Econ 1015, Section 2. Winter 2008 Practice Exercises for Final Exam 1. Which of the following(s) is (are) considered a rational decision?

(1) Jon spends $200 on designer shoes instead of buying his Economics textbook and Study guide. (2) Kerri takes 21 shots to celebrate her 21st birthday despite having an Econ1015 test the following morning. (3) Britney Spears, the 25-year old pop star with a monthly income of $737,000, is not saving for her retirement. (4) Wesley Snipes decides not to pay tax on his $40 million annual income. (5) All of the above are rational decisions

2. The Scarcity problem:

(1) Persists only because countries have failed to achieve continuous full employment. (2) Persists because material wants exceed available productive resources. (3) Has been solved in ALL industrialized nations. (4) Has been eliminated in affluent societies such as the United States and Canada. (5) All of the above are possible explanations.

3. A physician's knowledge and skills are referred to by economists as:

(1) intellectual raw materials (2) human capital (3) labor (4) entrepreneurship (5) physical capital

4. High-income people will sometimes decide to pay higher prices at convenience stores for goods rather than buying them from a discount store. They do this because

(1) they like to be seen paying more money (2) they are irrational (3) they do not mind wasting time (4) their opportunity cost of time is low (5) crowded and understaffed discount stores impose higher time costs

5. If a life can be saved for $500 using Method A and $530 using Method B, (1) it would be efficient to shift resources from A to B (2) it would be efficient to shift resources from B to A (3) both methods should be pursued to the maximum extent possible (4) both methods are on the economy's production possibilities frontier (5) neither method should be used if methods with higher dollar values are available

6. Mexico’s ability to produce better quality Tequila using the same amount of resources than the U.S. is called:

(1) Absolute awesomeness. (2) An unfair Mexican advantage. (3) Comparative advantage (4) Absolute advantage (5) A means of securing higher terms of trade

7. During the summer you made the decision to attend the Study Abroad program in Florence, Italy, which precludes you from living with your parents for free and from working at your usual summer job in which you normally earn $6,000 for the summer. The Study Abroad program cost (inclusive of everything including room and board) is $4,500. Your opportunity cost of attending the Study Abroad program is

(1) $8,500 (2) $9,500 (3) $10,500 (4) $11,200 (5) $11,500

8. Which of the following is the most accurate statement about production possibilities?

(1) An economy can produce only on the production possibilities frontier. (2) An economy can produce at any point inside or outside a production possibilities frontier. (3) An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier. (4) An economy can produce at any point inside the production possibilities frontier, but not on or outside the frontier. (5) Without trade, a country's production possibilities frontier is also its consumption possibilities frontier.

9. Some time ago the government of China required many highly skilled technicians and scientists to engage in unskilled agricultural labor in order to develop “proper social attitudes.” This policy probably caused China to produce

(1) At an inappropriate point along its production possibilities frontier. (2) Outside its production possibilities frontier with respect to food, but inside with respect to high- technology goods. (3) Inside its production possibilities frontier with respect to food, but outside with respect to high- technology goods. (4) Inside its production possibilities frontier. (5) Efficient amount of output.

Assume PPF1 represents the production possibilities curve for Afghanistan. 10. Afghanistan has suffered continuous and brutal civil wars and foreign invasions since the late 1970s. In late 2001 the United Nations Security Council authorized the creation of an International Security Assistance Force (ISAF), composed of NATO troops to assist the Afghan government. In 2005, the United States and Afghanistan signed a strategic partnership agreement and multi-billions of US dollars have been provided by the international community for the infrastructure reconstruction of the country. This international support will most likely result in:

(1) Expansion of Afghanistan’s economy, represented by a shift of Afghanistan’s PPF out to PPF0. (2) No effect on Afghanistan’s economy, represented by no change in the PPF of Afghanistan at PPF1. (3) Afghanistan’s economy expanding to PPF0 or shrinking to PPF3 depending upon whether Afghans like it or not. (4) Afghanistan’s economy shrinking due to the loss of capital resources, represented by a shift of Afghanistan’s PPF to PPF2. (5) Afghanistan’s economy shrinking due to the loss of factors of production, represented by a shift of Afghanistan’s PPF to PPF3.

ANSWER THE NEXT FIVE QUESTIONS ON THE BASIS OF THE FOLLOWING PRODUCTION POSSIBILITIES TABLE FOR TWO STATES, MONTANA AND MISSOURI.

Hours needed to make one Amount produced in 24 hours Basket Birdhouse Baskets Birdhouses Montana 6 2 4 12 Missouri 3 1.5 8 16 11. Montana has an absolute advantage in:

(1) Birdhouses and Missouri has an absolute advantage in baskets. (2) Baskets and Missouri has an absolute advantage in birdhouses. (3) Neither good and Missouri has an absolute advantage in both goods. (4) Both goods and Missouri has an absolute advantage in neither good. (5) Baskets and Missouri has an absolute advantage in neither good.

12. The opportunity cost of 1 basket for Montana is : The opportunity cost of 1 basket for Missouri is ;

(1) 1/3 birdhouse: 1/4 birdhouse. (2) 1 birdhouse: 1/2 birdhouse. (3) 3 birdhouses: 2 birdhouses. (4) 4 birdhouses: 2 2/3 birdhouses. (5) 1/4 birdhouses: 4 birdhouses .

13. Montana has a comparative advantage in:

(1) Baskets and Missouri has a comparative advantage in birdhouses. (2) Birdhouses and Missouri has a comparative advantage in baskets. (3) Neither good and Missouri has a comparative advantage in both goods. (4) Both goods and Missouri has a comparative advantage in neither good. (5) Birdhouses and Missouri has a comparative advantage in neither good.

