Spring06 1102H midterm 2 practice MC

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
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1. When opening a restaurant you may need to buy ovens, freezers, tables, and cash registers. Economists call
these expenditures
a. capital investment.
b. investment in human capital.
c. business consumption expenditures.
d. None of the above are correct.
2. When a country saves a larger portion of its GDP, it will have
a. less investment, and so have more capital and higher productivity.
b. less investment, and so have less capital and higher productivity.
c. more investment, and so have more capital and higher productivity.
d. more investment, and so have less capital and higher productivity.
3. Institutions in the economy that help to match one person's saving with another person's investment are
collectively called the
a. Federal Reserve system.
b. banking system.
c. monetary system.
d. financial system.
4. A bond is a
a. financial intermediary.
b. certificate of indebtedness.
c. certificate of partial ownership in an enterprise.
d. None of the above are correct.
5. A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a
a. bond.
b. stock.
c. mutual fund.
d. All of the above are correct.
6. The length of time until a bond matures is called the
a. duration.
b. term.
c. maturity.
d. intermediation.
7. On which bond is default most likely?
a. a junk bond
b. a municipal bond
c. a U.S. government bond
d. a corporate bond issued by Proctor and Gamble.
8. Which bond would you expect to pay the highest interest rate?
a. a bond issued by the U.S. government
b. a bond issued by General Motors
c. a bond issued by New York State
d. a bond issued by a new restaurant chain
9. Compared to bonds, stocks offer the holder

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a. lower risk.
b. partial ownership.
c. the likelihood of a lower return.
d. All of the above are correct.
Which of the following statements is most likely to be correct?
a. A general, persistent decline in stock prices is a signal that the economy is about to enter a
boom period because people will be able to buy stock for less money.
b. A general, persistent decline in stock prices is a signal that the economy is about to enter a
recession because low stock prices may mean that people are expecting low corporate
profits.
c. A general, persistent decline in stock prices does not tell us anything about the business
cycle because stock prices can fall for many reasons.
d. A general, persistent decline in stock prices is a signal that the economy is about to enter a
recession because low stock prices mean that corporations have had low profits in the past.
Profits not paid out to stockholders are
a. retained earnings.
b. known as dividends.
c. the denominator in the price-earnings ratio.
d. All of the above are correct.
The amount of revenue a firm receives for the sale of its products minus its costs of production as measured by
its accountants is the firm's
a. earnings.
b. retained earnings.
c. economic, or real, profit.
d. dividend.
Which of the following is not always correct in a closed economy?
a. National saving equals private saving plus public saving.
b. Net exports equal zero.
c. Real GDP measures both income and expenditures.
d. Private saving equals investment.
If the current market interest rate for loanable funds is below the equilibrium level, then the quantity of loanable
funds
a. demanded will exceed the quantity of loanable funds supplied and the interest rate will rise.
b. supplied will exceed the quantity of loanable funds demanded and the interest rate will rise.
c. demanded will exceed the quantity of loanable funds supplied and the interest rate will fall.
d. supplied will exceed the quantity of loanable funds demanded and the interest rate will fall.
What would happen in the market for loanable funds if the government were to decrease the tax on interest
income?
a. There would be an increase in the amount of loanable funds borrowed.
b. There would be a reduction in the amount of loanable funds borrowed.
c. There would be no change in the amount of loanable funds borrowed.
d. The change in loanable funds borrowed would be ambiguous.
Suppose a country has a consumption tax that is similar to a state sales tax. If its government eliminates the
consumption tax and replaces it with an income tax that includes an income tax on interest from savings, what
happens?
a. There is no change in the interest rate or saving.
b. The interest rate decreases and saving increases.
c. The interest rate increases and saving decreases.
d. None of the above are correct.

____ 17. Other things the same, if the government increases transfer payments to households, then
a. investment will rise.
b. the rate of interest will rise.
c. public saving will rise.
d. the market for loanable funds will be unaffected.
____ 18. A change in the tax laws which increases the supply of loanable funds will have a bigger effect on investment
when
a. the demand for loanable funds is more elastic and the supply of loanable funds is more
inelastic.
b. the demand for loanable funds is more inelastic and the supply of loanable funds is more
elastic.
c. both the demand for and supply of loanable funds are more elastic.
d. both the demand for and supply of loanable funds are more inelastic.
____ 19. Credit card balances are included in
a. M1 but not M2.
b. M2 but not M1.
c. M1 and M2.
d. neither M1 nor M2.
____ 20. Credit cards
a. defer payments.
b. are a store of value.
c. have led to wider use of currency.
d. are part of the money supply.
____ 21. Which of the following pairs correctly lists a function of the Fed and the part of the Fed directly responsible for
that action?
a. income tax policy-Board of Governors
b. conduct open market operations-New York Federal Reserve Bank
c. lender of last resort-The FOMC
d. None of the above is correct.
____ 22. If the reserve ratio is 5 percent and a bank receives a new deposit of $200, it
a. must increase required reserves by $190.
b. will initially see reserves increase by $190.
c. will be able to make new loans up to a maximum of $190.
d. None of the above is true.
Use the balance sheet for the following questions.
Table 29-3
Assets
Reserves
Loans

