final exam practice

36. According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes A. the interest rate to fall, so aggregate demand shifts right. B. the interest rate to fall, so aggregate demand shifts left. C. the interest rate to rise, so aggregate demand shifts right. D. the interest rate to rise, so aggregate demand shifts left. E. None of the above

A

1. Ramona decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping is A. the value of the knowledge she would have received had she attended class. B. the $24 she could have earned if she had worked at her job for those two hours. C. the value of her nap minus the value of attending class. D. nothing, since she valued sleep more than attendance at class. E. none of the above

A

11. For any given year, the CPI is the price of the basket of goods and services in the A. given year divided by the price of the basket in the base year, then multiplied by 100. B. given year divided by the price of the basket in the previous year, then multiplied by 100. C. base year divided by the price of the basket in the given year, then multiplied by 100. D. previous year divided by the price of the basket in the given year, then multiplied by 100. E. None of the above

A

15. Which of the following explains faster growth of real GDP in country A than in Country B? A. both greater population growth and greater productivity growth in Country A B. greater population growth in Country A, but not greater productivity growth in Country A C. greater productivity growth in Country A, but not greater population growth in Country A D. neither greater population growth nor greater productivity growth in Country A E. None of the above

A

29. Which list ranks assets from most to least liquid? A. money, bonds, cars, houses B. money, cars, houses, bonds C. bonds, money, cars, houses D. bonds, cars, money, houses

A

35. An economic expansion caused by a shift in aggregate demand that pushes output above the natural rate of output causes prices to A. rise in the short run, and rise even more in the long run. B. rise in the short run, and fall back to their original level in the long run. C. fall in the short run, and fall even more in the long run. D. fall in the short run, and rise back to their original level in the long run. E. None of the above.

A

4. If toast and butter are complements, then which of the following would increase the demand for butter? A. a decrease in the price of toast B. a decrease in the price of butter C. an increase in the price of butter D. both a and b are correct. E. None of the above

A

6. Which A. The purchase of economics tutoring services from a tutor who is a non-US citizen of the following is included in the calculation of US GDP? but lives within the US. B. The purchase of a new edition of a French textbook that was produced in a Mexico. C. The purchase of a used textbook from a friend who took the same class last year. D. All of the above E. None of the above

A

10. A country's real GDP rose from $500 to $530 while its nominal GDP rose from $600 to $700. What was this country's inflation rate as measured by the GDP Deflator? A. 16.7%. B. 10.0%. C. 15.0%. D. -9.1%.

B

13. By not taking into account the possibility of consumer substitution, the CPI A. understates the cost of living. B. overstates the cost of living. C. may overstate or understate the cost of living, depending on how quickly prices rise. D. may overstate or understate the cost of living, regardless of how quickly prices rise.

B

16. Suppose a country imposes new restrictions on how many hours people can work. If these new restrictions reduce the total number of hours worked in the economy, but all other factors that determine output are held fixed, then A. productivity and output both rise. B. productivity rises and output falls. C. productivity falls and output rises. D. productivity and output fall. E. None of the above

B

17. Suppose a country has constant returns to scale. If over time the country doubles its workers, its natural resources, its physical capital, and its human capital, but its technology is unchanged. Which of the following would double? A. both output and productivity B. output, but not productivity C. productivity, but not output D. neither productivity nor output

B

18. Suppose that a country increased its saving rate, then, other things equal, in the long run it would have A. higher productivity, and another unit of capital would increase output by more than before. B. higher productivity, but another unit of capital would increase output by less than before. C. lower productivity, and another unit of capital would increase output by more than before. D. lower productivity, but another unit of capital would increase output by less than before. E. None of the above

B

20. We would expect the internal rate of return on Bond A to be higher than the internal rate of return on Bond B if the two bonds have identical characteristics except that A. the default risk associated with Bond A is lower than the default risk associated with Bond B. B. Bond A has a term of 20 years and Bond B has a term of 2years. C. All of the above are correct. D. None of the above is correct.

