PART A: Multiple Choice questions Each question is worth 3 points 1. Which of the following is true about the discount rate? a) It is, by denition, always equal to the Federal Funds rate. b) It is the rate at which the FED lends or borrows money (in transactions with commercial banks). c) It is one of the FED's policy instruments d) (b) and (c) are both correct. e) None of the above is correct. 2. Consider a labor market with aggregate demand given by Ln = 200 10w (1:; is the wage) and aggregate supply given by L5 : 40 + 10ml Assume that the government enforces a minimum wage law an the minimum wage is set at u'} = 10. Which of the following is correct? a) The unemployment is 20.5 percent b) The unemployment is 25.5 percent c) The unemployment is 28.5 percent. d) Unemployment is zero I 3. Consider a coupon bond with maturity date n : 2, coupon of 10, interest rate of 5 percent, and face mlue of 50. What is the price of this coupon bond? a) $71.25 b) $63.95 c) $6115 d) $5485 4. The college premium in the United States has _ over time, and the main reason is the a) increased; skilled-biased technological change b) increased; increase in the supply of college graduates c) increased; adverse selection in labor markets d) decreased; increase in the supply of college graduates 5. Which of the following leads to a steeper Aggregate Demand curve? a) Firms' price setting behavior becomes more sensitive to changes in short-run output b) Firms' investment decisions become less sensitive to changes in the real interest rate c) Firms' investment decisions become more sensitive to changes in the real interest rate d) The monetary policy rule becomes more sensitive to changes in ination 6. Consider two types of Treasury bonds with a common face value of $1,000 The rst type of bonds have maturity n = l and trade at price p1 = 970; the second type have maturity n = 2 and trade at price pg = 950. Which of the following is true? a) The rst type of bonds has a lower yield to maturity b) The first type of bonds has a higher yield to maturity c) The two types of bonds have the same yield to maturity since they promise an equal payment of $1,000 on their perspective maturity date d) It is impossible to calculate the yield to maturity with the given information 7. If workers are laid off due to a negative demand shock, this is referred to as 7 unemployment? a) frictional b) cyclical c) structural d) separation 8. How could the liquidity premium theory of the term structure of interest rates explain a at yield curve? a) Investors expect short-term interest rates to decrease in the future b) Investors expect short-term interest rates to stay constant in the future c) Long-term bonds can be perfectly substituted with shortterm bonds d) The demand for long-term and short-term bonds is the same e) Both (b) and (d) are correct 9. Inspection of historical data reveals that the yield to maturity on municipal bonds is (often) lower than the yield to maturity on government bonds. This observation is: a) Reasonable when viewed from a risk perspective, because municipal bonds are safer than government bonds b) Reasonable when viewed from a risk perspective, because municipal bonds are riskier than government bonds c) Puzzling when viewed from a risk perspective, yet it can be rationalized by the superior liquidity of municipal bonds d) Puzzling when viewed from a risk perspective, yet it can be rationalized by the favorable tax treatment of municipal bonds 10, The FED plans to raise interest rates From this information you conclude that a) Shortru.n output will fall as the IS curve shifts to the left pushing the economy towards a recession b) Short-run output will rise as the IS curve shifts to the right pushing the economy towards an expansion c) Short-run output will fall along the IS curve pushing the economy towards a reces- 51011 d) Shortvrun output will rise along the IS curve pushing the economy towards an expansion
