Question one 6 The Federal Reserve System a has no real powers b is completely centralized c has 12 districts d also has control over fiscal policy 7 The Federal Open Market Committee consists of the following voting members a the president and the Board of Governors b Congresspeople, Senators, and the Board of Governors c the Secretary of the Treasury and the Board of Governors d the Board of Governors and five district bank presidents 8 Power in the Federal Reserve System is primarily held by the a president and Congress b Secretary of the Treasury, who appoints the members of the Board of Governors c member banks through their shares d Board of Governors of the system 9 A deposit at an FDIC insured bank is covered up to a 20 percent of the bank's reserves b $100,000 c $250,000 d an infinite amount there is no limit 10 When the Fed purchases government securities from a commercial bank, the bank a loses its ability to make loans b automatically becomes poorer c loses equity in the Fed d receives reserves that can be loaned out 11 When the Fed wants to expand the money supply, it a sells government securities b buys government securities c buys common stock d sells common stock Table 12 1 EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars) BANKS FEDERAL RESERVE SYSTEM ASSETS LIAB ASSETS LIAB Reserves $10 U S Gov't Bank Reserves U S Gov't Sec $10 $10 Securities $10 12 In Table 12 1, if the required reserve ratio is 10 percent, potentially, what can happen to the money supply Use the oversimplified money multiplier in your calculations a The money supply will decrease by $10 million b The money supply will decrease by $100 million c The money supply will increase by $10 million d The money supply will increase by $100 million 13 Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities to banks Using the oversimplified money multiplier, the money supply could potentially a decrease by $500 million b increase by $100 million c decrease by $100 million d increase by $500 million 14 Although the Fed has very strong influence over the money supply, it does not have complete control a Because the Fed has no idea how much reserves will change when it buys or sells securities b Because of unpredictable changes in the public's desire to hold cash or borrow and banks' desires to hold reserves or lend c Because of unpredictable changes in reserve requirements d Because the FOMC meets only twice a year 15 When the Fed sells government securities to the banks, how does it usually receive payment for the securities a by accepting checks on bank accounts b by drawing money out of circulation c by decreasing member bank profits not distributed by the Fed d by decreasing reserves in bank accounts at the Fed 16 If the Fed buys $5 million in government securities, how much could the money supply change a It will increase by $5 million b It will increase by more than $5 million c It will decrease by $5 million d It will decrease by more than $5 million 17 As a knowledgeable investor in 2001, you should have realized that as interest rates fell, bond prices would a also fall b rise c become more volatile, like stock prices d fall but not by as much as stock prices 18 If the Fed raises the discount rate, what will be the effect on the money supply a It will decrease the money supply b It will increase the money supply c No change in the money supply d Not enough data to give an answer 19 If the Fed increases the required reserve ratio, how will this affect excess reserves and the money supply a Both will decrease b Excess reserves increase and the money supply decreases c Both will increase d Excess reserves decrease and the money supply increases 20 If you divide the amount of nominal GDP by the money supply, you have computed the a multiplier b price level c velocity of money d inflation rate 21 If the federal government had implemented a fiscal policy which mandated a balanced budget during the sag in personal spending in 2008 2009, the result could cause a(n) a increase in aggregate demand and inflation b increase in aggregate demand and unemployment c decrease in aggregate demand and more inflation d decrease in aggregate demand and longer recession 22 The national debt a is increased by budget surpluses b is the value of the government's indebtedness at a moment in time c exceeded $20 trillion in 2006 d All of the above are correct 23 If, in a particular fiscal year, the federal government receives $1,990 billion in revenues and spends $1,865 billion for goods and services, the national debt will a increase by $1,990 billion b increase by $125 billion c decrease by $125 billion d decrease by $1,865 billion 24 If the economy is in an inflationary gap, which of the following is the least appropriate policy mix a a budget surplus and expansionary monetary policy b a budget deficit and expansionary monetary policy c a budget deficit and contractionary monetary policy d a budget surplus and contractionary monetary policy 26 The economy's self correcting mechanism (market forces) a tends to push unemployment toward a specific point called the natural rate of unemployment b works better at correcting inflationary gaps than recessionary gaps c cannot work if the Phillips curve is vertical d ensures that the economy will not have to endure a long period of high unemployment 27 What will tend to happen to wages if workers and employers foresee inflation a Both parties will seek to reduce nominal wages and therefore keep real wages the same b Nominal wages will remain constant but real wages will increase to avoid the effects of inflation c Inflation erodes purchasing power of workers, and real wages are unchanged d Nominal wages will increase by an amount that keeps real wages constant 28 Potential GDP is an estimate of the economy's ability to produce goods and services if the a labor force is fully employed b price level is stable c trade balance is zero d federal budget is balanced 33 Bank reserves a equal vault cash c equal vault cash deposits at the Fed b must equal 20 of demand deposits d can include government securities 34 Which Federal Reserve District President always has a vote in the FOMC a Boston c San Francisco b New York d Washington, D C 35 Each Federal Reserve District has three directors representing each of the following