Econ 102 Final Exam Name ID Section Number 1. Which of the following is not an accurate statement of core capital goods? A) proxy for business investments B) does not include transportation equipment C) is essential to productivity and long-run growth D) new orders remain below pre-recession peak 2. The demand curve for money will NOT shift as a result of a change in: A) the interest rate. B) banking technology. C) real GDP. D) the price level. 3. Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account at the local bank. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as. A) $90; $900 B) $90; $1,000 C) $100; $1,000 D) $100; $900 4. A 20% increase in the aggregate price level will increase the quantity of money demanded by: A) the money multiplier. B) 20%. C) 10%. D) half the money multiplier. Version 3 Page 1
Use the following to answer question 5: Figure: A Money Market 5. (Figure: A Money Market) The accompanying graph shows the money market. In this market, the equilibrium interest rate is: A) M0. B) r2. C) r3. D) r1. 6. In the long run, the only effect of monetary policy is on: A) the long-run aggregate supply. B) the aggregate price level. C) the aggregate output level. D) the interest rate. 7. Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account: A) there is no change in M1 or M2. B) M1 and M2 both increase by $50. C) M1 increases by $50. D) M2 increases by $50. Version 3 Page 2
8. When the output gap is, reflecting an inflationary gap, the unemployment rate is the natural rate of unemployment. A) positive; above B) negative; below C) negative; above D) positive; below Use the following to answer question 9: Figure: Monetary Policy and the AD SRAS Model 9. (Figure: Monetary Policy and the AD SRAS Model) An increase in the money supply is most likely to cause a shift: A) from SRAS' to SRAS. B) from SRAS to SRAS'. C) from AD' to AD. D) from AD to AD'. 10. Keynes believed that to end the Great Depression: A) a decrease in government spending would balance the budget. B) only a government takeover of industry could save the economy. C) a decrease in the money supply would fight inflation. D) the capitalist system needed only a narrow technical fix. 11. Which of the following is not a factor impacting the shape of today's yield curve? A) euro zone interest rate policy B) Federal Reserve reinvesting treasury securities C) emerging market turmoil D) rising stock prices Version 3 Page 3
12. A very low rate of inflation during a recession can lead to: A) government budget deficits. B) a liquidity trap, which makes monetary policy effective. C) a liquidity trap, which makes monetary policy ineffective. D) government budget surpluses. 13. When private lenders refused to lend to the Greek government, other European countries: A) provided emergency loans to Greece but demanded harsh budget cuts in return. B) also refused to lend money to Greece. C) forced Greece to leave the European Union. D) forced Greece to abandon the euro and return to the drachma for its currency. 14. A long-run Phillips curve has a(n) slope because. A) zero; there is a positive relationship between expected inflation and unemployment B) infinite; any unemployment rate below the NAIRU leads to ever-accelerating inflation C) negative; there is a positive relationship between the output gap and the NAIRU D) positive; any unemployment rate above the NAIRU leads to ever-accelerating inflation 15. Why did China buy $450 billion in foreign exchange reserves? A) to keep the yuan from depreciating B) to keep the yuan from appreciating C) to slow down the growth of the Chinese economy D) to encourage free trade between all nations 16. If wages and prices are perfectly flexible, a decrease in aggregate demand will cause a(n): A) decrease in the price level and employment. B) increase in the price level and no change in employment. C) decrease in the price level and no change in employment. D) increase in the price level and unemployment. Version 3 Page 4
17. Which of the following statements regarding exchange rate intervention is NOT true? A) A devaluation can be used to increase exports and reduce imports. B) A devaluation can be used to eliminate a recessionary gap. C) Devaluations and revaluations can be used to eliminate shortages or surpluses in the foreign exchange market. D) A revaluation can be used to eliminate a recessionary gap. 18. If the Federal Reserve wants to discourage banks from borrowing directly from the Federal Reserve and thus decrease the monetary base, it would likely: A) increase the discount rate. B) increase the reserve requirement. C) increase the federal funds rate. D) sell U.S. Treasury bills in an open market operation. 