Economic Analysis: Exchange Rates, Inflation, and Interest Rates - Prof. David A,Jr Denslo, Exams of Introduction to Macroeconomics

Download Economic Analysis: Exchange Rates, Inflation, and Interest Rates - Prof. David A,Jr Denslo and more Exams Introduction to Macroeconomics in PDF only on Docsity! TEST 2-1A Warrington College of Business ECO 2013, Spring 2011 Department of Economics Before handing in your test, please check that you have bubbled your name and UF ID number correctly and that you have bubbled in an answer for each question. Bubble in your UF ID number, using the first 8 columns. Your test should have 100 questions. Please check to see that it does. Only non-programmable calculators are allowed. Using a programmable calculator results in a penalty of 15 points. Please bubble in your Name & UFID on your scantron. We do not need your phone number. Instead of your section number, bubble in “1111” in the box labeled “Section”. Bubble A under “Test Form”. Bubble in the answers on the right-hand side of your scantron. When you are finished (before 9:20 am), hand in your scantron, signed on the back. You may keep your test. Check that you bubbled in some answer for all 100 questions. There is no extra penalty for incorrect answers. No way of receiving a message, such as a pager, may be consulted during the test. If you have a pager or cell phone and are expecting an urgent message, leave it and your ID with a proctor, who will relay the message to you. 1. Liaquat Ahamed wrote in Foreign Affairs, March 1, 2011, that most major currencies—the dollar, the euro, the pound, and the yen—as well as a host of minor currencies a. have fixed exchange rates against each other. b. float against each other. 2. Liaquat Ahamed wrote in Foreign Affairs, March 1, 2011, that like France in the 1920s, China has an _____ exchange rate and to sustain its peg is forced to accumulate enormous quantities of _____ reserves. a. undervalued … yuan b. undervalued … dollar c. overvalued … yuan d. overvalued … dollar 3. The terms in the Taylor Rule represent the Fed’s a. single mandate. b. dual mandate. c. triple mandate. d. quadruple mandate. 1 4. Liaquat Ahamed wrote in Foreign Affairs, March 1, 2011, “Many of the jobs lost at the onset of the latest downturn were tied to construction: not only construction workers themselves but many of the supporting workers, such as home improvement contractors or real estate brokers and lenders, lost their jobs, as did those people who worked in manufacturing construction materials. Given the extent of overbuilding during the last decade, it is unlikely that government spending or low interest rates will bring these jobs back. Instead, unemployed construction workers will have to gain new skills or relocate to areas that have jobs.” Ahamed is saying that much unemployment is now _____. That would likely mean that the economy is off the Beveridge Curve to the _____. a. cyclical … left b. cyclical … right c. structural … left d. structural … right 5. In a speech March 7, 2011, Dennis Lockhart, President of the Atlanta Fed, said that the Fed feels most comfortable with a core inflation rate just under a. zero. b. 1%. c. 2%. d. 3%. e. 4%. 6. In a speech March 7, 2011, Dennis Lockhart, President of the Atlanta Fed, said that with 20 million people either unemployed or involuntarily working only part-time, a. he did not think there was much danger inflation would accelerate. b. he feared that inflation would soon accelerate. 7. In a speech March 7, 2011, Dennis Lockhart, President of the Atlanta Fed, said “I spoke in Tallahassee, Fla., a few days ago on the nature of the unemployment problem. If my base case view of the future plays out, accumulating demand will favorably affect demand- sensitive job generation. But I also think there will remain what I called a harder nut of unemployment that will come down only gradually.” The “harder nut” that worried Lockhart is a. auto-correcting unemployment. b. structural unemployment. c. cyclical unemployment. d. deferred unemployment. e. Keynesian unemployment. 2 19. The Financial Products Group that brought down AIG suffered most notably major losses on its a. gambles on the yield curve. b. collateralized debt obligations backed by Greek bonds. c. credit default swaps guaranteeing derivatives of subprime mortgages. d. credit default swaps guaranteeing derivatives of Treasury securities. e. gambles on exchange rates. 