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 1800’s 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 he’s 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

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

d. When the wage is above the equilibrium level.S. In the U. the labor market is functioning more efficiently than it otherwise would function. 4000 workers. minimum-wage laws cause unemployment even for people with high skills and much experience. 0 workers. Which of the following is not correct? . b. c. job search is the primary explanation for the unemployment that is observed. In the U. d. 2000 workers. minimum-wage laws cause unemployment even for people with high skills and much experience. ____ 32. If the government imposes a minimum wage of $4. c. ____ 30.10 9 8 7 6 5 4 3 2 1 wage S D 10 20 30 40 50 60 70 80 90 hundreds of workers ____ 29. d.S. Unions may keep wages above their equilibrium level. ____ 31. 5000 workers. b. 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. a.S. Unions cannot keep wages above their equilibrium level. Which of the following is correct? a. b.S. Unions cannot keep wages above their equilibrium level. it is only among the least skilled and least experienced members of the labor force that minimum-wage laws cause unemployment. then unemployment will increase by a. c. there is a shortage of labor. In the U. Refer to Figure 28-1. the quantity of labor supplied exceeds the quantity of labor demanded. In the U.

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

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

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

a liability for the bank and an asset for Kellie's Print Shop. a. A bank loans Kellie's Print Shop $350. an asset for the bank and a liability for Kellie's Print Shop.600 in loans. b. The loan does not increase the money supply. $866.67. an asset for the bank and a liability for Kellie's Print Shop.000 in currency. Assets Reserves Loans $750 9. $1.c.67.960 in loans. Table 29-3. b. It has $444 in reserves and $3. $150 d.000 ____ 49. d.000 in deposits. It has $400 in reserves and $3. a liability for the bank and an asset for Kellie's Print Shop. If all banks in the economy have the same reserve ratio as this bank. The First Bank of Fairfield Assets Liabilities . All of this currency is deposited into a single bank. then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by a. Table 29-2. $4. an infinite amount. this loan is a. and has loaned out all it can given the reserve requirement. d. A bank has a 10 percent reserve requirement. and the bank then makes loans totaling $9. An economy starts with $10.250 Liabilities Deposits $10. c. $2.000 to remodel a building near campus to use as a new store. The T-account of the bank is shown below. c. b. On their respective balance sheets. The loan does not increase the money supply.556 in loans. c. None of the above is correct. ____ 48.250. The loan increases the money supply. The loan increases the money supply. It has $40 in reserves and $3. $200 ____ 47.000.00.666. Refer to Table 29-2. d.

the money supply a. The larger the reserve ratio is. b. c. c. the less the money supply rises.000 Deposits $10.000. d. The larger the reserve ratio is. d.000 . b. ____ 52. rises. The Fed’s primary tool to change the money supply is a. banks buy Treasury securities from Fed. Metropolis National Bank Assets Reserves Loans $60. c.000 8. If $1. falls. its a. redeeming Federal Reserve notes. reserves will increase by $200. The larger the reserve ratio is.000 is deposited into the First Bank of Fairfield. banks buy Treasury securities from the Fed.000. a. which increases the money supply. and the bank takes no other actions. If people decide to hold more currency relative to deposits. falls. changing the reserve requirement. which decreases the money supply. Table 29-7 Metropolis National Bank is currently holding 2% of its deposits as excess reserves.000 $440. b. which decreases the money supply. ____ 51. b. c.000 ____ 50. reserves will increase by $800. changing the interest rate on reserves. it buys Treasury securities. rises. conducting open market operations. d. liabilities will decrease by $1. assets will increase by $1. The larger the reserve ratio is. When the Fed conducts open-market purchases. the more the money supply falls. Refer to Table 29-3.000 Deposits Liabilities $500. it buys Treasury securities. the less the money supply falls.Reserves Loans $2. the more the money supply rises. d. which increases the money supply. ____ 53.

