Econ 102 Fall 2005 Final Exam with solutions

Econ 102 Fall 2005 Final Exam with solutions - Econ 102...

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Unformatted text preview: Econ 102: Fall 2005 Final Exam Instructions 1. This exam lasts for 3 hours and has three parts. Part A 1. Part A consists of 50 multiple choice questions. 2. Answer part A on the form provided. 3. Use only a number 2 pencil 4. You must fill in your student ID number and your Me by marking the boxes provided ‘ Parts B and C . 1. Part B consists of 10 true false questions , 2. Make sure you explain your answer. No points will b unsubstantiated answers. 3. Part C consists of 7 quantitative questions 4. Answer parts B and C in the space provided on the exam paper itself. / e awarded for Part A: Multiple Ohbice STOP HAVE YOU FILLED IN YOUR NAME AND STUDENT NUMBER ON THE FORM IN THE SPACE PROVIDED? . l. A variable x is related to a variable y by the expression y = l/x. x varies randomly in the interval [05,1]. The correlation coefficient between x and y is: a) —1 . b) l c) 0 . d) None of the above. 2. When data is detrended by the method of flexible detrending the business cycle component is obtained by: 3,}- Subtracting the flexible trend from the original data series. '13) Adding the flexible trend to theoriginal data series. 0) Dividing the flexible trend by the original data series. d) Multiplying the flexible trend by the original data series. 3. Which of the following statements describes the difference betWeen nominal and real gdp? a) Real gdp includes only goods; nominal gdp includes goods and services. b) Real gdp is measured by valuing all of the goods and services produced in a given year using base-year prices; nominal gdp values goods and services at current prices. c) Real gdp is equal to nominal gdp less the depreciation of the capital stock. d) Real gdp is equal to nominal gdp multiplied by the price level. 4. Which of the following statements is FALSE? a) Accumulating capital helps to produce extra output in the future. b) Output is produced from the services of human and physical capital through a production process. 0) Output is a stock that will give people utility for several periods. d) People can use income either to consume or to accumulate capital. 5. Which of the following is NOT a stock variable? a) Government debt. b) The labor force. c) The amount of money held by the public. d) Inventory investment. 6. Which of the following shifts the labor demand curve? M .. , a) An increase in the real wage. / b) A change in household preferences for leisure. c) A new invention that raises labor productivity. , \ x.\ d) An increase in expected future income of households. \_ 7. Which of the following statements regarding the production possibility frontier between goods today and goods tomorrow is FALSE? a) Points outside the fi'ontier are unattainable. b) Points inside the frontier are unattainable. c) There exists a point on the frontier that would be strictly preferred by a representative consumer to any point .inside the frontier. d) Any point on the frontier is attainable. 8. A decline in the real interest rate: ». W a) Shifts the investment demand curve leftward. b) Causes a movement up and left along the investment demand curve. c) Shifts the investment demand curve rightward. (1) Causes a movement 9. An agent lives for two periods. second period. She consumes this agent can borrow or lend at the interest rat down and right .along the investment demand curve. // She has incOme Y1 in the first period and Y2 in the C1 in the first period and C2 in the second period. If e r, her budget constraint will be: a) Ci+C2/(l+r)sYl+Yz/(l+r)v b) C1+C2/(l+r)2l_’l+YZ/(l+r) c) C1+C2/(l+r)>l’l+l’2/(l+r) d) None of the above. 10. In the two—period consumption mo tomorrow’s consumption in terms 0 del, if the interest rate is r, then the price of f today’s consumption is: a. l/r b. r 1 c. l + r K d. 1/0 +r) l 1. Which of the following will lead to an increase in the fundamental value 'of an asset? a) A fall in the interest rate. b) An anticipated fall in the expected future stream of income. ‘ c) An unexpected fall in the fibre stream of income. (1) A bubble. 