Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

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1 Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment is higher. c. right, so that at any inflation rate unemployment is lower. d. left, so that at any inflation rate unemployment is lower. 2. Over time people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, people eat at restaurants more and prepare their own meals at home less. Because of the way we measure GDP, this change will tend to a. make GDP fall over time. b. not make any change in GDP over time. c. make GDP rise over time. d. change GDP, but in an uncertain direction. 3. A decrease in government spending initially and primarily shifts a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. neither aggregate demand nor aggregate supply. 4. According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in a. the price level. b. the interest rate. c. the exchange rate. d. real wealth. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher Refer to Table 3-1. The Rancher has a comparative advantage in a. neither good, and the Farmer has a comparative advantage in both goods. b. both goods, and the Farmer has a comparative advantage in neither good. c. meat, and the Farmer has a comparative advantage in potatoes. d. potatoes, and the Farmer has a comparative advantage in meat. 6. If GDP rises, a. income and production must both rise. b. income and production must both fall. c. income must rise, but production may rise or fall. d. production must rise, but income may rise or fall. 7. The aggregate supply curve is upward sloping (and not vertical) in a. the short and long run. b. neither the short nor long run. c. the long run, but not the short run. d. the short run, but not the long run.

2 8. Which of the following tends to reduce the size of a shift in aggregate demand resulting from a tax change? a. the multiplier effect b. the crowding-out effect c. the accelerator effect d. None of the above is correct. 9. An adverse supply shock will cause the short-run Phillips curve to shift a. right and raise unemployment. b. right and lower unemployment. c. left and raise unemployment. d. left and lower unemployment. 10. An increase in the U.S. interest rate a. induces firms to invest more. b. induces households to increase consumption. c. shifts money demand to the right. d. leads to the appreciation of the U.S. exchange rate. 11. If your salary increased by 6 percent and prices increased by 2 percent, your real wage rose by a. 4 percent. b. 4.8 percent. c. 5.8 percent. d. 8 percent. 12. If demand for hamburger decreases due to mad cow disease, we would expect equilibrium price of hamburger a. to increase and equilibrium quantity to decrease. b. to decrease and equilibrium quantity to increase. c. and equilibrium quantity to both increase. d. and equilibrium quantity to both decrease. 13. Assume that the MPC is Assuming that only the multiplier effect matters, a decrease in government purchases of $10 billion will shift the aggregate demand curve a. left by $13.5 billion. b. left by $40 billion. c. right by $75 billion. d. right by $40 billion. 14. If the multiplier is 5, the MPC is a b c d If the exchange rate changes from 150 yen per dollar to 100 yen per dollar, the dollar has a. appreciated and so buys more Japanese goods. b. appreciated and so buys fewer Japanese goods. c. depreciated and so buys more Japanese goods. d. depreciated and so buys fewer Japanese goods. 16. In computing GDP, investment is spending on a. stocks, bonds, and other financial assets. b. real estate and financial assets. c. new capital equipment, inventories, and structures, including new housing. d. capital equipment, inventories, and structures, excluding household purchases of new housing.

3 17. In the long run, the inflation rate depends primarily on a. the ability of unions to raise wages. b. government spending. c. the money supply growth rate. d. the monopoly power of firms. Figure Refer to Figure If the economy starts at c and the money supply growth rate increases, in the long run the economy a. stays at c. b. moves to b. c. moves to e. d. None of the above is correct. 19. Refer to Figure Curve 1 is the a. long-run aggregate supply curve. b. short-run aggregate supply curve. c. long-run Phillips curve. d. short-run Phillips curve. 20. Refer to Figure If the economy starts at c and the money supply growth rate increases, in the short run the economy a. moves to b. b. moves to d. c. moves to e. d. moves to a. 21. Suppose a stock market boom makes people feel wealthier. The increase in wealth would a. increase consumption, which shifts the aggregate demand curve right. b. increase consumption, which shifts the aggregate demand curve left. c. decrease consumption, which shifts the aggregate demand curve right. d. decrease consumption, which shifts the aggregate demand curve left. 22. When the interest rate decreases, the opportunity cost of holding money a. increases, so the quantity of money demanded increases. b. increases, so the quantity of money demanded decreases. c. decreases, so the quantity of money demanded increases. d. decreases, so the quantity of money demanded decreases.

