University of California, Santa Barbara - ECON 2 Final Exam 1)According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also either a rise in output or a rise in the rate at which money changes hands

Question

University of California, Santa Barbara - ECON 2

Final Exam

1)According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

	either a rise in output or a rise in the rate at which money changes hands. either a rise in output or a fall in the rate at which money changes hands. either a fall in output or a rise in the rate at which money changes hands. either a fall in output or a fall in the rate at which money changes hands.
____	2. Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day and had a productivity of 2.5. Country B has a population of 800, of whom 560 worked 8 hours a day and had productivity of 3.0. The country with the higher real GDP was country A, and the country with higher real GDP per person was country A. country A, and the country with higher real GDP per person was country B. country B, and the country with higher real GDP per person was country A. country B, and the country with higher real GDP per person was country B.
____	3. Suppose that the adult population is 6 million, the number of employed is 3.8 million, and the labor-force participation rate is 70%. What is the unemployment rate? a. 6.7% 9.5% 10.5% 28%
____	4. Suppose the price index was 100 in 2004, 118 in 2005, and the inflation rate was lower between 2005 and 2006 than it was between 2004 and 2005. This means that a. the price index in 2006 was lower than 118. the price index in 2006 was lower than 136. the price index in 2006 was lower than 139.24. the inflation rate between 2005 and 2006 was lower than 1.18 percent.
____	5. The U.S. real GDP for 2014 is 16 trillion dollars. Approximately 10% of the U.S. real GDP is collected by the government through its tax collections. The underground or “shadow” economy is estimated to be between 8% and 14% of real GDP. Given this information, the underground economy costs the government taxing authorities to lose approximately a. 128 billion dollars to 224 billion dollars. 128 million dollars to 224 million dollars. 50 billion dollars to 100 billion dollars. 20 billion dollars to 80 billion dollars.
____	6. Which of the following statements are true?

Ceteris paribus, the lower the price level, the higher the velocity of money will be.
Ceteris paribus, the lower the money supply, the higher the velocity of money will be.
Ceteris paribus, the higher the value of money, the higher the velocity of money will be.
None of the above statements are true.

Scenario 26-2. Assume the following information for an imaginary, closed economy.

GDP = $200,000; consumption = $120,000; government purchases = $35,000; and taxes = $25,000.

____	7. Refer to Scenario 26-2. Suppose, for this economy, the relationship between the real interest rate, r, and investment, I, is given by the equation I = 69,000 – 3,000r. (If, for example, r = 10, this means that the real interest rate is 10 percent.) The equilibrium real interest rate for this economy is a. 6 percent. 7 percent. 8 percent. 9 percent.
____	8. Which of the following events will lead to an increase in money demand? a negative growth forecast for GDP a decrease in the price level an increase in the level of aggregate output an decrease in the money supply
____	9. A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first? a. 7 percent 8 percent 9 percent 10 percent
____ 10. What is the lowest interest rate at which you would prefer $100,000 today over $105,000 tomorrow? a. 3% 4% 6% 10% Table 23-7 The table below contains data for the country of Togogo. The base year is 1974.
Year		Nominal GDP	GDP Deflator
1974		$2000	100
1975		$3000	120
1976		$3750	150
1977		$6000	200

____ 11. Refer to Table 23-7. From 1976 to 1977,

inflation was 33.3% and output grew at a rate of 20%.
inflation was 33.3% and output grew at a rate of 60%.
inflation was 50% and output grew at a rate of 20%.
inflation was 50% and output grew at a rate of 60%.

____ 12. If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves

increase by $20 million and the money supply eventually increases by $250 million.
decrease by $20 million and the money supply eventually increases by $250 million.
increase by $20 million and the money supply eventually decreases by $250 million.
decrease by $20 million and the money supply eventually decreases by $250 million.

____ 13. The nominal interest rate for a consumer loan lasting from 2007 to 2008 is 8.5 percent and the real interest rate is 4.5 percent. If the consumer price index was 200 in 2007, what would the consumer price index value be in 2008? a. 192

208
209
217

____ 14. During the recent financial crisis velocity decreased. This means that the rate at which money changed hands

decreased. Other things the same, a decrease in velocity decreases the price level.
decreased. Other things the same, a decrease in velocity increases the price level.
increased. Other things the same, an increase in velocity decreases the price level.
increase Other things the same, an increase in velocity increases the price level.

____ 15. Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the

money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.

____ 16. The CPI was 100 in 2000 and 108 in 2001. Dorgan borrowed money in 2000 and repaid the loan in 2001. If the nominal interest rate on the loan was 12 percent, then the real interest rate was a. 2 percent

4 percent
10 percent
22 percent

____ 17. Suppose that some people report themselves as unemployed when, in fact, they are working in the underground economy. If these persons were counted as employed, then

both the unemployment rate and labor-force participation rate would be higher.
both the unemployment rate and labor-force participation rate would be lower.
the unemployment rate would be higher and the labor-force participation rate would be higher.
the unemployment rate would be lower and the labor-force participation rate would be unaffecte

____ 18. Suppose money the supply is declining at 6%, the velocity of declines by 2%, and real GDP is declining at 3%. What is inflation? a. 5%

11%
-2%
-5%

____ 19. Which of these is NOT a way that the Fed can control the money supply?

Changing the federal funds rate
Open market operations
Changing the required reserve ratio
Changing the real interest rate

____ 20. A newspaper article informs you that most businesses reduced production in the last quarter but also sold from their inventories during the last quarter. Based on this information GDP likely a. increased.

decreased.
stayed the same.
may have increased, decreased, or stayed the same.

