"Multiple Choice - DOC 6"
C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc Econ 1120 – INTRO MACRO - Wissink – S2011 – April 12, 2011 PRELIM #2 (TUESDAY) PRINT YOUR NAME: ____________________________________ Your C.U. Netid: _____________ YOUR C.U. STUDENT NUMBER: ____________________________ Check YOUR TA’s NAME: _____________TA = Billy Hsieh (Tuesday mornings) _____________TA = Emre Ekinci (Monday afternoons) _____________TA = Ying Wu (Thursday mornings) _____________TA = Tae Hoon Lim (Friday mornings-afternoons) INSTRUCTIONS: There are two sections in this exam Part I: 15 multiple choice questions @ 3 points each Part II: 3 problems @ 18, 18, and 19 points each ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes. HINTS: Read all questions carefully. Write legibly and remember to label all graphs and axes in diagrams. EXAM TAKING POLICY: NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom. NO CELL PHONES. NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”. NO GRAPHING CALCULATORS. NO BOOKS. NO NOTES. NO HELP SHEETS. NO TALKING TO EACH OTHER. NO ASKING THE PROCTORS ANY QUESTIONS ABOUT THE EXAM. GOOD LUCK! 1 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc ONCE AGAIN, please…. PRINT YOUR NAME: ____________________________________ Your C.U. Netid: _____________ YOUR C.U. STUDENT NUMBER: ____________________________ Check YOUR TA’s NAME: _____________TA = Billy Hsieh (Tuesday mornings) _____________TA = Emre Ekinci (Monday afternoons) _____________TA = Ying Wu (Thursday mornings) _____________TA = Tae Hoon Lim (Friday mornings-afternoons) GRADING---------------------------------------------------------------------------------------------------------- ______________/45 (mc) ______________/18 (q1) ______________/18 (q2) ______________/19 (q3) TOTAL: ___________/100 -------------------------------------------------------------------------------------------------------------------------- 2 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc Part I: Multiple Choice. Do them ALL. CIRCLE your answer. 1. If 2010 is taken as the base year, and the 2011 C.P.I. is 80, then between 2010 and 2011 A. there is inflation of 20%. B. there is deflation of 20%. C. there is inflation of 25%. D. there is stagflation of 20% E. there is a hyperinflation. 2. Refer to the table above with data from the La-La Land Labor Department. The labor force for this economy equals A. 95,000 people. B. 100,000 people. C. 175,000 people. D. 180,000 people. E. 100,000 divided by the population 16 and over. 3. Refer to the table above with data from the La-La Land Labor Department. The unemployment rate is A. 2.8% B. 5% C. 5.3% D. 7.2% E. .05% 4. Which of the following individuals is considered unemployed according to the way the U.S. calculates their official statistics? A. A former blue-collar worker, now out of work for half a year, who starts to enjoy staying at home and has stopped looking for work 6 weeks ago. B. A 15-year-old who lost his job from a local restaurant and is actively looking for another one. C. A college sophomore, who is actively looking for an unpaid summer internship on Wall Street. D. A Chrysler auto worker, just laid off last week, who is trying to get back into his old job or find a new one and is searching. E. A female with a Ph.D. in physics who decides to stay home and take care of her children. 3 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc 5. Assume a “simple frugal un-governed closed economy” where the consumption function (in billions) is: C = 500 + .6Y and desired investment, Id, is $100 billion. If current aggregate output/income is Y = $1,000 billion, we can conclude that A. undesired changes in inventories will be zero. B. there will be an undesired rise in inventory. C. there will be an undesired fall in inventory. D. aggregate output/income will tend to fall. E. the economy is in equilibrium, so there is no tendency for aggregate output to change. 6. If the “Keynesian” AEd multiplier is 3.0 and if desired investment falls by $20 million while exogenous exports rise by $50 million (other things remaining constant), by how much will the equilibrium level of income (Y*) rise? A. It doesn’t rise, Y* falls. B. $90 million C. $210 million D. $50 million E. $75 million. 7 Consider an economy completely described by the following two equations: S = -100 + .25Y and Id = 10 +.10Y. The “paradox of thrift” applied to this economy suggests that A. An exogenous increase in the desire to consume will make it so that in equilibrium people actually consume less. B. An exogenous increase in the desire to save will make it so that in equilibrium people actually save less. C. An exogenous increase in the desire to save will make it so that in equilibrium people save the same amount. D. An exogenous increase in desired investment leads to less saving in equilibrium. E. An exogenous increase in desired investment leads to less consumption in equilibrium. 