UMD Macro Exam 2

ID R

Multiple Choice
Identify the choice that best completes the statement or answers the question.
Figure 32-3
Refer to this diagram to answer the questions below.

____

____

____

____

____

1. Refer to Figure 32-3. At an interest rate of 3 percent, the diagram indicates that
a. in the market for foreign-currency exchange the quantity of dollars supplied equals the
quantity of dollars demanded.
b. national saving equals domestic investment.
c. net capital outflow + domestic investment = national saving.
d. there is a surplus in the market for foreign-currency exchange.
2. Refer to Figure 32-3. Domestic investment plus net capital outflow is represented by the
a. demand curve in panel a.
b. demand curve in panel c.
c. supply curve in panel a.
d. None of the above is correct.
3. Refer to Figure 32-3. Which curve shows the relation between the exchange rate and net exports?
a. the supply curve in panel a.
b. the demand curve in panel c.
c. the demand curve in panel a.
d. the supply curve in panel c.
4. Refer to Figure 32-3. National saving is represented by the
a. supply curve in panel a.
b. supply curve in panel c.
c. demand curve in panel a.
d. demand curve in panel c.
5. Refer to Figure 32-3. Which curve is determined by net capital outflow only?

____

6.

____

7.

____

8.

____

9.

____ 10.

____ 11.

____ 12.

____ 13.

a. the supply curve in panel c.

b. the demand curve in panel a.
c. the demand curve in panel c.
d. the supply curve in panel a.
Refer to Figure 32-3. The curve in panel b shows that as the interest rate rises,
a. domestic investment declines.
b. net capital outflow and domestic investment decline.
c. net capital outflow declines.
d. None of the above is correct.
If Kenya experienced capital flight, the supply of Kenyan schillings in the market for foreign-currency
exchange would shift
a. left, which would make the real exchange rate of the Kenyan schilling depreciate.
b. left, which would make the real exchange rate of the Kenyan schilling appreciate.
c. right, which would make the real exchange rate of the Kenyan schilling appreciate.
d. right, which would make the real exchange rate of the Kenyan schilling depreciate.
When conducting an open-market purchase, the Fed
a. buys government bonds, and in so doing decreases the money supply.
b. sells government bonds, and in so doing increases the money supply.
c. buys government bonds, and in so doing increases the money supply.
d. sells government bonds, and in so doing decreases the money supply.
The interest rate the Fed charges on loans it makes to banks is called
a. the federal funds rate.
b. the discount rate.
c. the prime rate.
d. the LIBOR.
If the Canadian government raises it budget deficit, then Canadas net capital outflows will
a. increase, so its exchange rate will rise.
b. increase, so its exchange rate will fall.
c. decrease, so its exchange rate will rise.
d. decrease, so its exchange rate will fall.
If people decide to hold more currency relative to deposits, the money supply
a. falls. The Fed could lessen the impact of this by selling Treasury bonds.
b. rises. The Fed could lessen the impact of the by selling Treasury bonds.
c. falls. The Fed could lessen the impact of this by buying Treasury bonds.
d. rises. The Fed could lessen the impact of this by buying Treasury bonds.
A country has private saving of $100 billion, public saving of -$30 billion, domestic investment of $50
billion, and net capital outflow of $20 billion. What is its supply of loanable funds?
a. $50 billion
b. $70 billion
c. $90 billion
d. $120 billion
The federal funds rate is the interest rate
a. on newly issued one-year Treasury bonds.
b. banks charge each other for short-term loans of reserves.
c. the Federal Reserves charges for loans it makes to the federal government.
d. the Federal Reserve charges banks for short-term loans.

