ECON 104 FINAL

Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the dresses for $1200 to kids attending the prom. The total contribution to GDP of this series of transactions is: A. $1200 B. $500 C. $2300 D. $1100

A. $1200

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves? A. $24,000 B. $20,000 C. $16,000 D. $84,000

A. $24,000

This question is about the entire banking system, not just one bank. Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of: A. $75,000. B. $300,000. C. $175,000. D. $122,000.

A. $75,000

With an MPS of .4, the MPC will be: A. 1.0 minus .4. B. the reciprocal of the MPS. C. .4 minus 1.0. D. .4.

A. 1.0 minus .4

The consumer price index was 177 in 2001 and 184 in 2002. Therefore, the rate of inflation from 2001 to 2002 was: A. 3.95% B. 3.8% C. 1.04% D. Not enough information to find the inflation rate

A. 3.95%

In the four-player circular flow, loans from banks represent A. An injection of money which flows to the business sector. B. An injection of money which flows to government. C. A leakage of money which weakens the economy. D. A leakage of money which strengths the economy.

A. An injection of money which flows to the business sector.

In the circular flow model: A. households are owners of labor, capital, land and entrepreneurial ability B. households are owners of labor and land while businesses are owners of capital and entrepreneurial ability C. households are sellers of intermediate products. D. households are sellers of final products.

A. Households are owners of labor, capital, land and entrepreneurial ability.

When the economy is at its equilibrium GDP level, all of the following will occur, except: A. Inventories will be zero B. There are no unplanned changes in inventories C. Saving equals planned investment D. Aggregate expenditures = GDP

A. Inventories will be zero

In the four-player circular flow, taxes represent A. Money which may return to the circular flow through government spending. B. Money which represents depreciation. C. Something that increases interest rates. D. None of the above.

A. Money which may return to the circular flow through government spending.

In an open economy the equilibrium GDP is determined at that point where: A. S + M + T = Ig + X + G. B. the 45-degree line and the saving schedule intersect. C. S + X + G = Ig + T. D. S + Ig + X = G + T.

A. S + M + T = Ig + X + G

Which of the following is false? A. The U.S. government recently defaulted on its debt. B. Federal Reserve recently bailed out the banking industry C. The U.S. government recently bailed out the financial industry in a program called TARP. D. The U.S. government recently bailed out the automobile industry.

A. The U.S. government recently defaulted on its debt

At the economy's natural rate of unemployment: A. the economy achieves its potential output. B. only cyclical unemployment exists. C. only frictional unemployment exists. D. only structural unemployment exists.

A. The economy achieves its potential output.

The MPC for an economy is: A. the slope of the consumption schedule or line. B. the slope of the savings schedule or line. C. 1 divided by the slope of the savings schedule or line. D. 1 divided by the slope of the consumption schedule or line.

A. The slope of the consumption schedule or line.

16. Excess reserves are A. actual reserves minus required reserves. B. vault cash minus reserves deposited at the Federal Reserve Bank. C. actual reserves minus loans. D. minimum amount of actual reserves a bank must keep on hand to back up its customers deposits.

A. actual reserves minus required reserves.

Given the expected rate of return on all possible investment opportunities in the economy: A. an increase in the real rate of interest will reduce the level of investment. B. an increase in the real interest rate will increase the level of investment. C. a change in the real interest rate will have no impact on the level of investment. D. a decrease in the real rate of interest will reduce the level of investment.

A. an increase in the real rate of interest will reduce the level of investment.

Inflation is undesirable because it: A. arbitrarily redistributes real income. B. invariably leads to hyperinflation. C. usually is accompanied by declining real GDP. D. must go together with cost-of-living increases.

A. arbitrarily redistributes real income.

A checkable deposit at a commercial bank is a(n): A. Asset to the depositor and a liability to the bank B. Liability to the depositor and an asset to the bank C. Liability to both the depositor and the bank D. Asset to both the depositor and the bank

A. asset to the depositor and a liability to the bank.

Which of the following statements is correct? A. Assets equal liabilities plus net worth. B. Actual reserves equal excess minus required. C. A single commercial bank can safely lend a multiple amount of its excess reserves. D. When borrowers default, other depositors must pay.

A. assets equal liabilities plus net worth.

Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit: A. at any level of GDP below $400. B. at all levels of GDP. C. only when GDP is stable. D. at any level of GDP above $400.

