Applied Macroeconomics
Exam Preparation Guide
Course Introduction
Applied Macroeconomics explores the practical implementation of macroeconomic theories and models to analyze real-world economic issues and policy decisions. The course covers key topics such as national income determination, unemployment, inflation, economic growth, fiscal and monetary policy, and international trade. Emphasis is placed on interpreting macroeconomic indicators, assessing the impact of global and domestic shocks on economies, and using quantitative tools and data analysis to evaluate policy outcomes. Students will apply macroeconomic concepts to current events, case studies, and contemporary policy debates, gaining skills to critically assess the effectiveness of macroeconomic strategies in diverse economies.
Recommended Textbook
The Economics of Money Banking and Financial Markets 9th Edition by Frederic S. Mishkin
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Chapter 1: Why Study Money, Banking, and Financial Markets
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Sample Questions
Q1) High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving.
A)discourage; encourage B)discourage; discourage C)encourage; encourage D)encourage; discourage
Answer: A
Q2) When the total value of final goods and services is calculated using current prices,the resulting measure is referred to as A)real GDP.
B)the GDP deflator.
C)nominal GDP.
D)the index of leading indicators.
Answer: C
Q3) What is a stock? How do stocks affect the economy?
Answer: A stock represents a share of ownership of a corporation,or a claim on a firm's earnings/assets.Stocks are part of wealth,and changes in their value affect people's willingness to spend.Changes in stock prices affect a firm's ability to raise funds,and thus their investment.
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Chapter 2: An Overview of the Financial System
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Q1) Which of the following is an example of an intermediate-term debt?
A)A thirty-year mortgage.
B)A sixty-month car loan.
C)A six month loan from a finance company.
D)A Treasury bond.
Answer: B
Q2) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A)commercial paper.
B)a negotiable certificate of deposit.
C)a municipal bond.
D)federal funds.
Answer: B
Q3) An important feature of money market mutual fund shares is A)deposit insurance.
B)the ability to write checks against shareholdings.
C)the ability to borrow against shareholdings.
D)claims on shares of corporate stock.
Answer: B
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Page 4
Chapter 3: What Is Money
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Sample Questions
Q1) A problem with barter exchange when there are many goods is that in a barter system
A)transactions costs are minimized.
B)there exists a multiple number of prices for each good.
C)there is only one store of value.
D)exchange of services is impossible.
Answer: B
Q2) As a store of value,money
A)does not earn interest.
B)cannot be a durable asset.
C)must be currency.
D)is a way of saving for future purchases.
Answer: D
Q3) If an individual moves money from a small-denomination time deposit to a demand deposit account,
A)M1 increases and M2 stays the same.
B)M1 stays the same and M2 increases.
C)M1 stays the same and M2 stays the same.
D)M1 increases and M2 decreases.
Answer: A
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Chapter 4: Understanding Interest Rates
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Sample Questions
Q1) A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a
A)simple loan.
B)fixed-payment loan.
C)coupon bond.
D)discount bond.
Q2) The nominal interest rate minus the expected rate of inflation
A)defines the real interest rate.
B)is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate.
C)is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate.
D)defines the discount rate.
Q3) All else equal,when interest rates ________,the duration of a coupon bond
A)rise; falls
B)rise; increases
C)falls; falls
D)falls; does not change
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Page 6
Chapter 5: The Behavior of Interest Rates
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Q1) If prices in the bond market become more volatile,everything else held constant,the demand curve for bonds shifts ________ and interest rates ________.
A)left; rise
B)left; fall
C)right; rise
D)right; fall
Q2) The interest rate falls when either the demand for bonds ________ or the supply of bonds ________.
A)increases; increases
B)increases; decreases
C)decreases; decreases D)decreases; increases
Q3) A rise in the price level causes the demand for money to ________ and the interest rate to ________,everything else held constant.
A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) The spread between interest rates on low quality corporate bonds and U.S.government bonds
A)widened significantly during the Great Depression.
B)narrowed significantly during the Great Depression.
C)narrowed moderately during the Great Depression.
D)did not change during the Great Depression.
Q2) If the expected path of one-year interest rates over the next five years is 4 percent,5 percent,7 percent,8 percent,and 6 percent,then the expectations theory predicts that today's interest rate on the five-year bond is
A)4 percent.
B)5 percent.
C)6 percent.
D)7 percent.
Q3) A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.
A)positive; raise
B)positive; lower
C)negative; raise
D)negative; lower
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Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient Market Hypothesis
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Q1) In the one-period valuation model,an increase in the required return on investments in equity
A)increases the expected sales price of a stock.
B)increases the current price of a stock.
