Practice Exam

Among the following list of bonds, which is most likely to have the highest yield? a. A so-called "junk" bond. b. A municipal bond issued by a U.S. municipality. c. A U.S. government bond. d. A corporate bond issued by Home Depot Corporation.

a. A so-called "junk" bond.

The Gold Standard is an example of __________. a. a monetary rule b. a discretionary monetary policy c. Friedman's Rule d. a Taylor-type rule

a. a monetary rule

Which of the following actions on the part of the Fed would most likely result in an increase in the money supply? a. an open market purchase. b. an increase in the required reserve ratio. c. an increase in the discount rate. d. an increase in the interest rate the Fed pays on bank reserves.

a. an open market purchase

"Crowding out" occurs when private investment declines because the U.S. federal government runs a __________ and makes interest rates ________. a. budget deficit; rise. b. budget deficit; fall. c. budget surplus; rise. d. budget surplus; fall.

a. budget deficit; rise.

If the natural rate of unemployment is 5.2 percent and the actual rate of unemployment is 5.7 percent, then, by definition, there is most likely: a. cyclical unemployment amounting to 0.5 percent of the labor force. b. frictional unemployment amounting to 0.5 percent of the labor force. c. structural unemployment amounting to 0.5 percent of the labor force. d. structural unemployment amounting to -0.5 percent of the labor force.

a. cyclical unemployment amounting to 0.5 percent of the labor force.

In the United States, mutual funds: a. provide diversification, but shareholders assume all of the risk associated with the mutual fund. b. provide diversification, and government insurance eliminates the risk to mutual fund investors. c. do not provide diversification, and shareholders assume all of the risk associated with the mutual fund. d. do not provide diversification, but government insurance eliminates the risk to mutual fund investors.

a. provide diversification, but shareholders assume all of the risk associated with the mutual fund.

Suppose a bond pays a 10 percent annual coupon, has a $10,000 face value, two years to maturity, and a 10 percent discount rate. Ceteris paribus, it follows that the present value or market prices of the bond today should be: a. $11,000.00 b. $10,000.00 c. $9,090.90 d. None of the above represents the price of the bond.

b. $10,000.00

Your friend Klaus argues that the current price of stock X is equal to the sum of the stock's fundamental value and a random component you cannot predict. It follows that Klaus is a proponent of: a. The risk / return tradeoff. b. The efficient markets hypothesis. c. Investing in stocks rather than bonds. d. Baseball, apple pie, and motherhood.

b. The efficient markets hypothesis.

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate? a. The real interest rate is the nominal interest rate times the rate of inflation. b. The real interest rate is the nominal interest rate minus the rate of inflation. c. The real interest rate is the nominal interest rate plus the rate of inflation. d. The real interest rate is the nominal interest rate divided by the rate of inflation.

b. The real interest rate is the nominal interest rate minus the rate of inflation.

Which of the following offers the best example of a good or service with a positive externality? a. tobacco products b. a flu shot that prevents a student from transmitting the virus to her dorm-mates c. lunch at McDonalds d. the pen you're writing with

b. a flu shot that prevents a student from transmitting the virus to her dorm-mates

Excludability is the property of a good whereby: a. one person's use diminishes other peoples' use. b. a person can be prevented from using it. c. the government rations the quantity of a good that is available. d. the resource is exhaustible.

b. a person can be prevented from using it.

For the Bureau of Labor Statistics (BLS) to place someone in the "unemployed" category, that person must: a. be officially excluded from the labor force. b. be actively seeking work and not finding it. c. have been previously employed during the past 52 weeks. d. all of the above are correct.

b. be actively seeking work and not finding it.

Refer back to your answer to the previous question. If the Fed took this action, then, ceteris paribus, it would most likely put ____________ pressure on the interest rates. a. upward b. downward c. no d. N/A

b. downward

People who are unemployed because they are in search of a job that best suits their skills, such as, for example, a recent college graduate, are included within the category of: a. structural unemployment. b. frictional unemployment. c. cyclical unemployment. d. marginal unemployment.

b. frictional unemployment.

If the velocity of money is constant, and if the money supply grows more rapidly than the rate of growth of real GDP, then, ceteris paribus, it follows that in the long run: a. the price level will decrease - i.e. the economy will experience deflation. b. the price level will increase - i.e. the economy will experience inflation. c. nominal GDP must be decreasing. d. none of the above is possible.

b. the price level will increase - i.e. the economy will experience inflation.

According to the quantity theory of money, which variable in the quantity theory equation is most likely to be stable - i.e. the variable that varies the least over time? a. money b. velocity c. price level d. output

b. velocity

Suppose there are 2 final goods produced in the economy - food and clothing. Further suppose the economy produces 20 units of food and 20 unites of clothing in the base year, and 25 units of food and 30 units of clothing in year t. In addition, suppose the price of food was $1.00 per unit in the base year and $2.00 in year t; whereas the price of clothing was $1.00 in the base year and $2.00 in year t. What is the real GDP for year t? a. $40 b. $45 c. $55 d. $110

c. $55

Which of the following is the correct formula for calculating the inflation rate? a. ((CPI in year 1 - CPI in year 2 ) / CPI in year 2) x 100 b. ((CPI in year 1) / (CPI in year 2)) x 100 c. ((CPI in year 2 - CPI in year 1) / CPI in year 1) x 100 d. ((CPI in year 2) / (CPI in year 1)) x 100

c. ((CPI in year 2 - CPI in year 1) / CPI in year 1) x 100

Suppose a basket of goods and services has been selected to calculate the CPI, and 2014 has been selected as the base year. In 2013, the basket's cost was $80; in 2014, the basket's cost was $86; and in 2015, the basket's cost was $90. The value of the CPI in 2015 was __________, and the inflation rate in 2015 was _____________. a. 112.5 and the inflation rate was 12.5% b. 112.5 and the inflation rate was 4.6% c. 104.6 and the inflation rate was 4.6% d. 104.6 and the inflation rate was 12.5%

c. 104.6 and the inflation rate was 4.6%

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the: a. CPI is easier to calculate than the GDP deflator. b. CPI measures a broader set of goods and services than the GDP deflator does. c. CPI better reflects the goods and services purchased by consumers. d. GDP deflator cannot be used to gauge inflation.

c. CPI better reflects the good and services purchased by consumers.

