Download Midterm Exam #2 Econ 219 Fall 2005 This is a closed book exam

Name: ________________________
Midterm Exam #2 Econ 219 Fall 2005
This is a closed book exam. You are required to abide all the rules of the Student Conduct Code
of the University of Connecticut.
Each multiple choice question is worth 2 points each. The last 5 problems are worth 4 points
each.
1. The money supply will decrease if the:
A) monetary base increases.
B) currency-deposit ratio increases.
C) discount rate decreases.
D) reserve-deposit ratio decreases.
2. In the Baumol-Tobin model, the benefit of holding money is:
A) the interest forgone.
B) convenience.
C) the lower risk and higher return compared to other assets.
D) the interest elasticity of money demand.
3. In a small open economy, if domestic saving equals $50 billion and domestic
investment equals $50 billion, then there is ______ and net capital outflow equals
______.
A) a trade deficit; $100 billion
B) balanced trade; $0
C) a trade surplus; $100 billion
D) balanced trade; $100 billion
4. If the fraction of employed workers who lose their jobs each month (the rate of job
separation) is 0.01 and the fraction of the unemployed who find a job each month is
0.09 (the rate of job findings), then the natural rate of unemployment is:
A) 1 percent.
B) 9 percent.
C) 10 percent.
D) about 11 percent.
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5. All of the following are causes of structural unemployment except:
A) minimum-wage laws.
B) the monopoly power of unions.
C) unemployment insurance.
D) efficiency wages.
6. In the IS-LM analysis, the increase in income resulting from a tax cut is usually _____
the increase in income resulting from an equal rise in government spending.
A) less than
B) greater than
C) equal to
D) sometimes less and sometimes greater than
7. The IS-LM model takes ______ as exogenous.
A) the price level and national income
B) the price level
C) national income
D) the interest rate
8. Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the
interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the
price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set
the money supply at:
A) 2,000.
B) 1,800.
C) 1,600.
D) 1,400.
9. The introduction of a stylish new line of Toyotas, which makes some consumers prefer
foreign cars over domestic cars, will, according to the Mundell-Fleming model with
fixed exchange rates, lead to:
A) a fall in income and net exports.
B) no change in income or net exports.
C) a fall in income but no change in net exports.
D) no change in income but a fall in net exports.
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10. According to the Mundell-Fleming model, under:
A) floating exchange rates, a monetary expansion raises income whereas a fiscal
expansion does not, but under fixed exchange rates, a fiscal expansion raises
income whereas a monetary expansion does not.
B) both floating and fixed exchange rates, a monetary expansion raises income, but a
fiscal expansion does not.
C) both floating and fixed exchange rates, a fiscal expansion raises income, but a
monetary expansion does not.
D) floating exchange rates, a fiscal expansion raises income whereas a monetary
expansion does not, but under a fixed exchange rate, a monetary expansion raises
income whereas a fiscal expansion does not.
Use paper provided to answer the following questions. Keep your answers short and precise. Do
not asnwer what you have not been asked.
11. Some economists argue that monetary policy is more potent in affecting economy than
the fiscal policy. Others argue the opposite. Explain the argumentation of both views in
the context of IS-LM model of closed economy.
12. Derive the Mundel - Fleming model for a small open economy. [Hint: There are two
cases, it is sufficient to explain one] What does the model explain?
13. Economic expansion throughout the rest of the world raises the world interest rate. Use
the Mundell-Fleming model to illustrate graphically the impact of an increase in the
world interest rate on the exchange rate and level of output in a small open economy
with a floating-exchange-rate system. Be sure to label: i. the axes; ii. the curves; iii. the
initial equilibrium levels; iv. the direction the curves shift; and v. the new short-run
equilibrium.
14. The government of a small open economy wishes to promote trade policies that will
result in currency appreciation.
a. Would protectionist policies (higher tariffs and more quotas) or freer trade policies
(tariff reductions and quota eliminations) be more effective in generating currency
appreciation?
b. Illustrate graphically the impact of the trade policy on the exchange rate of the small
open economy.
c. What will happen to the trade balance of the small open economy as a result of the
trade policies, assuming that the country started from a position of free trade?
d. What will happen to the quantity of exports and imports as a result of the trade
policies?
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15. Use the IS-LM model to illustrate graphically the impact on output and interest rates of a
one-time increase in the price level due to a large increase in oil prices. Be sure to label:
i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves
shift; and v. the terminal equilibrium values.
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Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
B
B
B
C
C
A
B
C
A
A
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13.
14. a. Protectionist policies will result in currency appreciation.
b. The protectionist policies increase the demand for net exports.
c. The trade balance will remain unchanged--still balanced.
d. The volume of exports will decrease (as a result of the currency appreciation), and the
volume of imports will decrease (as a result of the protectionist policies).
15.
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