ECON 201 Final Exam

If Fred's annual real income rises by 8 percent each year, his annual real income will double in about... A. 8 to 9 years. B. 10 to 11 years. C. 5 to 6 years. D. 19 to 20 year.s

A. 8 to 9 years.

An appropriate fiscal policy for a severe recession is... A. A decrease in tax rates. B. An increase in interest rates. C. Appreciation of the dollar. D. A decrease in government spending.

A. A decrease in tax rates.

Which of the following is the best example of economic investment? A. Apple builds a new plant to manufacture iPads. B. Your college purchases a 5-year-old building in order to have more classrooms. C. A retiree purchases U.S. government bonds. D. A company, like Bank of America, acquires another company, like Merrill Lynch.

A. Apple builds a new plant to manufacture iPads.

Markets, viewed from the perspective of the supply and demand model, A. Assume many buyers and sellers of a standardized product. B. Do not exist in the real-world economy. C. Assume market power so that buyers and sellers bargain with one anoher. D. Are approximated by markets in which a single seller determines price.

A. Assume many buyers and sellers of a standardized product.

Black markets are associated with... A. Ceiling prices and the resulting product shortages. B. Ceiling prices and the resulting product surpluses. C. Price floors and the resulting product shortages. D. Price floors and the resulting product surpluses.

A. Ceiling prices and the resulting product shortages.

The study of economics is primarily concerned with... A. Choices that are made in seeking the best use of resources. B. Demonstrating that capitalistic economies are superior to socialistic economies. C. Keeping private businesses from losing money. D. Determining the most equitable distribution of society's output.

A. Choices that are made in seeking the best use of resources.

If Z is an inferior good, an increase in money income will shift the... A. Demand curve for Z to the left. B. Demand curve for Z to the right. C. Supply curve for Z to the left. D. Supply curve for Z to the right.

A. Demand curve for Z to the left.

Because successive units of a good produce less and less additional satisfaction, the price must fall to encourage a buyer to purchase more units of the good. This statement is most consistent with which explanation for the law of demand? A. Diminishing marginal untility. B. The rationing function of prices. C. The substitution effect. D. The income effect.

A. Diminishing marginal utility.

The labor force includes... A. Employed workers and persons who are officially unemployed. B. Employed workers but excludes persons who are officially unemployed. C. Full-time works but excludes part-time workers. D. Permanent employees but excludes temporary employees.

A. Employed workers and persons who are officially unemployed.

Private property... A. Encourages owners to maintain or improve their property to preserve or enhance value. B. Discourages innovation, as people are often afraid to risk losing their own property. C. Discourages cooperation because people don't want to part with what they own. D. Does everything indicated by the other answers.

A. Encourages owners to maintain or improve their property to preserve or enhance value.

If actual GDP is $500 billion and there is a negative gap of $10 billion, potential GDP is... A. $510 billion. B. $490 billion. C. $10 billion. D. $990 billion.

A. $510 billion.

A price floor means that... A. Government is imposing a minimum legal price that is typically above the equilibrium price. B. Inflation is severe in this particular market. C. Government is imposing a maximum legal price that is typically below the equilibrium price. D. Sellers are artificially restricting supply to raise price.

A. Government is imposing a minimum legal price that is typically above the equilibrium price.

The simple circular flow model shows that... A. Households are on the selling side of the resource market and on the buying side of product market. B. Households are on the buying side of both product and resource markets. C. Businesses are on the selling side of both product and resource markets. D. Businesses are on the buying side of the product market and on the selling side of the resource market.

A. Households are on the selling side of the resource market and on the buying side of the product market.

An unexpected increase in total spending will cause an increase in GDP... A. If prices are sticky. B. If prices are fully flexible. C. Regardless of whether prices are sticky or fully flexible. D. Only if prices are stuck in the long term.

A. If prices are sticky.

A nation can increase its production possibilities by... A. Improving labor productivity. B. Shifting resources to product more consumer goods and less investment goods. C. Eliminating unemployment. D. Shifting resources from private goods to public goods.

