Practice Exam for Midterm 1
1. Suppose the figure above represent the market for peaches. Who is hurt by a price floor of $3 per pound?
I. Consumers who purchase peaches at the controlled price.
II. Producers who sell peaches at the controlled price.
III. Consumers who would like to buy peaches at the equilibrium price, but are unable to do so.
IV. Producers who would like to sell peaches at the equilibrium price, but are unable to do so.
a. I, III, and IV
b. I and III
c. II and III
d. I, II, III, and IV
2. Refer to the figure. Suppose the economy is producing at point “D”. Which of the following would allow the economy to produce at point C? Check all that apply.
a. Increase level of technology
b. Pay workers higher wages
c. Improve quantity and quality of resources
d. Choose a different allocation of resources
3. In the circular-flow diagram,
a. Factors of production flow from government to firms
b. Goods and services flow from households to firms
c. Income paid to the factors of production flows from firms to households
d. Spending on goods and services flows from firms to households
4. Which of the following transactions takes place in the markets for the factors of production in the circular-flow diagram?
a. Dylan receives a salary for his work as a financial analyst for an investment firm
b. Kristin buys two business suits to wear to her job as a Chief Information Officer
c. Jim receives clean water in his home in exchange for paying his water bill
d. Caroline owns a nail salon and receives payments from her clients for her services
5. Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also assume that Germany has an absolute advantage in
both fish and cars. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then
a. The two countries’ combined output of both goods will be higher than it would be in the absence of trade
b. Greece will produce more fish than it would produce in the absence of trade
c. Germany will produce more fish than it would produce in the absence of trade
d. All are correct
6. Which of the following is not correct?
a. Comparative advantage is the basis for mutually beneficial trade
b. Trade has the potential to benefit all nations
c. Trade allows nations to consume outside of their production possibilities curves
d. Absolute advantage is the basis for mutually beneficial trade
7. Flights to Paris are a normal good and people’s income rises. At the same time, the price of jet fuel rises. The equilibrium price of a flight to Paris ___ and the
equilibrium quantity of flights to Paris ___.
a. Might rise, fall, or not change; increases
b. Falls; decreases
c. Rises; increases
d. Rises; might increase, decease, or not change
8. If mayonnaise Miracle Whip are substitutes, then which of the following would increase the demand for Miracle Whip?
a. A decrease in the price of Miracle Whip
b. An increase in the price of mayonnaise
c. A decrease in the price of mayonnaise
d. An increase in the price of Miracle Whip
9. If a study by medical researchers finds that eating brown rice causes weight loss while eating white rice causes weight gain, then we likely would see
a. An increase in demand for brown rice and a decrease in demand for white rice
b. A decrease in demand for brown rice and an increase in demand for white rice
c. An increase in demand for both brown and white rice
d. No change in demand for either type of rice because weight loss is not a determinant of demand
10. Which of the following correctly describes how price adjustments eliminate a shortage?
a. As the price rises, the quantity demanded decreases while the quantity supplied increases
b. As the price rises, the quantity demanded increases while the quantity supplied decreases
c. As the price falls, the quantity demanded decreases while the quantity increases
d. As the price falls, the quantity demanded increases while the quantity supplied decreases
11. The French have lower GDP per capita relative to the United States and spend more time producing goods in the home consumption. French real GDP per capita ___
the standard living in France relative to the United States.
a. Underestimates
b. Is a perfect measure
c. Overestimates
12. The table displays data from the Bureau of Economic Analysis for the Unites States in 2012
Expenditure category Consumption Investment Government
Purchases
Exports Imports
Trillions of U.S.
Dollars
11.14 2.48 3.17 2.20 2.74
Calculate nominal GDP in 2012
a. $17.33 Trillion
b. $16.25 Trillion –
GDP=consumtion+investment+govpurchase+exports-imports
c. $21.70 Trillion
d. $13.94 Trillion
e. Cannot be determined from the information given
13. Refer to the table. What is the value of the GDP deflator in 2000?
a. Cannot be determined
b. 100
c. 105
d. 89 – GDP deflator = nominal GDP/real GDP * 100
e. 113
14. Refer to the figure. Suppose apple farmers decide to sell some of their orchard land for housing developments. What best describes the effect in the market for fresh
apples?
a. A
b. B
c. C
d. D
e. E
f. F
15. Assume the figures represented the market for sports cars. Which of the following best describes graph A?
a. The price of gasoline falls
b. The price of full-size sedans falls
c. Income decreases
d. The number of firms producing sports cars increases
e. None of these
16. Refer to the figure. What best describes the change in the diamond market if both consumers and diamond producers expect the price of diamonds to rise in the
future
a. A b. B
c. C
d. D
e. E
f. F
17. When two variables have a positive correlation,
a. When the x-variable increases, the y-variable decreases
b. When the x-variable decreases, the y-variable increases
c. When the x-variable decreases, the y-variable increases
d. More than one of the above is correct
18. Which of the following is true?
a. For an inferior good, when income increases, the demand curve shifts leftward
b. The demand curve for a good shift leftward when the price of a substitute rises
c. If consumers expect the price of a good will rise in the future, the demand curve shifts leftward