____ 14. From 2001 to 2004 the U.S. budget went from surplus to deficit. According to the open economy
macroeconomic model, this change should have
a. increased U.S. interest rates and decreased the real exchange rate of the dollar.
b. increased U.S. interest rates and increased the real exchange rate of the dollar.
c. decreased U.S. interest rates and decreased the real exchange rate of the dollar.
d. decreased U.S. interest rates and increased the real exchange rate of the dollar.
____ 15. When the money market is drawn with the value of money on the vertical axis, if money supply and money
demand both shift to the right
a. the price level must have risen
b. the price level must have fallen.
c. the price level rises if money supply shifts farther than money demand.
d. the price level falls if money supply shifts farther than money demand.
____ 16. If a country has saving of $2 trillion and investment of $1.5 trillion, then it has
a. a trade surplus and its net capital outflow = $.5 trillion.
b. a trade surplus and its net capital outflow = -$.5 trillion.
c. a trade deficit and its net capital outflow = $.5 trillion.
d. a trade deficit and its net capital outflow = -$.5 trillion.
____ 17. If monetary neutrality holds, then an increase in the money supply
a. increases real but not nominal variables. Most economists think that monetary neutrality
is a good description of the short run.
b. increases real but not nominal variables. Most economists think that monetary neutrality
is a good description of the long run.
c. increases nominal but not real variables. Most economists think that monetary neutrality
is a good description of the short run.
d. increases nominal but not real variables. Most economists think that monetary neutrality
is a good description of the long run.
Figure 26-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds
curves.

Supply

D2
D1

____ 18. Refer to Figure 26-2. What is measured along the horizontal axis of the graph?
a. the quantity of loanable funds
b. the size of the government budget deficit or surplus
c. the real interest rate
d. the nominal interest rate
____ 19. Refer to Figure 26-2. Which of the following events would shift the demand curve from D1 to D2?
a. The government goes from running a budget deficit to running a budget surplus.
b. Firms become optimistic about the future and, as a result, they plan to increase their
purchases of new equipment and construction of new factories.
c. A change in the tax laws encourages people to consume less and save more.
d. A change in the tax laws encourages people to consume more and save less.
____ 20. Other things the same, an increase in the U.S. real interest rate induces
a. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.
b. Americans to buy more foreign assets, which reduces U.S. net capital outflow.
c. Americans to buy more foreign assets, which increases U.S. net capital outflow.
d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.

Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds
curves.

S1

S2

Demand

____ 21. Refer to Figure 26-1. Which of the following events would shift the supply curve from S1 to S2?
a. In response to tax reform, firms are encouraged to invest more than they previously
invested.
b. In response to tax reform, households are encouraged to save more than they previously
saved.
c. Government goes from running a balanced budget to running a budget deficit.
d. Any of the above events would shift the supply curve from S1 to S2.
____ 22. Refer to Figure 26-1. What is measured along the vertical axis of the graph?
a. the nominal interest rate
b. the real interest rate
c. the quantity of investment
d. the quantity of saving
____ 23. Credit cards
a. represent the largest component of M1.
b. are not included in M1 but are included in M2.
c. are a form of money unique to the U.S.
d. are not considered money.
____ 24. When the Fed conducts open-market purchases,
a. it buys Treasury securities, which decreases the money supply.
b. it buys Treasury securities, which increases the money supply.
c. it borrows money from member banks, which increases the money supply.
d. it lends money to member banks, which decreases the money supply.
____ 25. If the money multiplier is 2 and the Fed buys $50,000 worth of bonds, what happens to the money supply?
a. it increases by $150,000
b. it decreases by $100,000
c. it decreases by $150,000
d. it increases by $100,000
____ 26. Which of the following would shift the demand for loanable funds to the right?
a. income tax increases
b. government expenditures increase
c. the interest rate falls
d. Congress and the President pass an investment tax credit

____ 27. Other things the same, as the real interest rate rises
a. domestic investment and net capital outflow both fall.
b. domestic investment rises and net capital outflow falls.
c. domestic investment falls and net capital outflow rises.
d. domestic investment and net capital outflow both rise.
____ 28. Suppose a country has a smaller increase in debt in 2012 than it had in 2011. Then other things the same,
a. the supply of loanable funds shifts and the interest rate falls.
b. the supply of loanable funds shifts and the interest rate rises.
c. the demand for loanable funds shifts and the interest rate falls.
d. the demand for loanable funds shifts and the interest rate rises.
____ 29. Net capital outflow equals
a. the value of domestic assets purchased by foreigners.
b. the value of foreign assets purchased by domestic residents.
c. the value of domestic assets purchased by foreigners - the value of foreign assets
purchased by domestic residents.
d. the value of foreign assets purchased by domestic residents - the value of domestic assets
purchased by foreigners.
____ 30. If a country raises its budget deficit, then its
a. net capital outflow rises and net exports fall.
b. net capital outflow falls and net exports rise.
c. net capital outflow and net exports rise.
d. net capital outflow and net exports fall.
____ 31. When the Fed decreases the discount rate, banks will
a. borrow more from the Fed and lend less to the public. The money supply decreases.
b. borrow more from the Fed and lend more to the public. The money supply increases.
c. borrow less from the Fed and lend more to the public. The money supply increases.
d. borrow less from the Fed and lend less to the public. The money supply decreases.
____ 32. At the equilibrium real interest rate in the open-economy macroeconomic model, the amount that people want
to save equals the desired quantity of
a. net capital outflow plus domestic investment.
b. net capital outflow.
c. domestic investment.
d. foreign currency supplied.
____ 33. When a country experiences capital flight its
a. net capital outflow increases and its real exchange rate falls.
b. net capital outflow decreases and its real exchange rate falls.
c. net capital outflow increases and its real exchange rate rises.
d. net capital outflow decreases and its real exchange rate rises.
____ 34. The Feds primary tool to change the money supply is
a. changing the reserve requirement.
b. conducting open market operations.
c. redeeming Federal Reserve notes.
d. changing the interest rate on reserves.
____ 35. When the government goes from running a balanced budget to running a budget surplus,
a. national saving decreases, the interest rate rises, and the economys long-run growth rate
is likely to decrease.

