ECON 201 OL4 US2 Fall 2014 Final Exam

Final Exam ECON 201 OL4 US2 Fall 2014I. MULTIPLE CHOICE (40 questions 2 points each). Choose the
one alternative that best completesthe statement or answers the question.1) ________ is a situation in which resources are limited in
quantity and can be used in different ways. 1) _______A) Choice B) EconomicsC) Supply and demand D) Scarcity2) The single largest expenditure component in GDP is: 2)
_______A) consumption expenditures. B) private investment
expenditures.C) net exports. D) government purchases.3) In the circular flow diagram, the different payments made
by firms to households are: 3) _______A) rent on office and factory buildings. B) interest on
borrowed money.C) wages and salaries. D) all of the above.4) ________ is commonly defined as six consecutive months of
declining real GDP. 4) _______A) A recession B) An expansion C) A peak D) A trough5) If gross investment in 2009 is $600 billion and
depreciation in 2012 is $50 billion, net investment in 2012 is: 5)_______A) $600 billion. B) $50 billion.C) $550 billion. D) none of the above.6) The number of people classified as employed is 220,000
and the number of people classified as unemployed is 30,000.The size of the labor force: 6) _______A) equals 250,000.B) equals 200,000.C) equals 300,000.D) cannot be determined from this information.7) Unanticipated inflation arbitrarily redistributes income
because: 7) _______A) medical costs rise faster than health insurance premiums.B) nominal interest rates fall below real interest rates.C) actual tax revenue decreases and so do government
subsidies.D) people forecast relative prices incorrectly and either
gain or lose purchasing power.8) A ?shoe?leather cost? is the cost associated with: 8)
_______A) trying to reduce holdings of cash when there is
inflation.B) changing price lists when there is inflation.C) designing a new basketball sneakers when there is
inflation.D) buying new shoes when there is inflation.Table 6.119) Refer to Table 6.11. If 1999 is the base year, the price
index in 2001 is: 9) _______A) 100. B) 1998. C) 121.7. D) 138.7.10) Refer to Table 6.11. If 1999 is the base year, then the
inflation rate (i.e., the growth rate of the price index) between 1999and 2000 is: 10) ______A) 121.7 percent. B) zero percent. C) 2.17 percent. D) 17.8
percent.Figure 8.111) Refer to Figure 8.1. If the saving rate is s2, the
economy reaches the long run equilibrium at: 11) ______A) pt. E. B) pt. A.C) pt. D. D) pt. C.12) If the economy experiences an increase in the amount of
capital stock per worker, then we say that the economy isexperiencing: 12) ______A) capital deepening. B) capital depreciation.C) capital widening. D) technological progress.13) Using a production possibility curve, a shifting of the
curve outward illustrates: 13) ______A) economic growth. B) a lower level of production.C) a decrease in the unemployment rate.D) fewer inputs.14) Steel rod prices are an example of: 14) ______A) custom prices. B) regulated prices.C) auction prices. D) personal prices.15) If the marginal propensity to consume is 0.8, the value
of the marginal propensity to save is: 15) ______A) 5. B) 1.25. C) 0.2. D) 0.8.16) The economy moves from a short?run equilibrium to the
long?run equilibrium through: 16) ______A) demand shocks. B) improvements in technology.C) supply shocks. D) adjustments in wages and prices.Figure
9.217) Refer to Figure 9.2. Suppose the economy is at Point A,
a decrease in the price level causes a movement to Point:17) ______A) D. B) C. C) E. D) B.18) A decrease in the money supply will cause output: 18)
______A) to increase in the short run; increase in the long run.B) to increase in the short run, decrease in the long run.C) to decrease in the short run; not change in the long run.D) to decrease in the short run; decrease in the long run.19) Federal discretionary spending consists of: 19) ______A) all the spending that Congress authorized by prior laws.B) interest payments on government debt held by the public.C) all the programs authorized by Congress on an annual
basis.D) all of the above.20) In 2011, federal spending was about ________ percent of
GDP. 20) ______A) 71 B) 25 C) 14.7 D) 3321) The length of time that the U.S. Treasury Department
takes to print and mail tax rebate checks to help the economyout of a recession is part of the: 21) ______A) inside lag. B) outside lag.C) identification lag. D) inside?outside lag.22) If the marginal propensity to consume is 0.75 and
