Principles of Macroeconomics
ECON 2301
Instructor: James Sondgeroth
Spring 2000



FINAL



1. Choice is fundamentally a consequence of

a. living in a world where there are both goods and bads.
b. how wealthy one is.
c. scarcity.
d. opportunity cost. 

2. The opportunity cost of your attending college is

a. the money you spend on college tuition, books, and so forth.
b. the highest valued alternative you forfeit to attend college.
c. the least valued alternative you forfeit to attend college.
d. equal to the salary you will earn when you graduate from college. 

3. Theories are

a. descriptions of the real world.
b. abstractions from the real world.
c. complexities of the real world.
d. predictions about the real world.
e. all of the above

4. Which of the following statements is true?

a. The concept of opportunity costs cannot be illustrated within a PPF framework.
b. If scarcity did not exist, neither would a PPF.
c. All PPFs are downward-sloping straight lines.
d. There are more attainable points than unattainable points in every PPF diagram.

5. Economic growth causes the PPF to

a. shift inward.
b. shift outward.
c. remain constant.
d. go from a straight line to a curve. 


6. A society is inefficient when

a. it produces at a point inside or below its PPF.
b. it does not produce the maximum output with its given resources and technology.
c. it can produce more of one good without giving up some of another good.
d. both a and b
e. all of the above 

7. If the demand curve for a good shifts leftward,

a. quantity demanded is less at each price.
b. quantity demanded remains constant at each price.
c. quantity demanded is greater at each price.
d. demand is greater at each price. 

8. Resource X is necessary to the production of good Y. If the price of resource X rises,

a. the supply curve of Y shifts leftward.
b. the supply curve of Y shifts rightward.
c. the supply curve of Y is unaffected.
d. there is a movement down the supply curve of Y.
e. there is a movement up the supply curve of Y. 

9. At a price below equilibrium price, there is

a. a surplus.
b. a shortage.
c. excess supply.
d. sub-equilibrium.
e. none of the above 




10. Refer to Exhibit C-1. Equilibrium price and quantity are

a. $2 and 250 units.
b. $4 and 150 units.
c. $2 and 150 units.
d. $6 and 250 units.
e. none of the above 



11. Refer to Exhibit C-10. If the price is $10,

a. sellers’ inventories rise.
b. sellers will bid down the price.
c. buyers will bid up the price.
d. both a and c
e. both b and c 



12. Gross Domestic Product (GDP) is

a. the total market value of all final goods and services produced annually within a country’s borders.
b. the total market value of all final and intermediate goods and services produced annually within a country’s borders.
c. the total market value of all intermediate goods and services produced annually within a country’s borders.
d. the total market value of all final goods and services produced every two years within a country’s borders.


13. By far the largest expenditure component in GDP is

a. gross private domestic investment.
b. government purchases of goods and services.
c. household consumption expenditures.
d. net exports.
e. none of the above


14. One measure of the inflation rate is the

a. sum of the CPIs of adjacent years.
b. percentage change in the CPI of adjacent years.
c. percentage change in the Real GDP of adjacent years.
d. GDP minus the Real GDP in a year.

15. Real GDP is always measured in

a. cheaper dollars.
b. quality of goods produced.
c. base-year dollars.
d. nominal dollars.
e. current dollars.

16. Persons who are retired or engaged in own-home housework are considered to be in which of the following categories?

a. in the civilian labor force
b. not in the labor force
c. employed
d. unemployed

17. The unemployment rate equals

a. the number of employed persons divided by the number of unemployed persons.
b. the number of unemployed persons divided by the civilian noninstitutional population.
c. the number of unemployed persons divided by the civilian labor force.
d. the sum of unemployed persons plus discouraged workers divided by the civilian labor force.


18. A “recession” is defined as

a. a period of a positive frictional unemployment rate.
b. two or more consecutive quarters of falling Real GDP.
c. the lowest point in a business cycle.
d. a period of negative inflation.

19. The real balance effect describes the change in

a. checking account balances that occur when the money supply increases or decreases.
b. the value of physical assets (e.g., houses) that results from a change in the price level.
c. the output producers produce as they attempt to balance their production in response to changes in consumers’ demand.
d. the value of cash holdings that results from a change in the price level.
e. the balance of cash holdings that results from a change in the amount of income earned.

