2013 Econ 104 Final Exam

53. When the price level actually falls, what is the economy experiencing? A) deflation B) disinflation C) stagflation D) devaluation

A

(SKIP) 58. (Figure: Aggregate Demand Conditions) Suppose the economy is initially at Point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by A) increasing taxes so that the AD curve shifts back to AD1. B) increasing taxes so that the AD curve shifts further out to AD5. C) increasing government spending so that the AD curve shifts back to AD1. D) increasing government spending so that the AD curve shifts further out to AD5.

A

(SKIP) Use the following to answer question 31: Figure: Three Dynamic AD Curves 31. (Figure: Three Dynamic AD Curves) Beginning at Point A in the figure, what is the short-run real GDP growth rate in this economy after a negative money shock? A) 1.2 percent B) 1.8 percent C) 3 percent D) 2 percent

A

(SKIP) Use the following to answer question 35: Figure: Dynamic Aggregate Demand 35. (Figure: Dynamic Aggregate Demand) Point A on this dynamic aggregate demand curve represents a real GDP growth rate of A) 5 percent. B) 7 percent. C) 3 percent. D) 2 percent.

A

14. Lillian lent A.J. $10,000 and increased her purchasing power by $200 when AJ repaid the loan a year later. Deflation of 2 percent also occurred that year. What nominal interest rate did Lillian charge A.J.? A) 0 percent B) 2 percent C) 4 percent D) 2.5 percent

A

15. What is the "velocity of money", if we're talking about the U.S. economy? A) The average number of times a dollar is spent in a year. B) The physical speed of U.S. dollars, measured in miles per year. C) The growth rate of nominal GDP. D) The growth rate of real GDP.

A

17. Government debt monetization generally leads to inflation. A) True B) False

A

2. Suppose 1,000 experts flip a coin once each year and half say the market will go up, while the other half say the market will go down. After six years how many experts would have been correct every year? A) 15 B) 62 C) 8 D) 31

A

23. If the growth rate of money is 3 percent, and the growth rate of velocity is 1 percent, the growth rate of nominal GDP is A) 4 percent. B) 1 percent. C) 0 percent. D) 2 percent.

A

24. The short-run aggregate supply curve shows a relationship between the real growth rate and the A) actual inflation rate. B) expected inflation rate. C) long-run inflation rate. D) None of the answers is correct.

A

25. Variation of real GDP around the normal growth rate are called A) business fluctuations. B) recessions. C) inflation variations. D) Solow growth rates.

A

29. If spending growth is 6 percent and inflation is also 6 percent, this means that A) real GDP did not increase. B) economic growth was 12 percent. C) more money is chasing an increased number of goods. D) a positive supply shock occurred.

A

3. High returns reward savers for bearing high risks. A) True B) False

A

32. Along a fixed dynamic AD curve, a one-percentage point increase in inflation predicts a one-percentage point increase in real GDP growth. A) True B) False

A

34. What factors triggered the Great Depression? A) tight monetary policy B) increased inflation C) increased money supply D) increased innovation

A

36. A reason why fourth-quarter economic fluctuations occur is A) spending on Christmas. B) spending on vacations. C) spending on renovation projects. D) post-Christmas spending declines.

A

38. Which of the following is NOT a transmission mechanism? A) reductions in the money supply B) intertemporal substitution C) uncertainty D) sticky wages and prices

A

4. The textbook uses the "no free lunch principle" in financial investment to indicate that: A) investment opportunities with high expected returns come with higher risk. B) investment opportunities with high expected returns come with lower risk. C) there is no relationship between risk and expected returns. D) there is always risk in holding any investment opportunity.

A

40. Marriage is a kind of irreversible investment. A) True B) False

A

46. When the Federal Reserve makes an "open market purchase", the amount of money available for the banking system to loan A) increases. B) decreases. C) remains constant. D) becomes difficult to predict

A

51. At the time the Federal Reserve must make a decision, the actual state of the economy may be unknown. A) True B) False

A

54. The Fed dealt with high inflation in the 1980s by A) reducing the money supply and causing aggregate demand to fall. B) raising the money supply and causing aggregate demand to rise. C) reducing the money supply and causing aggregate demand to rise. D) raising the money supply and causing aggregate demand to fall.

