V444

 

The University of Western Ontario

Economics 1022B-001, Introductory Macroeconomics

March Midterm Examination 2010

Professor J. Palmer

 

 

INSTRUCTIONS:

1.         The exam is set to be 1 hour long.

2.         The exam consists of 49 multiple choice questions.

3.         Record your name and student number on the Scantron Sheet.  Your answers to the Multiple Choice questions should go on the Scantron Sheet IN PENCIL ONLY.

4.         Calculators are not allowed. Also, no hats, no cell phones, no dictionaries, no talking, no beer, no wine, no illicit recreational drugs, and no extra paper.

5.         Choose the best answer.

6.         * NEW: No bathroom breaks.

7.         Hand in the scantron sheet; you may keep these questions.


 

 

1.   The economy is in long-run equilibrium when a Member of Parliament argues that the Bank of Canada should do more to combat unemployment. He argues that if the Bank of Canada increased the money supply faster, more workers would find jobs. The MP’s argument

      a.   is completely correct.

      b.   is completely wrong.

      c.   is true for the short run but not the long run.

      d.   is true for the long run but not the short run.

      e.   is true for The Maritime Provinces but not for The Prairies.

 

 

2.   Rank the following assets in order from greatest liquidity to least liquidity

            i.    Treasury Bills

            ii.   30-year Government of Greece bonds

            iii.  $10 bills

            iv.  $100 bills

            v.   a house with an appraised value of $5million

            vi.  a bottle of Lagavulin Scotch Whisky

 

      a.   i. ii, iii, iv, v

      b.   iii, ii, i, v, iv

      c.   v, i, iv, iii, ii

      d.   iv, v, ii, i, iii

      e.   iii, iv, i, ii, v

      f.    vi

 


 

3.   One determinant of the long-run average unemployment rate is the

      a.   market power of unions, while the inflation rate depends primarily upon the government spending.

      b.   minimum wage, while the inflation rate depends primarily upon the money supply growth rate.

      c.   rate of growth of the money supply, while the inflation rate depends primarily upon the market power of unions.

      d.   role of efficiency wages, while the inflation rate depends primarily upon the extent to which firms are competitive.

      e.   the size of the budget deficit, which determines both the non-accelerating inflation rate of unemployment and the rate of inflation.

 

 

4.   The analysis of Friedman and Phelps can be summarized in the following equation where a is positive number:

      a.   Unemployment Rate = Natural Rate of Unemployment – a (Actual Inflation - Expected Inflation).

      b.   Unemployment Rate = Natural Rate of Unemployment – a (Expected Inflation - Actual Inflation).

      c.   Unemployment Rate = Expected Rate of Inflation – a (Actual Inflation - Expected Inflation).

      d.   Unemployment Rate = Actual Rate of Inflation – a (Actual Unemployment - Expected Unemployment).

      e.   Unemployment Rate = Nominal rate of interest + a (Expected rate of inflation – Actual rate of inflation).

 

 

5.   In the nineteenth century, some countries were on gold standards so that on average the money supply growth rate was close to zero and expected inflation was more or less constant. For these countries during this time period, we find that increases in inflation were generally associated with falling unemployment. These findings

      a.   are consistent with Friedman and Phelps' theories, because they argued that when inflation was higher than expected, unemployment would fall.

      b.   are consistent with Friedman and Phelps' theories, because they argued that when prices rose unemployment would fall whether actual inflation was higher than expected or not.

      c.   are inconsistent with Friedman and Phelps' theories, because they argued that higher inflation would increase unemployment.

      d.   are inconsistent with Friedman and Phelps' theories, because they argued that inflation and unemployment were unrelated.

      e.   are consistent with the Friedman theories about the vertical long-run Phillips curve but are inconsistent with Phelps’ theories about the importance of inflationary expectations in the long run.

 

 

6.   In the late 1960s/early 1970s, the short-run Phillips curve shifted

      a.   right as inflation expectations rose.

      b.   right as inflation expectations fell.

      c.   left as inflation expectations rose.

      d.   left as inflation expectations fell.


