Midterm 2 Macro Review Materials B

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Midterm 2 Macro Review Materials B Econ 102 Cho 1. According to the quantity theory of money, which term within the quantity equation is the most stable over long periods of time? a. Price level b. Nominal GDP c. Output d. Velocity e. Money 2. In 2015, United States imported 1,000 cars from Great Britain, which cost 10,000 British pounds each. The US exported 500 cars to Great Britain, which cost 30,000 US dollars each. Suppose these are the only imports and exports for the US and the real exchange rate with Great Britain from the US perspective is 2. What are US net exports? a. 20,000,000 US Dollars b. 10,000,000 US Dollars c. 5,000,000 US Dollars d. 0 US Dollars e. -5,000,000 US Dollars 3. Suppose the United States decides to increase tariffs on all imports into the US. Relative to other currencies, this will cause the US dollar to a. not change in value b. depreciate c. appreciate d. ambiguous change in value e. first appreciate, then depreciate 4. Which of the following is most likely to be associated with an increase in poverty? a. The implementation of a new progressive tax b. The real income of those in the top 20% of income earners falls by 10% c. The Gini coefficient falls substantially d. The number of people earning below the level of the poverty line has decreased e. The number of single persons with children has increased substantially

5. An income distribution becomes more unequal as the a. Lorenz curve moves toward the diagonal b. Gini coefficient approaches zero c. Lorenz curve moves toward the bottom right corner of the diagram d. Gini coefficient approaches 0.5 e. None of the above 6. Which of the following would contract the money supply? a. The Federal Reserve buys Treasury bonds. b. The Federal Reserve decreases the reserve requirement. c. The Federal Reserve increases the discount rate. d. The Federal Reserve sells Treasury bonds. e. Both (c) and (d). 7. The biggest risk of fractional reserve banking is: a. The Federal Reserve will gain too much power b. Banks are fractured and cannot function well in the loanable funds market c. During times of crisis, banks could run out of vault cash d. Financial regulations are expensive and costly e. Depositors have to put different amounts of funds in different banks 8. If nominal GDP is $600, real GDP is $300, and the money supply is $100, then the price level is ________ and the velocity is _________. a. 2 ; 6 b. ½ ; 3 c. 3 ; 5 d. 1 ; 3 e. 3 ; 6 9. If the economy experiences unexpected hyperinflation then debtors (or borrowers) will be _________ and creditors (or lenders) will be _________ because the real value of the debt will _________. a. benefited; hurt; increase b. benefited; hurt; decrease c. hurt; benefited; increase d. hurt; benefited; decrease e. hurt; hurt; decrease

10. Suppose banks never have any excess reserves. If reserves increase, and at the same time deposits decrease, which of the following is consistent with this phenomenon? a. The required reserve ratio decreases b. The money multiplier decreases c. More cash and coins are being deposited into banks d. Banks are experiencing a bank run e. All of the above 11. Which of the following statements is true? a. The US dollar is commodity money. b. Bitcoin is a good "store of value" because the value is relatively stable over time. c. The Federal Reserve, officially backs and regulates Bitcoin. d. Bitcoin is a good "medium of exchange" e. Bartering is uncommon in places where fiat money is a good "medium of exchange". 12. In the three panel diagram, assume the following exogenous event. In the US, households begin saving more of their income. Assume also that the US NCO curve does not shift. For Canada, the NCO curve ______________. a. shifts outwards b. shifts inwards c. shifts upwards d. does not shift, but there is a movement up and left along the curve e. does not shift, but there is a movement down and right along the curve 13. The Federal Reserve wants to decrease the money supply by $1000. Banks never have excess reserves. The reserve requirement is 10%. Which of the following actions by the Fed will accomplish the Fed’s goal? a. Sell $200 worth of bonds b. Buy $100 worth of bonds. c. Sell $1000 worth of bonds. d. Buy $1000 worth of bonds. e. Sell $100 worth of bonds. 14. Which of the following is most likely to reflect a move towards a more equal distribution of income? a. The share of total income going to the top 20% of income earners rises from 40% to 50% b. The Gini coefficient rises towards one c. The share of income going to the bottom 20% of income earners falls from 8% to 7% d. The share of total income going to the bottom 50% of income earners rises from 40% to 50% e. The Lorenz curve becomes more bowed outwards

