Final exam of macroeconomics

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Econ2002.01FinalPracticeProblems2018.doc

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Economics 2002.01

Principles of Macroeconomics Name:_____________

Final Exam—Practice Problems

Each question has a value of one point. Select the best answer available.

1. The fact that human wants generally exceed the available resources is known as ___.

a. scarcity

b. welfare

c. shortage

d. deficits

2. Lenny had five hours to study the night before the big test. Instead, he used his five hours to play the latest version of his favorite video game which was released that morning. Lenny usually gets a B on a test, but this time he earned a D. This is an example of ___.

a. the fallacy of composition

b. violating the ceteris paribus assumption

c. poor decision-making

d. opportunity cost

3. When people consider the costs and benefits of incremental changes in their behavior, we say they are ___.

a. being rational

b. ignoring feedback effects

c. focusing on microeconomics

d. making decisions at the margin

4. When economists apply the scientific method, the first step is to ___.

a. identify the key variables

b. state the hypothesis

c. gather historical data and test the model

d. state you assumptions

5. Which of the following is a positive statement?

a. The death penalty is the proper punishment for felons.

b. Stock investors lose money if the price of their stock falls.

c. Investors ought to purchase more IBM stock.

d. The president needs to lower the tax rates since they are too high.

6. Which of the following best describes the difference between micro- and macro-economics?

a. Micro refers to the entire economy and macro refers to individual decision making.

b. Micro focuses on the “building blocks’ of the economy, while macro deals with the “big picture”.

c. Micro refers to small firms and macro to large corporations.

d. Micro refers to insignificant decision making, while macro is concerned with vital economic decisions.

7. The three questions that all economic systems must answer are ___.

a. why to produce, for whom to produce, and how to produce

b. what to produce, how much to produce, and what price to charge

c. what to produce, how to produce, and for whom to produce

d. what to produce, how much to produce, and for whom to produce

8. In economics, any kind of manufactured resource is considered to be ___.

a. land

b. labor

c. capital

d. entrepreneurship

9. The concave (bowed outward) shape of the production possibilities curve indicates that ___,

a. as the production of one good rises, the opportunity cost of that production rises

b. the trade-off between the two goods is constant along the curve

c. production of one good is characterized by increasing cost and the other by decreasing cost

d. as you move from one type of production to another, the opportunity cost declines

10. The dictator of Rusland wants to achieve the greatest possible growth. His advisors have given him three options for producing consumer goods and capital goods. Which choice will achieve his goal?

a. Produce only consumer goods.

b. Produce only capital goods.

c. Divide the resources equally between consumer goods and capital goods.

11. Assume that in the country of Rusland described above, there is an improvement in the technology used to produce consumer goods. The production possibilities frontier will ___.

a. shift inward

b. shift outward

c. increase at the consumer goods end and decrease at the capital goods end

d. change slope as the consumer goods end increases, but the capital goods end remains unchanged

Use the graph below to answer the next two questions.

12. Between points A and B, the opportunity cost of another bushel of corn is ___.

a. 0.50 yards of cloth

b. 1.00 yards of cloth

c. 1.25 yards of cloth

d. 1.50 yards of cloth

13. Point F shows a combination of goods that ___.

a. cannot be produced, given the economy’s capacity

b. employ the economy’s capacity efficiently

c. can be produced, but that would under-employ the economy’s resources

d. give society the same level of economic welfare

14. Comparative advantage is a concept that states ___.

a. that one nation can produce more of a good than another

b. that some nations should only be importers

c. what a country produces

d. that opportunity costs dictate what a country produces

15. How is the “what to produce” question answered in a command economy?

a. Suppliers produce what consumers want and what will make them (the suppliers) a profit.

b. Central planners in the government decide what will be produced.

c. Some decisions are made by the government, others reflect consumer wants.

d. Firms produce what they believe that people need in order to survive.

16. According to the law of demand, increases in the price of a product will ___.

a. decrease the quantity demanded of that product

b. increase the quantity demanded of that product

c. decrease the demand for the product

d. increase the demand for the product

17. Which of the following would shift the demand curve for computer disks?

a. The price of computer disks increase.

b. There is a technological advancement in the production of computer disks.

c. Consumer incomes increase.

d. Workers producing the computer disks receive a wage increase.

