Saka Bepp 1000 F22 Final Exam

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BEPP 1000 Final Exam Fall 2022, 12/16/22 NAME: TA’S NAME: _________________________________________________ Recitation Section / Time: ______________________________________ Instructions:  There are 4 parts.  There are a total of 100 points for 120 minutes. Plan your time accordingly.  Read all questions carefully.  No calculators or notes allowed.  Write legibly and label any diagrams appropriately and thoroughly.  This exam is given under the terms of Penn’s Code of Academic Integrity. My signature below certifies that I have complied with the University of Pennsylvania’s Code of Academic Integrity in completing this examination. Name (Printed) Signature Date 1 Total Score

PART 1: MULTIPLE CHOICE QUESTIONS (20 POINTS, 2 POINTS EACH) 1. If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would A) increase. B) remain the same. C) decrease. D) equal 20%. 2. During the Federal Open Market Committee (FOMC) meeting on Nov 23 2021, the Federal Reserve announced that it intends to begin decreasing its bond purchases. Everything else constant, the news should: A) decrease interest rates. B) not affect interest rates. C) increase interest rates. D) None of the above are necessarily true. 3. The following graph shows the unemployment rate for women between 2011 and 2019. Based only on this information, which of the following is true? A) The number of unemployed women has decreased during this period. B) The number of employed women has increased during this period. C) The number of women in the labor force has increased during this period. D) There is not enough information to determine if the number of unemployed/employed women has decreased and/or the number of women in the labor force has increased. 4. An increase in the price level causes A) the money demand curve to shift to the left. B) the money demand curve to shift to the right. C) a movement up along the money demand curve. D) a movement down along the money demand curve. 5. If imported Brazilian beef is part of the US consumption basket then if the price of Brazilian beef increases: A) US inflation measured by both the GDP deflator and the CPI increases. B) US inflation measured by the GDP deflator increases and inflation measured by the CPI stays the 2

same. C) US inflation measured by the GDP deflator stays the same and inflation measured by the CPI increases. D) US inflation measured by both the GDP deflator and the CPI stays the same. 6. If cyclical unemployment is eliminated in the economy, then A) the economy would still have frictional and structural unemployment. B) the unemployment rate would be below the natural rate of unemployment. C) the unemployment rate would be above the natural rate of unemployment. D) the economy would also eliminate structural unemployment. 7. If a Big Mac is $5.00 in the United States and 340 pesos in the Philippines, and the actual exchange rate between the United States and the Philippines is 43 pesos per dollar, which of the following would you expect to see in the long run, as currencies move towards their purchasing power parity ? A) a depreciation of the dollar B) an appreciation of the dollar. C) a decrease in the demand for dollars D) an appreciation of the Philippine pesos 8. Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of joblessness? A) Out-of-Labor-Force persons falsely report themselves to be looking for a job. B) discouraged workers stop looking for work. C) people employed in the underground economy do not report themselves as employed. D) inflation reduces real wages of the work force. 9. A recession tends to cause the federal budget to ________ because tax revenues automatically ________ and government spending on transfer payments automatically ________. A) decrease; fall; rise B) decrease; rise; fall C) increase; fall; rise D) increase; rise; fall 10. Which of the following does NOT count as part of US GDP? A) a realtor’s commission for selling an old farmhouse. B) wheat produced in the US but exported to Europe. C) the fee for work performed in the New York office of a British law firm. D) a desk produced last year but sold for the first time this year. PART 2: TRUE/FALSE QUESTIONS (10 POINTS, 2 POINTS EACH) 1. The tax multiplier has a larger magnitude (absolute value) than the government spending multiplier. 2. If a cryptocurrency is not a store of value then it is not considered money. 3. Government spending during an economic downturn, like the Covid Stimulus bills, acts as a stabilizer for the business cycle. 3

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4. In the long run the Fed may decrease the unemployment rate without increasing the inflation rate. 5. According to the Aggregate Expenditure Model, if the marginal propensity to consume is equal to the marginal propensity to save, then the government spending multiplier is 2. PART 3: SHORT ANSWER QUESTIONS (20 POINTS) 1) (4 points) State whether the following person is unemployed/if so what kind of unemployment they exhibit. a. Jonas’ factory job was shipped overseas two months ago, and he hasn’t started looking for a new job yet. b. Swati quit her old job and is about to have a third-round interview with a new company to determine if she’s a good fit. c. Andrea was laid off in the tech-sector. Since many tech companies aren’t hiring at the moment, Andrea is applying to jobs at restaurants. d. After losing her engineering job last year, Evanna is now back to school to get a masters in engineering, hoping the economy will be better when she graduates. 2) (6 points) Real GDP Consumption Planned Investment Government Purchases Net Exports $4,000 $3,250 $500 $250 $200 4,500 3,550 500 250 200 5,000 3,800 500 250 200 Using the table above, fill the table below by calculating the unplanned change in inventories for each level of GDP, and explaining what will happen to GDP in equilibrium. Real GDP Aggregate Expenditure Unplanned Change in Inventories Real GDP Will... $4,000 4,500 5,000 4

