Econ 102 Final Sample Questions

When is there a tradeoff between inflation and unemployment rate? a. In the short run b. In the long run c. In both the short run and long run d. There is never a tradeoff between the two

a. In the short run

Factory new orders rose 14% during the last year. Economists estimate that for every 10 cent increase in gas prices, how much does consumer spending fall during the following year? a. $13 billion b. $18 billion c. $22 billion d. $25 billion

a. $13 billion

In which case is the resulting increase in aggregate demand likely to be largest? a. A tax cut perceived by households as permanent b. A rise in taxes perceived by households as permanent c. A tax cut perceived by households as temporary d. A rise in taxes perceived by households as temporary

a. A tax cut perceived by households as permanent

Which of the following is an example of crowding out? a. An increase in government spending increases interest rates, causing investment to fall. b. A decrease in private savings increases interest rates, causing investment to fall c. A decrease in the money supply increases interest rates, causing investment to fall d. An increase in tax increases interest rates, causing investment to fall

a. An increase in government spending increases interest rates, causing investment to fall.

Which of the following would likely increase private saving? a. Expansion of IRA type accounts and a consumption tax b. Expansion of IRA type accounts, but not a consumption tax c. A consumption tax, but not expansion of IRA type accounts d. Neither expansion of IRA type accounts nor a consumption tax

a. Expansion of IRA type accounts and a consumption tax

Which of the following is not a factor currently impacting the Index of Leading Economic Indicators? a. Falling interest rates b. Russia/Ukraine War c. COVID-19 d. Supply Chain Constraints

a. Falling interest rates

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium? a. Increase taxes b. Increase government expenditures c. Increase the money supply d. Lower interest rates

a. Increase taxes

Which of the following is not currently a factor boosting up the Industrial Production Index? a. Less capacity constraints b. Rising oil prices c. Strong household balance sheets d. Rising motor vehicle production

a. Less capacity constraints

Which of the following is true? a. Monetary policy can be described either in terms of the money supply or in terms of the interest rate b. Monetary policy should be described in terms of the changes in the money supply c. Monetary policy should be described in terms of the Fed's interest rate target d. Monetary policy can be described either in terms of the inflation or in terms of the interest rate

a. Monetary policy can be described either in terms of the money supply or in terms of the interest rate

An economy in long-run equilibrium suffers a negative demand shock, causing GDP to fall below potential. What can the government do to bring the economy back to long-run equilibrium? a. Raise government purchases b. Raise interest rate c. Raise taxes d. Raise the minimum wage

a. Raise government purchases

New orders for durable goods rose 14% during the last year. Which of the following is currently not a factor impacting the demand for business investment spending on machines and equipment? a. Rising value of the dollar b. Rising corporate profits c. Rising labor force growth and employment d. Rising depreciation

a. Rising value of the dollar

How is the misery index calculated? a. Sum of the inflation rate and unemployment rate b. Difference between inflation rate and unemployment rate c. Sum of the inflation rate, unemployment rate, and interest rate d. Difference between the inflation rate and interest rate

a. Sum of the inflation rate and unemployment rate

Which of the following is not an automatic stabilizer? a. Tax cut b. Government spending c. Progressive tax system d. All of the above are automatic stabilizers

a. Tax cut

Advocates for settling monetary policy by rule rather than discretion often argue that a. central bankers with discretion are tempted to renege on their announced commitments to lower inflation b. central bankers following a rule will be more responsive to the needs of the political process c. fiscal policy is a much better tool for economic stabilization than is monetary policy d. it is sometimes useful to give the economy a burst of surprise inflation

a. central bankers with discretion are tempted to renege on their announced commitments to lower inflation

