Economics 100 Principles of Macroeconomics MIDTERM #4

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There are twenty-two multiple-choice questions, each worth ten points, and two nonmultiple
choice problems, for a total of 250 points. Pick the best answer for each
multiple-choice question and mark it on your scantron. Use a number two pencil and be
sure to completely erase any incorrect answers that you change. Answer the nonmultiple-choice
problems on your test sheet. Be sure to write your name class time on
your scantron and on the test sheet.
1. Commercial banks will tend to vary their lending in a way that:
 (a) increases total loans to the maximum at all times. (b) decreases total loans to the minimum at all times.
(c) changes with the season, not over the course of the business cycle.
 (d) reinforces the business cycle
2. The establishment of Federal deposit insurance was intended to prevent:
 (a) the Federal Reserve from manipulating interest rates
 (b) high levels of unemployment
 (c) stock market crashes such as the one in 1929
 (d) bank panics like those that happened between 1930 to 1933
3. The development of the “shadow banking” system and the deregulation of banking
and finance over the last thirty years has today contributed to:
 (a) less concentration in the industry as many more new, start-up firms were able to
enter.
 (b) more stability in the financial sector as big banks are able to diversify. (c) the largest financial crisis since the Great Depression
 (d) a smaller role for the Federal Reserve as a lender of last resort.
4. To ease monetary policy to fight a recession, the Fed would:
 (a) increase the supply of money by buying bonds.
 (b) increase the supply of money by selling bonds.
 (c) increase the demand for money by buying bonds. (d) increase the demand for money by selling bonds.
5. The Federal Reserve policy known as “Quantitative Easing” or QE is the Fed:
 (a) changing the target from interest rates to the quantity of money. (b) buying long-term bonds to bring down long-term interest rates.
 (c) increasing the quantity of money to bring down short-term interest rates.
 (d) making more loans to banks through the discount window so that they can lend
more.
6. Monetary policy is having little impact on the economy today because:
 (a) the Fed began to lower interest rates more than three and a half years ago, so the
impact has worn off.
 (b) low interest rates have caused an “asset price bubble” in stocks, so money is
flowing into the stock market and not on spending on goods and services.
 (c) there is a “liquidity trap” where banks are not lending despite a big increase in
the supply of money.
 (d) the multiplier effect of monetary policy is small.
7. During an economic expansion:
 (a) Tax revenues go up and social welfare spending also goes up.
 (b) Tax revenues go up and social welfare spending goes down. (c) Tax revenues go down and social welfare spending also goes down.
 (d) Tax revenues go down and social welfare spending goes up.
8. The Federal Government had a budget surplus in 2001 but a budget deficit in 2002.
 This was due to the recession, the tax cut, and the increased military spending. The
change from a budget surplus to a budget deficit was due to:
 (a) neither cyclical nor structural factors. (b) cyclical factors but not structural ones. (c) structural factors but not cyclical ones. (d) both cyclical and structural factors.
9. The San Mateo County Community College District has a large budget surplus. This
means the district:
 (a) must cut taxes and/or raise spending to balance the budget. (b) would be able cut taxes and/or raise spending without causing a budget deficit. (c) must raise taxes and/or cut spending to balance the budget.
 (d) should raise taxes and cut spending to make the surplus even larger.
10. The set of fiscal policies that would be most contractionary would be a(n):
 (a) increase in government spending and a decrease in taxes (b) decrease in government spending and an increase in taxes. (c) increase in both government spending and taxes
 (d) decrease in both government spending and taxes
11. If Congress raises taxes to fight inflation, then this would be an example of:
 (a) political business cycle
 (b) expansionary fiscal policy (c) discretionary fiscal policy (d) automatic stabilizers at work.
12. Assume that the economy was in a recession and there was a budget deficit. Then a
strict requirement that the Federal government had to balance its budget:
 (a) would worsen the effects of the recession. (b) would have no effect on the recession. (c) would counter the effects of the recession.
 (d) is unnecessary since government budgets are in a surplus during recessions.