C)reduces the expected sales price of a stock.
D)reduces the current price of a stock.
Q2) Evidence against market efficiency includes
A)failure of technical analysis to outperform the market.
B)the random walk behavior of stock prices.
C)the inability of mutual fund managers to consistently beat the market.
D)the January effect.
Q3) If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%,everything else held constant,when the Federal Reserve announces that the new rate of monetary growth will be 10%,the adaptive expectation forecast of the inflation rate is A)5%.
B)between 5 and 10%.
C)10%.
D)more than 10%.
Q4) What rights does ownership interest give stockholders?
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Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) A lesson of the Enron collapse is that government regulation
A)always fails.
B)can reduce but not eliminate asymmetric information. C)increases the problem of asymmetric information.
D)should be reduced.
Q2) A venture capital firm protects its equity investment from moral hazard through which of the following means?
A)It places people on the board of directors to better monitor the borrowing firm's activities.
B)It writes contracts that prohibit the sale of an equity investment to the venture capital firm.
C)It prohibits the borrowing firm from replacing its management.
D)It requires a 50% stake in the company.
Q3) Of the sources of external funds for nonfinancial businesses in the United States,corporate bonds and commercial paper account for approximately ________ of the total.
A)5%
B)10%
C)32%
D)50%
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Chapter 9: Financial Crises and the Subprime Meltdown
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Sample Questions
Q1) Before the South Korean financial crisis,sales by the top five chaebols (family-owned conglomerates)were
A)nearly 50% of GDP.
B)about 10% of GDP.
C)almost 90% of GDP.
D)nearly 25% of GDP.
Q2) A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession.This process is called A)debt deflation.
B)moral hazard.
C)insolvency.
D)illiquidity.
Q3) How can asymmetric information lead to a bank panic?
Q4) A bank panic can lead to a severe contraction in economic activity due to A)a decline in international trade.
B)the losses of bank shareholders.
C)the losses of bank depositors.
D)a decline in lending for productive investment.
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Chapter 10: Banking and the Management of Financial Institutions
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Sample Questions
Q1) As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.
A)decrease; increase
B)increase; decrease
C)increase; increase
D)decrease; not be affected
Q2) The principal-agent problem that exists for bank trading activities can be reduced through
A)creation of internal controls that combine trading activities with bookkeeping.
B)creation of internal controls that separate trading activities from bookkeeping.
C)elimination of regulation of banking.
D)elimination of internal controls.
Q3) A bank is insolvent when
A)its liabilities exceed its assets.
B)its assets exceed its liabilities.
C)its capital exceeds its liabilities.
D)its assets increase in value.
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Page 12
Chapter 11: Economic Analysis of Financial Regulation
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Sample Questions
Q1) Moral hazard and adverse selection problems increased in prominence in the 1980s
A)as deregulation required savings and loans and mutual savings banks to be more cautious.
B)following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets,thereby widening the scope for risk taking.
C)following a decrease in federal deposit insurance from $100,000 to $40,000.
D)as interest rates were sharply decreased to bring down inflation.
Q2) The subprime financial crisis showed the need for increased financial regulation,however,too much or poorly designed regulation could
A)choke off financial innovation.
B)increase the efficiency of the financial system.
C)increase economic growth.
D)increase international financial integration.
Q3) The Resolution Trust Corporation was created by the FIRREA in order to A)manage and resolve insolvent S&Ls.
B)build up trust in government regulation.
C)regulate the S&L industry.
D)purchase large amounts of government debt.
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Chapter 12: Banking Industry: Structure and Competition
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Sample Questions
Q1) Since 1980
A)bank profitability has declined.
B)banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.
C)banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities.
D)bank profits have grown rapidly due to deregulation.
Q2) A ________ is a subsidiary of a U.S.bank that is engaged primarily in international banking.
A)Edge Act corporation
B)Eurodollar agency
C)universal bank
D)McFadden corporation
Q3) The regulatory agency responsible for supervising savings and loans institutions is the
A)FSLIC.
B)Fed.
C)Comptroller of the Currency.
D)Office of Thrift Supervision.
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Page 14
Chapter 13: Central Banks and the Federal Reserve System
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Q1) Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate,and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries.
A)increase; more B)increase; less C)decrease; more D)decrease; less
Q2) Members of the Executive Board of the European System of Central Banks are appointed to ________ year,nonrenewable terms.
A)four
B)eight
C)ten
D)fourteen
Q3) In the Governing Council,the decision of what policy to implement is made by
A)majority vote of the Executive Board members.
B)majority vote of the heads of the National Banks.
C)consensus.
D)majority vote of all members of the Governing Council.
