Final Exam Review Questions

Name:

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

The total sales of all firms in the economy for a year

a.	equals GDP for the year.
b.	is larger than GDP for the year.
c.	is smaller than GDP for the year.
d.	equals GNP for the year.

The local Chevrolet dealership has an increase in inventory of 25 cars in 2006. In 2007 it sells all 25 cars. Which of the following statements is correct?

a.	The full value of the increased inventory will be counted as part of GDP in 2006, and the value of the cars sold in 2007 will not cause 2007 GDP to increase.
b.	The value of the increased inventory will not affect 2006 GDP; instead, the full value of the inventory will be counted as part of 2007 GDP.
c.	The value of the increased inventory will be counted as part of 2006 GDP and the value of the cars sold in 2007 will increase 2007 GDP.
d.	One-half of the value of the increased inventory will be counted as part of 2006 GDP and the other one-half of the value will be counted as part of 2007 GDP.

Suppose that dairy products have risen in price relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this “low” rate of price increase most relevant?

a.	substitution bias
b.	introduction of new goods
c.	unmeasured quality change
d.	income bias

In the small closed economy of San Lucretia, the currency is the denar. Statistics for last year show that private saving was 60 billion denars, taxes were 70 billion denars, government purchases of goods and services were 80 billion denars, there were no transfer payments by the government, and GDP was 400 billion denars. What were consumption and investment in San Lucretia?

a.	270 billion denars, 50 billion denars
b.	260 billion denars, 60 billion denars
c.	250 billion denars, 70 billion denars
d.	None of the above is correct.

Suppose that a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer’s interest income was tax free. This would shift the

a.	supply for loanable funds right making interest rates fall.
b.	supply of loanable funds left making interest rates rise.
c.	demand for loanable funds right making the interest rate rise.
d.	demand for loanable funds left making the interest rate fall.

Which of the following is correct concerning a risk-averse person?

a.	She would not play games where the probability of winning and losing a dollar are the same.
b.	She might not buy health insurance if she thinks her risks are low.
c.	Her marginal utility of wealth decreases as her income increases.
d.	All of the above are correct.

Which of the following is a source of market risk?

a.	Holding stocks in many companies carries the risk of a reduced average return.
b.	Real GDP varies over time and sales and profits move with real GDP.
c.	When a paper producer has declining sales, it is likely that so will other paper producers.
d.	If stockholders become aggravated with the way a CEO runs a company, the price of that company’s stock might fall in the stock market..

Suppose the United States exports cars to France and imports cheese from Switzerland. This situation suggests that

a.	the United States has a comparative advantage relative to Switzerland in producing cheese, and France has a comparative advantage relative to the United States in producing cars.
b.	the United States has a comparative advantage relative to France in producing cars, and Switzerland has a comparative advantage relative to the United States in producing cheese.
c.	the United States has an absolute advantage relative to Switzerland in producing cheese, and France has an absolute advantage relative to the United States in producing cars.
d.	the United States has an absolute advantage relative to France in producing cars, and Switzerland has an absolute advantage relative to the United States in producing cheese.

Opponents of free trade often want the United States to prohibit the import of goods made in overseas factories that pay wages below the U.S. minimum wage. Prohibiting such goods is likely to

a.	cause these factories to pay the U.S. minimum wage.
b.	increase the rate of technological advance in poor countries so that they can afford to pay higher wages.
c.	increase poverty in poor countries and benefit U.S. firms which compete with these imports.
d.	harm U.S. firms which compete with these imports.

10.

Ted is working part time. Alice is on temporary layoff. Who is counted as employed by the BLS?

a.	only Ted
b.	only Alice
c.	both Ted and Alice
d.	neither Ted nor Alice

11.

There will be structural unemployment if

a.	some wages are kept above their equilibrium level.
b.	some people choose not to work at the equilibrium wage.
c.	some wages are below their equilibrium level.
d.	There can be structural unemployment under all the possibilities above.

12.

The agency responsible for regulating the money supply in the United States is

a.	the Comptroller of the Currency.
b.	the U.S. Treasury.
c.	the Federal Reserve.
d.	the U.S. Bank.

13.

Velocity is

a.	Y/(M x P) and increases if dollars are exchanged less frequently.
b.	Y/(M x P) and increases if dollars are exchanged more frequently.
c.	(P x Y)/M and increases if dollars are exchanged less frequently.
d.	(P x Y)/M and increases if dollars are exchanged more frequently.

14.

If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in

a.	real output only.
b.	nominal output only.
c.	the price level only.
d.	Both the price level and nominal output.

15.

You put money in an account that earns a 5 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

a.	3.4 percent
b.	1.6 percent
c.	1 percent
d.	None of the above is correct.

16.

Which of the following is accurate?

a.	Monetary policy is neutral in both the short run and the long run.
b.	Though monetary policy is neutral in the long run, it may have effects on real variables in the short run.
c.	Monetary policy has profound effects on real variables in both the short run and the long run.
d.	Monetary policy has profound effects on real variables in the long run, but is neutral in the short run.