20. Debt on student loans _____ be nullified by declaring bankruptcy. Defaults on students loans are particularly common among graduates of _____ colleges and universities. a. can … public b. can … for-profit c. cannot … public d. cannot … for-profit 21. The adverse selection death spiral afflicts ______ health insurance. Rescission is more likely to be a problem with _____ health insurance. a. optional … optional b. optional … universal c. universal … optional d. universal … universal 22. Cases now in the courts involve the use of the commerce clause as a constitutional basis for a. granting patents on drugs. b. Medicare Part D. c. universal health insurance. d. the Federal Reserve. e. not allowing states to have their own anti-immigration laws. 23. The health production function has medical inputs on the horizontal axis and a. medical spending on the vertical. b. other inputs on the vertical. c. GDP on the vertical. d. quality adjusted life years on the vertical. 24. The health production function has _____ slope and becomes _____ to the right. a. negative … flatter b. negative … steeper c. positive … flatter d. positive … steeper 5 25. A diagram has BMI on the horizontal axis and extra medical costs per year on the vertical. The relationship is a. linear, with negative slope. b. U-shaped and nearly symmetric. c. U-shaped and much steeper to the far left. d. U-shaped and much steeper to the far right. 26. Bernanke defended the rescue of Bear Stearns on the grounds of a. inflation risk. b. counterparty contagion. c. exchange rate stability. d. legal responsibilities to depositors. e. legal responsibilities to owners of stock. 27. Chinese purchases of obligations of Fannie Mae and Freddie Mac shifted the NX/Y line in the shares model to the _____, causing U.S. interest rates to be _____ than they would have been otherwise. a. left … lower b. left … higher c. right … lower d. right … higher 28. A stock-of-housing supply-and-demand diagram for a particular city most notably has a a. demand curve that is less elastic to the left of the current equilibrium. b. demand curve that is less elastic to the right of the current equilibrium. c. supply curve that is less elastic to the left of the current equilibrium. d. supply curve that is less elastic to the right of the current equilibrium. 29. Consider the Gordon equation for the value of a house with variables P, R, and g. The widespread availability of subprime mortgages brought into the housing market more people who had _____ values of g, which initially caused the demand curve to shift to the _____. a. low … left b. low … right c. high … left d. high … right 6 30. Residential mortgage-backed securities pooled from subprime mortgages were organized into tranches in which the equity tranches were the first to suffer from defaults and the AAA tranches the last. The rating agencies assigned AAA ratings to large tranches of these derivatives on the assumption that house prices were likely to _____ and that the correlation of house prices across regions of the country was _____. a. keep rising … low b. keep rising … high c. start falling … low d. start falling … high 31. The collapse of house prices was severe in a. New York, South Carolina, and New Jersey. b. Texas, Oklahoma, and Kansas. c. Arizona, Nevada, and California. d. Canada and Germany. 32. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said in a recent speech: “In the spring of 2003 there was worldwide concern that the U.S. economy was falling into a ‘Japanese-like’ malaise; the recovery was stalling, deflation was likely to occur and unemployment was too high. This was the prevailing view despite the fact that the U.S. economy was growing at a 3.2 percent annual rate and the global economy’s average growth was nearly 3.6 percent. In addition, the fed funds policy rate was 1 ¼ percent. Although most knew that such a low rate would support an expanding economy, in June 2003 it was lowered further to 1 percent and was left at that rate for nearly a year, as insurance.” Hoenig emphasizes his view that an important result of that policy was a. severe inflation. b. a housing boom or bubble. c. a sharp depreciation of the dollar. d. an immediate downward shift of the aggregate expenditure line. e. a flatter policy-rule curve on the inflation-GDP diagram. 33. A problem with using the Phillips curve as a guide to policy in the 1970s was that Samuelson and Solow estimated it for a period during which the United States was _____ the gold standard, then the Fed applied it to a period when the United States was _____ the gold standard. a. on … off b. off … on 34. In 1962, having been advised that the actual unemployment rate was _____ the natural unemployment rate, Kennedy proposed a ______ fiscal policy. a. above …Keynesian b. above … supply side c. below … Keynesian d. below … supply side 7 47. During economic fluctuations, in percentages the output of durables varies much _____ than does the output of services. Some attribute the Great Moderation partly to a structural change in the economy, _____ in employment in durables relative to services. a. less … a decrease b. less … an increase c. more … a decrease d. more … an increase 48. Apples and pears are often used as examples of _____, in the belief that their cross-elasticity of demand is _____. a. complements … negative b. complements … positive c. substitutes … negative d. substitutes … positive 49. Your instructor several times briefly described the extra credit books in class. For example, he noted that Amity Shlaes, in The Forgotten Man attributed the depth of the depression to a. the inflation of the 1930s. b. the stock market crash of 1929. c. uncertainty caused by excessive government economic intervention. d. going off the gold standard. e. the small size of the federal government. 