Econ 202 Final Exam. Douglas, Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam.

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1 , Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Final Exam Multiple Choice. 2 points each. 1. According to the long-run Phillips curve, in the long run monetary policy influences a. the unemployment rate but not the inflation rate. b. both the inflation rate and the unemployment rate. c. the inflation rate but not the unemployment rate. d. neither the unemployment rate nor the inflation rate. Figure Refer to Figure 4-9. If the price is currently $8, then a. there is currently a shortage of 10 units, which will make the price rise by $2. b. there is currently a surplus of 20 units, which will make the price rise by $2. c. there is currently a surplus of 10 units, which will make the price rise by $2. d. there is currently a shortage of 20 units, which will make the price rise by $2. 3. An assistant manager at a restaurant gets a $100 a month raise. He figures that with his new monthly salary he cannot buy as many goods and services as he could buy last year. a. His real and nominal salary have fallen. b. His real and nominal salary have risen. c. His real salary has risen and his nominal salary has fallen. d. His real salary has fallen and his nominal salary has risen. 4. As an alternative to selling shares of stock as a means of raising funds, a large company could, instead, a. use equity finance. b. purchase bonds. c. sell bonds. d. invest in physical capital. 5. Suppose the basket of goods selected to calculate cost $50 in 2002, $55 in 2004, and $60 in Using 2004 as the base year, the value of the CPI in 2006 was about a b c d

2 6. The Fed can influence unemployment in a. the long run, but not in the short run. b. the short run and in the long run. c. neither the short nor the long run. d. the short run, but not in the long run. 7. An increase in the price level and a reduction in output would result from a. tax rebates. b. declining government expenditures. c. natural disasters such as hurricanes, floods, and droughts. d. a fall in stock prices. 8. According to the blog post by James Hamilton discussed in class, since September 2008 the Fed has provided a tremendous amount of liquidity to mortgage markets, which it has financed primarily by a. issuing long-term government bonds. b. more than doubling the money supply. c. raising taxes. d. crediting banks excess reserve accounts at the Fed. 9. Which of the following statements is true? a. The market prices of most resources have increased over the past 50 years because they are being used up. b. Americans have a higher standard of living than Indonesians because American workers are more productive than Indonesian workers. c. Productivity is calculated as hours worked divided by output produced. d. All of the above are correct. 10. Wealth is redistributed from lenders (creditors) to borrowers (debtors) when inflation is a. unexpectedly low. b. high, whether it is expected or not. c. unexpectedly high. d. low, whether it is expected or not. Figure Refer to Figure If the economy is at point b, a policy to restore full employment would be a. an increase in taxes. b. an increase in the money supply. c. a decrease in government purchases. d. All of the above are correct. 2

3 12. Refer to Figure Which of the following is correct? a. An attempt by all households to increase their savings might have caused the shift from AD 1 to AD 2. b. A wave of optimism could move the economy from point a to point b. c. If aggregate demand moves from AD 1 to AD 2, the economy will stay at point b in both the short run and long run. d. All of the above are correct. 13. A change in expected inflation shifts a. neither the short-run nor the long-run Phillips curve. b. the long-run Phillips curve, but not the long run Phillips curve. c. both the short-run and long-run Phillips curve right. d. the short-run Phillips curve, but not the long run Phillips curve. 14. Suppose that a country imports $75 million of goods and services and exports $100 million of goods and services. What is the value of net exports? a. $75 million b. -$25 million c. $25 million d. $175 million 15. The quantity of money has no real impact on things people really care about, such as the number of hours of work required to get the money to buy a car. Most economists would agree that this statement is true in a. neither the long run nor the short run. b. the long run, but not the short run. c. both the short run and the long run. d. the short run, but not the long run. 16. In which of the following cases was the inflation rate 10 percent over the last year? a. One year ago the price index had a value of 145 and now it has a value of 163. b. One year ago the price index had a value of 120 and now it has a value of 132. c. One year ago the price index had a value of 110 and now it has a value of 120. d. One year ago the price index had a value of 126 and now it has a value of People will want to hold less money if the price level a. increases or if the interest rate increases. b. increases or if the interest rate decreases. c. decreases or if the interest rate increases. d. decreases or if the interest rate decreases. 18. The efficient markets hypothesis says that a. stock prices do not follow a random walk. b. only individual investors can make money in the stock market. c. stocks prices reflect all publicly available information at all times. d. All of the above are correct. 19. In the United States, a three-pound can of coffee costs about $5. If the exchange rate is about 0.6 euros per dollar and a three-pound can of coffee in Belgium costs about 4 euros. What is the real exchange rate? a. 3/4 cans of Belgian coffee per can of U.S. coffee b. 4/5 cans of Belgian coffee per can of U.S. coffee c. 5/4 cans of Belgian coffee per can of U.S. coffee d. 4/3 cans of Belgian coffee per can of U.S. coffee 3