From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made people feel wealthier, then it would have shifted aggregate a. demand right b. demand left c. supply right d. supply left

a. demand right

If policymakers decrease aggregate demand, then in the short run the price level a. falls and unemployment rises b. and unemployment fall c. and unemployment rise d. rises and unemployment falls

a. falls and unemployment rises

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, a. production is more profitable and employment rises b. production is more profitable and employment fall c. production is less profitable and employment rises d. production is less profitable and employment falls

a. production is more profitable and employment rises

Using the liquidity-preference model, when the Federal Reserve decreases the money supply, a. the equilibrium interest rate increases b. the aggregate-demand curves shifts to the right c. the quantity of goods and services demand is unchanged for a given price level d. the short-run aggregate-supply curve shifts to the left

a. the equilibrium interest rate increases

Advocates of the theory of rational expectations believe that a. the sacrifice ration can be much smaller if policymakers make a credible commitment to low inflation b. if disinflation catches people by surprise, it will have minimal impact on unemployment c. wage and price setters never expect the central bank to follow through on its announcements d. expected inflation depends on the rates of inflation that people have recently observed

a. the sacrifice ration can be much smaller if policymakers make a credible commitment to low inflation

The short-term Phillips curve shows the combinations of a. unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve. b. unemployment and inflation that arise in the short run as short-run aggregate supply shifts the economy along the aggregate demand curve. c. real GDP and the price level that arise in the short run as short-run aggregate supply shifts the economy along the aggregate demand curve d. real GDP and the price level that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve

a. unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.

If a $1000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is a. 0.2 and the multiplier is 1.25 b. 0.8 and the multiplier is 5 c. 0.2 and the multiplier is 5 d. 0.8 and the multiplier is 8

b. 0.8 and the multiplier is 5

On average, over the past half century, the production of the U.S. economy as measured by real GDP has grown by about how much? a. 1% b. 3% c. 5% d. 7%

b. 3%

Approximately how long does it take a change in monetary policy to influence aggregate demand? a. 1 month b. 6 months c. 2 years d. 5 years

b. 6 months

Which of the following best describe the Latin phrase "scio me nihil scire"? a. to absurdity b. I know that I know nothing c. From the opposite d. From the stronger

b. I know that I know nothing

Which of the following is true about the natural rate of unemployment? a. It is beyond the influence of union pressure b. It is beyond the influence of monetary policy c. It is beyond the influence of search frictions d. None of the above

b. It is beyond the influence of monetary policy

Given a negative supply shock, which of the following will result in a subsequent rightward shift in the short-run Phillips curve? a. People viewing the rise in inflation due to the supply shock as temporary b. People viewing the rise in inflation due to the supply shock as permanent c. Policymakers accommodating the supply shock by reducing the money supply d. Policymakers accommodating the supply shock by reducing government spending

b. People viewing the rise in inflation due to the supply shock as permanent

If current output exceeds potential, then without government, which of the following will occur? a. AD will decrease, bringing the economy back to equilibrium b. SRAS will decrease, bringing the economy back to equilibrium c. LRAS will increase, bringing the economy back to equilibrium d. SRAS will increase, bringing the economy back to equilibrium

b. SRAS will decrease, bringing the economy back to equilibrium

Which of the following correctly describes a liquidity trap? a. The inability of the Fed to further raise interest rates through contractionary monetary policy b. The inability of the Fed to further lower interest rates through expansionary monetary policy c. The inability of the Fed to shift the aggregate demand curve leftward d. The inability of the Fed to produce a rightward movement along the aggregate demand

b. The inability of the Fed to further lower interest rates through expansionary monetary policy

A year ago a country reduced a tax rate on all interest income from 40% to 10%. During the year private saving was $600 billion as compared to $500 billion the year before the tax reform. Taxes collected on interest income fell by $150 billion. Assuming no other changes in government revenues or spending which of the following is correct? a. The substitution effect was larger than the income effect; national saving rose b. The substitution effect was larger than the income effect; national saving fell c. The income effect was larger than the substitution effect; national saving rose d. The income effect was larger than the substitution effect; national saving fell

b. The substitution effect was larger than the income effect; national saving fell

