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Principles of MacroeconomicsFinal ExamSpring 2011Choose the best answer to each of the following. WORK INDEPENDENTLY!!!1.The branch of economics that focuses on the study of output, inflation, and unemployment is known as __________.a)Capital b)Labor c)Macroeconomicsd)Microeconomics2.Which of the following describes a situation most closely related to microeconomics?a)A business firm decides to purchase new computers for its employees.b)The government reports that unemployment has increased over the past year.c)Research finds that inflation has slowed over the past decade.d)The government decides to cut taxes during a period of high unemployment.3.Which of the following factors of production used in making a textbook is an example of capital?a)The printing press used to print the bookb)The lumber used to make the paperc)The worker in charge of operating the printing pressd)The author of the textbook4.Janet is said to have a comparative advantage in software design compared with Miguel ifa)she can produce software code faster than Miguel.b)she can produce software code at a lower opportunity cost than Miguel.c)when their skills cannot be compared.d)when their skills are about the same.5.A marketa)is any arrangement people have for trading with one another.b)provides information that helps to coordinate decisions.c)provides incentives for people to participate in trading.d)All of the above6. An economic modela)is a way of representing a theory.b)often involves the use of a graph or mathematical expression.c)is used to explain the relationship among observed facts.d)All of the above7. The figure to the right shows the production possibilities for a city deciding how to allocate resources between police stations and hospitals. According to the figure, which production possibility requires more resources than the city has as its disposal?a)Point Ab)Point Bc)Point Cd)Point D8.If the price of a good rises, what are people likely to do?a)Substitute a less expensive goodb)Buy more of the goodc)Buy more of all goods because of added buying powerd)All of the above9.If hot dogs and hamburgers are substitutes and the price of hot dogs increases, what do we expect?a)An increase in the quantity of hot dogs demandedb)The demand curve for hot dogs to shift to the leftc)The demand curve for hot dogs to shift to the rightd)The demand curve for hamburgers to shift to the right10.If bagels and cream cheese are complements and the price of cream cheese increases, what do we expect?a)An increase in the quantity of cream cheese demandedb)The demand curve for cream cheese to shift to the leftc)The demand curve for cream cheese to shift to the rightd)The demand curve for bagels to shift to the right11.If an increase in income leads to an increase in the demand for beef, what do we conclude? a)The price of beef has decreased.b)Beef is a normal good.c)Beef is an inferior good.d)Tastes have shifted toward beef.12.According to Figure 2.5, how many pounds of beef will be sold when the market is in equilibrium?a)4 thousandb)3 thousandc)2 thousandd)1 thousand13. Which of the following is an example of a price floor?a)Rent controlsb)Minimum wagesc)Agricultural price supportsd)Both b and c14. Which of the following is an unintended consequence of rent controls?a)Lower rent for tenantsb)A shortage of rent-controlled apartmentsc)A surplus of rent-controlled apartmentsd)All of the above15.The measure of the percentage change in one variable to a percentage change in another variable is known as _______.a)Elasticityb)Pricec)Quantity demandedd)Revenue16.If the price of hamburgers increases by 1% and the quantity demanded falls by 2%, then there will be a)an increase in the price elasticity of demand.b)an increase in the price elasticity of supply.c)a shift in the demand curve.d)a decrease in revenue.17.If an increase in the price of a good leads to a decrease in revenue, then the demand for the good is ________.a)elasticb)inelasticc)perfectly inelasticd)zero18.Figure 3.2 shows the market for milk. According to this diagram, what happens to revenue when the price of milk falls from $3.00 to $1.00?a)Revenue falls from $3,000 to $1,000.b)Revenue rises from $1,000 to $3,000.c)Revenue remains unchanged at $1,000.d)Revenue remains unchanged at $3,000.19.Figure 3.2 shows the market for milk. According to this diagram, the demand for milk is __________.a)perfectly elasticb)perfectly inelasticc)unit elasticd)income elastic20.Figure 3.3 shows demand for bread. Using the midpoint formula, the price elasticity of demand over the range from $0.50 to $1.00 is closest to which of the following?a)-0.50b)-0.60c)-1.45d)-1.6721.Figure 3.3 shows demand for bread. According to the diagram, the demand for breada)is unit elastic at all prices.b)perfectly inelastic at all prices.c)perfectly elastic at all prices.d)varies along the demand curve depending on the price.22. Other things being equal, the fewer substitutes a good has, the more its demand will tend to be __________.a)elasticb)inelasticc)unit elasticd)income elastic23. Suppose that when your income is $1,000 a month, you consume 20 packages of noodle soup, and when your income is $2,000, you consume 10 packages of noodle soup. Using the midpoint formula, the income elasticity of demand is ____.a)-0.5b)0.5c)-1.0d)2.024.Which of the following would indicate whether two goods are substitutes or complements?a)Price elasticity of demandb)Price elasticity of supplyc)Income elasticity of