8. Which one of the following is NOT included in what the U.S. government defines as M1? A. currency in circulation B. checkable deposits C. demand deposits D. savings accounts E. travelers checks 4 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc 9. Suppose the required reserve ratio, rrr, is 20% and that all banks in Econoland are part of the commercial banking system and all banks hold zero in excess reserves. Assume that once money enters the banking system it stays in the banking system. Being afraid of the Big Bad Wolf, suppose Porky takes $700 out of his piggy bank and decides to deposit it into a checking account at the local bank. By doing so, the money supply, M1, in Econoland will A. not change. B. decrease by $700. C. decrease by $3,500. D. increase by$2,800. E. increase by $3,500. 10. Suppose the required reserve ratio, rrr, is 15%. Suppose that when people in the particular economy of Mistrustville sell securities to the central bank they immediately withdraw the money from the demand deposit that was created for them at their bank and then they keep all this paper money at home under their mattresses, since they do not trust the commercial bankers. As compared to an economy where everyone keeps all their money as demand deposits in commercial banks, the odd behavior of people in Mistrustville will tend to A. increase the value of the money multiplier. B. make monetary policy less effective. C. make monetary policy more effective. D. make fiscal policy less effective. E. make fiscal policy more effective. 11. The Fed wants to DECREASE the money supply. In which answer do both listed options have the potential to work? A. The Fed sells securities to the public & lowers the required reserve ratio. B. The Fed sells securities to the public & raises the required reserve ratio. C. The Fed buys securities from the public & raises the required reserve ratio. D. The Fed buys securities from the public & lowers the required reserve ratio. E. The Fed buys securities from the public & lowers the discount rate. 5 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc 12 If the annual market interest rate is 5% and there is no inflation, a bond with a face value of $10,000 and a maturity date in exactly two years is worth _________________ today. A. $9,523.81 B. $9,070.29 C. $10,526.63 D. $10,000 E. $10,500 13. Suppose that at the current interest rate the quantity of money supplied exceeds the quantity of money demanded. Given this information, we know that there will be pressure for A. the money supply to increase. B. bond prices to decrease and the interest rate to decrease. C. bond prices to increase and the interest rate to increase. D. bond prices to increase and the interest rate to decrease. E. bond prices to decrease and the interest rate to increase. 14. The transaction motive for holding cash balances ___________ money demand curve as aggregate income changes. The speculative motive for holding cash balances ____________ money demand curve as the interest rate changes. A. shifts the; shifts the B. shifts the; causes movements along the same C. causes movements along the same; shifts the D. causes movements along the same, causes movements along the same E. causes movements along the same, has no impact on the 6 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc 15. In a “no inflation” model that includes the goods and services market and the money market with money demand that depends on r and Y in the manner discussed in class, which of the following pairs of events is predicted to unambiguously lead to an increase in the equilibrium interest rate, r*? A. The Fed purchases government securities from the public and there is a decrease in government expenditures. B. The Fed decreases the discount rate and it also decreases the required reserve ratio. C. The Fed decreases the required reserve ratio and there is also an exogenous increase in the level of aggregate desired expenditures via an increase in subsistence consumption. D. The Fed sells government securities to the public and at the same time there is an increase in government expenditures. E. The Fed sells government securities to the public and at the same time it decreases the required reserve ratio. Keep going…… 7 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc Part II: Answer all questions. 1. Consider the following information presented by the Bureau of Labor Statistics in the small country of Snowdin. Let 2007 be the base year and let the base year bundle purchased by the typical urban Snowdinian be as indicated in the table. The table also lists prevailing per unit prices for the goods in this bundle for the years 2007, 2008 and 2009. Price per Unit in Years… Units Purchased 2007 2008 2009 in typical urban citizen’s bundle Apples 10 $1.80 $2.00 $2.10 Oranges 5 $2.50 $2.00 $2.40 Milk 2 $2.50 $3.00 $3.50 a) Suppose 2007 is the base year. What is the CPI for 2007? SHOW SOME WORK. b) Calculate the CPI for 2009. SHOW SOME WORK. c) Based on the CPI, what was the inflation rate between 2007 and 2009? SHOW SOME WORK. d) Suppose Joe lives in Snowdin. He got $500 from his grandmother when he graduated from high school in 2007. His sister Wilma graduates from high school in 