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Questions over chapters 14 and 15.

1.

The neo-classical theory of economic growth states that:


a. savings creates capital which drives growth
b. consumption creates capital which drives growth
c. natural resources create investment, which stimulates capital, and growth
d. income creates capital which drives growth

2.

The highest income countries per person are also the countries with the highest:
a. savings per person
b. consumption per person
c. capital per person
d. consumption to investment per person

3.

The modern theory of growth states that growth comes from:


a. ideas and innovations
b. investment in capital
c. natural resources
d. controlling trade

4.

According the United Nations, what is the biggest obstacle to economic development for poor
nations in the world today?
a. too much debt
b. treatment of women
c. child labor
d. poor transportation systems

5.

Human capital is the economists word for:


a. the portion of the labor force that uses capital in its work
b. the education, training and skills of workers
c. the portion of the labor force that performs unskilled tasks
d. production when people are substituted for capital, as in low income countries

6.

(True/False) The United States has both a high savings rate and a high rate of innovation,
which is why it grows so fast.

7.

(True/False) While all countries with lots of natural resources have good economic growth,
lack of resources does not prevent economic growth.

8.

(True/False) The phrase maximum sustainable growth means that creating economic
growth will automatically create stable prices and full employment.

9.

______________________________________________ policy means the use of the governments


taxing and spending powers to influence the economy.

10.

________ (True/False) The Employment Act of 1946 requires the government to maintain full
employment, regardless of inflation.

11.

The Classical economic philosophy of hands off is expressed by the French phrase:
______________________________________________________________________________

12.

To New Keynesian, wages are _____________________________________________ downward.

13.

In the current economic crisis, a Classical economist would have done what with the failing
banks and insurance companies?
a. let them go bankrupt, regardless of effect on anything else
b. let them go bankrupt, with the Fed protecting other financial institutions affected by it
c. forced another financial institution to buy them, with help from the Fed
d. exactly what the Fed did, buy billions in their stock to increase their reserves

14.

Keynesians believe that the best way to end a recession is:


a. tax cuts
b. government spending increases
c. industrial policy
d. do nothing

15.

(True/False) Data tell us that changing taxes has the strongest effect on the economy when
times are good, and less effect as times go bad.

16.

(True/False) All economists agree the government can effect the economy in a positive way.

17.

(True/False) The USA has traditionally used industrial policy, other countries have not.

18.

To stimulate the economy, the government should ___________ taxes.

19.

When lowering interest rates does not affect the economy, economists say that we are in a(n)
_____________________________________________________________________________

20.

It is called ______________________________________________________________________ when


the governments borrowing to pay for something like the stimulus package makes interest
rates go up, and lessens private borrowing.

21.

The ________________________________________________________________________ is the


time it takes for the government to realize that there is a problem which requires it to act.

22.

(True/False) It is easy and quick for the Fed to change the money supply or interest rates,
but it may months before the impact of that change filters through the whole economy.

23.

(True/False) The correct monetary policy to use during a demand recession would be to lower
interest rates and lower the money supply.

24.

If a recession is caused by a supply shock, the solution is to:


a. wait until its over and recovers, nothing much will help
b. use monetary policy only
c. raise government spending and leave the money supply alone
d. use industrial policy

25.

The idea that there is a tradeoff between inflation and unemployment in the short run is:
a. Greshams Law
b. The Phillips Curve
c. Keynes Conundrum
d. The Laffer Curve

Key Questions from Earlier: (NOTE: THERE WILL BE THINGS ON THE TEST NOT COVERED
HERE, THESE ARE THE QUESTIONS FROM YOUR TESTS THAT I THINK ARE MOST
IMPORTANT!)

1.

The entire Balance of Payments (all parts) adds up to _____________________________

2.

_________________ means that the value of the dollar has fallen because the market made it.

3.

(True/False) An increase in exports should make the value of your currency rise.

4.

(True/False) If the value of the dollar is falling against the Yen, it must be falling against all
other currencies as well.

5.

Modern exchange rates are supposed to be:


a. fixed
b. floating
c. multi-lateral
d. coordinated

6.

If the U.S. has a balance of trade deficit and exchange rates are free to float, this deficit:
a. should fix itself because the value of the dollar will fall
b. should fix itself because the value of the dollar will rise
c. can only be fixed through government intervention
d. should fix itself through movements of gold between nations

7.

Gross Domestic Product measures:


a. total production in the economy
b. total expenditure in the economy
c. total employment in the economy
d. a and b
e. a, b and c

8.

GDP equals:
a. C + I + T + (X-M)
b. C + S + G + (X-M)
c. C + I + G
d. C + S + T

9.

