The Fed Buys Bonds. Increase or Decrease Money Supply - Excel

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					CRC                               Final Examination                                     Econ 302
Spring 2009                              (250 points total)                               R B Le




      Your Name:
      Class time:


Directions:
  1 You have 110 minutes to finish this final examination.
  2 On this test copy you may circle the answers, draw graphs, or write notes, etc.
  3 You need a calculator to answer some questions.
  4 If you are asked to draw a straight line, use a ruler. Doing so will help you quickly
       find the answer on the diagram.
  5 Please mark your answers on a scantron (Form 882-E) with a number 2 pencil.
       Erase completely to change; failure to do so would result in your answer being
       incorrect.
  6 Turn in BOTH this test copy and your scantron when done. For your information,
       this test and its solutions will be posted on the internet early next week.
  7 Read the questions carefully and use your test time efficiently.
  8 Ask me if you have any questions.
  9 Good luck!




                                             (Final A)                                      Page 1 of 18
              This page is intentionally left blank.
(You can use this page for writing notes, doing calculations, etc.)




                             (Final A)                                Page 2 of 18
Questions              Find the letter that corresponds to the best answer.

 1.   Senator Smith wants to increase taxes on people with high incomes and use the
      money to help the poor. Senator Jones argues that such a tax will discourage
      successful people from working and will therefore make society worse off. An
      economist would say that
        a. we should agree with Senator Smith.
        b. we should agree with Senator Jones.
        c. a good decision requires that we recognize both viewpoints.
        d. there are no tradeoffs between equity and efficiency.

 2.   People are willing to pay more for a diamond than for a bottle of water because
       a. the marginal cost of producing an extra diamond far exceeds the marginal
            cost of producing an extra bottle of water.
       b. the marginal benefit of an extra diamond far exceeds the marginal benefit of
            an extra bottle of water.
       c. producers of diamonds have a much greater ability to manipulate diamond
            prices than producers of water have to manipulate water prices.
       d. water prices are held artificially low by governments, since water is necessary
            for life.

 3.   A typical worker in Italy can produce 24 units of product in an eight-hour day, while a
      typical worker in Poland can produce 30 units of product in a 10-hour day. We can
      conclude that
        a. worker productivity in Poland is higher than in Italy.
        b. the standard of living will likely be higher in Italy than in Poland.
        c. productivity is 3 units per hour for the Polish worker and 21/2 units per hour
             for the Italian worker.
        d. there will be no difference between the standard of living in Italy and Poland.

 4.   Which of the following claims is consistent with the views of mainstream
      economists?
        a. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of
           unemployment will temporarily fall.
        b. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of
           unemployment will temporarily rise.
        c. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of
           unemployment will permanently fall.
        d. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of
           unemployment will permanently rise.

 5.   In a market economy,
        a. supply determines demand and, in turn, demand determines prices.
        b. demand determines supply and, in turn, supply determines prices.
        c. the allocation of scarce resources determines prices and, in turn, prices
            determine supply and demand.
        d. supply and demand determine prices and, in turn, prices allocate scarce
            resources.

                                             (Final A)                                     Page 3 of 18
6.   Which of the following changes would not shift the demand curve for a good or
     service?
       a. a change in income
       b. a change in the price of the good or service
       c. a change in expectations about the future price of the good or service
       d. a change in the price of a related good or service

7.   When we compare an increase in supply with an increase in quantity supplied, we
     know that
       a. the former could be caused by a decrease in input costs and the latter would
           be caused by an increase in the price of the good.
       b. the former is depicted by a movement along the supply curve and the latter is
           depicted by a shift of the curve.
       c. both are always caused by a change in demand.
       d. both are always caused by a change in the number of market participants.

              Price    Quantity Demanded Quantity Supplied
              P ($)            Qd               Qs
               $5               15              45
               $4               20              35
               $3               25              25
               $2               30              15
               $1               35               5

8.   Refer to the table above, which of the following statements is true?
      a. The equilibrium price and quantity are $4 and 25, respectively.
      b. If the price were $5, a surplus of 40 units would exist and price would tend to
            fall.
      c. If the price were $2, a shortage of 15 units would exist and price would tend to
            rise.
      d. All of the above.

