practice exam 3 ECON 101-03

Due Monday November 10, 2011 by 11:00am. Complete the first 100 questions on a green scantron that has 50 spaces on the front and the last 50 on the back.

True/False Indicate whether the statement is true or false. (circle A for true, B for false) ___T_ 1. Within the U.S. population, women have higher rates of unemployment than men. __F__ 2. The Bureau of Labor Statistics U-5 measure of joblessness is the official unemployment rate. __T__ 3. The Bureau of Labor Statistics U-5 measure of joblessness includes marginally attached workers. __T__ 4. Sectoral shifts temporarily cause unemployment. __T__ 5. Public policy, without intending to do so, can increase frictional unemployment. __T__ 6. According to the theory of efficiency wages, firms operate more efficiently if wages are above the equilibrium level. __T__ 7. Efficiency wages create structural unemployment. ___T_ 8. Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as a unit of account. ____ 9. An increase in the reserve requirement ratio increases reserves and decreases the money supply.

___F_ 10. Suppose the nominal interest rate is 10 percent, the tax rate on interest income is 28 percent, and the inflation rate is 6 percent. Then the after-tax real interest rate is -3.2 percent. ___T_ 11. Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 0.8 percent. Then the inflation rate is 2.7 percent. ____ 12. In the late 1800s deflation caused farmers to suffer as the fall in crop prices reduced their income and thus their ability to pay off their debts. __T_ 13. If the exchange rate is 12.5 pesos per U.S. dollar, it is also 1/12.5 U.S. dollars per peso. ____ 14. If the price of a good in the U.S. is $10, the exchange rate is 2 units of foreign currency per dollar, and the foreign price of the same good is 30 units of foreign currency, then the real exchange rate is 2/3. Multiple Choice Identify the choice that best completes the statement or answers the question. ___D_ 15. Measuring unemployment is the job of the a. Congressional Budget Office. b. Department of Commerce. c. Council of Economic Advisers.

d. Bureau of Labor Statistics. ____A 16. The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of households, called the a. Census. b. Labor Survey. c. Survey of Economic Indicators. d. Current Population Survey. ___B_ 17. Who of the following is not included in the Bureau of Labor Statistics' employed category? a. those who worked in their own business b. those who worked as unpaid workers in a family member's business c. those waiting to be recalled to a job from which they had been laid off d. those who were temporarily absent from work because of vacation. ___C_ 18. Which of the following is correct? a. Labor force = number of employed. b. Labor force = population - number of unemployed. c. Unemployment Rate = number of unemployed unemployed) 100. d. Unemployment Rate = number of unemployed (number of employed + number of adult population 100.

____ 19. In 2009, based on concepts similar to those used to estimate U.S. employment figures, the Japanese adult noninstitutionalized population was 110.272 million, the labor force was 65.362 million, and the number of people employed was 62.242 million. According to these numbers, the Japanese labor-force participation rate and unemployment rate were about a. 56.4% and 2.8%. b. 56.4% and 4.8%. c. 59.3% and 2.8%. d. 59.3% and 4.8%. Table 28-1 Labor Data for Aridia Year Adult population 2010 2000 2011 3000 2012 3200

Number of employed Number of unemployed

1400 200

1300 600

1600 200

____ 20. Refer to Table 28-1. The labor force of Aridia in 2010 was a. 1400. b. 1600. c. 1800. d. 2000. ____ 21. Refer to Table 28-1. The labor-force participation rate of Aridia a. increased from 2010 to 2011 and increased from 2011 to 2012. b. increased from 2010 to 2011 and decreased from 2011 to 2012. c. decreased from 2010 to 2011 and increased from 2011 to 2012. d. decreased from 2010 to 2011 and decreased from 2011 to 2012. ____ 22. Since 1960, the natural rate of unemployment in the U.S. has been between a. 0.4 and 0.6 percent. b. 4 and 6 percent. c. 6 and 12 percent. d. 12 and 24 percent. B____ 23. Marginally attached workers are people who a. are looking for a better job than they currently have. b. are not working and are not looking for work, but would work if asked. c. are working part-time while they go to school or get training for a better job. d. are only a few years from retirement. ____ 24. Adam is looking for a job in marketing. He has had some offers and his prospects are promising but hes not yet accepted a job. Amanda lost her job working for Mercury Bicycles because many customers decided they prefer bicycles manufactured by Ultimate Bicycles instead. Who is frictionally unemployed? a. Adam but not Amanda b. Amanda but not Adam c. Adam and Amanda d. neither Amanda nor Adam

____ 25. Sandy has graduated from college and is devoting her time to searching for a job. She has seen plenty of openings, but has not yet been offered one that best suits her tastes and skills. Sandy is a. structurally unemployed. Structural unemployment exists even in the long run. b. structurally unemployed. There is no structural unemployment in the long run. c. frictionally unemployed. Frictional unemployment exists even in the long run. d. frictionally unemployed. There is no frictional unemployment in the long run. ____ 26. Which of the following does not help reduce frictional unemployment? a. government-run employment agencies b. public training programs c. unemployment insurance d. All of the above help reduce frictional unemployment. ____ 27. Which of the following is correct? a. Unemployment insurance raises structural unemployment because it reduces the job search efforts of the unemployed. b. Most economists are skeptical of the value of unemployment insurance primarily because they believe that it results in a poorer match between workers and jobs. c. Studies show that when the unemployed become ineligible for benefits, the probability of their finding a job rises markedly. d. All of the above are correct. ____ 28. When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it a. raises the quantity of labor supplied and raises the quantity of labor demanded compared to the equilibrium level. b. raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level. c. reduces the quantity of labor supplied and raises the quantity of labor demanded compared to the equilibrium level. d. reduces the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level. Figure 28-1

