ECON 311 Intermediate Macroeconomics Midterm Winter2014

A. $1,250

B. $2,800

C. $3,000

D. $2,470

E. $2,530

2.

Which of the following makes sense?  Inflation decreases and the output ratio is constant if…

A.

a beneficial supply shock combines with a reduced rate of NGDP growth.

B.

an adverse supply shock combines with a reduced rate of NGDP growth.

C.

a beneficial supply shock combines with a constant rate of NGDP growth.

D.

an adverse supply shock combines with a constant rate of NGDP growth.

E.

an adverse supply shock combines with an increased rate of NGDP growth.

3.

The Pigou Effect…

A.

explains the relationship of inflation and real interest rates.

B.

raises the real money supply when the price level is lower, and this larger money supply pushes down the interest rate.

C.

causes spending to rise in real terms when the price level is lower, so that a given stock of money buys more.

D.

is the relation between the level of output and the level of employment.

E.

is the relation between the level of inflation and the level of unemployment. 

4.

Nominal GDP is $20,000.  Net public debt is $12,000.  The nominal interest rate is 5% on government debt.  Nominal GDP grows at 7% per year.  Taxes = 30%*NGDP.  The primary government budget is in balance and is expected to remain so.  Which of the following is true?

A.

The debt/NGDP ratio is 60% and stable.

B.

The government is running a balanced total budget.

C.

The government will need to issue $600 (net) in new government bonds to cover its borrowing, and thus debt will grow as a share of nominal GDP.

D.

This government will need to move to a budget surplus to reduce its debt/NGDP ratio.

E.

The government will need to, on net, sell bonds to cover its deficit, and yet, the debt to nominal GDP ratio will fall. 

5.

In the FRED graph above, you should be able to figure out which line is which.  From the graph we can see that….

A.

real interest rates have been falling over the past year.

B.

deflation is likely, in the 0 to -1% range.

C.

inflation is rising.

D.

inflation is expected to be below 3% over the next decade.

E.

the Fisher effect is driving up both interest rates. 

6.

From James Surowiecki’s “A Brief History of Money” we learn that….

A.

Marco Polo learned of the use of government issued standardize coins in the court of Kublai Khan.

B.

Feudal society depended upon the institution of money to bring cooperation between social classes.

C.

The massive gold inflows from the Spanish colonies in the New World disrupted the economies of Europe, devaluing gold be reducing its scarcity, leading to waves of deflation.

D.

wildcats weren’t just the Big 10’s most wonderful sports franchise, but were also banks that issued their own currencies.

E.

the gold standard allows central banks much more flexibility since they can act without worrying about loss of value of their currency. 

7.

In a short-run AS-AD setting, an autonomous rise in investment demand would….

A.

drive up inflation and thus the price level, reducing real wages and leaving output unchanged.

B.

reduce real wages and other sticky costs, encouraging greater production.

C.

eventually cause short run aggregate supply to adjust, once contracts were renegotiated, so that the SAS would shift outward (or downward). 

D.

have no effect on output or the price level if the aggregate supply is vertical.

E.

drive up inflation and unemployment.

8.

From Blinder, what were the three T’s of any effective stimulus program, and what did they mean?

A.

Timely, in that the policy would start quickly, Tight in that the policy would offset the rising interest rates, and Temporary in that it would not be part of the structural policy in the long run. 

B.

Timely in that the policy would have effect while the economy was still weak, Targeted in that it would reach where it would have a big effect, and Temporary so that it would go away in the long run.

C.

TARP for fixing the banking system, TALF to fix the asset markets, and Taxes to be reduced and thus raise disposable income and consumption spending.

D.

Treasury, in that this was a political process and shouldn’t come from the Fed, Tilted toward the sectors that needed more help (mainly GM, Chrysler, housing), Total in that the second round spillover effects would boost the rest of the economy.

E.

Technical to expand LR sustainable growth, Tertiary in that it would reach beyond just the primary and secondary areas, and Tremendous because there would be no getting a second bill through Congress if this were too small.

9.

Why does an increase in the price level cause an increase in the amount of real GDP that firms produce, given that input costs are fixed? 

A.

It doesn’t; the increase in the price level increases the amount of nominal, not real GDP. 

B.

It’s the multiplier effect on spending.

C.

GDP is the market value of all final goods and services produced, so an increase in the price level causes an increase in the amount of production.

D.

Firms expand the amount of goods and services produced by using inputs that are now cheaper in real terms.

E.

The Keynes effect of prices on the real money supply and interest rates.

10.

From Blinder:   Treasury Secretary Paulson was worried that putting limits on executive compensation at bank as a condition for allowing those banks to use TARP money would create...

A.

stigma since it would show that the banks were so desperate that they would even take a pay cut.

B.

stigma since then everyone would know that execs at that bank weren’t so rich anymore.

C.

a bad signal since the bank would seem to have plenty of money, but in reality wouldn’t.

D.

bad incentives because then those execs wouldn't work as hard.

E.

an unnecessary signal, since it was common knowledge which banks were in trouble and which were not. 

11.

