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