EC301 Open-Book Midterm Exam (Weight 110 points)

1. (7 points) How are presidential election outcomes related to the performance of the economy?
2. (7 points) Discuss the difference between Microeconomics and Macroeconomics.
3. (10 points) Use the concepts of gross and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. “In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all.” Do you agree? Why or why not? Explain: “Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero.”
4. (7 points) What …show more content…

(b) A change in government spending: Increased government spending will have the same impact as lower savings, and will push the IS curve to the right

Question 6.
The LM function is liquidity preference minus the money supply. It tells that real money balances are a primary function of the interest rate and real income. This is usually represented as M/P = L(r, Y), which states real money balance M/P, where M is nominal money balance and P is price level, depends on the real interest rate r and real output Y.
An increase in money supply will cause the LM curve to shift to the right, thus lowering the equilibrium interest rate and increasing the equilibrium output. An increase in the demand for money should have the same impact: shift the LM curve to the right. If the price level falls the LM curve will shift to the right since real money balances will increase in such a case.
The Fed has control over the nominal money supply but not on money demand and price level. Money demand depends on the transaction demand of money and the Fed cannot influence the prices (they are determined by the market and customers) so as powerful as the Fed is they cannot influence demand for money.

Question 7. If MPC = 0.67, multiplier = 1/1-0.67 = 1/0. 33=3. Income should increase to 3x8 so