Last Bank of Cedar Bend

Liabilities
$25,000
Deposits
$125,000

$150,000

____ 23. Refer to Table 29-3. If the reserve requirement is 20 percent, this bank
a. has $10,000 of excess reserves.
b. needs $10,000 more of reserves to meet its reserve requirements.
c. needs $5,000 more of reserves to meet its reserve requirements.
d. just meets its reserve requirement.
____ 24. If the reserve ratio is 10 percent, the money multiplier is

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a. 100.
b. 10.
c. 9/10.
d. 1/10.
When the Fed conducts open market purchases, bank reserves
a. increase and banks can increase lending.
b. increase and banks must decrease lending.
c. decrease and banks can increase lending.
d. decrease and banks must decrease lending.
In a fractional reserve banking system with no excess reserves and no currency holdings, if the central bank
buys $100 million of bonds,
a. reserves and the money supply increase by less than $100 million.
b. reserves increase by $100 million and the money supply increases by $100 million.
c. reserves increase by $100 million and the money supply increases by more than $100
million.
d. both reserves and the money supply increase by more than $100 million.
If the reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed sells $10 million dollars
of bonds to the public, bank reserves
a. increase by $1 million and the money supply eventually increases by $10 million.
b. increase by $10 million and the money supply eventually increases by $100 million.
c. decrease by $1 million and the money supply eventually increases by $10 million.
d. decrease by $10 million and the money supply eventually decreases by $100 million.
When the number of dollars needed to buy a representative basket of goods falls, the value of money
a. rises, and so the price level rises.
b. rises, and so the price level falls.
c. falls, and so the price level rises.
d. falls, and so the price level falls.
When the money market is drawn with the value of money on the vertical axis, which of the following would
shift money demand right?
a. an increase in the price level
b. a decrease in the price level
c. open-market purchases by the central bank
d. None of the above is correct.
Economic variables whose values are measured in monetary units are called
a. dichotomous variables.
b. nominal variables.
c. classical variables.
d. real variables.
Nominal GDP measures
a. the total quantity of final goods and services produced.
b. the dollar value of the economy's output of final goods and services.
c. the total income received from producing final goods and services in constant dollars.
d. None of the above are correct.
According to the classical dichotomy, when the money supply doubles, which of the following also double?
a. the price level and nominal wages
b. the price level, but not the nominal wage
c. the nominal wage, but not the price level
d. neither the nominal wage nor the price level
The principle of monetary neutrality implies that an increase in the money supply will

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a. increase real GDP and the price level.

b. increase real GDP, but not the price level.
c. increase the price level, but not real GDP.
d. increase neither the price level nor real GDP.
According to the principle of monetary neutrality, a decrease in the money supply will not change
a. nominal GDP.
b. the price level.
c. unemployment.
d. All of the above are correct.
Velocity is computed as
a. (P Y)/M.
b. (P M)/Y.
c. (Y M)/P.
d. (Y M)/V.
If V and M are constant, and Y doubles, the quantity equation implies that the price level
a. falls to half its original level.
b. does not change.
c. doubles.
d. more than doubles.
Which of the following is not implied by the quantity equation?
a. If velocity is stable, an increase in the money supply creates a proportional increase in
nominal output.
b. If velocity is stable and money is neutral, an increase in the money supply creates a
proportional increase in the price level.
c. With constant money supply and output, an increase in velocity creates an increase in the
price level.
d. With constant money supply and velocity, an increase in output creates a proportional
increase in the price level.
Monica buys a bond for $750 and then sells it later for $950. Monica's gain is a
a. net gain.
b. Fisher.
c. capital gain.
d. All of the above are correct.
Foreign-produced goods and services that are sold domestically are called
a. imports.
b. exports.
c. net imports.
d. net exports.
Net capital outflow measures
a. foreign assets held by domestic residents minus domestic assets held by foreign residents.
b. the imbalance between the amount of foreign assets bought by domestic residents and the
amount of domestic assets bought by foreigners.
c. the imbalance between the amount of foreign assets bought by domestic residents and the
amount of domestic goods and services sold to foreigners.
d. None of the above is correct.
Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures
a. increase U.S. and Israeli net capital outflow.
b. increase U.S. net capital outflow, but decrease Israeli net capital outflow.
c. decrease U.S. net capital outflow, but increase Israeli net capital outflow.

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d. None of the above is correct.