9.   Beef is a normal good. You observe that both the equilibrium price and quantity of
     beef have fallen over time. Which of the following explanations would be most
     consistent with this observation?
       a. Consumers have experienced an increase in income and beef-production
            technology has improved.
       b. The price of chicken has risen and the price of steak sauce has fallen.
       c. The demand curve for beef must be positively sloped.
       d. New medical evidence has been released that indicates a negative correlation
            between a person’s beef consumption and his or her longevity.

10. Which of the following events would definitely result in a higher price in the market
    for gasoline?
      a. Demand for gasoline increases and supply of gasoline decreases.
      b. Demand for gasoline and supply of gasoline both decrease.
      c. Demand for gasoline decreases and supply of gasoline increases.
      d. Demand for gasoline and supply of gasoline both increase


                                            (Final A)                                       Page 4 of 18
           P ($)
8.00
           7.60
7.20
           6.80
6.40
           6.00
                                                                                                    S'
5.60
           5.20
4.80
           4.40
4.00
           3.60
                                                                                           S
3.20
           2.80
                                                            E
2.40
           2.00
1.60
           1.20
0.80
           0.40
                                                                                  D
                        200               600                        1,000        Q (million gallons)
       0
                                  400                      800                 1,200            1,600

11. Market research has revealed the following information about the market for
    gasoline, a normal good.
    The demand and supply schedules can be represented by the following equations.
    (All quantities are in millions of gallons.)

800                Qd         =     -166 2/3        P            +           1,200   (1)         7 1/5
800                Qs         =         500         P                         -400   (2)           4/5

       (Hint: Draw the demand and supply curves on the diagram above.)
       Which of the following statements is true?
         a. The market equilibrium price and quantity of gasoline are $2.4 and 1,000
              million gallons, respectively.
         b. At the price of $4.8, the quantity demanded is 400 million gallons.
         c. At the price of $1.2, the quantity supplied is zero.
         d. All of the above.

12. Refer to the graph above. Suppose that supply decreased by 800 million gallons, the
    new equilibrium price and quantity in the market would be, respectively,
      a. $1.2; 200 million gallons
      b. $2.4; 400 million gallons
      c. $3.6; 600 million gallons
      d. $4.8; 400 million gallons




                                               (Final A)                                       Page 5 of 18
13. Which of the following statements about GDP is correct?
     a. GDP measures two things at once: the total income of everyone in the
         economy and the total expenditure on the economy’s output of goods and
         services.
     b. Money continuously flows from households to firms and then back to
         households, and GDP measures this flow of money.
     c. GDP is generally regarded as the best single measure of a society’s economic
         well-being.
     d. All of the above are correct.

14. Consider two items that might be included in GDP: (1) The estimated rental value of
    owner-occupied housing; and (2) purchases of newly-constructed homes. How are
    these two items accounted for when GDP is calculated?
      a. Both item (1) and item (2) are included in the consumption component of
           GDP.
      b. Item (1) is included in the consumption component, while item (2) is included
           in the investment component.
      c. Item (1) is included in the investment component, while item (2) is included in
           the consumption component.
      d. Only item (2) is included in GDP and it is included in the investment
           component.

15. In a certain economy in 2005, the value of imports amounted to 80 percent of the
    value of exports. Consumption, investment, and government purchases added up to
    $5,000. The market value of all final goods and services produced within the
    economy was $5,500. It follows that the economy exported
      a. $500 worth of goods and services.
      b. $1,000 worth of goods and services.
      c. $1,500 worth of goods and services.
      d. $2,500 worth of goods and services.

16. A country reported a nominal GDP of $115 billion in 2006 and $125 billion in 2005; it
    reported a GDP deflator of 85 in 2006 and a deflator of 100 in 2005. Between 2005
    and 2006,
      a. real output rose and the price level fell.
      b. real output fell and the price level rose.
      c. real output and the price level both rose.
      d. real output and the price level both fell.