____ 36.

____ 37.

____ 38.

____ 39.

____ 40.

____ 41.

____ 42.

b. national saving increases, the interest rate falls, and the economys long-run growth rate is
likely to decrease.
c. national saving decreases, the interest rate rises, and the economys long-run growth rate
is likely to increase.
d. national saving increases, the interest rate falls, and the economys long-run growth rate is
likely to increase.
When the money market is drawn with the value of money on the vertical axis, if the money supply rises
a. the price level rises and the value of money falls.
b. the price level and the value of money fall.
c. the price level and the value of money rise.
d. the price level falls and the value of money rises.
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the
necessary funds from someone else,
a. their consumption expenditures are being financed by someone elses saving.
b. their consumption expenditures are being financed by someone elses investment.
c. their investments are being financed by someone elses saving.
d. their saving is being financed by someone elses investment.
The claim that increases in the growth rate of the money supply increase nominal interest rates but not real
interest rates is known as the
a. Friedman Effect.
b. Hume Effect.
c. Fisher Effect.
d. None of the above is correct.
Recently the Greek government had large deficits and people became worried about Greeces ability to
continue to make payments on its debt. Which of the these events raise a countrys interest rates?
a. increased concerns about the ability of the government to pay back its debt, but not an
increase in the budget deficit
b. an increase in the budget deficit, but not increased concerns about the ability of the
government to pay back its debt
c. an increase in the budget deficit, and increased concerns about the ability of the
government to pay back its debt
d. neither an increase in the budget deficit, nor increased concerns about the ability of the
government to pay back its debt
If the budget deficit increases then
a. saving and the interest rate rise
b. saving rises and the interest rate falls
c. saving falls and the interest rate rises
d. saving and the interest rate falls
If the supply of loanable funds curve shifts right, then the equilibrium
a. interest rate and level of net capital outflows rise.
b. interest rate rises and the equilibrium level of net capital outflow falls.
c. interest rate falls and the equilibrium level of net capital outflow rises.
d. interest rate and level of net capital outflows fall.
If a government of a country with a zero trade balance increases its budget deficit, then the real exchange rate
a. appreciates and there is a trade surplus.
b. depreciates and there is a trade surplus.

c. appreciates and there is a trade deficit.

d. depreciates and there is a trade deficit.
____ 43. Banks are able to create money only when
a. interest rates are above 2%.
b. the Fed sells U.S. government bonds.
c. the reserve ratio is 100%.
d. only a fraction of deposits are held in reserve.
____ 44. In the open-economy macroeconomic model, the key determinant of net capital outflow is the
a. real exchange rate.
b. real interest rate.
c. nominal exchange rate.
d. nominal interest rate.
____ 45. If the price of a sofa is $800 in the U.S. and 2400 pesos in Argentina, and the exchange rate is 4 pesos per
dollar, what is the real exchange rate?
a. 3
b. 4/3
c. 3/4
d. None of the above is correct.

SOLUTIONS:
1C
2A
3B
4A
5A
6C
7D
8C
9B
10C

11C
12B
13B
14B
15C
16A
17D
18A
19B
20A

21B
22B
23D
24B
25D
26D
27A
28A
29D
30D

31B
32A
33A
34B
35D
36A
37C
38C
39C
40C

41C
42C
43D
44B
45B