ECO 102-080
EXAM REVIEW SHEETS AND
PRACTICE EXAM QUESTIONS
STUDY
GUIDE FOR ECO 102-080, EXAM 1, chapters 1-4 and videos 1-4
MAKE
SURE THAT YOU UNDERSTAND THE FOLLOWING BEFORE TAKING THE FIRST EXAM.
·
What
does economics deal with?
·
What
is meant by scarcity?
·
What
are the 3 categories of resources?
·
What
is the difference between positive and normative economics?
·
What
is a production possibilities curve (ppc)?
·
What
can lead to shifts in a ppc?
·
What
does a market demand curve show?
·
What
factors can shift a demand curve?
·
What
is the distinction between a change in demand and a change in quantity
demanded?
·
Why
do demand curves slope downward?
·
Why
do supply curves slope upward?
·
What
factors can cause a change in supply?
·
What
is an equilibrium price?
·
What
causes surpluses or shortages?
·
How
will price adjust to surpluses or shortages?
·
What
is the circular flow model of the economy?
·
What
are external economies and diseconomies?
·
What
does gross domestic product (gdp) measure?
·
What
is meant by double counting?
·
What
is real gdp?
·
What
are the 2 methods of measuring gdp?
·
What
does a price index number mean?
·
What
does national income measure?
·
What
is potential gdp?
·
What
are some the limitations of gdp?
·
What
are the 4 phases of the business cycle?
·
What
is an aggregate demand curve?
·
What
are the reasons for the downward slope of an aggregate demand curve?
·
What
is an aggregate supply curve?
·
What
is the shape of the aggregate supply curve?
·
What
are the effects of shifts in the aggregate supply and demand curves on
equilibrium, the price level, and total real output? (see the exploring
further section at the end of the chapter.)
·
What
is frictional, structural, and cyclical unemployment?
·
How
is the unemployment rate calculated?
·
What
is say’s law and the classical view of
unemployment? (see
case study 4.1.)
·
What
is potential gdp?
·
What
is the Marxian view of unemployment? (see case study 4.2.)
·
What
is the Keynesian view of unemployment? (see case study 4.3.)
PRACTICE FOR EXAM 1, ECO
102-080
1.
Over
time the American economy has had:
(a)
fluctuations in growth and unemployment.
(b)
full employment without serious inflation.
(c)
continuous growth in output per person.
(d)
persistent deflation.
(e)
steadily increasing unemployment.
2.
Human
wants and desires:
(a)
are rarely influenced by advertising or
cultural factors.
(b)
can be classified into the categories of
land, labor, and capital.
(c)
are more readily satisfied when labor
productivity declines.
(d)
appear to be insatiable in the aggregate.
(e)
fall dramatically as incomes rise in the
economy.
3.
The
concept of scarcity:
(a)
refers to the fact that people only desire what
they cannot have.
(b)
is no longer relevant to the
(c)
creates the need to choose how to allocate
resources.
(d)
means that every country can produce enough to
fully satisfy every citizen’s wants.
4.
Answers
to economic issues which depend on an individual’s values or preferences are
called:
(a)
positive economics.
(b)
passive economics.
(c)
normative economics.
(d)
mechanical economics.
(e)
political economics.
5.
If a
graph of two variables shows a downward sloping relationship, that relationship
is considered to be:
(a)
inverse.
(b)
positive.
(c)
normative.
(d)
variable.
(e)
independent.
6.
One
of the four basic tasks any economic system must perform is:
(a)
measuring the size of its production possibilities
curve.
(b)
conducting a population census.
(c)
eliminating free resources.
(d)
classifying economic resources.
(e)
determining the kinds of goods to be produced and
the amount of each.
7.
An
economy operating inside its production possibilities curve is most likely:
(a)
at full employment.
(b)
using resources inefficiently.
(c)
being forced to give up the production of one
good to get more of another good.
(d)
facing a bowed-in curve.
(e)
producing no capital goods.
8.
In
the
(a)
government.
(b)
consumers.
(c)
unions.