Q4) Make the case for and against an independent Federal Reserve.
Page 15
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) If a person selling bonds to the Fed cashes the Fed's check,then reserves ________ and currency in circulation ________,everything else held constant.
A)remain unchanged; declines
B)remain unchanged; increases
C)decline; remains unchanged
D)increase; remains unchanged
Q2) If the required reserve ratio is 10 percent,currency in circulation is $400 billion,checkable deposits are $800 billion,and excess reserves total $0.8 billion,then the M1 money multiplier is
A)2.5.
B)1.67.
C)2.0.
D)0.601.
Q3) The variable that reflects the effect on the money supply of changes in factors other than the monetary base is the A)currency-checkable deposits ratio.
B)required reserve ratio.
C)money multiplier.
D)nonborrowed base.
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Page 16
Chapter 15: Tools for Monetary Policy
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Sample Questions
Q1) Everything else held constant,in the market for reserves,when the federal funds rate equals the discount rate,lowering the discount rate
A)increases the federal funds rate.
B)lowers the federal funds rate.
C)has no effect on the federal funds rate.
D)has an indeterminate effect of the federal funds rate.
Q2) The interest rate on seasonal credit equals
A)the federal funds rate.
B)the primary credit rate.
C)the secondary credit rate.
D)an average of the federal funds rate and rates on certificates of deposits.
Q3) When bad storms slow the check-clearing process,float tends to ________ causing the Fed to initiate ________ open market ________.
A)decrease; defensive; sales
B)decrease; dynamic; purchases
C)increase; defensive; sales
D)increase; dynamic; purchases
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Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s,its behavior suggests that it emphasized
A)free-reserve targeting.
B)interest-rate targeting.
C)a real-bills doctrine.
D)price-index targeting.
Q2) Which of the following is the best description of the monetary policy strategy followed by the European Central Bank (ECB)?
A)The ECB follows monetary targeting.
B)The ECB follows inflation targeting.
C)The ECB has a hybrid strategy with elements of both monetary targeting and inflation targeting.
D)The ECB has a Fed-like "just do it" approach.
Q3) Explain and demonstrate graphically how targeting the federal funds rate can result in fluctuations in nonborrowed reserves.
Q4) Explain what inflation targeting is.What are the advantages and disadvantages of this type of monetary policy strategy?
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Chapter 17: The Foreign Exchange Market
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Q1) ________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________,everything else held constant.
A)An increase; appreciate
B)An increase; depreciate
C)A decrease; appreciate
D)A decrease; depreciate
Q2) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate,everything else held constant.
A)An increase; increase
B)An increase; decrease
C)A decrease; increase
D)A decrease; decrease
Q3) The theory of PPP suggests that if one country's price level rises relative to another's,its currency should
A)depreciate.
B)appreciate.
C)float.
D)do none of the above.
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19
Chapter 18: The International Financial System
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Sample Questions
Q1) Which of the following is not an advantage to exchange-rate targeting?
A)It provides a strong nominal anchor to keep inflation under control.
B)It provides an automatic rule for policy to help avoid the time-inconsistency problem.
C)It is simple and clear so that the public can easily understand it.
D)It increases the accountability of policymakers.
Q2) Under the Exchange Rate Mechanism of the European Monetary System,when the British pound depreciated below its lower limit against the German mark,the German central bank was required to buy ________ and sell ________,thereby ________ international reserves.
A)pounds; marks; losing B)pounds; marks; gaining C)marks; pounds; gaining D)marks; pounds; losing
Q3) Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism.What disadvantages of exchange-rate targeting were exhibited during this crisis?
Q4) Explain an additional disadvantage for a country undergoing dollarization compared to a currency board or other exchange-rate targeting regimes.
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Page 20
Chapter 19: The Demand for Money
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Sample Questions
Q1) Evidence since 1915 indicates that velocity has
A)grown at a fairly constant rate,even in the short run.
B)fluctuated too much in the short run to be viewed as a constant.
C)trended downward since 1950 due to technological and financial innovations.
D)remained fairly constant in the short run,but tends to slowly increase.
Q2) In Friedman's modern quantity theory,velocity is procyclical because
A)money demand depends on permanent income,which is more stable than actual income.
B)money demand depends on actual income,which is more stable than permanent income.
C)velocity depends upon interest rates,which are stable over the business cycle.
D)velocity depends upon interest rates,which move procyclically.
Q3) Velocity,over the business cycle,tends to
A)rise during economic contractions.
B)fall during economic expansions.
C)stay constant.
D)fall during economic contractions.
Q4) Explain the Keynesian theory of money demand.What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?
