Econ 102/Lecture 100AnswersDayTimeLocationGSIEcon 102/Lecture 100 Answers Exam II Form 1 March 17, 2005 Section Day Time Location GSI 101 F 2:30-4 205 DENN Jooyong 102 F 11:30-1 373 Lorch Jooyong 103 F 1-2:30 373 Lorch Sue 104 M 4-5:30 351 DENN Joanne 105 M 2:30-4 330 DENN Joanne 107 F 1-2:30 110 DENN Sue 108 M 8:30-10 373 Lorch Seb · Do NOT open this exam booklet until instructed to do so! · Please take a moment to complete the identification information on the scantron. Indicate your NAME, discussion SECTION number, FORM number, and UM ID number. THIS, and showing up in the correct exam room are WORTH TWO POINTS ON THE EXAM! · The exam has 100 points and is designed to take about 60 minutes to complete. However, you’ll have approximately 80 minutes. Check that you have all 12 pages of the exam. · Read the questions and these instructions carefully! · Use the space provided in this booklet and the back of the pages to work out the answers to the multiple choice problems. Use the space provided on the actual page for the short answer questions. · You can use only NON-graphing calculators. · For multiple choice questions, you get 3 points for a correct answer, 0 points for a blank, and 0 points for a wrong answer. There are NO penalties for guessing. · Sign the honor code below! Honor Code: I did not use any unauthorized aid on this exam. Name: (PRINT) _______________________________ UM ID #: _______________________________ Signature: _______________________________Econ 102, Winter 2005, Midterm 2 Form 1 1) Suppose that the following data describe the US economy (in trillion US$). GDP=10 Consumption = 7 Domestic Investment = 2 US Foreign Direct Investment Abroad = 1.0 Foreign Direct Investment in the US = 1.3 Net Taxes = 1.2 Government Budget Deficit=0.2 Which of the following is necessarily TRUE? A. The amount of foreign Investment in the US exceeds the amount of US investment abroad. B. The amount of domestic investment exceeds the amount of private saving. C. The amount of exports exceeds the amount of imports. D. The amount of net tax collected by the US government exceeds the spending of the US government. E. none of the above [Both A and B are correct.] 2) Which of the following is a correct description of Capital Flight? A. a large and sudden rise in the aircraft industry B. a large and sudden movement of the physical capital stock across the regions within a country C. a large and sudden reduction in the supply of physical capital goods D. a large and sudden reduction in the supply of assets located in a country E. a large and sudden reduction in the demand for assets located in a country 3) A Swedish firm opens a factory that produces Mankiw textbooks in Ypsilanti. This will A. Decrease Sweden’s NFI, but not effect US NFI B. Increase Sweden’s NFI, but not effect US NFI C. Increase Sweden’s NFI and decrease US NFI D. Decrease US NFI, but not effect Sweden’s NFI E. Increase US NFI, but not effect Sweden’s NFI 24) The US government is considering a tax exemption on capital income to encourage private saving (accompanied by another tax change so as to leave the government budget unaffected). In the new equilibrium of the long run open economy model, net foreign investment will ______, supply of US dollars in the foreign exchange market will ______, and US trade deficit will ______. A. increase; increase; increase B. increase; increase; fall C. increase; fall; fall D. fall; fall; increase E. fall; fall; fall 5) The government of Sweden has recently announced a five-year plan for economic growth and it includes a more comfortable business environment for foreign investors, intended to attract foreign capital. Investors in the US (especially those in Ypsilanti) are enchanted by this opportunity and decide to build several plants in Swden. According to the long run open economy model, which of the following is TRUE about the US economy? A. Net exports increase by the same amount as the amount of foreign direct investment made on Slovakian plants. B. Supply of US dollar in foreign exchange market will not be affected because US monetary policy has not changed. C. Net foreign portfolio investment will increase due to a rise in real interest rate. D. Government saving will increase due to a rise in real interest rate. E. none of the above 6) Sue visited Banana Island over the winter break. For some reason, she couldn’t convert US dollars to Banana dollars (the currency for Banana Island) directly, so she had to convert US dollars to Mango dollars first. One Banana dollar exchanges for 1.2 Mango dollars and one US dollar exchanges for 1.5 Mango dollars. She was planning to take Econ 102 this semester, so she bought the Mankiw textbook for 60 Banana dollars in Banana Island. What is the cost of the textbook she bought in terms of US dollars? A. $ 33.3 B. $ 48 C. $ 60 D. $ 75 E. $ 108 37) Which of the following is true? A. Idiosyncratic risk affects all economic actors at once. B. For a risk-averse person, the pain from losing $1000 would be less than the gain from winning $1000. C. The stock market prices should follow a random walk according to the efficient markets hypothesis. D. If the efficient markets hypothesis is true, then you should be able to figure out which stock is more gainful in the stock market E. Since the prices of stocks change every minute, we can conclude that the stock price of a company should not reflect its expected future profitability Answer the following 2 questions based on the data in the table below Year 2002 2003 2004 Item Quantities Prices Quantities Prices Quantities Prices Coffee 8 $3 9 $2 12 $2.5 Cookies - - 25 $4 30 $5 TV sets 4 $400 6 $300 8 $200 Coats 5 $40 6 $50 7 $60 Take consumption in 2002 as the CPI basket. 8) With 2002 as your base year, what is the CPI in 2004? A. 68.2 B. 60.4 C. 120.6 D. 61.4 E. 192.8 9) With 2003 as the base year, what is the GDP deflator for 2004? A. 131.8 B. 115.6 C. 100.0 D. 75.8 E. 98.9 410) The Corporation of Imaginary offers two types of fellowships to the students in the University of Michigan with no requests. Being a student of University of Michigan, you can choose only one of them. Option A is to give you $1000 now; Option B is to give you, one year from now, $1,500 with a probability of 0.5 or $500 with a probability of 0.5.