I. Multiple Choice Questions. Choose one best answer for each questions, 1 point each.

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1 I. Multiple Choice Questions. Choose one best answer for each questions, 1 point each. 1. A macroeconomist - as opposed to a microeconomist - would study a. the effects of rent control on housing in New York City. b. the effects of foreign competition on the US auto industry. c. the effects of borrowing by the federal government. d. the effects of raising the gasoline tax on transit ridership. 2. When quantity supplied decreases at every possible price, we know that the supply curve has a. shifted to the left. b. shifted to the right. c. not shifted; rather, we have moved along the supply curve to a new point on the same curve. d. not shifted; rather, the supply curve has become flatter. 3. Figure 1 Price S S 2 1 Demand Quantity Refer to Figure 1. What is the amount of the tax per unit? a. $1 b. $2 c. $3 d. $4 4. According to the rule of 70, if the interest rate is 5 percent, how long will it take for the value of a savings account to double? a. about 3.5 years b. about 6.3 years c. about 12 years d. about 14 years 5. Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 16 years (with compounding interest rate)? a. $1(1 +.05) 16 b. $1( ) 16 c. $1( ) d. $1(1 + 16/.05) 16 1

2 6. Table 1 Labor Hours Needed to Make 1 Pound of: Amount Produced in 40 hours Meat Potatoes Meat Potatoes Farmer 8 hours/pound 5 hours/pound 5 pounds 8 pounds Rancher 4 hours/pound 10 hours/pound 10 pounds 4 pounds Refer to Table 1. Assume that the farmer and the rancher each has 40 labor hours available. If each person divides his time equally between the production of meat and potatoes, then total production is a. 5 pounds of meat and 4 pounds of potatoes. b. 6 pounds of meat and 7.5 pounds of potatoes. c. 7.5 pounds of meat and 6 pounds of potatoes. d. 10 pounds of meat and 8 pounds of potatoes. 7. The information below for 2008 in millions was reported by the World Bank. On the basis of this information, which list below contains the correct ordering of real GDP per person from highest to lowest? Country GDP (Constant US$) GDP(Current US$) Population Ghana 7,690 16, Kenya 17,569 30, Tanzania 15,394 20, a. Ghana, Kenya, Tanzania b. Ghana, Tanzania, Kenya c. Kenya, Tanzania, Ghana d. Kenya, Ghana, Tanzania 8. Figure 2. The figure shows a utility function for Dexter. Utility C B A $800 $1,300 $1,800 Wealth Refer to Figure 2. Which of the following statements is correct? a. Dexter craves risks b. Dexter despises risks. c. Dexter is indifferent between a risky business and a non-risky business, as long as they give him the same expected return. d. Dexter has wealth valued at $1,300 for sure 2

3 9. In 2009, based on concepts similar to those used to estimate U.S. employment figures, the Swedish adult non-institutionalized population was million, the labor force was million, and the number of people employed was million. According to these numbers, the Swedish labor-force participation rate and unemployment rate were about a. 64.6% and 8.2%. b. 64.6% and 5.3%. c. 59.3% and 8.2%. d. 59.3% and 5.3%. 10. When the Fed decreases the discount rate, banks will a. borrow more from the Fed and lend more to the public. The money supply increases. b. borrow more from the Fed and lend less to the public. The money supply decreases. c. borrow less from the Fed and lend more to the public. The money supply increases. d. borrow less from the Fed and lend less to the public. The money supply decreases. 11. If the CPI 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 12. The price level rises if either a. money demand shifts rightward or money supply shifts leftward. b. money demand shifts rightward or money supply shifts rightward. c. money demand shifts leftward or money supply shifts rightward. d. money demand shifts leftward or money supply shifts leftward. Figure 3. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. MS MS MD 10,000 15, Refer to Figure 3. Which of the following events could explain a shift of the money-supply curve from MS 1 to MS 2? a. an increase in the value of money b. a decrease in the price level c. an open-market purchase of bonds by the Federal Reserve d. None of the above is correct. 3

