Econ 1120 – INTRO MACRO –Fall-2011 –December14, 2011
Final Exam (Wednesday)
PRINT YOUR NAME: ______Your C.U. Netid: ______
YOUR C.U. STUDENT NUMBER: ______
Check YOUR TA’s NAME:
______TA= Minwook Kang (Tuesday sections)
______TA= Mirinda Lee Martin (Wednesday sections)
______TA= Lingwen Zheng(Thursday sections)
______TA= Yu Zhang (Friday sections)
INSTRUCTIONS:
There are two sections in this exam
- Part I: 25 multiple choice questions @ 2 points each
- Part II: 6 longer questionswith point values indicated on each. THE LONGEST QUESTIONS COME LAST SO LEAVE ENOUGH TIME TO FINISH THEM!!!!!!!!!!!!!!!
- ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 150 minutes.
- Final score counts for40% of final grade.
AGAIN, please….
PRINT YOUR NAME: ______Your C.U. Netid: ______
YOUR C.U. STUDENT NUMBER: ______
______TA= Minwook Kang (Tuesday sections)
______TA= Mirinda Lee Martin (Wednesday sections)
______TA= Lingwen Zheng(Thursday sections)
______TA= Yu Zhang (Friday sections)
GRADING------
____/50(mc)____/4(essay 1)____/4(essay 2)____/10(essay 3)____/10(essay 4) ______/12(essay 5)______/10(essay 6)
TOTAL: ______/100
------
1
Part I: Multiple Choice.
- A deficit in the current account means that there must be
a)a matching deficit in the capital account
b)a matching surplus for some other country or countries
c)a smaller government multiplier in absolute terms
d) all of the above
e)none of above
- A depreciation of the dollar tends to make U.S. exports___ and imports___
a)cheaper; more expensive
b)more expensive; cheaper
c)cheaper; cheaper
d)more expensive; more expensive
- There is a general tendency for the currencies of relatively high-inflation countries to___. There is a general tendency for the currencies of relatively high-interest rate countries to___.
a)appreciate; appreciate
b)depreciate; appreciate
c)depreciate; depreciate
d)appreciate; depreciate
- When the exchange rate is flexible, an expansionary fiscal policy can____ the currency and an expansionary monetary policy can____ the currency.
a)appreciate; appreciate
b)depreciate; appreciate
c)depreciate; depreciate
d)appreciate; depreciate
- With an open economy, let MPC = 0.6 and MPM = 0.1, what is the multiplier forgovernment expenditures?
a)2.5
b)2
c)3.33
d)None of the above
- Which of the following correctly summarizes the trade feedback effect?
a)EX in country A country A output(income) country’s A imports then the output (income) of these other countries imports of these other countries the export in country A will further
b)EX in country A country A output(income) country’s A imports then the output (income) of these other countries imports of these other countries the export in country A will further
c)EX in country A country A output(income) country’s A imports then the output (income) of these other countriesimports of these other countries the export in country A will further
d)EX in country A country A output(income) country’s A imports then the output (income) of these other countries imports of these other countries the export in country A will further
e)None of the above.
- The US has been running a deficit on its Current Account for several years. Which of the following statement is consistent with this?
a)Its international debt has been growing
b)The combined international debt of the rest of the world has been falling
c)It has consumed more goods and services in dollar terms than it has received from producing goods and services
d)All of the above
e)None of the above
- An 100 billion dollar increase in government spending will (assume MPC > 0 and MPM>0):
a)Havea bigger effect in the open economy.
b)Havea bigger effect in the closed economy.
c)Havethe same effect regardless of an economy being open or closed
d)I need to know the MPC and MPM in order to tell
- Compared to Developing nations, Developed nations generally possess
a)More total labor
b)More labor per unit of capital
c)Less total labor
d)Less labor per unit of capital
e)Approximately the same level as developing countries
- Recent events have led some observers to suggest that the European Central Bank should buy large quantities of bonds . We should expect to see:
a)Bond prices go down.
