ECO 101 Final Exam Study Guide
ECO 101 Final Exam Study Guide
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Final Exam Questions from Previous Versions of Final Examinations 1. The largest component of Aggregate Spending is (a) consumption. (b) wage income. (c) investment. (d) net exports. (e) government transfer payments. 2. Fiscal policies likely to shift the Aggregate Demand curve from AD t0 AD wo1ld include an increase in the: (a) level of government spending on national defense. (b) sale of U.S. Treasury bonds by the Federal Reserve System. (c) marginal tax rates on corporate and personal incomes. (d) reserves that banks are required to hold as percentages of their deposits. 3. Monetary policies likely to shift the Aggregate Demand curve from AD t0 AD wo1ld include an increase in: (a) government spending on schools, roads, and interstate highways. (b) purchases of U.S. Treasury bonds by the Federal Reserve System. (c) marginal tax rates on corporate and personal incomes. (d) reserves that banks are required to hold as percentages of their deposits. 4. Rising per capita income in the United States would probably result in a decrease in: (a) the number of yachts sold. (b) the demand for used tires. (c) the supply of unskilled labor. (d) federal budget surpluses. (e) autonomous net imports. 5. Firms are most likely to adopt an “efficiency wages” policy in attempts to: (a) offset workers’ desires to unionize. (b) increase the losses workers experience if they shirk and lose their jobs. (c) maximize the difference between the value of the marginal product of an individual worker and that worker’s marginal factor cost. (d) augment the human capital their workers possess. 6. If the national government requires banks to keep reserves equal to 20% of deposits, and if the banking system was "fully loaned up" before Kermit deposited $1,000 cash into his checking account, then the excess reserves in Miss Piggy’s Bank would now equal: (a) $1,000. (b) $800. (c) $500. (d) $200. (e) zero. 7. Suppose the government requires banks to keep reserves equal to 20% of deposits and that the banking system was "fully loaned up" before Kermit deposited $1,000 cash into his checking account. Now suppose Miss Piggy’s Bank loans $500 to Oscar in the form of a demand deposit. Oscar then writes a $500 check to a different bank to pay off an earlier loan. After all these transactions have transpired, Miss Piggy’s Bank’s excess reserves will have grown by a net total of: (a) $900. (b) $500. (c) $300. (d) $100. (e) zero. 1 8. Economists increasingly apply the term “churn” to the process in which new technologies and products or freer international trade stimulate rapid increases in real national income, but some entrepreneurs and investors lose their incomes and occasionally, vast fortunes, while some workers lose their jobs. “Churn” is actually a synonym for: (a) dialectical materialism, which led Karl Marx to predict that capitalism would be replaced by socialism. (b) creative destruction, as described by Joseph Schumpeter. (c) animal spirits, which John Maynard Keynes referenced to explain swings in the stock market. (d) the invisible hand described by Adam Smith in his Wealth of Nations. (e) economic democracy, as described by Paul Wolfowitz. 9. If equilibrium moves from point a to point b, the only market in this figure experiencing an increase in quantity supplied is shown in: (a) Panel A. (b) Panel B. (c) Panel C. (d) Panel D. 10. If equilibrium moves from point a to point b, the only market experiencing a decrease in demand is shown in: (a) Panel A. (b) Panel B. (c) Panel C. (d) Panel D. 11. If equilibrium moves from point a to point b, the only market experiencing a decrease in supply is shown in: (a) Panel A. (b) Panel B. (c) Panel C. (d) Panel D. 12. For any given firm to maximize profit in the long run does not necessarily require: (a) production in accord with the law of equal advantage. (b) MPP /w L MPP /r. (K) minimized cost for any given output. (d) P=MR=MC=MSB=MSC. (e) maximized output for any given cost. 13. If this economy is operating on AD 0, then in a figure depicting a Keynesian Aggregate Expenditures curve this economy would also be experiencing: (a) an inflationary gap. (b) classical full employment. (c) a GDP gap and a recessionary gap. (d) severe stagflation. 14. Keynesian theorists and classical macroeconomists would be most likely to agree about how this economy will adjust if: (a) Aggregate Demand declines from AD 1 to AD 0. (b) classical full employment requires output Q 1. (c) the recessionary gap equals the GDP gap. (d) severe stagflation occurs at point a. (e) Aggregate Demand increases from AD to AD . 2 15. Factoid: According to government estimates, the rate of private saving in the United States [a flow variable] has been negative in recent years. Theory: Saving is most reasonably defined as the change in wealth during a period. The truth is that: (a) personal money spent on education is primarily investment in human capital, and is currently misclassified as consumption spending. (b) the net worth of most families has increased in real [inflationadjusted] terms, so the GDP accountants are probably measuring the wrong stuff. (c) Answers (a) and (b) are both correct. 16. Enactment by the US Congress of a significantly higher legal minimum wage would be most likely to benefit almost all: (a) college professors. (b) American highschool dropouts in their teens. (c) relatively unskilled foreign workers whose production is exported to the United States. (d) experienced and highly skilled construction workers. (e) philosophy majors. 17. The public choice theory of regulation is most consistent with behavior in which: (a) bureaucrats impose unnecessarily costly and complex regulations in attempts to increase their power and budgets. (b) the public welfare is maximized when private market forces fail to yield efficiency. (c) the private interests of the industry being regulated are ignored. (d) private firms bid to provide public goods and public services at the lowest possible costs. 18. The availability of imported goods at lower costs than would be incurred domestically is most directly generated by: (a) uniqueness gains from trade. (b) dynamic gains from trade. (c) political spinoff gains from trade. (d) specialization gains from trade. (e) unilateral benefits from trade. 