Final Exam Review - Economics

Contents

• Intro

• Select Topics

• Sample Questions

  1. Sample Question: Government Purchases Multiplier

  2. Sample Question: Exchange Rate Graph

  3. Sample Question: Fall in Real GDP in U.S. and Japan

  4. Sample Question: Solve for RRR

  5. Sample Question: Demand for Yen

  6. Sample Question: Tax Multiplier Calculation

  7. Sample Question: At R*

  8. Sample Question: Mexican Pesos, Inflation in the U.S.

  9. Sample Question: Laffer Curve

  10. Sample Question: Shifting Supply of Money

  11. Sample Question: Shifting the Supply of Dollars

  12. Sample Question: EMP

  13. Sample Question: Explaining the Leftward Shift in the Demand for Dollars

  14. Sample Question: Interest Rate on Loanable Funds Market

  15. Sample Question: Potential Real GDP

  16. Sample Question: Government Incentives for Capital Stock Growth

  17. Sample Question: Government Running Large Budget Deficits

  18. Sample Question: Result A, Result B, Open Markets

Intro

• The document serves as a preliminary guide for students preparing for the final exam, providing approximate insights into its content.

• Topics included are:

  • Dynamic Aggregate Demand and Aggregate Supply (AD-AS) model

  • Monetary Policy

  • Fiscal Policy

  • Exchange Rate Graphs

  • Selected topics from “Open Economy” lectures, with an emphasis on exchange rate analysis.

• It's important to note that questions may derive from earlier exams (Exam 1 and Exam 2 revisions) and case studies previously covered.

Select Topics

• Exchange Rate Interpretation: On the vertical axis, you will find either the price of the dollar or the price of the euro.

• Review Examples: Emphasize the understanding of exchange rate graphs and the fundamental aspects discussed throughout the semester.

  • Case Study 0 related to monetary policy from Fall 2025 is crucial to review.

• Factors Affecting Money Market: Focus on shifts in the money supply curve due to:

  • Sale of bonds

  • Purchase of bonds

• Key Calculations: Be comfortable calculating inflation rates and understanding simultaneous GDP increases in the U.S. and Europe.

• Closed to Open Economy Links: Recognize how we connect these concepts within the context of fiscal policy and the tax multiplier calculations.

• Other Key Concepts:

  • Partial crowding out

  • Expansionary fiscal policy punchline in an open economy

  • Movement along the Laffer curve (from A to A’)

  • Okun’s Law and NAIRU basics

  • Comparison between the tax multiplier and government purchases multiplier.

Sample Questions

1. Sample Question: Government Purchases Multiplier

• Question: Suppose the government purchases multiplier is equal to 2. How much would GDP rise if government purchases rise by 100 billion?

• Answer: GDP would rise by $100 ext{ billion} imes 2 = 200 ext{ billion}$.

2. Sample Question: Exchange Rate Graph

• Question: Consider the figure above for dollars. What event would lead to the appreciation of the dollar?

  • Hint: Demand for dollars primarily involves European citizens converting euros into dollars to acquire U.S. goods and services. The supply involves U.S. citizens converting dollars back into euros.

  • Options:
    a. America experiences an economic expansion
    b. The return on European assets gets higher
    c. The return on American assets gets lower
    d. Euro citizens increase their preference for American goods and services

3. Sample Question: Fall in Real GDP in U.S. and Japan

• Question: Analyzing a simultaneous decline in real GDP in both the U.S. and Japan, we can conclude:

  • Hint: Graph for dollars considers Japanese citizens converting yen into dollars for U.S. goods.

  • Answer Choices:
    a. The effect on the dollar would be indeterminate
    b. The yen would depreciate
    c. The dollar would depreciate
    d. The dollar would appreciate

• Insight: The shifts of both demand and supply for dollars are likely leftward, causing ambiguity in the dollar's behavior.

4. Sample Question: Solve for RRR

• Question: Calculate the Required Reserve Ratio (RRR) if the change in demand deposits is 10,500 from an initial injection of 500 in reserves.

  • Possible Answers:
    a. Around 0.04 - 0.05
    b. Around 0.10
    c. $10,500 / 500$
    d. $1 / 0.10$

• Correct Calculation: $RRR = rac{10,500}{500} = 21$, leading to a percentage of 2100%. (Note: The question options may be misleading.)

5. Sample Question: Demand for Yen

• Question: The demand for yen will increase (shift rightward) if:

  • Assumption: U.S. citizens predominantly demand yen as they convert dollars into yen to access Japanese goods.

  • Options:
    a. Japanese interest rates increase on assets
    b. Income in the U.S. falls
    c. Americans get poorer
    d. Investing in Japanese assets falls

6. Sample Question: Tax Multiplier Calculation

• Question: The government aims for a $360 billion increase in real GDP. They plan to decrease taxes by an absolute amount, knowing the tax multiplier is 1.5. Calculate the required amount for the decrease in taxes.

  • Assumption: Price Level remains constant.

