Please read and sign the following statement. I will return this examination un-graded to anyone who does not sign this statement. "By my signature, I affirm that I have not received the assistance of anyone in the completion of this examination. It is permissible to use my text book, notes, solved problems, and the course web site in the completion of this examination. However, I will not discuss this exam with anyone other than Professor Assaf." Signature (Please print your name here; I will treat your printed name as your signature) This exam is due by end of day, Monday, April 25th. You are encouraged to turn in the exam prior to this date. Please upload your exam to the same place on Blackboard and do not send it by email. 1. Which component of GDP will be affected by each of the following transactions involving Ford Motor Company? If you believe that none of the components of GDP will be affected by the transactions, briefly explain why a) You purchase a new Ford Escape Hybrid from a Ford dealer. b) You purchase a 2010 Ford Escape Hybrid from a friend. c) Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana. d) Ford produces 1,000 Escapes in a factory of Missouri and ships them to a car dealer in Shanghai, China. e) Ford purchases new machine tools to use in its Missouri Escape factory. f) The state of Missouri builds a new highway to help improve access to the Ford Escape plant. 2. Suppose the information in the table on the next page is for simple economy that produces only four goods and services: text-books, hamburgers, shirts, and cotton. Assume that all the cotton is used in the production of shirts 2005 2012 2013 Product Quantity Price Quantity Price Quantity Price Textbooks 90 50 100 56 100 65 Hamburger s Shirts 50 30 50 25 65 25 Cotton 100 0.80 800 0.60 120 0.70 a) Use the information in the table to calculate real GDP for 2012 and 2013, assuming that the base year is 2005. 75 2 100 2 120 2.25 b) What is the growth rate of real GDP during 2013? 3. Discuss briefly the likely effect of each of the following on the unemployment rate: a. The length of time workers are eligible to receive unemployment insurance payments doubles. b. The minimum wage is abolished c. Most U.S. workers join labor unions. d. More companies make information on the job openings easily available 4. The federal government in the US has been running very large deficits. a. Use a market of loanable funds graph to illustrate the effect of the federal budget deficits. What happens to the equilibrium real interest rate and the quantity of loanable funds? What happens to the quantity of saving and investment? b. Now suppose that households believe that deficits will be financed by higher taxes in the near future, and households increase their saving in anticipation of paying those higher taxes. Briefly explain how your analysis in part a will be affected. 5. Suppose you deposit $5000 in currency into your checking account at a branch of Bank of America, which we will assume has no excess reserves at the time you make the deposit. Also assume that the required reserve ratio is 0.10, or 10%. a. Use a T-account to show the initial impact of this transaction of Bank of America's balance sheet. b. Suppose that Bank of America makes the maximum loan it can from the funds you deposited. Using a T-account show the initial impact of granting the loan of Bank of America's balance sheet. Also include on this T-account the transaction from part a. c. Now suppose that whoever took out the loan in part b writes a check for this amount and that the person receiving the check deposits it in a branch of Citibank. Show the effect of these transactions on the balance sheets of Bank of America and Citibank after the check has been cleared on the T-account for Bank of America, include the transactions from parts a and b). d. What is the maximum increase in checking account deposits that can result from your $5000 deposit? 6. Draw a demand and supply curve graph showing the equilibrium in the money market. Suppose the Fed wants to lower the equilibrium interest rate. Show on the graph how the Fed would accomplish this objective. 7. a. In a column in the Wall Street Journal, two economists at the Council on Foreign Relations argue: Simple put, the Fed must choose between managing the level of reserves and managing rates. It cannot do both". Do you agree? Briefly explain b. A former Federal Reserve official argued that at the Fed "the objectives of prices stability (i.e. inflation) and low long-term interest rate are essentially the same objective." Briefly explain how these two moves together. 8. Explain how each of the following events would affect the aggregate demand curve a. An increase in the price level b. An increase in government purchases c. Higher state income taxes d. Higher interest rates e. Faster income growth in other countries.