demandd)Cross elasticity of demand25.Figure 3.4 shows the supply of bread. Using the midpoint formula, the price elasticity of supply over the range of $2.00 to $1.00 is _____. a)0.5b)0.75c)1d)1.626.When would the share of the burden of a sales tax that is borne by the buyers tend to be greater, other things being equal? a)Buyers, instead of sellers, make the actual tax payments to the government.b)The demand for the good is elasticc)The demand for the good is inelastic.d)The good has many substitutes.27.In macroeconomics, variables that have been adjusted for the effects of inflation are called _________.a)Absolute variablesb)Real variablesc)Nominal variablesd)Normal variables28.If real GDP is above its natural rate, we say that there is which of the following?a)A contractionb)A cyclical troughc)A recessionary gapd)An inflationary gap29.Which of the following people would be counted as unemployed?a)A person who works 10 hours each week for pay but would like to work full time.b)A person who is not working but seeking employment.c)A person who was absent from a job because of bad weatherd)All of the above are counted as unemployed.30.People who are not working and not seeking employment are counted ina)the number of unemployed.b)the labor force.c)the unemployment rate.d)None of the above31.People who are willing to work in principle, but who do not look for work because they think no work is available area)called discouraged workers.b)not included in the labor force.c)counted as unemployed.d)Both a) and b), but not c)Table 4.1: Population and Unemployment Data (in thousands)Number of employed138Number of unemployed9Population (noninstitutional adult)20032.Table 4.1 reports population and employment statistics for a recent year. According to the table, how many people are in the labor force?a)129 thousandb)138 thousandc)147 thousandd)191 thousand33.Table 4.1 reports population and employment statistics for a recent year. According to the table, the unemployment rate is closest to which of the following?a)3.1%b)4.5%c)6.1%d)7.5%34. What is the portion of unemployed that is accounted for by people who are out of work for long periods of time because their skills do not match those required for available jobs known as?a)Frictional unemploymentb)Structural unemploymentc)Cyclical unemploymentd)Functional unemployment35. If the rate of inflation is 8 percent and the interest rate expressed in the ordinary way, in current dollars, is 11 percent, what is the real interest rate?a)-3 percentb)3 percentc)19 percentd)Approximately 72 percent36.If the average level of prices decreases at a steady rate of 5 percent for 12 consecutive months, we would say that the country is experiencing which of the following?a)Expansionb)Counteractionc)Declinationd)Deflation37.Taking the various effects of price increases and decreases into account, policy makers in most countries aim for which of the following?a)Steady, rapid inflationb)Steady but moderate deflationc)A low but positive rate of inflationd)A steadily rising rate of inflation38.Figure to the right shows a hypothetical business cycle. According to the diagram, a movement between which of the following two points is called a contraction?a)A to Bb)B to Cc)C to Dd)A to D39. Figure to the right shows a hypothetical business cycle. According to the diagram, what is a point like C called? a)The peak of the cycleb)The contractionc)The trough of the cycled)The expansion40.Which of the following is always equal to gross domestic income in the circular flow of income and expenditure?a)Gross leakagesb)Net tax revenues plus transfersc)Net exportsd)Gross domestic product41.Which of the following is an example of an injection?a)Exportsb)Consumptionc)Savingd)Net taxes42.In the circular flow, household savings are shown as a flow into which sector of the economy?a)Factor marketsb)Financial marketsc)Product marketsd)Foreign markets43.What do we mean when we say a country is experiencing “twin deficits?a)Exports exceed imports.b)Imports exceed exports.c)Government purchases exceed net taxes.d)Both b) and c)44. If firms produce goods that they expect to sell but fail to sell them because consumption is less than expected, there will bea)positive unplanned inventory investment.b)negative planned inventory investment.c)negative total investment.d)positive planned non-inventory investment.45. Which of the following is an example of a transfer payment?a)Government purchasesb)Income taxesc)Property taxesd)Social Security benefits46. The marginal propensity to consume normally has a value of:a)Less than 1b)Between 0 and 1c)Equal to 1d)Greater than 147. Which of the following has the strongest and most direct influence over the level of investment spending?a)Net exportsb)Consumer confidencec)The government budget deficitd)Interest rates48. Suppose that beginning from a state of equilibrium, there is an exogenous $1 billion increase in exports. Which of the following would be expected as a result?a)A decrease in equilibrium GDPb)No change in equilibrium GDPc)An increase of less than $1 billion in equilibrium GDPd)An increase of more than $1 billion in equilibrium GDP49.Counting both final and intermediate goods in GDP woulda)overstate production.b)understate production.c)give the same result as the sum of value added of each good and service.d)provide the appropriate value of all final goods and services produced in the economy.50.The expenditure approach to computing GDP involves summing which of the following? a)The values added