EXAM 2 Sample Questions (Ch. 16, 17, 20 & 22

ECON 202 | EXAM 2 Sample Questions (Ch. 16, 17, 20 & 21) Chapter 16: The Monetary System Essay Question 1 : Explain how the Fed can use open market operations to decrease the money supply in the economy. Essay Question 2 : Explain how the Fed can use a new method/term auction facility to increase the money supply in the economy. Essay Question 3 (ACTIVE LEARNING 1) : Bank and the Money Supply While cleaning your apartment, you look under the sofa cushion and Ξnd a $50 bill. You deposit that bill in your checking account and the Ξrst reserve requirement is 20%. A. What is the maximum amount that the money supply could increase? Maximum money supply = initial currency X money multiplier → Money multiplier = 1 / R, where R is the reserve ratio R = 20% 1/R = 1 / (0.2) = 5 Maximum money supply = $50 x 5 = $250 Maximum increase in money supply is $250 minus $50, which is $200. → MAX Increase = $200 B. What is the minimum amount that the money supply could increase? MIN Increase = $0 If you keep the money in your pocket, the money supply will remain $50. The Fed needs to conduct open market sale in order to decrease money supply in the economy Fed sells us govt bonds supply of bonds in market increases price of bonds decrease interestrate increases Fed sells bonds to households money supply decreases banks and firms monedy supply decreases TheFed can buy gout bonds from a bank to increase money soppy Banks buy loans from Fed reserves through auction I increasemoney supply

Ch. 16 Multiple Choice Questions 1. Which of the following statements is NOT true? a. Commodity money has intrinsic value. b. Money is used as a unit of account. c. Money is used as a store of value. d. Money is used as medium of exchange. e. None of the above. 2. M1 includes… a. Currency and savings deposits. b. Currency and demand deposits. c. None of the above. d. Money market funds. 3. If the reserve ratio increases, then… a. The supply of money increases. b. The supply of money decreases. c. None of the above. 4. A bank with a high leverage ratio indicates high risk. a. TRUE b. FALSE 5. The federal funds rate is the interest rate that… a. The Fed charges when it gives loans to commercial banks. b. One commercial bank charges when it gives loans to another commercial bank. c. Commercial banks usually charge when they give loans to consumers. d. None 6. The Federal Open Market Committee is comprised of… a. 7 board of governors and the chairman of the Fed b. 7 board of governors, some CEOs of the regional Fed Banks and the chairman of the Fed c. CEOs of the Regional Fed Banks and the chairman of the Fed d. CEOs of the Regional Fed Banks 7. Using the Open Market Operations if the Fed wants to increase money supply in the US economy, then… a. The Fed needs to buy US government bonds. b. The Fed needs to sell US government bonds. c. The Fed needs to both buy and sell US government bonds. d. None of the above. M confused um MI saving deposits High leverage ratioshigh risk EE BET Mease GFL Decrease Preofbdondsleenase I return from gases

Chapter 17: Money Growth and InΟation Essay Question 1 (ACTIVE LEARNING #1) : One Good = Corn The economy has enough labor, capital, and land to produce Y = 800 bushels of corn. V is constant. In 2008, MS = $2000, P = $5 / bushel A. Compute nominal GDP and velocity in 2008. Essay Question 2 (ACTIVE LEARNING #3) : Tax distortions You deposit $1,000 in the bank for one year. CASE 1: InΟation = 0%, nominal interest rate = 10% CASE 2: InΟation = 10%, nominal interest rate = 20% a. In which case does the real value of your deposit grow the most? Assume the tax rate is 25%. b. In which case do you pay the most taxes? c. Compute the after-tax nominal interest rate, then subtract inΟation to get the after-tax real interest rate for both cases. Nominal GDP P x Y 5 x 800 1840001 V If Y II if real GDP is constant then inflation rate moneygrowth rate If realGDP is growing then inflationrate money growth rate Ent In both cases the real interest rate is 10 so thereal value of thedeposit grows 105 before taxes based on CASE7 interest in some 100 25 in taxes noggestfinthst income 200 so intaxes assume the tax rate is251 CASE 1 nominal o.gg zg 100 251 751 real 7 St 01 T.si nominal 1 real 151 101 551

