# Econ 202 Final Exam. Douglas, Fall 2007 Version A Special Codes PLEDGE: I have neither given nor received unauthorized help on this exam.

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1 , Fall 2007 Version A Special Codes PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Final Exam 1. On average over the past 50 years, the U.S. economy has grown at the rate of about a. 3 percent per year. b. -6 percent per year. c. 10 percent per year. d. 0 percent per year. 2. A bank s assets include a. both its reserves and the deposits of its customers. b. the deposits of its customers, but not its reserves. c. its reserves, but not the deposits of its customers. d. neither its reserves nor the deposits of its customers. 3. Suppose a Big Mac costs \$3 in the U.S. and 1.5 pounds in Britain. If purchasing power parity holds, what is the nominal exchange rate of the dollar? a. 1 pound per dollar b. 1/2 pound per dollar c. 2 pounds per dollar d. 2 British Big Macs per US Big Mac. 4. By the Exchange Rate Effect, an increase in the US price level causes the US interest rate to a. increase, NCO to decrease, and net exports to decrease, but AD does not shift. b. increase, NCO to decrease, net exports to decrease, and the AD curve to shift left. c. increase, NCO to increase, net exports to increase, and the AD curve to shift right. d. increase, NCO to increase, and net exports to increase, but AD does not shift. 5. If a shortage currently exists in a market we know that the current price is a. above equilibrium price, and quantity supplied is greater than quantity demanded. b. above equilibrium price, and quantity demanded is greater than quantity supplied. c. below equilibrium price, and quantity supplied is greater than quantity demanded. d. below equilibrium price, and quantity demanded is greater than quantity supplied. 6. When Ghana sells chocolate to the United States, U.S. net exports a. increase, and U.S. net capital outflow decreases. b. decrease, and U.S. net capital outflow increases. c. increase, and U.S. net capital outflow increases. d. decrease, and U.S. net capital outflow decreases. 7. Suppose a closed economy had public saving of \$3 trillion and private saving of \$2 trillion. What is national saving and investment in this country? a. \$1 trillion, \$5 trillion b. \$1 trillion, \$2 trillion c. \$5 trillion, \$5 trillion d. \$5 trillion, \$2 trillion 8. Marta lends money at a fixed interest rate and then inflation rises more than expected. Her real interest rate is a. lower than she d expected, and the real value of the loan rises. b. lower then she d expected, and the real value of the loan falls. c. higher than she d expected, and the real value of the loan falls. d. higher than she d expected, and the real value of the loan rises. 1

2 9. If the reserve ratio is 10 percent, when the Fed sells \$10 million dollars of bonds, bank reserves may a. increase by \$10 million, causing the money supply to increase by up to \$100 million. b. increase by \$1 million, causing the money supply to increase by up to \$10 million. c. decrease by \$1 million, causing the money supply to decrease by up to \$10 million. d. decrease by \$10 million, causing the money supply to decrease by up to \$100 million. 10. In the United States, a cup of hot chocolate costs \$5. In Australia, the same hot chocolate costs \$6.5 Australian dollars. If the exchange rate is \$1.3 Australian dollars per U.S. dollar, the real exchange rate is a cups of U.S. hot chocolate per cup of Australian hot chocolate b. 59 cents. c. 1 cup of Australian hot chocolate per cup of U.S. hot chocolate d cup of Australian hot chocolate per cup of U.S. hot chocolate 11. The long-run aggregate supply curve shifts right if a. the price level decreases. b. the money supply increases. c. technology improves. d. All of the above are correct. 12. Given a nominal interest rate of 10 percent, in which case below would you earn the highest after-tax real interest rate on a \$100 bond? a. Inflation is 4 percent; the tax rate is 30 percent. b. Inflation is 3 percent; the tax rate is 40 percent. c. Inflation is 5 percent; the tax rate is 10 percent. d. The after-tax real interest rate is the same for all of the above. 13. The classical dichotomy and monetary neutrality state that changes in the money supply a. affect both nominal and real variables. b. affect neither nominal nor real variables. c. do not affect nominal variables, but do affect real variables. d. affect nominal variables, but not real variables. 14. According to liquidity preference theory, an increase in the price level shifts the a. money demand curve right so the interest rate decreases. b. money demand curve left so the interest rate decreases. c. money demand curve right so the interest rate increases. d. money demand curve left so the interest rate increases. 15. Which of the following would cause prices and real GDP to rise in the short run? a. an increase in the expected price level b. an increase in the money supply c. a decrease in the capital stock d. None of the above is correct. 16. According to classical macroeconomic theory, changes in the money supply affect a. real GDP and the price level. b. neither the price level nor real GDP. c. real GDP but not the price level. d. the price level, but not real GDP. 17. Which of the following is not included in aggregate demand? a. purchases by foreigners of consumer goods produced in the United States b. purchases of stock and bonds c. purchases of capital goods such as equipment in a factory d. purchases of services such as visits to the doctor 2

