Download Midterm 3

SMC Economics 2 - Bruce Brown
Version A - Midterm 3, Fall 2003
NAME_________________________________
- This exam has 40 questions, all of equal weight. Clearly fill in the bubble on your scantron corresponding to the best
answer. No points are deducted for incorrect answers, so each question should be answered.
- Students may: i) write on the exam (it will be returned, but not the scantron).
ii) use an ordinary language dictionary (not electronic or economics dictionary).
iii) ask clarifying questions about definitions or wording of the questions. If the question regards
definition of a term from this course, it will not be answered.
Multiple Choice Questions: mark the best answer on your scantron form
1) I equals investment, S equals saving, G equals government purchases, NT equals net taxes, and NX = net exports
(recall -NX = net foreign capital inflow). Using these symbols, the formula showing how investment is financed is
a. I = S + (NT - G) +NX
b. I = (S - NT)
c. I = S + (NT - G) - NX
d. I = G + S + NT.
2) The crowding-out effect is the tendency for:
a. lower private saving to decrease private spending like investment.
b. higher government budget deficits to increase total savings.
c. higher government budget deficits to decrease private spending like investment.
d. higher private savings to decrease government budget surpluses.
3) A prediction of the Ricardo-Barro effect is
a. a larger increase in interest rates when the government runs a budget deficit.
b. a larger decrease in interest rates when the government runs a budget surplus.
c. no effect on the real interest rate when the government runs a budget deficit.
d. a larger decrease in investment when the government runs a budget deficit.
4) An increase in the amount of capital per hour leads to ____ the productivity curve.
a. an upward shift of
b. an upward movement along
c. a downward shift of
d. a downward movement along
5) If real income is above the subsistence level, then, according to classical growth theory,
a. the population will decrease.
b. the population will increase.
c. the standard of living will continue to improve.
d. labor productivity will increase.
6) Neoclassical growth theory predicts that economic growth is
a. the result of technological advances.
b. impossible due to extremes in weather.
c. caused by women entering the workforce.
d. only temporary due to overpopulation.
7) New growth theory predicts that
a. countries with the highest real GDP per person are likely to be the first to experience a slowing economy.
b. national growth rates will not necessarily converge over time.
c. national growth rates will rise and fall as population rates change.
d. national growth rates will slowly converge over time.
8) The fastest growing nations today are those with
a. barriers that significantly limit international trade.
b. government intervention in markets to ensure high prices.
c. few funds spent on research and development.
d. the fastest growing exports and imports.
9) For something to be a “means of payment” means it
a. can be used to settle a debt.
b. is valuable and backed by gold.
c. requires a double coincidence of wants.
d. is valuable and backed by the government.
10) Which of the following is not a function of money?
a. medium of exchange
b. an input into the production process
c. store of value
d. unit of account
11) Barter is defined as
a. a generally accepted means of payment.
b. the exchange of goods and services for money.
c. the pricing of goods and services with one agreed upon standard.
d. the exchange of goods and services directly for other goods and services.
12) If someone buries money in a tin can beneath a tree, the money is functioning as a
a. medium of exchange.
b. store of value.
c. unit of account.
d. means of payment.
13) Credit cards, debit cards, and e-checks are
a. always counted as money.
b. sometimes counted as money, depending on what is purchased.
c. not money.
d. sometimes counted as money, depending on how they are used.
14) Which of the following counts as part of M1?
a. $5,000 in a checking account
b. $5,000 worth of gold
c. $5,000 credit line on a credit card
d. $5,000 worth of government bonds
15) M2 equals
a. M1 minus traveler’s checks because they are not really money.
b. M1 and is just another name for currency outside of banks.
c. M1 plus savings deposits, small time deposits, and money market fund deposits.
d. currency plus savings deposits, all time deposits, and money market funds and other deposits.
16) A commercial bank’s reserves are
a. currency in its vault plus the balance on its reserve account at a Federal Reserve Bank.
b. bonds issued by the U.S. government that are very safe.
c. savings and time deposits.
d. the provision of funds to businesses and individuals.
17) Banks and other monetary institutions perform which of the following functions?
a. lower costs of borrowing
b. pool the risks of lending
c. create liquidity
d. All of the above answers are correct.
18) We define a liquid asset as
a. bank loans made to low-risk borrowers.
b. any asset than can be converted into money easily and quickly with certainty.
c. any deposit held at a commercial bank.
d. any deposit held with the Federal Reserve.
19) The Board of Governors of the Federal Reserve System has
a. seven members elected by the public.
b. 12 members elected by the public.
c. seven members appointed by the president of the United States.
d. 12 members appointed by the president of the United States.
20) The most influential position in the Federal Reserve System is the
a. president of the Federal Reserve Bank of Chicago.
b. president of the Federal Reserve Bank of New York.
c. Chief Executive Officer (CEO) of the Fed.
d. chairman of the Board of Governors.
