In 2000 in the United Kingdom, the Adult Population Was About 46

Final Examination of ETP Economics

1. To decrease the money supply, the Fed could a. sell government bonds. b. increase the discount rate. c. increase the reserve requirement. d. All of the above are correct.

2. If you deposit $100 into a demand deposit at a bank, this action by itself a. does not change the money supply. b. increases the money supply. c. decreases the money supply.

d. has an indeterminate effect on the money supply.

3. The Fed can increase the price level by conducting open market

a. sales and raising the discount rate. b. sales and lowering the discount rate. c. purchases and raising the discount rate. d. purchases and lowering the discount rate.

4. In 1991 the Federal Reserve lowered the reserve requirement ratio from 12 percent to 10 percent. Other things the same this should have a. increased both the money multiplier and the money supply. b. decreased both the money multiplier and the money supply. c. increased the money multiplier and decreased the money supply. d. decreased the money multiplier and increased the money supply.

5. If the reserve ratio is 100 percent, depositing $500 of paper money in a bank will eventually increase the money supply by a. $5,000. b. $1,000. c. $500. d. $0.

1 6. If the reserve ratio is 20 percent, and banks do not hold excess reserves, when the Fed sells $40 million of bonds to the public, bank reserves a. increase by $40 million and the money supply eventually increases by $200 million. b. increase by $40 million and the money supply eventually increases by $800 million. c. decrease by $40 million and the money supply eventually decreases by $200 million. d. decrease by $40 million and the money supply eventually decreases by $800 million.

7. In the 1970s in response to recessions caused by an increase in the price of oil, the central banks in many countries increased the money supply. The central banks might have done this by a. selling bonds on the open market, which would have raised the value of money. b. purchasing bonds on the open market, which would have raised the value of money. c. selling bonds on the open market, which would have raised the value of money. d. purchasing bonds on the open market, which would have lowered the value of money.

8. According to the classical dichotomy, which of the following is influenced by monetary factors? a. real GDP b. unemployment c. nominal interest rates d. All of the above are correct.

9. The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, then a. the inflation rate will be zero. b. nominal GDP will grow by 10 percent. c. nominal GDP will stay the same. d. none of the above are correct.

10. Which of the following is not implied by the quantity equation? a. If velocity is stable, an increase in the money supply creates a proportional increase in nominal output. b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. c. With constant money supply and output, an increase in velocity creates an increase in the price level. d. With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

2 11. If a country had deflation, a. the nominal interest rate would be greater than the real interest rate. b. the real interest rate would be greater than the nominal interest rate. c. the real interest rate would equal the nominal interest rate. d. None of the above are necessarily correct.

12. If the economy unexpectedly went from inflation to deflation, a. debtors and creditors would both have reduced real wealth b. debtors and creditors would both have increased real wealth c. debtors would gain at the expense of creditors d. creditors would gain at the expense of debtors

13. When Ghana sells chocolate to the United States, U.S. net exports a. increase, and U.S. net capital outflow increases. b. increase, and U.S. net capital outflow decreases. c. decrease, and U.S. net capital outflow increases. d. decrease, and U.S. net capital outflow decreases.

14. A Russian flour mill buys wheat from the United States and pays for it with rubles. Other things the same, Russian a. net exports increase, and U.S. net capital outflow increases. b. net exports increase, and U.S. net capital outflow decreases. c. net exports decrease, and U.S. net capital outflow increases. d. net exports decrease, and U.S. net capital outflow decreases.

15. Tony, a U.S. citizen, uses some previously obtained Portuguese currency (escudo) to purchase a bond issued by a Portuguese company. This transaction a. increases U.S. net capital outflow by more than the value of the bond. b. increases U.S. net capital outflow by the value of the bond. c. does not change U.S. net capital outflow. d. decreases U.S. net capital outflow.

3 16. A country has $100 million of net exports and $170 million of saving. Net capital outflow is a. $70 million and domestic investment is $170 million. b. $70 million and domestic investment is $270 million. c. $100 million and domestic investment is $70 million. d. None of the above is correct.

17. In the United States, a cup of hot chocolate costs $5. In Australia, the same hot chocolate costs $10 Australian dollars. If the exchange rate is $2 Australian dollars per U.S. dollar, what is the real exchange rate? a. 1/2 cup of Australian hot chocolate per cup of U.S. hot chocolate b. 1 cup of Australian hot chocolate per cup of U.S. hot chocolate c. 2 cups of Australian hot chocolate per cup of U.S. hot chocolate d. None of the above is correct.

18. Which of the following could be a consequence of an appreciation of the U.S. real exchange rate? a. John, a French citizen, decides that Iowa pork has become too expensive and cancels his order. b. Nick, a U.S. citizen, decides that his trip to Nepal would be too costly and cancels his trip. c. Roberta, a U.S. citizen, decides to import fewer windshield wipers for her auto parts company. d. All of the above are correct.

19. When a country's central bank increases the money supply, its a. price level rises and its currency appreciates relative to other currencies in the world. b. price level rises and its currency depreciates relative to other currencies in the world. c. price level falls and its currency appreciates relative to other currencies in the world. d. price level falls and its currency depreciates relative to other currencies in the world.

20. Jack and Jill are co-owners of the U.S. firm Wells Petroleum. Jack borrows money to build an oil well in Texas. Jill borrows money to build an oil well in Venezuela. a. Both Jack and Jill's purchase of capital count as demand for loanable funds in the U.S. market. b. Neither Jack nor Jill's purchase of capital count as demand for loanable funds in the U.S. market. c. Jack's purchase of capital counts as demand for loanable funds in the U.S. market; Jill's purchase does not. d. Jill's purchase of capital counts as demand for loanable funds in the U.S. market; Jack's purchase does not.

