Economies 502.01 Professor S. McCafferty Spring, 2010 Midterm Examination IL Name AUESWERS Directions: Answer all questions. There are two sections to this exam. Part I: Multiple Choice. Each question is worth two (2) points. Please circle the letter corresponding to the best answer. 1. Net exports of goods are known as a.) the balance of payments. © the merchandise trade balance. €.) the current account, 4.) the capital and financial account. 2. If France has a trade deficit, then imports into France exceed exports from France, ’b.) exports from France exceed imports into France. c.) imports into the United States from France exceed exports from the United States into France. 4.) imports into France from the United States exceed exports from France into the United States. 3. The current account balance consists of a.) the trade balance plus the services balance. b,) net exports of goods and services, minus net unilateral transfers. © net exports of goods and services, plus investment income from abroad, plus net unilateral transfers. 4.) net exports of goods and services, plus investment income from abroad, plus net unilateral transfers, minus the capital and financial account balance. 4, The official settlements balance equals a.) the sum of the current account and the capital and financial account. b.) the current account minus net unilateral transfers ¢.) net investment income from abroad. @ the net increase in a country's official reserve assets.5. Suppose output is $35 billion, government purchases are $10 billion, desired consumption is $15 billion, and desired investment is $6 billion. Absorption is equal to a.) $25 billion © 331 billion. ¢.) $35 billion. .) $39 billion. 6. When there are two large open economies, if desired international borrowing by the domestic country exceeds desired international lending by the foreign country, then a.) domestic investment must fall. ‘b.) domestic investment must rise. ¢.) the world real interest rate must fall. © the world real interest rate must rise. 7. Assuming no change in the effective tax rate on capital, a decrease in the government budget deficit will reduce the current account deficit if and only if the decrease in the budget deficit a) reduces desired national saving. © increases desired national saving. ©.) reduces desired national investment. 4.) increases desired national investment. 8. The Bretton Woods system relied on a.) a flexible-exchange-rate system. b.) a floating-exchange-rate system. © a fixed-exchange-rate system. 4) an exchange-rate union. 9. When the domestic currency strengthens under a fixed-exchange-rate system, this is called a.) a depreciation. b.) an appreciation. c,) a devaluation. © arevatuation.10. The idea that similar foreign and domestic goods, or baskets of goods, should have the same price when priced in terms of the same currency is called a.) equity. purchasing power parity. ©.) efficiency. d)) the tragedy of the commons. 11. For something to satisfy the medium-of-exchange function of money, it must be a.) backed by gold. © readily exchangeable for other goods. ¢.) issued by a central bank. 4.) an inherently valuable commodity. 12, A good that is used as a medium of exchange as well as being a consumption good is called a.) a barter money. ® acommodity money. .) a legal tender. d.) adebased money. 13. M2 does not include @ Treasury bonds. '.) passbook savings accounts. c.) small-denomination time deposits. ) M1. 14, Velocity is defined as a.) nominal money stock/nominal GDP. O) nominal GDP/nominal money stock. ‘.) real money stock/real GDP. d.) me’. 15, If real money demand increases 5% and real money supply increases 10%, by about how much does the price level change? a.) Falls by 5% b.) Unchanged c.) Rises by 2% @ Rises by 5%