ECON 2500                                                                            Name: ______________________________

Exam #2                                                                  November 21, 1995

1.         The Federal Reserve System was started in ___________________.

2.         A picture of ___________________ is on the U.S. twenty dollar bill.

3.         FDIC stands for ____________________________________________.

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

1.         Explain graphically the determination of equilibrium GDP through both the aggregate expenditures-domestic output approach and the leakages-injections approach for the private sector.  How do government expenditures and taxation affect equilibrium GDP?

2.         What are the basic differences between the monetarists and the Keynesians?  What is the difference in the transmission mechanism of monetary policy that they see?  Why could one say "the debate between Keynesians and monetarists is an important facet of the larger controversy over the role of government in our lives"?

3.         Explain how the monetary-policy tools of the Federal Reserve Banks would be used to contract the supply of money.  How would they be used to expand the supply of money?  Which of the monetary policy tools available to the Federal Reserve is most effective?  Why is it more effective than other tools?

4.         Commercial banks seek both profits and safety.  Explain how the balance sheet of commercial banks reflects the desires of bankers for profits and for liquidity.

5.         What is the "full-employment budget"?  What is its significance?  What is the difference between a structural deficit and a cyclical budget?  Should government raise taxes or reduce government spending to eliminate a structural deficit?

6.         Complete the following table and determine the equilibrium levels of output and employment when investment is given as $16 billion.  Also determine the MPC, MPS, and the multiplier.  How is the difference between planned and actual savings and investment illustrated?

                                                   Real domestic                                              

            Possible levels               output

            of employment,             (GDP = DI)                       Consumption,      Saving,                
millions                           billions                               billions                 billions

40                           $240                                     $244                         $______

45                            260                                       260                            ______

50                            280                                       276                            ______

55                            300                                       292                            ______

60                            320                                       308                            ______

65                            340                                       324                            ______

70                            360                                       340                            ______

75                            380                                       356                            ______