Answer 55 multiple choice questions AND all the practice short-essay questions / problem sets.

Answer 55 multiple choice questions AND all the practice short-essay questions / problem sets.
eco201_exam2_extra_credits.pdf

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This assignment is optional. If you choose to
participate, it is due at the beginning of class on the
exam day. Please put your answers on scantron form
882-E.
ECON201: MACROECONOMICS
EXAM #2 EXTRA-CREDITS
(15 points)
Multiple-Choice Questions (0.5 point each)
Please put your answers on scantron form 882-E
1. The consumption schedule shows:
A. an inverse relationship between aggregate consumption and aggregate income.
B. a direct relationship between aggregate consumption and accumulated wealth.
C. a direct relationship between aggregate consumption and aggregate income.
D. an inverse relationship between aggregate consumption and accumulated financial
wealth.
2. If the MPC in an economy is .75, a $1 billion increase in taxes will ultimately reduce
consumption by:
A. $3 billion.
B. $4 billion
C. $1 billion
D. $.75 billion.
3. Refer to the above graph. A shift of the consumption schedule from C2 to C1 might be
caused by a(an):
A. decrease in saving.
B. increase in real GDP.
C. reverse wealth effect, caused by a decrease in stock market prices.
D. decrease in income tax rates.
4. If the real interest rate in the economy is i and the expected rate of return from
additional investment is r, then more investment will be forthcoming when:
A. i is greater than r.
B. r is greater than i.
C. i rises.
D. r falls.
5. In an effort to avoid recession, the government implements a tax rebate program,
effectively cutting taxes for households. We would expect this to:
A. increase aggregate demand.
B. reduce aggregate demand.
C. reduce aggregate supply.
D. affect neither aggregate supply nor aggregate demand.
6. In the above diagram, a shift from AS1 to AS3might be caused by a(n):
A. increase in productivity.
B. increase in the prices of oil.
C. decrease in the prices of domestic resources.
D. decrease in business taxes.
7. Other things equal, appreciation of the dollar:
A. increases aggregate demand in the United States and may decrease aggregate supply
by reducing the prices of imported resources.
B. decreases aggregate demand in the United States and may increase aggregate supply
by reducing the prices of imported resources.
C. decreases aggregate demand in the United States and may reduce aggregate supply by
increasing the prices of imported resources.
D. increases aggregate demand in the United States and may increase aggregate supply
by reducing the prices of imported resources.
8. In which of the following sets of circumstances can we confidently expect inflation?
A. aggregate supply increases and aggregate demand decreases
B. aggregate supply and aggregate demand both increase
C. aggregate supply and aggregate demand both decrease
D. aggregate supply decreases and aggregate demand increases
9. Refer to the above diagram. Suppose that aggregate demand increased from AD1 to
AD2. For the price level to stay constant:
A. the aggregate supply curve would have to shift leftward.
B. the aggregate supply curve would have to shift rightward.
C. the aggregate supply curve would have to be vertical.
D. real domestic output would have to remain constant.
10. If the MPC in an economy is .8, government could shift the aggregate demand curve
rightward by $100 billion by:
A. increasing government spending by $80 billion.
B. decreasing taxes by $25 billion.
C. decreasing taxes by $100 billion.
D. increasing government spending by $25 billion.
11. If you are estimating your total expenses for school next semester, you are using money
primarily as:
A) a medium of exchange.
B) a store of value.
C) a unit of account.
D) an economic investment.
12. In the United States, the money supply (M1) is comprised of:
A) coins, paper currency, and checkable deposits.
B) currency, checkable deposits, and Series E bonds.
C) coins, paper currency, checkable deposits, and credit balances with brokers.
D) paper currency, coins, gold certificates, and time deposits.
13. The purchasing power of the dollar:
A) has been increasing in recent years because of economic growth.
B) varies directly with the cost-of-living index.
C) is inversely related to the level of aggregate demand.
D) is the reciprocal of the price level.
14. The asset demand for money:
A) is unrelated to both the interest rate and the level of GDP.
B) varies inversely with the rate of interest.
C) varies inversely with the level of real GDP.
D) varies directly with the level of nominal GDP.
15. On a diagram where the interest rate and the quantity of money demanded are shown on the
vertical and horizontal axes respectively, the total demand for money can be found by:
A) horizontally adding the transactions and the asset demand for money.
B) vertically subtracting the transactions demand from the asset demand for money.
C) horizontally subtracting the asset demand from the transactions demand for money.