b)Interest rates go up
c)Neither a nor b
d)Both a and b
- GNP in Country will be larger than GDP if
a)Country X lets immigrants freely enter the country and they send money home
b)Country X lets foreign companies mine gold there.
c)Country X earns profits on stock holdings in country Y
d)All of the above
e)None of the above
- Which of the following arguments is correct and also doesNOT supportfree immigration?
a)The free flow of labor changes the skill distribution in the target country. The inflow of unskilled labor can take jobs away from low-skilled and low-income locals, increasing unemployment
b)The free flow of labor decreases inefficiency and therefore decreases world output.
c)More immigrants mean more workers which means the PPF is pushed out.
d)All of above
e)None of above
f)Only A & B
- When U.S. prices are rising relative to those in the rest of the world:
a)U.S exports tend to decrease.
b)U.S exports tend to increase.
c)U.S imports tend to decrease.
d)None of the above.
- Suppose we are in a world with only pounds and USDollars. Which of the following makes up the demand for pounds in international markets?
i. UK citizens
ii. US citizens traveling in UK
iii. UK companies
iv. US companies that want to invest in UK
v. Speculators who anticipate a decline in the value of the dollar relative to the pound
a)All the above
b)Only i and ii
c)All except i
d)ii and iv
e)ii iv and v
- Demand pull inflation is easier to deal with than cost push inflation because
a)Because fiscal policy is more effective than monetary policy under these circumstances
b)Because policy can focus on inflationary pressures without having to worry so much about employment effects
c)Because the exchange rate effects won’t cause the balance of payments to deteriorate
d)All of the above
- According to the theory of comparative advantage, a country should specialize and ______goods with ______opportunity cost.
a)import; the lowest
b)import; the highest
c)export; the lowest
d)export; the highest
- Refer to Figure above.An increase in the tax rate will increase tax revenue if the economy is at point
a)A
b)B
c)C
d)D
- Refer to the PPF above and assume both countries have same amount of input resources. The U.S. has an absolute advantage in the production of ______and Mexico has a comparative advantage in the production of _____.
a)Apples only; Apples
b)Apples only; Bananas
c)Bananas and Apple; Apples
d)Bananas only; Bananas
- Again refer to the Figure above for banana and apple production in the US and Mexico. The opportunity cost of producing apples in the U.S. is:
a)half banana
b)1 banana
c)2 bananas
d)Zero
- An increase in labor productivity can result from _____.
a)a population increase
b)technological progress
c)an increase in capital stock
d)B and C
e)None of the above
f)A and B
- In a closed economy, which equation should be true at equilibrium?
a)Saving = Investment
b)Saving = Investment + Government Spending
c)Saving = Investment +(Government Spending -Tax)
d)Saving= Investment +(Government Spending–Tax)+Net export
22. A newly formed expectation of future inflation would cause
a)current consumption to increase
b)future consumption to decrease
c)Bond prices to fall
d)All of the above
e)None of the above
- Joe has been out of work for six months and though he keeps looking he hasn’t found a job yet. He is
a)Now no longer counted as part of the labor force
b)A discouraged worker
c)Frictionally unemployed
d)Counted as unemployed
e)None of the above
- Which of the following statements about the Social Security system is false?
a)It is our nation’s largest system of support for people with disabilities.
b)It has no danger of insufficient funds for at least a decade or two.
c)Its projected shortfalls are even larger than those projected in Medicare.
d)All of the above
e)None of the above
25.Assume monetaryvelocity is constant, and the following equationholds.
