FINAL EXAM/ Principles of Macroeconomics/ Spring 2001/ James Sondgeroth

Name:

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

Scarcity means

a.	wants are greater than the limited resources available to satisfy these wants.
b.	wants are less than the limited resources available to satisfy these wants.
c.	resources are infinite.
d.	wants are limited.
e.	both c and d

Choice implies

a.	inefficiency.
b.	efficiency.
c.	opportunity cost.
d.	utility.
e.	disutility.

Opportunity cost is the value of

a.	the chosen alternative.
b.	the next best forfeited alternative.
c.	a free good.
d.	an economic good.

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

Points outside (or beyond) the PPF are

a.	attainable.
b.	unattainable.
c.	efficient.
d.	inefficient.

The law of increasing opportunity costs states that as

a.	less of a good is produced, the higher the opportunity costs of producing that good.
b.	more of a good is produced, the lower the opportunity costs of producing that good.
c.	more of a good is produced, the higher the opportunity costs of producing that good.
d.	more of a good is produced, the opportunity cost of producing the good remains the same.
e.	a and b

Exhibit 2-3

Refer to Exhibit 2-3. If PPF₁ is the relevant production possibilities frontier, PPF₂ may depict

a.	economic growth.
b.	an increase in resources.
c.	a general increase in productivity.
d.	all of the above

Capitalist thinkers believe that prices

a.	are useful in helping to ration goods and services.
b.	convey information to the buyer.
c.	provide incentives.
d.	are necessary to ensure that resources are allocated to their best use.
e.	all of the above

A socialist thinker believes that private property is economically undesirable because

a.	it cannot provide incentives to its owners.
b.	it often provides unfair political or social power to its owners.
c.	it shields its owners from the incentives provided by price changes.
d.	the government cannot effectively manage property.

10.

The three questions (economists say) that all societies must answer are:

a.	What to produce? Why produce it? For whom is it produced?
b.	What to produce? When to produce it? For whom is it produced?
c.	What to produce? How to produce it? To whom is the output distributed?
d.	What to produce? How long should it take to produce it? For whom is it produced?

11.

"As the price of apples goes up, the demand for apples goes down." The author of this statement

a.	implies that price and demand are unrelated.
b.	uses the word "demand" when he should use the word "supply."
c.	uses the word "demand" when he should use the words "quantity demanded."
d.	implies that demand is a complement to price.

12.

The rationing function of prices most nearly refers to the

a.	ability of the price system to generate an equitable distribution of income.
b.	capacity of a competitive market to equate the quantity demanded and the quantity supplied of a good.
c.	fact that ration coupons are needed to alleviate wartime shortages of good.
d.	tendency of supply and demand to shift in opposite directions.

13.

An effective price ceiling will

a.	clear the market.
b.	result in a shortage.
c.	result in a surplus.
d.	induce new firms to enter the industry.

14.

Suppose that 1967 is the base year for the Consumer Price Index (CPI) and in 1988 the CPI is 340. What does this "340" mean?

a.	What cost $100 in 1967 will cost 240 times as much in 1988.
b.	What cost $100 in 1967 will cost $340 in 1988.
c.	What cost $100 in 1967 will cost 100/340 (or .2941) times as much in 1988 (that is, it will cost $29.41 in 1988).
d.	What cost $100 in 1967 will cost $340 more in 1988.

15.

The unemployment rate equals the

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

16.

The unemployment due to the time it takes for unemployed people to locate a job utilizing their transferable skills is called __________ unemployment.

a.	structural
b.	cyclical
c.	natural
d.	frictional

17.

If you were to "build a dam" to measure the flow of GDP by the expenditure approach, where would you build it?

a.	in front of households to measure the flow of money coming in.
b.	behind business firms to measure the flow of money going out to the factor market.
c.	in front of the final goods and services market to measure the flow of money coming into it.
d.	in front of the government sector to measure all the taxes flowing into it.

18.

