Final

1. If total output is calculated by adding up the market value of goods and services produced, then more expensive items: 
A. receive the same weighting as cheaper items.
B. receive a higher weighting than cheaper items.
C. receive a smaller weighting than cheaper items.
D. are double counted.

2. The greater demand for paid childcare services as women's labor force participation increases represents primarily: 
A. an increase in economic activity.
B. a switch from market to non-market production.
C. a switch from non-market to market production.
D. a decrease in GDP.

3. Which of the following is an example of a final good? 
A. New computer software sold to a computer manufacturer for installation in new computers
B. The services provided by lawyers to a computer manufacturer
C. Computer chips sold to a computer manufacturer for installation in new computers
D. A new computer sold to a business firm.

4. Which of the following is NOT a capital good? 
A. Batteries purchased by a car manufacturer to install in new cars
B. Machines purchased by a car manufacturer to measure metal thicknesses
C. A new house purchased by a family
D. A new apartment building purchased by a corporation

E. None of the above is a capital good.

5. If workers received a 5 percent wage increase and the rate of inflation was 3 percent, then their real wage: 
A. increased by 2%.
B. increased by 8%.
C. remained constant.
D. decreased by 3%

E. decreased by 4% = (5% + 3% / 2).

6. Given the following data for the economy, compute the value of GDP.

   
A. 56
B. 83
C. 90
D. 141

7. A consumer expenditure survey reports the following information on consumer protein spending:

  

Using 2005 as the base year, by how much does a "cost of protein" index increase between 2005 and 2006? 
A. 5.2%
B. 8.6%
C. 13.4%
D. 14.3%

8. A factory worker earned $10 an hour in 1980. The CPI was 0.82 in 1980. The same factory worker was earning $15 an hour in 1990 when the CPI was 1.31. From 1980 to 1990, the factory worker's hourly real wage: 
A. increased from $7.63 to $18.29.
B. decreased from $12.20 to $11.45.
C. increased from $10 to slightly under $15
D. decreased from $18.29 to $7.63.

9. Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car also includes additional safety features. In this situation the CPI will tend to _____ inflation as a result of _____ bias. 
A. overstate; substitution
B. understate; substitution
C. accurately measure; substitution
D. overstate; quality adjustment

10. In Econoland in 2000, people with incomes between $20,000 and $30,000 must pay 12% of their income in taxes and people with incomes between $30,001 and $40,000 must pay 15%. In 2000, the CPI in Econoland equals 1.20 and increases to 1.35 in 2001. If the government of Econoland wants to keep households with a given real income from being pushed up into a higher tax bracket by inflation, the $20,000 to $30,000 bracket will be changed to: 
A. $15,873 to $23,810
B. $21,000 to $31,500

C. $22,500 to $33,750
D. $24,000 to $37,800
E. $25,200 to $37,800

11.       Assume an economy produces only Pucks, Root Beer and Back Sandals and the base year is 2000.

Year

Pucks

Root Beer

Sandals

Quantity

Price

Quantity

Price

Quantity

Price

2000

100

$5

300

$20

100

$20

2007

125

$7

250

$20

110

$25

  
What is the value GDP deflator for 2007? 
A. 1.08
B. 1.10
C. 1.01
D. 1.18.

12. Holding other factors constant, if prices of manufacturing goods rise relative to the prices of other products, then the real wages of manufacturing workers will _____ and employment of manufacturing workers will _____ because _____. 
A. increase; increase; demand for manufacturing workers will rise
B. increase; decrease; supply of manufacturing workers will rise
C. decrease; not change; demand for manufacturing workers will remain unchanged
D. decrease; decrease; supply of manufacturing workers will fall

13. High Tech, Inc. produces plastic chairs that sell for $10 each. The following table provides information about how many plastic chairs can be produced per hour. For simplicity assume that labor is the only input.

  
How many workers will be hired, if the hourly wage for workers is $35? 
A. 1
B. 2
C. 3
D. 4

14. Based on the following information, what is the unemployment rate?

   
A. 7.2%
B. 8.0%
C. 10.0%
D. 28.0%

15. Who of the following would be considered a discouraged worker? 
A. Ray wants to work forty hours per week, but can only find work for twenty hours per week.
B. Anna Marie has been looking for a job every day for the last month, but has not been hired.
C. Frank would like to work, but has not looked for work because he believes no jobs are available.
D. Melissa has a Ph.D. in physics, but is currently employed full time driving a taxi.

