EC102 .

03 NAME: _________________
ID #: ___________________
Spring 2017

FINAL EXAM
GROUP A
May 18, 2017

Instructions:
 You have 80 minutes to complete the exam. There will be no extensions.
 The exam consists of 40 multiple choice questions. Each multiple choice
question is worth 1.25 point for a total of 50 points.
 Use a pencil to mark your answers on the answer sheet. Make sure you write
your name and ID number on the answer sheet as well.
 Please mark the group of your test on the answer sheet under “Test Form.”
 No calculators, dictionaries or formula sheets are allowed.
 The use of cell phones is strictly prohibited. Make sure your cell phone is
turned off and inside your bag. Do NOT use your cell phone even for
timekeeping purposes.
 This is a closed books/notes exam.
 Choose only one answer for each question.
 3 wrong answers will take away one correct answer.
 There is absolutely no talking during the exam.
 The proctors will NOT answer any questions.
 There are 14 pages in this exam booklet.

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1. If Vestel purchases a production facility in the U.S., this will be recorded in the U.S.
balance of payments as a:
A) entry in the current account.
B) foreign currency outflow.
C) entry in the capital/financial account.
D) none of the above.

2. Automatic stabilizers:
A) automatically increase the size of deficits when the economy experiences demand-
pull inflation.
B) avoid the problems associated with the administrative lag of discretionary fiscal
policy.
C) automatically produce a budget that is balanced over the business cycle.
D) none of the above

3. Suppose the exchange rate is currently $1 = 4 TL. If a basket of groceries costs $150 in
the U.S. and there is purchasing power parity, the price of this same basket of groceries in
Istanbul is:
A) 150 TL.
B) 1500 TL.
C) 300 TL.
D) 600 TL.

4. Suppose the full-employment level of GDP is $250 billion in a hypothetical economy.

Currently, aggregate expenditures total $270 billion. Which of the following would be
most in accord with appropriate fiscal policy?
A) Lower tax rates on corporate income
B) Raising income taxes
C) Expanded spending on new domestic security programs
D) Decreases in interest rates

5. Which of the following is always entered as a negative number in the Turkish balance of
payments?
A) Net transfers
B) Net investment income
C) Goods exports
D) Turkish purchases of assets abroad

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6. "A recession became the Great Depression because the Fed allowed the money supply to
fall by 35% during the 1930s." This statement is most closely associated with which
school of thought?
A) Mainstream view
B) Monetarism
C) Rational expectations theory
D) Real business cycle theory

7. Suppose nominal GDP is $5000 billion, real GDP is $4000 billion, and the money supply
is $1000 billion. In this hypothetical economy, the velocity of money is:
A) 5.
B) 4.
C) 4.5.
D) $1000.

8. Comparing the short-run and long-run Phillips curve suggests that:

A) there is both a short-run and long-run tradeoff between inflation and
unemployment.
B) there is neither a short-run nor a long-run tradeoff between inflation and
unemployment.
C) there is a short-run but not a long-run tradeoff between inflation and
unemployment.
D) there is a long-run but not a short-run tradeoff between inflation and
unemployment.

9. In order to temporarily reduce the unemployment rate below its natural rate, the
government could:
A) decrease the rate of inflation below peoples' expectations.
B) reduce both the trade deficit and the budget deficit.
C) raise marginal tax rates and cut wasteful government spending.
D) increase the rate of inflation above peoples' expectations.

10. If the risk-free interest rate is 10%, what is the present value of a financial asset that is
guaranteed to pay $1100 one year from now?
A) $1000
B) $1210
C) $965
D) $1100

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11. A decrease in the money supply will:
A) raise interest rates, reducing planned investment and GDP.
B) raise interest rates, increasing planned investment and lowering GDP.
C) reduce interest rates, increasing planned investment and GDP.
D) reduce interest rates, reducing planned investment and GDP.

12. Suppose the required reserve ratio is 10% and the banking system initially has no excess
reserves. If $40 billion in new currency is deposited into the system, these new deposits
will initially create excess reserves of:
A) $4 billion.
B) $36 billion.
C) $40 billion.
D) $400 billion.

13. Whenever the Jones family receives change from a purchase, it goes into a jar to be used
in the summer as spending money for the family vacation. The primary function served by
the money in the jar is:
A) standard of value.
B) store of value.
C) unit of account.
D) medium of exchange.

14. Suppose the interest rate is currently 8% and the TCMB determines that investment of
$30 is required to reach full employment GDP. To target this outcome, the Fed might:
A) sell bonds to the public.
B) lower the discount rate.
C) raise the reserve requirement.
D) none of the above

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15. The effectiveness of an expansionary fiscal policy will be reduced if:
A) increased government borrowing increases interest rates, causing a reduction in
private investment.
B) it is accompanied by a cut in Social Security taxes as well.
C) the price level falls.
D) stock prices rise.

16. Suppose that Turkey and Mexico allow their currencies to float. Other things equal, if the
Turkish central bank raises Turkish interest rates relative to Mexican rates:
A) the TL will appreciate relative to the Mexican peso.
B) Mexico will be forced to accept policies leading to lower unemployment and
higher prices.
C) gold will flow into Turkey.
D) Mexico will be forced to sell official dollar reserves to maintain price stability.

