Download 2013 Spring Sample Midterm 2

Name:
Student Number:
Total: 25 Points
University of British Columbia
Econ 102
Sample Midterm 2
Instructor: Alfred Kong
This exam has 15 multiple choice questions in Part A and 5 short questions in Part B. Complete all the
questions. Good luck.
Part A.
Multiple choice questions. Each question is worth 1 point.
1) In macroeconomic analysis, the assumption that potential output (Y*) is changing is a
characteristic of
A) the adjustment process.
B) the national accounts model.
C) the long run.
D) the business cycle model.
E) the short run.
1) __C____
FIGURE 24-2
2) As the macro economy adjusts from the short run to the long run,
A) wages and other factor prices remain constant.
B) aggregate demand shocks cause deviations from potential output.
C) aggregate supply shocks cause deviations from potential output.
D) potential output is adjusting to close inflationary or recessionary gaps.
E) wages and other factor prices adjust to close output gaps.
2) __E____
3) Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of
the AD curve is to determine the price level. This is true because the
A) Y* depends on the price level.
B)
C)
D)
3) __D____
aggregate demand curve is horizontal.
aggregate demand curve is vertical.
Y* is independent of the price level.
E) AS curve is upward sloping.
4) If per capita GDP in a richer country grows at a faster annual rate than in a poorer country,
A) whether the gap in living standards widens or closes over time depends on the absolute
size of the relative growth rates.
B) the gap between their standards of living will widen over time.
C) the gap between their standards of living will close over time.
D) the gap between their standards of living will close over time as long as the rate of
population growth is higher in the poorer country.
E) the difference in their living standards will not change over time.
4) __B____
5) A common measure of a country's rate of economic growth is
A) the capital-output ratio.
B) the marginal efficiency of capital.
C) the change in output per capita.
D) the level of output per capita.
E) the level of real gross domestic product.
5) __C____
6) Consider a closed economy with real GDP in the long run of $400, consumption expenditures of
$250, government purchases of $75, and net tax revenue of $20. What is the level of national
saving?
A) $95
B) $225
C) $75
D) $55
E) $230
6)
__C___
7) Doug is saving money in order to purchase a new snowboard next winter. This represents using
money as
A) a store of value.
B) method of barter.
C) a medium of deferred payment.
D) a unit of account.
E) a medium of exchange.
7)
__A___
8) Fiat money has value because it
A) is only fractionally backed by gold.
B) can be manufactured at will by the issuing government.
C) has intrinsic value equal to its face value.
D) is fully backed by gold at a fixed ratio.
E) is generally accepted.
8)
__E___
Assets
Reserves
Loans
Liabilities
Bank North's
Balance
Sheet
$300
Deposits
$2200
Capital
$2500
$2000
$500
$2500
TABLE 27-1
9) Refer to Table 27-1. Assume that Bank North is operating with no excess reserves. What is their
actual reserve ratio?
A) 25%
B) 13.67%
C) 15%
D) 20%
E) 12%
9)
__C___
10) The present value of a bond is determined by the
A) face value and the date of maturity.
B) market rate of interest, the date of maturity, and the face value.
C) market rate of interest only.
D) marginal rate of income tax.
E) rate of inflation.
10) __B___
11) If the annual market rate of interest is 5 percent, an asset that promises to pay $100 after each of
the next two years has a present value of
A) $ 90.70.
B) $ 95.24.
C) $ 181.40.
D) $ 185.94.
E) $ 200.00.
11) __D___
12) Suppose that at a given interest rate and money supply, all firms and households simultaneously
try to reduce their money balances. They do this by trying to ________, which causes an excess
________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
A) buy bonds; supply of bonds; decrease in the price of bonds; increase
B) sell bonds; supply of bonds; decrease in the price of bonds; increase
C) sell bonds; supply of bonds; increase in the price of bonds; decrease
D) sell bonds; demand for bonds; increase in the price of bonds; decrease
E) buy bonds; demand for bonds; increase in the price of bonds; decrease
12) __E___
13) Any central bank, including the Bank of Canada, can implement its monetary policy by directly
influencing either ________ or ________, but not both.
A) money supply; money demand
B) aggregate demand; the interest rate
C) the money supply; the interest rate
D) aggregate supply; aggregate demand
E) the price level; the interest rate
13) __C___
14) To raise short-term market interest rates, the Bank of Canada could
A) purchase government securities in the open market.
B) increase the commercial banks' required reserves.
C) lower the reserve requirement.
D) increase its target for the overnight rate.
E) adjust the rate paid on Treasury bills.
14) __D___
15) The monetary transmission mechanism describes how changes in the demand for or supply of
money cause changes in the interest rate, which then cause changes in
1) aggregate demand and real GDP;
2) desired investment and net exports;
3) the price level.
A) 1 and 2
B) 1, 2, and 3
C) 2 only
D) 1 only
E) 3 only
15) __D___
Part B.
Short questions. Each question is worth 2 points.
Question 1
Briefly explain how and why banks create new money during the deposit multiplier process.
Bank creates money by making new loans. When banks get a new deposit, this leaves them with
excess reserves. The desire to make profits leads banks to lend out excess reserves, creating a
matching deposit, which is new money. When these loans are spent, the person receiving the
money deposits much of it in a bank deposit, creating excess reserves, and the process
continues.
Question 2
If the Bank of Canada wishes to reduce inflationary pressure, explain briefly what steps it will have to
carry out in the overnight loans market.
The Bank of Canada needs to reduce AD. To do this, the Bank must raise nominal and real
interest rates by raising the overnight rate. The Bank would raise its target range for the
overnight rate.
Question 3
Imagine a bond that promises to make coupon payments of $50 one year from now and $150 two
years from now, and to repay the principal of $1000 three years from now. Suppose also that the
market interest rate is 5% per year, and that no perceived risk is associated with the bond. Suppose
the bond is being offered for $1000. Would you buy the bond at that price? What do you expect to
happen to the bond price in the very near future? (2 points)
Present Value (PV)
= $50/(1.05) + $150/(1.05)2 + $1000/(1.05)3
= $47.62 + $136.05 + $863.84 = $1047.51
You should buy the bond at the price of $1000 because you can make a profit by doing so. You
could buy the bond for $1000 and ought to be able to sell it for $1047.51 since that is the bond’s
“worth” in terms of present value. The implied yield at the offered price is greater than the
market interest rate. Since there should be great demand for the bond at this price, we should
expect the bond price to rise in the near future.
Question 4
Suppose there is an inflationary gap in the short run, explain how the central bank can correct
this. Use diagrams to show your ideas. (2 points)
The central bank can bring the economy back at Y* by reducing money supply. When
MS decreases, interest rates go up and there is a decrease in desired investment
expenditure. As a result, the AD curve would shift to the left until the economy is back
at Y*.
Question 5
Could our living standards rise with the adoption of expansionary fiscal policy? (2 points)
In the short run, real GDP will go up so we are having a higher living standard with the
expansionary fiscal policy. But in the long run, real GDP will go back to Y* so the living
standard is unchanged.