Which of the following best describes the Latin phrase "suum cuique tribuere"? a. You too b. To render to every man his due c. One swallow does not make a summer d. One of many

b. To render to every man his due

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level a. increases the real value of households' money holdings b. decreases the real value of households' money holdings c. increases the real value of domestic currency in foreign-exchange markets d. decreases the real value of domestic currency in foreign-exchange markets

b. decreases the real value of households' money holdings

When the Federal Reserve increases the money supply and expands aggregate demand, it moves the economy along the short-run Phillips curve to a point with ________ inflation and ___________ unemployment. a. higher, higher b. higher, lower c. lower, higher d. lower, lower

b. higher, lower

Part of the argument against deficits is that they a. increase interest rates and investment b. increase interest rates and decrease investment c. decrease interest rates and investment d. decrease interest rates and decrease investment

b. increase interest rates and decrease investment

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would a. increase the rate at which the money supply increases. This will also move inflation closer to its previous rate. b. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate. c. decrease the rate at which the money supply increases. This will also move inflation closer to its original rate. d. decrease the rate at which the money supply increases. However, this will make higher than its previous rate.

b. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

Critics of stabilization policy argue that a. policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived. b. policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived. c. policy affects aggregate demand with a lag, but the effects are short-lived. d. policy does not affect aggregate demand.

b. policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to a. rise. This rise in price expectations shifts the short-run aggregate supply curve to the right. b. rise. This rise in price expectations shifts the short-run aggregate supply curve to the left. c. fall. This rise in price expectations shifts the short-run aggregate supply curve to the right. d. fall. This rise in price expectations shifts the short-run aggregate supply curve to the left.

b. rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

An increase in the expected price level shifts a. both the short-run and long-run aggregate supply curves to the left. b. the short-run aggregate supply to the left but does not affect the long-run aggregate supply curve. c. the long-run aggregate supply to the left but does not affect the short-run aggregate supply curve. d. neither the long-run aggregate supply curve nor the short-run aggregate supply curve to the left

b. the short-run aggregate supply to the left but does not affect the long-run aggregate supply curve.

Throughout U.S. history, what has been the most common cause of substantial increases in government debt? a. recession b. wars c. financial crises d. tax cuts

b. wars

According to traditional Keynesian analysis, which of the following will increase aggregate demand the most? a. $100 billion increase in taxation b. $100 billion decrease in taxation c. $100 billion increase in government spending d. $100 billion decrease in government spending

c. $100 billion increase in government spending

Approximately how many barrels of oil are produced every day on the global oil market? a. 50 million b. 75 million c. 100 million d. 125 million

c. 100 million

Which of the following means a reduction in the rate of inflation? a. Inflation b. Deflation c. Disinflation d. Stagflation

c. Disinflation

Which of the following is true of the Employment Act of 1946? a. It argues that policy instruments should be set to achieve long-run goals and that the economy should be left to deal with short-run fluctuations on its own b. It echoes the argument of Keynes' The General Theory of Employment and Money about the dangers of stabilizing aggregate demand c. It acknowledges the power of monetary and fiscal policy to address fluctuations in aggregate demand caused by irrational waves of pessimism and optimism d. It points the lag inherent in implementing fiscal policy as an argument against it

c. It acknowledges the power of monetary and fiscal policy to address fluctuations in aggregate demand caused by irrational waves of pessimism and optimism

Which of the following curves will shift in response to a series of technological advances improving production capabilities? a. SRAS b. LRAS c. LRAS and SRAS d. LRAS and AD

c. LRAS and SRAS

Which of the following is true of the business cycle? a. It measures long-term trends in the economy b. It concerns fluctuations with regular, predictable patterns c. Macroeconomic variables that fluctuate with it tend to move in the same direction d. Macroeconomic variables that fluctuate with it tend to move the same amount

c. Macroeconomic variables that fluctuate with it tend to move in the same direction

Which of the following best describes the Latin phrase "Petitio principii"? a. Thus always to tyrants b. From the face c. Request of the beginning d. Petition the principle

c. Request of the beginning

Decreased optimism about the future will have which of the following effects? a. Shift AD right b. Increase the quantity of aggregate output demanded c. Shift AD left d. Decrease the quantity of aggregate output demanded

c. Shift AD left

A policy that reduced the natural rate of unemployment would do which of the following? a. Shift the short-run Phillips curve rightward b. Shift the long-run Phillips curve rightward c. Shift the long-run aggregate supply curve rightward and the long-run Phillips curve leftward d. Shift both the short-run and long-run Phillips curves rightward

c. Shift the long-run aggregate supply curve rightward and the long-run Phillips curve leftward

