Econ 201: Exam 3 Practice Questions

Which of the following is an example of monetary policy? a) A rise in short-term interest rates b) A new bridge being built by the government c) A reduction in the federal income tax d) An increase in Social Security payments

a) A rise in short-term interest rates

Why does a small difference in economic growth result in a large difference in wealth over time? a. The effect of compounding allows growth to build upon previous growth. b. Over time, small growth rates turn into large growth rates. c. Over time, small growth rates end up turning negative, preventing further growth. d. Governments are more likely to support big countries than small countries.

a. The effect of compounding allows growth to build upon previous growth.

Suppose the production function for the country of Westlandia is Q = K + L, where Q is output, K is capital, and L is labor. Which of the following statements is true about this production function? a. Westlandia could achieve economic growth with labor alone. b. Labor exhibits diminishing marginal returns. c. Capital exhibits diminishing marginal returns d. All of the above statements are true.

a. Westlandia could achieve economic growth with labor alone.

If the inflation rate was 1% in 2014, 3% in 2015, and 2% in 2016, this economy experienced ____ from 2014 to 2015, and ____ from 2015 to 2016. a. inflation; disinflation b. disinflation; inflation c. disinflation; deflation d. inflation; deflation

a. inflation; disinflation

Suppose that the cost of a loaf of bread in Zanadoo is 20 shillings, and this represents a full day's wages for the typical factory worker. The 20 shillings represents a ____ value, whereas the loaf of bread costing a full day's wage represents a ____ value. a. nominal; real b. real; real c. nominal; nominal d. real; nominal

a. nominal; real

Suppose that a bank has accepted $20,000 in checking deposits, $40,000 in savings deposits, has $10,000 in cash reserves, and made $50,000 in loans. What is the bank's reserve ratio? a) 10% b) 16.6% c) 20% d) 25%

b) 16.6%

If the reserve requirement is 10%, what is the money multiplier? a) 100 b) 50 c) 10 d) 5

c) 10

If a bundle of goods used to calculate the consumer price index rises from $80 to $86 over a one-year period, what is the inflation rate for that year? a. 6.0% b. 10% c. 6.9% d. 7.5%

d. 7.5%

If China's economy maintains a 7% annual growth rate over the next 20 years, about how large will its economy be in 20 years if its current GDP is $12 trillion? a. $48 trillion b. $24 trillion c. $36 trillion d. $29 trillion

a. $48 trillion

Suppose that the consumer price index in Eastlandia rises from 150 to 159 over the past year, and that the city sets its car registration prices so that real prices stay the same. If the cost to register a car was $50 last year, how much would it cost this year, in nominal terms? a. $53 b. $59 c. $50 d. $56

a. $53

If Greenville's GDP doubled over 5 years, what was the approximate annual growth rate (using the rule of 70)? a. 14% b. 5% c. 20% d. 9%

a. 14%

Which of the following would represent the fastest annual growth of GDP per capita? a. An increase in real GDP per capita of 3%. b. An increase in real GDP of 5% and population growth of 1%. c. An increase in real GDP of 2% and population decline of 1%. d. An increase in real GDP of 6% and population growth of 4%.

b. An increase in real GDP of 5% and population growth of 1%.

At which of the following stages is the unemployment rate likely to be highest? a. At the very end of an economic recovery. b. At the very start of an economic recovery. c. At the very beginning of an economic recession. d. Midway through an economic recession.

b. At the very start of an economic recovery.

Suppose that a bank has loaned money to two businesses: a trustworthy computer manufacturer and a risky mining venture. Unfortunately, the mining venture fails, and the mining firm goes bankrupt. The bank has no insurance for this situation. Now, on its balance sheet, the bank has more liabilities than assets. What is this situation called, and what is the result of this situation? a. Fire sale. The available assets of the bank are sold for pennies on the dollar. b. Insolvency. The bank cannot pay back depositors. c. Consumption. The money that was lost has no effect on the bank's operating status, but the firm's loss counts as part of GDP. d. Bank run. Depositors run on the bank to cash out before the bank runs out of money. e. Illiquidity. Shares of the bank are not traded as often on a stock exchange.

b. Insolvency. The bank cannot pay back depositors.

Which of the following might cause the real value of money to rise in an economy? a) The government prints $1 million in new bills to finance its spending. b) The average price of food items rise by 20%. c) The price of houses and apartment rentals falls by 30%. d) Other countries in the world demand less of this money.

c) The price of houses and apartment rentals falls by 30%.

Which of the following forms would best represent fiat money? a) A rare baseball card given to a landlord in place of rent. b) An hour long golf lesson given in exchange for an hour of tutoring. c) Silver quarters made prior to 1965. d) A $20 bill printed in 2015.

d) A $20 bill printed in 2015.

