I. a) Given the following supply and demand schedules for steel, produced in a competitive market (quantities in tons per day):Price perTonQuantityDemandedQuantitySupplied$700900030007208000500074070007000760600090001. What are the equilibrium price and quantity? (2 pts.)2. Why will $700 not be the equilibrium price in this market? (2 pts.)b) For the next six questions,explain how the factor given will affect demand or supply and the equilibrium price and quantity; that is, will demand or supply increase or decrease, will the equilibrium price increase or decrease, and will the equilibrium quantity increase or decrease? You should provide a brief explanation for why you shifted the demand or supply curve. (3 points each.)1. An earthquake in Japan destroys factories that produce parts for American car manufacturers. Explain how this will affect the market for American cars.2. A press report that iPhones secretly collect data about their users reduces the popularity of iPhones. Explain how this will affect the market for iPhones.3. The cost of computer chips used to produce tablet computers decreases. Explain how this will affect the market for tablet computers.4. The government reports that batteries in electric cars often overheat, causing a risk of fire and injury. Explain how this affects the market for electric cars.5. There are a series of prolonged heat waves during the summer. Explain how this affects the market for air conditioners.6. New rules to reduce air pollution cause refineries that produce gasoline to make costly changes in production methods.

Explain how this will affect the market for gasoline.II. How will each of the following be affected by unanticipated inflation of 10% per year (will they be helped, hurt, or unaffected)? Explain your reasoning for each: (2 pts. each)a) A worker who receives a 4 percent wage increase each year.b) A person who invested in $100,000 in bonds paying a fixed interest rate of 6%.c) A person who borrows $20,000 at a fixed interest rate to buy a car.III. (Aggregate expenditures model) Given the following information about a closed economy:Employment,MillionsReal GDP,$BillionsConsumption,$BillionsInvestment,$BillionsGovernmentPurchases,$Billions70410034403004008042003520300400904300360030040010044003680300400a) What is the equilibrium value of GDP? (4 pts.)b) What is the value of the multiplier? (3 pts.)c) What would the new equilibrium be if government purchases decreased by $20? (5 pts.)d) Starting from the equilibrium in III.a), if full employment in this economy is 80 million, is this economy experiencing a recessionary or inflationary gap? (3 pts.)e) By how much would aggregate expenditures have to change at each level of GDP to eliminate the gap? Would expenditures have to decrease or increase? (3 pts.)IV. (AS-AD model) Explain whether each of the following will increase or decrease aggregate supply or aggregate demand (state whether the curve will shift left or right), whether real GDP will increase or decrease, and whether the price level will increase or decrease. These questions refer to the US economy. (3 pts. each)a) The federal government increases spending and reduces taxes.b) Recessions in European countries reduce US exports to Europe.c) Bad harvests around the world reduce food production and cause food prices to rise sharply.d) There is a sharp decrease in the global price of oil.e) The poor quality of education in public schools reduces the productivity of the US labor force.V. a) Give a brief explanation of each of the three functions of money (State what each is and briefly describe it). (6 pts.)b) If the interest rate increases, will the public want to hold more or less of its wealth in the form of money? (2 pts.)VI. a) (Money creation by a single bank) Given a bank with only the following items on its balance sheet: $1000 of Reserves and $1000 of Deposits. The reserve ratio (R) = .20.1. List the assets and liabilities on the banks balance sheet. What is the amount of excess reserves? (2 pts.)2. What is the maximum amount of loans it can make? List the items on the banks balance sheet after it has made these loans (and before any checks have cleared). By how much has the money supply changed? (2 pts.)3. List the items on the banks balance sheet after checks have been drawn on the proceeds of the loans and the checks have cleared. (2 pts.)b) (The Banking System and the Money Multiplier) Assume the balance sheet in question VI a) represents the entire banking system rather than a single bank. What is the maximum amount of deposits and lending that can be supported by the $1000 of reserves in the banking system (R = .20). List the items on the banking systems balance sheet with this maximum amount of loans and deposits. (4 pts.)c) (Open market operations) If the banking system is currently holding the following: $200 of reserves, $300 of government securities, $500 of loans, and $1000 of deposits, and the Reserve Ratio = .20:1. List the assets and liabilities on the balance sheet for the banking system. Can banks make any loans? (2 pts.)2. The Fed makes an open market purchase of $20 of government securities from the banks. List the items on the banking systems balance sheet before any new lending takes place. (2 pts.)3. List the items on the banking systems balance sheet after full monetary expansion has taken place (assume the expansion takes place by the banks making loans rather than purchasing securities). (2 pts.)4. If the economy is in