50. The unemployment rate is officially defined as the number unemployed divided by a. the number employed. b. the adult population. c. the average duration of unemployment. d. the labor force. 51. In the quantity equation of exchange, a. M and V are flow variables. b. M and Y are flow variables. c. M and P are flow variables. d. V and Y are flow variables. e. Y is the only flow variable. 52. Letting N be the number of workers and W the wage, suppose the labor demand curve is given by N = 1000 – 20W. If the wage is $30, then the number of workers demanded is a. less than 300. b. at least 300, but less than 500. c. at least 500, but less than 700. d. at least 700, but less than 900. e. 900 or more. 10 53. The demand curve for good A is given by P = 500 – 5QD. A decrease in consumer income changes the demand curve for good A to P = 550 – 5QD. Good A is a. an inferior good. b. a normal good. 54. The demand curve for good B is P = 500 – 4QD. The slope of the demand curve is a. minus 125. b. minus 4. c. minus 1/4. d. The question cannot be answered because no price or quantity is specified. 55. If the vertical intercept of the AE line is $6.0 trillion, the slope of the AE line is 2/3, and the actual level of GDP is $18.0 trillion, then unintentional inventory investment is a. negative (inventories are falling). b. zero. c. positive (inventories are rising). 56. The economy has been at equilibrium GDP of $15 trillion. The slope of the AE line is 1/2. Suddenly, the AE line shifts up by $25 billion and inventories start a. falling at an annual rate of $50 billion. b. falling at an annual rate of $100 billion. c. rising at an annual rate of $50 billion. d. rising at an annual rate of $100 billion. e. falling at an annual rate of $25 billion. 57. On the 45° diagram, the intercept of the aggregate expenditure line is $3.5 trillion, actual GDP is $10.0 trillion, and unintentional inventory investment is $0.5 trillion. The slope of the aggregate expenditure line is a. one-half. b. two-thirds. c. three-fourths. d. four-fifths. e. three-fifths. 58. An elasticity of demand equal to 1.4 means that a. a 7 percent increase in price causes a 5 percent decrease in quantity demanded. b. a 5 percent decrease in price causes a 7 percent increase in quantity demanded. c. quantity demanded will increase by 5 percent when price increases by 7 percent. d. quantity demanded will increase by 7 units when price decreases by $5. e. a $7 increase in price will cause quantity demanded to decrease by 5 units. 11 59. The health care act would finance health insurance for the lower 80% of the income distribution subsidized largely by a. a value-added tax, a form of sales tax. b. taxing high-carbon energy sources, such as oil and coal. c. income tax hikes on those with incomes over $200,000. d. Public ownership of drug companies. 60. The cross-elasticity of demand for good A with respect to good B is minus 2/3. Goods A and B are a. complements. b. substitutes. c. independent goods. 61. In the shares-of-GDP model, if the S/Y line shifts right, then the equilibrium real interest rate a. falls. b. does not change. c. rises. 62. In the shares-of-GDP model, the more elastic the NX/Y line, the a. less elastic the S/Y line. b. less elastic the (I+NX)/Y line. c. more elastic the S/Y line. d. more elastic the (I+NX)/Y line. 63. In the shares-of-GDP model, an increase in taxes shifts the C/Y line a. left, causing the equilibrium real interest rate to fall. b. left, causing the equilibrium real interest rate to rise. c. right, causing the equilibrium real interest rate to fall. d. right, causing the equilibrium real interest rate to rise. 64. An aggregate production function is given by Y = TK0.3N0.7. If technology grows 0.8% a year, capital grows 2.2% a year, and worker hours rise by 0.4% a year, then using our log-linear approximation, the rate of growth of real GDP is a. less than 1%. b. at least 1%, but less than 2%. c. at least 2%, but less than 3%. d. at least 3%, but less than 4%. e. 4% or more. 12 76. The exchange rate of the dollar is likely to fluctuate by smaller amounts if the demand for dollars is a. elastic. b. inelastic. 77. The efficiency loss from public unions is largest if the ranking of job applicants to be hired is from low to high opportunity cost. a. random. b. from high to low skill. 