Econ 102 Final Exam Name ID Section Number 1. Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract? A) a reduction in the number of discouraged workers B) an increase in the number of discouraged workers C) a decrease in the level of employment D) an increase in the level of employment 2. Long recessions often follow banking crises because: A) monetary policy is not very effective because banks hold on to excess reserves and are unwilling to lend them out. B) the vicious cycle of deleveraging that follows leads to overpriced assets. C) consumer and investment spending increase too rapidly, causing high rates of inflation. D) banking crises may cause a surplus of credit, so that interest rates fall to levels so low that investors earn very little in interest income. 3. Import prices are falling in the U.S. due to all of the following factors except: A) rising U.S. dollar exchange rate. B) weak global economic growth. C) falling U.S. interest rates. D) excess capacity in developing countries. 4. If the Fed reduces the inflation rate from 5% to 3%, it is: A) raising economic growth. B) engaging in disinflation. C) increasing employment. D) following a policy rule. Version 3 Page 1
5. During a liquidity trap: A) nominal interest rates will rise regardless of what policy the Federal Reserve pursues. B) monetary policy is ineffective, since nominal interest rates cannot fall below zero. C) the money market is in disequilibrium. D) the only tool that the Federal Reserve finds effective is expansionary monetary policy. 6. If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%: A) the quantity of nonmonetary interest-bearing financial assets demanded is less than the quantity supplied. B) the quantity of nonmonetary interest-bearing financial assets demanded is equal to the quantity supplied. C) the quantity of nonmonetary interest-bearing financial assets demanded is greater than the quantity supplied. D) it is impossible to predict which is greater, the quantity demanded or quantity supplied of nonmonetary interest-bearing financial assets. 7. The manufacturing component of the industrial production index rose 0.2% recently mostly due to rising business equipment production. Which of the following factors did not contribute to the rapid growth in equipment production? A) Faster consumer spending B) Less economic uncertainty C) Rising cost of capital D) Falling spare capacity 8. The growth in single family housing starts has been relatively weak during this current economic recovery due to all the following factors except: A) A rapid growth in household formation. B) Potential home buyers desire to maintain a strong balance sheet. C) Enhanced caution by potential home buyers. D) A large quantity of foreclosed homes. 9. The Glass-Steagall Act of 1933: A) separated banks into two categories, commercial banks and investment banks. B) created the Federal Reserve. C) created the Reconstruction Finance Corporation. D) limited interest rates that savings and loans could charge on mortgages. Version 3 Page 2
10. Which of the following statements is broadly agreed upon by modern macroeconomists? A) The central bank should pursue a policy of a specific target rate of inflation. B) Discretionary fiscal policy is typically an effective remedy for a recessionary gap except in special circumstances. C) Monetary and fiscal policy can both be effective at decreasing unemployment in the short run but not in the long run. D) A monetary rule should be pursued by the central bank. 11. The consumer confidence index recently rose to the highest level since October 2007 for all the following reasons except: A) falling debt burdens. B) an improving labor market. C) slow wage growth. D) improving credit availability. 12. A policy maker who aims at maintaining unemployment at 5% while the NAIRU for this economy is 4% will most likely find the economy running into: A) deflation. B) a much higher output level. C) inflation. D) a much lower unemployment level. 13. Monetary policy affects aggregate demand through changes in: A) tax receipts. B) export demand. C) consumer and investment spending. D) government spending. 14. Which of the following is true of the Federal Reserve's response to the banking crises of the 1930s and 2008? A) In the 1930s the Fed acted aggressively as a lender of last resort and to guarantee liabilities of troubled banks, but it did not act in 2008. B) In 2008 the Fed acted aggressively as a lender of last resort and to guarantee liabilities of troubled banks, but it did not act in the 1930s. C) In both crises, the Fed failed to use its power to act as a lender of last resort or to guarantee liabilities of troubled banks. D) In both crises, the Fed acted aggressively as a lender of last resort and to guarantee liabilities of troubled banks. Version 3 Page 3
