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Econ 4081 Midterm

Spring 2020

Each part a.b.c.d
is worth 5 points. In the last question, each part a.b.c is worth 10 points

Circle your answers!!

What is your CU Denver student ID number?

Take the first four digits of your student ID number. Call it the variable $$$. Take the last digit of

$$$ and call it the variable $$

For example, if your student ID is: 109677359:

$$$ = 1096, and $$ = 6.

$$x3 is 18

$$% is 6%

$$$*100 is $109,600

$$*1000 is $6,000

$$*10 is $60

Q1. An economy makes 3 goods A,B,C in years 2019 and 2020:

2019

Q

2020

A

P

10 $

1500

B

5 $

1500

C

1000

$

Q

20

P

18 $$*1000

5 $

1,000

500 $

20

a. What is the growth in real GDP between 2019 and 2020 using the average price of 2019 and

2020 as the base price?

b. What is the rate of inflation between 2019 and 2020 using the average price of 2019 and 2020

as the base price?

Q2. During a given year, the following activities occur:

1. An iron mining company pays its workers $$$*100 to mine 75 pounds of iron. The iron is sold

to a steel company for $300,000.

2. The steel company pays its workers $250,000 to make 50 pounds of steel from the 75 pounds

of iron. The steel is sold to a car manufacturer for $1,000,000.

3. The car manufacturer pays its workers $300,000 to make cars, which it sells directly to

customers for $1,900,000.

Show all calculation:

a. Using the production-of-final-goods approach, what is the GDP in this economy?

b. What is the value added at each stage of production?

c. What are the total wages and profits earned?

Q3. The relationship between the supply and demand of money is:

Hd = $YL(i) [c+theta*(1-c)]

Hs = supply of central bank money

$Y = nominal income

C = proportion of money held in currency

Theta = reserve ratio

Assume the following:

1.

2.

3.

4.

a.

b.

c.

d.

e.

The public holds 2% currency

The ratio of reserves to deposits is 0.15

The demand for money is given by: Md = $Y (0.8-4i)

The money base (central bank money) is $200 billion and nominal income is ($$x3) trillion.

What is the demand function for Central Bank money?

What is the equilibrium interest rate?

What is the overall supply of money in equilibrium?

What is the interest rate if central bank money is increased to $400 billion?

If, instead, the overall money supply increases to $$$ billion, assuming part c.), what does

interest rate change to?

Q4. Consider the following behavioral equations that describe the IS-LM equilibrium:

C = c0 + c1YD

c0 = $$*10, c1 = 0.75

T = t0 + t1Y

t0 = 0, t1 = 0.05

YD = Y-T

a.

b.

c.

d.

I = b0 + b1Y-b2i

b0 = 50, b1 = 0.25, b2 = 0.10

M/P = d1Y d2i

d1 = 1, d2 = 0.5

Calculate the government spending multiplier:

Calculate autonomous spending:

Given G = 25 and M/P is 50, What is equilibrium output?

What is the economic effect of setting taxes as a function of output? How does it affect the

multiplier?

Q5. Japan’s Lost Decade

In the 1980s, the Japanese economy grew at a rate of 3.89%, but it ran into trouble in 1989. The realestate bubble and stock market crashed, falling by more than 60%, and Japan fell into a recession. From

1991 to 2003, the Japanese economy grew at an average of 1.14% annually, below the rate of other

industrialized countries. This period of time is known as the lost decade.

a.) Explain and analyze this situation using IS-LM and AS-AD model.

b.) If you were a policy maker, what would you do? Show it on the IS-LM and AS-AD model.

c.) The Japanese government tried to use monetary policy to stimulate the economy. But it didnt

work, even though interest rates were zero. Why not? Show on the IS-LM and AS-AD model.

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Explanation & Answer:

5 Questions

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