ECON FINAL EXAM (50 QUESTIONS) - 91662

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Question 1 Historical evidence for the U.S. economy indicates that Answer recessions have occurred roughly once every six years since the 1960s. the unemployment rate usually decreases during a recession and increases shortly after the recession ends. real GDP usually remains roughly constant during a recession and decreases shortly after the recession ends. changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle. 2 points Question 2 Which of the following is most commonly used to monitor short-run changes in economic activity? Answer the inflation rate real GDP aggregate demand aggregate supply 2 points Question 3 During recessions investment Answer falls by a larger percentage than GDP. falls by about the same percentage as GDP. falls by a smaller percentage than GDP. falls but the percentage change is sometimes much larger and sometimes much smaller. 2 points Question 4 The classical model is appropriate for analysis of the economy in the Answer long run, since evidence indicates that money is not neutral in the long run. long run, since real and nominal variables are essentially determined separately in the long run. short run, provided money is not neutral. short run, provided real and nominal variables are highly intertwined. 2 points Question 5 Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes Answer both the short run and the long run. the short run, but not the long run. the long run, but not the short run. neither the long run nor the short run. 2 points Question 6 Aggregate demand includes Answer the quantity of goods and services both the government and customers abroad want to buy. the quantity of goods and services neither the government nor customers abroad want to buy. the quantity of goods and service the government wants to buy, but not the quantity of goods and services customers abroad want to buy. the quantity of goods and services customers abroad want to buy, but not the quantity of goods and services the government wants to buy. 2 points Question 7 The model of aggregate demand and aggregate supply Answer is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution of resources between markets to explain aggregate relationships. is different from the model of supply and demand for a particular market, in that we have to separate real and nominal variables in the aggregate model. is a straightforward extension of the model of supply and demand for a particular market, in which substitution of resources between markets is highlighted. is a straightforward extension of the model of supply and demand for a particular market, in which the interaction between real and nominal variables is highlighted. 2 points Question 8 When the price level falls the quantity of Answer consumption goods demanded rises, while the quantity of net exports demanded falls. consumption goods demanded and the quantity of net exports demanded both rise. consumption goods demanded and the quantity of net exports demanded both fall. consumption goods demanded falls, while the quantity of net exports demand rises. 2 points Question 9 When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded? Answer the real value of wealth the interest rate the value of currency in the market for foreign exchange All of the above are correct. 2 points Question 10 Other things the same, a decrease in the price level makes the dollars people hold worth Answer more, so they can buy more. more, so they can buy less less, so they can buy more. less, so they can buy less. 2 points Question 11 When the price level falls Answer households want to lend more, so the interest rate rises making the quantity of goods and services demanded rise. households want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise. households want to lend more, so the interest rate rises, making the quantity of goods and services demanded fall. None of the above are correct. 2 points Question 12 Other things the same, if the U.S. price level falls, then Answer the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate rises. the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate falls. the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate rises. the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate falls. 2 points Question 13 As the price level rises, Answer the exchange rate falls, so net exports fall. the exchange rate falls, so net exports rise. the exchange rate rises, so net exports fall. the exchange rate rises, so net exports rise. 2 points Question 14 Other things the same, as the price level rises, the real value of a dollar Answer rises, and interest rates rise. rises, and interest rates fall. falls, and interest rates rise. falls, and interest rates fall. 2 points Question 15 Other things the same, as the price level falls, a country’s exchange rate Answer and interest rates rise. and interest rates fall. falls and interest rates rise. rises and interest rates fall. 2 points Question 16 Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to desire Answer decreased consumption, shown as a movement to the left along a given aggregate-demand curve. increase consumption, shown as a movement to the right along a given aggregate-demand curve. decreased consumption, shifting the aggregate-demand curve to the left. increased consumption, shifting the aggregate-demand curve to the right. 2 points Question 17 Which of the following both shift aggregate demand left? Answer a decrease in taxes and at a given price level consumers feel more wealthy a decrease in taxes and at a given price level consumers feel less wealthy an increase in taxes and at a given price level consumers feel more wealthy an increase in taxes and at a given price level consumers feel less wealthy 2 points Question 18 If speculators bid up the value of the U.S. dollar in the market for foreign exchange, then Answer U.S. goods become more expensive relative to foreign goods so aggregate demand shifts right. U.S. goods become less expensive relative to foreign goods so aggregate demand shifts right. U.S. goods become more expensive relative to foreign goods so aggregate demand shifts left. U.S. goods become less expensive relative to foreign goods so aggregate demand shifts left. 2 points Question 19 The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change Answer in the price level and output. in the price level, but not output. in output, but not the price level. in neither the price level nor output. 2 points Question 20 The long-run aggregate supply curve shifts right if Answer immigration from abroad increases. the capital stock increases. technology advances. All of the above are correct. 2 points Question 21 According to the aggregate demand and aggregate supply model, in the long run an increase in the money supply leads to Answer increases in both the price level and real GDP. an increase in real GDP but does not change the price level. an increase in the price level but does not change real GDP. no change in either the price level or real GDP. 2 points Question 22 In the long run, technological progress Answer and increases in the money supply both make the price level rise. and increases in the money supply both make the price level fall. makes the price level rise, while increases in the money supply make prices fall. makes the price level fall, while increases in the money supply make prices rise. 2 points Question 23 If the price level rises above what was expected and nominal wages are fixed, then Answer production becomes less profitable so firms will hire fewer workers. production becomes less profitable so firms will hire more workers. production becomes more profitable so firms will hire fewer workers. production become more profitable so firms will hire more workers. 