EC202 MCQs
If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is equal to ___.
Translate the givens into symbols, Y - T = 4000 and C = 3500. G = 1000 and T = 800. S = Y - C - G = (Y - T) - C - G + T = 4000 - 3500 - 1000 + 800 = 300
Paasche Index
Weights its basket based on current consumption (Implicit Price Deflator)
In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget surplus or deficit. D) rate of economic and accounting profit.
factors of production and production function.
13. If the nominal interest rate is 1 percent and the expected inflation rate is 5 percent, the ex ante real interest rate is _-0.04_. (Enter your answer as a decimal.)
-0.04_
16. The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by: A) a significant increase in the reserve-deposit ratio. B) a significant decrease in the reserve-deposit ratio. C) open-market purchases. D) open-market sales.
A) a significant increase in the reserve-deposit ratio.
6. Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should: A) not build because the rate of return on the factory is only 6 percent. B) not build because the rate of return on the factory is only 12 percent. C) build because the rate of return on the factory is 30 percent. D) build because the rate of return on the factory is 35 percent.
B) not build because the rate of return on the factory is only 12 percent. The firm would pay 0.15($5,000,000) per year = $750,000 in interest which is more than it can earn in profit, so the firm would lose money after factoring in interest. Alternative you could view the factory as yielding a return of 600,000/5,000,000 = 0.12 or 12% which is less than the interest you are paying.
16. The inconvenience associated with reducing money holdings to avoid the inflation tax is called: A) menu costs.B) shoeleather costs.C) variable yardstick costs. D) fixed costs.
B) shoeleather costs.
13. The assumption that the factor's supply is fixed will imply that the factor's A) supply curve is horizontal. B) supply curve is vertical. C) supply curve slopes up to the right. D) demand curve slopes up to the right.
B) supply curve is vertical.
3. People use money as a unit of account when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.
B) use money as a measure of economic transactions.
10. In the United States, bank reserves consist of: A) currency and demand deposits. B) vault cash and deposits at the Federal Reserve. C) gold deposits at the Federal Reserve. D) the money supply.
B) vault cash and deposits at the Federal Reserve.
If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals ____.
C = 500 + 0.5(6000 - [200 + 0.2*6000]) = 2800
10. There are about 300 million people living in the U.S. The average wage is about $25/hour and people work an average of about 40 hours a week. This are very rough estimates, but based solely on this information the GDP of the United States as a whole is probably approximately: A) $16 billion. B) $160 billion. C) $16 trillion. D) $160 trillion.
C) $16 trillion. First note that ti says 40 hours per week but we want annual GDP unless otherwise specified so convert 40 hours/week to 2080 hours/year.300 million people x 25 $/hr x 2080 hours/(person x year) = $15.6 trillion / year.
8. If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals: A) $100 billion. B) $150 billion. C) $600 billion. D) $650 billion
C) $600 billion. M = C + D
1. Assume that the production function is Cobb-Douglas with parameter 𝛼= 0.3. If capital and labor are paid their marginal products, they receive the shares of income: A) 0.3 and 0.3. B) 0.7 and 0.7. C) 0.3 and 0.7. D) 0.7 and 0.3.
C) 0.3 and 0.7.
28. Which of the following is the best example of structural unemployment?A) Tim is looking for a job with flexible hours but has not been offered one yet.B) Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer- generated animation. C) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available. D) Fatima lost her job at a packing plant but has not looked very intensively for a new job because she still has two months of unemployment insurance benefits left.
C) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.
The two most important factors of production are: A) goods and services. B) labor and energy. C) capital and labor. D) saving and investment.
C) capital and labor.
10. In a closed economy, the components of GDP are: A) consumption, investment, government purchases, and exports. B) consumption, investment, government purchases, and net exports. C) consumption, investment, and government purchases. D) consumption and investment.
C) consumption, investment, and government purchases. Closed economy means NX = 0.
Accounting profit is: A) economic profit minus the return to capital. B) equal to economic profit. C) economic profit plus the return to capital. D) equal to the economic return to capital.
C) economic profit plus the return to capital.
