```ECO 102
Fall 2014 Semester
Midterm #2
Name: _________________________
Student ID#: ____________________
Part I: (30 points total) Instructions: Use the space provided (and the back of the page, if
1.
Explain why a central bank needs to know what is happening in the banking
system in order to do a good job regulating the country’s money supply.
2.
Suppose you are designing the system for collecting and reporting information
about a country’s labor market. You are trying to decide whether the following people
(Persons A, B, and C) should be classified as “employed”, “unemployed”, or “not
employed but not unemployed either”. Explain your reasoning:
a.
Every high school graduate must serve one year in the country’s army. They are
trained to march, shoot guns, etc., and paid \$50 per month while on their required
service. Person A is fulfilling his miltary service.
b.
In addition to the people fulfilling their required service, the army has regular,
full-time officers who train the soldiers, manage the budgets, look after the equipment,
draw up plans to defend the country, etc. They draw regular salaries comparable to
what people in the private sector are paid to do similar tasks (training, budgeting,
maintaining equipment, planning). Person B is a full-time officer.
c.
After completing his military service, person C applies for several jobs, but is hit
by a car while crossing the street and must recover from his injuries in a hospital for 4
months.
3.
Explain why a single country would have more than one definition of the money
supply (M1 or M2) so that measuring one would provide a different number than
measuring the second. Which is correct?
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.
A BGN 10 note is classified as _____ when it is in the wallet of an ordinary
person. The same BGN 10 note would be classified as _____ if were inside the vault of a
commercial bank. It is counted as part of the money supply _____.
a.
b.
c.
d.
e.
currency held by the public
currency held by the public
monetary base
money supply
none of the above.
bank reserves
bank reserves
money supply
deposits
in both cases
in the second case only.
in the first case only.
in the second case only.
2.
Okun’s Law relates the amount of _____ necessary to produce a 1 % change in
_____.
a.
b.
c.
d.
e.
extra investment
extra interest rate
extra wages
extra GDP
extra employment
amount of capital
savings
amount of labor supplied
the unemployment rate
wages
3.
Investors evaluate the expected profitability of potential projects that are
expected to generate profits in future years using the _____.
a.
b.
c.
d.
e.
present value formula.
money multiplier.
required reserve ratio.
Fischer equation
balance of payments equation.
4.
If R is the required reserve ratio and BR is total bank reserves, then the
maximum amount of money that regular commercial banks can create is:
a.
b.
c.
d.
e.
R ▪ BR
(1/R) ▪ BR
(R – 1) ▪ BR
(1/(1-R)) ▪ BR
R ▪ (1/BR)
3
5.
Decide which statements should go into which blanks in the following sentences:
Human capital is just like “real” capital because _____. Human capital is not like “real”
capital because _____.
(i) it requires the use of current resources that could have been used to satisfy
other needs;
(ii) it depends on comparing of rate of return to the interest rate
(iii) it’s ownership cannot be sold from person to another.
(iv) it allows each unit of labor to produce more output.
a.
b.
c.
d.
e.
(i) and (ii) in the first blank; (iii) and (iv) in the second blank.
(i) and (iii) in the first blank; (ii) and (iv) in the second blank.
(ii) and (iii) in the first blank; (i) and (iv) in the second blank.
(iii) and (iv) in the first blank; (i) and (ii) in the second blank.
(i), (ii), and (iv) in the first blank; (iii) in the second blank.
6.
Consider this bank balance sheet:
Reserves
Loans
100
400
Total
500
|
|
Deposits
Net Worth
500
100
Total
600
If the numbers for Reserves, Loans, and Deposits on the balance sheet are correct, then:
a.
b.
c.
d.
e.
the bank should make another 100 of loans.
the bank should add another 100 of reserves.
the bank should return 100 of deposits to the depositors.
the number on the balance sheet for Net Worth is wrong.
the bank should borrow 100 from the Central Bank.
7.
The ease with which an asset can be converted into money is called:
a.
b.
c.
d.
e.
liquidity.
the medium of exchange.
the store of value.
the unit of account.
none of the above.
4
8.
On January 1, a country has initially 10 people employed and zero people
unemployed. 2 people lose their jobs on January 2 and begin collecting unemployment
compensation. 2 more people lose their jobs on February 2 and begin collecting
unemployment compensation. On March 2, one of the 2 people who lost his job on
January 2 and one of the 2 people who lost a job on February 2 find new jobs and begin
working again. The others are still not employed. If the country has unemployment
compensation that lasts 2 months, it would report an unemployment rate of _____ on
March 16. If Country A has unemployment compensation that lasts 3 months, it would
report an unemployment rate of _____ on March 16.
a.
b.
c.
d.
e.
2/10
2/12
1/9
2/9
0/8
1/10
1/11
2/10
2/10
1/9
9.
The graph above shows how a worker responds to an increase in his wage. His
original budget at the lower wage is the line connecting points A and E. His new budget
at the new wage is the line connecting points A and F. The curved (dashed) lines are
indifference curves. The substitution effect of the increase in the wage would be the
movement from _____; and the income effect would be the movement from _____.
a.
b.
c.
d.
e.
