EC102 .03 and EC 102.

05 NAME: _________________
ID #: ___________________
Spring 2015

FINAL EXAM
GROUP A
May 26, 2015

Instructions:
 You have 100 minutes to complete the exam. There will be no extensions.
 The exam consists of 50 multiple choice questions. Each multiple choice
question is worth 1 point for a total of 50 points.
 Use a pencil to mark your answers on the answer sheet. Make sure you
write your name and ID number on the answer sheet as well.
 Please mark the group of your test on the answer sheet under “Test Form.”
 No calculators, dictionaries or formula sheets are allowed.
 The use of cell phones is strictly prohibited. Make sure your cell phone is
turned off and inside your bag. Do NOT use your cell phone even for
timekeeping purposes.
 This is a closed books/notes exam.
 Choose only one answer for each question.
 2 wrong answers will take away one correct answer.
 There is absolutely no talking during the exam.
 The proctors will NOT answer any questions.
 There are 16 pages in this exam booklet.

A-1
1) Suppose your country has a monetary policy that is used to stabilize the
economy, and you have a fixed exchange rate. Which of the following is
impossible?
a. Free flow of financial assets between countries
b. Capital controls on foreign countries
c. Trade balance
d. Government budget balance

2) Consider a country which is part of Eurozone and this country is running a debt
crisis. Which of the following is a way to resolve its debt crisis in a way it
cannot do as a part of the Eurozone:
a. Raising taxes or cutting spending
b. Devaluing its currency
c. Renegotiating its debt
d. Defaulting on its debt

3) Which of the following is a case of foreign direct investment?

a. Buying a small number of stock in a foreign company
b. Selling your company to a foreign investor
c. Buying foreign government debt
d. Selling a domestic corporate bond to a foreign investor

4) Which of the following increases the money supply?

a. A run on banks.
b. The Central Bank selling bonds.
c. The Central Bank reducing reserve requirements.
d. People decreasing the fraction of their cash that they keep in banks.
A-2
5) Suppose the marginal propensity to consume is 0.4. Then the government
spending multiplier is equal to:
a. 2.5
b. 1.33
c. 0.40
d. 0.60

6) Which of these is not one of the three functions of money?

a. Unit of Account.
b. Stable Rate of Exchange
c. Store of Value.
d. Medium of Exchange.

7) Which of the following is not one of the tools the Central Bank can use to affect
monetary policy?
a. Purchase and sale of bonds
b. Change in the discount rate offered to banks
c. Change in the interest rate charged on government debt
d. Change in reserve requirements

8) Fiscal policy is particularly effective when the economy is at the zero lower
bound because:
a. The marginal propensity to consume is lower
b. The marginal propensity to consume is higher
c. The crowding out effect is stronger
d. The crowding out effect is absent

A-3
9) Suppose last year, 1 US dollar bought 2.2 Turkish lira or 1.05 Canadian dollars.
This year, 1 US dollar buys 2.7 Turkish lira or 1 Canadian dollar. Which of the
following statements is true?
a. The Turkish lira depreciated against the US dollar and the Canadian dollar
appreciated against the US dollar.
b. The Turkish lira appreciated against the US dollar, and the Canadian dollar
depreciated against the US dollar.
c. The Turkish lira appreciated against the Canadian dollar.
d. The US dollar depreciated against the Turkish lira, and appreciated against the
Canadian dollar.

10) Automatic stabilizers:

a. Reduce the inflationary effect of government policy
b. Reduce government deficits
c. Increase the volatility of the business cycle
d. Avoid implementation lags

11) The Phillips curve illustrates that policymakers can use monetary and fiscal
policy to:
a. Tradeoff between inflation and unemployment in the short run and the long run
b. Tradeoff between inflation and unemployment in the short run but not the long
run
c. Tradeoff between inflation and unemployment in the long run but not the short
run
d. None of the above

A-4
12) Which of the following is a consequence of the “too big to fail” problem?
a. Banks have so much capital that they do not fail when they make bad
investments, so that they aren’t discouraged from risk-taking
b. Banks become increasingly concentrated so that they can behave like
monopolists, charging consumers high prices
c. Banks take more risk because they anticipate a government bailout if they fail
d. None of the above

13) In order to produce more fuel efficient cars, U.S. auto makers have used less
steel and more light weight materials. The unemployment it causes in the steel
industry is an example of:
a. cyclical unemployment
b. seasonal unemployment
c. structural unemployment
d. frictional unemployment
14) Real GDP is always measured in
a. quality of goods produced.
b. base-year dollars.
c. nominal dollars.
d. current dollars.