19. A recessionary gap measures the amount by which: (a) Aggregate Supply exceeds Aggregate Demand. (b) excess Aggregate Supply imposes deflationary pressures to reduce the price level. (c) autonomous expenditures are below the level needed for full employment. (d) inventory is unexpectedly being accumulated relative to the potential level of national output. (e) induced spending needs to grow to yield an unemployment rate of zero. 20. This curve depicts the: (a) revenue the poker chip company will receive from hiring various possible quantities of labor. (b) marginal physical product of labor [MPP L] in a market period. (c) short run total physical product of labor [TPP L]. (d) average physical product of labor [APP L] in the long run. 21. This firm’s marginal cost is minimized at a labor input of: (a) La. (b) Lb. (c) Lc. (d) zero. 22. This profitmaximizing poker chip producer would never hire labor beyond the amount of labor in this figure corresponding to point: (a) La. (b) Lb. (c) Lc. (d) Qa. (d) Qb. 23. Dividing the level of national income by the money supply yields the: (a) transactions costs of exchange. (b) price level. (c) income velocity of money. (d) rate of inflationary pressure. 3 24. Technological advances increased agricultural productivity enormously and the relative incomes of farmers declined dramatically between 1800 and today. Hardships endured by American farm families during this period were most directly attributable to: (a) the unionization of migrant agricultural workers. (b) free trade policies that stimulated outsourcing of agricultural work to low wage countries. (c) demands for farm products being relatively price and income inelastic. (d) giant trading firms acquiring significant monopoly power in international agricultural markets. (e) policies that subsidized the exchange rate of the dollar and reduced farm exports. 25. Uncle Sam offers to pay you [or your heirs or assigns] $1000 each year forever starting one year from today if you loan him some money today. The current interest rate on relatively riskfree government bonds is 4%. The maximum amount you would willingly loan Uncle Sam is: (a) $2,500. (b) $4,000. (c) $10,000. (d) $25,000. (e) $40,000. 26. Diseconomies of scale exist when: (a) prices to consumers decrease as more units are sold. (b) output increases when more resources are employed. (c) average costs increase as a firm invests and expands its productive capacity. (d) production imposes external costs on nearby thirdparty consumers and producers. (e) employment and the price level both rise as national output rises. 27. Failures to include estimates of the value of doityourself projects and homemakers’ services in official measures of national income and gross domestic product have almost certainly caused overstatements of official measures of: (a) unemployment rates. (b) average rates of economic growth. (c) aggregate national wealth. (d) realized inflation. (e) relative poverty. 28. Total fixed costs for this profitmaximizing firm equal: (a) 0bcq1. (b) 0adq2. (c) 0Peq2. (d) aPed. (e) Cannot be measured in this figure. 29. Total revenue can be measured as area: (a) 0bcq1. (b) 0adq2. (c) 0Peq2. (d) aPed. (e) None of the above. 30. If this firm is a typical pure competitor in this industry, then the firm is: (a) making normal accounting profit. (b) making zero economic profit. (c) breaking even. (d) in an industry in long run equilibrium. (e) All of the above. 31. In the past century or so, people have most frequently shifted to a barter system and quit using currency as a medium of exchange, unit of account, and store of value, when the economy in which they live has experienced the negative effects of: (a) hyperinflation. (b) tax rates being raised to the right hand side of the Laffer curve. (c) trade wars between nations that adopt protectionist policies. (d) deep and extended recessions or depressions. 32. Price cuts for new cars are likely to cause the demand for used cars to: (a) shift to the right. (b) pivot vertically. (c) become more horizontal. (d) shift to the left. 4 33. The nature and origins of the hardships faced by the families of American workers whose jobs are being “outsourced” to foreign countries where wage rates are significantly lower than in the U.S. is most akin to the hardships faced by American families that: (a) immigrated into the U.S. as political refugees after military coups in their home countries. (b) experienced job losses by family breadwinners during the Great Depression because average monetary wages fell by 25% while output prices fell by onethird. (c) were forced to leave family farms between 1800 and today when technological advances increased agricultural productivity enormously and the relative incomes of farmers declined dramatically. (d) had family breadwinners drafted into the military and paid roughly $20 per month during World War II. (e) had owned huge plantations before the Civil War, and then were dispossessed by greedy Yankee “carpetbaggers.” 34. When a country that previously followed protectionist policies lowers its trade barriers, domestic oligopolies frequently evolve into: (a) pure monopolies. (b) pure competitors. (c) monopolistic competitors. (d) international cartels. 35. Automatic stabilizers are at work when: (a) Congress enacts new antipollution controls. (b) the IRS closes tax loopholes for the wealthy. (c) tax revenue rises as personal income grows. (d) fiscal drag moderates the Laffer curve. 36. The case for a monetary growth rule or a laissez faire approach to macroeconomic policy is significantly weakened by: (a) "sticky" prices and wages. (b) the validity of the equation of exchange. (c) the power of Say’s law. (d) Adam Smith’s concept of “the invisible hand.” (e) the Laffer curve. 37. In Poor Richard’s Almanac, Benjamin Franklin asserted, “Fish and visitors stink in three days,” which is less a comment on how fast food spoils and more an illustration of the: (a) principle of equal marginal utilities per dollar. (b) law of equal marginal advantage. (c) law of diminishing marginal utility. (d) pervasiveness of rational ignorance. 38. The principle of equal marginal utilities per dollar suggests that: (a) added satisfaction from consuming a good eventually declines. (b) every good on which you spend identical amounts is equally useful. (c) $1,000 worth of water and a $1,000 diamond are identically satisfying. (d) the last cent spent on anything yields the same satisfaction as the last cent spent on anything else. (e) All of these. 