Econ 202 Section 2 Final Exam

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1 Douglas, Fall 2009 December 17, 2009 A: Special Code 0000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 2 Final Exam 1. The present value of a payment to be made in the future falls as a. the interest rate rises and the time until the payment is made decreases. b. the interest rate falls and the time until the payment is made increases. c. the interest rate falls and the time until the payment is made decreases. d. the interest rate rises and the time until the payment is made increases. Figure 4-7. Supply and Demand for Neckties. 2. Suppose the necktie market is currently in equilibrium as shown in Figure 4-7. What could cause the equilibrium price of neckties to fall to $35 and the equilibrium quantity to rise to 600? a. a drop in the price of suits (a complement). b. an increase in the price of silk used to make neckties. c. an improvement in the technology used to produce neckties. d. a fall in consumer income (neckties are a normal good). 3. The sticky-wage theory of the short-run aggregate supply curve says that when the price level is higher than expected, a. production is more profitable and employment rises. b. production is less profitable and employment falls. c. production is more profitable and employment falls. d. production is less profitable and employment rises. 4. If purchasing-power parity holds, a dollar will buy a. foreign currency equal to the U.S. price level divided by the foreign country s price level. b. one unit of each foreign currency. c. enough foreign currency to buy as many goods in the foreign country as it does in the United States. d. None of the above is implied by purchasing-power parity. 5. If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit? a. people holding a lot of currency but not lenders b. lenders and people holding a lot of currency c. neither lenders nor people holding a lot of currency d. lenders but not people holding a lot of currency 1

2 Douglas, A 6. Which of the following by itself is consistent with the directions that the price level and real GDP changed during the oil-embargo Stagflation of the 1970 s? a. aggregate demand shifted right b. aggregate demand shifted left c. aggregate supply shifted right d. aggregate supply shifted left 7. What would happen to the equilibrium price and quantity sold of leather gloves if the price of nylon gloves (a substitute) falls, at the same time that the cost of leather used to make gloves falls? a. Quantity will fall and price may either rise or fall. b. Quantity will rise and price may either rise or fall. c. Price will fall and quantity may either rise or fall. d. Price will rise and quantity may either rise or fall. 8. An economic contraction caused by a shift in aggregate demand causes prices to a. fall in the short run, and rise back to their original level in the long run. b. rise in the short run, and fall back to their original level in the long run. c. fall in the short run, and fall even more in the long run. d. rise in the short run, and rise even more in the long run. 9. The source of hyperinflations is primarily a. continuing increases in money demand. b. increases in money-supply growth. c. lower output growth. d. continuing declines in velocity. 10. If the required reserve ratio is 10 percent, and a bank receives a new deposit of $1000 in cash, then initially the bank has a a. $1000 increase in reserves and no increase in required reserves. b. $900 increase in excess reserves and $100 increase in required reserves. c. $1000 increase in reserves and no increase in excess reserves. d. $100 increase in excess reserves and $900 increase in required reserves. 11. If the price level increased from 220 to 242 over a year s time, what was the inflation rate? a. 22 percent b. 10 percent c. 110 percent d. None of the above is correct. 12. Fran buys $1,000,000 in bonds issued by Ford Motor Company. In turn, Ford uses the funds to buy new machinery for one of its factories. a. Fran and Ford are both saving. b. Fran is investing; Ford is saving. c. Fran and Ford are both investing. d. Fran is saving; Ford is investing. 13. Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run a. the price level will rise, and real GDP might rise, fall, or stay the same. b. the price level will fall, and real GDP might rise, fall, or stay the same. c. real GDP will fall and the price level might rise, fall, or stay the same. d. real GDP will rise and the price level might rise, fall, or stay the same. 2

3 Douglas, A 14. If the exchange rate changes from 135 Kazakhstan tenge per dollar to 150 Kazakhstan tenge per dollar, the dollar has a. depreciated. Other things the same, it now takes more dollars to buy Kazakhstani goods. b. appreciated. Other things the same, it now takes more dollars to buy Kazakhstani goods. c. depreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods. d. appreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods. 15. A roll of duct tape costs 2 Canadian dollars in Canada and 3 U.S. dollars in the U.S. If the nominal exchange rate is.80 Canadian dollars per U.S. dollar. a. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of U.S. duct tape. b. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of Canadian duct tape. c. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of U.S. duct tape. d. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of Canadian duct tape. 16. People choose to hold a smaller quantity of money if a. the interest rate falls, which causes the opportunity cost of holding money to rise. b. the interest rate rises, which causes the opportunity cost of holding money to fall. c. the interest rate falls, which causes the opportunity cost of holding money to fall. d. the interest rate rises, which causes the opportunity cost of holding money to rise. 17. The real interest rate is 8 percent and the nominal interest rate is 10.5 percent. Is there inflation or deflation? What is the inflation or deflation rate? a. inflation; percent b. deflation; 20.5 percent c. deflation; 2.5 percent d. inflation; 2.5 percent 18. Which of the following statements is correct for an open economy with a trade surplus? a. The trade surplus cannot last for very many years. b. The trade surplus must be offset by negative net capital outflow. c. The trade surplus implies that the country's national saving is greater than domestic investment. d. None of the above is correct. 19. In the long run, changes in the money supply affect a. prices. b. output. c. unemployment rates. d. All of the above. 20. Other things the same, a decrease in the price level motivates people to hold a. less money, so they lend more, and the interest rate falls. b. more money, so they lend more, and the interest rate rises. c. more money, so they lend less, and the interest rate falls. d. less money, so they lend less, and the interest rate rises. 3