14. If Montana and Missouri trade based on the principle of comparative advantage, Montana will export:

(1) Baskets and Missouri will export birdhouses. (2) Birdhouses and Missouri will export baskets. (3) Neither good and Missouri will export both goods. (4) Both goods and Missouri will export neither good. (5) All of the above are possible.

15. According to the Theory of Specialization and voluntary trade, which of

the following would be feasible terms for trade between Montana and Missouri for 1 basket?

(1) 1.5 birdhouse (2) 2.5 birdhouses (3) 6 birdhouses (4) 1/4 birdhouses (5) 3.5 birdhouses

16. Greg’s opportunity cost of 1 T-Shirt is 3 Bananas. Eddie’s opportunity cost of 1 Banana is 2 T-Shirts. If Eddie proposes giving Greg 1 T-Shirt for 1 Banana, will Greg accept the trade? Will both parties benefit?

(1) Greg rejects the trade, only Eddie benefits from such a trade (2) Greg rejects the trade, both parties would be hurt (3) Greg accepts the trade, both parties benefit (4) Greg accepts the trade, Eddie would be hurt from such a trade (5) Greg accepts the trade, both parties are hurt

17. Buyers and sellers who have no influence on market price are referred to as

(1) Market pawns. (2) Marginalists. (3) Price takers. (4) Price makers. (5) Price setters.

18. You and your best friends like to hang out at Buffalo Wild Wings after class on Friday. You’ve noticed that you drink twice as many domestic beers on Fridays when Buffalo Wild Wings has a “buy one get one free” appetizer special. Given the ceteris paribus assumption, you conclude that Domestic beer and appetizers are:

(1) Complements. (2) Complement in production. (3) Substitutes. (4) Normal goods. (5) Inferior goods.

19. Consider the market represented by the figure below. If the price of the good is currently $50.00, the price will:

(1) Fall, causing the quantity demanded to increase.

(2) Fall, causing the quantity supplied to increase. (3) Rise, causing the demand curve to shift to the right. (4) Rise, causing the supply curve to shift to the left. (5) Fall, causing the supply curve to shift to the right.

20. On Sunday Housecall, with Dr. Rosenfeld at Fox News, he announces that there is a relationship between Jalapeño Pepper and Health. People who eat Jalapeño peppers regularly suffer less from colds or the flu. As a result, we would expect:

(1) the demand for Jalapeño Pepper to decrease. (2) the demand for Jalapeño Pepper to increase. (3) the demand for Jalapeño Pepper to decrease and the supply for Jalapeño Pepper to decrease. (4) the demand for Jalapeño Pepper to increase and the supply for Jalapeño Pepper to increase. (5) All of the above are possible scenarios.

21. If Francis experiences a decrease in his income, we would expect that, as a result, Francis’s demand for

(1) Each of the good he purchases will remain unchanged (2) Normal goods will decrease. (3) Luxury goods will increase (4) Inferior goods will decrease (5) Complements will decrease

22. What will happen to the equilibrium price of new textbooks if more students attend college, paper becomes cheaper, and textbook authors accept lower royalties?

(1) Price will rise. (2) Price will fall. (3) Price will stay exactly the same. (4) The price change will be ambiguous. (5) Price will rise first then fall.

23. If Susan switches from going to Speedy Lube for an oil change to changing the oil in her car herself, then GDP:

(1) Necessarily rises. (2) Necessarily falls. (3) Will be unaffected because the same service is produced in either case.

(4) Will be unaffected because car maintenance is not included in GDP. (5) All of the above are possible scenarios.

24. For an economy as a whole; (1) Income is greater than expenditure (2) Firms’ profits are necessarily zero in a simple circular-flow diagram. (3) Income is equal to expenditure. (4) GDP measures income more precisely than it measures expenditure. (5) The number of firms must be equal to the number of households in a simple circular-flow diagram.

25. According to Wall Street Journal, the President and Congress have proposed an economic stimulus package which is aimed mainly at stimulating:

(1) Consumer spending by reducing tax rates. (2) Stimulating home construction by providing tax breaks for homebuilders. (3) Exports by lowering the value of the dollar. (4) Consumer spending by sending tax rebate checks directly to households. (5) Defense spending by increasing spending on the wars in Iraq and Afghanistan.

26. Which of the following is TRUE according to lecture and the text?

(1) An opportunity cost of economic growth is the present consumption given up to accumulate capital. (2) In an economy-wide sense property rights are an important prerequisite for the price system to work. (3) An absence of well-established and well-enforced property rights appears to be associated with a reduced standard of living. (4) The forces that make market economies work are demand and supply. (5) All of the above are true.

27. Which of the following would be classified as private investment? (1) an individual’s purchase of a used car (2) an individual’s purchase of a General Electric bond (3) a family’s purchase of groceries

(4) a family’s purchase of a new car (5) a family’s purchase of a newly built home

28. One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP?

(1) GDP increases by $4.00. (2) GDP increases by $6.00. (3) GDP increases by $1.50. (4) GDP increases by $3.50. (5) GDP increases by $7.50.

29. Which of the following items is counted as part of Government Purchases?

(1) Social Security Payments to your grand mother who is 75 years old. (2) The purchase of government bonds by your parents (3) Welfare payments received by Jimmy who is handicapped (4) Unemployment insurance payments paid to Katrina victims (5) The purchases of computers by the Senate Armed Services Committee

30. Suppose a U.S. automobile manufacturer produced $200 million worth of automobiles in the United States in 2004, but $50 million worth went unsold. How much was the company’s contribution to GDP?

