Econ 102 Section 4 – Principles of Macroeconomics
Instructor: C. Burkart
Once again, you will receive 5 points for putting your exam version in the correct folder when you are done. Your exam version is at the top right hand side of this page. If you put your exam in the wrong folder, grading of it may also be delayed. Multiple-choice questions are worth 3 points each.
1. Suppose Alicia writes a check for $10,000 on Bank Two and the check is deposited in another bank. If Bank Two initially (before the check) had $150,000 in demand deposits and if the required reserve ratio is 10%, we know that after all adjustments are made Bank Two will have ___________ in required reserves.
a. 10% of $150,000.
b. 10% of $160,000.
c. 10% of $10,000.
d. 10% of $140,000.
2. Suppose the Fed engages in an open market sale of $50,000 in government bonds. If the required reserve ratio is 20%, the money supply will eventually
a. decrease by $250,000.
b. decrease by $50,000.
c. decrease by [1/(1 - RRR)][$50,000] = $62,000.
d. decrease by [RRR/(1 - RRR)][$50,000] = $12,500.
3. An open market sale of bonds by the Fed will ___________ while an open market purchase by the Fed will ___________ .
a. increase the money supply; decrease the money supply.
b. decrease the money supply; increase the money supply.
c. increase the money supply; increase the marginal propensity to consume.
d. decrease the money multiplier; increase the money multiplier.
4. Demand deposits
a. are considered one of the more liquid assets.
b. are included in both the M1 and M2 measures of the money supply.
c. are the checking accounts held by households and business firms at commercial banks.
d. (a), (b), and (c).
5. M1
a. includes demand deposits, cash, and travelers' checks.
b. is larger in dollar value than M2.
c. includes just cash in the hands of the public.
d. includes cash stored by the Federal Reserve for future release.
6. A bank's net worth is
a. equal to total assets minus total liabilities.
b. equal to total liabilities minus total assets.
c. equal to its profit.
d. both (a) and (c).
7. Why are credit cards not considered money?
a. The total balance on credit cards is not known at any given time.
b. Only assets can be considered as money.
c. Credit card balances can purchase goods produced in foreign countries.
d. Credit cards are not useful for all the functions of money.
8. Liquidity is, in part,
a. the speed at which a loan can be paid off.
b. the speed at which a bank can generate revenue.
c. the speed at which an asset can be converted into cash.
d. a measure of an asset’s value.
9. The marginal propensity to consume is equal to:
a. the slope of the consumption-income line.
b. the fraction of any additional dollar of income that will be spent on goods and services.
c. DC/ DI.
d. all of the above.
10. The steeper the consumption-income line:
a. the larger is autonomous consumption.
b. the larger is planned investment.
c. the larger is disposable income.
d. the larger is the multiplier.
11. Autonomous consumption is:
a. what consumption spending would be in theory if income equaled zero.
b. the vertical intercept of the consumption-income line.
c. the combined impact on consumption spending of everything except disposable income.
d. all of the above.
12. If unplanned inventory investment is negative when output equals $500:
a. equilibrium output is greater than $500.
b. The government is running a budget deficit.
c. equilibrium output is less than $500.
d. equilibrium output is at $500.
13. Suppose as disposable income increases by $100 million, consumption expenditures increase by $90 million. The marginal propensity to consume is
a. 1.11.
b. 0.10.
c. 0.90.
d. $90 million.
14. The flatter the consumption function,
a. the larger is autonomous consumption.
b. the larger is the marginal propensity to consume.
c. the larger is the multiplier.
d. the smaller is the marginal propensity to consume.
Question 15 [12 pts.] Use the table below to answer subparts a. through d.
|
Y |
C |
IP |
G |
NX |
|
|
7000 |
6100 |
400 |
1000 |
500 |
|
|
8000 |
6900 |
400 |
1000 |
500 |
|
|
9000 |
7700 |
400 |
1000 |
500 |
|
|
10000 |
8500 |
400 |
1000 |
500 |
|
|
11000 |
9300 |
400 |
1000 |
500 |
|
|
12000 |
10100 |
400 |
1000 |
500 |
|
|
13000 |
10900 |
400 |
1000 |
500 |
|
a. What is the marginal propensity to consume implicit in this data?
0.80
b. What is the numerical value of the expenditure multiplier for this economy?
1/(1-0.8) = 5
c. What is the equilibrium level of real GDP?
12,000
d. Suppose that government purchases (G) decreased from 1,000 to 400 at each level of income. What would be the new equilibrium real GDP?
9,000
Question 16 [9 pts.] Calculate the changes in real GDP that would result in each of the following cases (show your work for full credit):
a. Government purchases rise by $7,500 and the MPC is 0.95.
MPC = 0.95 => Multiplier = 20 => Change in real GDP = 20 x $7,500 = $150,000
b. Planned investment spending falls by $300,000 and the MPC is 0.65.
MPC = 0.65 => Multiplier = 2.86 => Change in real GDP = 2.86 x -$300,000 = -$858,000 (or -$857,142 if not rounded)
c. Export spending rises by $60 billion at the same time that import spending rises by $65 billion, and the MPC is 0.75.
MPC = 0.75 => Multiplier = 4 => Change in real GDP = 4 x ($60 billion - $65 billion) = -$20 billion
Question 17 [6 pts.] Using the simplified bank balance sheet shown below, answer the following questions.
|
Assets |
|
|
Liabilities |
|
|
|
Property, buildings |
$ 16 |
million |
Demand deposit liabilities |
$ 100 |
million |
|
Bonds |
$ 30 |
million |
|
|
|
|
Loans |
$ 50 |
million |
|
|
|
|
Cash in vault |
$ 2 |
million |
|
|
|
|
Fed accounts |
$ 6 |
million |
|
|
|
a. What is the net worth of this bank?
$4 million
b. Assuming that the bank minimizes its holding of reserves, what must be the required reserve ratio under which it operates?
0.08
Question 18 [6 pts.] Suppose that the money supply is $3.2 trillion. The Fed decides that it wants to increase the money supply by $500 billion.
a. If the RRR is 0.10, what does the Fed need to do in order to stimulate the planned increase?
DD Multiplier = 1/RRR = 10. ΔMS = 10 x ΔReserves => +$500 billion = 10 x ΔReserves => ΔReserves = $500/10 = $50 billion. Therefore the Fed should buy $50 billion worth of bonds on the open market.
b. What if the RRR is 0.15?
Same process as part a., but they need to buy $75 billion (~$74.96 billion if rounded)