A

56. When using fiscal policy to fight a recession, the government will A) decrease taxes and/or increase government expenditures. B) increase taxes and/or decrease government expenditures. C) institute technological advancement in the economy. D) decrease government expenditures.

A

8. Historically, stocks offer __________ returns than bonds in the long run. A) higher B) lower C) the same

A

9. For a person making a financial investment, "compounding the returns" on the fund leads to a higher total return in the future than without compounding. A) True B) False

A

Use the following to answer question 18: Table: Consumer Price Index Year CPI Value 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 18. (Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which years did the country experience disinflation? I. 2006 II. 2007 III. 2008 IV. 2009 A) I and II only B) I and III only C) II and III only D) II and IV only

A (Probably not right)

(SKIP) Use the following to answer question 20: Figure: Real Shocks 20. (Figure: Real Shocks) From point X in the accompanying dynamic aggregate demand model, a negative supply shock that still lets the economy grow will change the inflation rate to A) 3 percent. B) 7 percent. C) 5 percent.

B

1. A buy-and-hold strategy only works for stocks that are very volatile. A) True B) False

B

13. Diversification is the only strategy that leads to a higher-than-market-average return. A) True B) False

B

16. The situation in which the government pays off its debts by printing money is called A) a money illusion. B) monetizing the debt. C) disinflation. D) the quantity theory of money.

B

21. The average annual rate of growth of real GDP in the United States has fluctuated around ____ for the last 50 years. A) 1 percent B) 3 percent C) 5 percent D) -1 percent

B

26. For any given expected inflation rate, short-run aggregate supply curves show the relationship between A) the money supply and growth rate of output. B) inflation and growth rate of output. C) production factors and wages. D) inflation and wages.

B

33. If spending in an economy increases by 3 percent and real GDP increases by 1 percent, the result will be A) a recession. B) inflation. C) a positive supply shock. D) war.

B

37. Which of the following individuals is practicing intertemporal substitution? A) Elmer moves to Washington State to take a job. B) Malika decides to stop being a stay-at-home mother and enters the workforce because the economy is booming. C) Anneliese studies continuously throughout the semester for her final exams. D) The United States enters a recession and Tashika loses her job.

B

39. The cost of shifting workers from declining sectors of the economy to growing sectors is known as A) irreversible employment. B) a labor adjustment cost. C) labor bunching. D) intertemporal substitution.

B

42. (Table: Money Supply Components) Table: Money Supply Components Reserves held by banks at the Fed $120 billion Currency $800 billion Checkable deposits $650 billion Savings deposits $375 billion Small-time deposits $957 billion Money market mutual funds $486 billion According to the data in the money supply components table, the total amount of M1 equals A) $920 billion. B) $1,450 billion. C) $3,268 billion. D) $3,388 billion.

B

45. When the Fed wants to change the money supply, it usually buys or sells money market mutual funds. A) True B) False

B

47. The discount rate is the interest rate charged on a(n) A) low interest loan from the Federal Reserve to a bank. B) loan from the Federal Reserve to a bank. C) long-term loan from one bank to another. D) overnight loan from one bank to another.

B

50. Most of the time, a majority of banks borrow from the Federal Reserve. A) True B) False

B

52. In the short run, if the Fed responds to a negative real shock by raising the growth rate of money supply, inflation will be A) lower than the rate without responding to the negative shock. B) higher than the rate without responding to the negative shock. C) the same as the rate without responding to the negative shock. D) lower or higher than the rate without responding to the negative shock, depending on the size of money supply growth.

B

55. The time necessary to recognize that an economic problem exists is called a(n) A) legislative lag. B) recognition lag. C) implementation lag. D) Each of these answers is correct.

