+Macroeconomics midterm D.

Dunlap, Instructor Summer 2017

Suppose that you are an economic advisor to the President of the U.S. You are presented with the

following set of economic statistics:

Suppose that you are an economic advisor to the President of the U.S. You are presented with the

following set of economic statistics:

NOMINAL GDP GROWTH RATE (Annualized)

3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter

3.3% 3.0% 2.8% 0.08% 5.6% 3.0% 3.5%

CPI (Annualized)

2% 1.8% 3.0% 3.08% 4.05% 5.01% 7.0%

UNEMPLOYMENT RATE

4.3% 4.8% 4.8% 4.8% 5.1% 5.3% 5.1%

1.) Assume that the 1st Quarter (of the 3rd year) is the most current data. How would

you describe the economic situation as depicted above?

2.) How would you describe the overall trend in price level?
3.) Given the above situation, do you think that government needs to do anything?

What would be your advice to the President? Explain your reasoning in detail.

4.) In one word, what kind of policy are you recommending?

5.) In the U.S., what body conducts monetary policy ?

6.) On a separate sheet of paper, draw graphs that depict what is happening to the

economy in the above scenario.

7.) The changes in the unemployment rate seem to lag behind changes in GDP

growth. Why?

8.) Look up President Obama’s jobs program. Based on what you have learned so far,

do you think that it is an effective way to address the unemployment problem? Why or

why not?

9.) What changes would you make in his program?

11.) What are the policy tools that government policymakers use?

12.) The idea that the economy is stable and that it self adjusts through changes in

wages and prices is called _______________________________ economics.

13.) Does the term “full employment” mean that everybody who wants a job has one?

What problems would you expect to see in an economy where there was zero

unemployment?

14.) What are the components of GDP?

15.) Suppose potential GDP is thought to be $15 trillion but actual GDP is $14 trillion

and there is high unemployment. The marginal propensity to consume is known to be .95.

(Or, if you prefer, we can say that MPE is .95). How much government spending would

be needed to bring the economy back to potential GDP?

_______________________________.
 16.) What is the Keynesian fiscal multiplier? Show it in algebraic form.

17.) What is C=a+BYD ? What do each of the equation’s terms stand for?

18.) The total market value of all the final goods and services produced within the

nation’s borders within a year is the _________________________ .

19.) Consider the statistics below:

REAL GDP GROWTH

1st Q 2nd Q 3rd Q 4th Q

4.8% 5.1% 5.9% 5.6%

ANNUALIZED CPI

4.7% 5.5% 6.0% 6.4%

What is the underlying problem in the economy?

20.) Is the problem serious enough that it requires government action? Why?

21.) If the President assesses the economic situation correctly, he will call for

a.) an expansionary fiscal policy

b.) a contractionary fiscal policy

c.) We don’t need no stinking policy.

22.) What policy tools might the government use?

23.) What determines the size of the American money supply?

20.). Keynes pointed out that rational households save as much income as possible during

hard times, but that excessive saving keeps the economy from returning to its potential (full
 employment.). This contradiction between individual and social good is called

_____________________________

24.) Suppose GDP shrinks by 2%. According to Okun’s rule, what will be the change

in the unemployment rate?

25.) In Keynesian theory, what is the major leakage from the circular flow?

_____________________ ?

22.) The idea that the economy has a “natural” rate of output and therefore a “natural” rate of

unemployment is a concept shared by:

1.) Monetarists and Democrats

2.) Keynesians and Marxists

3.) Keynesians and supply-side economists

4.) Neoclassical economists and Keynesians

5.) Neoclassical economists and monetarists

23.) Tyrone has been working at a local retail store. However, there is now a recession going on

and the store has had to lay off workers, including Tyrone. Tyrone is now suffering from:

(a) frictional unemployment

(b) structural unemployment

(c) cyclical unemployment

(d) seasonal unemployment

(f) the Blues

(24.) A hypothetical U.S. President is briefed on the economic situation. He finds that, in the

current quarter, a net of 300,000 jobs have been lost in the nation, consumer confidence is down,

and wholesale inventories have been building up. Meanwhile, he is facing an unpopular war,

higher oil prices, and a fiscal deficit that many describe as “out of control.” What major

economic problem is the President facing?

(a) incipient inflation

(b)incipient recession

(c) stagflation

(d)total economic collapse

(e) Problem? What problem?

25.) A U.S. President, (not the same one) facing a period of economic slowdown, calls a meeting

of his economic advisors. They look at the numbers and agree that the economy has entered a

“rough patch,” and that there is a possibility of a recession. However, the chief economist

advises doing nothing. “The economy is inherently stable. As demand shifts to the left, the price

level will fall, meaning that people will respond to lower prices by buying more. The market is

working fine. Leave it alone.” This economist is a (a) Marxist

(b) institutionalist

( c ) classical economist
 (a) Keynesian

(b)mercantilist

26.) The opposition party has its own economists. These economists say that the economy is

sliding into recession and that the government must take action to prevent catastrophic job

losses and fiscal deficits. They propose a program of “middle class tax cuts,” and increased

spending on extended unemployment benefits, Medicaid, and Food Stamps. They also propose a

“job creation” program which would lead to more federal spending on schools, highways, and

worker retraining. These economists are probably:

(a) Marxists

(b)Institutionalists

(c) classical economists

(d)Keynesians

(e) Mercantilists

27.) In question 13, the economists have proposed what is essentially a spending program. What

is the multiplier which they would use to calculate the economic impact of the government

spending a given amount of money?

(a) 1/(RR+C)

(b) (1-MPC)

(c) The reciprocal of the reserve requirement

(d) The reciprocal of the marginal propensity to save

(e) The reciprocal of the marginal propensity to consume

depreciation is ___________________________ .

29.) Using graphs, show the (Neo) Classical view of the economy and compare it to the

Keynesian views. (Use the other side of this paper.)

30.)What does each graph show about the stability of the macroeconomy?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________