d. An increase in population shifts the demand curve for most goods leftward
19. The downward-sloping demand curve illustrates
a. That demand decreases over time
b. That prices fall over time
c. The relationship between income and quantity demanded
d. The law of demand
20. A movement along the supply might be caused by a change in
a. Production technology
b. Input prices
c. Expectations about future prices
d. The price of the good or service that is being supplied
21. The signals that guide the allocation of resources in a market economy are
a. Surpluses and shortages
b. Quantities
c. Government policies
d. Prices
22. Which of the following would lead to an increase in GDP for the United States in 2013?
I. Toyota, a Japanese firm, produces cars in Kentucky in the first quarter of 2013
II. A 2013 model year Ford Fiesta is produced, but sits on a dealer lot until February 2014
III. $10,000 worth of new-crop Washington-grown wheat is exported to Japan in October 2013
IV. An international student purchases a ham sandwich from a Tempe Subway sandwich shop in May 2013
a. III, and IV
b. I and II
c. I, II and III
d. II and III
e. I, II, III and IV
23. Recently, a gluten free diet has gained popularity among those looking to eat healthily and lose weight. The supply and demand model in class predicts
a. A fall in the equilibrium of gluten free food and increase in quantity consumed
b. A rise in the equilibrium price of gluten free food and a decrease in quantity consumed
c. A rise in the price of gluten free food offered for sale and an increase in quantity consumed
d. An uncertain charge in the price of gluten free food an increase in the quantity consumed
24. Suppose the income of buyers in a market for an inferior food decrease and a technological advancement occurs also. What would we expect to happen in the
market?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous
b. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous
d. None of the above is correct
25. Which of the following would cause price to decrease?
a. A decrease in supply
b. An increase in demand
c. An increase in supply
d. A shortage of the good
26. Which of the following in an example of positive economic analysis?
a. Policy makers decide to spend more on education
b. A simple study is conducted that shows people should finish their college degrees
c. Policy makers believe that education is currently a more important issue than inflation
d. A simple study is conducted that shows annual earnings increase with education level
27. In economics, the cost of something is
a. The dollar amount you must pay to obtain it
b. The time you had spent to obtain it
c. The value of the next-best alternative forgone to get it
d. Often impossible to quantify, even in principle
28. Suppose the figure represents the market for apples. Suppose a price ceiling of $2 per pound is imposed. As a result,
a. There is a shortage of 35 thousand pounds of apples
b. There is a surplus of 35 thousand pounds of apples
c. There is a shortage of about 14 thousand pounds of apples
d. The market remains in equilibrium because the price ceiling is
not binding
29. Suppose the economy is producing at point C. What is the opportunity cost of increasing production of capital goods by 50 units?
a. 150 units of consumption goods
b. 75 units of capital goods
c. 50 units of consumption goods
d. It depends on the preferences of society
e. 200 units of consumption goods
30. It takes Suzi 6 hours to sew a shirt and 4 hours to bake a cake. Anna can sew a shirt in 3 hours and bake a cake in 1 hour. If Anna and Suzi decide to specialize and
trade, who should make shirts?
a. Anna
b. Suzi
c. Both
d. Neither
31. Rational individuals
a. Have complete and correct information
b. Make the same decisions as other rational individuals
c. Are not right most of the time
d. Are all of these
e. Weigh the costs and benefits of every action
32. Which of the following describes the difference between “scarcity” and “shortage”
a. There is no difference
b. In the economic sense, almost everything is scarce. A shortage of a good or services occurs when the quantity demanded is greater than the quantity supplied
at the current market price
c. There is a shortage of almost everything. Scarcity only occurs if the quantity demanded of a good or service is greater than the quantity supplied at the current
market price
d. In the economic sense, almost everything is scarce. A shortage of a good or service occurs when the quantity demanded is greater than the quantity supplied at
the equilibrium price
33. The table above is a production possibilities schedule for countries A and B.
Country A Bicycles 100 80 60 40 20 0
Wheat 0 40 80 120 160 200
Country B Bicycles 50 40 30 20 10 0
Wheat 0 30 60 90 120 150
I. The opportunity cost of producing one unit of bicycles in country A is 2 units of wheat
II. The opportunity cost producing one unit of bicycles in country B is 3 units of wheat
III. Country A has a comparative advantage in the production of bicycles
IV. Country B has a comparative advantage in the production of wheat
V. Suppose that before countries A and B decided to trade, country A produced 60 units of bicycles and 80 units of wheat. Country B produced 30 units of
bicycles and 60 units of wheat. If country A and B decide to specialize and trade, this would result in an increase in total production of bicycles in the
amount of 10 units and an increase in the total production of wheat in the amount of 10 units
34. Which of the following would cause a movement along the supply curve of cupcakes?
a. An improvement in technology for commercial mixers
b. A decrease in the price of cupcakes
c. An increase in the price of cake flour
d. All of the above are correct
35. Suppliers will be willing to supply a production in all of the following situations except
a. The price received is greater than the additional cost of producing the product
b. The price received tis at least equal to the additional cost of producing the product
c. The price received is equal to the additional cost of producing the product
d. The price received is less than the additional cost of producing the product
36. Which of the following would lead to a leftward shift in the supply curve for iPads (a normal good)?
a. A decrease in the price of the application that run on iPads
b. A decrease in the value of household wealth
c. A decrease in the price of laptop computers
d. The price of silicon, and input in production increases
e. A decrease in the price of iPads
37. Which of the following is the most likely explanation for the imposition of a price ceiling on the market for milk?
a. Policymakers have studied the effects of the price ceiling carefully, and they recognize that the price ceiling is advantageous for society as a whole
b. Buyers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into imposing the price ceiling
c. Sellers of milk, recognizing that the price ceiling is good for them, have pressured policymakers into imposing the price ceiling
d. Buyers and sellers of milk have agreed that the price ceiling is good for both of them and have therefore pressured the policymakers into imposing the price
ceiling
38. A price floor is
a. A legal minimum on the price at which a good can be sold
b. Often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price floor
c. A source of inefficiency in a market
d. All of the above are correct
Practice Exam for Midterm 2
1. Which of the following is/are considered an asset of a bank?
a. Reserves
b. Deposits from households and businesses
c. Debt or bank borrowing
d. Bank capital
2. When a bank is insolvent
a. All of these
b. It is at risk of being closed by regulators
c. Bank capital is negative
d. Liabilities exceed assets
3. Calculate the inflation rate over the period of 2008 (215.3) – 2009(214.6)
a. 0.7%
b. 15%
c. 0.33%
d. -.33% = (2009-2008)/2009*100
4. Fiat money is
a. Money without intrinsic value that is used as money because of government decree
b. A commodity, like gold or silver
c. Money with intrinsic value used as money without any government support or decree
