## Midterm Exam 2. Version B

Name: ________________________________ Midterm Exam 2 Econ 2020-010 Spring 2010 Date: March 12 Instructor: Soojae Moon Version B Instruction: On the...
Author: Shonda Stephens
Name: ________________________________

Midterm Exam 2 Econ 2020-010 Spring 2010 Date: March 12 Instructor: Soojae Moon

Version B Instruction: On the scantron, fill out your name (both the bubbles and the write-in portion) and place your recitation section number in the boxes labled `1234` Recitation Number 0011 0012 0013 0014

Day of week T T R R

Time 12:30 5:00 12:30 3:30

TA McMahan McMahan McMahan McMahan

Location CHEM 145 ECON 119 HLMS 259 EDUC 138

You have 50 minutes to complete the exam. There are total 30 questions. Please read carefully and choose the choice that best completes the statement or answers the question. Answer All. Try your best! Good luck!

Name: ________________________________ 1. The concept of monetary neutrality describes a situation in the long run when: A) increases in the money supply have no effect on real variables such as GDP but only raises the price level. B) increases in the money supply have no effect on the price level but only raises real GDP. C) decreases in the money supply lower real GDP and the price level. D) increases in the money supply raise real GDP and the price level. 2. To increase the money supply, the central bank could: A) lower the discount rate. B) make open-market purchases. C) lower reserve requirements. D) lower the discount rate, make open-market purchases, or lower reserve requirements. 3. Suppose a bank has excess reserves of \$800 and the reserve ratio is 10%. If Diana deposits \$1,500 of cash into her checking account and the bank lends \$600 to Russell, that bank can lend an additional: A) \$1,550 B) \$1,300 C) \$2,000 D) \$1,350 Deposit=1,500 =>rr=10%=>required reserve=10% of 1,500 =150 =>Excess reserve = 1,500-150=1,350 *Already had excess reserve = 800 => Total excess reserve = 800+1,350 = 2,150 *Already loaned out = 600 => Additional loan = 2,150-600 = 1,550 4. The tool of monetary policy that involves the Fed's buying and selling of government bonds is: A) moral suasion. B) reserve requirements. C) the discount rate. D) open-market operations. Use the following to answer question 5. Figure: Output Gap

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5. (Figure: Output Gap) Consider to the figure provided. If the economy is producing Y1, then it has: A) an inflationary gap, as actual real GDP exceeds potential real GDP and the Fed should use contractionary monetary policy. B) a recessionary gap, as potential real GDP exceeds actual real GDP and the Fed should use expansionary monetary policy. C) an inflationary gap, as potential real GDP exceeds actual real GDP and the Fed should use contractionary fiscal policy. D) a recessionary gap, as actual real GDP exceeds potential real GDP and the Fed should use expansionary fiscal policy. 6. Which of the following is part of M1? A) short-term certificates of deposit (CDs) B) shares of corporate stock C) currency in a bank's vault D) travelers checks 7. Automatic stabilizers are government spending and taxation rules that: A) cause fiscal policy to be expansionary when the economy contracts. B) cause fiscal policy to be contractionary when the economy contracts. C) cause fiscal policy to be neutral when the economy contracts. D) cause fiscal policy to be ineffective when the economy contracts. 8. If government spending increases and taxes decrease: A) implicit liabilities will increase. B) implicit liabilities will decrease. C) the public debt will increase. D) the public debt will decrease.