The government purchases component of GDP includes all of the following except: A) federal spending on goods. B) state and local spending on goods. C) federal spending on transfer payments. D) federal spending on services.
C) federal spending on transfer payments. Transfer payments are things like sending my mom a check for social security. The government is not purchasing anything from my mom so that does not contribute to GDP at all.
19. Most hyperinflations end with _____ reforms that eliminate the need for _____. A) monetary; taxesB) monetary; currencyC) fiscal; seigniorage D) fiscal; currency
C) fiscal; seigniorage Fiscal reforms mean changes in the amount of money the government needs in order to finance its operations. The reforms typically involve spending cuts that eliminate the need for large amounts of seignorage revenue.
16. In the circular flow diagram, firms receive revenue from the _____ market, which is used to purchase inputs in the _____ market. A) goods; financial B) factor; financial C) goods; factor D) factor; goods
C) goods; factor
30. According to Olivier Blanchard, Europeans are more likely to use increases in real wages resulting from technological progress to increase ______, and Americans are more likely to use these increases in real wages to increase ______. A) hours of work; hours of leisureB) consumption of goods and services; hours of leisure C) hours of leisure; consumption of goods and services D) unemployment insurance benefits; efficiency wages
C) hours of leisure; consumption of goods and services
9. When Toyota sells a car manufactured in America from its inventory, GDP A) increases.B) decreases.C) is not changed. D) increases or decreases, depending on the year the product was produced.
C) is not changed. The car was manufactured sometime in the past and counted toward GDP at that time when it was put into an inventory (e.g. as investment). When the car is sold it increases consumption and decreases investment (since it left the inventory) for no net contribution to GDP. This makes sense because nothing was produced at the time it was sold.
5. In equilibrium in a closed economy, total investment equals: A) private saving. B) public saving. C) national saving. D) household saving.
C) national saving.
4. In the national income accounts, consumption expenditures include all of the following except household purchases of: A) durable goods.B) nondurable goods.C) new residential housing. D) services.
C) new residential housing. Housing is considered investment when built and consumption when rented out.
22. The concept of monetary neutrality in the classical model means that an increase in the money supply growth rate will increase: A) real GDP.B) real interest rates.C) nominal interest rates.D) both saving and investment by the same amount.
C) nominal interest rates.
9. The rate of inflation is the:A) median level of prices.B) average level of prices.C) percentage change in the level of prices. D) measure of the overall level of prices.
C) percentage change in the level of prices.
12. The currency-deposit ratio is determined by: A) the Federal Reserve. B) business policies of banks and the laws regulating banks. C) preferences of households about the form of money they wish to hold. D) the Federal Deposit Insurance Corporation (FDIC).
C) preferences of households about the form of money they wish to hold.
8. Between August 1929 and March 1933, the money supply fell 28 percent. This large drop occurred because both the currency-deposit and reserve-deposit ratios ______ and despite the fact that the monetary base ______. A) fell; expanded B) fell; contracted C) rose; expanded D) rose; contracted
C) rose; expanded
18. The major source of government revenue in most countries that are experiencing hyperinflation is: A) customs duties.B) income taxes.C) seigniorage. D) borrowing.
C) seigniorage.
11. According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by: A) the Organization of the Petroleum Exporting Countries (OPEC). B) the U.S. Treasury.C) the Federal Reserve.D) private citizens.
C) the Federal Reserve.
1. The inflation rate is a measure of how fast:A) the total income of the economy is growing.B) unemployment in the economy is increasing.C) the general level of prices is rising.D) the number of jobs in the economy is expanding.
C) the general level of prices is rising.
5. People use money as a medium of exchange when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.
C) use money to buy goods and services.
5. Assume that an economy is described by a Cobb-Douglas production function. If average labor productivity is growing rapidly: A) labor's share of total income will be increasing.B) labor's share of total income will be decreasing.C) workers will experience high rates of real wage growth. D) economic profits will be positive.
C) workers will experience high rates of real wage growth. The labor share doesn't vary in Cobb-Douglas and since Cobb-Douglas is CRS there is no economic profit. The average labor productivity is proportional to W/P (see book) in Cobb-Douglas.