12. Aeoording to the quantity theory of money, which of the following might happen if the money supply increases? a) Velocity is constant, prices are constant, and total output increases. b) Velocity increases, prices are constant, and total output is constant. 0) Velocity is constant, prices fall, and total output is constant. d) Velocity increases, prices fall, and total output is constant. 13. If money demand is given by the equation (M/P)D = 0.4Y, where Y is real output: ‘ 5:} hi a) The velocity of circulation is positively related to the nominal interest rate. b) The velocity of circulation is negatively related to the nominal interest rate. d j .1/ c) The velocity of circulation equals 0.4. L..__,, ‘l . .4 kt \ Q} The velocity of circulation equals 2.5. Y LT: 1 l4. According to the classical theory of aggregate supply: aggregate supply is independent of the price level because: i a. The velocity of circulation is constant. b. Changes in labor demand and supply, as a fimction of the real wage, offset each other when the nominal price level changes. c. An increase in the nominal price level is accompanied by a corresponding increase in the nominal wage to keep the real wage and employment unchanged. (1. i The money supply does not affect real variables. 15. Let (:00 represent the standard deviation of X for any variable X. Let Y be de, I be investment and let C represent consumption. Which of the following is true for U.S. postwar data? ‘* a. a<o> am > 0(1) b. «m > 'otC) > 0(1) c. q(l)>g(Q/>.Q:Q’) d. 0(1) > 00’) > 0(6) 16. According to Chatterjee’s article “Real Business Cycles”, countercyclical policies contributed to a decrease in the volatility of gdp in the post-war period because: a) They kept government spending under control. b) They helped to prevent financial crises. .; ‘ c)7 They were associated with reforms that led to higher flexibility in the . k“ labor market. /',,d) They eliminated TFP fluctuations. 17. According to Robert Lucas’ article “Understanding Business Cycles”, business cycle fluctuations are: a) An equilibrium phenomenon. b) Caused by movements involuntary unemployment. c) Unrelated to the money supply. d) Excessive when compared with efficient fluctuations. 18. According to Irving Fisher, an unexpected rise in inflation will: / a) Benefit lenders and harm borrowers. b) Benefit borrowers and harm lenders. c) Benefit young people and harm old people. . p d) Benefit the government and harm firms. ‘ a . ./"” 19. According to, Irving Fisher, during a period of inflation, the nominal interest rate will rise: a) Always. b) Only when the inflation is unanticipated. c) Only when the inflation is anticipated. (1) It depends on the elasticity of investment. 20. According the article “Castles in Hot Air”, which of the following is evidence of a bubble in the housing market? . a) A declining nominal interest rate over the past decade. b) A limited supply of housing in metropolitan areas. c) The fact that housing prices are growing much faster than rents. d) The fact that housing prices tend to be sticky downwards. 21. Which of the following will be considered as unemployed? a) A college student who has taken time off from the labor force in order to complete studies. b) A new college graduate who is currently not working but is actively seeking employment. c) A college student who pays tuition by working part time on campus. d) All of the above. O 22. In a country with a working-age population of 130 million, 90 million workers are ' employed and 10 million workers are unemployed. What is the unemployment rate? a) 7.1%. .- b) 7.7%. 3? c) 5%; .. =6) 10%, 23. The U.S. unemployment rate has been .fl. a) Countercyclical except in the prewar period. b) Procyclical for the past century. is); Countercyclical for the past century d) Uncorrelated with de. ' l 24. Suppose that there is sudden change in households’ preferences such that they are willing to supply more labor for any level of real wages. Then, in a classical economy: a. The price level will decrease. b. The price level will increase. c. The labor demand curve will shifi to the left. d. None of the above 25. Which of the following policies will increase de and simultaneously reduce investment in the IS-LM model a) An increase in taxes ' ‘3 ‘ b) An increase in the money supply ,5 ’ ’ " c) An increase in government expenditure. d) None of the above. i\ 26. In the Keynesian model, investment is: $3 a An increasing function of the nominal interest rate"??? I). A decreasing function of the real interest rate. L I c. (A decreasing function of the nominal interest rate. . d. V A decreasing fiinction of gdp. 27. Consider a version of the Simple Keynesian model, in which the censumption function is C=100+0.8(Y-T), where Y is real income and .T is taxes. If both taxes and government expenditures increase by $10, the equilibrium level of income will (assuming everything else remains constant) a) Remain constant. b) Increase by $30. c) .. Increase by $10. d) Decrease by $40. 28. In the IS-LM model, which of the following statements is true? we" a) A higher nominal interest rate will increase the velocity of cichlation. . ii‘b) Investment demand is a decreasing fimction of the real interest rate. ’6) The IS curve ‘will be vertical if investment and saving are both \ independent of the interest rate. ‘ d)\‘-~All of the above 29. In the Keynesian theory of aggregate supply, which of the following statements is false? ‘ ' a) Output is always equal to potential output. b) Output may deviate from potential output in the short run. 9), The nominal wage is fixed in the short run. I‘d) None of the above. 30. The aggregate demand curve will shift to the left if a) There is an increase in the tax rate. 3- : l b) There is a fall in autonomous investment expenditure. I ’ 4' c) The money supply falls. d) All of the above. '7, 7. x 31. Which of the following changes does not shift the IS curve a) A fall in autonomous investment expenditure. b) An increase in the marginal propensity to consume. c) A change in the real interest rate. . d). An increase in transfer payments to households. 32. Which of the following is true‘of the Keynesian theory of aggregate supply? __a) The short-run aggregate supply curve is vertical. , b) The nominal wage is set by contract. 0) Money is neutral in the short run. 6 d) All of the above. 33. In the IS-LM model, an increase in the price level will: a) Not affect the slope or position of the LM cu’rv‘ei. , b) Shift the LM curve to the right. .7 2 it; c) Shifi the LM curve to the left. ' i V. H d) Make the IS curve steeper. ,5 ,L, .. .7 -./ -\l/" 34. In the IS-LM model, if people spontaneously decide to hold more money for any given interest rate: ' 'a ”A" a) The money demand curve will shift to the right. b) The LM curve will shifi to the left. I ‘ ~ ' c) Real gdp Will fall. \ , (w , f: ‘ I when“ :4) All of the above. 35. In the IS-LM model: a) A change in fiscal policy shifts the IS curve, and a change in monetary policy shifts the LM curve. b) A change in fiscal policy shifts the LM curve, and a change in monetary policy shifts the IS curve. c) A change in fiscal policy shifts the IS and LM curves in the same direction. (1) A change in monetary policy shifts the IS and LM curves in opposite directions. “x {N /.,......_, x , .. ‘ , / "N“ I - ' ’ , [UH » . x/ a» . ',.-f 36. Fiscal policy will have the biggest effect on gdp inthe simple Keynesian model in which of the following cases? a) The marginal propensity‘to consume is close to l. b) The marginal propensity to ceriume is zero. 0) The marginal propensity to consume is 0.5. d) The effect of fiscal policy on gdp doesn’t depend on the marginal propensity to consume. . ‘ 37. Suppose the government wants to boost aggregate demand through fiscal and monetary policy instruments. Which of the following policy mixes will deliver the desired result, unambiguously? :a)‘~- Increase taxes and the money supply. \b .-.>_\R_educe transfers made to citizens. 3) Increase government spending and the money supply, so that the interest rate dOes not rise. - ”d~)\_\lncrease government spending and reduce the money supply, so that gdp ‘ does not increase. 38. If the money supply increases by 10% and the price level increases by 8%, then the LM curve: ‘ in -' . - a) Shifts to the right except in the case when the velocity of circulation is a ‘ constant. lfi; Shifts to the right unambiguously. c) Shifts to the left except in the case when the velocity of circulation is a _ constant. a; d) Shifts to the left unambiguously. .if [T ‘ ‘ " . . . . . L " 39. Which of the following curves shlfi as a response to an mcrease 1n the price level? Q The IS and the AD CurVeS. y/L-‘q‘ :b) The LM and the AD Curves. C) The LM curve only. d) The IS curve only. I 40. The debt equation is stable when: )9 Ma) The nominal interest rate is greater than the growth rate of nominal gdp. “’v b) The primary deficit is balanced. c) The growth rate of gdp is higher that the inflation rate. (1) None of the above. 