Econ 202 Section 4 Final Exam

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1 Douglas, Fall 2009 December 15, 2009 A: Special Code PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing this is the only trade that these countries do. What are the net exports of Oceania and Escudia in that order? a. $140 and $140 b. $60 and -$60 c. $100 and $40 d. None of the above is correct. 2. When opening a bakery you need to buy ovens, mixers, and similar items which are tools for your workers to use. Economists call these expenditures a. capital investment. b. investment in human capital. c. personal saving. d. business consumption expenditures. 3. The long-run aggregate supply curve is vertical because a change in aggregate demand leads to a long-run change a. in output, but not the price level. b. in neither the price level nor output. c. in the price level and output. d. in the price level, but not output. 4. Last year, US nominal GDP was about a. $14 trillion, of which about 70% was consumption. b. $14 trillion; Real GDP was about $28 trillion in 1983 (base year) dollars. c. $1.4 trillion, of which about 70% was consumption. d. $14 trillion, of which about 50% was consumption. 5. 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 price level and real GDP c. only real GDP d. velocity of money 6. 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. 7. 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 investing; Ford is saving. b. Fran and Ford are both saving. c. Fran is saving; Ford is investing. d. Fran and Ford are both investing. 1

2 8. Suppose you purchased a house for $210,000 house 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 $180,000 and paid off your loan with 5% interest. You received a return on your own capital of a %. Your loss is determined by real factors, not your method of financing. b. -300%. If you had taken on more leverage, you would have lost more. c. -400%. Without leverage, you would have taken only a 14.3% loss. d %, which is the 14.3% loss on the house plus 5% interest. 9. If the exchange rate changes from 135 Kazakh tenge per dollar to 150 Kazakh tenge per dollar, the dollar has a. appreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods. b. depreciated. Other things the same, it now takes fewer dollars to buy Kazakhstani goods. c. appreciated. Other things the same, it now takes more dollars to buy Kazakhstani goods. d. depreciated. Other things the same, it now takes more dollars to buy Kazakhstani goods. Figure Refer to Figure An increase in the money supply would move the economy from C to a. B in the short run and 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 A in the long run. 11. Aggregate demand shifts right if a. taxes fall and shifts left if stock prices rise. b. taxes fall and shifts left if stock prices fall. c. taxes rise and shifts left if stock prices rise. d. taxes rise and shifts left if stock prices fall. 12. 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. $1000 increase in reserves and no increase in excess 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. 13. 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. fewer domestic goods and more foreign goods. d. more domestic goods and fewer foreign goods. 2

3 14. The source of hyperinflations is primarily a. lower output growth. b. continuing increases in money demand. c. increases in money-supply growth. d. continuing declines in velocity. 15. Which of the following by itself is consistent with the directions that the price level and real GDP changed at the onset of the Great Depression? a. aggregate supply shifted left b. aggregate demand shifted left c. aggregate supply shifted right d. aggregate demand shifted right 16. Suppose there were a large decline in net exports, caused by a sudden fall in foreign income. If the Fed wanted to prevent this from causing an increase in U.S. unemployment, it could a. sell bonds to lower interest rates. b. buy bonds to raise interest rates. c. buy bonds to lower interest rates. d. do nothing, since foreign income has no effect on the U.S. economy. 17. Which of the following combinations implies a nominal interest rate of 7 percent? a. a real interest rate of 6 percent and an inflation rate of 1 percent b. a real interest rate of 4 percent and an inflation rate of 11 percent c. a real interest rate of 5.5 percent and an inflation rate of 3 percent d. a real interest rate of 2.5 percent and an inflation rate of 2 percent 18. 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. increase and the quantity of money demanded will decrease. c. decrease and the quantity of money demanded will decrease. d. decrease and the quantity of money demanded will increase. 19. The sticky-wage theory of the short-run aggregate supply curve says that when the price level is higher than expected, a. production is less profitable and employment rises. b. production is more profitable and employment falls. c. production is more profitable and employment rises. d. production is less profitable and employment falls. 20. In the long run, changes in the money supply affect a. prices. b. real output. c. unemployment rates. d. All of the above. 21. The aggregate quantity of goods and service demanded rises as the aggregate price level falls because a. real wealth rises, interest rates fall, and the dollar depreciates. b. real wealth falls, interest rates fall, and the dollar depreciates. c. real wealth rises, interest rates rise, and the dollar appreciates. d. real wealth falls, interest rates rise, and the dollar appreciates. 22. 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 money supply d. a decrease in the expected price level 3

