Final exam problems econ102 spring 2011

2. In order for something to function well as a medium of exchange, it must be
a. issued by a central government.
b. readily and widely accepted in trade.
c. backed by a valuable commodity.
d. All of the above are correct.
ANSWER: b

19.If a bank receives a new demand deposit of $10,000, and the legal reserve requirement is 20 
percent, then the bank can lend out
a. $2,000.
b. $10,000.
c. $40,000.
d. $8,000.
ANSWER: d $8,000.

28.If there is a recession, the Fed would most likely
a. encourage banks to provide loans by lowering the discount rate.
b. encourage banks to provide loans by raising the discount rate.
c. restrict bank lending by lowering the discount rate.
d. restrict bank lending by raising the discount rate.
ANSWER: a encourage banks to provide loans by lowering the discount rate.

8. According to classical economists
a. prices are rigid.
b. both velocity and real output are variable.
c. changes in the money supply cause changes in velocity.
d. the velocity of money is constant.
ANSWER: d the velocity of money is constant.

Which of the following is a major source of inflation in the United States?
a. faster growth of the money supply than growth in GDP
b. monopoly power
c. low productivity
d. government regulation
ANSWER: a faster growth of the money supply than growth in GDP

18.Studies of money demand indicate that the nominal demand for money
a. does not depend on interest rates.
b. does not depend on the price level.
c. is proportional to the price level.
d. is proportional to the nominal interest rate.
ANSWER: c is proportional to the price level.

116. Printing money to finance government expenditures

a. causes the value of money to rise.
b. imposes a tax on everyone who holds money.
c. is the principle method by which the U.S. government finances its expenditures.
d. None of the above is correct.
ANS: B PTS: 1 DIF: 1 REF: 17-1

118. Suppose that the United States unexpectedly decided to pay off its debt by
printing new money. Which of the
following would happen?
a. People who held money would feel poorer.
b. Prices would rise.
c. People who had lent money at a fixed interest rate would feel poorer.
d. All of the above are correct.
ANS: D

144. The inflation tax

a. transfers wealth from the government to households.
b. is the increase in income taxes due to lack of indexation.
c. is a tax on everyone who holds money.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 1 REF: 17-2

156. When deciding how much to save, people care most about
a. after-tax nominal interest rates.
b. after-tax real interest rates.
c. before-tax real interest rates.
d. before-tax nominal interest rates.
ANS: B PTS: 1 DIF: 1 REF:

2. Foreign-produced goods and services that are sold domestically are called
a. imports.
b. exports.
c. net imports.
d. net exports.
ANS: A PTS: 1 DIF: 1 REF: 18-1
5. Suppose that a country imports $100 million of goods and services and exports
$75 million of goods and services,
what is the value of net exports?
a. $175 million
b. $75 million
c. $25 million
d. -$25 million
ANS: D PTS: 1 DIF: 1 REF: 18-1

19. You buy a new car built in Sweden. Other things the same, your purchase by itself
a. raises both U.S. exports and U.S. net exports.
b. raises U.S. exports and lowers U.S. net exports.
c. raises both U.S. imports and U.S. net exports.
d. raises U.S. imports and lowers U.S. net exports.
ANS: D PTS: 1 DIF: 1 REF: 18-1

31. Net capital outflow refers to the purchase of

a. foreign assets by domestic residents minus the purchase of domestic assets by
foreign residents.
b. foreign assets by domestic residents minus the purchase of foreign goods and
services by domestic residents.
c. domestic assets by foreign residents minus the purchase of domestic goods and
services by foreign residents.
d. domestic assets by foreign residents minus the purchase of foreign assets by
domestic residents.
ANS: A PTS: 1 DIF: 1 REF: 18-1

34. Suppose that more Chinese decide to vacation in the U.S. and that the Chinese
purchase more U.S. Treasury bonds.
Ignoring how payments are made for these purchases,
a. the first action by itself raises U.S. net exports, the second action by itself raises
U.S. net capital outflow.
b. the first action by itself raises U.S. net exports, the second action by itself lowers
U.S. net capital outflow.
c. the first action by itself lowers U.S. net exports, the second action by itself raises
U.S. net capital outflow.
d. the first action by itself lowers U.S. net exports, the second action by itself lowers
U.S. net capital outflow.

