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Homework answers / question archive / University of California, Santa Barbara  ECON 2 Final Exam 1)According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also either a rise in output or a rise in the rate at which money changes hands
University of California, Santa Barbara  ECON 2
Final Exam


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2. Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day and had a productivity of 2.5. Country B has a population of 800, of whom 560 worked 8 hours a day and had productivity of 3.0. The country with the higher real GDP was

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3. Suppose that the adult population is 6 million, the number of employed is 3.8 million, and the laborforce participation rate is 70%. What is the unemployment rate? a. 6.7%

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4. Suppose the price index was 100 in 2004, 118 in 2005, and the inflation rate was lower between 2005 and 2006 than it was between 2004 and 2005. This means that a. the price index in 2006 was lower than 118.

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5. The U.S. real GDP for 2014 is 16 trillion dollars. Approximately 10% of the U.S. real GDP is collected by the government through its tax collections. The underground or “shadow” economy is estimated to be between 8% and 14% of real GDP. Given this information, the underground economy costs the government taxing authorities to lose approximately a. 128 billion dollars to 224 billion dollars.

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6. Which of the following statements are true? 
Scenario 262. Assume the following information for an imaginary, closed economy.
GDP = $200,000; consumption = $120,000; government purchases = $35,000; and taxes = $25,000.
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7. Refer to Scenario 262. Suppose, for this economy, the relationship between the real interest rate, r, and investment, I, is given by the equation I = 69,000 – 3,000r. (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. 6 percent.


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8. Which of the following events will lead to an increase in money demand?


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9. A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first? a. 7 percent


____ 10. What is the lowest interest rate at which you would prefer $100,000 today over $105,000 tomorrow? a. 3%
Table 237
The table below contains data for the country of Togogo. The base year is 1974.


Year 
Nominal GDP 
GDP Deflator 


1974 
$2000 
100 


1975 
$3000 
120 


1976 
$3750 
150 


1977 
$6000 
200 


____ 11. Refer to Table 237. From 1976 to 1977,
____ 12. If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves
____ 13. The nominal interest rate for a consumer loan lasting from 2007 to 2008 is 8.5 percent and the real interest rate is 4.5 percent. If the consumer price index was 200 in 2007, what would the consumer price index value be in 2008? a. 192
____ 14. During the recent financial crisis velocity decreased. This means that the rate at which money changed hands
____ 15. Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the
____ 16. The CPI was 100 in 2000 and 108 in 2001. Dorgan borrowed money in 2000 and repaid the loan in 2001. If the nominal interest rate on the loan was 12 percent, then the real interest rate was a. 2 percent
____ 17. Suppose that some people report themselves as unemployed when, in fact, they are working in the underground economy. If these persons were counted as employed, then
____ 18. Suppose money the supply is declining at 6%, the velocity of declines by 2%, and real GDP is declining at 3%. What is inflation? a. 5%
____ 19. Which of these is NOT a way that the Fed can control the money supply?
____ 20. A newspaper article informs you that most businesses reduced production in the last quarter but also sold from their inventories during the last quarter. Based on this information GDP likely a. increased.
____ 21. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is
____ 22. You find $1,000 under your mattress and decide to deposit it into a bank rather than hold onto it. If the reserve requirement is 5%, at most, how much money can be created from your deposit? a. $1,000
____ 23. Tom invests $1,500 at an interest rate of 5%. During this time the price of a laptop computer rose from $1,500 to $1,560. What does this tell us about inflation and Tom’s real return 1 year after his investment? a. Inflation was 6%, and Tom’s real rate of return was 1%
____ 24. An American retailer purchased 100 pairs of shoes from a company in Denmark in the second quarter of 2010 but does not sell them to a consumer until the third quarter of 2010. In which quarter(s) is (are) the value of the shoes included in U.S. GDP?
____ 25. What is the value of receiving $2 every year forever at an interest rate of 0.2%?
____ 26. If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by
____ 27. Suppose some country had an adult population of about 25 million, a laborforce participation rate of 60 percent, and an unemployment rate of 6 percent. How many people were employed? a. 0.9 million
____ 28. Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium
Table 234
The country of Caspir produces only cereal and milk. Quantities and prices of these goods for the last several years are shown below. The base year is 2008.
Prices and Quantities
Year 
Price of Cereal 
Quantity of Cereal 
Price of Milk

Quantity of Milk 
2008 
$4.00 
90 
$1.50 
150 
2009 
$4.00 
100 
$2.00 
180 
2010 
$5.00 
120 
$2.50 
200 
2011 
$6.00 
150 
$3.50 
200 
____ 29. Refer to Table 234. This country’s output grew
____ 30. You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to have today?
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31. An instantaneous 6% increase in the velocity of money and a 3% decrease in the money supply would cause a: a. Increase in the price level of 3%

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32. A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is a. no less than 4.53 percent.

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33. A Texas household receives a Social Security check for $500, which it uses to purchase a $460 television made in Korea by a Korean firm and a $40 dinner at a local restaurant. As a result, U.S. GDP a. does not change.

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34. If the US economy quadruples in size in 35 years, what is the approximate average annual growth rate of GDP? a. 2%

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35. The purchase of rice produced this period is included in GDP if the rice is

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36. Alice says that the present value of $700 to be received one year from today if the interest rate is 6 percent is 
less than the present value of $700 to be received two years from today if the interest rate is 3 percent. Beth says that $700 saved for one year at 6 percent interest has a smaller future value than $700 saved for two years at 3 percent interest.
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37. Suppose you win a small lottery and you are given the following choice: You can (1) receive an immediate payment of $10,000 or (2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is a. 2 percent, but not if the interest rate is 3 percent.

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38. The manager of the bank where you work tells you that the bank has $400 million in deposits and $340 million dollars in loans. The Fed then raises the reserve requirement from 10 percent to 15 percent. Assuming everything else stays the same, how much is the bank holding in excess reserves after the increase in the reserve requirement? a. $0

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39. If real GDP is $2 billion, nominal GDP is $3 billion, the money supply (M1) is $1 billion, then what is velocity?

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40. In the loanable funds model, an increase in an investment tax credit would create a

interest rate.
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