practice exam 3 ECON 101-03

Due Monday November 10, 2011 by 11:00am. Comp ete t!e "ir#t 100 $ue#tion# on a %reen #cantron t!at !a# &0 #pace# on t!e "ront and t!e a#t &0 on t!e bac'.

(rue)*a #e Indicate whether the statement is true or false. (circle A for true, B for false) ___T_ 1. Within the U.S. population, women have higher rates of unemployment than men. __F__ 2. The Bureau of La or Statisti!s" U#$ measure of %o lessness is the offi!ial unemployment rate. __T__ &. The Bureau of La or Statisti!s" U#$ measure of %o lessness in!lu'es marginally atta!he' wor(ers. __T__ ). Se!toral shifts temporarily !ause unemployment. __T__ $. *u li! poli!y, without inten'ing to 'o so, !an in!rease fri!tional unemployment. __T__ +. ,!!or'ing to the theory of effi!ien!y wages, firms operate more effi!iently if wages are a ove the e-uili rium level. __T__ .. /ffi!ien!y wages !reate stru!tural unemployment. ___T_ 0. 1ar! puts pri!es on surf oar's an' s(ate oar's at his sporting goo's store. 2e is using money as a unit of a!!ount. ____ 3. ,n in!rease in the reserve re-uirement ratio in!reases reserves an' 'e!reases the money supply.

___F_ 14. Suppose the nominal interest rate is 14 per!ent, the ta5 rate on interest in!ome is 20 per!ent, an' the inflation rate is + per!ent. Then the after#ta5 real interest rate is #&.2 per!ent. ___T_ 11. Suppose the nominal interest rate is $ per!ent, the ta5 rate on interest in!ome is &4 per!ent, an' the after#ta5 real interest rate is 4.0 per!ent. Then the inflation rate is 2.. per!ent. ____ 12. 6n the late 1044"s 'eflation !ause' farmers to suffer as the fall in !rop pri!es re'u!e' their in!ome an' thus their a ility to pay off their 'e ts. __T_ 1&. 6f the e5!hange rate is 12.$ pesos per U.S. 'ollar, it is also 1712.$ U.S. 'ollars per peso. ____ 1). 6f the pri!e of a goo' in the U.S. is 814, the e5!hange rate is 2 units of foreign !urren!y per 'ollar, an' the foreign pri!e of the same goo' is &4 units of foreign !urren!y, then the real e5!hange rate is 27&. Mu tip e C!oice Identify the choice that best completes the statement or answers the question. ___9_ 1$. 1easuring unemployment is the %o of the a. :ongressional Bu'get ;ffi!e. . 9epartment of :ommer!e. !. :oun!il of /!onomi! ,'visers.

'. Bureau of La or Statisti!s. ____, 1+. The Bureau of La or Statisti!s pro'u!es 'ata on unemployment an' other aspe!ts of the la or mar(et from a regular survey of househol's, !alle' the a. :ensus. . La or Survey. !. Survey of /!onomi! 6n'i!ators. '. :urrent *opulation Survey. ___B_ 1.. Who of the following is not in!lu'e' in the Bureau of La or Statisti!s< =employe'> !ategory? a. those who wor(e' in their own usiness . those who wor(e' as unpai' wor(ers in a family mem er<s usiness !. those waiting to e re!alle' to a %o from whi!h they ha' een lai' off '. those who were temporarily a sent from wor( e!ause of va!ation. ___:_ 10. Whi!h of the following is !orre!t? a. La or for!e @ num er of employe'. . La or for!e @ population # num er of unemploye'. !. Unemployment Aate @ num er of unemploye' unemploye'D 144. '. Unemployment Aate @ num er of unemploye' Bnum er of employe' C num er of a'ult population 144.

____ 13. 6n 2443, ase' on !on!epts similar to those use' to estimate U.S. employment figures, the Eapanese a'ult non# institutionaliFe' population was 114.2.2 million, the la or for!e was +$.&+2 million, an' the num er of people employe' was +2.2)2 million. ,!!or'ing to these num ers, the Eapanese la or#for!e parti!ipation rate an' unemployment rate were a out a. $+.)G an' 2.0G. . $+.)G an' ).0G. !. $3.&G an' 2.0G. '. $3.&G an' ).0G. Table 28-1 La or 9ata for ,ri'ia +ear ,'ult population 2010 2444 2011 &444 2012 &244

Hum er of employe' Hum er of unemploye'

1)44 244

1&44 +44

1+44 244

____ 24. ,e"er to (ab e 2--1. The la or for!e of ,ri'ia in 2414 was a. 1)44. . 1+44. !. 1044. '. 2444. ____ 21. ,e"er to (ab e 2--1. The la or#for!e parti!ipation rate of ,ri'ia a. in!rease' from 2414 to 2411 an' in!rease' from 2411 to 2412. . in!rease' from 2414 to 2411 an' 'e!rease' from 2411 to 2412. !. 'e!rease' from 2414 to 2411 an' in!rease' from 2411 to 2412. '. 'e!rease' from 2414 to 2411 an' 'e!rease' from 2411 to 2412. ____ 22. Sin!e 13+4, the natural rate of unemployment in the U.S. has een etween a. 4.) an' 4.+ per!ent. . ) an' + per!ent. !. + an' 12 per!ent. '. 12 an' 2) per!ent. B____ 2&. 1arginally atta!he' wor(ers are people who a. are loo(ing for a etter %o than they !urrently have. . are not wor(ing an' are not loo(ing for wor(, ut woul' wor( if as(e'. !. are wor(ing part#time while they go to s!hool or get training for a etter %o . '. are only a few years from retirement. ____ 2). ,'am is loo(ing for a %o in mar(eting. 2e has ha' some offers an' his prospe!ts are promising ut he"s not yet a!!epte' a %o . ,man'a lost her %o wor(ing for 1er!ury Bi!y!les e!ause many !ustomers 'e!i'e' they prefer i!y!les manufa!ture' y Ultimate Bi!y!les instea'. Who is fri!tionally unemploye'? a. ,'am ut not ,man'a . ,man'a ut not ,'am !. ,'am an' ,man'a '. neither ,man'a nor ,'am

____ 2$. San'y has gra'uate' from !ollege an' is 'evoting her time to sear!hing for a %o . She has seen plenty of openings, ut has not yet een offere' one that est suits her tastes an' s(ills. San'y is a. stru!turally unemploye'. Stru!tural unemployment e5ists even in the long run. . stru!turally unemploye'. There is no stru!tural unemployment in the long run. !. fri!tionally unemploye'. Fri!tional unemployment e5ists even in the long run. '. fri!tionally unemploye'. There is no fri!tional unemployment in the long run. ____ 2+. Whi!h of the following 'oes not help re'u!e fri!tional unemployment? a. government#run employment agen!ies . pu li! training programs !. unemployment insuran!e '. ,ll of the a ove help re'u!e fri!tional unemployment. ____ 2.. Whi!h of the following is !orre!t? a. Unemployment insuran!e raises stru!tural unemployment e!ause it re'u!es the %o sear!h efforts of the unemploye'. . 1ost e!onomists are s(epti!al of the value of unemployment insuran!e primarily e!ause they elieve that it results in a poorer mat!h etween wor(ers an' %o s. !. Stu'ies show that when the unemploye' e!ome ineligi le for enefits, the pro a ility of their fin'ing a %o rises mar(e'ly. '. ,ll of the a ove are !orre!t. ____ 20. When a minimum#wage law for!es the wage to remain a ove the level that alan!es supply an' 'eman', it a. raises the -uantity of la or supplie' an' raises the -uantity of la or 'eman'e' !ompare' to the e-uili rium level. . raises the -uantity of la or supplie' an' re'u!es the -uantity of la or 'eman'e' !ompare' to the e-uili rium level. !. re'u!es the -uantity of la or supplie' an' raises the -uantity of la or 'eman'e' !ompare' to the e-uili rium level. '. re'u!es the -uantity of la or supplie' an' re'u!es the -uantity of la or 'eman'e' !ompare' to the e-uili rium level. Figure 28-1