16. Real GDP per person in both Alpha and Omega equals $2,000. Over the next 100 years real GDP per person grows at 1 percent annual rate in Alpha and at a 2 percent annual rate in Omega. After 100 years real GDP person in Alpha is _____ smaller than real GDP per person in Omega. 
A. $2,000
B. $4,540
C. $9,080
D. $12,495

17. In 1999 average labor productivity in the U.S. was $68,000 per worker and 49% of the population was employed. If over the next forty years average labor productivity increases by 85 percent, but the share of population employed falls to 36%, then compared to real GDP per person in 1999, real GDP per person in 2039 will be approximately: 
A. 85% larger.
B. 36% larger.
C. the same as in 1998.
D. 4% smaller.

18. Fred and Barney fill egg cartons with eggs. Fred just started the job and can only fill 25 cartons an hour. Barney has significant on-the-job experience that allows him to fill 50 cartons an hour. Both Fred and Barney work 50 hours a week. Fred's average weekly productivity is _____ cartons; Barney's average weekly productivity is ____ cartons; and as a team their average weekly productivity is _____ cartons.  (Remember average productivity of a team is also measured per person).
A. 1200; 5000; 7500
B. 25; 50; 37.5
C. 25; 50; 7,500
D. 1,250; 2,500; 1,875

19. Providing a constant number of workers with additional capital with which to work will ______ average labor productivity at a _____ rate. 
A. increase; increasing
B. increase; constant
C. increase; decreasing
D. decrease; decreasing

20. Saving $100 will: 
A. increase wealth by $100.
B. increase wealth by $100 only if the $100 is used to purchase an asset.
C. increase wealth by $100 only if the $100 is used to repay a debt.
D. decrease wealth by $100.

21. Wealth decreases as a result of _____ and/or _____. 
A. positive saving; capital gains
B. negative saving; capital gains
C. positive saving; capital losses
D. negative saving; capital losses

22. If Alex uses $800 from her checking account to buy a Treasury bond, her wealth: 
A. increases by $800.
B. decreases by $800.
C. increases by $1,600.
D. does not change.

23. If total government tax collections equal $300 billion, transfer payments equal $175 billion, and government interest payments equal $15 billion, then net taxes equal: 
A. $110 billion.
B. $140 billion.
C. $190 billion.
D. $160 billion.

24. If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving ____ and public saving ______. 
A. increases; increases
B. increases; decreases
C. does not change; increases
D. does not change; decreases

25. The builder of a new movie theater complex is trying to decide how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number of screens available:

  

After paying the movie distributor and meeting all other non-interest expenses, the owner expects to net $2.00 per ticket sold. Construction costs are $1,000,000 per screen.
If the real interest rate is 4%, how many screens will the builder build? 
A. 1
B. 2
C. 3

D. 4

26. Holding other factors constant, if Congress passes a 5% investment tax credit under which for every $100 a firm spends on new capital equipment it receives an extra $5 in tax refunds from the government, then the real interest rate will ____ and the equilibrium quantity of national saving and investment will _____.  (Assume no change in the government budget due to the changed tax policy).
A. increase; increase
B. increase; decrease
C. increase; not change
D. decrease; increase

27. The introduction of a new technology that raises the marginal product of new capital will: 
A. decrease real interest rates and increase the equilibrium quantity of saving supplied and demanded.
B. decrease real interest rates and the equilibrium quantity of saving supplied and demanded.
C. increase real interest rates and the equilibrium quantity of saving supplied and demanded.
D. increase real interest rates and decrease the equilibrium quantity of saving supplied and demanded.