recession when this easy money policy takes place, explain how the policy works and what effects it will have on real GDP, employment, and the price level (assume that the size of the open market operation is large enough to affect the economy). (5 pts.)VII. Multiple choice: For each question, write the letter of the best answer. (1 pt. each)1. In terms of the production possibilities curve, economic growth may be represented by:a) the curve shifting outward.b) the curve shifting inward.c) a curve which remains fixed.d) a point inside of the curve.Answer:2. A country experiences earthquakes and severe flooding, destroying much of its farming and factory capacity. This will cause its production possibilities curve to:a) shift outward.b) shift inward.c) remain fixed, but the economy will move to a point inside the curve.3. If the aggregate supply curve shifts left along the aggregate demand curve:a) the price level will decrease and there will be deflation.b) the price level will increase and there will be cost push inflation.c) the price level will increase and there will be demand pull inflation.d) the price level will remain unchanged.Answer:4. Increasing government spending and tax decreases characterize:a) contractionary fiscal policy. c) tight money policy.b) expansionary fiscal policy. d) easy money policyAnswer:5. If the MPC is .90, the multiplier will be:a) 10 b) 3.5c) 9 d) 1.1Answer:6. When aggregate expenditures are less than the total output of an economy:a) total output will decrease.b) total output will increase.c) the economy is in equilibrium and total output will not change.Answer:7. Assume the economy is experiencing demand-pull inflation. What fiscal policy actions would best address this problem?a) increase taxes and government spending.b) decrease taxes and government spending.c) decrease taxes and increase government spending.d) increase taxes and decrease government spending.Answer:8. A Federal budget deficit exists when:a) Federal government assets are less than liabilities.b) Federal government spending exceeds tax revenues.c) Federal government spending is increasing.d) taxes are reduced.Answer:9. The Federal backing for the money in the United States comes from:a) providing sufficient quantities of precious metals such as gold and silver to cover the amount of paper money in circulation.b) control over the money supply designed to keep the value of money stable over time.c) pledging physical assets, such as land, natural resources, and public buildings as collateral for outstanding currency.Answer:10. It is likely that an excessive increase in the money supply will:a) increase the purchasing power of each dollar.b) decrease the purchasing power of each dollar.c) have no impact on the purchasing power of the dollar.d) cause the price level to fall.Price perTonQuantityDemandedQuantitySupplied$700900030007208000500074070007000760600090001. What are the equilibrium price and quantity? (2 pts.)2. Why will $700 not be the equilibrium price in this market? (2 pts.)b) For the next six questions,explain how the factor given will affect demand or supply and the equilibrium price and quantity; that is, will demand or supply increase or decrease, will the equilibrium price increase or decrease, and will the equilibrium quantity increase or decrease? You should provide a brief explanation for why you shifted the demand or supply curve. (3 points each.)1. An earthquake in Japan destroys factories that produce parts for American car manufacturers. Explain how this will affect the market for American cars.2. A press report that iPhones secretly collect data about their users reduces the popularity of iPhones. Explain how this will affect the market for iPhones.3. The cost of computer chips used to produce tablet computers decreases. Explain how this will affect the market for tablet computers.4. The government reports that batteries in electric cars often overheat, causing a risk of fire and injury. Explain how this affects the market for electric cars.5. There are a series of prolonged heat waves during the summer. Explain how this affects the market for air conditioners.6. New rules to reduce air pollution cause refineries that produce gasoline to make costly changes in production methods. Explain how this will affect the market for gasoline.II. How will each of the following be affected by unanticipated inflation of 10% per year (will they be helped, hurt, or unaffected)? Explain your reasoning for each: (2 pts. each)a) A worker who receives a 4 percent wage increase each year.b) A person who invested in $100,000 in bonds paying a fixed interest rate of 6%.c) A person who borrows $20,000 at a fixed interest rate to buy a car.III. (Aggregate expenditures model) Given the following information about a closed economy:Employment,MillionsReal GDP,$BillionsConsumption,$BillionsInvestment,$BillionsGovernmentPurchases,$Billions70410034403004008042003520300400904300360030040010044003680300400a) What is the equilibrium value of GDP? (4 pts.)b) What is the value of the multiplier? (3 pts.)c) What would the new equilibrium be if government purchases decreased by $20? (5 pts.)d) Starting from the equilibrium in III.a), if full employment in this economy is 80 million, is this economy experiencing a recessionary or inflationary gap? (3 pts.)e) By how much would aggregate expenditures have to change at each level of GDP to eliminate the gap? Would expenditures have to decrease or increase? (3 pts.)IV. (AS-AD