15) The average amount of goods and services produced from each hour of a
worker's time is called
a. per capita GDP
b. per capita GNP
c. productivity
d. human capital
A-5
16) If the economy is at full employment and the government increases spending
on education programs, which of the following actions will prevent inflationary
pressures?
a. increase taxes by an amount greater than the increased education spending
b. decrease the welfare program by an amount equal to the increase in education
spending
c. issue bonds to finance the education spending
d. the government can avoid an inflation simply by doing nothing further

17) Suppose that the banking system holds $1 million in deposits and $300,000 in
legal reserves. If the required reserve ratio is 20 percent, the maximum amount
by which the banking system can expand the money supply is:
a. $100,000
b. $500,000
c. $1,000,000
d. $1,500,000

18) In order to serve as money, a thing must

a. be officially issued by the government
b. consist of, or be legally exchangeable for gold
c. be generally accepted in a given society in exchange for goods and services
d. have the faith and confidence of the public in the ability of the government to
pay its debt

19) Which of the following actions by the Fed is likely to be contractionary?

a. decreasing reserve requirements
b. decreasing the discount rate
c. selling bonds in the open market
d. all of these

A-6
20) The M1 measure of the money supply equals
a. paper money plus coins in circulation.
b. currency plus checking account balances plus traveler’s checks.
c. currency plus checking account balances.
d. currency plus checking account balances plus traveler’s checks plus savings
account balances.

21) Other things being equal, a reduction in the money supply will lead to a
a. rise in the rate of interest and no change in investment expenditure
b. fall in the rate of interest and an increase in investment expenditure
c. rise in the rate of interest and a decrease in investment expenditure
d. rise in the rate of interest and in increase in investment expenditure

22) According to the views of the Classical economists, if the money supply
doubles
a. real income will double
b. prices will double
c. there will be no effect on prices
d. prices will increase but not double

23) Potential or full-employment output is

a. a goal that can never be achieved by the economy
b. the GDP that would be produced if the economy's resources were fully
employed at a normal intensity of use
c. achieved during periods when all of the labour force is employed
d. the GDP that could be produced if the economy's resources were fully
employed at their maximum intensity of use
A-7
24) The currency that is in circulation in Turkey today is
a. not officially backed by anything
b. fractionally backed by gold
c. backed by the U.S. dollar
d. fully backed by gold held at the central bank

25) A lower TL/dollar exchange rate ______exports and _______imports in

Turkey. Aggregate demand in Turkey ____
a. decreases; increases; decreases
b. increases; decreases; increases
c. increases; decreases; decreases
d. increases; increases; increases

26) The Keynesian AS-curve implies that

a. the economy is always at the full-employment level of output
b. the AS-curve is completely vertical
c. wages and prices are completely flexible
d. a change in spending will affect GDP but not the price level

27) In an AD-AS diagram, an increase in nominal money supply is represented by

a. a shift of the AD-curve to the right
b. a shift of the AD-curve to the left
c. movement along the AD-curve from right to left
d. movement along the AD-curve from left to right

A-8
28) The natural rate of unemployment is generally assumed to be
a. very close to zero percent since everyone who wants to work is
already working
b. the rate of unemployment at which the actual inflation rate is zero
c. the rate of unemployment at which the expected inflation rate is zero
d. the rate of unemployment at which the expected inflation rate is equal
to the actual inflation rate

29) Net export equals ______

a. (G-T)+(S-I)
b. (T-G)+(S-I)
c. (G-T)+(I-S)
d. (T-G)+(I-S)

30) A decrease in world demand for Canadian exports ___ the demand for
Canadian dollars
a. increases
b. does not change
c. decreases
d. improves the quality

31) All of the following are major drawbacks of adopting a fixed exchange rate
EXCEPT that:
a. exchange controls must be imposed at the cost of more administrative red
tape and corruption.
b. resources must be diverted to the accumulation of large foreign exchang
reserves.
A-9
 c. monetary policy cannot be used to stabilize output and the inflation rate.
d. commerce among countries is more uncertain and riskier.

