Economics 2

FINAL EXAMINATION

THE DEADLINE FOR HANDING IN THE TEXT OF THIS FINAL EXAM TO DR. KANDEL IS DECEMBER 10, 2020. AN ABSENCE OF THE TEXT BY THE MORNING, DECEMBER 11, WILL BE AWARDED BY A ZERO SCORE.  

Question I.       80 pts.

Question II.   120 pts

Question III.  120 pts 

Total 320 points

Question I. 80 pts. Explain how the Federal Reserve System influences the lending activities of its member banks.

• The way the federal reserve system influences the lending activities of its members is through 

           I.1. 20 pts. Explain the mechanism of fractional reserves and deposit creation.  

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YOUR ANSWER

           I.2. 30 pts. Explain how the Federal Reserve System (FED) influences the lending activities of its member banks during recessions.

YOUR ANSWER

          I.3. 30 pts. Explain how the FED influences the lending activities of its member banks during the states of the US economy, which FED diagnoses as ‘overheating.’

YOUR ANSWER

Question II. 120 pts Explain the core intermediate transactional phases that influence the levels of macroeconomic demand and supply in the U.S. economy.  

II.1. 40 pts. Explain the circular flows of income and capital at the macroeconomic level. The overall diagram should illustrate your explanations. If needed, in addition to the overall diagram apply diagrams of specific intermediate transactional phases.  

YOUR ANSWER

          II.2. 80 pts. Uncertainty about future inflation may ruin a particular intermediate transactional phase. Describe this phase and explain conditions under which transactions inside this phase are facilitated or become prohibitively costly. 

                      II.2.1. 25 pts. Describe and explain the phase.

YOUR ANSWER

                      II.2.2. 25 pts. Describe and explain how banks set interest rates on typical loans.

YOUR ANSWER

                      II.2.3. 30 pts. Describe and explain conditions under which borrowing is facilitated or become prohibitively costly. 

YOUR ANSWER

Question III. 120 pts Explain the foundations of the traditional stabilization policy and supply-side economics by using the Aggregate Demand–Aggregate Supply diagram.  

III.1. 30 pts. Explain the logic of assigning macroeconomic variables to the axes of the Aggregate Demand–Aggregate Supply diagram.  

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YOUR ANSWER

          III.2. 40 pts. Explain the foundations of the traditional stabilization policy and unemployment-inflation tradeoffs by using the Aggregate Demand–Aggregate Supply diagram. 

YOUR ANSWER

          III.3. 50 pts. Explain the foundations of the supply-side economics, the absence of unemployment-inflation tradeoffs, and expansion of Aggregate demand by using the Aggregate Demand–Aggregate Supply diagram.