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ECON 311 Intermediate Macroeconomics Midterm Winter2014




Question;1. Which of the listed prices is the most you;would be willing to pay for $300 per year, every year, forever, starting three;years from today? Let the interest rate;be 10%.;A.;$1,250;B.;$2,800;C.;$3,000;D.;$2,470;E.;$2,530;2.;Which;of the following makes sense?;Inflation decreases and the output ratio is constant if?;A.;a;beneficial supply shock combines with a reduced rate of NGDP growth.;B.;an;adverse supply shock combines with a reduced rate of NGDP growth.;C.;a;beneficial supply shock combines with a constant rate of NGDP growth.;D.;an;adverse supply shock combines with a constant rate of NGDP growth.;E.;an;adverse supply shock combines with an increased rate of NGDP growth.;3.;The;Pigou Effect?;A.;explains;the relationship of inflation and real interest rates.;B.;raises;the real money supply when the price level is lower, and this larger money;supply pushes down the interest rate.;C.;causes;spending to rise in real terms when the price level is lower, so that a given;stock of money buys more.;D.;is;the relation between the level of output and the level of employment.;E.;is;the relation between the level of inflation and the level of;unemployment.;4.;Nominal;GDP is $20,000. Net public debt is;$12,000. The nominal interest rate is;5% on government debt. Nominal GDP;grows at 7% per year. Taxes =;30%*NGDP. The primary government;budget is in balance and is expected to remain so. Which of the following is true?;A.;The;debt/NGDP ratio is 60% and stable.;B.;The;government is running a balanced total budget.;C.;The;government will need to issue $600 (net) in new government bonds to cover its;borrowing, and thus debt will grow as a share of nominal GDP.;D.;This;government will need to move to a budget surplus to reduce its debt/NGDP;ratio.;E.;The;government will need to, on net, sell bonds to cover its deficit, and yet;the debt to nominal GDP ratio will fall.;5.;In;the FRED graph above, you should be able to figure out which line is;which. From the graph we can see;that?.;A.;real;interest rates have been falling over the past year.;B.;deflation;is likely, in the 0 to -1% range.;C.;inflation;is rising.;D.;inflation;is expected to be below 3% over the next decade.;E.;the;Fisher effect is driving up both interest rates.;6.;From;James Surowiecki?s ?A Brief History of Money? we learn that?.;A.;Marco;Polo learned of the use of government issued standardize coins in the court;of Kublai Khan.;B.;Feudal;society depended upon the institution of money to bring cooperation between;social classes.;C.;The;massive gold inflows from the Spanish colonies in the New World disrupted the;economies of Europe, devaluing gold be reducing its scarcity, leading to;waves of deflation.;D.;wildcats;weren?t just the Big 10?s most wonderful sports franchise, but were also;banks that issued their own currencies.;E.;the;gold standard allows central banks much more flexibility since they can act;without worrying about loss of value of their currency.;7.;In;a short-run AS-AD setting, an autonomous rise in investment demand would?.;A.;drive;up inflation and thus the price level, reducing real wages and leaving output;unchanged.;B.;reduce;real wages and other sticky costs, encouraging greater production.;C.;eventually;cause short run aggregate supply to adjust, once contracts were renegotiated;so that the SAS would shift outward (or downward).;D.;have;no effect on output or the price level if the aggregate supply is vertical.;E.;drive;up inflation and unemployment.;8.;From;Blinder, what were the three T?s of any effective stimulus program, and what;did they mean?;A.;Timely;in that the policy would start quickly, Tight in that the policy would offset;the rising interest rates, and Temporary in that it would not be part of the;structural policy in the long run.;B.;Timely;in that the policy would have effect while the economy was still weak;Targeted in that it would reach where it would have a big effect, and;Temporary so that it would go away in the long run.;C.;TARP;for fixing the banking system, TALF to fix the asset markets, and Taxes to be;reduced and thus raise disposable income and consumption spending.;D.;Treasury;in that this was a political process and shouldn?t come from the Fed, Tilted;toward the sectors that needed more help (mainly GM, Chrysler, housing);Total in that the second round spillover effects would boost the rest of the;economy.;E.;Technical;to expand LR sustainable growth, Tertiary in that it would reach beyond just;the primary and secondary areas, and Tremendous because there would be no;getting a second bill through Congress if this were too small.;9.;Why;does an increase in the price level cause an increase in the amount of real;GDP that firms produce, given that input costs are fixed?;A.;It;doesn?t, the increase in the price level increases the amount of nominal, not;real GDP.;B.;It?s;the multiplier effect on spending.;C.;GDP;is the market value of all final goods and services produced, so an increase;in the price level causes an increase in the amount of production.;D.;Firms;expand the amount of goods and services produced by using inputs that are now;cheaper in real terms.;E.;The;Keynes effect of prices on the real money supply and interest rates.;10.;From;Blinder: Treasury Secretary Paulson;was worried that putting limits on executive compensation at bank as a;condition for allowing those banks to use TARP money would create...;A.;stigma;since it would show that the banks were so desperate that they would even;take a pay cut.;B.;stigma;since then everyone would know that execs at that bank weren?t so rich;anymore.;C.;a;bad signal since the bank would seem to have plenty of money, but in reality;wouldn?t.;D.;bad;incentives because then those execs wouldn't work as hard.;E.;an;unnecessary signal, since it was common knowledge