Final_Exam_2009__soln_

					                            Introduction to Economics
                            Seoul National University
                                  Summer 2009


                                     Final Exam
                                    July 29, 2008

Instructions: You score +1 for each correct answer (i.e. there is no penalty for wrong
answers). There are 42 questions and 2 1/2 hours (about 3.5 minutes per question.)
GOOD LUCK!


1.      In 2007, Sal Company grows and sells $2 million worth of rice to Tasty Deuk
Company, which makes rice cakes.    Tasty Deuk Company produces $6 million worth of
rice cakes in 2007, of which households bought $4.5 million during the year. The unsold
$1.5 million worth of rice cakes remains in Tasty Deuk Company’s inventory at the end
of 2007. For the transactions just described, what is the contribution to GDP for 2007?
$6 million


2.      A German citizen buys an automobile produced in Korea by a Japanese
company. As a result,
     a. Korea net exports increase, Korea GDP is unaffected, Japanese GNP increases,
        German net exports decrease, and German GNP and GDP are unaffected.
     b. Korea net exports and GDP increase, Japanese GNP increases, German net
        exports decrease, and German GNP is unaffected, and German GDP decreases.
     c. Korea net exports and GDP increase, Japanese GNP increases, German net
        exports decrease, and German GNP and GDP are unaffected.
     d. Korea net exports and GDP are unaffected, Japanese GNP increases, and
        German net exports, GNP, and GDP decrease.


3.      In an imaginary economy, consumers buy only sandwiches and magazines.
The fixed basket consists of 20 sandwiches and 30 magazines.       In 2006, a sandwich
cost $4 and a magazine cost $2.   In 2007, a sandwich cost $5.   The base year is 2006.
If the consumer price index in 2007 was 125, then how much did a magazine cost in
2007?




                                           1
     a. $0.83
     b. $2.25
     c. $2.50
     d. $3.00


4.         For an imaginary economy, the consumer price index was 115.00 in 2004,
126.50 in 2005, and 136.62 in 2006.       Which of the following statements is correct?
     a. For this economy, the base year must be 2004.
     b. If the basket of goods that is used to calculate the CPI cost $75.00 in the base
           year, then that basket of goods cost $115.00 in 2004.
     c. This economy’s rate of inflation for 2006 is 10.12 percent.
     d. None of the above is correct.


5.         Mr. Kim bought a soccer boots in 1970 for $8.       He purchased the same soccer
boots in 2009 (new ones, of course) for $25.          If the price index was 38.8 in 1970 and
the price index was 180 in 2009, are soccer boots cheaper in 1970 or in 2009? 2009
[i.e. the price of the 1970 soccer boots in 2009 dollars is $37.11]


6.         Which of the following statements about real and nominal interest rates is
correct?
     a. When the nominal interest rate is rising, the real interest rate is necessarily
           rising; when the nominal interest rate is falling, the real interest rate is
           necessarily falling.
     b. If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then
           the real interest rate is 7 percent.
     c. An increase in the real interest rate is necessarily accompanied by either an
           increase in the nominal interest rate, an increase in the inflation rate, or both.
     d. When the inflation rate is positive, the nominal interest rate is necessarily
           greater than the real interest rate.


7.         Suppose that a country’s per capita income was $50 exactly 100 years ago and
is grown to $1,600. Use the rule of 70 to determine the average per annum growth rate.
3.5 percent [i.e. $1,600/$50 = 32. The rule of 70 says that if X is the growth rate of a
variable, then the variable doubles every 70/X years. This implies per capita income
doubled five times. Since it doubled 5 times in 100 years, it doubled every 20 years.
According to the rule of 70, the per capita income doubles every 70/X years. So, we



                                                  2
need 70/X = 20, which means that X is 3.5 percent.]


8.        President Bigego is running for re-election against opposition party leader
Pander.    Bigego proclaims that more people are working now than when he first took
office.   Pander says that the unemployment rate is higher now than when Bigego took
office. You conclude that
      a. one of them must be lying.
      b. both of them could be telling the truth if the labor force and employment grew
          at the exact same rate.
      c. both of them could be telling the truth if the labor force grew slower than
          employment.
      d. both of them could be telling the truth if the labor force grew faster than
          employment.


9.        Some persons are counted as out of the labor force because they have made no
serious or recent effort to look for work.        However, some of these individuals may
want to work even though they are too discouraged to make a serious effort to look for
work.     If these individuals were counted as unemployed instead of out of the labor
force, then
      a. both the unemployment rate and labor-force participation rate would be higher.
      b. the unemployment rate would be higher and the labor-force participation rate
          would be lower.
      c. the unemployment rate would be lower and the labor-force participation rate
          would be higher.
      d. both the unemployment rate and labor-force participation rate would be lower.