3 18. In the 1970s the Fed accommodated the increase in the price of oil by increasing the money supply. It might have done this by a. purchasing bonds on the open market, which would have raised the value of money. b. selling bonds on the open market, which would have raised the value of money. c. selling bonds on the open market, which would have raised the value of money. d. purchasing bonds on the open market, which would have lowered the value of money. 19. An economic expansion caused by a shift in aggregate demand causes prices to a. fall in the short run, and rise back to their original level in the long run. b. rise in the short run, and fall back to their original level in the long run. c. rise in the short run, and rise even more in the long run. d. fall in the short run, and fall even more in the long run. 20. When taxes decrease, consumption a. increases as shown by a movement to the right along a given aggregate demand curve. b. decreases, shifting aggregate supply to the right. c. increases, shifting aggregate demand to the right. d. None of the above is correct. 21. The sticky-wage theory says that a higher-than-expected price level will cause the aggregate a. quantity demanded to decrease, because real wages are lower than expected. b. quantity demanded to decrease, because nominal wages are lower than expected. c. quantity supplied to increase, because nominal wages are higher than expected. d. quantity supplied to increase, because real wages are lower than expected. 22. Suppose that the inflation rate is higher in Turkey than in the U.S. for the next six months. Then according to purchasing power parity, a. neither the US nominal nor the US real exchange rate rises. b. the US nominal exchange rate rises but the US real exchange rate does not. c. the US nominal exchange rate does not rise, but the US real exchange rate does. d. both the US nominal and US real exchange rates rise. 23. The two loops in the circular-flow diagram represent a. (i) the flows of real goods, services, and factors and (ii) the flow of dollars. b. (i) inputs into production processes and (ii) outputs from production processes. c. (i) the flow of dollars and (ii) other financial flows. d. (i) the flow of goods and (ii) the flow of services. 24. Profits paid out to stockholders are a. dividends. b. retained earnings. c. the denominator in the price-earnings ratio. d. All of the above are correct. 25. Suppose that monetary neutrality holds and that velocity is constant. A 5% increase in the money supply a. increases the price level by 5%. b. does not change the price level. c. increases the price level by more than 5%. d. increases the price level by 5%. 26. The nominal interest rate is 3.5 percent and the inflation rate is 2 percent. What is the real interest rate? a. 1.5 percent b percent c. 5.5 percent d. 7 percent 3

4 27. An increase in the price level makes the value of money a. increase, so people want to hold less of it. b. decrease, so people want to hold less of it. c. decrease, so people want to hold more of it. d. increase, so people want to hold more of it. 28. People own or hold money primarily because it a. has a guaranteed nominal return. b. can directly be used to buy goods and services. c. serves as a store of value. d. functions as a unit of account. 29. Which of the following events will definitely cause equilibrium quantity to fall? a. demand decreases and supply increases b. demand increases and supply decreases c. demand and supply both increase d. demand and supply both decrease 30. An increase in government spending initially and primarily shifts a. aggregate demand left. b. aggregate demand right. c. neither aggregate demand nor aggregate supply. d. aggregate supply right. 31. Which of the following changes would not shift the demand curve for Monty Python videos? a. a change in expectations about the future price of Monty Python videos b. a change in the price of Mr. Bean videos, a substitute good c. a change in the price of Monty Python videos d. a change in consumer income 32. Suppose the economy is in long-run equilibrium. If there is a tax increase at the same time that major new sources of oil are discovered in the country, then in the short-run we would expect a. real GDP will fall and the price level might rise, fall, or stay the same. b. the price level will rise, and real GDP might rise, fall, or stay the same. c. real GDP will rise and the price level might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same. 33. If the current interest rate is below the Fed's target, the Fed should a. sell bonds to increase the money supply. b. buy bonds to increase the money supply. c. buy bonds to decrease the money supply. d. sell bonds to decrease the money supply. 34. Monetary neutrality implies that an increase in the quantity of money will a. increase the nominal wage. b. decrease the real wage. c. increase employment. d. None of the above. 35. The negative relationship between price and quantity demanded a. is referred to as the law of demand. b. applies to most goods in the economy. c. is represented by a downward-sloping demand curve. d. All of the above are correct. 4

