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Final Exam ECON 201 OL4- 45 Questions




Question;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.;pt. D. CD) 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 ________.;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.;33);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;0) 4;A) government budget surplus.;B) government net revenue.;C) government budget deficit.;D) government net expenditure.;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);Table 8.1;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)


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