A. Improving labor productivity.

GDP excludes... A. The market value of unpaid work in the home. B. The production of services. C. The production of nondurable goods. D. Positive changes in inventories.

A. The market value of unpaid work in the home.

A large underground economy results in an... A. Understated GDP. B. Overstated GDP. C. Understated GPD price index. D. Overstated GDP price index.

A. Understated GDP.

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

A. Wealth effect.

The following factors explain the inverse relationship between the price level and the total demand for output, except... A. An interest-rate effect. B. A substitution effect. C. A foreign-purchases effect. D. A real-balances effect.

B. A substitution effect.

Planned investment plus unintended increases in inventories equals... A. Consumption. B. Actual investment. C. Unintended saving. D. Consumption minus saving.

B. Actual investment.

A decrease in consumer spending can be expected to shift the... A. Aggregate expenditures curve upward and the aggregate demand curve leftward. B. Aggregate expenditures curve downward and the aggregate demand curve leftward. C. Aggregate expenditures curve downward and the aggregate demand curve rightward. D. Aggregate expenditures curve upward and the aggregate demand curve rightwards.

B. Aggregate expenditures curve downward and the aggregate demand curve leftward.

The aggregate cost of unemployment can be measured by the... A. Amount by which actual GDP exceeds potential GDP. B. Amount by which potential GDP exceeds actual GDP. C. Excess of real GDP over nominal GDP. D. Excess of nominal GDP over real GDP.

B. Amount by which potential GDP exceeds actual GDP.

Because of unseasonably cold weather, the supply of oranges has substantially decreased. This statement indicates the... A. Price of oranges will fall. B. Amount of oranges that will be available at various prices has declined. C. Equilibrium quantity of oranges will rise. D. Demand for oranges will necessarily rise.

B. Amount of oranges that will be available at various prices has declined.

In a market system, employees and suppliers... A. Are generally subject to as much risk as firm owners but get to share in the profits. B. Are usually shielded from risk, but at the cost of not sharing in the profits of the firm. C. Are usually shielded from risk and share in the profits of the firm. D. Bear as much risk as firm owners but don't get to share in the profits.

B. Are usually shielded from risk, but at the cost of not sharing in the profits of the firm.

The immediate-short-run aggregate supply curve represents circumstances where... A. Both input and output prices are flexible. B. Both input and output prices are fixed. C. Input prices are fixed, but output prices are flexible. D. Input prices are flexible, but output prices are fixed.

B. Both input and output prices are fixed.

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the... A. Federal reserve. B. Budget surplus. C. Budget deficit. D. Public debt.

B. Budget surplus.

Recurring upswings and downswings in an economy's real GDP over time are called... A. Recessions. B. Business cycles. C. Output yo-yos. D. Total product oscillations.

B. Business cycles

Digital cameras and memory cards are... A. Independent goods. B. Complementary goods. C. Substitute goods. D. Inferior goods.

B. Complementary goods.

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.

GDP tends to overstate economic well-being because it takes into account... A. Improvements in product quality over time. B. Expenditures undertaken to correct pollution. C. Illegal activities of individuals and businesses. D. Nonmarket activities, such as the productive work of homemakers.

B. Expenditures undertaken to correct pollution.

Economic efficiency is the primary guide in answering which of the fundamental questions in a market economy? A. Who is to receive the output? B. How will the output be produced? C. What will be produced? D. How can the system accommodate change?

B. How will the output be produced?

Over time, the equilibrium price of a gigabyte of a computer memory has fallen, while the equilibrium quantity purchased has increased. Based on this we can conclude that... A. Increases in the demand for computer memory have exceeded increases in supply. B. Increases in the supply of computer memory have exceeded increases in demand. C. Decreases in the demand for computer memory have exceeded increases in supply. D. Decreases in the supply of computer memory have exceeded increases in demand.

