Economics 101

Multiple Choice Questions for Final Examination

Miller

PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. 1. Which of the following statements is correct? a. Real GDP is the total market value of the final goo s an services pro uce in !merica for sale in a "ear value in the prices of 1##$. %. &our %u"ing stock in the stock market is an example of investment s en!in" c. Potential Real GDP is alwa"s greater than E#$ili%ri$m Real GDP . 'ocial securit" an welfare are examples of spen ing on in&rastr$ct$re. e. !ll of the a%ove $. (he perio of the %$siness c'cle in which real GDP is increasin" is calle the) a. expansion %. peak c. recession . trough e. stagflation *. !ssume that+ in the population+ #, million people worke for pa" last week+ , million people i not work for pa" %ut ha %een seeking a -o%+ , million people i not work for pa" an ha not %een seeking a -o% for the past several months+ an ., million were un er age 1/. (he $nem lo'ment rate+ given these num%ers+ is) a. ,0 %. 10 c. 100 . $00 e. .,0 .. ! t"pe of $nem lo'ment in which workers are in2%etween -o%s or are searching for new an %etter -o%s is calle 3333333 unemplo"ment) a. frictional %. c"clical c. structural . turnover ,. Consi er three consumer goo s) 100 of 4oo !+ 100 of 4oo 5+ an 100 of 4oo C. 6n the %ase "ear+ 4oo ! sol at a price of 71+ 4oo 5 sol at a price of 71+ an 4oo C sol at a price of 71. 6n the current "ear+ 4oo ! sol at a price of 7*+ 4oo 5 sol at a price of 7,+ an 4oo C sol at a price of 710. (he (ons$mer Price In!e) *(PI+ for the current "ear is) a. 100 %. *00 c. ,00 . /00 e. 1000 /. Which of the following is a ,loser, &rom $ne) ecte! in&lation? a. workers with C89!s c. people who own (reasur" 5ills %. the mi le class . people who own homes an have fixe 2rate mortgages :. 6f the nominal interest rate on a checking account is $0 an the inflation rate is *0 this "ear+ the real interest rate is) a. ,0 %. $0 c. $;*0 . <10 e. *0 1. Which of the following woul cause the !eman! curve for automo%iles to s-i&t to t-e le&t? a. an increase in the price of the automo%iles %. an increase in the interest rate pai to %orrow mone" to pa" for the automo%ile c. an increase in %u"ers= incomes . an increase in the cost of pro uction of automo%iles Please T$rn Over

>age $ #. 'uppose it is announce that in ustr" anal"sts are pre icting that !ecrease! oil supplies from 6ra? will cause gasoline prices to rise+ %eginning next month. In t-e c$rrent .ee/+ the announcement woul ) a. shift the suppl" of gasoline right c. shift the eman for gasoline left %. shift the eman for gasoline right . have no effect on the eman or suppl" of gasoline 10. @!t the price of 7,00+ tickets for the 'uper 5owl are expensive. &et+ the are long lines of people who wish to %u" them. Man" people who esire tickets will not %e a%le to fin them.@ From this ?uote+ we know that the rice of 'uper 5owl tickets must %e) a. %elow e?uili%rium %. a%ove e?uili%rium c. e?ual to e?uili%rium 11. !ssume that the market for computers %egins in e?uili%rium. (hen+ there is a !ecrease in a rice o& Penti$m rocessors $se! in t-e ro!$ction o& com $ters. When the new e?uili%rium is reache + a. the price an ?uantit" of computers will %oth have risen %. the price an ?uantit" of computers will %oth have fallen c. the price of computers will have risen an the ?uantit" will have fallen . the price of computers will have fallen an the ?uantit" will have risen 1$. !ssume that the market for the stock of Microsoft %egins in e?uili%rium. (hen+ %ot- %$'ers an! sellers e) ect t-at t-e ne. Lin$) *a com etitor o& Microso&t Win!o.s+ .ill %e a lar"e s$ccess0 re!$in" Microso&t sales. When the new e?uili%rium is reache + a. the price an ?uantit" of the stock will %oth have risen %. the price an ?uantit" of the stock will %oth have fallen c. the ?uantit" of the stock will fall an the price will rise . the ?uantit" of the stock will fall %ut the effect on price cannot %e etermine e. the price of the stock will fall %ut the effect on ?uantit" cannot %e etermine 1*. !ssume that the market for Mexican pesos %egin in e?uili%rium. (hen+ t-e Me)ican econom' e) eriences a severe recession. 5ecause of the recession+ the Mexican companies lower their prices. !s a result of the recession an lower prices in Mexico) a. the ollar epreciates an the peso appreciates c. the ollar an the peso %oth appreciate %. the ollar appreciates an the peso epreciates . the ollar an the peso %oth epreciate 1.. Which of the following is an example of , ort&olio investment@? a. !n !merican places fun s in a savings account in Cana a %. (ok"o 5ank of Aapan %u"s Bnion 5ank of the Bnite 'tates c. 'aturn Corp. Cowne %" 4eneral MotorsD %uil s a new factor" in (ennessee . !n !merican puts 710+000 into a mone" market fun e. !ll of the a%ove (ontin$e!

