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Practice questions from previous exams

Use the following information to answer the next three questions:  Venezuela's inflation in the last few years has been estimated at more than 2,000 percent. Two days ago, a report on Reuters.com read, in part: "Under the midday sun, dozens of fishermen wait to sell their day’s catch by a lagoon in the town of Rio Chico on the Caribbean coast of Venezuela. But they aren’t expecting cash in return. Instead, they’re swapping fish for packages of flour, rice and cooking oil. “No cash accepted here, only barter,” said Mileidy Lovera, 30, walking along the shore with a cooler of fish that her husband had caught. She hoped to exchange it for food to feed her four children, or medicine to treat her son’s epilepsy."

5)  (3 pts) The information & story above specifically indicate that, in Venezuela, money lost the following function

a) unit of account

b) store of value

c) medium of exchange

d) all the above

6) (3 pts) The situation described above resembles more closely the following theory/model discussed in class

a) The Efficiency Wage Model, with fishermen receiving real wages above market

b) The Real Business Cycle Model, since the supply of money has affected the marginal product of labor

c) The Walrasian Model of relative price determination, where money plays no role

d) Keynes' Theory of Liquidity Preference, as the heightened uncertainty caused maximum money demand

e) All theories above apply to the Venezuelan current situation

7)   (3 pts)  If the situation in Rio Chico prevailed all over Venezuela, we would expect that:

a) Further increases in the money supply would be neutral in the short run but not the long run

b) Further increases in the money supply would be neutral in the long run but not the short run

c) Further increases in the money supply would be neutral: have no impact on output or the price level

d) Further increases in the money supply would be neutral: have no impact on output; raise the price level

a) Labor contracts imply rigid real wages and pro-cyclical nominal wages; but real wages are counter-cyclical

As discussed in class, some historians claim that Chinese Emperor Hsiao Wen (180–157 B.C.) sacrificed his rare white stag to use the animal’s skin to make a new currency for the empire. Use this info in the next 2 questions (hint: while I have a preferred answer, I am open to some variations if they are supported by solid arguments)

11) (4 pts) Which of the modern developments below would closely resemble the Emperor’s decision in terms of the problem(s) they meant to address and the principle/strategy utilized to address such problem(s)?

Mark all that apply.

a) US Federal Reserve Chairman Paul Volcker aggressively tightened monetary conditions in the early 1980s

b) Ecuador adopted the US dollar as the country’s official currency in the year 2000

c) Germany extinguished the Deutschmark and adopted the euro as its currency around the year 2000

d) In 1989, Brazil cut three zeros from its currency, the “cruzado,” and changed its name to “new cruzado” (i.e., introduced 1 new cruzado = 1,000 cruzados)

12) (6 pts) In no more than two sentences or 50 words, explain your answer(s) above, i.e., the conceptual similarity between the  development(s) you selected and the Emperor’s goal and rationale for the measure.

In the next three questions, use the IS-LM-AD-AS-LRAS model to explain developments associated with the 2009 “Great Recession” in the US. Follow the sequence of questions/prompts to assess the cause, effect, and rationale for policy measures adopted. If it makes it easier, you do not have to draw the graphs; just make sure to describe in a few words what curves shift & how the economic variables depicted in the graph would change as a result.   

13) (5 pts) The main direct triggers of the Great Recession in the US were a sharp drop in home and stock values that reduced household wealth. How are these developments incorporated in an IS-LM-AD-AS-LRAS framework? Make sure to indicate what happens to the main macroeconomic variables explained by the model (i.e., the variables on the axes of the graphs) 

14) (5 pts) The Federal Reserve promoted strong expansionary policies, including large monthly purchases of US Treasury bonds and mortgage-backed securities.  Make sure to indicate any curve shifts and their impact on the main macroeconomic variables explained by the model.

15) (5 pts) The Federal Reserve promoted strongly expansionary policies to address the recession, including large monthly purchases of US Treasury bonds and mortgage-backed securities.  One of their objectives was to minimize the impact of the crisis on unemployment.  Based on the FED’s policy reaction: does the FED believe in money neutrality? Explain in no more than two sentences (50 words)

16) (15 pts) Refer to Table 3 below to answer all questions that follow.  The table summarizes the results of an empirical study comprising dozens of countries and spanning several decades:

a) Compare the estimated values for β as the period of aggregation goes from a decade to a single year. What is the main conclusion supported by the point and interval estimates? Make sure to cite some of the key numbers in your answer (guideline: one or two sentences)

b) Now compare the estimated values for β in the two restricted samples.  What is the main conclusion supported by the point and interval estimates? Make sure to cite some of the key numbers in your answer (guideline: one or two sentences)