Spring 2018
Exam 2
Please answer all 40 questions. Please use the answer sheet provided by me. Please submit your answers to the Exam 1 drop box no later than 5:00pm on May 4th. This is an individual exercise, absolutely no assistance from anyone. You are on the honor system in that regard.
YEAR 1 2 3 4 5 6 7 8 9 10 11
ENR 150 200 175 210 150 200 125 250 200 175 250
Suppose a firm is contemplating an investment with an acquisition cost of $2,100 and an economic life of 11 years. Further suppose the stream of Expected Net Revenue on that investment is provided in the table above.
Please answer the next three questions based on the info provided above.
- Please select the correct statement from those provided below:
- Without information on the interest rate, it is impossible to determine whether or not the investment should be adopted.
- Without information on the PDV of the ENR stream for this investment, it is impossible to determine whether or not the investment should be adopted.
- Both (a) & (b) are correct.
- This investment is not profitable and should not be undertaken.
- This investment may or may not be profitable, depending on the interest rate.
- Suppose the ENR were 275 and 300 for years 10 and 11, respectively. Please select the correct statement from those provided below:
- Without information on the interest rate, it is impossible to determine whether or not the investment should be adopted.
- Without information on the PDV of the ENR stream for this investment, it is impossible to determine whether or not the investment should be adopted.
- Both (a) & (b) are correct.
- This investment is not profitable and should not be undertaken.
- Suppose the ENR were 200 for year 10 and r = 0. Please select the correct statement from those provided below:
- This investment is profitable and should be undertaken.
- Absent information on the PDV for this investment, it is impossible to determine whether or not the investment should be adopted.
- The PDV of the ENR stream for this investment is less than $2,100.
- This investment is not profitable and should not be undertaken.
| 4. | Other things equal, a 10 percent decrease in corporate income taxes will: | |
| A) | decrease the market price of real capital goods. | |
| B) | have no effect on the location of the investment-demand curve. | |
| C) | shift the investment-demand curve to the right. | |
| D) | shift the investment-demand curve to the left. | |
Use the following to answer questions 5 – 7:
| 5. | Refer to the above diagram for a private closed economy. The equilibrium level of GDP is: | |
| A) | $400. | |
| B) | $300. | |
| C) | $200. | |
| D) | $100. | |
| 6. | Refer to the above diagram for a private closed economy. At the equilibrium level of GDP, investment and saving are both: | |
| A) | $50. | |
| B) | $100. | |
| C) | $20. | |
| D) | $40. | |
| 7. | Refer to the above diagram for a private closed economy. The $400 level of GDP is: | |
| A) | that output at which saving is zero. | |
| B) | too high because consumption exceeds investment. | |
| C) | unstable because aggregate expenditures exceed GDP. | |
| D) | unstable because aggregate expenditures are less than GDP. | |
Use the following to answer questions 8 – 10:
| 8. | Refer to the above diagram for a private closed economy. The marginal propensity to consume is: | |
| A) | GF/GB. | |
| B) | DA/GB. | |
| C) | FE/DE. | |
| D) | FB/0B. | |
| 9. | Refer to the above diagram for a private closed economy. The upshift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig) 2 reflects: | |
| A) | an increase in investment expenditures. | |
| B) | a decrease in consumption expenditures. | |
| C) | an increase in the MPC. | |
| D) | an increase in the APS. | |
| 10. | Refer to the above diagram for a private closed economy. The multiplier is: | |
| A) | GF/DE. | |
| B) | GF/GB. | |
| C) | FE/GF. | |
| D) | AB/GF. | |
| 11. | The real-balances effect indicates that: | |
| A) | an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. | |
| B) | a lower price level will decrease the real value of many financial assets and therefore reduce spending. | |
| C) | a higher price level will increase the real value of many financial assets and therefore increase spending. | |
| D) | a higher price level will decrease the real value of many financial assets and therefore reduce spending. | |
