Economics 211 211 Macroeconomic Principles Exam 7 or 9 November 2011 Name: The value of this exam is 100 points. Instructor: Brian Young Please show your work where appropriate! Formulas and Definitions 5 points each #1: If the value of Nominal GDP is approximately $12.0 trillion and the value of M1 is approximately $1.5 trillion, use the equation of exchange to calculate the velocity of M1. Briefly explain why bond prices and interest rate are inversely related. List four policy tools available to the Federal Reserve and enumerate how they influence interest rates and the money supply. #4 What is the Marginal Propensity to Consume and how is it related to the autonomous expenditure multiplier? #5 Derive a money multiplier, similar to the one given on pp. 289-290 of the Bade & Parkin text, but which reflects the growing importance of the excess reserves which banks keep on deposit with the Fed. Page 1 of 5
Multiple Choice 3 points each #1 The demand for money increases when the price level a. increases. b. decreases. c. remains constant. d. None of the above answers is correct. The amount of loans that a bank can make is limited by a. a law enacted by Congress. b. the bank s excess reserves. c. a directive from the Federal Reserve System, which takes into account the bank s financial stability. d. the real interest rate. The business cycle is defined as a. changes in the stock market. b. changes in financial markets. c. persistent growth in potential GDP. d. irregular ups and downs in output and employment. #4 The quantity of real GDP supplied increases when the price level rises because a. profits decrease. b. real factor prices fall. c. real factor prices rise. d. real factor prices and profits both fall. #5 The Quantity Theory of Money is a proposition about the a. Fed s operating procedures to change the quantity of money. b. relationship between nominal and real interest rates. Page 2 of 5
c. relationship between a change in the supply of money and the price level. d. relationship between financial assets and currency demanded. #6 If real GDP decreases, there is a. an upward movement along the demand for money curve. b. a downward movement along the demand for money curve. c. a rightward shift of the demand for money curve. d. a leftward shift of the demand for money curve. #7 When disposable income increases from $9 trillion to $10 trillion, consumption expenditure increases from $6 trillion to $6.8 trillion. The MPC is a. 1.00. b. 0.80. c. 0.60. d. 0.68. #8 Which of the following increases the quantity of money demanded? a. a rise in the nominal interest rate b. a rise in the inflation rate c. a rise in the real interest rate d. a fall in the nominal interest rate #9 Which of the following is true about the expenditure multiplier? a. The multiplier effect for a change in investment spending is larger than the b. The multiplier effect for a change in investment spending is smaller than the c. The multiplier effect for a change in investment spending is the same as the d. The multiplier effect for a change in government spending is equal to zero. #10 The dual mandate of the Fed directs our central bank to a. both promote U.S. exports and maintain a strong dollar policy. Page 3 of 5
b. maintain both stable prices and full employment. c. keep interest rates low, but not so low that saving decreases. d. promote economic chaos wherever and whenever possible. #11 Which of the following ingredients would one most likely find in the popular cocktail known as Rum & Coke? a. Maple syrup, Clamato juice, and kerosene. b. Rum, Coke, and sometimes ice. c. The aggregate demand curve shifts leftward until real output reaches zero. d. This question is an insult to my intelligence! #12 When currency is deposited into a checking account, the immediate effect of the deposit is that M1 a. remains the same. b. increases. c. decreases. d. None of the above answers is correct because currency is not part of money. #13 To increase the quantity of money in the economy the Fed could a. increase the discount rate. b. increase the required reserve ratio. c. sell government securities. d. buy government securities. #14 If the Fed buys $10 million dollars of government securities from Wells Fargo, N.A., what happens to the bank s balance sheet? a. both assets and liabilities increase by $10 million. b. the bank loses $10 million of securities and gains $10 million of excess reserves. c. total deposits at the bank increase by $10 million. d. total assets of the bank increase by $10 million. #15 In the money market, if the quantity of money supplied by the Fed exceeds the quantity of money demanded, then to achieve equilibrium the Page 4 of 5
a. supply of money increases. b. nominal interest rate falls. c. inflation rate increases. d. demand for money increases. Short Answer 10 points each #1: How is the Quantity Theory of Money related to the Natural Rate Hypothesis? You are given the following information about an economy: 1) at full employment, the unemployment rate is 5% and real output is $500 billion; and 2) the following table applies: Inflation rate: 5% 2.5% 1.5% Unemployment rate: 4% 5% 6% Real output: $550 billion $500 billion $450 billion Assuming the price level in Period 0 was 100, graphically show the economy s long-run and short-run Phillips Curve and corresponding long-run and short-run aggregate supply curves in Period 1. Use the AS-AD Model to graphically display a recession and show how an increase in government expenditures is one way to return the economy to a full-employment equilibrium. Page 5 of 5