17. The price index in the first year is 150; in the second year it is 160; and in the third
    year it is 165. Which of the following statements is correct?
      a. The price level was higher in the second year than in the first year, and it was
            higher in the third year than in the second year.
      b. The inflation rate was positive between the first and second years, and it was
            positive between the second and third years.
      c. The inflation rate was lower between the second and third years than it was
            between the first and second years.
      d. All of the above are correct.


                                            (Final A)                                     Page 6 of 18
18. An important difference between the GDP deflator and the consumer price index is
    that
      a. the GDP deflator reflects the prices of goods and services bought by
          producers, whereas the consumer price index reflects the prices of goods and
          services bought by consumers.
      b. the GDP deflator reflects the prices of all final goods and services produced
          domestically, whereas the consumer price index reflects the prices of some
          goods and services bought by consumers.
      c. the GDP deflator reflects the prices of all final goods and services produced
          by a nation's citizens, whereas the consumer price index reflects the prices of
          final goods and services bought by consumers.
      d. the GDP deflator reflects the prices of all goods and services bought by
          producers and consumers, whereas the consumer price index reflects the
          prices of final goods and services bought by consumers.

19. Which of the following is the most accurate statement about real and nominal
    interest rates?
      a. Real interest rates can be either positive or negative, but nominal interest
           rates must be positive.
      b. Real interest rates and nominal interest rates must be positive.
       c. Real interest rates must be positive, but nominal interest rates can be either
           positive or negative.
      d. Real interest rates and nominal interest rates can be either positive or
           negative.

20. Samantha deposits $1,000 in a saving account that pays an annual interest rate of 4
    percent. Over the course of a year the inflation rate is 1 percent. At the end of the
    year Samantha has
      a. $50 more in her account, and her purchasing power has increased by about
          $30.
      b. $40 more in her account, and her purchasing power has increased by about
          $40.
      c. $40 more in her account, and her purchasing power has increased by about
          $30.
      d. $30 more in her account and her purchasing power has increased by about
          $50.

21. The natural rate of unemployment is the economist's notion of
      a. full employment.
      b. cyclical employment.
      c. structural unemployment.
      d. frictional unemployment.




                                           (Final A)                                       Page 7 of 18
22. The following table shows March 2009 data in the United States:
          Employed                   141 million
          Unemployed                   13 million
          Not in labor force           81 million
    Which of the following statements is true?
      a. The labor force in the U.S. is 164 million.
      b. The adult population in the U.S. is 245 million.
      c. The unemployment rate in the U.S. is 7.4%.
      d. The labor force participation rate in the U.S. is 65.5%.

23. Matt loses his job and decides to sit on the beach rather than looking for work the
    next few months. Other things the same, the unemployment rate
      a. increases, and the labor-force participation rate is unaffected.
      b. increases, and the labor-force participation rate decreases.
      c. decreases, and the labor-force participation rate increases.
      d. decreases, and the labor-force participation rate decreases.

24. Bob is looking for work after school, but everywhere he fills out an application the
    managers say they always have a lot more applications than open positions. Tom
    has a law degree. Several firms have made him offers, but he thinks he might be
    able to find a firm where his talents could be put to better use.
      a. Bob and Tom are both frictionally unemployed.
      b. Bob and Tom are both structurally unemployed.
      c. Bob is frictionally unemployed, and Tom is structurally unemployed.
      d. Bob is structurally unemployed, and Tom is frictionally unemployed.

25. The existence of money leads to
      a. greater specialization in production, but not a higher standard of living.
      b. a higher standard of living, but not greater specialization.
      c. greater specialization and a higher standard of living.
      d. neither greater specialization or a higher standard of living.