model) Explain whether each of the following will increase or decrease aggregate supply or aggregate demand (state whether the curve will shift left or right), whether real GDP will increase or decrease, and whether the price level will increase or decrease. These questions refer to the US economy. (3 pts. each)a) The federal government increases spending and reduces taxes.b) Recessions in European countries reduce US exports to Europe.c) Bad harvests around the world reduce food production and cause food prices to rise sharply.d) There is a sharp decrease in the global price of oil.e) The poor quality of education in public schools reduces the productivity of the US labor force.V. a) Give a brief explanation of each of the three functions of money (State what each is and briefly describe it). (6 pts.)b) If the interest rate increases, will the public want to hold more or less of its wealth in the form of money? (2 pts.)VI. a) (Money creation by a single bank) Given a bank with only the following items on its balance sheet: $1000 of Reserves and $1000 of Deposits. The reserve ratio (R) = .20.1. List the assets and liabilities on the banks balance sheet. What is the amount of excess reserves? (2 pts.)2. What is the maximum amount of loans it can make? List the items on the banks balance sheet after it has made these loans (and before any checks have cleared). By how much has the money supply changed? (2 pts.)3. List the items on the banks balance sheet after checks have been drawn on the proceeds of the loans and the checks have cleared. (2 pts.)b) (The Banking System and the Money Multiplier) Assume the balance sheet in question VI a) represents the entire banking system rather than a single bank. What is the maximum amount of deposits and lending that can be supported by the $1000 of reserves in the banking system (R = .20). List the items on the banking systems balance sheet with this maximum amount of loans and deposits. (4 pts.)c) (Open market operations) If the banking system is currently holding the following: $200 of reserves, $300 of government securities, $500 of loans, and $1000 of deposits, and the Reserve Ratio = .20:1. List the assets and liabilities on the balance sheet for the banking system. Can banks make any loans? (2 pts.)2. The Fed makes an open market purchase of $20 of government securities from the banks. List the items on the banking systems balance sheet before any new lending takes place. (2 pts.)3. List the items on the banking systems balance sheet after full monetary expansion has taken place (assume the expansion takes place by the banks making loans rather than purchasing securities). (2 pts.)4. If the economy is in recession when this easy money policy takes place, explain how the policy works and what effects it will have on real GDP, employment, and the price level (assume that the size of the open market operation is large enough to affect the economy). (5 pts.)VII. Multiple choice: For each question, write the letter of the best answer. (1 pt. each)1. In terms of the production possibilities curve, economic growth may be represented by:a) the curve shifting outward.b) the curve shifting inward.c) a curve which remains fixed.d) a point inside of the curve.Answer:2. A country experiences earthquakes and severe flooding, destroying much of its farming and factory capacity. This will cause its production possibilities curve to:a) shift outward.b) shift inward.c) remain fixed, but the economy will move to a point inside the curve.3. If the aggregate supply curve shifts left along the aggregate demand curve:a) the price level will decrease and there will be deflation.b) the price level will increase and there will be cost push inflation.c) the price level will increase and there will be demand pull inflation.d) the price level will remain unchanged.Answer:4. Increasing government spending and tax decreases characterize:a) contractionary fiscal policy. c) tight money policy.b) expansionary fiscal policy. d) easy money policyAnswer:5. If the MPC is .90, the multiplier will be:a) 10 b) 3.5c) 9 d) 1.1Answer:6. When aggregate expenditures are less than the total output of an economy:a) total output will decrease.b) total output will increase.c) the economy is in equilibrium and total output will not change.Answer:7. Assume the economy is experiencing demand-pull inflation. What fiscal policy actions would best address this problem?a) increase taxes and government spending.b) decrease taxes and government spending.c) decrease taxes and increase government spending.d) increase taxes and decrease government spending.Answer:8. A Federal budget deficit exists when:a) Federal government assets are less than liabilities.b) Federal government spending exceeds tax revenues.c) Federal government spending is increasing.d) taxes are reduced.Answer:9. The Federal backing for the money in the United States comes from:a) providing sufficient quantities of precious metals such as gold and silver to cover the amount of paper money in circulation.b) control over the money supply designed to keep the value of money stable over time.c) pledging physical assets, such as land, natural resources, and public buildings as collateral for outstanding currency.Answer:10. It is likely that an excessive increase in the money supply will:a) increase the purchasing power of each dollar.b) decrease the purchasing power of each dollar.c) have no impact on the purchasing power of the dollar.d) cause the price level to fall.