B

25. If the Federal Open Market Committee decides to decrease the money supply, then the Federal Reserve typically A. creates dollars and uses them to purchase government bonds from the public. B. sells government bonds from its portfolio to the public. C. creates dollars and uses them to purchase various types of stocks and bonds from the public. D. sells various types of stocks and bonds from its portfolio to the public.

B

28. If people decide to hold more currency relative to deposits, the money supply A. falls. The larger the reserve ratio is, the more the money supply falls. B. falls. The larger the reserve ratio is, the less the money supply falls. C. rises. The larger the reserve ratio is, the more the money supply rises. D. rises. The larger the reserve ratio is, the less the money supply rises. E. None of the above

B

31. When inflation rises, people will desire to hold A. less money and will go to the bank less frequently. B. less money and will go to the bank more frequently. C. more money and will go to the bank less frequently. D. more money and will go to the bank more frequently.

B

32. You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest? A. 1.5 percent. B. 2.5 percent. C. 5.0 percent. D. 4.5 percent.

B

33. In which case can we be sure aggregate demand shifts left overall? A. people want to save more for retirement and the Fed increases the money supply. B. people want to save more for retirement and the Fed decreases the money supply. C. people want to save less for retirement and the Fed increases the money supply. D. people want to save less for retirement and the Fed decreases the money supply.

B

8. Which of the following is included in the investment component of GDP? A. spending on new residential construction and spending on stocks and bonds B. spending on new residential construction but not spending on stocks and bonds C. spending on stocks and bonds but not spending on new residential construction D. neither spending on stocks and bonds nor spending on new residential construction E. None of the above

B

Table 1 Sample Population Person: Allen: Unpaid stay at home dad. Has not looked for a job in several years. Ben: College president. Allison: Part-time welder. Actively looking for full time work. Brittany: Self-employed full-time wedding singer. Cathy: Full-time physician's assistant. Calvin: Retired finance professor. Last applied for work 10 weeks ago. Diane: Laid-off fork-lift operator expecting to be recalled. David: Works for a bicycle store. Age 70. Evelyn: Manager of health food store. Eli: Museum guard. Was not at work last week due to illness. Flora: Has never been employed. Looked for a job last week. Frank: Fired from job as an investment banker. Last looked for work three weeks ago Refer to Table 1 above. How many in the sample are in the labor force? A. 11 B. 10 C. 9 D. 8

B

12. In an imaginary economy, consumers buy only razors and cologne. The fixed basket consists of 6 razors and 4 bottles of cologne. A razor cost $20 in 2009 and $25 in 2010. A bottle of cologne cost $30 in 2009 and $40 in 2010. Using 2009 as the base year, which of the following statements is correct? A.For the typical consumer, the number of dollars spent on razors is equal to the number of dollars spent on cologne in each of the two years. B. The consumer price index is 310 in 2010. C. The rate of inflation is 29.17% in 2010. D.All of the above are correct. E. None of the above is correct.

C

2. Betty's Bakery bakes fresh bread every morning. Any bread not sold by the end of the day is thrown away. A loaf of bread costs Betty $2.00 to produce, and she prices loaves of bread at $3.50 per loaf. Suppose near the end of one day Betty still has 12 loaves of bread on hand. Which of the following is correct? A. Betty should only sell the remaining bread for $3.50 per loaf since that is the regular price. B. Betty should only sell the remaining bread for $2.00 per loaf or more since that is what the bread costs to make. C. Betty should be willing to sell the remaining bread for any price above $0 per loaf since she will have to throw it away if she does not sell it for something. D. Betty should just throw the bread away. E. None of the above

C

21. In 2002 interest rates on mortgage fell and mortgage lending increased. Which of the following could explain both of these changes? A. The demand for loanable funds shifted rightward. B. The demand for loanable funds shifted leftward. C. The supply of loanable funds shifted rightward. D. The supply of loanable funds shifted leftward. E. None of the above.

C

22. If Congress decreased the tax rate on interest income, investment A. would increase and saving would decrease. B. would decrease and saving would increase. C. and saving would increase. D. and saving would decrease. E. None of the above.