Identify each statement as either true or false. 1. In the United States, banks keep the entire value of all customer deposits in the bank vault to meet customer withdrawals. 2. Banks typically loan out a portion of customer deposits. 3. Bank runs occur when many customers attempt to withdraw deposits from a bank at the same time and the bank is unable to pay all customer withdrawals. 4. The Federal Deposit Insurance Corporation (FDIC) protects bank depositors from bank failure. 5. The fractional reserve banking system requires all banks to keep the total value of customer deposits in their vaults to prevent bank runs.

1. False 2. True 3. True 4. True 5. False

GDP per capita in the countries of Neverland and Everland are 2,000 and 500, respectively. This suggests that, other things being equal, the returns from capital investment would be: 1) Greater in Neverland. 2) Greater in Everland. 3) The same in both countries.

2) Greater in Everland.

One benefit of using money to facilitate economic activity is that it does not require a double coincidence of wants. Which of the examples describes a double coincidence of wants? a. A baker, who is interested in acquiring meat, meets a butcher interested in acquiring bread. b. A baker, who is interested in acquiring vegetables, meets a butcher who is also interested in acquiring vegetables. c. Two people, who do not know one another, both order an extra-value meal #1 from McDonald's at the exact same moment. d. Two couples both try to purchase the same house.

a. A baker, who is interested in acquiring meat, meets a butcher interested in acquiring bread.

Suppose Hyperpolis's GDP increases by 15%, and its inflation rate is 12%, while Superpolis's GDP increases by 6%, and its inflation rate is 3%. Assuming the population in both countries remained constant, which economy grew faster? a. Both economies grew at the same rate. b. Superpolis's economy grew faster. c. Hyperpolis's economy grew faster. d. It is not possible to determine which economy grew faster.

a. Both economies grew at the same rate.

In 2008, the rate of inflation was 2%, which then rose to 3% in 2009 before falling back to 2% in 2010. Between 2008 and 2009, the economy experienced _____ and between 2009 and 2010, the economy experienced _____. a) inflation; disinflation b) inflation; deflation c) disinflation; inflation d) disinflation; deflation

a. Inflation; disinflation

Which of the following government actions would represent the largest increase in physical capital? a. Investment in hospitals and other health care facilities to modernize their operations. b. Taxes on corporate earnings. c. Tax credits to offset college tuition. d. Expansion of research and development in biotechnology.

a. Investment in hospitals and other health care facilities to modernize their operations.

In an attempt to promote renewable energy, the President and Congress approve an annual rebate to those who install solar panels on their roofs. What type of economic policy would this represent? a. Neither fiscal nor monetary policy. b. Both fiscal policy and monetary policy. c. Fiscal policy d. Monetary policy

a. Neither fiscal nor monetary policy.

There is much debate about whether the U.S. government should eliminate the penny from circulation and instead round all prices to the nearest 5 cents for everyday cash transactions. Which function of money does a penny not serve well? a) Store of value b) Medium of exchange c) The penny does not serve any of the functions of money well. d) Unit of account

b) Medium of exchange

Which of the following is a macroeconomic issue? a) Alex decides to spend his summer vacation at a science camp. b) South Park experiences an economic boom from increased tourism. c) Kira's Dress Factory decides to hire more workers. d) Jamal's Ice Cream Truck shuts down during the winter due to lack of customers.

b) South Park experiences an economic boom from increased tourism.

A popular teacher hands out candy bars to her students as an incentive for good behavior. If students choose to, they could then trade one candy bar for a sheet of stickers or two candy bars to skip a quiz. In this classroom, the teacher is using candy bars as a form of: a) barter b) commodity money c) flat money d) yummy money

b) commodity money

If the reserve requirement is currently 20%, what is the maximum amount of money that could be generated from a $2,000 bank deposit? a. $2,000 b. $10,000 c. $4,000 d. $1,600

b. $10,000

Suppose Will gives his wallet containing $100 to Alex to hold while he works out. During Will's workout, Alex uses the $100 to pay his mechanic who fixed his scooter. The mechanic then took this $100 to his vet to pay off his account for rescuing his pet bird. The vet then used the $100 to pay Alex for money she owed him for tutoring her in economics. After Will's workout, Alex returns the wallet with the same $100 bill inside. Although the same $100 bill was used without Will's knowledge, everybody's debt has been settled. How much money was created? a. $200 b. $300 c. $100 d. $0

b. $300

Suppose that the CPI in 2013 was 250 and the CPI in 2014 was 260. What is the rate of inflation in this economy? a) 3.8% b) 4.0% c) 10.0% d) 96.2%

b. 4.0%

Which of the following is least likely to result in inflation? a. Rising instability in oil-producing nations. b. A reduction in consumer confidence. c. The government printing money to finance deficits. d. A drought in California that causes farm production to fall.