(1) $50 million (2) $250 million (3) $150 million (4) $200 million (5) $0

31. Which of the following is FALSE according to lecture and the text?

(1) Three important macroeconomic goals most economists, and society at large, agree are economic growth, full employment, and stable prices (2) International data on GDP and socioeconomic variables leave no doubt that a nation's GDP is closely associated with its citizens' standard of living. (3) Gasoline is considered an intermediate good if it is sold by a Shell station to a motorist in Columbia, MO. (4) GDP is defined as the market value of all final goods and services

produced within a country in a given period of time. (5) A good that is produced abroad and sold domestically is called an import.

32. In a certain economy in 2005, households spent $1,000 on goods and services; purchases of capital equipment, inventories, and structures amounted to $350; government spent $450 on goods and services; and the value of imports exceeded the value of exports by $50. It follows that 2005 GDP for this economy was

(1) $1,750. (2) $1,850. (3) $1,950. (4) $2,100. (5) $1,800.

Table 2 Prices and Quantities Year Price of Sandwiches Quantity of Sandwiches Price of Magazines Quantity of Magazines 2006 $4.00 100 $2.00 180 2007 $5.00 120 $2.50 200 2008 $6.00 150 $3.50 200 33. Refer to Table 2. Nominal GDP for 2007 is

(1) $900. (2) $1,100. (3) $1,250. (4) $1,350. (5) $23

34. Refer to Table 2. Using 2006 as the base year, for 2007,

(1) Real GDP is $880 and the GDP deflator is 80. (2) Real GDP is $880 and the GDP deflator is 125. (3) Real GDP is $950 and the GDP deflator is 95. (4) Real GDP is $950 and the GDP deflator is 116. (5) Real GDP is $950 and the GDP deflator is 125.

35. When economists talk about growth in the economy, they measure that growth with the

(1) Absolute change in nominal GDP. (2) Percentage change in nominal GDP. (3) Absolute change in real GDP. (4) Percentage change in real GDP. (5) Overall price level.

36. A government budget deficit occurs when: (1) U.S. consumers buy more than U.S. producers produce. (2) Foreign holdings of American assets exceed American holdings of foreign assets. (3) Government spending is greater than tax revenues. (4) The value of U.S. imports exceeds the value of U.S. exports. (5) Government cuts taxes.

37. Which is an example of a DURABLE good consumption expenditure in GDP in 2007?

(1) A Latte you bought this morning from a Starbuck coffee shop. (2) A brand new house Jon’s parents just built this August. (3) A 1966 Mustang (automobile) Wilson just bought from a local used car store. (4) A brand new Kenmore dishwasher and drier Vivien bought from Home Depot last weekend. (5) 200 baby orange trees that an orange farmer in the Florida Keys planted this April.

38. Which of the following serves as an example of the underground or “shadow” economy?

(1) Maggie barters home repairs with her neighbor for gardening. (2) Kristal baby-sits regularly and fails to report her income. (3) Tony sells illegal drugs and fails to report his income. (4) All of the above are correct. (5) None of the above is correct.

39. Real GDP is not a perfect measure of the economy’s welfare; for example,

(1) It does not address if the air in the US became cleaner than ever before due to the “Clean Air Act”. (2) It does not address if the quality of products and services improves.

(3) It does not address if the amount of leisure increases. (4) It does not address if the distribution of income becomes increasingly unequal. (5) All of the above are correct.

40. According to the Wall Street Journal, a recession is always associated with:

(1) A Decline in real GDP. (2) A slow but positive growth of real GDP. (3) An increase in price levels. (4) The end of a war. (5) A decrease in nominal GDP.

1. Which of the following is FALSE with respect to the Consumer Price Index?

(1) A 5% increase in the price of butter has a greater effect on the CPI than a 5% increase in the price of margarine, because people consider these goods to be substitutes. (2) The Bureau of Labor Statistics is in charge of constructing and reporting the value of the CPI on a monthly basis. (3) Housing expenditures represent a large percentage of the typical urban household consumption basket. (4) The CPI is an imperfect measure of the true cost of living. (5) The CPI can be used to translate nominal values to real values and to index payments.

Use this table to answer the following 2 questions. Assume that consumers in this economy buy only chairs and desks. The base year is 2002, year during which consumers bought 3 chairs and 1 desk. Year Price of Chairs Price of Desks 2002 10 40 2003 12 40 2004 15 50 2. The value of the typical consumer basket is _____ in 2003 and _____ in 2004.

(1) 70; 76 (2) 50; 90 (3) 95; 70 (4) 76; 95 (5) 76; 100

3. The CPI is approximately ______ in 2003 and the inflation rate for 2004 is approximately ______.

(1) 108.5; 25% (2) 105; 25% (3) 95; 14% (4) 105; 50% (5) 108.5; 10%

4. Suppose your great grandfather’s salary was $5,000 in 1950 and that your father’s salary is $50,000 in 2008. Assuming that the CPI changed from 50 in 1950 to 400 in 2008,

(1) Your father is making less money than his grandfather’s. (2) Your father is making more money than his grandfather’s.

(3) Your father’s nominal salary is worthless. (4) The nominal salary of your great grandfather is larger than your father’s (5) Since prices changed, $5,000 in 1950 is equivalent to $50,000 today.