10.       The country of Meditor uses the merit as its currency. Recent national income
statistics showed that it had GDP of $700 million merits, no government transfer
payments, taxes of $210 million merits, a budget surplus of $60 billion merits, and
investment of $100 billion merits. What were its consumption and government
expenditures on goods and services? 450 million merits and $150 million merits


11.       For a closed economy, GDP is $11 trillion, consumption is $7 trillion, taxes are
$2 trillion and the government runs a deficit of $1 trillion. What are private saving and
national saving? $2 trillion and $1 trillion, respectively




                                              3
12.      Suppose the government deficit increases, but the interest rate remains the
same. Which of the following things might have happened simultaneously to keep
interest rates the same?
      a. The government reduces the amount that people may put into savings accounts
         on which the interest is tax exempt.
      b. Because they are optimistic about the future of the economy, firms desire to
         borrow more to purchase physical capital.
      c. Consumers decide to decrease consumption and work more.
      d. All of the above could explain why the interest rate would be unchanged.


13.      Suppose the Bank of Korea (BOK) requires banks to hold 10 percent of their
deposits as reserves. A bank has $20,000 of excess reserves and then sells to the BOK
a government bond worth $9,000. How much does this bank now have to lend out if it
decides to hold only required reserves? $29,000


14.      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                 Liabilities
               Reserves                   Deposits
                               $750                     $10,000
               Loans
                               $9,250


If all banks in the economy maintain exactly the same reserve ratio as this bank at all
times, then a sudden increase in reserves of $150 for this bank has the potential to
increase deposits for all banks by $2,000.00 [reserve ration is 7.50 percent; money
multiplier is 1 1/3; 150*money multiplier = 2000]


15.      The manager of the bank where you work tells you that your bank has $5
million in excess reserves. She also tells you that the bank has $300 million in deposits
and $255 million dollars in loans. Given this information, what is the reserve
requirement? 40/300 or 0.13333


For 16~17. The monetary policy of Salidiva is determined by the Salidivian Central



                                            4
Bank. The local currency is the salido. Salidivian banks collectively hold 100 million
salidos of required reserves, 25 million salidos of excess reserves, 250 million salidos
of Salidivian Treasury Bonds, and their customers hold 1,000 million salidos of deposits.
Salidivians prefer to use only demand deposits and so the money supply consists of
demand deposits.


16.      Assuming the only other item Salidivian banks have on their balance sheets is
loans, what is the value of existing loans made by Salidivian banks? 625 million salidos


17.      Suppose the Central Bank of Salidiva loaned the banks of Salidiva 5 million
salidos. Suppose also that both the reserve requirement and the percentage of deposits
held as excess reserves stay the same. By how much would the money supply of
Salidiva change? 40 million salidos


18.      If the reserve ratio is 8 percent, banks do not hold excess reserves, and people
do not hold currency, then when the central bank purchases $20 million of government
bonds, bank reserves
      a. increase by $20 million and the money supply eventually increases by $250
          million.
      b. decrease by $20 million and the money supply eventually increases by $250
          million.
      c. increase by $20 million and the money supply eventually decreases by $250
          million.
      d. decrease by $20 million and the money supply eventually decreases by $250
          million.


19.      The banking system currently has $50 billion of reserves, none of which are
excess. People hold only deposits and no currency, and the reserve requirement is 10
percent. If the central bank raises the reserve requirement to 12.5 percent and at the
same time sells $10 billion of government bonds, then by how much does the money
supply change?
      a. It falls by $20 billion.
      b. It falls by $110 billion.
      c. It falls by $180 billion.
      d. None of the above is correct.




                                            5
20.       The inflation tax refers to
      a. the revenue a government creates by printing money.
      b. higher inflation which requires more frequent price changes.
      c. the idea that, other things the same, an increase in the tax rate raises the
          inflation rate.
      d. taxes being indexed for inflation.


For 21~22. On the graph, MS represents the money supply and MD represents money
demand.
          1/p


                                MS
           1.125

                1

           0.875

            0.75

           0.625

             0.5
                                                   MD
           0.375                                        2
            0.25                                   MD1
           0.125


                                5,000
                                                            Quantity of Money

21.       Suppose the relevant money-demand curve is the one labeled MD1; also
suppose the economy’s real GDP is 30,000 for the year.       If the money market is in
equilibrium, then how many times per year is the typical dollar bill used to pay for a
newly produced good or service (i.e. calculate the velocity of money)? 12


22.     At the end of 2007 the relevant money-demand curve was the one labeled MD2.
At the end of 2008 the relevant money-demand curve was the one labeled MD1.
Assuming the economy is always in equilibrium, what was the economy’s approximate
inflation rate for 2008? 75 percent


23.       Assume an open economy. If a country had a trade surplus of $50 billion and
then its exports rose by $30 billion and its imports rose by $20 billion, its net exports
would now be $60 billion.