20. Suppose a drop in stock prices makes people feel less wealthy. This would cause ________ the economy’s AD curve.

a. movement down along
b. movement up along
c. a rightward shift of
d. a leftward shift of

21. A short-run aggregate supply curve shows

a. the amount of a particular good producers are willing and able to buy at a particular price, ceteris paribus.
b. the real output (Real GDP) producers are willing and able to sell at different price levels, ceteris paribus.
c. the real output (Real GDP) people are willing and able to buy and to sell at different price levels, ceteris paribus.
d. the real output (Real GDP) people are willing and able to buy at different price levels, ceteris paribus.

22. The AD curve shows that, as the price level falls, the quantity of

a. GDP demanded increases.
b. GDP demand decreases.
c. Real GDP demanded increases.
d. Real GDP demanded decreases.
e. none of the above

23. Natural Real GDP is

a. less than full-employment Real GDP.
b. equal to full-employment Real GDP.
c. greater than full-employment Real GDP.
d. independent of full-employment Real GDP.

24. If the SRAS curve intersects the AD curve to the left of Natural Real GDP, the economy is

a. in a recessionary gap.
b. at Natural Real GDP.
c. in an inflationary gap.
d. at full-employment Real GDP.


25. Refer to Exhibit F-2. The economy is currently producing Q1. At this level of Real GDP, the economy is in

a. an inflationary gap.
b. a recessionary gap.
c. an unemployment gap.
d. a high Real GDP gap.
e. none of the above


26. In a self-regulating economy, inflationary and recessionary gaps produce shifts of the ________ curve that ________.

a. AD, maintain the short-run equilibrium point
b. AD, move the economy to a long-run equilibrium point
c. SRAS, maintain the short-run equilibrium point
d. SRAS, move the economy to a long-run equilibrium point

27. When total expenditures are greater than total production,
as illustrated at Real GDP of Q2 Exhibit G-2 below, then
a. less is produced than households want to buy, which leads to decreases in inventory, which signals firms that they have underproduced, which causes firms to increase production.
b. more is produced than households want to buy, which leads to increases in inventory, which signals firms that they have underproduced, which causes firms to increase production.
c. less is produced than households want to buy, which leads to increases in inventory, which signals firms that they have underproduced, which causes firms to increase production.
d. more is produced than households want to buy, which leads to decreases in inventory, which signals firms that they have overproduced, which causes firms to increase production.


28. Refer to Exhibit G-2. Equilibrium Real GDP occurs at

a. $3,000 billion.
b. $1,500 billion.
c. $7,500 billion.
d. $4,000 billion.
e. $4,500 billion.


29. Two economists, Smith and Jones, are discussing the currently high unemployment rate. Smith says that something ought to be done quickly because the economy may not be able to restore itself to full employment. Jones says that it is better to take a “hands-off” approach. Which of the following is most likely to be true?

a. Smith and Jones are both Keynesian economists with a few differences of opinion.
b. Smith and Jones are both classical economists with a few differences of opinion.
c. Jones is probably a Keynesian economist, and Smith is a classical economist.
d. Smith is probably a Keynesian economist, and Jones a classical economist.
e. none of the above.

30. According to Say’s law,

a. the demand curve is negatively sloped.
b. the supply curve is positively sloped.
c. supply creates its own demand.
d. economic units should produce those goods for which they are low opportunity cost producers.

31. Keynes most likely believed that investment

a. is largely insensitive to changes in interest rates.
b. is largely sensitive to changes in interest rates.
c. is unrelated to business expectations.
d. is related to business expectations only during recessionary periods.

32. If income rises from $500 to $600 and consumption rises from $300 to $360, the marginal propensity to consume is ________.

a. .80
b. .60
c. 1.60
d. .90

33. Keynes argued that

a. monopolistic elements in the economy will prevent an immediate sharp fall in prices as a result of decreasing demand.
b. wages and prices are not flexible in a downward direction.
c. both a and b
d. neither a nor b

34. Fiscal policy refers to

a. efforts to balance a government's budget.
b. changes in the money supply to achieve particular economic goals.
c. changes in government expenditures and taxation to achieve particular economic goals.
d. the change in private expenditures that occurs as a consequence of changes in government spending.

35. Which of the following is an example of crowding out?

a. A decrease in the rate of growth of the stock of money decreases GDP.
b. A deficit causes an increase in interest rates that causes a decrease in investment spending.
c. An increase in tariffs causes a decrease in imports.
d. A decrease in government housing subsidies causes an increase in private spending on housing.


