Prof. Bill Even FORM 1. Directions

Transcription

1 ECO202: PRINCIPLES OF MACROECONOMICS SECOND MIDTERM EXAM SPRING 2012 Prof. Bill Even FORM 1 Directions 1. Fill in your scantron with your unique id and form number. Doing this properly is worth the equivalent of 1 question. 2. There are 46 multiple choice questions. Record your answer on both your scantron and your exam. Your scantron will not be returned, so your exam will serve as the record of your answers. 3. Your grade is determined entirely upon the answers listed on your scantron. Your scantron will not be returned so be sure to record your answers on your exam so that you will be able to check your answers once the key is posted. 5. You may use a calculator. The use of a cell phone is strictly prohibited and considered academic dishonesty. 6. You have until the end of the period to finish the exam. Additional time may be purchased at a price of 5 percentage points per minute. 7. You may not leave the room during the examination period. 8. Academic dishonesty is a serious offense. In the event I find someone behaving in a dishonest manner, I will ask that the maximum penalty allowed by the university be imposed. 9. When you finish, turn in your scantron. You may keep your copy of the exam.

2 1. Suppose that an ounce of gold is worth 3 times as much as an ounce of silver. If there are 10 grains of gold in a $1 gold coin and 25 grains of silver in a $1 silver coin, Gresham s law would predict that: a. neither gold or silver coins would circulate as money. b. gold coins would circulate as money, but silver coins would not. c. silver coins would circulate as money, but gold coins would not. d. both gold and silver coins would circulate as money. 2. When a person puts a dollar bill in a coffee can to save for a rainy day, money is being used as a. When a person uses a dollar bill to purchase a bottle of pop, money is being used as a ; a. unit of account; store of value b. medium of exchange; unit of account c. store of value; medium of exchange d. none of the above 3. While money has several functions, the one function that is unique to money (i.e. no other asset can serve this function) is: a. medium of exchange. b. store of value c. unit of account d. none of the above. There is always a substitute for money. 4. Which of the following statements is true? a. there are 9 members on the Federal Reserve Board of Governors. b. the Federal Reserve was established in c. Ben Bernanke is the chair of the Federal Reserve d. All of the above

3 To answer the next 4 questions, assume that the banking system starts with the following "base case" balance sheet and that (i) the public initially holds $1000 of non-bank cash; (ii) the reserve ratio is 4%; (iii) banks always loan out the maximum amount allowed. BALANCE SHEET Reserves $2,000 Demand Deposits $50,000 Loans $30,000 Govt. bonds $23,000 Owner's Equity $5,000 $55,000 $55, Start with the base case balance sheet. If the Fed sells $100 of government bonds to the banking system and the banking system completely adjusts to this change in their balance sheet, the loans will and M1 will. a. increase $100; increase $100 b. decrease $100; decrease $100 c. increase $2500; increase $2500. d. none of the above 6. Start with the base case balance sheet. If the Fed increases the reserve ratio from 4% to 5% and the bank system completely adjusts to this change, M1 will and the monetary base will. a. drop $10,000; not change b. drop $10,000; drop $10,000 c. rise $10,000; rise $10,000 d. rise $10,000; not change. 7. Starting with the base case balance sheet and the 4% reserve ratio, if the public chooses to withdraw $100 from its demand deposits and hold it as cash, after the bank system completely adjusts to this change, a. the monetary base will rise by $100 b. M1 will rise by $2,500 c. M1 will not change d. loans will fall by $2, If the Federal Reserve buys government bonds and banks always lend the maximum amount possible, we should expect the money supply to and interest rates to. a. rise; rise b. rise; fall c. fall; fall d. fal; rise. 9. Holding the coupon rate, maturity value and term of a bond constant, as the price of a bond rises, the yield on the bond: a. could rise or fall; b. falls. c. rises. d. does not change. 10. If a bond sells for a price that is below par, a. the yield will be negative

