ECON II: Macroeconomics Principles NOTE: RENAME THE FILE BY YOUR Lastname_MT BEFORE YOU SUBMIT. General Instructions: 1) You may use your textbook and/or class notes. 2) You may not discuss this exam with anyone either face to face or via email. 3) The Maximum Score Points Available on this exam: 40, each portion of each question has its potential raw score contribution as indicated. 4) Please do not send it by email. You will post your exam in the designated assignment drop box in the blackboard (just like the way you have posted your weekly assignments). 5) Exam is due back by midnight (EST) on Sunday, Feb 22 6) You do not have to display the questions in your answers. Just the Q #s and answers will be fine. 7) You may also wipe out the above instructions from your answer page or do not include them in your answer document. 8) Make sure you write down your name on the top of the page of your answer document I'll try to finish grading exams by later of the WK of Feb 23 and post your MT Scores in the grade book with my feedback individually. After the due date, I will send you the suggested answer key as well. Good luck! (Open Book and open notes Exam) Maximum Raw Score = 40 pts 1) A) Why do economists refer to the economy as "fully employed" even when there is measured unemployment as high as 5% -5.5%? (Hint: begin your answer with a definition of full employment and then compare with the concept of natural rate of unemployment (NAIRU); what is it and why? and what types of unemployment are they and how). How do you relate the most recent US unemployment rate (Look for Jan 2015 data on unemployment rate in www.bls.gov) to your conclusion of this question? In your conclusion, you need to indicate if the US economy is currently in a state of full employment? Why or why not? 4 pts B) Why would you expect the inflation rate to accelerate if the actual unemployment rate declined to a level lower than the "full employment" unemployment rate (NAIRU)? Explain your answer in a few sentences. What state of business cycles (such as recession, trough, recovery or boom) does the current US economy face, and why? 4pts C) Draw an AS/AD diagram illustrating your answer to part (B) That is, draw an AS/AD diagram which shows what happens if strong growth in AD has pushed actual RGDP to a level above potential (full employment) RGDP. Be sure to label all lines and axes in your diagram clearly. 4pts 2) A) Suppose Jean Splicer, an investor, buys $100,000 of shares of stock in a diversified bundle of Bio-tech firms and exactly one year later sells those shares for $108,000. If the value of the CPI at the date of Jean's purchase was 160, and rose by the sale date one year later to 168, what was her real rate of return on this investment? 2pts B) Why is it appropriate to use the CPI instead of the Gross Domestic Product Deflator in calculating the "real" rate of return in this example? 2 pts. 3) A) Suppose t ...

1. ECON II: Macroeconomics Principles
NOTE: RENAME THE FILE BY YOUR Lastname_MT
BEFORE YOU SUBMIT.
General Instructions:
1) You may use your textbook and/or class notes.
2) You may not discuss this exam with anyone either face to
face or via email.
3) The Maximum Score Points Available on this exam: 40, each
portion of each question has its potential raw score contribution
as indicated.
4) Please do not send it by email. You will post your exam in
the designated assignment drop box in the blackboard (just like
the way you have posted your weekly assignments).
5) Exam is due back by midnight (EST) on Sunday, Feb 22
6) You do not have to display the questions in your answers.
Just the Q #s and answers will be fine.
7) You may also wipe out the above instructions from your
answer page or do not include them in your answer document.
8) Make sure you write down your name on the top of the page
of your answer document
I'll try to finish grading exams by later of the WK of Feb 23 and
post your MT Scores in the grade book with my feedback
individually. After the due date, I will send you the suggested
answer key as well.
Good luck!
(Open Book and open notes Exam) Maximum Raw Score =
40 pts

2. 1) A) Why do economists refer to the economy as "fully
employed" even when there is measured unemployment as high
as 5% -5.5%? (Hint: begin your answer with a definition of full
employment and then compare with the concept of natural rate
of unemployment (NAIRU); what is it and why? and what types
of unemployment are they and how). How do you relate the
most recent US unemployment rate (Look for Jan 2015 data on
unemployment rate in www.bls.gov) to your conclusion of this
question? In your conclusion, you need to indicate if the US
economy is currently in a state of full employment? Why or why
not?
4 pts
B) Why would you expect the inflation rate to accelerate if
the actual unemployment rate declined to a level lower than the
"full employment" unemployment rate (NAIRU)? Explain your
answer in a few sentences. What state of business cycles (such
as recession, trough, recovery or boom) does the current US
economy face, and why? 4pts
C) Draw an AS/AD diagram illustrating your answer to part (B)
That is, draw an AS/AD diagram which shows what happens if
strong growth in AD has pushed actual RGDP to a level above
potential (full employment) RGDP. Be sure to label all lines and
axes in your diagram clearly.
4pts