Ch. 17 Multiple Choice Questions 1. Which of the following statement(s) is (are) true? a. If the price level increases, then the value of money decreases. b. If the money supply increases, then the price level increases, and the value of money decreases. c. If the money supply decreases, then the price level decreases, and the value of money increases. d. All of the Above. 2. Which of the following is an example of a Nominal variable? a. Nominal GDP b. Relative price c. Real interest rate d. Real GDP 3. Which of the following is an example of a Real variable? a. Relative price b. Real interest rate c. Real GDP d. All of the above 4. If the central bank doubles the money supply, then all nominal variables will double, but the real variables will remain unchanged. a. TRUE b. FALSE 5. Which of the following statements is true about Money Neutrality? a. An increase in money supply aΛect real variables both in the short run and long run. b. An increase in money supply aΛect real variable in the long run c. An increase in money supply nominal variable both in the short run and long run 6. Velocity of money is… a. The amount of money in the economy at a point in time. b. The rate at which money changes hands. c. The amount of money in checking accounts. d. The amount of money in savings account. 7. Which of the following is the Quantity Equation of Money? a. MV = PY b. Y = C + I + G + NX Vo to

Chapter 20: Aggregate Supply and Aggregate Demand Essay Question 1 : We know that if there is an increase in the general price level, then aggregate demand (AD) decreases. Since AD = C + I + G + NX, then it means that an increase in the price level causes a decrease in investment (I) and net exports (NX). A. Explain all the steps through which an increase in the price level causes a decrease in investment (I). B. Explain all the steps through which an increase in price level causes a decrease in net exports (NX). Essay Question 2 : As shown in PowerPoint slide 43, suppose the US economy is initially in equilibrium at point A. Using the diagram, explain how a crash in the stock market will aΛect the following macroeconomic variables: GDP, Price level, Unemployment, and Wage rate If the general pale levelin a country increases then consumers will feel poorer Consumers will either save lessor spend savings they madein the past common form ofsaving buying gout bonds Bond price decreases rate return from bond increases interest rate I interestrate increases investmentdemand deceases crash I C fans an shifts left Fonxaffected AD shifts right 3 P and Y lower 3 p and y higher unemployment tower 4 Pe falls SR AS shiftsright 4 Over time Pe rises s Ras shifts left

Essay Question 3 : Now suppose there is a boom in the stock market. Following the previous question, using the diagram, explain how the boom in the stock market will aΛect the following macroeconomic variables: GDP, Price level, Unemployment, and Wage rate. Essay Question 4 (Active Learning 2): Working with the model A. Draw the AD-SRAS-LRAS diagram for the US economy starting in a long-run equilibrium. B. A boom occurs in Canada. Use you diagram to determine the SR and LR eΛects on US GDP, the price level, and unemployment. p LRAS SRAS PI AD YW Y p LRAS SEAS SEAS P 00 C P B P A go ADI Y YwY

8. ACTIVE LEARNING 1: The Aggregate-Demand curve . What happens to the AD curve in each of the following scenarios? a. A ten-year-old investment tax credit expires. b. The US exchange rate falls. c. A fall in prices increases the real value of consumers’ wealth. d. State governments replace their sales taxes with new taxes on interest, dividends, and capital gains. AD curve will shift to the left investment falls AD curve win shift to the right increase in net exports AD curve will shift to the right moreconsumption Move down along AD curve wealth effect AD curve will shift to the right consumption demand increases

Chapter 21: The InΟuence of Monetary and Fiscal Policy on Aggregate Demand Essay Question 1 (Active Learning 2) : Monetary Policy For each of the events below, - Determine the short-run eΛects on output - Determine how the Fed should adjust the money supply and interest rates to stabilize output A. Congress tries to balance the budget by cutting government spending. B. A stock market boom increases household wealth. C. War breaks out in the Middle East, causing oil prices to soar . Essay Question 2 (Active Learning 3) : Fiscal Policy EΛects The economy is in recession. Shifting the AD curve rightward by $200B would end the recession. A. If MPC = 0.8 and there is no crowding out, how much should Congress increase G to end the recession? B. If there is crowding out, will Congress need to increase G more or less than this amount? This eventwould reduce AD and outpt Fed should increase MS and reduce r to increase AD increase AD raise output above natural rate Fedshould reduce MS and increase r to reduceAD reduce AS causing output to fall Fed should increase MS and reduce r to increase Ap 200 B S UOB Multiplier I 11 0.81 5 Increase G by 4013 to shift AD by 82006 5 840 B crowding out reduces the impart of G on AD Congress should increase 6 by a larger amount

8. Which of the following is an example of Expansionary Fiscal policy? a. Lowering tax rte b. Increasing government spending c. Both of the above d. None of the above 9. An expansionary Ξscal policy increases the interest rate causing the private investment to down. This in turn causes the aggregate demand to decrease. Tihis is called the Crowding Out EΛect. a. True b. False 10. If MPC is 0.9, then which of the following is the value of multiplier? a. 10 b. 5 c. 3 d. 20 8 0 Expansionary increase in G and or decrease in T Shifts AD right Contractionary decrease in G and or increase in T shifts AD left