14 3 0 . + $ ) & 2 1

wage S

14

24

&4

)4

$4

+4

.4

04

34

hundreds of workers

____ 23. ,e"er to *i%ure 2--1. 6f the government imposes a minimum wage of 8), then unemployment will in!rease y a. 4 wor(ers. . 2444 wor(ers. !. )444 wor(ers. '. $444 wor(ers. ____ &4. Whi!h of the following is !orre!t? a. 6n the U.S. it is only among the least s(ille' an' least e5perien!e' mem ers of the la or for!e that minimum#wage laws !ause unemployment. Unions may (eep wages a ove their e-uili rium level. . 6n the U.S. it is only among the least s(ille' an' least e5perien!e' mem ers of the la or for!e that minimum#wage laws !ause unemployment. Unions !annot (eep wages a ove their e-uili rium level. !. 6n the U.S. minimum#wage laws !ause unemployment even for people with high s(ills an' mu!h e5perien!e. Unions may (eep wages a ove their e-uili rium level. '. 6n the U.S. minimum#wage laws !ause unemployment even for people with high s(ills an' mu!h e5perien!e. Unions !annot (eep wages a ove their e-uili rium level. ____ &1. When the wage is a ove the e-uili rium level, a. the la or mar(et is fun!tioning more effi!iently than it otherwise woul' fun!tion. . there is a shortage of la or. !. the -uantity of la or supplie' e5!ee's the -uantity of la or 'eman'e'. '. %o sear!h is the primary e5planation for the unemployment that is o serve'. ____ &2. Whi!h of the following is not !orre!t?

a. When a union is present in a la or mar(et, wages are 'etermine' y the e-uili rium of supply an' 'eman'. . Li(e any !artel, a union is a group of sellers a!ting together in the hope of e5erting their %oint mar(et power. !. The pro!ess y whi!h unions an' firms agree on the terms of employment is !alle' !olle!tive argaining. '. 1ost wor(ers in the U.S. e!onomy are not mem ers of a union. ____ &&. Unions a. raise the wages of unioniFe' wor(ers an' raise unemployment. . raise the wages of unioniFe' wor(ers an' re'u!e unemployment. !. re'u!e the wages of unioniFe' wor(ers an' raise unemployment. '. re'u!e the wages of unioniFe' wor(ers an' re'u!e unemployment. ____ &). 6f there were no fa!tors (eeping wages from rea!hing e-uili rium then there woul' e no a. !y!li!al unemployment. . fri!tional unemployment. !. stru!tural unemployment. '. natural rate of unemployment. ____ &$. /ffi!ien!y wages, minimum#wage laws, an' unions all a. (eep wages elow the e-uili rium level, !ausing a shortage of la or. . (eep wages elow the e-uili rium level, !ausing a surplus of la or. !. (eep wages a ove the e-uili rium level, !ausing a shortage of la or. '. (eep wages a ove the e-uili rium level, !ausing a surplus of la or. ____ &+. :onsi'er five in'ivi'uals with 'ifferent o!!upations. ,llen Betty :alvin 9ie're /ri! prepares ta5es 'oes 'ry !leaning fi5es !omputers a(es rea' ar e!ues ri s wants ri s wants !omputer fi5e' wants rea' wants ta5es prepare' wants 'ry !leaning

6n a arter system whi!h of the following pairs has a 'ou le !oin!i'en!e of wants? a. ,llen an' /ri! . 9ie're an' :alvin

!. Both , an' B are !orre!t. '. Hone of the a ove are !orre!t. ____ &.. The ease with whi!h an asset !an e a. tra'e' for another asset 'etermines whether or not that asset is a unit of a!!ount. . transporte' from one pla!e to another 'etermines whether or not that asset !oul' serve as fiat money. !. !onverte' into a store of value 'etermines the li-ui'ity of that asset. '. !onverte' into the e!onomy"s me'ium of e5!hange 'etermines the li-ui'ity of that asset. ____ &0. *risoners sometimes 'etermine a single goo' to e use' as money. This goo' e!omes a. a me'ium of e5!hange an' a unit of a!!ount. . a me'ium of e5!hange, ut not a unit of a!!ount. !. a unit of a!!ount, ut not a me'ium of e5!hange. '. neither a unit of a!!ount nor a me'ium of e5!hange. ____ &3. Whi!h of the following items is in!lu'e' in 12? a. !re'it !ar's . money mar(et mutual fun's !. !orporate on's '. large time 'eposits ____ )4. Whi!h of the following is not in!lu'e' in either 11 or 12? a. money mar(et 'eposit a!!ounts . large time 'eposit !. 'eman' 'eposits '. money mar(et mutual fun's ____ )1. Small time 'eposits are in!lu'e' in a. 11 ut not 12. . 12 ut not 11. !. 11 an' 12. '. neither 11 nor 12. ____ )2. Whi!h of the following is !orre!t?

a. The Fe'eral Aeserve has 1) regional an(s. The Boar' of Iovernors has 12 mem ers who serve .#year terms. . The Fe'eral Aeserve has 1) regional an(s. The Boar' of Iovernors has . mem ers who serve 1)#year terms. !. The Fe'eral Aeserve has 12 regional an(s. The Boar' of Iovernors has 12 mem ers who serve .#year terms. '. The Fe'eral Aeserve has 12 regional an(s. The Boar' of Iovernors has . mem ers who serve 1)#year terms. ____ )&. Whi!h of the following statements regar'ing the Fe'eral ;pen 1ar(et :ommittee is !orre!t? a. ;nly the five voting regional Fe' presi'ents atten' the meetings. . ,ll regional Fe' presi'ents atten' an' vote at the meetings. !. ,ll regional Fe' presi'ents atten' the meetings, ut only five get to vote. '. Aegional Fe' presi'ents may neither atten' nor vote the meetings. ____ )). When !on'u!ting an open#mar(et pur!hase, the Fe' a. uys government on's, an' in so 'oing in!reases the money supply. . uys government on's, an' in so 'oing 'e!reases the money supply.

!. sells government on's, an' in so 'oing in!reases the money supply. '. sells government on's, an' in so 'oing 'e!reases the money supply. ____ )$. When the Fe'eral Aeserve sells assets from its portfolio to the pu li! with the intent of !hanging the money supply, a. those assets are government on's an' the Fe'"s reason for selling them is to in!rease the money supply. . those assets are government on's an' the Fe'"s reason for selling them is to 'e!rease the money supply. !. those assets are items that are in!lu'e' in 12 an' the Fe'"s reason for selling them is to in!rease the money supply. '. those assets are items that are in!lu'e' in 12 an' the Fe'"s reason for selling them is to 'e!rease the money supply. ____ )+. , an( whi!h must hol' 144 per!ent reserves opens in an e!onomy that ha' no an(s an' a !urren!y of 8144. 6f !ustomers 'eposit 8$4 into the an(, what is the value of the money supply? a. 8$4 . 8144

!. 81$4 '. 8244 ____ ).. , an( loans Jellie<s *rint Shop 8&$4,444 to remo'el a uil'ing near !ampus to use as a new store. ;n their respe!tive alan!e sheets, this loan is a. an asset for the an( an' a lia ility for Jellie<s *rint Shop. The loan in!reases the money supply. . an asset for the an( an' a lia ility for Jellie<s *rint Shop. The loan 'oes not in!rease the money supply. !. a lia ility for the an( an' an asset for Jellie<s *rint Shop. The loan in!reases the money supply. '. a lia ility for the an( an' an asset for Jellie<s *rint Shop. The loan 'oes not in!rease the money supply. ____ )0. , an( has a 14 per!ent reserve re-uirement, 8),444 in 'eposits, an' has loane' out all it !an given the reserve re-uirement. a. 6t has 8)4 in reserves an' 8&,3+4 in loans. . 6t has 8)44 in reserves an' 8&,+44 in loans. !. 6t has 8))) in reserves an' 8&,$$+ in loans. '. Hone of the a ove is !orre!t. (ab e 2.-2. ,n e!onomy starts with 814,444 in !urren!y. ,ll of this !urren!y is 'eposite' into a single an(, an' the an( then ma(es loans totaling 83,2$4. The T#a!!ount of the an( is shown elow. ,ssets Aeserves Loans 8.$4 3,2$4 Lia ilities 9eposits 814,444

____ )3. ,e"er to (ab e 2.-2. 6f all an(s in the e!onomy have the same reserve ratio as this an(, then an in!rease in reserves of 81$4 for this an( has the potential to in!rease 'eposits for all an(s y a. 80++.+.. . 81,+++.+.. !. 82,444.44. '. an infinite amount. (ab e 2.-3. (!e *ir#t /an' o" *air"ie d ,ssets Lia ilities

Aeserves Loans

82,444 0,444

9eposits

814,444

____ $4. ,e"er to (ab e 2.-3. 6f 81,444 is 'eposite' into the First Ban( of Fairfiel', an' the an( ta(es no other a!tions, its a. reserves will in!rease y 8244. . lia ilities will 'e!rease y 81,444. !. assets will in!rease y 81,444. '. reserves will in!rease y 8044. ____ $1. When the Fe' !on'u!ts open#mar(et pur!hases, a. an(s uy Treasury se!urities from Fe', whi!h in!reases the money supply. . an(s uy Treasury se!urities from the Fe', whi!h 'e!reases the money supply.