3. 2) A) Suppose Jean Splicer, an investor, buys $100,000 of
shares of stock in a diversified bundle of Bio-tech firms and
exactly one year later sells those shares for $108,000. If the
value of the CPI at the date of Jean's purchase was 160, and
rose by the sale date one year later to 168, what was her real
rate of return on this investment?
2pts
B) Why is it appropriate to use the CPI instead of the Gross
Domestic Product Deflator in calculating the "real" rate of
return in this example?
2 pts.
3) A) Suppose that as the economic recovery strengthened
consumer expectations of annual inflation increased from 2% to
3.5 % and, at the same time, the expected real rate of return
required to equate investor demand to the existing supply of 1
year Treasury notes increased from 1% to 1.5%. What would
you expect to happen to the nominal yields on 1-year T-notes
during the period over which these changes in inflation
expectations and required real yields occurred? (Give a
numerical answer if possible) Explain your reasoning.
3 pts.
B) Draw a supply/demand diagram of the US Treasury bond
market to illustrate the effects on it of the developments cited in

4. part A. Label your diagram clearly! 3 pts.
4) Use the data in the Table to answer the questions asked in 4a
and 4b on each of the 3 variables for the US economy:
a. Calculate the changes in inflation rates, unemployment rates
and the RGDP growth rates for the years from Year 2007
through 2014 and show them in a new column next to each of
the values of the three variables (a template of the table is given
below). 5 pts
Year
Real GDP
RGDP growth rate in %
Unemployment Rate
Change in U rate in %
CPI Indices
Inflation rate in %
2006
14,613.8
-
4.6%
-
201.6
-
2007
14,873.7
?
4.6%
?
207.3
?
2008
14,830.4
?
5.8%
?

5. 215.3
?
2009
14,418.7
?
9.3%
?
214.53
?
2010
14,783.8
?
9.6%
?
218.05
?
2011
15,020.6
?
8.9%
?
224.93
?
2012
15,369.2
?
8.1%
?
229.59
?
2013
15,710.3
?
7.4%
?
232.96

6. ?
2014
16,089.8
6.2
236.74
Source: for CPI and U-Rate date: www.bls.gov
For RGDP data: www.bea.gov
b. Based on those calculations, briefly describe the overall
economic performance over the last 8 years (2007-2014) and
critically predict about these three macroeconomic variables for
2015-16.
5 pts
Hint: While predicting the trend for 2015-16 (based on the
growth rates and trend you estimated in the table above), it is
imperative to observe the most recent data on these three
variables.
5) Since Fall of 2013, the price of oil has shown a steady
decline as continued increase of global oil production that has
far exceeded the rising demand for oil. Accordingly, many

7. analysts in the energy field have had predicted the likelihood of
further decline in oil price in the US market as the US continues
to expand its domestic oil production with a long term objective
of becoming even net exporter of oil by Y2030. Given that
prediction of falling global demand for petroleum oil and rising
supply of oil caused significant decline of oil price to come
down to as low as $45 per barrel in January 2015 from its price
of o $100 in January 2014.
Given the significant trend of declining oil price and expected
independence of oil production by US in coming decade, draw
an AS/AD diagram of macroeconomics model (not the oil
market itself), explaining the effect on the US macro-economy
of expected decline in oil price in 2014 and beyond. In your
explanation in words with the help of the diagram, you must
clearly explain the connection between changes in oil price and
the fluctuations in macroeconomic fundamentals in the US
economy. Then show the impact of continuous fall in oil price
on the US economy by using the same AD-AS model during the
recovery period of the economy from its great recession of
2008. The most recent price of crude oil has sharply decline at a
10 -year low level within the range between $50 and $54/barrel.
Read this article on most recent price forecast on crude oil.
http://www.inddist.com/news/2015/01/gasbuddy-releases-fuel-
price-outlook-2015
Finally, explain why sharp decline in oil prices might not
necessarily have positive or negative impact on the US equity
markets (stock market) even at the current trend of declining
but volatile oil prices.
4 pts.
Note: Keep in mind that the oil price is not the same as the

8. price level in macroeconomics diagrams, even though the
changes in oil price directly and indirectly affect the general
price level (such as CPI and GDPD). You do not necessarily
need to draw the diagram for oil market to answer this question.
But drawing of macroeconomic model of AD-AS behavior
impacted by the changes in oil price is required to substantiate
your answer.
6) Which of the following fiscal policy changes would have a
larger overall negative impact on AD and RGDP? Explain your
answer in a paragraph or two with credible logics and analysis.
Hint: Read my lecture notes on multiplier effects and also Ch. 9
in the textbook of Baumol and Blinder.
4 pts
A) A program of tax hike, distributed uniformly across the
households earning over $300K annually filing tax returns,
amounting to $85 billion in total tax hikes.
Alternatively,
B) An $85 billion sequester (called automatic federal
government spending cut) that went into effect on March 1,
2013. This was an across-the-board spending cut in federal
government’s various existing programs and services, including
maintenance of major infrastructures and aviation traffic control
systems.
Note: You may also use the AD-AS diagram as part of your
analysis, but not required. However, explaining the answer with
the concept of multiplier effects for these two alternative
options is the right way to address this question.