Economics 211
Exam #4
Macroeconomic Principles
Time: 2 hours
Date: 9 or 10 December 2013
Name ___________________________________
Section:________________________
Instructor: Brian B. Young
The value of this exam is 100 points plus 20
points for the bonus question.
Please show your work when appropriate!
Multiple Choice
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. The Taylor rule is a monetary-policy rule stipulating how much the central bank
should change the fed funds rate in response to changes in inflation, unemployment, or
real output. The Taylor Rule is an example of
a. a target rule.
b. an instrument rule.
c. a k% rule.
d. a 54-40 or fight rule.
2. Which of the following Fed actions would both increase the money supply?
a. buy bonds and raise the interest rate paid on excess bank reserves
b. buy bonds and lower the interest rate paid on excess bank reserves
c. sell bonds and raise the reserve requirement
d. sell bonds and lower the reserve requirement
3. 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.
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4. 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
5. “Crowding out” occurs when investment declines because
a. financing a budget deficit makes interest rates rise.
b. financing a budget deficit makes interest rates fall.
c. financing a budget surplus makes interest rates rise.
d. financing a budget surplus makes interest rates fall.
6. In 2012, in the United States, the sum of the balance of all three of the balance of
payments accounts was
a. slightly positive.
b. slightly negative.
c. greatly positive.
d. zero.
e. greatly negative.
7. 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
8. 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.
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9. 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.
10. 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.
11. 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
12. Which of the following is an example of an automatic fiscal policy action?
a. a decrease in the tax rate resulting from an effort to increase aggregate demand
to combat a recession
b. an increase in the tax rate resulting from a desire to shrink the budget deficit
c. an increase in spending on defense goods resulting from increased world
tensions
d. increased unemployment benefit payments resulting from higher
unemployment
e. None of the above answers are correct.
13. 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
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14. “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
15. 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.
16. 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
17. 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.
18. 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.
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19. The exchange rate is volatile because
a. the demand curve and the supply curve are horizontal
b. when a relevant factor changes, demand and supply change in opposite
directions.
c. when a relevant factor changes, demand and supply change in the same
direction.
d. the supply curve is vertical.
e. the demand curve is vertical.
20. In the debate over fixed rules versus feedback rules, Keynesians and monetarists
a.
agree that fixed rules work best.
b.
disagree, with Keynesians believing in feedback rules and Monetarists
backing fixed rules.
c.
agree that a feedback rule works best.
d.
disagree, with Keynesians backing fixed rules and Monetarists backing
feedback rules.
21. The Quantity Theory of Money and the Natural Rate Hypothesis both assume that
a. in the long run, we are all dead.
b. money is neutral in the long run.
c. wages are sticky.
d. capital flows to its highest return.
22. The argument that jobs are lost to free trade is
a.
totally false because no jobs are lost to free trade.
b.
correct because jobs are lost but foreign countries are helped and we can
afford losses.
c.
incorrect because no jobs are lost and new jobs are created by trade.
d.
correct because some jobs are lost but new jobs also are created.
23. 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.
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24. 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.
25. 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 Answers/Problems
15 points --- 1) Comment knowledgeably on the following statement. “If crowding out is a
significant problem, a stimulative monetary policy is preferred to deficit spending, whereas, if
we are in a liquidity trap, deficit spending (i.e., a stimulative fiscal policy) is preferred to a
stimulative monetary policy.”
15 points – 2) In December 2011, the short-term interest rate in Switzerland was 0%
while in Brazil it was 11.5%. In the spot market, one Swiss franc (CHF) bought two
Brazilian reals (BRL). The December 2012 futures contract for CHF was trading at
US$1.107; the same contract on BRL was trading at US$0.5194. If you had covered a
carry trade position with futures, was there an opportunity to profit? In this example,
did covered interest rate parity hold and, if not, how much did this trade deviate from
covered IRP?
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10 points – 3) You are given the following information about an economy:
1) at full
employment, the unemployment rate is 5% and real output is $1 trillion; and 2) the following
table applies:
State:
Inflation rate:
Unemployment rate:
Real output:
1
6%
3.5%
$1,030 billion
2
2.5%
5.0%
$1,000 billion
3
1%
7.5%
$950 billion
Assuming the price level in Period 0 was 150, graphically show the economy’s long-run and
short-run Phillips Curves and corresponding long-run and short-run aggregate supply curves
in Period 1. Also, please label the axes for full credit.
Phillips Curves
Aggregate Supply
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10 points – 4) You are given information about an economy that, at equilibrium expenditures,
the following table applies
State:
Price level:
Real output:
1
159.0
$950 billion
2
153.75
$1,000 billion
3
151.5
$1,030 billion
Further, assume that the slope of the AE curves is 0.5. Graphically depict this situation in the
Aggregate Expenditure model and, then, derive three points on the AD curve. Also, please label
both the axes and all three of your AE curves for full credit.
Aggregate Expenditure
Aggregate Demand
45°
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Bonus Question
20 points
Write a short essay contrasting the types of fiscal policy you would recommend in each
of the following situations:
1. The economy appears to be entering a period of recession and policy makers
need to boost aggregate demand (AD) as quickly as possible.
2. The economy’s long-run economic growth is at a lackluster level and policy
makers need to revive growth by shifting LRAS to the right.
Justify your answers by mentioning such topics as automatic stabilizers, infrastructure,
education, tax rates, consumption v. investment, marginal propensities to consume for
various income brackets, and the values of relevant multipliers.
If you feel as though you did not fully comprehend all the topics we
covered in this course, remember…
“If you understood what I said, I must have misspoken.”
--- Federal Reserve Chairman Alan Greenspan, 1993.
Happy Holidays!
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