d. Money with intrinsic value that is used as money because of government decree
5. Which of the following price changes would be reflected in the CPI?
I. The price of haircuts from a Tempe, AZ salon increases
II. The price of cars imported by the United States from Japan increases
III. The price of heavy farm equipment purchased by farmers in the United States increases
IV. The price of ammunition purchased by the United States government for military operations increases
a. I, II, III and IV
b. I and II
c. I and III
d. I, II and III
6. Common biases is the CPI include ___ and as a result, the CPI ____ the true cost of living
a. None/perfectly estimates
b. Unmeasured quantity change, substitution and introduction of
new goods/overestimates
c. Unmeasured quality change, introduction of new goods and
substitution/underestimates
d. Quantity, outlet and substitution/overestimates
e. Quantity, outlet and substitution/underestimates
7. When the consumer price index falls, the typical consumer
a. Can save less because they do not need to offset the effects of rising prices
b. Finds that its standard of living is not affected
c. Has to spend more dollars to maintain the same standard of living
d. Can spend fewer dollars to maintain the same standard of living
8. The consumer price index us used to
a. Monitor changes in the level of wholesale prices in the economy
b. Monitor changes in the level of real GDP overtime
c. Monitor changes in the stock market
d. Monitor changes in the cost of living over time
9. In 1970(17.8), a gallon of gasoline cost $0.36. Adjust this price to 2013(106.4) dollars.
a. $6.50
b. $2.15
c. $1.36
d. $3.83
10. Because of diminishing returns, an increase in the saving rate leads to
a. A decrease in productivity growth only for a while
b. A permanent increase in productivity growth
c. A permanent decrease in productivity growth
d. An increase in productivity growth only for a while
11. Suppose as a result of a decline in economic conditions, some employed workers are forced to retire early. Assuming no change in the number of unemployed
workers, this would result in a(n) ___ in the unemployment rate and a(n) ___ in the labor force participation rate.
a. Decrease/increase
b. Decrease/decrease
c. Increase/increase
d. Increase/decrease
12. Of the following, who is considered officially unemployed
a. Tess lost her job as a typesetter and sought work for about 2 years, but has given up looking
b. Kate is in school full time and not seeking employment
c. Buffy works part-time at the Double Meat Palace and has been actively seeking full time work as an administrative assistant
d. None of these are considered officially unemployed
e. Sissy is a 20-year-old college student who quit her job at a fast-food restaurant to focus on school
13. Which of the following is a store of value?
a. Fine art
b. All of these are correct
c. Currency
d. U.S. government bonds
14. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?
a. Medium of exchange
b. Store of value
c. None of these are correct
d. Unit of account
15. Which of the following can be measured by the level of real GDP per person?
a. Productivity
b. Both productivity and standard of living
c. Neither the standard of living nor productivity
d. The standard of living
16. By taking this class, you are
a. All of these
b. Increasing the technological knowledge of the economy
c. Building physical capital
d. Building human capital
17. The labor force equals the number of people
a. Unemployed
b. Employed
c. In the working-age population
d. Employed plus unemployed
18. Which of the following is the most liquid asset?
a. Treasury bonds
b. Stocks
c. Gold
d. Currency
19. A minimum wage of $16 per hour
a. Would increase unemployment by 400 persons
b. Would decrease unemployment by 400 persons
c. Would not result in a change in unemployment
d. Would decrease unemployment by 200 persons
e. Would increase unemployment by 200 persons
20. Which of the following is the most often used tool of monetary policy?
a. Open market operations
b. Paying interest on reserves
c. Reserve requirements
d. Fed lending to banks or discount loans
21. Suppose the reserve requirement is 5%. What is the maximum possible expansion of deposits that could result from an initial deposit of $500?
a. $20,000
b. $10,000
c. $5,000
d. $1,000
22. Which of the following is currently considered part of the U.S. monetary supply?
I. A savings deposit in the amount of $10,000
II. A bank deposit in the amount of $5,000
III. A $100 bill
IV. A Treasury Bond worth $10,000
a. I, III and IV
b. I, II and III
c. I, II
d. All are money
e. I and IV
23. Suppose the published interest rate on a one-year security (like a Treasury) is 3% and the inflation rate is 3%. The real interest rate is
a. 2%
b. 6%
c. 3%
d. 0%
e. -2%
24. Refer to the balance sheet. Suppose the reserve requirement is 10%. What is the maximum amount that Fictional First can loan out and still meet the reserve
requirement?
Assets Liabilities
Reserves $3,000 Deposits $22,000
Loans $20,000 Debt $2,000
Securities $5,000
a. $3,000
b. $800
c. $2,200
d. $0
e. $1,200
25. Which of the following explains why many European countries have unemployment rates are higher than in the United States?
a. Firms in European countries offer employees higher wages and higher benefits than do firms in the United States
b. Technological change occurs at a faster rate in Europe, so structural unemployment is higher in Europe
c. European countries offer higher unemployment benefits than the United States
d. The minimum wage in Europe is lower than it is in the United States
26. Which of the following types of unemployment is associated with longer spells of unemployment?
a. Fictional
b. Cyclical
c. All of these
d. Structural
27. Labor force = total employed + unemployed
Participation rate = labor force / civilian population
Unemployment rate = unemployed / labor force
28. If the Fed carries out an open market sale of U.S. government securities, the quantity of bank reserves ___ and the money supply ___.
