Economics 1 Department of Economics

Principles of Macroeconomics New York University

Prof. McIntyre Spring 2024

Sample Exam 2 – Version – A

Directions:
Fill out the Bubble Sheet with your official NYU name (from your NYU ID) and the
exam version letter.
Put all your answers on the bubble sheet using a blue or black pen or pencil.
Only the bubble sheet is collected and graded.
Choose the best answer. You have 70 minutes to complete this exam.

1. In the long run, if the government increases investment tax credits and raises taxes
elsewhere in the economy so that the government budget deficit is unchanged, then, other
things equal,
A. consumption and the interest rate rises.
B. consumption rises and the interest rate falls.
C. consumption falls, and the interest rate rises.
D. consumption falls, and the interest rate falls.
E. None of the above
Answer: C

2. In a closed economy, GDP is $15 trillion, consumption is $11 trillion, net taxes are $3
trillion and the government runs a surplus of $1 trillion. In this economy, private saving
and national saving are
A. $4 trillion and $2 trillion, respectively
B. $4 trillion and $0 trillion, respectively
C. $1 trillion and $2 trillion, respectively
D. $1 trillion and $0 trillion, respectively
E. None of the above
Answer: C

3. If there is shortage of loanable funds, then

A. the supply for loanable funds shifts right and the demand shifts left.
B. the supply for loanable funds shifts left and the demand shifts right.
C. neither curve shifts, but private savings increases and investment falls as the interest
rate rises to equilibrium.
D. neither curve shifts, but private savings decreases and investment increases as the
interest rate falls to equilibrium.
E. None of the above
ANSWER: C

4. According to the loanable funds model, in the long run, which of the following events
would result in lower interest rates and lower national saving, other things equal?
A. Firms become pessimistic about the future and cut back on plans to buy new
equipment and build new factories.
B. The government goes from running a budget surplus to running a budget deficit.
C. Congress passes a reform of the tax laws that encourages greater private saving.
D. Congress passes a reform of the tax laws that encourages greater investment.
E. None of the above
Answer: A
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5. In 2002 interest rates on home mortgages fell and mortgage lending for homes increased.
Which of the following could explain both of these changes?
A. The demand for loanable funds shifted rightward
B. The demand for loanable funds shifted leftward.
C. The supply of loanable funds shifted rightward.
D. The supply of loanable funds shifted leftward.
E. None of the above.
Answer: C

6. Suppose a new administration proposes an increase in government spending of $1

trillion. In the long run, other things equal, this policy implies,
A. Private savings must fall, investment must fall by more than $1 trillion, and interest
rates will rise.
B. National saving must fall by $1 trillion and investment must fall by $1 trillion, and
interest rates will rise.
C. National saving must fall, consumption must fall, investment must fall but none will
fall by as much as $1 trillion and interest rates will rise.
D. National saving must fall by $1 trillion, the sum of consumption and investment must
fall by $1 trillion and interest rates will rise.
Answer: C

7. Suppose a one-year zero coupon bond with a face value of $1000 sells for $900 today.
Anne and Bob each own this bond. Anne requires 10% to hold this bond. Bob requires
5% to hold this bond. The information given implies
A. Anne will sell the bond to Bob
B. Bob will sell the bond to Anne
C. Both Anne and Bob will sell this bond in the bond market
D. Both Anne and Bob will buy this bond in the bond market
E. None of the above
Answer: D

8. You own 1-year and 2-year zero coupon bonds of the same face value issued by Greece.
If read news that causes you to believe Greece is riskier than you previously thought, then
other things equal, you will
A. reduce the lowest price you will accept to sell only the one-year bond.
B. reduce the lowest price you will accept to sell only the two-year bond.
C. reduce the lowest price you will accept to sell both bonds, but the price for the two-
year bond will be lower than the price of the one-year bond.
D. reduce the lowest price you will accept to sell both bonds, but the price for the one-
year bond will be lower than the price of the two-year bond.
E. not reduce the lowest price you will accept to sell either bond.
Answer: C

9. The efficient market hypothesis implies that investors should:

A. adopt an active investment strategy.
B. adopt a passive investment strategy.
C. use anomalies as the basis for investment decisions.
D. use analysis of prior stock returns as the basis for investment decisions.
E. None of the above
Answer: B
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10. A finding that would provide evidence against the efficient market hypothesis is,
A. Above normal returns cannot be made using technical trading rules.
B. People can make sustained above normal returns using public information.
C. Changes in stock prices are random and unpredictable.
D. About 50% of actively managed mutual funds outperform the market this year.
E. None of the above
Answer: B