 

7.   In recent years, inflation expectations have fallen. This has shifted the short-run Phillips curve

      a.   left, meaning that at any given inflation rate unemployment will be lower in the short run than before.

      b.   right, meaning that at any given inflation rate unemployment will be lower in the short run than before.

      c.   right, meaning that at any given inflation rate unemployment will be higher in the short run than before.

      d.   left, meaning that at any given inflation rate unemployment will be higher in the short run than before.

      e.   up, meaning that at any given unemployment rate, the rate of inflation will be lower in the short run than before.

 

 

8.   Which of the following would not be associated with an adverse supply shock?

      a.   The short-run Phillips curve shifts left.

      b.   Unemployment rises.

      c.   The price level rises.

      d.   Output falls.

      e.   The aggregate supply curve shifts left.

 

 

9.   In the AS-AD model, if policymakers accommodate an adverse supply shock, the unemployment rate

      a.   and the price level will rise.

      b.   and the price level will fall.

      c.   will rise and the price level will fall.

      d.   will fall and the price level will rise.

      e.   will rise but the price level will remain unchanged.

 

 

10. Suppose a war temporarily disrupts the supply of oil to the country. We would expect the

      a.   short-run aggregate supply curve, short-run Phillips curve, and long-run Phillips curve to shift left.

      b.   short-run aggregate supply curve, short-run Phillips curve, and long-run Phillips curve to shift right.

      c.   short-run aggregate supply curve to shift left, and the short-run Phillips curve and long-run Phillips curve to shift right.

      d.   short-run aggregate supply curve to shift left, the short-run Phillips curve to shift right, and the long-run Phillips curve to be unaffected.

      e.   Short-run aggregate supply curve to remain unchanged, the short-run Phillips curve to shift to the right, and the long-run aggregate demand curve to shift to the left.

 

 


 

11. Suppose an economy with high inflation decides to decrease the money supply growth rate.

      a.   Initially unemployment rises. Eventually the short-run Phillips curve shifts left.

      b.   Initially unemployment rises. Eventually the short-run Phillips curve shifts right.

      c.   Initially unemployment falls. Eventually the short-run Phillips curve shifts right.

      d.   Initially unemployment falls. Eventually the short-run Phillips curve shifts left.

      e.   York answer: all of the above.

 

 

12. The theory of rational expectations

      a.   describes how policymakers react to supply shocks.

      b.   concerns how people use information to predict the future.

      c.   predicts that people always forecast inflation correctly.

      d.   explains how people act when there is unemployment and jobs must be rationed.

      e.   Assumes that people consistently make systematic mistakes when planning for the future.

 

 

13. In the mid and late 1990s, due to economic growth and due to lower inflation expectations,

      a.   aggregate supply and the Phillips curve shifted right.

      b.   aggregate supply and the Phillips curve shifted left.

      c.   aggregate supply shifted right and the Phillips curve shifted left.

      d.   aggregate supply shifted left and the Phillips curve shifted right.

      e.   aggregate supply and the Phillips curve both remained unchanged.

 

 

14. Interest rates stated in the Wall Street Journal are

      a.   classical variables.

      b.   dichotomous variables.

      c.   dependent variables.

      d.   real variables.

      e.   nominal variables.

 

 

15. Velocity in the country of Aquilonia is always stable. In 2002, the money supply was $100 billion, nominal GDP was $500 billion, and the real interest rate was 3 percent. In 2003, the money supply was $105 billion and real GDP did not change from its level in 2002. Assume these changes were generally anticipated. As a result, the nominal interest rate in 2003 was approximately

      a.   3 percent.

      b.   5 percent.

      c.   8 percent.

      d.   11 percent.

      e.   14 percent.

 

 


 

16. You buy stock and its price rises just as much as the price level, so before taxes you made

      a.   a nominal and real gain, and you pay taxes on the nominal gain.

      b.   a nominal and real gain, but you pay taxes only on the real gain.

      c.   a nominal gain, but no real gain, yet you pay taxes on the nominal gain.

      d.   a nominal gain, but no real gain, so you pay no taxes on the nominal gain.

      e.   no nominal gain, and a real loss due to the taxes you will have to pay.