a. Falls, increases
b. Falls, decreases
c. Rises, increases
d. Raises, decreases
29. Suppose the Federal Reserve wanted to decrease the money supply. It could
a. Perform open market purchases
b. Make loans to banks
c. Decrease the reserve requirement
d. Increase the interest rate paid on bank reserves
30. Suppose the Federal Reserve wanted to increase the money supply. It could
a. Increase the interest rate paid on bank reserves
b. Increase the discount rate
c. Perform open market purchase of securities
d. Increase the reserve requirement
31. Which of the following is TRUE?
a. Growth in capital per worker is required for sustained growth in real GDP per person
b. Growth in productivity is required for sustained growth in real GDP per capita
c. Abundant natural resources are required for sustained growth in real GDP per person
d. Stable or declining population is required for sustained growth in real GDP per person
e. All of these are true
32. Productivity is defined as the quantity of
a. Goods and services produced per unit of time
b. Goods and services produced from each unit of labor input
c. Labor required to product one unit of goods and services
d. Labor required to produce a nation’s GDP
33. Which of the following would increase productivity?
a. An increase in natural resources per worker
b. An increase in the physical capital stock per worker
c. An increase on human capital per worker
d. All of these are correct
34. Matt is going to college to become a pharmacist. What he learns about existing information increases
a. Neither technological knowledge nor human capital
b. Both technical knowledge and human capital
c. Technological knowledge but not human capital
d. Human capital but not technological knowledge
35. Holding the nominal interest rate constant, the real interest rate
a. Is not influenced by the inflation rate
b. Decreases during periods of deflation
c. Decreases when there is an increase in the inflation rate
d. Increases when there is an increase in the inflation rate
36. Which of the following is a determinant of productivity
a. Human capital per worker
b. Natural resources per worker
c. All of these are correct
d. Physical capital per worker
37. If the Fed wants to raise the Federal Funds rate it will
a. Buy government securities in order to decrease the quantity of reserves
b. Buy government securities in order to increase the quantity of reserves
c. Sell government securities in order to increase the quantity of reserves
d. Sell government securities in order to decrease the quantity of reserves
38. Which of the following does the Federal Reserve not do?
a. It acts as a lender of last resort to banks
b. It controls the supply of money
c. It tries to ensure the health of the banking system
d. It makes loans to any qualified business that requests one
Midterm 2 Questions
1. Which of the following is/are considered an asset of a bank?
a. Reserves
b. Debt or bank borrowing
c. Deposits from households and businesses
d. Bank capital
2. When bank is insolvent
a. Liabilities exceed assets
b. All of these
c. It is at risk being closed by regulators
d. Bank capital is negative
3. Calculate the inflation rate over the period 2011 (224.9) – 2012 (229.6)
a. 2.09% -- 2012-2011/2011*100
b. -2.00%
c. 5.5%
d. 24.9%
4. Currently, U.S. currency is
a. Fiat money with intrinsic value
b. Fiat money with no intrinsic value
c. Commodity money with intrinsic value
d. Commodity money with no intrinsic value
5. Which of the following price changes would be reflected in the CPI?
I. The price of haircuts from a Tempe, AZ salon increases
II. The price of cars imported by the U.S. from Japan increases
III. The price of heavy firearm equipment purchased by farmers in the U.S. increases
IV. The price of ammunition purchased by the U.S. government for military operations increases
a. I, II and III
b. I and III
c. I, II, II and IV
d. I and II
6. The CPI basket is adjusted ___. Because the introduction of new goods makes each dollar more valuable, the CPI ___ the true cost of living
a. Frequently / under-estimates
b. Infrequently / over-estimates
c. Infrequently / over-estimates
d. Frequently / perfectly estimates
7. When the consumer price index falls, the typical consumer
a. Has to spend more dollars to maintain the same standard of living
b. Can spend fewer dollars to maintain the same standard of living
c. Find that its standard of living is not affected
d. Can save less because they do not need to offset the effects of rising prices
8. The consumer price index is used to
a. Convert nominal GDP into real GDP
b. Turn dollar figures into meaningful measures of purchasing power
c. Measure the value of goods and services that consumers purchase
d. Measure the quantity of goods and services that the economy produces
9. In 1970 (17.8), the suggested retail price of a Ford Mustang hardtop V8 was $2740. Adjust this price to 2013 dollars
a. $16,378
b. $291,536
c. $2,740
d. $29,519
10. If a country increases its savings rate,
a. Capital increases and productivity growth increases for a short while
b. Capital increases and productivity growth increases permanently
c. Capital increases and productivity growth decreases for a short while
11. Suppose as a result of an improvement in job prospects, discouraged workers return to actively seeking employment. This would result in a(n) ___ in the
unemployment rate and a(n) ___ in the labor force participation rate
a. Decrease / increase
b. Increase / decrease
c. Decrease / decrease
d. Increase / increase
12. Kate is in school full time and not seeking employment. Kate is officially considered
a. Employed
b. Unemployed
c. Not part of the labor force
d. Both unemployed and not part of the labor force
13. The Federal Funds rate is
a. The interest rate on the 3-month Treasury bill
b. Is influenced by open market operations
c. Is the interest rate on the 30-year treasury bond
d. Is also known as the prime rate
14. Which of the following does the Federal Reserve not do?
a. Conduct monetary policy
b. Act as a lender of last resort
c. Convert Federal Reserve Notes into gold
d. Serve as a bank regulator
15. Which of the following is a store of value?
a. Currency
b. U.S. government bonds
c. Fine art
d. All of these are correct
16. You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate?
a. Medium of exchange
b. Unit of account
c. Store of value
d. Liquidity
17. The level of real GDP person
a. Differs widely across countries, but the growth rate of real GDP per person differs widely across countries
b. Is very similar across countries, but the growth rate of real GDP per person differs widely across countries
c. And the growth rate of real GDP per person are similar across countries
d. And the growth rate of real GDP per person varies widely across countries
18. Human capital increases through
a. Saving and investment
b. Education and training
c. Technological innovation
d. Increases in population
19. The labor force is best described by
a. All full-time employed workers plus all unemployed workers
b. All employed workers plus unemployed workers plus working-
aged students
c. All employed workers plus unemployed
d. The working-aged population
20. Which list ranks assets from most to least liquid?
a. Money, Treasury bonds, cars, houses
b. Money, cars, houses, Treasury bonds
c. Treasury bonds, money, cars, houses
d. Treasury bonds, cars, money, houses
21. A minimum wage of $16 per hour
a. Would increase unemployment by 200 people
b. Would increase unemployment by 400 persons
c. Would decrease unemployment by 200 persons
d. Would decrease unemployment by 400 persons
e. Would not result in a change in unemployment
22. Which of the following is a tool of monetary policy?
a. All are tools
b. Government transfers
c. Open market operations
d. Federal market operations
e. Federal funds rate
f. Tax rates
23. Suppose the reserve requirement is 5%. What is the maximum possible expansion of deposits that could result from an initial deposit of $500?
