DRY RUN EXAM NUMBER 2

ECON 2030: Principlis of Macroeconomics
Second Hour Exam
Any Semester, Pentamber 32, 2001
Prof. Roger W. Garrison ANSWERS

INSTRUCTIONS: Write your name and some nine-digit number on both the exam and the scan sheet. Answer all 33 questions. No penalty for guessing. On completing the exam, hand in the scan sheet and be prepared to show your exam and your Auburn I.D.

1. Are you wearing a hat or other headgear? (Answer d = 3 points)
A. Yes, I always wear a hat.
B. Yes, but the bill is in the back.
C. Yes, I had my barber carve nader for president in my hair, and it hasn't grown out yet.
D. No, I am not wearing a hat or other headgear.

2. The Federal Reserve is charged with managing the money supply, which currently amounts to about
A. $120 billion in currency and coin plus $500 billion in checking-account money.
B. $500 billion in currency and coin plus about $600 billion in checking-account money.
C. $600 billion in currency and coin plus about $120 in commercial bank reserves.
D. $120 billion in commercial bank reserves plus about $600 in checking-account money.

3. The fact that the money supply is much less than the dollar value of the economy's annual income or output is a simple reflection of the fact that
A. the velocity of money is greater than zero but less than one.
B. the velocity of money is considerably greater than one.
C. the required reserve ratio is considerably less than one.
D. the velocity of money is the reciprocal of the required reserve ratio.

4. The claim that in normal times, the velocity of money is stable and nearly constant
A. is accepted as true by neither Monetarists nor Keynesians.
B. is accepted as true by Monetarists but rejected as false by Keynesians.
C. is accepted as true by Keynesians and Monetarists alike.
D. is accepted as true by Keynesians but rejected as false by Monetarists.

5. Consider a period during which the level of real output is trending upward. If there is no change in the money supply and the velocity of money is constant, then we would expect to see
A. a downward trend in prices.
B. an upward trend in prices.
C. a decreased use of cash relative to checking-account money.
D. an increased use of cash relative to checking-account money.

6. An increase in the velocity of money can be understood as
A. a decrease in money hoards, which puts upward pressure on prices.
B. an increase in money hoards, which puts upward pressure on prices.
C. a decrease in money hoards, which puts downward pressure on prices.
D. an increase in money hoards, which puts downward pressure on prices.

7. The actual production of US currency is accomplished
A. exclusively by the Federal Reserve Bank of New York.
B. by each of the Federal Reserve Banks.
C. by the Department of Commerce, which oversees the nation's commercial banks.
D. by the Bureau of Engraving and Printing, which is housed in the Department of the Treasury.

8. Thinking in terms of the equation of exchange and using Keynesian imagery, we can say that a waning of the animal spirits is most directly represented by

A. an increase in Q.

B. an increase in V.

C. a decrease in Q.

D. a decrease in V.

9. The claim that, in the long run, changes in the price level are almost exclusively attributable to changes in the money supply
A. is accepted and emphasized by both Monetarists and Keynesians.
B. is accepted as true by neither Monetarists nor Keynesians.
C. is accepted as true by Monetarists but is rejected-or ignored-by Keynesians.
D. is seen as an important truth by Keynesians but is seen as a trivial truth by Monetarists.

10. Suppose that unrest in the Middle East causes a reduction in the supply of oil flowing to the U.S., which leads to a 20% increase in the price of oil. Economists who accept the quantity theory of money will claim that
A. prices in general will rise because everything depends upon (is related to) oil.
B. the Federal Reserve should increase the money supply so that people can pay the higher gas prices.
C. whatever the Fed does, there will be substantial inflation--although not a 20% inflation rate.
D. there will be no inflation in the U.S. so long as the Fed does not increase the money supply.

11. The Federal Reserve System, which was created
A. just after the civil war, consists of 12 regional banks.
B. just after the civil war, consists of 18 regional banks.
C. just before WWI, consists of 12 regional banks.
D. just before WWI, consists of 18 regional banks.

12. The ratio of Reserves-to-Deposits, symbolized by R/D, is a ratio for which the Federal Reserve sets
A. both a minimum and a maximum value.
B. neither a minimum nor a maximum value.
C. a minimum value but no maximum value.
D. a maximum value but no minimum value.

13. The Federal Reserve often increases the money supply by "engaging in open market operations." That is,
A. the Fed increases the discount rate to decrease the commercial banks' willingness to make loans.
B. the Fed decreases the discount rate to increase the commercial banks' willingness to make loans.
C. the Fed sells Treasury bills that didn't even exist before it sold them.
D. the Fed buys Treasury bills with money that didn't even exist before the purchase was made.

14. There are three distinct policy tools, but these tools are all alike in that they constitute different ways
A. of changing the required reserve ratio.
B. of lending money into existence.
C. of transferring public debt to the central bank.
D. of adding to the banking system's total reserves.

15.Suppose we observe that the market price of a one-year Treasury bill whose value-at-maturity is $10,000 has fallen from $9,444 to $9,333. This price change may be the consequence of
A. increased Treasury borrowing, which puts downward pressure on interest rates.
B. decreased Treasury borrowing, which puts downward pressure on interest rates.
C. increased Treasury borrowing, which puts upward pressure on interest rates.
D. decreased Treasury borrowing, which puts upward pressure on interest rates.

16. Suppose the government decides to "honor hard work by raising the minimum wage." As a consequence, many would-be employees may become self-employed by entering the growing arts-and-crafts business. Since sellers at arts-and-crafts fairs deal primarily in cash, the growth of this sector of the economy will
A. cause the money supply to rise, assuming the Federal Reserve takes no counteraction.
B. cause the money supply to fall, assuming the Federal Reserve takes no counteraction.
C. have no effect on the money supply, even if the Federal Reserve takes no counteraction.
D. lead to a slight increase in the general price level, no matter what the Federal Reserve does.

