Download Midterm #3

ECO 102
Fall 2009 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:
Refer to the article from the recent Economist (at the back of this exam) to answer
the following questions:
1.
What circumstances make Spain’s current economic situation more serious than
other EU countries?
2.
The article mentions Spain’s high government budget deficit as one of the
problems facing the government. If fixing this problem is the top priority for the
government, what steps would be necessary? Show the impact of these measures on
Spains AD-AS diagram
3.
Suppose Spain’s government does not do much to reduce the government budget
deficit over the next several years. What might happen then?
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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.
The quantity of output produced rises above its natural level when the price level
rises above the price level people expect to prevail. This explains why:
a.
b.
c.
d.
e.
unintended investment is equal to zero.
the SRAS curve is upward-sloping.
the aggregate demand curve is downward-sloping.
savings are equal to investment.
the LRAS curve is upward-sloping.
2.
When government spending rises, the rise in the government budget deficit might
raise interest rates. The rise in interest rates might cause crowding out of:
(i)
(ii)
(iii)
(iv)
investment
net exports
taxes
wages
a.
b.
c.
d.
e.
both i) and (iii) are true.
both (ii) and (iii) are true.
both (i) and (iv) are true.
both (iii) and (iv) are true.
both (i) and (ii) are true.
3.
Changes in fiscal policy that stimulate aggregate demand when the economy goes
into recession without requiring deliberate action by the government are called:
a.
b.
c.
d.
e.
menu costs.
discretionary policy.
rational expectations.
automatic stabilizers.
sacrifice ratios.
4.
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.
the aggregate demand curve is downward-sloping.
the LRAS curve is vertical.
the SRAS curve is upward-sloping.
higher unemployment is associated with lower inflation.
none of the above.
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5.
People decide how to divide their wealth between holding money and owning
other types of assets (like bonds) by balancing the interest rate they receive on bonds to
the liquidity and safety of money. Therefore their demand to hold money will rise as
interest rates fall. This is the idea behind:
a.
b.
c.
d.
e.
the Phillips Curve.
Rational Expectations theory.
automatic stabilizers.
the misperceptions theory.
the liquidity preference theory.
6.
When a person’s income was $100 per month, the person spent $80. When the
person’s income rises to $105 per month, the person’s spending rises to $83. The
person’s marginal propensity to consume is:
a.
b.
c.
d.
e.
0.6
0.8 when income was $100/month, and 0.79 when income is $105/month.
0.815
between 0.79 and 0.8.
0.8
7.
When domestic interest rates rise, domestic assets become _____ attractive to
investors, so the value of the domestic currency in foreign exchange markets _____.
a.
b.
c.
d.
e.
more
falls
less
rises
less
falls
more
rises
none of the above.
8.
The _____ is the rate at which a person can trade the goods and services of one
country for the goods and services of another country.
a.
b.
c.
d.
e.
purchasing power parity
official reserve transactions balance
real exchange rate
nominal exchange rate
net capital outflow
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9.
According to Purchasing Power Parity, in the long run the increase in the foreign
exchange value of country A’s currency compared to country B’s currency should be
determined by:
a.
how much faster A’s international reserve assets grow compared to B’s
international reserve assets.
b.
how much higher A’s interest rates are compared to B’s interest rates.
c.
how much faster B’s price level rises compared to A’s price level.
d.
how much faster A’s net exports grow compared to B’s net exports.
e.
how much faster A’s GDP grows compared to B’s GDP.
10.
In an open economy, a central bank that wants to stimulate aggregate demand
would _____ interest rates in its country. This would also cause its currency to _____.
The change in exchange rates would _____ the impact of monetary policy on the AD
curve.
a.
b.
c.
d.
e.
lower
raise
lower
lower
raise
depreciate
appreciate
appreciate
depreciate
depreciate
decrease
increase
decrease
increase
increase
11.
If a loaf of Bulgarian bread costs BGN 0.80, and an identical loaf of British bread
costs GBP 0.40, and the exchange rate is 0.3 GBP/BGN, then the real exchange rate (how
much British bread can be purchased with one loaf of Bulgarian bread) is:
a.
b.
c.
d.
e.
1.1
3.33
1.67
0.6
0.8
12.
In an open economy, a government that wants to stimulate aggregate demand
would increase government expenditure. The increase in the amount of government
borrowing would _____ interest rates, and cause the exchange rate to _____. This would
_____ the impact of the increased government expenditure on aggregate demand.
a.
b.
c.
d.
e.
decrease
depreciate
increase
depreciate
increase
depreciate
decrease
appreciate
none of the above.
increase
increase
decrease
increase
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13.
An economic variable that moves in the opposite direction of GDP over the
course of the business cycle is a ____ variable. An economic variable that has turning
points before GDP’s turning points is called a _____ variable.
a.
b.
c.
d.
e.
counter-cyclical
lagging
leading
pro-cyclical
none of the above.
leading
pro-cyclical
lagging
counter-cyclical
14.
The sticky wage theory, the sticky price theory, and the misperceptions theory are
all used to explain why:
a.
b.
c.
d.
e.
unemployment exists even when the economy is at the natural rate of output.
the long-run AS curve is vertical.
the short-run AS curve is upward-sloping.
the balance of payments MUST balance.
the AD curve slopes downward.
15.
The short-run aggregate supply curve would shift to the right 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 price level
a.
b.
c.
d.
e.
both (i) and (ii) are true.
both (ii) and (iii) are true.
only (i) is true.
only (ii) is true.
only (iii) is true.
16.
If the marginal propensity to consume is 0.9, and the marginal propensity to
import is 0.1, then when government purchases of output rise by 10, the aggregate
demand curve will shift to the right by:
a.
b.
c.
d.
e.
9
11
8
10.
none of the above.
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17.
When government expenditure rises by 10, the aggregate demand curve shifts to
the right by more than 10. This is the _____ effect, which is bigger if:
a.
b.
c.
d.
e.
aggregate demand
liquidity
multiplier
product market
none of the above.
MPI is bigger
the MPI is bigger
the MPC is smaller
MPC is zero
Aggregate
Expenditure
AE = C+I+G+NX
X
Z
Income (GDP)
18.
In the graph above, an increase in government spending would be shown as:
a.
b.
c.
d.
e.
a shift downwards of the AE line.
a shift upwards of the AE line.
an increase in the slope of the AE line.
an increase in the slope of the 45-degree line.
none of the above.
19.
In the graph above, the AE line would have a higher slope if:
a.
b.
c.
d.
e.
the natural rate of output were higher.
the marginal propensity to consume were higher.
the marginal propensity to import were higher.
net exports were lower.
interest rates were higher.
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20.
Suppose the central bank lowers the amount of reserves (as a percent of deposits)
that banks are required to hold. This causes _____ and _____.
a.
b.
c.
d.
e.
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 MS 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
the AD curve to shift to the right
EXTRA CREDIT (1 point)
The figure on the left can be divided into 2 identical parts by cutting along the dashed
line. Show how the figure on the right can also be divided into 2 identical parts with a
single (not necessarily straight) cut.
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