Economics Past Finals Questions

Banks create money when they:

make loans.

Enchante Inc., a designer clothing company, buys $400 worth of silk from a silk trader and $30 worth of accessories from AccessoriesRuS to produce each dress. If the value added by Enchante is equal to $200, then according to the value-added approach, the price of the designer dress should be:

$630

When transfers increase by 50 and the marginal propensity to consume is 0.8, aggregate expenditures change by how much?

200

The ratio of productivity growth contributed by the second industrial revolution compared to the third industrial revolution is

3.0

A vicious cycle of deleveraging occurs when: A) asset sales to cover losses produce negative balance sheet effects and force creditors to call in loans, forcing more sales of assets at decreasing prices. B) bank regulators take over a bank. C) deposit insurance is paid out. D) top executives at failing companies are forced to return bonuses.

A

If the economy is at potential output and the Fed increases the money supply, in the SHORT run the likely result will be a(n) _____ in investment and a(n) _____ in consumption. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A

If the equilibrium interest rate in the money market is 5%, at an interest rate of 2% the quantity of nonmonetary interest-bearing financial assets demanded is _____ the quantity supplied. A) less than B) greater than C) equal to D) irrelevant to

A

Investment spending: A) fluctuates more than consumption. B) fluctuates less than consumption. C) fluctuates by the same amount as consumption. D) is less volatile than consumption

A

The Taylor rule: A) provides guidance for setting a federal funds rate target. B) says that interest rates often should be negative. C) provides guidance on timing of monetary policy with fiscal policy. D) refers to a discretionary fiscal policy rule.

A

The annual percentage change in the aggregate price level is negative when there is: A) deflation. B) disinflation. C) inflation. D) spiraling inflation.

A

The course packet article where Mr. Smith lost his job served as an example of A) the multiplier B) marginal propensity to consume C) structural unemployment D) cyclical unemployment

A

The producer price index is often regarded as a warning sign of inflation because: A) commodity producers are relatively quick to raise prices. B) producers are likely to have monopoly control over prices. C) consumers have to pay the prices charged. D) commodity producers can sell whatever they want at higher prices.

A

In general, a change in the price level, all other things unchanged, causes: A) a movement along the aggregate demand curve. B) a shift of the aggregate demand curve. C) both a movement along the aggregate demand curve and a shift in the curve. D) no change in the purchasing power of assets.

A) a movement along the aggregate demand curve.

Which of the following is true about automatic stabilizers? A) they raise the government deficit in recessions B) they reduce the government deficit in recessions C) they occur when the government cuts spending to avoid raising the deficit in recessions D) they occur when the government raises spending to try to keep the unemployment rate from rising

A) they raise the government deficit in recessions

Banks are financial intermediaries that: A) have customer deposits as the primary asset and loans to borrowers as the primary liability. B) provide liquid assets to lenders and long-term financing to borrowers. C) are types of mutual funds. D) have customer deposits as the primary asset and that provide liquid assets to lenders.

B

Following an increase in the minimum wage from $7.25 to $15, which of the following would imply the smallest increase in unemployment? A) Elastic demand curve B) Inelastic demand curve C) Elastic supply curve D) Horizontal supply curve

B

If the economy is at potential output and the Fed increases the money supply, in the short run interest rates will likely: A) increase. B) decrease. C) remain constant. D) fluctuate randomly

B

Many economists view resource scarcity as a: A) major obstacle to long-run economic growth. B) problem resolved fairly well by the market mechanism. C) primary reason for poor countries' lack of economic growth. D) problem for wealthy countries but not for poorer countries.

B

Stabilization policies have: A) not reduced the effects of business cycles caused by either demand shocks or supply shocks. B) reduced the economic fluctuations caused by demand shocks but have not been effective against supply shocks. C) reduced the economic costs of supply shocks but have not been so successful against demand shocks. D) reduced economic fluctuations by neutralizing the effects of both supply and demand shocks.

B

Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the following is the most likely result? A) Equilibrium real GDP will be more than anticipated. B) The economy will move into a recession. C) The economy will generate a larger inflationary gap than anticipated. D) This will not have any adverse effects on the economy, since inflation has been abated.

