Spring 2008 (Exam #3) Econ 100B 1 of 12 Name: ____________________________ SID : ____________________________ Discussion Section: ________________ Economic 100B Macroeconomic Analysis Professor Steven Wood Spring 2008 Exam #3 Please sign the following oath: The answers on this test are entirely my own work. I neither gave nor received any aid while taking this test. I will not discuss the questions on this test until after 3:30 p.m. on May 22, 2008. ______________________ Signature Any test turned in without a signature indicating that you have taken this oath will be assigned a grade of zero. Graph Instructions When drawing diagrams, the following rules apply: 1. Completely, clearly and accurately label all axes, lines, curves, and equilibrium points. 2. The original diagram and any equilibrium points MUST be drawn in black or pencil. 3. The first change in any variable, curve, or line and any new equilibrium points MUST be drawn in red. 4. The second change in any variable, curve, or line and any new equilibrium points MUST be drawn in blue. 5. The third change in any variable, curve, or line and any new equilibrium points MUST be drawn in green. Do NOT open this test until instructed to do so. Good Luck!Spring 2008 (Exam #3) Econ 100B 2 of 12 This page intentionally left blank.Spring 2008 (Exam #3) Econ 100B 3 of 12 A. Multiple Choice Questions. Circle the letter corresponding to the best answer. (3 points each; total of 30 points.) 1. If a U.S. company imports 10 Toyotas from Japan at $15,000 each, and the Japanese company buys airline tickets on a U.S. airline with the money, how does this affect the U.S. balance of payments accounts? a. Debit: imports; credit: capital and financial account. b. Debit: capital and financial account; credit: imports. c. Debit: imports; credit: exports. d. Debit: exports; credit imports. 2. A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents. The country is currently running a capital and financial account surplus. This imposition of the capital controls will cause: a. Net exports to decrease. b. Real domestic interest rates to rise. c. Real world interest rates to rise. d. Desired national saving to fall. 3. A depreciation of the dollar causes: a. A decrease in U.S. exports. b. An increase in U.S. exports. c. An increase in the prices of U.S. imports. d. An increase in the prices of U.S. exports. 4. The U.S. real interest rate rises relative to the British real interest rate. British net exports _______ and the British exchange rate _______. a. Increase; rises. b. Increase; falls. c. Decrease; rises. d. Decrease; falls. 5. Suppose Japan is currently running a current account surplus. The most effective way of eliminating this current account surplus would be to _______ government purchases and _______ the domestic money supply. a. Increase; increase. b. Increase; decrease. c. Decrease; increase. d. Decrease; decrease.Spring 2008 (Exam #3) Econ 100B 4 of 12 6. Suppose that Federal Reserve wanted to reduce the money supply without using open-market operations. It could try to get the public to _______ their currency-deposit ratio and _______ banks’ reserve requirements, which would in turn change the banks’ reserve-deposit ratio. a. Decrease; lower. b. Decrease; raise. c. Increase; lower. d. Increase; raise. 7. The problem with the strategy of achieving credibility through reputation is that: a. Reputations are rarely credible. b. Reputations lack any commitment. c. Serious costs may be incurred during the period in which reputation is established. d. Rules always have a lower cost than reputations in maintaining credibility. 8. An increase in the marginal tax rate, with the average tax rate held constant, will: a. Increase the amount of labor supplied at any real wage. b. Not affect the amount of labor supplied at any real wage. c. Decrease the amount of labor supplied at any real wage. d. Increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate. 9. Government budget deficits are a burden on future generations if they: a. Cause higher inflation. b. Are not used for government capital formation. c. Cause national saving to fall. d. Are always a primary government deficit. 10. In which case would you be most likely to expect inflation to accelerate? a. The government runs a sustained government deficit by lowering tax rates. b. The government runs a sustained government deficit by increasing government purchases. c. The government runs a sustained government deficit and funds it by borrowing from the public. d. The government runs a sustained government deficit and funds it by increasing the money supply.Spring 2008 (Exam #3) Econ 100B 5 of 12 B. Answer BOTH of the following questions in the space provided. (35 points each, total of 70 points.) 1. Open Economy IS – LM Model. The U.S. and Argentina are very minor trading partners with extremely small amounts of imports and exports between them. Both the U.S. and Argentine economies were in general equilibrium in 1994 with a flexible exchange rate. Suppose that both economies can be described by the Keynesian model and that Ricardian equivalence does not hold. In 1995, the U.S. economy experienced an investment boom. The Federal Reserve reacted immediately by changing monetary policy so that the economy remained at its full-employment level. Also in 1995, the Argentine government reduced government spending. a. Based only on this information, use a 2-country, open economy IS – LM diagram with a Foreign Exchange Market