4 20. Using the liquidity-preference model, when the Federal Reserve increases the money supply, a. the aggregate-demand curve shifts to the left. b. the long-run aggregate-supply curve shifts to the right. c. the equilibrium interest rate decreases. d. the quantity of goods and services demanded is unchanged for a given price level. 21. Suppose that we observe a large increase in the price of new cars (a normal good), while the quantity sold increases slightly. Which of the following sets of events most likely caused this to occur? a. improved technology for producing cars, and higher interest rates for car loans b. lower steel prices, and increases in consumer incomes c. higher wages for auto workers, and increases in consumer incomes d. higher steel prices, and decreases in population 22. Compared to short-term bonds, other things the same, long-term bonds generally have a. less risk and so they pay higher interest rates. b. less risk and so they pay lower interest rates. c. about the same risk and so they pay about the same interest rate. d. more risk and so they pay higher interest rates. 23. The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if a. the price level is higher than expected making production less profitable. b. the price level is higher than expected making production more profitable. c. the price level is higher than expected making production less profitable. d. the price level is lower than expected making production more profitable. 24. You observe a closed economy that has a government deficit and positive investment. Which of the following is correct? a. Private and public saving are both positive. b. Private saving is negative; public saving is positive. c. Both private saving and public saving are negative. d. Private saving is positive; public saving is negative. 25. The monetary base has more than doubled since September According to the James Hamilton blogpost on Bernanke s recent testimony that we discussed in class, this change has resulted in a. restored banking system stability, at the cost of already accelerating inflation rates. b. an unstoppable chain of events that will result in hyperinflation (signs of which are already clearly visible in commodity prices). c. the Fed paying interest on reserves in order to prevent a rapid increase in the money supply. d. high bonuses to bank managers, higher unemployment rates, and accelerating inflation rates. 26. What would happen to the equilibrium price and quantity of coffee if the price of tea (a substitute) falls, and the technology for roasting coffee improves? a. Price will fall and the effect on quantity is ambiguous. b. Quantity will fall and the effect on price is ambiguous. c. Quantity will rise and the effect on price is ambiguous. d. Price will rise and the effect on quantity is ambiguous. 27. A Big Mac costs 240 yen in Japan and $3 in the U.S.. The exchange rate is 100 yen per dollar. Which of the following changes would definitely move the real exchange rate towards purchasing-power parity? a. the price of Big Macs in the U.S. rises, and the nominal exchange rate rises b. the price of Big Macs in the U.S. falls, and the nominal exchange rate falls c. the price of Big Macs in the U.S. falls, and the nominal exchange rate rises d. the price of Big Macs in the U.S. rises, and the nominal exchange rate falls 4

5 28. If the dollar appreciates, perhaps because of speculation or government policy, then U.S. net exports a. increase which shifts aggregate demand right. b. decrease which shifts aggregate demand left. c. decrease which shifts aggregate demand right. d. increase which shifts aggregate demand left. 29. When the real exchange rate for the dollar depreciates, U.S. goods become a. less expensive relative to foreign goods, which makes exports rise and imports fall. b. more expensive relative to foreign goods, which makes exports fall and imports rise. c. less expensive relative to foreign goods, which makes exports fall and imports rise. d. more expensive relative to foreign goods, which makes exports rise and imports fall. 30. A Swiss watchmaker opens a factory in the United States. This is an example of Swiss a. foreign direct investment. b. foreign portfolio investment. c. imports. d. exports. 31. Other things the same, automatic stabilizers tend to a. raise government spending during recessions and lower spending during expansions. b. lower government spending during expansions and recessions. c. raise government spending during expansions and recessions. d. raise government spending during expansions and lower spending during recessions. 32. In the nation of Mankiwia in 2008, consumption was $6000, exports were $1000, GDP was $10,000, government purchases were $2000, and imports were $600. What was Mankiwia s investment in 2008? a. $3600 b. $1600 c. $1400 d. $ When the money supply decreases a. interest rates rise and so aggregate demand shifts right. b. interest rates fall and so aggregate demand shifts left. c. interest rates fall and so aggregate demand shifts right. d. interest rates rise and so aggregate demand shifts left. 34. Acarapi is a full-time homemaker not currently searching for other work. Ximena is a full-time student who is not looking for a job. Who is included in the labor force by the Bureau of Labor Statistics? a. only Ximena b. neither Acarapi nor Ximena c. both Acarapi and Ximena d. only Acarapi 35. Which of the following items is included in GDP? a. the sale of used goods b. the sale of services such as those performed by a doctor c. the sale of stocks and bonds d. All of the above are included in GDP. 36. Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy? a. the FOMC b. the Board of Governors c. the regional Federal Reserve Bank presidents d. the Central Bank Policy Commission 5