B. Increases in the supply of computer memory have exceeded increases in demand.

Running shoes and staplers are... A. Inferior goods. B. Independent goods. C. Substitute goods. D. Complementary goods.

B. Independent goods.

According to economists, economic self-interest... A. Has the same meaning as selfishness. B. Is a reality that underlies economic behavior. C. Is usually self-defeating. D. Means that people never make wrong decisions.

B. Is a reality that underlies economic behavior.

The equilibrium level of GDP is associated with... A. An excess of planned investment over saving. B. No unintended changes in inventories. C. An unintended increase in business inventories. D. An unintended decrease in business inventories.

B. No unintended changes in inventories.

Specialization in production is economically beneficial primarily because it... A. Guarantees full employment. B. Permits the production of a larger output with fixed amounts of resources. C. Allows everyone to have a job that he or she likes. D. Facilitates trade by bartering.

B. Permits the production of a larger output with fixed amounts of resources.

The supply curve shows the relationship between... A. Production costs and the amount demanded. B. Price and quantity supplied. C. Physical inputs of resources and the resulting units of output. D. Total business revenues and quantity supplied.

B. Price and quantity supplied.

The production of durable goods varies more than the production of nondurable goods because... A. Purchases of durable goods are not postponable. B. Purchases of durable goods are postponable. C. The producers of nondurable goods have monopoly power. D. Producers of durable goods are highly competitive.

B. Purchases of durable goods are postponable.

When economists refer to "investment," they are describing a situation where... A. People are buying shares of corporate stock. B. Resources are devoted to increasing future output. C. Money is saved in a bank account. D. Financial assets are purchased in the hope of a monetary gain.

B. Resources are devoted to increasing future output.

Opportunity costs exist because... A. Wants are scarce relative to resources. B. The decision to engage in one activity means forgoing some other activity. C. Most decisions do not involve sacrifices or trade-offs. D. Households and businesses make rational decisions.

B. The decision to engage in one activity means forgoing some other activity.

The presence of market failures implies that... A. Command systems are superior to market systems in the allocation of resources. B. There is an active role for government, even in a market system. C. Money is not an effective tool for exchange in a market system. D. Individuals and firms should strive to be self-sufficient rather than specialize.

B. There is an active role for government, even in a market system.

Financial institutions reward savers with the following, except... A. Interest. B. Wages. C. Dividends. D. Capital gains.

B. Wages.

The market system's answer to the fundamental question, "What will be produced?" is essentially... A. "Low-cost goods and services." B. "Goods and services that possess lasting value." C. "Goods and services that are profitable." D. "Goods and services that can be produced using large amounts of capital."

C. "Goods and services that are profitable."

A large negative GDP gap implies... A. An excess of imports over exports. B. A low rate of unemployment. C. A high rate of unemployment. D. A sharply rising price level.

C. A high rate of unemployment.

Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity? A. An increase in demand. B. A decrease in demand. C. An increase in supply. D. A decrease in supply.

C. An increase in supply.

Suppose that Julia receives a $20 gift card for the local coffee shop, where she only buys lattes and muffins. If the price of a latte is $4 and the price of a muffin is $2, then we can conclude that Julia... A. Should only buy muffins. B. Should only buy lattes. C. Can buy 5 lattes or 10 muffins if she chooses to buy only one of the two goods. D. Can buy 5 lattes and 10 muffins with her $20 gift card.

C. Can buy 5 lattes or 10 muffins if she chooses to buy only one of the two goods.

If the unemployment rate is 9 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 4 percent. D. Natural rate of unemployment will eventually increase.

C. Cyclical unemployment rate is 4 percent.

With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource prices will... A. Decrease equilibrium price and quantity. B. Increase equilibrium price and quantity. C. Decrease equilibrium price and increase equilibrium quantity. D. Increase equilibrium price and decrease equilibrium quantity.

C. Decrease equilibrium price and increase equilibrium quantity.

If products A and B are complements and the price of B decreases, the... A. Demand for A will decline and the demand for B will increase. B. Demand curves for both A and B will shift to the left. C. Demand for A will increase and the quantity of B demanded will increase. D. Amount of B purchased will increase, but the demand curve for A will not shift.