b. A reduction in consumer confidence

Suppose that the stock market rises significantly over the next year, making investors wealthier and more optimistic about the economy while raising the overall level of consumption. Is this increase in consumer confidence a microeconomic or a macroeconomic issue? a. Microeconomic b. Macroeconomic c. Both microeconomic and macroeconomic. d. Neither microeconomic nor macroeconomic.

b. Macroeconomic

In which situation is the real value of 1 unit of currency the highest? a) A Big Mac that costs 7 Swiss Francs in Zurich. b) A Big Mac that costs $4.75 in New York City. c) A Big Mac that costs 4 pounds in London. d) A Big Mac that costs 450 yen in Tokyo.

c) A Big Mac that costs 4 pounds in London.

The country of Eggville uses eggs as its official form of currency. All prices in Eggville are shown in terms of eggs, and residents carry around baskets of eggs to buy goods and services. Residents, however, cannot save eggs because they end up spoiling. Which functions of money do eggs serve? a) Medium of exchange, unit of account, and store of value. b) Medium of exchange and store of value. c) Medium of exchange and unit of account. d) Unit of account and store of value.

c) Medium of exchange and unit of account.

Some people believe that the government should guarantee its citizens a basic standard of living by raising the minimum wage, providing housing assistance to the poor, and offering health care coverage to everyone. What type of economist is most likely to favor this view? a. All would favor this view. b. A monetarist c. A Keynesian economist d. A classical economist

c. A Keynesian economist

Which of the following situations would be considered a money leakage? a. A bank holding only the minimum required reserves. b. A business that refuses to accept cash and handles all transactions using credit cards. c. A senior citizen who keeps her retirement savings in a shoe box underneath her bed. d. A college student who never carries any cash.

c. A senior citizen who keeps her retirement savings in a shoe box underneath her bed.

If Galaxia has a GDP that is 10 times larger than that of Myopia, which country would likely have greater marginal returns to capital based on the law of diminishing marginal returns to capital? a. Both countries would have marginal returns to capital equal to 0 due to diminishing returns. b. Galaxia c. Myopia d. Both countries would have equal marginal returns to capital.

c. Myopia

From 2015 to 2016, the overall price level rose from 200 to 220. Over the same period, tuition rates at the local community college rose from $100 to $115 per credit hour. What can be concluded from the rise in tuition relative to overall inflation? a. Tuition rates increased at the same rate as inflation. b. Tuition rates increased at a slower rate than inflation. c. Tuition rates increased at a faster rate than inflation. d. Tuition rates and inflation cannot be compared with the numbers given.

c. Tuition rates increased at a faster rate than inflation

Which of the following scenarios would result in economic growth in the country of Everland? a) GDP and prices double. b) GDP and population doubles, while prices remain the same. c) Population doubles while GDP and prices remain the same. d) GDP doubles while prices remain the same.

d) GDP doubles while prices remain the same.

Which type of economist would be least supportive of attempts to build a new high-speed railway network by raising taxes on gasoline? a. A monetarist b. A Keynesian economist c. None would be supportive. d. A classical economist

d. A classical economist

All of the following are considered factors of production except: a. a vacant piece of land that has never been used. b. an antique sewing machine that Jill still uses to alter clothes. c. Randy, who has worked as a mechanic for twenty years. d. All of the above are factors of production.

d. All of the above are factors of production.

Which of the following will result in the largest amount of money creation? a. Transferring $1,000 from a checking account into a savings account. b. Converting $1,000 in coins into $1,000 in bills. c. Using a $1,000 bond that matures to buy another $1,000 bond. d. Depositing $1,000 in cash into a checking account.

d. Depositing $1,000 in cash into a checking account.

Which of the following policies would likely not promote economic growth? a. Awarding scholarships to bright high school students. b. Offering after-work computer enhancement classes. c. Replacing old snow plows with new state-of-the-art snow plows. d. Reducing the number of student visas issued to international students.

d. Reducing the number of student visas issued to international students.

Gus takes his $15 in lemonade stand earnings and deposits it into his savings account. Meanwhile, Gus's dad borrows $20,000 to buy a new family car. Gus's $15 represents a(n) ____ for the bank, while his dad's $20,000 loan represents a(n) ____ for the bank. a. asset; asset b. asset; liability c. liability; liability d. liability; asset

d. liability; asset