(d)
firms.
(e)
nonprofit organizations.
9.
Increases
in demand (not quantity demanded) can be caused by:
(a)
decreases in price.
(b)
increases in costs of production.
(c)
decreases in the prices of substitute goods.
(d)
increases in income.
(e)
decreases in the number of consumers in the
market.
10.
A
fall in which of the following will increase the demand for large
automobiles?
(a)
the price of small automobiles.
(b)
the price of gasoline.
(c)
the price of large automobiles.
(d)
buyers’ incomes.
(e)
consumer preferences for driving large
automobiles.
11.
A
supply curve will shift with changes in:
(a)
technology.
(b)
income.
(c)
tastes.
(d)
number of buyers.
(e)
market price.
12.
In
general, supply curves slope upward to the right because:
(a)
increases in the price of a commodity lead to
rightward shifts of the supply curve.
(b)
rising prices motivate producers to offer more
units for sale.
(c)
technology progresses over time, increasing the
ability of firms to produce more at existing prices.
(d)
of increases in input prices as production
is increased.
(e)
empirical studies almost always show that this is
the case.
13.
At
the equilibrium price:
(a)
scarcity is eliminated.
(b)
everyone is content.
(c)
there is no inflation.
(d)
price equals quantity.
(e)
quantity demanded equals quantity supplied.
14.
For
a market to exhibit excess demand:
(a)
supply must exceed demand.
(b)
the equilibrium price must be too high to
clear the market.
(c)
actual price must be below the equilibrium
price.
(d)
the demand curve must slope upward.
(e)
the market must be growing.
15.
In
free markets, the price system encourages producers to meet consumers’ wants
because:
(a)
it signals producers as to which goods will
be profitable.
(b)
producers have the public interest in mind.
(c)
it allows the government to direct firms to
the best technique.
(d)
it rewards consumers for the resources they
bring to the marketplace.
(e)
consumers are generally willing to pay more than
the actual price.
16.
The
fact that there is no way to prevent a citizen from benefiting from
expenditures on national defense, whether he pays taxes or not, is an example
of:
(a)
unfair distribution of income.
(b)
an external economy.
(c)
an external diseconomy.
(d)
a public good.
(e)
a transfer payment.
17.
The
next 2 questions are based on the following graph:
S1
D
and S represent the market demand and supply curves for wheat in 1960. D1 and S1 represent the market demand and
supply curves in 1985. Assume there were
no support programs in either. In the
graph:
(a)
demand rose; supply fell.
(b)
demand fell; supply rose.
(c)
both demand and supply fell.
(d)
both demand and supply rose.
(e)
both demand and supply remain unchanged.
18.
From
the event depicted in the graph one can conclude that over the period in
question, wheat:
(a)
prices and output fell.
(b)
prices and output rose.
(c)
prices and income rose.
(d)
output and income fell.
(e)
prices fell and output rose.
19.
Gross
domestic product:
(a)
equals the total wages paid in a year.
(b)
is a measure of government product.
(c)
equals the total value of final goods and
services produced in a year.
(d)
is composed of all goods, both final and
intermediate.
(e)
is an obsolete economic indicator of
inflation.
20.
When
measuring GDP, we double count if we include the value of:
(a)
final goods.
(b)
intermediate goods.
(c)
personal consumption expenditures.
(d)
gross private domestic investment.
(e)
net exports.
21.
Expressing
GDP in constant dollars is an attempt to adjust for changes in:
(a)
the money supply.
(b)
population.
(c)
the unemployment rate.
(d)
quality improvements.
(e)
prices.
22.
One
important element of our well-being which does
not show up in the GDP is our consumption of:
(a)
new automobiles.
(b)
imported consumer goods.
(c)
nondurable goods.
(d)
medical services.
(e)
leisure time.
23.
Which
of the following is a limitation of real GDP as a measure of economic
well-being?
(a)
little is revealed about the distribution of
composition of output.
(b)
output is overstated because intermediate
production is included.
(c)
both fail to account for the consumption of
the nation’s productive capacity.