!. it uys Treasury se!urities, whi!h in!reases the money supply. '. it uys Treasury se!urities, whi!h 'e!reases the money supply. ____ $2. The Fe'"s primary tool to !hange the money supply is a. !hanging the interest rate on reserves. . !hanging the reserve re-uirement. !. !on'u!ting open mar(et operations. '. re'eeming Fe'eral Aeserve notes. ____ $&. 6f people 'e!i'e to hol' more !urren!y relative to 'eposits, the money supply a. falls. The larger the reserve ratio is, the more the money supply falls. . falls. The larger the reserve ratio is, the less the money supply falls. !. rises. The larger the reserve ratio is, the more the money supply rises. '. rises. The larger the reserve ratio is, the less the money supply rises. (ab e 2.-0 1etropolis Hational Ban( is !urrently hol'ing 2G of its 'eposits as e5!ess reserves. Metropo i# Nationa /an' ,ssets Aeserves Loans 8+4,444 8))4,444 9eposits Lia ilities 8$44,444

____ $). ,e"er to /a ance 1!eet o" Metropo i# Nationa /an'. 1etropolis Hational Ban( is !urrently hol'ing 2G of 'eposits as e5!ess reserves. ,ssuming that all an(s have the same re-uire' reserve ratio, an' then none want to hol' e5!ess reserves what is the value of the money multiplier? a. 0.2$ . 14 !. 12 '. 24 1cenario 2.-2. The 1onetary *oli!y of TaFi is !ontrolle' y the !ountry"s !entral an( (nown as the Ban( of TaFi. The lo!al unit of !urren!y is the taF. ,ggregate an(ing statisti!s show that !olle!tively the an(s of TaFi hol' &44 million taFes of re-uire' reserves, .$ million taFes of e5!ess reserves, have issue' .,$44 million taFes of 'eposits, an' hol' 22$ million taFes of TaFian Treasury on's. TaFians prefer to use only 'eman' 'eposits an' so all money is on 'eposit at the an(. ____ $$. Aefer to 1cenario 2.-2. ,ssuming the only other thing TaFian an(s have on their alan!e sheets is loans, what is the value of e5isting loans ma'e y TaFian an(s? a. +,344 million taFes . .,12$ million taFes !. .,&$4 million taFes '. Hone of the a ove is !orre!t. ____ $+. To in!rease the money supply, the Fe' !oul' a. sell government on's. . 'e!rease the 'is!ount rate. !. in!rease the reserve re-uirement. '. Hone of the a ove is !orre!t. ____ $.. Whi!h of the following will not help to prevent an( runs? a. government insuran!e of 'eposits . fra!tional reserve an(ing !. 144G reserve an(ing '. ,ll of the a ove prevent an( runs. ____ $0. ;ver the past .4 years, pri!es in the U.S. have risen on average a out a. 2 per!ent per year. . ) per!ent per year. !. + per!ent per year.

'. 0 per!ent per year. ____ $3. When the pri!e level falls, the num er of 'ollars nee'e' to uy a representative as(et of goo's a. in!reases, so the value of money rises. . in!reases, so the value of money falls. !. 'e!reases, so the value of money rises. '. 'e!reases, so the value of money falls. ____ +4. When the money mar(et is 'rawn with the value of money on the verti!al a5is, if the pri!e level is a ove the e-uili rium level, there is an a. e5!ess 'eman' for money, so the pri!e level will rise. . e5!ess 'eman' for money, so the pri!e level will fall. !. e5!ess supply of money, so the pri!e level will rise. '. e5!ess supply of money, so the pri!e level will fall. ____ +1. When the money mar(et is 'rawn with the value of money on the verti!al a5is, an in!rease in the money supply shifts the money supply !urve to the a. right, lowering the pri!e level. . right, raising the pri!e level. !. left, raising the pri!e level. '. left, lowering the pri!e level. ____ +2. :onsi'er the money mar(et 'rawn with the value of money on the verti!al a5is. 6f money 'eman' is un!hange' an' the pri!e level rises, then a. the money supply must have in!rease', perhaps e!ause the Fe' ought on's. . the money supply must have in!rease', perhaps e!ause the Fe' sol' on's. !. the money supply must have 'e!rease', perhaps e!ause the Fe' ought on's. '. the money supply must have 'e!rease', perhaps e!ause the Fe' sol' on's. ____ +&. Suppose there is a surplus in the money mar(et. a. This !oul' have een !reate' y an in!rease in the money supply. The value of money will rise. . This !oul' have een !reate' y an in!rease in the money supply. The value of money will fall. !. This !oul' have een !reate' y a 'e!rease in the money supply. The value of money will rise.

'. This !oul' have een !reate' y a 'e!rease in the money supply. The value of money will fall. ____ +). The pri!e level falls if either a. money 'eman' or money supply shifts rightwar'. . money 'eman' shifts rightwar' or money supply shifts leftwar'. !. money 'eman' shifts leftwar' or money supply shifts rightwar'. '. money 'eman' or money supply shifts leftwar'. Figure 30-1

____ +$. ,e"er to *i%ure 30-1. 6f the money supply is M 2 an' the value of money is 2, then there is an e5!ess a. 'eman' for money that is represente' y the 'istan!e etween points , an' :. . 'eman' for money that is represente' y the 'istan!e etween points , an' B. !. supply of money that is represente' y the 'istan!e etween points , an' :. '. supply of money that is represente' y the 'istan!e etween points , an' B. *i%ure 30-2. ;n the graph, 1S represents the money supply an' 19 represents money 'eman'. The usual -uantities are measure' along the a5es.

1.12$ 1 4.0.$ 4..$ 4.+2$ 4.$ 4.&.$ 4.2$ 4.12$

1S

192 191

$,444

____ ++. ,e"er to *i%ure 30-2. 6f the relevant money#'eman' !urve is the one la ele' 191, then the e-uili rium value of money is a. 4.$ an' the e-uili rium pri!e level is 2. . 2 an' the e-uili rium pri!e level is 4.$. !. 4.$ an' the e-uili rium pri!e level !annot e 'etermine' from the graph. '. 2 an' the e-uili rium pri!e level !annot e 'etermine' from the graph. ____ +.. The pri!e level is a a. relative varia le. . 'i!hotomous varia le !. real varia le. '. nominal varia le. ____ +0. ,n asso!iate professor of physi!s gets a 8244 a month raise. She figures that with her new monthly salary she !an uy more goo's an' servi!es than she !oul' uy last year. a. 2er real an' nominal salary have risen. . 2er real an' nominal salary have fallen. !. 2er real salary has risen an' her nominal salary has fallen. '. 2er real salary has fallen an' her nominal salary has risen. ____ +3. 6f M @ &,444, ! @ 2, an' " @ +,444, what is velo!ity? a. 172.