2 points Question 24 Other things the same, when the price level rises more than expected, some firms will have Answer higher than desired prices which increases their sales. higher than desired prices which depresses their sales. lower than desired prices which increases their sales. lower than desired prices which depresses their sales. 2 points Question 25 According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what they produce had Answer increased, so they would increase production. increased, so they would decrease production. decreased, so they would increase production. decreased, so they would decrease production. 2 points Question 26 The effects of a higher than expected price level are shown by Answer shifting the short-run aggregate supply curve right. shifting the short-run aggregate supply curve left. moving to the right along a given aggregate supply curve. moving to the left along a given aggregate supply curve. 2 points Question 27 A decrease in the expected price level shifts Answer only the long-run aggregate supply curve right only the short-run aggregate supply curve right. both the short-run and the long-run aggregate supply curve right. Neither the short-run nor the long-run aggregate supply curve right. 2 points Question 28 Which of the following shifts short-run, but not long-run aggregate supply right? Answer a decrease in the actual price level a decrease in the expected price level a decrease in the capital stock an increase in the money supply 2 points Question 29 In 1986, OPEC countries increased their production of oil. This caused Answer the price level to rise. aggregate supply to shift right. unemployment to rise. None of the above is correct. 2 points Question 30 Keynes believed that economies experiencing high unemployment should adopt policies to 2 points reduce the money supply. reduce government expenditures. increase aggregate demand. increase aggregate supply. Question 31 The interest-rate effect Answer depends on the idea that increases in interest rates decrease the quantity of goods and services demanded. depends on the idea that increases in interest rates decrease the quantity of goods and services supplied. is responsible for the downward slope of the money-demand curve. is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. 2 points Question 32 The wealth effect stems from the idea that a higher price level Answer increases the real value of households’ money holdings. decreases the real value of households’ money holdings. increases the real value of the domestic currency in foreign-exchange markets. decreases the real value of the domestic currency in foreign-exchange markets. 2 points Question 33 According to John Maynard Keynes, Answer the demand for money in a country is determined entirely by that nation’s central bank. the supply of money in a country is determined by the overall wealth of the citizens of that country. the interest rate adjusts to balance the supply of, and demand for, money. the interest rate adjusts to balance the supply of, and demand for, goods and services. 2 points Question 34 While a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows: Answer “Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.” “Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent.” 2 points Question 35 People choose to hold a smaller quantity of money if Answer the interest rate rises, which causes the opportunity cost of holding money to rise. the interest rate falls, which causes the opportunity cost of holding money to rise. the interest rate rises, which causes the opportunity cost of holding money to fall. the interest rate falls, which causes the opportunity cost of holding money to fall. 2 points Question 36 If expected inflation is constant, then when the nominal interest rate increases, the real interest rate Answer increases by more than the change in the nominal interest rate. increases by the change in the nominal interest rate. decreases by the change in the nominal interest rate. decreases by more than the change in the nominal interest rate. 2 points Question 37 When the Fed sells government bonds, the reserves of the banking system decrease; increases increase; decreases increase; increases decrease; decreases 2 points Question 38 The opportunity cost of holding money Answer decreases when the interest rate increases, so people desire to hold more of it. decreases when the interest rate increases, so people desire to hold less of it. increases when the interest rate increases, so people desire to hold more of it. increases when the interest rate increases, so people desire to hold less of it. 2 points Question 39 If there is excess money supply, people will Answer deposit more into interest-bearing accounts, and the interest rate will fall. deposit more into interest-bearing accounts, and the interest rate will rise. withdraw money from interest-bearing accounts, and the interest rate will fall. withdraw money from interest-bearing accounts, and the interest rate will rise. 2 points Question 40 According to liquidity preference theory, if the price level increases, then the equilibrium interest rate Answer rises and the aggregate quantity of goods demanded rises. rises and the aggregate quantity of goods demanded falls. falls and the aggregate quantity of goods demanded rises. falls and the aggregate quantity of goods demanded falls. 2 points Question 41 If the MPC = 3/5, then the government purchases multiplier is 5/3 5/2 5 1.5 2 points Question 42 If the multiplier is 5, then the MPC is Answer 0.05. 0.5. 0.6. 0.8. 2 points Question 43 In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is Answer $151.25. $166.75. $170.20. $175.00. 2 points Question 44 If the MPC is 0.80 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by Answer $80 billion. $125 billion. $500 billion. $800 billion. 2 points Question 45 Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand Answer shifts rightward by $62.5 billion. shifts rightward by $50.0 billion. shifts rightward by $32.5 billion. None of the above is correct. 2 points Question 46 The economist A.W. Phillips published a famous article in 1958 in which he showed a negative correlation between the rate of unemployment and the rate of inflation. positive correlation between the rate of unemployment and the rate of inflation. negative correlation between the rate of unemployment and the rate of interest. positive correlation between the rate of unemployment and the rate of interest 2 points Question 47 1. In the short run, policy that changes aggregate demand changes Answer 2 points both unemployment and the price level. neither unemployment nor the price level. only unemployment. only the price level. Question 48 If policymakers decrease aggregate demand, then in the short run the price level Answer falls and unemployment rises. and unemployment fall. and unemployment rise. rises and unemployment falls. 2 points Question 49 If the central bank increases the money supply, then in the short run prices Answer rise and unemployment falls. fall and unemployment rises. and unemployment rise. and unemployment fall. 2 points Question 50 According to the short-run Phillips curve, if the central bank increases the money supply, then Answer inflation and unemployment will both fall. inflation and unemployment will both rise. inflation will fall and unemployment will rise. inflation will rise and unemployment will fall. 2 points
Solution Description