(d)
they only measure a nation’s expenditures,
not its income.
(e)
both fail to account for expenditures by the
public sector.
24. The two methods of measuring the value of
output are called the:
(a)
input and output approaches.
(b)
direct and residual approaches.
(c)
business and household approaches.
(d)
domestic and foreign approaches.
(e)
income and expenditures approaches.
25.
The
largest component of our national income is
(a)
corporate profits.
(b)
rental and interest income.
(c)
employee compensation.
(d)
personal and corporate taxes.
(e)
welfare payments.
26.
The
total amount of goods and services that could be produced if the economy were
at full employment is called the:
(a)
business cycle.
(b)
price level.
(c)
potential GDP.
(d)
GDP
deflator.
(e)
aggregate demand curve.
27.
In
general, a business cycle goes through its phases in the following sequence:
(a)
trough, peak, expansion, recession.
(b)
recession, trough, expansion, peak.
(c)
trough, recession, expansion, peak.
(d)
trough, expansion, recession, peak.
(e)
expansion, recession, trough, peak.
28.
During
a period when total spending is too high relative to potential output, the
economy experiences:
(a)
excessive unemployment.
(b)
falling average prices.
(c)
a “glut.”
(d)
a “Great Crash.”
(e)
inflation.
29.
The
level of real national output demanded at each price level:
(a)
declines as aggregate supply increases.
(b)
is horizontal according to the classical economists.
(c)
is unaffected by changes in interest rates.
(d)
can be calculated only when the economy is
at full employment.
(e)
Is
inversely related to the price level
30.
Both
aggregate demand and aggregate supply curves are relationships between:
(a)
income and employment.
(b)
output and income.
(c)
the price level and real output.
(d)
interest rates and the prices of financial
assets.
(e)
inflation and unemployment.
31. It is argued that short run aggregate
supply curves slope upward to the right because:
(a)
short run price levels are inversely related
to individual produce prices.
(b)
falling profits force firms to increase prices.
(c)
in the short run, wages and raw materials
prices tend to rise less rapidly than product prices.
(d)
as price rises, demand falls.
(e)
increases in aggregate supply cause prices to
rise.
32. A
horizontal short run aggregate supply curve reflects:
(a)
no upward pressure on prices because of
significant levels of unemployed productive capacity.
(b)
full employment of the economy’s resources.
(c)
falling price levels.
(d)
stagflation.
(e)
Say’s
Law.
33. At full employment, the short run aggregate
supply curve:
(a)
slopes downward.
(b)
becomes vertical.
(c)
shifts to the right.
(d)
causes the aggregate demand curve to fluctuate.
(e)
has a considerable amount of excess
capacity.
34. The three generally recognized types of
unemployment are:
(a)
voluntary, potential, and residual.
(b)
cyclical, frictional, and structural.
(c)
involuntary, temporary, and disciplinary.
(d)
teenage, female, and nonwhite.
(e)
Classical,
Keynesian, and post-Keynesian.
35. A
significant problem with
(a)
exclude people who are under 16 and actively
looking for work.
(b)
change monthly, making measurement of the
unemployment rate impossible.
(c)
exclude those who are self-employed.
(d)
are based on a selected sample of the
population and miss counting large numbers of employed people.
(e)
do not indicate those who are underemployed
or who have given up looking for work.
36. Say’s Law:
(a)
states that the total amount paid out for
resources must equal the value of the goods produced.
(b)
states that all income spent must have been
earned.
(c)
is the intellectual basis for the Keynesian
model of income and employment.
(d)
is an integral part of the Marxian analysis
of capitalism.
(e)
requires the assumption of wage and price
rigidities.
37. A major purpose of Keynes’ “General
Theory” was to explain:
(a)
how a less-than-full employment equilibrium
was possible in a capitalist economy.
(b)
the automatic mechanisms in a capitalist
society that generate a high level of employment.
(c)
how supply creates its own demand.
(d)
the close interrelationships between the
savers and investors in any society.