350 million tazes d. .500 million tazes of deposits. sell government bonds. b. 100% reserve banking d. 12 d. 4 percent per year. and then none want to hold excess reserves what is the value of the money multiplier? a. b.____ 54. The Monetary Policy of Tazi is controlled by the country’s central bank known as the Bank of Tazi. prices in the U. All of the above prevent bank runs. 7. government insurance of deposits b. Assuming that all banks have the same required reserve ratio. and hold 225 million tazes of Tazian Treasury bonds. the Fed could a. None of the above is correct. 2 percent per year. ____ 57. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves. have issued 7. 7. None of the above is correct. Which of the following will not help to prevent bank runs? a. Refer to Balance Sheet of Metropolis National Bank. 10 c. 75 million tazes of excess reserves. increase the reserve requirement. 20 Scenario 29-2. ____ 56. decrease the discount rate. 8. The local unit of currency is the taz. Refer to Scenario 29-2. c. 6. fractional reserve banking c.25 b. have risen on average about a. ____ 55. 6 percent per year. Over the past 70 years. d.900 million tazes b. Tazians prefer to use only demand deposits and so all money is on deposit at the bank.125 million tazes c. c.S. To increase the money supply. Metropolis National Bank is currently holding 2% of deposits as excess reserves. ____ 58. what is the value of existing loans made by Tazian banks? a. Assuming the only other thing Tazian banks have on their balance sheets is loans.

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

. supply of money that is represented by the distance between points A and C. money demand shifts rightward or money supply shifts leftward. If the money supply is MS2 and the value of money is 2. b. b. The price level falls if either a.d. ____ 64. c. Figure 30-1 ____ 65. demand for money that is represented by the distance between points A and B. money demand shifts leftward or money supply shifts rightward. then there is an excess a. MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. c. d. supply of money that is represented by the distance between points A and B. Figure 30-2. The value of money will fall. On the graph. money demand or money supply shifts rightward. Refer to Figure 30-1. d. demand for money that is represented by the distance between points A and C. money demand or money supply shifts leftward. This could have been created by a decrease in the money supply.

d. Her real and nominal salary have fallen.125 MS MD2 MD1 5. 2 and the equilibrium price level cannot be determined from the graph. 0. An associate professor of physics gets a $200 a month raise. Her real and nominal salary have risen. then the equilibrium value of money is a.25 0.000 ____ 66. Her real salary has fallen and her nominal salary has risen.5. dichotomous variable c.5 and the equilibrium price level cannot be determined from the graph. The price level is a a. nominal variable.5 and the equilibrium price level is 2.125 1 0. If M = 3. b.000. ____ 67. c. and Y = 6. .875 0.1. 1/2. real variable.5 0.000. Her real salary has risen and her nominal salary has fallen.625 0. ____ 68. d. b. b. d. a. c.75 0. Refer to Figure 30-2. 0. P = 2. If the relevant money-demand curve is the one labeled MD1. ____ 69. what is velocity? a.375 0. relative variable. She figures that with her new monthly salary she can buy more goods and services than she could buy last year. 2 and the equilibrium price level is 0.

One year later he takes his money out and notes that while hus money was earning interest. . ____ 71. 3.5 percent. explains how prices adjust to obtain equilibrium in the money market. The inflation tax a. Walter earned a nominal interest rate of a. c. What is your after-tax real rate of interest? a. The tax rate on nominal gains was 20 percent. c.5 percent. 5 percent and a real interest rate of 2 percent ____ 72. Suppose someone in Lessidinia bought a parcel of land for 20. ____ 70. says the government can generate revenue by printing money. 1.b. prices rose 1. the person sold the land for 100. d. In 2002. 3.000 foci. 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. None of the above is correct. Walter puts money in a savings account at his bank earning 3. ____ 74. b. and your marginal tax rate is 20 percent. 4. is an alternative to income taxes and government borrowing. Inflation is 2 percent.8 percent d.5 percent and a real interest rate of 5 percent. b. None of the above is correct. ____ 73.2 percent c. is the revenue created when the government prints money. All of the above are correct. The Fisher effect a. d. 5 percent and a real interest rate of 3. says there is a one for one adjustment of the nominal interest rate to the inflation rate. b.5 percent d. d.000 foci (the local currency) in 1960 when the price index equaled 100. c. 2. and the price index equaled 600. The country of Lessidinia has a tax system identical to that of the United States. c. 4.5 percent and a real interest rate of 2 percent. taxes most those who hold the most money. You put money into an account and earn a real interest rate of 6 percent. 3. explains how higher money supply growth leads to higher inflation.8 percent b.

both debtors and creditors would have reduced real wealth.’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. d.’s c. the U. Which country’s exports increase? a. b.a. b.’s d. citizen. ____ 76. both debtors and creditors would have increased real wealth. higher than she had expected. 60 percent ____ 75. d. lower then she had expected. and the real value of the loan is higher than she had expected. c. Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. Refer to Table 31-1. and the real value of the loan is lower than she had expected. pays a Spanish architect to design a metal casting factory. Bill. a. c. -30 percent c. a U. ____ 77. neither Spain’s nor the U. and the real value of the loan is higher than she had expected. creditors would gain at the expense of debtors. lower than she had expected. What are Bolivia’s exports? a.S. The real interest rate she earns is a. and the real value of the loan is lower than she had expected.S. Spain’s b. If the economy unexpectedly went from inflation to deflation. -60 percent b. higher than she had expected. debtors would gain at the expense of creditors. Spain’s and the U.S. $60 billion . 30 percent d.S.