The words "total market value" are part of the definition of GDP. These words refer to the monetary value of goods and services at

a.	base-year prices.
b.	today's prices.
c.	current prices.
d.	GDP-adjusted prices.
e.	b and c

19.

The two ways of measuring Gross Domestic Product are the __________ approach and the __________ approach.

a.	expenditure; income
b.	expenditure; national product
c.	national product; income
d.	real gross domestic product; nominal gross domestic product
e.	net national product; personal income

20.

Look at the following data: GDP = $5,998 billion; investment = $1,322 billion; exports = $300 billion; government purchases = $1,450 billion; consumption = $3,400 billion. What does import spending equal?

a.	$400 billion
b.	$374 billion
c.	$200 billion
d.	$274 billion
e.	none of the above

21.

A business cycle refers to the

a.	continued expansion in Real GDP.
b.	recurrent swings (up and down) in Real GDP.
c.	continued decline in Real GDP.
d.	period when Real GDP grows at unusually high rates.
e.	none of the above

22.

One of the reasons why the AD curve slopes downward is that as the

a.	price level rises, purchasing power rises.
b.	price level falls, purchasing power rises.
c.	nation's income level rises, purchasing power rises.
d.	nation's income level rises, purchasing power falls.
e.	This is a trick question, because the curve is upward sloping.

23.

Which of the following factors can shift the AD curve?

a.	net exports
b.	government purchases
c.	the money supply
d.	b and c
e.	a, b, and c

24.

The short-run aggregate supply curve is

a.	downward sloping.
b.	upward sloping.
c.	vertical.
d.	horizontal.

25.

Changes in which of the following will not cause the AS curve to shift?

a.	the wage rate
b.	prices of nonlabor inputs
c.	the price level
d.	productivity
e.	All of the above will cause the AS curve to shift.

26.

An increase in the price of nonlabor inputs such as oil and energy

a.	shifts the AD curve leftward causing a recession.
b.	shifts the SRAS curve leftward causing an inflationary gap to open up.
c.	shifts the SRAS curve leftward causing a recession.
d.	shifts the AD curve rightward causing inflation.
e.	shifts the SRAS curve rightward causing deflation.

27.

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.

28.

If an economist believes the economy removes recessionary and inflationary gaps by itself, which of the following describes what he thinks will happen when the economy is in an inflationary gap?

a.	As old wage bargains expire, wages fall, and the SRAS curve shifts rightward.
b.	As old wage bargains expire, wages fall, and the SRAS curve shifts leftward.
c.	As old wage bargains expire, wages rise, and the SRAS curve shifts leftward.
d.	As old wage bargains expire, wages fall, and the AD curve shifts rightward.

29.

According to Say's law, there can be

a.	neither a general overproduction nor a general underproduction of goods.
b.	a general overproduction but not a general underproduction of goods.
c.	a general underproduction but not a general overproduction of goods.
d.	both a general overproduction and a general underproduction of goods.

30.

Keynes believed that saving is

a.	more responsive to changes in income than to changes in interest rates.
b.	less responsive to changes in income than to changes in interest rates.
c.	equally responsive to changes in income and to changes in interest rates.
d.	dependent only on changes in interest rates.

31.

According to Keynes, the private sector (by itself)

a.	can always move the economy out of a recessionary gap.
b.	cannot always move the economy out of a recessionary gap.
c.	can never move the economy out of a recessionary gap.
d.	can only move the economy out of a recessionary gap if the SRAS curve drops.
e.	can only move the economy out of a recessionary gap if the SRAS curve rises.

32.

The consumption function is a function showing the relationship between consumption and

a.	disposable income.
b.	exports.
c.	interest rates.
d.	investment.

33.

Autonomous consumption is

a.	the change in consumption that results as a person's (or nation's) income increases or decreases.
b.	that portion of total consumption that is dependent upon the level of income.
c.	the steady increase in the consumption of goods and services that automatically occurs as a person grows from a child to an adult.
d.	that portion of total consumption that is independent of the level of income.

34.

