MACRO ECON 101 PRACTICE QUESTIONS FOR THE FIRST EXAM

MACRO ECON 101 PRACTICE QUESTIONS FOR THE FIRST EXAM 1. If a level of production is feasible then: a) it is efficient b) it is inefficient c) it can be either efficient or inefficient d) it is on the PPF 2. Consider the following PPF: Wheat 0 10 20 30 40 Corn 1000 900 700 450 0 Which of the following statements is true? a) the opportunity cost of 1000 units of corn is 0 units of wheat b) the opportunity cost of 10 units of wheat is 100 units of corn c) the opportunity cost of 10 units of wheat is 900 units of corn d) the marginal opportunity cost of wheat is constant 3. If Brooklyn College tuition rises: a) the opportunity cost of attending Brooklyn College falls b) the opportunity cost of attending Brooklyn College rises c) the opportunity cost of attending Brooklyn College is unaffected because foregone earnings are unchanged d) the opportunity cost of attending Brooklyn College may rise or fall 4. If the minimum wage rises from $4.25/hr to 5.15/hr and the equilibrium wage is $5.30/hr, then: a) equilibrium employment will fall b) equilibrium employment will rise c) equilibrium employment will remain unchanged d) equilibrium employment may rise or fall 5. Suppose there is a cold winter in Florida. The most likely effect on the orange juice market is that: a) supply will fall, thereby lowering the equilibrium price b) supply will fall, thereby raising the equilibrium price c) demand will fall, thereby lowering the equilibrium price d) demand will fall, thereby raising the equilibrium price 6. “I used to wear both wool and polyester suits. However, the price of polyester suits has risen so much that now I only buy wool suits.” This statement implies that for this person: a) wool and polyester suits are both normal b) wool and polyester suits are both inferior goods c) wool and polyester suits are substitutes d) wool and polyester suits are complements 7. Assume that consumers view Brisas and Portabelos (two types of mushroom) as interchangeable. Suppose that a portion of the Brisa crop is destroyed by bad weather but the Portobelo crop is undamaged. Which of the following is likely to occur in the Portobelo market? a) equilibrium quantity and price will both fall b) equilibrium quantity will rise but equilibrium price will fall c) equilibrium quantity will fall but equilibrium price will rise d) equilibrium quantity and price will both rise 8. Suppose that the New York Post raises its price from $0.50 to $0.75 and its revenue rises although circulation falls slightly. This implies that the relevant region of the demand curve is: a) inelastic but not perfectly inelastic b) perfectly elastic c) perfectly inelastic d) elastic but not perfectly elastic 9. Now suppose that the New York Post raises its price from $0.50 to $0.75 and its revenue rises but circulation does not change. This implies that the relevant region of the demand curve is: a) inelastic but not perfectly inelastic b) perfectly elastic c) perfectly inelastic d) elastic but not perfectly elastic 10. Now suppose that the New York Post raises its price from $0.50 to $0.75 and its revenue falls. This implies that the relevant region of the demand curve is: a) inelastic but not perfectly inelastic b) perfectly elastic c) perfectly inelastic d) elastic 11. You can unambiguously predict an increase in the equilibrium price if: a) demand and supply both increase b) demand and supply both decrease c) demand increases and supply decreases d) demand increases and supply increases 12. If the unemployment rate increases from 10% to 12%, the: a) economy will move closer to the production possibility frontier b) economy will move farther away from the production possibility frontier c) economy will move up its production possibility frontier d) economy’s production possibility frontier will shift back and to the left 13. Which segment of the following scenario is part of the adjustment process when quantity demanded exceeds quantity supplied (i.e. there is excess demand)? a) price starts to fall b) quantity demanded rises c) quantity supplied rises d) demand shifts to the right 14. For an economy to produce at a point beyond its current PPF, the economy must: a) waste less b) be more efficient c) reduce inputs d) increase inputs 15. When Hurricane Andrew passed through Louisiana in the summer of 1992, approximately a quarter of the sugar cane crop was destroyed. Holding other factors constant: a) the supply of sugar has decreased and the price of sugar will increase b) the supply of sugar has decreased and the price of sugar will decrease c) the demand for sugar has increased and the price of sugar will increase d) the demand for sugar has decreased and the price of sugar will decrease 16. Which of the following will unambiguously occur when there is a simultaneous increase in supply and a decrease in demand? a) an increase in equilibrium price b) a decrease in equilibrium price c) an increase in equilibrium quantity d) a decrease in equilibrium quantity 17. Checking account balances (demand deposits) are included in: a) M1 only b) M2 only c) neither M1 nor M2 d) both M1 and M2 18. Net worth is: a) assets + liabilities b) assets + capital c) assets - capital d) assets - liabilities 19. The central bank of the United States is known as the: a) Federal Reserve System b) Federal Deposit Insurance Corporation c) Department of the Treasury d) Federal Savings and Loan Insurance Corporation 20. A checking deposit in a bank is considered of that bank. a) a liability b) an asset c) net worth d) capital 21. Dollar Bank has $500 million in deposits. Dollar Bank is meeting its reserve requirement and has no excess reserves. It has $125 million in reserves. Dollar Bank faces a required reserve ratio