Which of the following best describe the Latin phrase "Alea iacta est"? a. To learn the cause of things b. Law of succinctness c. The die has been cast d. By heads

c. The die has been cast

In constructing its stimulus package, the Obama administration determined that which of the following increased GDP the most? a. a dollar of tax cut b. a dollar increase in wages c. a dollar increase in government spending d. a dollar increase in saving

c. a dollar increase in government spending

A vertical long-run Phillips curve is consistent with a. the conclusion of Friedman and Phelps, but it is not consistent with the classical idea of monetary neutrality b. the classical idea of monetary neutrality, but it is not consistent with the conclusion of Friedman and Phelps c. both the conclusion of Friedman and Phelps and the classical idea of monetary neutrality d. neither the conclusion of Friedman and Phelps nor the classical idea of monetary neutrality

c. both the conclusion of Friedman and Phelps and the classical idea of monetary neutrality

Which of the following is not an argument for maintaining a positive rate of inflation? a. it merits real interest rates to be negative b. it allows real wages to fall without cuts in nominal wages c. it increase the variability of relative prices d. it would be costly to reduce inflation to zero

c. it increase the variability of relative prices

Other things the same, automatic stabilizers tend to a. raise expenditures during expansions and recessions b. lower expenditures during expansions and recessions c. raise expenditures during recessions and lower expenditures during expansions d. raise expenditures during expenditures and lower expenditures during recessions

c. raise expenditures during recessions and lower expenditures during expansions

When an adverse supply shock shifts the short-run aggregate-supply curve to the left, it also a. moves the economy along the short-run Phillips curve to a point with higher inflation and lower unemployment b. moves the economy along the short-run Phillips curve to a point with lower inflation and higher unemployment c. shifts the short-run Phillips curve rightward d. shifts the short-run Phillips curve leftward

c. shifts the short-run Phillips curve rightward

"Money is a veil" best describes a. the general view of the economy b. the historical view of the economy c. the classical view of the economy d. economy in the short run but not the long run

c. the classical view of the economy

Edward Prescott and Finn Kyland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is know as a. inflation targeting b. the monetary policy reaction lag c. the time inconsistency of policy d. the sacrifice ratio dilemma

c. the time inconsistency of policy

If the Consumer Confidence Index falls by more than ______ points during a short period of time, economists expect a recession in the next 3-6 months. a. 10 b. 15 c. 20 d. 30

d. 30

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year, the sacrifice ration is a. 1/5 b. 2 c. 5/2 d. 5

d. 5

Which of the following in not true of the Volker Disinflation? a. It was enacted following adverse supply shocks initiated by OPEC b. It resulted in around 4 percent increase in unemployment c. The disinflation was not as costly as many economists anticipated, lending credence to the theory of rational expectations d. All of the above

d. All of the above

If the economy is in long-run equilibrium, a decrease in government spending will do which of the following? a. Cause inflation but no change in output in the short run b. Cause deflation but no change in output in the short run c. Cause no change in price level and increase output in the long run d. Cause deflation but no change in output in the long run

d. Cause deflation but no change in output in the long run

If the Federal Reserve wanted to engage in stabilization policy, how should it respond to a tax cut by the government? a. Expand aggregate demand by raising the money supply b. Expand aggregate demand by lowering the money supply c. Contract aggregate demand by raising the money supply d. Contract aggregate demand by lowering the money supply

d. Contract aggregate demand by lowering the money supply

Which of the following is an accurate explanation of what it means for the sacrifice ratio to be 6? a. For each percentage point of unemployment that is reduced, 6 percent of annual output much be sacrificed in the transition b. For each percentage point of inflation that is reduced, 6 percent of employment must be sacrificed in the transition c. For each percentage point of output that is reduced, 6 percent of inflation must be sacrificed in the transition d. For each percentage point of inflation that is reduced, 6 percent of annual output must be sacrificed in the transition

d. For each percentage point of inflation that is reduced, 6 percent of annual output must be sacrificed in the transition