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

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

real terms and implies the dollar will depreciate.S. ____ 91.5 pesos and someone forecasts that in a year it will be 14 pesos. decrease in U. real terms and implies the dollar will appreciate. If the price of a good in Barbados is 3 Barbados dollars and the price in the U. c.S. and net exports equals $150 billion.S. increase in U. It will take fewer dollars to buy a good that costs 50 euros. c. In an open economy.S.S. the dollar buys fewer euros. . If you are vacationing in France and the dollar depreciates relative to the euro. net capital outflow as a percent of GDP was due to a(n) a. ____ 92. investment. b. none of the above is correct . 1. d. If a dollar currently purchases 12. the dollar buys more euros. the dollar buys more euros.S. dollars. good d. b. It will take more dollars to buy a good that costs 50 euros. consumption expenditure equals $975 billion. nominal terms and implies the dollar will depreciate.S. national saving. good b.850 billion. the dollar buys fewer euros.75 Barbados goods per U. then the forecast is given in a. d. What is national savings? a. investment equals $500 billion. 3 Barbados goods per U.S. what is the real exchange rate to the nearest 100th? a.S. good c. It will take more dollars to buy a good that costs 50 euros. d.____ 89. b. decrease in U.S. increase in U. c. dollar. Most of the change from 2000 to 2006 in U. government expenditure equals $225 billion. $650 billion d. ____ 93. nominal terms and implies the dollar will appreciate. $0 b. is 2 U. The nominal exchange rate is 2 Barbados dollars per U. $500 billion c. gross domestic product equals $1. $975 billion ____ 90. It will take fewer dollars to buy a good that costs 50 euros.S.33 Barbados goods per U. then a. national saving. investment.

____ 94. d. or prices in Israel were lower.S. prices in the U. or prices in Israel were higher. ____ 97. If US goods cost 1/5 of one dollar for every kroner Danish goods cost. d.S.S. If the number of Japanese yen a dollar buys falls. which causes U. then the real exchange rate a. goods c.S. net exports to increase. b. one fifth the price of the U. . c. b. a digital camera costs $200. b.S.S. The same camera in London sells for 90 pounds. which of the following would both increase the U. real exchange rate with Israel? a. ____ 98. appreciates which causes U. were higher. enough foreign currency to buy as many goods as it does in the United States. depreciates which causes U. In the U. five b.S. foreign currency equal to the U. A person in London with $200 could exchange them for pounds and have more than enough to buy the camera there. c. prices in the U. the amount of kroner that can be bought with 1/5 of one dollar.S. then which of the following would be correct? a. prices in the U. If the exchange rate were . The real exchange rate is less than 1. goods? a. b. ____ 96. appreciates. c. Other things the same. The real exchange rate is less than 1. net exports to increase.S were higher. or prices in Israel were higher.S. or prices in Israel were lower. net exports to decrease. A person in London with $200 could exchange them for pounds and have more than enough to buy the camera there.50 pounds per dollar. d. c. net exports to decrease. A person in London with $200 could exchange them for pounds but then wouldn’t have enough to buy the camera. ____ 95. a dollar will buy a. price level divided by the foreign country’s price level. If purchasing-power parity holds. were lower.S. depreciates which causes U. A person in London with $200 could exchange them for pounds but then wouldn’t have enough to buy the camera there. were lower. one unit of each foreign currency. but neither country’s price level changes. d. The real exchange rate is greater than 1. the real exchange rate would be computed as how many Danish goods per U. prices in the U.S. The real exchange rate is greater than 1.S. None of the above is correct.