Monetary Supply * Monetary Velocity = Price level * Output
Which of following is correct conclusion?
a)If economy always converges to long-run output very fast, increase of money supply only inducesan increase in the price level.
b)Increase of Money supply causes increase of output only.
c)Increase of Money supply has no effect on our economy.
d)All of above
e)None of the above
Part II: Essay questions. Relative importance of each question is indicated by the point values for each. 50 Points total
1.Exchange Rates(4 points)
Consider the exchange rate between the US and Japan. Currently 1 US Dollar = 77.6200 Yen. This also means that 0.0129 USD = 1 Yen.For each individualsituation below, (I) draw a graph illustrating what happens in the currency exchange market between US Dollars and Japanese Yen and (II) explain which currency appreciates and which currency depreciates (or that neither happens if that is the case).
- A new Nintendo console built and sold by Japanese company is put on the market just in time for Christmas and desired by many US consumers. (1 point)
- In Japan, it suddenly becomes very popular for (Japanese) world traveling tourists to visit the natural wonders of the world, including the Grand Canyon and Niagara Falls. (1 point)
- The interest rate in the US increases relative to the interest rate in Japan. (1 point)
- The price of Toyota cars (a Japanese car company) sold to the US drops significantly, but the Central Bank of Japan is committed to keeping the exchange rate constant. Moreover, to keep exchange rate constant, does Central Bank of Japan need to increase or decrease supply of Money Yen? (1 point)
2.Exchange rate and Central bank intervention(4 points)
- Suppose that the current exchange rate is 10 pesos = 1 US$. Please draw the supply and demand curves for pesos and indicate the equilibrium exchange rate. (2 points)
- Because of the recent development of online-shopping malls, the U.S. products have become more attractive and available for Mexican customers. How this would affect the equilibrium exchange rate? (2 points)
3.The European Union Agrees to a Pact to Cut Spending (10points)
Assume that the countries which make up the European Union can be treated as a single economy for purposes of macroeconomic analysis. In recent news, the leaders of these countries reached an agreement to impose new stricter standards on allowable government deficits. To comply with these new rules most of the countries in the EU will have to impose sharp spending reductions.
- Using the graphical analysis taught in this course, illustrate how this will change the economic equilibrium in the goods and money market of the EU (4points)
- What will happen to European interest rates and what effect will this have on the exchange rate of the Euro vis a vis other currencies? (3points)
- What effect will the new equilibrium you illustrated in part a above have on the United States and why? (3points)
4.Aggregate Supply and Demand with an Oil Shock (10points) - Read the news article below and answer the following questions.
Our view: Mideast oil shock threatens U.S., again
A crisis in the Middle East endangers world oil supplies. The price of crude shoots up, followed by pump prices all over the USA. Agitated Americans wonder why this is happening. Politicians look for scapegoats and vow to make the nation energy independent.
By Shana Sureck, AP
By Shana Sureck, AP
If the script sounds familiar, it's because we've seen this movie before, and no one deserves an Academy Award.
In 1973, an embargo by Arab oil producers caused short supplies and long lines at U.S. gas stations. In 1979, it was the revolution in Iran. In 1990 and 1991, it was Saddam Hussein's invasion of Kuwait and the Persian Gulf War. This time, it's violent unrest in Libya— and the threat that it will spread elsewhere in the region — that has sent prices close to $100 a barrel, menacing the fragile economic recovery at home.
Once again, Americans are reminded how events thousands of miles away can affect their daily lives. Despite four decades of promises to free the U.S. from its dependence on volatile foreign oil, the nation remains frighteningly vulnerable to price spikes and sudden reductions in supply.
- Suppose the oil shock described in the article above actually happened. Assuming the economic authorities make no policy response, draw an Aggregate Demand/Aggregate Supply diagram illustrating the immediate short run impact effect of such a shock. Explain why you drew the diagram the way you did and what the outcome will be for output and prices. (4 points)
- Now, still maintaining the assumption of no economic policy response by the government, draw a new diagram illustrating the long run effects of such a shock. Explain why you drew the diagram the way you did and explain the outcome for output and prices. (3 points)
- Now suppose that, in the short run the government DOES make a response designed to eliminate the adverse effects of the shock on output and unemployment. What policies could they employ? Draw an AD-AS diagram to illustrate(3 points)
5. “Exchange Rate and Government Intervention”(12points)
Read the article, Paulson Warns of Fallout Over Yuan, from the WSJ on Dec. 16, andanswer the following questions.