(e)
why Marx’s predictions about capitalism were
inevitable.
Answer
Key to Exam 1 Practice Questions
1.
a
2.
d
3.
c
4.
c
5.
a
6.
e
7.
b
8.
d
9.
d
10.
b
11.
a
12.
b
13.
e
14.
c
15.
a
16.
d
17.
d
18.
e
19.
c
20.
b
21.
e
22.
e
23.
a
24.
e
25.
c
26.
c
27.
b
28.
e
29.
e
30.
c
31.
c
32.
a
33.
b
34.
b
35.
e
36.
a
37.
a
STUDY
GUIDE FOR ECO 102-080, EXAM 2
MAKE
SURE THAT YOU KNOW THE FOLLOWING BEFORE TAKING THE SECOND EXAM.
·
WHAT IS THE
CONSUMPTION FUNCTION, THE MARGINAL PROPENSITIES TO CONSUME AND SAVE?
·
WHAT ARE THE
DETERMINANTS OF INVESTMENT SPENDING, THE EXPECTED RATE OF RETURN AND THE
INTEREST RATE, THE DECISION TO INVEST?
·
WHAT IS THE
EQUILIBRIUM LEVEL OF GDP (GRAPH OF C + I ON PAGE 129 OF THE TEXT)? WHAT HAPPENS IF GDP DOES NOT EQUAL INTENDED
SPENDING?
·
WHAT ARE THE
REASONS FOR THE VOLATILITY OF INVESTMENT?
·
WHAT IS THE
MULTIPLIER, AND HOW IS IT USED?
·
HOW DID KEYNES
DISAGREE WITH THE CLASSICAL ECONOMISTS?
·
WHAT CAN CAUSE
SHIFTS IN THE CONSUMPTION FUNCTION? (THE NONINCOME DETERMINANTS OF
CONSUMPTION?)
CH.6
·
WHAT IS DISCRETIONARY FISCAL POLICY?
·
WHAT ARE THE EFFECTS OF CHANGES IN GOVERNMENT SPENDING ON GDP?
·
WHAT ARE THE EFFECTS OF CHANGES IN TAXES ON GDP?
·
WHAT IS A RECESSIONARY GAP?
·
WHAT IS AN INFLATIONARY GAP?
·
WHAT TYPES OF FISCAL POLICY SHOULD BE USED TO REDUCE UNEMPLOYMENT?
·
WHAT TYPES OF FISCAL POLICY SHOULD BE USED TO REDUCE INFLATION?
·
WHAT ARE AUTOMATIC STABILIZERS?
·
WHAT ARE TRANSFER PAYMENTS?
·
WHAT ARE THE MAJOR FEDERAL, STATE, AND LOCAL TAXES?
·
WHAT IS INFLATION?
·
WHAT ARE THE EFFECTS OF INFLATION?
·
EXPLAIN THE 2 TYPES OF INFLATION, DEMAND-SIDE AND SUPPLY-SIDE.
·
WHAT IS THE PHILLIPS CURVE?
·
WHAT IS THE DIFFERENCE BETWEEN REAL INCOME AND MONEY INCOME?
·
WHAT IS THE NAIRU?
·
WHAT IS MONEY?
·
WHAT ARE THE 3 FUNCTIONS OF MONEY?
·
WHAT IS FIAT MONEY?
·
WHAT ARE DEMAND DEPOSITS?
·
WHAT ARE THE DEFINITIONS OF THE MONEY SUPPLY, M-1 AND M-2?
·
WHAT IS FRACTIONAL RESERVE BANKING?
·
WHAT ARE THE ASSETS AND LIABILITIES OF BANKS?
·
HOW DO BANKS CREATE MONEY?
·
WHAT IS THE FEDERAL RESERVE?
·
WHAT ARE EXCESS RESERVES?
PRACTICE FOR EXAM 2, ECO 102-080
1. The relationship between household spending and disposable income is known as:
(a) the investment function.
(b) the multiplier.
(c) net national product.
(d) the consumption function.
(e) the saving function.