4 b. the yield will exceed the coupon rate c. the yield will be less than the coupon rate d. none of the above; more information is needed to know the yield. 11. Consider a one year bond with a 6% coupon rate and a maturity value of $1000 that sells for $1015 today. The yield to maturity on this bond is: a. 4.4 % b. 4.5% c. 4.6% d. 5.0% 12. Suppose that you go to the bank and want to take out a loan. You promise the bank that you will pay back $10,000 in two years and another $10,000 in 4 years. If the bank is willing to lend you money at 4% interest, how much should they be willing to lend you today? a. $17,794 b. $18,211 c. $18,347 d. $18, Consider a 20 year zero coupon bond with a maturity value of $1000 that sells for $400 today. The annual yield to maturity on this bond is: a. 1.9 % b. 3.3% c. 4.3 d. 4.7% 14. Suppose stock prices reflect their fundamental value. Which of the following would lead to higher prices? a. news that corporate tax rates will be increased next year. b. news that corporate profits will fall next year, but not by as much as previously believed. c. news that interest rates will rise sharply over the next year. d. all of the above. 15. In the money supply / money demand model, if the interest rate is above the equilibrium interest rate, the market adjusts by: a. people buying bonds which drives bond prices up and interest rates down b. people buying bonds which drives bond prices and interest rates up c. people selling bonds which drives bond prices down and interest rates up d. people selling bonds which drives bond prices and interest rates up 16. If the stock market declines sharply over the next 6 months, you are likely to lose MORE on your stock portfolio if you have stocks that have: a. a higher than average PE ratio b. a lower than average PE ratio c. a beta coefficient greater than one. d. a beta coefficient less than one. 17. Assuming stocks reflect their fundamental value, if a company is expected to have above average growth in earnings in the future it should have: a. a higher than average PE ratio b. a lower than average PE ratio c. a beta coefficient greater than one

5 d. a beta coefficient less than one. Answers 18. According to the equation of exchange, which of the following would lead to increased inflation? a. an increase in the rate of growth in the money supply or an increase in velocity b. a slower rate of growth in real GDP or a decrease in velocity c. a faster rate of growth in real GDP or an increase in the money supply d. a faster rate of growth in real GDP or a decrease in velocity 19. The price of a call option on IBM stock should rise as the strike (exercise) price or the price of IBM stock. a. rises; rises b. rise;s falls. c. falls; rises. d. falls; falls. 20. If you have privileged information that leads you to believe that the price of Bank of America stock is going to rise sharply over the next 6 months, you could profit on this information by a put option and a call option for the stock. a. buying; buying b. buying; selling c. selling; selling d. selling; buying 21. Between 2008 and 2011, the number of South Korean won per Euro dropped from approximately 1800 to This means that over the past 3 years, the won (appreciated, depreciated) relative to the Euro and the amount that South Korean citizens pay for imports from the Euro zone (increased; decreased). a. appreciated; increased b. appreciated; decreased c. depreciated; increased d. depreciated; decreased 22. If a country s currency appreciates, this should cause its imports to and its exports to. a. rise; rise b. rise; fall c. fall; fall d. fall; rise To answer the next 2 questions, refer to the article from the NY Times published in October 2010 about the effects of U.S. monetary policy reducing interest rates during the great recession.

6 American investment in overseas stock funds, which was running at about $4 billion a month over the summer, has surged since Ben S. Bernanke, the Federal Reserve chairman, suggested the possibility of another round of quantitative easing at the end of August. About $19 billion has flowed into these funds since Aug. 1, according to TrimTabs, a funds researcher. 23. This pronounced increase in U.S. investment overseas should have led to: a. a depreciation of the dollar since it would increase the supply of dollars b. a depreciation of the dollar since it would decrease the demand for dollars c. an appreciation of the dollar since it would increase the demand for dollars d. an appreciation of the dollar since it would decrease the supply of dollars 24. Assume that the U.S. had a capital account surplus and a current account deficit prior to increase in U.S. investment overseas. This rapid increase in U.S. investment overseas would cause the capital account surplus to and the current account deficit to. a. grow; grow b. grow; shrink c. shrink; grow d. shrink; shrink