19. A deficit in the current account means there will be: A) a balanced financial account. B) a surplus in the financial account. C) either a surplus or a deficit in the financial account. D) a deficit in the financial account. 20. Keynesians argued that monetary policy would NOT be effective if: A) no one bought bonds when the Fed conducted open-market operations. B) other countries did not follow monetary policy similar to that of the United States. C) there was a liquidity trap. D) the Fed was independent of political pressure. 21. Which of the following statements regarding the Empire State Manufacturing Survey is not accurate? A) New York state is highly exposed to defense industries B) first look at the health of the manufacturing sector C) publishes a diffusion index D) index > 50 indicates an expansion 22. If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 2%, the opportunity cost of holding the checking account as money is: A) 0.02%. B) 1%. C) 2%. D) zero. Version 3 Page 5
23. The Fed measures the expected rate of inflation as the difference between the: A) consumer price index and the core rate of inflation. B) the actual and natural rates of unemployment. C) interest rate on ordinary government bonds and the interest rate on government bonds whose yield is protected from inflation. D) actual and potential output. 24. 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) consumer and investment spending increase too rapidly, causing high rates of inflation. C) 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. D) the vicious cycle of deleveraging that follows leads to overpriced assets. 25. If at the current interest rate the demand for money is $300 billion and the supply of money is $200 billion, then the interest rate will: A) rise. B) remain unchanged. C) be in equilibrium. D) fall. 26. Which of the following statements does not accurately describe the Index of Leading Economic Indicators? A) Stock prices as one of the 10 components of the index. B) Is calculated by incorporating 10 other economic indicators. C) Expect a recession if the 6 month growth rate falls below a negative 2 percent. D) An index value greater than zero indicates an expanding economy. 27. The medium-of-exchange function means that money is used: A) to accumulate purchasing power. B) to pay for goods and services. C) as the common denominator of prices. D) as the common denominator of future payments. Version 3 Page 6
28. If the real exchange rate rose 1.8% over the last year, and the nominal exchange rate rose 0.9% during the same time period; how much faster was U.S. inflation than the average inflation rate in the rest of the world? A) -0.9% B) 0.9% C) 2.7% D) -2.7% 29. The annual growth rate in the Producer Price Index has been below 1% for the last 2 years due to all the following factors except: A) falling production of primary metals. B) falling energy prices. C) rising value of the dollar. D) weak overseas economic growth. 30. In a vicious cycle of deleveraging: A) banks are forced to sell assets at a deep discount to reduce their debt. B) depository banks and shadow banks engage in maturity transformation. C) the Fed is prohibited from acting as a lender of last resort. D) banks buy some type of asset and push the price up to an unreasonable level. 31. If the exchange rate is $1 = 110, a $20,000 Ford truck costs in Japan. A) 20,000 B) 2.2 million C) 18,182 D) 3 million 32. It has been pointed out by economists that capital flows as a share of world savings and investment today are much smaller than they were over a century ago. Which of the following is a likely explanation? A) restrictions on migration and political risks B) restrictions on migration C) greater economic integration in the present D) political risks Version 3 Page 7
33. Industrial Production is made up of 3 components: Manufacturing Output, Utility Output, and Mining Output. Manufacturing output makes up percent of the total industrial production. A) 50 B) 75 C) 85 D) 25 34. In the long run, when the actual inflation rate gets embedded into people's expectation: A) it is possible to achieve lower unemployment in the long run by accepting higher inflation. B) the trade-off between inflation and unemployment becomes even stronger. C) there is no longer a trade-off between inflation and unemployment. D) actual inflation at any unemployment rate is always higher than expected inflation. 35. In the United States, the institution that is charged with determining the size of the monetary base and with regulating the banking system is the: A) Commerce Department. B) Treasury Department. C) U.S. Senate Banking Committee. D) Federal Reserve. 36. A sudden and widespread disruption of financial markets that occurs when people lose faith in the liquidity of financial institutions and markets is a(n): A) debt overhang. B) asset bubble. C) maturity transformation. D) financial panic. 37. The theory of rational expectations contends that policy activism is: A) warranted, because discretionary policies have a strong effect on real output. B) not warranted; the public defeats discretionary policies because everyone expects them and therefore their effectiveness is thwarted. C) not warranted, because we don't know enough about the workings of the economy to stabilize it. D) warranted, because expectations are rational only in the short run. Version 3 Page 8