11. A friend informs you she made above-average returns last year on the US stock market.
She claims this is evidence that the efficient market hypothesis (EMH) does not hold.
Your correct response would be,
A. The EMH may still hold as she took on higher risk stocks
B. The EMH may still hold as she has not sustained these above average returns.
C. The EMH may still hold if she used inside information.
D. All of the above.
E. None of the above, your friend’s experience is evidence against the EMH
Answer: D

12. You are considering purchasing a machine today. The machine is made in a foreign
country and takes one year to arrive in the US. You know that one year from now, the
machine will make you $1000 profit. Then it will break, and you can sell it for scrap
value for $500. Ignoring tariffs and transportation costs, what is the most you should pay
for the machine today if your alternative rate of interest is 5%?
A. $1000.00
B. $2000.00
C. $1904.86
D. $1500.00
E. $1428.57
Answer: E

13. A person in the labor force

A. has a job.
B. is at least 16 years old and either has a job or does not have a job.
C. is at least 16 years old and either has a job, or does not have a job but has recently
looked for work, or is on temporary layoff and expects to return to work in four
weeks, or expects to start a job in four weeks.
D. None of the above is correct.
Answer: C

14. A discouraged worker

A. is in the labor force as defined by the BLS.
B. wants and is available for a job but does not have one, and has looked for work in the
past 12 months but is not currently looking.
C. is unemployed as defined by the BLS.
D. All of the above are correct.
E. None of the above is correct
Answer: B

15. Of the following people, who would necessarily be included in the Bureau of Labor
Statistics’ “unemployed” category?
A. Huey, who did not work during the previous four weeks
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B.
Dewey, a worker who tried to find new employment during the previous four weeks
C.
Louie, who was an unpaid worker during the previous four weeks
D.
None of the other answers is correct.
E.
Huey, Dewey, and Louie would all necessarily be included in the unemployed
category.
ANSWER: D

16. Politician A says the unemployment rate is lower than when she took office. Politician B
says more people are unemployed now compared to when Politician A took office. You
conclude that
A. one of them must be lying.
B. both of them could be telling the truth if the labor force grew faster than the number
of workers unemployed.
C. both of them could be telling the truth if the labor force and the number of workers
unemployed grew at the exact same rate.
D. both of them could be telling the truth if the labor force grew slower than the
number of workers employed.
E. More than one of the may be correct
Answer: B

17. Other things equal, which of the following would decrease the unemployment rate?
(i) an increase in the number of women who return to work after being stay-at-
home mothers
(ii) a preference among older men to retire early
(iii) an increase in the maximum number of weeks for which someone can receive
government unemployment benefits
(iv) an increase in the number of previously unemployed women who stop looking
for work

A. (i) only
B. (ii) only
C. (ii) and (iii) only
D. (i) and (iv) only
E. None of the above
Answer: D

18. A country has a total population of 100 million, an adult population of 80 million, a labor
force participation rate of 60%, a monthly separation rate of 3% and a monthly finding rate
of 30%. The number of people employed in this country is
A. 43.6 million
B. 33.3 million
C. 26.7 million
D. 56.7 million
E. None of the above
Answer: A

19. We would expect the internal rate of return on Bond A to be higher than the internal rate
of return on Bond B if the two bonds were identical in very way except that
A. the default risk associated with Bond A is lower than the credit risk associated with
Bond B.
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B. Bond A was issued by the US government and Bond B was issued by a corporation.
C. Bond A has a term of 20 years and Bond B has a term of 2 years.
D. All of the above are correct.
E. None of the above
Answer: C

20. In 2016, XYZ Corporation had total earnings of $500 million and retained 20 percent of
its earnings. If the price of a share of XYZ stock is $70 and if there are 100 million shares
outstanding, then what is the price-earnings ratio?
A. 6.25
B. 11.2
C. 14.0
D. 17.5
E. 20
ANSWER: C

21. A one-year zero coupon bond promises to pay $1,200 next year. If your alternative
interest rate is 4 percent, then the most you would pay for such a bond is
A. $1,055.56.
B. $1,120.89.
C. $1,232.89.
D. $1,338.26.
E. $1153.85
ANSWER: E

22. A manufacturing company is thinking about building a new factory. The factory, if built,
will yield the company $121 million in 2 years, and it would cost $100 million today to
build. The company will decide to build the factory if the interest rate is
A. no greater than 12 percent.
B. no greater than 11 percent.
C. no greater than 10 percent.
D. no greater than 9 percent.
ANSWER: C