than in the Euro area.S. foreign countries rise. d.S.S. . b. ____ 102.500 to $2. ____ 101. According to purchasing power parity. it costs more dollars to buy a Big Mac in the U. 1. then in the Euro area. None of the above is implied by purchasing-power parity.95 If the value is less than this. then a. d. both countries rise.95 If the value is less than this. 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. nominal exchange rate would depreciate.d. than in the Euro area. b. rose from $1.S. . b. than in the Euro area. If the exchange rate is 8 Moroccan dirhams per U. a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat.S. then the a. both countries fall. c. c. b. currency must rise if the price levels in a. nominal exchange rate would appreciate. the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the United States. ____ 100. 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. Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U. it costs fewer dollars to buy a Big Mac in the U. dollars.21 euros in the Euro area.S.05 If the value is less than this. ____ 99. If a McDonald's Big Mac cost $3.000 and the price of the same basket of goods rose from 600 units of some other country’s currency to 1.06 in the United States and 3. the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the United States and selling them in Morocco.000 units of that country’s currency. 1.05 If the value is less than this. it costs fewer dollars to buy a Big Mac in the U. the United States rises. and a similar crate of oranges in Miami sells for $45 dollars. real exchange rate would appreciate. then purchasingpower parity implies the nominal exchange rate is how many euros per dollar? a. it costs more dollars to buy a Big Mac in the U. c.S. if the price of a basket of goods in the U.

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

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

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

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

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

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

The appearance of the long-run aggregate-supply (LRAS) curve a. is inconsistent with the concept of monetary neutrality. an increase in the actual price level c. only in the long run. b.c. in neither the short run nor long run. in both the short run and the long run. d. an increase in the expected price level ____ 134. Which of the following shifts the short-run aggregate supply curve to the right? a. a decrease in the actual price level b. . but not an increase in the price level that is greater than expected. The aggregate demand and aggregate supply model implies monetary neutrality a. c. ____ 133. neither an increase in the price level that is greater than expected nor an increase in the expected price level. Refer to Figure 33-2. d. Figure 33-2. P LRAS AS1 AS2 P1 P2 A B AD Y1 Y2 Y ____ 135. a decrease in the expected price level d. only in the short run. an increase in the expected price level.

Explain why banks can influence the money supply if the required reserve ratio is less than 100 percent. Which two of the Ten Principles of Economics imply that the Fed can profoundly affect the economy? 141. c. Both the price level and real GDP fall. Pessimism Suppose the economy is in long-run equilibrium. real GDP will fall and the price level might rise. d. In the short run what happens to the price level and real GDP? a. a required reserve ratio of 10 percent. c. The price level falls and real GDP rises. d.b. or stay the same. ____ 136. real GDP will rise and the price level might rise. the price level will rise. . how much money can be created from $100 of reserves? Show your work. The price level rises and real GDP falls. fall. indicates that Y1 is the natural rate of output. fall. be associated with an increase in frictional unemployment? 139. Draw a simple T-account for First National Bank which has $5. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions. and excess reserves of $300. fall. 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. b. and loss of confidence in policymakers. Both the price level and real GDP rise. a. ____ 137. or stay the same.000 of deposits. 143. Then because of corporate scandal. and real GDP might rise. If the reserve ratio is 20 percent. Teenage unemployment is higher than unemployment of people ages 20 and over. Suppose the economy is in long-run equilibrium. the price level will fall. international tensions. Refer to Pessimism. c. such as technological improvement or a decrease in the price of imported oil. Make sure your balance sheet balances. or stay the same. d. 140. Explain why economists would attribute at least part of this difference to minimum-wage laws. then we would expect that in the short-run. 142. people become pessimistic regarding the future and retain that level of pessimism for some time. All of the above are correct. Short Answer 138. b. Why might a favorable change in the economy. or stay the same. fall. and real GDP might rise.

Make a list of expenditures whose sum equals GDP. citizens start saving more. what happens to each of these values if the central bank changes the reserve requirement ratio to 2%. and banks don’t change their holdings of Treasury bonds? How much does the money supply change by? 145. Economists agree that increases in the money-supply growth rate increase inflation and that inflation is undesirable. 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. but appreciated by more than 100 percent against the Italian lira during the same period? Defend your answer. The long-run trend in real GDP is upward. Suppose the Fed sells government bonds. Assuming that people hold no currency.S.S. 146. How is this possible given business cycles? What explains the upward trend? 156. can lead to a change in the U. Under what circumstances does purchasing-power parity explain how exchange rates are determined. 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. banks still want to hold the same percentage of excess reserves. Use a graph of the money market to show what this does to the value of money. 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 U.144. exchange rate. 151. 152. What do trade policies do to the standard of living? 155.S. Explain how an increase in the demand for capital goods in the U. Colonial America had little industry and so had mostly raw materials to export. Can purchasing-power parity be used to explain the fact that the U. 149. What does this suggest about net exports and net capital outflow in colonial America? 148. and why is it not completely accurate? 150.S. So why have there been hyperinflations and how have they been ended? 147. dollar has depreciated by more than 50 percent against the German mark between 1970 and 1998. Explain how the relation between the real exchange rate and net exports explains the downward slope of the demand for foreign-currency exchange curve. . At the same time. 154. 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.