B

Which of the following have had the most real GDP growth since 2007?A) Chicago metropolitan area B) United States C) western Europe D) Japan

B

Which of the following is a likely prediction about the next 20 years? A) Output per person will grow faster than output per hour B) Output per hour will grow faster than output per person C) Output per hour and output per person will grow at the same rate D) Hours of work will grow faster than the population

B

Which of the following is included in GDP? A) sale of steel to an auto firm B) sale of auto to a steel firm C) sale of stock by president of auto firm D) sale of bond by U. S. government

B

The article "Hurry Up and Waste" uses the following as an example of waste A) The Great Depression B) World War II C) The Obama stimulus D) State government spending

B) World War II

An important part of Ben Bernanke's "quantitative easing" policy is

Buying government bonds Buying mortgage backed securities

A disadvantage of raising government spending to eliminate a recessionary gap is: A) multiplier is smaller than for tax cuts B) all government spending is wasteful C) multiplier is smaller than for transfer payments D) lack of "shovel-ready projects"

C

Price ceilings will impose costs on society because they: A) will eliminate long waiting lines. B) may result in black market prices, which are lower than the market-determined price would be. C) lead to a smaller quantity offered on the market. D) help businesses instead of consumers.

C

Some argue that budget deficits will lead to reduced private spending because: A) the government will purchase so many goods and services that it will lead to a shortage of consumer goods and services. B) budget deficits will reduce interest rates on savings and decrease consumers' wealth. C) consumers, anticipating higher taxes, will reduce consumption to save money to pay the future taxes. D) the government will have to increase transfer payments to finance the deficit.

C

Suppose the required reserve ratio is 10% and a depositor withdraws $500 from her checkable deposit. The money supply will _____ if the banking system does NOT hold any excess reserves. A) be unchanged B) decrease by $500 C) decrease by $4,500 D) decrease by $5,000

C

Which of the following inventions was not part of the Second Industrial Revolution? . A) electricity B) internal combustion engine C) steam engine D) telephone

C

Government spending will NOT crowd out private spending if: A) all of the resources in the economy are employed. B) aggregate income is at its potential level. C) there is an inflationary gap. D) there is a recessionary gap.

D

The larger the amount of outstanding public debt: A) the lower the tax revenue the government must collect. B) the more spending the government can afford. C) the smaller the crowding out of private investment spending. D) the larger the fraction of the federal budget deficit that must be devoted to interest payments.

D

Which asset would NOT fit the economist's definition of money? A) currency B) checkable bank deposits C) coins D) bonds

D

Which of the following industries had the highest cost inflation over the last few decades? A) computers B) automobiles C) food D) higher education

D

Which of the following is an advantage to the recipient of foreign investment? A) Foreigners are content to receive lower profits and interest rates than are domestic investors. B) Foreigners don't expect to receive profits and interest as often as do domestic investors. C) Domestic firms with foreign investors are exempt from domestic income taxes on a portion of their net income. D) Foreign companies often bring new technology to the recipient country, and this increases productivity.

D

Which of the following is not true of quantitative easing? A) Raises Fed assets B) Raises Fed liabilities C) Raises difference between gross federal debt and net federal debt D) Reduces difference between gross federal debt and net federal debt

D) Reduces difference between gross federal debt and net federal debt

Which one of the following statements is FALSE? A) The Taylor rule sets the federal funds rate on the basis of both inflation rate and output gap, whereas inflation targeting is based on a desired inflation rate. B) The Taylor rule sets the federal funds rate on the basis of past inflation rates, whereas inflation targeting is based on a forecast of the inflation rate. C) The Taylor rule can be more flexible, whereas inflation targeting provides more transparency and accountability. D) The Taylor rule sets the federal funds rate on the basis of only past inflation rates, whereas inflation targeting is based on a target interest rate and business cycles.

D) The Taylor rule sets the federal funds rate on the basis of only past inflation rates, whereas inflation targeting is based on a target interest rate and business cycles.

In the course packet reading "The Fed Still Has Ammo" what is meant by "ammo:? A) ability to conduct open-market purchases B) ability to conduct open-market sales C) ability substantially to raise interest rates D) ability substantially to reduce interest rates

D) ability substantially to reduce interest rates

An increase in the money supply will decrease interest rates in the short run but will not affect interest rates in the long run because an increase in the money supply will eventually _____ prices and _____ money demand. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

D) increase; increase

Which region provides the strongest support for the convergence hypothesis?

East Asia

During the four years between late 2009 and late 2013, the unemployment rate in the US fell from 10.0 to 7.0 percent, despite the fact that real GDP only grew by 2 percent per year during that 4 year period. What were the reasons cited in lecture for this paradox?

Falling labor force participation rate, slower productivity growth

An important source of changes of income inequality over the past decade is:

Loss of jobs by middle-income clerical workers and unionized manufacturing workers

Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function?