Question 1

Historical evidence for the U.S. economy indicates that

Answer

recessions have occurred roughly once every six years since the 1960s.

the unemployment rate usually decreases during a recession and increases shortly after the recession ends.

real GDP usually remains roughly constant during a recession and decreases shortly after the recession ends.

changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle.

2 points   

Question 2

Which of the following is most commonly used to monitor short-run changes in economic activity?

Answer

the inflation rate

real GDP

aggregate demand

aggregate supply

2 points   

Question 3

During recessions investment

Answer

falls by a larger percentage than GDP.

falls by about the same percentage as GDP.

falls by a smaller percentage than GDP.

falls but the percentage change is sometimes much larger and sometimes much smaller.

2 points   

Question 4

The classical model is appropriate for analysis of the economy in the

Answer

long run, since evidence indicates that money is not neutral in the long run.

long run, since real and nominal variables are essentially determined separately in the long run.

short run, provided money is not neutral.

short run, provided real and nominal variables are highly intertwined.

2 points   

Question 5

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

Answer

both the short run and the long run.

the short run, but not the long run.

the long run, but not the short run.

neither the long run nor the short run.

2 points   

Question 6

Aggregate demand includes

Answer

the quantity of goods and services both the government and customers abroad want to buy.

the quantity of goods and services neither the government nor customers abroad want to buy.

the quantity of goods and service the government wants to buy, but not the quantity of goods and services customers abroad want to buy.

the quantity of goods and services customers abroad want to buy, but not the quantity of goods and services the government wants to buy.

2 points   

Question 7

The model of aggregate demand and aggregate supply

Answer

is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution of resources between markets to explain aggregate relationships.

is different from the model of supply and demand for a particular market, in that we have to separate real and nominal variables in the aggregate model.

is a straightforward extension of the model of supply and demand for a particular market, in which substitution of resources between markets is highlighted.

is a straightforward extension of the model of supply and demand for a particular market, in which the interaction between real and nominal variables is highlighted.

2 points   

Question 8

When the price level falls the quantity of

Answer

consumption goods demanded rises, while the quantity of net exports demanded falls.

consumption goods demanded and the quantity of net exports demanded both rise.

consumption goods demanded and the quantity of net exports demanded both fall.

consumption goods demanded falls, while the quantity of net exports demand rises.

2 points   

Question 9

When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?

Answer

the real value of wealth

the interest rate

the value of currency in the market for foreign exchange

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