7. Economic statistics that measure the price level include A) personal incomeB) GDP deflatorC) PCE deflator D) GNP E) CPIOther examples include the PPI (producer price index).
B) GDP deflator C) PCE deflator E) CPIOther examples include the PPI (producer price index).
1. Which of the following is the best example of a flexible price? A) the price of a cup of coffee in a coffee shopB) the price of gasoline at a service stationC) the price of a ticket at a movie theater D) the price of a book in a bookstore
B) Gasoline prices are updated basically every day. The prices of the other goods are rarely updated.
12. "Inflation tax" means that:A) as the price level rises, taxpayers are pushed into higher tax brackets.B) as the price level rises, the real value of money held by the public decreases.C) as taxes increase, the rate of inflation also increases.D) in a hyperinflation, the chief source of tax revenue is often the printing of money.
B) as the price level rises, the real value of money held by the public decreases.
6. Payment is deferred by using _______, but immediate access to funds occurs when using ______. A) currency; demand deposits B) credit cards; debit cards C) demand deposits; savings deposits D) debit cards; credit cards
B) credit cards; debit cards
2. In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would ______. (Hint: draw a diagram) A) crowd out exactly $10 billion of investment. B) crowd out between zero and $10 billion of investment. C) not crowd out any investment. D) crowd out more than $10 billion of investment.
B) crowd out between zero and $10 billion of investment. You did a problem just like this but with specific equations and numbers on problem set 2. Review that problem. This is important!
In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease, depending on whether consumption is greater or less than investment.
B) decrease. When C + I + G < Y then there is excess supply and the relevant price (the interest rate) will drop to bring S and D into balance.
6. Endogenous variables are:A) fixed at the moment they enter the model. B) determined within the model.C) the inputs of the model.D) from outside the model.
B) determined within the model.
5. Macroeconomic models are used to explain how ______ variables influence ______ variables. A) endogenous; exogenousB) exogenous; endogenousC) microeconomic; macroeconomic D) macroeconomic; microeconomic
B) exogenous; endogenous
. Crowding out occurs when an increase in government spending ______ the interest rate and investment ______. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases
B) increases; decreases
14. If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in: A) inflation of 1 percent and the nominal interest rate of less than 1 percent. B) inflation of 1 percent and the nominal interest rate of 1 percent. C) inflation of 1 percent and the nominal interest rate of more than 1 percent. D) both inflation and the nominal interest rate of less than 1 percent.
B) inflation of 1 percent and the nominal interest rate of 1 percent.
3. In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. This causes: A) investment to fall and the interest rate to rise. B) investment to rise and the interest rate to fall. C) investment and the interest rate to both fall. D) investment and the interest rate to both rise.
B) investment to rise and the interest rate to fall. Method #1: S = Y - C - G, and here G falls so S is probably rising. But this ignores that C is a function of T so you have to factor in that as T falls C will rise, partially canceling out the drop in G. But since it only partially cancels the change in G the net effect is an increase in S.Method #2: If G and T both fall by the same amount then Spub does not change. But since C is a function of T private savings, Spr = Y - C - T will change. If T falls by $100 then C will rise by 100xMPC < 100 and Spr will rise slightly.
21. The classical dichotomy:A) cannot hold if money is "neutral."B) is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money. C) fully describes the world in which we live, especially in the short run. D) arises because money depends on the nominal interest rate.
B) is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money.
A competitive, profit-maximizing firm hires labor until the: A) marginal product of labor equals the nominal wage. B) marginal product of labor equals the real wage. C) real wage equals the real rental price of capital. D) wage equals the rental price of capital.
B) marginal product of labor equals the real wage.
15. If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease
B) more; decrease
26. If the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is ____. (Give your answer as a decimal so 5% would be 0.05.)
