EC 302 FINAL EXAM QUESTONS AND ANSWERS

EC 302 FINAL EXAM QUESTIONS
AND ANSWERS
Anh4increaseh4inh4theh4marginalh4propensityh4toh4consumeh4will:h4-h4ANSWERS--
Leadh4toh4theh4consumptionh4functionh4becomingh4steeper

Whichh4ofh4theh4followingh4areh4characteristich4ofh4Friedman'sh4'Permanenth4Incomeh4Hy
pothesis'?h4-h4ANSWERS---h4Theh4mainh4influenceh4onh4long-
runh4consumptionh4ish4someh4formh4ofh4long-runh4averageh4income
-h4Consumptionh4willh4tendh4toh4beh4ah4constanth4proportionh4ofh4long-
runh4averageh4incomeh4(permanenth4income)

Inflation/CPIh4Equationh4-h4ANSWERS--Infaltionh4t=h4(CPIh4t+1h4-h4CPIh4t)
h4/CPIh4t



Ath4theh4optimalh4levelh4ofh4investment,h4whichh4ofh4theh4followingh4relationh4holds:h4-
h4ANSWERS--P*F(K)h4=h4PK(r+d)



Marginalh4benefith4ofh4capitalh4=h4Marginalh4costh4ofh4capital

Inh4theh4Modiglianih4Life-
Cycleh4Theory,h4ifh4theh4numberh4ofh4yearsh4toh4retirementh4decreases,h4lifeh4resourcesh4
willh4________h4andh4currenth4consumptionh4willh4___________h4-h4ANSWERS--
decrease,h4decrease

Ifh4theh4Keynesianh4consumptionh4functionh4ish4givenh4byh4Ch4=h4150h4+h40.60Y,h4andh4Yh4i
ncreasesh4byh41h4unit,h4thenh4savingsh4-h4ANSWERS--Increasesh4byh40.40h4unit

Ifh4ah4pizzah4Econlandh4hash4ah4populationh4ofh460h4peopleh4withh440h4ofh4themh4workingh4
producingh4ah4totalh4outputh4ofh4$600,000.h4Theh4standardh4ofh4livingh4ofh4Econlandh4equa
lsh4________h4whileh4averageh4laborh4productivityh4equalsh4________.h4-h4ANSWERS--
10000,h415000

Standardh4ofh4Living:h4Totalh4Outputh4/h4Population

Averageh4Laborh4Productivity:h4Totalh4Outputh4/h4Populationh4ofh4Workers

Ifh4nominalh4GDPh4ish4$15h4trillionh4andh4realh4GDPh4ish4$12h4trillion,h4thenh4GDPh4deflatorh
4ish4givenh4by:h4-h4ANSWERS--

125,h4andh4thish4indicatesh4thath4theh4priceh4levelh4hash4increasedh425%h4sinceh4theh4base
h4year



GDPh4Deflator:h4Nominalh4/h4Realh4*100

Michiganh4beganh4indexingh4itsh4minimumh4wageh4toh4inflationh4inh42010.h4Consequently,
h4whenh4theh4inflationh4rateh4ish45%,h4minimumh4wageh4earnersh4inh4Michiganh4whoh4areh4

, ableh4toh4stayh4employedh4canh4expecth4____________________________.h4-
h4ANSWERS--Ah4nominalh4wageh4increaseh4ofh45%



Supposeh4thath4theh4baseh4yearh4forh4CPIh4ish42014.h4Theh4costh4ofh4theh4CPIh4basketh4inh4
2014h4ish4$50;h4theh4costh4ofh4theh4basketh4inh42015h4wash4$60,h4andh4theh4costh4ofh4theh4b
asketh4inh42016h4wash4$66.h4Whath4wash4theh4CPIh4inh42015?h4-h4ANSWERS--
CPIh4Basketh42014=50$
CPIh4Basketh42015=60$
So,h460/50*100h4(Takeh4yearh4youh4wanth4andh4divideh4byh4baseh4year)

=120

Accordingh4toh4theh4quantityh4theoryh4ofh4money,h4whath4ish4theh4effecth4ofh4anh4increaseh4i
nh4theh4quantityh4ofh4money?h4-h4ANSWERS--Anh4increaseh4inh4theh4priceh4level


Quantityh4theoryh4ofh4moneyh4ish4givenh4byh4Mh4Vh4=h4Ph4Yh4,h4hereh4weh4assumeh4thath4Vh4
andh4Yh4areh4constant,h4henceh4ash4Mh4↑h4=⇒h4Ph4↑

Anh4increaseh4inh4theh4sensitivityh4ofh4moneyh4demandh4toh4theh4interesth4rate:h4-
h4ANSWERS--Makesh4LMh4curveh4flatter.h4



-
h4Theh4LMh4equationh4ish4givenh4byh4:h4Mh4Ph4=h4kYh4−hi,h4whereh4hh4ish4theh4sensitivityh4ofh4
moneyh4demandh4toh4interesth4rate.h4Henceh4theh4equationh4canh4beh4rewrittenh4ash4ih4=h4k
Y/h4hh4−h4M/Ph4*1/h4hh4,h4soh4ash4hh4increasesh4whenh4allh4otherh4remainingh4constanth4then
h4k/hh4decreases,h4henceh4slopeh4becomesh4flatter.



Whichh4ofh4theh4followingh4areh4characteristich4ofh4Keynesianh4theoryh4ofh4money?h4-
h4ANSWERS--

Moneyh4canh4beh4usedh4forh4transaction,h4speculativeh4andh4precautionaryh4purposeh4un
derh4Keynesianh4theory.

Moneyh4demandh4ish4elastich4withh4respecth4toh4interesth4rate

Supposeh4theh4followingh4changesh4happenh4inh4theh4IS-LMh4model;
I.h4Governmenth4increasesh4taxes.
II.h4Centralh4bankh4decreasesh4moneyh4supply.
III.h4Exogenoush4consumption,h4C0,h4ish4increased.

Whichh4ofh4theh4followingh4statementsh4ish4true?h4-h4ANSWERS--
Ifh4IIh4andh4IIIh4happen,h4thenh4theh4equilibriumh4interesth4rateh4willh4definitelyh4increase.


-h4Ah4decreaseh4inh4moneyh4supplyh4shiftsh4theh4LMh4curveh4toh4theh4left
Henceh4increasingh4interesth4ratesh4whereash4increaseh4inh4C0h4willh4shifth4theh4ISh4curveh
4toh4theh4right,h4raisingh4interesth4rate.h4

Henceh4whenh4bothh4happensh4thenh4interesth4rateh4willh4increaseh4forh4sure.
Additionh4inh4taxesh4willh4shifth4theh4ISh4curveh4toh4left,h4decreasingh4theh4interesth4henceh4
resulth4canh4beh4ambiguous