The labor force is defined as:


a. everyone over 16
b. everyone over 16 and under 65, unless they are employed
c. the employed and the unemployed
d. the employed and the employable

10.

Aggregate demand is:


a. total expenditure in the economy
b. total production in the economy
c. total consumer activity in the economy
d. both a and b

11.

An increase in imports to the US from other countries would shift:


a. aggregate demand to the left
b. aggregate supply to the left
c. aggregate demand to the right
d. aggregate supply to the right

12.

A government budget cut would shift:


a. aggregate demand to the left
b. aggregate supply to the left
c. aggregate demand to the right
d. aggregate supply to the right

13.

A decrease in investment spending in the US would:


a. increase prices and lower Real GDP
b. increase prices and raise Real GDP
c. decrease prices and lower Real GDP
d. decrease prices and raise Real GDP

14.

(True/False) Says Law tells us that people decide how much to save, and the amount they
consume is the left-over after they make the saving decision.

15.

(True/False) Classical economists believe that the economy is stable and self-correcting.

Figure 1

16.

The graph above represents a(n):


a. inflationary gap
b. recessionary gap
c. expansionary gap
d. equilibrium gap

17.

On Figure 1 on the answer sheet, draw a line to represent how the Classical economists
believed the gap would be eliminated.

18.

The change you drew in #16 would happen, according to Classical economists:
a. only through government spending and taxing changes
b. because wages fall, without any government action
c. because wages fall, caused by actions of the government
d. because wages rise, without any government action

19.

In Classical theory, if a recession starts in the economy, what will happen?


a. wages and prices will fall to correct it
b. wages and prices will rise to correct it
c. wages and prices will fail to adjust properly and will have to be primed
d. prices will rise and wages will fall to correct it

20.

Suppose my income this month is $10,000 and I spent $9,000, and last month my income was
$9,000 and I spent $8,200. What is my MPC?
_______________

21.

If my MPC is what you calculated in #21, a $10 billion increase in government spending
would cause how big a change in GDP?
$___________B

22.

Keynes though the most important determinant of investment was:


a. interest rates
b. expectations
c. taxes
d. champagne

23.

____________(True/False) Supply side economics is based in part on the idea that tax cuts for
the rich will trickle down and help the poor and middle class.

24.

_________(True/False) New Classicals and New Keynesians believe that the Classicals were
right in the long run, but disagree about how the economy works in the short run. This is
called the Neo-Classical Synthesis.

25.

The equation of exchange is ________________________ = ___________________________

26.

The ________________________ of money is the average number of times each dollar is spent
each year.

27.

Modern New Keynesians believe that recessions are caused by:


a. the multiplier effect on unemployment
b. speculation
c. supply shocks
d. sticky wages

28.

Almost all money in the world today is ____ money


a. commodity
b. fiat
c. industrial
d. contractural

29.

Which of the following is not one of the functions of money?


a. medium of exchange
b. store of value
c. moderator of wealth
d. unit of account

30.

When David Hume said that money was the oil of trade, he meant which function of money?
a. medium of exchange
b. store of value
c. moderator of wealth
d. unit of account

31.

In a fractional reserve banking system, banks must keep:


a. a percentage of their deposits on reserve in the bank
b. a percentage of their loans on reserve in the bank

c. a set dollar amount on reserve in the bank, based on their size


d. a percentage of their average daily transactions on reserve in the bank
32.

(True/False) An increase in the money supply should increase inflation.

33.
_____

The Federal Reserve is intended to be:


a. independent of Congress and the president to keep inflation lower
b. independent of Congress and the president to keep unemployment lower
c. controlled by Congress and the president to keep inflation lower
d. controlled by Congress and the president to keep unemployment lower

34.

The central bank increases the money supply by __________ bonds.

35.

When the Fed does what it says in #34, interest rates should:
a. fall
b. rise
c. remain unchanged

36.

The ______________ rate is what the Fed charges banks when they borrow from it.

37.

Most of the money in the world is:


a. cash printed by the government
b. created by banks when they make loans
c. created through printing bonds
d. created by banks taking deposits

38.

M1 is mainly:
a. cash and coins
b. currency and checking accounts
c. currency, checking accounts, and small savings and time deposits
d. a freeway in London
Bills National Bank
Loans: $15,000
Securities: $10,000
Deposits: $30,000
Required Reserve Ratio = 10%

39.

Bills National Bank as listed above has $______________________________ in cash.

40.

The required reserves of Bills National Bank are $ _____________________________

41.

The actual reserves of Bills National Bank are $ _____________________________

42.

The excess reserves of Bills National Bank are $ _____________________________