Download Midterm #2

ECO 102
Spring 2016 Semester
Midterm #2
Name: _________________________
Student ID#: ____________________
Part I: (3 points for each correct answer – 60 points total) Select the one best answer
for each of the following questions. If you change your mind, make sure it is obvious
what your final choice is.
Some questions may seem very similar to questions you have seen on quizzes or old
exams. Read carefully! One altered word in a question can change the answer.
1. If all the people in a country hold onto their money for longer periods of time
before spending it, then:
a.
b.
c.
d.
e.
the price level would go up.
production would go down.
net factor payments would go up.
the velocity of money would go down.
the money supply would go down.
2. Consider the 3 situations below:
(i)
Alice is a sales representative who has just moved to Blagoevgrad with her
family. She has filed job applications with all local employers but has not yet received a
job offer.
(ii)
Bob is an airline pilot for Lufthansa. Lufthansa has laid off 30% of its pilots and
crew when it cut back its schedule of flights in response to the global economic
slowdown.
(iii)
Steve is an unemployed former provost and looking for a job as an economics
professor. No university will consider hiring him because they assume he will quit as
soon as he finds a new job as a provost.
Alice's situation would be called _____ unemployment; Bob's situation would be called
_____ unemployment; Steve's situation would be called _____ unemployment .
a.
b.
c.
d.
e.
seasonal, cyclical, frictional.
frictional, cyclical, structural.
structural, frictional, seasonal.
frictional, seasonal, cyclical.
cyclical, structural, frictional.
3. An economist who argues that a more generous unemployment compensation
system is bad for the country's labor market would emphasize that:
(i) A more generous unemployment compensation system would permit an
unemployed person to find the new job that makes proper use of the
person’s skills.
(ii) When the unemployed can collect benefits from the government, it makes it
possible for an employer with a temporary drop in business to lay-off its
workers and let the government take care of them for a while, and then rehire them when business picks up.
(iii) If the unemployment compensation is generous, more unemployed workers will
choose to pretend to seek work, in order to remain officially “unemployed”
and collect the benefits for as long as the government is willing to pay
benefits.
a.
b.
c.
d.
e.
Only (i) is true.
Only (ii) is true.
Only (iii) is true.
Both (i) and (ii) are true.
Both (ii) and (iii) are true.
4. In which case is money created?
a.
b.
c.
d.
e.
A depositor takes money out of the bank.
A shopper uses a credit card to make a purchase.
A bank makes a loan.
Our country exports more than it imports.
A depositor puts money in a bank.
5. When we compare the price of a slice of pizza to the price of a kebapche by
comparing the number of Bulgarian leva we would spend on the pizza to the
number of leva we would spend on the kebapche, we are using the Bulgarian lev
as:
(i) medium of exchange
(ii) unit of account
(iii) store of value
a.
b.
c.
d.
e.
only (i) is true.
only (ii) is true.
only (iii) is true.
(i), (ii), and (iii) are all true.
none of the above (a) through (d) is correct.
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6. A business evaluating a possible investment project will compare the project’s
____ to _____.
a.
b.
c.
d.
e.
Internal rate of return; the firm’s cost of borrowing
Cost; the firm’s available cash
Liquidity; longevity
Profits; the firm’s dividends
Cost; the firm’s ability to borrow.
7. A balance sheet always balances because:
a. the purchase of every asset requires acquiring a liability of equal value.
b. the value of liabilities is always equal to the value of assets.
c. when assets are greater than liabilities, the difference is profits which are paid
out to the owners of the firm.
d. net worth is defined to be the difference between total asset value and total
liabilities.
e. when liabilities are greater than assets, the firm must go out of business.
8. In the market for savings and borrowing, the amount of money savers are willing
to save depends on the interest rate savers earn. At higher interest rates, the
amount saved rises if the _____ effect on savers is strong. At higher interest
rates, the amount saved falls if the _____ effect on savers is strong.
a.
b.
c.
d.
e.
income; life-cycle
life-cycle; substitution
substitution; income
income; substitution
life-cycle; income
9. A person who remains unemployed for several years is most likely to be:
a.
b.
c.
d.
e.
frictionally unemployed.
structurally unemployed.
cyclically unemployed.
retired.
naturally unemployed.
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10. When the wage rate rises for a person who is already employed, the effect of the
increase in wages is felt in two ways. The _____ effect causes the person to wish
to enjoy more leisure (and provide less labor). The _____ effect causes the
person to wish to enjoy less leisure and provide more labor at the higher wage.
a.
b.
c.
d.
e.
income
Doppler
interest rate
substitution
none of the above.
substitution
income
income
Doppler
11. In the 1930’s movie serial “Radar Men from the Moon”, hero Commando Cody
takes his rocket ship to the moon to stop the Moon people from taking over the
earth. If Cody also wanted to study the Moon economy while there and wanted
to measure the Moon’s money supply, he would count whatever the Moon
people use as:
(i) Medium of exchange
(ii) Unit of account
(iii) Store of Value
a.
b.
c.
d.
e.
Only (i) is true.
only (ii) is true.
only (iii) is true.
(i), (ii), and (iii) are all true.
none of the above.
12. If a production function is shown as Y = F(K,N) and we want to measure the
marginal product of labor, we would see what happens to output when we
_____ capital and _____ labor.
a.
b.
c.
d.
e.
