Economics 1 Department of Economics

Principles of Macroeconomics New York University

Prof. McIntyre Spring 2024

Exam 2, Thursday, April 11, 2024

Version – A – Answers
Directions:
Fill out the Bubble Sheet with your official NYU name (from your NYU ID) and the exam
version letter.
Put all your answers on the bubble sheet using a blue or black pen or pencil.
Only the bubble sheet is collected and graded.
Choose the best answer. You have 70 minutes to complete this exam.

1. For a closed economy, GDP is $12 trillion, consumption is $7 trillion, taxes net of transfers are $3
trillion, and the government runs a deficit of $1 trillion. What are private saving and national
saving?
A. $5 trillion and $3 trillion, respectively
B. $5 trillion and $1 trillion, respectively
C. $2 trillion and $3 trillion, respectively
D. $2 trillion and $1 trillion, respectively
ANSWER:

2. The Eye of Horus incense company has $10 million in cash, which it has accumulated from
retained earnings. It was planning to use these resources to build a new factory. Recently, the rate
of interest has increased. The increase in the rate of interest should
A. not influence the decision to build the factory because The Eye of Horus doesn't have to
borrow any money.
B. not influence the decision to build the factory because its stockholders are expecting a new
factory.
C. make it more likely that The Eye of Horus will build the factory because a higher interest rate
will make it more valuable.
D. make it less likely that The Eye of Horus will build the factory because the opportunity cost
of the $10 million is now higher.
ANSWER:

3. If there is a surplus of loanable funds, then

A. the supply for loanable funds shifts right, and the demand shifts left.
B. the supply for loanable funds shifts left, and the demand shifts right.
C. neither curve shifts, but the quantity of loanable funds supplied increases, and the quantity
demanded decreases as the interest rate rises to equilibrium.
D. neither curve shifts, but the quantity of loanable funds supplied decreases, and the quantity
demanded increases as the interest rate falls to equilibrium.
ANSWER:

4. Suppose the government were to replace the income tax with a consumption tax so that the
interest paid to private savings was no longer taxed. The result would be that the interest rate
A. and investment both would increase.
B. and investment both would decrease.
C. would increase, and investment would decrease.
D. would decrease, and investment would increase.
ANSWER:
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5. Other things the same, if the government increases transfer payments to households, then the
effect of this on the government’s budget
A. will make investment rise.
B. will make the rate of interest rise.
C. will make public saving rise.
D. All of the above are correct.
ANSWER:

6. Which of the following are the effects of an increased government budget deficit?
A. the supply of loanable funds does not change; a higher interest rate reduces private saving
B. the supply of loanable funds does not change; a higher interest rate raises private saving
C. at any interest rate, the supply of loanable funds is less; a higher interest rate reduces private
saving
D. at any interest rate, the supply of loanable funds is less; a higher interest rate raises private
saving
ANSWER:

7. Two bonds have the same coupon payments, the same face value and the same term. The first was
issued by a state government and the probability of default is believed to be low. The other was
issued by a corporation and the probability of default is believed to be high. Which of the
following is correct?
A. Because they have the same term to maturity, the internal rate of return should be the same.
B. Because of the differences in risk, the state bond should have a higher internal rate of return.
C. Because of the differences in risk, the corporate bond should have a higher internal rate of
return.
D. It is not possible to say if one bond has a higher internal rate of return than the other.
ANSWER:

8. Suppose a certain bond pays a coupon of $50 one year from today, a coupon of $50 two years
from now, and $1000 two years from now. What is the bond's price if the interest rate is 5
percent?
A. $1,050.00
B. $1,045.35
C. $1,000.00
D. $945.35
ANSWER:

9. You have a choice among three saving options. Option 1: receive $1100 immediately. Option 2:
receive $1150 one year from now. Option 3: receive $1300 two years from now. The interest rate
is 15 percent. Rank these three options from highest present value to lowest present value.
A. Option 1; Option 2; Option 3
B. Option 3; Option 2; Option 1
C. Option 2; Option 3; Option 1
D. Option 3; Option 1; Option 2
ANSWER:

10. A car salesperson gives you three alternative ways to pay for your car. The first is to pay $18,000
today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years
from today. Which do you prefer if your alternative interest rate is 6 percent?
A. The first.
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B. The second.
C. The third.
D. You are indifferent between all three.
ANSWER:

11. William put money in his account at First National Bank fourteen years ago and have never
withdrawn funds or added funds to this account. Today, William is thinking about withdrawing
cash from this account. He is told that his money has quadrupled over the last 14 years.
According to the rule of 70, what rate of interest did William earn?
A. 5 percent
B. 7 percent
C. 10 percent
D. 14 percent
ANSWER:

12. Which of the following statements accurately describes the Efficient Market Hypothesis (EMH)?
A. Markets are always the most efficient way to allocate resources.
B. Buyers and sellers in a market are always perfectly rational.
C. Asset prices reflect all publicly available information.
D. Asset prices reflect the true value of the asset.
Answer:

13. According to the Efficient Market Hypothesis, if the stock market is inefficient, then
A. Future stock prices are predictable.
B. Future stock prices are unpredictable.
C. One cannot predict future stock prices about 50% of the time.
D. Either B or C.
Answer:

14. If the stock market is efficient, then adjusted for risk, returns will be
A. Low
B. Normal
C. High.
D. Either A or C
Answer:

