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ECN 202

Exam questions
Assume that in the base year (2008), a country's nominal GDP is 10,000 billion dollars. The country has been experiencing inflation at a rate of 5% each year since the year 2003. Based on this information, the real GDP of 2008 is equal to:
$10,000 billion
The reason the dollar value of only final goods and services are counted in GDP is that:
if we counted the value of all goods we would count inputs, like the value of steel in a new automobile, more than once
A decrease in demand and a decrease in supply will lead to a __________ in equilibrium quantity and an ___________ in equilibrium price.
decrease; indeterminate change
Suppose the economy is at point G (lies under the curve). This implies that:
the economy is experiencing unemployment and/or inefficient allocation of resources
Given a supply curve for lamps, when the price of lamps increases, the:
quantity supplied increases
The circular-flow diagram illustrates how firms ______ goods and services and ________ factors of production.
sell; buy
The primary difference between a change in supply and a change in the quantity supplied is that:
a change in quantity supplied is a movement along the supply curve, while a change in supply is a shift in the supply curve
A decrease in the prices of DVD players (a complement) would result in a change illustrated by:
the move from h to i (shift of demand curve to the right)
When building a model, economists:
simplify reality in order to highlight what really matters
The United States and Germany can produce both wheat and aluminum. The table shows the maximum annual output combinations of wheat and aluminum that can be produced. Based on the table:
the U.S. has a comparative advantage in wheat and an absolute advantage in wheat
An example of a government transfer is a:
Social Security payment
A small town has a thriving market for acupuncture treatments. In an effort to regulate this market, the town requires each acupuncture therapist to purchase a license. Initially, the government issues only enough licenses to provide for 20 treatments per month. This quota creates a quota rent equal to:
Which is not an inefficiency caused by price floors?
inefficiently low prices
Equity means that:
everyone gets his or her fair share of the goods and services produced
Long-run growth is:
the sustained upward trend in aggregate output per person over several decades
Which of the following demonstrates one of the three principles of economy-wide interactions?
fearing a recession, Congress approved a White House proposal to send tax rebates to 2007 taxpayers
When the supply curve shifted from the initial equilibrium, the new intersection of supply and demand has a price of _______ and quantity of 400. This could have resulted from ______.
$1.50; an increases in refining technology
The trough of the business cycle:
is a temporary minimum level of real GDP
The U.S. production possibility frontier will _______ if there is a large influx of immigrants.
shift out
Which of the following is true about inflation and deflation?
both inflation and deflation can pose problems for the economy
If an economy has used up all opportunities to make someone better off (without making someone else worse off) then it has achieved ______.
When the value of a nation's imports exceeds the value of that nation's exports, the nation is said to have:
a trade deficit
if macroeconomic policy has been successful over a period of time, it is likely that the economy has not seen:
severe recessions
Which of the following is most likely a macroeconomics question rather than a microeconomics question?
"is the national unemployment rate rising or falling?"
Specialization and trade should lead to all of the following except:
a decrease intotal economic output
If the government imposes a price floor of $1.00per can of soda, there will be a(n):
surplus of 3 units
A binding price ceiling is designed to:
keep prices low
Technological improvements will:
shift the production possibility frontier outward
The GDP for 2007 was:
C + G + I + E - IM
$94 billion
The law of demand is illustrated when:
an increase in the purchases of personal computers results from lower prices
In the graph, an effective price ceiling would be the price indicated at ______ and a ______ would exist as the difference between _______.
point d (below equilibrium); shortage, points i and h
In recent times the U.S. government has been trying to help the economy through one of the worse economic slumps. The policies used are based on:
Keynesian theory
All points on the production possibility frontier represent:
efficient production points
Scarcity in economics means:
not having sufficient resources to produce all the gods and services we want
The quota rent refers to:
the difference between the demand price and the supply price at the quota limit; Pd-Ps
An example of investment spending would be:
a purchase of anew productive machine
The government of a small town has decided to ban smoking in all restaurants, stores, and government offices. This is an example of which principle?
when markets fail to achieve efficiency, government intervention can improve society's welfare
Margo spends $10,000 on one year's college tuition. The opportunity cost of spending on year in college for Margo is:
whatever should would have purchased with the $10,000 and whatever she would have earned had she not been in college
Inflation can be measured by:
the percentage change in the CPI
You read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in 2008 would have cost:
20% more than the same market basket purchased in the base year
The equilibrium real GDP is:
$500 billion
If planned investment spending increases autonomously by $100, GDP will:
increase by $250
Frictional unemployment is:
good since that means people may be seeking jobs that match their job skills
Changes in taxes shift the aggregate demand curve ______ equal-sized changes in government purchases
by less than
Which of the following is an expansionary fiscal policy?