5 36. What will happen to the equilibrium price and quantity of legal music downloads if ipods become cheaper, it becomes more difficult to download illegally, and payments to musicians by recording companies fall? a. Quantity will rise and the effect on price is ambiguous. b. Price will fall and the effect on quantity is ambiguous. c. Price will rise and the effect on quantity is ambiguous. d. Quantity will fall and the effect on price is ambiguous. 37. Suppose that the government were to eliminate all taxes on dividends. According to our loanable funds model, this would make the interest rate a. and investment decrease. b. increase and investment decrease. c. and investment increase. d. decrease and investment increase. 38. Which of the following is included in M1 but not in M2? a. savings deposits b. demand deposits c. currency d. all of the above are in M Which of the following events would cause both the equilibrium price and equilibrium quantity of Dodge Neons (a fuel-efficient but inferior good) to increase? a. an increase in consumer income b. wages of auto workers fall. c. a decrease in consumer income d. gas mileage of SUVs and mid-size sedans improves. 40. An Italian citizen opens and operates a spaghetti factory in the United States. This is Italian a. foreign portfolio investment that increases Italian net capital outflow. b. foreign portfolio investment that decreases Italian net capital outflow. c. foreign direct investment that increases Italian net capital outflow. d. foreign direct investment that decreases Italian net capital outflow. 41. During the last few decades, sunscreen sales have increased while the price of sunscreen has risen and the variety of sunscreen products offered has increased. What s the most likely explanation? a. Health-conscious consumers heeded health warnings and decided to buy more sunscreen. b. Cancer activists successfully lobbied to obtain government subsidies for sunscreen use. c. Sunscreen producers increased production out of concern for the public s health. d. Government officials ordered sunscreen producers to produce more sunscreen. 42. Which of the following shifts short-run AS, but not long-run AS, to the right? a. a decrease in the expected price level b. a decrease in the actual price level c. a decrease in the capital stock d. an increase in the money supply 43. If the exchange rate changes from 115 yen per dollar to 125 yen per dollar, the dollar has a. depreciated, which tends to increase the US trade deficit. b. depreciated, which tends to decrease the US trade deficit. c. appreciated, which tends to increase the US trade deficit. d. appreciated, which tends to decrease the US trade deficit. 44. Which of the following typically rises during a recession? a. garbage collection b. automobile sales c. unemployment d. corporate profits 5

