econ222 midterm exam2 winter07 - Winter 2007 Econ 22...

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Unformatted text preview: Winter 2007 Econ 22 Midterm Exam #2 v6 Name . MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The period between a busineSs cycle peak and a business cycle trough is called 1) S 2 A) expansion. B) recalculation. C) diffusion. D) recession. 2) Which of the following would be classified as durable goods? I 2) 2% A A) refrigerators B) ink pens C) notebooks D) tomatoes 3) Inflation tends to during the expansion phase of the business cycle and 3) é i C -1 during the recession phase of the business cycle. A)‘ldecrease; increase B) decrease; decrease further increase; decrease D) increase; increase further 4) When the economy enters a recessionary phase of the business cycle, unemployment tends to 4) \ 2 A) be unchanged. B) decrease. C) change in the same direction as the rate of inflation. {PS/increase. 5) During the recession phase of the business cycle, 5) L A) interest rates are usually falling. B)’ihcome is usually rising. g/unemployment is usually falling. D) production is usually rising. 6) The formula for the multiplier is 6) A 2 A) MPC/(l—MPS) ' B) 1/(1-MPC) C) l/MPC D) (1-MPC)/MPS 7) If the marginal propensity to consume is 0.85, what is the multiplier? 7) é l D A) 1.85 B) 8.50 C) 1.18 D) 6.67 /_ -._ ,. w 3 - , ,5 ff 8) Which of the following financial assets is most liquid? "*2 Q; \‘ 1‘: a ta 8) .1 * .1 k 3t V ”A) a government bond B) a corporate bond TEE-C “r (x C) a mutual fund share pfa dollar bill . . . . . W (L 9) The pr1nc1ple that an increase in the price level makes US. exports more expensive and foreign 9) imports cheaper, causing a decrease in net exports, is called the A) interest rate effect. B) relative price effect. C) foreign purchases effect. D) real balances effect. 10) An increase in the price level leads to a decrease in the quantity of real GDP demanded because 10) l 2 the increase in the price level 12 1 Q i A) lowers interest rates, decreasing investment. B) leads consumers to switch to goods and services whose prices have not increased. / AU], C) makes US. exports less expensive and foreign imports more expensive, decreasing net Jr exports. D) lowers the real value ofyhousehold wealth, decreasing consumption. 11) Which of the following will NOT cause the aggregate demand curve to shift? A change in 11) ‘a A) government purchases B) the price level ;.C/)’personal income taxes /D) business taxes L/ / / 12) At potential GDP (full-employment GDP), unemployment equals ’ 12) j) A) cyclical unemployment. B) zero. C) frictional unemployment. D) frictional and structural unemployment. 13) Along the long-run aggregate supply curve, a decrease in the price level the quantity of 13) 22 real GDP supplied. v . / A) increases B) does not change i . C) may increase or may decrease D) decreases \‘ ,, 14) The short-run aggregate supply 3% curve slopes upward because over the short run as the 14) D prices of final goods and services rise the A) pr'ce of wages rise more rapidly. /B) interest rates are fixed. 94 exports are fixed. D) price of wages rise more slowly. 15) Along the short-run aggregate supply curve, a higher price level leads to __ profits by 15) _D_ firms. A) no change in B) higher or lower C) lower D) higher 16) In the basic aggregate demand and aggregate supply model, an increase in government 16) A purchases will in the shortan lead to in real GDP and in the price level. mificriase;l‘an increase B) a decrease; a decrease C) an increase; a decrease D) a decrease; an increase ( w 17) In the basic aggregate demand and aggregate supply model, a decrease in interest rates will in 17) B the short run lead to in real GDP and in the price level. g A) an increase; a decrease B) an increase; 'an ingrgegge) C) a decrease; a decrease D) a decrease; an increase 7%“ 18) In the adjustment of the economy in the long run from an "overheated economy" (where GDP iS 18) g C above its potential) back to potential GDP, workers and firms will adjust their expected future price level , which will A) downward; shift long-run aggregate supply to the right. B) upward; shift short-run aggregate supply to the right. C) upward; shift short-run aggregate supply to the left. D) downward; shift long—run aggregate supply to the left. 9 19) Economies where goods and services are traded directly for other goods and services are called 19) 2 fl __ economies. A) direct B) barter C) trade D) exchange 20) Money is 20) £ A) the value of assets minus the value of debts. B) any asset that people are generally willing to accept in exchange for goods and services or for payment of debts. C) the amount earned during a year. D) the value of assets. 