Econ 202 Final Exam. Douglas, Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam.

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1 , Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Final Exam 1. When the government spends more, the initial effect is that a. aggregate demand shifts right. b. aggregate demand shifts left. c. aggregate supply shifts right. d. aggregate supply shifts left. 2. 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. 3. An increase in the price level makes consumers feel less wealthy. As a result, a. aggregate demand shifts right. b. aggregate demand shifts left. c. there is a movement to right along a fixed aggregate demand curve. d. there is a movement to the left along a fixed aggregate demand curve. 4. In recent years, the Federal Reserve has conducted policy by setting a target for a. bank reserves. b. the monetary growth rate. c. the exchange rate. d. the federal funds rate. 5. Babe Ruth's 1931 salary was $80,000. The price index for 1931 is 15.2 and the price index for 2001 is 177. Ruth's 1931 salary was equivalent to a 2001 salary of about a. $93,000. b. $930,000. c. $1,930,000. d. $9,300, The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold? a. 20 florin b. 40 florin c. 80 florin d. 100 florin 7. If there is crowding out, which of the following might decrease as government expenditures increased? a. the number of immigrants entering the country b. the demand for money c. interest rates d. demand for new machinery and factories 8. Which list contains only actions that decrease the money supply? a. make open market purchases, raise the reserve requirement ratio b. make open market purchases, lower the reserve requirement ratio c. make open market sales, raise the reserve requirement ratio d. make open market sales, lower the reserve requirement ratio 1

2 9. 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. 10. According to classical macroeconomic theory, in the long run a. monetary growth affects both real and nominal variables. b. the only real variable affected by monetary growth is the unemployment rate. c. factors that affect unemployment are influenced by monetary growth. d. monetary growth affects only nominal variables. 11. Which of the following shifts aggregate demand to the right? a. an increase in the price level b. an increase in the money supply c. a decrease in the price level d. a decrease in the money supply 12. The country of Sylvania has a GDP of $1,000, investment of $200, government purchases of $200, and net capital outflow of negative $100. This means that a. consumption equals $700. b. consumption equals $600. c. consumption equals $500. d. saving equals $ Which of the following equations is correct? a. S = I + C b. S = I - NX c. S = I + NCO d. S = NX - NCO. 14. According to the quantity equation, if P = 12, Y = 10, M= 80, then V = a b. 1.5 c. 96. d. None of the above is correct. 15. When the dollar appreciates, U.S. a. exports decrease, while imports increase. b. exports and imports decrease. c. exports and imports increase. d. exports increase, while imports decrease. 16. An economic contraction caused by a shift in aggregate demand causes prices to a. rise in the short run, and rise even more in the long run. b. rise in the short run, and fall back to their original level in the long run. c. fall in the short run, and fall even more in the long run. d. fall in the short run, and rise back to their original level in the long run. 17. The economy might move to a point on the Phillips curve where unemployment is higher if, a. the inflation rate increases. b. the government increases its expenditures. c. the Fed decreases the money supply. d. None of the above are correct. 2

3 18. Trade can make everybody better off because it a. increases cooperation among nations. b. allows people to specialize according to comparative advantage. c. requires some workers in an economy to be retrained. d. reduces competition among domestic companies. 19. The dictator of Turan seizes farms belonging to his political opponents, and gives the farms to his friends, who are not farmers. Turan courts rule that the seizures are illegal, but the dictator ignores them. We would expect that the growth rate in Turan will a. fall temporarily, but will return to where it was when the new owners learn how to farm. b. increase because the amount of human capital in the country will increase as the new owners learn how to farm. c. fall and remain lower for a long time. d. not be affected unless widespread civil disorder or civil war results. 20. The short-run Phillips curve intersects the long-run Phillips curve where a. expected inflation is greater than actual inflation. b. expected inflation equals actual inflation. c. the quantity of goods and services demanded equals the quantity supplied. d. the quantity of labor demanded equals the quantity supplied. 21. Which of the following would definitely NOT shift this week s demand curve for peanut butter? a. a change in income b. a change in the price of peanut butter c. a change in expectations about next week s price of peanut butter d. a change in the price of jelly 22. If the interest rate is currently below the Fed's target, to reach its 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. 23. Suppose there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. As a result, we would expect a. the price level to rise and real GDP to fall. b. the price level to fall and real GDP to rise. c. the price level and real GDP both to stay the same. d. All of the above are possible. 24. If cigarettes and marijuana are substitutes, an increase in the cigarette tax would a. decrease the demand for marijuana. b. increase the demand for marijuana. c. decrease the quantity demanded of marijuana, but not shift its demand curve. d. increase the quantity demanded of marijuana, but not shift its demand curve. 25. An increase in the price level causes the aggregate quantity demanded to decrease because a. wealth rises, interest rates rise, and the dollar appreciates. b. wealth rises, interest rates fall, and the dollar depreciates. c. wealth falls, interest rates rise, and the dollar appreciates. d. wealth falls, interest rates fall, and the dollar depreciates. 26. If a bank uses $100 of reserves to make a new loan, this action by itself initially makes the money supply a. and wealth increase by $100. b. and wealth decrease by $100. c. increase by $100 while wealth does not change. d. decrease by $100 while wealth decreases by $100. 3