3) (5 points) Suppose the current required reserve ratio is 12%. A bank has deposits of $500 and no excess reserves. The Federal Reserve now reduces the required reserve ratio to 5%. a. (1 point) How much excess reserves does the bank have if it still keeps 12% reserves? b. (1 point) Calculate the new money multiplier when required reserve ratio is 5%. c. (1 point) Calculate the overall money supply in the economy with a 5% required reserve ratio. d. (2 points) What happens to the money supply when the Fed decreases the required reserve ratio? Indicate using a money market graph. Label the axes and curves. 4) (5 points) Suppose Economia has a population of 1000 people. 300 people are under 16 years of age. 700 people are 16 and up. The labor force participation rate is 60% and 70 people are unemployed. a. (1 point) What is the working age population? b. (1 point) How many people are employed? c. (1 point) What is the unemployment rate? (you can leave this as a ratio) Now suppose that due to a poor economic outlook 50 of those unemployed workers become 5

discouraged. d. (1 point) Does the unemployment rate increase, decrease, or stay the same? e. (1 point) Does the labor force participation rate increase, decrease, or stay the same? PART 4: PROBLEMS (50 POINTS) 1) (14 points) Consider the data below for a simple economy which produces Bread and Jam. Use 2016 as the base year. 2016 2017 2018 Product Quantity Price Quantity Price Quantity Price Bread 6 $2 4 $2.50 5 $3 Jam 12 4 14 5 15 6 a. (3 points) Calculate the nominal GDP for each year. b. (3 points) Calculate the real GDP for each year. 6

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c. (3 points) Calculate the GDP deflator for each year. d. (4 points) Calculate the inflation rate between 2016 and 2017 and the inflation rate between 2017 and 2018. e. (1 point) Does the inflation rate from 2017-2018 calculated in part (d) under-estimate, over- estimate, or accurately predict the change in cost of living for someone who consumed bread, jam, and also imported cheese if price of cheese were $4 in 2017 and $6 in 2018? 7

2) (14 points) Suppose we are in EconomicsLand, a closed economy. The following question considers the effect of an increase in government spending in EconomicsLand: a. (3 points) EconomicsLand is currently in a recession. Please draw the AD/AS curve for EconomicsLand and label the current equilibrium E1. Label all axes and curves. b. (3 points) Now suppose the government of EconomicsLand increases government spending so that the actual GDP of EconomicsLand equals potential GDP. Will this affect AD, SRAS or LRAS? Draw the affected curve onto your graph from part (a) and label the new curve Curve2. Label the new equilibrium E2. c. (2 points) What happened to the GDP as a result of the change in part b? d. (4 points) Now draw the money market and show what the consequence of the increase in government spending is on money markets. 8

e. (2 points)As a result of the change in money markets, how is Investment in this economy affected? 3) (10 points) The following are statistics for the economy of EconomicsLand: Natural rate of unemployment = 4 percent Current rate of unemployment = 5 percent Expected (i.e., long run) inflation rate = 3 percent Current inflation rate = 2 percent a. (3 points) Use the information above to draw the Phillips curves. Label all axes and curves. You should draw 2 curves: The Long Run Phillips Curve (LRPC) and the Short Run Phillips Curve (SRPC). b. (2 points) Mark on your graph the point that reflects the current and long-run rates. Label the points C and L respectively c. (1 points) Is the economy currently in an expansionary period or a recession? d. (2 points) Now suppose the economy of EconomicsLand shifts to point L. If workers and firms expect the Fed to implement an expansionary policy, mark the change to the economy when the Fed does implement the expansionary monetary policy. Label the point X. e. (2 points) If instead, the economy is at point L, but workers and firms did not expect the Fed to change their monetary policy, mark the change to the economy if the Fed does in fact implement an expansionary monetary policy. Label the point Y. 9

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4) (12 points) The table below shows the supply and demand for the local currency of each of the three countries A, B and C in their respective foreign exchange market vis a vis the US dollar. Note that the supply and demand are identical for each currency. [i.e. Country A’s currency is called A$. When USD/A$ = 2.40, demand for currency A is 8. Country B’s currency is called B$. When USD/B$ = 2.40, demand for currency B is 8. Country C’s currency is called C$. When USD/C$ = 2.40, demand for currency C is 8. Same for supply.] Exchange Rate (USD/local currency) Demand per day (millions of local currency) Supply per day (millions of local currency) 2.40 8 2 2.70 5 5 3.00 2 8 Countries A and B have fixed exchange rates at USD 3.00/A$ and USD 2.40/B$ respectively, while country C has a floating rate. The local currencies of A, B and C are represented as A$, B$ and C$ respectively. a. (4 points) Draw a separate FOREX graph for each country’s currency. In each, mark all axes and curves, and label the market (i.e., fundamental) exchange rate and the fixed exchange rate. b. (3 points) i. At the fixed exchange rate, is the A$ overvalued or undervalued versus the USD? ii. Should country A’s central bank buy or sell A$ in the FOREX to support the fixed exchange rate? 10

iii. How much should A’s central bank buy or sell A$ in the FOREX per day to support the fixed exchange rate? c. (3 points) i. At the fixed exchange rate, is the B$ overvalued or undervalued versus the USD? ii. Should country B’s central bank buy or sell B$ in the FOREX to support the fixed exchange rate? iii. How much should B’s central bank buy or sell B$ in the FOREX per day to support the fixed exchange rate? Suppose now that you are a speculator with ample resources in each of these countries as well as in the U.S. You were investing in the country whose peg was overvalued relative to the USD. You heard that a devaluation is coming. What would you do with the currency? Buy or sell it? Which of the 3 currencies would that be? d. (2 points) Which one currency would you choose to speculate on? Would you buy it or sell it? [page intentionally blank] 11

Saka Bepp 1000 F22 Final Exam

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