Final Exam ECON 201 OL4 US2 Fall 2014-________ is a situation in which resources are limited in quantity...

Final Exam ECON 201 OL4 US2 Fall 2014

I. MULTIPLE CHOICE (40 questions 2 points each). Choose the one alternative that best completes

the statement or answers the question.

1) ________ is a situation in which resources are limited in quantity and can be used in different ways. 1) _______

A) Choice B) Economics

C) Supply and demand D) Scarcity

2) The single largest expenditure component in GDP is: 2) _______

A) consumption expenditures. B) private investment expenditures.

C) net exports. D) government purchases.

3) In the circular flow diagram, the different payments made by firms to households are: 3) _______

A) rent on office and factory buildings. B) interest on borrowed money.

C) wages and salaries. D) all of the above.

4) ________ is commonly defined as six consecutive months of declining real GDP. 4) _______

A) A recession B) An expansion C) A peak D) A trough

5) If gross investment in 2009 is $600 billion and depreciation in 2012 is $50 billion, net investment in 2012 is: 5)

_______

A) $600 billion. B) $50 billion.

C) $550 billion. D) none of the above.

6) The number of people classified as employed is 220,000 and the number of people classified as unemployed is 30,000.

The size of the labor force: 6) _______

A) equals 250,000.

B) equals 200,000.

C) equals 300,000.

D) cannot be determined from this information.

7) Unanticipated inflation arbitrarily redistributes income because: 7) _______

A) medical costs rise faster than health insurance premiums.

B) nominal interest rates fall below real interest rates.

C) actual tax revenue decreases and so do government subsidies.

D) people forecast relative prices incorrectly and either gain or lose purchasing power.

8) A ?shoe?leather cost? is the cost associated with: 8) _______

A) trying to reduce holdings of cash when there is inflation.

B) changing price lists when there is inflation.

C) designing a new basketball sneakers when there is inflation.

D) buying new shoes when there is inflation.Table 6.11

9) Refer to Table 6.11. If 1999 is the base year, the price index in 2001 is: 9) _______

A) 100. B) 1998. C) 121.7. D) 138.7.

10) Refer to Table 6.11. If 1999 is the base year, then the inflation rate (i.e., the growth rate of the price index) between 1999

and 2000 is: 10) ______

A) 121.7 percent. B) zero percent. C) 2.17 percent. D) 17.8 percent.

Figure 8.1

11) Refer to Figure 8.1. If the saving rate is s2, the economy reaches the long run equilibrium at: 11) ______

A) pt. E. B) pt. A.C) pt. D. D) pt. C.

12) If the economy experiences an increase in the amount of capital stock per worker, then we say that the economy is

experiencing: 12) ______

A) capital deepening. B) capital depreciation.

C) capital widening. D) technological progress.

13) Using a production possibility curve, a shifting of the curve outward illustrates: 13) ______

A) economic growth. B) a lower level of production.

C) a decrease in the unemployment rate.D) fewer inputs.

14) Steel rod prices are an example of: 14) ______

A) custom prices. B) regulated prices.

C) auction prices. D) personal prices.

15) If the marginal propensity to consume is 0.8, the value of the marginal propensity to save is: 15) ______

A) 5. B) 1.25. C) 0.2. D) 0.8.

16) The economy moves from a short?run equilibrium to the long?run equilibrium through: 16) ______

A) demand shocks. B) improvements in technology.

C) supply shocks. D) adjustments in wages and prices.Figure 9.2

17) Refer to Figure 9.2. Suppose the economy is at Point A, a decrease in the price level causes a movement to Point:

17) ______

A) D. B) C. C) E. D) B.

18) A decrease in the money supply will cause output: 18) ______

A) to increase in the short run; increase in the long run.

B) to increase in the short run, decrease in the long run.

C) to decrease in the short run; not change in the long run.

D) to decrease in the short run; decrease in the long run.

19) Federal discretionary spending consists of: 19) ______

A) all the spending that Congress authorized by prior laws.

B) interest payments on government debt held by the public.

C) all the programs authorized by Congress on an annual basis.

D) all of the above.