marginal propensity to import is 0.15, then the multiplier in an openeconomy is: 22) ______A) 4. B) 8.3. C) 10. D) 2.5.23) If both government spending and taxes increase by an
equal amount at the same time, GDP will: 23) ______A) decrease.B) increase.C) remain the same.D) None of the above are true, it is impossible to say.24) A $100 million increase in government spending causes:
24) ______A) an equal amount of change in equilibrium output in an
open and a closed economy.B) a larger change in equilibrium output in a closed economy
than in an open economy.C) a larger change in equilibrium output in a closed economy
than in an open economy if the marginal propensity toimport is zero.D) a larger change in equilibrium output in an open economy
than in a closed economy.25) The boom period of the late 1990s was a good example of:
25) ______A) the depressing effect on share prices of low expectations
about future dividends.B) the Q?theory of investment at work.C) the irrationality of long?term investments when share
prices are not high enough.D) the impact that low interest rates have of investment
expenditure.26) A ?bank run? occurs when panicky depositors
simultaneously: 26) ______A) withdraw their funds in order to invest in Treasury
bills.B) withdraw their funds from a bank they believe will fail.C) chase a bank owner who has fled the country.D) deposit their funds in a bank offering high deposit
interest rates.27) According to the neoclassical theory of investment, the
important determinant of investment spending is: 27)______A) taxes and the real interest rate.B) nominal interest rates and taxes.C) the business climate.D) government spending.Additional ApplicationCOPING WITH A STOCK MARKET CRASH: BLACK MONDAY, 1987How did the Fed successfully respond to the major stock
market crash in 1987?On October 19, 1987, known as ?Black Monday,? the Dow Jones
index of the stock market fell a dramatic 22.6 percent in one day. Similar
declines were felt in other indexes and stock markets around the world. These
declines shocked both businesses and investors. In just 24 hours, many people
and firms found themselves much less wealthy. The public began to worry that
banks and other financial institutions—to protect their own loans and
investments—would call in borrowers? existing loans and stop making new ones. A
sharp drop in available credit could, conceivably, plunge the economy into a
deep recession.Alan Greenspan had just become chairman of the Federal
Reserve that year. As a sophisticated economist with historical knowledge of
prior financial crises, he recognized the seriousness of the situation. He
quickly issued a public statement in which he said that the Federal Reserve
stood ready to provide liquidity to the economy and the financial system. Banks
were told that the Fed would let them borrow liberally. In fact, the Fed
provided liquidity to such an extent that interest rates even fell. As a result
of Greenspan?s action, ?Black Monday? did not cause a recession in the United
States.28) The dramatic drop in stock values on October 19, 1987,
known as ?Black Monday,? was potentially catastrophic for theeconomy because: 28) ______A) the Fed could not execute any open market operations and
the required reserve ratio had been set too low by the previous administration.B) banks and financial institutions might have called in
existing loans and stop making new ones.C) the value of the U.S. dollar was likely to fall too and
that would create a massive trade deficit.D) the federal government found itself on the brink of
default, so ruining millions of public debt holders.29) First National Bank has liabilities of $1 million and
owners? equity of $300,000. First National Bank?s assets are:29)______A) $700,000.B) $100,000.C) $1.3 million.D) $900,000.30) Which of the following is included in M1, but not
included in M2? 30) ______A) travelers checksB) checking depositsC) currencyD) All assets in M1 are included in M2.Figure 14.331) Refer to Figure 14.3. At an interest rate of 10%, there
is: 31) ______A) an excess supply of money of $500.B) an excess demand for money of $300.C) an excess supply of money of $300.D) an excess demand for money of $500.32) Fed actions that increase the money supply: 32) ______A) tend to lead to a depreciation of the currencies of other
nations.B) usually have no effect on a currency?s exchange value.C) tend to lead to a depreciation of a nation?s currency.D) tend to lead to an appreciation of a nation?s currency.33) When the economy is in a boom, the interest rates