4 Douglas, A Table 28-1 Labor Data for Wrexington Year Adult population Number of employed Number of unemployed Refer to Table The unemployment rate in Wrexington in 2006 was a. not possible to calculate from the data given. b. 12.5% c. 6.25% d. 11.1%. 22. The usual measure of the U.S. rate of unemployment (U3) is currently at about a. 25%, which is higher than the Great Depression.. b. 15.5%, meaning that cyclical unemployment is at about 10%. c. 10%, including discouraged workers and involuntary part-time workers. d. 10%. The rate is higher if you take account of discouraged workers and involuntary part-time workers. 23. Which of the following events could explain an increase in interest rates occurring at the same time as an increase in investment? a. The government budget went from surplus to deficit. b. The government instituted an investment tax credit for business. c. The government reduced the tax rate on savings. d. None of the above is correct. 24. In the U.S., people are required to pay taxes on a. real capital gains, not nominal capital gains. b. nominal interest earnings, not real interest earnings. c. real interest earnings, not nominal interest earnings. d. wages and salaries only, not capital gains or interest earnings. 25. At one point in an article assigned in class, Martin Wolf complains about China s exchange rate protectionism. What might Wolf mean by exchange rate protectionism? a. By accumulating reserves of U.S. dollars, China keeps the nominal exchange rate of the dollar artificially high, which increases Chinese exports to the U.S. b. By accumulating reserves of U.S. bonds, China keeps the nominal exchange rate of the dollar artificially low, which increases Chinese exports to the U.S. c. The Chinese government prevents the release of any information about the exchange rate of its currency, thus protecting its own industries. d. China is deliberately trying to keep the real exchange rate of the dollar low relative to the Chinese yuan. 26. Suppose there were a large decline in net exports, resulting in a fall in GDP. If the Fed wanted to return the economy to full employment, it could a. buy bonds to lower interest rates. b. buy bonds to raise interest rates. c. sell bonds to lower interest rates. d. sell bonds to raise interest rates. 4

5 Douglas, A Figure Refer to Figure A decrease in government spending would move the economy from A to a. B in the short run and A in the long run. b. B in the short run and the long run. c. D in the short run and C in the long run. d. D in the short run and the long run. 28. According to the classical dichotomy and money neutrality, when the money supply doubles which of the following doubles? a. the price level and nominal GDP b. the velocity of money c. real GDP d. the price level and real GDP 29. Suppose that initially the supply of money M=300, P=2, and nominal GDP is 600. Then a financial panic causes people to hoard dollars, so that the velocity of money is cut in half, while the Fed keeps M constant. According to the quantity equation, which of the following is possible after the change in velocity? a. P = 1 and Nominal GDP = 600. b. P = 3 and Real GDP = 200. c. P = 1.5 and Real GDP = 200. d. P = 2 and Real GDP = When a bank buys bonds issued by Kroger Co., the bank is using the methods of a. equity finance to borrow. b. debt finance to lend. c. debt finance to borrow. d. equity finance to lend. 31. The vertical long-run aggregate supply (LRAS) curve indicates that in the long run a shift in aggregate demand will lead to a change a. in output, but not the price level. b. in neither the price level nor output. c. in the price level, but not output. d. in the price level and output. 32. Using the liquidity-preference model, when the Federal Reserve increases the money supply, a. the equilibrium interest rate decreases. b. the quantity of goods and services demanded is unchanged for a given price level. c. the aggregate-demand curve shifts to the left. d. the long-run aggregate-supply curve shifts to the right. 5