4 23. During expansions, automatic stabilizers make government expenditures a. and taxes fall. b. and taxes rise. c. rise, and taxes fall. d. fall and taxes rise. 24. If the interest rate is below the Fed's target, the Fed would a. buy bonds to increase the money supply. b. buy bonds to decrease the money supply. c. sell bonds to increase the money supply. d. sell bonds to decrease the money supply. 25. If the economy unexpectedly went from inflation to deflation, a. debtors and creditors would both have reduced real wealth. b. debtors and creditors would both have increased real wealth. c. debtors would gain at the expense of creditors. d. creditors would gain at the expense of debtors. 26. Which of the following would cause stagflation (as in the 1970 s)? a. aggregate demand shifts right b. aggregate demand shifts left c. aggregate supply shifts right d. aggregate supply shifts left 27. The price of a bond should equal the sum of the present values of its future payments. What should be the price of a bond that pays $50 in one year and $1,050 in two years, if the interest rate is 5%? a. $1, b. $1, c. $1, d. $ Which of the following equations will always represent GDP in an open economy? a. S = I - G b. I = Y - C + G c. Y = C + I + G d. Y = C + I + G + NX Table 11-2 year price of pork price of corn 2003 $20 $ $20 $ Refer to Table Suppose that the basket of goods in the CPI consisted of 3 units of pork and 2 units of corn. What is the consumer price index for 2004 if the base year is 2003? a. 100 b. 105 c. 115 d Net capital outflow = net exports implies that a. the supply of dollars equals the demand for dollars in the foreign-currency exchange market. b. national saving equals domestic investment. c. the volume of exports equals the volume of imports. d. All of the above are correct.

5 31. When the Fed buys government bonds, the reserves of the banking system a. increase, so the money supply increases. b. increase, so the money supply decreases. c. decrease, so the money supply increases. d. decrease, so the money supply decreases. 32. In the last few years household savings have declined. This means that a. supply of loanable funds shifted right. b. supply of loanable funds shifted left. c. demand for loanable funds shifted right. d. demand for loanable funds shifted left. 33. A monetary injection by the Fed a. increases interest rates and increases aggregate demand. b. increases interest rates and decreases aggregate demand. c. decreases interest rates and decreases aggregate demand. d. decreases interest rates and increases aggregate demand. Figure Refer to Figure Which of the following would cause the aggregate demand curve to shift from AD 1 to AD 2? a. an increase in government purchases b. a decrease in stock prices c. consumers and firms become more optimistic about the future. d. an increase in the price level 35. Other things being constant, when a business issues more stock, the a. supply of the stock is greater and thus the price will fall. b. supply of the stock is less and thus the price will rise. c. demand for the stock is greater and thus the price will rise. d. demand for the stock is less and thus the price will fall. 36. The effect of an increase in the aggregate price level is represented by a a. shift to the right of the aggregate demand curve. b. shift to the left of the aggregate demand curve. c. movement to the left along a given aggregate demand curve. d. movement to the right along a given aggregate demand curve.

6 37. Which of the following equations is correct? a. S = I + C b. S = I - NX c. S = I + NCO d. S = NX - NCO. 38. If the government raises government expenditures, in the short run, prices a. rise and unemployment falls. b. fall and unemployment rises. c. and unemployment rise. d. and unemployment fall. 39. If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves a. increase by $20 million and the money supply eventually increases by $200 million. b. decrease by $20 million and the money supply eventually increases by $200 million. c. increase by $20 million and the money supply eventually decreases by $200 million. d. decrease by $20 million and the money supply eventually decreases by $200 million. 40. Suppose that the incomes of buyers in a particular market for a normal good decline and there is also a reduction in input prices. What would we expect to occur in this market? a. Equilibrium price would increase, but the impact on quantity would be ambiguous. b. Equilibrium price would decrease, but the impact on quantity would be ambiguous. c. Both equilibrium price and equilibrium quantity would increase. d. Equilibrium quantity would increase, but the impact on price would be ambiguous. 41. Cyclical unemployment is closely associated with a. long-term economic growth. b. short-run ups and downs of the economy. c. fluctuations in the natural rate of unemployment. d. seasonal fluctuations in spending. 42. An increase in the minimum wage would a. increase both the quantity demanded and the quantity supplied of labor. b. decrease both the quantity demanded and the quantity supplied of labor. c. increase the quantity of labor demanded while decreasing the quantity supplied. d. decrease the quantity of labor demanded while increasing the quantity supplied. 43. According to Friedman and Phelps, the unemployment rate is below the natural rate when actual inflation a. is greater than expected inflation. b. is less than expected inflation. c. equals expected inflation. d. is low. 44. When taxes decrease, consumption a. increases, so aggregate demand shifts right. b. increases, so aggregate supply shifts right. c. decreases, so aggregate demand shifts left. d. decreases, so aggregate supply shifts left. 45. The supply of loanable funds slopes a. upward because an increase in the interest rate induces people to save more. b. downward because an increase in the interest rate induces people to save less. c. downward because an increase in the interest rate induces people to invest less. d. upward because an increase in the interest rate induces people to invest more.