4 14. Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your a. nominal wage is higher. b. nominal wage is lower. c. real wage is higher. d. real wage is lower. 15. Based on the quantity equation, if M = 3,000, P = 2, and Y = 4,500, then V = a b c. 3. d According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then a. nominal and real GDP would fall by 7 percent. b. nominal GDP would fall by 7 percent; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would fall by 7 percent. d. neither nominal GDP nor real GDP would change. 17. Shawn puts money into an account. One year later he sees that he has 5 percent more dollars and that his money will buy 6 percent more goods. a. The nominal interest rate was 11 percent and the inflation rate was 5 percent. b. The nominal interest rate was 6 percent and the inflation rate was 5 percent. c. The nominal interest rate was 5 percent and the inflation rate was -1 percent. d. None of the above is correct. 18. Wealth is redistributed from debtors to creditors when inflation was expected to be a. high and it turns out to be high. b. low and it turns out to be low. c. low and it turns out to be high. d. high and it turns out to be low. 19. Juan lives in Ecuador and purchases a motorcycle manufactured in the United States. The motorcycle is a. both a U.S. and Ecuadorian export. b. both a U.S. and Ecuadorian import. c. a U.S. import and an Ecuadorian export. d. a U.S. export and an Ecuadorian import. 20. If U.S. residents purchase $500 billion of foreign assets and foreigners purchase $1300 billion of U.S. assets, a. U.S. net capital outflow is $800 billion; capital is flowing into the U.S. b. U.S. net capital outflow is $800 billion; capital is flowing out of the U.S. c. U.S. net capital outflow is -$800 billion; capital is flowing into the U.S. d. U.S. net capital outflow is -$800 billion; capital is flowing out of the U.S. 21. Which of the following equations is always correct in an open economy? a. I = Y - C b. I = S c. I = S - NCO d. I = S + NX 4

5 22. During some year a country had exports of $50 billion, imports of $70 billion, and domestic investment of $100 billion. What was its saving during the year? a. $80 billion b. $100 billion c. $120 billion d. $150 billion 23. You are staying in London over the summer and you have a number of dollars with you. If the dollar depreciates relative to the British pound, then other things the same, a. the dollar would buy more pounds. The depreciation would discourage you from buying as many British goods and services. b. the dollar would buy more pounds. The depreciation would encourage you to buy more British goods and services. c. the dollar would buy fewer pounds. The depreciation would discourage you from buying as many British goods and services. d. the dollar would buy fewer pounds. The depreciation would encourage you to buy more British goods and services. 24. According to purchasing-power parity, if a basket of goods costs $100 in the U.S. and the same basket costs 800 pesos in Argentina, then what is the nominal exchange rate? a. 8 pesos per dollar b. 1 peso per dollar c. 1/8 peso per dollar d. none of the above is correct 25. A Big Mac in Japan costs 320 yen while it costs $3.60 in the U.S.. The nominal exchange rate is 80 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity? a. the price of Big Macs in the U.S. falls, the nominal exchange rate falls b. the price of Big Macs in the U.S. falls, the nominal exchange rate rises c. the price of Big Macs in the U.S. rises, the nominal exchange rate falls d. the price of Big Macs in the U.S. rises, the nominal exchange rate rises 26. Other things the same, an increase in the U.S. interest rate causes the quantity of loanable funds supplied to a. rise because net capital outflow and domestic investment rise. b. rise because national saving rises. c. fall because net capital outflow and domestic investment rise. d. fall because national saving falls. 27. If at a given real interest rate desired national saving were $50 billion, domestic investment were $40 billion, and net capital outflow were $20 billion, then at that real interest rate in the loanable funds market there would be a a. surplus. The real interest rate would rise. b. surplus. The real interest rate would fall. c. shortage. The real interest rate would rise. d. shortage. The interest rate would fall. 5

6 28. If the supply of loanable funds shifts right, then the equilibrium a. levels of net capital outflow and domestic investment decrease. b. level of net capital outflow increases and the equilibrium level of domestic investment decreases. c. level of net capital outflow decreases and the equilibrium level of domestic investment increases. d. levels of net capital outflow and domestic investment increase. Figure percent $billions 29. Refer to Figure 4. In the Figure shown, if the real interest rate is 6 percent, the quantity of loanable funds demanded is a. $20 billion, and the quantity supplied is $40 billion. b. $20 billion, and the quantity supplied is $60 billion. c. $60 billion, and the quantity supplied is $20 billion. d. $60 billion, and the quantity supplied is $40 billion. 30. If the demand for loanable funds in the LF market shifts right, then the real interest rate a. rises. b. falls. c. rises then falls. d. falls then rises. 31. An increase in the budget deficit causes domestic interest rates a. and investment to rise. b. to rise and investment to fall. c. to fall and investment to rise. d. and investment to fall. 32. The sum of the components of the aggregate expenditure that are not influenced by real GDP is called a. induced expenditure. b. the MPC. c. autonomous consumption. d. autonomous expenditure. 6

7 Figure Refer to Figure The initial effect of an increase in the budget deficit in the loanable funds market on the supply side is illustrated as a move from a. a to b. b. a to c. c. c to b. d. c to d. 34. Refer to Figure In the market for foreign-currency exchange, the effects of an increase in the budget surplus is illustrated as a move from f to a. e. b. f. c. h. d. g. 35. As recessions begin, production a. and unemployment both rise. b. rises and unemployment falls. c. falls and unemployment rises. d. and unemployment both fall. 36. The variables on the vertical and horizontal axes of the aggregate demand and supply graph are a. the price level and real output. b. real output and employment. c. employment and the inflation rate. d. the value of money and the price level. 37. Changes in the price level affect which components of aggregate demand? a. only consumption and investment b. only consumption and net exports c. only investment d. consumption, investment, and net exports 7

