Economics 211
Macroeconomic Principles
Exam #3
Date: 2-August-2012
Name ___________________________________
The value of this exam is 100 points.
Instructor: Brian B. Young
Please show your work when appropriate!
Multiple Choice and True/False
2 points each
Answer multiple choice and true/false questions on the Scantron® input sheet. Be sure to put
your name on all submitted work so you may receive proper credit. Good luck!
1. President George W. Bush and Congress cut taxes and raised government
expenditures in 2003. According to the aggregate supply and aggregate demand model
a. both the tax cut and the increase in government expenditures would tend to
increase output.
b. only the tax cut would tend to increase output.
c. only the increase in government expenditures would tend to increase output.
d. neither the tax cut nor the increase in government expenditures would tend to
increase output.
2. Which of the following Fed actions would both increase the money supply?
a. buy bonds and raise the interest rate paid on bank reserves
b. buy bonds and lower the interest rate paid on bank reserves
c. sell bonds and raise the reserve requirement
d. sell bonds and lower the reserve requirement
3. If expenditure plans are very responsive to changes in the interest rate and the Fed
fears we are in a recession, then the Fed will need to
a.
increase the interest rate by a large amount.
b.
increase the interest rate by a small amount.
c.
decrease the interest rate by a large amount.
d.
decrease the interest rate by a small amount.
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4. The gold standard of the Nineteenth Century was much better at controlling
business cycles than the fiat money standard we are on now.
a. True.
b. False.
5. Which of the following is true?
a.
Monetary policy is subject to long law-making time lags.
b.
Monetary policy does not require a good estimate of potential GDP.
c.
Monetary policy is not subject to forecasting error.
d.
Monetary policy can be enacted more quickly than fiscal policy.
6. If the world price of textiles is higher than Vietnam’s domestic price of textiles
without trade, then Vietnam
a. should import textiles.
b. has a comparative advantage in textiles.
c. should produce just enough textiles to meet its domestic demand.
d. should refrain altogether from producing textiles
7. “Crowding out” occurs when investment declines because
a. a budget deficit makes interest rates rise.
b. a budget deficit makes interest rates fall.
c. a budget surplus makes interest rates rise.
d. a budget surplus makes interest rates fall.
8. Many economists believe that crowding out is not a problem for the U.S. economy
right now because
a. many economists suffer from an acute mental illness called economania.
b. foreigners prefer to invest in United States Treasury securities.
c. the liquidity trap allows the government to finance a substantial deficit
without raising interest rates.
d. the U.S. dollar is the preferred currency for international trade.
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9. A balanced budget would require that when real GDP is contracting rapidly,
a. the government raise taxes or cut expenditures. This would increase
magnitude of economic fluctuations.
b. the government raise taxes or cut expenditures. This would decrease
magnitude of economic fluctuations.
c. the government cut taxes or raise expenditures. This would increase
magnitude of economic fluctuations.
d. the government cut taxes or raise expenditures. This would decrease
magnitude of economic fluctuations
the
the
the
the
10. A monetarist is an economist who believes that
a.
changes in the money supply have no effect on the economy.
b.
monetary policy should be run using feedback rules.
c.
fluctuations in the money stock are the main source of economic
fluctuations.
d.
monetary policy should be run by discretionary policy.
11. If the Fed fears inflation, then the Fed
a.
directs banks to lower the nominal interest rate.
b.
directs banks to raise the nominal interest rate.
c.
will sell government securities in the open market.
d.
will buy government securities in the open market.
12. The main reason that interest rate parity (IRP) holds more closely than purchasing
power parity (PPP) is that
a. different countries have different rates of inflation.
b. central banks intervene in currency markets.
c. capital is much more mobile across national borders than are the other
factors of production.
d. different countries and cultures purchase different baskets of goods.
13. A Keynesian activist is an economist who believes that fluctuations in
a.
the money stock are the main source of economic fluctuations.
b.
aggregate demand combined with sticky wages are the main source of
economic fluctuations.
c.
aggregate supply combined with sticky prices are the main source of
economic fluctuations.
d.
aggregate demand and aggregate supply with flexible prices are the main
source of economic fluctuations
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14. With international trade, a country
a. cannot consume at a point outside of its PPF.
b. can consume at a point outside its PPF.
c. cannot consume at a point on its PPF.
d. None of the above answers is correct.
15. Suppose aggregate demand suddenly falls. In order to stabilize the economy, the
government might
a. increase the money supply.
b. increase government expenditures.
c. decrease taxes.
d. All of the above are correct
16. “Ceteris paribus, fluctuations in exchange rates create a situation in which a given
amount of money buys the same basket of goods and services in different currencies.”
The previous statement describes
a. interest rate parity
b. purchasing power parity
c. the law of demand for foreign exchange.
d. comparative advantage
17. The World Trade Organization (WTO) has made trade restrictions a thing of the
past.
a. True.
b. False.
18. Ceteris paribus, in the foreign exchange market which of the following increases the
demand for U.S. dollars?
a. The Japanese interest rate rises.
b. The expected future exchange rate falls.
c. The U.S. interest rate rises.
d. None of the above answers will increase the demand for U.S. dollars.
19. The Federal Reserve is charged with the dual goals of full employment and price
stability whereas the European Central Bank concerns itself with only the single goal of
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keeping the rate of inflation at or slightly below 2%. The ECB does not address
unemployment because
a. Europeans don’t mind being unemployed since the benefits are so generous.
b. the ECB believes that unemployment is best addressed by the fiscal policies of
the individual Eurozone member states.
c. unemployment has never been much of a problem in Europe.
d. the ECB is a relatively new central bank and is going take on one policy
initiative at a time.