>age * PLEASE DO NOT WRITE ON THIS EXAMINATION FORM 1,. Which of the following woul cause the a""re"ate !eman! curve to s-i&t to t-e ri"-t? a. an increase in purchases %" the fe eral government %. an increase in real interest rates c. an appreciation of the !merican ollar . a ecrease in the mone" suppl" 1/. !ssume that an econom" %egins in macroeconomic e?uili%rium. (hen+ ta)es are si"ni&icantl' !ecrease!. !s a result of this change) a. there is expansion an inflation in the B' c. there is stagflation in the B' %. there is recession an eflation in the B' . there is expansion an eflation in the B' 1:. A lar"e increase in oil rices+ such as the ones occurring in 1#:* an 1#:#+ will cause a. inflation an expansion c. inflation an recession %. recession an isinflation . expansion an eflation 11. !ssume that pro uction in the Bnite 'tates is value at 710+000. Eational income is therefore 710+000. 8f their income+ workers pa" 71+000 in taxes+ save 7,00+ spen 71+000 on consumer goo s+ an spen 7,00 on imports. 5usinesses spen 71+000 in new investment spen ing. !n + foreigners spen 7,00 on exports. 6n or er to avoi an" pro%lems of inflation or unemplo"ment+ t-e "overnment s-o$l! -ave a %$!"et !e&icit or s$r l$s o&1 a. 0 %. 7,00 surplus c. 7,00 eficit . 71+000 eficit e. 7$+000 eficit 1#. From 1##0 to 1##,+ the B.'. econom" was in a recessionar' "a . !ccor ing to the classical economists+ which of the following shoul have occurre ? a. wages shoul have fallen which woul cause more workers to %e hire %. prices shoul have fallen which woul increase consumer spen ing c. interest rates shoul have fallen which woul increase consumer an investment spen ing . all of the a%ove shoul have occurre $0. Which of the following statements is;are true a%out the classical #$antit' t-eor' o& mone'? a. (he e?uation of exchange is MF G >Q %. (he classical economists assume that F woul rise when real interest rates rise c. (he classical economists conclu e that increases in the mone" suppl" cause increases in real 4H> an nothing else . all of the a%ove Please T$rn Over