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Chapter 20: The Islm Model
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Q1) If the economy is on the IS curve,but is to the right of the LM curve,aggregate output will ________ and the interest rate will ________.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q2) Aggregate demand in an economy with no government or foreign trade is
A)consumer expenditure plus actual investment.
B)consumer expenditure plus planned investment.
C)consumer expenditure plus inventory investment.
D)consumer expenditure plus fixed investment.
Q3) Keynes reasoned that consumer expenditure is most closely related to
A)the level of interest rates.
B)the price level.
C)disposable income.
D)the marginal tax rate.
Q4) Keynes believed that unstable investment caused the Great Depression.Using the simple Keynesian model,explain how a fall in investment affects equilibrium output.
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Chapter 21: Monetary and Fiscal Policy in the ISLM Model
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Q1) Everything else held constant,a decrease in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will
A)right; increase B)right; decrease C)left; increase D)left; decrease
Q2) As bonds become a riskier asset,the demand for money ________ and,all else constant,the equilibrium interest rate ________. A)rises; rises B)rises; falls C)falls; rises D)falls; falls
Q3) An autonomous appreciation of the U.S.dollar makes American goods ________ expensive relative to foreign goods which ________ net exports in the U.S. A)less; decreases B)less; increases C)more; decreases D)more; increases
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Page 23
Chapter 22: Aggregate Demand and Supply Analysis
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Q1) The aggregate supply curve is the total quantity of
A)raw materials offered for sale at different prices.
B)final goods and services offered for sale at the current price level.
C)final goods and services offered for sale at different price levels.
D)intermediate and final goods and service offered for sale at different price levels.
Q2) Suppose the economy is producing at the natural rate of output.An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in the aggregate price level in the long run,everything else held constant.
A)an increase; an increase
B)a decrease; a decrease
C)no change; an increase
D)no change; a decrease
Q3) The Lucas supply function indicates that deviations of unemployment from the natural rate level respond to
A)any increase in aggregate demand.
B)unanticipated inflation.
C)a supply shock.
D)expected changes in inflation.
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Page 24
Chapter 23: Transmission Mechanisms of Monetary Policy: The Evidence
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Q1) The monetarist-Keynesian debate on the importance of monetary policy is unresolved because monetarists and Keynesians focus on two different types of evidence that generate conflicting conclusions.Monetarists tend to focus on
A)structural-model evidence,while Keynesians focus on reduced-form evidence.
B)reduced-form evidence,while Keynesians focus on structural-model evidence.
C)reduced-form evidence,while Keynesians focus on direct-model evidence.
D)structural-model evidence,while Keynesians focus on direct-model evidence.
Q2) Because of the presence of asymmetric information problems in credit markets,an expansionary monetary policy causes a ________ in net worth,which ________ the adverse selection problem,thereby ________ increased lending to finance investment spending.
A)decline; increases; encouraging B)rise; increases; discouraging C)rise; reduces; encouraging D)decline; reduces; discouraging
Q3) Monetarists assert that monetary policy may affect aggregate demand through A)only an interest rate channel.
B)only an exchange rate channel.
C)only two channels: interest rates and exchange rates. D)many channels.
Page 25
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Chapter 24: Money and Inflation
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Q1) If the Fed pursues a policy goal of
A)preventing high interest rates,and deficits cause interest rates to rise,then deficits will lead to money creation.
B)preventing high inflation,and deficits cause inflation to rise,then deficits will lead to money creation.
C)preventing high bond prices,and deficits cause bond prices to rise,then deficits will lead to money creation.
D)preventing high stock prices,and deficits cause stock prices to rise,then deficits will lead to money creation.
Q2) The ________ lag represents the time it takes to pass legislation to implement a particular (fiscal)policy,while the ________ lag is the time it takes for policymakers to change policy instruments once they have decided on the new policy.
A)legislative; effectiveness
B)legislative; recognition
C)legislative; implementation
D)implementation; legislative
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Chapter 25: Rational Expectations: Implications for Policy
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Q1) Steve the economist tells his students that one anticipated policy is just like any other-none has any effect on aggregate output.You can probably infer that he is a A)Keynesian economist.
B)monetarist.
C)proponent of activist policies.
D)new classical economist.
Q2) In the new classical model, A)wages and prices are sticky with respect to expected changes in the price level.
B)a rise in the expected price level results in an immediate and equal rise in wages and prices.
C)an anticipated increase in the money supply will increase aggregate output temporarily.
D)unanticipated policy has no effect on aggregate output and unemployment.
Q3) Explain why anticipated policy has different short-run effects on real output and the price level in the new classical,new Keynesian,and traditional models.What are the long-run effects of anticipated policy in each model?
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