7 25. Based on the supply/demand model for the dollar in foreign currency markets, which of the following would cause the dollar to depreciate relative to the Brazilian peso? a. an increase in Brazilian demand for U.S. exports.. b. a decreased desire in the U.S. to invest in the Brazilian stock market. c. an increase in U.S. prices relative to Brazil. d. none of the above. 26. Suppose interest rate parity holds and the dollar is expected to depreciate by 5% relative to the Euro over the next year. Also, suppose government bonds in the Euro zone pay 10% interest. If interest rate parity holds, U.S. government bonds must pay an interest rate of: a. 5% b. 10% c. 15% d. none of the above. 27. Suppose the dollar is expected to depreciate by 5 percent over the next year relative to the Euro. Also, suppose 1 year government bonds currently offer an interest rate of 9% in the Euro zone and 13% in the U.S. Based on this information, a wise investor would: a. be indifferent between U.S. and Euro bonds since the exchange rate fluctuation will offset the lower interest rate in the Euro zone.. b. prefer U.S. bonds over Euro bonds since U.S bonds will net a 9% higher rate of return after adjusting for the exchange rate movement. c. prefer U.S. bonds over Euro bonds since they will net a 1% higher rate of return after adjusting for the exchange rate movement. d. prefer Euro bonds over U.S. bonds since Euro bonds will net a 1% higher rate of return after adjusting for the exchange rate movement. 28. An upward sloping yield curve a. is less common than a downward sloping yield curve b. implies that interest rates on short term bonds are lower than interest rates on long term bonds c. often occurs prior to a recession d. all of the above 29. The Federal Reserve recently implemented operation twist which was a program where they tried to long term bond rates and short term bond rates by long term bonds and short term bonds. a. increase; decrease; buying; selling b. increase; decrease; selling; buying c. decrease; increase; buying; selling. d. decrease; increase; selling; buying. 30. As discussed in class, the Swiss franc appreciated significantly as a result of the result financial turmoil in the Euro zone. Because of the significant appreciation of the Swiss franc, their exports began to and the central bank decided that it would attempt to offset the appreciation by. a. fall; selling francs which caused their reserves of Euros to rise. b. fall; buying francs which caused their reserves of Euros to fall. c. rise; selling francs which caused their reserves of Euros to rise. d. none of the above.

8 31. Suppose initially that the capital and current accounts in the U.S. are in balance. Suppose that investors in the U.S. begin to believe that European financial markets will perform poorly over the next few years. Considering the effect of this on the Euro/$ exchange rate, we should expect that this will cause the dollar to (strengthen, relative) to the Euro and eventually cause the U.S. to incur a current account (deficit, surplus) and a capital account (surplus, deficit). a. strengthen; surplus; deficit b. strengthen; deficit; surplus c. weaken; surplus; deficit d. weaken; deficit; surplus 32. Suppose the exchange rate is currently 150 yen per dollar and that the price of gold is $1200 per ounce in the U.S. and 170,000 yen per ounce in Japan. Based on these figures, we should expect to find people buy gold in and resell it in. This will gradually decrease gold prices in and ubcrease gold prices in. a. Japan; U.S. Japan; U.S. b. Japan; U.S. U.S.; Japan; c. U.S.; Japan; Japan; U.S. d. U.S.; Japan; U.S.; Japan. 33. According to the theory of purchasing power parity, the number of Brazilian pesos per dollar will fall if : a. Brazilian prices rise relative to U.S. prices b. Brazilian prices fall relative to U.S. prices c. Brazilian interest rates rise relative to U.S. interest rates d. Brazilian interest rates fall relative to U.S. interest rates