39. Prohibition Corporation’s popular St. Valentine’s Day software is going into version 6. The first point Prohibition needs to identify in its quest to maximize profit is: (a) point e. (b) point f. (c) point g. (d) point h. (e) point i. 40. At the point where the price elasticity of demand for this software is unitary, the price is roughly: (a) $20, resulting in sales of roughly 16 million copies. (b) $27, resulting in roughly 13 million copies being sold. (c) $32, resulting in roughly 10 million copies being sold. (d) $40, resulting in roughly 6 million copies being sold. (e) $47, resulting in roughly 5 2million copies being sold. 41. Major tools the Federal Reserve System uses to control the money supply and to control broad financial conditions do not include: (a) reserve requirements. (b) excess reserves ratios. (c) open market operations. (d) discounting operations. 42. When a country experiences economic growth because trade allows imports of new technologies, these gains are a form of: (a) specialization gains. (b) political spinoff gains. (c) dynamic gains. (d) uniqueness gains. (e) scale gains. 43. Widespread political opposition to free trade would be likely to almost completely evaporate if: (a) violent antiglobalist demonstrators were subjected to harsh prison terms. (b) twice as many people became educated about the specialization gains from trade. (c) politicians did not pander to people’s chauvinistic impulses. (d) trade adjustment assistance programs paid for by gainers from freer trade fully compensate any people who lose when trade barriers are lowered. 44. If no externalities exist in production and if all markets in a nation are initially in purely competitive long run equilibria, pretrade relative prices and the opportunity costs of production are given by the absolute value of the slope at various points along the: (a) production possibilities frontier. (b) production function. (c) community indifference curve. (d) total product curve. (e) demand curve for exports. 45. In the past fifteen years or so, macroeconomic policy makers in the United States have tended to rely relatively most on: (a) a monetary growth rule to keep the price level stable. (b) relatively passive fiscal policy, and relatively active open market operations to accomplish shortrun stabilization. (c) balancing the federal budget to minimize the crowdingout problem. (d) activist fiscal policies to ensure that the economy stabilizes in the righthand portion of the Laffer curve. 46. Immigration “reforms” that forced illegal aliens from Mexico to leave the United States would be most likely to: (a) increase Aggregate Demand in the United States. (b) cause the US price level to fall. (c) improve the terms of trade between the United States and Mexico. (d) reduce Aggregate Supply in the United States. (e) increase the real incomes of average American citizens. 47. The Aggregate Supply curve in the figure below most consistent with classical theory goes through: (a) points a, c, and b. (b) points b, c, and d. (c) points c, a, and d. (d) points d, c, and a. 48. If this economy starts at point c and then Aggregate Demand shifts to AD , a2cording to: (a) Keynesian theory, the economy will quickly move to point a. (b) classical theory, the economy will rapidly adjust to point b. (c) Keynesian theory, the economy will immediately move to point d. (d) classical theory, the economy will instantly shift to point a. 49. If this economy starts at point c and then Aggregate Demand shifts to AD , according to: (a) both classical 1 and Keynesian theory, the economy will experience inflation. (b) classical theory, real economic growth will accelerate. (c) classical theory, excessive unemployment 6 will be reduced. (d) Keynesian theory, the unemployment rate will increase. 50. Items that might reasonably serve as stores of value do not include: (a) stocks. (b) cash. (c) Treasury bonds. (d) newlyissued credit cards. (e) antique Barbie dolls. 51. The Black Plague that killed millions of medieval Europeans probably most directly and immediately resulted in: (a) greater reliance on mercantilist economic theory. (b) higher standards of living for the survivors. (c) more favorable attitudes of early Christian theologians toward capitalism. (d) faster rates of technological advance. (e) the emergence of the enclosure movement and the industrial revolution. 52. With a constant price level, Aggregate Demand is positively related to the: (a) purchases of government bonds by the Federal Reserve System. (b) federal government's structural budget deficit. (c) reserve requirements ratio. (d) Federal Reserve System's discount rate. (e) unemployment rate. 53. According to classical economic theory, if everyone attempts to save more, falling: (a) interest rates will stimulate investment and economic growth. (b) sales revenue will cause unemployment to rise and output to fall. (c) tax collections will increase federal budget surpluses. (d) military spending will stimulate aggression by foreign enemies. 54. Completing your degree is most likely to be an important signal that will help you secure a well paid job with a bright future if potential employers: (a) want to ensure that job applicants have already acquired significant amounts of specific human capital. (b) use attainment of a degree as an important screening device. (c) intend to invest heavily in general human capital through on thejob training (d) expect to reduce labor costs through aggressive policies of automation. (e) are under court orders to hire employees without regard to race, creed, religion, ethnicity, sex, or professional qualifications. 55. This figure depicts an economic model known as a: (a) market model. (b) model of demand and supply. (c) roundabout model. (d) circular flow model. (e) rollover model. 56. The exterior flows in this highly simplified model of a market economy are monetary. In the broadest terms, the flow identified as a is: (a) entrepreneurial profit. (b) wages and salaries. (c) rent and interest. (d) national income. (e) consumption. 57. A programmer who plays computer games all day instead of working is guilty of: (a) managerial slack. (b) inefficiency wages. (c) shirking. (d) economic sloth. (e) duplicity costs to the employer. 