5. Suppose that the US Patrol Border regularly buys high tech radars manufactured in England and that suddenly the price of these radars increases. This price change will be reflected in

(1) the Consumption Population Survey (2) the GDP deflator and in the CPI (3) the CPI, but not in the GDP deflator (4) the GDP deflator, but not in the CPI (5) neither the GDP deflator, nor the CPI

6. Assume that NewTech Corporation creates and sell a new cell phone that includes all the previous features of existing cell phones plus the ability of detect if your interlocutor is lying when talking to you (do not laugh, it may actually happen soon!). If this phone sells for the same price of existing cell phones,

(1) The CPI index will overstate the true cost of living. (2) The CPI index will understate the true cost of living. (3) This illustrates the problem of unmeasured quality change and/or the introduction of new goods in the construction of the CPI. (4) This illustrates the problem of substitution bias in the construction of the CPI. (5) Both 1 and 3 are true statements.

7. Which of the following statements is/are TRUE with respect to the Consumer Price Index?

(1) Government expenditures are part of the basket of goods and services used to determine the value of the CPI. (2) The CPI basket does not include imported goods. (3) Spending in food and beverages usually represents more than 30% of total spending by a typical household. (4) Since changes in goods’ quality are quite difficult to measure, the CPI is not a perfect measure of the true cost of living (5) All of the above are true.

8. Assume that the price of transportation increases by more than overall inflation as measured by changes in the CPI. If transportation represents 17% of the CPI basket,

(1) The CPI will understate the true cost of living for a household that spends less than 17% on transportation. (2) The CPI will overstate the true cost of living for a household that spends less than 17% on transportation. (3) The CPI will understate the true cost of living for a household that spends more than 17% on transportation. (4) The CPI will overstate the true cost of living for a household that spends more than 17% on transportation. (5) Both 2 and 3 will occur.

9. Which of the following is/are TRUE about indexation? (1) Indexation refers to automatically correct a dollar amount for inflation. (2) Social Security payments are indexed. (3) Indexation makes harder to fight inflation. (4) Some labor contracts are indexed by changes in inflation. (5) All of the above are true statements.

10. Assume that over the course of last year the CPI value changed from 150 to 165. If last year you deposited your savings and earned 15%, your real interest rate is

(1) 30% (2) 20% (3) 15% (4) 10% (5) 5%

11. According to lecture, compared to Brazil, Poland and the United States, Bolivia had the _____ rate of inflation in the period 1970 – 2000, which was around a _____ percent annual rate.

(1) highest; 200 (2) highest; 12,000 (3) lowest; 5 (4) lowest; 15 (5) highest; 1,000

12. According to lecture, the United States had relatively _____ inflation rates during the 1970 – 1982 period and relatively ____ inflation rates during the 1990 – 2000 period.

(1) low; low

(2) low; high (3) high; low (4) high; high (5) zero; negative

13. The BLS attempts to solve the substitution bias in the construction of the CPI by constructing an alternative measure of the cost of living called the _______ CPI

(1) Indexed (2) Chained (3) Complement (4) Laspeyres (5) Paasche

14. Which of the following is/are TRUE about economic growth?

(1) Investing in education increases human capital (2) Physical capital cannot be increased (3) Protecting domestic industries increases a country’s productivity (4) None of the above are true (5) All of the above are true

15. Suppose General Motors Co. builds a car factory in Chile. This investment is referred to as _______ and it will raise the income of Chileans, as measured by GNP, by _____ than it will increase the production in Chile, as measured by GDP.

(1) Direct investment; more (2) Foreign direct investment; less (3) Portfolio investment; more (4) Foreign direct investment; more (5) Portfolio investment; less

16. Suppose Country A has a population of 5,000, of whom 4,500 work 8 hours a day to produce 100,000 final goods. Country B has a population of 8,000, of whom 5,000 work 7 hours a day to produce 130,000 final goods.

(1) Country A has higher productivity and higher real GDP per person than country B. (2) Country A has lower productivity and lower real GDP per person than country B. (3) Country A has higher productivity, but lower real GDP per person than country B. (4) Country A has lower productivity, but higher real GDP per person than country B.

(5) Country B has the same productivity and the same real GDP per person with country A.

17. Which of the following factors contribute to economic growth?

(1) Investment in research and development (2) Enforcement of property rights (3) Political stability (4) Policies that favor free trade and the interaction between countries (5) All of the above

18. Suppose that 4 years from today you graduate from the University of Missouri and you find a job at the United Nations. While you are having lunch, you are approached by an advice seeking Prime Minister. He wants to adopt measures to increase its country meager GDP per person. He is thinking about restricting international trade to protect the developing agricultural industry of his country. Your advice would probably be:

(1) Go ahead, this will protect your industry and allow it to grow. (2) Do not do that, this will only isolate your country and will result in lower per person GDP. (3) You cannot tell, since international trade is not a determinant of economic growth. (4) Go ahead, but make sure you protect all industries and restrict all international trade. (5) That this is a good idea, as inward – oriented policies worked before for other countries.

19. Which of the following is FALSE with respect to the United States’ financial system?

(1) Financial institutions can be grouped in two categories: financial markets and financial intermediaries. (2) Through financial markets savers indirectly finance borrowers. (3) Mutual Funds are an example of financial intermediaries. (4) Issuing stock is considered equity financing. (5) Commercial banks are an example of financial intermediaries.

20. According to lecture, because of asymmetric information problems in the financial system, nonfinancial businesses in the United States get their funds mostly through

(1) equity financing (2) debt financing (3) mutual funds financing (4) indirect finance

(5) direct finance 21. In the loanable funds framework the _____ curve represents the behavior of people that saved funds, while the _____ curve represents the behavior of people that need funds. The price of the loan is referred to as the ______

(1) demand; supply; discount rate. (2) demand; supply; interest rate. (3) supply; demand; discount rate. (4) supply; demand; interest rate. (5) supply; demand; federal funds rate.