18. Suppose that there was a virus that killed more than ¼ of the dairy cows in the United States. Which of the following best describes the above situation, considering the market for milk?

a. There will be a shortage of milk, leading to an increase in the price.

b. There will be a shortage of milk, leading to a decrease in the price.

c. There will be a surplus of milk, leading to an increase in the price.

d. There will be a surplus of milk, leading to a decrease in the price.

19. John works at The Spaghetti Shop in the mall near his house. The Shop lowered its price on lasagna, ceteris paribus. John saw that over time the sales of both lasagna and garlic bread increased. He knew it was because ___.

a. the Shop had also decreased the price of garlic bread

b. lasagna and garlic bread were complements

c. that consumers tastes for garlic bread had changed

d. people had higher incomes and were spending them on garlic bread

20. A shortage exists when ___.

a. the price in the market is above the equilibrium price

b. the quantity demanded is less than the quantity supplied

c. resources are limited

d. the quantity supplied is less than the quantity demanded

21. An increase in the cost of the production will ___.

a. cause a move up along the supply curve

b. shift the supply curve to the left

c. cause a move down along the supply curve

d. shift the supply curve to the right

22. When there is an increase in supply, then the equilibrium price will ___ and the equilibrium quantity will ___.

a. fall; fall

b. fall; rise

c. rise; fall

d. rise; rise

Use the graph below to answer the next three questions.

23. The equilibrium price in this market is ___ and the equilibrium quantity is ___.

a. $9, 20

b. $2, 75

c. $6, 50

d. $2, 20

24. A decrease in the price of the product from $9 to $6 causes ___.

a. a decrease in supply

b. a decrease in the quantity supplied from 70 to 50 units

c. a surplus to exist in the market

d. an increase in the quantity demanded from 20 to 75 units

25. Suppose the government wants to regulate the market shown in the graph above. Which of the following government set prices would be the most effective price ceiling?

a. $9

b. $6

c. $2

26. Which of the following is a leakage in the circular flow?

a. investment

b. saving

c. government purchases

d. transfer payments

27. In order, the four phases of the business cycle are ___.

a. contraction, expansion, peak, trough

b. trough, peak, expansion, contraction

c. expansion, trough, contraction, peak

d. peak, contraction, trough, expansion

28. Use the following to calculate GDP.

Consumption	$12,000	Wages	$9,000
Investment	$3,200	Transfer Payments	$1,350
Exports	$1,000	Government Purchases	$5,600
Imports	$850

a. $24,350

b. $22,650

c. $33,000

d. $20,950

29. The final market value of a good is ___.

a. the sum of all value added at all stages of production

b. the value added during the last stage of production

c. the sum al all final values at each stage of production

d. less than the price it is sold for

30. Suppose the economy starts out with a non-institutionalized adult population of 200,000 on January 1; 70,000 are working and 5,000 are unemployed. By February 1, the original 5,000 unemployed are still job hunting. In addition, rosy economic news has convinced 5,000 previously discouraged workers to start sending out resumes – and 3,000 of them have found jobs! The unemployment changed from ___ in January to ___ in February.

a. 7.1%; 9.6%

b. 6.7%; 8.8%

c. 15%; 11.4%

d. 3.8%; 4.0%

31. An agricultural laborer is unemployed between periods of planting and harvesting. This type of unemployment is ___.

a. structural

b. cyclical

c. seasonal

d. frictional

32. What type of inflation occurs if increased spending on goods and services cause firms to raise product prices?

a. Demand-pull

b. Cost-push

c. Composition shift

d. Expectational

33. The nominal interest rate is 9% and the expected rate of inflation is 5%. The real rate of interest is ___.

a. 13%

b. 5%

c. 4%

d. 9%

34. Suppose that the actual inflation rate were higher than the expected rate of inflation this year. This would result in ___.

a. gains for lenders at a fixed rate of interest

b. losses for borrowers at a fixed rate of interest

c. losses for both borrowers and lenders at a fixed rate of interest

d. benefits for borrowers at a fixed rate of interest

e. both A and B

35. Use the information below to calculate the CPI in the current year.

Product	Quantity in Market Basket	Unit Price in the Base Year	Unit Price in the Current Year
Bar of Soap	10	$1	$1
Big Mac	20	$2	$3
Pair of Socks	30	$3	$2

a. CPI = 140

b. CPI = 71

c. CPI = 108

d. CPI = 93

36. Last year the price index had a value of 120 and it now has a value of 125. Based on this information, the rate of inflation over the last year is ___.

a. 4.2%

b. 2.0%

c. 5.0%

d. 4.0%

37. An increase in net exports would ___.

a. lower the price level, but rise production and employment

b. raise the price level, but lower production and employment

c. raise the price level, production and employment

d. lower the price level, production, and employment

38. Which of the following items will cause the long run aggregate supply curve to shift to the right?

a. an increase in producer expectations

b. an increase in capital

c. a period of unusually good weather

d. a decrease in the expected level of prices

39. A strike that shuts down the nation’s steel factories would

a. shift aggregate demand to the right.

b. shift aggregate demand to the left.

c. shift aggregate supply to the left.

d. shift aggregate supply to the right.