 

 

17. Wealth is distributed from debtors to creditors when the rate of inflation is

      a.   high, but expected.

      b.   low, but expected.

      c.   unexpectedly high.

      d.   unexpectedly low.

 

 

18. According to the crowding-out effect, an increase in government spending

      a.   increases the interest rate and so increases investment spending.

      b.   increases the interest rate and so decreases investment spending.

      c.   decreases the interest rate and so increases investment spending.

      d.   decreases the interest rate and so decreases investment spending.

      e.   increases planned consumption spending, which “crowds out” planned saving.

 

 

19. The current GDP of an economy in long-run equilibrium is $500 billion. If the marginal propensity to consume out of disposable income is.8, the marginal rate of taxation is .4, and the marginal propensity to import is .3, what would be the approximate long-run impact on the GDP of this economy if the gubmnt increased its spending by $10 billion? [hint: read carefully and choose the best answer.]

      a.   zero.

      b.   GDP would increase by $22 billion.

      c.   GDP would increase by $50 billion.

      d.   GDP would increase by $78 billion.

      e.   GDP would increase by $100 billion.

 

 

20. The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure, which will lower shipping costs for many businesses. We should generally expect that in the short run,

      a.   real GDP will increase and the price level will fall, but in the long run, there will be no effect.

      b.   real GDP will increase and the price level will fall, but in the long run, real GDP will increase and the price level might rise, fall or stay the same.

      c.   real GDP will increase and the price level might rise, fall or stay the same, and in the long run, real GDP will increase and the price level might rise, fall or stay the same.

      d.   real GDP will increase and the price level might rise, fall or stay the same, but in the long run, the price level will increase and real GDP might rise, fall or stay the same.

 

 


 

21. The most important automatic stabilizer is

      a.   open-market transactions.

      b.   the tax system.

      c.   unemployment compensation.

      d.   welfare benefits.

      e.   the goods and services tax.

 

 

22. A decrease in the price level induces people to hold

      a.   less money, so they lend less, and the interest rate rises.

      b.   less money, so they lend more, and the interest rate falls.

      c.   more money, so they lend more, and the interest rate rises.

      d.   more money, so they lend less, and the interest rate falls.

 

 

23. The sticky wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, the real wage

      a.   rises, so employment rises.

      b.   rises, so employment falls.

      c.   falls, so employment rises.

      d.   falls, so employment falls.

 

 

24. Suppose the economy is in long-run equilibrium. If there is a tax cut at the same time that major new sources of oil are discovered in the country, then in the short-run we would expect

      a.   real GDP will rise and the price level might rise, fall, or stay the same.

      b.   real GDP will fall and the price level might rise, fall, or stay the same.

      c.   both real GDP and the price level will rise.

      d.   the price level will rise, and real GDP might rise, fall, or stay the same.

      e.   the price level will fall, and real GDP might rise, fall, or stay the same.

 

 


25. In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in the supply of gold to Cairo

      a.   raised both the price level and the value of gold in Cairo.

      b.   raised the price level, but decreased the value of gold in Cairo.

      c.   lowered the price level, but increased the value of gold in Cairo.

      d.   lowered both the price level and the value of gold in Cairo.

      e.   had no effect on the price level in Cairo.

 

 

26. When the money market is depicted in a diagram with the value of money on the vertical axis, an increase in the money supply creates an excess

      a.   supply of money causing people to spend more.

      b.   supply of money causing people to spend less.

      c.   demand for money causing people to spend more.

      d.   demand for money causing people to spend less.

      e.   supply of money which, in turn, causes a decrease in the demand for money.

 

 

27. When the money market is depicted in a diagram with the value of money on the vertical axis, if the price level is above the equilibrium level, there is a

      a.   shortage, so the price level will rise.

      b.   shortage, so the price level will fall.

      c.   surplus, so the price level will rise.

      d.   surplus, so the price level will fall.

      e.   black market solution.