2009. Based on the CPI in Snowdin, how much should Grandma give Wilma so that grandma’s gift to Wilma is consistent with her gift to Joe? SHOW SOME WORK. e) Many argue that the type of CPI calculation Snowdin (and many other countries, including the United States) use suffers from two flaws: 1) it is rather narrow in its scope and 2) it tends to overstate the impact of higher prices. Briefly explain what these comments mean and what other measure of inflation/deflation might be out there for an economy. ANSWER SPACE 8 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc ANSWER SPACE 9 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc 2. Suppose an economy completely described by the following set of equations: C [C c Yd ], I d I , G G, EX X , IM F , and T [T t Y ] Note: Yd refers to disposable income and there is no money market or inflation. a) Derive the equation for equilibrium output/income Y* using the notation and equations above. SHOW YOUR WORK. b) Using the “Keynesian Cross” diagram, illustrate your equilibrium. c) Using the notation above, what are the equations for the Government expenditure multiplier, K G , and the Tax multipler K T in this model? SHOW YOUR WORK. d) Suppose that the marginal propensity to consume is .75 and that the marginal tax rate is .20. You are told that there is currently a recessionary gap of $5,000 in this economy. What does that mean, exactly? e) Explain in sufficient detail ONE kind of fiscal policy the government can use to eliminate the recessionary gap. SHOW YOUR WORK and be specific with respect to values. f) Suppose we introduce a money market with money demand and supply as discussed in class. If the president and congress (the fiscal policy guys) had a genie-in-a-bottle who would grant them only two wishes in order to make fiscal policy have lots of efficacy, what wishes would the fiscal guys ask for? Briefly defend your wishes. ANSWER SPACE 10 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc ANSWER SPACE 11 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc 3. Seppo and Vin are neighbors who live in Grayville, a country that has a fractional reserve banking system with a required reserve ratio of 25%. Assume there is only one monopoly bank in Grayville, Blackbank. Blackbank always loans up to where excess reserves = $0. The symbol for Grayville’s currency is $. The Fed in Grayville wants to buy $500 in government securities from the public. Suppose it buys $200 worth from Seppo and $300 from Vin. Suppose that both Seppo and Vin get paid for the securities by the Fed via direct deposit to their checking accounts (DD-Vin and DD-Seppo) at Blackbank. ORIGINAL T-Accounts THE FED Blackbank Assets Liabilities +Net Worth Assets Liabilities +Net Worth Securities $20,000 Reserves $5,000 Reserves $5,000 DDp $20,000 Currency $2,500 Loans $17,000 Net Worth $2,000 Net Worth $12,500 Seppo Vin Assets Liabilities +Net Worth Assets Liabilities +Net Worth DD-Seppo $2,000 Debt $0 DD-Vin $4,000 Debt $0 Currency $500 Net Worth $4,500 Currency $1,000 Net Worth $5,500 Securities $2,000 Securities $500 FINAL T-Accounts THE FED Blackbank Assets Liabilities +Net Worth Assets Liabilities +Net Worth Securities Reserves Reserves DDp Currency $2,500 Loans Net Worth $2,000 Net Worth $12,500 Seppo Vin Assets Liabilities +Net Worth Assets Liabilities +Net Worth DD-Seppo Debt $0 DD-Vin Debt $0 Currency Net Worth $4,500 Currency Net Worth $5,500 Securities Securities 12 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc a) Given the information in the top half of the T-accounts for Grayville, what is the value of the money supply PRIOR to The Fed’s purchase of the securities from Seppo and Vin? (Note that Seppo and Vin are just two of many people that live in Grayville.) b) What final impact does the open market operation above have on the money supply of Grayville assuming Blackbank uses its portfolio of loans to make adjustments to its reserves position? NOTE: Assume Seppo and Vin are no longer involved after the initial transaction. c) Fill in all the missing blanks in the bottom half of the T accounts illustrated on the previous page as they would appear once the money supply had reached its new final position from part (b) above. d) How would your answer to only part (b) above change if it turns out that Vin asks the Fed to pay him with dollar bills rather than a demand deposit at his bank, since Vin would like to keep that money under his mattress? (Or the next question…) e) Identify and briefly explain two kinds of situations (that would be deviations from the story line above) that would end up reducing the impact of the Fed’s open market operation. ANSWER SPACE 13 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc ANSWER SPACE 14 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc ANSWER SPACE 15 C:\Docstoc\Working\pdf\86ce6d7e-f913-4ef3-b569-7670994635b7.doc ANSWERS FOR THE MULTIPLE CHOICE QUESTIONS 1 B 2 B 3 B 4 D 5 C 6 B 7 B 8 D 9 D. Please note that the 700$ has already been part of M1. Therefore, the money increases by 700/0.2- 700=2800. 10 B 11 B 12 B 13 D 14 B 15 D 16