6 Douglas, A 33. According to the AS/AD model, an increase in the price level and a reduction in real GDP might result from a. tax rebates. b. a fall in stock prices. c. an epidemic that killed or incapacitated a large percentage of the work force. d. declining government expenditures. 34. Larry, a U.S. citizen, opens and operates a bookstore in Spain. This action is an example of both a. U.S. foreign direct investment and U.S. domestic investment. b. investment for Larry and U.S. foreign direct investment. c. investment for Larry and U.S. foreign portfolio investment. d. U.S. foreign portfolio investment and U.S. domestic investment. 35. In which of the following cases would the quantity of money demanded be largest? a. interest rate r = 0.06, price level P = 1.0 b. interest rate r = 0.03, price level P = 1.4 c. interest rate r = 0.03, price level P = 1.2 d. interest rate r = 0.04, price level P = In 2008, the United States net exports (NX) amounted to a a. trade deficit of about 5% of GDP, similar to previous years. b. trade deficit of about 50% of GDP, sharply increased over previous years. c. trade surplus of about 5% of GDP, similar to previous years. d. trade balance near zero, as usual. 37. In 1945 a rule of thumb for a young man was that he must make $40 per week before he could afford to marry and start a family. The CPI was about 20 in 1944 and about 200 in This 1945 rule of thumb would suggest that in 2005 a man should make how much before marrying? a. $200 per week b. $400 per week. c. $100 per week d. $4 per week. 38. When the price level rises, the number of dollars needed to buy a representative basket of goods a. increases, and so the value of money rises. b. increases, and so the value of money falls. c. decreases, and so the value of money rises. d. decreases, and so the value of money falls 39. During recessions, automatic stabilizers tend to make the government's budget a. move toward balance. b. not necessarily move the budget in any particular direction. c. move toward surplus. d. move toward deficit. 40. Mike, a U.S. citizen, buys $1,000 worth of olives from Greece. By itself this purchase a. increases U.S. exports by $1,000 and decreases U.S. net exports by $1,000. b. increases U.S. imports by $1,000 and decreases U.S. net exports by $1,000. c. increases U.S. exports by $1,000 and increases U.S. net exports by $1,000. d. increases U.S. imports by $1,000 and increases U.S. net exports by $1, In 2008 (as described by James Hamilton) the Federal Reserve and U.S. Treasury cooperated so that a. Treasury issued currency, which the Fed spent on lavish parties for bankers. b. Treasury purchased large amounts of goods and services and the Fed sold bonds. c. Treasury sold Treasury bonds, while the Fed created new excess reserves by buying private mortgage-backed securities and other assets and making loans to banks. d. Treasury increased its deficit while the Fed increased the required reserve ratio. 6

7 Douglas, A 42. What will happen to the equilibrium price and quantity of cigarettes if the price of chewing tobacco (a substitute) rises sharply at the same time that the price of filters used to make cigarettes falls? a. Quantity will rise and price may either rise or fall. b. Price will rise and quantity may either rise or fall. c. Price will fall and the quantity may either rise or fall. d. Quantity will fall and price may either rise or fall. 43. If W denotes the value of an hour s work measured in terms of money and P is the CPI, then a. classical economic theory would say that W is not affected by the supply of money. b. W/P represents the value of an hour s work measured in terms of goods and services. c. 1/P can be interpreted as the inflation rate. d. All of the above are correct. 44. Investment is a a. relatively small part of real GDP, so it causes little of the fluctuation in real GDP. b. relatively small part of real GDP, yet it causes much of the fluctuation in real GDP. c. majority of real GDP, yet it causes just a small share of the fluctuation in real GDP. d. majority of real GDP, so it accounts for much of the fluctuation in real GDP. 45. A decrease in the expected price level shifts short-run aggregate supply (AS) to the a. right, but an increase in the current price level does not shift short-run AS. b. left, and an increase in the current price level shifts short-run AS to the left. c. right, and an increase in the current price level shifts short-run AS to the right. d. left, but an increase in the current price level does not shift short-run AS. 46. Which of the following shifts both short-run and long-run aggregate supply left? a. a decrease in the expected price level b. a decrease in the actual price level c. a decrease in the capital stock d. a decrease in the money supply 47. According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will a. increase and the quantity of money demanded will decrease. b. increase and the quantity of money demanded will increase. c. decrease and the quantity of money demanded will decrease. d. decrease and the quantity of money demanded will increase. 48. A depreciation of the U.S. real exchange rate induces U.S. consumers to buy a. fewer domestic goods and fewer foreign goods. b. more domestic goods and more foreign goods. c. more domestic goods and fewer foreign goods. d. fewer domestic goods and more foreign goods. 49. Aggregate demand shifts right if a. taxes fall and shifts left if stock prices fall. b. taxes rise and shifts left if stock prices fall. c. taxes fall and shifts left if stock prices rise. d. taxes rise and shifts left if stock prices rise. 7

8 Douglas, A 50. Suppose you purchased a house for $210,000 in late 2007 using $10,000 of your own financial capital (money), and $200,000 of borrowed money. You sold the house a year later for $250,000 and paid off your loan with 5% interest. You received a return on your own capital of a. 14%, which is the 19% profit on the house minus 5% interest. b. 19%. Leverage makes no difference in your profit. c. 300%. Without leverage, you would have made only a 19% profit. d. 400%. If you had taken on more leverage, you would have made an even higher return. 8

9 ID: A Econ 202 Section 2 Final Exam Answer Section MULTIPLE CHOICE 1. D 2. C 3. A 4. C 5. B 6. D 7. C 8. C 9. B 10. B 11. B 12. D 13. B 14. D 15. B 16. D 17. D 18. C 19. A 20. A 21. D 22. D 23. B 24. B 25. A 26. A 27. C 28. A 29. C 30. B 31. C 32. A 33. C 34. B 35. B 36. A 37. B 38. B 39. D 40. B 41. C 42. A 43. B 1