Hold constant; increase by a tiny amount
increase by a tiny amount; hold constant
double; double
double; hold constant
none of the above are correct.
13. The definition of the monetary base is:
a.
b.
c.
d.
e.
Whatever is used as the medium of exchange.
Currency held by the public plus bank reserves.
Currency held by the public plus deposits.
Required reserves plus excess reserves.
Whatever serves as medium of exchange, store of value, and unit of account.
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14. If a bank is required to hold 10% of its deposits as reserves, and it currently has
$200 of deposits and holds $50 of reserves, then the biggest loan that the bank is
able to make will be:
a.
b.
c.
d.
e.
$20
$50
$180
$30
None of the above.
15. The liquidity of an asset refers to:
a. How uncertain the value of the asset is.
b. how quickly and easily the asset can be converted to cash.
c. how easily the asset can be moved from one location to another, or from one
use to another.
d. how easy it is to borrow money in order to obtain the asset.
e. how important the asset is compared to the other assets.
16. On our island where each coconut costs one unit of money, we are able to buy
and sell 8 coconuts per day using 8 units of money by using each unit of money
one time per day. We are able to buy and sell 8 coconuts using 16 units of
money by using each unit of money one time every two days on average. The
difference between the first situation and the second would be described as:
a.
b.
c.
d.
e.
An increase in the money supply.
An increase in the price level.
An increase in the velocity of money.
An increase in GDP.
None of the above.
17. If R is the percentage of its Deposits that every bank is required to hold as
reserves, then the maximum amount of money that banks can possibly create
out of $10 of monetary base is:
a.
b.
c.
d.
e.
$10 x R
$10
$10 x (1/R)
$10 x (R-1)/R
$10 x (1+R)
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18. The definition of M1 is “currency held by the public plus demand deposits”.
Currency is not held “by the public” when it is held by:
(i) the central bank
(ii) foreigners
(iii) regular banks
(iv) private businesses
a.
b.
c.
d.
e.
(i), (ii), and (iii) are true.
Only (i) and (ii) are true.
Only (i) and (iii) are true.\
Only (ii) is true.
Only (iii) is true.
19. Since banks seek to earn profits, the amount of excess reserves (ER) that banks
would like to hold is usually equal to:
a.
b.
c.
d.
e.
The bank’s deposits
The bank’s deposits multiplied by the required reserve ratio R.
Zero.
The bank’s loans multiplied by the required reserve ratio R.
The monetary base.
20. When we use money to convert the ability to buy something today into the
ability to buy something next week, we are using money as a:
a.
b.
c.
d.
e.
Unit of account
Store of value.
Medium of exchange.
Unit of account, store of value, AND medium of exchange.
None of the above.
Part II. (30 points total) Answer each of the questions below in the spaces provided.
Essay:
1. Since Barrack Obama became President of the United States, the unemployment
rate has dropped from 7.8% in 2009 when he took office to 4.9% today.
Republicans (who are against Obama) say this isn't impressive because the
"labor force participation rate" (LFPR) is now only 62.9%, when it was 65.7% in
2009. The LFPR is the number of working people plus the number of
unemployed) divided by the working-age population of the country.
Question: Is the LFPR a better measure of the health of the labor market than the
unemployment rate? What are the pro's (arguments for) and con's (arguments against)
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using the LFPR instead of the unemployment rate to measure the condition of the labor
market?
2. Under what conditions would the owner of a firm (for example: an airline)
believe that the production function for his or her firm shows increasing returns
to scale?
Do the same conditions and arguments also apply to the economy of an entire country?
Why or why not?
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3. In 2015 a country had the following situation:
A.
B.
C.
D.
20 of its people were working.
8 of its people were unemployed and collecting unemployment compensation
12 of its people were not working but not collecting unemployment.
5 of its people were serving in the military.
In 2016, the following changes occurred:
a. 3 of the 12 people in C. took jobs and became employed.
b. 4 of the 20 people in A. lost their jobs. 2 began collecting unemployment
benefits. 2 went to graduate school.
c. 1 of the 8 people in B. took a job.
d. 1 of the 8 people in B. joined the military
e. 2 of the 8 people in B. stopped collecting unemployment benefits, with no other
information about what they did.
f. 1 of the 20 people in A. joined the military.
Questions:
3a. What is the unemployment rate in 2015? (Expressing your answer as a fraction -- for
instance: 10/55 -- is OK.)
3b. What is the unemployment rate in 2016?
4. The news reports on the economy sometimes mention (A) the number of people
added to the payrolls of all firms (new hires); and also sometimes (B) the number
of people filing for unemployment compensation for the first time (new claims).
Suppose (A) > (B). Does this mean the unemployment rate will fall? Why or why
not?
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EXTRA CREDIT (2 points)
1. In the pictures below, one is famous economist John Maynard Keynes, one is
famous economist Adam Smith, one is Commando Cody, and one is my dog.
Which is which?
a.
b.
c.
d.
e.
(1) Keynes; (2) Smith; (3) Cody; (4) Dog
(1) Smith; (2) Dog; (3) Keynes; (4) Cody
(1) Cody; (2) Keynes; (3) Smith; (4) Dog
(1) Dog; (2) Cody; (3) Smith; (4) Keynes
(1) Dog; (2) Smith; (3) Cody; (4) Keynes
(1)
(2)
(3)
(4)
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2. The shape below can be divided into 2 identical parts with one (not necessarily
straight) cut. Show how.
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