C. Demand for A will increase and the quantity of B demanded will increase.

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.

Which of the following is not a typical characteristic of a market system? A. Private property. B. Competition in product and resource markets. C. Government ownership of most property resources. D. Freedom of enterprise.

C. Government ownership of most property resources.

The immediate-short-run aggregate supply curve is... A. Vertical. B. Upward-sloping. C. Horizontal. D. Downward-sloping.

C. Horizontal.

Exports have the same effect on the current size of GDP as... A. Taxes. B. Saving. C. Investment. D. Imports.

C. Investment.

Gordon sells narcotics "on the street." This type of illegal activity... A. Would be considered double counting in calculating GDP. B. Is estimated and included in GDP figures. C. Is excluded from GDP figures. D. Causes GDP to be overstated.

C. Is excluded from GDP figures.

The four factors of production are... A. Land, labor, capital, and money. B. Labor, capital, technology, and entrepreneurial ability. C. Land, labor, capital, and entrepreneurial ability. D. Land, capital, entrepreneurial ability, and money.

C. Land, labor, capital, and entrepreneurial ability.

A higher rate of investment now will generate... A. More saving now. B. More current consumption. C. More future production. D. More future inflation.

C. More future production.

A change in the amount saved due to a change in income is represented by a... A. Change in the marginal propensity to save. B. Shift of the entire saving schedule. C. Movement along the saving schedule. D. Change in the marginal propensity to consume.

C. Movement along the saving schedule.

Purposeful behavior means that... A. Decision makers do not make mistakes when weighing costs and benefits. B. People are selfish in their decision making. C. People weigh costs and benefits to make decisions. D. People are immune from emotions affecting their decision.s

C. People weigh costs and benefits to make decisions.

If aggregate expenditures exceed GDP in a private closed economy... A. Unplanned investment in inventories will occur. B. Leakages will exceed injections. C. Planned investment will exceed saving. D. Saving will exceed planned investment.

C. Planned investment will exceed saving.

What is the primary reason that changes in total spending lead to cyclical changes in output and employment? A. Government is unable to respond by changing the amount of money in circulation. B. Changes in total spending cause supply shocks that cause cyclical variation. C. Prices are sticky in the short run. D. Prices are flexible in the long run.

C. Prices are sticky in the short run.

Banks and other financial institutions... A. Are the primary investors in equipment, factories, and other capital goods. B. Lack relevance in the modern economy because they focus primarily on financial assets and generally do not engage in real investment activity. C. Promote economic growth by helping to direct household savings to businesses that want to invest. D. Often hinder economic activity by creating barriers between household savers and firms wanting to invest in capital goods.

C. Promote economic growth by helping to direct household savings to businesses that want to invest.

Savings are transferred from savers to borrowers through the following intermediaries, except... A. Mutual funds. B. Pension funds. C. Real estate brokers. D. Insurance companies.

C. Real estate brokers.

An increase in investment spending caused by higher expected rates of return will... A. Shift the aggregate expenditures curve downward and the aggregate demand curve to the left. B. Shift the aggregate supply curve to the left. C. Shift the aggregate expenditures curve upward and the aggregate demand curve to the right. D. Move the economy up along an existing aggregate demand curve.

C. Shift the aggregate expenditures curve upward and the aggregate demand curve to the right.

The natural rate of unemployment is... A. Higher than the full-employment rate of unemployment. B. Lower than the full-employment rate of unemployment. C. That rate of unemployment occurring when the economy is at its potential output. D. Found by dividing total unemployment by the size of the labor force.

C. That rate of unemployment occurring when the economy is at its potential output.

A lump-sum tax means that... A. Tax revenues vary directly with GDP. B. Tax revenues vary inversely with GDP. C. The same amount of tax revenue is collected at each level of GDP. D. The tax only applies to one time period.