UE* = s/(s+f) = 0.01/(0.01+0.09) = 0.1
Laspeyres Index
Uses a constant basket of goods; Can be biased to upward movement when old products are replaced by newer and more expensive products, higher quality products replacing lower quality and by consumers using substitute goods when those in the basket get expensive (CPI) tends to show higher inflation, tend to overstate inflation
Real money balances are defined as M/P. This name should make sense as it is analogous to the real wage (W/P), real rental price of capital (R/P), and real GDP(PY/P). If the GDP growth rate of a country is 8 percent and inflation is 4 percent, and the velocity of money remains constant, what is the change in real money balances? (Give your answer as a decimal so 5% would be 0.05.)
MV = PYM/P = Y/V%∆(M/P) = %∆Y - ∆%V = 0.08
9. High-powered money is another name for: A) currency. B) demand deposits. C) the monetary base. D) M2.
C) the monetary base.
11. If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: A) 0.6. B) 1.67. C) 2.0. D) 2.5
D) 2.5
The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, the change in private saving is $____ billion. (For all of these numeric problems pay attention to the scale and don't type in the units. If you think the answer is $5 billion then just enter "5").
S = Y - C - T ∆S = ∆Y - ∆C - ∆T, note that ∆C = -(MPC)∆T ∆S = 0 + (MPC)∆T - ∆T ∆S = 0 + (0.6)(100 billion) - 100 billion = -$40 billion
Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t0 + t1Y. If t0 increases by 1 unit, then the change in consumption is ___. Notice that T is endogenous in this model—they depend on income—whereas in the basic model T was exogenous. (not to turn in: is this model of taxes, where they depend on income, more or less realistic than exogenous taxes?)
-0.85 If t0 increases by 1 unit then T increases by 1 unit and C drops by 0.85 units. If that is abstract just make up numbers for t0 and t1 and then try increasing t0 by 1 unit and seeing what happens to C.
Unlike the real world, the classical model with fixed output assumes that: A) capital and labor are fully utilized. B) all capital is fully utilized, but some labor is unemployed. C) all labor is fully employed, but some capital lies idle. D) some capital lies idle, and some labor is unemployed
A) capital and labor are fully utilized.
17. In the case of an unanticipated increase in inflation: A) creditors with an unindexed contract are hurt because they get less than they expected in real terms. B) creditors with an indexed contract gain because they get more than they contracted for in nominal terms. C) debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms. D) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.
A) creditors with an unindexed contract are hurt because they get less than they expected in real terms.
4. People use money as a store of value when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.
A) hold money to transfer purchasing power into the future.
. Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005. (This is from a case study discussed in the book.) A) increased B) decreased C) did not change D) were negative
A) increased
20. An example of a nominal variable is the: A) price level B) quantity of goods produced in a year C) relative price of bread D) real wage
A) price level
24. The natural rate of unemployment is: A) the average rate of unemployment around which the economy fluctuates. B) about 10 percent of the labor force.C) a rate that never changes.D) the transition of individuals between employment and unemployment.
A) the average rate of unemployment around which the economy fluctuates.
10. In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP. A) the productive capability of the economy; the money supply B) the money supply; the productive capability of the economy C) velocity; the money supplyD) the money supply; velocity
A) the productive capability of the economy; the money supply
8. Which of the following is a flow variable? A) wealthB) the number unemployedC) government debt D) income
A) wealthB) the number unemployedC) government debt D) income
3. Which of the following statements about economic models is true?A) There is only one correct economic model.B) All economic models are based on the same assumptions.C) Economic models show how endogenous variables affect exogenous variables. D) Economists use different models to address different economic phenomena.
D) Economists use different models to address different economic phenomena. Note that C gets things backwards. The models show how exogenous variables impact endogenous variables.
13. The central bank in the United States is the: A) Bank of America. B) U.S. Treasury. C) The People's Bank of America D) Federal Reserve.
D) Federal Reserve.
7. The central bank in the United States is the: A) Bank of America.B) U.S. Treasury.C) U.S. National Bank. D) Federal Reserve.
D) Federal Reserve.
15. The ex post real interest rate will be greater than the ex ante real interest rate when the: A) rate of inflation is increasing.B) rate of inflation is decreasing.C) actual rate of inflation is greater than the expected rate of inflation. D) actual rate of inflation is less than the expected rate of inflation.