26. Which of the following is included in both M1 and M2?
     a. demand deposits
     b. savings deposits
     c. small time deposits
     d. money market mutual funds

27. Suppose the banking system currently has $300 billion in reserves, that the reserve
    requirement is 10%, and that $3 billion of the reserves are excess reserves that will
    not be lent out. What is the value of deposits?
      a. $3,300 billion
      b. $2,970 billion
      c. $2,700 billion
      d. $2,673 billion




                                            (Final A)                                      Page 8 of 18
28. Which of the following is correct?
     a. If the Fed purchases bonds in the open market, then the money supply curve
         shifts right. A change in the price level does not shift the money supply curve.
     b. If the Fed sells bonds in the open market, then the money supply curve shifts
         right. A change in the price level does not shift the money supply curve.
     c. If the Fed purchases bonds, then the money supply curve shifts right. An
         increase in the price level shifts the money supply curve right.
     d. If the Fed sells bonds, then the money supply curve shifts right. A decrease in
         the price level shifts the money supply curve right.

29. In order to maintain stable prices, a central bank must
      a. maintain low interest rates.
      b. keep unemployment low.
      c. tightly control the money supply.
      d. sell indexed bonds.

30. Suppose that the money supply tripled, but at the same time velocity fell by half and
    real GDP was unchanged. According to the quantity equation the price level
      a. is the same as its old value.
      b. is 6 times its old value.
      c. is 3 times its old value.
      d. is 1.5 times its old value.

31. You buy a stock and its price rises just as much as the price level. Before taxes you
    made
     a. a nominal and real gain, and you pay taxes on the nominal gain.
     b. a nominal and real gain, but you pay taxes only on the real gain.
     c. a nominal gain, but no real gain, yet you pay taxes on the nominal gain.
     d. a nominal gain, but no real gain, so you pay no taxes on the nominal gain.

32. If a country has negative net capital outflows, then its net exports are
       a. positive and its saving is larger than its domestic investment.
       b. positive and its saving is smaller than its domestic investment.
       c. negative and its saving is larger than its domestic investment.
       d. negative and its saving is smaller than its domestic investment.

33. The United States has a GDP of $11,340 billion, investment of $1,330 billion,
    government purchases of $2,075 billion, and net capital outflow of negative $310
    billion. This means that
       a. consumption equals $8,245 billion.
       b. consumption equals $7,500 billion.
       c. consumption equals $6,245 billion.
       d. saving equals $1,000 billion.

34. If the U.S. real exchange rate appreciates, U.S. net exports
       a. and U.S. net capital outflow both increase.
       b. and U.S. net capital outflow both decrease.
       c. increase and U.S. net capital outflow decreases.
       d. decrease and U.S. net capital outflow increases.


                                            (Final A)                                   Page 9 of 18
35. Other things the same, an increase in the interest rate would tend to reduce
     a. domestic investment, but not net capital outflow.
     b. net capital outflow, but not domestic investment.
      c. both domestic investment and net capital outflow.
     d. neither domestic investment nor not capital outflow.

36. If net exports are negative, then
       a. net capital outflow is positive, so foreign assets bought by Americans are
            greater than American assets bought by foreigners.
       b. net capital outflow is positive, so American assets bought by foreigners are
            greater than foreign assets bought by Americans.
       c. net capital outflow is negative, so foreign assets bought by Americans are
            greater than American assets bought by foreigners.
       d. net capital outflow is negative, so American assets bought by foreigners are
            greater than foreign assets bought by Americans.

37. You see on the Internet that the U.S. exchange rate has fallen. This might have
    been caused by
      a. a decrease in the demand for or a decrease in the supply of dollars in the
          market for foreign-currency exchange.
      b. a decrease in the demand for or an increase in the supply of dollars in the
          market for foreign-currency exchange.
      c. an increase in the demand for or a decrease in the supply of dollars in the
          market for foreign-currency exchange.
      d. an increase in the demand for or a increase in the supply of dollars in the
          market for foreign-currency exchange.

38. Historically, the change in real GDP during recessions has been
      a. mostly a change in investment spending.
      b. mostly a change in consumption spending.
      c. about equally divided between consumption and investment spending.
      d. sometimes mostly a change in consumption and sometimes mostly a change
           in investment.

39. 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.

40. From 2007 to 2008 there was a dramatic fall in the price of houses. If this made
    people feel poorer then it would shift
      a. aggregate supply right.
      b. aggregate supply left.
      c. aggregate demand right.
      d. aggregate demand left.




