Download Midterm #3

ECO 102
Fall 2013 Semester
Midterm #3
Name: _________________________
Student ID#: ____________________
Part I: (30 points total) Instructions: Use the space provided (and the back of the
page, if necessary) to answer the following:
1.
Small countries export a large percentage of everything they produce. A large
percentage of what consumers in small countries buy is imported. Does this make fiscal
policy in these countries more powerful in correcting a recessionary or expansionary gap
or less powerful? Explain your reasoning.
2.
What might make a country’s natural rate of unemployment rise?
3.
Suppose Bulgaria has a fixed exchange rate, and a large number of foreign
tourists to Bulgaria decide they will buy Bulgarian assets (condominiums in Bankso).
What happens to Bulgaria’s money supply? What happens to equilibrium income (and
GDP)?
4.
If the foreign visitors suddenly stop coming, and many seek to sell their property
in Bulgaria – what happens then to Bulgaria’s money supply? What happens to
equilibrium income (and GDP)?
5.
Suppose a small country with a fixed exchange rate imports all of its oil. The
international price of oil rises suddenly. (Assume the imported oil is used by both
consumers (petrol for their automobiles) and producers (fuel for heat and to generate
electricity.) Show what happens to the economy of the country using the SRAS-AD
framework.
2
Part II. (3 points for each correct answer) 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.
1.
Suppose there is a floating exchange rate. When the central bank lowers domestic
interest rates and raises the money supply, domestic assets become _____ attractive in
comparison to foreign assets. As a result, the value of the domestic currency _____ in
foreign exchange markets.
a.
b.
c.
d.
e.
more
rises
more
falls
less
rises
less
falls
none of the above.
2.
According to Purchasing Power Parity, the value of one unit of Country A’s
currency should fall compared to the value of one unit of Country B’s currency when:
a.
b.
c.
d.
e.
A’s inflation is higher than B’s inflation.
A’s net exports grow compared to B’s net exports.
A’s GDP grows compared to B’s GDP.
A’s international reserve assets grow compared to B’s international reserve assets.
A’s interest rates higher compared to B’s interest rates.
3.
I can buy a basket of goods at Carrefour in Sofia and spend BGN, or the same
basket of the same goods at Carrefour in Serres, Greece and spend EUR. If the exchange
rate between BGN and EUR is that 1.95 BGN = 1 EUR, and the Purchasing Power Parity
condition holds, then:
a.
b.
c.
d.
e.
the basket that costs BGN 100 in Sofia will cost EUR 195 in Serres.
the basket that costs EUR 100 in Serres will cost BGN 195 in Sofia.
the basket that costs BGN 1.95 in Sofia will cost EUR 1.95 in Serres.
the basket that costs EUR 100 in Serres can be purchased with BGN 100.
none of the above.
4.
The short-run aggregate supply curve would shift to the left if:
(i)
(ii)
(iii)
there is an increase in the quantity of labor available
there is an increase in the amount of physical or human capital available
there is an increase in the expected inflation rate
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.
3
5.
Suppose the central bank purchases government bonds using open market
operations. This causes _____ and _____.
a.
b.
c.
d.
e.
the MS curve to shift to the right
the MS curve to shift to the left
the MD curve to shift to the left
the MS curve to shift to the right
the MD curve to shift to the right
the AD curve to shift to the right
the AS curve to shift to the right.
the AD curve to shift to the right
the AS curve to shift to the left
the AD curve to shift to the left
Planned
Aggregate
Expenditure
PAE = C+I+G+NX
X
Z
GDP
6.
In the graph above, suppose the economy’s actual level of output (GDP) is shown
at Z. In this case, the amount of unplanned investment is shown on the graph as the line
from:
a.
b.
c.
d.
e.
(1) to (2).
(2) to (3).
(3) to (4).
(4) to (5).
(5) to (1).
7.