>age . $1. !ssume that the Bnite 'tates an 4reat 5ritain are %oth on the Gol! Stan!ar!. (here is inflation in the Bnite 'tates %ut not in 4reat 5ritain. !s a result of the inflation in the Bnite 'tates+ a. 4ol woul leave the Bnite 'tates an go to 4reat 5ritain %. 4ol woul leave 4reat 5ritain an go to the Bnite 'tates c. (he !merican ollar woul epreciate . (he !merican mone" suppl" woul increase $$. !t an income of 7100+000+ 6 spent 7#0+000 on consumer goo s. When m" income rose to 7$00+000+ 6 spent 71/0+000 on consumer goo s. M" mar"inal ro ensit' to cons$me is) a. 0.# %. 0.1 c. 0.: . 1 e. 7:0+000 $*. National Dis osa%le Income Ta)es Income (ons$m tion Investment Government 7100 7100 0 7 ,0 7 $, 7100 $00 100 100 1$, $, 100 *00 100 $00 $00 $, 100 .00 100 *00 $:, $, 100 ,00 100 .00 *,0 $, 100 /00 100 ,00 .$, $, 100 :00 100 /00 ,00 $, 100 100 100 :00 ,:, $, 100 Bsing these num%ers+ t-e e#$ili%ri$m real GDP *e#$al to National Income+ is) a. *00 %. .00 c. ,00 . /00 e. :00 $.. Which of the following woul cause cons$m tion to rise? a. the 4H> Heflator rises %. a greater proportion of the population is %etween age $0 an *0 c. transitor" income increases . income is taken from poor people an given to rich people $,. Which of the following woul cause %$siness investment s en!in" to rise? a. an increase in real interest rates from ,0 to 10 %. a ecrease in the corporate profits tax rate from .10 to *.0 c. a re uction of the investment tax cre it from 100 to $0 . sales falling in relation to capacit" from #00 to /00 (ONTIN2ED

>age , PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. $/. !ssume that net exports increase %" 71 %illion. E?uili%rium Ieal 4H> will rise %" more than 71 %illion. Explain wh". Ci.e.+ .-' is t-ere a m$lti lier3D. a. an increase in net exports appreciates the ollar causing a further increase in net exports %. an increase in net exports causes an increase in tax revenues which increases government spen ing c. an increase in net exports increases income causing an increase in in uce consumption . an increase in net exports causes an increase in the mone" suppl" $:. (he largest trans&er in the fe eral %u get is) a. efense %. e ucation c. social securit" . welfare e. police

$1. (he largest ta) collecte at the &e!eral "overnment level is the) a. income tax %. sales tax c. propert" tax . social securit" tax $#. ! person ha an income of 7$0+000 last "ear an pai 710+000 in tax. (his "ear+ the person ha an income of 7100+000 an pai 7*0+000 in tax. (he personJs mar"inal ta) rate is) a. $,0 %. *00 c. ,00 . 1000 *0. (he tax in ?uestion $# is) a. progressive %. regressive c. proportional

*1. !ssume that E?uili%rium 4H> is 7.+000 %illion. >otential 4H> is 7,+000 %illion. (he marginal propensit" to consume is .;, C0.1D. 5" how much an in what irection shoul "overnment $rc-ases %e change ? a. increase %" 71+000 %illion c. increase %" 7100 %illion %. ecrease %" 71+000 %illion . increase %" 7$00 %illion *$. Bsing the num%ers in ?uestion *1+ %" how much shoul ta)es %e change ? a. increase %" 71+000 %illion c. ecrease %" 7$00 %illion %. ecrease %" 71+000 %illion . ecrease %" 7$,0 %illion **. !ssume that E?uili%rium Ieal 4H> is 7$0+000 while >otential Ieal 4H> is 71,+000. (he marginal propensit" to consume is #;10. !ssume that government eci es to lo.er ta)es %" 71+000. (o pa" for this+ it lo.ers "overnment $rc-ases %" 71+000. !s a result of these two changes+ what is the new E?uili%rium Ieal 4H>? a. 71#+000 %. 7$0+000 c. 7$1+000 . 71.+000 e. 71+000 PLEASE T2RN O4ER

>age / *.. Which of the following statements is true a%out t-e national !e%t? a. 6n total+ it is higher now than it has ever %een %. Most of it is owe %" the fe eral government to foreigners c. 6t means that a tremen ous %ur en is %eing passe to our chil ren . 5ecause of it+ the Bnite 'tates is on the verge of %ankruptc" e. !ll of the a%ove *,. 6f the o&&icial &e!eral %$!"et shows a !e&icit of 7$00 %illion while the str$ct$ral %$!"et is has a s$r l$s of 7$00 %illion+ it can %e conclu e that) a. the intent of fiscal polic" is ver" expansionar" %. there is h"perinflation c. the unemplo"ment rate is well a%ove the natural rate . state an local governments have large surpluses e. off2%u get spen ing is counte in the official eficit %ut not in the structural eficit */. (he P-illi s c$rve escri%es the relationship %etween) a. the fe eral %u get eficit an the tra e eficit %. savings an investment c. the unemplo"ment rate an the inflation rate . marginal tax rates an tax revenues *:. 'everal a -ustments have %een suggeste to the official %u get eficit to %e a%le to measure the effects of the %u get eficit on the econom". For which of the following woul the a -uste eficit %e lar"er than the official %u get eficit? a. state an local %u get surpluses nee to %e a e to the official %u get eficit %. the effects of unemplo"ment nee to %e taken out of the official %u get eficit c. the effects of inflation nee to %e taken out of the official %u get eficit . off2%u get spen ing nee s to %e a e to the official %u get eficit *1. Which of the following is inclu e in M56? a. gol c. checka%le eposits %. cre it car s . mone" market mutual fun s e. stock