22. Refer to the loanable funds framework. Assume that during an economic expansion income rises, which affects the supply of funds. Suppose also that as new opportunities for investment arise, the demand curve is also affected. Therefore, during en economic expansion we should expect

(1) an increase in the quantity of loans and an ambiguous effect on the interest rate. (2) a decrease in the quantity of loans and an ambiguous effect on the interest rate. (3) the quantity of loans to remain the same and the interest rate to fall. (4) the quantity of loans to remain the same and the interest rate to increase. (5) both the quantity of loans and the interest rate to stay the same.

23. Suppose that the loanable funds market is in equilibrium and then the government runs a budget deficit. The _______ funds curve will shift left, effectively ________ the equilibrium quantity of loanable funds. This situation is known as

(1) demand for; increasing; crowding out. (2) demand for; decreasing; investment substitution. (3) supply of; decreasing; crowding out. (4) supply of; increasing; crowding out. (5) supply of; increasing; investment substitution.

24. John is considering buying stock with its savings. After careful consideration, John expects firms (corporations) that are in the renewable energy industry to do pretty good in the future. John buys stock only from 2 firms in this industry. Which of the following is/are TRUE statements?

(1) John is taking the correct decision, everybody expects the renewable energy industry to soar! (2) John is not diversifying its portfolio and will suffer huge losses if the renewable energy industry does not perform as expected. (3) John is able to eliminate the firm specific risk (4) John is able to eliminate market risk (5) All of the above are true statements

25. According to lecture, a U.S. Treasury bond is considered to be a ______ bond. This means that corporate bonds (everything else equal) will usually offer ______ yields, to compensate for their _______ risk.

(1) default free; higher; higher (2) default free; higher; lower (3) tax free; higher; lower (4) tax free; lower; higher (5) tax free; lower; lower

26. Which option is FALSE with respect to the efficient market hypothesis? (1) According to the efficient market hypothesis, stock traders form rational expectations. (2) If the efficient market hypothesis holds, then stock prices should follow a random walk. (3) Prices that follow a random walk are unpredictable based on current information. (4) If the stock market is efficient, then you should always follow the advice of financial advisors, since using past and current data they can predict price changes. (5) The best strategy for the small investor is to “buy and hold”

27. Which of the following is/are TRUE about risk aversion?

(1) Individuals buy insurance because they are risk averse. (2) One way to reduce the risk of your investment portfolio is to buy different stocks or bonds. (3) Usually assets that are riskier yield a higher expected return. (4) Not all individuals have the same attitude towards risk. (5) All of the above are true statements.

28. I prefer $220 to be paid one year from today rather than $200 today. This is because

(1) I know that the interest rate is greater than 10%

(2) I know that the interest rate is less than 10% (3) The interest rate equals 15% (4) I know that the interest rate is less than 15% (5) $220 is more than $200

Use the following information to answer the next two questions: suppose the Bureau of Labor Statistics reports that the total population of the US is 330 million and that the working age population is 240.5 million. The number of employed and the number of unemployed workers are 157 and 6 million respectively. 29. The size of the labor force would be ____ while the unemployment rate would be____

(1) 240.5; (6/240.5)X100 (2) 163; (6/163)X100 (3) 240.5; (157/240.5)X100 (4) 163; (6/157)X100 (5) 151; (6/330)X100

30. The employment to population ratio would be ____, while the labor force participation rate would be ____

(1) (330/240.5)X100; (240.5/330)X100 (2) (157/240.5)X100; (163/240.5)X100 (3) (163/240.5)X100; (157/240.5)X100 (4) (157/330)X100; (163/330)X100 (5) (163/330)X100; (157/330)X100

31. Suppose that in Brazil the frictional unemployment rate is 2%, the structural unemployment rate is 3% and the cyclical unemployment rate is 1%. Then the (overall) rate of unemployment in Brazil is

(1) 5% (2) 3% (3) 4% (4) 6% (5) 7%

32. Which one of the following statements about job search is FALSE?

(1) The process of job search is considered to be the cause of frictional unemployment (2) The time spent trying to find the right match between a position and

a worker’s preferences is referred to as job search (3) Government employment insurance programs are partially blamed for giving frictionally unemployed individuals the wrong incentives to look for a job. (4) Government job agencies can help speed up the process of finding a job (5) None of the above is a false statement

33. Minimum wage laws usually directly affect ______ and create an excess _____ labor in the labor market.

(1) a large percentage of the working population; supply of (2) a large percentage of the working population; demand for (3) a small percentage of the working population; supply of (4) a small percentage of the working population; demand for (5) all individuals earning wages; demand for

34. The theory of ________ explains why it might be profitable for a firm to offer higher than equilibrium wages to its workers. This practice usually results in _______.

(1) efficiency wages; more unemployment (2) job search; less unemployment (3) minimum wages; more unemployment (4) efficiency wages; less unemployment (5) job search; less effort provided by workers

Consider the following information to answer the next two questions: Suppose Christie is looking for a job and cannot find a perfect match, while John keeps applying for jobs, but there seems to be much more candidates as him than available positions. 35. Christie’s unemployment is best described as ______ unemployment, while John’s situation can be best described as _______ unemployment.

