Sample Final Exam

Sample ExamPrinciples of Economics__________________________________________________________________________________________

Exhibit 6-1Year CPI

1 2172 2203 2254 2315 240

1. _____ Refer to Exhibit 6-1. Prices rose by __________ percent from Year 1 to Year 2.a. 1.38b. 0.14c. 1.29d. 1.94e. 3.00

2. _____ Look at the following data: The frictional unemployment rate is 1.5 percent, the natural unemployment rate is 4.5 percent, and the cyclical unemployment rate is -1 percent. The structural unemployment rate is _________ percent and the actual unemployment rate (in this economy) is ___________ percent.

a. 6; 3.5b. 3; 5.5c. 3; 3.5d. 6; 5.5

3. _____ Suppose there are 50 million persons in the population, 25 million persons in the civilian labor force, and 20 million persons are employed. The number of people unemployed is _______ million and the unemployment rate is ___________ percent.

a. 25; 50b. 5; 10c. 5; 20d. 10; 10

4. _____ At the time of Kelsey’s 20 year high school reunion she was earning $50,000 and the CPI was 120. Now that it is time for her to attend her 30 year high school reunion, Kelsey’s income has risen to $97,000 and the CPI is 230. At her 30 year reunion, can Kelsey rightfully brag that her real income has risen since the last time she saw her former classmates ten years ago?

a. Yes, Kelsey’s real income rose during that 10 year period.b. No, Kelsey’s real income fell during that 10 year period.c. No, Kelsey’s real income remained constant during that 10 year period.d. It is impossible to determine what happened to Kelsey’s real income.

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Sample ExamPrinciples of Economics__________________________________________________________________________________________5. _____ A plumber who quits his job in Indianapolis and moves to Orlando where

additional plumbers are needed is said to be ___________________ unemployeda. frictionallyb. structurallyc. cyclicallyd. underemployed

6. _____ You have data for compensation of employees, proprietors' income, rental income, and net interest. Can you compute national income?

a. Yes.b. No, since data on indirect business taxes are missing.c. No, since data on corporate profits is missing.d. No, since data on the capital consumption allowance is missing.e. No, since net interest has not been adjusted for profits.

7. _____ What does annual economic growth refer to?a. annual increases in GDPb. annual increases in consumption spendingc. annual increases in investment spendingd. annual increases in Real GDPe. none of the above

8. _____ Suppose that net exports are -$300 billion and exports are $500 billion. Imports equals

a. $800 billion.b. $400 billion.c. $200 billion.d. -$200 billion.e. There is not enough information to answer this question.

9. _____ Which of the following is always a characteristic of the contraction phase of the business cycle?

a. lower unemployment ratesb. a decline in Real GDPc. higher inflation ratesd. a decline in GDPe. all of the above

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Exhibit 7-4

Economic Data for Country A

Year/Quarter Real GDP2012/Quarter 1 $450 billion 2012/Quarter 2 $430 billion2012/Quarter 3 $425 billion2012/Quarter 4 $439 billion

10. _____ Refer to Exhibit 7-4. Did Country A experience a recession (based on the standard definition) in 2012?

a. Yes, because Real GDP declined during two consecutive quarters in 2012b. No, because Real GDP did not decline during three consecutive quarters in 2012.c. Yes, because Real GDP was lower at the end of the year than it was at the

beginning of the year.d. This information cannot be determined because the determination of a recession

is based upon GDP not Real GDP.

11. _____ Here is a consumption function: C = C0 + MPC(Yd). The C0 term is usually defined as

a. autonomous consumption.b. point-zero consumption.c. mandatory consumption.d. propensitory consumption.e. none of the above

12. _____ The larger the marginal propensity to save,a. the smaller the multiplier.b. the larger the multiplier.c. the smaller the change in Real GDP, given a change in autonomous

consumption.d. a and ce. none of the above

13. _____ When the MPC = 0.9, the multiplier isa. 0.20.b. 1.25.c. 2.50.d. 5.00.e. 10.00.

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14. _____ A rise in MPC makes the total expenditures (TE) curve __________ and __________ the multiplier.

a. steeper; raisesb. steeper; lowersc. flatter; raisesd. flatter; lowers

15. _____ Keynes argued thata. 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. a and bd. none of the above

16. _____ Which of the following is not an aspect of Keynesian economics?a. Wages and prices tend to be inflexible downward.b. Supply does not necessarily generate its own demand.c. The interest rate is important in determining the level of investment, but not as

important as other variables.d. Unemployment above natural unemployment is always a temporary

phenomenon.

17. _____ According to efficiency wage models, labor productivity depends ona. the number of employees at a firm; the smaller the number of employees, the

more productive each employee is.b. the amount of capital that employees have to work with.c. the wage rate the firm pays its employees; a cut in wages can cause labor

productivity to decline.d. whether or not the economy is currently producing Natural Real GDP.e. none of the above

18. _____ Inventory levels unexpectedly fall and firms increase the quantity of goods and services they produce. Which of the following is consistent with these two occurrences?