10 9 8 7 6 5 4 3 2 1

wage S

10

20

30

40

50

60

70

80

90

hundreds of workers

____ 29. Refer to Figure 28-1. If the government imposes a minimum wage of $4, then unemployment will increase by a. 0 workers. b. 2000 workers. c. 4000 workers. d. 5000 workers. ____ 30. Which of the following is correct? a. In the U.S. it is only among the least skilled and least experienced members of the labor force that minimum-wage laws cause unemployment. Unions may keep wages above their equilibrium level. b. In the U.S. it is only among the least skilled and least experienced members of the labor force that minimum-wage laws cause unemployment. Unions cannot keep wages above their equilibrium level. c. In the U.S. minimum-wage laws cause unemployment even for people with high skills and much experience. Unions may keep wages above their equilibrium level. d. In the U.S. minimum-wage laws cause unemployment even for people with high skills and much experience. Unions cannot keep wages above their equilibrium level. ____ 31. When the wage is above the equilibrium level, a. the labor market is functioning more efficiently than it otherwise would function. b. there is a shortage of labor. c. the quantity of labor supplied exceeds the quantity of labor demanded. d. job search is the primary explanation for the unemployment that is observed. ____ 32. Which of the following is not correct?

a. When a union is present in a labor market, wages are determined by the equilibrium of supply and demand. b. Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power. c. The process by which unions and firms agree on the terms of employment is called collective bargaining. d. Most workers in the U.S. economy are not members of a union. ____ 33. Unions a. raise the wages of unionized workers and raise unemployment. b. raise the wages of unionized workers and reduce unemployment. c. reduce the wages of unionized workers and raise unemployment. d. reduce the wages of unionized workers and reduce unemployment. ____ 34. If there were no factors keeping wages from reaching equilibrium then there would be no a. cyclical unemployment. b. frictional unemployment. c. structural unemployment. d. natural rate of unemployment. ____ 35. Efficiency wages, minimum-wage laws, and unions all a. keep wages below the equilibrium level, causing a shortage of labor. b. keep wages below the equilibrium level, causing a surplus of labor. c. keep wages above the equilibrium level, causing a shortage of labor. d. keep wages above the equilibrium level, causing a surplus of labor. ____ 36. Consider five individuals with different occupations. Allen Betty Calvin Diedre Eric prepares taxes does dry cleaning fixes computers bakes bread barbecues ribs wants ribs wants computer fixed wants bread wants taxes prepared wants dry cleaning

In a barter system which of the following pairs has a double coincidence of wants? a. Allen and Eric b. Diedre and Calvin

c. Both A and B are correct. d. None of the above are correct. ____ 37. The ease with which an asset can be a. traded for another asset determines whether or not that asset is a unit of account. b. transported from one place to another determines whether or not that asset could serve as fiat money. c. converted into a store of value determines the liquidity of that asset. d. converted into the economys medium of exchange determines the liquidity of that asset. ____ 38. Prisoners sometimes determine a single good to be used as money. This good becomes a. a medium of exchange and a unit of account. b. a medium of exchange, but not a unit of account. c. a unit of account, but not a medium of exchange. d. neither a unit of account nor a medium of exchange. ____ 39. Which of the following items is included in M2? a. credit cards b. money market mutual funds c. corporate bonds d. large time deposits ____ 40. Which of the following is not included in either M1 or M2? a. money market deposit accounts b. large time deposit c. demand deposits d. money market mutual funds ____ 41. Small time deposits are included in a. M1 but not M2. b. M2 but not M1. c. M1 and M2. d. neither M1 nor M2. ____ 42. Which of the following is correct?

a. The Federal Reserve has 14 regional banks. The Board of Governors has 12 members who serve 7-year terms. b. The Federal Reserve has 14 regional banks. The Board of Governors has 7 members who serve 14-year terms. c. The Federal Reserve has 12 regional banks. The Board of Governors has 12 members who serve 7-year terms. d. The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms. ____ 43. Which of the following statements regarding the Federal Open Market Committee is correct? a. Only the five voting regional Fed presidents attend the meetings. b. All regional Fed presidents attend and vote at the meetings. c. All regional Fed presidents attend the meetings, but only five get to vote. d. Regional Fed presidents may neither attend nor vote the meetings. ____ 44. When conducting an open-market purchase, the Fed a. buys government bonds, and in so doing increases the money supply. b. buys government bonds, and in so doing decreases the money supply. c. sells government bonds, and in so doing increases the money supply. d. sells government bonds, and in so doing decreases the money supply. ____ 45. When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply, a. those assets are government bonds and the Feds reason for selling them is to increase the money supply. b. those assets are government bonds and the Feds reason for selling them is to decrease the money supply. c. those assets are items that are included in M2 and the Feds reason for selling them is to increase the money supply. d. those assets are items that are included in M2 and the Feds reason for selling them is to decrease the money supply. ____ 46. A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $100. If customers deposit $50 into the bank, what is the value of the money supply? a. $50 b. $100

c. $150 d. $200 ____ 47. A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is a. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply. b. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the money supply. c. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money supply. d. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the money supply. ____ 48. A bank has a 10 percent reserve requirement, $4,000 in deposits, and has loaned out all it can given the reserve requirement. a. It has $40 in reserves and $3,960 in loans. b. It has $400 in reserves and $3,600 in loans. c. It has $444 in reserves and $3,556 in loans. d. None of the above is correct. Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below. Assets Reserves Loans $750 9,250 Liabilities Deposits $10,000