15. Who of the following would necessarily be included in the Bureau of Labor Statistics’
“unemployed” category?
A. Harry, who did not work during the previous four weeks
B. DeShawn, who tried to find new employment during the previous four weeks
C. Lawrence, who was an unpaid worker during the previous four weeks
D. None of the above is correct.
ANSWER:

16. President Bigego is running for re-election against Senator Pander. Bigego proclaims that fewer
people are employed now than when Senator Pander took office. Senator Pander says the
unemployment rate is lower now than when President Bigego took office. You conclude that
A. one of them must be lying.
B. both of them could be telling the truth if the labor force and employment grew at the same
rate.
C. both of them could be telling the truth if the labor force fell less than employment.
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D. both of them could be telling the truth if the labor force fell more than employment.
ANSWER:

17. Suppose that some country had an adult population of about 25 million, a labor-force
participation rate of 60 percent, and an unemployment rate of 6 percent. How many people were
unemployed?
A. 0.846 million
B. 0.9 million
C. 1.5 million
D. 6 million
ANSWER:

18. Some persons are counted as out of the labor force because they have made no serious or recent
effort to look for work. However, some of these individuals may want to work even though they
are too discouraged to make a serious effort to look for work. If these individuals were counted as
unemployed instead of out of the labor force, then
A. both the unemployment rate and labor-force participation rate would be higher.
B. the unemployment rate would be higher, and the labor-force participation rate would be
lower.
C. the unemployment rate would be lower, and the labor-force participation rate would be
higher.
D. both the unemployment rate and labor-force participation rate would be lower.
ANSWER:

19. Derrick loses his job but does not look for work. Which of the following are the consequences of
this change in Derrick's status?
A. unemployment rises, and the labor force is unchanged
B. unemployment rises, and the labor force falls
C. unemployment and the labor force are unchanged
D. unemployment is unchanged, and the labor force falls
ANSWER:

20. Frictional unemployment is

A. not inevitable; rather, it can be reduced to zero by well-designed public policies.
B. not inevitable; rather, it could be reduced to zero if by the elimination of unemployment
insurance.
C. inevitable, because at any given time, jobs are being created in some firms and destroyed in
other firms.
D. inevitable, because in some industries, wages are always set above the level that brings
supply and demand into equilibrium.
ANSWER:

21. When a minimum wage law forces the wage to remain above the equilibrium level, the result is
A. both a shortage of labor and a shortage of jobs.
B. a shortage of labor and a surplus of jobs.
C. a surplus of labor and a shortage of jobs.
D. both a surplus of labor and a surplus of jobs.
ANSWER:

22. Minimum wage laws are least likely to affect the wages paid to
A. teenagers.
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B. low-skill workers.
C. inexperienced workers.
D. highly-educated workers.
ANSWER:

23. Refer to the figure above. If the government imposes a minimum wage of $12, how many
workers will be unemployed?
A. 0
B. 2,000
C. 4,000
D. 10,000
ANSWER:

24. The theory of efficiency wages explains why

A. setting wages at the equilibrium level may increase unemployment.
B. it may be in firms' best interest to offer wages above the equilibrium level.
C. the most efficient way to pay workers is to pay them according to their skills.
D. it is efficient for firms to set wages at the equilibrium level.
ANSWER:

25. A firm may pay efficiency wages in an attempt to

A. reduce incentives to shirk.
B. reduce turnover.
C. attract and keep a well-qualified pool of applicants.
D. All of the above are correct.
ANSWER:

26. Dollar bills, rare paintings, and emerald necklaces are all
A. media of exchange.
B. units of account.
C. stores of value.
D. All of the above are correct.
ANSWER:

27. For purposes of analyzing the money supply, it is best thought of as

A. those assets that can be readily used to buy goods and services.
B. currency only.
C. currency plus all bank accounts.
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D. currency plus all bank accounts plus bonds.

ANSWER:

28. Suppose at the end of the month, you withdraw $183.55 in cash from your savings account at
your bank, then by this transaction,
A. M1 rose and M2 was constant
B. M1 rose and M2 fell
C. M1 rose and M2 rose
D. M1 was constant, but M2 rose
Answer:

29. You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in
your piggy bank illustrates money’s function as a _______. The laptop’s price is posted as $500.
The $500 price illustrates money’s function as a _____. You use the $500 to purchase the laptop.
This transaction illustrates money’s function as a ______.
A. store of value, medium of exchange, unit of account
B. store of value, unit of account, medium of exchange
C. medium of exchange, unit of account, store of value
D. medium of exchange, store of value, unit of account
ANSWER:

30. Which of the following statements is correct?

A. All items that are included in M1 are included also in M2.
B. All items that are included in M2 are included also in M1.
C. Credit cards are included in both M1 and M2.
D. Savings deposits are included in both M1 and M2.
ANSWER:

31. Which of the following is not included in either M1 or M2?

A. US Government Bonds
B. small time deposits
C. demand deposits
D. money market mutual funds
ANSWER:

32. At any given time, the voting members of the Federal Open Market Committee include
A. some but not all of the presidents of the regional Federal Reserve banks.
B. the president of the Federal Reserve Bank of New York.
C. all the members of the Board of Governors.
D. all of the above are correct.
ANSWER: