Econ question (4 choice question,4 explain)

Page 1

Name: __________________________ Date: _____________

1. In an economic model:

A) exogenous variables and endogenous variables are both fixed when they enter the

model.

B) endogenous variables and exogenous variables are both determined within the

model.

C) endogenous variables affect exogenous variables.

D) exogenous variables affect endogenous variables.

2. What is the difference between sticky prices and flexible prices? Explain.

3. Which of the following is the best example of a sticky price?

A) the price of a barrel of oil

B) the price of the U.S. dollar in terms of euros

C) the price of a share of stock

D) the price of a soda in a vending machine

Why?

4. Which of the following is the best example of a flexible price?

A) the price of a cup of coffee in a coffee shop

B) the price of gasoline at a service station

C) the price of a ticket at a movie theater

D) the price of a book in a bookstore

Why?

5. How does the distinction between flexible and sticky prices impact the study of

macroeconomics?

A) The study of flexible prices is confined to microeconomics, while macroeconomics

focuses on sticky prices.

B) Macroeconomists use flexible prices to explain inflation and sticky prices to

explain unemployment.

C) Flexible prices are typically assumed in the study of the long run, while sticky

prices are assumed in the study of the short run.

D) Endogenous variables are measured using flexible prices, while exogenous

variables are measured using sticky prices.

6. a. Define Long Run and Short Run in macroeconomics, and explain how prices and total

output (Y) behave in each situation.

b. Draw the Long Run Aggregate Supply Curve (LRAS). Show the impact of a fall in

demand on prices and output (Y), graphically and with words.

c. Draw the Short Run Aggregate Supply Curve (SRAS). Show the impact of a fall in

demand on prices and output (Y), graphically and with words.

Page 2

7. a) Explain the Classical Model of the Long Run using graphs and equations for the market

for goods and services. Carefully explain the components: what determines supply, demand, and

prices.

b) Explain the Classical Model of the Long Run using graphs and equations for the market

for loanable funds. Carefully explain the components: what determines supply, demand, and

prices.

8. Use analysis the Classical model to explain the impact of a fiscal policy in the long run. More

specifically, suppose that the government approves a package to help the economy by increasing

government spending in 1 trillion dollars. Assume that the economy starts from equilibrium:

a) What are the effects of this policy in the long run on savings, investment, consumption, real

output, real interest rates, investment, savings, and consumption?

b) Show it graphically using the market for loanable funds (Hint: r in the Y-axis and I, S in the

X-axis).