13. Fiscal policy involving cutting taxes and/or raising transfers for low-income
households will have a multiplier effect on total spending that is:
 (a) greater than an equal dollar change in taxes or transfers for high income
households.
 (b) less than an equal dollar change in taxes or transfers for high income
households.
 (c) the same as an equal dollar change in taxes or transfers for high income
households.
 (d) zero, only changes in government purchases have a multiplier effect.
14. Which of the following is NOT a significant cause of the U.S. public debt?
 (a) spending on wars (b) recessions
 (c) tax cuts (d) demand-pull inflation
15. Interest payments on which bonds that make up the U.S. public debt is considered to
be the greatest burden on the U.S. economy? Bonds:
 a) owned by Americans.
 b) owned by the Rest of the World. c) owned by the Social Security trust fund. d) owned by the Federal Reserve bank.
16. In 2001 there was a record amount ER S
of foreign purchases of U.S. stocks
and bonds. This increase in foreign
purchases of U.S. assets would cause
the U.S. Dollar to: er (a) appreciate (b) depreciate
(c) would not affect the ER D
(d) have a fixed exchange rate 0 q Q
17. The U.S. was on a “gold standard” from 1879 to 1933. Which of the following was a
a major disadvantage of being on the gold standard from an economic point of view?
 (a) the fixed exchange rate made international trade and investment easier. (b) the price of gold varied according to how much gold the government bought.
 (c) countries on the gold standard could not do expansionary monetary policy
 (d) it causes the currencies on the gold standard to appreciate and makes their trade
deficits larger.
18. If Intel was manufacturing chips in the United States that were exported to China to
be made into cell phones for the Chinese market, but now is building a chip
manufacturing plant in China to provide chips to make cell phones in China for the
Chinese market, this action would directly:
 (a) increase imports to the United States (b) decrease imports to the United States
 (c) increase U.S. exports
 (d) decrease U.S. exports.
19. If the U.S. economy were to grow rapidly, this would: (a) increase both U.S. imports and economic growth in the Rest of the World.
 (b) decrease U.S. imports and increase economic growth in the Rest of the World.
 (c) increase U.S. imports and decrease economic growth in the Rest of the World. (d) decrease both U.S. imports and economic growth in the Rest of the World.
20. If the government had an easy money policy of lowering interest rates, then:
 (a) the U.S. dollar would appreciate, causing net exports to decrease.
 (b) the U.S. dollar would depreciate, causing net exports to increase. (c) the U.S. dollar would depreciate, causing net exports to decrease.
 (d) the U.S. dollar would appreciate, causing net exports to increase.
21. The United States has become a net debtor nation where the rest of the world owns
more assets in the United States than the United States owns assets in the rest of the
world. The United States external debt is directly caused by:
 (a) years of households borrowing more and more to buy expensive homes. (b) years of large U.S. Federal government budget deficits.
 (c) the low value of the U.S. dollar, which makes it cheap for the Rest of the World
to buy U.S. assets and expensive for Americans to buy assets in the Rest of the World.
 (d) years of large U.S. current account deficits
22. Which of the following is a possible negative result of the large U.S. external debt is:
 (a) that the U.S. government will default on bonds sold to the Rest of the World. (b) a soft landing where the U.S. dollar slowly depreciates that causes Aggregate
Demand to go up, leading to an expansion.
 (c) a hard landing where rapid depreciation of the U.S. dollar causes Aggregate
Supply to go down, causing stagflation.
 (d) that the U.S. will stop buying imports from the Rest of the World.
Please answer problems 23 and 24 on your test sheet on the next two pages.