A. at any level of GDP below $400.

What do investment and government expenditures have in common? A. both represent injections to the circular flow B. both represent leakages from the circular flow C. neither is subject to the multiplier effect D. both represent a decline in indebtedness

A. both represent injections to the circular flow.

The investment demand curve will shift to the right as the result of: A. businesses becoming more optimistic about future business conditions. B. the availability of excess production capacity. C. an increase in the real interest rate. D. an increase in business taxes.

A. businesses becoming more optimistic about future business conditions.

Other things equal, the multiplier effect associated with a change in government spending is: A. equal to that associated with a change in investment or consumption. B. the same as that associated with a change in taxes. C. greater than that associated with a change in investment. D. less than that associated with a change in investment.

A. equal to that associated with a change in investment or consumption.

The level of aggregate expenditures in the private closed economy is determined by the: A. expenditures of consumers and businesses. B. equality of the MPC and MPS. C. intersection of the saving schedule and the 45-degree line. D. intersection of the saving and consumption schedules.

A. expenditures of consumers and businesses.

If the multiplier in an economy is 5, a $20 billion increase in net exports will: A. increase GDP by $100 billion. B. increase GDP by $20 billion. C. reduce GDP by $4 billion. D. decrease GDP by $100 billion.

A. increase GDP by $100 billion.

If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will: A. increase by $10 billion. B. increase by $2.10 billion. C. increase by $4.29 billion. D. decrease by $4.29 billion.

A. increase by $10 billion.

38. Which of the following is discretionary government spending? A. military spending. B. Medicare spending, including the Part D prescription plan. C. interest paid on the national debt. D. Social Security benefits paid to retirees.

A. military spending.

"Subprime mortgage loans" refer to: A. mortgages that are given to home buyers with poor credit ratings. B. mortgages that are given to home buyers with good credit ratings. C. mortgages to buyers of homes that are in need of substantial repair. D. loans from the Federal Reserve to home mortgage lenders.

A. mortgages that are given to home buyers with poor credit ratings.

The coordination problem in the centrally planned economies refers to the idea that: A. planners had to send required inputs to each enterprise. B. the price level and the level of employment were inversely related. C. the immediate effect of more investment was less consumption. D. exports had to be equal to imports for a central plan to work.

A. planners had to send required inputs to each enterprise.

Corporate profits are: A. the sum of corporate profit taxes paid, dividends, and undistributed corporate profits. B. the sum of corporate profit taxes paid and dividends, then subtract out undistributed corporate profits. C. the sum of dividends and retained earnings (also called retained earnings), then subtract out corporate profit taxes paid D. the sum of dividends, undistributed corporate profits, and proprietors' income.

A. the sum of corporate profit taxes paid, dividends, and undistributed corporate profits.

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of: A. $180,000. B. $80,000. C. $50,000. D. $500,000.

B. $80,000

The change in real GDP is equal to A. (1 - MPS) multiplied by the initial change in spending B. 1/(1-MPC) multiplied by the initial change in spending. C. change in nominal GDP divided by initial change in spending. D. change in GDP less the initial change in spending.

B. 1/ (1-MPC) multiplied by the initial change in spending.

The multiplier is: A. 1/(1 - MPS). B. 1/MPS. C. 1/MPC. D. 1/(1 + MPC)

B. 1/MPS

Assuming the total population is 200 million, the civilian labor force is 125 million, and 100 million workers are employed, the unemployment rate is: A. 12.5% B. 20% C. 50% D. 80%

B. 20%

The United States' economy is considered to be at natural rate of unemployment when: A. 5 percent of the total population is unemployed. B. 5 percent of the labor force is unemployed. C. there is 5% cyclical unemployment. D. there is zero unemployment

B. 5 percent of the labor force is unemployed.

A bank owns U.S. Treasury bonds. In the bank's balance sheet, this would be listed as part of: A. Physical capital B. Assets C. Checkable deposits D. Liabilities

B. Assets

In what type of business do the owners bear no personal financial responsibility for the company's debts and obligations? A. Partnerships. B. Corporations. C. Sole proprietorships. D. All of the above.

B. Corporations

Real GDP measures: A. current output at current prices. B. current output at base year prices. C. base year output at current prices. D. base year output at current exchange rates.

B. Current output at base year prices.

If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the country's capital stock: A. may have either increased or decreased. B. increased by $65 billion. C. increased by $55 billion. D. decreased by $55 billion.

B. Increased by $65 billion.

Exports have the same effect on the current size of GDP as: A. saving. B. investment. C. imports. D. taxes.