                                          (Final A)                                    Page 10 of 18
41. Which of the following shifts aggregate demand to the right?
     a. Congress reduces purchases of new weapons systems.
     b. The price level falls.
     c. The Fed buys bonds in the open market.
     d. Net exports fall.

42. An economic contraction caused by a shift in aggregate demand causes prices to
     a. rise in the short run, and rise even more in the long run.
     b. rise in the short run, and fall back to their original level in the long run.
     c. fall in the short run, and fall even more in the long run.
     d. fall in the short run, and rise back to their original level in the long run.

43. Policymakers who control monetary and fiscal policy and want to offset the effects
    on output of an economic contraction caused by a shift in aggregate supply could
    use policy to shift
      a. aggregate demand to the right.
      b. aggregate demand to the left
      c. aggregate supply to the right.
      d. aggregate supply to the left.




P                                                                                   SRAS8
GDP
Deflator
                                                                                SRAS67

                                              E8
                                                                   E7


                                   E6

                                               AD8                  AD7

                                   AD6
                                                                    Q = Y ($) Real GDP

44. The above diagram shows three equilibrium points for the U.S. economy in 2006,
    2007, and 2008. Given the original AD6 and SRAS67 as shown, which of the
    following statements is true?
      a. From 2006 to 2007, the U.S. economy expanded, aggregate demand
           increased.
      b. From 2007 to 2008, the U.S. economy declined, both aggregate demand and
           short-run aggregate supply decreased.
      c. Compared to 2007, the U.S. economy fell into a stagflation in 2008.
      d. All of the above.


                                          (Final A)                                     Page 11 of 18
45. Which of the following Fed actions would increase the money supply?
     a. buy bonds, raise interest rates, and raise the reserve requirement
     b. buy bonds, lower interest rates, and lower the reserve requirement
     c. sell bonds, raise interest rates, and raise the reserve requirement
     d. sell bonds, lower interest rates, and lower the reserve requirement

46. Which of the following properly describes the interest rate effect?
     a. A higher price level leads to higher money demand, higher money demand
         leads to higher interest rates, a higher interest rate increases the quantity of
         goods and services demanded.
     b. A higher price level leads to higher money demand, higher money demand
         leads to lower interest rates, a higher interest rate reduces the quantity of
         goods and services demanded.
     c. A lower price level leads to lower money demand, lower money demand leads
         to lower interest rates, a lower interest rate reduces the quantity of goods and
         services demanded.
     d. A lower price level leads to lower money demand, lower money demand leads
         to lower interest rates, a lower interest rate increases the quantity of goods
         and services demanded.

47. In the short run, an increase in the money supply causes interest rates to
      a. increase, and aggregate demand to shift right.
      b. increase, and aggregate demand to shift left.
      c. decrease, and aggregate demand to shift right.
      d. decrease, and aggregate demand to shift left.

48. Economists agree on all of the following except that
     a. government should use only fiscal policy to try to stabilize the economy.
     b. in the long run, increases in the money supply increase prices, but not output.
      c. recessions are associated with decreases in consumption, investment, and
         employment.
     d. increases in the money supply shift aggregate demand to the right.

49. Which of the following statements is true?
     a. The short-run Phillips curve describes a negative relationship between
         inflation and unemployment.
     b. Shifts in aggregate demand cause movements along a short-run Phillips
         curve.
     c. Shifts in short-run aggregate supply cause shifts in short-run Phillips curve.
     d. All of the above.




                                           (Final A)                                     Page 12 of 18
p(%)
Inflation
Rate
                                   A (year 1)

                                                B (year 2)

                                                             C (year 3)


                                                                          SRPC


                                                                          u (%) Unemployment Rate

50. The diagram above shows three points on a short-run Phillips curve. The economy
    was originally at point A in year 1, then it moved to point B in year 2, and finally to
    point C in year 3.
    Which of the following statements is true?
      a. From year 1 to year 2, the economy expanded.
      b. From year 2 to year 3, the economy fell into a recession.
      c. The inflation rate in year 3 was higher than that in year 1.
      d. All of the above.