Name: ________________________________ Public debt is a government debt held by individuals and institutions outside the government. Increase in government spending and lowering taxes are expansionary fiscal policies and this will make a budget surplus smaller or a budget deficit bigger. This will also make public debt increase. Implicit liabilities is a spending promises made by governments that are like a debt although they are not included in the usual debt statistics. In the US, the largest implicit liabilities arise from Social Security and Medicare, which promise transfer payments to Social Security and Medicare. They are Government transfers and the question doesn’t mention about TR, so we can eliminate answers that contain implicit liabilities. 9. The demand for money is higher in Japan than in the United States because: A) telecommunications and information technology is more advanced in the United States than in Japan. B) the Japanese use credit cards more than people in the United States. C) Japanese interest rates are very high in comparison to interest rates in the United States. D) Japanese interest rates are very low in comparison to interest rates in the United States. Figure: Short-Run Determination of the Interest Rate

10. (Figure: Short-Run Determination of the Interest Rate) If the money supply is currently at MS1 and the central bank chooses to buy bonds, then the resulting shortrun shift in the supply of savings (loanable funds) may be represented by a shift of the: A) money supply curve to MS2 that raises the interest rate. B) supply of loanable funds from S1 to S2 and a lower interest rate. C) supply of loanable funds from S2 to S1 and a higher interest rate. D) interest rate from r2 to r1. Liquidity preference model: Ms↑→r↓→I ↑→Y↑ →Yd ↑→ saving ↑ Loanable funds market: saving ↑ → supply of loan ↑ → r↓

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11. Holding everything else constant, if the required reserve ratio falls, then: A) a \$1 loan can lead to a smaller change in the money supply than before the change in the required reserve ratio. B) the money multiplier increases. C) the amount of excess reserves falls also. D) the money multiplier decreases. 12. If a bank has deposits of \$100,000, cash on hand of \$10,000 and \$15,000 on deposit at the Federal Reserve, and the required reserve ratio is 0.20, then the bank: A) has no excess reserves. B) has excess reserves of \$5,000. C) has insufficient reserves to meet requirements. D) has an insufficient deposit to loan ratio. Bank reserves are currency held by banks in their vaults (\$10,000) plus their deposits (\$15,000) at the Federal Reserve, so \$25,000. Excess reserves is a bank’s reserves over and above the reserves required by law or regulation. Required reserves is \$100,000*0.2=\$20,000. Excess reserves = bank’s reserves – reserve required by law = \$25,000-\$20,000 = \$5,000. 13. The primary difference between M1 and M2 is that: A) the dollar amount of M1 is much larger than the dollar amount of M2. B) M1 includes checkable deposits, but M2 does not. C) M2 includes checkable deposits, but M1 does not. D) M2 includes savings deposits and time deposits, but M1 does not. M1: currency, traveler’s check and checking deposits M2: M1 + near moneys (saving deposits, time deposits..) 14. The demand curve for money will shift to the right because of a: A) fall in the interest rate. B) rise in real GDP. C) rise in the interest rate D) fall in real GDP. Remember 4 factors that shift money demand curve? One of them is change in real GDP. Increase in real GDP shift Md shift right 15. A change in taxes or a change in government transfers affects consumption through a change in: A) autonomous consumption. B) the marginal propensity to save. C) disposable income. D) government spending.

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Disposable income is an income plus government transfers minus taxes: the total amount of household income available to use for consumption and saving. 16. If the MPC is 0.8 and the government spending decreases by \$50 million, then equilibrium GDP will decrease by: A) \$40 million. B) \$50 million. C) \$200 million. D) \$250 million. 50*(1/0.2)=250 17. When the Fed decreases bank's reserves through an open-market operation: A) deposits increase, currency in circulation increases, and the monetary base remains the same. B) the monetary base decreases, the money multiplier decreases, and the money supply increases. C) loans increase, the federal funds rate rises, and the discount rate rises. D) the monetary base decreases, loans decrease, and the money supply decreases. Use the following to answer question 18. Figure: Short-Run Equilibrium

18. (Figure: Short-Run Equilibrium) The accompanying graph shows the current shortrun equilibrium in the economy. Appropriate fiscal policy action in this situation would be: A) a decrease in transfer payments. B) an increase in government purchases. C) a decrease in tax rates.