                                              6
24.      A Mexican firm exchanges Pesos for U.S. dollars and then uses these dollars to
purchase corn from the U.S.    This transaction
      a. increases Mexican net capital outflow, and increases U.S. net exports.
      b. increases Mexican net capital outflow, and decreases U.S. net exports.
      c. decreases Mexican net capital outflow, and increases U.S. net exports.
      d. decreases Mexican net capital outflow, and decreases U.S. net exports.


25.      In the U.S. a digital camera costs $150.   The same camera in London sells for
60 pounds.    If the exchange rate is .50 pounds per dollar, is the real exchange greater
or less than 1? The real exchange rate is greater than 1 [A person in London with $150
could exchange them for pounds and have more than enough to buy the camera there.]


26.      Suppose the real exchange rate is 1/2 gallon of Canadian gasoline per gallon of
U.S. gasoline, a gallon of U.S. gasoline costs $5.00 U.S., and a gallon of Canadian gas
costs 8 Canadian dollars. What is the nominal exchange rate for the U.S as home
country? .80 Canadian dollars per U.S. dollar


27.      If the Kenyan nominal exchange rate declines, and prices are unchanged in
Kenya and abroad, what happens to the Kenyan real exchange rate? Increase, decrease,
or remain the same?


28.      A Big Mac in Japan costs 240 yen while it costs $3 in the U.S.         The nominal
exchange rate is 100 yen per dollar.    Which of the following would both make the real
exchange rate move towards purchasing-power parity?
      a. the price of Big Macs in the U.S. falls, the nominal exchange rate falls
      b. the price of Big Macs in the U.S. falls, the nominal exchange rate rises
      c. the price of Big Macs in the U.S. rises, the nominal exchange rate falls
      d. the price of Big Macs in the U.S. rises, the nominal exchange rate rises


29.      At a given real interest rate desired national saving would be $50 billion,
domestic investment would be $40 billion, and net capital outflow would be $20 billion,
then at that real interest rate in the loanable funds market there would be a




                                             7
      a. surplus.    The real interest rate would rise.
      b. surplus.    The real interest rate would fall.
      c. shortage.    The real interest rate would rise.
      d. shortage.    The interest rate would fall.


30.      Which of the following contains a list only of things that increase when the
budget deficit of the U.S. increases?
      a. U.S. supply of loanable funds, U.S. interest rates, U.S. domestic investment
      b. U.S. imports, U.S. interest rates, the real exchange rate of the dollar
      c. U.S. interest rates, the real exchange rate of the dollar, U.S. domestic
         investment
      d. the real exchange rate of the dollar, U.S. net capital outflow, U.S. net exports


31.      Which of the following would both raise the U.S. exchange rate?
      a. capital flight from other countries to the U.S. occurs and the U.S. moves from
         budget surplus to budget deficit
      b. capital flight from other countries to the U.S. occurs and the U.S. moves from
         budget deficit to budget surplus
      c. capital flight from the U.S. to other countries occurs, the U.S. moves from
         budget surplus to budget deficit
      d. capital flight from U.S. to other countries occurs, the U.S. moves from budget
         deficit to budget surplus


32.      If a country experiences capital flight, then the real exchange rate would
      a. fall.   To offset this fall the government could increase the budget deficit, and
         this would increase domestic interest rates.
      b. fall.   To offset this fall the government could decrease the budget deficit, and
         this would increase domestic interest rates.
      c. rise.   To offset this rise the government could increase the budget deficit, and
         this would decrease domestic interest rates.
      d. rise.   To offset this rise the government could decrease the budget deficit, and
         this would decrease domestic interest rates.


33.      In Korea, the aggregate quantity of goods and services demanded changes as
the price level rises because




                                               8
      a. real wealth falls, interest rates rise, and the won appreciates.
      b. real wealth falls, interest rates rise, and the won depreciates.
      c. real wealth rises, interest rates fall, and the won appreciates.
      d. real wealth rises, interest rates fall, and the won depreciates.