groups except a stock brokers c Businesses b Bankers d Consumers 36 If bankers decide to keep a lower fraction of deposits on reserve, the money supply will a decrease b increase c remain unchanged d move more quickly through the economy 37 Which of the following is an example of money serving as a medium of exchange a Richard puts money into a piggy bank b Ellen deposits cash into a money market account c Sean puts a new $20 bill into his currency collection d Marian buys a carbo loaded drink before a marathon 38 Money is an imperfect store of value when a the rate of inflation is high b the unemployment rate is high c gold prices are falling d businesses are failing due to bankruptcy 39 The narrowest definition of the money supply (M1) includes a cash and travelers' checks b cash, travelers' checks, and savings account balances c cash, checking account balances, and travelers' checks d cash, bank deposits, and money market accounts 40 Most economists believe that monetary policy a is less important than fiscal policy b is more important than fiscal policy c and fiscal policy are equally important d and fiscal policy are both unimportant 41 Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves a are disliked by depositors b means lower profits for banks c are discouraged by government regulators d All of the above are correct 42 If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank's reserve position if the required reserve ratio is 20 percent a The bank has $500,000 of required reserves and $500,000 of excess reserves b The bank has $600,000 of required reserves and $400,000 of excess reserves c The bank has $400,000 of required reserves and $600,000 of excess reserves d The bank has $200,000 of required reserves and $800,000 of excess reserves 43 Which of the following would be an asset to a bank a A discount loan from the Fed b a checking account of a professor c a loan to a new business 44 If Ms Smith transfers $5,000 from her checking account to her savings account, then a M1 falls and M2 remains the same b M1 falls and M2 rises c both M1 and M2 rise d M1 remains the same and M2 rises 45 The Arizona Bank receives a new deposit of $2,500 The reserves requirement is 20 percent How much can this bank loan out as a result of this deposit a $12,500 b $10,000 c $2,000 d $2,500 46 If nominal GDP is $7,700 billion and M1 is $1,000 billion, then velocity is a 10 7 b 7 7 c 7 1 d 7 0 47 According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of 5), a 10 percent increase in the money supply will raise a nominal GDP by 10 percent b GDP by half that amount c nominal GDP by 50 percent d GDP by 20 percent 48 Which of the factors below contributed to the collapse of the Phillips curve in the 1970s a Economic research proved there was no relationship between inflation and unemployment rates b The U S government was running triple digit deficits in the 1970s, compounding the normal shifts in aggregate demand c The 1970s were full of adverse supply shocks such as the oil price increases of 1973 1974 d The aggregate demand curve shifted to the left at the end of the Vietnam War 49 If depositors become worried about the safety of their deposit accounts, they may trigger a a deposit surplus b fiscal policy crisis c bank run d required reserve increase Question 2 Production Problem 1 Consider the Cobb Douglas production function f(x,y) 12x0 4y0 8 (A) Find the intensities ( and 1 ) of the two factors of production Does this firm have decreasing, increasing, or constant returns to scale What percentage of the firm's total production costs will be spent on good x (B) Suppose the firm decides to increase its input bundle (x, y) by 10 That is, it inputs 10 more units of good x and 10 more units of good y What is the percent increase in output (C) Suppose the firm has a production quota of q 1000 units, and the firm inputs x 100 units of the first good How many units of the second good does it need to use to meet the quota (D) Assume the firm has a production quota of q 2000 units, and the input prices are (px,py) (7,19) Find the minimized cost C(2000) and the conditional factor demands (x,y) Problem 2 Consider the linear (perfect substitutes) production function f (x, y) 12 7x 19 4y (A) How many units of good y would be a perfect substitute for 1 unit of good x What is the slope of the firm's isoquants (B) Suppose the input prices are (px,py) (5,8) What is the slope of the isocost lines How much output does the firm get when it inputs $1 worth of good x How much output does the firm get when it inputs $1 worth of good y (C) Suppose this firm has a production quota of q 500 units Find the minimized cost C(500) and the corresponding conditional factor demands (D) Draw the firm's level 500 isoquant, as well as the isocost lines Indicate the cost minimizer on your diagram Problem 3 Consider the Leontiev (perfect complements) production function f (x, y) M in x , y 9 6 5 2 (A) How many units of good y would be a perfect complement for 1 unit of good x What is the equation of the firm's kink line (B) Assume the firm has a production quota of q 400 units Graph the firm's level 400 isoquant What are the coordinates of the kink (C) Suppose the input prices are (px,py) (16,9) Find the minimized cost C(400) What is the cost minimizing input bundle (x, y) (D) Give a complete geometric illustration of this firm's cost minimization On a single diagram, draw the firm's level 400 isoquant, the isocost lines, and the cost minimizing input bundle Problem 4 Suppose that a firm's production plan is (x, y, z) (102, 19, 957), and the market prices are (px , py , pz ) (10, 5, 1 25) How much profit would the firm make if it carried out this plan Problem 5 Suppose that a firm's production function is f(x,y) 20x0 7y0 3 Starting from the input bundle (x, y) (40, 60), how much extra output will the firm get if it increases x from 40 to 41 How many units of output will the firm lose if x decreases from 40 to 39 Problem 6 Suppose that the production of airframes (for aircraft) uses two inputs capital (good x) and labor (good y) The production function is f(x,y) xy Assume that the price of capital is $1 per unit, and the price of labor is $10 per unit The manufacturer wants to make 121,000 airframes Find the cost minimizing combination of capital and labor inputs