B. Investment.

Which of the following shows how to go from NI to PI? A. PI = NI - taxes on production - social security taxes - corporate income tax - retained earnings B. PI = NI - taxes on production - social security taxes - corporate income tax - retained earnings + transfers C. PI = NI - personal income taxes D. None of the above

B. PI= NI - taxes on production - social security taxes - corporate income tax - retained earnings + transfers

Which of the following best defines national income? A. income received by households less personal taxes B. the before-tax income received by households C. incomes earned by U.S. resource outside the geography of the domestic economy D. the market value of the annual output net of consumption of fixed capital

B. The before-tax income received by households.

In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the: A. interest-rate effect. B. wealth effect. C. multiplier effect. D. Keynes effect.

B. Wealth effect.

The 45-degree line on a graph relating consumption and income shows: A. the amounts households will plan to save at each possible level of income. B. all the points at which consumption and income are equal. C. all points where the MPC is constant. D. all points at which saving and income are equal.

B. all the points at which consumption and income are equal.

In a private closed economy, when aggregate expenditures exceed GDP: A. saving will decline. B. business inventories will fall. C. business inventories will rise. D. business inventories will be stable.

B. business inventories will fall.

Bank of America, J.P. Morgan Chase, and Citibank, are all primarily: A. securities firms. B. commercial banks. C. mutual fund companies. D. insurance companies.

B. commercial banks

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to: A. decrease by $25 billion. B. decrease by $50 billion. C. decrease by $150 billion. D. remain unchanged since spending on military goods is unproductive and usually wasteful.

B. decrease by $50 billion.

The phrase "too much money chasing too few goods" best describes: A. the GDP gap. B. demand-pull inflation. C. the inflation premium. D. cost-push inflation.

B. demand-pull inflation

The value of money: A. goes up with the level of employment. B. goes down when the price level goes up. C. goes up when the interest rate goes up. D. goes up when the price level goes up.

B. goes down when the price level goes up.

The multiplier applies to: A. investment but not to net exports or government spending. B. investment, net exports, and government spending. C. spending by the private sector but not by the public sector. D. increases in spending but not to decreases in spending.

B. investment, net exports, and government spending.

The practical significance of the multiplier is that it: A. keeps inflation within tolerable limits. B. magnifies initial changes in spending into larger changes in GDP. C. equates the real interest rate and the expected rate of return on investment. D. helps to stabilize the economy.

B. magnifies initial changes in spending into larger changes in GDP

36. The public debt is the amount of money that: A. Americans owe to foreigners. B. the Federal government owes to holders of U.S. securities. C. state and local governments owe to the Federal government. D. the Federal government owes to taxpayers.

B. the federal government owes to holders of US securities.

In defining money as M1, economists exclude time deposits because: A. the intrinsic value of time deposits is nil. B. they are not directly or immediately a medium of exchange. C. they lose value over time. D. the purchasing power of time deposits is much less stable than that of checkable deposits and currency.

B. they are not directly or immediately a medium of exchange.

Which of the following is not a characteristic of the market system? A. private property. B. freedom of enterprise. C. government ownership of major industries. D. competition in product and resource markets.

C- Government ownership of major industries

Nominal GDP for 2010 is $5800 and the price index is 72. In the base year the price index was 100. What is real GDP or 2010? A. $80.55 B. $5800 C. $8055 D. Not enough information to find real GDP.

C. $8055

In the flow of income and spending, saving and investment are, respectively: A. Wealth and income B. Income and wealth C. A leakage and an injection D. An injection and a leakage

C. A leakage and an injection.

The basic policy-making body in the U.S. banking system is the: A. Federal Monetary Authority. B. Council of Economic Advisers. C. Board of Governors of the Federal Reserve. D. US Department of Treasury

C. Board of Governors of the Federal Reserve.

Which are liabilities to a bank? A. Capital stock and reserves B. Property and capital stock C. Demand and time deposits D. Vault cash and demand deposits

C. Demand and time deposits

Kara voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching for a position in management. Kara presently is: A. cyclically unemployed. B. structurally unemployed. C. frictionally unemployed. D. not a member of the labor force.

C. Frictionally unemployed.

Gross domestic product (GDP) measures and reports output: A. as an index number. B. in percentage terms. C. in dollar amounts. D. in quantities of physical units (for example, pounds, gallons, and bushels).

C. In dollar amounts

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the: A. M2 money supply will decline. B. M1 money supply will decline. C. M1 money supply will not change. D. M2 money supply will increase.

C. M1 money supply will not change.

In the United States, business cycles have occurred against a backdrop of a long-run trend of: A. declining unemployment. B. stagnant productivity growth. C. rising real GDP. D. rising inflation.