*#. Which of the following is true a%out t-e Fe!eral Reserve S'stem? a. its seven 5oar mem%ers are appointe %" the >resi ent of the Bnite 'tates %. its main polic"2making %o " is calle the C58 c. it insures checking accounts against %ank failure . it accepts eposits from in ivi uals an makes loans for mortgages e. !ll of the a%ove (ONTIN2ED

>age : PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. .0. !ssume that the Fe! increases t-e monetar' %ase %" 71 %illion when the reserve re?uirement is 1;:. !s a result+ the mone" suppl" will) a. increase %" 71 %illion c. increase %" 7: %illion %. ecrease %" 71 %illion . increase %" 71.* million .1. 6f the Fe! .is-es to !ecrease *ti"-ten+ t-e mone' s$ a. %u" (reasur" securities in the open market %. raise the iscount rate c. lower the reserve re?uirements . raise marginal tax rates l'+ it shoul )

.$. (he !eman! &or mone' will &all if) a. Ieal 4H> rises c. the 4H> Heflator rises %. real interest rates rise . people expect eflation soon .*. !n increase in t-e mone' s$ l' causes) a. interest rates to fall+ investment spen ing to rise+ an %. interest rates to rise+ investment spen ing to rise+ an c. interest rates to rise+ investment spen ing to fall+ an . interest rates to fall+ investment spen ing to fall+ an aggregate aggregate aggregate aggregate eman eman eman eman to rise to rise to fall to fall

... 6f in ivi uals &orecast &$t$re rices %' e)aminin" t-e rates o& in&lation o& t-e resent an! recent ast0 the" are using) a. a aptive expectations c. inflationar" expectations %. rational expectations . structural expectations .,. 6f t-e act$al $nem lo'ment rate is %elo. t-e nat$ral rate o& $nem lo'ment+ it woul %e expecte that) a. the rate of inflation woul increase c. the >hillips curve woul shift to the left %. wages woul fall . the natural rate of unemplo"ment woul fall ./. !ccor ing to the monetarist acceleration theor"+ in t-e lon"5r$n+ a. the actual unemplo"ment rate will %e %elow the natural rate of unemplo"ment %. the actual unemplo"ment rate will %e e?ual to the natural rate of unemplo"ment c. the actual inflation rate will %e e?ual to the natural inflation rate . the %u get eficit will %e e?ual to Kero e. the mone" suppl" will %e growing at a constant rate per "ear PLEASE T2RN O4ER

>age 1 .:. !ccor ing to the monetarists+ in the lon"5r$n+ the P-illi s ($rve is) a. vertical c. ownwar 2sloping %. horiKontal . upwar 2sloping .1. Which of the following statements is true a%out s$ l'5si!e economics? a. (he main change ma e %" the tax laws of 1#11 an 1#1/ was to increase marginal tax rates in or er to %alance the %u get %. (he 9affer Curve sa"s that+ if marginal tax rates fall+ tax revenues will rise+ an the %u get eficit will ecrease c. 6f the tax laws of 1#11 an 1#1/ ha ha their inten e effect+ consumption woul have risen+ causing an increase in %oth real 4H> an in the price level . !ll of the a%ove .#. (hose who o ose a (onstit$tional amen!ment to re#$ire a %alance! &e!eral %$!"et woul make which of the following arguments) a. Heficits are %a %ecause the" can cause crow ing out %. 'uch an amen ment coul force the government to un ertake policies that woul increase a recessionar" gap c. Heficits can cause inflation %" increasing aggregate eman . 5u get eficits can cause an increase in the tra e eficit %" appreciating the ollar ,0. 6f the mone" suppl" is) 7100 %illion 1$0 %illion 1.0 %illion 1/0 %illion 1$0 %illion 6f the interest rate is) 100 10 /0 .0 $0 (he interest rate is) 100 10 /0 .0 $0 6nvestment spen ing is) 710 %illion $0 %illion *0 %illion .0 %illion ,0 %illion