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Question one. 6. The Federal Reserve System a. has no real powers b. is completely centralized. c. has 12 districts. d. also has control over

Question one.

6. The Federal Reserve System

has no real powers

is completely centralized.

has 12 districts.

also has control over fiscal policy.

____7.The Federal Open Market Committee consists of the following voting members:

the president and the Board of Governors.

Congresspeople, Senators, and the Board of Governors.

the Secretary of the Treasury and the Board of Governors.

the Board of Governors and five district bank presidents.

____8.Power in the Federal Reserve System is primarily held by the

president and Congress.

Secretary of the Treasury, who appoints the members of the Board of Governors.

member banks through their shares.

Board of Governors of the system.

____ 9.A deposit at an FDIC-insured bank is covered up to

20 percent of the bank's reserves.

$100,000.

$250,000.

an infinite amount; there is no limit.

____ 10.When the Fed purchases government securities from a commercial bank, the bank

loses its ability to make loans.

automatically becomes poorer.

loses equity in the Fed.

receives reserves that can be loaned out.

____ 11.When the Fed wants to expand the money supply, it

sells government securities.

buys government securities.

buys common stock.

sells common stock.

Table 12-1

EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars)

BANKS

FEDERAL RESERVE SYSTEM

ASSETS

LIAB.

ASSETS

LIAB.

Reserves +$10

U.S. Gov't

Bank Reserves

U.S. Gov't

Sec. +$10

+$10

Securities -$10

____ 12.In Table 12-1, if the required reserve ratio is 10 percent, potentially, what can happen to the money supply? Use the oversimplified money multiplier in your calculations.

The money supply will decrease by $10 million.

The money supply will decrease by $100 million.

The money supply will increase by $10 million.

The money supply will increase by $100 million.

____ 13.Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities to banks. Using the oversimplified money multiplier, the money supply could potentially:

decrease by $500 million.

increase by $100 million.

decrease by $100 million.

increase by $500 million.

____ 14.Although the Fed has very strong influence over the money supply, it does not have complete control

Because the Fed has no idea how much reserves will change when it buys or sells securities.

Because of unpredictable changes in the public's desire to hold cash or borrow and banks' desires to hold reserves or lend.

Because of unpredictable changes in reserve requirements.

Because the FOMC meets only twice a year.

____ 15.When the Fed sells government securities to the banks, how does it usually receive payment for the securities?

by accepting checks on bank accounts

by drawing money out of circulation

by decreasing member bank profits not distributed by the Fed

by decreasing reserves in bank accounts at the Fed

____ 16.If the Fed buys $5 million in government securities, how much could the money supply change?

It will increase by $5 million.

It will increase by more than $5 million.

It will decrease by $5 million.