2. The marginal propensity to consume is the:
(a) fraction of an extra dollar of GDP that becomes disposable income.
(b) share of GDP spend by households and businesses.
(c) proportion of an extra dollar of disposable income that is spent on consumption.
(d) reciprocal of the average propensity to consume.
(e) fraction of disposable income that is consumed.
3. If Carolyn’s consumption rises by $5,000 as her income increases from $26,000 to $32,000 per year, her marginal propensity to consume is:
(a) .16.
(b) 19.
(c) .83.
(d) 1.20.
(e) impossible to determine from the data.
4. One minus the marginal propensity to consume equals:
(a) the average propensity to consume.
(b) the multiplier.
(c) the marginal propensity to save.
(d) the expected rate of return.
(e) disposable income.
5. Investment in a project will take place if the:
(a) marginal propensity to save exceeds the marginal propensity to consume.
(b) expected rate of return exceeds the interest rate.
(c) interest rate exceeds the marginal propensity to save.
(d) net investment in the economy exceeds gross investment.
(e) multiplier exceeds the expected rate of return.
6. The next 2 questions are based on the following diagram:
1500
Given the consumption (C) and investment (I) spending shown on the graph, equilibrium GDP will be:
(a) $1,500 billion.
(b) $1,700 billion.
(c) $1,800 billion.
(d) $1,900 billion.
(e) $2,100 billion.
7. At equilibrium the amount of investment spending would be:
(a) $200 billion.
(b) $300 billion.
(c) $1,700 billion.
(d) $1,900 billion.
(e) $2,100 billion.
8. One reason for the volatility of investment is that:
(a) investment decisions can be postponed because of the durability of capital goods.
(b) motives for saving and investment are the same for businesses and households.
(c) firms maintain a constant rate of capacity utilization from year to year.
(d) wages and prices are flexible.
(e) consumption spending is erratic and unpredictable.
9. A marginal propensity to consume of .8 means the value of the multiplier is:
(a) 1.
(b) 2.
(c) 3.
(d) 4.
(e) 5.
10. If the marginal propensity to consume is .6, a $1.2 billion increase in intended investment will increase equilibrium GDP by:
(a) $.4 billion.
(b) $.6 billion.
(c) $1.2 billion.
(d) $2.5 billion.
(e) $3 billion.
11. The use of government spending taxes for stabilization purposes is known as:
(a) unemployment compensation.
(b) fiscal policy.
(c) budget multipliers.
(d) employment finance.
(e) Keynesian consumption.
12. Government may attempt to reduce unemployment by:
(a) shifting the aggregate demand curve to the left.
(b) increasing the tax rate on personal income.
(c) reducing private spending.
(d) increasing government spending.
(e) decreasing the multiplier.
13. Fiscal policy which promotes, either directly or indirectly, the reduction of private and public spending would be appropriate when the economy is:
(a) experiencing a high rate of inflation.
(b) experiencing a high rate of unemployment.
(c) entering a recession.
(d) exporting more than it imports.
(e) experiencing rapidly falling price levels.
14. In an economy experiencing a high unemployment rate, appropriate fiscal policy would attempt to:
(a) cut government spending.
(b) discourage firms from investing.
(c) increase personal tax rates.
(d) reduce welfare payments to households.
(e) shift the aggregate demand curve to the right.
15. If the economy is operating on the positively-sloped range of the short run aggregate supply curve, fiscal policy which increases total spending will:
(a) lower total real output and raise the price level.
(b) promote increased employment with higher price levels.
(c) shift the aggregate supply curve to the right, increasing the price level.
(d) raise prices but leave total real output and employment unchanged.
(e) shift the aggregate demand curve to the left.
16. The Employment Act of 1946:
(a) reduced tax rates 10% across the board.
(b) established the Joint Economic Committee of Congress and the Council of Economic Advisers.
(c) made it a matter of government policy to promote a favorable balance of trade.
(d) created automatic stabilizers to replace discretionary fiscal policy.
(e) requires the government to undertake spending on public works to ensure full employment.