!ssume that e?uili%rium 4H> is 7.00 %illion+ potential 4H> is 7,00 %illion+ the marginal propensit" to consume is #;10+ the interest rate is 10+ investment spen ing is 7$0 %illion+ the mone" suppl" is 71$0 %illion+ an the reserve re?uirement is 1;10. 7' -o. m$c- an! in .-at !irection s-o$l! t-e Fe! c-an"e t-e monetar' %ase3 a. increase it %" 7$0 %illion . increase it %" 7$ %illion %. ecrease it %" 7100 %illion e. ecrease it %" 710 %illion c. increase it %" 7#0 %illion END OF EXAMINATION

Ans.ers 1. 11. $1. *1. .1. ! H ! H 5 $. 1$. $$. *$. .$. ! E C H 5 *. ! 1*. ! $*. 5 **+ ! .*. ! .. ! 1.. ! $.. 5 *.. ! ... ! ,. H 1,. ! $,. 5 *,. C .,. ! /. 1/. $/. */. ./. C ! C C 5 :. 1:. $:. *:. .:. H C C H ! 1. 5 11. 5 $1. ! *1. C .1. 5 #. 1#. $#. *#. .#. 5 10. ! H $0. ! ! *0. 5 ! .0. C 5 ,0. H

Economics 101

Final Examination

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(his course has involve a macroeconomic histor" of the $0th centur". (his centur" has seen ma-or economic pro%lems+ inclu ing inflation+ recessions an a 4reat Hepression+ slow economic growth+ %u get eficits+ an tra e eficits. 1. 9et us consi er first the pro%lem of inflation. (he Bnite 'tates has experience persistent in&lation *in&lationar' "a s+ !$rin" t-e 689:s an! es eciall' t-ro$"-o$t t-e 68;:s. 5ut there has %een some inflation ever" "ear since 1#,.. a. 6nflation is measure %" %oth the (ons$mer Price In!e) *(PI+ an GDP De&lator. Explain how each of these is calculate ? What arguments have %een ma e to support the assertion that t-e (ons$mer Price In!e) overstates t-e rise in t-e cost o& livin"? %. (hen+ e) lain .-' in&lation is a ro%lem for the Bnite 'tates. 6n particular+ consi er the effects of unexpecte inflation on the !istri%$tion o& .ealt- *.-o "ains an! .-o loses3+ an its effects on t-e "ro.t- o& real GDP over time. c. Explain the ca$ses of the inflation of the 1#/0s an of the 1#:0s. Eame as man" causes as "ou can. 6llustrate "our answer using the aggregate eman + aggregate suppl"+ potential real 4H> "ra -. 5e sure to inclu e in "our answer the causes of the sta"&lation of the 1#:0s. . Explain wh" the inflation rates were re uce so ramaticall" in the 1#10s an 1##0s. W-at &iscal an! monetar' olicies .ere $se! to re!$ce t-e in&lation rates3 !gain+ illustrate "our answer using the aggregate eman + aggregate suppl"+ potential real 4H> "ra -. * <: oints &or =$estion 6+ $. 'econ + let us consi er t-e ro%lem o& recessions an! !e ression. (here was a 4reat Hepression in the 1#*0s. !n since 1#/1+ there have %een four main recessions. a. E) lain -o. t-e $nem lo'ment rate is meas$re!. What criticisms can %e ma e of the official unemplo"ment rate measure? %. E) lain .-' recessions an! recessionar' "a s are ro%lems for the Bnite 'tates. C5e sure to efine each term.D (hat is+ what are the %a effects that result from them? c. Explain the ca$ses of the 4reat Hepression of the 1#*0s an the ca$ses of the recessions since Worl War 66. Eame as man" causes as "ou can. 6llustrate "our answer using the aggregate eman + aggregate suppl"+ potential real 4H> "ra -. . Explain wh" the 4reat Hepression an these recessions eventuall" en e . First+ what arguments are given %" Classical economists that these woul en automaticall"+ if the