It will decrease by more than $5 million.

____ 17.As a knowledgeable investor in 2001, you should have realized that as interest rates fell, bond prices would

also fall.

rise.

become more volatile, like stock prices.

fall but not by as much as stock prices.

____ 18.If the Fed raises the discount rate, what will be the effect on the money supply?

It will decrease the money supply.

It will increase the money supply.

No change in the money supply.

Not enough data to give an answer.

____ 19.If the Fed increases the required reserve ratio, how will this affect excess reserves and the money supply?

Both will decrease.

Excess reserves increase and the money supply decreases.

Both will increase.

Excess reserves decrease and the money supply increases.

____ 20.If you divide the amount of nominal GDP by the money supply, you have computed the

multiplier.

price level.

velocity of money.

inflation rate.

____ 21.If the federal government had implemented a fiscal policy which mandated a balanced budget during the sag in personal spending in 2008-2009, the result could cause a(n)

increase in aggregate demand and inflation.

increase in aggregate demand and unemployment.

decrease in aggregate demand and more inflation

decrease in aggregate demand and longer recession.

____ 22.The national debt

is increased by budget surpluses.

is the value of the government's indebtedness at a moment in time.

exceeded $20 trillion in 2006.

All of the above are correct.

____ 23.If, in a particular fiscal year, the federal government receives $1,990 billion in revenues and spends $1,865 billion for goods and services, the national debt will

increase by $1,990 billion.

increase by $125 billion.

decrease by $125 billion.

decrease by $1,865 billion.

____ 24.If the economy is in an inflationary gap, which of the following is the least appropriate policy mix?

a budget surplus and expansionary monetary policy

a budget deficit and expansionary monetary policy

a budget deficit and contractionary monetary policy

a budget surplus and contractionary monetary policy

____ 26.The economy's self-correcting mechanism (market forces)

tends to push unemployment toward a specific point called the natural rate of unemployment.

works better at correcting inflationary gaps than recessionary gaps.

cannot work if the Phillips curve is vertical.

ensures that the economy will not have to endure a long period of high unemployment.

____ 27.What will tend to happen to wages if workers and employers foresee inflation?

Both parties will seek to reduce nominal wages and therefore keep real wages the same.

Nominal wages will remain constant but real wages will increase to avoid the effects of inflation.

Inflation erodes purchasing power of workers, and real wages are unchanged.

Nominal wages will increase by an amount that keeps real wages constant.

____ 28.Potential GDP is an estimate of the economy's ability to produce goods and services if the

labor force is fully employed.

price level is stable.

trade balance is zero.

federal budget is balanced.

____ 33.Bank reserves

equal vault cash

equal vault cash & deposits at the Fed

must equal 20% of demand deposits

can include government securities

____ 34.Which Federal Reserve District President always has a vote in the FOMC?

Boston

San Francisco

New York

Washington, D.C.

____ 35.Each Federal Reserve District has three directors representing each of the following groups except

stock brokers

Businesses

Bankers

Consumers

____ 36.If bankers decide to keep a lower fraction of deposits on reserve, the money supply will

decrease.

increase.

remain unchanged.

move more quickly through the economy.

____ 37.Which of the following is an example of money serving as a medium of exchange?

Richard puts money into a piggy bank.

Ellen deposits cash into a money market account.

Sean puts a new $20 bill into his currency collection.

Marian buys a carbo-loaded drink before a marathon.

____ 38.Money is an imperfect store of value when

the rate of inflation is high.

the unemployment rate is high.

gold prices are falling.

businesses are failing due to bankruptcy.

____ 39.The narrowest definition of the money supply (M1) includes

cash and travelers' checks.

cash, travelers' checks, and savings account balances.

cash, checking account balances, and travelers' checks.

cash, bank deposits, and money market accounts.

____ 40.Most economists believe that monetary policy

is less important than fiscal policy.

is more important than fiscal policy.

and fiscal policy are equally important.

and fiscal policy are both unimportant.

____ 41.Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves

are disliked by depositors.

means lower profits for banks.

are discouraged by government regulators.

All of the above are correct.

____ 42.If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank's reserve position if the required reserve ratio is 20 percent?

The bank has $500,000 of required reserves and $500,000 of excess reserves.

The bank has $600,000 of required reserves and $400,000 of excess reserves.

The bank has $400,000 of required reserves and $600,000 of excess reserves.

The bank has $200,000 of required reserves and $800,000 of excess reserves.