28. The coupon rate on newly issued bonds is usually higher if it has a ____ maturity period and a ____ risk that the borrower will go bankrupt. 
A. shorter; greater
B. shorter; smaller
C. longer; greater
D. longer; smaller

29. A three-year bond with a principal amount of $5,000, a 3% coupon rate paid annually, one year from maturity will sell for what price (rounded to the nearest dollar) in the bond market if current market rates of interest at the time of sale is 5%? 
A. $4,762
B. $4,905
C. $5,000
D. $5,150

30. An increase in current market interest rates results in a(n) _____ in the required rate of return to hold stocks and _____ current stock prices. 
A. increase; lowers
B. increase; raises
C. decrease; raises
D. decrease; lowers

31. Based on the following information, compute the value of the M1 measure of the money supply.

A. $320 billion

B. $330 billion

C. $520 billion

D. $530 billion

E. $4,320 billion

32. There is $5,000,000 of currency in Econland, all held by banks as reserves. The public does not hold any currency. If the banks' desired reserve/deposit ratio is .20, then the money supply equals:

A. $5,000,000

B. $6,000,000

C. $10,000,000

D. $20,000,000

E. $25,000,000

33. If bank reserves are 200, the public holds 400 in currency, and the desired reserve/deposit ratio is .25, the deposits are ____ and the money supply is _____.

A. 200; 600

B. 400; 800

C. 600; 1,000

D. 800; 1,200

E. 2,400; 2,800

34. The money supply in Macroland is currently 3,000, bank reserves are 250, currency held by public is 500, and banks' desired reserve/deposit ratio is 0.10. Assuming the values of the currency held by the public and the desired reserve/deposit ratio do not change, if the Central Bank of Macroland wishes to decrease the money supply to 2,500, then it should conduct an open-market ____ government bonds to/from the public.

A. purchase of 50

B. purchase of 250

C. purchase of 500

D. sale of 50

E. sale of 500

35. All of the following are characteristics of short-term economic fluctuations EXCEPT: 
A. expansions and recessions are felt in only a few sectors of the economy.
B. expansions and recessions are irregular in length and severity.
C. unemployment rises during recessions.
D. durable-goods industries are more sensitive to short-term fluctuations than service and non-durable industries.

36. Which of the following statements is true? 
A. In the basic Keynesian model planned investment always equals actual investment.

B. If firms sell more than expected, actual investment increases because previously unsold goods (from last

     year’s inventory) are taken out to be sold, which raises the investment component of GDP.
C. If firms sell less than expected, actual investment falls because households eventually buy the unsold goods

     at bargain prices.

D. If firms sell less than expected, actual investment increases because the unsold goods are added to inventory,

     which is counted as investment. 
 

37. When recessions are the result of slowing growth in potential output, the government's best response is a policy to: 
A. increase aggregate demand.
B. decrease aggregate demand.
C. promote saving and investment.
D. reduce government spending.

38. If the frictional rate of unemployment equals 2 percent, the structural rate of unemployment equals 3 percent, and the cyclical rate of unemployment equals 2 percent, then the natural rate of unemployment equals: 
A. 7%.
B. 2%.
C. 3%.
D. 5%.

39. Compared to older workers, younger workers change jobs more frequently, so they are more prone to _____ unemployment and have fewer skills, so they are more prone to ____ unemployment. 
A. cyclical; frictional
B. frictional; structural
C. structural; frictional
D. frictional; cyclical

40. If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent below potential? 
A. 2%
B. 4%
C. 5%
D. 6%

41. If the actual rate of unemployment equals the natural rate of unemployment, then: 
A. potential output is greater than real GDP.
B. potential output equals real GDP.
C. potential output is less than real GDP.
D. there is a recessionary gap.

42. All of the following would be included in planned aggregate expenditure EXCEPT: 
A. spending on consumer durables.
B. planned changes in inventories.
C. sales of domestically produced goods to foreigners.
D. interest paid on the government debt.

43. A decrease in stock prices:

A. alters the consumption function by increasing the marginal propensity to consume
B. alters the consumption function by decreasing the marginal propensity to consume
C. alters the consumption function by increasing the autonomous part of consumption.
D. alters the consumption function by decreasing the autonomous part of consumption.