____ 49. Refer to Table 29-2. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by a. $866.67. b. $1,666.67. c. $2,000.00. d. an infinite amount. Table 29-3. The First Bank of Fairfield Assets Liabilities

Reserves Loans

$2,000 8,000

Deposits

$10,000

____ 50. Refer to Table 29-3. If $1,000 is deposited into the First Bank of Fairfield, and the bank takes no other actions, its a. reserves will increase by $200. b. liabilities will decrease by $1,000. c. assets will increase by $1,000. d. reserves will increase by $800. ____ 51. When the Fed conducts open-market purchases, a. banks buy Treasury securities from Fed, which increases the money supply. b. banks buy Treasury securities from the Fed, which decreases the money supply. c. it buys Treasury securities, which increases the money supply. d. it buys Treasury securities, which decreases the money supply. ____ 52. The Feds primary tool to change the money supply is a. changing the interest rate on reserves. b. changing the reserve requirement. c. conducting open market operations. d. redeeming Federal Reserve notes. ____ 53. If people decide to hold more currency relative to deposits, the money supply a. falls. The larger the reserve ratio is, the more the money supply falls. b. falls. The larger the reserve ratio is, the less the money supply falls. c. rises. The larger the reserve ratio is, the more the money supply rises. d. rises. The larger the reserve ratio is, the less the money supply rises. Table 29-7 Metropolis National Bank is currently holding 2% of its deposits as excess reserves. Metropolis National Bank Assets Reserves Loans $60,000 $440,000 Deposits Liabilities $500,000

____ 54. Refer to Balance Sheet of Metropolis National Bank. Metropolis National Bank is currently holding 2% of deposits as excess reserves. Assuming that all banks have the same required reserve ratio, and then none want to hold excess reserves what is the value of the money multiplier? a. 8.25 b. 10 c. 12 d. 20 Scenario 29-2. The Monetary Policy of Tazi is controlled by the countrys central bank known as the Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank. ____ 55. Refer to Scenario 29-2. Assuming the only other thing Tazian banks have on their balance sheets is loans, what is the value of existing loans made by Tazian banks? a. 6,900 million tazes b. 7,125 million tazes c. 7,350 million tazes d. None of the above is correct. ____ 56. To increase the money supply, the Fed could a. sell government bonds. b. decrease the discount rate. c. increase the reserve requirement. d. None of the above is correct. ____ 57. Which of the following will not help to prevent bank runs? a. government insurance of deposits b. fractional reserve banking c. 100% reserve banking d. All of the above prevent bank runs. ____ 58. Over the past 70 years, prices in the U.S. have risen on average about a. 2 percent per year. b. 4 percent per year. c. 6 percent per year.

d. 8 percent per year. ____ 59. When the price level falls, the number of dollars needed to buy a representative basket of goods a. increases, so the value of money rises. b. increases, so the value of money falls. c. decreases, so the value of money rises. d. decreases, so the value of money falls. ____ 60. When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an a. excess demand for money, so the price level will rise. b. excess demand for money, so the price level will fall. c. excess supply of money, so the price level will rise. d. excess supply of money, so the price level will fall. ____ 61. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply shifts the money supply curve to the a. right, lowering the price level. b. right, raising the price level. c. left, raising the price level. d. left, lowering the price level. ____ 62. Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then a. the money supply must have increased, perhaps because the Fed bought bonds. b. the money supply must have increased, perhaps because the Fed sold bonds. c. the money supply must have decreased, perhaps because the Fed bought bonds. d. the money supply must have decreased, perhaps because the Fed sold bonds. ____ 63. Suppose there is a surplus in the money market. a. This could have been created by an increase in the money supply. The value of money will rise. b. This could have been created by an increase in the money supply. The value of money will fall. c. This could have been created by a decrease in the money supply. The value of money will rise.

d. This could have been created by a decrease in the money supply. The value of money will fall. ____ 64. The price level falls if either a. money demand or money supply shifts rightward. b. money demand shifts rightward or money supply shifts leftward. c. money demand shifts leftward or money supply shifts rightward. d. money demand or money supply shifts leftward. Figure 30-1

____ 65. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess a. demand for money that is represented by the distance between points A and C. b. demand for money that is represented by the distance between points A and B. c. supply of money that is represented by the distance between points A and C. d. supply of money that is represented by the distance between points A and B. Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes.

1.125 1 0.875 0.75 0.625 0.5 0.375 0.25 0.125

MS

MD2 MD1

5,000

____ 66. Refer to Figure 30-2. If the relevant money-demand curve is the one labeled MD1, then the equilibrium value of money is a. 0.5 and the equilibrium price level is 2. b. 2 and the equilibrium price level is 0.5. c. 0.5 and the equilibrium price level cannot be determined from the graph. d. 2 and the equilibrium price level cannot be determined from the graph. ____ 67. The price level is a a. relative variable. b. dichotomous variable c. real variable. d. nominal variable. ____ 68. An associate professor of physics gets a $200 a month raise. She figures that with her new monthly salary she can buy more goods and services than she could buy last year. a. Her real and nominal salary have risen. b. Her real and nominal salary have fallen. c. Her real salary has risen and her nominal salary has fallen. d. Her real salary has fallen and her nominal salary has risen. ____ 69. If M = 3,000, P = 2, and Y = 6,000, what is velocity? a. 1/2.