  • Possible Answers:
    a. 240 billion
    b. 1.2 billion
    c. 360 billion
    d. 133.33 billion
    e. 300 billion

• Calculation: $ext{Decrease in Taxes} = rac{360 ext{ billion}}{1.5} = 240 ext{ billion}$.

7. Sample Question: At R*

• Question: Referring to Figure Y, if S’ is the new level of money supply, which answer reflects accurate market behavior?

  • Options:
    A) At R, the price of bonds is likely to start falling, and R will rise, aiming for new equilibrium B) At R there is an excess supply of money
    C) The Fed likely conducted expansionary monetary policy to increase money supply
    D) Both A and B
    E) Both B and C

8. Sample Question: Mexican Pesos, Inflation in the U.S.

• Question: Analyzing a graph for Mexican pesos interacting solely with U.S. trade, what happens if U.S. inflation rises faster than in Mexico?

  • Options:
    a. Mexican citizens will buy more U.S. goods and services
    b. The supply of pesos will shift left, and pesos will appreciate
    c. The supply of pesos will shift right, and pesos will appreciate
    d. The demand for U.S. dollars will shift right

• Insight: Recognize the interplay between supply and demand curves, particularly when U.S. goods become more expensive for Mexican citizens.

9. Sample Question: Laffer Curve

• Question: Reviewing the graph and the associated expressions, determine which statement is accurate?

  • Options:
    a. Higher tax revenues always lead to a decrease in tax rate
    b. A rise in the capital stock is essential for long-term economic growth
    c. A lower tax rate increases tax revenues for a movement from B to B’ on the Laffer curve
    d. A lower tax rate increases tax revenues while moving from A to A’ on the Laffer curve.

10. Sample Question: Shifting Supply of Money

• Question: Review Figure Y. If S’ reflects the new money supply, which explanation best fits this shift?

  • Options:
    A) Nominal interest rate, or R, rose
    B) The Fed likely conducted open market purchases of bonds
    C) The Fed likely conducted open market sales of bonds
    D) Expansionary fiscal policy was implemented by the government

11. Sample Question: Shifting the Supply of Dollars

• Question: Referring to Figure C, which situation explains the shift from S1 to S2, presuming that Americans mainly supply dollars?

  • Options:
    a. U.S. interest rates rise relative to Europe
    b. Americans prefer fewer European goods
    c. Health experts indicate French red wine raises cholesterol
    d. Health experts indicate French red wine lowers cholesterol

12. Sample Question: EMP

• Question: If the economy is producing above potential GDP and the Fed introduces the appropriate monetary policy with incorrect timing, which of the following outcomes is expected?

  • Options:
    A) Contractionary policy may not suffice to revert the economy back to potential
    B) Contractionary policy results only in increased expansion
    C) Expansionary policy won't restore the economy to potential
    D) Expansionary policy results solely in a recession

13. Sample Question: Explaining the Leftward Shift in the Demand for Dollars

• Question: Analyzing the provided exchange rate graph for the U.S. and Britain, when explaining a leftward shift of the demand curve for dollars, which reasoning best aligns?

  • Options:
    a. The dollar appreciates
    b. Consumer sentiment rises overseas
    c. Consumer sentiment decreases abroad
    d. The supply of dollars shifts

14. Sample Question: Interest Rate on Loanable Funds Market

• Question: Referring to the accompanying figure above, how can the measure on the vertical axis be best characterized?

  • Options:
    a. Excessively high interest rate
    b. Short-run interest rate
    c. Long-run interest rate
    d. Inflation rate
    e. Real interest rate
    f. Both options c and e
    g. Both options b and e

15. Sample Question: Potential Real GDP

• Question: Defining Potential Real GDP, which statement is accurate?

  • Options:
    a. All firms produce at their optimal capacity on their best day
    b. All firms operate at their “normal” production capacity
    c. Fortune 500 companies produce at maximum capacity
    d. None of the above statements are correct

16. Sample Question: Government Incentives for Capital Stock Growth

• Question: In options discussed to promote growth in the capital stock to escalate capital per worker, which measures reflect discussion points?

  • Options:
    a. Decreasing corporate profits tax
    b. Increasing capital gains tax for households
    c. Reducing household consumption tax
    d. Increasing investment tax credit for firms
    e. Both options a and b
    f. Both options a and d

17. Sample Question: Government Running Large Budget Deficits

• Question: In the context of the loanable funds market, what likely consequences rise from governments running significant budget deficits?

  • Options:
    a. Escalating real interest rates will “crowd out” private business investments
    b. The supply curve for loanable funds will shift right
    c. Real interest rate will decline as a result
    d. Demand for loanable funds will increase prominently

18. Sample Question: Result A, Result B, Open Markets

• Question: Based on the graph for British pounds in relation to the U.S. dollar, if there is a simultaneous rightward shift of demand for pounds and a leftward shift of supply for pounds, what is likely to occur?

  • Options:
    a. The pound will depreciate; the dollar will appreciate
    b. The pound will depreciate; the dollar will depreciate
    c. The pound will appreciate; the dollar will depreciate
    d. The pound will undergo volatile changes; the dollar will succumb to trade wars.