E. has no effect on the consumption function of a nation.

44. The two parts of the Keynesian consumption function are induced consumption that depends on _____ and autonomous consumption that depends on _____. 
A. disposable income; factors other than disposable income
B. planned spending; unplanned spending
C. actual inflation; expected inflation
D. inflation; wealth

E. GDP; GNP

45. If planned aggregate expenditure (PAE) in an economy equals 1,000 + .9Y and potential output (Y*) equals 9,000, then this economy has: 
A. an expansionary gap.
B. a recessionary gap.
C. no output gap.
D. no autonomous expenditure.

46. PAE=1000 + 0.75Y.  If output equals 5,000 then Planned Aggregate Expenditure is _____ output and firms will ____ production. 
A. less than; decrease
B. greater than; decrease
C. equal to; not change
D. less than; increase

47. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ________ to eliminate any output gap. 
A. increase by 20
B. increase by 200
C. increase by 250
D. decrease by 200

48. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the MPC equals 0.8, and potential output (Y*) equals 9,000, then taxes must be increased by ________ to eliminate any output gap. 
A. 20
B. 200
C. 225
D. 250

49. Planned aggregate expenditure in an economy can be written as: PAE = 1000 + .9 Y.  Facing a recessionary gap the Government decides to spend an additional $100 on the economy and plans on financing the project by raising taxes by $100.  By how much will short run equilibrium output change in this economy, if at all?
A. Short run equilibrium output will remain unchanged
B. Short run equilibrium output will rise by $1000 (= 100 x 10)
C. Short run equilibrium output will rise by $100
D. Short run equilibrium output will rise by $900 (= 1000 x 0.9)
 

50. If the income-expenditure multiplier equals 5 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by _____ the real interest rate by _____ percentage points. 
A. decreasing; 2
B. increasing; 4
C. increasing ; 2.5
D. decreasing; 2.5

51. According to the monetary policy rule, if actual inflation exceeds the target rate of inflation, 
A. the Fed will lower interest rates.
B. the Fed will raise interest rates.
C. the Fed will increase the money supply.
D. the Fed will set the interest rate equal to the rate of inflation.

52. Three macroeconomic factors that affect the demand for money are: 
A. the nominal interest rate; real income, and the price level.
B. the nominal interest rate; capital, and labor.
C. the real interest rate, velocity of circulation and the price level.
D. capital, labor, and technology.

53. Because the Fed determines the money supply, the: 
A. money supply curve is downward sloping.
B. money supply curve is upward sloping.
C. money supply curve is vertical.
D. money supply curve is horizontal.

54. If the nominal interest rate is below the equilibrium value, then quantity of money demanded is ______ than the quantity of money supplied; bond prices will ____, and the nominal interest rate will ____. 
A. greater; fall; increase
B. greater; fall; decrease
C. greater; rise; increase
D. less; fall; increase

55. When the Fed engages in an open market purchase, the money supply ____ and the nominal interest rate ______. 
A. increases; increases
B. increases; decreases
C. decreases; decreases
D. decreases; increases

56. The Federal Reserve can: 
A. simultaneously set any money supply and any nominal interest rate target.
B. set the target money supply and target nominal interest rate independently.
C. only set a money supply target that is consistent with the target nominal interest rate.
D. only target the money supply, not the nominal interest rate.

57. The Federal Reserve discount rate is the rate of interest charged on loans from _____ to _____. 
A. the Federal Reserve; commercial banks
B. the Federal Reserve; the U.S. Treasury
C. commercial banks; the Federal Reserve
D. the U.S. Treasury; commercial banks

E. commercial banks to commercial banks on very short term, namely overnight loans.

58. In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds. 
A. increase; 3,133
B. increase; 4,100
C. increase; 4,667
D. increase; 2,667

59. If the Fed's monetary policy rule does not change, then when inflation increases the Fed responds by _____ the real interest rate, which _____ consumption and investment spending, which _____ output. 
A. increasing; increases; increases
B. increasing; increases; decreases
C. increasing; decreases; decreases
D. decreasing; decreases; increases

60. For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the _____ shifts _____. 
A. aggregate demand curve; right
B. aggregate demand curve; left
C. short-run aggregate supply line; upward
D. short-run aggregate supply line; downward

61. An leftward shift in the Fed's monetary policy rule reaction is a monetary _____ , and the aggregate demand curve _______.  (Recall that the MPR is drawn with interest rates on the vertical axis). 
A. tightening; shifts right
B. tightening; shifts left
C. easing; shifts left
D. easing; shifts right