b. 1. c. 4. d. None of the above is correct. ____ 70. The inflation tax a. is an alternative to income taxes and government borrowing. b. taxes most those who hold the most money. c. is the revenue created when the government prints money. d. All of the above are correct. ____ 71. Walter puts money in a savings account at his bank earning 3.5 percent. One year later he takes his money out and notes that while hus money was earning interest, prices rose 1.5 percent. Walter earned a nominal interest rate of a. 3.5 percent and a real interest rate of 5 percent. b. 3.5 percent and a real interest rate of 2 percent. c. 5 percent and a real interest rate of 3.5 percent d. 5 percent and a real interest rate of 2 percent ____ 72. The Fisher effect a. says the government can generate revenue by printing money. b. says there is a one for one adjustment of the nominal interest rate to the inflation rate. c. explains how higher money supply growth leads to higher inflation. d. explains how prices adjust to obtain equilibrium in the money market. ____ 73. You put money into an account and earn a real interest rate of 6 percent. Inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 4.8 percent b. 3.2 percent c. 2.8 percent d. None of the above is correct. ____ 74. The country of Lessidinia has a tax system identical to that of the United States. Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency) in 1960 when the price index equaled 100. In 2002, the person sold the land for 100,000 foci, and the price index equaled 600. The tax rate on nominal gains was 20 percent. Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain.

a. -60 percent b. -30 percent c. 30 percent d. 60 percent ____ 75. If the economy unexpectedly went from inflation to deflation, a. both debtors and creditors would have reduced real wealth. b. both debtors and creditors would have increased real wealth. c. debtors would gain at the expense of creditors. d. creditors would gain at the expense of debtors. ____ 76. Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is a. higher than she had expected, and the real value of the loan is higher than she had expected. b. higher than she had expected, and the real value of the loan is lower than she had expected. c. lower than she had expected, and the real value of the loan is higher than she had expected. d. lower then she had expected, and the real value of the loan is lower than she had expected. ____ 77. Bill, a U.S. citizen, pays a Spanish architect to design a metal casting factory. Which countrys exports increase? a. Spains b. the U.S.s c. Spains and the U.S.s d. neither Spains nor the U.S.s Table 31-1 Goods Purchased Abroad Sold Abroad Bolivian Trade Flows Services $40 billion Purchased Abroad $10 billion Sold Abroad $20 billion $25 billion

____ 78. Refer to Table 31-1. What are Bolivias exports? a. $60 billion

b. $35 billion c. $10 billion d. None of the above are correct. ____ 79. Suppose that foreign citizens decide to purchase more U.S. pharmaceuticals and U.S. citizens decide to buy more stock in foreign corporations. Other things the same, these actions a. raise both U.S. net exports and U.S. net capital outflows. b. raise U.S. net exports and lower U.S. net capital outflows. c. lower both U.S. net exports and U.S. net capital outflows. d. lower U.S. net exports and raise U.S. net capital outflows. ____ 80. Mark, a U.S. citizen, buys stock in a British Shipping company. This purchase is an example of a. investment for Mark and U.S. foreign direct investment. b. investment for Mark and U.S. foreign portfolio investment. c. saving for Mark and U.S. foreign direct investment. d. saving for Mark and U.S. foreign portfolio investment. ____ 81. Catherine, a citizen of Spain, decides to purchase bonds issued by Chile instead of ones issued by the United States even though the Chilean bonds have a higher risk of default. An economic reason for her decision might be that a. she dislikes U.S. foreign policy. b. the Chilean bonds pay a higher rate of interest. c. the U.S. government is more stable than the Chilean government. d. None of the above provide an economic reason for buying the riskier bond. ____ 82. If a country changes its corporate tax laws so that domestic businesses build and manage more business in other countries, then the net capital outflow of that country a. and the net capital outflow of other countries rise. b. rises and the net capital outflow of other countries fall. c. falls and the net capital outflow of other countries rise. d. None of the above are correct. ____ 83. When the Sykes Corporation (an American company) buys shares of Audi stock (a German company) for its pension fund, U.S. net capital outflow a. increases because an American company makes a portfolio investment in Germany. b. declines because an American company makes a portfolio investment in Germany.

c. increases because an American company makes a direct investment in Germany. d. declines because an American company makes a direct investment in Germany. ____ 84. If saving is greater than domestic investment, then a. there is a trade deficit and Y > C + I + G. b. there is a trade deficit and Y < C + I + G. c. there is a trade surplus and Y > C + I + G. d. there is a trade surplus and Y < C + I + G. ____ 85. A British grocery chain uses previously obtained U.S. dollars to purchase apples from the United States. This transaction a. increases British net capital outflow, and increases U.S. net exports. b. increases British net capital outflow, and decreases U.S. net exports. c. decreases British net capital outflow, and increases U.S. net exports. d. decreases British net capital outflow, and decreases U.S. net exports. ____ 86. A country has a trade deficit. Its a. net capital outflow must be positive, and saving is larger than investment. b. net capital outflow must be positive and saving is smaller than investment. c. net capital outflow must be negative and saving is larger than investment. d. net capital outflow must be negative and saving is smaller than investment. ____ 87. The U.S. has a trade surplus. Which of the following is correct? a. capital is flowing into the U.S. and S > I b. capital is flowing into the U.S. and S < I c. capital is flowing out of the U.S. and S > I d. capital is flowing out of the U.S. and S < I ____ 88. If Japans national saving exceeds its domestic investment, then Japan has a. positive net capital outflows and negative net exports. b. positive net capital outflows and positive net exports. c. negative net capital outflows and negative net exports. d. negative net capital outflows and positive net exports.