of each intermediate good used in the production of a final goodb)Consumption, investment, government purchases, and net exportsc)Wages, salaries, interest income, rent, and profitd)The value of intermediate plus final goods and services51.Which of the following components of GDP is largest for the US economy? a)Consumptionb)Investmentc)Government purchasesd)Net exports52.Which of the following is a nondurable consumption good?a)furnitureb)automobilec)gasolined)appliances53.The rental value of an owner-occupied house is included in which component of GDP?a)Consumptionb)Intermediate valuec)Fixed investmentd)None of the above54. Which of the following is included in the government purchases component of GDP?a)Pay of active-duty soldiersb)Veterans benefits paid to disabled former soldiersc)Unemployment benefits to civilian workersd)Both a) and b), but not c)55. Which of the following is included in the investment component of GDP?a)Construction of a new commercial warehouseb)Purchases of initial inventory to stock the shelves of a newly opened bookstorec)Construction of a private residenced)All of the above56. Which of the following provides the best measure of total economic activity that takes place within the borders of a country?a)Gross domestic productb)Net national incomec)Gross national productd)Disposable national income57.A price index based on a sample of goods and services purchased by households is known as the _______.a)Base year price indexb)Consumer Price Index (CPI)c)GDP Deflatord)Producer Price Index (PPI)58.In 2003, nominal GDP was roughly $10,000 and the GDP deflator was 110. According to this information, real GDP was closest to which of the following a)$9,890b)$9,091c)$11,000d)$11,000,00059.To which of the following does the term “The Fed”, as used in the United States, refer?a)The Treasury Departmentb)The Federal governmentc)The US central bank, called the Federal Reserved)The Federal Deposit Insurance Corporation60.Every country has a government agency that is responsible for monetary policy, and often for regulating banks; the general term for this agency is _________.a)The central bankb)The federal bankc)The bank supervision authorityd)The treasury61.Which of the following equations correctly relates assets, liabilities, and net worth?a)Assets + liabilities = net worthb)Assets + net worth = liabilitiesc)Assets = liabilities + net worthd)Liabilities – assets = net worth62.First National Bank has Assets of $50 billion and liabilities of $42 billion. We can conclude that its net worth is ______. a)$8 billionb)$-8 billion (negative net worth)c)$92 billiond)$108 billion63. People like to keep money in checking accounts because they can use that money to make transactions or withdraw it as cash. In other words, the funds in those accounts are ___.a)Liquidb)Solventc)Distributabled)Marketable64. Which of the following is an example of a government sponsored enterprise specializing in mortgage loans?a)Fannie Maeb)Freddie Macc)The Fedd)Both a) and b), but not c)65. The main purpose of insuring bank deposits is to prevent ______.a)Securitizationb)Bank runsc)Liquidity riskd)Gambling with other people’s money66. Which of the following contributed to the financial crisis of 2008?a)Failure of the ratings processb)Vanishing liquidity of securitized mortgage assetsc)Fragmented and ineffective bank regulationd)All of the above67.Which of the following is not one of the basic functions of money?a)Store of valueb)Unit of accountc)Medium of barterd)Medium of exchange68.In economics, the term “velocity” refers to which of the following?a)The ratio of nominal GDP to the money stockb)The average number of times each unit of money is used each year to purchase final goodsc)Both a) and b)d)Neither a) nor b)69.Which of the following is the correct version of the equation of exchange? (note: Y and Q are both symbols for real GDP)a)MV=PYb)MY=PVc)MV=P/Qd)P=Q/MV70.If velocity is assumed to be constant, then according to the Quantity Theory of Money, an increase in the money stock must cause an increase in which of the following?a)The price levelb)Real GDPc)Nominal GDPd)All of the above71. Which of the following acts as a constraint on the ability of banks to create loans?a)The need to hold liquid reservesb)The fact that consumers frequently withdraw part of newly created bank deposits in the form of currencyc)Both a) and b)d)Neither a) nor b) 72. In a simplified banking system where deposits are the only form of money and the required reserve ratio is 0.2, the deposit multiplier would be _____.a)20b)5c)0.5d)0.0273. Which of the following is the Fed’s most important instrument of monetary policy?a)Printing new paper currencyb)Changing the discount ratec)Changing the required reserve ratiod)Conducting open market operations74.If nominal income and price level both double, a)consumer real income increases.b)consumer real income decreases.c)the real income of consumers remains unchanged.d)the real value of money held by consumers increases.75.Other things being equal, which of the following will cause the aggregate demand curve to shift to the right? a)A decrease in consumer confidenceb)An increase in net taxesc)An increase in foreign demand for a country’s exportsd)An increase in interest rates76.Other things being equal, if the central banks undertakes expansionary monetary policy, we expect a)the aggregate demand curve to shift to the right.b)the aggregate demand curve to shift to the left.c)the economy to move up along the aggregate demand