23. Monetary Policy: In June of 2004 π
the Federal Reserve changed to a AS
policy of monetary tightening to
counter rising inflation. Using what
you have learned in class,
show the impact of a Federal
Reserve Bank monetary tightening
on aggregate demand, output, and π
inflation using the aggregate
demand/aggregate supply diagram 0 Y
to the right. Be sure to show and y
label what happens to GDP and
inflation. (10 points total) AD

24. Fiscal Policy: (A) What are the three actions that the Federal Government can take
to fight recession using fiscal policy? (15 points)
 1. ___________________________________________________
 2. ___________________________________________________
 3. ___________________________________________________
(B) Given that the Federal budget was in a deficit, what would be the impact of the
Federal government acting to fight a recession on the federal budget? (5 points)

There are twenty-two multiple-choice questions, each worth ten points, and two nonmultiple
choice problems, for a total of 250 points. Pick the best answer for each
multiple-choice question and mark it on your scantron. Use a number two pencil and be
sure to completely erase any incorrect answers that you change. Answer the nonmultiple-choice
problems on your test sheet. Be sure to write your name class time on
your scantron and on the test sheet.
1. The Federal Reserve policy known as “Quantitative Easing” or QE is the Fed:
 (a) changing the target from interest rates to the quantity of money.
 (b) buying long-term bonds to bring down long-term interest rates.
 (c) increasing the quantity of money to bring down short-term interest rates.
 (d) making more loans to banks through the discount window so that they can lend
more.
2. Commercial banks will tend to vary their lending in a way that:
 (a) increases total loans to the maximum at all times. (b) decreases total loans to the minimum at all times.
(c) changes with the season, not over the course of the business cycle.
 (d) reinforces the business cycle
3. The establishment of Federal deposit insurance was intended to prevent:
 (a) the Federal Reserve from manipulating interest rates
 (b) high levels of unemployment
 (c) stock market crashes such as the one in 1929
 (d) bank panics like those that happened between 1930 to 1933
4. The development of the “shadow banking” system and the deregulation of banking
and finance over the last thirty years has today contributed to:
 (a) less concentration in the industry as many more new, start-up firms were able to
enter.
 (b) more stability in the financial sector as big banks are able to diversify.
 (c) the largest financial crisis since the Great Depression (d) a smaller role for the Federal Reserve as a lender of last resort.
5. To ease monetary policy to fight a recession, the Fed would:
 (a) increase the supply of money by buying bonds. (b) increase the supply of money by selling bonds. (c) increase the demand for money by buying bonds.
 (d) increase the demand for money by selling bonds.
2
6. If Congress raises taxes to fight inflation, then this would be an example of:
 (a) political business cycle
 (b) expansionary fiscal policy (c) discretionary fiscal policy
 (d) automatic stabilizers at work.
7. Monetary policy is having little impact on the economy today because:
 (a) the Fed began to lower interest rates more than three and a half years ago, so the
impact has worn off.
 (b) low interest rates have caused an “asset price bubble” in stocks, so money is
flowing into the stock market and not on spending on goods and services.
 (c) there is a “liquidity trap” where banks are not lending despite a big increase in
the supply of money.
 (d) the multiplier effect of monetary policy is small.
8. During an economic expansion:
 (a) Tax revenues go up and social welfare spending also goes up.
 (b) Tax revenues go up and social welfare spending goes down.
 (c) Tax revenues go down and social welfare spending also goes down.
 (d) Tax revenues go down and social welfare spending goes up.
9. The Federal Government had a budget surplus in 2001 but a budget deficit in 2002.
 This was due to the recession, the tax cut, and the increased military spending. The
change from a budget surplus to a budget deficit was due to:
 (a) neither cyclical nor structural factors.
 (b) cyclical factors but not structural ones.
 (c) structural factors but not cyclical ones.
 (d) both cyclical and structural factors.
10. The San Mateo County Community College District has a large budget surplus. This
means the district:
 (a) must cut taxes and/or raise spending to balance the budget.
 (b) would be able cut taxes and/or raise spending without causing a budget deficit.
 (c) must raise taxes and/or cut spending to balance the budget. (d) should raise taxes and cut spending to make the surplus even larger.
11. The set of fiscal policies that would be most contractionary would be a(n):
 (a) increase in government spending and a decrease in taxes (b) decrease in government spending and an increase in taxes.