Which of the following best describes the Latin phrase "risus abundant in ore stultorum"? a. From crowd, knowledge b. Voice of the people c. Infinite is the number of fools d. Laughter is abundant in the mouth of fools

d. Laughter is abundant in the mouth of fools

An economy in long-run equilibrium suffers a negative demand shock, causing GDP to fall below potential. How will the economy transition back to long-run equilibrium in the absence of government intervention? a. Households will become wealthier, shifting AD right b. Commodity prices will fall, shifting AD right c. Productivity will fall, shifting SRAS right d. Nominal wage will fall, shifting SRAS right

d. Nominal wage will fall, shifting SRAS right

Import prices (excluding fuels) rose 7.5% over the last year. Which of the following was not a factor causing the increase in import prices? a. Falling value of the dollar b. Rising inflation abroad c. COVID-19 Supply Chain Constraints d. Rising unemployment rate

d. Rising unemployment rate

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve? a. When interest rates fall, In-and-Out Convenience Stores decides to build some new stores b. The exchange rate falls, so French restaurants in Paris buy more Kansas beef. c. Tyler feels wealthier because of the price-level decrease and so he decides to remodel his kitchen d. With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers

d. With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers

Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could a. increase the money supply, which will reduce interest rates b. decrease the money supply, which will reduce interest rates c. increase the money supply, which will increase interest rates d. decrease the money supply, which will increase interest rates

d. decrease the money supply, which will increase interest rates

An increase in household saving causes consumption to a. rise and aggregate demand to increase b. rise and aggregate demand to decrease c. fall and aggregate demand to increase d. fall and aggregate demand to decrease

d. fall and aggregate demand to decrease

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will a. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. b. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. c. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower. d. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

d. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

An economist would be more likely to argue for reducing inflation if she thought that the central bank a. lacked credibility and if bonds were usually not indexed for inflation b. lacked credibility and if bonds were usually indexed for inflation c. had credibility and if bonds were usually not indexed for inflation d. had credibility and if bonds were usually indexed for inflation

d. had credibility and if bonds were usually indexed for inflation

If the Federal Reserve increase the rate of money growth and maintains it at the new higher rate, eventually expected inflation will _________ and the short-run Phillips curve will shift __________. a. decrease, downward b. decrease, upward c. increase, downward d. increase, upward

d. increase, upward

The Fed lowered interest rates in 2007 and 2008. This implies, other things the same, that the Fed a. increased the money supply because it was concerned about inflation b. decreased the money supply because it was concerned about unemployment c. decreased the money supply because it was concerned about inflation d. increased the money supply because it was concerned about unemployment

d. increased the money supply because it was concerned about unemployment

Suppose the Federal Reserve pursues contractionary monetary policy. In the long run a. both inflation and the unemployment rate are higher than they were prior to the change in policy b. inflation is higher and the unemployment rate is the same as it was prior to the change in policy c. inflation is lower and the unemployment rate is lower than it was prior to the change in policy d. inflation is lower and the unemployment rate is the same as it was prior to the change in policy

d. inflation is lower and the unemployment rate is the same as it was prior to the change in policy

The Federal Reserve will tend to tighten monetary policy with the goal is to stabilize the economy when a. interest rates are rising too rapidly b. it thinks the unemployment rate is too high c. the growth rate of real GDP is quite sluggish d. it thinks inflation is too high today, or will become too high in the future

d. it thinks inflation is too high today, or will become too high in the future

Which of the following is not a reason to prefer monetary policy by rule rather than by discretion? a. the political business cycle b. time inconsistency of policy c. abuse of power d. supply shocks

d. supply shocks

A change in the expected price level shifts a. the AD curve b. both the SRAS and LRAS curve c. the LRAS curve but not the SRAS curve d. the SRAS curve but not the LRAS curve

d. the SRAS curve but not the LRAS curve

Advocates of taxing consumption rather than income argue that a. a consumption tax is better automatic stabilizer b. taxing consumption does not cause any deadweight loss c. the rich consume a higher fraction of income than the poor d. the current tax code discourages people from saving

d. the current tax code discourages people from saving

An unfavorable supply shock will cause a. unemployment to fall and the short-run Phillips curve to shift left b. unemployment to fall and the short-run Phillips curve to shift right c. unemployment to rise and the short-run Phillips curve to shift left d. unemployment to rise and the short-run Phillips curve to shift right

d. unemployment to rise and the short-run Phillips curve to shift right