(1) frictional; natural (2) cyclical; frictional (3) structural; cyclical (4) frictional; structural (5) natural; cyclical

36. Which statement is/are TRUE about these individual’s situations?

(1) John’s situation is probably the result of below equilibrium wages

(2) John’s situation is probably the result of above equilibrium wages (3) Christie’s situation is a typical symptom of a weak economy (4) Christie’s time spent looking for a job could be reduced, but usually cannot be eliminated. (5) Both 2 and 4 are true statements

37. Research shows that usually union workers earn _______ equilibrium wages, which results in _____ unemployment

(1) above; more (2) below; less (3) above; less (4) below; more (5) below, about the same

38. If an adult individual states that it is not longer working or looking for a job, this will result in

(1) an increase of the labor force (2) a decrease of the labor force (3) a decrease in the number of people in the “not in the labor force” category (4) an increase in the number of people in the “not in the labor force” category (5) both 2 and 4

39. Which of the following statements best describes unemployment in the United States?

(1) most spells of unemployment are short, while most unemployment observed at any given time is long term unemployment. (2) most spells of unemployment are long term, and most unemployment observed at any given time is long term unemployment. (3) most spells of unemployment are short, and most unemployment observed at any given time is short term unemployment. (4) most spells of unemployment are long term, while most unemployment observed at any given time is short term unemployment. (5) The current unemployment rate is 6.5%

40. The unemployment rate is not a perfect measure of joblessness because

(1) different groups of people within a country have different unemployment rates

(2) people often lie about their intentions to look for a job (3) it is quite difficult to measure movements in and out of the labor force (4) none of the above (5) all of the above

1. What describes the US banking system? (1) Federal Reserve System. (2) Frictional Banking System. (3) Frankly Ridiculous Banking System. (4) Fractional Banking System. (5) Fraternity Banking System.

2. Given the following information, what would be the values of M1 and M2?

Small time deposits $650 billion Demand Deposits and other Checkable Deposits $300 billion Savings-type deposits $750 billion Money market mutual funds $600 billion Travelers' checks $25 billion Large time deposits $600 billion Currency $100 billion Miscellaneous Categories in M2 $25 billion

(1) M1 = $400 billion, M2 = $2,475 billion. (2) M1 = $125 billion, M2 = $3,025 billion. (3) M1 = $425 billion, M2 = $2, 450 billion. (4) M1 = $425 billion, M2 = $1,875 billion. (5) M1 = $400 billion, M2 = $3,025 billion.

3. In recent years, the Federal Reserve has conducted policy by setting a target for:

(1) Bank reserves. (2) The monetary growth rate. (3) The exchange rate. (4) The federal funds rate. (5) The discount rate.

4. Which of the following is FALSE according to lecture or text?

(1) The most liquid assets in the US are Federal Reserve Notes and coins. . (2) Federal Reserve notes are legal tender in the U.S. because there is public trust in the authorities who issue them and the printing technique has reached a sufficiently advanced stage that counterfeiting is extremely difficult. (3) In order for legal tender to work properly, the authorities who issue it implicitly promise the public that they will not print paper money so

fast that it loses its value. (4) Commodity money and fiat money are legal tender in the U.S. (5) A rapid expansion of the money supply has been a problem throughout history and results in a rapid decrease in the value of money.

5. Which of the following is FALSE according to lecture or text? (1) In reality, the money supply increases a lot less than the potential due to the holding of excess reserves by commercial banks. (2) Money demand refers to how much wealth people want to hold in liquid form. (3) When economists and government officials speak about the money supply, they usually mean M1. (4) The monetary base is also known as “high powered money” and the federal government controls it. (5) Liquidity refers to the ease with which an asset is converted to the medium of exchange.

6. Which of the following is not included in M1? (1) Federal reserve notes (2) demand deposits (3) traveler’s checks (4) credit cards (5) coins

7. According to the balance sheet below. What is the reserve ratio?

First Bank of Mason City Assets Liabilities Required Reserves $20.00 Deposits $100.00 Loans $80.00

(1) 0 percent. (2) 20 percent. (3) 80 percent. (4) 100 percent. (5) 2 percent.

8. In recent years the Federal Open Market Committee has focused on a target for:

(1) M1 growth.

(2) The federal funds rate. (3) Total reserves of banks. (4) The discount rate. (5) The number of Treasury Securities issued by the federal government.

9. The political business cycle refers to:

(1) The fact that about every four years some politician advocates greater government control of the Fed. (2) The potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected. (3) The part of the business cycle caused by the reluctance of politicians to smooth the business cycle. (4) Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time. (5) the fact that the fights between Democrats and Republican have an adverse impact on the nation’s output

10. Which of the following is INCORRECT?

(1) The Federal Reserve serves as a bank regulator. (2) The 12 regional Federal Reserve Banks regulate banks in their districts. (3) The New York Federal Reserve Bank president always gets to vote at the FOMC meeting (4) All members of the Board of Governors sit on the Federal Open Market Committee. (5) The Board of Governors is currently chaired by Ben Bernanke and it has 12 members who serve 4-year terms.

11. Which of the following executes open market operations?

(1) The FOMC (2) San Francisco Federal Reserve Bank (3) Kansas City Federal Reserve Bank (4) Board of Governors (5) New York Federal Reserve Bank

12. Sally sells 40 bags of lettuce for a total of $80 at the farmers’ market. (1) The $80 is a real variable. The quantity of lettuce is a nominal variable.

(2) The $80 is a nominal variable. The quantity of lettuce is a real variable. (3) Both the $80 and the quantity of lettuce are nominal variables. (4) Both the $80 and the quantity of lettuce are real variables. (5) None of the above is correct.

13. Suppose the actual inflation rate turns out to be higher than the expected inflation rate by 2 percent. Which of the following is true?

