ECN

Page 1 of 4

Economics 211 Macroeconomic Principles

Exam #3 Due date: 10 May 2017 No exam will be accepted after 13 May 2017. No exceptions!

Name ________________________________

Instructor: Brian B. Young

The value of this exam is 100 points. Please show your work where appropriate!

Multiple Choice

2 points each

To answer multiple choice questions, please open your MCCCD Canvas account and complete the quiz entitled

“Exam #3 Multiple Choice.” Good luck!

Short Answer

50 points total

Please use a word processor to submit short answers. Be sure to put your name on all submitted work so you may

receive proper credit. In lieu of a word processor, you may block print your short answers provided that your

handwriting is exceptionally legible. Good luck!

1) – 15 points

The short-term interest rate on Sylvania’s silvo currency is 1.0% while the short-term interest

rate on Freedonia’s freedo currency is 9.0%. In the spot market, one silvo buys two freedos. If

interest rate parity holds, how many freedos can we expect to buy with one silvo 12 months

from today?

The 12-month futures contract for silvos is trading at US$0.7400; the same contract on freedos is

trading at US$0.3425. If you cover a currency carry trade position with futures, is there an

opportunity to profit? If so, exclusive of leverage and transactions costs, what is your annual

rate of return? Show how you arrived at your answer.

Page 2 of 4

2) - 10 points You are given the following information about an economy: 1) at full employment, the unemployment rate is 5% and real output is $1 trillion; and 2) the

following table applies:

State: 1 2 3

Inflation rate: 6% 2.5% 1%

Unemployment rate: 3.5% 5.0% 7.5%

Real output: $1,030 billion $1,000 billion $950 billion

Assuming the price level in Period 0 was 150, graphically show the economy’s long-run and

short-run Phillips Curves and corresponding long-run and short-run aggregate supply curves

in Period 1. Also, please label the axes for full credit.

Phillips Curves Aggregate Supply

Page 3 of 4

3) - 10 points You are given information about an economy that, at equilibrium

expenditures, the following table applies

State: 1 2 3

Price level: 159.0 153.75 151.5

Real output: $950 billion $1,000 billion $1,030 billion

Further, assume that the slope of the AE curves is 0.5. Graphically depict this situation in the

Aggregate Expenditure model and, then, derive three points on the AD curve. Also, please label

both the axes and all three of your AE curves for full credit.

Aggregate Expenditure Aggregate Demand

45°

Page 4 of 4

4) – 15 points

Write a short essay contrasting the types of fiscal policy you would recommend in each

of the following situations:

1. The economy appears to be on the precipice of a deep recession and policy

makers need to boost aggregate demand (AD) as quickly and cheaply as

possible.

2. The economy’s long-run economic growth rate has slowed to an anemic level

and policy makers need to revive growth by shifting LRAS to the right.

Justify your answers by mentioning such topics as automatic stabilizers, infrastructure,

education, tax rates, consumption v. investment, marginal propensities to consume for

various income brackets, the values of relevant multipliers, and give some examples.