D) vertically adding the transactions and the asset demand for money.
16. Refer to the above diagram of the money market. Given Dm and Sm, an interest rate of i3 is not
sustainable because the:
A) supply of bonds in the bond market will decline and the interest rate will rise.
B) supply of bonds in the bond market will increase and the interest rate will decline.
C) demand for bonds in the bond market will decline and the interest rate will rise.
D) demand for bonds in the bond market will rise and the interest rate will fall.
Use the following to answer question 17:
Answer the next question(s) on the basis of the following information for a bond having no
expiration date: bond price = $1000; bond fixed annual interest payment = $100; bond annual
interest rate = 10 percent.
17. Refer to the above information. If the price of this bond falls by $200, the interest rate will:
A) rise by 2.5 percentage points.
B) rise by 5 percentage points.
C) fall by 2.5 percentage points.
D) fall by 5 percentage points.
18. The Federal Open Market Committee (FOMC) is made up of:
A) the chair of the Board of Governors along with the 12 presidents of the Federal Reserve
Banks.
B) the seven members of the Board of Governors along with the president of the New York
Federal Reserve Bank.
C) the seven members of the Board of Governors of the Federal Reserve System along with
the three members of the Council of Economic Advisers.
D) the seven member of the Board of Governors of the Federal Reserve System along with the
president of the New York Federal Reserve Bank and four other Federal Reserve Banks
presidents on a rotating basis.
19. To say that the Federal Reserve Banks are quasi-public banks means that:
A) they are privately owned, but managed in the public interest.
B) they deal only with banks of foreign nations and do not have direct business contact with
U.S. banks.
C) they deal only with commercial banks, and not the public.
D) they are publicly owned, but privately managed.
20. Which of the following is the basic economic policy function of the Federal Reserve Banks?
A) holding the deposits or reserves of commercial banks
B) acting as fiscal agents for the Federal government
C) controlling the supply of money
D) the collection or clearing of checks among commercial banks
21. Most modern banking systems are based on:
A) money of intrinsic value.
B) commodity money.
C) 100 percent reserves.
D) fractional reserves.
22. The reserves of a commercial bank consist of:
A) the amount of money market funds it holds.
B) deposits at the Federal Reserve Bank and vault cash.
C) government securities that the bank holds.
D) the bank’s net worth.
Use the following to answer questions 13 – 14
Answer the next question(s) on the basis of the following table for a commercial bank or thrift:
(1)
(2)
(3)
(4)
Reserve requirement,
percent
W
8
12
20
Checkable
deposits
$100,000
X
200,000
300,000
Actual
reserves
$ 10,000
20,000
Y
70,000
Excess
reserves
$
0
12,000
8,000
Z
23. Refer to row 3 in the above table. The number appropriate for space Y is:
A) $24,000.
B) $32,000.
C) $48,000.
D) $96,000.
24. Refer to row 4 in the above table. The number appropriate for space Z is:
A) $10,000.
B) $70,000.
C) $48,000.
D) zero.
25. Banks create money when they:
A) add to their reserves in the Federal Reserve Bank.
B) accept deposits of cash.
C) sell government bonds.
D) exchange checkable deposits for the IOU’s of businesses and individuals.
Use the following to answer question 26:
Answer the next question(s) on the basis of the following balance sheet for the First National
Bank of Bunco. All figures are in millions.
Assets
Reserves
Securities
Loans
Property
$20
25
15
90
Liabilities and net worth
Checkable Deposits
$100
Capital Stock
50
26. Refer to the above data. If the legal reserve ratio is 14 percent, suppose that customers of this
bank collectively write checks for cash at the bank in the amount of $6 million. As a result, the
bank’s excess reserves diminish to:
A) $0.
B) $6 million.
C) $.72 million.
D) $.84 million.
27. When a bank loan is repaid the supply of money:
A) is constant, but its composition will have changed.
B) is decreased.
C) is increased.
D) may either increase or decrease.
Use the following to answer questions 28-30:
Answer the next question(s) on the basis of the following consolidated balance sheet for the
commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in
billions.
Assets
Reserves
$ 30
Securities
70
Loans
130
Property
200
Liabilities and net worth
Checkable Deposits
$300
Capital Stock
130
28. Refer to the above data. The commercial banking system has excess reserves of:
A) $0 billion.
B) $30 billion.
C) $60 billion.
D) $70 billion.
29. Refer to the above data. After a deposit of $10 billion of new currency into a checking account
in the banking system, excess reserves will increase by:
A) $0 billion.
