Economics 105

Spring 2019

Dr. Martin Santamaria

Student Name:_____________________________________

Student ID:________________________________________

Economics 105
2nd Midterm Examination
Spring 2019

Instructions:

a. You have 1 hour and 50 minutes to finish your exam. Write your name and ID number on the
upper left corner of this page.
b. Confirm that your test has 12 pages. The last two pages can be used as scratch paper. You may
detach any of the two last pages.
c. Use a pen to write your answers. You give up your right to a regrade if you choose to use a
pencil. With you, you should only have a pen, and a calculator.
d. Show ALL your work.
e. The table below indicates how points will be allocated on the exam. You can answer the
questions in any order you like. Use your time carefully and efficiently.

Question Points Your Score

MC 33
Question 1 27
Question 2 9
Question 3 11
Question 4 10
Question 5 10
Exam Total 100

f. You are NOT allowed to use your cell phone during the exam. Please, turn off your cell phone
and put it away. If you are found using a cell phone during the examination, you will be
considered in violation of academic integrity, and you will be reported to the Academic Integrity
Office.
g. Once you started the exam you are not allowed to leave the room until you turn in your exam.
h. KEEP YOUR EYES ON YOUR OWN PAPER, AND KEEP YOUR PAPER OUT OF VIEW OF YOUR
NEIGHBORS.
 Economics 105

Spring 2019

Dr. Martin Santamaria

Part I. Multiple Choice Questions (30 points total, 3 points each)

Please, write your answers on the space provided below:

1.______ 2. ______ 3.______ 4._______ 5._______ 6.________

7.______ 8.______ 9._______ 10.______ 11.______

1. You are given the following information about the economy:

Consumption 8000
Investment 1000
Government purchases 1000
Net exports 0
Government transfers 500
Government tax revenue 1700

Private saving is _____ ; public saving is ________; and national saving is ______.

A. 800; 200; 600

B. 800; 200; 1,000
C. 1,000; 800; 1,000
D. None of the above.

2. When an individual deposits currency into a checking account:

A. bank reserves increase which allows banks to lend more and, ultimately, increases the money
supply.
B. bank reserves decrease which reduces the amount banks can lend thereby reducing the growth
of the money supply.
C. bank reserves are unchanged.
D. bank liabilities increase which reduces the amount banks can lend, thereby reducing the growth
of the money supply.
 Economics 105

Spring 2019

Dr. Martin Santamaria

3. Ralph purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a
coupon rate of 6% paid annually. One year before the bond matures (and after receiving the coupon
payment for the first year), Ralph has

A. A promise to get paid $600 one year from today.

B. A promise to get paid 10,600 one year from today.
C. A promise to get paid 10,000 one year from today.
D. None of the above.

4. Ralph (same situation as question 3) sells the bond in the bond market. What price (rounded to the
nearest dollar) will Ralph receive for his bond if the prevailing interest rate is 5%?

A. $9,524
B. $10,000
C. $10,095
D. $10,600
E. $11,130

5. Suppose that Joe owns a house worth USD 100,000. He owes $20,000 in a car loan and owns shares
worth $40,000 in a mutual fund. These are all of his assets and liabilities. Joe’s net wealth is given by

A. $160,000
B. $120,000
C. $100,000
D. None of the above

6.The most liquid asset is:

A. A bond
B. A valuable art piece
C. A gold ring
D. A checkable deposit at a commercial Bank

7. Money whose value derives entirely from the belief that others will accept it as payment is called:

A. Commodity Money.
B. Fiat Money.
C. Commodity-backed Money.
D. None of the above.
 Economics 105

Spring 2019

Dr. Martin Santamaria

8. A bunk run:

A. Occurs because banks hold only a fraction of deposits on reserve.

B. It occurs when many of a Bank’s depositors try to withdraw its deposits because they fear a bank
failure.
C. Are often proved contagious.
D. All of the above.

9. Suppose that country A exports 20 billion worth of goods and services, but it only imports 10 billion
worth of goods and services. Then it must be that:

A. Country A’s citizens and government must be borrowing 10 Billion from foreigners.
B. Country A’s net foreign investment must equal 10 billion dollars.
C. Country A’s net foreign investment must be investing 10 billion dollars abroad in excess of what
foreigners are investing in country A.
D. None of the above.

10. Crowding out occurs when a government increased budget deficit leads to a

A. Reduction on the interest rate and increased private investment.

B. Increase on the interest rate and reduction of private investment.
C. Increase on the interest rate and increase on private investment.
D. Reduction of the interest rate and reduction of private investment.

11. A task of the financial system is:

A. Reducing transaction Costs.

B. Reducing risk.
C. Providing liquidity.
D. All of the above.
E. None of the above.
 Economics 105

Spring 2019

Dr. Martin Santamaria

Short Answer Questions (67 points)

Question 1 (27 points)
In this question you will be asked to analyze different situations in the market for loanable funds
discussed in chapter 10. When asked to justify your answer in one of the graphs below, clearly label the
axes, equilibrium quantities and interest rates, and curves, and indicate any shifts with arrows.

a) (9 points) Suppose that we observe that in Econland, real interest rates have been decreasing
over time. Give one possible explanation for this observation, make sure to explain which curves
are moving and why. Justify your answer using the diagram below.
 Economics 105

Spring 2019

Dr. Martin Santamaria

b) (9 points) Use the axis below to draw the supply and demand of loanable funds. Show the
equilibrium interest rate, Investment and Savings. What is the effect of an increase in the
savings rate (fraction of income saved) of households?

c) (9 points) Suppose that when expected inflation equals 0 the equilibrium nominal interest rate is
4%. If expected inflations goes up to 4%. What is the value of the new equilibrium nominal
interest rate? Justify your answer using the diagram below.
 Economics 105

Spring 2019

Dr. Martin Santamaria

Question 2 (9 points)
Explain in your words what each of the following terms mean (3 points each):

a) Financial Intermediary:

b) Stock or Share.

c) Mortgage-backed security:
 Economics 105

Spring 2019

Dr. Martin Santamaria

Question 3 (11 points)

Martin’s National Bank has a desired reserve-deposit ratio of 0.1. Assume that Martin’s National Bank
starts with 0 reserves, 0 loans, and 0 deposits. The Bank of Canada conducts an open market operation
in which it buys $1000 worth of government bonds from Robert. Robert deposits the $1000 at his
checking account at Martin’s National Bank.

a) (5 points) Using the blank lines on the T-account below, show Martin’s National Bank’s balance
sheet after this transaction.

Assets Liabilities

Deposits
Reserves

Loans

b) (6 points) Assuming that all other banks have the same desired reserve-deposit ratio as Martin’s
National Bank, what is the overall increase in deposits (throughout the entire banking system)
that will occur as a result of the open market operation? Carefully justify your answer.
 Economics 105

Spring 2019

Dr. Martin Santamaria

Question 4 (10 points)

In class we discussed that firms have essentially two ways to borrow money, issue corporate bonds or
get a loan from a bank. Discuss the advantages and disadvantages of each approach.

Question 5) (10 points)

Most housing market analysts in Vancouver agree that the Vancouver Metropolitan area is experiencing
a “bubble” in the housing market.

a) (5 points) What is a housing bubble?

 Economics 105

Spring 2019

Dr. Martin Santamaria

b) (5 points) What is going on with the price of houses in Vancouver? Why? What empirical
evidence would help determine if the claim is true.
 Economics 105

Spring 2019

Dr. Martin Santamaria

SCRATCH PAPER
 Economics 105

Spring 2019

Dr. Martin Santamaria

SCRATCH PAPER