University of California, Santa Barbara

Econ 2 Spring 2012 Midterm 2 Version A

1)In a closed economy, if Output remained the same, but Government Spending rose, Taxes rose by the same amount as Governemnt Spending, and Consumption fell but by less than the increase in Taxes, what would happen to private and national saving?

 

	national saving would fall and private saving would rise national saving would rise and private saving would fall both national saving and private saving would fall None of the above is correct.
____	2. An increase in the budget deficit would cause a shortage of loanable funds at the original interest rate, which would lead to falling interest rates. surplus of loanable funds at the original interest rate, which would lead to rising interest rates. shortage of loanable funds at the original interest rate, which would lead to rising interest rates. surplus of loanable funds at the original interest rate, which would lead to falling interest rates.
____	3. Other things the same, if the government increases transfer payments to households, this change

1. will make investment rise.
2. will make the rate of interest rise.
3. will make public saving rise.
4. All of the above are correct.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 26-3.   The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves.

 

 

A

B

C

F

S

S

D

D

1

2

1

2

i

 

       

____	4. Refer to Figure 26-3.   Which of the following movements would be consistent with the government budget going from deficit to surplus and the simultaneous enactment of an investment tax credit? a. a movement from Point A to Point C a movement from Point B to Point A a movement from Point B to Point F a movement from Point C to Point B
____	5. 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
____	6. You have a contract with someone who has agreed to pay you $20,000 in four years. She offers to pay you now instead. For which of the following interest rates and payments would you take the money today?. a. 8 percent, $15,000 7 percent, $16,000 6 percent, $17,000 All of the above are correct.
____	7. Fourteen years ago William put money in his account at First National Bank.  William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did William earn? a. 5 percent 7 percent 10 percent 14 percent

____          8. You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70? a. $4

2. $8
3. $16
4. $32

  

____ 9. You receive $500 today which you plan to save for two years.  Also, in two years you will be given another $500.  If the interest rate is 5 percent, what is the present value of the payment of $500 today and the $500 in two years?

1. $500(1.05)² + $500/(1.05)²
2. $500(1.05)² + $500
3. $500 + $500/(1.05)²
4. $500 + $500

  

____ 10. A soup manufacturer unexpectedly announces that it has hired a new manager.  It is widely believed that this manager will raise the profitability of the corporation.  At the same time interest rates unexpectedly rise.  Which of the above would tend to make the price of the stock rise? a. the announcement and the rise in interest rates

2. the announcement but not the rise in interest rates
3. the rise in interest rates, but not the announcement
4. neither the announcement nor the rise in interest rates

  

____ 11. President Bigego is running for re-election against Senator Pander.  Bigego proclaims that more people are working now than when he took office.  Pander says that the unemployment rate is higher now than when Bigego took office. You conclude that a. one of them must be lying.

2. both of them could be telling the truth if the labor force and employment grew at the exact same rate.
3. both of them could be telling the truth if the labor force grew slower than employment.
4. both of them could be telling the truth if the labor force grew faster than employment.

  

____ 12. Suppose that the adult population is 4 million, the number of unemployed is 0.25 million, and the labor-force participation rate is 75%.  What is the unemployment rate? a. 6.25%

2. 8.3%
3. 9.1%
4. 18.75%

  

____ 13. Suppose that some people are counted as unemployed when, to maintain unemployment compensation, they search for work only at places where they are unlikely to be hired.  If these individuals were counted as out of the labor force instead of as unemployed, then

1. both the unemployment rate and labor-force participation rate would be higher.
2. both the unemployment rate and labor-force participation rate would be lower.
3. the unemployment rate would be lower and the labor-force participation rate would be higher.
4. the unemployment rate would be higher and the participation rate would be lower.

 

 

 

 

____ 14. Some people who are employed or who are not making serious effort to find employment will report themselves as unemployed.  Some people who want to find work will be counted as out of the labor force. a. Both the first and the second fact tend to make the reported unemployment rate lower than otherwise.

2. Both the first and the second fact tend to make the reported unemployment rate higher than otherwise.
3. The first fact tends to make the reported unemployment rate higher than otherwise, while the second fact tends to make the reported unemployment rate lower than otherwise.
4. The first fact tends to make the reported unemployment rate lower than otherwise, while the second fact tends to make the reported unemployment rate higher than otherwise.