 (c) increase in both government spending and taxes
 (d) decrease in both government spending and taxes
3
12. In 2001 there was a record amount ER S
of foreign purchases of U.S. stocks
and bonds. This increase in foreign
purchases of U.S. assets would cause
the U.S. Dollar to: er (a) appreciate (b) depreciate
(c) would not affect the ER D
(d) have a fixed exchange rate 0 q Q
13. Assume that the economy was in a recession and there was a budget deficit. Then a
strict requirement that the Federal government had to balance its budget:
 (a) would worsen the effects of the recession. (b) would have no effect on the recession.
 (c) would counter the effects of the recession.
 (d) is unnecessary since government budgets are in a surplus during recessions.
14. Fiscal policy involving cutting taxes and/or raising transfers for low-income
households will have a multiplier effect on total spending that is:
 (a) greater than an equal dollar change in taxes or transfers for high income
households.
 (b) less than an equal dollar change in taxes or transfers for high income
households.
 (c) the same as an equal dollar change in taxes or transfers for high income
households.
 (d) zero, only changes in government purchases have a multiplier effect.
15. Which of the following is NOT a significant cause of the U.S. public debt?
 (a) spending on wars (b) recessions
 (c) tax cuts
 (d) demand-pull inflation
16. Interest payments on which bonds that make up the U.S. public debt is considered to
be the greatest burden on the U.S. economy? Bonds:
 a) owned by Americans. b) owned by the Rest of the World.
 c) owned by the Social Security trust fund.
 d) owned by the Federal Reserve bank.
4
17. The United States has become a net debtor nation where the rest of the world owns
more assets in the United States than the United States owns assets in the rest of the
world. The United States external debt is directly caused by:
 (a) years of households borrowing more and more to buy expensive homes. (b) years of large U.S. Federal government budget deficits. (c) the low value of the U.S. dollar, which makes it cheap for the Rest of the World
to buy U.S. assets and expensive for Americans to buy assets in the Rest of the World.
 (d) years of large U.S. current account deficits
18. The U.S. was on a “gold standard” from 1879 to 1933. Which of the following was a
a major disadvantage of being on the gold standard from an economic point of view?
 (a) the fixed exchange rate made international trade and investment easier. (b) the price of gold varied according to how much gold the government bought.
 (c) countries on the gold standard could not do expansionary monetary policy (d) it causes the currencies on the gold standard to appreciate and makes their trade
deficits larger.
19. If Intel was manufacturing chips in the United States that were exported to China to
be made into cell phones for the Chinese market, but now is building a chip
manufacturing plant in China to provide chips to make cell phones in China for the
Chinese market, this action would directly:
 (a) increase imports to the United States (b) decrease imports to the United States
 (c) increase U.S. exports (d) decrease U.S. exports.
20. If the U.S. economy were to grow rapidly, this would:
 (a) increase both U.S. imports and economic growth in the Rest of the World. (b) decrease U.S. imports and increase economic growth in the Rest of the World. (c) increase U.S. imports and decrease economic growth in the Rest of the World.
 (d) decrease both U.S. imports and economic growth in the Rest of the World.
21. If the government had an easy money policy of lowering interest rates, then: (a) the U.S. dollar would appreciate, causing net exports to decrease.
 (b) the U.S. dollar would depreciate, causing net exports to increase. (c) the U.S. dollar would depreciate, causing net exports to decrease. (d) the U.S. dollar would appreciate, causing net exports to increase.
5
22. Which of the following is a possible negative result of the large U.S. external debt is:
 (a) that the U.S. government will default on bonds sold to the Rest of the World. (b) a soft landing where the U.S. dollar slowly depreciates that causes Aggregate
Demand to go up, leading to an expansion.
 (c) a hard landing where rapid depreciation of the U.S. dollar causes Aggregate
Supply to go down, causing stagflation.
 (d) that the U.S. will stop buying imports from the Rest of the World.