7 58. The Phillips curve hypothesis posits a tradeoff between: (a) economic stability and growth. (b) consumption today vs. consumption tomorrow. (c) unemployment and inflation. (d) low interest rates and low taxes. (e) interest rates and the money supply. 59. If Aggregate Supply is perfectly flat, changes in Aggregate Demand will change: (a) aggregate output, but the price level will not change. (b) the price level, but aggregate output will not change. (c) both aggregate output and the price level. (d) neither aggregate output nor the price level. 60. A formula for new autonomous spending (∆A) that would exactly eliminate an existing GDP gap would be: (a) ∆A = (recessionary gap)/(deflation rate). (b) GDP gap = ∆A / recessionary gap. (c) ∆A = (GDP gap) x (autonomous spending multiplier). (d) GDP gap = ∆A / (autonomous spending multiplier). (e) ∆A = (GDP gap) / (autonomous spending multiplier). 61. Even if your real income were held constant by adjusting for price changes, your spending pattern would respond to changes in relative prices because of the: (a) substitution effect. (b) marginal utility equality effect. (c) income effect. (d) utilitymaximizing effect. (e) wealth effect. 62. The events of September 11, 2001, caused the Federal Reserve System to almost immediately: (a) raise margin requirements to squelch excessive stock market speculation. (b) expand discount lending and aggressively purchase U.S. Treasury bonds through open market operations. (c) put caps on transfers of funds across international borders to reduce money laundering by suspected terrorist groups. (d) seek loans from foreign central banks to stabilize the exchange rate of the dollar. (e) facilitate funding of the federal budget deficit by selling newlyissued U.S. Treasury bonds. 63. The long run for production theory is a time period across which: (a) all production takes place. (b) firms can adjust all their resources and costs. (c) larger firms absorb smaller firms. (d) marginal costs become decreasingly important. (e) implicit costs become explicit costs. 64. According to natural rate theory, overly expansionary monetary and fiscal policies: (a) may reduce unemployment temporarily. (b) eventually generate inflationary expectations. (c) cause nominal interest rates to rise in the long run. (d) lack longterm effects on unemployment. (e) All of the above. 65. If the tax structure is 0 and potential GDP = $14 trillion but current GDP = $8 trillion, then the current budget: (a) and the cyclical and structural budgets are all running deficits. (b) balances, with the structural budget showing a surplus while the cyclical budget is in deficit. (c) is in surplus and the structural and cyclical budgets are both in deficit. (d) and cyclical budget are in deficit, but the structural budget is in surplus. (e) and cyclical and structural budgets all balance. 66. When full employment GDP is $12 trillion and current GDP is $8 trillion, if the tax structure is T1, there would be a cyclical budget: (a) surplus and a structural budget deficit. (b) deficit and a balanced 8 structural budget. (c) deficit and a structural budget deficit. (d) surplus and a structural budget surplus. 67. Suppose El Salvador produces coffee at lower opportunity costs than Spain, while Spain can produce olive oil at lower opportunity costs than El Salvador. Citizens of both countries can definitely gain from international trade because of the efficiencies associated with: (a) the international circular flow model. (b) comparative advantage. (c) positive externalities. (d) economies of scale. 68. The negative slope of the Aggregate Demand curve is not in part a consequence of the: (a) foreignsector substitution effect. (b) wealth effect. (c) interest rate effect. (d) liquidity effect. 69. The menu costs of inflation include the: (a) political disruption and social unrest. (b) purely nominal costs of inflation. (c) resources absorbed to reset rate and price schedules. (d) social costs, but not the real costs, of inflation. (e) transaction costs associated with looking for new jobs after layoffs. 70. A purely competitive firm faces a demand curve that is: (a) perfectly inelastic. (b) upward sloping. (c) perfectly elastic. (d) a vertical line. (e) downward sloping. 71. If the expected rate of return you calculate on an asset exceeds the interest rate: (a) its present value exceeds its price. (b) the market is in long term equilibrium. (c) you should avoid buying the asset. (d) the price should fall quickly. 72. The KMart Corporation operates Kmart and Sears retail stores, provides financial services such as insurance and the Discover card, and has a real estate division. These characteristics identify KMart as a: (a) vertically integrated firm. (b) conglomerate firm. (c) monopoly. (d) multinational firm. 73. Jamie refused a minimumwage job offer. The greater likelihood of finding a better job by remaining unemployed is an example of: (a) allocative benefits from frictional unemployment. (b) unemployment induced by structural misfit. (c) laziness caused by poor parental guidance. (d) unrealistic expectations. 74. If the import car market was in equilibrium before the US government limited car imports to Q , the 1rice that American buyers will pay for an import: (a) falls from P 0 to P 1 (b) is stable, but dealer profits fall by Q 0 Q . 1c) rises from P 0o P .2(d) shows a subsidy wedge of P P . 2 1 75. If the import market in the United States was in equilibrium before the Japanese government began subsidizing each auto exported by the amount dg, then U.S. car buyers would: (a) pay P for 2 car previously priced at P .0(b) suffer Q 0Q u1employment, and they will buy fewer imports. (c) gain profit equal to the irregular area bcdge. (d) wind up paying P each 1or Q 2 imported cars. 9 76. Starting from a free trade equilibrium, if our government now tried to boost U.S.made auto sales by imposing a price ceiling of P 1n imported cars: (a) the quantity of cars imported will fall from Q 0o Q .1(b) American car prices would settle at P . (2) foreign car exporters would ship more luxury cars to the United States. (d) Americanmade car sales would rise by Q Q . 2 0 77. The potential money multiplier is to the reserve requirement ratio as the Keynesian “full strength” spending multiplier is to the: (a) rate of return on investment. (b) marginal propensity to save. (c) natural rate of interest. (d) recessionary gap. (e) structural budget deficit. 