FORM 1 Name: Section No.: UM ID No.: GSI: Economics 102 Introduction to Macroeconomics Prof. Alan Deardorff Midterm Exam 1 October 16, 2000 INSTRUCTIONS: READ CAREFULLY!!! 1. Please do not open the exam book until you are told to do so. 2. PLACE YOUR NAME, STUDENT UM ID NO. (ON THE FRONT OF YOUR MCARD, ALL EIGHT DIGITS, DO NOT WRITE SSN), SECTION NUMBER AND FORM NUMBER ON THE EXAM AND ON THE SCANTRON SHEET. THIS IS WORTH TWO POINTS ON THE EXAM. 3. This exam has 100 points and is designed to take about 60 minutes to complete. However, you have approximately 80 minutes to complete the test. Check that you have all 11 pages of the exam. 4. Section A consists of 25 multiple choice questions worth 3 points each, followed by 5 true-false questions. Answers to all of the questions in Section A should be marked on the scantron sheet using a #2 pencil. There are no penalties for guessing. 5. Section B consists of 2 parts for which you must provide written answers on these sheets. Point values for questions in Section B are indicated in parentheses. Please try to fit your answer into the space provided. 6. Good luck! GSI Sections Tom Bishop 112, Thu 10-11:30 113, Thu 8:30-10 Brahima Coulibaly 102, Wed 1-2:30 103, Wed 2:30-4 Herman Kamil 101, Thu 4-5:30 109, Thu 1-2:30 Yener Kandogan 111, Thu 2:30-4 George Li 105, Thu 4-5:30 115, Wed 1-2:30 Byung-ho Suh 107, Thu 10:11:30 108, Thu 1-2:30 Hui-chen Wang 110, Thu 2:30-4 114, Thu 10:11:30 Yingbin Xiao 104, Wed 2:30-4 116, Thu 4-5:30Alan Deardorff Mid-term #1 Econ 102, Fall 2000 Page 1 of 11 FORM 1 1PART A: Multiple Choice (3 points each; 75 points total) Select the one best answer and mark it on the SCANTRON sheet. A1. Which of the following policies will lead to an INCREASE in the equilibrium real interest rate in the market for loanable funds? I. A decrease in investment tax credit II. An increase in tax rate on savings III. An increase in government spending (a) Only I (b) Only II (c) I and II (d) II and III (e) I, II and III A.2. Which of the following policies could the Federal Reserve use to INCREASE the money supply? I. Selling bonds II. Increasing the minimum reserve requirement III. Decreasing the discount rate (a) I and II (b) I and III (c) II and III (d) Only III (e) None of I, II or III A.3. Assume that the minimum reserve ratio is 10%, that banks do not hold excess reserves, and that the public does not hold cash. The amount of loans made by banks totals to $900 million. What will be the money supply if the Federal Reserve now buys bonds amounting to $5 million? (a) $1,100 million (b) $1,050 million (c) $995 million (d) $950 million (e) $905 millionAlan Deardorff Mid-term #1 Econ 102, Fall 2000 Page 2 of 11 FORM 1 2A.4. Fill in the blanks. “ ______ represent indebtedness, whereas _____ represent ownership. ______ is a type of bond that never matures. _______ are offered by shaky corporations.” (a) Bonds, stocks, Default, Perpetuities (b) Stocks, bonds, Perpetuity, Mutual funds (c) Bonds, stocks, Junk bonds, Defaults (d) Stocks, bonds, Default, Junk bonds (e) Bonds, stocks, Perpetuity, Junk bonds A.5. In measuring GDP, which of the following is classified as investment? (a) purchase of a US government bond (b) purchase of newly constructed housing by individuals (c) purchase of a public company’s stock (d) (b) and (c) (e) (a), (b) and (c) A.6. Which of the following are reasons why the CPI tends to overstate the increase in the cost of living: (a) people are able to substitute goods and services when their relative prices change. (b) improvements in quality are under-estimated by government agencies. (c) the introduction of new goods gives people less purchasing power because they have to buy more to maintain the same standard of living. (d) (a) and (b) (e) (a) and (c) A.7. Which of the following is TRUE? (a) Desired national savings is the total amount of savings deposits in national banks. (b) Desired national savings is equal to private savings minus investment. (c) Desired national savings is equal to desired investment at the equilibrium interest rate. (d) National savings is equal to private savings minus public savings. (e) National savings reflects the national output that remains after government purchases have been paid for.Alan Deardorff Mid-term #1 Econ 102, Fall 2000 Page 3 of 11 FORM 1 3A.8. Which of the following DOES change US GDP in the year that it occurs? (a) Mary buys an old car from a dealer in New York. (b) An American company buys stock in a Tennessee company. (c) A Japanese company builds a factory in the US. (d) An American firm imports a capital good produced at its subsidiary in Japan. (e) An American tourist buys a Ford car produced in Mexico. A.9. A change in the tax laws encouraging Americans to save will lead to which of the following? (a) There will be a shift of the supply curve of loanable funds to the left. (b) The equilibrium interest rate will increase, because investment now has a higher return. (c) Investment will be lower, given that savings has increased, and investors expect the law of diminishing returns to operate. (d) The supply of loanable funds will shift to the right and the demand for loanable funds will shift to the left. (e) The equilibrium level of savings and the equilibrium level of investment will increase by the same amount. A.10. Suppose we have the following data for five countries, giving their levels and growth rates of GDP per capita. Assume that the growth rates given are constant for all time. Country GDP per capita in Year 2000 Annual growth rate of GDP per capita W $2,000 1.8% X $3,000 1% Y $2,000 2% Z $1,000 5% All of the following are FALSE EXCEPT, (a) Without more information, we cannot say whether country Z will ever catch up to country Y. (b) Country Z will catch up country Y after approximately 70 years. (c) The ratio of GDP per capita of country Z to that of country Y (that is, Z/Y) will never double, but will instead decrease over time. (d) It will take longer for country Y than for country W, to catch up country X. (e) Country Y’s GDP per capita will be $4000 in approximately the year 2035.Alan Deardorff Mid-term #1 Econ 102, Fall 2000 Page 4 of 11 FORM 1 4 A.11. This question has to do with the “Law” of Diminishing (Marginal) Returns (LDR). All the following are CORRECT, EXCEPT: (a) The actual time