4 23. During recessions, automatic stabilizers tend to make the government's budget a. move toward deficit. b. move toward surplus. c. move toward balance. d. not necessarily move the budget in any particular direction. 24. 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. Price will fall and quantity may either rise or fall. c. Quantity will rise and price may either rise or fall. d. Quantity will fall and price may either rise or fall. 25. The U.S.natural rate of unemployment is about 5.5% and the current unemployment rate (U3) is about a. 10%, meaning that cyclical unemployment is at about 4.5%. b. 16.5%, meaning that cyclical unemployment is at about 3%. c. 21.5%, meaning that cyclical unemployment is at about 16%. d. 10%, meaning that cyclical unemployment is at about 15.5%. 26. When a business sells bonds, it 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. 27. In 1945 a rule of thumb was that a young man must make $40 per week before he could afford to marry and start a family. The CPI was about 20 in 1944 and about 100 in To apply the same rule of thumb in 1983 the young man should make a. $400 per week. b. $100 per week c. $200 per week d. $8 per week. 28. A decrease in the expected price level shifts short-run aggregate supply (AS) to the a. left, 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. right, but an increase in the current price level does not shift short-run AS. 29. If the Federal Reserve decided to lower interest rates, it could a. sell bonds to raise the money supply. b. buy bonds to raise the money supply. c. sell bonds to lower the money supply. d. buy bonds to lower the money supply. 30. According to James Hamilton, the chief danger to the U.S. economy posed by the big changes in the Fed s balance sheet since September 2008 are a. the Fed may someday have to pay interest on excess reserves. b. hyperinflation due to the higher taxes required to pay interest on recent Treasury borrowings. c. increased inflation and increased taxpayer liability for interest payments if the Fed s new assets don t pay off. d. more government control over large banks. 4

5 31. An economic contraction caused by a shift in aggregate demand causes prices to a. rise in the short run, and fall back to their original level in the long run. b. rise in the short run, and rise even more in the long run. c. fall in the short run, and fall even more in the long run. d. fall in the short run, and rise above their original level in the long run. 32. If purchasing-power parity holds, a dollar will buy a. one unit of each foreign currency. b. foreign currency equal to the U.S. price level divided by the foreign country s price level. c. enough foreign currency to buy as many goods in the foreign country as a dollar will buy in the United States. d. None of the above is implied by purchasing-power parity. 33. 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. U.S. foreign portfolio investment and U.S. domestic investment. c. investment for Larry and U.S. foreign direct investment. d. investment for Larry and U.S. foreign portfolio investment. 34. If Congress were to change the tax laws so that investors no longer got tax breaks for purchasing new houses, the likely result in the loanable funds market would be a. higher interest rates and greater investment. b. lower interest rate and less investment. c. higher interest rates and less investment. d. lower interest rates and greater investment. 35. 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. 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. 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. 36. 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 fall and the quantity may either rise or fall. c. Price will rise and quantity may either rise or fall. d. Quantity will fall and price may either rise or fall. 37. A country has a trade deficit. Its a. net capital outflow must be positive and domestic saving is smaller than investment. b. net capital outflow must be negative and domestic saving is smaller than investment. c. net capital outflow must be negative and domestic saving is larger than investment. d. net capital outflow must be positive, and domestic saving is larger than investment. 38. 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 falls, which causes the opportunity cost of holding money to fall. c. the interest rate falls, which causes the opportunity cost of holding money to rise. d. the interest rate rises, which causes the opportunity cost of holding money to rise. 5