20) In 2011, federal spending was about ________ percent of GDP. 20) ______

A) 71 B) 25 C) 14.7 D) 33

21) The length of time that the U.S. Treasury Department takes to print and mail tax rebate checks to help the economy

out of a recession is part of the: 21) ______

A) inside lag. B) outside lag.

C) identification lag. D) inside?outside lag.

22) If the marginal propensity to consume is 0.75 and marginal propensity to import is 0.15, then the multiplier in an open

economy is: 22) ______

A) 4. B) 8.3. C) 10. D) 2.5.

23) If both government spending and taxes increase by an equal amount at the same time, GDP will: 23) ______

A) decrease.

B) increase.

C) remain the same.

D) None of the above are true, it is impossible to say.

24) A $100 million increase in government spending causes: 24) ______

A) an equal amount of change in equilibrium output in an open and a closed economy.

B) a larger change in equilibrium output in a closed economy than in an open economy.

C) a larger change in equilibrium output in a closed economy than in an open economy if the marginal propensity to

import is zero.

D) a larger change in equilibrium output in an open economy than in a closed economy.

25) The boom period of the late 1990s was a good example of: 25) ______

A) the depressing effect on share prices of low expectations about future dividends.

B) the Q?theory of investment at work.

C) the irrationality of long?term investments when share prices are not high enough.

D) the impact that low interest rates have of investment expenditure.

26) A ?bank run? occurs when panicky depositors simultaneously: 26) ______

A) withdraw their funds in order to invest in Treasury bills.

B) withdraw their funds from a bank they believe will fail.

C) chase a bank owner who has fled the country.

D) deposit their funds in a bank offering high deposit interest rates.

27) According to the neoclassical theory of investment, the important determinant of investment spending is: 27)

______

A) taxes and the real interest rate.

B) nominal interest rates and taxes.

C) the business climate.

D) government spending.

Additional Application

COPING WITH A STOCK MARKET CRASH: BLACK MONDAY, 1987

How did the Fed successfully respond to the major stock market crash in 1987?

On October 19, 1987, known as ?Black Monday,? the Dow Jones index of the stock market fell a dramatic 22.6 percent in one day. Similar declines were felt in other indexes and stock markets around the world. These declines shocked both businesses and investors. In just 24 hours, many people and firms found themselves much less wealthy. The public began to worry that banks and other financial institutions—to protect their own loans and investments—would call in borrowers? existing loans and stop making new ones. A sharp drop in available credit could, conceivably, plunge the economy into a deep recession.

Alan Greenspan had just become chairman of the Federal Reserve that year. As a sophisticated economist with historical knowledge of prior financial crises, he recognized the seriousness of the situation. He quickly issued a public statement in which he said that the Federal Reserve stood ready to provide liquidity to the economy and the financial system. Banks were told that the Fed would let them borrow liberally. In fact, the Fed provided liquidity to such an extent that interest rates even fell. As a result of Greenspan?s action, ?Black Monday? did not cause a recession in the United States.

28) The dramatic drop in stock values on October 19, 1987, known as ?Black Monday,? was potentially catastrophic for the

economy because: 28) ______

A) the Fed could not execute any open market operations and the required reserve ratio had been set too low by the previous administration.

B) banks and financial institutions might have called in existing loans and stop making new ones.

C) the value of the U.S. dollar was likely to fall too and that would create a massive trade deficit.

D) the federal government found itself on the brink of default, so ruining millions of public debt holders.

29) First National Bank has liabilities of $1 million and owners? equity of $300,000. First National Bank?s assets are:29)

______

A) $700,000.

B) $100,000.

C) $1.3 million.

D) $900,000.

30) Which of the following is included in M1, but not included in M2? 30) ______

A) travelers checks

B) checking deposits

C) currency

D) All assets in M1 are included in M2.

Figure 14.3

31) Refer to Figure 14.3. At an interest rate of 10%, there is: 31) ______

A) an excess supply of money of $500.

B) an excess demand for money of $300.

C) an excess supply of money of $300.

D) an excess demand for money of $500.

32) Fed actions that increase the money supply: 32) ______

A) tend to lead to a depreciation of the currencies of other nations.

B) usually have no effect on a currency?s exchange value.

C) tend to lead to a depreciation of a nation?s currency.