an increase in unemployment benefits
A process that brings the inflation rate down, is called:
The percentage of the labor force who are unemployed is the:
unemployment rate
In order to be officially unemployed, a person must be:
looking for work in the past 4 weeks
Structural unemployment means there are:
more people seeking work than there are jobs in a particular industry
One of the shortcomings of fiscal policy is that:
it has less time lags and sometimes it may end up destabilizing the economy as a result of these lags
Which of the following is true?
unexpected inflation benefits borrowers and hurts lenders
Planned investment spending is ______ to the interest rate because ________.
negatively related; a rise in the market interest rate makes any given investment project less profitable
if real GDP is less than aggregate expenditure, then inventories will:
fall and firms will increase their future production
Suppose investment spending increases by $50 billion, and as a result the equilibrium income increases by $200 billion. The value of the MPC is:
If government increases income tax rates, the aggregate demand curve is likely to:
shift to the left
Deviations from the natural rate of unemployment are known as:
cyclical unemployment
The government has a budget surplus if:
its total revenues are greater than its total expenditures
The short-run aggregate supply curve will decrease if:
commodity prices rise
If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPC is:
If the aggregate consumption equals $100,000,000 + .75 x YD, then autonomous consumption is:
To close an inflationary gap employing fiscal policy, the government could:
reduce budget allocations to interstate highway maintenance
The interest rate effect is the tendency for changes in the price level to affect:
interest rates and this affect the quantity of investment and consumption demand
When the economy is producing output below potential, it has a:
recessionary gap
As an inflationary gap is eliminated through self-correcting adjustment, the equilibrium price level _____ and the equilibrium real output ______.
increases; decreases
The country of Livonia has an adult population of 100 million. 60% of Livonia's population are employed, but 10% of the people are unemployed. The Labor Force Participation Rate in Livonia is:
Government payments to households for which no good or service is provided in return are called:
transfer payments
States that are required by their constitutions to have annually balanced budgets are likely to:
experience more severe business cycles than those not required to balance their budgets
Menu costs are:
the real cost of changing listed prices
In the short run, an increase in net exports is illustrated by:
a shift to the right in the aggregate demand curve
According to the aggregate demand curve, when the aggregate price level _____, the quantity of _______.
rises; aggregate output demand falls
In the long-run if all prices, including the nominal wage, rate doubled, then aggregate output supplied would:
remain unchanged
The only government policy that has a DIRECT effect on the aggregate demand curve is:
changing the level of government purchases of final goods and services
The accompanying graph shows the current short-run equilibrium in the economy. Appropriate fiscal policy action in this situation would be:
a decrease in transfer payments
Which of the following will cause a decrease in unplanned inventory investment?
an unexpected increase in consumer spending
If the stock market crashes:
the aggregate consumption function will shift down
Which of the following is an automatic stabilizer?
unemployment compensation payment to the unemployed auto-workers
Discouraged workers are those individuals:
who have given up looking for a job
Implicit liabilities refer to the promises made by the government, such as:
Social Security and Medicare
The SRAS curve is upward rising because:
a higher aggregate price level leads to higher output since most production costs are fixed in the short run
If MPC = .9, the multiplier is
1/1-.9 = 10
Which of the following would be a part of macroeconomics?
a study of recessions
A key theme fundamental to all economics is:
people have unlimited wants facing limited means to satisfy them
The best measure of the opportunity cost of any choice is:
whatever you have given up to make that choice, even if no monetary costs are involved
You are planning to study eight hours this week for your economics final and are considering studying a ninth hour. You should:
make our decision based on the cost of your next best alternative use of your time compared to the benefit of one more hour of study
The phrase "gains from trade" refers to the:
increase in total output that is realized when an individual specialize in particular tasks and trade with each other
In most cases, economic efficiency is achieved through:
incentive built into a market economy
Market failure occurs when:
individual actions have side effects that are not properly taken into account
The models used in economics:
emphasize basic relationships by abstracting from complexities in the everyday world
An economy is said to have a comparative advantage if it:
has the lowest cost for producing a particular good
Eastland and Westland produce only two goods, peaches and oranges, and this figure shows each nation's production possibilities frontier for the two goods. Eastland has a comparative advantage in producing:
oranges only; because it has a steeper slope
Which of the following is NOT a factor of production?
