Economics 302 Name ________________________________Answers to Second MidtermJune 14, 2007 Student ID Number _____________________Version 1This midterm consists of 25 multiple choice questions (some with just two answers and some with up to five answers) worth 2 points each for a total of 50 points and 3 problems worth a total of 50 points. Please answer all multiple choice questions on the scantron provided. Pleases show all your work on the exam booklet: if any questions arise as to the integrity of your exam, we will NOT give full credit unless suitable work is shown in the exam booklet.For all questions please pick the BEST answer.SCANTRON DIRECTIONSPlease fill out your scantron sheet carefully. You need to use a number 2 pencil and you need to bubble in your - Name- Student Identification Number (and NOT your social security number)- Your exam version number in special codes column “A”PROBLEM DIRECTIONS:Please answer these questions on your test booklet. Please write legibly and please take some time to organize your answer before your write it.If you have questions about any question on the exam please make a note of that question on your exam booklet and then draw the proctor’s attention to this question at the end of the exam. Please do not ask the proctor any questions during the exam: no questions will be answered during the exam period.You have 75 minutes to complete the exam. Please use your exam booklet margins for any calculations youneed to do.Calculators are fine to use. Problem #1 (12 points) _____________________Problem #2 (22 Points) ______________________Problem #3 (16 Points) ______________________TOTAL _______________________Multiple Choice:1. For a small, open economy when spending exceeds production then I. This country will run a trade deficitII. This country will be a net lenderIII. This country will export less than it importsa. Statements I, II and III are trueb. Statements I and II are truec. Statements I and III are trued. Statements II and III are true.Answer: C.2. The national accounts identity for a small open economy can be written as a. Y = C + I + G + Xb. Y = Cd + Id + Gd + NXc. NX = NS – Id. All of the above answers accurately express the national accounts identityAnswer: C.3. For a small, open economy, if there is an increase in the level of national savings for a given level of investment, then the Classical Model suggests that this economy willa. Find that its net exports are diminishedb. Find that its net exports are increasedAnswer: B.4. In a model of a small, open economy the expression Y – C – G is equivalent to a. National Savingb. Private Savingc. Government Savingd. InvestmentAnswer: A.5. When the trade balance is negative, then it must be the case thatI. Exports are greater than importsII. Imports are greater than exportsIII. Net capital outflow are negativeIV. National savings is less than investmenta. Statements I, III and IV are true.b. Statements II, III and IV are true.c. Statements II and IV are trued. Statements I and III are trueAnswer: B.6. For a small, open economy when investment exceeds national saving then I. The trade balance is negativeII. The trade balance is positiveIII. The world real interest rate is higher than the real interest rate in the small,open economya. Statements I and III are true.b. Statements II and III are true.c. Statement I is true.d. Statement II is true.Answer: C.7. A small, open economy is initially in a long run equilibrium situation where the real interest rate in this economy equals the world real interest rate. Assume that this economy has full capital mobility. Then, this small, open economy reduces their level of government spending, holding everything else constant. This will a. Result in national saving being less than investment for this economy at the world real interest rate.b. Result in this country becoming a net lender to foreign economies.c. Result in net capital outflows being negative.d. Answers (a) and (c) are both true for this economy.Answer: B.8. When a large country increases their level of government spending this leads to a. Increases in the world real interest rate and therefore decreases in the levelof worldwide spending.b. Reductions in world savings and therefore an increase in the world real interest rate.c. Reductions in world savings which are offset by reductions in the level of investment, so that government spending crowds out investment and has no impact on the world real interest rate.d. Decreases in the world real interest rate and therefore an increase in economic production.Answer: B.9. Which of the following statements is true?I. The nominal exchange rate expresses the relative price of the currency of two countriesII. The real exchange rate is equal to the nominal exchange rate plus the rate of inflation.III. The real exchange rate expresses the rate at which the goods of one country trade for the goods of another country.a. Statements I, II and III are true.b. Statements I and II are true.c. Statements I and III are true.d. Statement I is true.e. Statement II is true.Answer: C.10. Based on the model we used in class, the real exchange rate from country A’s perspective will increase if the price level in country B increases, holding everything else constant.a. Trueb. FalseAnswer: B. If the price level in country B increases this will make the price ratio for the price level in country A to the price level in Country B get smallerand therefore lead to decreases in the real exchange rate in Country A.11. While holding everything else constant, Country A finds that the nominal exchange rate for country B’s currency to country A’s currency increases. This will cause the real exchange rate from Country A’s perspective to decrease.a. Trueb. FalseAnswer: B. If the nominal exchange rate increases, this causes the numerator of the real exchange rate to increase and therefore the real exchange rate to increase.12. When the real exchange rate is relatively low, thena. Foreign goods are relatively cheap and domestic goods are relatively expensive.b. Foreign goods are relatively cheap and domestic goods are relatively cheap.c. Foreign goods are relatively expensive and domestic goods are relatively expensive.d. Foreign goods are relatively expensive and domestic goods are relatively cheap.Answer: D. When the real exchange rate is relatively cheap this makes the country’s exports more attractive: hence, domestic goods are relatively cheap and