An economy starts out with Y = Y^N, no growth in Y^N, and an inflation rate of 6%.  Then an adverse supply shock hits the economy and pushes the SP curve upward by 5%.  Which one of the following might be correct (that is, isn’t clearly wrong)? 

A.

An extinguishing policy pushes Y/Y^N down to 95 and inflation down to 6%, a neutral policy pushes Y/Y^N down to 97.5 and lets inflation go to 8.5%, and an accommodating policy would leave output unchanged.

B.

An extinguishing policy keeps Y/Y^N at 100 and pushes inflation down to zero, a neutral policy allows both Y/Y^N and inflation to rise equally, and an accommodating policy would let output and inflation rise as markets allow.

C.

An extinguishing policy pushes inflation down to zero, which means that Y/Y^N would be 89, a neutral policy would have inflation be 5.5% and output be 95.5%, and an accommodating policy would leave inflation unchanged but allow output to fall.

D.

Inflation would rise to 11%, but under an extinguishing policy, output would be maintained at 100, while neural would have output fall by 6%, and accomodating would allow output to rise if NGDP were growing enough. 

E.

An extinguishing policy would push the SP curve back to its original position, a neutral policy would push it back to the point where growth of nominal GDP is steady, and an accommodating policy would leave the SP curve where it was after the supply shock.

12.

Jaimovich and Siu find that in recent economic downturns….

A.

job growth is strong as the economy recovers, but wages stay remarkable low.

B.

the Phillips Curve adjusts downward as people come to accept lower and lower wages.

C.

income inequality has largely been driven by formerly middle income workers moving into high income jobs, leaving the poor further and further behind. 

D.

wages were surprisingly flexible downward in most professions, other than in high income ones.

E.

jobs lost in middle income, routine tasks during downturns did not come back when the economy recovered.

13.

Blinder:  TARP money was used to “half-own” mountains of dodgy assets from Citigroup and B of A.  This means that…

A.

the US Treasury was intervening in private markets.

B.

the Fed would get half the gains if the involved private securities went up, and get half the losses if they went down.

C.

the US Treasury was outright buying half the mortgage backed assets in question.

D.

the Fed was guaranteeing the banks against losses, but would get no payoff if the asset prices went up.

E.

the Fed’s balance sheet would grow by only half of what it would if it had wholly-owned the assets.

14.

A bank has $400 in loans, $200 in government bonds, $500 in deposits, $50 borrowed from the Fed, $100 of reserves, and $100 from Hot Money.  How big a percentage decline is the bank’s assets would it take to make the bank insolvent?  (Round your answer to the nearest whole number.)

A.

5%

B.

7%

C.

10%

D.

12%

E.

20%

15.

Suppose the previous bank could earn an average of 6% on its assets and had to pay 5% on everything it held on the right side.  What would be this bank’s return on equity? 

A.

1%

B.

10%

C.

14%

D.

20%

E.

0%, the bank is breaking even.

16.

The bank collects $2 from repayment on its loans, and uses this to buy a SIV named JarJar, that has $100 in assets backed with $98 of commercial paper and $2 of equity.  Now how small a decrease in the value of the bank’s assets will make it insolvent?   (Round your answer to the nearest whole number.)

A.

6%

B.

5%

C.

4%

D.

3%

E.

2%

17.

From Michael Lewis, the surprising thing about Greece is that it got into trouble despite….

A.

having its banking sector almost complete avoid getting involved US with subprime-mortgage backed bonds.

B.

meticulous and open record keeping on all of its transactions. 

C.

paying government workers much less than workers in private Greek companies or workers in comparable jobs in other European countries. 

D.

being aided by Goldman Sachs, a firm dedicated to the highest ethical and financial standards.

E.

despite being largely untouched by the global economic downturn.

18.

If policy makers pursue an expansionary policy, what will happen to employment and the number of vacancies? 

A.

Vacancies will fall as will the labor force.

B.

Vacancies will fall but the labor force will rise, raising unemployment.

C.

Vacancies will rise and if the labor supply is fixed, then unemployment will fall..

D.

Vacancies will fall and unemployment will rise as people leave the labor force. 

E.

Vacancies will fall since so many people will get jobs.

19.

From Michael Lewis’s piece on Germany we learn about the German fixation of feces (what’s with that?!) and the problems that the German Landesbanks got into.   Which of the following explains what happened best?

A.

To earn higher returns, these banks sought out riskier securities.

B.

With a firm determination to follow rules, these banks only bought very simple financial securities rather than getting the safer securities that benefitted from more complex design.

C.

They only bought securities created in Germany, which make them undiversified.

D.

They vastly overpaid their workers by Wall Street standards, and that made them unprofitable.

E.

They bought what they thought were the highest yielding minimum risk securities, but largely didn’t understand what they’d bought and how risky it was.

20.

Which of the following is a correct description of how something affects the SP curve?

A.

Increase in the nominal money supply shifts the SP to the right.

B.

Increase in the nominal money supply moves the equilibrium to the right along the SP curve.

C.

Increased inflationary expectations is a movement along the SP curve.

D.

Increased inflationary expectations shift the curve to the right or down.

E.

A rise in the growth rate of NGDP shifts the curve outward (to the right or down).