23. John decides which stocks to purchase by throwing darts at the stock pages of The Wall
Street Journal. John probably believes that
A. stock prices follow a random walk.
B. the stock market uses information efficiently
C. it is better to own stock in many companies than it is to own stock in a few
companies
D. All of the above are correct.
E. None of the above is correct
ANSWER: D

24. If the government budget deficit increases, then other things equal,
A. Consumption and investment both fall, and the real interest rate rises
B. Private saving rises and investment falls, and the real interest rate rises
C. Consumption rises and investment falls, and the real interest rate rises
D. Consumption and investment fall, and the real interest rate falls
E. More than one of the above is correct.
Answer: E
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25. Private savings is Sp = 100 + 10r, government spending on goods is 100, taxes are 80 and
transfers are 30. If investment is I = 100 – 10r then in equilibrium in the loanable funds
market the interest rate is
A. 2.5%, private saving = 125, and investment = 75
B. 5%, private saving = 100, and investment = 75
C. 2.5%, private saving = 100, and investment = 100
D. 5%, private saving = 125, and investment = 100
E. 2.5%, private saving = 100, and investment = 75
Answer: A

26. Consider the labor market situation of the people described in the table below.
Person Status
Jose Unpaid stay at home dad. Has not looked for a job in several years.
Linda President of NYU
Allison Part-time welder. Actively looking for full time work.
Joshua Self-employed full-time wedding singer.
LaToya Full-time physician’s assistant.
Calvin Retired finance professor. Last applied for work 10 weeks ago.
Demetrius Laid-off fork-lift operator expecting to be recalled in four weeks.
Tianran Works for a bicycle store. Age 70.
Evelyn Manager of health food store.
Eli Museum guard. Was not at work last week due to illness.
Flora Has never been employed. Looked for a job last week.
Frank Fired from job as an investment banker. Last looked for work three weeks ago.
How many in the table above are unemployed and how many are in the labor force?
A. 5 are unemployed and 10 are in the labor force
B. 4 are unemployed and 9 are in the labor force
C. 3 are unemployed and 10 are in the labor force
D. 2 are unemployed and 9 are in the labor force
E. None of the above
ANSWER: C

27. Sean loses his job and decides to travel rather than look for work during the next few
months. Other things equal, Sean’s job loss causes the unemployment rate to
A. increase, and the labor-force participation rate to decrease.
B. increase, and the labor-force participation rate to be unchanged.
C. be unchanged, and the labor-force participation rate to decrease
D. be unchanged and the labor-force participation rate to be unchanged.
E. None of the above
ANSWER: A

28. Suppose a country had an adult population of 25 million, a labor-force participation rate
of 60 percent, and an unemployment rate of 6 percent. How many people were
employed?
A. 0.9 million
B. 14.1 million
C. 15 million
D. 23.5 million
E. None of the above
ANSWER: B
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29. In an imaginary country last month the separation rate was 6% and the finding rate was
80%. These data imply
A. The unemployment rate last month was 8%
B. The unemployment rate last month was 7%
C. The unemployment rate last month was 6%
D. The unemployment rate last month was 5%
Answer: B

30. Efficiency wages

A. increase productivity.
B. increase unemployment.
C. improve worker health in poor countries
D. reduce monitoring costs
E. All of the above are correct.
ANSWER: E

31. Which of the following statements is correct?

A. All items that are included in M1 are included also in M2.
B. All items that are included in M2 are included also in M1.
C. Credit cards are included in both M1 and M2.
D. Savings deposits are included in both M1 and M2.
E. None of the above is correct.
ANSWER: A

32. Which list ranks assets from most to least liquid?

A. money, bonds, cars, houses
B. money, cars, houses, bonds
C. bonds, money, cars, houses
D. bonds, cars, money, houses
Answer: A

33. When conducting an open-market purchase, the Fed

A. buys government bonds, and in so doing increases the money supply.
B. buys government bonds, and in so doing decreases the money supply.
C. ells government bonds, and in so doing increases the money supply.
D. sells government bonds, and in so doing decreases the money supply.
E. None of the above is correct
ANSWER: A

34. A person deposits $100 of currency into her savings account at a commercial bank.
A. M1 falls and M2 rises
B. M1 falls and M2 is constant
C. M1 is constant and M2 is constant
D. M1 is constant and M2 rises
E. We don’t know what happens to M1 but M2 rises
Answer: B