                                            (Final A)                                      Page 13 of 18
Answers
 1.   c.   True.   (TB p. 5)
                   Any society tries to achieve two macroeconomics goals -- efficiency
                   and equity.
                   However, there exists a short-run tradeoff between the two goals.
                   A good decision requires that we take both goals into account.

 2.   b.   True.   (TB p. 6)
                   A person's willingness to pay for any good is based on marginal
                   benefit (MB).
                   Generally, the MB of an extra diamond far exceeds the MB of an
                   extra bottle of water.

 3.   d.   True.   (TB p. 12)
                   Productivity = Hourly output per worker
                               Output       Hours worked        Productivity
                   Italy            24            8                   3 units
                   Poland           30           10                   3 units
                   Workers in both countries have equal productivity, so they
                   enjoy the same living standard.

 4.   a.   True.   (TB p. 13)
                   Society faces a short-run (temporary) tradeoff between inflation
                   and unemployment.
                   If inflation rises, then unemployment will fall temporarily.

 5.   d.   True.   (TB p. 63)

 6.   b.   True.   (TB p. 69)
                   A change in price represents a movement along the demand curve.

 7.   a.   True.   (TB p. 74)

 8.   c.   True.   (TB pp. 75-76)

 9.   d.   True.   (TB p. 69)
                   Both price and quantity fall when demand falls.
                   This is true when people's tastes about beef change.

10.   a.   True.   (TB p. 82)

11.   b.   True.   (Lecture notes)
                   See the diagram above.

12.   c.   True.   (TB p. 80)
                   See the diagram above.



                                        (Final A)                                     Page 14 of 18
13.   d.   True.    (TB p. 93)

14.   b.   True.    (TB pp. 96-97)
                    The rents people pay for rental houses/apartments are considered
                    consumption.
                    The mortgage payments people pay for new houses are considered
                    investment.

15.   d.   True.    (TB p. 96)
                      GDP          =       C+I+G     +             EX - IM
                      $5,500       =        $5,000   +             EX - 80%*EX
                        $500       =          20% EX
                       EX          =        $2,500

16.   a.   True.    (TB p. 101)
                        Year     Ym               P            Y    Real output = real GDP
                        2005 $125.00            100      $125.00
                        2006 $115.00             85      $135.29
                                               down           up

17.   d.   True.    (TB p. 116)
                                  Year 1      Year 2      Year 3
                     CPI            150         160         165
                     p (%)                     6.7%        3.1%

18.   b.   True.    (TB pp. 120-121)

19.   a.   True.    (TB p. 125)

20.   c.   True.    (TB p. 125)
                           im         p             i
                         4%         1%           3%
                         $40        $10          $30

21.   a.   True.    (TB pp. 200-201)

22.   d.   True.    (TB pp. 199-200)
      a.   False.         LF = E + U =                      154 million
      b.   False.        AP = LF + NiLF =                   235 million
      c.   False.      u (%) = (U / LF) x 100 =            8.4%
      d.   True.     lfpr (%) = (LF / AP) x 100 =         65.5%

23.   b.   True.    (TB pp. 199-200)
                            E        U              LF     NiLF         AP      u(%)     lfpr(%)
                            8        2              10        6         16    20.0%       62.5%
                            7        2               9        7         16    22.2%       56.3%
                                                                               up        down
                    Matt loses his job and does not look for work, so E falls by 1, U is
                    unchanged, NiLF increases by 1.


                                           (Final A)                                   Page 15 of 18
24.   d.   True.   (TB p. 206)

25.   c.   True.   (TB p. 226)

26.   a.   True.   (TB p. 230)

27.   b.   True.   (TB p. 236)
                       TR = Total Reserves =                   $300 billion
                         rr = reserve requirement =            10%
                       ER = Excess Reserves =                    $3 billion
              so       RR = Required Reserves =                 $30 billion
             and      mm = money multiplier =                    10
                   Deposits = Total Reserves + Total Loans = TR + TL
                   TL = (TR - RR - ER) x mm =                $2,670 billion
                   Deposits = TR + TL =                      $2,970 billion

28.   a.   True.   (TB p. 250)
                   When the Fed purchases bonds, the Fed increases money supply.
                   The money supply curve shifts to the right.
                   A change in the price level does not shift the money supply curve.
                   It shifts the money demand curve.