9 34. Which of the following would lead to a larger capital account surplus in the U.S.? a. increased purchases of foreign bonds by U.S. citizens, or increased purchases of U.S. bonds by foreign citizens. b. increased purchases of foreign bonds by U.S. citizens, or decreased purchases of U.S. bonds by foreign citizens c. decreased purchases of foreign bonds by U.S. citizens, or increased purchases of U.S. bonds by foreign citizens. d. decreased purchases of foreign bonds by U.S. citizens, or decreased purchases of U.S. bonds by foreign citizens. 35. Assuming that the official settlements account has a zero balance, when a country is a net lender to the rest of the world, the country will have a current account and a capital account. a. surplus; surplus b. surplus; deficit c. deficit; surplus d. deficit; deficit 36. Which of the following would simultaneously increase long run aggregate supply and contribute to lower real wages? a. more immigration is allowed. b. Social Security is made less generous. c. technological innovations that improve labor productivity d. all of the above. e. only a and b. 37. Which of the following would simultaneously increase long run aggregate supply and contribute to higher real wages? a. the amount of capital per worker increases b. tax rates on wages are reduced c. Social Security is made more generous. d. all of the above. 38. A decrease in aggregate demand (AD) would be caused by transfers, government spending, or an expectation of future inflation. a. lower; increased; greater. b. none of the above. c. lower; decreased; lower. d. higher; decreased; greater.

10 Consider the diagram below to answer the next 3 questions: LAS SAS AD 39. At the short run equilibrium described in the above diagram, the economy is producing (above, below) potential GDP and the real wage is (above, below) the equilibrium real wage. a. above; above. b. above; below. c. below; above. d. below; below 40. At the short run equilibrium described in the above diagram, there is (upward, downward) pressure on real wages because the unemployment rate is (above, below) the natural rate. a. downward; above. b. downward; below c. upward; above. d. upward; below. 41. Starting at the short run equilibrium described in the above diagram, as the economy moves to the long run equilibrium, it should experience: a. increases in real wages and prices and decreases in employment. b. decreases in real wages, decreases in prices and increases in employment. c. increases in real wages and prices and increases in employment. d. decreases in real wages, increases in prices and increases in employment. 42. Suppose that the economy starts at a long run equilibrium and is producing at potential output. Now suppose that the U.S. increases income taxes. Considering the likely effect of this on AD, we should expect that in the short run: a. prices rise, real wages fall, and the unemployment rate drops below the natural rate. b. prices rise, real wages rise, and the unemployment rate drops below the natural rate. c. prices fall, real wages fall, and the unemployment rate falls below the natural rate. d. prices fall, real wages rise, and the unemployment rate rises above the natural rate. e. none of the above. 43. Suppose that the economy starts at a long run equilibrium and is producing at potential output. Now suppose that the U.S. increases income taxes. Considering the likely effect of this on AD, we should expect that in the long run: a. prices rise and the unemployment rate settles at the natural rate. b. prices rise and the unemployment rate settles above the natural rate. c. prices fall and the unemployment rate settles above the natural rate. d. prices fall and the unemployment rate settles at the natural rate.

11 e. none of the above. Answers 44. Suppose that the economy currently has an inflationary gap. This means that a. the economy is producing more than potential GDP b. the unemployment rate is above the natural rate of unemployment c. real wages are above the equilibrium real wage d. all of the above. 45. According to a WSJ article discussed in class last week, Ben Bernanke recently announced that the Fed (is, is not) likely to raise interest rates over the next year and this announcement led to a sharp (increase, decrease) in stock prices. a. is; increase b. is; decrease c. is not; increase d. is not; decrease 46. In class, we discussed an article from The Economist which compared the price of in different countries to determine which currencies are over or under valued relative to purchasing power parity. a. Big Macs b. gold c. government bonds d. oil

12 1 c 2 c 3 a 4 c 5 d 6 a 7 d 8 b 9 b 10 b 11 a 12 a 13 d 14 b 15 a 16 c 17 a 18 a 19 c 20 d 21 b 22 b 23 a 24 c 25 c 26 c 27 d 28 b 29 c 30 a 31 b 32 b 33 b 34 c 35 b 36 e 37 a 38 c 39 b 40 d 41 a 42 d 43 d 44 a 45 c 46 a Answers