78. Lynde signed up for a monster overload of 21 hours this semester. The table below reflects how daily hours of study affect Lynde’s GPA. The marginal product (improvement in GPA) from an extra hour of study per day is: (a) highest during the fifth hour Lynde studies. (b) minimized at 10 hours of study daily. (c) consistently diminishing. (d) increasing steadily as Lynde boosts study from six to ten hours. (e) subject to the law of diminishing marginal utility immediately after two hours of study. 79. Suppose Lynde’s daily “utils” from studying are quantifiable as precisely equal to 10 × GPA. Lynde’s combinations for total utils (jollies) generated by studying and hours of leisure (L = no studying = sleeping) fit the formula U = 50 + 3.1L +10GPA. Combined utility from studying and leisure is maximized when Lynde studies roughly: (a) 3 hours per day. (b) 4 hours per day. (c) 5 hours per day. (d) 6 hours per day. (e) 7 hours per day. 80. When calculating Gross Domestic Product by summing all forms of expenditures, government outlays (checks written by the government) that are excluded include: (a) Social Security benefit checks. (b) funding for the President, the Cabinet, and members of Congress and the Supreme Court. (c) research funding to universities. (d) spending on such economic capital as roads or schools that can be used for decades. (e) any payments by state or local government agencies but not federal agencies. 81. Allowing the US President to exercise a “line item veto” that would eliminate certain budgetary outlays passed by Congress is widely supported as a method that may help prevent inefficiencies associated with: (a) bureaucracy. (b) pork barrel legislation. (c) point voting. (d) democracy. (e) plurality. 82. In a production possibility frontier model, a society that currently chooses higher levels of consumer goods and fewer capital goods experiences: (a) more future economic goods. (b) improved economic efficiency. (c) slower rates of economic growth. (d) higher rates of unemployment in the future. 83. The Gross Domestic Product of the United States would not be increased as a consequence of: (a) a professor from Moscow teaching at Harvard and sending her pay to her family in Russia. (b) Thailand exporting more and more Nike running shoes to Florida. (c) Toyota building a new Camry assembly plant in California. (d) increased imports by Sweden of corn grown in South Dakota. 10 84. One form of the social costs of unemployment during a recession is illustrated when: (a) Joe, a 62year old machinist, is laidoff and produces nothing while looking for another job. (b) Amy, Joe’s wife, no longer has a job because she has been replaced by automated robots. (c) Amy files for a divorce because Joe is so discouraged he no longer even applies for jobs. (d) Unemployed workers compete to fill the limited job openings in their community. (e) Joe files for early retirement Social Security even though he planned to work until age 65. 85. Sticky wages and prices are least consistent with: (a) markets characterized by kinked demand curves. (b) efficiency wages. (c) wage and price floors and ceilings. (d) classical macroeconomic theory. (e) Keynesian theory. 86. Buying low in one market and simultaneously selling high in another market is called: (a) speculation. (b) gambling. (c) arbitrage. (d) hedging. (e) optioning. 87. The budget equation for the federal government can be summarized as [a] abilitytopay taxes + benefit taxes = total tax revenue. [b] government purchases = government outlays + transfer payments. [c] G = T + change in national debt + change in monetary base. [d] GT = [SI] + [M X]. [e] C + I + G + [XM] = GDP. 88. Major problems associated with massive and rising federal budget deficits potentially include: (a) more rapid inflation and slower economic growth. (b) lower rates of private investment. (c) higher rates of money growth. (d) higher interest rates. (e) All of the above. 89. If Dana’s income were zero, her spending of $400 each month would be completely devoted to rent, hot dogs, foreign films, and yoga classes. Fortunately, her disposable income is $2000 per month, and she currently spends a total of $1800 each month. Dana’s: (a) marginal propensity to consume is 0.90. (b) autonomous consumption is $1400 per month. (c) marginal propensity to save is 0.2. (d) induced consumption is $1400 per month. 90. Broad categories of inflation do not include: (a) sneaking inflation. (b) hyperinflation. (c) creeping inflation. (d) expectational inflation (e) galloping inflation. 91. A shift of Aggregate Demand from AD to AD would be 0 1 most likely to follow increases in: (a) pessimism on the parts of American consumers and investors. (b) government spending or welfare payments. (c) net exports and visits to America by foreign tourists. (d) investments in the United States by foreign corporations. 92. The period in American history most accurately characterized by the shift in this figure was the: (a) American Civil War . (b) Great Depression during 19291933. (c) dotcom tech boom of 19931999. (d) administration of President Ronal Reagan from 1981 1989. (e) prosperity experienced from September 11, 2001 to the present. 93. In a simple linear Keynesiancross model, if the mpc = 3/5, closing a $60 billion GDP gap could be accomplished through new government spending of: (a) $15 billion. (b) $24 billion. (c) $36 billion. (d) $40 billion. (e) $60 billion. 11 94. During a recession or depression, demand creates its own supply according to: (a) Say’s law. (b) Keynesian theory. (c) supplyside economics. (d) the invisible hand. (e) classical macroeconomic theory. 95. The federal budget deficit or surplus: (a) is unaffected by national income. (b) depends only on discretionary fiscal policy. (c) is as often a symptom as it is a cause of the state of the economy. (d) must balance at all times to prevent business cycles. 96. Reasonably consistent increases in standards of living for most Americans across the past two centuries are probably least attributable to: (a) population growth. (b) technological advances. (c) declines in transaction costs as systems of communication and transportation networks have improved. (d) relatively free international trade in accord with comparative advantage. (e) specialization and the division of labor. 