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15. The US and the UK are both open economies. Suppose that due to “Brexit”, people believe that the UK is a riskier place to keep their financial capital. For the United States, net capital outflow __________ and real interest rates ___________. a. increases ; increase b. increases ; decrease c. decreases ; increase d. decreases ; decrease e. decreases ; do not change 16. Which of the following statements about net exports is FALSE? a. Trade policies do not affect the trade balance b. Trade policies do not affect the real exchange rate c. An appreciation of a nation’s currency causes exports to fall d. A depreciation of a nation’s currency causes imports to fall e. Both (c) and (d) 17. Assume R = 20% and E = 5% for all banks, and throughout all steps of the money multiplier. Jennifer withdraws $200 from her checking deposits and keeps it in the form of currency. As a result, the decrease in the money supply is closest in magnitude to ___________. a. $200 b. $500 c. $800 d. $1000 e. $2000 18. In the long run money market, suppose the Federal Reserve reduces the money supply. It accomplishes this by ____________ U.S. government bonds, and this will result in a ______________ price level. a. purchasing ; higher b. purchasing ; lower c. selling ; higher d. selling ; constant e. selling ; lower 19. In the three panel diagram, if the supply of loanable funds shifts left, then a. the supply of dollars in the market for foreign-currency exchange shifts left. b. the supply of dollars in the market for foreign-currency exchange shifts right. c. the net capital outflow curve shifts left. d. the net capital outflow curve shifts right. e. None of the above

20. Suppose that firms scale back investment in plants and equipment. In the three panel diagram, NCO ____________, and the real exchange rate ___________. a. increases ; increases b. increases ; decreases c. increases ; does not change d. decreases ; increases e. decreases ; does not change 21. Suppose that the Federal Reserve purchases large amounts of U.S. government bonds. In the long run money market, the value of money ___________ and the price level _____________. a. increases ; increases b. increases ; decreases c. does not change ; does not change d. decreases ; increases e. decreases ; decreases 22. In the three panel diagram, assume the following exogenous event. In the US, government deficits increase. For the US, the real interest rate ____________ , and the real exchange rate _____________. a. increases ; increases b. increases ; decreases c. increases ; does not change d. decreases ; increases e. decreases ; decreases 23. In the three panel diagram, assume the following exogenous event. As developing countries around the world become richer, they begin saving much more of their income both domestically and abroad. For the US, the real interest rate ____________ , and exports _____________. a. increases ; increase b. increases ; decrease c. decreases ; increase d. decreases ; decrease e. decreases ; do not change

Long Question Section: "(T)rade (D)eals & the (T)hree-panel (D)iagram" (12 Points) 1. Assume that the United Kingdom (UK) is an open economy, and that the national currency is the British pound. In 2016, the UK voted to leave the European Union, which is commonly referred to as “Brexit”. However, assume that there have been new talks about striking a new trade deal between the UK and the European Union (EU). Suppose that the UK and EU strike a new trade deal. As a result, you are given the following pieces of information: i. The UK now has a more stable economic environment, or is considered less risky. ii. UK residents begin spending more of their income purchasing grocery items as uncertainty is reduced [assume that this event does not affect business investment in plants and machines]. iii. After (i) and (ii), you notice that in the new equilibrium, the UK real interest rate decreases. a. (6 points) Using the blank space on the next page, draw a well-labeled three panel diagram for the UK (or United Kingdom), demonstrating the effects of the trade deal on the UK economy. Label the initial equilibrium as point A, and the final equilibrium as point B in each of the three panels. b. (3 points) Using your diagram, determine what happens to the following variables for the UK economy listed below. Simply circle your answer for each variable below, and provide explanations only for the variables denoted with a “*” in the space provided. National savings [increases/decreases/no change] Investment [increases/decreases/no change] E [increases/decreases/no change] NCO* [increases/decreases/no change]

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Three Panel Diagram for 1.a.

Midterm 2 Macro Review Materials B

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