C. Rising real GDP

The words "open economy" means A. There are a limited number of government regulations which apply to the business sector. B. Private property rights are protected. C. The economy trades with other economies. D. The economic system is based on markets.

C. The economy trades with other economies.

The most important determinant of consumer spending is: A. the level of household borrowing. B. the stock of wealth. C. the level of income. D. consumer expectations.

C. The level of income.

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of: A. its excess reserves. B. the MPS. C. the reserve ratio. D. its actual reserves.

C. The reserve ratio

The phase of the business cycle in which real GDP is at a minimum is called: A. the peak. B. a recession. C. the trough. D. the underside.

C. The trough

An inflationary expenditure gap is the amount by which: A. equilibrium GDP falls short of the full-employment GDP. B. aggregate expenditures exceed any given level of GDP. C. aggregate expenditures exceed the full-employment level of GDP. D. saving exceeds investment at the full-employment GDP.

C. aggregate expenditures exceed the full-employment level of GDP.

When a check is cleared, A. all reserves and deposits at all banks are unchanged. B. bank receiving the check loses reserves and deposits C. bank from which the check is written loses reserves and deposits D. bank from which the check is written gains reserves and deposits

C. bank from which the check is written loses reserves and deposits.

The MPC can be defined as A. one divided by the MPS B. consumption divided by income C. change in consumption divided by change in income D. change in consumption

C. change in consumption divided by change in income.

In the United States, the money supply (M1) is comprised of: A. currency, checkable deposits, and Series E bonds. B. paper currency, coins, gold certificates, and time deposits. C. coins, paper currency, and checkable deposits. D. coins, paper currency, checkable deposits, and credit balances with brokers.

C. coins, paper currency, and checkable deposits.

Inflation initiated by increases in wages or other resource prices is labeled: A. demand-pull inflation. B. demand-push inflation. C. cost-push inflation. D. cost-pull inflation.

C. cost-push inflation

If the unemployment rate is 7 percent and the natural rate of unemployment is 5 percent, then the: A. frictional unemployment rate is 5 percent. B. cyclical unemployment rate and the frictional unemployment rate together are 5 percent. C. cyclical unemployment rate is 2 percent. D. natural rate of unemployment will eventually increase.

C. cyclical unemployment rate is 2 percent.

The reserves of a commercial bank consist of: A. government securities that the bank holds. B. the bank's net worth. C. deposits at the Federal Reserve Bank and vault cash. D. the amount of money market funds it holds.

C. deposits at the Federal Reserve Bank and vault cash.

The amount that a commercial bank can lend is determined by its: A. outstanding checkable deposits. B. required reserves. C. excess reserves. D. outstanding loans.

C. excess reserves

Tom grows fruits and vegetables for home consumption. This activity is: A. excluded from GDP in order to avoid double counting. B. excluded from GDP because an intermediate good is involved. C. excluded from GDP because no market transaction occurs. D. included in GDP because it reflects production

C. excluded from GDP because no market transaction occurs.

Net exports are: A. that portion of consumption and investment goods sent to other countries. B. exports plus imports. C. exports less imports. D. imports less exports

C. exports less imports

In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because: A. of changes in trade deficits and surpluses. B. the length of the workweek has declined historically. C. prices may change over time. D. depreciation may be greater or smaller than gross investment.

C. prices may change over time.

Imports have the same effect on the current size of GDP as: A. exports. B. investment. C. saving. D. consumption.

C. saving

At the point where the consumption schedule intersects the 45-degree line: A. the MPC equals 1. B. saving equals income. C. saving is zero. D. the APC is zero.

C. saving is zero.

Value added refers to: A. any increase in GDP that has been adjusted for adverse environmental effects. B. the excess of gross investment over net investment. C. the difference between the value of a firm's output and the value of the inputs it has purchased from others. D. the portion of any increase in GDP that is caused by inflation as opposed to an increase in real output.

C. the difference between the value of a firm's output and the value of the inputs it has purchased from others.

The portion of the public debt held outside Federal agencies and the Federal Reserve is: A. all held by US lenders. B. all held by foreign lenders. C. the most important consideration when thinking about the debt problem. D. the least important consideration when thinking about the debt problem.

C. the most important consideration when thinking about the debt problem.

Economic growth is measured as A. the percent change in nominal GDP B. the percent change in nominal NI C. the percent change in real GDP D. the percent change in real NI

C. the percentage change in real GDP

The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially: A. "With as much machinery as possible." B. "Using the latest technology." C. "By exploiting labor." D. "Using the least-cost production techniques."