8 38. Which of the following effects provide incentives for consumers to spend less when the price level rises? a. the wealth effect and the interest-rate effect b. the wealth effect but not the interest-rate effect c. the interest-rate effect but not the wealth effect d. neither the wealth-effect nor the interest rate effect 39. The Central Bank of Wiknam increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the right? a. both the money supply increase and the investment tax credit b. the money supply increase but not the investment tax credit c. the investment tax credit but not the money supply increase d. neither the investment tax credit nor the money supply increase 40. The long-run aggregate supply curve shifts right if a. technology improves. b. the price level decreases. c. the money supply increases. d. All of the above are correct. 41. In the short run, an increase in the money supply causes interest rates to a. increase, and aggregate demand to shift right. b. increase, and aggregate demand to shift left. c. decrease, and aggregate demand to shift right. d. decrease, and aggregate demand to shift left. 42. If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could a. buy bonds to increase the money supply. b. buy bonds to decrease the money supply. c. sell bonds to increase the money supply. d. sell bonds to decrease the money supply. 43. If the multiplier is 5, then the MPC is a b c d Take the following information as given for a small, imaginary economy: When income is $10,000, consumption spending is $6,500. When income is $11,000, consumption spending is $7,300. The marginal propensity to consume for this economy is a b c or 0.664, depending on whether income is $10,000 or $11,000. d

9 45. The multiplier effect a. and the crowding-out effect both amplify the effects of an increase in government expenditures. b. and the crowding-out effect both diminish the effects of an increase in government expenditures. c. diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects. d. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects. 46. If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by a. increasing the money supply, which raises interest rates. b. increasing the money supply, which lowers interest rates. c. decreasing the money supply, which raises interest rates. d. decreasing the money supply, which lowers interest rates. 47. Which of the following is not an automatic stabilizer? a. the minimum wage b. the unemployment compensation system c. the federal income tax d. the welfare system Disposable income (dollars) Consumption expenditure (dollars) Using the table above, if disposable income is 400, saving is a. $50 b. -$50 c. $0 d. $ Short run Philips curve measures the relationship between inflation rate and unemployment, and is downward sloping a. true b. false 50. Long run Philips curve measures the relationship between inflation rate and unemployment, and is downward sloping a. true b. false 9

10 II. Long Questions. 1. This question deals with CPI and inflation (15 points) 2012 Statistics Item Quantity Price Loaves of bread 20 $3.00 Jugs of soda 20 $ Statistics Item Quantity Price Loaves of bread 22 $4.00 Jugs of soda 30 $1.50 The tables above give the purchases of an average consumer in a small economy (These consumers purchase only loaves of bread and jugs of soda, and these two items constitute the entirety of the CPI basket). Suppose 2012 is the reference base period. a. Give me the quantities for each item in the CPI basket. (3 pts.) b. What is the cost of the CPI basket using 2012 prices? (show steps) (5 pts.) c. What is the cost of the CPI basket using 2013 prices? (show steps) (5 pts.) d. What is the CPI in 2013? (show steps) (5 pts.) e. Using CPI, calculate the inflation rate in (show steps) (7 pts.) 10

11 2. This question deals with fiscal policy and its effect on the AD/AS model. (20 points) a. Use a graph and words to explain the effect of an increase in government expenditure on the AD/AS model. In this question, assume there is no multiplier effect and no crowding out effect. (8 points) b. Use two graphs and words to show me how the multiplier effect and the crowding out effect could affect your answer in part (a), respectively. (12 points) 11

12 3. This questions deals with concepts in the money market (15 points) The figure above shows the demand for money in Kiteland. a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 3 percent, draw the supply of money curve, mark it as MS0. b) Suppose that Kiteland's Central Bank wants to raise the interest rate by 1 percentage point, draw the supply of money curve, mark it as MS1. c) In order to change the quantity of money to raise the interest rate by one percentage point, if the Central Bank uses an open market operation, does it make an open market purchase or an open market sale? Explain your answer. 12

13 Bonus Question ( points) In the country of Midland, autonomous consumption expenditure is $60 million, and the marginal propensity to consume is 0.6. Investment is $110 million, government expenditure is $70 million, and there are no income taxes. Investment and government expenditure are constant they do not vary with income. The nation does not trade with the rest of the world. a) Draw the aggregate expenditure curve. (2 pts) b) What is the autonomous aggregate expenditure? (2 pts) c) What is the size of the multiplier in Midland's economy? (2 pts) d) What is aggregate planned expenditure and what is happening to inventories when real GDP is $800 million? (2 pts) e) What is the economy's equilibrium aggregate expenditure? (2 pts) f) What is your instructor s name? (2 pts if you get it right, - 1 trillion pts and an evil stare from me if you get it wrong) 13

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