17.

If Argentina's domestic investment exceeds national saving, then Argentina has

a.	positive net capital outflows and negative net exports.
b.	positive net capital outflows and positive net exports.
c.	negative net capital outflows and negative net exports.
d.	negative net capital outflows and positive net exports.

18.

In an open economy, the market for loanable funds equates national saving with

a.	domestic investment.
b.	net capital outflow.
c.	national consumption minus domestic investment.
d.	None of the above is correct.

19.

Which of the following would not be a consequence of an increase in the U.S. government budget deficit?

a.	U.S. interest rates rise.
b.	U.S. net capital outflow falls.
c.	The real exchange rate of the U.S. dollar depreciates.
d.	The U.S. supply of loanable funds shifts left.

20.

Suppose that the United States imposes an import quota on automobiles. In the open-economy macroeconomic model this quota shifts the

a.	U.S. supply of loanable funds left.
b.	U.S. demand for loanable funds left.
c.	demand for U.S. dollars in the market for foreign-currency exchange right.
d.	supply of U.S. dollars in the market for foreign-currency exchange left.

21.

Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is

a.	temporarily low and so supply a smaller quantity of labor.
b.	temporarily low and so supply a larger quantity of labor.
c.	temporarily high and so supply a smaller quantity of labor.
d.	temporarily high and so supply a larger quantity of labor.

22.

The most important automatic stabilizer is

a.	open-market transactions.
b.	the tax system.
c.	unemployment compensation.
d.	welfare benefits.

23.

In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg the

a.	unemployment rate.
b.	inflation rate.
c.	growth rate of real national income.
d.	All of the above are correct.

24.

A policy change that changes the natural rate of unemployment changes

a.	neither the long-run Phillips curve nor the long-run aggregate supply curve.
b.	both the long-run Phillips curve and the long-run aggregate supply curve.
c.	the long-run Phillips curve, but not the long-run aggregate supply curve.
d.	the long-run aggregate supply curve, but not the long-run Phillips curve.

25.

Which of the following explains the time-inconsistency of policy explained by Kydland and Prescott?

a.	A contractionary monetary policy will lead to higher unemployment in the short-run but not the long-run.
b.	An expansionary monetary policy will lead to higher unemployment in the short-run but not the long-run.
c.	Expected inflation is higher than otherwise if the public believes that policymakers will be tempted to raise inflation to reduce unemployment.
d.	Expected inflation is lower than otherwise if the public believes that policymakers will be tempted to lower inflation to reduce unemployment.

26.

If in response to an adverse aggregate supply shock the Fed increased the money supply,

a.	unemployment and inflation would both rise.
b.	unemployment and inflation would both fall.
c.	unemployment would rise and inflation would fall.
d.	unemployment would fall and inflation would rise.

27.

If the sacrifice ratio is 3, reducing the inflation rate from 10 percent to 6 percent would require sacrificing

a.	2 percent of annual output.
b.	5 percent of annual output.
c.	6 percent of annual output.
d.	None of the above is correct.

28.

Suppose that the central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate supply shifts right the central bank would have to

a.	increase the money supply, which causes output to move closer to its long-run equilibrium.
b.	increase the money supply, which causes output to move farther from long-run equilibrium.
c.	decrease the money supply, which causes output to move closer to its long-run equilibrium.
d.	decrease the money supply, which causes output to move farther from long-run equilibrium.

29.

If a country had a rule that required the ratio of debt to GDP to be constant, it would necessarily have to run a surplus if

a.	real GDP rose and the inflation rate were positive.
b.	real GDP rose and the inflation rate were negative.
c.	real GDP fell and the inflation rate were positive.
d.	real GDP fell and the inflation rate were negative.

30.

Which of the following is included in the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

a.	A retail outlet in Russia wants to buy semi-conductors from a U.S. manufacturer.
b.	A U.S. bank loans dollars to Blair, a U.S. resident, who wants to purchase a new house in the United States.
c.	A U.S. based mutual fund wants to purchase bonds issued by an Italian corporation.
d.	All of the above are correct.

Short Answer

31.

U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of U.S. residents?

32.

The table below uses data for the year 2003 provided by the BLS and adjusted to be comparable to U.S. data. All values are in thousands. Fill in the blank entries in the table. Show your work!

Country	Adult Population	Labor Force	Employed	Unemployed	Unemployment Rate	Labor-Force Participation Rate
Japan	109,474		62,510	3,500
France		26,870		2,577		57.41
Germany	70,159	39,591			9.69

33.

Following the recession of 2001 there was a month where employment and the unemployment rate rose. Assuming the computations were correct, how is it possible for both to have increased?

34.

Economists argue that the move from barter to money increased trade and production. How is this possible?

35.

Suppose that a country has $120 billion of national savings, and $80 billion of domestic investment. Is this possible? Where did the other $40 billion of national savings go?

36.

Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?

37.

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

38.

Describe three costs of inflation.