a. $10,000 – 500/0.05
b. $5,000
c. $1,000
d. $20,000
24. Which of the following is NOT currently considered part of the U.S. money supply?
I. A savings deposit in the amount of $10,000
II. A bank deposit in the amount of $5,000
III. A $100 bill
IV. A Treasury Bond worth $10,000
a. III and IV
b. IV
c. II, III and IV
d. I and II
e. All are money
25. The natural rate of unemployment corresponds to the unemployment rate with no
a. Cyclical unemployment
b. Seasonal unemployment
c. Frictional unemployment
d. Structural unemployment
e. Employment
26. Suppose the published interest rate on a one-year security (like a Treasury) is 5% and the inflation rate is 3%. The real interest rate is
a. 3%
b. -2%
c. 5%
d. 0%
e. 2%
27. Refer to the balance sheet. Suppose the reserve requirement is 10%. What is the maximum amount that the bank can loan out and still meet the reserve
requirement?
Assets Liabilities
Reserves $3200 Deposits $20,000
Loans $15,000 Debt $2000
Securities $5000
a. $2000
b. $1200
c. $0 d. $1000
e. $2200
28. Francis lost his job in as an autoworker due to low demand during a recession. Francis is an example of
a. A discouraged worker
b. Cyclical unemployment
c. Structural unemployment
d. Frictional unemployment
29. Which of the following types of unemployment is associated with longer spells of unemployment?
a. All of these
b. Cyclical
c. Structural
d. Frictional
30. The labor force = 155,500 = 144,000 + 11,500
The labor force participation rate = 63.2% = 155,500/246,000*100
The unemployment rate = 7.4% = 11500/155,000*100
July 2013 Civilian population 16+ Total employed Employed part-time
looking for full-time
Unemployed Discouraged workers
Thousands of persons 246,000 144,000 8,200 11,500 1,000
31. Suppose the Federal Reserve wanted to increase the money supply. It could
a.
b. Decrease the discount rate
c. Increase the reserve requirement
d. Perform open market sales of securities
e. Increase the interest rate paid on bank reserves
32. Suppose the Federal Reserve wanted to increase the money supply. It could
a. Increase the discount rate
b. Decrease the reserve requirement
c. Perform open market sales of securities
d. Increase the interest rate paid on bank reserves
33. Which of the following is FALSE?
a. Growth in human capital leads to productivity growth
b. None are false
c. Growth in productivity is required for sustained economic growth
d. Abundant natural resources are required to sustain economic growth
e. Growth in capital can lead to growth in real GDP per person, but is not a source of sustained economic growth
34. Productivity is defined as the quantity of
a. Labor required to produce a nation’s GDP
b. Labor required to produce one unit of goods and services
c. Goods and services produced from each unit of labor input
d. Goods and services produced per unit of time
35. Perry accumulated a lot of mathematical skills while in HS, college and grad school. Economists include these skills as part of Perry’s
a. Proprietary knowledge
b. Technological knowledge
c. Human capital
d. Physical capital
36. Matt is going to college to become a pharmacist. What he learns about existing information increases
a. Both technical knowledge and human capital
b. Technological knowledge but not human capital
c. Human capital but not technological knowledge
d. Neither technological knowledge nor human capital
37. Which of the following would increase productivity
a. An increase in the physical capital stock per worker
b. An increase in human capital per worker
c. An increase in natural resources per worker
d. All of these are correct
38. Holding the nominal interest rate constant, the real interest rate
a. Decrease when there is an increase in inflation rate
b. Increases when there is an increase in the inflation rate
c. Is not influenced by the inflation rate
d. Decrease during periods of deflation
Practice Exam for Midterm 3
1. Suppose the economy is producing at point A. Which of the following best describes the adjustment back to the neutral level of output?
a. The economy will not adjust back to the natural level in this case
b. Wages and input prices rise and the new equilibrium in point B
c. Aggregate demand decreases and the new equilibrium point is D
d. Aggregate supply increases and in the new equilibrium point is D
e. Wages and input prices fall and the new equilibrium is point D
2. Which of the following would not lead to a decrease in aggregate demand and a leftward shift in the AD curve?
a. An increase in domestic price level
b. An increase in interest rate
c. All of the above would increase aggregate demand and shift the
AD curve leftward
d. An appreciation of the domestic currency
e. A decrease in housing prices
3. The short-run consequence of an increase in the personal income tax levied on households is best described by graph
a. A
b. B
c. C
d. D
e. E
f. F
4. Which of the following would cause a movement from point B to C?
a. A decrease in the personal income tax rate
b. A fall in household wealth due to a financial crisis
c. An increase in the price of energy, an input in production
d. An increase in value of household stock portfolios
5. Other things the same, when the price level falls, interest rates
a. Fall, so firms decrease investment
b. Rise, so firms decrease investment
c. Rise, so firms increase investment
d. Fall, so firms increase investment
6. Which of the following shifts both the short-run and long-run aggregate supply right?
a. An increase in the expected price level
b. An increase in the actual price level
c. None of the above is correct
d. An increase in the capital stock
7. Which of the following would lead to a shift in the short-run aggregate supply curve but no change in the long-run aggregate supply curve?