D) tend to lead to an appreciation of a nation?s currency.

33) When the economy is in a boom, the interest rates ________ and the bond prices ________. 33) ______

A) increase; decrease

B) increase; increase

C) decrease; decrease

D) decrease; increase

34) One implication of Say?s Law is that: 34) ______

A) unemployment will always persist.

B) there will always be a recession, as not all goods in the economy will be purchased.

C) inflation will always exist, as all goods in the economy will be purchased.

D) there is no recession, as all goods produced in the economy will be purchased.

35) When an incumbent politician uses expansionary fiscal and monetary policy to increase the chance of re?election, that

politician is generating a(n): 35) ______

A) political business cycle.

B) a sociological depression.

C) economically sound campaign.

D) political dynasty.

36) In the long run, without government intervention, the economy responds to a decrease in aggregate demand with:

36) ______

A) a decrease in short?run aggregate supply.

B) an increase in short?run aggregate supply.

C) an increase in aggregate demand.

D) a second decrease in aggregate demand.

37) Inflation in the long run is positively correlated with: 37) ______

A) nominal wage growth, but not nominal interest rates.

B) neither nominal wages nor nominal interest rates.

C) nominal wages and nominal interest rates.

D) nominal interest rates, but not nominal wages.

38) If the Fed is credible or believable in its desire to fight inflation, it can deter the private sector: 38) ______

A) from taking aggressive actions that drive prices down.

B) from lowering real wages.

C) from developing rational expectations about inflation.

D) from taking aggressive actions that drive up prices.

Additional Application

INFLATION?INDEXED BONDS IN THE UNITED STATES

Are there bonds that can protect your investments from inflation?

In 1997, the U.S. Department of the Treasury created a new financial instrument called the Treasury Inflation?Protected Security, or TIPS. The key feature of TIPS is that the payments to investors adjust automatically to compensate for the actual changes in the Consumer Price Index. Therefore, TIPS provide protection to investors from inflation.

Like other government bonds, TIPS make interest payments every six months and a payment of the original principal when the bond matures. However, unlike other Treasury bonds, these payments are automatically adjusted for changes in inflation. Despite their obvious attractions, the market for TIPS is still rather small. As of 2005, there were about $200 billion in TIPS outstanding, compared to a total volume of about $4 trillion ($4,000 billion) total Treasury obligations.

Because TIPS compensate for actual inflation, the interest rate on these bonds differs from conventional bonds by the expected inflation rate. By comparing the interest rates on TIPS to other government bonds of similar maturity, economists can estimate the public?s expectations of inflation.

SOURCE: Simon Kwan, ?Inflation Expectations: How the Market Speaks,? Federal Reserve Bank of San Francisco Economic

Letter, October 7, 2005.

39) According to the application, the difference between the interest rates on TIPS and the interest rates on non?inflation indexed securities represents: 39) ______

A) the public?s expectation of inflation in the future.

B) the government?s expectation of inflation in the future.

C) the public?s expectation of inflation in today.

D) the Fed?s expectation of inflation in the today.

40) If what a government spends exceeds what it collects in taxes in a year, then the government is experiencing a:40)

______

A) government budget surplus. B) government net revenue.

C) government budget deficit. D) government net expenditure.

SOLUTIONS GUIDE: Please reword to ensure originalty.

II. SHORT ANSWER. (5 questions 4 points each). Please write a separate paragraph to explain

your answer to each of the following questions.

41) Explain why we must take into account changes in business inventories when calculating GDP. 41)

42) If Year 1 is the base year, the price index for Year 2 is 105, and the price index for Year 3 is 103. What is the inflation rate in Years 2 and 3? Explain what has happened to the cost of living between Years 1 and 2 and Years 2 and 3. 42)

43) Refer to Table 8.1. Compute real GDP per capita for each of the three countries. Why is it important to examine real GDP per capita rather than real GDP? 43) _____________

44) ?The budget surpluses incurred by the government during the late 1990s were purely due to the major tax increase implemented during Clinton?s Administration.? Do you agree or disagree? And please explain why? 44)

45) Assume the money market is initially in equilibrium. Now, suppose that the price level falls. Please explain what effect this reduction in the aggregate price level will have on the money market. 45) _____________