curve without a shift.d)the economy to move down along the aggregate demand curve without a shift.77. In the long run, given time for the prices of all inputs to adjust fully, the aggregate supply curve willa)be vertical.b)be horizontal.c)have a positive slope.d)have a negative slope.78.The short-run aggregate supply curve has a positive slope because a)consumption increases when prices rise.b)input prices are fully flexible.c)expected input prices adjust gradually to changes.d)the economy is above the natural rate of output.79.Which of the following will tend to cause the short-run aggregate supply cure to shift to the left?a)An increase in consumer incomeb)An increase in expected wages and the prices of other inputsc)A decrease in wage costs and other input pricesd)A reduction in interest rates80.According to the information given in the graph to the right, the economy’s point of short-run equilibrium will be at which of the intersections?a)AS and long-run ASb)AS and ADc)AD and long-run ASd)In the center of the triangle formed by the three curves81. According to the information given in the graph to the right, as the economy self-corrects, moving from its short-run equilibrium to a new long-run equilibrium, which of the following will occur? a)Input prices will rise.b)Long-run aggregate supply will shift to the left.c)The short-run aggregate supply curve will shift to the right.d)The long-run aggregate supply curve will shift to the left.82.Beginning from a short-run equilibrium at point B in Figure 9.4, the economy will next tend to move toward a long-run equilibrium at which of the following points during self-correction?a)AFigure 9.4b)Bc)Cd)D83.In the short run, a rightward shift in the aggregate demand curve, beginning from equilibrium, will tend to cause which of the following to increase?a)Real outputb)The price levelc)Unemploymentd)Both a) and b), but not c)84.Which of the following will be true if unemploymenta)There will be upward pressure on output prices.b)There will be downward pressure on wages.c)The natural level of real output will tend to rise.d)Inflation will increase.85.On December 31, the market exchange rate is 100 Japanese yen for 1 U.S. dollar. In January, the Fed raises interest rates while Japanese interest rates are unchanged. As a result, we would expect which of the following?a)An appreciation of the yenb)An appreciation of the dollarc)A depreciation of the dollard)Both a) and c), but not b)86.Other things being equal, which of the following would tend to cause an increase in the quantity of goods imported to the United States from China?a)An increased rate of growth of consumer income in the U.S.b)An appreciation of the U.S. dollarc)A depreciation of the yuan (the Chinese currency)d)All of the above87.Policy related to taxes and government purchases is known asa)Fiscal policyb)Financial policyc)Countervailing policyd)Federal policy88.It the economy has a recessionary gap, the government could use fiscal policy to return to full employment by doing which of the following?a)Cutting interest ratesb)Increasing taxesc)Increasing government purchasesd)All of the above89.If the effective multiplier for fiscal policy is 2, how much change in government purchases would be required to close a $500 billion recessionary gap, other things being equal?a)A $250 billion increaseb)A $1 trillion increasec)A $1 trillion decreased)A $250 billion decrease90.Elements of fiscal policy that move the budget toward surplus as the economy expands and toward deficit as it contracts are called ________.a)Automatic stabilizersb)Autonomous fiscal policyc)Accommodating budget policyd)Crowding-out effects91.Which of the following is a possible source of the funds that a country needs for investment in new capital and replacement of old capital?a)The government budget deficitb)Household savingc)An external imbalance, in the form of more exports than importsd)All of the above92.A country experiences several years of steady inflation with unemployment below its natural level. Then monetary and fiscal policies are sharply tightened. We expect which of the following to increase as a result?a)The unemployment rateb)Real GDPc)The natural level of real outputd)The rate of inflation93.A certain country experiences inflation as a result of a severe crop failure, beginning from a situation of price stability. This inflation would best be called __________.a)Monetization inflationb)Demand pull inflationc)Cost push inflationd)Deflation94.An episode when unemployment and the price level both increase while real output falls below its natural level is calleda)Demand side inflationb)An inflationary recession (or “stagflation”)c)A great depressiond)Hyperinflation95. According to the Phillips curve, other things being equal, as the rate of inflation increases, which of the following occurs? a)The unemployment rate increasesb)Hyperinflation slowsc)The unemployment rate decreasesd)Real output increases96.A country that experiences a rate of inflation of 1 million percent per year would be said to experience ________.a)An inflationary recessionb)Hyperinflationc)Hyperdeflationd)High definition inflation97. After a big drop in world oil prices, the country of Valeria, an oil importer, experiences a period of rapid economic growth accompanied by falling prices. This episode would best be called _______.a)Inflationary recessionb)Supply-side deflationc)Demand-side deflationd)Exchange-rate based stabilization

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