21) Commodity money is a good used as money that 21) {g PS A) has value independent of its use as money. B) has little to no value independent of its use as money. Z27 can be used to purchase commodities, but not services. ,B’fis backed by a valuable commodity such as gold. 22) If whole tomatoes were money, which of the following functions of money would be the hardest 22) Z for tomatoes to satisfy? A) Unit of account B) Medium of exchange C) Store of value D) Certificate of gold 23) Fiat money has 23) C/ A) little to no intrinsic value but is backed by the quantity of ,gold held by the central bank. /B)’value independent of its use as money. C) little to no intrinsic value and is authorized by the central bank or governmental body. /D)/value, because it can be redeemed for gold by the central bank. 24) The M1 measure of the money supply equals 24) CI/ .Aa/paper money plus coins. P) currency plus checking account balances plus traveler's checks plus savings account balances. C) currency plus checking account balances plus traveler's checks. ”currency plus checking account balances. 25) If someone withdraws $500 from their savings account and puts it in their Checking account, 25) Q 5 then M1 will and M2 will A) not change; increase B) increase; decrease @increase; not change D) not change; decrease 26) Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A 26) A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's reserves immediately increase by /’ g @)‘$10,000. B) $50,000. C) $2,000. D) $8,000. 27) As a result of Kristy's deposit, checking account deposits in the banking system as a whole 27) @ (including the original deposit) could increase up to a maximum of A) $100,000. B) $50,000. C) $8,000. D) $10,000. 28) As a result of Kristy's deposit, Bank A's required reserves increase by 28) C/ A) $8,000. B) $10,000. C) $2,000. 1 D) $50,000. moon ' "-1"! < ”13000549 29) As a result of Kristy's deposit, Bank A can make a maximum loan of 29) y A) $50,000. B) $10,000. C) $2,000. D) $8,000. 30) Which of the following best describes how banks create money? 30) g g A) Banks charge fees for providing financial advice. - a \BiBanks create checking account deposits when making loans from excess reserves. Q2) Banks charge higher interest rates on loans than they pay on deposits. D) Banks make loans from reserves. 31) The three main monetary policy tools used by the Federal Reserve to manage the money supply 31) g A are A) open market operations, discount policy, and reserve requirements. interest rates, tax rates, and government spending. open market operations, the exchange rate of the dollar against foreign currencies, and ’ government purchases. D) tax rates, governmgnileIrchases, and government transfer payments. (- v 32) Open market operations refer to the purchase or sale of to control the money supply. 32) g _: A A) US. Treasury securities by the Federal Reserve B) corporate bonds and stocks by the US. Treasury @orporate bonds and stocks by the Federal Reserve D) US. Treasury securities by the US. Treasury 33) To increase the money supply, the Federal Reserve could 33) E @raise the required reserve ratio. B) conduct an open market purchase of Treasury securities. C) decrease income taxes. D) raise the discount rate. 34) A decrease in the discount rate bank reserves and the money supply. 34) A z: ; C) , \. MW»- W Mdecreasks;ffncreases B) decreases; decreases ih‘Creases; increases D)'in&eases; decreases 35) If households and firms decide to hold less of their money in checking account deposits and 35) E: 2 more in currency, then the money supply A) will increase. 69MB decrease. C) may increase or decrease. D) will not change. 36) An increase in the interest rate 36) O A) decreases the opportunity cost of holding money. B) increases the percentage yield of holding money. C) decreases the percentage yield of holding money. <9 increases the opportunity cost of holding money. 37) Using the money demand and money supply model, an increase in money demand would cause 37) 2 E the i terest rate to i” , ’ ,4." '* (I) ncrease. \ B not change. C)/decrease. A V D) J all below the inflation rate. 38) The interest rate that banks charge other banks for overnight loans is the ‘ 38) _E)_ A) discount rate. B) federal funds rate. ' 9 Treasury bill rate. D) prime rate. 39) Which of the following would be most likely to induce the Federal Reserve to conduct 39) [email protected]_ expansionary monetary policy? A significant decrease in A) oil prices B) investment spending. C) income tax rates. ,DTbusiness taxes. ’ r. r 40) Which of the following would be most likely to induce the Federal Reserve to conduct 40) C contractionary monetary policy? A) A significant decrease in government purchases '3) A significant decrease in investment spending. (9A significant increase in the wealth of households from stock market gains and housing “’1‘ price increases. (/D)A significant increase in income tax rates. 