Econ. 3440 Midterm

Instructions:

i)   Spend about three minutes on each question .

ii)  Answer all questions .

Question 1:

Consider a two country model with flexible exchange rates. Suppose velocities in Canada and Europe  are constant. Output grows at the rate of 3% in Canada and 1% in Europe. If the rate of appreciation of the euro (rate of increase in e) is 1%, what is the difference between rate of growth of money in Canada and Europe (that is, the rate of growth of money in Canada minus the rate of growth of money in Europe)?

A) 2%

B)  −2%

C)  3%

D) −3%

Question 2:

The introduction of Automated Teller Machines (ATM) meant that more transactions were paid for using funds in accounts . This resulted in in the demand for M2 .

A)  savings;      a substantial increase

B)  checking;     a substantial increase

C)  checking;      a substantial fall

D)  None the other answers

Question 3:

Which of the following is a liability for the central bank?

A) Accounts of the government at the central bank .

B)  Cash held by the chartered banks (i .e . , currency held by chartered banks)

C)  All of the other answers except the one that says “None of the other answers”

D) None of the other answers

Question 4:

Suppose the Canadian central bank buys Canadian dollars in exchange for euros (takes in Canadian dollars and give out euros) on the foreign exchange market . This activity of the central bank will

.

A)  encourage the chartered banks in Canada to make more loans

B)  result in an increase in interest rates in Canada

C)  result in an increase in the monetary base in Canada

D)  None of the other answers .

Question 5:

Suppose you are given the following information:

Currency held by households and firms: $400 million Cash held by Chartered banks: $200 million Checking and savings accounts and term deposits held by households and firms: $900 million .

Checking accounts held by chartered banks at the central bank: $100 million . Then the reserves of the chartered banks is , while the monetary base is .

A) $300;   $600

B)  $200;   $1300

C)  $100;   $700

D) None of the other answers

Question 6:

Suppose there is an increase in the use of credit cards . Then .

A) people will , on average , hold less money in their checking and savings accounts .

B) the price level will increase because velocity of money will be higher

C) All the other answers except the one that says “None of the other answers” .

D) None of the other answers

Question 7:

Suppose the government taxes households and firms, and then uses the funds to buy airplanes from Europe . After all these transactions are completed there will be .

A)  no change in the balance on the accounts of the government at the central bank .

B)  a fall in the reserves of the chartered banks

C)  an increase in interest rates

D)  All the other answers

Question 8:

Derivative Mortgage Backed Securities .

A)  gave its holders a share in the returns on the pool of sub-prime mortgages in U .S .

B)  turned out to be good assets because they pooled risk associated with a large number of mortgages .

C)  All the other answers except the one that says “None of the other answers”

D) None of the other answers

Question 9:

A country that experiences growth in its output of its government expenditures; otherwise it may experience .

(Note: Monetization means paying for expenditures by money creation .)

A) should monetize part;             inflation

B)  should not monetize any part;            inflation

C)  should monetize part;             deflation

D) should not monetize any part;            deflation

Question 10:

Suppose it is expected that the U.S. dollar will gain value relative to the euro in the future. Then people will hold onto . The euro will then value relative to the dollar.

A) more dollars and less euros;               lose

B)  more euros and less dollars;               lose

C)  more dollars and less euros;               gain

D) more euros and less dollars;               gain

Question 11:

If Purchasing Power Parity holds then .

A) = +

B) = +

C) = −

D) None of the other Answers

Question 12:

Suppose you are given the following information

Currency Held by Households and Firms: $20 billion

Cash Held by the Chartered Banks: $10 billion

Monetary Base: $70 billion

M2: $200 billion

Then the money multiplier m will be .

A) 20

B)  10

C)  6.67

D) 2.86

Question 13:

Which one of the following is a liability for the chartered banks?

A)  Cash held by the chartered banks

B)  Accounts held by the households and firms

C)  All the other answers except the one that says “none of the other answers” .

D)  None of the other answers .

Question 14:

Consider a country with a large underground economy . For that country the central bank can have a reasonably accurate measure of the .

A) money supply

B)  ratio of the actual velocity (including the underground sector) to the actual nominal GDP (including the underground sector)

C)  All the other answers , except the one that says “None of the other answers” .

D) None of the other answers .

Question 15:

Suppose because of the COVID crisis the government sends a cheque for $2,000 to you; and you deposit this in your bank account. This question is specifically with regards to you depositing this cheque: when the cheque clears .

A) the balance on the accounts chartered banks at the central bank will increase.

B)  the chartered banks will have more reserves.

C)  All the other answers except the one that says “none of the other answers” .

D) None of the other answers.

Question 16:

Suppose euro is one day regarded as a credible alternative to the U .S . dollar in international transactions . This would .

A) make it cheaper for Europeans to pay for their government expenditures by printing money .

B)  increase value of the euro relative to the dollar .

C)  All the other answers except the one that says “None of the other answers” .

D) None of the other answers

Question 17:

Consider a two country model of the world economy with flexible exchange rates . In that case, the    fundamental equation for the determination of the exchange rate (the price of the foreign currency) is given by . . .

A) e = × ×

B) e = × ×

C) e = × ×

D) e = × ×

Question 18:

Suppose there is an increase in the use of credit cards. Then the households and firms will hold dollars in their bank accounts; and the money multiplier will become .

A) more;  larger .

B)  less;     smaller.

C)  more;  smaller.

D) less;     larger.