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midterm2spring2007

# midterm2spring2007 - Economics 302 Spring 2007 Second...

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Economics 302 Name _______________________________ Spring 2007 Second Midterm Student ID Number ____________________ March 29, 2007 Section Number _______________________ This midterm consists of four parts: a binary choice section comprised of 15 questions worth 2 points each; a short response section with 2 short response questions worth 5 points each; a problem section with two problems worth a total of 40 points; and an essay section worth a total of 20 points. You will want to write legibly since illegible answers will be graded as wrong answers. You will want to present your work in an orderly fashion since a lack of organization will be interpreted as a lack of mental clarity and competent expression. You will want to make sure your answers are clear and easy to find on the test. In the binary choice section of the exam, pick the BEST answer. All work should be done on the exam booklet and all answers should provide work and any formulas that are used. A lack of work for any answer will be penalized by a lower grade on that section. Calculators are fine to use. SCORE: Binary Choice 30 points __________________ Short Response 10 points 1. 5 points __________________ 2. 5 points __________________ Problems 40 points 1. 20 points __________________ 2. 20 points __________________ Essay 20 points __________________ TOTAL 100 points __________________ 1

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I. Multiple Choice (worth 2 points each or 30 points total) 1. Consider an economy in which the job separation rate, s, is 10% and the job finding rate, f, is 90%. If this economy starts with an unemployment rate of 5%, will the unemployment rate in the subsequent periods be higher or lower than 5%? a. Higher b. Lower Answer: A. Higher, since the natural rate of unemployment in this case is 10% and the unemployment rate will converge over time to that rate. 2. Holding other factors constant, legislation to cut taxes in an open economy will: a. Reduce national savings and lead to a trade deficit. b. Increase national savings and lead to a trade deficit. c. Increase national savings and lead to a trade surplus. Answer: A. 3. An increase in the trade deficit could be the result of a. An increase in taxes. b. A decrease in the world interest rate. c. An increase in government spending. Answer: C. 4. In a small, open economy, when spending is greater than production this country will import more than it exports, it will run a trade deficit, and it will be a net lender to foreign economies. a. True b. False Answer: B. The country will import more than it exports if spending is greater than production, it will run a trade deficit, but it will be a net borrower from foreign economies. 5. Suppose net exports are greater than zero for a small open economy. Then, it must be the case that this economy has a a. Positive capital outflow. b. Positive capital inflow. Answer: A. When a country has positive net exports it is producing more than it is spending and hence, it will be able to provide capital funds to other economies. 2
6. Suppose that a small, open economy initially is in a situation with balanced trade at the prevailing interest rate. If the world real interest rate increases above this initial level then this small open economy will have a. A positive net capital outflow.

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