of: a) 1.25% b) 4% c) 20% d) 25% 22. Bank One has $100 million in reserves. Bank One is meeting its reserve requirements and has no excess reserves. The required reserve ratio is 20%. Bank One’s demand deposits are: a) $120 million b) $200 million c) $500 million d) $600 million 23. The difference between a bank’s actual reserves and its required reserves is equal to its: a) excess reserves b) required reserve ratio c) profit margin d) net worth 24. First Charter Bank faces a required reserve ratio is 30%. If a new deposit of $300 is made, the bank can initially expand loans by: a) $300 b) $90 c) $210 d) $100 25. Consider the figures from the previous question. The money supply will eventually expand by as much as: a) $100 b) $300 c) $2100 d) $1000 26. If the required reserve ratio is decreased, the money multiplier: a) decreases b) increases c) remains the same, as long as banks hold no excess reserves d) could either increase or decrease 27. Suppose that loan recipients choose to hold a fraction of their money in the form of cash. This will the size of the money multiplier. a) reduce b) increase c) have no effect on d) double 28. If the money multiplier is 2, the required reserve ratio is: a) 2% b) 20% c) 25% d) 50% 29. Which of the following instruments is NOT used by the Federal Reserve to change the money supply? a) the Federal tax code b) the required reserve ratio c) the discount rate d) open market operations 30. Which of the following represents an action by the Federal Reserve which is designed to decrease the money supply? a) buying government securities in the open market b) a decrease in the required reserve ratio c) a decrease in federal spending d) an increase in the discount rate 31. An open market purchase of securities by the Federal Reserve results in in reserves and in the supply of money. a) an increase; a decrease b) an increase; an increase c) a decrease; a decrease d) a decrease; an increase 32. The interest rate on bonds increases from 5% to 8%. This will cause: a) no change in optimal money balances because checking deposits don’t earn interest b) optimal money balances to increase because it raises the opportunity costs of holding money c) optimal money balances to decrease because it raises the opportunity cost of holding money d) optimal money balances to increase because it reduces the opportunity cost of holding money 33. If the quantity of money demanded is less than the quantity of money supplied, then the interest rate will: a) either increase or decrease, depending on the amount of excess demand b) increase c) decrease d) not change 34. An increase in the money supply, ceteris paribus, a) will decrease the interest rate b) will increase the interest rate c) will increase the excess demand for money b) will increase the demand for money 35. If there is an excess supply of money, then the interest rate: a) is below the equilibrium interest rate b) is above the equilibrium interest rate c) equals the equilibrium interest rate d) must be equal to 0 36. An increase in income: a) leads to an increase in the interest rate b) leads to a decrease in the interest rate c) will reduce money demand but will not affect the interest rate d) will increase the money supply, but will not affect the interest rate 37. The interest rate that banks are charged when they borrow reserves from other banks is the: a) commercial paper rate b) AAA corporate bond rate c) federal funds rate d) prime rate 38. If the interest rate falls: a) bond prices remain the same, but interest payments are made more frequently b) bond prices rise c) bond prices fall d) bond prices could either rise or fall depending on the magnitude of the decrease in the interest rate 39. Ed’s monthly starting balance is $3000. Ed spends $100 per day. Initially, Ed keeps all of his income in a non-interest earning checking account. Ed decided to change his strategy and at the beginning of each month he deposits one-third of his income into his checking account and buys two bonds with the remainder of his income. After ten days he cashes in one bond and after ten days after that he cashes in the other bond. Which of the following statements is TRUE? a) If Ed uses either strategy, his average monthly balance is $1500 b) The second strategy involves lower money management costs because Ed now earns interest on the bonds he has purchased c) Ed’s optimal money balance is $100 d) If the interest rate paid on bonds decreases, the opportunity cost of Ed’s original strategy is reduced 40. Tom’s optimal balances have decreased. This could have been caused by: a) a reduction in the costs paid for switching from bonds to money b) a decrease in the interest rate c) an increase in income d) an increase in the price of bonds ANSWERS TO THE SIXTH SET OF PRACTICE QUESTIONS FOR THE FIRST EXAM 1. c) A level of production is “feasible” if it can be produced. Such production points lie on or within the PPF. A point on the PPF is efficient and a point within the PPF is inefficient. 2. b) If wheat production is raised from 0 to 10 then corn production must fall from 1000 to 900. So the opportunity cost of 10 units of wheat is 100 units of corn. 3. b) Note that the opportunity cost of attending Brooklyn College includes both the direct costs (e.g. tuition and books) and the indirect costs such as foregone earnings. 4. c) Note that the minimum wage cannot affect the equilibrium wage (at least in the short run) because the equilibrium is given by the intersection of the supply and demand curves. However, it is somewhat reasonable to assume the question deals with the issue of how actual employment is affected by a minimum wage hike. As the original and new levels of the minimum wage are below the equilibrium, actual employment is not affected. 