. 1. !. ). '. Hone of the a ove is !orre!t. ____ .4. The inflation ta5 a. is an alternative to in!ome ta5es an' government orrowing. . ta5es most those who hol' the most money. !. is the revenue !reate' when the government prints money. '. ,ll of the a ove are !orre!t. ____ .1. Walter puts money in a savings a!!ount at his an( earning &.$ per!ent. ;ne year later he ta(es his money out an' notes that while hus money was earning interest, pri!es rose 1.$ per!ent. Walter earne' a nominal interest rate of a. &.$ per!ent an' a real interest rate of $ per!ent. . &.$ per!ent an' a real interest rate of 2 per!ent. !. $ per!ent an' a real interest rate of &.$ per!ent '. $ per!ent an' a real interest rate of 2 per!ent ____ .2. The Fisher effe!t a. says the government !an generate revenue y printing money. . says there is a one for one a'%ustment of the nominal interest rate to the inflation rate. !. e5plains how higher money supply growth lea's to higher inflation. '. e5plains how pri!es a'%ust to o tain e-uili rium in the money mar(et. ____ .&. Kou put money into an a!!ount an' earn a real interest rate of + per!ent. 6nflation is 2 per!ent, an' your marginal ta5 rate is 24 per!ent. What is your after#ta5 real rate of interest? a. ).0 per!ent . &.2 per!ent !. 2.0 per!ent '. Hone of the a ove is !orre!t. ____ .). The !ountry of Lessi'inia has a ta5 system i'enti!al to that of the Unite' States. Suppose someone in Lessi'inia ought a par!el of lan' for 24,444 fo!i Bthe lo!al !urren!yD in 13+4 when the pri!e in'e5 e-uale' 144. 6n 2442, the person sol' the lan' for 144,444 fo!i, an' the pri!e in'e5 e-uale' +44. The ta5 rate on nominal gains was 24 per!ent. :ompute the ta5es on the nominal gain an' the !hange in the real value of the lan' in terms of 2442 pri!es to fin' the after#ta5 real rate of !apital gain.

a. #+4 per!ent . #&4 per!ent !. &4 per!ent '. +4 per!ent ____ .$. 6f the e!onomy une5pe!te'ly went from inflation to 'eflation, a. oth 'e tors an' !re'itors woul' have re'u!e' real wealth. . oth 'e tors an' !re'itors woul' have in!rease' real wealth.

!. 'e tors woul' gain at the e5pense of !re'itors. '. !re'itors woul' gain at the e5pense of 'e tors. ____ .+. 1arta len's money at a fi5e' interest rate an' then inflation turns out to e higher than she ha' e5pe!te' it to e. The real interest rate she earns is a. higher than she ha' e5pe!te', an' the real value of the loan is higher than she ha' e5pe!te'. . higher than she ha' e5pe!te', an' the real value of the loan is lower than she ha' e5pe!te'. !. lower than she ha' e5pe!te', an' the real value of the loan is higher than she ha' e5pe!te'. '. lower then she ha' e5pe!te', an' the real value of the loan is lower than she ha' e5pe!te'. ____ ... Bill, a U.S. !itiFen, pays a Spanish ar!hite!t to 'esign a metal !asting fa!tory. Whi!h !ountry"s e5ports in!rease? a. Spain"s . the U.S."s !. Spain"s an' the U.S."s '. neither Spain"s nor the U.S."s (ab e 31-1 Ioo's *ur!hase' , roa' Sol' , roa' Bolivian Tra'e Flows Servi!es 8)4 illion *ur!hase' , roa' 814 illion Sol' , roa' 824 illion 82$ illion

____ .0. ,e"er to (ab e 31-1. What are Bolivia"s e5ports? a. 8+4 illion

. 8&$ illion !. 814 illion '. Hone of the a ove are !orre!t. ____ .3. Suppose that foreign !itiFens 'e!i'e to pur!hase more U.S. pharma!euti!als an' U.S. !itiFens 'e!i'e to uy more sto!( in foreign !orporations. ;ther things the same, these a!tions a. raise oth U.S. net e5ports an' U.S. net !apital outflows. . raise U.S. net e5ports an' lower U.S. net !apital outflows. !. lower oth U.S. net e5ports an' U.S. net !apital outflows. '. lower U.S. net e5ports an' raise U.S. net !apital outflows. ____ 04. 1ar(, a U.S. !itiFen, uys sto!( in a British Shipping !ompany. This pur!hase is an e5ample of a. investment for 1ar( an' U.S. foreign 'ire!t investment. . investment for 1ar( an' U.S. foreign portfolio investment. !. saving for 1ar( an' U.S. foreign 'ire!t investment. '. saving for 1ar( an' U.S. foreign portfolio investment. ____ 01. :atherine, a !itiFen of Spain, 'e!i'es to pur!hase on's issue' y :hile instea' of ones issue' y the Unite' States even though the :hilean on's have a higher ris( of 'efault. ,n e!onomi! reason for her 'e!ision might e that a. she 'isli(es U.S. foreign poli!y. . the :hilean on's pay a higher rate of interest. !. the U.S. government is more sta le than the :hilean government. '. Hone of the a ove provi'e an e!onomi! reason for uying the ris(ier on'. ____ 02. 6f a !ountry !hanges its !orporate ta5 laws so that 'omesti! usinesses uil' an' manage more usiness in other !ountries, then the net !apital outflow of that !ountry a. an' the net !apital outflow of other !ountries rise. . rises an' the net !apital outflow of other !ountries fall. !. falls an' the net !apital outflow of other !ountries rise. '. Hone of the a ove are !orre!t. ____ 0&. When the Sy(es :orporation Ban ,meri!an !ompanyD uys shares of ,u'i sto!( Ba Ierman !ompanyD for its pension fun', U.S. net !apital outflow a. in!reases e!ause an ,meri!an !ompany ma(es a portfolio investment in Iermany. . 'e!lines e!ause an ,meri!an !ompany ma(es a portfolio investment in Iermany.

!. in!reases e!ause an ,meri!an !ompany ma(es a 'ire!t investment in Iermany. '. 'e!lines e!ause an ,meri!an !ompany ma(es a 'ire!t investment in Iermany. ____ 0). 6f saving is greater than 'omesti! investment, then a. there is a tra'e 'efi!it an' K L : C 6 C I. . there is a tra'e 'efi!it an' K M : C 6 C I. !. there is a tra'e surplus an' K L : C 6 C I. '. there is a tra'e surplus an' K M : C 6 C I. ____ 0$. , British gro!ery !hain uses previously o taine' U.S. 'ollars to pur!hase apples from the Unite' States. This transa!tion a. in!reases British net !apital outflow, an' in!reases U.S. net e5ports. . in!reases British net !apital outflow, an' 'e!reases U.S. net e5ports. !. 'e!reases British net !apital outflow, an' in!reases U.S. net e5ports. '. 'e!reases British net !apital outflow, an' 'e!reases U.S. net e5ports. ____ 0+. , !ountry has a tra'e 'efi!it. 6ts a. net !apital outflow must e positive, an' saving is larger than investment. . net !apital outflow must e positive an' saving is smaller than investment. !. net !apital outflow must e negative an' saving is larger than investment. '. net !apital outflow must e negative an' saving is smaller than investment. ____ 0.. The U.S. has a tra'e surplus. Whi!h of the following is !orre!t? a. !apital is flowing into the U.S. an' S L 6 . !apital is flowing into the U.S. an' S M 6 !. !apital is flowing out of the U.S. an' S L 6 '. !apital is flowing out of the U.S. an' S M 6 ____ 00. 6f Eapan"s national saving e5!ee's its 'omesti! investment, then Eapan has a. positive net !apital outflows an' negative net e5ports. . positive net !apital outflows an' positive net e5ports. !. negative net !apital outflows an' negative net e5ports. '. negative net !apital outflows an' positive net e5ports.