An example of expansionary fiscal policy is

a.	an increase in government purchases, or an increase in taxes, or both.
b.	a decrease in government purchases, or a decrease in taxes, or both.
c.	an increase in government purchases, or a decrease in taxes, or both.
d.	a decrease in government purchases, or an increase in taxes, or both.
e.	holding government purchases constant while increasing taxes.

Exhibit 10-1

35.

Refer to Exhibit 10-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely propose

a.	an increase in government purchases.
b.	a decrease in government purchases.
c.	an increase in taxes.
d.	a and c
e.	b and c

36.

When a decrease in one or more components of private spending completely offsets the increase in government spending, there is

a.	incomplete crowding out.
b.	zero crowding out.
c.	complete crowding out.
d.	complete crowding in.
e.	either c or d

37.

Which of the following is not an example of a "lag" that diminishes the potential impact of fiscal policy?

a.	the data lag
b.	the recessionary lag
c.	the legislative lag
d.	the transmission lag
e.	None of the above; all are examples of such lags.

38.

A unit of account is

a.	a bank account.
b.	a savings account.
c.	a common measurement in which values are expressed.
d.	the same as a medium of exchange.
e.	none of the above

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.

Which of the following is true?

a.	Credit cards are money because they are widely accepted for purposes of exchange.
b.	The early bankers were goldsmiths.
c.	If the required-reserve ratio is 20 percent, the simple deposit multiplier is 5.
d.	a and b
e.	b and c

41.

Which of the following statements is false?

a.	Banks make loans with excess reserves.
b.	Banks can create checkable deposits through their lending practices.
c.	Reserves = bank deposits at the Federal Reserve + vault cash.
d.	Currency (which is a component of the M1 money supply) is the same as vault cash.
e.	The smaller the required-reserve ratio, the larger the simple deposit multiplier.

42.

The United States is divided into __________ Federal Reserve districts, each with a district bank.

a.	three
b.	eight
c.	twelve
d.	twenty

43.

When the Fed purchases securities from a bank, it __________ reserves, __________ the monetary base, and __________ the money supply.

a.	decreases; decreases; decreases
b.	increases; increases; increases
c.	decreases; decreases; increases
d.	increases; increases; decreases e has no impact on; has no impact on; has no impact on

44.

The simple quantity theory of money predicts that if

a.	the money supply rises by $200, then GDP falls by $200.
b.	GDP rises by $400, then the money supply rises by $400.
c.	the money supply rises by 10 percent, then the price level rises by 10 percent.
d.	the money supply falls by $300, then GDP rises by $300.

45.

Monetarists believe

a.	Real GDP is not determined by M in the long run.
b.	velocity is constant.
c.	the SRAS is vertical.
d.	a and c
e.	a, b and c

46.

One-shot inflation can be caused by

a.	an increase in aggregate supply only.
b.	an increase in aggregate demand only.
c.	an increase in aggregate supply or a decrease in aggregate demand.
d.	an increase in aggregate demand or a decrease in aggregate supply.
e.	any movement in aggregate demand or supply.

47.

Real-world continued inflation is probably a result of continued

a.	increases in aggregate demand.
b.	decreases in aggregate demand.
c.	increases in aggregate supply.
d.	decreases in aggregate supply.

48.

The quantity supplied of money is assumed (in the textbook and in lecture) to be

a.	inversely related to the interest rate.
b.	directly related to the interest rate.
c.	independent of the interest rate.
d.	largely determined by the Fed.
e.	c and d

49.

If the interest rate increases, the opportunity cost of money __________, and the quantity demanded of money __________.

a.	does not change; does not change
b.	increases; also increases
c.	decreases; increases
d.	increases; decreases
e.	decreases; also decreases

50.

Which scenario best explains the Keynesian transmission mechanism when the investment demand curve is vertical?

a.	The interest rate falls, investment falls even more, the AD curve shifts rightward, but total expenditures do not change.
b.	The interest rate falls, investment rises, total expenditures rise, and the AD curve shifts rightward.
c.	The interest rate falls, investment falls instead of rising, and the AD curve ends up shifting leftward.
d.	The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in the AD curve.