Use the following graph to answer the following question.

40. According to the graph, this economy’s main problem is probably ___.

a. inflation

b. unemployment

c. low output

d. stagflation

Use the following diagram to answer the following question.

41. For the economy illustrated in the above diagram, the proper discretionary fiscal policy would be to ___.

a. decrease transfer payments

b. increase taxes

c. increase government spending

d. decrease the money supply

42. The time it takes to determine a problem in the economy exists is known as the ___.

a. effectiveness lag

b. policy lag

c. implementation lag

d. recognition lag

43. Which of the following c.05ould be considered discretionary spending?

a. unemployment compensation

b. food stamps

c. defense spending

d. progressive income tax rates

44. Crowding out occurs when ___.

a. an increase in saving causes a decrease in net taxes

b. an increase in net taxes causes a decrease in consumption

c. an increase in the money supply causes a decrease in net exports

d. an increase in government spending causes a decrease in business investment

45. Keynesian economists believe ___.

a. that except in periods of national emergency, the federal government should balance its budget

b. the federal government should balance its budget over the business cycle

c. the federal government should run a deficit during periods of high unemployment and run a surplus during period of high inflation

d. all deficits are bad because of “crowding out”

46. The national debt ___.

a. is the difference between government spending and tax revenues for any given year

b. is the accumulation of deficits over time

c. can be eliminated by balancing the budget each year

d. has a benefit in that it reduces the trade deficit

47. Supply-Side economists believe___.

a. incentives matter

b. government works

c. expectations matter

d. money matters

48. When one good or service is traded for another good or service, we have ___.

a. commodity money

b. fiat money

c. a barter system

d. seignorage

49. Amanda was saving for college. Whenever she earned some money, she put it in her savings account. This describes money in its role as ___.

a. a medium of exchange

b. a store of value

c. a unit of account

d. a standard of deferred payment

Use the following balance sheet for Bank Q to answer the next two questions. Assume the required reserve ratio is 0.25.

Assets	Liabilities
Total Reserves = $12,000	Deposits = $
Loans = $20,000	Loans from the Fed = $3000
Securities = $11,000
$43,000	$43,000

50. Bank Q has ___ of excess reserves.

a. $12,000

b. $10,000

c. $5,000

d. $2,000

51. Based on Bank Q’s balance sheet, how much money can the banking system create?

a. $160,000

b. $12,000

c. $8,000

d. $40,000

Use the following information to answer the following three questions. Bank T has $7,000 deposited with the Federal Reserve, $3,000 in vault cash, and is holding $25,000 of securities. It has $100,000 in checkable deposits and no loans from the Federal Reserve. Assume the required reserve ratio is 0.05.

52. How many dollars of total reserves is Bank T holding?

a. $5,000

b. $3,000

c. $28,000

d. $10,000

53. Bank T is required to hold ___ as required reserves.

a. $250

b. $5,000

c. $1,250

d. $3,000

54. Bank T can create ___ of new money.

a. $100,000

b. $5,000

c. $2,000

d. $0

55. Suppose the monetary base is equal to $6 million and the required reserve ratio is 0.20, what is the money supply?

a. $1.2 million

b. $30 million

c. $3.3 million

d. $6 million

Use the following balance sheet for the FED to answer the next two questions.

Assets	Liabilities
Securities = $14 billion	Bank Reserve Deposits = $12 billion
Loans = $1 billion	Currency in Circulation = $

$15 billion	$15 billion

56. How much currency is currently in circulation?

a. $3 billion

b. $15 billion

c. $1 billion

d. The currency in circulation cannot be determined based on this information.