____ 03. 6n an open e!onomy, gross 'omesti! pro'u!t e-uals 81,0$4 illion, !onsumption e5pen'iture e-uals 83.$ illion, government e5pen'iture e-uals 822$ illion, investment e-uals 8$44 illion, an' net e5ports e-uals 81$4 illion. What is national savings? a. 84 . 8$44 illion !. 8+$4 illion '. 83.$ illion ____ 34. 1ost of the !hange from 2444 to 244+ in U.S. net !apital outflow as a per!ent of I9* was 'ue to aBnD a. 'e!rease in U.S. investment. . 'e!rease in U.S. national saving. !. in!rease in U.S. investment. '. in!rease in U.S. national saving. ____ 31. 6f you are va!ationing in Fran!e an' the 'ollar 'epre!iates relative to the euro, then a. the 'ollar uys more euros. 6t will ta(e fewer 'ollars to uy a goo' that !osts $4 euros. . the 'ollar uys more euros. 6t will ta(e more 'ollars to uy a goo' that !osts $4 euros. !. the 'ollar uys fewer euros. 6t will ta(e fewer 'ollars to uy a goo' that !osts $4 euros. '. the 'ollar uys fewer euros. 6t will ta(e more 'ollars to uy a goo' that !osts $4 euros. ____ 32. 6f a 'ollar !urrently pur!hases 12.$ pesos an' someone fore!asts that in a year it will e 1) pesos, then the fore!ast is given in a. real terms an' implies the 'ollar will appre!iate. . real terms an' implies the 'ollar will 'epre!iate. !. nominal terms an' implies the 'ollar will appre!iate. '. nominal terms an' implies the 'ollar will 'epre!iate. ____ 3&. The nominal e5!hange rate is 2 Bar a'os 'ollars per U.S. 'ollar. 6f the pri!e of a goo' in Bar a'os is & Bar a'os 'ollars an' the pri!e in the U.S. is 2 U.S. 'ollars, what is the real e5!hange rate to the nearest 144th? a. & Bar a'os goo's per U.S. goo' . 1.&& Bar a'os goo's per U.S. goo' !. ..$ Bar a'os goo's per U.S. goo' '. none of the a ove is !orre!t

____ 3). 6n the U.S. a 'igital !amera !osts 8244. The same !amera in Lon'on sells for 34 poun's. 6f the e5!hange rate were .$4 poun's per 'ollar, then whi!h of the following woul' e !orre!t? a. The real e5!hange rate is greater than 1. , person in Lon'on with 8244 !oul' e5!hange them for poun's an' have more than enough to uy the !amera there. . The real e5!hange rate is greater than 1. , person in Lon'on with 8244 !oul' e5!hange them for poun's ut then woul'n"t have enough to uy the !amera there. !. The real e5!hange rate is less than 1. , person in Lon'on with 8244 !oul' e5!hange them for poun's an' have more than enough to uy the !amera there. '. The real e5!hange rate is less than 1. , person in Lon'on with 8244 !oul' e5!hange them for poun's ut then woul'n"t have enough to uy the !amera. ____ 3$. 6f US goo's !ost 17$ of one 'ollar for every (roner 9anish goo's !ost, the real e5!hange rate woul' e !ompute' as how many 9anish goo's per U.S. goo's? a. five . one fifth the pri!e of the U.S. goo's !. the amount of (roner that !an e ought with 17$ of one 'ollar. '. Hone of the a ove is !orre!t. ____ 3+. 6f the num er of Eapanese yen a 'ollar uys falls, ut neither !ountry"s pri!e level !hanges, then the real e5!hange rate a. 'epre!iates whi!h !auses U.S. net e5ports to in!rease. . 'epre!iates whi!h !auses U.S. net e5ports to 'e!rease. !. appre!iates whi!h !auses U.S. net e5ports to in!rease. '. appre!iates, whi!h !auses U.S. net e5ports to 'e!rease. ____ 3.. ;ther things the same, whi!h of the following woul' both in!rease the U.S. real e5!hange rate with 6srael? a. pri!es in the U.S. were higher, or pri!es in 6srael were higher. . pri!es in the U.S were higher, or pri!es in 6srael were lower. !. pri!es in the U.S. were lower, or pri!es in 6srael were higher. '. pri!es in the U.S. were lower, or pri!es in 6srael were lower. ____ 30. 6f pur!hasing#power parity hol's, a 'ollar will uy a. one unit of ea!h foreign !urren!y. . foreign !urren!y e-ual to the U.S. pri!e level 'ivi'e' y the foreign !ountry"s pri!e level. !. enough foreign !urren!y to uy as many goo's as it 'oes in the Unite' States.

'. Hone of the a ove is implie' y pur!hasing#power parity. ____ 33. 6f the e5!hange rate is 0 1oro!!an 'irhams per U.S. 'ollars, a !rate of oranges !osts )44 'irhams in the 1oro!!an !apital of Aa at, an' a similar !rate of oranges in 1iami sells for 8)$ 'ollars, then a. the real e5!hange rate is greater than one an' ar itrageurs !oul' profit y uying oranges in the Unite' States an' selling them in 1oro!!o. . the real e5!hange rate is greater than one an' ar itrageurs !oul' profit y uying oranges in 1oro!!o an' selling them in the Unite' States. !. the real e5!hange rate is less than one an' ar itrageurs !oul' profit y uying oranges in the Unite' States an' selling them in 1oro!!o. '. the real e5!hange rate is less than one an' ar itrageurs !oul' profit y uying oranges in 1oro!!o an' selling them in the Unite' States. ____ 144. 6f a 1!9onal'<s Big 1a! !ost 8&.4+ in the Unite' States an' &.21 euros in the /uro area, then pur!hasing# power parity implies the nominal e5!hange rate is how many euros per 'ollar? a. 1.4$ 6f the value is less than this, it !osts more 'ollars to uy a Big 1a! in the U.S. than in the /uro area. . 1.4$ 6f the value is less than this, it !osts fewer 'ollars to uy a Big 1a! in the U.S. then in the /uro area. !. .3$ 6f the value is less than this, it !osts more 'ollars to uy a Big 1a! in the U.S. than in the /uro area. '. .3$ 6f the value is less than this, it !osts fewer 'ollars to uy a Big 1a! in the U.S. than in the /uro area. ____ 141. *ur!hasing#power parity implies that the nominal e5!hange rate given as foreign !urren!y per unit of U.S. !urren!y must rise if the pri!e levels in a. foreign !ountries rise. . the Unite' States rises. !. '. oth !ountries rise. oth !ountries fall.

____ 142. ,!!or'ing to pur!hasing power parity, if the pri!e of a as(et of goo's in the U.S. rose from 81,$44 to 82,444 an' the pri!e of the same as(et of goo's rose from +44 units of some other !ountry"s !urren!y to 1,444 units of that !ountry"s !urren!y, then the a. nominal e5!hange rate woul' appre!iate. . nominal e5!hange rate woul' 'epre!iate. !. real e5!hange rate woul' appre!iate.

'. real e5!hange rate woul' 'epre!iate. ____ 14&. ,!!or'ing to pur!hasing power parity, if the Fe'eral Aeserve in!rease' the money supply a. U.S. pri!es woul' rise an' the nominal e5!hange rate woul' rise. . U.S. pri!es woul' rise an' the nominal e5!hange rate woul' fall. !. U.S. pri!es woul' fall an' the nominal e5!hange rate woul' rise. '. U.S. pri!es an' the nominal e5!hange rate woul' fall. ____ 14). The open#e!onomy ma!roe!onomi! mo'el in!lu'es a. only the mar(et for loana le fun's. . only the mar(et for foreign#!urren!y e5!hange. !. oth the mar(et for loana le fun's an' the mar(et for foreign#!urren!y e5!hange.

'. neither the mar(et for loana le fun's or the mar(et for foreign#!urren!y e5!hange. ____ 14$. 6n the open#e!onomy ma!roe!onomi! mo'el, the supply of loana le fun's !omes from a. the sum of 'omesti! investment an' net !apital outflow. . the sum of national saving an' net !apital outflow. !. national saving. '. net e5ports ____ 14+. ;ther things the same, a higher real interest rate raises the -uantity of a. 'omesti! investment. . net !apital outflow. !. loana le fun's 'eman'e'. '. loana le fun's supplie'. ____ 14.. 6n the open#e!onomy ma!roe!onomi! mo'el, the supply of loana le fun's !omes from a. national saving. 9eman' !omes from only 'omesti! investment. . national saving. 9eman' !omes from 'omesti! investment an' net !apital outflow. !. ;nly net !apital outflow. 9eman' for loana le fun's !omes from national saving. '. 'omesti! investment an' net !apital outflow. 9eman' for loana le fun's !omes from national saving. ____ 140. ;ther things the same, as the real interest rate rises a. 'omesti! investment an' net !apital outflow oth rise.

