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Your Name Here: / Ecn.120A, Spring 2007(“fixed” version of exam)Todd Easton
Final Exam
Please write your name in the upper-left hand corner of this exam, to be sure you get credit for all your work.
Part IMultiple Choice Questions
Answer the questions below on the answer sheet provided, using a #2 pencil. You should take a maximum of 80 minutes for this section. Each question is worth 3 points; the entire section is worth 75 points.
1) If real GDP decreases from 2001 to 2002, we can conclude that
a) production levels are lower in 2002.
b) price levels are lower in 2002.
c) there is less unemployment in 2002.
2) Positive items in the US balance of payments are
a) items that generate a demand for dollars on foreign exchange markets.
b) items that generate a supply of dollars to foreign exchange markets.
c) items that tend to raise the domestic price level in the United States.
d) items that tend to lower the domestic price level in the United States.
3) The manipulation of the supply of money and the interest rate is called
a) monetarism.
b) fiscal policy.
c) incomes policy.
d) monetary policy.
Questions 4) to 6) refer to the table below and to the right, which shows the output resulting from a person working an 8 hour day in two countries: Arbez and Arboc.4) Arbez
a) has an absolute advantage in the production of cloth.
b) has an absolute advantage in the production of wheat.
c) has a comparative advantage in the production of cloth.
d) should export cloth to Arboc. / Arbez / Arboc
Wheat / 12 bushels / 6 bushels
Cloth / 12 yards / 12 yards
5) The opportunity cost of one bushel of wheat in Arboc is
a) 1/2 yard of cloth.
b) 2 yards of cloth.
c) 6 yards of cloth.
d) 12 yards of cloth.
6) Arboc has a comparative advantage in producing
a) wheat.
b) cloth.
c) both wheat and cloth.
d) neither wheat nor cloth.
7) There is a sharp fall in investment spending. It would be possible to maintain the economy at its current output level by using any of the following measures except ______government spending and ______taxes.
a) raising, raising
b) lowering, lowering
c) raising, lowering
d) lowering, raising
8) The price of beans rises sharply. Which of the following cannot be true?
a) The supply of beans decreased, with no change in the demand for beans.
b) The demand for beans increased, with no change in the supply of beans.
c) The demand for beans increased, with an increase in the quantity supplied of beans.
d) The supply of beans increased, with an increase in the quantity demandedof beans.
9) Gross private domestic investment has three components:
a) nonresidential investment, residential investment, and inventory investment.
b) business investment in plant and equipment, residential construction, and net exports of machinery.
c) purchases of new firms, purchases of existing firms, and purchases of residential housing stock.
10) Which of the following statements is closest to the truth?
a) Federal debt is only what the federal government owes to other countries.
b) Federal debt is another name for the federal budget deficit.
c) Each year the budget deficit of the federal government adds to the federal debt.
d) Each year the change in the federal budget deficit is equal to the level of the federal debt.
11) Beginning in England in the mid-18th century, technical change and capital accumulation sharply increased productivity in which two industries?
a) agriculture and shipbuilding
b) agriculture and textiles
c) agriculture and railroading
d) agriculture and steel making
12) Which of the following changes will unambiguously increase consumption expenditure at every level of income and shift the consumption function upward?
a) a reduction in interest rates and expectations of higher income in the future
b) a reduction in interest rates and expectations of lower income in the future
c) an increase in wealth and expectations of lower income in the future
d) an increase in interest rates and an increase in wealth
13) A labor union wants the union members’ real wages to go up by 2.0% for the coming year. How much of an increase in wages should the union ask for, given that the inflation rate is expected to be 3.7% for the coming year?
a) 2.85%
b) 5.70%
c) 1.70%
d) 2.00%
14) Using money as a medium of exchange is more efficient than barter because:
a) goods and services cannot be used as a unit of account.
b) money is the only asset that can be used as a store of value.
c) money is a better store of value than any good or service.
d) barter requires a double coincidence of wants.
15) [bad question]
16) Monetary policy has been used more frequently than fiscal policy to fight inflation. Which of the following seems the most likely explanation of this fact?
a) The Federal Reserve Bank is less subject to political pressure than Congress.
b) Most economists do not believe that contractionary fiscal policy would work to lower aggregate expenditures.
c) Large deficits have limited the use of monetary policy to fight inflation.
17) One reason a depreciation of the US dollar would tend to increase the US price level is because
a) a depreciation makes imported inputs more expensive.
b) domestic buyers will tend to demand more imports instead of domestically produced goods.
c) a depreciation makes imported consumer goods less expensive.
18) When interest rates on bonds fall, one would normally expect
a) bond prices to rise.
b) bond yields to rise.
c) bonds’ face values to rise.
