Econ 102 Midterm 3 Practice exam for Final

A country's balance of payments accounts records A) the international trading, borrowing, and lending positions of a country over a period of time B) only the goods and services purchases among countries over a period of time C) the flow of human and non-human capital among countries over a period of time D) only official transactions between governments over a period of time

A

According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to A) an exchange rate depreciation B) an exchange rate appreciation C) a balance of payments deficit D) a balance of payments surplus

A

According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to A) an exchange rate depreciation B) an exchange rate appreciation C) a balance of payments deficit D) a balance of payments surplus

A

Arbitrage in the foreign exchange market, international loans markets, and goods markets results in A) purchasing power parity, interest rate parity and law of one price B) purchasing power parity, price parity and no round-trip profit C) purchasing power parity, interest rate parity and round-trip profit D) purchasing power parity, interest rate parity and price parity

A

As a result of the recession in 2008, the default risk increased. How did this change affect the loanable funds market? A) There was a leftward shift in the supply of loanable funds curve. B) There was a movement down along the demand for loanable funds curve. C) There was a rightward shift in the supply of loanable funds curve. D) There was a movement up along the supply of loanable funds curve.

A

Frank spends Saturday afternoon at the Dodge dealership looking at new trucks. The model that he is interested in has a sticker price of $29,000. The fact that the price is quoted in dollars is an example of money used as a A) unit of account B) store of value C) medium of exchange D) All of the above answers are correct

A

If the price level in the U.S. is 120, the price level in South Africa is 140, and the nominal exchange rate is 7 South African rands per dollar, then the real exchange rate is A) 6 South African goods per U.S. good B) 8.4 South African goods per U.S. good C) 1.4 South African goods per U.S. good D) 9.8 South African goods per U.S. good

A

Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 20 percent. How many deposits can Bank A create? A) zero, because Bank A has no excess reserves B) $400 C) $200 D) $800

A

Suppose a British bank offers a 3 percent interest rate while a U.S. bank offers a 7 percent interest rate. People must expect the U.S. dollar will A) depreciate 4 percent B) depreciate 10 percent C) appreciate 10 percent D) appreciate 4 percent

A

Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the A) U.S. dollar depreciates by 2 percent a year B) U.K. pound depreciates by 2 percent a year C) U.S. dollar appreciates by 2 percent a year D) None of the above answers is correct because interest rate parity requires that the interest rates be the same in both countries

A

The demand for Mexican tomatoes by an American food grocery chain creates a A) supply of U.S. dollar B) demand for the U.S. dollar C) supply of Mexican pesos D) demand for an interest rate differential

A

The larger the public's currency drain from the banking system, the A) smaller is the money multiplier B) smaller is the monetary base C) larger is the monetary base D) larger is the money multiplier

A

When a good is imported into the United States, a ________is created. A) demand for foreign currencies and a supply of dollars B) supply of foreign currency with no effect on the market for the dollar C) supply of foreign currencies and a demand for dollars D) demand for dollars with no effect on markets for foreign currencies

A

When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals A) 5. B) 20.0. C) 0.2. D) 0.5.

A

When the nominal interest rate rises, the opportunity cost of holding money A) rises and people hold less money B) falls and people hold more money C) rises and people hold more money D) falls and people hold less money

A

Which of the following exchange rate policies uses a target exchange rate, but allows the target to change? A) crawling peg B) fixed exchange rate C) flexible exchange rate D) moving target

A

Which of the following items are considered physical capital? I. shares of Ford stock traded on the New York Stock Exchange II. the Taco Bell store nearest you III. the rental cars owned by Hertz Rental-A-Car IV. the salaries paid to Intel executives A) II and III B) I and IV C) I, II and III D) I, II and IV

A

With everything else the same, in the foreign exchange market the A) larger the value of U.S. exports, the greater is the quantity of dollars demanded B) the higher the exchange rate, the cheaper are U.S.-produced goods and services C) the lower the exchange rate, the smaller is the expected profit from buying dollars D) lower the exchange rate, the smaller the amount of U.S. exports.

A

A factor determining the supply of U.S. dollars in the foreign exchange market is the A) expected future interest rate in the United States B) expected future exchange rate C) U.S. supply of exports D) expected future interest rate in foreign countries.