32) If assets owners in Japan and the United States consider Japanese and U.S.
assets as good substitutes for each other and if the U.S. interest rate is 5% and
the Japanese interest rate is 2%, then all of the following will occur EXCEPT
that:
a. financial inflows will reduce the U.S. interest rate.
b. financial outflows will increase the Japanese interest rate.
c. the interest rate gap between the United States and Japan will be eliminated.
d. loanable funds will be exported from the United States to Japan.

33) American retailers import toys from China. In the U.S. balance of payments
account, this transaction is entered as:
a. a payment to foreigners in the financial account.
b. a payment from foreigners in the financial account.
c. a payment to foreigners in the current account.
d. a payment from foreigners in the current account

A-10
34) (Figure: Monetary Policy I) Refer to the information in the figure Monetary
Policy I. If the economy is initially at E1 and the central bank chooses to sell
bonds, then:
a. AD2 will shift to the right, creating an inflationary gap.
b. AD2 may shift to AD1, creating a recessionary gap.
c. AD1 may shift to AD2, closing an existing recessionary gap.
d. AD1 will shift to the left, increasing an existing recessionary gap.

35) An example of a factor that causes the natural rate of unemployment to fall is:
a. a binding minimum wage.
b. the recent increase in the activity of temporary employment agencies.
c. a slowdown in productivity growth.
d. the unintended by-product of government policies referred to as
Eurosclerosis.

A-11
36) When the actual unemployment rate is equal to the natural rate of
unemployment:
a. the unemployment rate is zero.
b. potential output exceeds actual output.
c. the output gap is zero.
d. actual output exceeds potential output.

37) If the government increases the taxes on corporate profits then the real interest
rate ____ and the equilibrium quantity of investment and saving _____.
a. rises; increases
b. rises; decreases
c. falls; increases
d. falls; decreases

38) Contractionary fiscal policy would most likely be used to shift aggregate
demand in panel _______ from _______.
a. (b); AD1 to AD2
b. (a); AD2 to AD1
c. (a); AD1 to AD2
d. (b); AD2 to AD1

A-12
39) When an individual decides to hold money instead of other assets, that
individual:
a. is giving up the interest that could have been earned by holding other
types of assets.
b. becomes more likely to suffer from money illusion.
c. is not affected by unanticipated inflation.
d. is able to maintain a higher standard of living.

40) A financial asset is considered less liquid if

a. it has a longer maturity
b. it is issued by the government rather than a large company
c. it earns a lower yield
d. none of the above

41) The size of the money multiplier increases

a. with an increase in the currency-deposit ratio
b. with a decrease in the reserve-deposit ratio
c. as the Central Bank undertakes open market sales
d. as the Central Bank decreases the discount rate

42) The natural rate of unemployment can be reduced by

a. improving the organization of the labor market
b. reducing the availability of unemployment benefits
c. increasing the skills and training of the long-term unemployed
d. all of the above

A-13
43) If inflation were always perfectly anticipated, then
a. menu costs would not arise
b. currency holders would still be stuck with a negative rate of return
c. unemployment would always be at its natural rate
d. all of the above

44) GDP can be calculated as:

a. the total value of all final goods and services produced in a given year.
b. the sum of all spending by firms on inputs used to produce final goods
and services in a given year.
c. the value of all of the intermediate goods used to produce final goods
and services in a given year.
d. the amount of tax paid on all intermediate and final goods and
services in a given year.

45) The price in the loanable funds market is the:

a. consumer price index.
b. interest rate.
c. price level.
d. rate of return of a project.

46) To acquire human capital a person would:

a. save to buy a printing press.
b. purchase a printing press rather than use his or her money on
consumption.
c. learn to use a printing press.
d. sell the books that the printing press produces.
A-14
47) If output is growing at 5% annually, how many years will it take for output to
quadruple?
a. 14 years
b. 10 years
c. 20 years
d. 28 years

48) Suppose an economy's aggregate price level increases and its aggregate level
of real GDP decreases. This could arise from:
a. a positive demand shock.
b. a negative supply shock.
c. a positive supply shock.
d. a negative demand shock.

49) A current account deficit “must be financed by capital inflows” because the
current account deficit is paid by
a. borrowing from rest of the world
b. increased taxes
c. increasing Canadian foreign reserves
d. increasing our investment in capital and increasing real GDP

50) Unanticipated inflation:

a. reduces the value of money.
b. increases the value of future obligations.
c. increases certainty about the future.
d. helps lenders

A-15