____ 89. In an open economy, gross domestic product equals $1,850 billion, consumption expenditure equals $975 billion, government expenditure equals $225 billion, investment equals $500 billion, and net exports equals $150 billion. What is national savings? a. $0 b. $500 billion c. $650 billion d. $975 billion ____ 90. Most of the change from 2000 to 2006 in U.S. net capital outflow as a percent of GDP was due to a(n) a. decrease in U.S. investment. b. decrease in U.S. national saving. c. increase in U.S. investment. d. increase in U.S. national saving. ____ 91. If you are vacationing in France and the dollar depreciates relative to the euro, then a. the dollar buys more euros. It will take fewer dollars to buy a good that costs 50 euros. b. the dollar buys more euros. It will take more dollars to buy a good that costs 50 euros. c. the dollar buys fewer euros. It will take fewer dollars to buy a good that costs 50 euros. d. the dollar buys fewer euros. It will take more dollars to buy a good that costs 50 euros. ____ 92. If a dollar currently purchases 12.5 pesos and someone forecasts that in a year it will be 14 pesos, then the forecast is given in a. real terms and implies the dollar will appreciate. b. real terms and implies the dollar will depreciate. c. nominal terms and implies the dollar will appreciate. d. nominal terms and implies the dollar will depreciate. ____ 93. The nominal exchange rate is 2 Barbados dollars per U.S. dollar. If the price of a good in Barbados is 3 Barbados dollars and the price in the U.S. is 2 U.S. dollars, what is the real exchange rate to the nearest 100th? a. 3 Barbados goods per U.S. good b. 1.33 Barbados goods per U.S. good c. .75 Barbados goods per U.S. good d. none of the above is correct

____ 94. In the U.S. a digital camera costs $200. The same camera in London sells for 90 pounds. If the exchange rate were .50 pounds per dollar, then which of the following would be correct? a. The real exchange rate is greater than 1. A person in London with $200 could exchange them for pounds and have more than enough to buy the camera there. b. The real exchange rate is greater than 1. A person in London with $200 could exchange them for pounds but then wouldnt have enough to buy the camera there. c. The real exchange rate is less than 1. A person in London with $200 could exchange them for pounds and have more than enough to buy the camera there. d. The real exchange rate is less than 1. A person in London with $200 could exchange them for pounds but then wouldnt have enough to buy the camera. ____ 95. If US goods cost 1/5 of one dollar for every kroner Danish goods cost, the real exchange rate would be computed as how many Danish goods per U.S. goods? a. five b. one fifth the price of the U.S. goods c. the amount of kroner that can be bought with 1/5 of one dollar. d. None of the above is correct. ____ 96. If the number of Japanese yen a dollar buys falls, but neither countrys price level changes, then the real exchange rate a. depreciates which causes U.S. net exports to increase. b. depreciates which causes U.S. net exports to decrease. c. appreciates which causes U.S. net exports to increase. d. appreciates, which causes U.S. net exports to decrease. ____ 97. Other things the same, which of the following would both increase the U.S. real exchange rate with Israel? a. prices in the U.S. were higher, or prices in Israel were higher. b. prices in the U.S were higher, or prices in Israel were lower. c. prices in the U.S. were lower, or prices in Israel were higher. d. prices in the U.S. were lower, or prices in Israel were lower. ____ 98. 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 countrys price level. c. enough foreign currency to buy as many goods as it does in the United States.

d. None of the above is implied by purchasing-power parity. ____ 99. If the exchange rate is 8 Moroccan dirhams per U.S. dollars, a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat, and a similar crate of oranges in Miami sells for $45 dollars, then a. the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the United States and selling them in Morocco. b. the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the United States. c. the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the United States and selling them in Morocco. d. the real exchange rate is less than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the United States. ____ 100. If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area, then purchasingpower parity implies the nominal exchange rate is how many euros per dollar? a. 1.05 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area. b. 1.05 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. then in the Euro area. c. .95 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area. d. .95 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. than in the Euro area. ____ 101. Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S. currency must rise if the price levels in a. foreign countries rise. b. the United States rises. c. both countries rise. d. both countries fall. ____ 102. According to purchasing power parity, if the price of a basket of goods in the U.S. rose from $1,500 to $2,000 and the price of the same basket of goods rose from 600 units of some other countrys currency to 1,000 units of that countrys currency, then the a. nominal exchange rate would appreciate. b. nominal exchange rate would depreciate. c. real exchange rate would appreciate.

d. real exchange rate would depreciate. ____ 103. According to purchasing power parity, if the Federal Reserve increased the money supply a. U.S. prices would rise and the nominal exchange rate would rise. b. U.S. prices would rise and the nominal exchange rate would fall. c. U.S. prices would fall and the nominal exchange rate would rise. d. U.S. prices and the nominal exchange rate would fall. ____ 104. The open-economy macroeconomic model includes a. only the market for loanable funds. b. only the market for foreign-currency exchange. c. both the market for loanable funds and the market for foreign-currency exchange. d. neither the market for loanable funds or the market for foreign-currency exchange. ____ 105. In the open-economy macroeconomic model, the supply of loanable funds comes from a. the sum of domestic investment and net capital outflow. b. the sum of national saving and net capital outflow. c. national saving. d. net exports ____ 106. Other things the same, a higher real interest rate raises the quantity of a. domestic investment. b. net capital outflow. c. loanable funds demanded. d. loanable funds supplied. ____ 107. In the open-economy macroeconomic model, the supply of loanable funds comes from a. national saving. Demand comes from only domestic investment. b. national saving. Demand comes from domestic investment and net capital outflow. c. Only net capital outflow. Demand for loanable funds comes from national saving. d. domestic investment and net capital outflow. Demand for loanable funds comes from national saving. ____ 108. Other things the same, as the real interest rate rises a. domestic investment and net capital outflow both rise.