121. 129. 104. 136. 105. 111. 124. practice exam 3 Answer Section 101. 120. 135. 132. 116. 137. 128. 108. 113. 122. 126.157. 127. 130. 118. 117. 114. 131. 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 . 103. 134. 109. 102. 125. 112. 110. Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves. 119. 123. 106. 107. 133.

2.200 $5. total reserves are $60 million and the multiplier is now 25. $600 million. 141.000 144. creating frictional unemployment.) Required reserves are 2% of $1. the money supply will be greater under fractional-reserve banking. and Treasury bonds $90 million = $750. (Also. the bank only has to hold $15 million on reserve and so now has $30 million of excess reserves. In labor markets where the equilibrium wage is above the minimum wage. ANS: When the reserve requirement is less than 100 percent. In this way. so deposits should be $1. a decrease in the price of imported oil would likely reduce the demand for U. the balance sheet balances. ANS: The only liability is deposits which equal $750 million. ANS: 1. . oil workers and increase the demand for automobile workers. Since liabilities equal assets. ANS: Assets Reserves Loans First National Bank Liabilities Deposits $100 = $500.04 = 25. the decrease in the reserve requirement ratio leads to an increase in deposits of $750 million. 139. The money they lend out is redeposited. Total reserves are $60 billion which summed with loans. Since people ages 20 and over tend to have more experience and education than teenagers. ANS: Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand for labor among different firms. There is a short-run tradeoff between inflation and unemployment. Between the 2% requirement and the 2% for excess the reserve ratio is now 4% and the multiplier is now 1/. banks can lend out deposits. Prices rise when the government prints too much money.500 million. For example.SHORT ANSWER 138. the minimum wage does not create unemployment. 142. When the Fed lowers the reserve requirement ratio to 2%. $800 $4.500 million of deposits = $30 million. So. 140. the minimum wage matters less and so creates less unemployment. Similarly. deposits can be greater than reserves. ANS: People who are experienced and educated are likely to find jobs where the equilibrium wage is above the minimum wage. technological progress makes some industries decline and others advance. Since deposits are greater under fractionalreserve banking and since deposits are part of the money supply.S. Initially banks need to hold 6% on reserve and want to hold 2% as excess reserves.20) 143. ANS: (1/.

net capital outflow must also have been negative. Net capital outflow would have been negative because the colonies sold stocks. ANS: Net exports were negative because the value of exports was low. 145. If net exports were negative. This shifts the money supply curve from MS2 to MS1 and makes the value of money increase.Excess reserves are 2% of $1. so loans should have also increased by $750 million. ANS: Purchasing-power parity works well in helping us explain long-term trends in exchange rates. inadequate tax revenue. Since money is worth more. 148. Massive and continued increases in the quantity of money led to hyperinflation. ANS: When the Fed sells government bonds. and (2) even tradable goods are not always perfect substitutes when they are produced in different countries. so that the money supply rose by $750 million. they turned to the printing presses to pay their bills. and the colonies imported capital goods. this means loans should have risen by $750 million. 147. Under the given assumptions. Therefore. It is not completely accurate because (1) not all goods are easily traded. that is exactly what has happened. The additional deposits came by way of additional lending. In fact. it takes less to buy goods with it.500 million of deposits and so now also equal $30 million. liabilities should have risen by $750 million. . 149. since deposits rose by $750 million. and limited ability to borrow. 146. and in explaining what happens to exchange rates during hyperinflation. which ended when the governments instituted fiscal reforms eliminating the need for the inflation tax and subsequently slowed money supply growth. Also. which means the price level falls. and other domestic assets to foreigners to buy capital goods. Deposits rose by as much as the money supply since people don’t hold currency. bonds. 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. Overall the money supply rose by $750 as explained above. the money supply decreases. ANS: Typically. the government in countries that had hyperinflation started with high spending.

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

technological advances cause the long-run aggregate supply curve to shift right. .157. Increases in the money supply cause the aggregate demand curve to shift right. Output growth puts downward pressure on the price level. P LRAS1 LRAS2 AD2 AD1 Output Over time. but money supply growth contributes to rising prices. ANS: See graph.

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