which banks were in trouble;and which were not.;11.;An;economy starts out with Y = YN, no growth in YN, and an;inflation rate of 6%. Then an adverse;supply shock hits the economy and pushes the SP curve upward by 5%. Which one of the followingmight be correct (that is, isn?t;clearly wrong)?;A.;An;extinguishing policy pushes Y/YN down to 95 and inflation down to;6%, a neutral policy pushes Y/YN down to 97.5 and lets inflation;go to 8.5%, and an accommodating policy would leave output unchanged.;B.;An;extinguishing policy keeps Y/YN at 100 and pushes inflation down;to zero, a neutral policy allows both Y/YN and inflation to rise;equally, and an accommodating policy would let output and inflation rise as;markets allow.;C.;An;extinguishing policy pushes inflation down to zero, which means that Y/YN;would be 89, a neutral policy would have inflation be 5.5% and output be;95.5%, and an accommodating policy would leave inflation unchanged but allow;output to fall.;D.;Inflation;would rise to 11%, but under an extinguishing policy, output would be maintained;at 100, while neural would have output fall by 6%, and accomodating would;allow output to rise if NGDP were growing enough.;E.;An;extinguishing policy would push the SP curve back to its original position, a;neutral policy would push it back to the point where growth of nominal GDP is;steady, and an accommodating policy would leave the SP curve where it was;after the supply shock.;12.;Jaimovich;and Siu find that in recent economic downturns?.;A.;job;growth is strong as the economy recovers, but wages stay remarkable low.;B.;the;Phillips Curve adjusts downward as people come to accept lower and lower;wages.;C.;income;inequality has largely been driven by formerly middle income workers moving;into high income jobs, leaving the poor further and further behind.;D.;wages;were surprisingly flexible downward in most professions, other than in high;income ones.;E.;jobs;lost in middle income, routine tasks during downturns did not come back when;the economy recovered.;13.;Blinder: TARP money was used to ?half-own? mountains;of dodgy assets from Citigroup and B of A.;This means that?;A.;the;US Treasury was intervening in private markets.;B.;the;Fed would get half the gains if the involved private securities went up, and;get half the losses if they went down.;C.;the;US Treasury was outright buying half the mortgage backed assets in question.;D.;the;Fed was guaranteeing the banks against losses, but would get no payoff if the;asset prices went up.;E.;the;Fed?s balance sheet would grow by only half of what it would if it had;wholly-owned the assets.;14.;A;bank has $400 in loans, $200 in government bonds, $500 in deposits, $50;borrowed from the Fed, $100 of reserves, and $100 from Hot Money. How big a percentage decline is the bank?s;assets would it take to make the bank insolvent? (Round your answer to the nearest whole;number.);A.;5%;B.;7%;C.;10%;D.;12%;E.;20%;15.;Suppose;the previous bank could earn an average of 6% on its assets and had to pay 5%;oneverything it held on the right;side. What would be this bank?s return;on equity?;A.;1%;B.;10%;C.;14%;D.;20%;E.;0%;the bank is breaking even.;16.;The;bank collects $2 from repayment on its loans, and uses this to buy a SIV;named JarJar, that has $100 in assets backed with $98 of commercial paper and;$2 of equity. Now how small a decrease;in the value of the bank?s assets will make it insolvent? (Round your answer to the nearest whole;number.);A.;6%;B.;5%;C.;4%;D.;3%;E.;2%;17.;From;Michael Lewis, the surprising thing about Greece is that it got into trouble;despite?.;A.;having;its banking sector almost complete avoid getting involved US with;subprime-mortgage backed bonds.;B.;meticulous;and open record keeping on all of its transactions.;C.;paying;government workers much less than workers in private Greek companies or;workers in comparable jobs in other European countries.;D.;being;aided by Goldman Sachs, a firm dedicated to the highest ethical and financial;standards.;E.;despite;being largely untouched by the global economic downturn.;18.;If;policy makers pursue an expansionary policy, what will happen to employment;and the number of vacancies?;A.;Vacancies;will fall as will the labor force.;B.;Vacancies;will fall but the labor force will rise, raising unemployment.;C.;Vacancies;will rise and if the labor supply is fixed, then unemployment will fall..;D.;Vacancies;will fall and unemployment will rise as people leave the labor force.;E.;Vacancies;will fall since so many people will get jobs.;19.;From Michael Lewis?s piece on;Germany we learn about the German fixation of feces (what?s withthat?!) and the problems that the;German Landesbanks got into. Which of;the following explains what happened best?;A.;To;earn higher returns, these banks sought out riskier securities.;B.;With;a firm determination to follow rules, these banks only bought very simple;financial securities rather than getting the safer securities that benefitted;from more complex design.;C.;They;only bought securities created in Germany, which make them undiversified.;D.;They;vastly overpaid their workers by Wall Street standards, and that made them;unprofitable.;E.;They;bought what they thought were the highest yielding minimum risk securities;but largely didn?t understand what they?d bought and how risky it was.;20.;Which;of the following is a correct description of how something affects the SP;curve?;A.;Increase;in the nominal money supply shifts the SP to the right.;B.;Increase;in the nominal money supply moves the equilibrium to the right along the SP;curve.;C.;Increased;inflationary expectations is a movement along the SP curve.;D.;Increased;inflationary expectations shift the curve to the right or down.;E.;A;rise in the growth rate of NGDP shifts the curve outward (to the right or;down).


Paper#57260 | Written in 18-Jul-2015

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