20. Ignoring any supply-side effects, suppose the government is considering cutting taxes by
$100 billion or increasing government purchases by $100 billion. Then
a. both policies would increase aggregate demand by the same amount.
b. both policies would increase aggregate demand but the tax cut has a smaller effect.
c. both policies would increase aggregate demand but the increase in government
purchases has a smaller effect.
d. the tax cut would decrease aggregate demand and the increase in government purchases
would increase aggregate demand
21. Discretionary fiscal policy works to close a deflationary gap by shifting the
a.
AD curve leftward.
b.
AS curve leftward.
c.
AD curve leftward and AS curve leftward.
d.
AD curve rightward.
22. When the world price of oil rises rapidly, it causes the
a.
AD curve to shift rightward.
b.
AS curve to shift leftward.
c.
AS curve to shift rightward.
d.
AD curve to shift leftward.
23. The interest rate paid to hold the Turkish Lira is 11.5% while the interest rate paid
to hold the U.S. Dollar is 0.125%. According to interest rate parity, over the course of
one year, we should expect
a. the lira to appreciate by 11.375% against the dollar.
b. the lira to depreciate by 11.375% against the dollar.
c. the dollar to appreciate by 11.375% against the lira.
d. the dollar to depreciate by 11.375% against the lira.
e. both b. and c. are correct.
24. In the debate over fixed rules versus feedback rules, Keynesians and monetarists
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a.
b.
c.
d.
agree that fixed rules work best.
disagree, with Keynesians believing in feedback rules and Monetarists
backing fixed rules.
agree that a feedback rule works best.
disagree, with Keynesians backing fixed rules and Monetarists backing
feedback rules.
25. The two main functions of the WTO are to promote world trade in goods and
services and to settle trade disputes between countries.
a. True.
b. False.
26. If the economy is in an extreme condition, such as a deep recession, then
a.
fiscal policy has a role while monetary policy is best for normal
fluctuations.
b.
fiscal policy has no role and only monetary policy can stabilize the
economy.
c.
neither policy can be used.
d.
both fiscal policy and monetary policy work very well in this situation.
27. Historically, the Fed has always used open market operations to diversify its
portfolio and purchase a variety of diverse securities, such as Treasury bills and lesser
quality debt obligations from the private sector.
a. True.
b. False.
28. The Federal Reserve System is a division of the United States Department of the
Treasury.
a. True.
b. False.
29. Lower Slobbovia imports 1,000 cars per month. After imposing a $500 per car tariff,
imports fall to 800 cars per month. How much does Lower Slobbovia’s government
collect in tariff revenue?
a.
$900,000
b.
$500,000
c.
$400,000
d.
$100,000
30. The argument that jobs are lost to free trade is
a.
totally false because no jobs are lost to free trade.
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b.
c.
d.
correct because jobs are lost but foreign countries are helped and we can
afford losses.
incorrect because no jobs are lost and new jobs are created by trade.
correct because some jobs are lost but new jobs also are created.
31. When a German company purchases a U.S. company for $20 million, in the balance of
payments the value of that transaction is recorded in the
a.
purchase account.
b.
current account.
c.
investment account.
d.
capital account.
32. If the current account balance has a $70 million deficit and there was no change in official
reserves during that year, then we know that
a.
the balance of payments must register a $70 million surplus.
b.
the capital account balance must have a $70 million surplus.
c.
the official settlements account balance must have a $70 million surplus.
d.
net transfers were $70 million.
33. Over the past year, Brazil’s central bank (Banco Central do Brasil) has lowered its target
interest rate from 12.5% to 8%. This action indicates that, at this time, Brazil’s central bank is
more concerned about unemployment than it is about inflation.
a.
True
b.
False
34. In the CBO’s analysis of the American Recovery and Reinvestment Act of 2009, we saw that
tax cuts and credits for lower- and middle-income people had a much larger output multiplier
than tax cuts for high-income people. This is not surprising since lower-income people have a
higher marginal propensity to consume than do higher-income people.
a.
True
b.
False
35. When a recession occurs so that real GDP decreases, the federal government’s budget
automatically moves in the direction of a
a.
deficit.
b.
surplus.
c.
balance.
d.
None of the above answers is correct.
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Short Answer
10 points each
Answer short answer questions on separate sheets of paper if needed. Be sure to write legibly
and be sure to put your name on all submitted work so you may receive proper credit. Good
luck!
1. Suppose that Iran announces that it has mined the Strait of Hormuz. This causes the world
price of crude oil to jump by 50% to $135 per barrel. Show this situation on an AS-AD graph.
Also, explain how we could return to full-employment equilibrium under both a Keynesian
(demand-side) and a neoclassical (supply-side) adjustment process. What is the role of the
government under each of these processes?
2. Explain why the United States can run a large trade deficit every year for decades seemingly
without any severely adverse impact on the U.S. economy.
3. Consider the fiscal policies of two hypothetical presidential candidates. Candidate R
proposes fewer regulations on business and lower tax rates for firms (corporate taxes) and highincome individuals. Candidate D proposes more government spending on infrastructure and
education and tax cuts/credits for low- and middle-income individuals. Use your vast and
extensive knowledge of macroeconomics to show how each candidate’s proposals would likely
affect long- and short-run aggregate supply and aggregate demand, the price level, output, and
the budget deficit.
Have a great summer!
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