7 46. A firm in India sells jackets to a U.S. department store chain. By itself, this sale a. increases U.S. and Indian net exports. b. decreases U.S. and Indian net exports. c. increases U.S. net exports and decreases Indian net exports. d. decreases U.S. net exports and increases Indian net exports. 47. As the reserve ratio increases, the money multiplier a. increases. b. does not change. c. decreases. d. could do any of the above. Figure Refer to Figure When the money supply curve shifts from MS 1 to MS 2, a. the demand for goods and services decreases. b. the economy's ability to produce goods and services increases. c. the equilibrium price level increases. d. the equilibrium value of money increases. 49. According to classical economic theory, changes in the money supply affect a. nominal variables and real variables. b. nominal variables, but not real variables. c. real variables, but not nominal variables. d. neither nominal nor real variables. 50. If purchasing-power parity holds, then the value of the a. real exchange rate is equal to one. b. nominal exchange rate is equal to one. c. real exchange rate is equal to the nominal exchange rate. d. real exchange rate is equal to the difference in inflation rates between the two countries. 51. An increase in the price level induces people to hold a. less money, so they lend less, and the interest rate rises. b. less money, so they lend more, and the interest rate falls. c. more money, so they lend more, and the interest rate falls. d. more money, so they lend less, and the interest rate rises. 52. Which of the following definitions is correct? a. Labor force = number of employed. b. Labor force = population - number of unemployed. c. Unemployment Rate = (number of unemployed [number of employed + number of unemployed]) 100. d. Unemployment Rate = (number of unemployed adult population) 100.

8 53. The misperceptions theory of the short-run aggregate supply curve says that if the price level increases more than people expect, firms believe that the relative price of what they produce has a. decreased, so they increase production. b. decreased, so they decrease production. c. increased, so they increase production. d. increased, so they decrease production. 54. The money supply in Freedonia is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Freedonia? a. Velocity is 2 and the price level is 1. b. Velocity is 4 and the price level is 8. c. Velocity is 8 and the price level is 4. d. There is insufficient information to answer the question. 55. According to the AD/AS model, in the long run an increase in the money supply leads to a. increases in both the price level and real GDP. b. an increase in real GDP but does not change the price level. c. an increase in the price level but does not change real GDP. d. does not change either the price level or real GDP.

9 According to an article in the NY Times yesterday: [Alan ]Greenspan cautioned that the country should not be lulled into a false sense of security about the federal deficit just because at the moment interest rates on long-term Treasury securities remain [fairly constant]. 1) Draw diagrams below showing equilbrium in the markets for Foreign Exchange and Loanable Funds. Be sure to label all axes and curves that you draw, and show the initial equilbrium exchange rate e 0, interest rate r 0, savings LF 0, and dollars exchanged for foreign currency FX 0. 2) If the government increases its deficit, which curve shifts? Which direction? This shift (ceteris paribus) should cause interest rates to (rise or fall), the dollar to appreciate or depreciate), and the trade deficit to (rise or fall) 3) Show the shift on your graphs below. Label the new equilibrium values e 1, r 1, LF 1, and FX 1. 4) In fact, we have not seen the interest rate change mentioned above, which gives rise to the false sense of security that Greenspan mentioned. A (rightward, leftward) shift of the curve would explain the lack of movement in interest rates. On your graphs below, show this shift and label the new equilibrium values e 2, r 2, LF 2, and FX 2. 5) In recent years the Saudis, Chinese, and Indians have purchased increasing amounts of US Treasury bonds and currency. If foreigners decide not to purchase US bonds and dollars anymore, and current US budget deficit trends continue, the macromodels discussed in class would predict that US interest rates will (increase, decrease,?), the dollar will (depreciate, appreciate,?), US net exports will (increase, decrease,?), US Investment will (increase, decrease,?), US long term real growth rates will (increase, decrease,?), and your opportunity to become wealthy will (increase, decrease,?). If you like, you may (optionally) explain your answer below and on the back of the page, to make sure I understand your reasoning.

10 Multiple Choice Answers 1. ANS: A 2. ANS: C 3. ANS: B 4. ANS: B 5. ANS: C 6. ANS: A 7. ANS: D 8. ANS: B 9. ANS: A 10. ANS: D 11. ANS: A 12. ANS: D 13. ANS: B 14. ANS: D 15. ANS: D 16. ANS: C 17. ANS: C 18. ANS: C 19. ANS: C 20. ANS: B 21. ANS: A 22. ANS: C 23. ANS: D 24. ANS: D 25. ANS: D 26. ANS: D 27. ANS: C 28. ANS: D 29. ANS: D 30. ANS: A 31. ANS: A 32. ANS: B 33. ANS: D 34. ANS: B 35. ANS: A 36. ANS: C 37. ANS: C 38. ANS: A 39. ANS: A 40. ANS: B 41. ANS: B 42. ANS: D 43. ANS: A 44. ANS: A 45. ANS: A 46. ANS: D 47. ANS: C 48. ANS: C 49. ANS: B

11 50. ANS: A 51. ANS: D 52. ANS: C 53. ANS: C 54. ANS: C 55. ANS: C

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