62. When the Federal Reserve reduces its inflation target, it sets a _____ real interest rate for each rate of inflation, which will _____ consumption and investment spending at every level of output. 
A. higher; increase
B. higher; decrease
C. lower; decrease
D. lower; increase

63. Inflation inertia is the result of the behavior of ____ and the existence of ______. 
A. the central bank; automatic stabilizers
B. real and nominal interest rates; an output gap
C. autonomous aggregate demand; the Fed's policy reaction function
D. inflation expectations; long-term wage and price contracts

64. When there is an expansionary gap, inflation will ______ , in response to which the Federal Reserve will ____ real interest rates, and output will _____. 
A. decline; raise; decline
B. increase; lower; expand
C. decline; lower; decline
D. increase; raise; decline

65. Starting from long-run equilibrium, the long-run impact(s) of an easing of monetary policy by the Fed compared to the original equilibrium, is(are): 
A. higher inflation.
B. higher output.
C. higher inflation and higher output.
D. lower inflation and lower output.

66. Consider the AD-AS model with output (Y) on the horizontal axis and actual inflation (π) on the vertical axis.  Assume that the economy is initially at a short and long run equilibrium.  Suppose house prices crash and consumers reduce their consumption spending.  What immediate effect will this change have on the AD-AS graphs?  Assume no change in monetary or fiscal policy.

A. AD will shift right and an expansionary gap will open up
B. AD will shift left and a recessionary gap will open up.
C. AS will shift left and an expansionary gap will open up.
D. No graphs will shift; we will just move south-east (down and right) on the AD graph.

E. No graphs will shift; we will just move north-west (up and left) on the AD graph.

67. In the face of a permanent increase in exogenous spending, output returns to potential in the long run: 
A. only if the Federal Reserve accommodates the shock.
B. only if the Federal Reserve blocks the shock by raising the target real interest rate.
C. only if the Federal Reserve blocks the shock by lowering the target real interest rate.
D. regardless of whether the Federal Reserve accommodates or blocks the shock.

68. In the face of a permanent increase in exogenous spending, the inflation rate will permanently increase if the Federal Reserve: 
A. accommodates the shock.
B. blocks the shock by raising the target interest rate.
C. blocks the shock by shifting the monetary policy reaction function upward to the left.
D. offsets the rightward shift of the aggregate demand curve.

69. Shocks to _____ require the Fed to choose between inflation and output stability, while shocks to _____ do not require the Fed to choose between inflation and output stability. 
A. the stock market; aggregate demand
B. the stock market; aggregate supply
C. aggregate demand; aggregate supply
D. aggregate supply; aggregate demand

70. In order to determine whether a temporary bulge in inflation has shifted inflationary expectation, the Federal Reserve can monitor: 
A. real interest rates.
B. nominal interest rates.
C. the core rate of inflation.
D. the unemployment rate.

71. The credibility of monetary policy is the: 
A. recognition that open market purchases increase the money supply, even though banks and the public affect the money multiplier.
B. degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run costs.
C. pace at which monetary policy can return an economy to potential when inflationary expectations are anchored.
D. practice of the Federal Reserve of relying primarily on open market operations rather than discount rate lending or changes in reserve requirements.

72. Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to avoid a recession, however short. 
A. increase the target inflation rate.
B. decrease the target inflation rate.
C. maintain the initial target inflation rate.
D. shift the short-run aggregate supply curve up.

73. Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to keep inflation from becoming permanently higher. 
A. increase the target inflation rate.
B. decrease the target inflation rate.
C. maintain the initial target inflation rate.
D. shift the short-run aggregate supply curve up.

74. Suppose the economy is initially in long-run equilibrium. What effect would the Fed lowering its inflation target have on the AD curve?

A. It would shift the AD curve to the left.
B. It would have no effect on the AD curve.
C. It would shift the AD curve to the right.
D. The effect is unknown; it could shift to the right or to the left.

75. To prevent inflation from becoming permanently higher following an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____. 
A. lower the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run.
B. raise the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run.
C. maintain the inflation rate target; maintain the real interest rate target
D. maintain the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run.