B) $7 billion.
C) $9 billion.
D) $10 billion.
30. Refer to the above data. After the deposit, the maximum amount by which this commercial
banking system can expand the supply of money by lending is:
A) $9 billion.
B) $45 billion.
C) $36 billion.
D) $90 billion.
ECO201 MACROECONOMICS
EXAM #2 REVIEW SHEET
I. Exam #2 covers the following topics:
Topics from Exam #1:
1. Definition of economics as a social science (chapter 1)
2. The PPC and opportunity cost (chapter 1)
3. Demand, supply, and the market (chapter 3)
4. GDP measurement (chapter 25)
5. Economic growth, business cycles, unemployment and inflation (chapters 26 &)
Topics covered since exam #1:
6. AS-AD Model (chapters 28 & 30).
7. Fiscal Policy (chapter 31)
8. Long-run AD-AS model and applications (chapter 36)
9. Money and the U.S. Monetary System (chapter 32)
10. Banking and Financial Markets (chapter 33)
11. Monetary Policy (chapter 34)
12. Principle of Comparative Advantage (chapter 38)
II. Practice short-essay questions / problem sets.
(Most of the problem sets below are from McConnell & Brue and various other sources. For more
practices, see end of chapter problems in McConnell & Brue.)
Problem Set #1:
Use the Keynesian Consumption Theory to explain how each of the following will affect aggregate
consumption spending:
1. A significant decrease in the value of residential real estate.
2. A significant increase in Federal personal income taxes.
Problem Set #2:
Use the Life-Cycle Theory of Consumption to answer the following questions:
Suppose DNA research helps increase life expectancy from T to T’, where T’ > T. All else equal,
what is the effect on consumption Ct and saving St in any period t and why?
Problem Set #3:
Suppose the federal government gives every U.S. household a $5000 one-time federal income
tax refund this year.
1. Explain the effect, if any, the refund may have on unemployment according to each of the
following consumption theories:
a. Keynesian Consumption Theory
b. Permanent-Income Hypothesis
c. Life-Cycle Theory of Consumption
2. Which of the three consumption theories listed above that would predict the most number
of jobs created by this tax refund?
Problem Set #4:
What are the basic determinants of investment? Explain the relationship between the real interest
rate and the level of investment. Why is investment spending unstable? How is it possible for
investment spending to increase even in a period in which the real interest rate rises?
Problem Set #5:
Suppose the Coco-Waku economy has an MPC of 0.9 and real GDP of $400 billion. If investment
spending falls by $4 billion, what will be its new level of real GDP?
Problem Set #6:
This question explores how international trade affects the multiplier.
1. Assume initially that a country is isolated from the world and its MPC is 0.8. What is
the multiplier?
2. Now assume it opens up its borders and people still spend 80 cents of every new
dollar earned on consumption. But 50 cents is spent on domestically produced
consumption goods and 30 cents on imported consumption goods. What is the
multiplier now? What is the effect of international trade on the multiplier in this case?
Problem Set #7:
True/False and Explain: a depreciation of U.S. currency would cause a contractionary impact on
the U.S. economy. [Grading is based on explanation only.]
Problem Set #8:
1. Suppose that aggregate demand and supply for a hypothetical economy are as shown:
Amount of
real domestic
output demanded,
billions
Price level
(price index)
Amount of
real domestic
output supplied,
billions
$100
200
300
400
500
300
250
200
150
150
$400
400
300
200
100
1. Use these sets of data to graph the aggregate demand and supply curves. What will
be the equilibrium price level and level of real domestic output in this hypothetical
economy? Is the equilibrium real output also the absolute full-capacity real output?
Explain.
2. Why will a price level of 150 not be an equilibrium price level in this economy? Why
not 250?
3. Suppose that buyers desire to purchase $200 billion of extra real domestic output at
each price level. What factors might cause this change in aggregate demand? What
is the new equilibrium price level and level of real output? Over which range of the
aggregate supply curve—horizontal, intermediate, or vertical—has equilibrium
changed?
Problem Set #9:
Other things being equal, construct a graph(s) to illustrate what effect each of the following has on
the equilibrium price level and level of real output:
1. An increase in aggregate demand in the vertical range of aggregate supply.
2. An increase in aggregate supply with no change in aggregate demand (assume
prices and wages are flexible).