a. A decrease in the expected price level
b. All would shift both the long-run aggregate supply and short-run
aggregate supply curves
c. An increase in the population
d. An increase in the level of capital stock
e. An increase in the general level of technology
8. Suppose the Federal Reserve announces an expansion in the money supply. Households and expansion in the money supply. Households and firms act rationally by
revising expectations to anticipate an increase in the inflation rate. As a result,
a. Inflation rises and unemployment rate falls
b. Inflation falls and the unemployment rate rises
c. Inflation rises and the unemployment rate increases
d. Inflation rises and the unemployment rate does not change very
much
9. Suppose an economy is experiencing a period of high inflation. The government and central bank announce a contractionary policy to reduce the rate of inflation. The
Phillips curve predicts a(n) ___ in unemployment. If households and firms believe the policy to be credible and revise their expectations to expect lower inflation, the
change in unemployment would be ___ than if households and firms maintain their previous expectations.
a. Decrease/greater
b. Increase/less
c. Decrease/less
d. Increase/greater
10. Which of the following the policy actions shifts the aggregate-demand curve?
a. An increase in government spending
b. An increase in the money supply
c. All of the above are correct
d. An increase in taxes
11. Which of the following would be classified as fiscal policy?
a. A state government passes laws regarding voting access
b. The Federal Reserve cuts interest rates to stimulate the economy
c. All of these
d. The federal government passes laws restricting the use of dangerous chemical in food production
e. The federal government cuts taxes to stimulate the economy
12. Suppose the expected inflation rate increases from 5% to 8%. According to the Fisher effect
a. The nominal interest rate decreases by 3 percentage points
b. The real interest rate decreases by 3 percentage points
c. The real interest rate increases by 3 percentage points
d. The nominal interest rate increases by percentage points
13. If the economy is producing below the natural rate of output in the short-run, wages and input prices will eventually ___ and ___ will increase, returning the
economy to long-run equilibrium
a. Rise/aggregate demand
b. Fall/aggregate demand
c. Rise/short-run aggregate supply
d. Fall/long-run aggregate supply
e. Fall/short-run aggregate supply
14. Relative-price variability
a. Rises with inflation, leading to a misallocation of resources
b. Rises with inflation, leading to an improved allocation of
resources
c. Falls with inflation, leading to an improved allocation of
resources
d. Falls with inflation, leading to a misallocation of resources
15. The inflation tax
a. All of the above are correct
b. Is the revenue created when the government prints money
c. Is an alternative to income taxes and government borrowing
d. Is like a tax on everyone who holds money
16. An earthquake destroys capital stock in an economy. The result is
a. A leftward shift in the short-run aggregate supply curve and no
change in the long-run aggregate supply curve
b. A rightward shift in the aggregate demand curve
c. A rightward shift in the long-run aggregate supply curve
d. A leftward shift in the long-run aggregate supply curve
17. In the long-run,
a. an increase in the price level increases the aggregate quantity of GDP supplied
b. an increase in the price level reduces the aggregate quantity of GDP supplied
c. an increase in the price level increases the level of potential GDP
d. an increase in the price level has no effect on the aggregate quantity of GDP supplied
18. Suppose the economy begins in long-run equilibrium. The Federal Reserve has decided the inflation rate is too high and implements a contraction in the money
supply. What best describes the path the economy takes as a result of the subsequent adjustment to a new long-run equilibrium?
a. D to C to B
b. B to C to D
c. D to A to B
d. A to B to C
e. D to A to D
19. Refer to the Phillips curve. Suppose the relevant Phillips curve is curve II and the natural rate of unemployment is 4.5%. if the Federal Reserve decide to decrease the
money supply and the effects are perfectly anticipated. Then the economy most likely moves to point
a. A
b. B
c. D
d. E
e. C
20. Which graph best describes short-run effect of a decrease in the quantity of discount loans made by the Federal Reserve?
a. B
b. D
c. C
d. A
21. Which graph best describes the effect of a decrease in price level, all else constant?
a. A
b. D
c. B
d. C
22. The Federal Reserve controls ___ and the influences ___ with the intention of influencing ___
a. Money demand/tax rates/government spending
b. Money supply/government spending/price level
c. Money supply/interest rates/investments
d. Money demand/interest rates/investment
23. Suppose the tax rate on nominal interest income is 20% and does not change over time. Also assume the real interest rate remains constant. In year 1, the inflation
rate is 4% and the nominal interest rate is 10%. In year 2, the inflation rate is 14%
I. The real interest in both years is = 6
II. The nominal interest rate in year 2 is = 20
III. The after-tax nominal interest rate in year 1 is = 8
IV. The after-tax nominal interest rate in year 2 is = 16
V. The after-tax real interest rate in year 1 is = 4
VI. The after-tax real interest rate in year 2 is = 2
24. The Phillips curve suggests that in the short-run,
a. Unemployment and inflation are positively/directly related
b. Unemployment and inflation are negatively/inversely related
c. Unemployment and inflation are unrelated
25. Suppose the expected inflation rate is 5% and the relevant Phillips curve is curve II. What is the natural rate of unemployment?