36. The effectiveness lag is

a. the time between the implementation of a policy and when the impact of the policy is felt.
b. the time between the enactment of a policy and the implementation of the policy.
c. the time between realizing a policy is needed and enacting the policy.
d. the time between the occurrence of an event and policymakers realizing the event has occurred.

37. Money’s basic advantage as compared to barter is that

a. everybody has money but not everyone has the opportunity to barter.
b. with a barter system, there is no way to measure, or express, the value of goods, but there is with money.
c. money reduces transaction costs.
d. money is the only medium you can use to store your wealth.

38. Ml is comprised of

a. currency held outside banks + checkable deposits + credit cards.
b. currency held outside banks + checkable deposits + savings deposits.
c. currency held outside banks + checkable deposits + certificates of deposit.
d. currency held outside banks + checkable deposits + traveler’s checks.

39. Fractional reserve banking is a term used to describe a banking system whereby

a. individual banks share a fraction of the total funds deposited in the whole banking system.
b. banks are required to quote interest rates in fractions.
c. banks hold reserves equal to only a fraction of their deposit liabilities.
d. banks hold reserves equal to a multiple of their deposit liabilities; that is, fractional in this case really means multiple.
e. banks are required to maintain a certain fraction of their deposits in the form of checkable deposits, a certain fraction of their deposits in the form of savings deposits, etc.

40. Bank A has deposits of $9,000 and reserves of $2,000. If the required-reserve ratio is 12.5 percent, the simple deposit multiplier is

a. 2.
b. 4.
c. 6.
d. 8.

41. Which of the following statements is false?

a. The Fed serves as the lender of last resort.
b. The Fed serves as a fiscal agent for the U.S. Treasury.
c. A major responsibility of the Fed is to control the nation’s money supply.
d. The federal government is the Fed’s banker.

42. An “open market operation” is said to occur when the Fed

a. arranges for the merger of two banks.
b. changes the interest rate at which it lends reserves.
c. transfers reserves between banks.
d. buys or sells government securities.


43. The discount rate is the interest rate

a. banks pay on certificates of deposit.
b. the Fed pays on reserves held by banks.
c. the Fed charges when it lends reserves to banks.
d. banks charge their loan customers.
e. on short-term Treasury securities.

44. In symbols, the equation of exchange says

a. MP = QV.
b. MQ = PV.
c. MV = PQ.
d. MP = MQ.

45. The view that the Great Depression was caused by government bungling, especially by the Federal Reserve, is associated with

a. J.M.Keynes.
b. Jean Baptiste Say.
c. Adam Smith.
d. Karl Marx.
e. Milton Friedman.


46. Open market operations are

a. the buying and selling of Federal Reserve Notes in the open market.
b. the means by which the Fed supplies the economy with currency.
c. the means by which the Fed acts as the government’s banker.
d. the buying and selling of government securities by the Fed.
e. the buying and selling of government securities by the Treasury. 


47. The simple quantity theory of money predicts that changes in

a. the money supply lead to strictly proportional changes in the price level.
b. the money supply do not affect the price level.
c. the price level lead to strictly proportional changes in velocity and GDP.
d. velocity lead to nearly proportional changes in the money supply. 

48. If the interest rate increases, the opportunity cost of money

a. does not change, and neither does the quantity demanded of money.
b. increases, and the quantity demanded of money also increases.
c. decreases, and the quantity demanded of money increases.
d. increases, and the quantity demanded of money decreases.
e. decreases, and the quantity demanded of money also decreases.

49. The Keynesian transmission mechanism might get blocked if

a. investment is insensitive to changes in interest rates.
b. the goods market is not in equilibrium.
c. the money supply rises too quickly.
d. interest rates are too high before they fall.


50. The monetary policy most likely to be favored by monetarists is

a. a constant (nongrowing) money supply.
b. frequent discretionary changes in the money growth rate.
c. a constant and slow rate of monetary growth.
d. vigorous monetary expansion during recessions.
e. a steadily increasing rate of monetary growth.




 

 

KEY

1. c 2. b 3. b 4. b 5. b 6. e 7. a 8. a 9. b 10. e
11. c 12. a 13. c 14. b 15. c 16. b 17. c 18. b 19. d 20. d
21. b 22. c 23. b 24. a 25. a 26. d 27. a 28. e 29. d 30. c
31. a 32. b 33. c 34. c 35. b 36. a 37. c 38. d 39. d 40. d
41. d 42. d 43. c 44. c 45. e 46. d 47. a 48. d 49. a 50. c