BEIJING—Former U.S. Treasury Secretary Hank Paulson warned that a slower pace of yuan appreciation could produce political problems for China in the U.S., especially during an election year.
"It's in our interest and China's interest that China continues to reform the RMB and move to a market-determined" exchange rate said Mr. Paulson, referring to the yuan, which is also known as the renminbi, or RMB. A slowing of yuan appreciation "would be unfortunate for [China] and it would heighten tension with the U.S."
Since China said it would loosen the yuan's tie with the dollar in June 2010, the yuan has appreciated at an annual rate of 5% to 6% against the dollar. But since November 1, the yuan has been flat against the dollar.
Chinese officials have stressed that they remain committed to currency "flexibility." But market analysts in China say that with export growth sagging, Beijing will look to reduce the pace of yuan appreciation.
In currency trading on Monday, the yuan hit the low end of its trading band against the U.S. dollar for the fourth consecutive session as investors continued to seek the perceived safety of the U.S. currency amid growing worries over China's slowing economy and weakening exports. Even so, in those past four sessions, the yuan has appreciated 0.2% against the dollar due to the central bank's apparent efforts to prevent the yuan from falling too sharply, which could prompt the political problems Mr. Paulson warned against.
Heard on the Street
But Mr. Paulson said he didn't support pressuring China to boost its currency through punitive legislation of the kind that has passed the Senate and is being blocked thus far in the House by the Republican leadership. "That's the way to a trade war," he said.
Despite the ongoing tension between the U.S. and its trading partners, the nations are becoming more interdependent, the former Treasury secretary said.
"With the economic issues in the U.S. and the economic issues in Europe, the pressures on China are going to be greater," Mr. Paulson said. "The world is going to be more reliant on Chinese growth, and all those that are rooting against China had better be careful of what they're rooting for."
- In the article, Mr Paulson states that "It's in our interest and China's interest that China continues to reform the RMB and move to a market-determined" exchange rate. Based on what you read in the article what would we expect to happen to the USD-RMB exchange rate if China allowed it to be determined by the market without interfering? Be clear as towhether you are expressing the exchange rate in terms of dollars per yuan OR yuan per dollar (do not do both). Also, we are not looking for an exact number, but a general explanation of what would happen to the exchange rate. (Please note, as stated in the article, RMB is another name for yuan). (3 points)
- The article says that China is controlling the exchange rate so that it does not change “too sharply”. Suppose that right now, China’s Central Bank is working to hold the exchange rate constant (since that is essentially what is happening since a 0.2% change is fairly small). What is China’s Central Bank probably doing to keep the exchange rate constant? (You may find a graph to be helpful here to aid your thinking, though it is not necessary to answering this question.) (2 points)
- Which groups in the US will be happy if the exchange rate changes to be more in line with the market (as explained in the article and, hopefully, your answer to part a)? Which groups in the US will be sad? Why might this be more important during an election year? (2 points)
- In 2001, 1 US dollar can buy 8 Chinese Yuan. If you were atrader in Goodman Sake at 2001, you realized china government disliked fast appreciation of Yuan and expectedYuan would appreciate slowly about 6% a year owing to china governmentintervention. Please make a plan to make a profit for Goodman Sakegiven you can borrow US dollar at 2% interest rate. (2 points)
- The article mentions that if the US passes punitive legislation against China, it’s “the way to a trade war.” If a trade war starts with China, name at least one type of policy that the US is likely to use with regards to trade with China. (Looking for a policy that directly affects trade with China and that can be implemented by economic policy authorities; thus, starting a military war is not the answer we are looking for.) (3 points)
6. “Exchange Rate and Government Intervention”(10points)
The following article comes from