C. The same amount of tax revenue is collected at each level of GDP.

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.

GDP tends to overstate economic well-being because it takes into account... A. All of the illegal activities conducted by organized crime in the economy. B. Spending on intermediate goods that are used to produce final goods. C. Total spending to deal with the adverse health effects of some products. D. The personal labor time that car owners spend working on car repairs and maintenance of their vehicles.

C. Total spending to deal with the adverse health effects of some products.

Core inflation measures... A. Changes in the prices of the most commonly used goods, including food and energy. B. Underlying changes in the CPI, after accounting for the price volatility of high-tech goods. C. Underlying increases in the CPI after removing volatile food and energy prices. D. Changes in key input prices.

C. Underlying increases in the CPI after removing volatile food and energy prices.

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

D. A leakage and an injection.

The foreign purchases, interest rate, and real-balances effects explain why the... A. Economy will adjust toward equilibrium. B. Aggregate expenditures schedule may shift up or down. C. Aggregate demand curve may shift to the left or right. D. Aggregate demand curve is downward sloping.

D. Aggregate demand curve is downward sloping.

Investment spending in the United States tends to be unstable because... A. Innovation occurs at an irregular price. B. Expected profits are highly variable. C. Capital goods are durable. D. All of the factors mentioned in other answers contribute to the instability.

D. All of the factors mentioned in other answers contribute to the instability.

Which of the following is not seen by economists as an underlying cause of business cycle fluctuations? A. Unexpected financial bubbles that eventually burst. B. Shocks to the money supply by the nation's central bank. C. Supply shocks caused by major innovations. D. All of these are identified as causes of business cycle changes.

D. All of these are identified as causes of business cycle changes.

The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are... A. Military goods and capital goods. B. Services and nondurable consumer goods. C. Clothing and education. D. Capital goods and durable consumer goods.

D. Capital goods and durable consumer goods.

An increase in the price of a product will reduce the amount of it purchased because... A. The higher price will signal to consumers that the good is of low quality. B. The higher price means that real incomes have risen. C. Consumers substitute relatively high-priced for relatively low-priced products. D. Consumers will substitute other products for the one whose price has risen.

D. Consumers will substitute other products for the one whose price has risen.

During the Great Recession of 2007-2009, real interest rates... A. Increased sharply, and investments declined significantly. B. Declined to about zero, and investments increased sharply. C. Increased sharply, and investments also rose significantly. D. Declined to about zero, and investments also declined sharply.

D. Declined to about zero, and investments also declined sharply.

Which of the following groups is the principal source of savings in an economy? A. Banks. B. Government. C. Businesses. D. Households.

D. Households.

The annual rate of inflation can be found by subtracting... A. The real income from the nominal income. B. Last year's price index from this year's price index. C. This year's price index from last year's price index and dividing the difference by this year's price index. D. Last year's price index from this year's price index and dividing the difference by last year's price index.

D. Last year's price index from this year's price index and dividing the difference by last year's price index.

If the price level decreases, then the aggregate expenditures schedule will shift. This translates into a... A. Shift in aggregate demand to the left. B. Shift in aggregate demand to the right. C. Movement up along the aggregate demand curve. D. Movement down along the aggregate demand curve.

D. Movement down along the aggregate demand curve.

Environmental pollution is accounted for in... A. GDP. B. PI. C. DI. D. None of these.

D. None of these.

The aggregate supply curve (short run) is upsloping because... A. Wages and other resource prices are flexible upward but inflexible downwards. B. The price level is flexible upward but inflexible downard. C. Wages and other resource prices match changes in the price level. D. Per-unit production costs rise as the economy moves toward and beyond its full-employment real output.

D. Per-unit production costs rise as the economy moves toward and beyond its full-employment real output.

The law of demand states that, other things equal, A. Consumers will buy more of a product at high prices than at low prices. B. The larger the number of buyers in a market, the lower will be product price. C. Price and quantity demanded are directly related. D. Price and quantity demanded are inversely related.