B

60. The difficulties of using fiscal policy to affect the economy include I. the crowding out effect. II. the time lag in policy effects. III. the slow growth rate of human capital. A) I only B) II only C) I and II only D) II and III only

C

61. Which of the following statements explains why Argentina had over a 100 percent crowding out during the 1999 to 2002 period? A) The government accidentally contracted expenditure instead of expanding it. B) uncertainty and pessimism C) implementation lags D) recognition lags

B

7. The least risky financial assets are those that A) are negatively correlated with your portfolio B) tend to fall in price when most of your other investments rise in price. C) Both A and B.

C

10. Compared to stocks, art investments have _____ monetary returns because they offer ______ nonpecuniary returns. A) lower; lower B) higher; higher C) lower; higher D) higher; lower

C

11. According to the efficient markets hypothesis, the person who most likely earns the highest return for holding the stock of Company ABC on a single day is: A) a person who follows a buy-and-hold strategy. B) an active trader who knows the historical prices of ABC. C) ABC's CEO who has inside information about the company's new projects.

C

12. For a mutual fund, a load is: A) the expected return of the fund. B) the risk of the fund. C) the fee for managing the fund.

C

19. A major problem with inflation is that after it starts A) it always stops quickly because the economy always corrects itself naturally. B) it can only be ended by a new Congress, especially a new House of Representatives. C) it is difficult to stop without experiencing high unemployment.

C

22. If spending growth is 3 percent, and real GDP growth is 2 percent, what is the inflation rate? A) 3 percent B) 5 percent C) 1 percent D) 2 percent

C

27. If wages are not as flexible as prices, an increase in money growth will lead to A) an increase in inflation and a rise in real long-run GDP growth. B) an increase in inflation but no rise in real short-run GDP growth. C) an increase in inflation and in firms' profits. D) no change in inflation, but a fall in firms' profits.

C

28. The Solow growth rate is the rate of economic growth that occurs when A) Hyperinflation occurs. B) prices and wages are sticky. C) prices and wages are flexible. D) the money supply is falling.

C

30. How has the role of agricultural production changed in the Indian economy? A) It has become a greater part of GDP, due to technological advances. B) It has remained about 40 percent of GDP, but has doubled in yield. C) It has fallen to about 20 percent of GDP due to economic diversification. D) It is now only 1 percent of GDP.

C

48. A permanent increase in money growth will cause inflation to increase in A) the short run only. B) the long run only. C) both the short run and the long run. D) neither the short run nor the long run.

C

5. (Table: Investment) Refer to the table. Rank the investments in order from the least risky to the most risky. Table: Investment Investment Rate of Return A 10% B 4.5% C 47.36% D 18% A) A, B, C, D B) C, B, A, D C) B, A, D, C D) C, D, A, B

C

59. Examples of automatic stabilizers include I. food stamps. II. unemployment benefits. III. implementation lags. A) I only B) II only C) I and II only D) II and III only

C

6. A risk-loving individual would choose which of the following investment instruments? A) government bonds B) stocks from a company listed on the Dow Jones Industrial Average C) stock from a very new company that has high growth potential D) a low-risk mutual fund

C

41. All of the following are means of payment in the United States EXCEPT A) Federal Reserve notes. B) checkable deposits. C) savings deposits. D) stock options.

D

43. Why does so much U.S. currency circulate in other countries? A) Several countries use the U.S. dollar as their official currency. B) The U.S. dollar is frequently used in drug trafficking. C) Dollars hold their value in unstable countries. D) Each of these answers is correct.

D

44. The amount by which the money supply expands with each additional dollar in reserves is the A) reserve ratio. B) discount rate. C) fractional reserve. D) money multiplier.

D

49. Who is Ben Bernanke? A) the Secretary of the U.S. Treasury B) the Chairman of the President's Council of Economic Advisors C) the Vice President of the United States D) the Chairman of the Federal Reserve

D

57. When consumers save their tax cut to pay for for a future tax increase they are adhering to A) the bandwagon effect. B) intertemporal substitution. C) the multiplier effect. D) Ricardian equivalence.

D