| 12. | If investment increases by $10 billion and the economy’s MPC is .8, the aggregate demand curve will shift: | |
| A) | leftward by $40 billion at each price level. | |
| B) | rightward by $10 billion at each price level. | |
| C) | rightward by $50 billion at each price level. | |
| D) | leftward by $20 billion at each price level. | |
| 13. | An economist who favors smaller government would recommend: | |
| A) | tax cuts during recession and reductions in government spending during inflation. | |
| B) | tax increases during recession and tax cuts during inflation. | |
| C) | tax cuts during recession and tax increases during inflation. | |
| D) | increases in government spending during recession and tax increases during inflation. | |
| 14. | If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $30 billion by: | |
| A) | reducing government expenditures by $125 billion. | |
| B) | reducing government expenditures by $20 billion. | |
| C) | increasing taxes by $50 billion. | |
| D) | increasing taxes by $250 billion. | |
| 15. | Which of the following represents the most expansionary fiscal policy? | |
| A) | a $10 billion tax cut | |
| B) | a $10 billion increase in government spending | |
| C) | a $10 billion tax increase | |
| D) | a $10 billion decrease in government spending | |
| 16. | Which of the following represents the most contractionary fiscal policy? | |
| A) | a $30 billion tax cut | |
| B) | a $30 billion increase in government spending | |
| C) | a $30 billion tax increase | |
| D) | a $30 billion decrease in government spending | |
| 17. | Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment? | |
| A) | a decrease of $12 billion | |
| B) | an increase of $25 billion | |
| C) | an increase of $10 billion | |
| D) | an increase of $15 billion | |
Use the following to answer questions 18 – 19:
| 18. | Refer to the above diagram of the money market. The vertical money supply curve Sm reflects the fact that: | |
| A) | bond prices and interest rates are inversely related. | |
| B) | the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes. | |
| C) | the velocity of money is zero. | |
| D) | lower interest rates result in lower opportunity costs of supplying money. | |
| 19. | Refer to the above diagram of the money market. The equilibrium interest rate is: | |
| A) | i1. | |
| B) | i2. | |
| C) | i3. | |
| D) | not determinable without additional information. | |
| 20. | Suppose the demand for money and the supply of money increase simultaneously. We can: | |
| A) | expect the interest rate to rise and bond prices to fall. | |
| B) | expect the interest rate to fall and bond prices to rise. | |
| C) | the nominal GDP to expand. | |
| D) | not predict what will happen to interest rates or bond prices. | |
| 21. | Research involving industrially advanced countries suggests that: | |
| A) | the more independent the central bank, the lower the average annual growth of real GDP. | |
| B) | the more independent the central bank, the higher the average annual growth of real GDP. | |
| C) | there is no relationship between the degree of independence of a country’s central bank and the growth rate of its real GDP. | |
| D) | the less independent the central bank, the higher the average annual rate of inflation. | |
| 22. | The primary purpose of the legal reserve requirement is to: | |
| A) | prevent banks from hoarding too much vault cash. | |
| B) | provide a means by which the monetary authorities can influence the lending ability of commercial banks. | |
| C) | prevent commercial banks from earning excess profits. | |
| D) | provide a dependable source of interest income for commercial banks. | |
| 23. | Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank’s required and excess reserves are equal, then its actual reserves: | |
| A) | are $30,000. | |
| B) | are $10,000. | |
| C) | are $20,000. | |
| D) | cannot be determined from the given information. | |
| 24. | Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be: | |
| A) | zero. | |
| B) | 10 percent. | |
| C) | 20 percent. | |
| D) | 25 percent | |
Use the following to answer questions 25 – 27:
Use the following balance sheet for the ABC National Bank in answering the next question(s). Assume the required reserve ratio is 20 percent.
