Principles of Macroeconomics - Exam 3

 

1. Which of the following is not true regarding Venezuela:

  1. Venezuela is a major importer of oil from the US. **
  2. Venezuela is Latin America’s 4th largest economy.
  3. In April 2002, a brief coup temporarily displaced President Chavez.
  4. Venezuela holds national elections to select a president.

 

2. Which of the following is true regarding the SEC (Securities and Exchange Commission):

  1. The SEC is a private organization that assists firms when they want to issue news shares of stock.
  2. To ensure maximum effectiveness, the Bush administration is making sure that the SEC is fully funded as stipulated in the Sarbanes-Oxley Bill.
  3. The Public Accounting Oversight Board was created within the SEC to review accounting firms and practices.
  4. William Webster is the Chairman of the SEC and he selected his close friend Harvey Pitt to head the Public Accounting Oversight Board. **

 

3. Which of the following is not true regarding the Information Awareness Office:

  1. The Information Awareness Office is headed by John Poindexter who was convicted in 1990 of lying to Congress.
  2. The Total Information Awareness database will attempt to track and screen transactions made by Americans.
  3. The Total Information Awareness database is an attempt to better inform ordinary Americans about the potential for terrorist activities when they travel abroad. **
  4. The Homeland Security Act provides funding for the Total Information Awareness database.

 

4. Which of the following is not true:

  1. The November unemployment rate increased to 6%.
  2. President Bush signed a bill that will commit the government to reimburse the insurance industry in future terrorist attacks in the US.
  3. As a result of the Sept. 11, 2001 terrorist attacks, 90% of US insurance firms went bankrupt after using all of their cash reserves. **
  4. President Bush has issued federal regulations that require local school districts to allow students to transfer from failing schools to other schools within the same school district.

 

5. Which of the following is true regarding Brazil and the FTAA (Free Trade of the Americas)

  1. Recent elections in Brazil primarily resulted in chaos as the antiquated voting system collapsed.
  2. Newly elected President Lula da Silva of Brazil is a conservative, close friend of President Bush, and strong advocate of free trade with the US.
  3. Generous agricultural subsidies in the US are a major concern for many Latin American countries as their domestic farmers have a difficult time competing with low-cost US agricultural exports. **
  4. The goal of FTAA negotiations is to expand NAFTA to include both Mexico and Brazil.

 

6. Holding everything else constant, in a typical business cycle if the Federal Reserve decreases  interest rates:

  1. The growth rate of GDP will fall.
  2. The growth rate of GDP will rise. **
  3. Changes in the interest rate will have no effect on GDP.
  4. None of the above.

 

7. How would the Fed use open market operations (OMO) to lower interest rates?

a.   The Fed sells bonds to banks.

b.   The Fed reduces the discount rate.

c.   The Fed sells gold certificates.

d.   The Fed buys bonds from banks. **

 

8. Expansionary monetary policy by the Fed should lead to:

a.   An increase in the monetary base, an increase in the money supply, and a decrease in the Fed Funds rate. **

b.   An increase in the monetary base, a decrease in the money supply, and an increase in the Fed Funds rate.

c.   A decrease in the monetary base, a decrease in the money supply, and a decrease in the Fed Funds rate.

d.   A decrease in the monetary base, a decrease in the money supply, and an increase in the Fed Funds rate.

    

9. Expansionary monetary policy by the Fed should lead to:

a.   An increase in investment and an increase in aggregate demand. **

b.   A decrease in investment and an increase in aggregate demand.

c.   An increase in investment and a decrease in aggregate demand.

d.   Leave investment unchanged but decrease aggregate demand.

 

10. If an individual bank receives $1,000,000 in new deposits and the required reserve ratio is 10 percent, the bank must keep the following amount of required reserves with the Fed?

a.   $900,000.

b.   $1,000,000

c.   $100,000 **

d.   $0

    

11. Assume that the money multiplier equals 2.5 and if the Fed buys $1 million in bonds from a bank, the monetary base will:

a.   Increase by $1 million. **

b.   Increase by $2.5 million.

c.   Decrease by $1 million.

d.   Decrease by $2.5 million.

 

12. Assume that the money multiplier equals 2.5 and if the Fed buys $1 million in bonds from a bank, the money supply will:

a.   Increase by $1 million.

b.   Increase by $2.5 million. **

c.   Decrease by $1 million.

d.   Decrease by $2.5 million.

 

13. When we look at two currencies, a floating exchange rate is best described as:

a.   The number of dollars in circulation in both domestic and foreign markets.

b.   The ratio between imports and exports.