17. Which of the following discretionary policies both restrains the growth of government
and helps return the economy to full employment from a recession?
A) A tax cut
B) A tax increase
C) An increase in government spending
D) A decrease in government spending

18. Consider the table above for US foreign transactions in billions of dollars. The U.S.
balance on current account is a:
A) deficit of $10 billion.
B) deficit of $25 billion.
C) deficit of $35 billion.
D) surplus of $10 billion.

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19. Consider the following hypothetical exchange rates: $1 = 4 TL; 1 Chinese yuan = $.10.
We can conclude that 1 TL trades for:
A) 2.5 yuan.
B) 5 yuan.
C) 1 yuan.
D) 25 yuan.

20. An expansionary fiscal policy is best represented by graph:

A) A.
B) B.
C) C.
D) D.

21. The change in GDP associated with a change in government spending is:
A) equal to the change in government spending.
B) smaller than—and opposite in sign to—that associated with an equal change in
taxes.
C) smaller than—and of the same sign as—that associated with an equal change in
net exports.
D) larger than—and opposite in sign to—that associated with an equal change in
taxes.

22. The modern Keynesian approach to cure a recession might include

A) Expanding the money supply or increasing government spending.
B) Expanding the money supply or reducing government spending.
C) Contracting the money supply or increasing government spending.
D) Contracting the money supply or reducing government spending.

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23. If the MPC is .75, government could eliminate a $240 billion deviation from the full-
employment output level in a recession by:
A) increasing government spending by $240.
B) reducing lump-sum taxes by $80.
C) reducing lump-sum taxes by $60.
D) balancing its budget.

24. Unanticipated inflation:

A) arbitrarily redistributes income from creditors to debtors.
B) invariably leads to unemployment.
C) reduces the real incomes of all individuals.
D) has the same economic consequences as anticipated inflation.

25. Suppose the CPI is currently 126, while its value one year previously it was 120. The rate
of inflation over the past year was:
A) 5%.
B) 6%.
C) 7%.
D) 8%.

26. If a nation's real GDP is growing at 2% per year, its real output will double in
approximately:
A) 50 years.
B) 40 years.
C) 35 years.
D) 33 years.

27. The Turkish money supply is "backed" by:

A) gold.
B) silver.
C) TMSF.
D) the ability of the government to maintain its value.

28. GDP excludes expenditures for:

A) additions to inventories.
B) new housing.
C) government purchases of military equipment.
D) corporate stock.

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29. Suppose nominal GDP in the base year was $380 billion. Five years later, nominal GDP
was $480 and the GDP price index was 120. Over those five years, real GDP:
A) increased by $20 billion.
B) increased by $96 billion.
C) increased by $80 billion.
D) did not change.

30. Disposable income consists of:

A) personal income plus personal taxes.
B) net domestic product minus personal taxes.
C) GDP corrected for inflation.
D) consumption plus saving.

31. Supply-side policy to reduce inflation would focus on

A) Decreasing the money supply.
B) Decreasing the interest rates to encourage investment.
C) Increasing the incentives to produce goods and services.
D) Raising marginal tax rates to reduce aggregate demand.

32. The normal market demand curve for money is

A) A horizontal curve at very high interest rates, where the quantity demanded changes
but the interestrate is constant.
B) An upward-sloping demand curve, where more money is held when interest rates are
higher.
C) A vertical demand curve, where the same amount of money is held regardless of the
interest rate.
D) A downward-sloping demand curve, where more money is held at lower interest rates

33. When a country has a current account deficit, the country

A) is lending abroad.
B) must have a government budget surplus.
C) is borrowing from abroad.
D) must have a government budget deficit.

34. An intermediate good is a good that is

A) is tangible good that includes substantial services.
B) a stand-in for all goods.
C) neither normal nor inferior.
D) used as an input.

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35. Britons holidaying in the USA would be shown in the US current account as
A a deficit
B a surplus
C an export
D an import

36. Unlike classics, the simple Keynesian model illustrates the idea that the economy can
come to rest for quite a long time at a level of aggregate output
A) only at the full employment level.
B) below the full employment level.
C) only when the price level is fixed.
D) only when wages are stable.

37. A central bank _____ of domestic currency and corresponding _____ of foreign assets in
the foreign exchange market leads to an equal increase in its international reserves and the
monetary base.
A) sale; purchase
B) sale; sale
C) purchase; sale
D) purchase; purchase

38. Holding other factors constant, which of the following would increase the size of the U.S.
current account deficit?
A) An increase in the amount of services purchased from foreigners
B) An increase in unilateral transfers from Americans to foreigners
C) An increase in American’s net investment income
D) Only (a) and (b) of the above

39. Over the long run the rate of depreciation of the nominal exchange rate between two
countries is approximately equal to the difference in national _________ rates.
A) real output growth
B) real interest
C) productivity growth
D) inflation
40. By _____________ economists refer to an unanticipated inflation that reduces the real
value of outstanding government debt
A) seigniorage
B) the inflation tax
C) cost of inflation
D) unanticipated default