In what sense do positive externalities cause the so-called "invisible hand" of the marketplace to "fail"? a. Such externalities lead to government intervention in markets, which exacerbates the problems associated with externalities. b. Such externalities eliminate "free-riding". c. In the absence of government intervention, markets with positive externalities often fail to produce the maximum total benefit to society. d. Markets with positive externalities produce too much of the good or service in question.

c. In the absence of government intervention, markets with positive externalities often fail to produce the maximum total benefit to society.

In an imaginary economy, consumers buy only pizza and puppy chow. The fixed basket consists of 6 pizzas and 4 bags of puppy chow. A pizza cost $20 in 2009 and $25 in 2010. A bag of puppy chow cost $30 in 2009 and $40 in 2010. Using 2009 as the base year, which of the following statements is correct? a. The consumer price index in 2010 was 240. b. The consumer price index in 2010 was 310. c. The rate of inflation in 2010 was 29.17%. d. The rate of inflation in 2010 was 31.00%.

c. The rate of inflation in 2010 was 29.17%.

Which of the following is correct? a. Labor force = number of employed. b. Labor force = population - number of unemployed. c. Unemployment Rate = number of unemployed / (# of employed + number of unemployed) x 100 d. Unemployment Rate = number of unemployed / adult population x 100.

c. Unemployment Rate = number of unemployed / (# of employed + number of unemployed) x 100

Ceteris paribus, which of the following is most likely to lead to an increase in total surplus in a market? a. When the government imposes an excise tax on that market. b. When the government imposes a sales tax on that market. c. When the government removes an excise tax on that market. d. Both A and B are correct.

c. When the government removes an excise tax on that market.

Ceteris paribus, which of the following actions by the Federal Reserve would put downward pressure on the money supply? a. an open-market purchase of government bonds b. a reduction in commercial bank reserve requirements c. an increase in the interest rate paid on bank reserves d. a decrease in the discount rate on Fed lending

c. an increase in the interest rate paid on bank reserves

Ceteris paribus, if the government removes a tax on a good, then the price paid by buyers will _______________ while the (net) price received by the seller will ___________. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

c. decrease; increase

So-called "private goods" are typically said to be: a. subject to "free-riding". b. nonrival in consumption. c. excludable. d. non excludable.

c. excludable

In national income accounting, for an economy as a whole, it must be the case that: a. wages and salaries equal profits. b. consumption equals income. c. income equals to total expenditures. d. consumption equals the sum of rental income, profits, and interest.

c. income equals total expenditures.

Suppose the Fed has decided to decrease the money supply. Ceteris paribus, it follows that it would ____________ the ______________. a. increase; prime rate b. decrease; prime rate c. increase; Fed Funds target rate d. decrease; discount rate

c. increase; Fed Funds target rate

When we speak of the "money supply," specifically MI, we are including all of the following EXCEPT: a. metal coins. b. paper currency. c. lines of credit accessible with credit cards. d. bank deposits accessible with debit cards.

c. lines of credit accessible with credit cards.

Nominal GDP can be obtained by summing the: a. wages and salaries paid to all workers. b. quantities produces of all final goods and services. c. market values of all final goods and services. d. difference between the market values of all final goods and services and the costs of producing those goods and services.

c. market values of all final goods and services.

If the prices of all final goods and services produced in the economy rose while the quantities exchanged of all final goods and services stayed the same, which of the following would increase? a. both real GDP and nominal GDP. b. real GDP but not nominal GDP. c. nominal GDP but not real GDP. d. neither nominal GDP nor real GDP.

c. nominal GDP but not real GDP.

Which of the following would be considered assets on a typical commercial bank's balance sheet? a. both deposits made by its consumers and reserves b. deposits made by its customers but not reserves c. reserves, but not deposits made by its consumers d. neither deposits made by its customers nor reserves

c. reserves, but not deposits made by its consumers

A person who is counted as "unemployed" by BLS: a. is also considered to be in the labor force. b. must actively be seeking work and not finding it. c. must be at least 16 years old. d. all of the above are correct.

d. all of the above are correct.

Typically, when a tax is levied on sellers of tea, ceteris paribus: a. the well-being of both sellers and buyers of tea is unaffected. b. sellers of tea are made worse off, and the well-being of buyers is unaffected. c. sellers of tea are made worse off, and buyers of tea are made better off. d. both sellers and buyers of tea are made worse off.

d. both sellers and buyers of tea are made better off.

Suppose that the minimum reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. If the Fed sells $1 million of government bonds to commercial banks, then the banking system's reserves ________, and the money supply will _________. a. increase by 1 million, increase by 1 million b. increase by 1 million, increase by 10 million c. decrease by 1 million, decrease by 1 million d. decrease by 1 million, decrease by 10 million

d. decrease by 1 million, decrease by 10 million

On the expenditures side of the nominal GDP equation, in absolute value, which of the following components is currently the smallest in the United States? a. consumption b. investment c. government spending d. net exports

d. net exports