ECON 2500                                                    Name: ______________________________

EXAM #2                                                        November 21, 1996

1.    RET stands for __________________________________________________.

2.    Oct. 29 Professor Ramanadham spoke on __________________________.

3.    Spiders have _______ legs.

Answer four (4) of the following six (6) questions:

1.    Define the "full-employment budget" and explain its significance.  How does it differ from the "actual budget"?  What is the difference between a structural deficit and a cyclical deficit?

2.    In an economy experiencing a recession where the MPC = .8 how much would the government have to shift aggregate demand to increase the equilibrium income level by $25.  What if a tax cut were desires instead to increase aggregate demand.  Explain your analysis in both cases.

3.    How and why may the money supply change if you deposit $1000 cash to your demand deposit?  Illustrate your answer with an example where the reserve requirement is 5%.

4.    What would tight monetary policy be and how would it work?  When would it be used?

5.    What is the equation of exchange?  How and when might it be used?  What are the differences in how it might be interpreted? What evidence does the text offer?