Instructor’s Note – You can reason this out. Total production is TP while Total Expenditures is TE. We this in the Aggregate Demand and Aggregate Supply functions.

a. TP is greater than TE.b. TP is less than TE.c. TE is equal to TP minus the rise in inventories above the optimum inventory level.d. TP is equal to TE.e. b and c

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Sample ExamPrinciples of Economics__________________________________________________________________________________________19. _____ Government purchases rise by $100 billion and the MPC is equal 0.75.

Assuming that idle resources exist at each expenditure round, and the multiplier is operative, the change in Real GDP equals

a. $40 billion.b. $75 billion.c. $400 billion.d. $750 billion.e. $250 billion.

20. _____ In the simple Keynesian model, an increase in aggregate demand leads to an increase in

a. Real GDP and the price level.b. the price level and no change in Real GDP for levels of Real GDP below Natural

Real GDP.c. the price level and a decrease in Real GDP.d. Real GDP and no change in the price level for levels of Real GDP below Natural

Real GDP.e. There is not enough information to answer the question.

21. _____ If consumption changes because of a change in the price level, then thea. economy moves from one point on an AD curve to another point on the same

curve.b. AD curve shifts.c. economy moves from one point on a SRAS curve to another point on the same

curve.d. SRAS curve shifts.e. none of the above

22. _____ A rise in wage ratesa. causes the AD curve to shift leftward.b. causes the short-run aggregate supply (SRAS) curve to shift rightward.c. does not affect the present position of the SRAS curve.d. causes the AD curve to shift rightward.e. causes the SRAS curve to shift leftward.

23. _____ If aggregate quantity demanded is greater than aggregate quantity supplied at a particular price level, then

a. consumers will bid prices upward, and a greater quantity of output will be supplied.

b. the shortage will likely be eliminated.c. a and bd. none of the above

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24. _____ In the short run, a decrease in wage rates, ceteris paribus, shifts thea. AD curve to the right, causing equilibrium price level to rise and equilibrium Real

GDP to increase.b. AD curve to the left, causing equilibrium price level to fall and equilibrium Real GDP

to decrease.c. SRAS curve to the right, causing equilibrium price level to fall and equilibrium Real

GDP to increase.d. SRAS curve to the left, causing equilibrium price level to rise and equilibrium Real

GDP to decrease.

25. _____ Starting from short-run equilibrium, wage rates rise. What is the effect on the price level and Real GDP in the short run?a. The price level rises and Real GDP falls.b. The price level falls and Real GDP rises.c. The price level rises and Real GDP rises.d. The price level falls Real GDP falls.

26. _____ When the economy is in a recessionary gap, Keynesian economists will often advocate expansionary policy measures. Why?

a. Keynesians believe the economy sometimes gets stuck in a recessionary gap and can't get itself out without government intervention.

b. Keynesians believe the economy itself sometimes takes too long to eliminate the recessionary gap and return to full-employment output.

c. Keynesians are generally in favor of increasing taxes.d. a and be. a and c

27. _____ An example of contractionary fiscal policy isa. an increase in government expenditures, or an increase in taxes, or both.b. a decrease in government expenditures, or a decrease in taxes, or both.c. an increase in government expenditures, or a decrease in taxes, or both.d. a decrease in government expenditures, or an increase in taxes, or both.e. increasing government expenditures while holding taxes constant.

28. _____ To eliminate an inflationary gap, Keynesian theory indicates that government shoulda. increase taxes.b. decrease taxes.c. increase government purchases.d. decrease government purchases.e. either a or d

Exhibit 15-3

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29. _____ Refer to Exhibit 15-3. The economy is currently at point 7. If the economy self-regulates, it will end up at point __________, whereas if contractionary monetary policy is effective, it will end up at point __________.

a. 8; 6b. 9; 6c. 9; 5d. 9; 3e. 3; 9

30. _____ Which of the following factors can shift the AD curve?a. net exportsb. government purchasesc. the money supplyd. b and ce. a, b, and c

31. _____ If peanuts were widely accepted for purposes of exchange, thena. peanuts would be money.b. peanuts would be less valuable than they are currently.c. we would observe people using peanuts to purchase cars.d. a and ce. a and b

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32. _____ Compared to barter, money __________ transaction costs, making transactions __________ time-consuming.

a. increases; moreb. increases; lessc. reduces; mored. reduces; less

33. _____ M1 is comprised of currency held outside banks + traveler’s checks + __________.

a. credit cardsb. savings depositsc. Goldd. checkable depositse. money market mutual funds

34. _____ 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.

35. _____ Required reserves are the amount ofa. reserves a bank must hold against its deposits as mandated by the Federal Reserve.b. cash a bank must hold against its deposits as mandated by the Federal Reserve.c. checkable deposits a bank must hold against all other deposits as mandated by the

U.S. Treasury.d. reserves a bank must hold against all its assets as mandated by the Federal

Reserve.