10 ID: A 44. B 45. A 46. C 47. D 48. C 49. A 50. C 2

11 Douglas, Fall 2009 December 17, 2009 B: Special Code 0000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 2 Final Exam 1. A roll of duct tape costs 2 Canadian dollars in Canada and 3 U.S. dollars in the U.S. If the nominal exchange rate is.80 Canadian dollars per U.S. dollar. a. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of U.S. duct tape. b. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of U.S. duct tape. c. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of Canadian duct tape. d. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of Canadian duct tape. 2. Which of the following events could explain an increase in interest rates occurring at the same time as an increase in investment? a. The government instituted an investment tax credit for business. b. The government reduced the tax rate on savings. c. The government budget went from surplus to deficit. d. None of the above is correct. Table 28-1 Labor Data for Wrexington Year Adult population Number of employed Number of unemployed Refer to Table The unemployment rate in Wrexington in 2006 was a. 11.1%. b. 12.5% c. 6.25% d. not possible to calculate from the data given. 4. What would happen to the equilibrium price and quantity sold of leather gloves if the price of nylon gloves (a substitute) falls, at the same time that the cost of leather used to make gloves falls? a. Price will rise and quantity may either rise or fall. b. Quantity will fall and price may either rise or fall. c. Quantity will rise and price may either rise or fall. d. Price will fall and quantity may either rise or fall. 5. Using the liquidity-preference model, when the Federal Reserve increases the money supply, a. the equilibrium interest rate decreases. b. the aggregate-demand curve shifts to the left. c. the long-run aggregate-supply curve shifts to the right. d. the quantity of goods and services demanded is unchanged for a given price level. 6. The source of hyperinflations is primarily a. continuing increases in money demand. b. increases in money-supply growth. c. continuing declines in velocity. d. lower output growth. 1

12 Douglas, B 7. People choose to hold a smaller quantity of money if a. the interest rate rises, which causes the opportunity cost of holding money to fall. b. the interest rate rises, which causes the opportunity cost of holding money to rise. c. the interest rate falls, which causes the opportunity cost of holding money to rise. d. the interest rate falls, which causes the opportunity cost of holding money to fall. 8. According to the AS/AD model, an increase in the price level and a reduction in real GDP might result from a. an epidemic that killed or incapacitated a large percentage of the work force. b. tax rebates. c. a fall in stock prices. d. declining government expenditures. 9. Investment is a a. relatively small part of real GDP, yet it causes much of the fluctuation in real GDP. b. majority of real GDP, yet it causes just a small share of the fluctuation in real GDP. c. relatively small part of real GDP, so it causes little of the fluctuation in real GDP. d. majority of real GDP, so it accounts for much of the fluctuation in real GDP. 10. If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit? a. lenders and people holding a lot of currency b. people holding a lot of currency but not lenders c. lenders but not people holding a lot of currency d. neither lenders nor people holding a lot of currency 11. Larry, a U.S. citizen, opens and operates a bookstore in Spain. This action is an example of both a. U.S. foreign portfolio investment and U.S. domestic investment. b. investment for Larry and U.S. foreign portfolio investment. c. investment for Larry and U.S. foreign direct investment. d. U.S. foreign direct investment and U.S. domestic investment. 12. In 1945 a rule of thumb for a young man was that he must make $40 per week before he could afford to marry and start a family. The CPI was about 20 in 1944 and about 200 in This 1945 rule of thumb would suggest that in 2005 a man should make how much before marrying? a. $200 per week b. $400 per week. c. $4 per week. d. $100 per week 13. Which of the following by itself is consistent with the directions that the price level and real GDP changed during the oil-embargo Stagflation of the 1970 s? a. aggregate demand shifted left b. aggregate supply shifted right c. aggregate demand shifted right d. aggregate supply shifted left 14. Which of the following statements is correct for an open economy with a trade surplus? a. The trade surplus must be offset by negative net capital outflow. b. The trade surplus cannot last for very many years. c. The trade surplus implies that the country's national saving is greater than domestic investment. d. None of the above is correct. 2

13 Douglas, B 15. If the exchange rate changes from 135 Kazakhstan tenge per dollar to 150 Kazakhstan tenge per dollar, the dollar has a. depreciated. Other things the same, it now takes more dollars to buy Kazakhstani goods. b. appreciated. Other things the same, it now takes more dollars to buy Kazakhstani goods. c. appreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods. d. depreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods. 16. Suppose that initially the supply of money M=300, P=2, and nominal GDP is 600. Then a financial panic causes people to hoard dollars, so that the velocity of money is cut in half, while the Fed keeps M constant. According to the quantity equation, which of the following is possible after the change in velocity? a. P = 1.5 and Real GDP = 200. b. P = 1 and Nominal GDP = 600. c. P = 3 and Real GDP = 200. d. P = 2 and Real GDP = A depreciation of the U.S. real exchange rate induces U.S. consumers to buy a. fewer domestic goods and more foreign goods. b. fewer domestic goods and fewer foreign goods. c. more domestic goods and fewer foreign goods. d. more domestic goods and more foreign goods. Figure 4-7. Supply and Demand for Neckties. 18. Suppose the necktie market is currently in equilibrium as shown in Figure 4-7. What could cause the equilibrium price of neckties to fall to $35 and the equilibrium quantity to rise to 600? a. an improvement in the technology used to produce neckties. b. a drop in the price of suits (a complement). c. a fall in consumer income (neckties are a normal good). d. an increase in the price of silk used to make neckties. 19. If the price level increased from 220 to 242 over a year s time, what was the inflation rate? a. 22 percent b. 10 percent c. 110 percent d. None of the above is correct. 20. What will happen to the equilibrium price and quantity of cigarettes if the price of chewing tobacco (a substitute) rises sharply at the same time that the price of filters used to make cigarettes falls? a. Price will fall and the quantity may either rise or fall. b. Quantity will rise and price may either rise or fall. c. Quantity will fall and price may either rise or fall. d. Price will rise and quantity may either rise or fall. 3