The slope will get steeper.

A graph that plots the growth rate of real GDP per capita since the year 1300 shows

a peak of growth in the middle of the 20th century, slower growth before and after

Rising inventories usually indicate:

an economy that slows unexpectedly.

Suppose that the economy is in long-run macroeconomic equilibrium and aggregate demand increases. As the economy moves to short-run macroeconomic equilibrium, there is:

an inflationary gap with low unemployment.

Which of the following is considered to be investing in a physical asset?

buying a new factory that produces IBM handheld devices

The introduction of ATMs:

decreased the demand for cash because it reduced the cost of moving from other assets into cash.

The present value of a future payment ??? when interest rates ???

decreases when the interest rate rises.

When an economy is expanding, unemployment tends to _____ and overall prices tend to _____.

fall, rise

Changes in aggregate demand can be caused by changes in:

government spending

The course packet reading on the Fed's current dilemma emphasizes the link between _________ interest rates, a _________ dollar, and ___________ net exports.

higher, stronger, and lower

Which of the following did not happen during 2007-2009

household liabilities increased

The term "consumer deleveraging" refers to

households paying off debts and reducing their consumption purchases

As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n):

increase in aggregate demand.

According to the wealth effect, when prices decrease, the purchasing power of assets:

increases and consumption increases.

Planned investment spending is ?? related to the interest rate

is negatively related to the interest rate.

A country's GNP:

is the total factor income earned by residents of a country.

The aggregate expenditure line has a slope:

less than 1.

In the absence of minimum wages, efficiency wages, or labor unions, a decline in the demand for labor will likely result in which of the following if wages are flexible?

lower level of employment but likely no change in the unemployment rate

the opportunity cost of holding money ?? as the interest rate ??.

rises, rises

The invention of ATMs reduced the:

shoe-leather costs of inflation.

The indirect ownership of physical capital refers to households owning:

stock

Sam, who is 55 years old and has been a steelworker for 30 years, is unemployed because the steel plant in his town closed and moved to Mexico. Sam is experiencing:

structural unemployment

If nominal wages fall, then the short-run aggregate:

supply curve shifts to the right.

The marginal propensity to consume is:

the change in consumer spending divided by the change in aggregate disposable income

In an asset bubble:

the price of an asset is pushed to an unreasonably high level because of expectations of further price gains.

Banks are illiquid because:

their loans are less liquid than their deposits.

If the economy is at equilibrium below potential output:

there is a recessionary gap, and expansionary fiscal policy is appropriate.

People forgo interest and hold money:

to reduce their transactions costs.

The money supply curve is:

vertical

Whenever planned aggregate spending exceeds real GDP, unplanned inventory investment is: A) negative. B) zero. C) positive. D) unpredictable.

A

Which of the following does not use chain weights in its calculation? A) Consumer Price Index B) real GDP C) real consumption expenditures D) GDP deflator

A

The _____ interest rate _____. A) nominal; can be negative B) real; cannot be negative C) real; can only be positive D) real; can be zero, positive, or negative

D

The term "NINJA" loans refers to A) Sub-prime borrowing B) Corporate borrowing C) Government borrowing D) Under-water borrowing

A) Sub-prime borrowing

Growth accounting enables us to: A) calculate how long it takes the economy to grow. B) calculate the effects of technological progress on economic growth. C) compare growth rates across countries. D) better calculate real GDP per capita.

B) calculate the effects of technological progress on economic growth.

Which of the following has declined by about four percentage points since 2007? A) unemployment rate B) employment-population ratio C) ratio of actual to potential real GDP D) ratio of consumption to disposable income

B) employment-population ratio

If the Federal Reserve conducts an open-market purchase, bank reserves _____ and the money supply _____. A) decrease; decreases B) increase; increases C) decrease; increases D) increase; decreases

B) increase; increases

For the past several months, per capita output has increased, but at a slower and slower rate. Over the same period, the unemployment rate has been falling, but it appears to have leveled off and may soon rise. Where in the business cycle is the economy?

the business-cycle peak

A depression occurs when:

the economic downturn becomes extremely deep and prolonged.

All of the following are examples of bank regulations designed to prevent bank runs EXCEPT: A) reserve requirements. B) deposit insurance.C) the federal funds rate. D) capital requirements.

the federal funds rate

The interest rate is 5% in the market for loanable funds. Investors wish to borrow $100 million and savers wish to save $125 million at this interest rate. We would expect:

the interest rate to fall, as there is a surplus of loanable funds.