C

24. Which of the following is correct? A. Unemployment insurance raises structural unemployment because it reduces the job search efforts of the unemployed. B. Most economists are skeptical of the value of unemployment insurance primarily because they believe that it results in a poorer match between workers and jobs. C. Studies show that when the unemployed become ineligible for benefits, the probability of their finding a job increases dramatically. D. All of the above are correct. E. None of the above

C

30. Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory, A. inflation averaged 8% per year and the real interest rate was 9%. B. inflation averaged 11% per year and the real interest rate was 17%. C. inflation averaged 5% per year and the real interest rate was 4%. D. inflation averaged 1% per year and the real interest rate was 6%. E. None of the above

C

34. If output is above its natural rate, then according to sticky-wage theory A. workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce less at any given price level. B. workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce more at any given price level. C. workers will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level. D. workers and firms will strike bargains for higher wages. In response to the higher wages firms will produce more at any given price level. E. None of the above

C

7. Over the last 20 years, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has A. reduced measured GDP . B. not affected measured GDP . C. increased measured GDP by the value added by the restaurant's preparation and serving of the meals. D. All of the above are correct E. None of the above is correct

C

9. If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise? A. both real GDP and nominal GDP . B. real GDP but not nominal GDP . C. nominal GDP but not real GDP . D. neither nominal GDP nor real GDP . E. None of the above

C

3. You observe the price of a good is rising. You can necessarily conclude that: A. demand is increasing B. supply is increasing C. demand and supply are decreasing D. the quantity demanded exceeds the quantity supplied E. the quantity demanded is less than the quantity supplied

D

14. The CPI differs from the GDP deflator in that A. the CPI is an inflation index, while the GDP deflator is a price index. B. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. C. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the GDP deflator but not in the CPI. D. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the GDP deflator but not in the CPI.

D

19. Which of the following is consistent with the catch-up effect? A. The United States had a higher growth rate before 1900 than after. B. After World War II the United States had lower growth rates than war-ravaged European countries. C. Although the United States has a relatively high level of output per worker, its growth rate of output per worker is rather modest compared to some countries. D. All of the above are correct. E. None of the above is correct.

D

26. The manager of your bank tells you that the bank has $10 million in excess reserves. She also tells you that the bank has $400 million in deposits and $375 million dollars in loans. Given this information you find that the reserve requirement must be A. 10/400. B. 25/400. C. 35/400. D. 15/400. E. None of the above.

D

27. Suppose the reserve ratio is 10 percent, banks are all loaned up, and people hold only deposits and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves A. increase by $20 million and the money supply eventually increases by $20 million. B. increase by $20 million and the money supply eventually increases by $200 million. C. decrease by $2 million and the money supply eventually increases by $20 million. D. decrease by $20 million and the money supply eventually decreases by $200 million. E. None of the above

D

37. If the Fed conducts open-market sales, which of the following quantities increase(s)? A. interest rates, prices, and investment spending B. interest rates and prices, but not investment spending C. interest rates and investment, but not prices D. interest rates, but not investment or prices E. None of the above

D

38. Assume there is a multiplier effect, some crowding out and no other effects. An increase in government expenditures changes aggregate demand more, A. the smaller the MPC and the stronger the influence of income on money demand. B. the smaller the MPC and the weaker the influence of income on money demand. C. the larger the MPC and the stronger the influence of income on money demand. D. the larger the MPC and the weaker the influence of income on money demand. E. None of the above.

D

39. In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller? A. The interest rate falls and there are many sticky price firms in the US economy. B. The interest rate falls and there are many flexible price firms in the US economy. C. The interest rate rises and there are many sticky price firms in the US economy. D. The interest rate rises and there are many flexible price firms in the US economy.

D

5. If an economy's GDP rises, then it must be the case that the economy's A. income rises and saving falls. B. income and saving both rise. C. income rises and expenditure falls. D. income and expenditure both rise. E. None of the above is correct

D