14 Douglas, B 21. Mike, a U.S. citizen, buys $1,000 worth of olives from Greece. By itself this purchase a. increases U.S. imports by $1,000 and decreases U.S. net exports by $1,000. b. increases U.S. exports by $1,000 and decreases U.S. net exports by $1,000. c. increases U.S. imports by $1,000 and increases U.S. net exports by $1,000. d. increases U.S. exports by $1,000 and increases U.S. net exports by $1, In the U.S., people are required to pay taxes on a. real capital gains, not nominal capital gains. b. wages and salaries only, not capital gains or interest earnings. c. nominal interest earnings, not real interest earnings. d. real interest earnings, not nominal interest earnings. 23. When the price level rises, the number of dollars needed to buy a representative basket of goods a. increases, and so the value of money falls. b. decreases, and so the value of money falls c. decreases, and so the value of money rises. d. increases, and so the value of money rises. 24. Other things the same, a decrease in the price level motivates people to hold a. less money, so they lend more, and the interest rate falls. b. less money, so they lend less, and the interest rate rises. c. more money, so they lend more, and the interest rate rises. d. more money, so they lend less, and the interest rate falls. 25. Suppose there were a large decline in net exports, resulting in a fall in GDP. If the Fed wanted to return the economy to full employment, it could a. buy bonds to lower interest rates. b. buy bonds to raise interest rates. c. sell bonds to raise interest rates. d. sell bonds to lower interest rates. 26. According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will a. increase and the quantity of money demanded will increase. b. decrease and the quantity of money demanded will increase. c. increase and the quantity of money demanded will decrease. d. decrease and the quantity of money demanded will decrease. 27. If purchasing-power parity holds, a dollar will buy a. one unit of each foreign currency. b. enough foreign currency to buy as many goods in the foreign country as it does in the United States. c. foreign currency equal to the U.S. price level divided by the foreign country s price level. d. None of the above is implied by purchasing-power parity. 28. Aggregate demand shifts right if a. taxes fall and shifts left if stock prices fall. b. taxes rise and shifts left if stock prices rise. c. taxes rise and shifts left if stock prices fall. d. taxes fall and shifts left if stock prices rise. 29. Which of the following shifts both short-run and long-run aggregate supply left? a. a decrease in the money supply b. a decrease in the expected price level c. a decrease in the actual price level d. a decrease in the capital stock 4

15 Douglas, B 30. A decrease in the expected price level shifts short-run aggregate supply (AS) to the a. right, but an increase in the current price level does not shift short-run AS. b. left, but an increase in the current price level does not shift short-run AS. c. left, and an increase in the current price level shifts short-run AS to the left. d. right, and an increase in the current price level shifts short-run AS to the right. 31. At one point in an article assigned in class, Martin Wolf complains about China s exchange rate protectionism. What might Wolf mean by exchange rate protectionism? a. The Chinese government prevents the release of any information about the exchange rate of its currency, thus protecting its own industries. b. China is deliberately trying to keep the real exchange rate of the dollar low relative to the Chinese yuan. c. By accumulating reserves of U.S. bonds, China keeps the nominal exchange rate of the dollar artificially low, which increases Chinese exports to the U.S. d. By accumulating reserves of U.S. dollars, China keeps the nominal exchange rate of the dollar artificially high, which increases Chinese exports to the U.S. 32. In 2008 (as described by James Hamilton) the Federal Reserve and U.S. Treasury cooperated so that a. Treasury sold Treasury bonds, while the Fed created new excess reserves by buying private mortgage-backed securities and other assets and making loans to banks. b. Treasury issued currency, which the Fed spent on lavish parties for bankers. c. Treasury purchased large amounts of goods and services and the Fed sold bonds. d. Treasury increased its deficit while the Fed increased the required reserve ratio. 33. The vertical long-run aggregate supply (LRAS) curve indicates that in the long run a shift in aggregate demand will lead to a change a. in the price level and output. b. in the price level, but not output. c. in output, but not the price level. d. in neither the price level nor output. 34. When a bank buys bonds issued by Kroger Co., the bank is using the methods of a. equity finance to lend. b. debt finance to lend. c. debt finance to borrow. d. equity finance to borrow. 35. If W denotes the value of an hour s work measured in terms of money and P is the CPI, then a. 1/P can be interpreted as the inflation rate. b. classical economic theory would say that W is not affected by the supply of money. c. W/P represents the value of an hour s work measured in terms of goods and services. d. All of the above are correct. 36. In 2008, the United States net exports (NX) amounted to a a. trade deficit of about 5% of GDP, similar to previous years. b. trade balance near zero, as usual. c. trade surplus of about 5% of GDP, similar to previous years. d. trade deficit of about 50% of GDP, sharply increased over previous years. 37. In the long run, changes in the money supply affect a. output. b. unemployment rates. c. prices. d. All of the above. 5