Please answer problems 23 and 24 on your test sheet on the next two pages.
23. Monetary Policy: In June of 2004 π
the Federal Reserve changed to a AS policy of monetary tightening to
counter rising inflation. Using what
you have learned in class,
show the impact of a Federal
Reserve Bank monetary tightening
on aggregate demand, output, and π
inflation using the aggregate
demand/aggregate supply diagram 0 Y
to the right. Be sure to show and y
label what happens to GDP and
inflation. (10 points total) AD
24. Fiscal Policy: (A) What are the three actions that the Federal Government can take
to fight recession using fiscal policy? (15 points)
 1. ___________________________________________________
 2. ___________________________________________________
 3. ___________________________________________________
(B) Given that the Federal budget was in a deficit, what would be the impact of the
Federal government acting to fight a recession on the federal budget? (5 points)

Midterm #4 is on Wednesday, April 30 and Friday, May 2nd. The midterm will cover
the following topics: banks and the business cycle (chapter 8, pp. 176-179; chapter 9, p.
196), monetary policy (chapter 10, pp. 205-222), government finance and the business
cycle (chapter 7, pp. 149-153), fiscal policy (chapter 7, pp. 144-149, 153-155),
government deficits and debt (chapter 7, pp. 155-159), Exchange Rates (chapter 12, pages
251-259), Trade Deficit (Reader, pp. 8-9), and External Debt (chapter 12, pp. 247-251,
Reader, pages 10-11). Please answer the following questions to prepare for the midterm.
1. Banks and the Business Cycle: Loans from commercial banks will tend to:
 (a) decrease during recessions and increase during recoveries, thus tending to
increase business cycle fluctuations.
 (b) increase during recessions and decrease during recoveries, thus tending to
reduce business cycle fluctuations.
 (c) change with the season, not over the course of the business cycle.
 (d) vary with the discount rate, which is the cost of borrowing from the Fed.
2. Banks and the Business Cycle: Why are bank panics such as those of 1930 to 1933
highly unlikely today?
3. Monetary Policy: What is the standard monetary policy response to a recession?
 Please explain the steps to this monetary policy, starting with the Federal Reserve open
market operation and ending with the impact on inflation and unemployment using an
aggregate demand/aggregate supply model. What is the Fed’s Quantitative Easing?
4. Monetary Policy: What are three problems with monetary policy?
5. Government Finance: How does the business cycle affect tax revenues and
government spending? How does the finance of the Federal government differ from that
of state and local government to changes in the business cycle?
6. Government Finance: The 1993 tax increase and limits on spending by the Clinton
administration, and the economic boom of the 1990s has led to a Federal government
budget surplus in the late 1990s after almost thirty years of deficits. Economists would
say that these surpluses were caused by:
 (a) cyclical and structural factors.
 (b) cyclical factors but not structural ones.
 (c) structural factors but not cyclical ones.
 (d) neither cyclical nor structural factors.
 2
7. Fiscal Policy: What are the government’s three policy options to fight inflation using
fiscal policy? What impact would this have on the federal budget?
8. Fiscal Policy: What is an automatic stabilizer? What are the limitations of automatic
stabilizers? What is the alternative fiscal policy?
9. Fiscal Policy: Some politicians are suggesting a constitutional amendment to require
the Federal Government to balance its budget every year. What is the economic problem
is this is enforced.
10. Government Deficits and Debt: What is the U.S. public debt? What are the historical
causes of the U.S. public debt? What is the burden of the debt?
11. Exchange Rates: There are signs that foreign investors are losing interest in U.S
stocks and bonds. Use a supply and demand graph of the foreign exchange market to
show the impact of on the exchange rate for US Dollars. Has the dollar appreciated or
depreciated?
12. Exchange Rates: What was the main advantage of the gold standard? What was the
main disadvantage?
Trade Deficit: What are the four main reasons for the growth of the U.S. trade
deficit?
14. External Debt: Where does the U.S. external debt come from? What are the two
ways the external debt could be resolved?
13.

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