35. Which of the following would be U.S. foreign direct investment?

a. A Swedish car manufacturer opens a plant in Tennessee.
b. A Dutch citizen buys shares of stock in a U.S. company.
c. A U.S. based hotel chain opens a new hotel in Brazil.
d. A U.S. citizen buys stock in companies located in Japan.
ANS: C PTS: 1 DIF: 1 REF: 18-1

46. Greg, a U.S. citizen, opens an ice cream store in Bermuda. His expenditures are
U.S.
a. foreign portfolio investment that increase U.S. net capital outflow.
b. foreign portfolio investment that decrease U.S. net capital outflow.
c. foreign direct investment that increase U.S. net capital outflow.
d. foreign direct investment that decrease U.S. net capital outflow.
ANS: C PTS: 1 DIF: 1 REF: 18-1

57. Net capital outflow

a. is always greater than net exports.
b. is always less than net exports.
c. is always equal to net exports.
d. could be any of the above.
ANS: C PTS: 1 DIF: 1 REF: 18-2

81. If a country has a trade surplus

a. it has positive net exports and positive net capital outflow.
b. it has positive net exports and negative net capital outflow.
c. it has negative net exports and positive net capital outflow.
d. it has negative net exports and negative net capital outflow.
ANS: A

82. If a country has a trade deficit

a. it has positive net exports and positive net capital outflow.
b. it has positive net exports and negative net capital outflow.
c. it has negative net exports and positive net capital outflow.
d. it has negative net exports and negative net capital outflow.
ANS: D PTS: 1 DIF: 2 REF: 18-2
86. Which of the following equations is correct?
a. S = I + C
b. S = I - NX
c. S = I + NCO
d. S = NX - NCO.
ANS: C

107. All saving in the U.S. economy shows up as

a. investment in the U.S. economy.
b. U.S. net capital outflow.
c. either investment in the U.S. economy or U.S. net capital outflow.
d. None of the above is correct.
ANS: C PTS: 1 DIF: 1 REF: 18-1

127. Other things the same, if the exchange rate changes from 115 yen per dollar to
125 yen per dollar, the dollar has
a. appreciated and so buys more Japanese goods.
b. appreciated and so buys fewer Japanese goods.
c. depreciated and so buys more Japanese goods.
d. depreciated and so buys fewer Japanese goods.
ANS: A

136. In late 2000, you could purchase about 400 drachma for a dollar. In late 2005
you could purchase about 280
drachma for a dollar. These exchange rates are given in
a. real terms and over this period the dollar appreciated.
b. real terms and over this period the dollar depreciated.
c. nominal terms and over this period the dollar appreciated.
d. nominal terms and over this period the dollar depreciated.
ANS: D PTS: 1 DIF: 2 REF: 18-2

139. Suppose the same basket of goods costs $100 in the U.S. and 50 pounds in
Britain. According to purchasing power
parity, what is the nominal exchange rate?
a. 2 pounds per dollar
b. 1 pound per dollar
c. 1/2 pound per dollar
d. None of the above is correct
ANS: C

4. The open-economy macroeconomic model examines the determination of

a. the output growth rate and the real interest rate.
b. unemployment and the exchange rate.
c. the output growth rate and the inflation rate.
d. the trade balance and the exchange rate.
ANS: D PTS: 1 DIF: 1 REF: 19-0

9. In the open-economy macroeconomic model, the supply of loanable funds comes

from
a. national saving.
b. private saving.
c. domestic investment.
d. the sum of domestic investment and net capital outflow.
ANS: A PTS: 1 DIF: 1 REF: 19-1

13. Other things the same, a higher real interest rate raises the quantity of
a. domestic investment.
b. net capital outflow.
c. loanable funds demanded.
d. loanable funds supplied.
ANS: D PTS: 1 DIF: 1 REF: 19-1