D) actual rate of inflation is less than the expected rate of inflation.
14. When the Fed makes an open-market sale, it: A) increases the money multiplier (m). B) increases the currency-deposit ratio (cr). C) increases the monetary base (B). D) decreases the monetary base (B).
D) decreases the monetary base (B).
The price received by each factor of production is determined by: A) demand for output and supply of factors. B) demand for factors and supply of output. C) demand and supply of output. D) demand and supply of factors
D) demand and supply of factors. The demand for output and supply of output both indirectly are related to factor prices (the real wage and real rental price of capital) but the best answer to this question is that its about D and S for the factors.
With a Cobb-Douglas production function, the share of output going to labor: A) decreases as the amount of labor increases. B) increases as the amount of labor increases. C) increases as the amount of capital increases. D) does not depend on the amount of labor in the economy.
D) does not depend on the amount of labor in the economy.
4. In the relationship expressed in functional form Y = G(K, L), Y stands for real GDP, K stands for the amount of capital in the economy, and L stands for the amount of labor in the economy. In this case G( ): A) is the growth rate of real GDP when the amount of capital and labor in the economy is fixed. B) indicates that the variables inside the parentheses are endogenous variables in the model. C) is the symbol that stands for government input into the production process.D) is the function telling how the variables in the parentheses determine real GDP.
D) is the function telling how the variables in the parentheses determine real GDP.
11. Net national product equals GNP: A) plus net investment.B) minus net investment.C) plus depreciation. D) minus depreciation.
D) minus depreciation.
7. All of the following assets are included in M1 except: A) currency. B) demand deposits. C) traveler's checks. D) money market deposit accounts
D) money market deposit accounts. Traveler's checks count toward M1 because they are checks, basically. Money market deposits are less liquid because you cannot use your check card to spend those funds.
29. Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to: A) reduce labor turnover.B) improve the quality of the firm's labor force. C) increase worker effort.D) reduce the firm's wage bill.
D) reduce the firm's wage bill.
27. Frictional unemployment is inevitable because:A) different sectors do not shift.B) the economy needs to be lubricated.C) workers never quit their jobs to change careers.D) the demand for different goods always fluctuates.
D) the demand for different goods always fluctuates.
2. What determines the ratio of the wage to rental rate of capital in a competitive, profit-maximizing economy with constant returns to scale? A) the quantity of economic profits earned by firm ownersB) the interest rateC) the ratio of public saving to private saving D) the marginal productivity of labor relative to the marginal productivity of capital
D) the marginal productivity of labor relative to the marginal productivity of capital
According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal: A) total investment. B) total saving. C) total profits. D) total output.
D) total output.
25. In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the ______ who find a job each month, while the rate of job separation equals the percentage of the ______ who lose their job each month. A) labor force; labor force B) labor force; unemployed C) employed; labor force D) unemployed; employed
D) unemployed; employed
2. When studying the short-run behavior of the economy, an assumption of ______ is more plausible, whereas when studying the long-run equilibrium behavior of an economy, an assumption of ______ is more plausible. A) inflation; unemploymentB) unemployment; inflationC) flexible prices; sticky prices D) sticky prices; flexible prices
D)sticky prices; flexible prices
With the Cobb-Douglas production function Y = AK0.5L 0.5 where A, K, and L are all 100, the marginal product of capital is ___. (Hint: this production function is discussed in detail in the book and in the video linked to in the slides. You can but don't have to use calculus for this problem.)
For Cobb-Douglas 𝑴𝑷𝑲 = 𝜶𝒀/𝑲 (this is shown in the book and you should know it). Y = 100*1000.5*1000.5 = 10,000 and 𝜶 = 𝟎. 𝟓 (the exponent on K) so 𝑴𝑷𝑲 = 𝟎. 𝟓 × 𝟏𝟎, 𝟎𝟎𝟎/ 𝟏𝟎𝟎 = 50.
Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate, in percent. In addition, assume that G=0. In this case, then r = ____
I(r) = S and you can replace S = Y - C - G 2000 - 100r = 5000 - (500 + 0.6*5000) - 0 r = 5