b. domestic investment and net capital outflow both fall. c. domestic investment rises and net capital outflow falls. d. domestic investment falls and net capital outflow rises. ____ 109. Suppose the U.S. supply of loanable funds shifts left. This will a. increase U.S. net capital outflow and increase the quantity of loanable funds demanded. b. increase U.S. net capital outflow and decrease the quantity of loanable funds demanded. c. decrease U.S. net capital outflow and increase the quantity of loanable funds demanded. d. decrease U.S. net capital outflow and decrease the quantity of loanable funds demanded. ____ 110. When the real exchange rate for the dollar depreciates, U.S. goods become a. less expensive relative to foreign goods, which makes exports rise and imports fall. b. less expensive relative to foreign goods, which makes exports fall and imports rise. c. more expensive relative to foreign goods, which makes exports rise and imports fall. d. more expensive relative to foreign goods, which makes exports fall and imports rise. ____ 111. Which of the following is correct in an open economy? a. S = I b. S = NX + NCO c. S = NCO d. S = I + NCO ____ 112. Other things the same, in the open-economy macroeconomic model, which of the following would make India's net capital outflow increase? a. a decrease in U.S. interest rates b. a decrease in Indian interest rates c. an appreciation of the Indian rupee d. None of the above is correct. Figure 32-3 Refer to this diagram to answer the questions below.

____ 113. Refer to Figure 32-3. Which curve shows the relation between the exchange rate and net exports? a. the demand curve in panel a. b. the demand curve in panel c. c. the supply curve in panel a. d. the supply curve in panel c. ____ 114. If a country went from a government budget deficit to a surplus, national saving would a. increase, shifting the supply of loanable funds right. b. increase, shifting the supply of loanable funds left. c. decrease, shifting the demand for loanable funds right. d. decrease, shifting the demand for loanable funds left. ____ 115. If the budget deficit increases, then a. U.S. residents will want to purchase more foreign assets and foreign residents will want to purchase more U.S. assets b. U.S. residents will want to purchase more foreign assets and foreign residents will want to purchase fewer U.S. assets c. U.S. residents will want to purchase fewer foreign assets and foreign residents will want to purchase more U.S. assets d. U.S. residents will want to purchase fewer foreign assets and foreign residents will want to purchase fewer U.S. assets ____ 116. Suppose that the United States imposes an import quota on televisions. In the open-economy macroeconomic model this quota shifts the a. U.S. supply of loanable funds left.

b. U.S. demand for loanable funds left. c. demand for U.S. dollars in the market for foreign-currency exchange right. d. supply of U.S. dollars in the market for foreign-currency exchange left. ____ 117. If a country had capital flight, then the real exchange rate would a. fall. To offset this fall the government could increase the budget deficit. b. fall. To offset this fall the government could decrease the budget deficit. c. rise. To offset this rise the government could increase the budget deficit. d. rise. To offset this rise the government could decrease the budget deficit. ____ 118. Real GDP a. moves in the same direction as unemployment. b. is not adjusted for inflation. c. measures economic activity and real income. d. All of the above are correct. ____ 119. The classical model is appropriate for analysis of the economy in the a. long run, since evidence indicates that money is not neutral in the long run. b. long run, since real and nominal variables are essentially determined separately in the long run. c. short run, provided money is not neutral. d. short run, provided real and nominal variables are highly intertwined. ____ 120. When the price level increases, the real value of peoples money holdings a. falls, so they buy more. b. falls, so they buy less. c. rises, so they buy more. d. rises, so they buy less. ____ 121. Other things the same, a decrease in the price level makes the dollars people hold worth a. more, so they can buy more. b. more, so they can buy less. c. less, so they can buy more. d. less, so they can buy less.

____ 122. As the price level rises a. people will want to buy more bonds, so the interest rate rises. b. people will want to buy fewer bonds, so the interest rate falls. c. people will want to buy more bonds, so the interest rate falls. d. people will want to buy fewer bonds, so the interest rate rises. ____ 123. As the price level rises a. people are more willing to lend, so interest rates rise. b. people are more willing to lend, so interest rates fall. c. people are less willing to lend, so interest rates fall. d. people are less willing to lend, so interest rates rise. ____ 124. Other things the same, an increase in the price level causes the interest rate to a. increase, the dollar to depreciate, and net exports to increase. b. increase, the dollar to appreciate, and net exports to decrease. c. decrease, the dollar to depreciate, and net exports to increase. d. decrease, the dollar to appreciate, and net exports to decrease. ____ 125. Which of the following shifts aggregate demand to the right? a. a decrease in the money supply b. increases in the profitability of capital due perhaps to technological progress. c. the repeal of an investment tax credit d. a decrease in the price level ____ 126. Aggregate demand shifts left if a. taxes rise and shifts left if stock prices rise. b. taxes rise and shifts left if stock prices fall. c. taxes fall and shifts left if stock prices rise. d. taxes fall and shifts left is stock prices fall. ____ 127. Which of the following shifts aggregate demand right? a. both a decrease in the price level and the implementation of an investment tax credit b. a decrease in the price level but not the implementation of an investment tax credit c. the implementation of an investment tax credit but not a decrease in the price level