D. Price and Quantity demanded are inversely related.

The demand curve shows the relationship between... A. Consumer tastes and quantity demanded. B. Price and production costs. C. Money income and quantity demanded. D. Price and quantity demanded.

D. Price and quantity demanded.

A recession is defined as a period in which... A. Cost-push inflation is present. B. Nominal domestic output falls. C. Demand-pull inflation is present. D. Real domestic output falls.

D. Real domestic output falls.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth? A. Postponement of a highway construction program. B. Reductions in agricultural subsidies and veterans benefits. C. A congressional proposal to incur a federal surplus to be used for the retirement of public debt. D. Reductions in federal tax rates on personal and corporate income.

D. Reductions in federal tax rates on personal and corporate income.

Investment happens when... A. Current income is greater than current spending. B. Current consumption is greater than current output. C. Resources are devoted toward increasing current output. D. Resources are devoted toward increasing future output.

D. Resources are devoted toward increasing future output.

An effective price ceiling will... A. Induce new firms to enter the industry. B. Clear the market. C. Result in a product surplus. D. Result in a product shortage.

D. Result in a product shortage.

The effect of expansionary fiscal policy is shown as a... A. Leftward shift in the economy's aggregate supply curve. B. Movement along an existing aggregate demand curve. C. Leftward shift in the economy's aggregate demand curve. D. Rightward shift in the economy's aggregate demand curve.

D. Rightward shift in the economy's aggregate demand curve.

The basic truth that underlies the study of economics is the fact that we all face... A. Death. B. Taxes. C. Risk. D. Scarcity.

D. Scarcity.

If the price of gasoline increases significantly, then we'd expect the demand curve for large trucks and SUVS to... A. Become upward-sloping. B. Shift to the right. C. Not shift, but there will be a movement along that demand curve. D. Shift to the left.

D. Shift to the left.

Okun's law... A. Measures the trade-off between the rate of inflation and the rate of unemployment. B. Indicates the number of years it will take for a constant rate of inflation to double the price level. C. Quantifies the relationship between nominal and real incomes. D. Shows the relationship between the unemployment rate and the size of the negative GDP gap.

D. Shows the relationship between the unemployment rate and the size of the negative GDP gap.

If the government wishes to increase the level of real GDP, it might reduce... A. Transfer payments. B. The size of the budget-deficit. C. Its purchases of goods and services. D. Taxes.

D. Taxes

The Economizing Problem is... A. How to distribute resources equally among all members of society. B. That people's means often exceed their wants. C. That people do not know how to rationally allocate resources. D. The need to make choices because economic wants exceed economic means.

D. The need to make choices because economic wants exceed economic means.

If there is a shortage of product X, and the price is free to change... A. Fewer resources will be allocated to the production of this good. B. The supply curve will shift to the left and the demand curve to the right, eliminating the shortage. C. The price of the product will decline. D. The price of the product will rise.

D. The price of the product will rise.

What combination of changes would most likely decrease the equilibrium price? A. When demand decreases and supply decreases. B. When supply decreases and demand increases. C. When demand increases and supply increases. D. When supply increases and demand decreases.

D. When supply increases and demand decreases.

GDP underestimates the amount of economic production in the United States because it excludes... A. Spending for the U.S. military. B. Transfer payments. C. Purchases of stocks and bonds. D. Work performed by people for their own benefit.

D. Work performed by people for their own benefit.

Economists refer to purchases of stocks and bonds as "investment." True/False

False

Real GDP accounts for changes in product quality; nominal GDP does not. True/False

False

A nation's stock of capital is the collection of human-made resources that help to produce goods and services and are divided into two broad categories that are referred to as "tools" and recipes." True/False

True

Banks and other financial institutions provide the link between savers and economic investors in the macroeconomy. True/False

True

The statistic called Gross Output (GO) is bigger than GDP, because GO sums up the values in all stages of a productive economy, whereas GDP accounts only for the final stage. True/False

True