(1) The actual real interest rate the borrowers pay will be higher (less) than expected. (2) The actual real interest rate the lenders receive will be higher (lower) than expected. (3) Lenders win (lose) and borrowers lose (win). (4) All of the above are correct consequences. (5) None of the above describes the consequences. <<

14. Which of the following is FALSE according to lecture or text?

(1) The most liquid assets in the US are Federal Reserve Notes and coins. Federal Reserve Notes are monetary liabilities of the Fed and coins are monetary liabilities of the U.S. Treasury. (2) Federal Reserve notes are legal tender in the U.S. because there is public trust in the authorities who issue them and the printing technique has reached a sufficiently advanced stage that counterfeiting is extremely difficult. (3) In order for legal tender to work properly, the authorities who issue it implicitly promise the public that they will not print paper money so fast that it loses its value. (9) Commodity money and fiat money are legal tender in the U.S. (10) A rapid expansion of the money supply has been a problem throughout history and results in a rapid decrease in the value of money. This is called “Currency debasement”.

15. Andrew purchased one share of GE stock for $200 in year 1 and sold that share in year 2 for $400. The inflation rate between year 1 and year 2 was 50%. If the capital gains tax is 50%, what’s Andrew’s after tax- real capital gain if the tax is on nominal gains? What is it if the tax is on real gains?

(1) $0, $50 (2) $50, $0 (3) $100, $50

(4) $100, $150 (5) $0, $0

16. Which of the following is TRUE? (1) Nominal exchange rates vary substantially over time. (2) Purchasing-power parity describes the forces that determine exchange rates in the long run. (3) According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the different price levels in those countries. (4) All of the above are true.

17. Refer to the Figure above. If the money supply is MS2 and the value of money is 2,

(1) the value of money is less than its equilibrium level. (2) the quantity of money demanded is greater than the quantity of money supplied. (3) the quantity of money supplied is greater than the quantity of money demanded. (4) the price level is higher than its equilibrium level. (5) the value of money and the price level are at equilibrium level.

18. Which of the following is FALSE?

(1) U.S. exports as a percentage of GDP have about doubled over the last 50 years. The U.S. currently has a trade deficit. (2) The increase in international trade in the United States is partly due to improvements in transportation and advances in telecommunications. (3) Net capital outflow measures the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners. (4) If a country changes its corporate tax laws so that domestic firms build and manage more firms overseas, then this country will increase foreign direct investment which increases net capital outflow. (5) Given the fact that citizens of a country are not saving much, it is worse to have foreigners invest in the domestic economy than no one at all.

19. The country of Sylvania has a GDP of $900, investment of $200, government purchases of $200, and net capital outflow of negative $100. This means that

(1) Consumption equals $600. (2) Consumption equals $500. (3) Saving equals $300. (4) Consumption equals $700. (5) Net export equals $600.

20. The nominal exchange rate is about 1.8 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?

(1) 36 florin (2) 72 florin (3) 90 florin (4) 40 florin (5) 18 florin

21. Which of the following could be a consequence of a depreciation of the U.S. real exchange rate?

(1) John, a French citizen, decides that Iowa pork has become too expensive and cancels his order. (2) Roberta, a U.S. citizen, decides to import fewer windshield wipers for her auto parts company. (3) Nick, a U.S. citizen, decides that the trip to Nepal he’s been thinking about is now made affordable by the depreciation. (4) All of the above are correct. (5) None of the above is correct.

22. If the exchange rate is 5 units of Peruvian currency per dollar and a hotel room in Lima costs 300 units of Peruvian currency, how many dollars do you need to get a room?

(1) 1,500. Your purchase will increase Peru's net exports and increase U.S. net exports. (2) 1,500. Your purchase will have no effect on Peru's net exports but decrease U.S. net exports. (3) 60. Your purchase will have no effect on Peru's net exports nor U.S. net exports. (4) 60. Your purchase will decrease Peru's net exports and increase U.S. net exports. (5) 60. Your purchase will increase Peru's net exports and decrease U.S. net exports.

23. Suppose that the minimum wage increases in Canada. This will affect the _______, which will shift to the ____

(1) Short run aggregate supply curve; left. (2) Long run aggregate supply curve; right. (3) Aggregate demand curve; right (4) Aggregate demand curve; left. (5) Long run supply curve; left

24. Consider the aggregate supply and aggregate demand model. Suppose General Electric introduces a new technology that allows firms to produce more units of output using the same amount of inputs. This will represent an increase in _______ that shifts the long run supply curve to the _____, increasing _________.

(1) Productivity, left; real GDP (2) Productivity; right; the price level (3) Inflation; left; real GDP (4) Productivity; right; real GDP (5) Inflation; right; real GDP

25. Which of the following events will shift the long run aggregate supply curve to the left?

(1) An increase in the capital stock of the economy. (2) An increase in the growth rate of money. (3) A severe hurricane that damages the nation’s capital stock. (4) A decrease in income taxes. (5) A decrease in the minimum wage.

26. When ________, the aggregate demand curve shifts to the right. If expectations about the price level remain unchanged, the economy moves to a point with higher ____.

(1) The Fed buys bonds in the open market; unemployment and price level. (2) The Fed buys bonds in the open market; employment and price level. (3) Congress reduces purchases of new weapons systems; unemployment and price level. (4) Congress reduces purchases of new weapons systems; employment and price level.

(5) The Fed sells bonds in the open market; employment and price level.

27. Consider the aggregate supply and aggregate demand model. Suppose that the European Union (a big consumer of goods produced in the United States) goes into a severe recession. According to the AS – AD model, we should expect _____ to increase in the United States as a result of a(n) ____ in U.S. net exports.