4 Figure 3-4: Daily Production Possibilities for Barney and Betty 27. Refer to Figure 3-4. Barney has a comparative advantage in a. both goods and Betty has a comparative advantage in neither good. b. loaves of bread and Betty has a comparative advantage in pies. c. neither good and Betty has a comparative advantage in both goods. d. pies and Betty has a comparative advantage in loaves of bread. 28. Refer to Figure 3-4. The opportunity cost of 1 loaf of bread for Barney is a. 1/4 pie. b. 1/2 pie. c. 1 pie. d. 2 pies. 29. Which of the following is included in M2 but not in M1? a. currency b. demand deposits c. savings deposits d. All of the above are included in both M1 and M2 30. The primary reason that U.S. living standards are higher today than they were a century ago is that a. more productive natural resources have been discovered. b. physical capital per worker has increased. c. technological knowledge has increased. d. human capital has increased. 31. In the United States, a pound of coffee costs about $5. Suppose the exchange rate is about 0.8 euros per dollar and a pound of coffee in Belgium costs about 3 euros. What is the real exchange rate? a. 5/3 lb of Belgian coffee per lb of U.S. coffee b. 4/3 lb of Belgian coffee per lb of U.S. coffee c. 3/4 lb of Belgian coffee per lb of U.S. coffee d. 3/5 lb of Belgian coffee per lb of U.S. coffee 32. Liquidity preference refers directly to Keynes' theory concerning a. the effects of changes in money demand and supply on interest rates. b. the effects of changes in money demand and supply on exchange rates. c. the effects of wealth on expenditures. d. the difference between temporary and permanent changes in income. 4

5 33. Most economists believe that a tradeoff between inflation and unemployment exists a. only in the short run. b. only in the long run. c. in both the short and long run. d. in neither the short nor long run. 34. Jill uses some euros that she already had to purchase a bond issued by a French vineyard. This transaction a. increases U.S. net capital outflow by more than the value of the bond. b. increases U.S. net capital outflow by the value of the bond. c. does not change U.S. net capital outflow. d. decreases U.S. net capital outflow. 35. 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. The equilibrium price would increase, but the amount sold may rise or fall. b. The equilibrium price would decrease, but the but the amount sold may rise or fall. c. Both equilibrium price and equilibrium quantity would increase. d. Equilibrium quantity would increase, but the but the price may rise or fall 36. If a U.S. textbook publishing company sells texts overseas, U.S. net exports a. increase, and U.S. net capital outflow increases. b. increase, and U.S. net capital outflow decreases. c. decrease, and U.S. net capital outflow increases. d. decrease, and U.S. net capital outflow decreases. 37. Today s American currency is a. fiat money with intrinsic value. b. fiat money with no intrinsic value. c. commodity money with intrinsic value. d. commodity money with no intrinsic value. 38. If Y and V are constant, and M doubles, the quantity equation implies that the price level a. more than doubles. b. less than doubles. c. doubles. d. might do any of the above; more information is needed. 39. If the MPC is 0.75 and there is no crowding-out, an initial autonomous increase in NX of $100 billion will eventually shift the AD curve to the right by a. $75 billion. b. $133 billion. c. $400 billion. d. $100 billion. 40. A vertical long-run Phillips curve a. is consistent with the principle of monetary neutrality. b. is inconsistent with real world data. c. implies that the natural rate of unemployment depends on the inflation rate. d. All of the above are correct. 41. An increase in expected inflation shifts a. only the long-run Phillips curve right. b. only the short-run Phillips curve right. c. neither the short-run nor long-run Phillips curve right. d. both the short-run and long-run Phillips curve right. 5

6 42. 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. 43. What part of the Fed meets every six weeks to determine monetary policy? a. the Board of Governors b. the FOMC c. the regional Federal Reserve Bank presidents d. the Central Bank Policy Commission. 44. 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. 45. Which of the following would definitely result in a higher price for chocolate? a. demand increases and supply decreases b. demand and supply both decrease c. demand decreases and supply increases d. demand and supply both increase 46. Which of the following is incorrect concerning the long run? a. Higher money supply growth leads to higher output growth. b. An unemployment rate of zero is unobtainable. c. Per-capita real GDP depends on productivity. d. An increase in the money supply raises the price level. 47. The opportunity cost of holding money a. decreases when the interest rate increases, so people desire to hold more of it. b. decreases when the interest rate increases, so people desire to hold less of it. c. increases when the interest rate increases, so people desire to hold more of it. d. increases when the interest rate increases, so people desire to hold less of it. 6

7 Figure Refer to Figure If the economy is at point b, a policy to restore full employment would be a. an increase in the money supply. b. a decrease in government purchases. c. an increase in taxes. d. All of the above are correct. 49. If the reserve ratio is 10 percent, $1,000 of excess reserves can create up to a. $100 of new money. b. $1,000 of new money. c. $10,000 of new money. d. None of the above are correct. In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes and 2 gallons of gasoline. The prices have been as follows: Table 11-3 Year Apples Bread Robes Gasoline 1999 $1.00 $2.00 $10.00 $ $1.00 $1.50 $9.00 $ $2.00 $2.00 $11.00 $ $3.00 $3.00 $15.00 $ Refer to Table What was the inflation rate, as measured by the CPI, between 2001 and 2002? a. 40% b. 28.6% c. 55% d. 77% 7

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

9 ID: A 44. ANS: C 45. ANS: A 46. ANS: A 47. ANS: D 48. ANS: A 49. ANS: C 50. ANS: A 2

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