6 37. Suppose that you borrowed $200,000 in 2007 and combined it with $100,000 of your own money to buy a small house in Las Vegas for $300,000. You sold the house one year later for $200,000, and paid off the loan with 10% interest. Your return on your own capital was a. 100% b. -120% c. -33% d. -100% 38. If the Fed conducts open-market purchases, the money supply a. decreases and aggregate demand shifts right. b. increases and aggregate demand shifts right. c. decreases and aggregate demand shifts left. d. increases and aggregate demand shifts left. 39. A scholarship gives you $1,000 today and promises to pay you $1,000 one year from today. What is the present value of these payments? a. $1,000 + $1,000/(1 + r) b. $2,000/(1 + r) 2. c. $1,000(1 + r) + $1,000(1 + r) 2 d. $1,000/(1 + r) + $1,000/(1 + r) The recession of appears to have been mostly the result of a. falling aggregate supply due to decreased availability of natural resources. b. falling aggregate demand due to decreases in the money supply. c. falling aggregate supply due to lack of investment spending. d. falling aggregate demand due to falling housing prices, high levels of financial leverage, poor risk management by large financial firms, and subsequent financial panic. 6

7 20 points total. Answer in the space provided. Name 41. a. Suppose that the federal government moves aggressively in the coming year to balance the budget. According to the model of the open economy discussed in class, this move should cause equilibrium interest rates to (circle one: RISE, FALL, NO CHANGE), the amount of private investment to (RISE, FALL, NO CHANGE), the trade deficit to (INCREASE, DECREASE, NO CHANGE), and the dollar to (APPRECIATE, DEPRECIATE, NO CHANGE). Use a graph below to illustrate this change, being sure to label all curves, axes, and equilibria: b. According to the Aggregate Supply / Aggregate Demand model and the discussion of fiscal policy in class, balancing the current Federal budget should be (EXPANSIONARY, CONTRACTIONARY), and should cause the value of money to (RISE, FALL) and the unemployment rate to (RISE, FALL). c. Explain your answer in part b, using a graph and a sentence or two. Label all curves and axes. Turn over for Extra Credit Questions 7

8 EXTRA CREDIT (UP TO 5 POINTS). ANSWER ONE OF THE TWO QUESTIONS BELOW. XCa In 1993 the Federal government combined a tax increase and budgetary restraint to reduce the Federal budget deficit. There followed a robust economic expansion with low inflation. Using a few sentences AND THE AS/AD MODEL (being careful to explain any curve shifts that you employ), explain the low-inflation prosperity of the mid-to-late 1990s. XCb. USING BOTH THE PHILLIPS CURVE AND THE AS/AD DIAGRAM, explain why, in the early 1980s, Fed Chairman Paul Volcker took extraordinary steps to publicly announce and underline his determination to reduce the inflation rate, before he actually took policy steps to do so. 8

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

10 ID: A SHORT ANSWER 41. a. FALL, INCREASE, FALL, DEPRECIATE. Graph should show an increase in the supply of loanable funds and an increase in NCO. b. CONTRACTIONARY, RISE, RISE. c. Graph should show a demand decrease. XCa. There was an outward shift of AS for many reasons, including increased foreign and domestic investment in the US economy due in part to increased investor optimism that the Federal government was going to be fiscally responsible. Other factors the maturation of the baby boom as workers, increased productivity due to computers and the internet, rapidly improving technology, and other factors. XCb. Volcker was attempting to reduce inflationary expectations, which would reduce the rate of growth of nominal wages and therefore shift the short-run Phillips curve to the left and the short-run AS curve to the right. 2