________ and the bond prices ________. 33) ______A) increase; decreaseB) increase; increaseC) decrease; decreaseD) decrease; increase34) One implication of Say?s Law is that: 34) ______A) unemployment will always persist.B) there will always be a recession, as not all goods in the
economy will be purchased.C) inflation will always exist, as all goods in the economy
will be purchased.D) there is no recession, as all goods produced in the
economy will be purchased.35) When an incumbent politician uses expansionary fiscal
and monetary policy to increase the chance of re?election, thatpolitician is generating a(n): 35) ______A) political business cycle.B) a sociological depression.C) economically sound campaign.D) political dynasty.36) In the long run, without government intervention, the
economy responds to a decrease in aggregate demand with:36) ______A) a decrease in short?run aggregate supply.B) an increase in short?run aggregate supply.C) an increase in aggregate demand.D) a second decrease in aggregate demand.37) Inflation in the long run is positively correlated with:
37) ______A) nominal wage growth, but not nominal interest rates.B) neither nominal wages nor nominal interest rates.C) nominal wages and nominal interest rates.D) nominal interest rates, but not nominal wages.38) If the Fed is credible or believable in its desire to
fight inflation, it can deter the private sector: 38) ______A) from taking aggressive actions that drive prices down.B) from lowering real wages.C) from developing rational expectations about inflation.D) from taking aggressive actions that drive up prices.Additional ApplicationINFLATION?INDEXED BONDS IN THE UNITED STATESAre there bonds that can protect your investments from
inflation?In 1997, the U.S. Department of the Treasury created a new
financial instrument called the Treasury Inflation?Protected Security, or TIPS.
The key feature of TIPS is that the payments to investors adjust automatically
to compensate for the actual changes in the Consumer Price Index. Therefore,
TIPS provide protection to investors from inflation.Like other government bonds, TIPS make interest payments
every six months and a payment of the original principal when the bond matures.
However, unlike other Treasury bonds, these payments are automatically adjusted
for changes in inflation. Despite their obvious attractions, the market for
TIPS is still rather small. As of 2005, there were about $200 billion in TIPS
outstanding, compared to a total volume of about $4 trillion ($4,000 billion)
total Treasury obligations.Because TIPS compensate for actual inflation, the interest
rate on these bonds differs from conventional bonds by the expected inflation
rate. By comparing the interest rates on TIPS to other government bonds of
similar maturity, economists can estimate the public?s expectations of
inflation.SOURCE: Simon Kwan, ?Inflation Expectations: How the Market
Speaks,? Federal Reserve Bank of San Francisco EconomicLetter, October 7, 2005.39) According to the application, the difference between the
interest rates on TIPS and the interest rates on non?inflation indexed
securities represents: 39) ______A) the public?s expectation of inflation in the future.B) the government?s expectation of inflation in the future.C) the public?s expectation of inflation in today.D) the Fed?s expectation of inflation in the today.40) If what a government spends exceeds what it collects in
taxes in a year, then the government is experiencing a:40)______A) government budget surplus. B) government net revenue.C) government budget deficit. D) government net expenditure.II. SHORT ANSWER. (5 questions 4 points each). Please write
a separate paragraph to explainyour answer to each of the following questions.41) Explain why we must take into account changes in
business inventories when calculating GDP. 41)42) If Year 1 is the base year, the price index for Year 2
is 105, and the price index for Year 3 is 103. What is the inflation rate in
Years 2 and 3? Explain what has happened to the cost of living between Years 1
and 2 and Years 2 and 3. 42)Table 8.143) Refer to Table 8.1. Compute real GDP per capita for each
of the three countries. Why is it important to examine real GDP per capita
rather than real GDP? 43) _____________44) ?The budget surpluses incurred by the government during
the late 1990s were purely due to the major tax increase implemented during
Clinton?s Administration.? Do you agree or disagree? And please explain why?
44)
45) Assume the money market is initially in equilibrium.
Now, suppose that the price level falls. Please explain what effect this
reduction in the aggregate price level will have on the money market. 45)