Principles of Economics II
Final Exam. (for Class 7)
Dec. 14, 2005 (Wed.)
Student No.
Name
* Fill in the blank (6 Questions. Each 3 points, Total of 18 points).
1. Definition of (
): the ease with which an asset can be converted into the
economy's medium of exchange.
2. Definition of (
) (
) : the proposition that changes in the
money supply do not affect real variables.
3.
Definition of (
) (
) (
): the rate at which a person
can trade the goods and services of one country for the goods and services of
another.
4. Definition of (
) (
): a government policy that directly
influences the quantity of goods and services that a country imports or
exports.=> Change this into a New Question!
5. When the aggregate-supply curve shifts to the left, the short-run effect is
falling output and rising prices - a combination called (
6. Definition of (
that
result
) (
).
): the additional shifts in aggregate demand
when expansionary fiscal policy increases income and thereby
increases consumer spending.
* Multiple choice (11 Questions, 3 points each. Random Guess with -1 points., Total of
33 points).
1. If the discount rate is raised, banks choose to borrow
a.
more from the Fed so reserves increase.
b.
more from the Fed so reserves decrease.
c.
less from the Fed so reserves increase.
d.
less from the Fed so reserves decrease.
2. If the reserve ratio is 10 percent, $1,000 of excess reserves can create
a.
$100 of new money.
b.
$1,000 of new money.
c.
$10,000 of new money.
d.
None of the above are correct.
Use the figure below for the following 2 questions.
3. If the money supply is MS2 and the value of money is 2, there is excess
a.
demand equal to the distance between A and C.
b.
demand equal to the distance between A and B.
c.
supply equal to the distance between A and C.
d.
supply equal to the distance between A and B.
4. When the money supply curve shifts from MS1 to MS2,
a.
the equilibrium value of money decreases.
b.
the equilibrium price level decreases.
c.
the supply of money has decreased.
d.
the demand for goods and services will decrease.
5. A country has $100 million of net exports and $170 million of saving. Net
capital outflow is
a.
$70 million and domestic investment is $170 million.
b.
$70 million and domestic investment is $270 million.
c.
$100 million and domestic investment is $70 million.
d.
None of the above is correct.
Use the figure below to answer the following 2 questions.
6. Which of the following shifts show the effects of an import quota?
a.
a shift of NCO0 to the right in Panel B
b.
a shift from D0 to D1 in Panel C
c.
a shift from D0 to D2 in Panel C
d.
None of the above would show the effects ofan import quota.
7. If the interest rate were initially at r0and an import quota was imposed, the
interest rate would
a.
stay at r0.
b.
decrease because supply would shift right.
c.
increase because supply would shift left.
d.
decrease because demand would shift left.
Consider the exhibit below for the following 2 questions.
8. If the economy is at A and there is a fall in aggregate demand, in the short
run the economy
a.
stays at A.
b.
moves to B.
c.
moves to C.
d.
moves to D.
9. The economy would be moving to long-run equilibrium if it started at
a.
A and moved to B.
b.
C and moved to B.
c.
D and moved to C.
d.
None of the above is correct.
For the following 2 questions, use the diagram below:
10.
Which of the following would cause the aggregate demand curve to
shift from AD1 to AD2?
a.
an increase in government purchases
b.
a decrease in stock prices
c.
consumers and firms become more optimistic about the future.
d.
an increase in the price level
11.
Which of the following is true?
a.
Unemployment rises as the economy moves from a to b.
b.
Either fiscal or monetary policy could be used to move the economy
from b to a.
c.
If the economy is left alone, then as the economy moves from b to
long-run equilibrium, the price level will fall farther.
d.
All of the above are correct.
* True /False (7 Question. 2 points each. Random Guess with -2 points.)
1. M2 is both larger and more liquid than M1.
2. In the long run, an increase in the growth rate of the money supply leads to
an increase in the real interest rate, but no change in the nominal
interest rate.
3. Negative net exports are the same as a trade surplus.
4. In an open economy, the demand for loanable funds comes from both domestic
investment and net capital outflow.
5. Because not all prices adjust instantly to changing conditions,an unexpected
fall in the price level leaves some firms with higher-than-desired prices,
and these higher-than-desired prices depress sales and induce firms to
reduce the quantity of goods and services they produce.
6. The most important lag for monetary policy is the time it takes to formulate
policy, while the most important lag for fiscal policy it the time it
takes for the economy to respond to changes in government spending.
7. During recessions, the government tends to run a budget deficit.
* Answer the followng questions. (55 points)
1. Answer the following steps one by one. Use relevant graphs if necessary. (30 points):
1) Why is AD curve downward sloping? Explain this in 3 different perspectives. (10 points)
2) Explain why expansionary fiscal policy has a multiplier effect? And discuss the
conditions necessary to have such effect. (10 points)
3) Assume that an economy is in its long-run equilibrium. Explain the the short-run and
long-run impact of expansionary fiscal policy using a graph. (10 points)
2. Answer the following question using a model proper to explain a short-term fluctuation.
(25 points)
-
"A critical November 1998 OPEC meeting failed to reverse the decline in oil prices.
OPEC in 1997 had an earlier failure when it approved a 10% quota increase at a time
when the Asian economies were entering a prolonged slump after the financial crisis.
As a result, OPEC, until the recent hike in oil prices that began around 2000,
experienced the lowest prices for crude oil after adjusting for inflation since the
pre-embargo days of 1972." (from Asia Times, May 26, 2005)
1) Try to model the low crude oil price of 1998 above to explain the short term
economic fluctuation using a graph. (10 points)
2) What would be the long-run equilibrium? Explain how this long-run equilibrium is
achieved? Compare this long-run equilibrium with that of short-run using a graph. (15
points)