41) The increase in the amount the government collects in taxes when the economy expands and the 41) 9 decrease in the amount the government collects in taxes when the economy goes into a recession is an example of \ A) automatic monetary policy. (B) iscretionary fiscal policy. C) discretionary monetary policy. ' automatic stabilizers. 42) Expansionary fiscal policy involves 42) a A) increasing the money supply and decreasing interest rates. B) increasing taxes or decreasing government purchases. C) increasing government purchases or decreasing taxes. D) decreasing the money supply and increasing interest rates. 43) If real GDP exceeded potential real GDP and inflation was increasing, which of the following wouldibe an appropriate fiscal policy? «16m increase in oil prices FB) An increase in taxes (C) A decrease in the money supply and an increase in the interest rate )D)’An increase in government spending 44) The use of fiscal policy to stabilize the economy is limited because (Affhe legislative process can be slow, which means that it is difficult to make fiscal policy / actions in a timely way. B) changes in government spending and tax rates have a small effect on aggregate demand. C) the Internal Revenue Service (IRS) resist changes in tax rates, because of all the changes they would have to make to the tax code. D) changes in government spending and tax rates have a small effect on interest rates. 45) Crowding out refers to a decline in as a result of an increase in A) government purchases; tax rates @ government purchases; private expenditures C) tax revenues; unemployment D) private expenditures; government purchases 46) Using Okun's law, what will be the amount of the GDP gap if the unemployment rate rises above its natural level of 4.5% to 7.5%? ’4 ,§ / A , A) 1.5% B) 3% C) 6% I D 7.5% . . . ,. . . . ,, g u E 47) In The World 18 Flat Frledman describes the Quiet CI'ISIS as: A) the increase in trade barriers adopted by the US. in recent years that will hurt future growth B) the fact that US. students aren't encouraged to learn foreign languages C) the reduction in US. math and science skills and government funding D) all of the above . 48) What factors work to America's favor according to Friedman in The World is Flat? A) its university system B) its strong government funding for science and research C) its celebrity culture D) all of the above 49) What ' the "Triple Convergence" according to Friedman? that Karl Marx's socialist theories are losing ground to capitalism B) that India, China and Russia are beginning to "shutout the US. strategically and with trade policy 5/ C) the development of technologies that flatten the world, specialists to use them, and 3billion people from lesser developed parts of the world have joined the global economy :14)" 45) D 46) C- 47) L am 49) " law/)4. D) the development of anti-capitalist rhetoric in South America, the strategic partnerships between Russia and the middle east, and China's currency peg. 50) True or false: The Taylor Rule measures the time lage it takes for fiscal policy to take effect 50) &_ A) True B) False ESSAY. Write your answer in your bluebook. 51) Given: the potential GDP for an economy is $200b, its natural unemployment rate is 5% and its MPC=0.8 a. b. F“ g. h. i. Graph the effect of an income tax increase. Label the new equilibrium. If the unemployment rate increases to 8%, what will be the GDP gap and new level of actual GDP according to Okun’s law? Describe and graph the self-correction mechanism that theoretically moves the economy back to potential GDP without any governmental assistance. Explain Keyne’s criticism of the self-correction mechanism. If the govemment decided to increase spending by $60 billion, how much should it increase government spending? Graph the supply and demand for money and label equilibrium interest rate. Describe (and graph) an appropriate response by the Federal Reserve to the recession. Describe how open-market operations work (be specific). If the required reserve ratio were 25% and the Fed pumps $100b into the economy, by how much would the money supply increase (including the initial $100b)? Explain the impact of e) and g) on the economy and show this impact on an AD/SRAS graph. Extra credit: Briefly explain why the savings and loan crisis occurred b Lb 3 ,i A? ...
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