____ 21. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is

$75,000; thus, Ruben's purchasing power increased between 2001 and 2006.
$75,000; thus, Ruben's purchasing power decreased between 2001 and 2006.
$85,000; thus, Ruben's purchasing power increased between 2001 and 2006.
$85,000; thus, Ruben's purchasing power decreased between 2001 and 2006.

____ 22. You find $1,000 under your mattress and decide to deposit it into a bank rather than hold onto it. If the reserve requirement is 5%, at most, how much money can be created from your deposit? a. $1,000

$2,000
$10,000
$20,000

____ 23. Tom invests $1,500 at an interest rate of 5%. During this time the price of a laptop computer rose from $1,500 to $1,560. What does this tell us about inflation and Tom’s real return 1 year after his investment? a. Inflation was 6%, and Tom’s real rate of return was -1%

Inflation was 6.5%, and Tom’s real rate of return was 5%
Inflation was 5%, and Tom’s real rate of return was 0%
Inflation was 4%, and Tom’s real rate of return was 1%

____ 24. An American retailer purchased 100 pairs of shoes from a company in Denmark in the second quarter of 2010 but does not sell them to a consumer until the third quarter of 2010. In which quarter(s) is (are) the value of the shoes included in U.S. GDP?

the second and third quarters
the second quarter but not the third quarter
the third but not the second quarter
neither the second nor the third quarter

____ 25. What is the value of receiving $2 every year forever at an interest rate of 0.2%?

$2,000
$200
$100
$1,000

____ 26. If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

buying bonds. This buying would reduce reserves.
buying bonds. This buying would increase reserves.
selling bonds. This selling would reduce reserves.
selling bonds. This selling would increase reserves.

____ 27. Suppose some country had an adult population of about 25 million, a labor-force participation rate of 60 percent, and an unemployment rate of 6 percent. How many people were employed? a. 0.9 million

14.1 million
15 million
23.5 million

____ 28. Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium

interest rates and the equilibrium quantity of loanable funds rise.
interest rates rise and the equilibrium quantity of loanable funds fall.
interest rates fall and the equilibrium quantity of loanable funds rise.
interest rates and the equilibrium quantity of loanable funds fall.

Table 23-4

The country of Caspir produces only cereal and milk. Quantities and prices of these goods for the last several years are shown below. The base year is 2008.

Prices and Quantities

Year	Price of Cereal	Quantity of Cereal	Price of Milk	Quantity of Milk
2008	$4.00	90	$1.50	150
2009	$4.00	100	$2.00	180
2010	$5.00	120	$2.50	200
2011	$6.00	150	$3.50	200

____ 29. Refer to Table 23-4. This country’s output grew

29.9% from 2008 to 2009.
33.3% from 2009 to 2010.
24.3% from 2009 to 2010.
15.4% from 2010 to 2011.

____ 30. You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?

$66,225.25
$67,556.42
$68,058.32
$71,428.57

____	31. An instantaneous 6% increase in the velocity of money and a 3% decrease in the money supply would cause a: a. Increase in the price level of 3% Increase if the price level of 9% Decrease in the price level of 3% The effect on the price level is not calculable with the information available.
____	32. A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is a. no less than 4.53 percent. no greater than 4.53 percent. no less than 5.81 percent. no greater than 5.81 percent.
____	33. A Texas household receives a Social Security check for $500, which it uses to purchase a $460 television made in Korea by a Korean firm and a $40 dinner at a local restaurant. As a result, U.S. GDP a. does not change. increases by $40. increases by $540. increases by $1000.
____	34. If the US economy quadruples in size in 35 years, what is the approximate average annual growth rate of GDP? a. 2% 4% 6% 8%
____	35. The purchase of rice produced this period is included in GDP if the rice is used in a meal a restaurant sells during the same period they buy the rice. purchased by a family who uses it to make tuna casserole for its supper. purchased by a frozen food company to increase its inventory. B and C are correct.
____	36. Alice says that the present value of $700 to be received one year from today if the interest rate is 6 percent is

less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Beth says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.

Both Alice and Beth are correct.
Both Alice and Beth are incorrect.
Only Alice is correct.
Only Beth is correct.

____

37. Suppose you win a small lottery and you are given the following choice: You can (1) receive an immediate payment of $10,000 or (2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is a. 2 percent, but not if the interest rate is 3 percent.

3 percent, but not if the interest rate is 4 percent.
4 percent, but not if the interest rate is 5 percent.
5 percent, but not if the interest rate is 6 percent.

____

38. The manager of the bank where you work tells you that the bank has $400 million in deposits and $340 million dollars in loans. The Fed then raises the reserve requirement from 10 percent to 15 percent. Assuming everything else stays the same, how much is the bank holding in excess reserves after the increase in the reserve requirement? a. $0

$20 million
$40 million
$60 million

____

39. If real GDP is $2 billion, nominal GDP is $3 billion, the money supply (M1) is $1 billion, then what is velocity?

1
2
3
3/2

____

40. In the loanable funds model, an increase in an investment tax credit would create a

shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.
shortage at the former equilibrium interest rate. This shortage would lead to a fall in the interest rate.
surplus at the former equilibrium interest rate. This surplus would lead to a rise in the interest rate.
surplus at the former equilibrium interest rate. This surplus would lead to a fall in the

interest rate.