36. _____ If checkable deposits in Bank A total $300 million and the required reserve ratio is 10 percent, then required reserves at Bank A equal

a. $3.0 million.b. $30.0 million.c. $3.3 million.d. $300,000

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37. _____ Bank A has checkable deposits of $800,000 and total reserves of $200,000. If the required reserve ratio is 0.15, the bank has required reserves of

a. $600,000.b. $120,000.c. $90,000.d. $30,000.

38. _____ M2 includes M1 plus all of the following excepta. savings deposits.b. retail money market mutual funds.c. short-term U.S. government securities.d. small-denomination time deposits.

39. _____ Inflation does the greatest harm to money's function as aa. medium of exchange.b. unit of account.c. store of value.d. liquid asset.

40. _____ Which of the following is not a major responsibility of the Fed?a. controlling the money supplyb. serving as the federal government's bankerc. determining tax ratesd. acting as a lender of last resort

41. _____ Open market operations are thea. buying and selling of Federal Reserve Notes in the open market.b. means by which the Fed supplies the economy with currency.c. means by which the Fed acts as the government's banker.d. buying and selling of government securities by the Fed.e. buying and selling of government securities by the Treasury.

42. _____ If the Fed wants to increase the money supply through an open market operation, it will

a. purchase government securities.b. sell government securities.c. first purchase, then sell, government securities.d. lend more reserves to commercial banks.

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43. _____ The Fed can change the money supply by changinga. the required reserve ratio.b. marginal income tax rates.c. federal excise taxes.d. unemployment benefits.

44. _____ The larger the simple deposit multiplier,a. the higher the required reserve ratio.b. the higher the discount rate.c. the larger the change in the money supply for a given change in deposits.d. the less likely the Fed will be to use its monetary policy tools.

45. _____ Which of the following will increase the money supply?a. an increase in the discount rate (relative to the federal funds rate)b. a decrease in the required reserve ratioc. an open market sale by the Fedd. a and ce. b and c

46. _____ The Federal Open Market Committee (FOMC)a. has six members.b. conducts open market operations.c. is the policy-making body within the Treasury.d. is the governing body of the Federal Reserve System.e. a, b, and c

47. _____ The Board of Governors of the Federal Reservea. is made up of seven members.b. is a group of advisers reporting to the President.c. is located in New York City.d. members are appointed to four-year terms by the President and confirmed by the

Senate.e. all of the above

48. _____ Which of the following is not a monetary policy tool of the Fed?a. changing the required reserve ratiob. changing the discount ratec. setting the price level and the market rate of interestd. conducting open market operations

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49. _____ A bank is less likely to borrow from the central bank when the __________ falls relative to the __________.

a. discount rate; required reserve ratiob. excess reserve; required reservesc. discount rate; federal funds rated. federal funds rate; discount rate

50. _____ If reserves increase by $5 million, what is the difference in the resulting change in checkable deposits when the required reserve ratio is 12.5 percent compared to when it is 10 percent?

a. $12.5 millionb. $10 millionc. $2.5 milliond. $100 million

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

a. does not change; does not changeb. increases; also increasesc. decreases; increasesd. increases; decreasese. decreases; also decreases

52. _____ Which best describes the Keynesian transmission mechanism when the money supply increases?

a. The interest rate rises; this in turn reduces investment spending, which in turn raises total expenditures and shifts the AD curve rightward.

b. The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve leftward.

c. The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve rightward.

d. The interest rate falls; this in turn stimulates investment spending, which in turn lowers total expenditures and shifts the AD curve leftward.

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Exhibit 15-1

53. _____ Refer to Exhibit 15-1. Keynesians are often accused of having an "inflationary bias." This is due at least in part to their advocacy of expansionary monetary policy when they believe it is needed to take the economy from point

a. B to point C.b. B to point A.c. D to point C.d. A to point B.

54. _____ A change in the money supply will change investment whena. the money supply is a function of the price level.b. investment is interest-sensitive.c. investment depends only on the level of GDP.d. investment is interest-insensitive.e. the supply for money is a function of the interest rate.

55. ______ The demand-for-money curve illustrates the __________ relationship between the quantity demanded of money and __________.

a. inverse; the interest rateb. direct; GDP.c. direct; the interest rated. inverse; GDP

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Answer Key

1 A 11 A 21 A 31 D 41 D 51 D2 C 12 D 22 E 32 D 42 A 52 C3 C 13 E 23 C 33 D 43 A 53 A4 A 14 A 24 C 34 C 44 C 54 B5 A 15 C 25 A 35 A 45 B 55 A6 C 16 D 26 D 36 B 46 B 567 D 17 C 27 D 37 B 47 A 578 A 18 B 28 E 38 C 48 C 589 B 19 C 29 D 39 C 49 D 5910 A 20 D 30 E 40 C 50 B 60

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Sample Final Exam

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