a. 4%
b. 5.5%
c. Cannot be determined
d. 4.5%
e. 3%
26. Which of the following accounts for about two-thirds of the decline in output during a recession?
a. The decline in net exports
b. The decline in total consumption spending
c. The decline in investment spending
d. The decline in government purchases
27. If the relevant short-run aggregate supply curve is SAS2, what is the expected price level?
a. P2
b. P1
c. Cannot be determined
d. P0
28. In the short-run, an increase in aggregate supply leads to ___ price level and ___ in unemployment
a. A decrease/an increase
b. A decrease/a decrease
c. An increase/no change
d. An increase/a decrease
29. The sticky wage theory of the short-run aggregate supply curve says that when the price level rises more than expected
a. Production is less profitable and employment rises
b. Production is less profitable and employment falls
c. Production is more profitable and employment rises
d. Production is more profitable and employment falls
30. In order to understand how the economy works in the short-run, we need to
a. Understand that money is neutral in the short run
b. Understand that “money is veil”
c. Study a model in which real and nominal variables interact
d. Study the classical model
31. Examples of automatic stabilizers include government expenditures that ___ when national income decreases and help explain why deficits are ___ during recession
a. Do not change/larger
b. Increase/larger
c. Decrease/larger
d. Increase/smaller
32. A favorable supply shock, like a decrease in the price of oil, would cause
a. A movement up and along the short-run Phillips curve
b. The short-run Phillips curve to shift to the right and a less-favorable trade-off between unemployment and inflation
c. The short-run Phillips curve to shift to the left and a more favorable trade-off between unemployment and inflation
d. The short-run Phillips curve to shift to the right and no change in the trade-off between unemployment and inflation
33. If inflation is higher than what was expected,
a. Debtors receive a higher real interest rate than they had anticipated
b. Debtors pay a higher real interest rate than they had anticipated
c. Creditors receive a lower real interest rate than they had anticipated
d. Creditors pay a lower real interest rate than they had anticipated
34. The unemployment rate was most likely greater than the natural rate at points
a. A and D
b. A, B, C and D
c. A and B
d. B and C
35. Which of the following would lead to a decrease in the multiplier effect of fiscal policy?
a. The income tax rate decreases
b. Household save a higher fraction of income
c. Households save a higher fraction of income
d. Households borrow more to finance spending
36. Money neutrality suggests that an increase in the money supply leads to ___ in price level and inflation and ___ in real GDP
a. An increase/an increase
b. A decrease/a decrease
c. Increase/no change
d. An increase/a decrease
37. Suppose the economy begins in recession. What is the short-run result of an open market purchase of securities by the Federal reserve?
a. A movement from B to C
b. A movement from B to D
c. A movement from D to A
d. A movement from C to B
38. Suppose the relevant Phillips curve is curve I and the economy is currently at point “B”. If the Federal Reserve implements a policy to decrease the money supply and
the effects are not anticipated, the economy most likely moves to point
a. D
b. A
c. C
d. B
Midterm 3 Questions
1. If the economy is producing above the natural rate of output in the short-run, wages and input prices will eventually ___ and ___ will decrease, returning the
economy to long-run equilibrium
a. Rise/short-run aggregate supply
b. Fall/short-run aggregate supply
c. Fall/long-run aggregate supply
d. Fall/aggregate demand
2. Suppose the economy is producing at point A. Which of the following best describes the adjustment back to the natural level of output?
a. Wages and input prices rise and the new equilibrium in point B
b. Wages and input prices fall and the new equilibrium is point D
c. Aggregate demand decreases and the new equilibrium is point D
d. Aggregate supply increases and in the new equilibrium is point D
3. Which of the following would cause a movement from point C to B?
a. An increase in the price of energy, an input in production
b. A decrease is the wage rate
c. A decrease in the personal income tax
d. An increase in interest rate
4. Which of the following would cause a movement from point B to C?
a. An increase in value of household stock portfolios
b. An increase in the price of energy, an input in production
c. A decrease in the personal income tax rate
d. A fall in household wealth due to financial crisis
5. Which of the following would cause a movement from point A to D?
a. An appreciation of the domestic currency
b. An increase in housing prices
c. Consumers become more optimistic about future income
d. An increase in the price of gasoline
6. Other things the same, when the price level falls, interest rates
a. Rise, so firms increase investment
b. Rise, so firms decrease investment
c. Fall, so firms increase investment
d. Fall, so firms decrease investment
7. Which of the following would cause a shift in the short-run aggregate supply curve, but no change in the long-run aggregate supply curve?
a. An increase in the size of the labor force
b. An increase in the wage rate
c. An increase in the level of technology
d. An increase in the quantity of capital
e. All of the above would shift both the long-run and short-run
aggregate supply curve
8. Which of the following shifts both short-run and long-run aggregate supply left?
a. A decrease in the actual price level
b. A decrease in the expected price level
c. A decrease in the capital stock
d. A decrease in the money supply
9. Suppose the Federal Reserve announces an expansion in the money supply. Households and firms act rationally by revising expectations to anticipate an increase in
the inflation rate. As a result,
a. Inflation rises and the unemployment rate does not change very
much
b. Inflation rises and the unemployment rate increases
c. Inflation rises and the unemployment rate falls
d. Inflation falls and the unemployment rate rises
10. Suppose an economy is experiencing a period of high inflation. The government and central bank announce a contractionary policy to reduce the rate of inflation. The
Phillips curve predicts a(n) ___ in unemployment. If households and firms believe the policy to be credible and revise their expectations to expects lower inflation,
the change in unemployment would be ___ than if households and firms maintain their previous expectations
a. Increase/less
b. Increase/greater
c. Decrease/less
d. Decrease/greater
11. An increase in government spending initially and primarily shifts
a. Aggregate demand to the right
b. Aggregate demand to the left
c. Aggregate supply to the right
d. Neither aggregate demand nor aggregate supply in either
direction
12. Suppose the expected inflation rate increases from 5% to 10%. If the Fisher effect holds,
a. The nominal interest rate increases by 5 percentage points
b. The nominal interest rate decreases by 5 percentage points
c. The real interest rate increases by 5 percentage points
d. The real interest rate decreases by 5 percentage points
13. Higher inflation
a. Causes firms to change prices less frequently and makes relative prices less variable
b. Causes firms to change prices less frequently and makes relative prices more variable
c. Causes firms to change prices more frequently and makes relative prices less variable
d. Causes firms to change prices more frequently and makes relative prices more variable
14. Governments may prefer an inflation tax to some other type of tax because the inflation tax
a. Is easier to impose
b. Reduces inflation
c. Falls mainly on high-income individuals
d. Reduces the real cost of government expenditure
15. The long-run aggregate supply curve is vertical because
a. At full employment prices are stable
b. There is no cyclical inflation
c. The natural level of real GDP is independent of the price level
d. The money wage rate increases faster than the price level
16. In the long-run,
a. An increase in the price level increases the level of potential GDP
b. An increase in the price level reduces the aggregate quantity of GDP supplied
c. An increase in the price level has no effect on the aggregate quantity of GDP supplied
d. An increase in the price level increases the aggregate quantity of GDP supplied
17. Suppose the above represents the U.S. economy in the 1980s right before the Volker contractionary monetary policy. If the economy begins in the long-run
equilibrium, the monetary contraction causes a movement from ___ to ___. After expectations adjust to reflect a different price level and inflation rate, the economy
eventually moves to point ___.