B

A small country is an international borrower and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's international borrowing ________. A) does not change; does not change B) does not change; decreases C) does not change; increases D) increases; does not change

B

Depository institutions do all the following EXCEPT A) pool risks B) create required reserve ratios C) create liquidity D) minimize the cost of obtaining funds

B

If a nation's central bank increased domestic interest rates, the nation's exchange rate would change if the country's exchange rate was a A) a crawling peg B) a flexible exchange rate C) a fixed exchange rate D) a nominally fixed exchange rate

B

If an economy has a velocity of circulation of 3, then A) the quantity of money is 3 times real GDP B) in a year the average dollar is exchanged 3 times to purchase goods and services in GDP C) the quantity of money is $3 for every dollar of GDP D) nominal GDP is 1/3 the size of the quantity of money

B

If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately A) 10 percent B) 6 percent C) 4 percent D) 0.25 percent

B

In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's net investment totaled A) -$300,000 B) -$100,000 C) $200,000 D) $1 million.

B

In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment. A) decreases; decreases B) increases; decreases C) decreases; increases D) increases; increases

B

Suppose Mitsubishi Bank (a Japanese bank) expects the exchange rate to be 125 yen per U.S. dollar at the end of the year. If today's exchange rate is 120 yen per U.S. dollar, Mitsubishi bank A) sells U.S. dollars today because it expects losses from buying U.S. dollars and holding them B) buys U.S. dollars today because it expects profit from buying U.S. dollars and holding them C) does not buy or sell any U.S. dollars today because it expects zero profit from buying U.S. dollars and holding them D) None of the above answers is correct because a foreign commercial bank cannot buy or sell U.S. dollars

B

Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is CORRECT? A) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. B) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent. C) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent. D) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.

B

Suppose the United States spends more on foreign goods and services than foreigners spend on our goods and services and the United States sells no foreign assets. Then the A) rest of the world may or may not finance the U.S. trade deficit. B) United States must borrow an amount equal to imports minus exports. C) United States must borrow an amount equal to national saving. D) United States must borrow an amount equal to consumption expenditure plus investment.

B

Suppose the peso-dollar foreign exchange rate changes from 50 pesos per dollar to 30 pesos per dollar. Then the peso has ________ against the dollar and the dollar has ________ against the peso. A) depreciated; appreciated B) appreciated; depreciated C) appreciated; appreciated D) depreciated; depreciated

B

The monetary base is the sum of A) foreign and domestic deposits at the Fed. B) currency and reserves of depository institutions. C) currency and checkable deposits at depository institutions. D) U.S. Treasury notes and other government securities.

B

The sale of $1 billion of securities to a bank or some other business by the Fed is an example of A) a change in the required reserve ratio B) an open market operation C) a multiple contraction of the quantity of money. D) a last resort loan

B

The term "crowding out" relates to the decrease in A) consumption expenditure from an increase in investment B) private investment from a government budget deficit C) the real interest rate from a government budget deficit D) saving from an increase in disposable income

B

When part of the quantity of money is held in currency, then A) the Fed will find it beneficial to increase the discount rate B) a currency drain occurs C) there is a higher level of excess reserves D) the money multiplier will increase in value

B

When people who are holding the money of some other country want to exchange it for U.S. dollars, they ________ U.S. dollars and ________ that other country's money. A) demand; demand B) demand; supply C) supply; demand D) supply; supply

B

When the U.S. exchange rate rises, foreign goods become ________ and U.S. imports ________. A) less expensive; decrease B) less expensive; increase C) more expensive; increase D) more expensive; decrease

B

Which of the following explains why the demand for loanable funds is negatively related to the real interest rate? A) Consumers are willing to spend less and hence save more at higher real interest rates. B) A lower real interest rate makes more investment projects profitable. C) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment. D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate.

B

A rise in the real interest rate A) creates a movement downward along the demand for loanable funds curve B) shifts the demand for loanable funds curve leftward C) creates a movement upward along the demand for loanable funds curve D) shifts the demand for loanable funds curve rightward.