15. If the reserve ratio is 25% and the money supply increases by $100,000, then the initial reserve injection by Federal Reserve was: A) $25,000. B) $2,500. C) $10,000. D) $4,000. 16. Expectations of a higher inflation rate shift the short-run aggregate supply curve to the, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts. A) left; down B) right; up C) right; down D) left; up 17. A government can target its exchange rate only if it: A) continues to actively use monetary policy for exchange market intervention and stabilization purposes. B) pursues policies that tend to be inflationary. C) is willing to give up its use of monetary policy for stabilization purposes. D) increases the amount of uncertainty in the foreign exchange markets. 18. Suppose you transfer $500 from your savings account to your checking account. With this transaction, M1 and M2. A) increases; decreases B) stays the same; decreases C) decreases; decreases D) increases; stays the same 19. Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be: A) no change in the natural rate of unemployment and no change in inflation. B) a decrease in the natural rate of unemployment and an increase in inflation. C) a decrease in the natural rate of unemployment and no change in inflation. D) no change in the natural rate of unemployment and an increase in inflation. Version 3 Page 4
20. A government with a large deficit will also produce high inflation in the economy if it: A) finance the deficit via seigniorage. B) reduce government spending. C) raise taxes. D) impose debt ceiling. 21. The zero lower bound for interest rates is: A) only a theory that never actually occurs in the real world. B) the fact that interest rates can't go below zero. C) a theory that says that interest rates should have no bounds or limits. D) a law that prohibits credit unions from paying interest on checkable deposits. 22. Suppose a new regulation lowers the interest rates banks can offer on checking account funds. This will result in: A) a shift leftward of the money demand curve. B) a shift rightward of the money demand curve. C) a shift leftward in the money supply curve. D) a shift rightward in the money supply curve. 23. If the Federal Reserve wants to lower the interest rate, it will: A) keep the money supply unchanged. B) mandate a lower interest rate. C) increase the money supply. D) decrease the money supply. 24. The loanable funds model focuses on the: A) supply of funds from lenders and the demand from borrowers. B) demand for money. C) supply of funds from lenders. D) supply of funds from borrowers and the demand by lenders. 25. Which of the following was an argument in favor of using discretionary fiscal policy in fighting the Great Recession? A) The lags associated with monetary policy would be destabilizing. B) Monetary policy could not be effective, since interest rates were near zero. C) If taxes were increased, the budget could be balanced. D) If government spending decreased, the budget surplus would increase. Version 3 Page 5
26. When borrowers don't respond to short-term interest rates of zero, the economy is experiencing: A) maturity transformation. B) an asset bubble. C) a liquidity trap. D) hyperinflation. 27. Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis because: A) political instability in the Middle East was causing a depreciation of the euro and the dollar. B) austerity would only increase inflation and unemployment. C) the lag associated with automatic stabilizers was too long. D) the effectiveness of monetary policy was limited by the zero bound on interest rates. 28. Which of the following is not a factor pushing down long-term interest rates? A) Rising inflation expectations B) Fed's quantitative easing C) Mideast turmoil D) Euro-zone debt crisis 29. If the required reserve ratio rises: A) the money multiplier will also rise. B) the amount of reserves in the banking system will decrease. C) the banking system must keep more of a deposit in its reserves. D) excess reserves will also rise. 30. Suppose you are told that the short-run Phillips curve has shifted upward. Which of the following must have happened? A) The SRAS curve has shifted to the left. B) The SRAS curve has shifted to the right. C) The AD curve has shifted to the right. D) The AD curve has shifted to the left. Version 3 Page 6
31. If the required reserve ratio is 10%, and the Fed conducts an open market purchase of $100, what is the maximum possible change in the money supply resulting from this purchase? A) $10,000 B) $10 C) $1,000 D) $100 32. Which of the following is an explanation of banking crises? A) Banks are paying low interest rates on deposits and charging high interest rates on loans. B) Many banks make the same mistake of investing in an asset bubble. C) Banks engage in maturity transformation. D) The Federal Reserve, acting as a lender of last resort, introduces too much competition into the system. 33. The authors of Monetary History of the United States are: A) Milton Friedman and Anna Schwartz. B) George and Jeb Bush. C) Bill Clinton and Al Gore. D) John Maynard Keynes and Karl Marx. 34. Contractionary monetary policy causes in the price level in the short run and in the price level in the long run. A) a decrease; a decrease B) a decrease; no change C) no change; no change D) no change; a decrease 35. Suppose the economy experiences price inflation such that a typical basket of goods is now more expensive than it used to be. All else equal, we would expect: A) a downward movement along a fixed money demand curve. B) the demand for money to shift outward. C) an upward movement along a fixed money demand curve. D) the demand for money to shift inward. Version 3 Page 7