 

 

28. Samuelson and Solow believed that the Phillips curve

      a.   implied that low unemployment was associated with low inflation.

      b.   indicated that the aggregate supply and aggregate demand model was incorrect.

      c.   offered policymakers a menu of possible economic outcomes from which to choose.

      d.   showed that at sufficiently low interest rates, monetary policy is ineffective.

      e.   All of the above are correct.

 

 

29. Suppose that the money supply increases. In the short run, this increases employment according to

      a.   both the short-run Phillips curve and the aggregate demand and aggregate supply model.

      b.   neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.

      c.   only the short-run Phillips curve.

      d.   only the aggregate demand and aggregate supply model.

      e.   the long-run Phillips curve but not the short-run Phillips curve.

 

 


 

Use the pair of diagrams below to answer the following two questions.

 

Figure 1

[assume the number 2 is not directly above the number 1 in the graph on the right]

 

 

30. Refer to Figure 1. If the economy starts at c and 1, then in the short run, a decrease in taxes moves the economy to

      a.   d and 2.

      b.   d and 3.

      c.   back to c and 1.

      d.   e and 2

      e.   None of the above is correct.

 

 

31. Refer to Figure 1. If the economy starts at c and 1, then in the long run, an increase in the rate of growth of the money supply moves the economy to

      a.   b and 2.

      b.   a and 3.

      c.   back to c and 1.

      d.   e and 2

      e.   None of the above is correct.

 

 

32. During severe financial crises, the public tends to hold relatively more currency and relatively fewer deposits. This decision makes reserves

      a.   decrease and the money supply increase.

      b.   decrease and the money supply decrease.

      c.   increase, but leaves the money supply unchanged.

      d.   decrease, but leaves the money supply unchanged.

      e.   increase and the money supply increase.

 


 

33. In 1968, economist Milton Friedman published a paper that was critical of the Phillips curve on the grounds that

      a.   it seemed to work for wages but not for inflation.

      b.   monetary policy was ineffective in combating inflation.

      c.   it was irrelevant for most countries.

      d.   Phillips had made errors in collecting his data.

      e.   It ignores how changing inflationary expectations shift the short-run Phillips curve.

 

 

34. The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. The central bank of Freedonia has instituted a policy of zero inflation. Assuming that velocity is stable, if real GDP grows by 5 percent this year, how will the central bank of Freedonia want to change the money supply this year?

      a.   It will not change the money supply at all.

      b.   It will try to increase the money supply by 5 percent.

      c.   It will try to reduce the money supply by 5 percent.

      d.   It will try to increase the money supply by 2.5 percent.

      e.   It will try to reduce the money supply by 2.5 percent.

 

 

35. The evidence from hyperinflations indicates that money growth and inflation

      a.   moved together, which supports the quantity theory.

      b.   moved together, which does not support the quantity theory.

      c.   did not move closely with each other, which supports the quantity theory.

      d.   did not move closely with each other, which does not support the quantity theory.

      e.   are inversely correlated, which supports the quantity theory.

 

 

36. Governments may prefer an inflation tax to some other kind of tax since the inflation tax

      a.   is easier to impose.

      b.   reduces inflation.

      c.   falls mainly on high-income individuals.

      d.   reduces the real cost of government expenditure.

      e.   All of the above are correct.

 

 

37. In the long run, which of the following would shift the long-run Phillips curve to the right?

      a.   an increase in unemployment payments

      b.   an increase in the money supply

      c.   a decrease in the money supply

      d.   tax cuts

      e.   an increase in government expenditures

 


 

Use the graph below to answer the following question.

 

Figure 2

 

 

 

38. Refer to Figure 2. Curve 1 is the

      a.   long-run aggregate supply curve.

      b.   short-run aggregate supply curve.

      c.   short-run aggregate demand curve.

      d.   short-run Phillips curve.

      e.   long-run Phillips curve.