6 45. If the stock market crashes, a. aggregate demand increases, which the Fed could offset by increasing the money supply. b. aggregate demand decreases, which the Fed could offset by increasing the money supply. c. aggregate demand increases, which the Fed could offset by decreasing the money supply. d. aggregate demand decreases, which the Fed could offset by decreasing the money supply. 46. The long-run aggregate supply curve a. indicates monetary neutrality in the long run. b. is vertical. c. is a graphical representation of the classical dichotomy. d. All of the above are correct. 47. Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that a. the nation is producing an efficient combination of goods. b. the nation is not efficiently using all available resources. c. there will be a large opportunity cost if the nation tries to increase production. d. the nation is producing beyond its capacity, and inflation will occur. 48. Oceania buys \$40 of wine from Escudia and Escudia buys \$100 of wool from Oceania. Supposing this is the only trade that these countries do. The net exports of Oceania are a. \$60, and Escudia s NCO is -\$60 b. \$100, and Escudia s NCO is \$40 c. \$140, and Escudia s NCO is \$140 d. None of the above is correct. 49. Which of the following lists two things that both increase the money supply? a. lower the discount rate, lower the reserve requirement ratio b. lower the discount rate, raise the reserve requirement ratio c. raise the discount rate, lower the reserve requirement ratio d. raise the discount rate, raise the reserve requirement ratio 50. Which of the following is considered human capital? a. the amount you get paid each week to work at the library b. any capital goods that require a human to be present to operate c. the things you have learned this semester d. the comfortable chair in your dorm room where you read economics texts 51. From 2001 to 2005 housing prices rose. If this made people feel wealthier, then it would shift a. aggregate demand left. b. aggregate demand right. c. aggregate supply left. d. aggregate supply right. 52. Other things the same, as the price level rises, the real value of a dollar a. rises, and interest rates fall. b. falls, and interest rates rise. c. rises, and interest rates rise. d. falls, and interest rates fall. 53. Which of the following does the Federal Reserve not do? a. convert Federal Reserve Notes into gold b. serve as a bank regulator c. lend to banks d. conduct monetary policy 6

7 54. Over the last 5 years the annual U.S. inflation rate was about a. 50 to 60 percent. b. 0 to -1 percent. c. 2 to 3 percent. d. 10 to 15 percent. 55. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost \$3 in 2006 and \$5.40 in A hamburger cost \$5 in 2006 and \$6 in Which of the following statements is correct? a. When 2006 is chosen as the base year, the consumer price index is 90 in b. When 2007 is chosen as the base year, the consumer price index is 100 in c. When 2006 is chosen as the base year, the inflation rate is 150% from 2006 to d. When 2007 is chosen as the base year, the inflation rate is 50% from 2006 to

8 ID: A Econ 202 Final Exam Answer Section MULTIPLE CHOICE 1. ANS: A MSC: Definitional 2. ANS: C MSC: Definitional 3. ANS: B MSC: Analytical 4. ANS: A MSC: Analytical 5. ANS: D MSC: Applicative 6. ANS: D MSC: Applicative 7. ANS: C MSC: Definitional 8. ANS: B MSC: Analytical 9. ANS: D MSC: Applicative 10. ANS: C MSC: Analytical 11. ANS: C MSC: Applicative 12. ANS: C MSC: Applicative 13. ANS: D MSC: Definitional 14. ANS: C MSC: Analytical 15. ANS: B MSC: Applicative 16. ANS: D MSC: Definitional 17. ANS: B MSC: Interpretive 18. ANS: D MSC: Applicative 19. ANS: C MSC: Analytical 20. ANS: C MSC: Applicative 21. ANS: D MSC: Definitional 22. ANS: B MSC: Analytical 23. ANS: A MSC: Interpretive 24. ANS: A MSC: Definitional 25. ANS: D MSC: Applicative 26. ANS: A MSC: Applicative 27. ANS: C MSC: Definitional 28. ANS: B MSC: Definitional 29. ANS: D MSC: Applicative 30. ANS: B MSC: Applicative 31. ANS: C MSC: Interpretive 32. ANS: D MSC: Analytical 33. ANS: D MSC: Analytical 34. ANS: A MSC: Definitional 35. ANS: D MSC: Interpretive 36. ANS: A MSC: Analytical 37. ANS: D MSC: Analytical 38. ANS: D MSC: Definitional 39. ANS: C MSC: Applicative 40. ANS: C MSC: Interpretive 41. ANS: A MSC: Applicative 42. ANS: A MSC: Applicative 43. ANS: C MSC: Interpretive 1

9 ID: A 44. ANS: C MSC: Definitional 45. ANS: B MSC: Analytical 46. ANS: D MSC: Definitional 47. ANS: B MSC: Interpretive 48. ANS: A MSC: Analytical 49. ANS: A MSC: Definitional 50. ANS: C MSC: Definitional 51. ANS: B MSC: Applicative 52. ANS: B MSC: Analytical 53. ANS: A MSC: Definitional 54. ANS: C MSC: Definitional 55. ANS: D MSC: Applicative 2

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