Econ-4040-001 14SSInternational EconomicsExam 4 (Finance Policy)Name:M# Student ID:Read all of the following information...
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Econ-4040-001 14SS
International Economics
Exam 4 (Finance Policy)
Name:
M# Student ID:
Read all of the following information before starting the exam:
⢠This exam has two (2) sections. Be sure to follow the directions for each section.
⢠Please keep your written answers brief; be clear and to the point. Points will be taken o? for
incoherent or irrelevant statements.
⢠Show all of your work, and write legibly in order to receive full credit. Partial credit will be
given, so be sure to demonstrate how you arrived at your answer. (Points will be taken o? if
you simply write down your answer even if it is correct.)
⢠You have 120 minutes to complete the exam. Allocate your time carefully.
⢠Please do not write in the table below.
⢠Good luck!
Question:
1
2
3
4
5
6
7
Total
Points:
4
4
4
4
4
12
12
44
Bonus Points:
0
0
0
0
0
0
0
0
Score:
Exam 4 (Finance Policy)âPage 1 of 3
SECTION 1: SHORT ANSWER
Short-Answer Directions: (4 points each) Answer all questions in this section. Show all of your
work in the space provided on the blank pages at the end of the exam. Be sure to clearly identify
the question you attempt to answer.
1. (4 points) Describe the Keynesian cross diagram. In your description, explain its purpose and
how it is used to derive the IS curve.
2. (4 points) Describe the money market diagram. In your description, explain its purpose and
how it is used to derive the LM curve.
3. (4 points) What is stabilization policy? Would more optimistic consumers and ?rms in a
depressed economy (resulting in increased spending) be considered stabilization policy?
4. (4 points) What is dollarization and what is the cost to a country from dollarization?
5. (4 points) From Dr. Ant´nio Martinsâ presentation, compare the Merkel memorandum to
o
the German chancellor in The Economist magazine and the statement of the president of the
European Central Bank Mario Draghi in response to the euro zone crisis.
Exam 4 (Finance Policy)âPage 2 of 3
SECTION 2: LONG ANSWER
Long-Answer Directions: (various points) Answer all questions in this section. Show all of your
work in the space provided on the blank pages at the end of the exam. Be sure to clearly identify
the part of the problem you attempt to answer.
6. During the 1990s, U.S. depositors dramatically increased the share of their funds in money
market mutual fund accounts, which o?ered depositors higher interest rates versus standard
checking. The widespread use of ?nancial instruments during the 1990s led to a decrease in
money demand because people held a smaller share of their deposits in checkable accounts
(demand deposits).
(a) (4 points) Illustrate in a diagram how this shock a?ects the U.S. output, interest rate,
exchange rate, consumption, investment, and trade balance. In your answer, use the
money market and IS-LM-FX diagrams. Label your initial equilibrium point A and your
short-run equilibrium point B.
(b) (4 points) Illustrate in a new diagram how your answer to part (a) changes if the Fed used
monetary policy to stabilize output. Label your initial equilibrium point A, your short-run
equilibrium point B, and your stabilization equilibrium point C.
(c) (4 points) Explain how your answer to part (a) changes if the Fed used monetary policy
to maintain a ?xed exchange rate.
7. From March to November 2001, the U.S. experienced a recession caused (in part) by the
dotcom bubble. To help stimulate the economy, President Bush proposed a tax cut, while the
Fed Chairman Greenspan had been increasing the U.S. money supply.
A more severe recession (i.e., the Great Recession) occurred from December 2007 to June 2009
related to the housing bubble. Fed Chairman Bernanke had taken interest rates to zero, while
President Obama argued for an unprecedented ?scal stimulus.
(a) (3 points) During the 2001 recession, would expansionary monetary policy or ?scal policy
have been more e?ective to reduce the large U.S. current account de?cit that existed?
Provide a brief explanation.
(b) (3 points) During the Great Recession, monetary policy proved ine?ective. Brie?y explain
why.
(c) (3 points) If the Fed keeps interest rates at zero, is monetary policy accommodating (to
?scal policy)? Provide a brief explanation.
(d) (3 points) In response to the Great Recession, Congress passed the American Recovery
and Reinvestment Act (ARRA) of 2009. Brie?y discuss one (relevant) policy design and
implementation factor faced by policymakers when responding to this shock.
HAVE A WONDERFUL SUMMER!!!
