Glendale Community College



Economics 211Macroeconomic PrinciplesExam #4 --- Part I Time: 1h 25m Date: 1 August 2013Name ___________________________________Class #15059Instructor: Brian B. YoungThe value of this exam is 75 points plus 15 points for the Bonus Question. Good luck! Please show your work where appropriate!Multiple Choice2 points each1) When a movement up along the short-run aggregate supply curve occurs, there is also aa.movement down along the short-run Phillips curve.b.movement up along the short-run Phillips curve.c.rightward shift of the short-run Phillips curve.d.leftward shift of the short-run Phillips curve.2) Which of the following is true?i. Comparative advantage drives international trade.ii. Compared to a no-trade situation, imports make domestic producers better off.iii. Tariffs lower the domestic price of imported goods.a. i and iiib. i and iic. Only iid. Only iiie. Only i3) Unplanned inventories increase whena.real GDP is less than aggregate planned expenditure.b.actual aggregate expenditure is greater than aggregate planned expenditure.c.actual aggregate expenditure is equal to GDP.d.aggregate planned expenditure is less than GDP.4) Which of the following is true?a.Monetary policy is subject to long law-making time lags.b.Monetary policy does not require a good estimate of potential GDP.c.Monetary policy is not subject to forecasting error.d.Monetary policy can be enacted more quickly than fiscal policy.5) An economy has neither imports nor income taxes. The MPC is 0.67 and real GDP is $150 billion. The government increases expenditures by $4 billion. The government expenditure multiplier is about ____ and the change in real GDP from the increase in government expenditures is about ____ billion.a.4; $16b.3; $12c.5; $20d.3; $96) A balanced budget would require that when real GDP is contracting rapidly,a. the government raise taxes or cut expenditures. This would increase the magnitude of economic fluctuations.b. the government raise taxes or cut expenditures. This would decrease the magnitude of economic fluctuations.c. the government cut taxes or raise expenditures. This would increase the magnitude of economic fluctuations.d. the government cut taxes or raise expenditures. This would decrease the magnitude of economic fluctuations7) How could an expansionary fiscal policy increase real GDP and lower the price level?a. if aggregate supply decreases more than aggregate demand increasesb. if aggregate supply increases more than aggregate demand increasesc. if aggregate supply decreases less than aggregate demand decreasesd. if the aggregate supply increases equals the aggregate demand increasee. if aggregate supply decreases more than aggregate demand decreases8) Ignoring any supply-side effects, suppose the government is considering cutting taxes by $100 billion or increasing government purchases by $100 billion. Thena.both policies would increase aggregate demand by the same amount.b.both policies would increase aggregate demand but the tax cut has a smaller effect.c.both policies would increase aggregate demand but the increase in government purchases has a smaller effect.d.the tax cut would decrease aggregate demand and the increase in government purchases would increase aggregate demand9) The sum of the balances of the three accounts of the balance of payments (the current account, the capital account, and the official settlements account) isa. positive if there is a balance of trade surplus or negative if there is a balance of trade deficit.b. negative if there is a balance of trade deficit.c. positive if there is a balance of trade surplus.d. equal to zero.e. negative if there is a balance of trade surplus or positive if there is a balance of trade deficit.10) An increase in the price level shifts thea.AD curve leftward.b.AD curve rightward.c.AE curve downward.d.AE curve upward.11) Which of the following is an example of a liquidity trap?a.The government increases spending and crowds out private investment.b.Private spending is very sensitive to a change in the interest rate.c.A change in the quantity of money does not change the interest rate.ernment spending does not increase the demand for money or aggregate demand.12) Keynesians maintain that fluctuations ina.the money stock are the main source of economic fluctuations.b.aggregate demand combined with sticky wages are the main source of economic fluctuations.c.aggregate supply combined with sticky prices are the main source of economic fluctuations.d.aggregate demand and aggregate supply with flexible prices are the main source of economic fluctuations13) Monetarists maintain that fluctuations ina.the money stock are the main source of economic fluctuations.b.aggregate demand combined with sticky wages are the main source of economic fluctuations.c.aggregate supply combined with sticky prices are the main source of economic fluctuations.d.aggregate demand and aggregate supply with flexible prices are the main source of economic fluctuations14) The Quantity Theory of Money and the Natural Rate Hypothesis share the common contention thatin the long run, we are all dead.money is neutral in the long run.wages are sticky.capital flows to its highest return.15) For many years, U.S. investment has exceeded savings and government expenditure has exceeded taxes. These imbalances (deficits) have been financed through international ________ by the United States as shown by the surplus on the balance of payments ________ account.a. lending; official settlementsb. lending; currentc. borrowing; capitald. borrowing; currente. borrowing; official settlements16) Ceteris paribus, if U.S. imports increase, then in the foreign exchange market thea. demand for U.S. dollars increases.b. quantity of U.S. dollars supplied decreases.c. supply of U.S. dollars increases.d. quantity of U.S. dollars supplied increases.e. supply of U.S. dollars decreases.17) In 2002, President Geo. W. Bush imposed a tariff on imported steel. He did so in response to rent seeking behavior bya. foreign steel consumers.b. domestic steel consumers.c. foreign steel producers.d. foreign politicians.e. domestic steel producers.18) In the United States,a. the Federal Reserve sets monetary and fiscal policies.b. Congress must approve monetary policy changes.c. Congress initializes changes in monetary policy and the Fed approves the changes.d. the Federal Reserve sets monetary policy.e. the President initializes changes in monetary policy and the Fed approves the changes.19) In late 2007, the Fed began a series of cuts in the federal funds rate. Because the core inflation rate was about two percent, the most likely reason for these interest rate cuts wasa. to increase the real interest rate.b. to dampen the economic impact of a recession.c. to raise the price of the dollar in the foreign exchange market.d. to reduce the natural unemployment rate.e. to encourage households to save more money.20) If a tax cut increases aggregate labor supply, then the tax cuta. decreases aggregate demand.b. decreases potential GDP (LRAS) because the real wage rate falls.c. does not affect aggregate demand.d. increases potential GDP (LRAS).e. Both answers B and C are correct.Problems20 points --- 1) Comment knowledgeably on the following statement. “If crowding out is a significant problem, a stimulative monetary policy is preferred to deficit spending, whereas, if we are in a liquidity trap, deficit spending (i.e., a stimulative fiscal policy) is preferred to a stimulative monetary policy.”15 points --- 2) The short-term interest rate on Sylvania’s silvo currency is 0% while the short-term interest rate on Freedonia’s freedo currency is 10%. In the spot market, one silvo buys two freedos. If naked (uncovered) interest rate parity holds, how many freedos can we expect to buy with one silvo 12 months from today?The 12-month futures contract for silvos is trading at US$0.7200; the same contract on freedos is trading at US$0.3400. If you cover a currency carry trade position with futures, is there an opportunity to profit? If so, exclusive of leverage and transactions costs, what is your annual rate of return?Bonus Question15 pointsWrite a short essay contrasting the types of fiscal policy you would recommend in each of the following situations:The economy appears to be entering a period of recession and policy makers need to boost aggregate demand (AD) as quickly as possible.The economy’s long-run economic growth is at a lackluster level and policy makers need to revive growth by shifting LRAS to the right.Justify your answers by mentioning such topics as automatic stabilizers, infrastructure, education, tax rates, consumption v. investment, marginal propensities to consume for various income brackets, and the values of relevant multipliers.If you feel as though you did not fully comprehend all the topics we covered in this course, remember…“If you understood what I said, I must have misspoken.” --- Federal Reserve Chairman Alan Greenspan, 1993. ................
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