When inflation is less than expected, firms are unable to reduce their costs (like
wages and rental of equipment) and instead reduce output. This explains why:
a.
b.
c.
d.
e.
the AD curve shows higher output demanded at higher inflation rates.
the LRAS curve shows that firms produce more output at lower inflation rates.
the SRAS curve shows that consumers demand less output at lower inflation rates.
the SRAS curve shows that firms produce less output at lower inflation rates.
none of the above.
4
8.
In the long run, an economy’s production of GDP depends on its supplies of
labor, capital, and natural resources, and on the available technology. This explains why:
a.
b.
c.
d.
e.
higher unemployment is associated with lower inflation.
the aggregate demand curve is downward-sloping.
the LRAS curve is vertical.
the SRAS curve is upward-sloping.
none of the above.
9.
When a person’s income is $100 per month, the person spends $80. When the
person’s income rises to $110 per month, the person’s spending rises to $89. The
person’s marginal propensity to consume is:
a.
b.
c.
d.
e.
0.8 when income was $100/month, and 0.89 when income is $110/month.
0.89
0.9
0.8
0.6
10.
In the money supply – money demand diagram, the money demand curve is ____
because:
a.
upward-sloping
b.
upward-sloping
c.
downward-sloping
d.
downward-sloping
e.
none of the above.
at higher interest rates, more money is needed to
pay the interest.
at higher price levels, any amount of spending will
require more money.
at higher interest rates, the interest that is not earned
by holding money is greater.
at higher price levels, people will hold onto money
for a shorter period of time.
11.
When equilibrium output is more than potential GDP, there is a _____ gap, and
actual inflation is _____ than expected inflation. If expected inflation adjusts because of
the difference, then _____.
a.
b.
c.
d.
e.
expansionary
recessionary
recessionary
expansionary
none of the above.
greater
greater
less than
less than
short-run aggregate supply shifts to the left.
aggregate demand shifts to the right
short-run aggregate supply shifts to the left
aggregate demand shifts to the left
5
12.
Over the long run, output and income will tend to converge to ____. The force
that eventually causes this to happen is:
the central bank’s use of monetary policy to promote fullemployment.
interest rates adjust to set money supply equal to money
demand.
prices and wages rise when there is more-than-usual
demand for products and labor, and fall when there is lessthan-usual demand for products and labor.
firms increase output when unplanned investment is
positive, and decrease output when unplanned investment is
negative.
firms decrease output when unplanned investment is
positive, and increase output when unplanned investment is
negative.
a.
potential GDP
b.
equilibrium output
c.
potential GDP
d.
potential GDP
e.
zero
13.
The economy’s self-correcting mechanism is:
a.
the central bank raises the money supply when output is less than potential GDP.
b.
the government uses automatic stabilizers to bring output back to equilibrium.
c.
firms are forced to accept lower price increases, and workers lower wage
increases – when output is less than potential GDP.
d.
the government uses fiscal policy to restore output to potential GDP.
e.
inflation rises when output is less than potential GDP.
14.
Raising the discount rate leads to _____ reserves in the banking system and a
_____ in the money supply.
a.
b.
c.
d.
e.
more
decrease
less
increase
less
decrease
more
increase
none of the above.
15.
Exogenous changes in spending are changes in planned spending caused by
changes in:
a.
b.
c.
d.
e.
output.
potential GDP.
the real interest rate.
something other than output or the real interest rate.
either output or the real interest rate.
6
16.
The degree to which the public believes the central bank's promises to keep
inflation low is called the _____ of monetary policy.
a.
b.
c.
d.
e.
credibility
independence
anchoring
inertia
accomodation
17.
In the balance of payments accounting system, ____ are recorded with a “plus”.
Transactions related to the purchase or sale of _____ are recorded in the Capital Account.
a.
b.
c.
d.
e.
receipts of foreign cash
assets
spending of foreign cash
currently produced goods or services
spending of foreign cash
assets
spending of international reserve assets
currently produced goods or services
receipts of foreign cash
currently produced goods or services
18.