  

____ 15. Suppose that autoworkers are unionized in one region of the country but not in the other.  If the unionized workers abolished their unions, employment 

1. and wages of autoworkers in that region would rise.
2. of automobile workers in that region would rise, but wages of automobile workers  in that region would fall.
3. and wages of autoworkers in that region would fall.
4. of automobile workers in that region would fall but wages of automobile workers in that region would rise.

  

____ 16. In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by the public

1. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds.
2. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.
3. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds.
4. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.

  

____ 17. 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

1. buying bonds. This buying would reduce reserves.
2. buying bonds. This buying would increase reserves.
3. selling bonds. This selling would reduce reserves.
4. selling bonds. This selling would increase reserves.

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 26-4.   On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.

 

 

$50

$62

6

%

8

%

Supply

D

D

1

2

L

r

 

       

____ 18. Refer to Figure 26-4.  Regard the position of the Supply curve as fixed, as on the graph.  If the nominal interest rate is 8 percent, the inflation rate is 1 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be

 

a.

.

b.

.

c.

between

and

.

d.

to the right of

.

 

____ 19. Refer to Figure 26-4.  If the equilibrium quantity of loanable funds is $50 billion and if the equilibrium nominal interest rate is 8 percent,  then 

1. there is an excess supply of loanable funds at a real interest rate of 6 percent.
2. there is an excess demand for loanable funds at a real interest rate of 8 percent.
3. the rate of inflation is approximately 2 percent.
4. the rate of inflation is approximately 14 percent.

  

____ 20. The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 10 percent, how much is the bank holding in excess reserves?

1. $15 million
2. $19.5 million
3. $25.5 million
4. $30 million

  

____ 21. If the reserve ratio is 10 percent, banks do not hold excess reserves, people hold only deposits and no currency, then when the Fed sells $10 million worth of bonds to the public, bank reserves a. increase by $1 million and the money supply eventually increases by $10 million.

2. increase by $10 million and the money supply eventually increases by $100 million.
3. decrease by $1 million and the money supply eventually increases by $10 million.
4. decrease by $10 million and the money supply eventually decreases by $100 million.

 

 

 

____ 22. Other things the same if reserve ratio decreases

1. the money multiplier increases, and the money supply decreases.
2. the money multiplier decreases, and the money supply increases.
3. the money multiplier increases, and the money supply increases.
4. the money multiplier decreases, and the money supply decreases.

  

____ 23. Two bonds have the same term to maturity.  The first was issued by a state government and the probability of default is believed to be low.  The other was issued by a corporation and the probability of default is believed to be high.  Which of the following is correct?

1. Because they have the same term to maturity the interest rates should be the same.
2. Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate.
3. Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.
4. It is not possible to say if one bond has a higher interest rate than the other.

 

 

Scenario 26-3.  Assume the following information for an imaginary, open economy.  

 

Consumption = $1,000; investment = $300; net exports = $100;  taxes = $230; private saving = $200; and national saving = $150.

 

____ 24. Refer to Scenario 26-3.  For this economy, GDP equals

1. $1,400.
2. $1,430.
3. $1,580
4. $1,680.

  

____ 25. 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.

2. no greater than 4.53 percent.
3. no less than 5.81 percent.
4. no greater than 5.81 percent.

  

____ 26. John says that the future value of $250 saved for one year at 6 percent interest is less than the future value of $250 saved for two years at 3 percent interest. George says that the present value of a $250 payment to be received in one year when the interest rate is 6 percent is less than the value of a $250 payment to be received in two years when the interest rate is 3 percent. a. John and George are both correct.

2. John and George are both incorrect.
3. Only John is correct.
4. Only George is correct.

  

____ 27. Which of the following would both make the interest rate on a bond higher than otherwise?

1. the interest it pays is taxed and it is long term
2. the interest it pays is taxed and it is short term
3. the interest it pays is tax exempt and it is long term
4. the interest it pays is tax exempt and it is short term

 

 

 

 

 

____ 28. Which of the following is a source of frictional unemployment?

1. changes in the composition of demand among industries or regions
2. minimum wages
3. labor unions
4. None of the above is correct.