A decrease in the price of a good will result in:
an increase in the quantity demanded
If people demand more of product A when the price of B falls, then A and B are:
Which of the following is likely to cause a rightward shift in the demand for home-delivered pizza?
a larger population
The typical supply curve illustrates that:
other things equal, the quantity for a good is positively related to the price of a good
If the price of mozzarella cheese declines due to a major technological breakthrough in the dairy industry, there would be:
an increase in the supply of pizza
In the market for wheat, what would happen if the price of ethanol increases dramatically?
a decrease in the supply of wheat
A decrease in demand and a decrease in supply will lead to a(n) _____ in equilibrium quantity and a(n) _____ in equilibrium price.
decrease; indeterminate change
If rent controls are set at RENT3:
rent would remain at RENT2 (equilibrium)
If the minimum wage is a binding price floor then:
the number of workers who want to work will be greater than the number of jobs available
The modern tools of macroeconomic policy are:
fiscal policy and monetary policy
Keynesian economics propagates the economic ideas:
that argue that the government can help a depressed economy through fiscal and monetary policies
The short-run alternation between economic downturns, and economic upturns and expansions is known as the:
business cycle
Suppose an economy experiences rising total output accompanied by increasing employment; this is generally known as:
Long-run growth is:
the sustained upward trend in aggregate output per person over several decades
If the economy grew at a 3% rate this year and average prices grew ____, people would be better off this year compared with last year
slower than 3%
The annual percentage change in the aggregate price level is negative when there is:
Households derive income from all of the following except:
Which of the following would NOT be considered a government transfer?
payment by the defense department for a new weapons system
Investment spending represents spending on:
productive physical capital
Which of the following is false? Gross domestic product:
the total production of all final and intermediate goods and services
Real GDP is the same as:
inflation and adjusted GDP
Positive unplanned inventor investment occurs when:
actual sales are less than expected sales
An example of an automatic stabilizer that works when the economy contracts is:
a rise in government transfers, as more people receive unemployment insurance benefits
An inflationary gap can be closed with:
a decrease in government purchases
If planned investment spending increases autonomously by $100, GDP will:
increase by $250
Consider a simple economy; MPC = 0.75, income = $400 billion and aggregate consumption spending = $400 billion. The autonomous consumption is:
$100 billion
Keynesian economists believe that the budget be "balanced" each fiscal year. Is this correct?
No, a budget needs to be balanced only on average; it can be in a deficit when there is a recession and offset by surpluses when the economy is doing well
If GDP is smaller than planned aggregate spending, then:
unplanned inventory investment is negative
Which of the following would be the appropriate response of the North-west government? (using graph)
expand aggregate demand by decreasing taxes to close the recessionary gap (move curve to equilibrium)
Discretionary fiscal policy involves:
using government spending or tax policy to affect aggregate demand
The short-run aggregate supply curve slopes upward because of:
wage and price stickiness
Cyclical unemployment is characterized as:
the deviation in the actual rate of unemployment away from the natural rate
According to the accelerator principle:
there is a positive relationship between expected future growth and planned investment spending
The aggregate demand curve is negatively sloped in part because of the impact of interest rates on:
consumption and investment
A downward shift in the consumption function can be caused by:
a decline in consumer wealth
Aggregate demand will decrease if:
the government raises the tax rate
Contractionary fiscal policy would include:
increased taxes
"Income-expenditure equilibrium" can be defined as a situation in which:
there is no unplanned inventory investment
All of the following are examples of fiscal policy EXCEPT:
reducing the money supply in order to raise the interest rate
Because of the pressure existing at the short-run equilibirum at Y2 and P2:
the SRAS curve will shift to the left
Stagflation may result from:
an increase in the price of imported oil
If the actual inflation rate is less than the expected inflation rate, then:
the lenders gain and the borrowers lose
Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is:
$7.5 trillion
Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.80. Assuming no taxes and no trade, by how much will real GDP change?
$500 billion decrease (1/1-.8*100)
In 2007, the Bureau of Labor Stats. concluded the unemployment rate to be 7.5%. If the frictional unemployment was 3% and the structrual unemployment was 2%, then the cyclical unemployment rate would be:
2.5% (actual-natural)
Menu costs refer to the increase cost:
of changing listed prices
In the short run, an increase in wages is illustrated by:
the SRAS1 curve shifting to the left to SRAS2
The rate of unemployment that exists when the economy is at full employment is:
the natural rate of unemployment
Discretionary fiscal policy may fail to stabilize the economy or even make the economy less stable due to:
lags in deciding and implementing a policy change
Among the costs of inflation are all of the following except:
efficiency wage costs
If your disposable income increase from $10,000 to $15,000 and your consumption increase from $9,000 to $12,000, your MPC is:
Suppose that the economy is in a recessionary gap, the policy makers in the government can:
increase the money supply, lower the interest rate, increase investment and consumption spending and thus increase aggregate demand
The rate of unemployment is found by dividing the:
number of people looking for work by the number of people looking for work plus the number of people employed
People who are in the process of changing jobs are accounted for in the category of:
frictional unemployment
Changes in taxes shift the aggregate demand curve______ equal-sized changes in government purchases.
by less than
The consumption of aggregate demand are:
C, I, G, X-IM
In the consumption function, an individual household's consumer spending:
is positively related to its current disposable income
All of the following will increase the economy's potential output EXCEPT:
a decrease in the aggregate price level
The relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world is called:
aggregate demand
The official unemployment rate reported by the government may tend to understate the amount of unemployment by:
excluding discouraged workers who are not actively seeking employment