Download Midterm #3

ECO 102
Fall 2002 Semester
Midterm #3
Name: _________________________
Student ID#: ____________________
Instructions: Provide answers to the following questions. Show your work as much as
possible. For the multiple choice, make sure you have one and only one final choice
clearly indicated for each question
Part I: Instructions: Provide answers to the following questions.
1.
The countries of the EU that have adopted the euro as their common currency
must adopt the same monetary policy throughout the euro-zone. In your opinion, would
this make the use of fiscal policy within each of the countries more effective or less
effective? Explain.
2.
As a condition of adopting the euro, each country had to promise to observe limits
on the amount of government debt and government borrowing. Each country using the
euro is supposed to keep its government budget deficit below 3% of the country's GDP,
and its total outstanding government debt below 60% of the country's GDP. Do these
restrictions make it easier or harder for countries to use fiscal policy to maintain GDP
close to full-employment? Why would countries want to impose these limits on
themselves and the other countries participating in the common currency?
3.
Most post-communist countries (like Bulgaria) experienced a sharp increase in the
unemployment rate following the collapse of the communist system. Explain why you
think this was such a common outcome. Would expansionary fiscal and/or monetary
policy have prevented the rise in unemployment? Explain why or why not?
4.
Our economic model predicts that attempts to stimulate aggregate demand so
much that unemployment falls below the natural rate, or the non-accelerating inflation
rate of unemployment (NAIRU), leads to rising inflation rather than falling
unemployment. How do we know what the NAIRU is? Does it ever change over the
course of time? If so, why?
Part II:
Clearly indicate below your choice for the best answer.
1.
A bank would count all of the following as assets, except:
A.
B.
C.
D.
E.
cash in the vaults.
government bonds.
loans outstanding.
reserves on deposit at the central bank.
customers' deposits.
2.
The use of money to measure the relative value of goods and services is its:
A.
B.
C.
D.
E.
medium of exchange function.
store of value function.
unit of account function.
double coincidence of wants function.
fractional reserve function.
3.
Which of the following would the central bank use to decrease the money supply?
A.
banks
B.
C.
D.
E.
a reduction in the interest rate at which commercial banks borrow from central
a reduction in reserve requirements
a reduction in the discount rate
a purchase of government bonds
none of the above
4.
The explanation for Okun's law (that a 1 percentage point decrease in the
unemployment rate produces a greater proportionate increase in output) is that:
A.
much of the increase in output is forthcoming from workers who had been
employed but partially idle.
B.
output rises in response to the payment of efficiency wages.
C.
the law of diminishing returns has been repealed.
D.
as employment rises, particularly productive workers are hired.
E.
workers become more productive in response to a lower unemployment rate, as
efficiency wage theory predicts.
5.
Assume that the economy is initially at zero inflation and an unemployment rate
of U3. If a fiscal or monetary stimulus lowers the unemployment rate to U2, the longterm result, when expectations have fully adjusted, will be an unemployment rate of:
A.
B.
C.
D.
E.
U1.
U2.
U3.
U4.
U5.
6.
The opportunity cost of holding money is:
A.
B.
C.
D.
E.
the exchange rate.
the velocity.
the real interest rate.
the nominal interest rate.
none of the above.
7.
The equilibrium condition in the income-expenditure model of a closed economy
without government is:
A.
B.
C.
D.
E.
savings equals consumption.
consumption equals desired plus unplanned investment.
savings equals desired investment.
consumption equals output.
savings equals unplanned investment.
8.
According to traditional monetary theory, monetary policy affects output by:
A.
altering the availability of credit.
B.
changing the exchange rate and thus net exports.
C.
affecting stock prices and thus firms' incentives to raise funds for investment on
the stock market.
D.
changing interest rates and investment.
E.
changing the size of the government deficit.
9.
Assume that the economy is below full employment, and the price level is fixed.
A fiscal stimulus to the economy, without any accommodating change in the money
supply:
A.
B.
C.
D.
E.
raises the interest rate, which raises the level of private investment.
raises the interest rate, which lowers the level of private investment.
has no effect on either the interest rate or the level of private investment.
lowers the interest rate, which lowers the level of private investment.
lowers the interest rate, which raises the level of private investment.
10.
Efficiency wages are advocated as a solution to the problem of adverse selection,
that is, as a solution to the problem that, when the firm:
A.
B.
C.
D.
E.
raises the wage, its best workers leave the firm.
lowers the wage, its best workers leave the firm.
lowers the wage, workers quit randomly.
lowers the wage, its worst workers leave the firm.
raises the wage, its worst workers leave the firm.
11.
Which of the following correctly states the correlation between inventories and
output according to the two theories of inventory investment?
A.
Both production smoothing and production facilitating imply that output and
inventories are negatively correlated.
