Macro Economics  FINAL                   TEST 4                                                           200/1000 points             

Instructions:      1. Answer all questions.  The points or value assigned to each is given with the question.  

                        2. Put your name on each page (protection in the event pages should become separated.)                         3. If you need additional space to work, use blank space within this test first, then any paper you deem appropriate, but put the question number and your name on each page. If no question number, the pages will be treated as worksheets only.

                        4. You may use an 81/2 by 11” sheet of paper with notes on it, or  a translation dictionary if English is not your first language.  Points are lost for sentences that do not make sense, see No. 6 below.  So bring whatever you need to make sure you can write clearly.  No other resource  may be used– especially not  your neighbor or a cell phone. Turn off and put away all cell phones. If you are caught looking at someone else’s paper, your test will be taken up and given a grade of 0 (zero).  Look at your own cheat sheet.

                        5. You get to miss one multiple choice free, and remember partial credit is possible. There is no penalty for guessing, so do not leave any of the multiple choice unanswered.

                        6. No one leaves the room after the test has started, so if you are uncertain, make your stop before the exam begins.

                        7. And remember to start with what you DO know and then work into what you don’t know. You have one hour and 15 minutes. 

 

 

GOOD LUCK!     GO FORTH AND PROSPER, FOR I AM COUNTING ON YOU TO PAY MY SOCIAL SECURITY.

 

 

NAME:  

CLASS TIME     start time and day of week:  ______________________________

 

MULTIPLE CHOICE: 150 points total for this section. Answer all questions. For a statement to be true, the entire statement must be true, not just part of it.   Each is worth 10 points.  Everyone gets to miss one free.   Put your name or initials on each page, in case pages are separated. Circle the correct answer and put the letter [A, B, C, etc] in the space before each number. No harm in guessing, so don’t leave any blank.  5 points for not following directions.

 

Suppose the Fed decided to purchase $30 billion worth of government securities in the open market. What impact would this action have on the economy?  Specifically, answer the following  6  questions in numbers or in four words or less:

1 .  How will M1 be affected initially? _________________________________

 

2.   By how much will the banking system's lending capacity increase if the reserve requirement is 25 percent? _______________________________________

 

3.  Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? ______________________________________________________

 

4.  By how much will aggregate demand increase if consumers borrow and spend all the newly available credit?  (think aggregate demand multiplier) __________ __________________________________________________________________

 

5.  Under what circumstances (“recession” or “inflation”) would the Fed be pursuing such an open market policy? _________________________________________

 

6. To attain those same objectives, what should the Fed do (“increase” or “decrease”) with the Discount rate? _________________

 

 

___________ 7.  Based on the most recent nominal income figures for the US,  the current money supply ‘M1’, is what percent of income (rounded)?

                a.   100%

                b.   50- 60%

                c.  11- 12%

                d.  4 - 5%

____________8.   If the FOMC lowers its Target Federal Funds Rate at the next meeting, that would take the target rate down to 3.00%.

                a. true

                b. false

 

____________9.   If the 30 – year Treasury Bond yield went up another ‘1 percentage  point’,  that would take it above 5%.

                a. true

                b. false

 

___________10.   The Demand for Money  does  not obey the Law of Demand because our wants and needs are unlimited.

                a. true

                b. false.

 

___________ 11.   Monetary Policy is economically better than fiscal policy  when it comes to fighting inflation because the impact on Aggregate Demand can be determined ahead of time.  Unlike  Fiscal Policy where we just have to wait and see.

                a. true

                b. false

 

________ 12.  If the FED  increases the  Discount Rate and the Reserve Requirement  Ratio,  we would expect to see Aggregate Demand:

                a.  increase

                b. decrease

 

_________13.  The Federal  Open Market Committee meets and determines that the  Inflation rates are at unacceptably high rates .  To deal with this problem they could :

                a.  order the NY Federal  Reserve Bank to  sell Treasuries.

                b. change the tax rate on large businesses.

                c.  lower the Required Reserve Ratio

                d. lower the MPC

                e. All the above are true.

 

 

 

 

 

 

 

__________ 14.    The number of deposit dollars that the banking system can create from $1 of excess reserves is equal to 1 divided by the Required Reserve Ratio.

                a. true

                b. false

 

___________15.    Using the following  data,  how much will the lending capacity of the banking system  decrease?  

                a.  $ zero

                b.  $ 10 billion

                c.  $  20 billion

                d.  $ 50 billion

                e.  $100 billion

 

 

DATA:=>            Total Deposits                                       $100 billion

                                            Total Reserves                                      $  30 billion

                                            Required Reserves                              $  20 billion

                                            Excess Reserves                                   $  10 billion         

 

___________16.  What  the Required Reserve Ratio associated with the data above?

                a. 10%

                b. 20%

                c. 30%

                d. none of the above

 

 

__________ 17.  A bank that finds itself short of reserves at the end of the day can turn to other banks for help.  When this happens

                 a.  the  transaction is called Open Market  Operations.

                b.   the transaction must take place at  the  Discount Rate (ie the over – night borrowing rate  will equal  the Discount Rate.)

                c.  the borrowing bank is borrowing in the Federal Funds Market

                d. the bank must complete a Form f8.2008

 

_________18.    A  one year, $100 Treasury Bond is sold  for $102.  The Bond will pay a 10% rate when redeemed at the end of the year.   What is the actual yield realized by the customer who purchases that bond and holds it for the whole one year term. ?

                a. 7-8%

                b. 10%

                c.  2%

                d. 5%

 

________ __19.  If interest rates go up the quantity of money demanded will  go down.

                a. true

                b. false

 

 

___________20.  If interest rates go up the quantity demanded of Investment  will go down.

                a. true

                b. false

 

__________21.   IF the quantity demanded of  Investment funds goes down, the Aggregate Demand Curve must shift to the right.

                a. true

                b. false

 

__________ 22.  Assume that a $1,000 bond issued in 2009 pays $100 in interest each year.  What is the current yield on the bond if it can be purchased for  $800.

                a. 10%

                b. 15%

                c. 20%

                d. 80%

 

 

 

 

Use the graph above to answer the following question:

 

__________ 23.    In this example,  if both AS  and AD increase,   in the net final outcome

                a.  there will be no upward pressure on prices since the AS  curve increased.

                b.  prices will rise but not by as much as they would have risen if only the AD had changed.

                c.  real  output rises from ‘10’ to ‘12’.

                d.  there is a clear Keysian  scenario here at price level of ‘100’.

 

__________24.  Could the changes in the  graph above reflect a tightening up of the money supply by the Federal Government?

                a.  yes

                b. no