(1) Unemployment; decrease. (2) Unemployment; increase. (3) Employment; decrease. (4) Employment; increase. (5) Real GDP; decrease.

28. The sticky wage theory of the short run aggregate supply curve states that when the price level rises more than expected:

(1) Production is more profitable and employment rises. (2) Production is less profitable and employment falls. (3) Production is more profitable and employment falls. (4) Production is less profitable and unemployment falls. (5) Production is less profitable and employment rises.

29. For the United States economy, which of the following is the most important reason for the downward slope of the aggregate demand curve?

(1) The wealth effect. (2) The interest rate effect. (3) The inflation effect. (4) The real wage effect. (5) The exchange rate effect.

30. The liquidity preference theory is most relevant for the ______, and supposes that the ______ adjusts to bring money supply and money demand into balance.

(1) Short run; exchange rate (2) Long run; price level (3) Short run; interest rate. (4) Long run; interest rate (5) Long run; exchange rate

31. According to the Fisher equation, if expected inflation remains constant, then when the nominal interest rate falls, the real interest rate ______.

(1) Falls by more than the change in the nominal interest rate. (2) Falls by the change in the nominal interest rate. (3) Increases by more than the change in the nominal interest rate. (4) Increases by the change in the nominal interest rate. (5) Remains unchanged.

32. According to the liquidity preference theory, if the quantity of money supplied is greater than the quantity of money demanded, the interest rate will ______ and the quantity of money demanded will ______.

(1) Decrease; increase. (2) Increase; increase. (3) Decrease; decrease. (4) Increase; remain unchanged. (5) Increase; decrease.

33. In the short run, an increase in government expenditures affects the _____ and raises ______.

(1) Short run aggregate supply curve; the price level and real GDP (2) Long run aggregate supply curve; unemployment. (3) Aggregate demand curve; the price level and real GDP. (4) Aggregate demand curve; the price level and unemployment. (5) Short run aggregate supply; unemployment.

34. Suppose the government buys a bridge. The owner of the company that builds the bridge pays his workers. The workers increase their spending. Firms that these workers buy goods from increase their output. This type of effect on spending illustrates

(1) The wealth effect. (2) The real wage effect. (3) The multiplier effect. (4) The crowding out effect. (5) The Fisher effect.

35. Suppose that the marginal propensity to consume is 0.9 and that the government increases its purchases by 50 million. Assuming there is no

crowding out effect, total demand for goods and services will increase by ____. If we allow for the possibility of some crowding out effect, then total demand for goods and services will increase by _____.

(1) 500 million; more than 500 million (2) 50 million; more than 50 million (3) 5 million; more than 5 million (4) 5 million; less than 5 million (5) 500 million; less than 500 million

36. Consider the interaction of the aggregate supply and aggregate demand model and the Phillips curve. In the long run,

(1) the natural rate of unemployment depends primarily on the level of aggregate demand (2) inflation depends primarily upon the money supply growth rate. (3) The Phillips curve slopes downward. (4) There is a tradeoff between the inflation rate and the rate of unemployment. (5) All of the above are correct.

37. If the Fed decides to reduce the money supply growth rate, then in the long run,

(1) Prices will be lower and unemployment will be higher. (2) Inflation and unemployment will be unchanged. (3) Prices will be lower and unemployment will be lower. (4) Prices will be lower and unemployment will be unchanged. (5) All of the above are correct.

38. In 2001, Congress and President Bush instituted tax cuts. According to the short-run Phillips curve this change should have

(1) Reduced inflation and unemployment. (2) Raised inflation and unemployment. (3) Reduce inflation and raised unemployment. (4) Raised inflation and reduced unemployment. (5) Raised inflation and left unemployment unchanged

39. If the short-run Phillips curve were stable, which of the following would be unusual?

(1) An increase in government spending and a fall in unemployment (2) An increase in inflation and a decrease in output

(3) A decrease in the inflation rate and a rise in the unemployment rate (4) A decrease in the money supply and a rise in unemployment. (5) All of the above

40. Which of the following would we not expect if government policy moved the economy up along a given short- run Phillips curve?

(1) Sarai reads in the newspaper that the central bank recently raised the money supply. (2) Prakash gets more job offers. (3) Louis makes smaller increases in the prices at his health food store. (4) Jessica's nominal wage increase is larger. (5) Davide sees on TV that interest rates are decreasing.

41. In the long run, ______ shifts the long-run Phillips curve to the right.

(1) An increase in the minimum wage. (2) A decrease in tax rates (3) An increase in the money supply (4) A decrease in the money supply (5) A technological improvement that raises productivity.

42. An increase in expected inflation shifts ____, giving to policymakers a _____ favorable short run trade off between inflation and unemployment

(1) The long-run Phillips curve left; less (2) The short-run Phillips curve right; less (3) The short-run Phillips curve left; less (4) Both the short-run and long-run Phillips curve left; more (5) The long run Phillips curve left; more

43. Which of the following is an argument against trying to use policy to stabilize the economy?

(1) Recessions represent a waste of resources. (2) Monetary and fiscal policy can effectively reduce the negative effects of recessions. (3) Recessions impose excessive and unnecessary hardship to households and firms. (4) Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time. (5) All of the above.

44. The political business cycle refers to (1) The fact that about every four years some politician advocates greater government control of the Fed. (2) The potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected (3) the part of the business cycle caused by the reluctance of politicians to smooth the business cycle. (4) changes in output created by the monetary rule the Fed must follow. (5) All of the above.