21) The Fed’s policy tools include
a. holding deposits for the U.S. government, reserve requirements, and the discount rate.
b. required reserve ratios, the discount rate, and open market operations.
c. setting regulations for lending standards and approving or rejecting loans banks make to large corporations.
d. supervision of the banking system and buying and selling commercial banks.
22) The minimum amount of deposits that banks must hold is determined by the
a. federal funds rate.
b. interest rate.
c. discount rate.
d. required reserve ratio.
23) The monetary base is the
a. sum of coins, Federal Reserve notes, and banks’ reserves at the Fed.
b. sum of gold and foreign exchange held by the Fed.
c. minimum reserve banks must hold to cover any losses from unpaid loans.
d. sum of government securities and loans held by the Fed.
24) A bank‘s balance sheet is a statement that summarizes
a. only the bank’s reserves.
b. the number of banks in a community.
c. the bank’s assets and liabilities.
d. only the bank’s loans.
25) Which of the following is a bank liability?
a. loans
b. equipment
c. government securities
d. checkable deposits
26) A bank has checkable deposits of $500,000, loans of $300,000, and government securities of $200,000. If the required
reserve ratio is 10 percent, the amount of required reserves is
a. $50,000.
b. $500,000.
c. $20,000.
d. $30,000.
27) Excess reserves are the
a. amount of reserves a bank holds at the Fed.
b. amount of reserves the Fed requires banks to hold.
c. amount of reserves held minus required reserves.
d. same as the required reserves.
28) The simple deposit multiplier equals
a. 1/(required reserve).
b. 1/(excess reserve ratio).
c. 1/(required reserve ratio).
d. the required reserve ratio.
29) If the required reserve ratio is 15 percent and banks loan all of their excess reserves, a new deposit of $20,000 leads to
a total increase in deposits of
a. $20,000.
b. $200,000.
c. $133,333.
d. $3,000.
30) The Fed’s policy tools are
a. open market operations, excess reserves, and required reserves.
b. open market operations, closed market operations, and required reserves.
c. the excess reserve ratio, the required reserve ratio, and the discount rate.
d. the required reserve ratio, the discount rate, and open market operations.
31) Whenever the Fed increases the required reserve ratio, excess reserves ____ and the quantity of money ____.
a. increase; increases
b. increase; decreases
c. decrease; decreases
d. decrease; increases
32) The Fed changes the required reserve ratio
a. every time it conducts an open market operation.
b. less often than it conducts open market operations.
c. never.
d. more often than it conducts open market operations.
33) If the Fed buys securities from a commercial bank, the effect on the quantity of money
a. is less than when the Fed buys securities from the non-bank public.
b. is the same as when the Fed buys securities from the non-bank public.
c. is larger than when the Fed buys securities from the non-bank public.
d. depends on whether the bank was borrowing reserves from another bank.
34) If the Fed buys government securities, then
a. new bank reserves are created.
b. the quantity of money is not changed, just its composition.
c. the quantity of money decreases.
d. old bank reserves are destroyed.
35) A currency drain is cash
a. draining into the banks.
b. held outside the banks.
c. lost in the drain.
d. held at the Fed.
36) The money multiplier is used to determine how much the
a. monetary base increases when the Fed purchases government securities.
b. quantity of money increases when the monetary base increases.
c. monetary base increases when the quantity of money increases.
d. quantity of money increases when the required reserve ratio increases.
37) The Fed makes an open market operation purchase of $200,000. The currency drain is 0.33 and the required reserve
ratio is 0.10. By how much does the quantity of money increase?
a. $250,000
b. $2,000,000
c. $333,333
d. $500,000
38) The video “Free To Choose” was introduced by Arnold Schwarzenegger. He argued that:
a) the U.S. economy is superior to the Austrian economy since the U.S. government uses more and better regulations.
b) the U.S. economy is worse than the Austrian economy since the U.S. government uses more and worse regulations.
c) the U.S. economy is superior to the Austrian economy since the U.S. government is smaller and less “socialistic.”
d) the U.S. economy is worse than the Austrian economy since the Austrian government cares more about its poor
people.
39) Milton Friedman felt the government of Hong Kong was relatively successful in 1979, because:
a) it was controlled by brilliant and effective regulators from the UK.
b) it transferred money from the rich to the poor, thus reducing poverty.
c) it was pro-business, and would not allow any Hong Kong firms to go out of business (become bankrupt).
d) it did not regulate the economy and allowed unsuccessful firms to go out of business.
40) The video “Free To Choose” Milton Friedman discussed the manufacture of a wooden pencil to illustrate
a) how markets can cause people to cooperate in order to make such an item, even if they don’t like one another.
b) how markets can cause conflict when the revenue from pencil sales are divided between those involved in production.
c) how governments can do a better job of producing simple items, but not complex ones.
d) how markets can cause selfish people to chop down scarce trees and contribute to global warming.