| 25. | Refer to the above data. This commercial bank has excess reserves of: | |
| A) | $0. | |
| B) | $3,000. | |
| C) | $12,000. | |
| D) | $5,000. | |
| 26. | Refer to the above data. This bank can safely expand its loans by a maximum of: | |
| A) | $7,000. | |
| B) | $25,000. | |
| C) | $12,000. | |
| D) | $5,000. | |
| 27. | Refer to the above data. If the original balance sheet was for the commercial banking system, rather than a single bank, loans and checkable deposits could have been expanded by a maximum of: | |
| A) | $8,000. | |
| B) | $15,000. | |
| C) | $48,000. | |
| D) | $25,000. | |
| 28. | Which of the following will increase commercial bank reserves? | |
| A) | the purchase of government bonds in the open market by the Federal Reserve Banks | |
| B) | a decrease in the reserve ratio | |
| C) | an increase in the discount rate | |
| D) | the sale of government bonds in the open market by the Federal Reserve Banks | |
| 29. | Which of the following best describes the cause-effect chain of an easy money policy? | |
| A) | A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. | |
| B) | A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. | |
| C) | An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. | |
| D) | An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. | |
| 30. | If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to: | |
| A) | sell government securities, raise reserve requirements, and raise the discount rate. | |
| B) | buy government securities, raise reserve requirements, and raise the discount rate. | |
| C) | sell government securities, lower reserve requirements, and lower the discount rate. | |
| D) | sell government securities, raise reserve requirements, and lower the discount rate. | |
| 31. | If the economy were encountering a severe recession, proper monetary and fiscal policies would call for: | |
| A) | selling government securities, raising the reserve ratio, lowering the discount rate, and a budgetary surplus. | |
| B) | buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit. | |
| C) | buying government securities, raising the reserve ratio, raising the discount rate, and a budgetary surplus. | |
| D) | buying government securities, reducing the reserve ratio, raising the discount rate, and a budgetary deficit. | |
| 32. | All else equal, when the Federal Reserve Banks engage in a tight money policy, the prices of government bonds usually: | |
| A) | fall. | |
| B) | rise. | |
| C) | remain constant. | |
| D) | move in the same direction as the bonds’ interest rate yield. | |
| 33. | One of the strengths of monetary policy relative to fiscal policy is that monetary policy: | |
| A) | can be implemented more quickly. | |
| B) | is subject to closer political scrutiny. | |
| C) | does not produce a net export effect. | |
| D) | entails a larger spending income multiplier effect on real GDP. | |
| 34. | The problem of cyclical asymmetry refers to the idea that: | |
| A) | a tight money policy can force a contraction of the money supply, but an easy money policy may not achieve an expansion of the money supply. | |
| B) | the monetary authorities have been less willing to use an easy money policy than they have a tight money policy. | |
| C) | cyclical downswings are typically of longer duration than cyclical upswings. | |
| D) | an easy money policy can force an expansion of the money supply, but a tight money policy may not achieve a contraction of the money supply. | |
| 35. | An easy money policy may be frustrated if the: | |
| A) | demand-for-money curve shifts to the left. | |
| B) | investment-demand curve shifts to the left. | |
| C) | saving schedule shifts downward. | |
| D) | investment-demand curve shifts to the right. | |
| 36. | Some economists contend that the velocity of money often changes in such a way as to frustrate monetary policy. Which of the following statements is consistent with this thinking? | |
| A) | An increase in the money supply will increase the interest rate and reduce the amount of money held as an asset. | |
| B) | A decrease in the money supply will decrease the interest rate and increase the amount of money held as an asset. | |
| C) | A decrease in the money supply will increase the interest rate and reduce the amount of money held as an asset. | |
| D) | An increase in the money supply will lower the interest rate and reduce the amount of money held as an asset. | |
| 37. | According to the equation of exchange, changes in the money supply can affect: | |
| A) | only the velocity of money. | |
| B) | both the price level and real output. | |
| C) | only real output and employment. | |
| D) | only the price level. | |
| 38. | The equation of exchange suggests that, if the supply and velocity of money remain unchanged, an increase in the physical volume of goods and services produced will cause: | |
| A) | the unemployment rate to rise. | |
| B) | the Federal Reserve Banks to sell securities in the open market. | |
| C) | a decline in the price level. | |
| D) | an automatic budget deficit. | |
| 39. | If the price level does not change from one period to the next: | |
| A) | the money supply must have been constant during the period. | |
| B) | velocity must have been constant during the period. | |
| C) | nominal GDP must have remained constant during the period. | |
| D) | none of the above responses are valid. | |
| 40. | Most monetarists would say that: | |
| A) | the MV = PQ equation provides a better understanding of the macroeconomy than does the Ca + Ig + Xn + G = GDP equation. | |
| B) | most changes in the price level are explainable by changes in the money supply. | |
| C) | the velocity of money is quite stable. | |
| D) | all of the above are true. | |
