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Econ 102/100, March 16, 2006 Answers Part I: Multiple Choice: (26 Questions, 3 pts each=78 pts) Select the best answer among the given choices 1. Based on the following information, what would be the increase in the unemployment rate be if the discouraged workers were categorized as Unemployed? Total population 300,000,000 Adult population 200,000,000 Adult population who have given up on finding work 30,000,000 Number employed 140,000,000 Number unemployed 10,000,000 a) 15.6% higher b) 20.0% higher c) 13.3% higher d) 16.7% higher e) None of the above, the unemployment rate would decrease. 2. Which of the following statements is correct? A. The natural rate of unemployment includes frictional unemployment, structural unemployment and cyclical unemployment. B. In ordered to be considered employed, a person must have worked full time during the previous month. C. The unemployment rate underestimates the hardship in a weak labor market because of discouraged workers. D. The labor-force participation rate has been greatly increased over the last 50 years for women, but not for men. a) A and C b) B and C c) C and D d) A, B, and D e) B, C, and D 13. Which of the following would NOT cause the price level to rise according to the quantity theory model? a) The Fed buys government bonds from the public through open market operations b) An increase in the velocity of money c) An increase in real GDP d) The Fed lowers the discount rate e) None of the above (that is, all of the above would cause the price level to rise) 4. Which of the following statements is true? A. The inflation tax affects everyone differently. B. Hyperinflation does not have any adverse affects because of money neutrality. C. Creditors benefit from unexpected increases in the price level. a) A only b) B only c) A and B d) B and C e) A, B and C 5. Which of the following statements about the functions of the Federal Reserve is INCORRECT? a) The Fed can increase money supply by purchasing government bonds b) The Fed can increase money supply by decreasing the reserve requirement c) The Fed can increase money supply by decreasing the discount rate d) The Fed can increase money supply by decreasing the reserve holdings of the commercial banks e) The Fed can increase money supply by decreasing the interest rate on the loans that the Fed makes to banks 2Questions 6 and 7 are related: 6. Suppose that the original total value of stone wheels (used as money) on the Island of Yap is 1000 fei. The commercial banking system keeps reserves at exactly 10% of all deposits and no stone wheels are held in the hands of islanders. One day, an islander called Braveman discovers a new rock and chisels 10 more stone wheels, worth a total of 200 fei, out of it and then deposits those wheels in the bank. Based on this information, the original money supply on the island is______ and increases by ______ after Braveman’s deposit. a) 10,000 fei; 2,000 fei b) 1,000 fei; 200 fei c) 10,000 fei; 12,000 fei d) 9,000 fei; 1,800 fei e) 1,000 fei; 2,000 fei 7. After Braveman’s deposit, by what amount will the money supply on Yap increase if the reserve ratio is decreased to 8%? a) 1,500 fei b) 2,000 fei c) 2,500 fei d) 3,000 fei e) 3,500 fei 8. Which of the following statements about exchange rates is INCORRECT? a) When purchasing power parity holds, the real exchange rate equals 1 b) When purchasing power parity holds, the nominal exchange rate equals the ratio of foreign price to domestic price c) When purchasing power parity holds, the nominal exchange rate of dollars will be equal to the amount of foreign currency a unit of it can buy d) When purchasing power parity holds, the ratio of the real exchange rate to the nominal exchange rate will be 1 e) None of the above (that is, all of the above statements are correct) 39. Nadia, a strange girl from rural Slovakia who gets enjoyment only from consuming widgets and nothing else, is contemplating the following vacation options: A: A summer in Nice where widgets cost 8 Euros each B: A summer in Toledo, Ohio where widgets cost 1 dollar each C: A summer in Bratislava where widgets cost 2000 Koruna The exchange rates are 4 Euro per dollar, 1,500 Koruna per dollar and 375 Koruna per Euro. Which vacation do you recommend for Nadia? a) Toledo, Ohio b) Nice c) Bratislava d) She should go to London and take advantage of the arbitrage opportunities on the currency exchange since she can make money trading in Euros, Dollars and Koruna e) None of the above 10. All else equal, tighter monetary policy (whereby the supply of money in the economy is increased more slowly over time) in the long run open economy model must a) Increase inflation and raise the equilibrium real interest rate and real exchange rate. b) Increase inflation and the nominal interest rate. c) Decrease inflation and lower real interest rate and real exchange rate. d) Decrease inflation and the nominal interest rate. e) None of the above. 411. New concern about the future of their country causes the citizens of the Square Republic to put their savings into US dollars instead of the local currency (which is referred to as ‘capital flight’ from Square Republic). Which of the following statements is true? I. Capital flight from the Square Republic will reduce the equilibrium real interest rate there. II. Capital flight will imply that net exports are lower in the Square Republic because investment and hence output fall. III. Capital flight will cause real depreciation of the Republic’s currency. a) I only b) II only c) III only d) I, II and III e) None of the above. 12. Suppose US citizens experience a sudden burst of caution and permanently increase their marginal propensity to save. In the long run open economy model, all else being equal, this would I. Lower the real interest rate and depreciate the real exchange rate in the US. II. Decrease US consumption of foreign and domestic goods and cause NX to rise. III. Increase domestic investment in the US economy and cause foreign portfolio investment into the US to fall. a) I only b) II only c) III only d) All of I, II, and III e) None of I, II, and III 513. Nadia, a Slovakian citizen, purchases a new Volkswagon from Germany using Slovakian currency. The German automaker then holds


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U-M ECON 102 - Study Guide

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