 

 

39. Based on the quantity equation, if M = 125, V = 4, and Y = 200, then P =

      a.   0.5

      b.   1

      c.   1.5

      d.   2

      e.   2.5

 

 


 

40. An increase in the expected price level shifts short-run aggregate supply to the

      a.   right, and an increase in the actual price level shifts short-run aggregate supply to the right.

      b.   right, and an increase in the actual price level does not shift short-run aggregate supply.

      c.   left, and an increase in the actual price level shifts short-run aggregate supply to the left.

      d.   left, and an increase in the actual price level does not shift short-run aggregate supply.

      e.   opposite side of the aggregate demand curve when the natural unemployment rate is zero.

 

 

41. Which of the following shifts short-run aggregate supply right?

      a.   an increase in the price level

      b.   an increase in the minimum wage

      c.   a decrease in the price of oil

      d.   a decrease in immigration from England

      e.   an increase in the natural unemployment rate

 

 

42. Which of the following would cause prices and real GDP to rise in the short run?

      [reminder:  choose the best answer]

      a.   Short-run aggregate supply shifts right.

      b.   Short-run aggregate supply shifts left.

      c.   Aggregate demand shifts right.

      d.   Aggregate demand shifts left.

      e.   Both aggregate demand and aggregate supply shift upward.

 

 

43. If the long-run Phillips curve shifts to the left, then for any given rate of money growth and inflation the economy will have

      a.   higher unemployment and lower output.

      b.   higher unemployment and higher output.

      c.   lower unemployment and lower output.

      d.   lower unemployment and higher output.

      e.   higher unemployment and higher rates of inflation.

 

 

44. If the minimum wage decreased, then at any given rate of inflation

      a.   both output and unemployment would be higher.

      b.   neither output nor employment would be higher.

      c.   output would be higher and unemployment would be lower.

      d.   unemployment would be lower and output would also be lower.

      e.   both the long-run and the short-run Phillips curves would shift to the right.

 

 


 

45. Which of the following did not happen during the onset of the Great Depression?

      a.   The money supply fell as households took money out of banks.

      b.   The Bank of Canada was abolished.

      c.   The real GDP per person fell about 30 percent.

      d.   Bankers began holding greater reserves.

      e.   The unemployment rate rose dramatically.

 

 

46. Suppose that there has been bad weather, a decrease in the availability of oil, or some other temporary increase in firms' costs, and the economy has reached its new short-run equilibrium. As the economy moves from this short-run equilibrium to long-run equilibrium, prices

      a.   and output rise.

      b.   and output fall.

      c.   rise and output falls.

      d.   fall and output rises.

      e.   go lower than the average I.Q. of York graduates.

 

 

47. If there is a sudden unanticipated drop in the money supply, people will

      a.   deposit more into interest-bearing accounts, and the interest rate will fall.

      b.   deposit more into interest-bearing accounts, and the interest rate will rise.

      c.   withdraw money from interest-bearing accounts, and the interest rate will fall.

      d.   withdraw money from interest-bearing accounts, and the interest rate will rise.

      e.   None of the above is correct.

 

 

48. When the interest rate increases, the opportunity cost of holding money

      a.   increases, so the quantity of money demanded increases.

      b.   increases, so the quantity of money demanded decreases.

      c.   decreases, so the quantity of money demanded increases.

      d.   decreases, so the quantity of money demanded decreases.

      e.   None of the above is correct.

 

 

49. In the long run, a decrease in the rate of growth of the money supply will

      a.   increase inflation and shift the short-run Phillips curve right.

      b.   increase inflation and shift the short-run Phillips curve left.

      c.   decrease inflation and shift the short-run Philips curve right.

      d.   decrease inflation and shift the short-run Phillips curve left.

      e.   None of the above is correct.

 

 


 

Answer Key for the 2010 March midterm examination V444

 

1. c

2. e

3. b

4. a

5. a

6. a

7. a

8. a

9. a

10. d

11. a

12. b

13. c

14. e

15. c

16. c

17. d

18. b

19. a

20. c

21. b

22. b

23. c

24. a

25. b

26. a

27. b

28. c

29. a

30. e

31. e

32. b

33. e

34. b

35. a

36. a

37. a

38. e

39. e

40. d

41. c

42. c

43. d

44. c

45. b

46. d

47. d

48. b

49. d