78. In the shares-of-GDP model, a tax hike causes the dollar to _____, which causes the ratio NX/Y to _____. a. appreciate … fall b. appreciate … rise c. depreciate … fall d. depreciate … rise 79. Suppose the interest rate in Berlin is 4% and the interest rate in the United States is 2%. According to pure interest rate parity, the market expects the (algebraic) change in the exchange rate of the dollar versus the euro to be _____ over the coming year. a. less than -2% b. at least -2%, but less than 0% c. at least 0%, but less than 2% d. at least 2%, but less than 4% e. 4% or more 80. Suppose the interest rate in Tokyo is 1% and the interest rate in the United States is 3%. According to pure interest rate parity, the market expects the (algebraic) change in the exchange rate of the yen to be _____ over the coming year. a. less than -2%. b. at least -2%, but less than 0%. c. at least 0%, but less than 2%. d. at least 2%, but less than 4%. e. 4% or more. 81. A change in the exchange rate shifts the NX line up by $0.1 trillion. If the slope of the aggregate expenditure line on the 45° diagram is 0.2, that shift increases equilibrium GDP by a. less than $50 billion. b. at least $50 billion, but less than $100 billion. c. at least $100 billion, but less than $200 billion. d. at least $200 billion, but less than $300 billion. e. $300 billion or more. 15 82. The long-run international economic trilemma is that two countries can have only two of fixed exchange rates, _____, and independent monetary policies. a. tariffs b. different currencies c. free capital flows d. free trade e. independent fiscal policies 83. On the inflation-GDP diagram, the horizontal line is a. the interest rate curve. b. the velocity of money curve. c. the policy rule curve. d. the inflation-adjustment line. e. natural GDP. 84. On the inflation-GDP diagram, a policy action is represented by _____ and a change in policy regime is represented by _____. a. a movement along the policy rule curve … a shift of the policy rule curve relative to the natural GDP line b. a shift of the policy rule curve relative to the natural GDP line … a movement along the policy rule curve c. a shift of the policy rule curve relative to the natural GDP line … a shift of the policy rule curve relative to the natural GDP line d. a movement along the policy rule curve … a movement along the policy rule curve 85. Inflation-GDP diagram A has a policy rule curve with a slope of minus one. Inflation-GDP diagram B has a policy rule curve with a slope of minus one-half. Which diagram represents a more vigorous central bank response to higher inflation? a. A. b. B. 86. Suppose that Exxon’s earnings per share are $5, that the opportunity cost of investment funds is 10%, and that Exxon’s earnings per share are expected to fall by 3% a year. Using the very simple stock price formula, the price of a share of stock would be a. less than $40. b. at least $40, but less than $50. c. at least $50, but less than $60. d. at least $60, but less than $70. e. $70 or more. 16 87. A diagram shows the variance of a portfolio of a million dollars invested in stocks on the vertical axis and the number of different companies on the horizontal. The amount invested in each company is the same. Normally, the line showing the relation between the variance and number of companies a. has negative slope and become steeper to the right. b. has positive slope and become steeper to the right. c. has negative slope and become flatter to the right. d. has positive slope and become flatter to the right. e. be horizontal. 88. The Fed’s purpose with QE2 is to a. raise long-term interest rates. b. reduce short-term interest rates. c. reduce long-term interest rates. d. raise short-term interest rates. 89. Other countries fear that the Fed’s QE2 causes their currencies to a. depreciate, causing their exports to fall. b. appreciate, causing their exports to fall. c. appreciate, causing their exports to rise. d. depreciate, causing their exports to rise. 90. Suppose that in terms of the 45° diagram, QE2 causes the U.S. net export line to shirt up by $20 billion. If the slope of the AE line is 0.4, that effect by itself would raise equilibrium GDP by a. less than $50 billion. b. at least $50 billion, but less than $100 billion. c. at least $100 billion, but less than $150 billion. d. at least $150 billion, but less than $200 billion. e. $200 billion or more. 91. Suppose the government purchases multiplier is 2 and t, the marginal tax rate is 0.3. Then in the simple 45° diagram model, an increase in G of $200 billion would increase the federal deficit by a. less than $100 billion. b. at least $100 billion, but less than $125 billion. c. at least $125 billion, but less than $150 billion. d. at least $150 billion, but less than $175 billion. e. $175 billion or more. 17