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ECN 302

Sample Test 2

Spring 2023

Test 2

1) (10 points total)

a) (5 points) Define natural employment surplus and present its mathematical formula.

b) (5 points) Assume  and

What is the level of the natural employment surplus (NES)?

By how much must autonomous taxes change if the natural employment surplus is to become zero?

2)  (20 points total; 2.5 points each part)

Assume that the following equations summarize the structure of a closed economy.

Answer the following questions:

What is the equation of the IS curve?

What is the equation of the LM curve?

What is the equilibrium real output?

What is the equilibrium interest rate?

What is the level of consumption at equilibrium?

What is the level of planned investment at equilibrium?

Determine whether leakages equal injections at equilibrium.

Assume that  and   Is there an excess demand for money or excess supply of money in this situation?  How much?  Is there unplanned inventory change?  If so, what is the value of the unplanned inventory change?

3)  (10 points total) 

Explain how the monetary and fiscal authorities can work together to raise equilibrium GDP without raising interest rates. Describe a situation where this co-operation might be the only feasible way of expanding equilibrium output. Define the term “monetizing the debt” as part of your answer.

4)  (10 points total)

To fight inflation a small open economy with fixed exchange rates wants to permanently decrease real GDP. Should it use fiscal or monetary policy (i.e. reduce government spending or contract the nominal money supply) to accomplish its goals?

Explain using diagrams.