97. The statement that, “in the long run, we are all dead,” is central to: (a) John Maynard Keynes’s critique of classical macroeconomic theory. (b) Thomas Robert Malthus’ theory of the long run states of human populations. (c) Karl Marx’s perception that “capitalism will be swept into the dustbin of history. (d) St. Thomas Aquinas’s view that charging interest for loans is contrary to the will of God. (e) Joseph Schumpeter’s characterization that the dynamics of capitalism is a process of creative destruction. 98. Which of the following would expand Aggregate Demand according to Keynesians, while stimulating Aggregate Supply according to supplysiders? (a) Increasing government purchases of goods and resources. (b) Increasing transfer payments. (c) Open market purchases of Treasury bonds by the FED. (d) Cutting personal and corporate marginal income tax rates. (e) Licensing oil companies to drill in national forests. 99. Demandpull inflation is caused by: (a) human wants exceeding available economic resources. (b) wage increases exceeding increases in productivity. (c) Aggregate Demand exceeding Aggregate Supply at full employment. (d) greedy unions and profiteers. (e) an increase in the discount rate. 100. Cyclical unemployment in this figure would be most severe at the time corresponding to: (a) point a. (b) point b. (c) point c. (d) point d. (e) point e. 101. Official measures of the business cycle would identify a complete business cycle as occurring between point: (a) a and point e. (b) b and point f. (c) c and point g. (d) d and point f. 12 102. Airlines that overbooked their flights used to “bump” the ticketed passengers who checked in latest. The Federal Aviation Administration now requires compensation of volunteers willing to wait for a later flight. This “payment” system is more efficient than “bumping” to determine who loses a seat because now: (a) the airline’s profits are maximized. (b) everyone has an equal chance to get money they had not counted on. (c) passengers who value the timely flight least are the ones who miss the flight. (d) the flight is far more likely to remain on schedule. (e) the distribution of seats is fairer than it would be under random selection. 103. At an interest rate of 5% per year the present value of a bond paying $100 per year forever is: (a) infinite. (b) $500. (c) $909.10. (d) $2000. 104. International trade tends to be MOST important to: (a) small specialized countries. (b) large diversified countries. (c) primitive economies. (d) industrialized countries. (e) socialist countries. 105. When 200,000 gallons of water are applied per acre, 4 tons are harvested from each acre of linguini trees annually, but cutting back to 160,000 gallons causes the crop per acre to fall to 2 tons annually. The water elasticity of linguini production is: (a) 3.0. (b) 1.5. (c) 1.5. (d) 3.0. 106. The value of the marginal product of a variable resource is its marginal product multiplied by: (a) the marginal revenue from the sale of its addition to output. (b) its cost. (c) the price of the product. (d) one. (e) the marginal factor cost of the resource. 107. Market failures seldom arise when: (a) noncompetitive industries dominate economic activity. (b) external production economies are common. (c) external production diseconomies are ignored by decision makers. (d) all prices are flexible, resources are equitably distributed, externalities are absent, information is symmetric, and markets are both vigorously competitive and relatively stable. (e) decreasing production costs characterize most industries. 108. Macroeconomic problems are clearly identified only after: (a) a deliberation lag. (b) an administrative lag. (c) an impact lag. (d) an inefficiency lag. (e) a recognition lag. 109. FED purchases of government securities on the open market most directly and immediately increase the: (a) discount rate. (b) monetary base. (c) demand for money. (d) market interest rate. (e) unemployment rate. 110. D 0 and S are the initial demand and supply for labor. Classical theory suggests that employers cannot exploit workers by paying wage W because: (a) workers would join a union, and this would drive wages up to W 2. (b) any wage less than W 1 creates shortages of workers, forcing employers to compete by bidding up the wage rate until it rises to W 1. (c) only L2 unskilled workers are available at wage W 0. (d) surplus workers between L 3 and L 1 will be competing for these jobs. 13 111. Suppose a prosperous period yielded equilibrium at point e before a recession reduced demand for labor to D 0. Classical theory would conclude that: (a) roughly L workers will be involuntarily unemployed during the recession. (b) L 3 L1 workers will remain unemployed for a significant period only if the wage rate is rigid at W1 because of minimum wage laws, union contracts, or other frictions that hinder wage flexibility. (c) 2 workers will soon be fully employed at a wage rate of W 2. (d) equilibrium moves from point e to point b. 112. According to the natural real rate of interest hypothesis: (a) contractionary monetary policies permanently reduce real interest rates. (b) the real rate of interest is the percentage of purchasing power paid by a borrower to a lender. (c) monetary growth lowers nominal interest rates in the long run. (d) the natural unemployment rate equals the nominal interest rate. 113. When Federal Reserve District Banks lower the discount rate, it is untrue that: (a) member banks borrow more from the Fed. (b) the monetary base grows. (c) the actual money multiplier grows. (d) banks reduce their holdings of excess reserves. (e) the potential money multiplier increases. 114. Keynesian Aggregate Expenditures are the sum of: (a) Aggregate Demand + Aggregate Supply. (b) income + borrowing. (c) C + S + T and depend primarily on expectations. (d) C + I + G + (XM) as these planned spendings relate to income. (e) consumer purchases + household saving + imports. 115. Monetary policy tools do NOT include changes in the: (a) discount rate. (b) reserve requirements ratio. (c) marginal income tax rate. (d) total value of bonds the Federal Reserve System buys or sells. (e) open market operations. 116. A foundation for both President Reagan’s and President Bush’s tax cuts is the notion that excessively high tax rates reduce taxed behavior (via, e.g., tax evasion and avoidance, and less investment and production) so much that tax revenue may fall. This idea is expressed as the: (a) Phillips curve. (b) Laffer curve. (c) efficient markets theory. (d) liquidity preference theorem. (e) Fisher effect. 