4 21. If net exports are negative, then a. net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners. b. net capital outflow is positive, so American assets bought by foreigners are greater than foreign assets bought by Americans. c. net capital outflow is negative, so foreign assets bought by Americans are greater than American assets bought by foreigners. d. net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

22. If the real exchange rate for the dollar is below the equilibrium level, the quantity of dollars supplied in the foreign-currency exchange market is a. less than the quantity demanded and the dollar will appreciate. b. less than the quantity demanded and the dollar will depreciate. c. greater than the quantity demanded and the dollar will appreciate. d. greater than the quantity demanded and the dollar will depreciate.

23. If the government of India made policy changes that increased national saving, the real exchange rate of the rupee would a. depreciate and Indian net exports would rise. b. depreciate and Indian net exports would fall. c. appreciate and Indian net exports would rise. d. appreciate and Indian net exports would fall.

24. In 2002, the United States imposed restrictions on the importation of steel into the United States. Our open- economy macroeconomic model shows that such a policy would a. lower the real exchange rate and increase net exports. b. lower the real exchange rate and have no effect on net exports. c. raise the real exchange rate and decrease net exports. d. raise the real exchange rate and have no effect on net exports.

25. If Kenya experienced capital flight, the supply of Kenyan schillings in the foreign-currency exchange market would shift a. left, which would make the real exchange rate of the Kenyan schilling appreciate. b. left, which would make the real exchange rate of the Kenyan schilling depreciate. c. right, which would make the real exchange rate of the Kenyan schilling appreciate. d. right, which would make the real exchange rate of the Kenyan schilling depreciate.

5 26. An increase in the price level causes the aggregate quantity of goods and services demanded to decrease because a. wealth rises, interest rates rise, and the dollar appreciates. b. wealth rises, interest rates fall, and the dollar depreciates. c. wealth falls, interest rates rise, and the dollar appreciates. d. wealth falls, interest rates fall, and the dollar depreciates.

27. Which of the following shifts aggregate demand to the left? a. an increase in the price level b. a decrease in the money supply c. an increase in net exports d. an investment tax credit

28. In the long run, technological progress a. and increases in the money supply both make the price level rise. b. and increases in the money supply both make the price level fall. c. makes the price level rise, while increases in the money supply make prices fall. d. makes the price level fall, while increases in the money supply make prices rise.

29. Which of the following shifts short-run, but not long-run aggregate supply right? a. a decrease in the price level b. a decrease in the expected price level c. a decrease in the capital stock d. an increase in the money supply.

30. Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices a. and output are higher. b. and output are lower. c. are higher and output is the same. d. are the same and output is lower.

6 31. Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, then we would expect that in the short-run, a. real GDP will rise and the price level might rise, fall, or stay the same. b. real GDP will fall and the price level might rise, fall, or stay the same. c. the price level will rise, and real GDP might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same.

32. If the interest rate is below the Fed’s target, the Fed would a. buy bonds to increase the money supply. b. buy bonds to decrease the money supply. c. sell bonds to increase the money supply. d. sell bonds to decrease the money supply.

33. Assuming crowding-out but no multiplier or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate a. demand right by more than $100 billion. b. demand right by less than $100 billion. c. supply left by more than $100 billion. d. supply left by less than $100 billion.

34. If the MPC is 0.80 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by a. $80 billion. b. $125 billion. c. $500 billion. d. $800 billion.

35. If Congress cuts spending to balance the federal budget, the Fed can act to prevent unemployment and recession while maintaining the balanced budget by a. increasing the money supply. b. decreasing the money supply. c. raising taxes. d. cutting expenditures.

7 36. In recent years, inflation expectations have fallen. This has shifted the short-run Phillips curve a. left, meaning that at any given inflation rate unemployment will be lower in the short run than before. b. right, meaning that at any given inflation rate unemployment will be lower in the short run than before. c. right, meaning that at any given inflation rate unemployment will be higher in the short run than before. d. left, meaning that at any given inflation rate unemployment will be higher in the short run than before.

37. Suppose a war disrupts the supply of oil to the country. We would expect the a. short-run aggregate supply curve, short-run Phillips curve, and long-run Phillips curve to shift left. b. short-run aggregate supply curve, short-run Phillips curve, and long-run Phillips curve to shift right. c. short-run aggregate supply curve to shift left, and the short-run Phillips curve and long-run Phillips curve to shift right. d. short-run aggregate supply curve to shift left, the short-run Phillips curve to shift right, and the long-run Phillips curve to be unaffected.

38. Suppose that Congress changed the laws governing the Fed such that Congress gained control over monetary policy. Shortly after that, Congress decided that it would significantly increase its spending, and it would fund the new spending by printing money. If expectations are completely rational, one might expect that the resulting inflation would a. reduce unemployment substantially in the short run, but not in the long run. b. probably not have much impact on unemployment in the short run or the long run. c. reduce unemployment substantially in the short run and in the long run. d. only reduce unemployment in the long run because it would be anticipated.

39. A policy change that changes the natural rate of unemployment changes a. neither the long-run Phillips curve nor the long-run aggregate supply curve. b. both the long-run Phillips curve and the long-run aggregate supply curve. c. the long-run Phillips curve, but not the long-run aggregate supply curve. d. the long-run aggregate supply curve, but not the long-run Phillips curve.

40. The economy will move to a point on the Phillips curve where unemployment is higher if, a. the inflation rate increases. b. the government increases its expenditures. c. the Fed decreases the money supply. d. None of the above are correct.