government -ust i nothing. 'econ + what fiscal an monetar" policies have %een use to en the recessions? !gain+ illustrate "our answer using the aggregate eman + aggregate suppl"+ potential real 4H> "ra -. *<: oints &or =$estion <+ *. (hir + after 1#:*+ the Bnite 'tates experience a ro%lem o& ver' slo. economic "ro.t-. Especiall"+ pro uctivit" grew slower than in the past an slowl" in comparison to other countries. a. Low o we measure economic "ro.t-? Low o we measure ro!$ctivit'? % %. What are the ro%lems t-at -ave res$lte! from the slow perio of economic growth? c. What monetar" an fiscal policies were un ertaken to increase economic growth? (o what extent were the" successful? *6: oints &or =$estion >+ >age $ .. Fourth+ from 1#11 to 1##1+ the Bnite 'tates ha ver' -i"- %$!"et !e&icits. a. De&ine ,%$!"et !e&icit, an! ,national !e%t,+ highlighting the ifference. %. Low is the official %u get eficit measure ? (o properl" measure the effects of these %u get eficits on the econom"+ .-at c-an"es are nee!e! to the official %u get eficit calculation? WH?3 When these changes are ma e+ what oes the ata show a%out the a -uste %u get eficits? c. What are the effects of %u get eficits on the !merican econom"? Consi er wa"s %" which %$!"et !e&icits ma' %e "oo! for the !merican econom" an wa"s %" which %$!"et !e&icits ma' %e -arm&$l to the !merican econom". . Is t-e national !e%t o& over @A B trillion an economic ro%lem for the Bnite 'tates? Explain wh" or wh" not. *6A oints &or =$estion C+ ,. 'ince the earl" 1#10s+ the Bnite 'tates has also experience -i"- tra!e !e&icits. a. Hefine Dtra!e !e&icitE. Low is it measure ? %. Explain the three s"stems for international economic relations that existe in the $0th centur") t-e Gol! Stan!ar!0 t-e 7retton Woo!s S'stem0 an! t-e s'stem o& &loatin" e)c-an"e rates. c. 8ne of the main changes in the worl in the $0th centur" was t-e "ro.t- o& international tra!e. First+ explain wh" this occurre ? (hen+ state wh" this has contri%ute to economic growth? . 5ase on the material covere in the course+ e) lain .-' t-e tra!e !e&icits o& t-e 68F:s an! 688:s ma' -ave occ$rre!. Consi er as man" reasons as "ou can. * 6A oints &or =$estion A+ /. (his course has explore ifferent economic philosophies as to how the !merican econom" operates an what shoul %e one to correct economic pro%lems. (he course has consi ere the (lassical0 Ge'nesian0 Monetarist0 an! S$ l'5Si!e -iloso -ies0 the philosophies that have %een most important in the $0th centur". !t the time of the examination+ 'o$ .ill %e "iven a sit$ation. (he information "ou will %e given will inclu e real 4H>+ the growth of real 4H>+ potential real 4H>+ real interest rates+ consumer spen ing+ %usiness investment spen ing+ government spen ing+ tax revenues+ the mone" suppl"+ the inflation rate+ an the unemplo"ment rate+ an the natural rate of unemplo"ment.

a. 4iven the situation+ what woul a (lassical economist recommen %e one? E) lain .-'. e. 4iven this situation+ what woul a Ge'nesian economist recommen %e one? E) lain .-'. f. 4iven this situation+ what woul a Monetarist economist recommen %e one? E) lain .-'. g. 4iven this situation+ what woul a S$ l'5si!e economist recommen %e one? E) lain .-'. 6n "our answer to these ?uestions+ s-o. t-e !i&&erences %et.een t-ese vie.s of the !merican econom". *<: oints &or =$estion 9+