16 Douglas, B 38. The real interest rate is 8 percent and the nominal interest rate is 10.5 percent. Is there inflation or deflation? What is the inflation or deflation rate? a. inflation; 2.5 percent b. inflation; percent c. deflation; 2.5 percent d. deflation; 20.5 percent 39. The usual measure of the U.S. rate of unemployment (U3) is currently at about a. 25%, which is higher than the Great Depression.. b. 15.5%, meaning that cyclical unemployment is at about 10%. c. 10%, including discouraged workers and involuntary part-time workers. d. 10%. The rate is higher if you take account of discouraged workers and involuntary part-time workers. 40. Suppose you purchased a house for $210,000 in late 2007 using $10,000 of your own financial capital (money), and $200,000 of borrowed money. You sold the house a year later for $250,000 and paid off your loan with 5% interest. You received a return on your own capital of a. 300%. Without leverage, you would have made only a 19% profit. b. 400%. If you had taken on more leverage, you would have made an even higher return. c. 14%, which is the 19% profit on the house minus 5% interest. d. 19%. Leverage makes no difference in your profit. 41. According to the classical dichotomy and money neutrality, when the money supply doubles which of the following doubles? a. the price level and real GDP b. the price level and nominal GDP c. the velocity of money d. real GDP 42. During recessions, automatic stabilizers tend to make the government's budget a. move toward surplus. b. move toward balance. c. move toward deficit. d. not necessarily move the budget in any particular direction. 43. An economic contraction caused by a shift in aggregate demand causes prices to a. fall in the short run, and rise back to their original level in the long run. b. rise in the short run, and rise even more in the long run. c. rise in the short run, and fall back to their original level in the long run. d. fall in the short run, and fall even more in the long run. 44. The present value of a payment to be made in the future falls as a. the interest rate rises and the time until the payment is made decreases. b. the interest rate falls and the time until the payment is made decreases. c. the interest rate rises and the time until the payment is made increases. d. the interest rate falls and the time until the payment is made increases. 45. Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run a. the price level will rise, and real GDP might rise, fall, or stay the same. b. real GDP will fall and the price level might rise, fall, or stay the same. c. real GDP will rise and the price level might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same. 6

17 Douglas, B 46. If the required reserve ratio is 10 percent, and a bank receives a new deposit of $1000 in cash, then initially the bank has a a. $100 increase in excess reserves and $900 increase in required reserves. b. $900 increase in excess reserves and $100 increase in required reserves. c. $1000 increase in reserves and no increase in required reserves. d. $1000 increase in reserves and no increase in excess reserves. 47. In which of the following cases would the quantity of money demanded be largest? a. interest rate r = 0.04, price level P = 1.2 b. interest rate r = 0.06, price level P = 1.0 c. interest rate r = 0.03, price level P = 1.4 d. interest rate r = 0.03, price level P = The sticky-wage theory of the short-run aggregate supply curve says that when the price level is higher than expected, a. production is more profitable and employment rises. b. production is less profitable and employment falls. c. production is more profitable and employment falls. d. production is less profitable and employment rises. 49. Fran buys $1,000,000 in bonds issued by Ford Motor Company. In turn, Ford uses the funds to buy new machinery for one of its factories. a. Fran is saving; Ford is investing. b. Fran and Ford are both investing. c. Fran and Ford are both saving. d. Fran is investing; Ford is saving. Figure Refer to Figure A decrease in government spending would move the economy from A to a. B in the short run and A in the long run. b. D in the short run and C in the long run. c. D in the short run and the long run. d. B in the short run and the long run. 7

18 ID: B Econ 202 Section 2 Final Exam Answer Section MULTIPLE CHOICE 1. C 2. A 3. A 4. D 5. A 6. B 7. B 8. A 9. A 10. A 11. C 12. B 13. D 14. C 15. C 16. A 17. C 18. A 19. B 20. B 21. A 22. C 23. A 24. A 25. A 26. B 27. B 28. A 29. D 30. A 31. D 32. A 33. B 34. B 35. C 36. A 37. C 38. A 39. D 40. A 41. B 42. C 43. D 1