a. B/C/D
b. B/A/D
c. B/C/A
d. D/C/B
18. Suppose the relevant Phillips curve is curve I and the natural rate of unemployment is 5.5%. if the Federal Reserve decides to increase the money supply and the
effects are perfectly anticipated, then the economy most likely moves to point
a. B
b. A
c. D
d. E
19. Which graph best describes the short-run effect of an increase in the quantity of discount loans made by the Federal Reserve?
a. A
b. B
c. C
d. D
20. Which graph describes the effect of an increase in price level, all else constant?
a. A
b. B
c. C
d. D
21. The Fed lowers the federal funds rate. A mechanism through which aggregate demand increases is that the lower federal funds rate
a. Decreases other short-term interest rate, which increases investment, thereby increasing aggregate demand
b. Raises the exchange rate so that net exports decrease, which increases investment, thereby increasing aggregate demand
c. Increases other short-term interest rates, which decreases investment, thereby decreasing aggregate demand
d. Decreases other short-run interest rate, which decreases investment, thereby increasing aggregate demand
22. Country X taxes nominal interest income at a rate of 10% Country Y taxes nominal interest income at a rate of 20%. The real interest rate before tax in country X and Y
is 4%. Country X has an inflation rate of 16% per year. Country Y has an inflation rate of 6% per year.
The nominal interest rate in country X is = 6
The nominal interest rate in country Y is = 14
The after-tax nominal interest rate in country X is = 14
The after-tax nominal interest rate in country Y is = 5
The after-tax real interest rate in country X is = 8
The after-tax real interest rate in country Y is = 8
23. Policymakers face a trade-off between unemployment and inflation
a. In the short-run
b. In the long-run
c. In both the short-run and the long-run
d. In neither the short-run or the long-run
24. Suppose the natural rate of unemployment is 5.5% and the relevant Phillips curve is curve II. What is the expected rate of inflation?
a. 4%
b. 5%
c. Cannot be determined
d. 1.75%
25. Recessions come at
a. Regular intervals. During recessions consumption spending falls relatively more than investment spending
b. Regular intervals. During recessions investment spending falls relatively more than consumption spending
c. Irregular intervals. During recessions consumption spending falls relatively more than investment spending
d. Irregular intervals. During recessions investment spending falls relatively more than consumption spending
26. Suppose the economy begins in long-run equilibrium. Firms experience an increase in the cost of production. This is best described by graph
a. A
b. B
c. C
d. D
27. Suppose an economy begins in equilibrium producing at the natural rate of real GDP. What is the long-run result of an increase in government purchases?
a. An increase in the price level and an increase in real GDP
b. No change in the price level and an increase in real GDP
c. An increase in the price level and no change in real GDP
d. No change in the price level and no change in real GDP
28. The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
a. Production is more profitable and employment rises
b. Production is more profitable and employment falls
c. Production is less profitable and employment rises
d. Production is less profitable and employment falls
29. Most economists believe that classical theory describes the world
a. In the short-run
b. In the long-run
c. In both short and long run
d. In neither short nor long run
30. During recessions, automatic stabilizers tend to make government’s budget
a. Move toward deficit
b. Move toward surplus
c. Move toward balance
d. Not necessarily move the budget in any particular direction
31. An adverse supply shock, like an increase in the price of oil, would cause
a. The short-run Phillips curve to shift to the right and a less-favorable trade-off between unemployment and inflation
b. The short-run Phillips curve to shift to the left and a more favorable trade-off between unemployment and inflation
c. The short-run Phillips curve to shift right and no change in the trade-off between unemployment and inflation
d. A movement up and along the short-run Phillips curve
32. Calculate the velocity of M1 in 2014. Round to the nearest 10th
a. 6
b. .1
c. 6.5
d. 10
e. 1.1
33. If the economy unexpectedly went from inflation to deflation,
a. Both debtors and creditors would have reduced real wealth
b. Both debtors and creditors would have increased real wealth
c. Debtors would gain at the expense of creditors
d. Creditors would gain at the expense of debtors
34. The unemployment rate was most likely greater than the natural rate at points
a. A and B
b. B and C
c. C and D
d. A, B, C and D
35. A tax cut shifts the aggregate demand curve the farthest if
a. The MPC is large and if the tax cut is permanent
b. The MPC is large and if the tax cut is temporary
c. The MPC is small and if the tax cut is permanent
d. The MPC is small and if the tax cut is temporary
36. According to the quantity theory of money, ___ is stable in the ___.
a. Velocity of money/long-run
b. Velocity of money/short-run
c. Nominal GDP/long-run
d. Nominal GDP/short-run
37. The short-run result of an open market purchase of securities by the Federal Reserve a(n) ___ in price level and a(n) ___ in real GDP.
a. Increase/increase
b. Cannot be determined/increase
c. Decrease/increase
d. Decrease/decrease
38. Suppose the relevant Phillips curve is curve I and the economy is currently at point “B”. If the Federal Reserve implements a policy to decrease the money supply and
the effects are not anticipated, the economy most likely moves to point
a. C
b. A
c. B
d. D
