100b08mid1s - Economics 100B University of California,...


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Unformatted text preview: Economics 100B University of California, Santa Cruz Professor K. Kletzer Fall 2008 Sample Midterm Instructions: Do all three parts. Graphs are useful for illustrating and explaining your answer, but you must use words to fully explain what you are showing in a graph. A graph by itself is not an answer. Part A (45%) Choose any 3 of the following 4 statements. For each one you choose, state whether it is true, false or ambiguous and explain why. You must provide an explanation to receive any credit. A1) An increase in the money supply raises GDP in the short run and in the medium run. A2) An income tax cut raises investment and GDP in the short run but has no effect on investment or GDP in the medium run. A3) In transition from the short run to the medium run, a fiscal expansion reduces unemployment and increases inflation. A4) An oil price shock raises unemployment in the short run but not in the medium run. Part B (25%) Answer each part. This question uses the following IS-LM model from your problem sets: Y=C+I+G C = c0 + c1 (1-t)Y I = b1 Y - b2 i M/P = d1Y - d2 i B1) Show how the short-run effect of G on Y depends on the parameter d2. You may answer using algebra or a combination of algebra and a graph. B2) Explain why the parameter d2 matters for how much an increase in G raises Y in the short run. Part C (30%) Answer the following question. You should use both words and graphs in your answer; equations can be helpful. C1) Explain how an increase in government expenditure affects output, unemployment, the interest rate and investment in the short run and in the medium run. If the economy begins in recession, how does an increase in government expenditure affect the adjustment of the economy to the medium run? In your answer, explain how unemployment, inflation and the growth rate of output respond to the increase in government expenditure. ...
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This note was uploaded on 02/08/2011 for the course ECON 100B taught by Professor Yisun during the Spring '07 term at University of California, Santa Cruz.

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