19 ID: B 44. C 45. D 46. B 47. C 48. A 49. A 50. B 2

20 Douglas, Fall 2009 December 17, 2009 C: Special Code 0000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 2 Final Exam 1. In 1945 a rule of thumb for a young man was that he must make $40 per week before he could afford to marry and start a family. The CPI was about 20 in 1944 and about 200 in This 1945 rule of thumb would suggest that in 2005 a man should make how much before marrying? a. $4 per week. b. $200 per week c. $100 per week d. $400 per week. 2. When a bank buys bonds issued by Kroger Co., the bank is using the methods of a. equity finance to lend. b. equity finance to borrow. c. debt finance to lend. d. debt finance to borrow. 3. The usual measure of the U.S. rate of unemployment (U3) is currently at about a. 25%, which is higher than the Great Depression.. b. 10%, including discouraged workers and involuntary part-time workers. c. 10%. The rate is higher if you take account of discouraged workers and involuntary part-time workers. d. 15.5%, meaning that cyclical unemployment is at about 10%. 4. If the price level increased from 220 to 242 over a year s time, what was the inflation rate? a. 10 percent b. 110 percent c. 22 percent d. None of the above is correct. 5. Which of the following statements is correct for an open economy with a trade surplus? a. The trade surplus cannot last for very many years. b. The trade surplus implies that the country's national saving is greater than domestic investment. c. The trade surplus must be offset by negative net capital outflow. d. None of the above is correct. 6. The real interest rate is 8 percent and the nominal interest rate is 10.5 percent. Is there inflation or deflation? What is the inflation or deflation rate? a. deflation; 2.5 percent b. deflation; 20.5 percent c. inflation; 2.5 percent d. inflation; percent 7. In the U.S., people are required to pay taxes on a. nominal interest earnings, not real interest earnings. b. wages and salaries only, not capital gains or interest earnings. c. real interest earnings, not nominal interest earnings. d. real capital gains, not nominal capital gains. 1

21 Douglas, C 8. Aggregate demand shifts right if a. taxes rise and shifts left if stock prices fall. b. taxes fall and shifts left if stock prices fall. c. taxes rise and shifts left if stock prices rise. d. taxes fall and shifts left if stock prices rise. 9. During recessions, automatic stabilizers tend to make the government's budget a. move toward deficit. b. move toward balance. c. not necessarily move the budget in any particular direction. d. move toward surplus. 10. At one point in an article assigned in class, Martin Wolf complains about China s exchange rate protectionism. What might Wolf mean by exchange rate protectionism? a. China is deliberately trying to keep the real exchange rate of the dollar low relative to the Chinese yuan. b. The Chinese government prevents the release of any information about the exchange rate of its currency, thus protecting its own industries. c. By accumulating reserves of U.S. bonds, China keeps the nominal exchange rate of the dollar artificially low, which increases Chinese exports to the U.S. d. By accumulating reserves of U.S. dollars, China keeps the nominal exchange rate of the dollar artificially high, which increases Chinese exports to the U.S. 11. In the long run, changes in the money supply affect a. unemployment rates. b. prices. c. output. d. All of the above. 12. Which of the following by itself is consistent with the directions that the price level and real GDP changed during the oil-embargo Stagflation of the 1970 s? a. aggregate demand shifted right b. aggregate supply shifted left c. aggregate supply shifted right d. aggregate demand shifted left 13. Suppose there were a large decline in net exports, resulting in a fall in GDP. If the Fed wanted to return the economy to full employment, it could a. sell bonds to lower interest rates. b. buy bonds to lower interest rates. c. buy bonds to raise interest rates. d. sell bonds to raise interest rates. 14. What will happen to the equilibrium price and quantity of cigarettes if the price of chewing tobacco (a substitute) rises sharply at the same time that the price of filters used to make cigarettes falls? a. Price will fall and the quantity may either rise or fall. b. Quantity will rise and price may either rise or fall. c. Quantity will fall and price may either rise or fall. d. Price will rise and quantity may either rise or fall. 15. According to the AS/AD model, an increase in the price level and a reduction in real GDP might result from a. declining government expenditures. b. an epidemic that killed or incapacitated a large percentage of the work force. c. tax rebates. d. a fall in stock prices. 2

22 Douglas, C 16. The vertical long-run aggregate supply (LRAS) curve indicates that in the long run a shift in aggregate demand will lead to a change a. in the price level, but not output. b. in neither the price level nor output. c. in the price level and output. d. in output, but not the price level. 17. If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit? a. people holding a lot of currency but not lenders b. neither lenders nor people holding a lot of currency c. lenders but not people holding a lot of currency d. lenders and people holding a lot of currency 18. What would happen to the equilibrium price and quantity sold of leather gloves if the price of nylon gloves (a substitute) falls, at the same time that the cost of leather used to make gloves falls? a. Quantity will rise and price may either rise or fall. b. Price will rise and quantity may either rise or fall. c. Price will fall and quantity may either rise or fall. d. Quantity will fall and price may either rise or fall. 19. In which of the following cases would the quantity of money demanded be largest? a. interest rate r = 0.04, price level P = 1.2 b. interest rate r = 0.03, price level P = 1.4 c. interest rate r = 0.06, price level P = 1.0 d. interest rate r = 0.03, price level P = When the price level rises, the number of dollars needed to buy a representative basket of goods a. increases, and so the value of money rises. b. increases, and so the value of money falls. c. decreases, and so the value of money falls d. decreases, and so the value of money rises. 21. Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run a. the price level will rise, and real GDP might rise, fall, or stay the same. b. real GDP will rise and the price level might rise, fall, or stay the same. c. real GDP will fall and the price level might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same. 22. A depreciation of the U.S. real exchange rate induces U.S. consumers to buy a. more domestic goods and more foreign goods. b. fewer domestic goods and fewer foreign goods. c. more domestic goods and fewer foreign goods. d. fewer domestic goods and more foreign goods. 23. Mike, a U.S. citizen, buys $1,000 worth of olives from Greece. By itself this purchase a. increases U.S. imports by $1,000 and decreases U.S. net exports by $1,000. b. increases U.S. exports by $1,000 and increases U.S. net exports by $1,000. c. increases U.S. exports by $1,000 and decreases U.S. net exports by $1,000. d. increases U.S. imports by $1,000 and increases U.S. net exports by $1,000. 3