29.   c.   True.   (TB p. 253)

30.   d.   True.   (TB p. 253)
                        M    x   V           =         P    x     Y         =            Ym
                       100       8           =         4         200        =           800
                       300       4           =         6         200        =           1200
                     tripled   halved        =        1.5       same        =            1.5

31.   c.   True.   (TB p. 258)

32.   d.   True.   (TB p. 283)

33.   a.   True.   (TB pp. 281-282)
                       GDP          C           I         G NX = NCO           S
                    $11,340    $8,245      $1,330    $2,075    -$310      $1,020

34.   b.   True.   (TB p. 288)
                   If the U.S. real exchange rate appreciates, U.S. goods and services
                   become more expensive to foreigners. U.S. exports fall and U.S.
                   imports rise, thus NX falls. Since NCO equals NX, NCO also falls.

35.   c.   True.   (TB p. 309)
                   When domestic interest rate rises, domestic investment falls.
                   Foreigners invest more in the domestic country, so capital inflow
                   (CI) rises. NCO, that equals CO - CI, falls.



                                        (Final A)                                      Page 16 of 18
36.   d.   True.   (TB p. 302)
                   NX = NCO, so if NX < 0, then NCO < 0.
                   That means that CI > CO, or domestic (American) assets bought by
                   foreigners (CI) are greater than foreign assets bought by Americans
                   (CO).

37.   b.   True.   (TB pp. 309-312)
                   Price falls when demand falls or supply rises.
                   Exchange rate is the price of a currency in terms of other
                   currencies.
                   The U.S. exchange rate falls when:
                   - foreigners demand fewer dollars, and
                   - Americans supply more dollars.

38.   a.   True.   (TB p. 326)

39.   b.   True.   (TB p. 332)
                   All prices tend to move in the same direction. The price level P is
                   the prices of goods and services produced domestically; the
                   interest rate i is the price of money; and the exchange rate ex is the
                   price of domestic currency.
                   So when P is higher, i is higher, and ex is also higher.
                   ex is higher so domestic goods and services become more
                   expensive to foreigners, NX fall.

40.   d.   True.   (TB p. 335)
                   People are poorer, they buy less. AD shifts to the left. The economy
                   falls into a recession.

41.   c.   True.   (TB p. 335)
                   AD shifts when there is a change in C, I, G, or NX.
                   When G falls, AD shifts to the left.
                   The price level P represents a movement along the AD, not a shift.
                   The Fed buys bonds, interest rate falls, so C and I rise, AD shifts to
                   the right.
                   NX fall, AD shifts to the left.

42.   c.   True.   (TB p. 346)
                   An economic contraction shifts AD to the left in the short run and
                   causes a recession. Price falls and deflation occurs. Left alone,
                   the economy will self-adjust and more deflation will occur, i.e. P
                   will fall further as the economy gets back to long-run equilibrium.

43.   a.   True.   (TB p. 353)




                                        (Final A)                                     Page 17 of 18
44.   d.   True.   (Lecture notes)
                   From 2006 to 2007, both GDP and P rose, the economy's AD
                   shifted to the right, the economy expanded.
                   From 2007 to 2008, GDP fell and P rose, both SRAS and AD
                   shifted to the left. However, SRAS shift was greater than AD shift.
                   The economy fell into a stagflation.

45.   b.   True.   (TB p. 363)

46.   d.   True.   (TB p. 367)

47.   c.   True.   (TB p. 368)

48.   a.   True.   (TB p. 379)

49.   d.   True.   (TB pp. 387, 388, 399)

50.   b.   True.   (Lecture notes)




                                        (Final A)                                   Page 18 of 18

				
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