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2018 MT #2

March 9, 2018 Midterm #2 Economics 102

Two Hours. Due Monday 12 March 2018 in Class.

This is a 2-hour, closed book midterm. Handwritten responses are absolutely fine.
Use our jargon whenever and wherever appropriate.
Question are equally weighted.

  1. Foreign Exchange. Drawing a Graph Helpful but not Necessary..
    1. If US interest rates rise relative to those of our trading partners, what happens in foreign exchange markets? Why?
    2. So what? Why should we care about things international?
  2. Consumption.
    1. The life cycle model suggests that consumption is smoother than income. Why?
    2. So what?
  3. Investment.
    1. What drives business investment? Why?
    2. What drives new residential investment? Why?
  4. Exogenous.
    1. In our simple models, what components of GDP do we treat as exogenous?
    2. What does that imply?
  5. Multiplier.
    Social security tax rates were set in 1983, designed to make the system “sound” for the next 30 years, with the expectation that rates would be adjusted prior to the retirement of the Baby Boomers. That didn’t happen. So assume Congress acts to “save” Social Security and boosts taxes by 1% of GDP (or $200 bil).

    1. Explain the multiplier process. That is, trace how this affects the economy.
    2. What is the “ball park” magnitude of the impact? Would the have same been true when Germany (in fact) adjusted their pension system?
  6. AD & AS. Show in a Graph.
    New technologies move rapidly from the lab to production and investment in solar cells booms. Think lots of installers on top of lots of buildings, lots of work for linemen and (from one and all) business for Lowes.

    1. What would be the impact on AS? Why?
    2. What would be the impact on AD? Why? Can we say anything about the equilibrium?
  7. Fiscal policy.
    1. What makes it difficult to “fine tune” FP to “cure” the business cycle?
    2. Why might FP be less effective in countries with a Federal system?
  8. LRAS. Show in a Graph.
    Assume there’s a repeat of the M7.9 New Madrid earthquake of 1811 south of St. Louis. That’s strong enough to level cities in the region, since Missouri doesn’t have anti-quake building codes.

    1. What does this do to LRAS?
    2. Given that most of the US population won’t be directly affected, what happens to AD? To “price” and real Y?