Consumers in the country – who want to purchase some imported goods – want to
see the domestic currency become more _____. Producers in a country who export some
of their output want to see the domestic currency become more _____.
a.
b.
c.
d.
e.
weak
competitive
weak
strong
strong
strong
strong
competitive
weak
competitive
19.
Legal measures to limit the ability of people to buy or sell foreign currency
(designed to help maintain a fixed exchange rate system) are called:
a.
b.
c.
d.
e.
international reserves.
reserve requirements
open market operations
capital controls
discount rates.
20.
When firms and workers lower the amount of inflation they expect:
a.
b.
c.
d.
e.
the AD shifts to the left.
the AD shifts to the right.
the SRAS shifts to the left.
the SRAS shifts to the right.
the LRAS shifts to the right.
7
Part III Extra Credit: Remember these? One-half extra credit point for each correct
answer.
Select ONE best answer for each question:
1.
In a market economy, individuals pursue their own self-interest. Does this serve
the public interest because of the:
a.
b.
c.
d.
Operation of competitive markets.
Social responsibility of business leaders.
Careful planning and coordination of market activity.
Because individuals understand what is in the public interest.
2.
What is the most essential characteristic of a market economy?
a.
b.
c.
d.
Effective labor unions.
Good government regulation.
Responsible action by business leaders.
Active competition in the marketplace.
3.
What would happen to employment if the government mandated a minimum
wage above what employers currently pay?
a.
b.
c.
Employment would go up.
Employment would go down.
Employment would stay the same.
4.
What must the government do to reduce high inflation?
a.
b.
c.
d.
Increase both spending and the money supply.
Decrease both spending and the money supply.
Decrease spending and increase the money supply.
Increase spending and decrease the money supply.
5.
Why do professional sports players generally earn more than farmers and
steelworkers?
a.
b.
c.
d.
Team owners are monopolists.
Sports players are really entertainers rather than producers.
There are fewer professional sports players than farmers or steelworkers.
Good sports players are more scarce, given the demand for their services.
8
6.
When industries or countries specialize in producing goods and services, this
results in:
a.
b.
c.
d.
Increased price inflation.
Less output per hour worked.
Greater economic interdependence.
More equal distribution of income.
7.
When a country's people and its other resources are fully employed, which of the
following must be true before more of any one item can be produced?
a.
b.
c.
Private enterprise has to produce it rather than the government.
There has to be less production of other products.
There has to be a general decrease in prices.
8.
Why are private businesses not likely to operate a lighthouse?
a.
Ship owners buy insurance policies to protect themselves from losses so they
won't pay for lighthouses.
b.
The light from the lighthouse can be used even by ships that do not pay a fee for
the service.
c.
It would cost private business more to operate a lighthouse than it costs the
government.
d.
The cost of operating a lighthouse is too high
9. What is the most important task of all economies?
a.
b.
c.
d.
To balance imports and exports.
To balance the government's budget.
To make the best use of scarce resources.
To save money to reduce the national debt.
10.
If your annual income rises by 5 percent while prices of the things you buy rise by
10 percent:
a.
b.
c.
You are better off.
You are worse off.
You are unaffected.
11.
Which of the following occurs when one country trades wheat to another country
in exchange for oil?
a.
b.
c.
d.
Both countries gain.
Both countries lose.
The country that trades wheat gains, the country that trades oil loses.
The country that trades oil gains, the country that trades wheat loses.
9
12.
Which of the following approaches to pollution control makes the best use of a
country's economic resources?
a.
b.
c.
d.
Abolishing the use of toxic chemicals.
Using resources to reduce all pollution damage.
Controlling pollution as long as the extra benefits are greater than the extra costs.
Prohibiting economic activities that cause pollution or harm the environment.
13.
Which of the following limits an economy's potential output?
a.
b.
c.
d.
The quantity and quality of labor, capital, and natural resources.
Business demand for final goods and services.
Government regulations and spending.
The amount of money in circulation.
10