Exam 4 (Finance Policy)âPage 3 of 3
International Economics
Exam 4 (Finance Policy)
Name:
M# Student ID:
Read all of the following information before starting the exam:
⢠This exam has two (2) sections. Be sure to follow the directions for each section.
⢠Please keep your written answers brief; be clear and to the point. Points will be taken o? for
incoherent or irrelevant statements.
⢠Show all of your work, and write legibly in order to receive full credit. Partial credit will be
given, so be sure to demonstrate how you arrived at your answer. (Points will be taken o? if
you simply write down your answer even if it is correct.)
⢠You have 120 minutes to complete the exam. Allocate your time carefully.
⢠Please do not write in the table below.
⢠Good luck!
Question:
1
2
3
4
5
6
7
Total
Points:
4
4
4
4
4
12
12
44
Bonus Points:
0
0
0
0
0
0
0
0
Score:
Exam 4 (Finance Policy)âPage 1 of 3
SECTION 1: SHORT ANSWER
Short-Answer Directions: (4 points each) Answer all questions in this section. Show all of your
work in the space provided on the blank pages at the end of the exam. Be sure to clearly identify
the question you attempt to answer.
1. (4 points) Describe the Keynesian cross diagram. In your description, explain its purpose and
how it is used to derive the IS curve.
2. (4 points) Describe the money market diagram. In your description, explain its purpose and
how it is used to derive the LM curve.
3. (4 points) What is stabilization policy? Would more optimistic consumers and ?rms in a
depressed economy (resulting in increased spending) be considered stabilization policy?
4. (4 points) What is dollarization and what is the cost to a country from dollarization?
5. (4 points) From Dr. Ant´nio Martinsâ presentation, compare the Merkel memorandum to
o
the German chancellor in The Economist magazine and the statement of the president of the
European Central Bank Mario Draghi in response to the euro zone crisis.
Exam 4 (Finance Policy)âPage 2 of 3
SECTION 2: LONG ANSWER
Long-Answer Directions: (various points) Answer all questions in this section. Show all of your
work in the space provided on the blank pages at the end of the exam. Be sure to clearly identify
the part of the problem you attempt to answer.
6. During the 1990s, U.S. depositors dramatically increased the share of their funds in money
market mutual fund accounts, which o?ered depositors higher interest rates versus standard
checking. The widespread use of ?nancial instruments during the 1990s led to a decrease in
money demand because people held a smaller share of their deposits in checkable accounts
(demand deposits).
(a) (4 points) Illustrate in a diagram how this shock a?ects the U.S. output, interest rate,
exchange rate, consumption, investment, and trade balance. In your answer, use the
money market and IS-LM-FX diagrams. Label your initial equilibrium point A and your
short-run equilibrium point B.
(b) (4 points) Illustrate in a new diagram how your answer to part (a) changes if the Fed used
monetary policy to stabilize output. Label your initial equilibrium point A, your short-run
equilibrium point B, and your stabilization equilibrium point C.
(c) (4 points) Explain how your answer to part (a) changes if the Fed used monetary policy
to maintain a ?xed exchange rate.
7. From March to November 2001, the U.S. experienced a recession caused (in part) by the
dotcom bubble. To help stimulate the economy, President Bush proposed a tax cut, while the
Fed Chairman Greenspan had been increasing the U.S. money supply.
A more severe recession (i.e., the Great Recession) occurred from December 2007 to June 2009
related to the housing bubble. Fed Chairman Bernanke had taken interest rates to zero, while
President Obama argued for an unprecedented ?scal stimulus.
(a) (3 points) During the 2001 recession, would expansionary monetary policy or ?scal policy
have been more e?ective to reduce the large U.S. current account de?cit that existed?
Provide a brief explanation.
(b) (3 points) During the Great Recession, monetary policy proved ine?ective. Brie?y explain
why.
(c) (3 points) If the Fed keeps interest rates at zero, is monetary policy accommodating (to
?scal policy)? Provide a brief explanation.
(d) (3 points) In response to the Great Recession, Congress passed the American Recovery
and Reinvestment Act (ARRA) of 2009. Brie?y discuss one (relevant) policy design and
implementation factor faced by policymakers when responding to this shock.
HAVE A WONDERFUL SUMMER!!!
Exam 4 (Finance Policy)âPage 3 of 3