5. b) A cold winter in Florida will reduce orange juice production, thereby shifting the supply curve to the left. So equilibrium price will rise and equilibrium quantity will fall. 6. c) An increase in the price of one of the goods has increased the demand for the other. So the two goods are substitutes. 7. d) It is implicit that the two goods are substitutes. As some of the Brisa crop is destroyed the supply curve will shift to the left. As the price of Brisas is now higher the demand for Portabelos will rise, thereby raising the equilibrium quantity and price of Portabelos. 8. a) As the price increase has raised revenue demand is inelastic. However, as circulation fell demand is not perfectly inelastic. 9. c) In this case circulation does not change so demand is perfectly inelastic. 10. d) As an increase in price reduces revenue it follows that demand is necessarily elastic. However, as revenue is still positive demand is not perfectly elastic. If demand were perfectly elastic the Post would have no sales when its price rose. 11. c) Both an increase in demand and a decrease in supply will cause equilibrium price to rise. So if both occur simultaneously the equilibrium price will unambiguously rise. Note that a) and d) are identical but this is not a correct response. An increase in demand tends to raise equilibrium price but an increase in supply has the opposite effect. So the net effect is ambiguous. 12. b) In this case inputs are being less heavily utilized. The PPF is not affected. However, the economy moves further within the PPF because all productive factors are not being used. Note that the PPF only changes if there is a change in the level of technology or the amount of inputs available. 13. c) If there is excess demand the price starts to rise which causes quantity supplied to rise. Note that the supply curve is not shifting. Rather, firms move up along their existing supply curves. 14. d) If the economy is more efficient it will move closer to its existing PPF. The economy will only expand its PPF if more inputs are available or technology improves. 15. a) As the sugar crop was damaged the supply curve of sugar shifts to the left. The equilibrium price of sugar will rise. 16. b) Both an increase in supply and a decrease in demand will cause the equilibrium price to fall. So if both occur simultaneously equilibrium price will unambiguously fall. Note that the effect on equilibrium quantity is ambiguous. 17. d) Checking accounts are the most liquid asset (except perhaps cash) and are included in all of the monetary aggregates. 18. d) 19. a) 20. a) 21. d) The bank is keeping 25% of its deposits (125/500) in reserves. As it is loaned out we know that the bank has no excess reserves and is just satisfying its reserve requirements. So the required reserve ratio must be 25%. 22. c) If Bank One is just meeting its requirements then its reserves must be equal to 20% of its demand deposits. So 100/(0.2) = 500 23. a) 24. c) The bank is able to loan 70% (i.e. 100% - 30%) of the new demand deposit. It follows that ($300) (0.7) = $210. 25. d) The money multiplier is equal to 1/(0.3) = 10/3. So ($300) * (10/3) = $1000. 26. b) This must be true because the money multiplier is the reciprocal of the required reserve ratio. 27. a) The multiplier will go down because at each stage a certain fraction of each new loan will not be redeposited. So banks will receive smaller demand deposits and the money multiplier process will be weaker. This issue was dealt with in one of the questions in Problem Set 2. 28. d) The required reserve ratio is equal to the reciprocal of the money multiplier. As the money multiplier is 2, the required reserve ratio is equal to ½ = 50%. 29. a) The tax code is not controlled by the Federal Reserve. However, it is necessary to note that changes in taxes do not affect the money supply. 30. d) Note that a) and b) will raise the money supply and c) is a form of fiscal policy. 31. b) An open market purchase will increase bank reserves. Both demand deposits and reserves rise, but as banks are not obliged to keep all of them on reserve the banks now have excess reserves. So banks can now increase the volume of loans, thereby raising the money supply. 32. c) An increase in interest rates raises the opportunity cost of holding money because more interest income is foregone. This causes optimal money balances to decrease. 33. c) If the quantity of money demanded is less than the quantity supplied there will be excess supply of money. As the public attempts to hold a less liquid portfolio by buying bonds this pushes bond prices up, thereby reducing interest rates. 34. a) An increase in the money supply causes excess supply of money. This raises bond prices, thereby lowering interest rates. 35. b) If there is excess supply of money the public will attempt to become less liquid. This will raise bond prices and lower interest rates. Interest rates will continue to fall until the public is willing to hold the existing stock of money. 36. a) An increase in income will raise money demand. So the equilibrium interest rate will rise. 37. c) Note that the discount rate refers to the interest rate that the Fed charges banks to borrow from it. 38. b) An increase in bond prices will reduce interest rates. If interest rates are generally falling bond prices will rise. 39. d) Ed’s first portfolio is perfectly liquid. He holds no bonds. So a decrease in interest rates will reduce the opportunity cost of that strategy. 40. a) If the cost of buying and selling bonds falls Tom will choose to hold more bonds in his portfolio. He will therefore hold less money and have a less liquid portfolio. Note that the other three options would all cause him to increase his desired money holdings.