. 'omesti! investment an' net !apital outflow oth fall. !. 'omesti! investment rises an' net !apital outflow falls. '. 'omesti! investment falls an' net !apital outflow rises. ____ 143. Suppose the U.S. supply of loana le fun's shifts left. This will a. in!rease U.S. net !apital outflow an' in!rease the -uantity of loana le fun's 'eman'e'. . in!rease U.S. net !apital outflow an' 'e!rease the -uantity of loana le fun's 'eman'e'. !. 'e!rease U.S. net !apital outflow an' in!rease the -uantity of loana le fun's 'eman'e'. '. 'e!rease U.S. net !apital outflow an' 'e!rease the -uantity of loana le fun's 'eman'e'. ____ 114. When the real e5!hange rate for the 'ollar 'epre!iates, U.S. goo's e!ome a. less e5pensive relative to foreign goo's, whi!h ma(es e5ports rise an' imports fall. . less e5pensive relative to foreign goo's, whi!h ma(es e5ports fall an' imports rise. !. more e5pensive relative to foreign goo's, whi!h ma(es e5ports rise an' imports fall. '. more e5pensive relative to foreign goo's, whi!h ma(es e5ports fall an' imports rise. ____ 111. Whi!h of the following is !orre!t in an open e!onomy? a. @I . !. '. @ #$ C #%& @ #%& @ I C #%&

____ 112. ;ther things the same, in the open#e!onomy ma!roe!onomi! mo'el, whi!h of the following woul' ma(e 6n'ia<s net !apital outflow in!rease? a. a 'e!rease in U.S. interest rates . a 'e!rease in 6n'ian interest rates !. an appre!iation of the 6n'ian rupee '. Hone of the a ove is !orre!t. Figure 32-3 Aefer to this 'iagram to answer the -uestions elow.

____ 11&. ,e"er to *i%ure 32-3. Whi!h !urve shows the relation etween the e5!hange rate an' net e5ports? a. the 'eman' !urve in panel a. . the 'eman' !urve in panel !. !. the supply !urve in panel a. '. the supply !urve in panel !. ____ 11). 6f a !ountry went from a government u'get 'efi!it to a surplus, national saving woul' a. in!rease, shifting the supply of loana le fun's right. . in!rease, shifting the supply of loana le fun's left. !. 'e!rease, shifting the 'eman' for loana le fun's right. '. 'e!rease, shifting the 'eman' for loana le fun's left. ____ 11$. 6f the u'get 'efi!it in!reases, then a. U.S. resi'ents will want to pur!hase more foreign assets an' foreign resi'ents will want to pur!hase more U.S. assets . U.S. resi'ents will want to pur!hase more foreign assets an' foreign resi'ents will want to pur!hase fewer U.S. assets !. U.S. resi'ents will want to pur!hase fewer foreign assets an' foreign resi'ents will want to pur!hase more U.S. assets '. U.S. resi'ents will want to pur!hase fewer foreign assets an' foreign resi'ents will want to pur!hase fewer U.S. assets ____ 11+. Suppose that the Unite' States imposes an import -uota on televisions. 6n the open#e!onomy ma!roe!onomi! mo'el this -uota shifts the a. U.S. supply of loana le fun's left.

. U.S. 'eman' for loana le fun's left. !. 'eman' for U.S. 'ollars in the mar(et for foreign#!urren!y e5!hange right. '. supply of U.S. 'ollars in the mar(et for foreign#!urren!y e5!hange left. ____ 11.. 6f a !ountry ha' !apital flight, then the real e5!hange rate woul' a. fall. To offset this fall the government !oul' in!rease the u'get 'efi!it. . fall. To offset this fall the government !oul' 'e!rease the u'get 'efi!it. !. rise. To offset this rise the government !oul' in!rease the u'get 'efi!it. '. rise. To offset this rise the government !oul' 'e!rease the u'get 'efi!it. ____ 110. Aeal I9* a. moves in the same 'ire!tion as unemployment. . is not a'%uste' for inflation. !. measures e!onomi! a!tivity an' real in!ome. '. ,ll of the a ove are !orre!t. ____ 113. The !lassi!al mo'el is appropriate for analysis of the e!onomy in the a. long run, sin!e evi'en!e in'i!ates that money is not neutral in the long run. . long run, sin!e real an' nominal varia les are essentially 'etermine' separately in the long run. !. short run, provi'e' money is not neutral. '. short run, provi'e' real an' nominal varia les are highly intertwine'. ____ 124. When the pri!e level in!reases, the real value of people"s money hol'ings a. falls, so they uy more. . falls, so they uy less. !. rises, so they uy more. '. rises, so they uy less. ____ 121. ;ther things the same, a 'e!rease in the pri!e level ma(es the 'ollars people hol' worth a. more, so they !an uy more. . more, so they !an uy less. !. less, so they !an uy more. '. less, so they !an uy less.

____ 122. ,s the pri!e level rises a. people will want to uy more on's, so the interest rate rises. . people will want to uy fewer on's, so the interest rate falls. !. people will want to uy more on's, so the interest rate falls. '. people will want to uy fewer on's, so the interest rate rises. ____ 12&. ,s the pri!e level rises a. people are more willing to len', so interest rates rise. . people are more willing to len', so interest rates fall. !. people are less willing to len', so interest rates fall. '. people are less willing to len', so interest rates rise. ____ 12). ;ther things the same, an in!rease in the pri!e level !auses the interest rate to a. in!rease, the 'ollar to 'epre!iate, an' net e5ports to in!rease. . in!rease, the 'ollar to appre!iate, an' net e5ports to 'e!rease. !. 'e!rease, the 'ollar to 'epre!iate, an' net e5ports to in!rease. '. 'e!rease, the 'ollar to appre!iate, an' net e5ports to 'e!rease. ____ 12$. Whi!h of the following shifts aggregate 'eman' to the right? a. a 'e!rease in the money supply . in!reases in the profita ility of !apital 'ue perhaps to te!hnologi!al progress. !. the repeal of an investment ta5 !re'it '. a 'e!rease in the pri!e level ____ 12+. ,ggregate 'eman' shifts left if a. ta5es rise an' shifts left if sto!( pri!es rise. . ta5es rise an' shifts left if sto!( pri!es fall. !. ta5es fall an' shifts left if sto!( pri!es rise. '. ta5es fall an' shifts left is sto!( pri!es fall. ____ 12.. Whi!h of the following shifts aggregate 'eman' right? a. oth a 'e!rease in the pri!e level an' the implementation of an investment ta5 !re'it . a 'e!rease in the pri!e level ut not the implementation of an investment ta5 !re'it !. the implementation of an investment ta5 !re'it ut not a 'e!rease in the pri!e level

'. neither a 'e!rease in the pri!e level nor the implementation of an investment ta5 !re'it ____ 120. 6f the 'ollar appre!iates e!ause of spe!ulation or government poli!y U.S. a. aggregate 'eman' shifts left. U.S. aggregate 'eman' also shifts left if other !ountries e5perien!e re!essions. . aggregate 'eman' shifts left. U.S. aggregate 'eman' shifts right if other !ountries e5perien!e re!essions. !. aggregate 'eman' shifts right. U.S. aggregate 'eman' also shifts right if other !ountries e5perien!e re!essions. '. aggregate 'eman' shifts right. U.S. aggregate 'eman' shifts left if other !ountries e5perien!e re!essions. ____ 123. 6n the long run, te!hnologi!al progress a. an' in!reases in the money supply oth ma(e the pri!e level rise. . an' in!reases in the money supply oth ma(e the pri!e level fall. !. ma(es the pri!e level rise, while in!reases in the money supply ma(e pri!es fall. '. ma(es the pri!e level fall, while in!reases in the money supply ma(e pri!es rise. ____ 1&4. 6f the pri!e level rises a ove what was e5pe!te' an' nominal wages are fi5e', then a. pro'u!tion e!omes less profita le so firms will hire fewer wor(ers. . pro'u!tion e!omes less profita le so firms will hire more wor(ers. !. pro'u!tion e!omes more profita le so firms will hire fewer wor(ers. '. pro'u!tion e!ome more profita le so firms will hire more wor(ers. ____ 1&1. ;ther things the same, if pri!es fell when firms an' wor(ers were e5pe!ting them to rise, then a. employment an' pro'u!tion woul' rise. . employment woul' rise an' pro'u!tion woul' fall. !. employment woul' fall an' pro'u!tion woul' rise. '. employment an' pro'u!tion woul' fall. ____ 1&2. Whi!h of the following shifts the short#run aggregate supply !urve right? a. oth an in!rease in the pri!e level that is greater than e5pe!te' an' an in!rease in the e5pe!te' pri!e level. . an in!rease in the pri!e level that is greater than e5pe!te', ut not an in!rease in the e5pe!te' pri!e level.