38. The concept of the monetary policy rule is based on the assumption that: A) the velocity of money is constant in the short run. B) discretionary fiscal policy crowds out investment spending. C) the natural rate of unemployment is constant in the long run. D) monetary policy lags are shorter than fiscal policy lags. 39. Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 20%. Then Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly. That bank can lend an additional: A) $2,400. B) $1,000. C) $800. D) $200. 40. In a graph of a money demand curve, which of the following variables is plotted on the vertical axis? A) the rate of price inflation B) the interest rate on 30-year Treasury bills C) the interest rate on liquid assets, like short-term CDs D) the rate of return in the stock market 41. The relationship between the output gap and the unemployment rate can be summarized thus: A) When the output gap is negative, the unemployment rate is below the natural rate. B) When there is an inflationary gap, the unemployment rate is above the natural rate. C) When the output gap is zero, the unemployment rate is also zero. D) When the output gap is positive, the unemployment rate is below the natural rate. 42. A depreciation of the domestic currency below the exchange rate fixed by the government can be countered by all of the following measures EXCEPT by: A) decreasing capital flows into the country. B) decreasing foreign exchange reserves. C) limiting the domestic purchase of foreign financial assets. D) decreasing capital flows out of the country. 43. There may NOT have been business cycles in the United States before 1854 because: A) monetary policy conducted by the Fed was very successful. B) the economy was a rural, agricultural economy. C) the banking system established by Alexander Hamilton prevented business cycles. D) the country was growing too rapidly to have a recession. Version 3 Page 9
Use the following to answer question 44: 44. (Scenario: Monetary Base and Money Supply) How much is M1? A) $480 billion B) $330 billion C) $380 billion D) $325 billion 45. The unemployment rate will fall if potential output growth is: A) higher than the inflation rate. B) higher than actual output growth. C) lower than actual output growth. D) equal to actual output growth. 46. The Consumer Confidence Index fell in October due to all the following factors except: A) worries over pace of job growth. B) fears of future tax increases. C) political uncertainty. D) falling home prices. Use the following to answer question 47: Scenario: The Velocity Equation Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate price level equals 2. Version 3 Page 10
47. (Scenario: The Velocity Equation) Refer to the information in the scenario The Velocity Equation. If the money supply is $5 trillion, then the velocity of money is: A) 5. B) 4. C) 8. D) 10. Use the following to answer question 48: Figure: AD AS Model and the Short-Run Phillips Curve 48. (Figure: AD AS Model and the Short-Run Phillips Curve) Refer to the information in the figure. If the central bank decreases the money supply so that aggregate demand shifts from AD2 to AD1, then the unemployment rate will be: A) 6%. B) zero. C) 2%. D) 4%. 49. Long-term interest rates are higher than short-term rates. This reflects a belief that: A) short-term rates are expected to rise. B) the Federal Reserve is undergoing a change in policy. C) short-term rates are expected to fall. D) short-term rates are expected to remain the same. Version 3 Page 11
50. If the government guarantees not only the deposits but also the other liabilities of a failing bank, the government usually: A) merges it with the Federal Reserve. B) temporarily takes over the bank but then reprivatizes it as soon as possible. C) closes the bank permanently. D) merges it with the Treasury. Version 3 Page 12
Answer Key 1. B 2. A 3. A 4. B 5. B 6. B 7. A 8. D 9. D 10. D 11. D 12. C 13. A 14. B 15. B 16. C 17. D 18. A 19. B 20. C 21. D 22. B 23. C 24. A 25. A 26. D 27. B 28. B 29. A 30. A 31. B 32. A 33. B 34. C 35. D 36. A 37. B 38. A 39. B 40. C 41. D 42. A 43. B 44. B Version 3 Page 13
45. C 46. D 47. B 48. A 49. A 50. D Version 3 Page 14