6 39. The present value of a payment to be made in the future increases as a. the interest rate falls and the time until the payment is made decreases. b. the interest rate rises 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. 40. To decrease the money supply, the Fed can a. buy government bonds or increase the discount rate. b. buy government bonds or decrease the discount rate. c. sell government bonds or increase the discount rate. d. sell government bonds or decrease the discount rate. 41. 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 fall, 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 rise, and real GDP might rise, fall, or stay the same. 42. 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 risen. b. His real and nominal salary have fallen. c. His real salary has fallen and his nominal salary has risen. d. His real salary has risen and his nominal salary has fallen. 43. If people had been expecting prices to rise but in fact prices fell, then who 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 Table 28-1 Labor Data for Wrexington Year Adult population Number of employed Number of unemployed Refer to Table The labor force of Wrexington in 2004 was a b c d

7 Figure 4-7. Supply and Demand for Neckties. 45. Suppose the necktie market is currently in equilibrium as shown in Figure 4-7. What could cause the equilibrium price of neckties to rise to $35 and the equilibrium quantity to rise to 600? a. an increase in the price of silk used to make neckties. b. a drop in the price of suits (a complement). c. a fall in consumer income (neckties are a normal good). d. an improvement in the technology used to produce neckties. Figure Refer to Figure If the current interest rate is 2 percent, a. there is an excess supply of money. b. people will try to borrow more money, which drives interest rates up. c. as the money market moves to equilibrium, people will buy more goods. d. All of the above are correct. 47. If a dollar buys more potatoes in the U.S. than in France, then a. the real exchange rate is less than 1; a profit might be made by buying potatoes in France and selling them in the U.S. b. the real exchange rate is greater than 1; a profit might be made by buying potatoes in the U.S. and selling them in France. c. the real exchange rate is less than 1; a profit might be made by buying potatoes in the U.S. and selling them in France. d. the real exchange rate is greater than 1; a profit might be made by buying potatoes in France. and selling them in the U.S. 7

8 48. Which of the following will reduce the price level and real output in the short run? a. technical progress b. an increase in the money supply c. an increase in oil prices d. a decrease in the money supply 49. Suppose that the value of a bond is the sum of the present values of all of its future payments. A certain bond pays $50 in one year, $50 in two years, and $1050 in three years. Using an interest rate of 5%, what is the value of the bond? a. $1150 b. $ c. $ d. $ 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 consumer 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 consumer goods and services. d. All of the above are correct. 8

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

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

11 Douglas, Fall 2009 December 15, 2009 B: Special Code PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. When opening a bakery you need to buy ovens, mixers, and similar items which are tools for your workers to use. Economists call these expenditures a. investment in human capital. b. personal saving. c. capital investment. d. business consumption expenditures. 2. 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 saving. c. Fran is investing; Ford is saving. d. Fran and Ford are both investing. 3. 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 a dollar will buy 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. 4. 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. velocity of money c. only real GDP d. the price level and nominal GDP 5. The U.S.natural rate of unemployment is about 5.5% and the current unemployment rate (U3) is about a. 21.5%, meaning that cyclical unemployment is at about 16%. b. 10%, meaning that cyclical unemployment is at about 15.5%. c. 10%, meaning that cyclical unemployment is at about 4.5%. d. 16.5%, meaning that cyclical unemployment is at about 3%. 6. 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. 7. Suppose there were a large decline in net exports, caused by a sudden fall in foreign income. If the Fed wanted to prevent this from causing an increase in U.S. unemployment, it could a. sell bonds to lower interest rates. b. buy bonds to lower interest rates. c. buy bonds to raise interest rates. d. do nothing, since foreign income has no effect on the U.S. economy. 1

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