When Ghana sells chocolate to the United States, U.S. net exports
a. increase, and U.S. net capital outflow increases.
b. increase, and U.S. net capital outflow decreases.
c. decrease, and U.S. net capital outflow increases.
d. decrease, and U.S. net capital outflow decreases.
A U.S. computer maker sells computers to a German firm. The U.S. company uses all of the revenues from this
sale to purchase automobiles from German firms. These transactions
a. increase both U.S. net exports and U.S. net foreign investment.
b. decrease both U.S. net exports and U.S. net foreign investment.
c. increase U.S. net exports and do not affect U.S. net foreign investment.
d. None of the above is correct.
All saving in the U.S. economy shows up as
a. investment in the U.S. economy.
b. U.S. net capital outflow.
c. either investment in the U.S. economy or U.S. net capital outflow.
d. None of the above is correct.
From 1991-2000, U.S. net capital outflow as a percent of GDP became a
a. larger positive number.
b. smaller positive number.
c. larger negative number.
d. smaller negative number.
The nominal exchange rate is the
a. nominal interest rate in one country divided by the nominal interest rate in the other country.
b. rate at which a person can trade the currency of one country for the currency of another.
c. price of a good in one country divided by the price of the same good in another.
d. the number of goods a person can trade for a similar good in another country.
If goods in the United States cost the same number of dollars as German goods cost euros, the real exchange rate
would be computed as how many German goods per U.S. goods?
a. one
b. the price of the U.S. goods
c. the amount of German currency that can be bought with one unit of U.S. currency
d. None of the above is correct.
An appreciation of the U.S. real exchange rate induces U.S. consumers to buy
a. fewer domestic goods and fewer foreign goods.
b. more domestic goods and fewer foreign goods.
c. fewer domestic goods and more foreign goods.
d. more domestic goods and more foreign goods.
If the U.S. real exchange rate appreciates, net exports
a. increase and net capital outflow decreases.
b. decrease and net capital outflow increases.
c. and net capital outflow increase.
d. and net capital outflow decrease.
Suppose that the exchange rate is 50 Bangladesh taka per dollar, that a bushel of rice costs 200 taka in
Bangladesh and $3 in the United States. Then the real exchange rate is
a. greater than one and arbitrageurs could profit by buying rice in the United States and selling
it in Bangladesh.
b. greater than one and arbitrageurs could profit by buying rice in Bangladesh and selling it in
the United States.

c. less than one and arbitrageurs could profit by buying rice in the United States and selling it
in Bangladesh.
d. less than one and arbitrageurs could profit by buying rice in Bangladesh and selling it in the
United States.

Spring06 1102H midterm 2 practice MC

Answer Section
MULTIPLE CHOICE
1. ANS: A
capital investment.
DIF: 1
REF: SECTION: 26.0
OBJ: TYPE: M
2. ANS: C
more investment, and so have more capital and higher productivity.
DIF: 1
3. ANS: D
financial system.

REF: SECTION: 26.0

OBJ: TYPE: M

DIF: 1
REF: SECTION: 26.0
4. ANS: B
certificate of indebtedness.

OBJ: TYPE: M

DIF: 1
5. ANS: A
bond.

REF: SECTION: 26.1

OBJ: TYPE: M

DIF: 1
6. ANS: B
term.

REF: SECTION: 26.1

OBJ: TYPE: M

DIF: 1
7. ANS: A
a junk bond

REF: SECTION: 26.1

OBJ: TYPE: M

DIF: 1
REF: SECTION: 26.1
8. ANS: D
a bond issued by a new restaurant chain

OBJ: TYPE: M

DIF: 1
9. ANS: B
partial ownership.

OBJ: TYPE: M

REF: p. SECTON: 26.1

DIF: 1
REF: SECTION: 26.1
OBJ: TYPE: M
10. ANS: B
A general, persistent decline in stock prices is a signal that the economy is about to enter a recession because
low stock prices may mean that people are expecting low corporate profits.
DIF: 2
11. ANS: A
retained earnings.

REF: SECTION: 26.1

OBJ: TYPE: M

DIF: 1
12. ANS: A
earnings.

REF: SECTION: 26.1

OBJ: TYPE: M

DIF: 1
REF: SECTION: 26.1
13. ANS: D
Private saving equals investment.

OBJ: TYPE: M

DIF: 1
REF: SECTION: 26.2
OBJ: TYPE: M
14. ANS: A
demanded will exceed the quantity of loanable funds supplied and the interest rate will rise.
DIF: 2
REF: SECTION: 26.3
OBJ: TYPE: M
15. ANS: A
There would be an increase in the amount of loanable funds borrowed.
DIF: 2
REF: SECTION: 26.3
16. ANS: C
The interest rate increases and saving decreases.

OBJ: TYPE: M

DIF: 3
REF: SECTION: 26.3
17. ANS: B
the rate of interest will rise.