57. If the required reserve ratio is 0.10, the money supply is ___.

a. $1.2 billion

b. $150 billion

c. $3 billion

d. $140 billion

58. The interest rate one bank charges another bank for loans is called the ___.

a. prime lending rate

b. discount rate

c. federal funds rate

d. short-term Treasury rate

59. A bond has a face value of $250 and sells for a price of $245. The interest rate on the bond is ___.

a. 0.98%

b. 1.02%

c. 2.00%

d. 2.04%

60. Assume the velocity is constant. If the money supply is increasing by 4% and the rate of growth in GDP is 1%, what is the rate of change in prices?

a. 4%

b. 0%

c. 1%

d. 3%

Use the following information to answer the next question.

Money Supply………. $4.4 trillion

Velocity of Money….. 3

Real GDP…………… $10.6 trillion

61. Based on this information, the price level is ___.

a. 2.41

b. 1.25

c. 3.53

d. 0.80

Use the following diagram to answer the following question.

62. Given the macroeconomic problem illustrated in the diagram, the FED should ___

a. sell bonds

b. raise the federal funds rate

c. lower the required reserve ratio

d. raise the discount rate

63. When the Federal Reserve sells bonds, it ___ in the bond market.

a. increases the demand for bonds

b. decreases the demand for bonds

c. increases the supply of bonds

d. decreases the supply of bonds

64. When the Federal Reserve sells bonds, it ___.

a. increases the price of bonds and lowers the interest rate

b. increases the price of bonds and raises the interest rate

c. decreases the price of bonds and lowers the interest rate

d. decreases the price of bonds and raises the interest rate

65. Suppose that the federal government increases transfer payments. All else equal, we would predict ___.

a. both output and the price level will rise

b. output will rise, but the price level will fall

c. output will fall, but the price level will rise

d. both output and the price level will fall

Use the following diagram to answer the next question.

66. A classical economist would argue the proper thing to do in this situation is ___.

a. decrease taxes

b. reduce government spending

c. do nothing and let the flexible wages and prices adjust the economy back to full employment

d. have the FED sell bonds

67. Which school of thought focuses on the short run?

a. Monetarists

b. Keynesians

c. New Classical economists

d. Supply-Side economists

68. The New Classical or Rational Expectations model says that people form their expectations about prices based on ___.

a. past events

b. current events

c. anticipated future events

d. all of the above

69. Monetarists would argue that fiscal policy is ineffective because ___.

a. the liquidity trap means that policy changes have no effect on the price level

b. businesses may not respond to changes in interest rates

c. private spending can be crowded out by the deficits associated with expansionary fiscal policy

d. anticipated changes in fiscal policy will cause people to adjust their behavior

70. Keynesians argue that the aggregate supply curve is ___.

a. downward sloping

b. upward sloping

c. vertical

d. sometimes vertical and sometimes horizontal

Use the following diagram to answer the next two questions. Assume that the economy begins at point A and there is an anticipated decrease in the money supply.

71. The Keynesian theory argues that the anticipated decrease in the money supply causes a move from ___.

a. point A to point B

b. point A to point C and then from point C to point B

c. point A to point B and then from point B to point C

d. point A to point C

72. According to the Monetarists, the anticipated decrease in the money supply causes a move from ___.

a. point A to point B

b. point A to point C and then from point C to point B

c. point A to point B and then from point B to point C

d. point A to point C

73. The natural rate of unemployment is___.

a. equal to the seasonal unemployment rate

b. the unemployment rate when no one in the work force is unemployed longer than 6 months

c. defined by the government according to a formula which includes government spending, consumption, and the tax rate

d. the unemployment rate when the economy produces at its potential GDP

Answers:

1. a

2. d

3. d

4. b

5. b

6. b

7. c

8. c

9. a

10. b

11. d

12. a

13. c

14. d

15. b

16. a

17. c

18. a

19. b

20. d

21. b

22. b

23. c

24. b

25. c

26. b

27. d

28. d

29. a

30. b

31. c

32. b

33. c

34. d

35. d

36. a

37. c

38. b

39. c

40. a

41. c

42. d

43. c

44. d

45. c

46. b

47. a

48. c

49. b

50. d

51. d

52. d

53. b

54. b

55. b

56. a

57. b

58. c

59. b

60. d

61. b

62. c

63. b

64. d

65. a

66. c

67. b

68. d

69. c

70. b

71. a

72. c

73. d

Yards of Cloth

Bushels of Corn

9.5

8.5

2.5

3.25

Price

Quantity

SRAS

Potential Output

Price Level

Real GDP

Price Level

Real GDP

Price Level

SRAS1

AD1

LRAS

RGDP

Price Level

Real GDP

Price Level

AD1

AD2

AS1

AS2

LRAS