Economics 302 Answers to Second Midterm June 14 2007 Name Student ID Number Version 1 This 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 DIRECTIONS Please 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 you need 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 deficit II This country will be a net lender III This country will export less than it imports a b c d Statements I II and III are true Statements I and II are true Statements I and III are true 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 X b Y Cd Id Gd NX c NX NS I d All of the above answers accurately express the national accounts identity Answer 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 will a Find that its net exports are diminished b Find that its net exports are increased Answer B 4 In a model of a small open economy the expression Y C G is equivalent to a National Saving b Private Saving c Government Saving d Investment Answer A 5 When the trade balance is negative then it must be the case that I Exports are greater than imports II Imports are greater than exports III Net capital outflow are negative IV National savings is less than investment a Statements I III and IV are true b Statements II III and IV are true c Statements II and IV are true d Statements I and III are true Answer B 6 For a small open economy when investment exceeds national saving then I The trade balance is negative II The trade balance is positive III The world real interest rate is higher than the real interest rate in the small open economy a b c d Statements I and III are true Statements II and III are true Statement I is true 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 level of 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 countries II 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 b c d e Statements I II and III are true Statements I and II are true Statements I and III are true Statement I is true 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 True b False Answer 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 smaller and 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 True b False Answer 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 then a 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 foreign goods are relatively expensive 13 Starting at a point of trade balance and holding everything else constant if the real exchange rate falls then this country will a Import less than it exports and it will therefore run a trade surplus b Import less than it exports and it will therefore