OBJ: TYPE: M

DIF: 3
REF: SECTION: 26.3
OBJ: TYPE: M
18. ANS: A
the demand for loanable funds is more elastic and the supply of loanable funds is more inelastic.
DIF: 3
19. ANS: D
neither M1 nor M2.

REF: SECTION: 26.3

OBJ: TYPE: M

DIF: 1
20. ANS: A
defer payments.

REF: SECTION: 29.1

OBJ: TYPE: M

DIF: 1
REF: SECTION: 29.1
OBJ: TYPE: M
21. ANS: B
conduct open market operations-New York Federal Reserve Bank
DIF: 1
REF: SECTION: 29.2
22. ANS: C
will be able to make new loans up to a maximum of $190.

OBJ: TYPE: M

DIF: 2
REF: SECTION: 29.2
23. ANS: C
needs $5,000 more of reserves to meet its reserve requirements.

OBJ: TYPE: M

DIF: 1

REF: SECTION: 29.3

OBJ: TYPE: M

24. ANS: B
10.
DIF: 1
REF: SECTION: 29.3
25. ANS: A
increase and banks can increase lending.

OBJ: TYPE: M

DIF: 2
REF: SECTION: 29.3
OBJ: TYPE: M
26. ANS: C
reserves increase by $100 million and the money supply increases by more than $100 million.
DIF: 2
REF: SECTION: 29.3
OBJ: TYPE: M
27. ANS: D
decrease by $10 million and the money supply eventually decreases by $100 million.
DIF: 3
REF: SECTION: 29.3
28. ANS: B
rises, and so the price level falls.

OBJ: TYPE: M

DIF: 2
REF: SECTION: 30.1
29. ANS: D
None of the above is correct.

OBJ: TYPE: M

DIF: 2
30. ANS: B
nominal variables.

OBJ: TYPE: M

REF: SECTION: 30.1

DIF: 1
REF: SECTION: 30.1
OBJ: TYPE: M
31. ANS: B
the dollar value of the economy's output of final goods and services.
DIF: 1
REF: SECTION: 30.1
32. ANS: A
the price level and nominal wages

OBJ: TYPE: M

DIF: 1
REF: SECTION: 30.1
33. ANS: C
increase the price level, but not real GDP.

OBJ: TYPE: M

DIF: 1
34. ANS: C
unemployment.

REF: SECTION: 30.1

OBJ: TYPE: M

DIF: 1
35. ANS: A
(P Y)/M.

REF: SECTION: 30.1

OBJ: TYPE: M

DIF: 1
REF: SECTION: 30.1
36. ANS: A
falls to half its original level.

OBJ: TYPE: M

DIF: 1
REF: SECTION: 30.1
OBJ: TYPE: M
37. ANS: D
With constant money supply and velocity, an increase in output creates a proportional increase in the price
level.
DIF: 3
38. ANS: C
capital gain.

REF: SECTION: 30.1

OBJ: TYPE: M

DIF: 1
39. ANS: A
imports.

REF: SECTION: 30.2

OBJ: TYPE: M

DIF: 1
REF: SECTION: 31.1
OBJ: TYPE: M
40. ANS: B
the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic
assets bought by foreigners.
DIF: 1
REF: SECTION: 31.1
OBJ: TYPE: M
41. ANS: B
increase U.S. net capital outflow, but decrease Israeli net capital outflow.
DIF: 2
REF: SECTION: 31.1
42. ANS: D
decrease, and U.S. net capital outflow decreases.

OBJ: TYPE: M

DIF: 2
REF: SECTION: 31.1
43. ANS: D
None of the above is correct.

OBJ: TYPE: M

DIF: 2
REF: SECTION: 31.1
OBJ: TYPE: M
44. ANS: C
either investment in the U.S. economy or U.S. net capital outflow.
DIF: 1
REF: SECTION: 31.1
45. ANS: C
larger negative number.

OBJ: TYPE: M

DIF: 2
REF: SECTION: 31.1
OBJ: TYPE: M
46. ANS: B
rate at which a person can trade the currency of one country for the currency of another.
DIF: 1
REF: SECTION: 31.2
OBJ: TYPE: M
47. ANS: C
the amount of German currency that can be bought with one unit of U.S. currency
DIF: 2
REF: SECTION: 31.2
48. ANS: C
fewer domestic goods and more foreign goods.

OBJ: TYPE: M

DIF: 1
REF: SECTION: 31.2
49. ANS: D
and net capital outflow decrease.

OBJ: TYPE: M

DIF: 2
REF: SECTION: 31.2
OBJ: TYPE: M
50. ANS: C
the real exchange rate is less than one and arbitrageurs could profit by buying rice in the U.S. and selling it in
Bangladesh.
DIF: 3

REF: SECTION: 31.3

OBJ: TYPE: M