17. The Minnesota Federal Reserve Bank offers an economics literacy test in which one question is: "What would happen to employment if the government mandated a minimum wage above what employers currently pay?" The correct answer, as reported by the Minnesota Fed, is

A. employment would go up.	C. employment would stay the same.
B. employment would go down.	D. employment may go up or go down.

18. The so-called "Federal-Funds Rate" is the rate of interest that
A. the U.S. Treasury pays to borrow money from the Federal Reserve.
B. commercial banks pay when they borrow directly from the Federal Reserve.
C. the U.S. Treasury pays on T-bills held by pension funds and other private non-bank institutions.
D. commercial banks pay when they borrow from other commercial banks to meet their reserve requirements.

19. For the past six months, the Discount Rate has been set at

A. 5.5%

B. 6.0%

C. 6.5%

D. 7.0%

20. For the past six months, the Federal Funds Rate has been kept in the vicinity of

A. 5.5%

B. 6.0%

C. 6.5%

D. 7.0%

By the time you finally earn your Ph.D. in Economics, the money supply may have grown to $2,000 billion-with $800 billion in the form of currency and coin. Let's assume that the required reserve ratio is still 0.20 and that banks are not holding any excess reserves. Soon after graduation, you take a job at the Federal Reserve and people lose their confidence in the banking system. They immediately make withdrawals in the amount of $40 billion. Use this information to answer the following four questions.

21. Before the $40 billion of withdrawals were made, the total reserves in the banking system stood at

A. $640 billion.

B. $440 billion.

C. $240 billion.

D. $140 billion.

22. Absent Federal Reserve counteraction, the withdrawals will cause the money supply

A. to increase to $2,040 billion.	C. to increase to $2,160 billion.
B. to decrease to $1,840 billion.	D. to decrease to $1,960 billion.

23. The Federal Reserve could counteract the loss-of-confidence effect on the money supply by

A. buying $32 billion worth of T-bills.	C. buying $40 billion worth of T-bills.
B. selling $32 billion worth of T-bills.	D. selling $40 billion worth of T-bills.

24. Alternatively, the Federal Reserve could counteract the withdrawals by (You don't need a calculator)
A. increasing the required reserve ratio to 24.17%
B. increasing the required reserve ratio to 21.47%
C. increasing the required reserve ratio to 27.14%.
D. decreasing the required reserve ratio to 17.24%.

25. The legislation that created the Federal Reserve System included a provision for making the central bank independent. The independence supposedly follows from the fact that
A. Fed officials are prohibited from communicating directly with the President or the Treasury Secretary.
B. each of the Federal Reserve Banks can formulate and implement its own monetary policies.
C. the seven members of the Board of Governors serve staggered fourteen-year terms.
D. Federal Reserve policy based on narrow political objectives is strictly prohibited by the judiciary.

26. According to the Monetarists, there was downward pressure on prices and wages during the Hoover administration and the first Roosevelt administration because
A. neither Hoover nor Roosevelt was aggressive enough in implementing the appropriate fiscal policies.
B. the Federal Reserve had allowed the money supply to collapse.
C. surplus output from the "roaring '20s" had made most all goods cheap.
D. there was an increased tendency on the part of the public to hoard money.

27. In the worst years of the Great Depression, the government orchestrated the burning of potatoes, the killing of piglets, and the plowing under of cotton in order to
A. keep the prices of those commodities from falling.
B. make the prices of those commodities more flexible.
C. ensure a fair price of those commodities to consumers.
D. avoid the inflation that selling those commodities at high market-clearing prices would entail.

28. In 1960, John Kennedy claimed that America had entered upon a new era-meaning that the Democrats had
A. committed themselves to the Equal Rights Amendment.
B. promised to reject Keynesianism once and for all.
C. discovered a contradiction in Roosevelt's view of the economy.
D. realized that space exploration could take the place of war as an object of government expenditure.

29. Faced with rising budget deficits and an upcoming election (1964), Lyndon Johnson undertook to
A. increase government spending and cut taxes.
B. raise taxes to cover the rising government spending.
C. cut government spending in low-priority areas.
D. establish an effective ceiling on government spending.

30. If the Federal Reserve were to adopt the goal of a constant money supply, it could achieve this goal by
A. by taking the discount rate as the appropriate target for the federal funds rate.
B. by buying Treasury bills when the interest rate falls and selling them with it rises.
C. by forbidding banks to hold excess reserves.
D. by using any or all of its policy tools to offset changes induced by the behavior of banks and their depositors.

31. Suppose that new taxes on tobacco products cause the tax-included price of cigarettes to double. Microeconomists would predict that the quantity of tobacco products bought will fall only slightly and that total spending on cigarettes will more-than-double. Monetarists would claim that the tax will
A. result in a slightly higher rate of inflation.
B. cause the Federal Reserve to undertake compensatory policy actions.
C. have no effect on the general price level.
D. result in a slightly higher velocity of money.

32. The rate of unemployment, widely publicized on Friday of this month,

A. held at 3.9 %.

B. rose to 4.0 %.

C. rose to 4.1 %.

D. rose to 4.2 %.

33. Did you bring your Auburn I.D. today?
A. Yes, I brought it.
B. No, I didn't even know that I was supposed to bring it.
C. No, I knew I was supposed to bring it but I forgot.
D. No, I chewed mine to pieces while watching the election returns.