31. Which of the following would make both the equilibrium interest rate and the
equilibrium quantity of loanable
funds decrease?
a. The demand for loanable funds shifts right.
b. The demand for loanable funds shifts left.
c. The supply of loanable funds shifts right.
d. The supply of loanable funds shifts left.
ANS: B PTS: 1 DIF: 2 REF: 19-1

57. The amount of dollars demanded in the market for foreign-currency exchange at
a given real exchange rate
increases if
a. either U.S. imports or exports increase.
b. either U.S. imports or exports decrease.
c. either U.S. imports increase or U.S. exports decrease.
d. either U.S. imports decrease or U.S. exports increase.
ANS: D PTS: 1 DIF: 2 REF: 19-1

59. The price that balances supply and demand in the market for foreign-currency
exchange in the open-economy
macroeconomic model is the
a. nominal exchange rate.
b. nominal interest rate.
c. real exchange rate.
d. real interest rate.
ANS: C

74. Other things the same, if the Canadian real interest rate were to increase,
Canadian net capital outflow
a. and net capital outflow of other countries would rise.
b. and net capital outflow of other countries would fall.
c. would rise, while net capital outflow of other countries would fall.
d. would fall, while net capital outflow of other countries would rise.
ANS: D PTS: 1 DIF: 1 REF: 19-2

Example:
When U.S. government U.S. real interest rate increases US domestic
investment decreases
budget deficit
increases

U.S. net
Capital US real
outflow falls exchange rate of domestic currency appreciates US
trade balance falls

S = I + NCO
I = S – NCO NCO = S – I
Y = C + I + G + NCO
NX = NCO
.

122. The aggregate supply curve is upward sloping rather than vertical in
a. the short and long run.
b. neither the short nor the long run.
c. the long run, but not the short run.
d. the short run, but not the long run.
ANS: C PTS: 1 DIF: 1 REF: 20-4
127. The long-run aggregate supply curve
a. is vertical.
b. is a graphical representation of the classical dichotomy.
c. indicates monetary neutrality in the long run.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 1 REF: 20-4
An increase in which of the following, other things the same, shifts aggregate
demand to the right?
a. consumption
b. investment
c. government expenditures
d. All of the above are correct.
ANS: D PTS: 1 DIF: 1 REF: 20-3
. When the money supply increases
a. interest rates fall and so aggregate demand shifts right.
b. interest rates fall and so aggregate demand shifts left.
c. interest rates rise and so aggregate demand shifts right.
d. interest rates rise and so aggregate demand shifts left.
ANS: A PTS: 1 DIF: 2 REF: 20-3
TOP: Aggregate demand shifts | Money supply MSC: Analytical
145. According to the aggregate demand and aggregate supply model, in the long
run an increase in the money supply leads to
a. increases in both the price level and real GDP.
b. an increase in real GDP but does not change the price level.
c. an increase in the price level but does not change real GDP.
d. no change in either the price level or real GDP.
ANS: C PTS: 1 DIF: 2 REF: 20-4
179. Which of the following shifts both the short-run and long-run aggregate supply
right?
a. an increase in the actual price level
b. an increase in the expected price level
c. an increase in the capital stock
d. None of the above is correct.
ANS: C PTS: 1 DIF: 2 REF: 20-4
TOP: Short-run aggregate supply shifts MSC: Applicative
160. The sticky-price theory of the short-run aggregate supply curve says that if the
price level rises by 5% and people
were expecting it to rise by 2%, then firms have
a. higher than desired prices which increases their sales.
b. higher than desired prices which depresses their sales.
c. lower than desired prices which increases their sales.
d. lower than desired prices which depresses their sales.
ANS: C PTS: 1 DIF: 2 REF: 20-4
40. Which of the following would shift long-run aggregate supply to the right?
a. increased immigration from abroad
b. a decrease in the price of an imported natural resource
c. opening the economy to international trade
d. All of the above are correct.
ANS: D PTS: 1 DIF: 1 REF: 20-4
TOP: Long-run aggregate supply shifts MSC: Applicative