23 Douglas, C 24. Suppose you purchased a house for $210,000 in late 2007 using $10,000 of your own financial capital (money), and $200,000 of borrowed money. You sold the house a year later for $250,000 and paid off your loan with 5% interest. You received a return on your own capital of a. 19%. Leverage makes no difference in your profit. b. 400%. If you had taken on more leverage, you would have made an even higher return. c. 14%, which is the 19% profit on the house minus 5% interest. d. 300%. Without leverage, you would have made only a 19% profit. 25. If W denotes the value of an hour s work measured in terms of money and P is the CPI, then a. 1/P can be interpreted as the inflation rate. b. classical economic theory would say that W is not affected by the supply of money. c. W/P represents the value of an hour s work measured in terms of goods and services. d. All of the above are correct. 26. According to the classical dichotomy and money neutrality, when the money supply doubles which of the following doubles? a. the price level and nominal GDP b. the velocity of money c. the price level and real GDP d. real GDP 27. A roll of duct tape costs 2 Canadian dollars in Canada and 3 U.S. dollars in the U.S. If the nominal exchange rate is.80 Canadian dollars per U.S. dollar. a. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of Canadian duct tape. b. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of U.S. duct tape. c. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of Canadian duct tape. d. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of U.S. duct tape. 28. People choose to hold a smaller quantity of money if a. the interest rate rises, which causes the opportunity cost of holding money to rise. b. the interest rate falls, which causes the opportunity cost of holding money to rise. c. the interest rate falls, which causes the opportunity cost of holding money to fall. d. the interest rate rises, which causes the opportunity cost of holding money to fall. 29. Using the liquidity-preference model, when the Federal Reserve increases the money supply, a. the long-run aggregate-supply curve shifts to the right. b. the quantity of goods and services demanded is unchanged for a given price level. c. the equilibrium interest rate decreases. d. the aggregate-demand curve shifts to the left. 30. In 2008, the United States net exports (NX) amounted to a a. trade deficit of about 5% of GDP, similar to previous years. b. trade deficit of about 50% of GDP, sharply increased over previous years. c. trade surplus of about 5% of GDP, similar to previous years. d. trade balance near zero, as usual. 31. Larry, a U.S. citizen, opens and operates a bookstore in Spain. This action is an example of both a. U.S. foreign portfolio investment and U.S. domestic investment. b. investment for Larry and U.S. foreign direct investment. c. U.S. foreign direct investment and U.S. domestic investment. d. investment for Larry and U.S. foreign portfolio investment. 4

24 Douglas, C 32. The source of hyperinflations is primarily a. continuing increases in money demand. b. continuing declines in velocity. c. lower output growth. d. increases in money-supply growth. 33. An economic contraction caused by a shift in aggregate demand causes prices to a. fall in the short run, and rise back to their original level in the long run. b. fall in the short run, and fall even more in the long run. c. rise in the short run, and fall back to their original level in the long run. d. rise in the short run, and rise even more in the long run. 34. A decrease in the expected price level shifts short-run aggregate supply (AS) to the a. left, and an increase in the current price level shifts short-run AS to the left. b. right, and an increase in the current price level shifts short-run AS to the right. c. left, but an increase in the current price level does not shift short-run AS. d. right, but an increase in the current price level does not shift short-run AS. 35. According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will a. increase and the quantity of money demanded will increase. b. decrease and the quantity of money demanded will decrease. c. decrease and the quantity of money demanded will increase. d. increase and the quantity of money demanded will decrease. 36. Suppose that initially the supply of money M=300, P=2, and nominal GDP is 600. Then a financial panic causes people to hoard dollars, so that the velocity of money is cut in half, while the Fed keeps M constant. According to the quantity equation, which of the following is possible after the change in velocity? a. P = 3 and Real GDP = 200. b. P = 1.5 and Real GDP = 200. c. P = 1 and Nominal GDP = 600. d. P = 2 and Real GDP = Which of the following shifts both short-run and long-run aggregate supply left? a. a decrease in the actual price level b. a decrease in the capital stock c. a decrease in the expected price level d. a decrease in the money supply 38. Investment is a a. relatively small part of real GDP, so it causes little of the fluctuation in real GDP. b. majority of real GDP, so it accounts for much of the fluctuation in real GDP. c. majority of real GDP, yet it causes just a small share of the fluctuation in real GDP. d. relatively small part of real GDP, yet it causes much of the fluctuation in real GDP. 39. If the required reserve ratio is 10 percent, and a bank receives a new deposit of $1000 in cash, then initially the bank has a a. $1000 increase in reserves and no increase in excess reserves. b. $1000 increase in reserves and no increase in required reserves. c. $100 increase in excess reserves and $900 increase in required reserves. d. $900 increase in excess reserves and $100 increase in required reserves. 5

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