B.
Both production smoothing and production facilitating imply that output and
inventories are positively correlated.
C.
Production smoothing implies that output and inventories are positively
correlated, but production facilitating implies that they are negatively correlated.
D.
Production smoothing implies that output and inventories are negatively
correlated, but production facilitating implies that they are positively correlated.
E.
Neither theory implies anything about the correlation.
12.
When firms pay efficiency wages that are above the market wage:
A.
B.
C.
D.
E.
the economy is operating at full employment.
there is an excess supply of labor.
there is no involuntary unemployment.
the labor market clears at the efficiency wage.
the labor market would not clear at the market wage.
13.
If there is a reduction in the U.S. interest rate:
A.
foreigners are discouraged from investing in the United States, which reduces the
demand for dollars in the foreign exchange market.
B.
foreigners are discouraged from investing in the United States, which increases
the demand for dollars in the foreign exchange market.
C.
Americans are encouraged to invest abroad, which increases the demand for
dollars in the foreign exchange market.
D.
foreigners are encouraged to invest in the United States, which increases the
demand for dollars in the foreign exchange market.
E.
foreigners are encouraged to invest in the United States, which reduces the
demand for dollars in the foreign exchange market.
14.
Increases in the rate of inflation tend to lead to:
A.
B.
C.
D.
E.
greater stability in relative prices.
greater variability in relative prices.
constant relative prices.
an increase in all relative prices.
a decrease in all relative prices.
15.
Assume that the price level is fixed and there is excess capacity in the economy.
When an increase in the money supply lowers the interest rate and increases investment
and national income, the higher national income:
A.
shifts the money demand curve to the left, reinforcing the fall in the interest rate.
B.
shifts the money demand curve to the left, partially offsetting the fall in the
interest rate.
C.
has no further impact on money demand or the interest rate.
D.
shifts the money demand curve to the right, partially offsetting the fall in the
interest rate.
E.
shifts the money demand curve to the right, reinforcing the fall in the interest rate.
16.
The fractional reserve system in banking means that banks:
A.
lend a fraction of their money to consumers and a fraction to businesses.
B.
hold a fraction of the amount on deposit in reserves.
C.
hold a fraction of the amount on loan in reserves.
D.
lend a fraction of their money to foreign businesses and a fraction to domestic
businesses.
E.
may not borrow from the central bank.
17.
Automatic stabilizers are:
A.
programs, such as unemployment insurance or progressive taxation, that increase
spending during recessions and reduce it during economic booms.
B.
policy rules that restrain the use of discretionary fiscal and monetary policy.
C.
the adjustments that individuals with rational expectations make to offset fiscal
and monetary policy.
D.
market responses, such as increased interest rates, that limit the ability of
government to stimulate the economy.
E.
a and c.
18.
If there is a reduction in the U.S. interest rate the price of dollars in terms of
foreign currencies:
A.
rises, which encourages imports into the United States and discourages exports
from the United States, leading to an increase in aggregate expenditures.
B.
rises, which discourages imports into the United States and encourages exports
from the United States, leading to an increase in aggregate expenditures.
C.
is unaffected, so that there is no impact on imports, exports, or aggregate
expenditures.
D.
falls, which encourages imports into the United States and discourages exports
from the United States, leading to an increase in aggregate expenditures.
E.
falls, which discourages imports into the United States and encourages exports
from the United States, leading to an increase in aggregate expenditures.
19.
Most investment is financed:
A.
B.
C.
D.
E.
out of retained earnings.
by borrowing at the real interest rate.
by issuing new shares.
by selling bonds.
by raising product prices.
20.
The production-smoothing function of inventories refers to:
A.
the role inventories play in enabling firms to produce at a steady rate.
B.
the use of inventories to meet expected demand.
C.
the role inventories play in ensuring firms do not run out of inputs.
D.
the use of inventories to meet orders without delay.
E.
the role inventories play in avoiding idle workers and machines while a delivery
of inputs is awaited.
Answer Sheet for Test "F02MT3.TST", 12/9/102
No. in
Q-Bank
No. on
Test Correct Answer
11 59 (-,b,-) 1
E
11 114
2
C
11 103 (-,c,-) 3
E
15 54 (-,b,-) 4
A
14 36 (-,b,b) 5
C
12 83
6
D
10 75 (-,b,-) 7
C
12 87
8
D
13 24 (-,b,-) 9
B
15 34 (-,b,-) 10
B
10 96
11
D
15 44 (-,b,-) 12
B
12 72 (-,b,-) 13
A
14 13 (-,b,-) 14
B
12 38 (-,c,-) 15
D
11 125
16
B
13 56
17
A
12 76 (-,b,-) 18
E
10 93
19
A
10 71 (-,b,-) 20
A
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