36. Assume the money supply doubles, followed by a doubling of the wage rate and the price level. Under these circumstances, we can safely conclude which of the following? A) Real aggregate output will fall in half. B) Real aggregate output will double. C) Nominal output will double, but real output will fall. D) Nominal output will double, but real output will remain unchanged. 37. All other things unchanged, an increase in the value of the dollar against the euro U.S. net exports and shifts the aggregate demand curve to the. A) increases; left B) decreases; left C) decreases; right D) increases; right 38. One of the benefits of banks is that they: A) increase the opportunity cost of the trade-off between rate of return and liquidity. B) encourage people to hold more cash. C) reduce the amount of liquidity in the economy. D) reduce the opportunity cost of the trade-off between rate of return and liquidity. 39. Traveler's checks and checkable deposits are: A) not considered part of the M grouping. B) part of M1. C) considered near-monies. D) part of the monetary base. 40. If the Federal Open Market Committee engages in an open market purchase, it will: A) shift the money demand curve to the left. B) shift the money demand curve to the right. C) shift the money supply curve to the left. D) shift the money supply curve to the right. 41. Suppose a bank receives a $5,000 deposit and the reserve ratio is 25%. Based on this deposit alone, the bank can lend out: A) $3,500. B) $4,000. C) $3,750. D) $4,500. Version 3 Page 8
42. A shift in the demand for loanable funds to the left could be caused by: A) a more optimistic economy. B) more business spending financed through borrowing. C) less business spending financed through borrowing. D) a loosening of requirements needed to borrow funds. 43. If a country wishes to increase the exchange rate to a rate above its equilibrium value in the foreign exchange market, it will notice: A) a surplus of its currency at the desired exchange rate. B) a shortage of its currency at the desired exchange rate. C) that it must increase the supply of its currency in the foreign exchange market. D) that it can achieve this rate by pursuing expansionary monetary policy. 44. A negative output gap is associated with: A) a natural rate of unemployment. B) an unusually high unemployment rate. C) no changes in the unemployment rate. D) an unusually low unemployment rate. 45. The money multiplier is equal to: A) about 3.9 in the United States. B) the ratio of the monetary base to the money supply. C) the money supply divided by the reserve ratio. D) the ratio of the money supply to the monetary base. 46. Which of the following explains why the Federal Reserve never buys U.S. Treasury bills directly from the federal government? A) It could reduce the power of the Fed. B) It could make the budget deficit worse. C) It could be a route to disastrous inflation. D) It could lead to a recession. 47. When the Fed conducts open market purchases from banks, interest rates: A) fluctuate randomly. B) decrease. C) increase. D) remain constant. Version 3 Page 9
48. The short-run Phillips curve: A) illustrates that expected inflation has little impact on the natural rate of unemployment. B) broke down in the 1970s because of a supply shock. C) depicts the positive relationship between the unemployment rate and the inflation rate. D) shows that policies may not be effective in changing the natural rate of unemployment. 49. The Great Moderation consensus among macroeconomists is described by all of the following EXCEPT that: A) the central bank should be independent of politics. B) monetary policy is the only way to get out of the liquidity trap. C) monetary policy should play the main role in stabilization policy. D) discretionary fiscal policy should be used sparingly. 50. When an economy has debt deflation: A) aggregate demand decreases as borrowers' real debts increase, which leads to less spending. B) aggregate demand increases, since the real debt burden is reduced. C) the economy moves quickly to its potential output. D) aggregate demand is not affected, since real variables are not affected. Version 3 Page 10
Answer Key 1. B 2. A 3. C 4. B 5. B 6. A 7. C 8. A 9. A 10. C 11. C 12. A 13. C 14. B 15. A 16. D 17. C 18. D 19. D 20. A 21. B 22. A 23. C 24. A 25. B 26. C 27. D 28. A 29. C 30. A 31. C 32. B 33. A 34. A 35. B 36. D 37. B 38. D 39. B 40. D 41. C 42. C 43. A 44. B Version 3 Page 11
45. D 46. C 47. B 48. B 49. B 50. A Version 3 Page 12