!. an in!rease in the e5pe!te' pri!e level, ut not an in!rease in the pri!e level that is greater than e5pe!te'. '. neither an in!rease in the pri!e level that is greater than e5pe!te' nor an in!rease in the e5pe!te' pri!e level. ____ 1&&. Whi!h of the following shifts the short#run aggregate supply !urve to the right? a. a 'e!rease in the a!tual pri!e level . an in!rease in the a!tual pri!e level !. a 'e!rease in the e5pe!te' pri!e level '. an in!rease in the e5pe!te' pri!e level ____ 1&). The aggregate 'eman' an' aggregate supply mo'el implies monetary neutrality a. only in the short run. . only in the long run. !. in oth the short run an' the long run. '. in neither the short run nor long run. *i%ure 33-2.

! LA,S ,S1 ,S2 *1 *2 , B ,9

K1 K2

"

____ 1&$. ,e"er to *i%ure 33-2. The appearan!e of the long#run aggregate#supply BLA,SD !urve a. is in!onsistent with the !on!ept of monetary neutrality.

. is !onsistent with the i'ea that point , represents a long#run e-uili rium ut not a short# run e-uili rium when the relevant short#run aggregate#supply !urve is ,S1. !. in'i!ates that K1 is the natural rate of output. '. ,ll of the a ove are !orre!t. 2e##imi#m Suppose the e!onomy is in long#run e-uili rium. Then e!ause of !orporate s!an'al, international tensions, an' loss of !onfi'en!e in poli!yma(ers, people e!ome pessimisti! regar'ing the future an' retain that level of pessimism for some time. ____ 1&+. ,e"er to 2e##imi#m. 6n the short run what happens to the pri!e level an' real I9*? a. Both the pri!e level an' real I9* rise. . Both the pri!e level an' real I9* fall. !. The pri!e level rises an' real I9* falls. '. The pri!e level falls an' real I9* rises. ____ 1&.. Suppose the e!onomy is in long#run e-uili rium. 6f there is a sharp in!rease in the minimum wage as well as an in!rease in pessimism a out future usiness !on'itions, then we woul' e5pe!t that in the short#run, a. real I9* will rise an' the pri!e level might rise, fall, or stay the same. . real I9* will fall an' the pri!e level might rise, fall, or stay the same. !. the pri!e level will rise, an' real I9* might rise, fall, or stay the same. '. the pri!e level will fall, an' real I9* might rise, fall, or stay the same.

1!ort 3n#4er 1&0. Why might a favora le !hange in the e!onomy, su!h as te!hnologi!al improvement or a 'e!rease in the pri!e of importe' oil, e asso!iate' with an in!rease in fri!tional unemployment? 1&3. Teenage unemployment is higher than unemployment of people ages 24 an' over. /5plain why e!onomists woul' attri ute at least part of this 'ifferen!e to minimum#wage laws. 1)4. Whi!h two of the 'en !rinciples of (conomics imply that the Fe' !an profoun'ly affe!t the e!onomy? 1)1. /5plain why an(s !an influen!e the money supply if the re-uire' reserve ratio is less than 144 per!ent. 1)2. 6f the reserve ratio is 24 per!ent, how mu!h money !an e !reate' from 8144 of reserves? Show your wor(. 1)&. 9raw a simple T#a!!ount for First Hational Ban( whi!h has 8$,444 of 'eposits, a re-uire' reserve ratio of 14 per!ent, an' e5!ess reserves of 8&44. 1a(e sure your alan!e sheet alan!es.

1)). Suppose that in a !ountry the total hol'ings of an(s were as followsN re-uire' reserves @ 8)$ million e5!ess reserves @ 81$ million 'eposits @ 8.$4 million loans @ 8+44 million Treasury on's @ 834 million Show that the alan!e sheet alan!es if these are the only assets an' lia ilities. ,ssuming that people hol' no !urren!y, what happens to ea!h of these values if the !entral an( !hanges the reserve re-uirement ratio to 2G, an(s still want to hol' the same per!entage of e5!ess reserves, an' an(s 'on"t !hange their hol'ings of Treasury on's? 2ow mu!h 'oes the money supply !hange y? 1)$. Suppose the Fe' sells government on's. Use a graph of the money mar(et to show what this 'oes to the value of money. 1)+. /!onomists agree that in!reases in the money#supply growth rate in!rease inflation an' that inflation is un'esira le. So why have there een hyperinflations an' how have they een en'e'? 1).. :olonial ,meri!a ha' little in'ustry an' so ha' mostly raw materials to e5port. ,t the same time, there were many opportunities to pur!hase !apital goo's an' earn a high rate of return e!ause there was little e5isting !apital so that the marginal pro'u!t of !apital was relatively high. What 'oes this suggest a out net e5ports an' net !apital outflow in !olonial ,meri!a? 1)0. :an pur!hasing#power parity e use' to e5plain the fa!t that the U.S. 'ollar has 'epre!iate' y more than $4 per!ent against the Ierman mar( etween 13.4 an' 1330, ut appre!iate' y more than 144 per!ent against the 6talian lira 'uring the same perio'? 9efen' your answer. 1)3. Un'er what !ir!umstan!es 'oes pur!hasing#power parity e5plain how e5!hange rates are 'etermine', an' why is it not !ompletely a!!urate? 1$4. /5plain how the relation etween the real e5!hange rate an' net e5ports e5plains the 'ownwar' slope of the 'eman' for foreign#!urren!y e5!hange !urve. 1$1. /5plain how an in!rease in the 'eman' for !apital goo's in the U.S. !an lea' to a !hange in the U.S. e5!hange rate. 1$2. Suppose that U.S. !itiFens start saving more. What 'oes this imply a out the supply of loana le fun's an' the e-uili rium real interest rate? What happens to the real e5!hange rate? 1$&. Suppose that the Tur(ish government u'get 'efi!it in!reases. What !urves in the open#e!onomy ma!roe!onomi! mo'el shift? /5plain why ea!h !urve shifts the 'ire!tion it 'oes. 1$). What 'o tra'e poli!ies 'o to the stan'ar' of living? 1$$. The long#run tren' in real I9* is upwar'. 2ow is this possi le given usiness !y!les? What e5plains the upwar' tren'? 1$+. 1a(e a list of e5pen'itures whose sum e-uals I9*.