34.      A decrease in the expected price level shifts short-run aggregate supply to the
      a. right, and an increase in the actual price level shifts short-run aggregate
         supply to the right.
      b. right, and an increase in the actual price level does not shift short-run
         aggregate supply.
      c. left, and an increase in the actual price level shifts short-run aggregate supply
         to the left.
      d. left, and an increase in the actual price level does not shift short-run aggregate
         supply.


35.      If the economy is initially at long-run equilibrium and aggregate demand
declines, then in the long run the price level
      a. and output are higher than in the original long-run equilibrium.
      b. and output are lower than in the original long-run equilibrium.
      c. is lower and output is the same as the original long-run equilibrium.
      d. is the same and output is lower than in the original long-run equilibrium.


36.      If international speculators lose confidence in foreign economies and want to
move some of their wealth into the Korean economy, then in the short run there is
      a. an increase in the value of the Korean won in foreign exchange markets, a
         lower level of Korean output and a lower Korean price level.
      b. an increase in the value of the Korean won in foreign exchange markets, a
         higher level of Korean output and a higher Korean price level.
      c. a decrease in the value of the Korean won in foreign exchange markets, a
         lower level of Korean output and a lower Korean price level.
      d. a decrease in the value of the Korean won in foreign exchange markets, a
         lower level of Korean output and a higher Korean price level.


37.      Imagine the Korean economy is in long-run equilibrium. Then suppose the
value of the Korean won increases. At the same time, people in Korea revise their
expectations so that the expected price level falls. We would expect that in the short-



                                             9
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.


38.         According to liquidity preference theory, an increase in money demand for
some reason other than a change in the price level causes
         a. the interest rate to fall, so aggregate demand shifts right.
         b. the interest rate to fall, so aggregate demand shifts left.
         c. the interest rate to rise, so aggregate demand shifts right.
         d. the interest rate to rise, so aggregate demand shifts left.




For 39~40. On the left-hand graph, MS represents the supply of money and MD
represents the demand for money; on the right-hand graph, AD represents aggregate
demand.       The usual quantities are measured along the axes of both graphs.
.


                         MS




    r2                                                      P2
                                                            P1
    r1                                   MD
                                           2
                                                                                          AD

                                         MD
                                           1



                                                                              Y2     Y1


.
39.         A decrease in Y from Y1 to Y2 is explained as follows:




                                                 10
      a. The Federal Reserve increases the money supply, causing the money-demand
         curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to
         r2; and this increase in r causes Y to decrease from Y1 to Y2.
      b. An increase in P from P1 to P2 causes the money-demand curve to shift from
         MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this
         increase in r causes Y to decrease from Y1 to Y2.
      c. A decrease in P from P2 to P1 causes the money-demand curve to shift from
         MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this
         increase in r causes Y to decrease from Y1 to Y2.
      d. An increase in the price level causes the money-demand curve to shift from
         MD2 to MD1; this shift of MD causes r to decrease from r2 to r1; and this
         decrease in r causes Y to decrease from Y1 to Y2.


40.      Assume the money market is always in equilibrium, and suppose r1 = 0.08; r2 =
0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following
statements is correct?
      a. When r = r2, nominal output is higher than it is when r = r1.
      b. When r = r2, real output is higher than it is when r = r1.
      c. When r = r2, the expected rate of inflation is higher than it is when r = r1.
      d. If the velocity of money is 4 when r = r2, then the quantity of money is 3,000.




41.      On the left-hand graph, MS represents the supply of money and MD represents
the demand for money; on the right-hand graph, AD represents aggregate demand.
The usual quantities are measured along the axes of both graphs.




                                             11
.
                                                            P

                         MS




    r2

                                                                                                AD
    r1                                  MD
                                                                                                     2
                                          2
                                                                                           AD
                                                                                                3
                                                                                      AD
                                                                                           1
                                        MD
                                          1



                                                                                                         Y


Suppose the multiplier is 3 and the government increases its purchases by $25 billion.
Also, suppose the AD curve would shift from AD 1 to AD2 if there were no crowding out;
the AD curve actually shifts from AD1 to AD3 with crowding out.         Finally, assume the
horizontal distance between the curves AD 1 and AD3 is $30 billion.      What is the extent
of crowding out, for any particular level of the price level? $45 billion.


42.         Suppose the economy is in long-run equilibrium. In a short span of time, there
is a decline in the money supply, a tax increase, a pessimistic revision of expectations
about future business conditions, and a rise in the value of the won. In the short run, we
would expect
         a. the price level and real GDP both to rise.
         b. the price level and real GDP both to fall.
         c. the price level and real GDP both to stay the same.
         d. All of the above are possible.




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