ECON 205- PRINCIPLES OF MACROECONOMICS
REVIEW QUESTIONS FOR SECOND MIDTERM
SHORT- ANSWER QUESTIONS
1. Identify
each of the following acts as representing either saving or investment.
a. Fred uses
some of his income to buy government bonds.
b. Julie
takes some of her income and buys mutual funds.
c. Alex
purchases a new truck for his delivery business using borrowed funds.
d. Elaine
uses some of her income to buy stock in a major corporation.
e. Henrietta
hires a builder to construct a new building for her bicycle shop.
2. Explain
why the demand for loanable funds slopes downward and why the supply of
loanable funds slopes upward.
3. In a
closed economy, GDP is $1000, government purchases are $200, and consumption is
$700. If the government has a budget surplus of $25, what are investment,
taxes, private saving, and national saving?
4. What’s
the difference between firm-specific risk and market risk? Will diversification
eliminate one or both? Explain.
5. Draw
graphs showing the following three relationships.
1. The
relation between utility and wealth for a risk averse consumer.
2. The
relation between standard deviation and the number of stocks in a portfolio.
3. The
relation between return and risk.
6. Jack’s
Lock and Key is considering remodeling. It estimates that the remodeling will
cost $6,000 and that as a result revenues will rise by $3,000 the first year,
$2,500 the second year, $1,500 the third year and have no effect after then. If
the interest rate is 5%, should Jack’s remodel? Defend your answer by showing
your work.
7. Your boss
asks you to do fundamental analysis of a corporation. What value is she asking
for and how would you estimate this value? Why might someone be willing to pay
more than the fundamental value for a stock?
MULTIPLE CHOICE QUESTIONS
Scenario 1. Assume the following information for an
imaginary, closed economy.
GDP = $5 trillion; consumption = $3.1 trillion; government
purchases = $0.7 trillion; and taxes = $0.9 trillion.
1. Refer to
Scenario 1. For this economy, investment amounts to
a. $0.4
trillion.
b. $2.1
trillion.
c. $1.7
trillion.
d. $1.2
trillion.
2. Refer to
Scenario 1. For this economy, public saving is equal to
a. $0.2
trillion and the government is running a budget surplus of $0.2 trillion.
b. $0.2
trillion and the government is running a budget deficit of $0.2 trillion.
c. -$0.2
trillion and the government is running a budget deficit of $0.2 trillion.
d. -$0.2
trillion and the government is running a budget surplus of $0.2 trillion.
3. Refer to
Scenario 1. For this economy, private saving is equal to
a. $0.3
trillion.
b. $1.2
trillion.
c. $1.0
trillion.
d. $1.7
trillion.
4. Refer to
Scenario 1. For this economy, national saving is equal to
a. $1.1
trillion.
b. $2.9
trillion.
c. $1.2
trillion.
d. $1.7
trillion.
5. Refer to
Scenario 1. Suppose, for this economy, the relationship between the real
interest rate, r, and investment, I, is given by the equation I = 10.78 –
3.03r. (If, for example, r = 10, this means that the real interest rate is 10
percent.) The equilibrium real interest rate for this economy is
a. 3.19
percent.
b. 3.00
percent.
c. 3.16
percent.
d. 7.14
percent.
6. In
answering which of the following questions would you find it necessary to
calculate a present value?
a. Should
Jane put $1,000 today into a 5-year certificate of deposit that pays 4 percent
annual interest?
b. Should
ABC Corporation buy a factory today for $2 million, knowing that the factory
will yield the corporation $3 million after 5 years?
c. If Jill
puts $5,000 today into a bank account that pays 3 percent interest, then how
much will she have in the account after 2 years?
d. You would
find it necessary to calculate a present value in order to answer all of these
questions.
7. You
deposit $3,000 into an N–year certificate of deposit that pays 4.5 percent
annual interest, and at the end of the N years you have $4,082.59. What is the
number of years, N?
a. 4
b. 5
c. 6
d. 7
Labor Data for Aridia – Table 1
Year 2010 2011 2012
Adult population 2,000 3,000 3,200
Number of employed 1,400 1,300 1,600
Number of unemployed 200 600 200
8. Refer to
Table 1. The labor force of Aridia
a. increased
both from 2010 to 2011 and from 2011 to 2012.
b. increased
from 2010 to 2011 but decreased from 2011 to 2012.
c. decreased
from 2010 to 2011 but increased from 2011 to 2012.
d. decreased
both from 2010 to 2011 and from 2011 to 2012.
9. Refer to
Table 1. The number of adults not in the labor force of Aridia in 2010 was
a. 200.
b. 400.
c. 600.
d. 1,800.
10. Refer to
Table1. The unemployment rate of Aridia in 2012 was
a. 6.25%.
b. 11.1%.
c. 12.5%.
d. 56.25%.
11. Suppose
the banking system currently has $300 billion in reserves, the reserve
requirement is 5 percent, and excess reserves are $30 billion. What is the
level of loans?
a. $270 billion
b. $5,400 billion
c. $6,000 billion
d. $5,100 billion
12. If the
federal funds rate were above the level the Federal Reserve had targeted, the
Fed could move the rate back towards its target by
a. buying bonds. This buying would reduce reserves.
b. buying bonds. This buying would increase reserves.
c. selling bonds. This selling would reduce reserves.
d. selling bonds. This selling would increase reserves.
13. If the
reserve ratio is 15 percent, and banks do not hold excess reserves, and people
hold only deposits and no currency, then when the Fed sells $25.5 million worth
of bonds to the public, bank reserves
a. increase by $25.5 million and the money supply eventually
increases by $382.5 million.
b. increase by $25.5 million and the money supply eventually
increases by $170 million.
c. decrease by $25.5 million and the money supply eventually
decreases by $382.5 million.
d. decrease by $25.5 million and the money supply eventually
decreases by $170 million.
14. If a bank
uses $500 of excess reserves to make a new loan when the reserve ratio is 8
percent, this action by itself initially makes the money supply
a. and wealth increase by $500.
b. and wealth decrease by $500.
c. increase by $500 while wealth does not change.
d. decrease by $500 while wealth decreases by $500.
15.Which of the following statements is correct? In the
special case of the 100-percent reserve banking the money multiplier is
a. 0 and banks create money.
b. 0 and banks do not create money.
c. 1 and banks create money
d. 1 and banks do not create money.