  1. One currency is fixed to another.
  2. The value of the currency is determined by supply and demand in foreign exchange markets. **

 

14. Which of the following statements is accurate in regards to the US dollar:

  1. The central bank (e.g. Federal Reserve) is responsible for printing the domestic currency and there is a floating exchange rate. **
  2. Banks are responsible for printing the domestic currency and there is a floating exchange rate.
  3. The central bank has no ability to print the domestic currency and dollarization was adopted to minimize domestic inflation.
  4. The central bank is responsible for printing the domestic currency and the value of the currency is adjusted to maintain a fixed level to another currency.

 

15. Ecuador’s currency is best described by:

  1. The central bank (e.g. Federal Reserve) is responsible for printing the domestic currency and there is a floating exchange rate.
  2. Banks are responsible for printing the domestic currency and there is a floating exchange rate.
  3. The central bank has no ability to print the domestic currency and dollarization was adopted to minimize domestic inflation. **
  4. The central bank is responsible for printing the domestic currency and the value of the currency is adjusted to maintain a fixed level to another currency.

 

16. When Argentina and Mexico pegged their pesos to the dollar, this was best described by:

  1. The central bank (e.g. Federal Reserve) is responsible for printing the domestic currency and there is a floating exchange rate.
  2. Banks are responsible for printing the domestic currency and there is a floating exchange rate.
  3. The central bank has no ability to print the domestic currency and dollarization was adopted to minimize domestic inflation.
  4. The central bank is responsible for printing the domestic currency and the value of the currency is adjusted to maintain a fixed level to the dollar. **

 

17. Foreign savers like to purchase debt issued by the US Treasury since it is perhaps the safest financial asset in the world. Assume for political reasons, a significant group of foreign savers decides to sell their US financial assets and take their money out of the US. Holding everything else constant, we would expect:

  1. The money to leave through the current account and the dollar to depreciate.
  2. The money to leave through the current account and the dollar to appreciate.
  3. The money to leave through the capital account and the dollar to depreciate. **
  4. The money to leave through the capital account and the dollar to appreciate.

 

18. If there is an increase in the supply of dollars in the foreign exchange market, we would expect (holding everything else constant):

  1. No change in the value of the dollar.
  2. The dollar to depreciate. **
  3. The dollar to appreciate.
  4. The dollar to disappear.

 

19. If US consumers purchase more imports, we would expect (holding everything else constant):

  1. An increase in the supply of dollars in foreign exchange markets and the dollar to depreciate. **
  2. A decrease in the supply of dollars in foreign exchange markets and the dollar to appreciate.
  3. An increase in the demand for dollars in foreign exchange markets and the dollar to appreciate.
  4. A decrease in the demand for dollars in foreign exchange markets and the dollar to depreciate.

 

20. If foreign consumers purchase more goods and services produced in the US (US exports), we would expect (holding everything else constant):

  1. An increase in the supply of dollars in foreign exchange markets and the dollar to depreciate.
  2. A decrease in the supply of dollars in foreign exchange markets and the dollar to appreciate.
  3. An increase in the demand for dollars in foreign exchange markets and the dollar to appreciate. **
  4. A decrease in the demand for dollars in foreign exchange markets and the dollar to depreciate.

 

21. An expansionary monetary policy by the Fed would be expected to:

  1. Raise domestic income, reduce imports, and increase the current account trade deficit.
  2. Raise domestic income, increase imports, and increase the current account trade deficit. **
  3. Reduce domestic income, reduce imports, and reduce the current account trade deficit.
  4. Reduce domestic income, raise imports, and reduce the current account trade deficit.

 

22. Which of the following was not a contributing factor to the Mexican currency crisis:

a.   A large current account deficit.

b.   Capital flight through the capital account.

c.   A low inflation rate in comparison to the United States.**

d.   A peg of the Mexican peso to the U.S. dollar.

 

23. Which of the following was not a consequence of the Mexican currency crisis:

a.   A higher domestic inflation rate.

b.   Lower import prices. **

c.   An increase in exports.

d.   An economic recession.

 

24. The main reason that Argentina established a currency board was to:

  1. Abolish the peso and use American dollars as the official currency.
  2. Balance the federal government budget so it could no longer run a deficit and borrow money.
  3. To appreciate the value of the peso in order to become more competitive in foreign markets.
  4. Stabilize the domestic money supply and control the inflation rate. **

 

25. At the present time:

  1. The US is running a current account surplus that is the result of the depreciation of the US dollar during the 1990s.
  2. The US is running a current account deficit that is the result of the depreciation of the US dollar and weak economic growth present during the 1990s.
  3. The US is running a current account deficit that is the result the value of exports from the US exceeding the value of imports into the US.
  4. The US is running a current account deficit that is the result of the rising value of the US dollar and strong economic growth present during the 1990s. **