d) Net exports decrease and NCO increases e) The quota on French films breaks the NX=NCO identity.d) NCO of the US increasesa) 1.4%Econ 102, Section 100 NAME: (print) _______________________________ Exam II, Form 1 UM ID # _____________________ Section #______________ Econ 102/100 Second Midterm Exam March 15, 2007 Section Day Time Location GSI 101 Friday 2:30-4 142 Lorch JB 102 Friday 11:30-1 269 Dennison Sue 103 Friday 1-2:30 430 Dennison Angus 104 Friday 10-11:30 B239 EH Sue 105 Friday 2:30-4 B239 EH Angus 106 Friday 10-11:30 B247 EH Omar 107 Friday 1-2:30 315 Dennison JB 108 Friday 11:30-1 455 Dennison Omar 109 Friday 11:30-1 130 Dennison Brian Instructions • 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 IS 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 10 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. Signature: _____________________________________Part I: Multiple Choice: (26 questions, 3 pts each = 78 pts) Pick the best answer among the given choices. 1) On March 7, 2007, the United States nominal exchange rate between U.S. dollars and Euros was 0.762€/$. Which of the following interpretations of this fact is CORRECT? a) The Mankiw textbook must be more expensive in terms of U.S. dollars in Europe than in the U.S. b) With 1 Euro you can purchase 0.762 U.S. dollars. c) The Mankiw textbook must be less expensive in terms of U.S. dollars in Europe than in the U.S. d) With 1 U.S. dollar you can purchase 0.762 Euros. e) The theory of PPP says this nominal exchange rate must move towards 1 in the long run. 2) Angus is planning a vacation to the city of Sao Paulo in Brazil to work on his suntan. He checks the WSJ and finds that you can buy 2.2 Brazilian Reals with a U.S. dollar. He also finds that in Sao Paulo he can buy a tube of suntan lotion for 4 Reals, while in Ann Arbor the suntan lotion costs $2.40 per tube. Which of the following statements is CORRECT? a) Angus can’t figure out where it is cheaper to buy the suntan lotion with this information. b) A tube of suntan lotion is cheaper in Sao Paulo than in Ann Arbor. c) A tube of suntan lotion is cheaper in Ann Arbor than in Sao Paulo. d) It does not matter where Angus buys the suntan lotion, because PPP holds in this case. e) If one dollar could purchase at least 3 Reals, then at the same prices the suntan lotion would be cheaper in Sao Paulo. 3) The U.S. is currently experiencing a large trade deficit. President Bush is considering a new policy that would greatly restrict the imports of foreign goods by the use of import quotas. According to Mankiw’s Open Economy Model, which of these predictions of the consequence of the policy is CORRECT? a) Because imports will fall, Net Exports will increase, and therefore NCO must increase as well. b) U.S. exports will increase because there will be less competition from imported goods. c) Even though imports will fall, NCO will not increase because the policy does not change the incentives for capital to flow into and out of the U.S. d) This policy will make the U.S. better off because reducing imports will reduce the trade deficit. e) None of the above. 4) Recall the model of the supply and demand for loanable funds. Which statement about the model is INCORRECT? a) The supply of loanable funds comes from public and private saving. b) The demand for loanable funds comes from both households and firms that want to borrow money for investments. c) At a higher real interest rate, a greater quantity of loanable funds is supplied. d) If the interest rate falls, the demand curve for loanable funds will shift to the right. e) If the tax rate on interest income were increased, the supply curve of loanable funds would shift to the left.5) Suppose there are two different bonds that have an equal present value at 5% interest rate and the same maturity date in 10 years. Most of the payments from Bond 1 are received within the first 5 years while most of the payments from Bond 2 are received during the second 5 years. If the interest rate increases, which of the following is true? a) The present values of the two bonds do not change. b) The present values of the two bonds change, but the present values remain equal. c) Bond 1 has a higher present value than Bond 2 at the higher interest rate. d) Bond 2 has a higher present value than Bond 1 at the higher interest rate. e) The present values of both bonds increase. 6) What does diversification of risk in the textbook refer to? a) The reduction of both firm-specific risk and market risk by investing in a smaller number of stocks. b) The reduction of firm-specific risk but not market risk by investing in a smaller number of stocks. c) The reduction of market risk but not firm-specific risk by investing in a smaller number of stocks. d) The reduction of both firm-specific risk and market risk by investing in a larger number of stocks. e) The reduction of firm-specific risk but not market risk by investing in a larger number of stocks. 7) What is the difference between the Federal Funds rate and the discount rate? a) The Federal Funds rate is charged by the Fed on what it lends; the discount rate is paid by the Fed on what it borrows. b) The Federal Funds is short term and the discount rate is long term. c) They refer to two different interest rates. The Federal Funds rate is controlled directly by the Fed, but the Fed only sets a target to influence the discount rate. d) They refer to two different interest rates. The discount rate is controlled directly by the Fed, but the Fed only sets