (8)c. (9)b. (10)d.
(11)d. (12)d. (13)a. (14)a. (15)c. (16)d.

II. Problems

(1) [Keynesian cross, Keynesian multipliers: 12 pts]

1. \$17 trillion.
2. down.
3. \$1 trillion.
4. decrease.
5. \$2.5 trillion.
6. 2.5 (= Δ GDP / Δ G).

(2) [Consumption function: 8 pts]

1. 0.8.
2. 0.75.
3. 4.
4. \$480 billion.
5. \$30 billion.
6. 3.
7. \$40 billion.
8. \$120 billion.

(3) [Monetary policy: 8 pts]

1. 2.5 percent.
2. 6.5 percent.
3. up.
4. left.

(4) [How business cycles begin: 20 pts] Full credit requires accurate graphs.

1. up, right, boom.
2. down, left, recession.
3. up, right, boom.
4. down, left, recession.

1. \$16.5 trillion.
2. equal.
3. \$15.5 trillion.
4. 6 percent.
5. greater.
6. \$16.5 trillion.
7. 2 percent.
8. equal.

(6) [Fiscal policy, tax rates: 4 pts]

1. 18.5 percent (= total tax / income).
2. 28 percent (= Δ tax / Δ income).

(7) [Fiscal policy: 8 pts]

1. recession.
2. deficit.
3. \$400 billion.
4. deficit.
5. \$100 billion.

(8) [Monetary policy: 8 pts]

1. decrease.
2. 0.5 percentage points.
3. decrease.
4. \$0.3 trillion.

III. Critical thinking

Same as Version A.