MacroEconomic

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Name Econ 201 Midterm

Putting your name on your answers—exams with no name will not be graded, you agree to the following Honor Code Statement: Honor Code: I pledge on my honor that I will neither give nor receive help on any part of this exam. You will be graded on both correctness and style in answering. Make sure to provide graphs that are correctly labeled where applicable. This exam should be individual effort only. You can use your notes, book, video lectures and PowerPoints on canvas, but you are not allowed to use anything or anyone else. If anyone asks you for help on the exam feel free to let me know so you can benefit, and they can…

1. (7 pts) (a) Suppose that an economy is hit with an adverse oil shock (a rapid increase in the price of oil). Use the labor market and the production function (draw graphs and clearly state) to show the predicted effects on employment, wages, unemployment, and real GDP. (b) Consider the following data for Japan in early 1970s:

Oil Price Employment Unemployment Real Wage Real GDP ($/Barrel) (1000s of persons) (growth rate) 1985 Yen

1971 2.57 51216 645 8.03% 178993 1972 2.80 51242 736 9.60% 193712 1973 3.14 52595 668 7.52% 208484 1974 11.22 52364 722 2.31% 207197 1975 10.60 52228 1004 4.02% 213122 1976 11.83 52705 1074 1.26% 222098

Note that oil prices about tripled in 1974. Are your predictions in (a) consistent with the Japanese experience of the mid- 1970s? What is or isn’t consistent?

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2. (8 pts) Following rapid increase in the number of unemployed people in the mid- 1970s, suppose that the Japanese government wanted to stimulate the economy by using fiscal stimulus (increase in government expenditure or a decrease in income taxes). Use the Goods Market (draw graphs and clearly state) to show the predicted effects on the interest rate, level of savings, and level of investment if we assume that: (a) Japan is a closed economy.

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3. (5 pts) Following rapid increase in the number of unemployed people in the mid- 1970s, suppose that they wanted to stimulate the economy by using monetary stimulus. What type of policy would they conduct to stimulate the economy?

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Part 2 (15 points total) 1. Use the following information about the labor market: W=100-N W=10+2N Y=A*K.5N.5

a) Graph each of these curves. Make sure to completely label the graph and indicate which curve is the labor supply and which is labor demand.

b) What is the market-clearing wage? Suppose that no worker is willing to work for less than $0. What are the employee (sum of the difference between what someone would work for and what they get) and employer surpluses (sum of the difference between what a firm would pay and what they do pay the workers)? Hint: the surpluses are areas (triangles, squares, trapezoids etc)

c) Suppose that A=1 and K=1. Graph the production function. Given the number of workers you found in b) what is the output that is produced?