C

According to the quantity theory of money, in the long run, an increase in the quantity of money results in an equal percentage increase in ________. A) the growth rate of real GDP B) the growth rate of potential GDP C) the price level D) the inflation level

C

According to the quantity theory of money, in the long run, changes in the price level are the result of changes in the A) real interest rate B) velocity of circulation C) quantity of money D) prime interest rate

C

Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result A) only the demand curve for Indian rupees shifts rightward B) only the demand curve for European euros shifts rightward C) the demand curve for European euros and the supply curve for Indian rupees both shift rightward D) the demand curve for European euros shifts rightward and the supply curve for Indian rupees shifts leftward

C

An increase in the currency drain A) results in an increase in deposits B) results in an increase in required reserves C) decreases the size of the money multiplier D) leads to an increase in excess reserves

C

Aside from being a means of payment, the other functions of money are A) medium of exchange and the ability to buy goods and services. B) pricing, contracts, and store of value. C) medium of exchange, unit of account, and store of value. D) medium of exchange, unit of account, and means of lending.

C

At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled A) 1 machine B) 2 machines C) 3 machines D) 6 machines.

C

Controlling the quantity of money and interest rates to influence aggregate economic activity is called A) foreign policy B) fiscal policy C) monetary policy D) bank antitrust policy

C

Credit cards are A) a part of money because they are used in so many transactions. B) not part of money because the government has no control over the amount of credit outstanding. C) not part of money because they represent a loan of money to the user. D) a part of money when the transaction approach is used but not when the liquidity approach is used.

C

If the Fed wants to depreciate the dollar against the yen, the Fed will A) increase the demand for dollars by selling yen B) increase the supply of dollars by selling yen C) increase the supply of dollars by buying yen D) decrease the supply of dollars by selling yen

C

If the world real interest rate falls, then a country that is an international lender A) does not change the amount of its lending B) increases the amount of its lending C) decreases the amount of its lending D) None of the above answers is correct because lending might increase, decrease, or not change

C

In the foreign exchange market, an increase in the world demand for U.S. exports shifts the A) supply curve for U.S. dollars rightward B) supply curve for U.S. dollars leftward C) demand curve for U.S. dollars rightward D) demand curve for U.S. dollars leftward

C

Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 10 yuan, the price of this airplane to China Airlines is A) 10.52 million yuan B) 10 million yuan C) 950 million yuan D) 9.5 million yuan

C

Suppose the Fed wants to fix the U.S. dollar/Mexican peso rate at 11 pesos per dollar under a fixed exchange rate policy. If the exchange rate falls to 10 pesos per dollar, the Fed can A) sell dollars B) attempt to freeze all sales of dollars C) buy dollars D) any of the above actions could take place

C

The higher the exchange rate today, the A) greater the quantity of U.S. dollars demanded in the foreign exchange market today B) greater is the expected profit from buying U.S. dollars today and holding them C) smaller is the expected profit from buying U.S. dollars today and holding them D) smaller is the expected profit from buying foreign currency today and holding it.

C

When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________. A) increase; increase B) increase; decrease C) increase; stay the same D) decrease; increase

C

When the U.S. exchange rate falls, U.S. goods become ________ to foreign residents and U.S. exports ________. A) more expensive; decrease B) more expensive; increase C) less expensive; increase D) less expensive; decrease

C

Which of the following is TRUE regarding the real interest rate?I.The real interest rate is the opportunity cost of borrowed funds. II. The real interest rate equals the nominal interest rate adjusted for inflation. A) I B) II C) both I and II D) neither I nor II

C

Which of the following shifts the demand for loanable funds curve leftward? A) a decrease in the taxes paid by the business B) a fall in the real interest rate C) a decrease in the expected profit D) a rise in the real interest rate

C

A small country is an international lender and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's international lending ________. A) increases; does not change B) increases; decreases C) does not change; does not change D) does not change; increases

D

According to the Ricardo-Barro effect A) government budget deficits increase households' expected future disposable income. B) government deficits raise the real interest rate. C) taxpayers fail to foresee that government deficits imply higher future taxes. D) households increase their personal saving when governments run budget deficits.

D

If 100 Japanese yen buy more U.S. dollars today than yesterday, the dollar has ________ and the yen has ________. A) depreciated; depreciated B) appreciated; appreciated C) appreciated; depreciated D) depreciated; appreciated

D

If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________. A) surplus; negative B) deficit; positive C) deficit; negative D) surplus; positive

D

If the European Central Bank increases interest rates A) the demand curve for European euros shifts leftward and the supply curve of European euros shifts rightward B) the demand curve for European euros and the demand curve for U.S. dollars both shift rightward C) the demand curve for European euros shifts leftward and the demand curve for U.S. dollars shifts rightward D) the demand curve for European euros shifts rightward and the supply curve of European euros shifts leftward