____ 43.Which of the following would be an asset to a bank?

A discount loan from the Fed.

a checking account of a professor

a loan to a new business

____ 44.If Ms. Smith transfers $5,000 from her checking account to her savings account, then

M1 falls and M2 remains the same.

M1 falls and M2 rises.

both M1 and M2 rise.

M1 remains the same and M2 rises.

___45.The Arizona Bank receives a new deposit of $2,500. The reserves requirement is 20 percent. How much can this bank loan out as a result of this deposit?

$12,500

$10,000

$2,000

$2,500

____ 46.If nominal GDP is $7,700 billion and M1 is $1,000 billion, then velocity is

10.7.

7.7.

7.1.

7.0.

____ 47.According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of 5), a 10 percent increase in the money supply will raise

nominal GDP by 10 percent.

GDP by half that amount.

nominal GDP by 50 percent.

GDP by 20 percent.

____ 48.Which of the factors below contributed to the collapse of the Phillips curve in the 1970s?

Economic research proved there was no relationship between inflation and unemployment rates.

The U.S. government was running triple-digit deficits in the 1970s, compounding the normal shifts in aggregate demand.

The 1970s were full of adverse supply shocks such as the oil price increases of 1973-1974.

The aggregate demand curve shifted to the left at the end of the Vietnam War.

____ 49.If depositors become worried about the safety of their deposit accounts, they may trigger a

deposit surplus.

fiscal policy crisis.

bank run.

required reserve increase.

Question 2.

Production

Problem 1. Consider the Cobb-Douglas production function f(x,y) = 12x0.4y0.8.

(A) Find the intensities ( and 1 ) of the two factors of production. Does this firm have decreasing, increasing, or constant returns to scale? What percentage of the firm's total production costs will be spent on good x?

(B) Suppose the firm decides to increase its input bundle (x, y) by 10%. That is, it inputs 10% more units of good x and 10% more units of good y. What is the percent increase in output?

(C) Suppose the firm has a production quota of q = 1000 units, and the firm inputs x = 100 units of the first good. How many units of the second good does it need to use to meet the quota?

(D) Assume the firm has a production quota of q = 2000 units, and the input prices are (px,py) = (7,19). Find the minimized cost C(2000) and the conditional factor demands (x,y).

Problem 2. Consider the linear (perfect substitutes) production function f (x, y) = 12.7x + 19.4y.

(A) How many units of good y would be a perfect substitute for 1 unit of good x? What is the slope of

the firm's isoquants?

(B) Suppose the input prices are (px,py) = (5,8). What is the slope of the isocost lines? How much output does the firm get when it inputs $1 worth of good x? How much output does the firm get when it inputs $1 worth of good y?

(C) Suppose this firm has a production quota of q = 500 units. Find the minimized cost C(500) and the corresponding conditional factor demands.

(D) Draw the firm's level-500 isoquant, as well as the isocost lines. Indicate the cost minimizer on your diagram.

Problem 3. Consider the Leontiev (perfect complements) production function f (x, y) = M in x , y . 9.6 5.2

(A) How many units of good y would be a perfect complement for 1 unit of good x? What is the equation of the firm's kink line?

(B) Assume the firm has a production quota of q = 400 units. Graph the firm's level-400 isoquant. What are the coordinates of the kink?

(C) Suppose the input prices are (px,py) = (16,9). Find the minimized cost C(400). What is the cost minimizing input bundle (x, y)?

(D) Give a complete geometric illustration of this firm's cost minimization. On a single diagram, draw the firm's level-400 isoquant, the isocost lines, and the cost minimizing input bundle.

Problem 4. Suppose that a firm's production plan is (x, y, z) = (102, 19, 957), and the market prices are (px , py , pz ) = (10, 5, 1.25). How much profit would the firm make if it carried out this plan?

Problem 5. Suppose that a firm's production function is f(x,y) = 20x0.7y0.3. Starting from the input bundle (x, y) = (40, 60), how much extra output will the firm get if it increases x from 40 to 41? How many units of output will the firm lose if x decreases from 40 to 39?

Problem 6. Suppose that the production of airframes (for aircraft) uses two inputs: capital (good x) and labor (good y). The production function is f(x,y) = xy. Assume that the price of capital is $1 per unit, and the price of labor is $10 per unit. The manufacturer wants to make 121,000 airframes. Find the cost-minimizing combination of capital and labor inputs.