41. In the IS-LM model, the aggregate demand curve is downward sloping because an increase in the price level: a) Increases the profitability of investment projects, leading to an increase in investment demand and hence gdp. b) Reduces the profitability of investment projects, leading to a fall in y , investment demand and hence gdp. c); Reduces the real value of the money stock, increasing the real interest rate, . . ”I lowering investment demand, and thereby causing gdp to fall. ‘ d) Increases the real value of the money stock, increasing the real interest rate, lowering investment demand, and thereby causing gdp to fall. 42. Suppose the nominal interest rate is 5% and the growth rate of nominal gdp is 10%. If the government maintains a policy of running a constant primary deficit to gdp ratio of d every year, what is the value of d that is consistent with a steady state value of debt to gdp of 2.2? (recall that the debt equation is given by the ’ ‘ ir"r'~r2p:: 1+i 8 .— ' h “'7 :7 :r’v» \- -. a" .. - ‘ e ression b =d + b ~- " a: k ' K ‘ ) .L W Xp I 1+" 1—1) I 3> (g 0 i V. -1}, ,3" $11. 0.05 ' v”? :. . , ' I. ~77: ««««« > N b) "0'1 l, a?" 17 i w ' l "'7': "4 W "I" a C) 1 \l a. "l"; W ’ :5 -. T. fix d 5 {*7 “L: N" a g i ‘ . g ) 2 \JLQ". "‘24“ , gl. :1, 3: I? a m “A : 4):; 4,“: LL." 43. In the Keynesian theory of aggregate supply the short run aggregate supply slopes up because: a) p The pricelevel is set by monopolistically competitive firms. b) The nominal wage is set by contract. -. c) Real marginal cost is upward sloping. d) Supply curves slope up 44. If you knew the slope of the Philips curve, what could you infer? a) The slope of the labor supply curve. b) The intercept of labor demand curve. A c) The slope of aggregate supply curve. , ‘f‘l - d) None of the above. 5 .- . «3.. 45. The real interest rate is 3%, inflation is 1%, and the growth rate of nominal gdp is 5%. All these variables are expected to remain stable. It follows that; a) The debt to gdp ratio will increase forever. b) The debt to gdp ratio will stabilize at some positive value. c) The debt to gdp ratio will stabilize at some value that may be positive, negative or zero. d) The debt to gdp ratio will stabilize at a negative value. 10 46. According to the article by A.W. Phillips, as originally published in 1959 a) There is a negative relationship between wage inflation and Unemployment in the UK that remained stable for half a century. (5) There is a natural rate of unemployment that cannot be influenced by '“‘“ changes in the rate of money creation. i J “'5?" There is a negative relationship between wage inflation and "’ unemployment in the UK that shifts in response to 'changes in expected ‘ price inflation d) All of the above. 47. Which of the following is implied by the theory of the expectations augmented Phillips curve? a) The way that expectations are formed is important in determining the effects of monetary policy. bflncreases in the money supply will increase 'mxgrows more slowly than expected inflation. (cg/Output will grow at the same rate as potential output if the rate of growth of the money supply is equal to 2%. d) All of the above. gdp if the money supply [18. If there is an increase in the expected rate of price inflation, other things equal a) The rate of output growth will be higher y; f _4 f beThe rate of inflation will be lower ”A“ ‘7' 3 CQ/Tbe rate of output growth will be lower d) None of the above. 49. The US. data from the post-war period reveals that the annual rate of change of the gdp price deflator a) Fluctuated around 8% in the 1950’s b) Never rose above 15% 6); Increased to a peak of 10% in 1960 and subsequently fell to around 2% in the 1990’s d) All of the above. 50. If unemployment exceeds the natural rate of unemployment a) Inflation is above expected inflation. b) Inflation is below expected inflation. c) Inflation is equal to expected inflation. d) Not enough data to determine the answer. 11 v I -u p ...
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