B to E;
A to G;
B to C:
G to B;
B to D;
E to C
G to B
C to F
B to C
D to C
5
10.
Choose the correct responses to fill in the blanks:
The money supply goes up without any change in the monetary base when _____; the
monetary base goes up without any change in the money supply when _____.
(i) A regular commercial bank uses its excess reserves to make a loan
(ii) A regular commercial bank borrows bank reserves from the central bank
(iii) A depositor withdraws cash from his account at a regular commercial bank
(iv) A regular commercial bank buys a government bond from the central bank.
a.
b.
c.
d.
e.
(i)
(ii)
(ii)
(iii)
(iii)
(iv)
(iv)
(i)
both (i) and (ii)
both (iii) and (iv)
11.
After the first moon landing, the world discovered that the moon is basically an
airless ball of dirt and lost interest in seeing, reading about, or paying for astronauts to
go visit the moon. The highly-skilled and highly-paid engineers and scientists who had
devoted their careers to building vehicles to carry astronauts to the moon lost their
jobs. If these people discovered that no other employers were interested in their skills,
their continuing unemployment would best be described as:
a.
b.
c.
d.
e.
natural unemployment.
structural unemployment.
frictional unemployment.
cyclical unemployment.
none of the above.
12.
When the interest rate rises for a person who is already saving part of his
income, the effect of the increase in the interest rate is felt in two ways. The _____
effect causes the person to wish to enjoy more future spending (and increase his
savings). The _____ effect causes the person to wish to enjoy both more current
spending and more future spending by reducing the amount of savings.
a.
b.
c.
d.
e.
income
Doppler
interest rate
substitution
substitution
substitution
income
income
Doppler
income
6
13.
In the 1930’s movie serial “Phantom Empire”, the hero is “radio’s singing
cowboy” – Gene Autry. Gene discovers the entrance to the underground civilization of
Murania. If Gene wants to discover what the inhabitants of Murania use as money, he
should see what they use as the:
(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.
14.
On our island where each coconut costs 2 units of money, we are able to buy
and sell 8 coconuts using 16 units of money by using each unit of money one time. We
are able to buy and sell 8 coconuts using 8 units of money by using each unit of money
two times. 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.
a decrease in the price level.
15.
1/R is the money multiplier, which is:
a.
the fraction of deposits that banks hold as reserves.
b.
the amount of loans a bank can make from a given deposit.
c.
the interest rate the central bank charges on loans of reserves.
d.
the amount of money the central bank can create through open market
operations.
e.
the amount of money the banking system generates with each unit of reserves.
16.
Suppose the central bank raises the percent of deposits that regular commercial
banks are required to hold as reserves. This will have the effect of:
a.
b.
c.
d.
e.
decreasing the money supply but leaving the monetary base unchanged.
decreasing the money supply but increasing the monetary base.
leaving the money supply unchanged but decreasing the monetary base.
increasing the money supply and increasing the monetary base.
increasing the money supply but decreasing the monetary base.
7
17.
When we describe how expensive item A is compared to item B by comparing
the number of units of money required to purchase A and comparing that to the
number of units of money required to purchase B, we are using money as:
a.
b.
c.
d.
e.
unit of account
store of value.
medium of exchange
all of the above.
none of the above.
18.
If the central bank wants to decrease the money supply, it could make open
market ____ or _____ the required reserve ratio. If it wants to increase the money
supply, it could make open market _____ or _____ the required reserve ratio.
a.
b.
c.
d.
e.
purchases
raise sales
purchases
lower sales
sales raise purchases
sales lower purchases
none of the above.
lower
raise
lower
raise
19.
When a company will not be able to ever pay all its debts, but the creditors (the
people the company owes money to) will get more money from allowing the company
to continue to operate than they would get from closing the company – the company
will likely go through _____. If the creditors think the best course of action would be to
close the company completely, then the company goes through _____.
a.
b.
c.
d.
e.
bankruptcy liquidation
bankruptcy oxidation
bankruptcy conflagration
bankruptcy instigation
none of the above.
bankruptcy re-organization
bankruptcy re-orientation.
bankruptcy constipation.
bankruptcy cessation
20.
A variable that moves in the same direction as GDP during an economic
expansion is _____. A variable that changes direction after GDP changes direction during
a.
b.
c.
d.
e.
procyclical
countercyclical
conincident
none of the above.
lagging
countercyclical
procyclical
8
EXTRA CREDIT (1 point)
In the pictures below, one is famous economist David Ricardo, one is the first man on
the moon Neil Armstrong, one is “radio’s singing cowboy” Gene Autry, and one is
former professional wrestler Randy “Macho Man” Savage. Which is which?
a.
b.
c.
d.
e.
(1) Armstrong; (2) Macho Man; (3) Ricardo; (4) Autry
(1) Autry; (2) Armstrong; (3) Autry; (4) Ricardo
(1) Macho Man; (2) Ricardo; (3) Autry; (4) Armstrong
(1) Ricardo; (2) Autry; (3) Macho Man; (4) Armstrong
(1) Ricardo; (2) Armstrong; (3) Autry; (4) Macho Man
9
```