d. neither a decrease in the price level nor the implementation of an investment tax credit ____ 128. If the dollar appreciates because of speculation or government policy U.S. a. aggregate demand shifts left. U.S. aggregate demand also shifts left if other countries experience recessions. b. aggregate demand shifts left. U.S. aggregate demand shifts right if other countries experience recessions. c. aggregate demand shifts right. U.S. aggregate demand also shifts right if other countries experience recessions. d. aggregate demand shifts right. U.S. aggregate demand shifts left if other countries experience recessions. ____ 129. In the long run, technological progress a. and increases in the money supply both make the price level rise. b. and increases in the money supply both make the price level fall. c. makes the price level rise, while increases in the money supply make prices fall. d. makes the price level fall, while increases in the money supply make prices rise. ____ 130. If the price level rises above what was expected and nominal wages are fixed, then a. production becomes less profitable so firms will hire fewer workers. b. production becomes less profitable so firms will hire more workers. c. production becomes more profitable so firms will hire fewer workers. d. production become more profitable so firms will hire more workers. ____ 131. Other things the same, if prices fell when firms and workers were expecting them to rise, then a. employment and production would rise. b. employment would rise and production would fall. c. employment would fall and production would rise. d. employment and production would fall. ____ 132. Which of the following shifts the short-run aggregate supply curve right? a. both an increase in the price level that is greater than expected and an increase in the expected price level. b. an increase in the price level that is greater than expected, but not an increase in the expected price level.

c. an increase in the expected price level, but not an increase in the price level that is greater than expected. d. neither an increase in the price level that is greater than expected nor an increase in the expected price level. ____ 133. Which of the following shifts the short-run aggregate supply curve to the right? a. a decrease in the actual price level b. an increase in the actual price level c. a decrease in the expected price level d. an increase in the expected price level ____ 134. The aggregate demand and aggregate supply model implies monetary neutrality a. only in the short run. b. only in the long run. c. in both the short run and the long run. d. in neither the short run nor long run. Figure 33-2.

P LRAS AS1 AS2 P1 P2 A B AD

Y1 Y2

____ 135. Refer to Figure 33-2. The appearance of the long-run aggregate-supply (LRAS) curve a. is inconsistent with the concept of monetary neutrality.

b. is consistent with the idea that point A represents a long-run equilibrium but not a shortrun equilibrium when the relevant short-run aggregate-supply curve is AS1. c. indicates that Y1 is the natural rate of output. d. All of the above are correct. Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. ____ 136. Refer to Pessimism. In the short run what happens to the price level and real GDP? a. Both the price level and real GDP rise. b. Both the price level and real GDP fall. c. The price level rises and real GDP falls. d. The price level falls and real GDP rises. ____ 137. Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, then we would expect that in the short-run, a. real GDP will rise and the price level might rise, fall, or stay the same. b. real GDP will fall and the price level might rise, fall, or stay the same. c. the price level will rise, and real GDP might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same.

Short Answer 138. Why might a favorable change in the economy, such as technological improvement or a decrease in the price of imported oil, be associated with an increase in frictional unemployment? 139. Teenage unemployment is higher than unemployment of people ages 20 and over. Explain why economists would attribute at least part of this difference to minimum-wage laws. 140. Which two of the Ten Principles of Economics imply that the Fed can profoundly affect the economy? 141. Explain why banks can influence the money supply if the required reserve ratio is less than 100 percent. 142. If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? Show your work. 143. Draw a simple T-account for First National Bank which has $5,000 of deposits, a required reserve ratio of 10 percent, and excess reserves of $300. Make sure your balance sheet balances.

144. Suppose that in a country the total holdings of banks were as follows: required reserves = $45 million excess reserves = $15 million deposits = $750 million loans = $600 million Treasury bonds = $90 million Show that the balance sheet balances if these are the only assets and liabilities. Assuming that people hold no currency, what happens to each of these values if the central bank changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of excess reserves, and banks dont change their holdings of Treasury bonds? How much does the money supply change by? 145. Suppose the Fed sells government bonds. Use a graph of the money market to show what this does to the value of money. 146. Economists agree that increases in the money-supply growth rate increase inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? 147. Colonial America had little industry and so had mostly raw materials to export. At the same time, there were many opportunities to purchase capital goods and earn a high rate of return because there was little existing capital so that the marginal product of capital was relatively high. What does this suggest about net exports and net capital outflow in colonial America? 148. Can purchasing-power parity be used to explain the fact that the U.S. dollar has depreciated by more than 50 percent against the German mark between 1970 and 1998, but appreciated by more than 100 percent against the Italian lira during the same period? Defend your answer. 149. Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate? 150. Explain how the relation between the real exchange rate and net exports explains the downward slope of the demand for foreign-currency exchange curve. 151. Explain how an increase in the demand for capital goods in the U.S. can lead to a change in the U.S. exchange rate. 152. Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate? 153. Suppose that the Turkish government budget deficit increases. What curves in the open-economy macroeconomic model shift? Explain why each curve shifts the direction it does. 154. What do trade policies do to the standard of living? 155. The long-run trend in real GDP is upward. How is this possible given business cycles? What explains the upward trend? 156. Make a list of expenditures whose sum equals GDP.

157. Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves.

practice exam 3 Answer Section

101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: A A B C C D B B D A D B B A C A C B B A D D B B B C A D D D D C B C B B

SHORT ANSWER 138. ANS: Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand for labor among different firms. For example, a decrease in the price of imported oil would likely reduce the demand for U.S. oil workers and increase the demand for automobile workers. Similarly, technological progress makes some industries decline and others advance, creating frictional unemployment. 139. ANS: People who are experienced and educated are likely to find jobs where the equilibrium wage is above the minimum wage. In labor markets where the equilibrium wage is above the minimum wage, the minimum wage does not create unemployment. Since people ages 20 and over tend to have more experience and education than teenagers, the minimum wage matters less and so creates less unemployment. 140. ANS: 1. Prices rise when the government prints too much money. 2. There is a short-run tradeoff between inflation and unemployment. 141. ANS: When the reserve requirement is less than 100 percent, banks can lend out deposits. The money they lend out is redeposited. In this way, deposits can be greater than reserves. Since deposits are greater under fractionalreserve banking and since deposits are part of the money supply, the money supply will be greater under fractional-reserve banking. 142. ANS: (1/.20) 143. ANS: Assets Reserves Loans First National Bank Liabilities Deposits

$100 = $500.

$800 $4,200

$5,000

144. ANS: The only liability is deposits which equal $750 million. Total reserves are $60 billion which summed with loans, $600 million, and Treasury bonds $90 million = $750. Since liabilities equal assets, the balance sheet balances. Initially banks need to hold 6% on reserve and want to hold 2% as excess reserves. When the Fed lowers the reserve requirement ratio to 2%, the bank only has to hold $15 million on reserve and so now has $30 million of excess reserves. Between the 2% requirement and the 2% for excess the reserve ratio is now 4% and the multiplier is now 1/.04 = 25. So, the decrease in the reserve requirement ratio leads to an increase in deposits of $750 million. (Also, total reserves are $60 million and the multiplier is now 25, so deposits should be $1,500 million.) Required reserves are 2% of $1,500 million of deposits = $30 million.

Excess reserves are 2% of $1,500 million of deposits and so now also equal $30 million. Deposits rose by as much as the money supply since people dont hold currency, so that the money supply rose by $750 million. The additional deposits came by way of additional lending, so loans should have also increased by $750 million. Also, since deposits rose by $750 million, liabilities should have risen by $750 million. Under the given assumptions, this means loans should have risen by $750 million. Overall the money supply rose by $750 as explained above. 145. ANS:

When the Fed sells government bonds, the money supply decreases. This shifts the money supply curve from MS2 to MS1 and makes the value of money increase. Since money is worth more, it takes less to buy goods with it, which means the price level falls. 146. ANS: Typically, the government in countries that had hyperinflation started with high spending, inadequate tax revenue, and limited ability to borrow. Therefore, they turned to the printing presses to pay their bills. Massive and continued increases in the quantity of money led to hyperinflation, which ended when the governments instituted fiscal reforms eliminating the need for the inflation tax and subsequently slowed money supply growth. 147. ANS: Net exports were negative because the value of exports was low, and the colonies imported capital goods. If net exports were negative, net capital outflow must also have been negative. Net capital outflow would have been negative because the colonies sold stocks, bonds, and other domestic assets to foreigners to buy capital goods. 148. ANS: The theory of purchasing-power parity suggests that Italy must have experienced much more inflation than the United States while Germany must have experienced much less inflation. In fact, that is exactly what has happened. 149. ANS: Purchasing-power parity works well in helping us explain long-term trends in exchange rates, and in explaining what happens to exchange rates during hyperinflation. It is not completely accurate because (1) not all goods are easily traded, and (2) even tradable goods are not always perfect substitutes when they are produced in different countries.

150. ANS: When the U.S. real exchange rate appreciates, U.S. goods become more expensive relative to foreign goods. This induces U.S. citizens to buy more goods overseas, which increases U.S. imports. The appreciation also induces foreign citizens to buy fewer U.S. goods, so U.S. exports fall. The decline in exports and increase in imports decreases net exports, and so the demand for U.S. dollars declines. The inverse relation between the exchange rate and the quantity of U.S. dollars demanded in the foreign-currency exchange market is represented by the downward-sloping demand curve. 151. ANS: An increase in demand for capital goods is an increase in investment demand. As investment demand increases, the demand for loanable funds shifts right. This shift leads to an increase in the real interest rate. The increase in the interest rate reduces net capital outflow. The reduction in net capital outflow shifts the supply of currency in the foreign exchange market to the left, raising the real exchange rate. 152. ANS: The supply of loanable funds increases, and the equilibrium real interest rate falls. Because of the lower interest rate, U.S. net capital outflow rises. This increase makes the supply of dollars shift to the right, and the real exchange rate of the dollar depreciates. 153. ANS: The supply of Turkish loanable funds curve shifts left because the government deficit decreases national saving. As the supply of loanable funds shifts left, the Turkish interest rate rises. This increase in the interest rate causes the quantity of Turkish net capital outflow to fall, which means that people will be supplying fewer Turkish dinar in order to purchase foreign assets. So the supply of dinar in the foreign-currency exchange market shifts left. 154. ANS: Trade policies reduce both imports and exports. While they leave the trade balance unchanged, they reduce trade overall and so reduce the gains from trade. This lowers the standard of living. U.S. industries that produce goods on which imports are reduced may gain, but overall there is a loss. 155. ANS: There are occasional short-lived periods of negative real GDP growth. However, in most years real GDP increases. The years of increase are more frequent and the increases large enough that over long periods of time real GDP increases despite the occasional declines. The long-run upward trend in real GDP is due to increases in the labor force and capital stock and advances in technological knowledge. 156. ANS: consumption, investment, government expenditures, and net exports.

157. ANS: See graph.

P

LRAS1

LRAS2

AD2

AD1

Output

Over time, technological advances cause the long-run aggregate supply curve to shift right. Increases in the money supply cause the aggregate demand curve to shift right. Output growth puts downward pressure on the price level, but money supply growth contributes to rising prices.