D

If the Federal Reserve increases interest rates A) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward B) the demand curve for U.S dollars shifts leftward and the demand curve for European euros shifts rightward C) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward D) the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward

D

If the People's Bank of China adopted a flexible exchange rate policy A) the yuan would depreciate B) the U.S. dollar would appreciate C) the yuan-U.S. dollar exchange rate would rise D) the U.S. dollar would depreciate

D

If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP? A) $6 trillion B) $3 trillion C) $333 billion D) $12 trillion

D

In the foreign exchange market, the supply curve for dollars slopes upwards because A) supply curves always slope upwards B) as the exchange rate rises, more dollars are supplied since the profit from selling dollars falls C) as the exchange rate rises, imports become more expensive, and more dollars are supplied to pay for the imports D) as the exchange rate rises, imports become cheaper, and more dollars are supplied to pay for the increase in the quantity of imports

D

In the loanable funds market, the supply comes from A) only saving and the government budget surplus B) only the government budget surplus and international borrowing C) only saving D) saving, the government budget surplus and international borrowing

D

In the short run, when the Fed decreases the quantity of money A) bond prices rise and the interest rate falls B) the demand for money increases C) the supply of money curve shifts rightward D) bond prices fall and the interest rate rises

D

In the short run, when the Fed increases the quantity of money A) the demand for money increases B) bond prices fall and the interest rate rises C) the supply of money curve shifts leftward D) bond prices rise and the interest rate falls

D

Last year the exchange rate between U.S. dollars and Mexican pesos was 10 pesos per dollar. Today is it 11 pesos per dollar. Here, the dollar ________ against the peso, and the peso ________ against the dollar A) depreciated; appreciated B) depreciated; depreciated C) appreciated; appreciated D) appreciated; depreciated

D

Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 9 yuan, the price of this airplane to China Airlines is A) 85.5 million yuan B) 10.6 million yuan C) 11.11 million yuan D) 855 million yuan

D

Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond A) does not change because it is not affected by the interest rate B) falls from $25,000 to $20,000 C) rises from $2,000 to $2,500 D) falls from $2,500 to $2,000

D

The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet? A) Securities increase by $100 million and reserves increase by $100 million B) Securities increase by $100 million and reserves decrease by $100 million C) Securities decrease by $100 million and deposits decrease by $100 million D) Securities decrease by $100 million and reserves increase by $100 million

D

The capital stock increases whenever A) net investment exceeds gross investment. B) gross investment is exceeds net investment. C) gross investment is negative. D) net investment is positive.

D

The demand curve for U.S. dollars slopes downward because as the dollar ________ U.S. goods become ________ expensive to foreign residents, so they purchase fewer U.S. goods, and the quantity of dollars demanded decreases. A) depreciates; more B) appreciates; less C) depreciates; less D) appreciates; more

D

The funds used to buy and operate physical capital are A) saving B) wealth C) depreciation D) financial capital

D

The lower the exchange rate today, ceteris paribus, the A) smaller the quantity of U.S. dollars demanded in the foreign exchange market today B) smaller is the expected profit from buying U.S. dollars today and holding them C) greater is the expected profit from buying foreign currency today and holding it D) greater is the expected profit from buying U.S. dollars today and holding them

D

The opportunity cost of holding money refers to A) the price level B) the utility that would have been received if the money balances had been used to buy a good or service C) the service fees charged to withdraw currency from an ATM D) the interest that could have been earned if the money balances had been changed into an interest-bearing asset

D

The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is ________. A) $9 million B) $3 million C) $6 million D) $27 million

D

The quantity of real money demanded is A) proportional to the price level B) negatively related to the price level C) positively related to the price level D) independent of the price level

D

The term "foreign currency" refers to foreign I. coins II. notes III. bank deposits A) II only B) II and III only C) I and II only D) I, II, and III

D

U.S. investment is financed from A) private saving and borrowing from the rest of the world only. B) private saving, government budget deficits, and borrowing from the rest of the world. C) private borrowing, government budget deficits, and lending to the rest of the world. D) private saving, government budget surpluses, and borrowing from the rest of the world.

D

When a bank has excess reserves A) it can make loans B) it can create money C) it has too many loans D) Both answers A and B are correct.

D

Which of the following will lead to an appreciation of the U.S. dollar against the British pound? A) an increase in U.S. demand for British imports B) an increase in British interest rates C) a decrease in British demand for U.S. assets D) an increase in British demand for U.S. imports

D