3. An increase in aggregate demand and a decrease in aggregate supply.
4. A decrease in aggregate demand in the intermediate range of aggregate supply.
Problem Set #10:
In the late 1990’s, a growing number of economists argued that policy makers were focusing too
much on fighting inflation. The economists also argued that the technical level of potential output
had risen. Show their argument using the AD-AS model.
Problem Set #11:
Rough estimates suggest that the MPE (marginal propensity to expend which is an aggregate
variable we use to represent marginal propensity to consume, marginal propensity to import, etc.)
for the U.S. economy averaged about 90 percent between 1949 and 1990. But between 1991 and
2000, the MPE was 105 percent, and has been even higher since then. People are on balance
consuming all their income and then some, and are up to their eyeballs in consumer debt.
1. What do these data imply for the Multiplier? [You may substitute MPE for MPC in the
equation M = 1/(1-MPC).]
2. What do these data say about what powered the U.S. economy from 2001 to 2008, and
should the data have suggested that the expansion was unsustainable?
Problem Set #12:
You’ve just been appointed chairman to the Council of Economic Advisers in the Dismal Science
Land. You must rely on your research assistant for the specific numbers. He says the GDP gap
(recessionary gap) is $651.2 billion, MPC is .9, and the president wants to lower unemployment.
1. By how much would government spending have to increase to shift the aggregate
demand curve rightward by $651.2 billion?
2. How large a tax cut would be needed to achieve this same increase in aggregate
demand? Why the difference?
3. Determine one possible combination of government spending increases and tax
decreases that would accomplish this same goal.
Problem Set #13:
Describe (1) how the crowding-out effects may occur with government fiscal stimulus spending,
and (2) how they may affect the interest rate, consumption spending, private investment spending
and net exports.
Problem Set #14:
You’ve just been appointed chairman to the Council of Economic Advisers in the Dismal Science
Land. Current GDP is $600,000, unemployment is 5 percent, and there are signs of coming
inflation. You rely on your research assistant for the specific numbers. He tells you that potential
GDP (full-employment GDP) is $564,000 and the MPC is .5
1. The government wants to eliminate the inflationary gap.
suggest?
What policy would you
2. By how much will unemployment change after your policy has taken effect?
Problem Set #15:
What is the Laffer Curve and how does it relate to supply-side economics? Why is determining
the location where the economy is on the curve so important in assessing tax policy?
Problem Set #16:
Explain how a demand-pull inflation would affect the economy first in the short run and then in the
long run. Assume that the United States is initially operating at its full-employment level of output
and prices and wages are eventually flexible both upward and downward. Construct a long-run
AD-AS model to illustrate your answer.
Problem Set #17:
Explain how an AS shock such as a sudden increase in oil prices would affect the economy first in
the short run and then in the long run. Assume that the United States is initially operating at its
full-employment level of output and prices and wages are eventually flexible both upward and
downward. Construct a long-run AD-AS model to illustrate your answer.
Problem Set #18:
1. What are the three functions money serves in modern economy?
2. Why barter economy is inefficient?
3. How would an increase in nominal GDP change equilibrium interest rate in the money
market, all else equal? Construct a money market diagram to illustrate your answer.
Problem Set #19:
Assume that the following data characterize a hypothetical economy: money supply = $200
billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded
as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each
2-percentage-point fall in the interest rate.
1. What is the equilibrium interest rate? Explain.
2. At the equilibrium interest rate, what are the quantity of money supplied, the total
quantity of money demanded, the amount of money demanded for transactions, and
the amount of money demanded as an asset?
Problem Set #20:
Suppose Chemical Bank makes a loan of $100,000 to Al. Al uses the loan to buy a house from
Bob, and Bob deposits Al’s check into his account at Citibank. Show what happens at each stage
of this process to the deposit liabilities and the reserve of each of the two banks.
Problem Set #21:
Suppose Al has a checking account in Bank A, and Bob has a checking account in Bank B.
Banks A and B each have $100,000 in deposit liabilities and $30,000 in reserves, and the required
reserve ratio is 20%. Show what happens to each bank’s deposit liabilities, reserves, and excess
reserves if Al writes a check for $10,000 to Bob, Bob deposits the check into his account at Bank
B, and Bank B collects from Bank A.
Problem Set #22:
Suppose in the banking system as a whole, demand deposits are equal to $80,000,000 and
reserves are equal to $17,000,000 with a legal reserve ratio of 10%. If the Fed doubles the
required ratio, by how much will the money-creating potential (also known as the maximum
lending potential) of the banking system as a whole drop?
Problem Set #23:
Suppose the simplified consolidated balance sheet shown below is for the entire …
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