Econ 1; Mid-term Exam; Instructor: I Hossein-zadeh
Part A: Essay, Definitions, and Calculations Questions
(Answer any 3 of 4; 15 points each )
I. Carefully define the following terms and explain their importance to the study of
economics:
a. leading economic indicators, b. Rules versus discretion
c. controlling M vs. controlling r d. effects of interest rate on velocity
d. monetarism e. Keynesianism
f. equation of exchange g. automatic stabilizer
II. Noble Laureate Milton Friedman is said to have endorsed replacing the federal
Reserve Board with a (smart) horse. Once a year, this horse would trot to the front
of the Fed building as reporters asked, "What will happen to the money supply
this year?" The horse would tap its hoof four times and headlines the next day
would proclaim: "Money Supply to Grow four Percent This Year!" What does
this tell you about Friedman's monetary view? Explain and evaluate.
III. Compute the level of equilibrium GDP for the following economy:
C = 100 + 0.8(Y - T)
I = 80
G = 50
T = 40
X = 35
IM = 40
IV. Carefully draw a diagram which shows the level of expenditures at various levels
of real GDP. Indicate the level of equilibrium GDP on your diagram. Be sure that
your diagram is completely and correctly labeled.