117. If passed in an election, these ballot proposals will be funded by extra property taxes. Under majority rule voting: (a) excessively costly bike paths are built, but costefficient flood control is defeated. (b) costefficient bike paths are defeated, but the inefficient flood control program passes. (c) excessively costly bike paths and inefficient flood control program both pass. (d) costefficient bike paths and the inefficient flood control program both pass. 14 (e) excessively costly bike paths and cost efficient flood control program are both defeated. 118. The normative macroeconomic goals of: (1) stabilizing the price level by limiting the growth of Aggregate Demand, and (2) maximizing productive capacity and Aggregate Supply through laissez faire policies, are most consistent with: (a) Federal Reserve System policies. (b) Keynesian theory. (c) Internal Revenue Service regulations. (d) classical macroeconomic theory. (e) central planning in a socialist economy. 119. Classical macroeconomics predicts a long run Aggregate Supply curve, with aggregate Q and P on the axes, that is: (a) upward sloping from left to right. (b) vertical at fullemployment. (c) actually a production possibilities curve. (d) horizontal at the current price level. 120. The volatility across time of commodity prices and asset prices tends to be dampened by the actions of successful: (a) labor union arbitrageurs. (b) corporate CEOs who exploit the opportunities embedded in asymmetric information. (c) speculators. (d) monopolistic competitors. 121. A list of oligopolies that comprised firms with significant market power in the United States half a century ago, but which can now more reasonably be categorized as monopolistically competitive because of intense competition from foreign firms would not include the: (a) breakfast cereals industry. (b) automobile industry. (c) consumer electronics industry [e.g., stereos, TVs, and small appliances]. (d) steel industry. 122. The process of transforming predictable income streams into wealth is known as: (a) asset conversion. (b) monopolization. (c) financial optimization. (d) capitalization. (e) financial alchemy. 123. The added cost from producing an extra unit of output is: (a) average variable cost. (b) average fixed cost. (c) shortrun average cost. (d) marginal cost. 124. A bank robber who gets away with a lot of cash has most immediately and directly increased the: (a) riskiness of financial investments. (b) expectations of inflation. (c) money supply. (d) liquidity effect. (e) monetary base. 125. In the extreme Keynesian case of depression, the Aggregate Supply curve is: (a) horizontal until fullemployment output is reached. (b) vertical at the current levels of prices and output. (c) a Bellshaped curve. (d) negatively sloped. 126. Early classical economists such as Adam Smith and Thomas Robert Malthus theorized that business cycles are primarily caused by changes in: (a) population in response to resource availability. (b) capitalists' ability to exploit labor. (c) sociopsychological mass movements. (d) unexpected business inventories. (e) public confidence or pessimism. 127. The processes by which individuals attempt to ascertain what other people are likely to do in a specific situation in order to maximize their personal gains, or to minimize harm, are called: (a) rational decision making. (b) profit maximization. (c) collusion. (d) strategic behavior. (e) limit pricing. 15 128. If this DVD firm's fixed resources had cost more than we used to calculate these curves, there would be an upward shift in curve(s): (a) x. (b) B. (c) C. (d) A and C. (e) A, B, and C. 129. Curve B in this figure illustrates this DVD maker’s: (a) average variable costs. (b) average total costs. (c) marginal costs. (d) average fixed costs. (e) total sunk costs. 130. If labor is the only variable input for this DVD player producer, at point x in this figure this firm would minimize its: (a) average variable costs and operate most efficiently. (b) marginal costs and maximize its workers’ marginal productivity. (c) average fixed costs. (d) total cost and maximize its profits. 131. Curve D depicts this DVD firm’s: (a) average variable costs. (b) average total costs. (c) marginal costs. (d) average fixed costs. (e) average implicit costs. 132. Supply shocks that cause rightward shifts of shortrun Phillips curves: (a) cause longterm deflationary growth. (b) worsen the shortrun tradeoff between unemployment and inflation. (c) cause shortrun leftward shifts in Aggregate Demand. (d) do not change policymakers' options. 133. Changes in Aggregate Demand are most easily traced to changes in: (a) the labor market. (b) monetary or fiscal policies. (c) raw materials costs. (d) Aggregate Supply. (e) the work ethic of young Americans. 134. The traditional Keynesian remedies for a recession or depression are: (a) laissez faire government policies. (b) increases in government spending or reductions in tax rates. (c) balancing the federal budget and paying off the national debt. (d) higher tariffs on imports or reduced import quotas to slow the outsourcing of domestic jobs. (e) aggressive foreign policies that will ensure jobs in the military for many young people. 135. According to classical macroeconomic theory, full employment is ensured in the long run because: (a) planned investment depends on volatile saving. (b) demand creates its own supply. (c) prices, wages, and interest rates are flexible, and Say’s law ensures that supply creates its own demand. (d) rich capitalists will consume conspicuously. (e) aggregate output adjusts to shifts in Aggregate Demand. 136. The financial investment with the lowest expected rate of return for an investor would be: (a) municipal bonds. (b) US Treasury bonds. (c) lottery tickets. (d) “blue chip” stocks. (e) mutual funds. 137. A member of a cartel would be most likely to increase its profits by: (a) undercutting the prices of other cartel members if it did not get caught. (b) setting its price above that of other cartel members. (c) aggressive nonprice marketing promotions. (d) producing less than the cartel set production quotas to drive the price up. (e) pressuring the cartel to raise its price if demand is price elastic. 