# Project #84534 - Econ ONLY 7 QUESTIONS SMALL BUDGET

### MACROECONOMICS  (ECON II) MID-TERM EXAM

Maximum Raw Score  =   42 pts

1)  The Economy cannot be considered fully employed unless the measured unemployment rate is below 1%. Agree or disagree and explain your answer in a paragraph.                                          4pts

2) A) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the "full employment" unemployment rate (NAIRU) and remained at that low level for a year or longer?  Explain your answer in a few sentences.                                          4pts

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B) Draw an AS/AD diagram illustrating your answer to part (A). Be sure to label all lines and axes in your diagram clearly.  4pts

3) A) Suppose Jean Splicer, an investor, buys \$500,000 of shares of stock in a diversified bundle of Bio-tech firms and exactly one year later sells those shares for \$530,000. Assume the value of the CPI at the date of Jean's purchase was 190 and rose by the sale date one year later to 200 while the value of the GDP Deflator was 120 at the time of her purchase and rose to 125 by the date she sold her shares.  What was Jean’s real rate of return on this investment?  4pts

B) Explain why you used either the CPI data or the GDPD data in your answer to part A. (2 pts)

4) A) Suppose that several months of data showed the CPI increasing at a 4 % annual rate due largely to increases in the price of energy and food related commodities following several years when the CPI only increased by 2.2 % per year.  Suppose this increase causes investor expectations of annual inflation to also increase from 2.2% to 4%.  Assume, at the same time that fears of higher inflation create concerns that rising interest rates will derail the economic recovery and lead to another recession. Assume the resulting increase in risk aversion among investors drives the expected real rate of return required to equate investor demand to the existing supply of 1 year Treasury notes down to 0.2 % from .6%.  What would you expect to happen to the nominal yields on 1-year T-notes during the period over which these changes in inflation expectations and required real yields occurred? (Give a numerical answer if possible) Explain your reasoning. 4 pts.

B) Draw a supply/demand diagram of the US Treasury bond market to illustrate the effects on it of the developments cited in part A. (Note: you do not have to include the exact numerical price of a 1 year T-Note before and after the change in expectations.)   But label your diagram clearly!   4pts.

5) Between Q1, 2014 and Q1, 2015 measured Output in the non- farm business sector increased by 3.2%. During this time period the unemployment rate fell from 6.6% to 5.5% and total hours worked in the nonfarm business sector increased by 2.8%.

What was the % rate of change in labor productivity over the year?  Explain your answer briefly.    4pts

6)  Suppose that the Federal Government announced a tax rebate of \$500 for all individuals filing singly and \$1000 for all families filing jointly or as head of household in the upcoming tax year.  Further, suppose that the Government budget included a broad based reduction in Government spending on goods and services, whose total amount was equal to the total amount of the tax rebates. What would be the overall impact on AD of these policy changes or would the policy change effects completely cancel each other out?

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7) On  July 15 of this year the Federal Reserve presented its semi - annual report on the Economy to Congress.  Janet Yellen, Chair of the Fed, testified  about the Fed’s view of the economy at that time.  Although the Fed does not use the words aggregate demand or aggregate supply in its communications, the underlying concepts very much inform their analysis and policy decisions .

Please Read Janet Yellen’s testimony @ http://www.federalreserve.gov/ …    then click on “News and Events” …then click on “Testimony .“

Summarize Janet Yellen’s analysis of likely AD growth in the last half of 2015 (don’t just quote her directly…if you quote her, explain what she is saying  in AD or AS terms)…Which AD components does she think will rebound from the  close to 0% growth last winter and into early spring and why?  Which AD components does she think will continue to have low growth and why?

6pts

 Subject General Due By (Pacific Time) 10/04/2015 12:00 am
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