Macro · Unit 5 · Paper 3

Long-Run Consequences of Policy unit test

A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.

Paper 1 Paper 2 Paper 3

Each paper is built from this unit’s 31 terms and is the same for everyone, so a teacher can assign “Unit 5, Paper 3” and every student sits the identical test. Multiple choice is marked objectively; the written sections you mark yourself against the model answer and rubric.

Suggested time 37 min 34 points0/17 attempted

Productivity

Long-run Phillips curve (LRPC)

Adaptive expectations

Central bank independence

Investment in human capital

Supply-side policies

Short-run Phillips curve (SRPC)

Natural rate hypothesis

Real interest rate and investment

Rules vs discretion

Disinflation and its cost

Policy lag comparison

Short answer 1. Define or explain: Mapping AD–AS onto the Phillips curve

3 pts

Short answer 2. Define or explain: Why saving matters for growth

3 pts

Short answer 3. Define or explain: Costs of a growing national debt

3 pts

Short answer 4. Define or explain: Fiscal and monetary policy in combination

3 pts

Free response

10 pts

This course has no free-response prompt tagged to this unit, so one from elsewhere in the course is used. It is still worth writing — the skill transfers.

LONG FREE-RESPONSE. Assume the economy of Ardenia is open, has a flexible exchange rate, and is currently in a recession. The unemployment rate is 9 percent while the natural rate of unemployment is 5 percent. The marginal propensity to consume is 0.75, and the recessionary output gap is $600 billion.

Draw a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, and show the current short-run equilibrium relative to full-employment output.

Calculate the spending multiplier and the minimum increase in government purchases needed to close the recessionary gap, showing your work.

On your graph from part (a), show the effect of that increase in government purchases on aggregate demand and on the price level.

Assume the increase is financed entirely by government borrowing. Using a correctly labeled graph of the loanable funds market, show the effect on the real interest rate.

Given your answer in part (d), explain the effect on financial capital flows into Ardenia and on the international value of the Ardenian dollar.

Explain the resulting effect on Ardenian net exports.