1Econ 102 ANSWERS at the end Lecture 100 Exam II Form 1 ECON 102/100 March 18, 2003 Section Day Time Location GSI 101 F 10-11:30 1060 EH Irina Grafova 102 TH 11:30-1 B239 EH Ivan Kandilov 104 TH 1-2:30 351 DENN Jon Millar 105 TH 2:30-4 173 LORCH Jan Sokolowsky 106 TH 4-5:30 142 LORCH Jan Sokolowsky 107 F 2:30-4 142 LORCH Jon Millar 109 F 11:30-1 B239 EH Irina Grafova · 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 point 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: _______________________________ Section #: __________2Multiple Choice: (26 questions, 3 pts each = 78 pts) Pick the best answer among the given choices. 1. Your grandmother wants to help you out, and she offers to give you either $700 today or $735 one year from now. The real interest rate is 5%, the economy is experiencing deflation, and you want to base your decision on present values using the nominal interest rate. Which do you choose? a) Neither; with deflation you are better off getting nothing. b) You are indifferent between the options. c) You prefer to receive $700 right away. d) You prefer to receive $735 one year from now. e) The above information is insufficient to make a sound choice. 2. Suppose the velocity of money does not change over time. The Federal Reserve is following a policy of increasing the money stock by 7% each year. Output grows at a rate of 2.4%. If the real interest rate is 3%, then the nominal interest rate a) is equal to 6.4%. b) is equal to 1.6%. c) is equal to 7.6%. d) is equal to exactly 10%. e) cannot be determined from the given information. 3. Classical Dichotomy refers to a) monetary non-neutrality. b) the opposing forces of demand and supply. c) the differences between Republicans’ and Democrats’ economic views. d) the struggle for power between the Federal Reserve Bank and the national government. e) the theoretical separation of nominal and real variables. 4. Which of the following is NOT a cost of expected inflation? a) arbitrary redistribution of wealth b) shoeleather cost c) menu cost d) relative price variability e) inflation-induced tax distortions 5. If the velocity of money increases, then a) the price level decreases all else constant. b) the value of money decreases all else constant. c) the demand for money increases all else constant. d) the supply of money shifts back all else constant. e) nominal GDP falls relative to the money stock.36. European investors purchase US corporate bonds using euros. These euros are sold further on foreign exchange market to a US firm that uses them to purchase French wine. Which of the following is TRUE for the US net exports (NX) and for the net foreign portfolio investment (FPI) and net foreign direct investment (FDI) that together add to net foreign investment (NFI)? a) FPI ¯ and NX ¯ b) FDI ¯ and NX ¯ c) FPI  and NX ¯ d) FPI ¯ and NX does not change e) FDI  and NX  7. If the US real exchange rate appreciates due to a change in the supply of US dollars in the foreign exchange market, US exports ________ a) and imports both increase b) and imports both decrease c) increase and imports decrease d) increase and imports stay the same e) decrease and imports increase 8. According to Purchasing Power Parity theory, which of the following is TRUE? a) the real interest rate must be equal to one b) a dollar must be able to purchase the same quantity of goods in all countries c) a dollar must be able to purchase the same quantity of foreign currency in all foreign countries d) all of a), b), and c) e) none of the above 9. Which of the following is TRUE according to the data below? Country Price of a Big Mac Exchange rate South Korea 3000 won 1218 won/$ Spain 375 pesetas 155 pesetas/$ Mexico 19.9 peso 9.53 peso/$ Netherlands 2.16 euros 0.916 euros/$ US 2.43 US dollars a) The Netherlands offers the cheapest Big Mac. b) South Korea offers the most expensive Big Mac. c) Mexico offers the cheapest Big Mac. d) Mexico offers the most expensive Big Mac. e) None of above.4 10. Why might the US long-run aggregate supply curve shift? a) increase in immigration b) increase in the economy’s capital stock c) a discovery of a vast, new oil field in Alaska d) all of (a), (b), and (c). e) none of the above, since the long-run aggregate supply curve is vertical 11. During the stock market crash of October 1987, the Fed a) nearly created a financial panic by not acting as a lender of last resort. b) nearly created a financial panic by raising the discount rate. c) prevented a financial panic by raising reserve requirements. d) prevented a financial panic by providing liquidity to the financial system. e) prevented a financial panic by lowering reserve requirements. 12. If the reserve ratio is 25%, and banks do not hold excess reserves, then when the Fed sells $40 million of bonds to the public, bank reserves _______ by $40 million and the money supply eventually ____________ . a) increase; increases by $70 million b) increase; increases by $160 million c) decrease; decreases by $70 million d) decrease; decreases by $160 million e) None of the above. 13. Although we usually assume for simplicity that banks hold no excess reserves, in fact, during recessions, banks typically choose to hold more excess reserves relative to their deposits. For a given amount of reserves in the economy, this action a)