1$.. 6llustrate the !lassi!al analysis of growth an' inflation with aggregate 'eman' an' long#run aggregate supply !urves.

practice exam 3 3n#4er 1ection

141. 142. 14&. 14). 14$. 14+. 14.. 140. 143. 114. 111. 112. 11&. 11). 11+. 11.. 110. 113. 124. 121. 122. 12&. 12). 12$. 12+. 12.. 120. 123. 1&4. 1&1. 1&2. 1&&. 1&). 1&$. 1&+. 1&.. ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN ,HSN , , B : : 9 B B 9 , 9 B B , : , : B B , 9 9 B B B : , 9 9 9 9 : B : B B

15O,( 3N16E, 1&0. ,HSN /ven generally favora le !hanges will usually involve some sort of se!toral sho!( that !hanges the 'eman' for la or among 'ifferent firms. For e5ample, a 'e!rease in the pri!e of importe' oil woul' li(ely re'u!e the 'eman' for U.S. oil wor(ers an' in!rease the 'eman' for automo ile wor(ers. Similarly, te!hnologi!al progress ma(es some in'ustries 'e!line an' others a'van!e, !reating fri!tional unemployment. 1&3. ,HSN *eople who are e5perien!e' an' e'u!ate' are li(ely to fin' %o s where the e-uili rium wage is a ove the minimum wage. 6n la or mar(ets where the e-uili rium wage is a ove the minimum wage, the minimum wage 'oes not !reate unemployment. Sin!e people ages 24 an' over ten' to have more e5perien!e an' e'u!ation than teenagers, the minimum wage matters less an' so !reates less unemployment. 1)4. ,HSN 1. *ri!es rise when the government prints too mu!h money. 2. There is a short#run tra'eoff etween inflation an' unemployment. 1)1. ,HSN When the reserve re-uirement is less than 144 per!ent, an(s !an len' out 'eposits. The money they len' out is re'eposite'. 6n this way, 'eposits !an e greater than reserves. Sin!e 'eposits are greater un'er fra!tional# reserve an(ing an' sin!e 'eposits are part of the money supply, the money supply will e greater un'er fra!tional#reserve an(ing. 1)2. ,HSN B17.24D 1)&. ,HSN ,ssets Aeserves Loans First Hational Ban( Lia ilities 9eposits

8144 @ 8$44.

8044 8),244

8$,444

1)). ,HSN The only lia ility is 'eposits whi!h e-ual 8.$4 million. Total reserves are 8+4 illion whi!h summe' with loans, 8+44 million, an' Treasury on's 834 million @ 8.$4. Sin!e lia ilities e-ual assets, the alan!e sheet alan!es. 6nitially an(s nee' to hol' +G on reserve an' want to hol' 2G as e5!ess reserves. When the Fe' lowers the reserve re-uirement ratio to 2G, the an( only has to hol' 81$ million on reserve an' so now has 8&4 million of e5!ess reserves. Between the 2G re-uirement an' the 2G for e5!ess the reserve ratio is now )G an' the multiplier is now 17.4) @ 2$. So, the 'e!rease in the reserve re-uirement ratio lea's to an in!rease in 'eposits of 8.$4 million. B,lso, total reserves are 8+4 million an' the multiplier is now 2$, so 'eposits shoul' e 81,$44 million.D Ae-uire' reserves are 2G of 81,$44 million of 'eposits @ 8&4 million.

/5!ess reserves are 2G of 81,$44 million of 'eposits an' so now also e-ual 8&4 million. 9eposits rose y as mu!h as the money supply sin!e people 'on"t hol' !urren!y, so that the money supply rose y 8.$4 million. The a''itional 'eposits !ame y way of a''itional len'ing, so loans shoul' have also in!rease' y 8.$4 million. ,lso, sin!e 'eposits rose y 8.$4 million, lia ilities shoul' have risen y 8.$4 million. Un'er the given assumptions, this means loans shoul' have risen y 8.$4 million. ;verall the money supply rose y 8.$4 as e5plaine' a ove. 1)$. ,HSN

When the Fe' sells government on's, the money supply 'e!reases. This shifts the money supply !urve from M ) to M 1 an' ma(es the value of money in!rease. Sin!e money is worth more, it ta(es less to uy goo's with it, whi!h means the pri!e level falls. 1)+. ,HSN Typi!ally, the government in !ountries that ha' hyperinflation starte' with high spen'ing, ina'e-uate ta5 revenue, an' limite' a ility to orrow. Therefore, they turne' to the printing presses to pay their ills. 1assive an' !ontinue' in!reases in the -uantity of money le' to hyperinflation, whi!h en'e' when the governments institute' fis!al reforms eliminating the nee' for the inflation ta5 an' su se-uently slowe' money supply growth. 1).. ,HSN Het e5ports were negative e!ause the value of e5ports was low, an' the !olonies importe' !apital goo's. 6f net e5ports were negative, net !apital outflow must also have een negative. Het !apital outflow woul' have een negative e!ause the !olonies sol' sto!(s, on's, an' other 'omesti! assets to foreigners to uy !apital goo's. 1)0. ,HSN The theory of pur!hasing#power parity suggests that 6taly must have e5perien!e' mu!h more inflation than the Unite' States while Iermany must have e5perien!e' mu!h less inflation. 6n fa!t, that is e5a!tly what has happene'. 1)3. ,HSN *ur!hasing#power parity wor(s well in helping us e5plain long#term tren's in e5!hange rates, an' in e5plaining what happens to e5!hange rates 'uring hyperinflation. 6t is not !ompletely a!!urate e!ause B1D not all goo's are easily tra'e', an' B2D even tra'a le goo's are not always perfe!t su stitutes when they are pro'u!e' in 'ifferent !ountries.

1$4. ,HSN When the U.S. real e5!hange rate appre!iates, U.S. goo's e!ome more e5pensive relative to foreign goo's. This in'u!es U.S. !itiFens to uy more goo's overseas, whi!h in!reases U.S. imports. The appre!iation also in'u!es foreign !itiFens to uy fewer U.S. goo's, so U.S. e5ports fall. The 'e!line in e5ports an' in!rease in imports 'e!reases net e5ports, an' so the 'eman' for U.S. 'ollars 'e!lines. The inverse relation etween the e5!hange rate an' the -uantity of U.S. 'ollars 'eman'e' in the foreign#!urren!y e5!hange mar(et is represente' y the 'ownwar'#sloping 'eman' !urve. 1$1. ,HSN ,n in!rease in 'eman' for !apital goo's is an in!rease in investment 'eman'. ,s investment 'eman' in!reases, the 'eman' for loana le fun's shifts right. This shift lea's to an in!rease in the real interest rate. The in!rease in the interest rate re'u!es net !apital outflow. The re'u!tion in net !apital outflow shifts the supply of !urren!y in the foreign e5!hange mar(et to the left, raising the real e5!hange rate. 1$2. ,HSN The supply of loana le fun's in!reases, an' the e-uili rium real interest rate falls. Be!ause of the lower interest rate, U.S. net !apital outflow rises. This in!rease ma(es the supply of 'ollars shift to the right, an' the real e5!hange rate of the 'ollar 'epre!iates. 1$&. ,HSN The supply of Tur(ish loana le fun's !urve shifts left e!ause the government 'efi!it 'e!reases national saving. ,s the supply of loana le fun's shifts left, the Tur(ish interest rate rises. This in!rease in the interest rate !auses the -uantity of Tur(ish net !apital outflow to fall, whi!h means that people will e supplying fewer Tur(ish 'inar in or'er to pur!hase foreign assets. So the supply of 'inar in the foreign#!urren!y e5!hange mar(et shifts left. 1$). ,HSN Tra'e poli!ies re'u!e oth imports an' e5ports. While they leave the tra'e alan!e un!hange', they re'u!e tra'e overall an' so re'u!e the gains from tra'e. This lowers the stan'ar' of living. U.S. in'ustries that pro'u!e goo's on whi!h imports are re'u!e' may gain, ut overall there is a loss. 1$$. ,HSN There are o!!asional short#live' perio's of negative real I9* growth. 2owever, in most years real I9* in!reases. The years of in!rease are more fre-uent an' the in!reases large enough that over long perio's of time real I9* in!reases 'espite the o!!asional 'e!lines. The long#run upwar' tren' in real I9* is 'ue to in!reases in the la or for!e an' !apital sto!( an' a'van!es in te!hnologi!al (nowle'ge. 1$+. ,HSN !onsumption, investment, government e5pen'itures, an' net e5ports.

1$.. ,HSN See graph.

!

LA,S1

LA,S2

,92

,91

&utput

;ver time, te!hnologi!al a'van!es !ause the long#run aggregate supply !urve to shift right. 6n!reases in the money supply !ause the aggregate 'eman' !urve to shift right. ;utput growth puts 'ownwar' pressure on the pri!e level, ut money supply growth !ontri utes to rising pri!es.