Economics 5 Final Exam Phil Miller Winter 2002
1. A useful economic model
a. deals only with possibilities that actually occurred.
b. makes only realistic assumptions.
c. may make some unrealistic assumptions in order to simplify a complex reality.
d. should avoid drawing conclusions that have public policy implications, since economics is not equipped to
make value judgments.
2. If a person can produce greater quantities of a good than another person in a given amount of time, he as a(n)
a. comparative advantage.
b. absolute advantage.
c. declarative advantage.
d. entire advantage.
3. Which of the following would be most likely to cause an outward shift of the demand curve for electricity?
a. a decrease in the price of electricity
b. an increase in the price of air conditioners
c. an increase in the price of heating oil
d. a decrease in the price of natural gas
4. If price rises, what happens to the quantity supplied of a product?
a. It increases.
b. It decreases.
c. It does not change.
d. Quantity supplied is constant, but supply increases.
5. At an equilibrium price for gasoline,
a. everyone with the desire and the income to buy gasoline at that price can do so.
b. surpluses are inevitable.
c. inherent market forces will eventually change the quantities demanded and supplied.
d. suppliers must be using the most efficient oil-drilling equipment available. 6. The silverware industry has been in serious decline since the 1980s. Family dining habits are less formal so
people purchase less silverware. Also, in 1979-1980, the price of silver increased from $5 to $21 per ounce.
Which graph in Figure 5-12 best illustrates these developments?
7. Real GDP
a. is nominal GDP adjusted for changes in the price level.
b. is also called nominal GDP.
c. measures GDP minus depreciation of capital.
d. will always change when prices change.
8. In Figure 6-2, if the aggregate demand curve shifts inward over time, the economy will
a. experience inflation.
b. see a sustained increase in the price level.
c. experience a significant decrease in unemployment.
d. experience economic recession.
9. According to the text, the government can use aggregate demand management policies to reduce unemployment
rates. A byproduct of this policy will be
a. an increase in the price level.
b. a decrease in real GDP.
c. a decrease in the price level.
d. an increase in the budget surplus. 10. If the discouraged workers were included in the labor force,
a. the unemployment rate would fall.
b. the labor force would decrease.
c. the employment rate would rise.
d. the unemployment rate would rise.
11. If borrowers and lenders expect a higher rate of inflation,
a. nominal interest rates should decrease.
b. nominal interest rates should remain constant.
c. nominal interest rates should increase.
d. real interest rates should increase.
12. Consumption spending accounts for what share of GDP?
a. about one third
b. about half
c. about two thirds
d. about three fourths
e. about four fifths
13. Which of the following would be most likely to shift the consumption function upward?
a. a stock market crash
b. a price level increase
c. increased corporate layoffs
d. a stock market boom
14. Investment spending
a. accounts for about 50 percent of GDP.
b. is remarkably stable and cushions the swings in GDP.
c. is extraordinarily variable.
d. follows movements in disposable income with great reliability.
15. In the circular flow model of an economy, total output equals total income
a. only at equilibrium.
c. only at non-equilibrium levels of income.
16. If the price level rises due to a shift in AS, the effect on the expenditure schedule and equilibrium real GDP is to
a. increase both.
b. decrease both.
c. shift the expenditure schedule upward and decrease equilibrium real GDP.
d. shift the expenditure schedule downward and increase equilibrium real GDP. 17. As a result of the Balkan wars, the populations of Serbia and Kosovo as well as their capital stocks were
reduced. This can be illustrated by the aggregate supply curve
a. shifting outward.
b. becoming flatter.
c. shifting inward.
d. becoming more elastic.
18. The typical result of a decrease in aggregate supply is
a. falling output accompanied by accelerating inflation.
b. falling output accompanied by decelerating inflation.
c. rising output accompanied by accelerating inflation.
d. rising output accompanied by decelerating inflation.
19. In Figure 11.3, if full employment occurs at 5,000 and the price level is currently 130, then we can expect the
a. aggregate supply curve to shift to the left until a new equilibrium is established at an output level of 4,000.
b. aggregate demand curve to shift to the right until a new equilibrium is established at an output level of
c. price level to fall to 110.
d. aggregate demand to shift to the left and aggregate supply to shift to the right until the price level reaches
20. According to Baumol and Blinder, government transfer payments act as automatic stabilizers because as labor
a. transfer payments decrease as well.
b. transfer payments remain constant.
c. transfer payments increase.
d. transfer payments to the government increase.
21. The primary goal of supply-side fiscal policies is to
a. balance the federal budget.
b. reduce the balance of payments deficit.
c. reduce the money supply.
d. reduce inflation and increase growth at the same time. 22. If the demand-side effects of supply-side tax cuts are greater the supply-side effects, then we can expect the
result to be a(n)
a. decrease in output and prices.
b. decrease in output and an increase in prices.
c. increase in output and prices.
d. increase in output and a decrease in prices.
23. Credit cards are
a. included in the M1 definition of the money supply.
b. included in the M2 definition of the money supply.
c. included in the M3 definition of the money supply.
d. not included in the definition of the money supply.
24. Which of the following would be an asset to a bank?
a. Cash in its vault.
b. A loan to a university student.
c. A government security.
d. All of the above are correct.
25. When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a
loan of $800 to a new borrower, this set of transactions
a. decreases the money supply by $1,000.
b. decreases the money supply by $200.
c. does not change the money supply.
d. increases the money supply by $200.
e. increases the money supply by $800.
26. The required reserve ratio is 10 percent, but banks actually keep 20 percent on reserve. The money supply
multiplier in this case is
27. If the banking system has $5 million in excess reserves and the required reserve ratio is 25 percent, what is the
maximum amount by which the money supply can be increased?
a. $25 million
b. $20 million
c. $5 million
d. $2.5 million
28. Milly Miser removes $250,000 from her mattress and opens a checking account. This single transaction
increases the money supply by
d. -$250,000 29. Figure 14-1 shows a money demand schedule. If real GDP decreases, all else equal, the MD schedule will
a. shift outward.
b. shift inward.
c. become steeper.
d. become flatter.
e. remain unchanged.
30. The correct chain of causation illustrating the effects of monetary policy is
a. money, interest rates, AD, I.
b. money, interest rates, I, AD.
c. AD, I, interest rates, money.
d. AD, money, interest rates.
31. In Figure 14-2, which panel shows the effect on the interest rate of an open market purchase by the Fed?
32. In Figure 14-2, which panel shows the effect on the interest rate of a decrease in nominal GDP?
d. 4 33. In 1996, nominal GDP was $7,576 billion and M1 was $1,117 billion. Velocity was
34. The velocity of circulation is the
a. speed at which the multiplier takes effect.
b. speed at which money circulates.
c. speed at which tax cuts get spent.
d. rate at which money creation takes place.
35. If the aggregate supply curve is flat,
a. expansionary fiscal or monetary policy will cause a