16 138. Production entails using knowledge or technology to apply energy to increase the: (a) the amounts of resources available. (b) income generated for corporations. (c) production possibilities frontier. (d) value of materials to consumers in form, place, possession, or the time they will be used. (e) physical quantities of goods and services available. 139. If the tax structure is T0 and potential GDP = $10 trillion but current GDP = $6 trillion, the current budget: (a) and the cyclical and structural budgets are all running deficits. (b) balances, with the structural budget showing a surplus. (c) is in surplus and the structural and cyclical budgets are both in deficit. (d) and cyclical budgets are in deficit, but the structural budget is in surplus. (e) and cyclical and structural budgets all balance. 140. In the short run, the labor supply in an economy depends least on: (a) population size and labor force participation rate. (b) individuals’ preferences between leisure and income from work. (c) the demand for labor. (d) rates and structures of wages. (e) human capital. 141. The kinked demand curve model of oligopoly predicts that rival firms will: (a) produce less than if they were monopolies, but more than if they were in pure competition. (b) try to outmaneuver each other through unpredictable strategies. (c) compete primarily by adopting increasingly efficient technology. (d) invariably follow titfortat pricing strategies. (e) keep outputs and prices reasonably constant even if marginal costs fluctuate slightly. 142. If a deep recession occurs when there is a huge surplus in the structural budget [also known as the fullemployment budget], this may indicate that: (a) fiscal drag is a problem. (b) tax rates are too low. (c) G exceeds T at full employment. (d) inflation has been cured by the invisible hand. (e) the Laffer curve hypothesis is totally invalid. 143. Advocates of setting monetary policy so that the money supply would grow at a low fixed percentage rate forever believe that such a policy would prevent the economy from experiencing: (a) cyclical unemployment. (b) demandpull inflation. (c) recessions or stagnant growth. (d) high unemployment or inflation caused by erratic macroeconomic policies. (e) Aggregate Supply shocks. 144. The “simple” version of the Equation of Exchange: (a) relates increases in the money supply to decreases in velocity. (b) equals Y = C + I + G. (c) was first formulated by Milton Friedman. (d) contradicts Keynesian monetary theory. (e) is MV = PQ. 145. To start up her Dehydrated Water business, Lynn invested $10,000 from her savings account, which was earning $1,000 per year in interest and quit her salaried job as a financial consultant. She also uses an apartment she owns as her office, which she previously had rented out for $6,500 per year. Which of the following is NOT an implicit cost of Lynn's new business? (a) The $6,500 in rent. (b) The full $10,000 in savings she invested. (c) The $1,000 in interest. (d) Her previous salary. (e) All of the above are implicit costs. 17 146. Gross private domestic investment in the GDP accounts would NOT include: (a) growth of manufacturers' inventories. (b) purchases of new shares of Google stock. (c) new machinery bought by firms. (d) new residential housing and production facilities. (e) a new Toyota factory built in Georgia. 147. These Aggregate Supply and Demand curves reflect an economy in which the: (a) full employment output is Q0. (b) movement from point b to point c entails pure price inflation. (c) vertical distance bc is the inflationary recessionary gap. (d) horizontal distance ab is the recessionary gap. 148. In the depression range of this Keynesian model, the Aggregate Supply curve is: (a) horizontal. (b) vertical. (c) sloped upward to the right. (d) negatively related to unemployment and inflation. 149. New forms of credit that made it easier to buy things without paying for them immediately with currency or a check would increase the: (a) efficiency of money as a medium of exchange. (b) return on money as a financial asset. (c) rates of deflation and unemployment. (d) tendency towards secular stagnation. 150. George Stigler was the first major modern economist to: (a) support the theories of John Maynard Keynes. (b) argue persuasively that regulation is often instigated by the regulated. (c) perceive that businesses spend millions of dollars a year lobbying against regulation. (d) recommend block pricing for natural monopolists. (e) serve as Vice President of the United States. 151. Adverse selection and moral hazard tend to be most significant in markets that: (a) are oligopolistic. (b) are dominated by onetime transactions. (c) deal in homogeneous goods. (d) deal with consumer goods instead of resources. (e) are purely competitive. 152. If variable cost is exactly proportional to output, the: (a) total fixed cost curve is a rectangular hyperbola. (b) firm's profits are proportional to its sales. (c) marginal cost curve rises as output grows. (d) total cost curve is a straight line. 153. A purely competitive industry's demand for labor is: (a) less elastic than the horizontal summation of the individual firms’ demands. (b) perfectly elastic. (c) upward sloping because of diminishing marginal returns to labor. (d) equal to the horizontal summation of the demand curves of the individual firms. (e) not affected by changes in demand for the product of the industry. 154. A vertical short run Aggregate Supply curve (a) is central to Keynesian theory. (b) translates changes in Aggregate Demand into growth of GDP. (c) conforms to Marxist macroeconomic assumptions. (d) quickly converts changes in Aggregate Demand into changes in the price level. 18 155. If transaction costs exist, then taxes on what appear to be pure economic rents: (a) pose especially severe problems for economic efficiency. (b) reduce incentives to put resources to their best uses. (c) could easily be used as a "single tax" to replace all current taxes. (d) are rapidly forward shifted to final users of products. (e) are justified on the grounds of equity. 156. All of the following may cause labor markets to be less than purely competitive EXCEPT: (a) unions and employer trade associations. (b) backwardbending labor supply curves. (c) monopolistic power exercised by a firm. (d) monopsonistic power exercised by a firm. 157. Josh will spend $24 of his weekly food budget on tuna fish milk shakes and chorizo tac
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