D. "Using the least-cost production techniques."

A commercial bank has checkable-deposit liabilities of $50,000 and a reserve ratio of 20 percent. What is the amount of required reserves? A. $250,000 B. $50,000 C. $1 million D. $10,000

D. $10,000

According to the Bureau of Labor Statistics, to be officially unemployed a person must: A. be receiving unemployment compensation payments. B. be enrolled in a job training program. C. have adequate job skills. D. be in the labor force.

D. Be in the labor force

A nation's gross domestic product (GDP): A. is the dollar value of all final goods produced but not services B. is the dollar value of all final goods and services but excludes exports C. can be found by summing C + In + S + Xn. D. can be found by summing C + Ig + G + Xn.

D. Can be found by summing C + Ig + G + Xn

In the U.S. economy the money supply is controlled by the: A. Congress. B. Senate Committee on Banking and Finance. C. U.S. Treasury. D. Federal Reserve System.

D. Federal Reserve System.

Commercial banks create money when they: A. accept cash deposits from the public. B. purchase Treasury bonds from dealers. C. raise their interest rates. D. make loans.

D. Make loans

Which of the following statements is correct? A. When a loan is made, the money supply is decreased B. When a loan goes into default, the money supply is increased C. A single bank can legally lend an amount equal to its total reserves D. A single bank can only make loans if it has excess reserves

D. a single bank can only make loans if it has excess reserves.

At equilibrium real GDP in a private closed economy: A. the MPC must equal the APC. B. the slope of the aggregate expenditures schedule equals the MPS. C. planned saving and consumption are equal. D. aggregate expenditures and real GDP are equal.

D. aggregate expenditures and real GDP are equal.

Money functions as: A. a store of value. B. a unit of account. C. a medium of exchange. D. all of these.

D. all of these.

The money supply is backed: A. dollar-for-dollar by gold and silver. B. by government bonds. C. by gold reserves representing a fraction of the total value of dollars in circulation. D. by the government's ability to control the supply of money and therefore to keep its value relatively stable.

D. by the government's ability to control the supply of money and therefore to keep its value relatively stable.

Which of the following statements concerning the equilibrium level of GDP is incorrect? A. leakages equal injections B. no unintended changes in inventories will occur C. there will be no tendency for businesses to alter the aggregate rate of production D. full employment will necessarily be realized

D. full employment will necessarily be realized.

Which of the following activities is excluded from GDP, causing GDP to understate a nation's production? A. the services of health care workers B. the services of military personnel C. the construction of new buildings D. goods and services produced in the underground economy

D. goods and services produced in the underground economy.

Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will: A. increase by $100 billion. B. fall by $100 billion. C. increase by less than $100 billion. D. increase by more than $100 billion.

D. increase by more than $100 billion.

Other things equal, an increase in an economy's exports will: A. decrease aggregate expenditures and therefore decrease its equilibrium GDP. B. have no effect on domestic GDP because imports will change by an offsetting amount. C. lower the marginal propensity to consume. D. increase expenditures and therefore increase its equilibrium GDP.

D. increase expenditures and therefore increase its equilibrium GDP

The M2 money supply includes: A. currency in bank vaults. B. stock certificates. C. the cash value of life insurance policies. D. individual shares in money market mutual funds.

D. individual shares in money market mutual funds.

The amount of reserves that a commercial bank is required to hold is equal to: A. the amount of its checkable deposits. B. its checkable deposits divided by its total assets. C. the sum of its checkable deposits and time deposits. D. its checkable deposits multiplied by the reserve requirement.

D. its checkable deposits multiplied by the reserve requirement.

Structural unemployment: A. is also known as frictional unemployment. B. is the main component of cyclical unemployment. C. is said to occur when people are waiting for the economy to become stronger D. may involve a skills mismatch between unemployed workers and job openings.

D. may involve a skills mismatch between unemployed workers and job openings.

The reserve ratio refers to the ratio of a bank's: A. capital stock to its total assets. B. checkable deposits to its total liabilities. C. reserves to its liabilities and net worth. D. required reserves to its checkable-deposit liabilities.

D. required reserves to its checkable-deposit liabilities.

Other things equal, if the required reserve ratio was lowered: A. the actual reserves of banks would increase. B. the Federal funds interest rate would rise. C. banks would have to reduce their lending. D. the size of the monetary multiplier would increase.

D. the size of the monetary multiplier would increase.