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Midterm #2 Web Page

Smitka sections Economics 102 Midterm #2 Fall 2017

Due by 5:00 pm Monday November 6th – bring to class or to Huntley 125B
You may type or handwrite. No Blue Book required.
Pledge! Please limit your time to 2 hours.
Answer MY question. I point you in a direction compatible with a short answer.
Use JARGON where appropriate.

  1.   Congress passes a big tax cut, with a cumulative impact over the next decade of $1.6 trillion.
    1.   What does this do to interest rates?
    2.   Why does that matter?
  2.   War breaks out with the Democratic People’s Republic of Korea, and container ships can no longer get insurance to sail to northeast Asia. Air freight of semiconductors from South Korea stops, too. Without crucial components, factories across the automotive industry shut down 2 weeks later.
    1.   What curve shifts in our basic model?
    2.   How does that affect inflation?
  3.   Congress wrote the tax formula for Social Security decades ago at a fixed 12.4% of wages. So while population aging was predictable, the program is no longer collecting enough taxes to cover pension outflows. Hence in 2022, under the new Mark Warner Administration – yet one more president from Virginia – Congress makes “minor” changes to the program to “enhance” revenue.
    1.   Trace the impact on the economy, assuming a net magnitude of $150 billion.
    2.   Explain the logic of your story.
  4.   Exogenous versus Endogenous.
    1.   What is the distinction, and why does it matter?
    2.   We normally simplify by treating G, τ and TR as exogenous. Explain how modest exceptions – endogenous aspects of these – help stabilize the economy.
  5.   What are the strengths and weaknesses of fiscal policy as a tool for smoothing the ups and downs of the economy?

    Calculating the impact on consumers and businesses of “π” inflation is straightforward, so as long as it remains steady we can build its effect in to wages and other long-term contracts. It is thus irrelevant in a sophisticated economy such as that of the U.S. Or are there exceptions?

    The deleted text was carried over from the html code of the previous midterm. The bold text is that of the (correct) pdf version. If you answered what I have now crossed out, I will work around that without penalizing you.

  6.   Investment is volatile.
    1.   Doesn’t the use of net present value in corporate planning make business fixed investment a predictable function of macroeconomic variables?
    2.   What components of investment “I” do change in a predictable manner, and why?
  7.   Why save?
    1.   What does that do to consumption?
    2.   Why does that matter in macroeconomics?
  8.   Sticky prices, sticky wages: so what?