Name_________________________________________ ECO202: PRINCIPLES OF MACROECONOMICS SECOND MIDTERM EXAM April 10, 2008 Prof. Bill Even FORM 1 Directions 1. Fill in your scantron with your unique id and form number. Doing this properly is worth the equivalent of 1 question. 2. There are 42 multiple choice questions. 3. Your grade is determined entirely upon the answers listed on your scantron. You will not receive your scantron back. Be sure to record your answers on your exam so that you will be able to check your answers once the key is posted. 5. You may use a calculator. Cell phones or other devices that may be used to store text are not allowed. 6. You have until the end of the period to finish the exam. Additional time may be purchased at a price of 5 percentage points per minute. 7. Academic dishonesty is a serious offense. In the event I find someone behaving in a dishonest manner, I will ask that the maximum penalty allowed by the university be imposed.1. A good example of a commodity money popular in U.S. history is: a. a silver dollar b. gold dust c. a dollar bill d. all of the above. 2. Which of the following is true? a. the monetary base = bank reserves + non-bank cash b. bank reserves = bank cash + bank deposits with the Federal Reserve c. M1 = non-bank cash + demand deposits d. all of the above. 3. Which of the following would all lead to a decrease in the money supply? a. an increase in the reserve ratio and Fed sales of government securities. b. an increase in the reserve ratio and Fed purchases of government securities. c. a decrease in the reserve ratio and Fed sales of government securities. d. a decrease in the reserve ratio and Fed purchases of government securities. 4. Over the past several months, the Federal Reserve has been concerned about the economy entering a recession. Many economists believe that an important cause of the economic slowdown is that: a. the Fed has been raising the discount rate over the past several months and it is causing consumers to cut back on spending. b. there has been a collapse in housing prices and a rapid increase in foreclosures on homes that have made banks less willing to lend funds thus contributing to less spending in the economy. c. the Fed has been cutting the discount rate over the past several months and it has led to less consumer spending. d. the dollar has weakened over the past year and this has contributed to less demand for U.S. exports. 5. Suppose that there is a bi-metallic standard. A one dollar gold coin contains 40 grains of gold and a one dollar silver coin contains 160 grains of silver. If the free market price of one grain of gold is three times as high as that for one grain of silver, we should expect that: a. silver coins will circulate as money and gold coins will not circulate. b. gold coins will circulate as money and silver coins will not circulate. c. neither silver nor gold coins will circulate as money. d. both silver and gold coins will circulate as money. 6. According to the equation of exchange, inflation will increase if: a. there is an increase in the growth rate of the money supply. b. there is an increase in the velocity of money. c. there is a decrease in the growth rate of real GDP. d. any of the above would increase inflation.To answer the next 2 questions, assume that the banking system starts with the following "base case" balance sheet and that (i) the public initially holds $100 of non-bank cash; (ii) the reserve ratio is 25%; (iii) banks always loan out the maximum amount allowed. BALANCE SHEET Reserves $2,000 Demand Deposits $8,000 Loans $6,000 Govt. bonds $5,000 Owner's Equity 5,000 $13,000 $13,000 7. Start with the base case balance sheet. If the Fed sells $100 of government bonds from the banking system and the banking system completely adjusts to this change in their balance sheet, the loans will ______ and M1 will _______. a. increase $100; increase $250. b. decrease $100; decrease $400. c. increase $250; increase $250. d. decrease $400; decrease $400. e. none of the above. 8. Start with the base case balance sheet. If the Fed reduces the reserve ratio from 25% to 20% and the bank system completely adjusts to this change, a. M1 and loans will increase by $2,000. b. M1 and loans will decrease by $2,000 c. the monetary base will decrease by $2,000 d. the monetary base will increase by $2,000 9. Start with the base case balance sheet. If the public chooses to deposit $10 of nonbank cash into demand deposits and the bank system completely adjusts to this change: a. the monetary base will increase by $10. b. the monetary base will decrease by $10. c. M1 will not change. d. M1 will increase by $30.10. Suppose that the public becomes nervous about the banking system and decides to withdraw some of their demand deposits and hold it as cash. This will: a. force banks to reduce loans and drive up interest rates. b. lead to a decrease in M1. c. not affect the monetary base. d. all of the above. 11. As the price of a bond rises, the yield on the bond: a. could rise or fall. b. falls. c. rises. d. does not change. 12. Consider a 1 year bond with a coupon rate of 9% and a maturity value of $1000. If the bond sells for $1030 today, the yield to maturity on this bond would be _______ (round your answer to the nearest 0.1% -- e.g. 7.2%) a. 5.8% b. 6.0% c. 3.1% d. 5.2% 13. Consider a 5 year zero coupon bond with a maturity value of $1,000 that sells for $900 today. What is the yield to maturity on this bond? a. 11.1% b. 9.9% c. 6.3% d. 2.1%. 14. If stock prices reflect their “fundamental value”, then the recent decline in stock prices months might be explained by: a. the Federal Reserve cutting interest rates b. a decline in the expected future corporate profits because of concerns about an upcoming recession c. the tax rebates that are being promised to taxpayers in summer 2008 d. any of the above. 15. Suppose that you purchase a call option on IBM for a price of $5 and an exercise price of $100 that expires on January 1 of next year. A person would exercise this option only if the price of IBM ______ and would make a net profit (net of the purchase price) only if the price of IBM____. a. falls below $100; falls below $95 b. falls below $95; falls below $100 c. rises above $100; rises above