  

____ 29. Minimum wages create unemployment in markets where they create a 

1. shortage of labor.  Unemployment of this type is called frictional.
2. shortage of labor.  Unemployment of this type is called structural.
3. surplus of labor.  Unemployment of this type is called frictional.
4. surplus of labor.  Unemployment of this type is called structural.

 

 

Values of Assets

 

 

Asset                      Amount in $Billions

Small time deposits           780  

Large time deposits          1,700  

Demand deposits 450  

Other checkable deposits 370  

Savings deposits    4950  

Traveler's checks 5  

Money market mutual funds        740 

Currency    880 

Miscellaneous categories of M2 50

 

 

____ 30. Refer to Value of Assets.  What is the value of M1 in billions of dollars? a. 1705

2. 2485
3. 6295
4. 7075

  

____ 31. Greg L. owns a bicycle shop. He must decide between selling one of two new bicycle models: the Rooftop Monkey and the Human Centipede. If Greg sells the Rooftop Monkey, he will earn $1,000 per year forever (a perpetuity). If he instead chooses to sell the Human Centipede, he will be able to earn $10,000 at the end of one year. What interest rate will make Greg indifferent between the two models if he makes his decision using discounted present value? a. 11.1%

2. 12.5%
3. 10%
4. Greg should sell Human Centipedes regardless of what the interest rate is

  

____ 32. In the article "Voodoo Multipliers", Robert Barro does not think the greater than 1.0 multiplier assumed by Team Obama is realistic. Which one of the following is not the assumption for this huge multiplier? a. The government is better than the private market at marshaling idle resources to produce useful stuff. 

2. Some unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure those out. 
3. The market fails since there is something wrong with the price system. 
4. Domestic markets cannot effectively allocate resources in an open economy because capital and labor prices are lower in developing countries. 

 

 

____ 33. In  the  article  “What’s  Really  Happening  in  Housing  Markets?”  from  July  2007,  which  of  the  following  do  the  authors mention as a plausible reason for why housing prices outpaced income in coastal states but not in interior states?

1. Credit constraints were relaxed for homebuyers in coastal cities but not in Midwestern cities.
2. The price of land has risen in coastal areas but has remained stagnant in non-coastal areas
3. Land is a much more scarce resource on the coasts and housing prices on the coast are closely tied to the price of land.
4. None of the above.

  

____ 34. Which of the following are true of tranches?

1. The highest rated tranches are paid last.
2. The highest rated tranches have the highest credit risk.
3. The lowest rated tranches have the highest interest rates.
4. All of the above are true.

  

____ 35. In  the  article,  "Obama  Misreads  Message  of  ‘Live  Free  or  Die,’"  Amity  Shlaes  argues  that  the  differing government policies in Maine and New Hampshire have shown that, a. Government should expand healthcare spending

2. Creating more government jobs will lead to economic growth
3. Income taxes are more efficient than sales taxes
4. Lower taxes are better for economic growth

  

____ 36. Which of the following does NOT accurately describe securitization?

1. Securitization can be used to pool mortgages together to sell a group of assets as a single asset.
2. Securities can be split up into tranches to create one or more securities whose rating is higher than the average rating of the underlying collateral asset pool.
3. Securitization made it more difficult for subprime borrowers to get loans to buy homes.  d. None of the above.

  

____ 37. How does JOLTS calculate the separation rate?

 

a.

b.

c.

 

4. None of the above are correct

  

____ 38. Less vacancies relative to unemployed means:

1. It is more difficult for a worker to find a job.
2. It is easier for a job to find a worker.
3. Neither A or B are correct.
4. Both A and B are correct.

 

 

 

 

 

 

  

____ 39. The yield curve typically,

1. is upward sloping because there is a positive relationship between time to maturity and interest rates.
2. is downward sloping shape because there is a negative relationship between time to maturity and interest rates.
3. is upward sloping because there is a positive relationship between unemployment and inflation
4. is downward sloping becasue there is a negative relationship between unemployment and inflation

  

____ 40. The  term  “crowding  out”  is  given  to,

1. The tendency for increased budget deficits to reduce investment spending.
2. The tendency for increased budget surpluses to reduce investment spending.
3. When you buy a lot of shares of only a few stocks to reduce risk.
4. When you buy a few shares of a lot of stocks to reduce risk.