Name: ________________________________ D) an increase in the investment tax credit. Potential output < actual output: there is a inflationary gap. To close inflationary gap, they need to use contractionary fiscal policy. 19. The money demand curve is _________ because a lower interest rate ___________. A) upward-slopping; increases the opportunity cost of holding money B) downward-slopping; increases the opportunity cost of holding money C) upward-slopping; decreases the opportunity cost of holding money D) downward-slopping; decreases the opportunity cost of holding money Use the following to answer question 20. Figure: Changes in the Money Supply

20. (Figure: Changes in the Money Supply) If the supply of money shifts from S1 to S2, the Fed must have _______ government bonds in the open market. A) sold B) bought C) issued new D) borrowed 21. Suppose the MPC = 0.8 and the government cuts taxes by \$40 billion. Which of the following will be the likely effect? A) Real GDP will expand by \$200 billion. B) Real GDP will contract by \$200 billion. C) Real GDP will expand by \$160 billion. D) Real GDP will contract by \$160 billion. 40*[0.8/(1-0.8)]=160 Use the following to answer questions 22-23.

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Figure: Fiscal Policy I

22. (Figure: Fiscal Policy I) Suppose that this economy is in equilibrium at E2. If there is an increase in taxes, then: A) AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. B) AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. C) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. D) AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP. 23. (Figure: Fiscal Policy I) Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, then: A) AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. B) AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. C) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. D) AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP. 24. All of the following are roles of money, EXCEPT: A) a measure of wealth. B) a medium of exchange.

Name: ________________________________ C) a unit of account. D) a store of value. 25. Suppose an economy has \$200,000 of demand deposits and \$40,000 of excess reserves with a 10% required reserve ratio. If the monetary authorities raise the required reserve ratio to 20%, then which of the following will likely follow? A) The excess reserves will rise by 10%. B) The excess reserves will fall by 10%. C) There will be no more excess reserves in the system. D) Excess reserves will decrease by \$20,000. Deposit=200,000 =>rr=10%=>required reserve=10% of 200,000 =20,000 =>Excess reserve = 200,000-20,000=180,000 *Already had excess reserve = 40,000 => Total excess reserve = 180,000+40,000=220,000 Deposit=200,000 =>rr=20%=>required reserve=20% of 200,000 =40,000 =>Excess reserve = 200,000-40,000=160,000 *Already had excess reserve = 40,000 => Total excess reserve = 160,000+40,000=200,000 Excess reserves will decrease by \$20,000 if the monetary authorities raise the required reserve ratio to 20%. 26. The government budget balance equals: A) Taxes + Government purchases + Government transfers. B) Taxes – Government purchases – Government transfers. C) Taxes – Government purchases + Government transfers. D) Taxes + Government purchases – Government transfers. 27. All of the following are examples of fiscal policy EXCEPT: A) increasing the reimbursement amounts under Medicaid. B) reducing the money supply in order to raise the interest rate. C) increasing the personal income tax deductions for home ownership. D) reducing federal subsidies to state universities. A) is government transfer, C) is regarding tax, D) is regarding government spending, so A,C,D is a fiscal policy, but B) is monetary policy (altering money supply) 28. A decrease in the supply of money, with no change in demand for money, will lead to_______ in the equilibrium quantity of money and _______ in the equilibrium interest rate. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease

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29. When an individual decides to hold money instead of other assets: A) that individual is giving up the interest that could have been earned by holding other types of assets. B) that individual becomes more likely to suffer from money illusion. C) that individual is not affected by unanticipated inflation. D) that individual is able to maintain a higher standard of living. 30. The discount rate is the interest rate the Fed charges on loans to: A) consumers. B) the federal government. C) state governments. D) banks.

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Answer Key - Midterm2-B 1. A 2. D 3. A 4. D 5. A 6. D 7. A 8. C 9. D 10. B 11. B 12. B 13. D 14. B 15. C 16. D 17. D 18. A 19. D 20. B 21. C 22. B 23. C 24. A 25. D 26. B 27. B 28. C 29. A 30. D