19) Which of the following is most apt to raise output and worsen inflation in the United States?
a) a decline in the world price of crude oil
b) a decline in the price of the United States dollar on foreign exchange markets
c) a rise in interest rates in the United States, relative to interest rates in the rest of the world
d) a rise in tax rates in the United States, relative to tax rates in the rest of the world
20) Which of the following would be the best example of something that would directlycontribute to an increase in factor income in the United States Balance of Payments?
a) Canadians increase their purchases of American bonds
b) Americans increase their purchases of Canadian bonds
c) Japanese firms in the United States get more profitable
d) American firms in Japan get more profitable
21) Normally, when a Treasury bond matures, the Treasury issues a new bond. The revenue from selling the new bond is used to pay off the owner of the bond that matured. During the year 2000, the federal government ran a budget surplus. As a result, the Treasury paid off some maturing bonds in a different way: the Treasury used tax revenues in excess of budgeted government spending to pay off some bond owners. This practice
a) reduced M1.
b) left M1 unaffected.
c) increased M1.
22) Suppose the banking system has $1 million of reserves when the reserve requirement is 0.20. What is the volume of demand deposits in the system if there are no excess reserves?
a) $200,000
b) $500,000
c) $5,000,000
d) $2,000,000
23) One line of the US Balance of Payments is called: “Private sales and purchases of assets.” One possible cause of a net increase in this line would be
a) the Fed buying Chinese Treasury bonds.
b) the Chinese central bank buying US Treasury bonds.
c) Europeans increasing their holdings of American private assets.
d) Europeans decreasing their holdings of American private assets.
24) The graph at right is from an Economist article on our syllabus. It shows foreign ownership of US Treasury bonds, as a proportion of all bonds not owned by the Fed. What is the best explanation of the cause of the steep rise in this line since 1995?a) The federal government has spent far more than it has collected in tax revenue.
b) The dollar has depreciated against some currencies, but not against the Chinese currency, the yuan.
c) The Chinese central bank has been buying dollars with yuan, year after year. /
25) A surgeon left the labor force to have a baby. Last October, she returned to the labor force and looked for work. She was thus counted as unemployed. Her unemployment should probably be classified as
a) frictional.
b) structural.
c) cyclical.
Part II Essay Questions
Write concise answers to each question in the spaces provided. Write your answers in plain English, using a minimum of jargon. You should take a maximum of 30 minutes for the whole section.(The entire section is worth 30 points.)
1) [6 pts.]The table below describes an imaginary economy, one somewhat like our own. Use it to answer questions a) and b) below.
year 1 / year 2 / year 3inflation rate / 2.8% / 3.1% / 3.7%
interest rate / 4.0% / 4.1% / 5.2%
budget deficit / $400 b. / $360 b. / $280 b.
a) Did monetary policy move in an expansionary or a restrictive direction between year 2 and year 3?
b) How can you tell?
2) [12 pts.] Please use the data in the table to answer a) and b) below.
year 1 / year 2 / year 3unemployment rate / 7.6% / 8.3% / 7.0%
inflation rate / 7.1% / 6.3% / 5.6%
a) Explain, entirely in words, what this change in inflation rates (from year 1 to year 3) means for the price level.
b) Examine the data and then explain whether they are consistent with a model of inflation that includes both a short-run Phillips Curve and a long-run Phillips Curve.
3) [12 points] In the April 2001 issue of Business Korea, Kim Young-Min wrote about changes in the exchange rate of the Korean currency, the won. The graph to the right is from the article; it covers the period between the end of February and the end of March 2000.The top line in the graph shows how many won the dollar bought during this period. Young-Min says the Bank of Korea believed the change in the exchange rate during this period was due to a fall in the price of a key Korean export (semiconductors) and to a rise in the price of a key Korean import (crude oil).
How could the change in export and import prices mentioned by the Bank of Korea lead to this movement in the won’s exchange rate? Your explanation should refer to the supply and demand for won on foreign exchange markets /
For 4 points extra credit: draw a diagram toillustrate your answer. Put the price of the won on the vertical axis (in $s
per won).
Correct Answers to Part I
1)a / 2)a / 3)d / 4)b / 5)b
6)b / 7)d / 8)d / 9)a / 10)c
11)b / 12)a / 13)b / 14)d / 15)d
16)a / 17)a / 18)a / 19)b / 20)d
21)b / 22)c / 23)c / 24)c / 25)a
/ Have a good summer! Keep reading!
Feel free to drop by my office, or to write me at , if you want to talk macroeconomics this summer of next fall. And, if you loved macroeconomics, consider taking the intermediate macroeconomics course we will offer this Fall!