17. The government can use fiscal policy to reduce inflation by:
(a) increasing total spending.
(b) modifying the tax laws to induce less personal saving.
(c) increasing government expenditures.
(d) increasing the budget deficit.
(e) increasing the tax rate on personal income.
18. Structural features of our economy which work to offset the effects of the business cycle are called:
(a) tools of discretionary policy.
(b) public works programs.
(c) full employment bills.
(d) automatic stabilizers.
(e) countercyclical propensities.
19. Automatic stabilizers make fiscal policy easier to undertake because they:
(a) allow economists to formulate flexible and comprehensive rules so that the economy will be perpetually stable.
(b) enable policy makers to prescribe public works programs during inflationary periods since expenditures for unemployment and welfare have correspondingly decreased.
(c) act to increase spending when the economy turns down to decrease spending when the economy overheats.
(d) eliminate the causes of unemployment and inflation experienced by the economy.
(e) give the president the complete authority for determining stabilization policy.
20. A basic objection to increased public works spending when serious unemployment appears likely to develop is that:
(a) such spending would lead to a budget deficit.
(b) such spending would lead to a decline in GDP.
(c) all public works projects are wasteful.
(d) there is a long lag between authorizing a program and actually spending the money.
21. An expenditure by the government for which no products or services are received in exchange is called a:
(a) tax.
(b) public good.
(c) transfer payment.
(d) multiplier.
(e) stabilizer.
22. Currently the largest share of the annual federal budget goes for:
(a) interest on the national debt.
(b) energy programs.
(c) education and health.
(d) national defense and other items connected with international relations and national security.
(e) social security programs, welfare and other income security programs, health, and education.
23. The greatest source of federal government tax receipts is the:
(a) personal income tax.
(b) corporate income tax.
(c) estate and gift tax.
(d) general sales tax.
(e) property tax.
24. The value of the multiplier in an open economy is generally:
(a) less than zero.
(b) greater than the multiplier in a closed economy.
(c) identical to the value of the multiplier in a closed economy.
(d) less than the value of the multiplier in a closed economy.
(e) indeterminate because the behavior of exports is unpredictable.
25. The value of money:
(a) rises during periods of inflation.
(b) is inversely related to the price level.
(c) is unaffected by creeping inflation.
(d)
has remained relatively
constant in the
(e) falls as real income rises.
26. Inflation:
(a) means demand is falling and supply is rising.
(b) increases the value of the money supply.
(c) rarely affects the distribution of income or wealth.
(d) is generally highest when there is plenty of excess capacity and unemployed resources.
(e) is a general upward movement in the average level of prices.
27. High rates of inflation are frequently characteristic of:
(a) depressions.
(b) times of great unemployment.
(c) wartime.
(d) periods of falling aggregate demand.
(e) rural areas.
28. A Consumer Price Index of 325 means that:
(a) prices are 325% higher than those in the base year.
(b) prices are 225% higher than those in the base year.
(c) prices are 125% higher than those in the base year.
(d) prices are 25% higher than those in the base year.
(e) prices are 3.25% higher than those in the base year.
29. Inflation:
(a) hurts people living on fixed incomes.
(b) inevitably tends to die out.
(c) has been the experience of this country since its founding.
(d) does not tend to redistribute income.
(e) inevitably leads to deflation.
30. Demand-side inflation is most likely to occur when the economy:
(a) has substantial excess capacity.
(b) is approaching or operating at full employment.
(c) has an aggregate demand curve shifting to the left.
(d) has a horizontal aggregate supply curve.
(e) has labor productivity rising faster than wages.
31. Increases in the price level accompanied by reductions in total real output mean that the economy is experiencing:
(a) leftward shifts in the aggregate demand curve.
(b) full employment.
(c) technological advances leading to increased productivity.
(d) leftward shifts in the Phillips curve.
(e) supply-side inflation.
32. Demand-side and supply-side inflation differ in that in one case:
(a) total real output rises; and in the other, it falls.
(b) the price level rises; and in the other, it falls.
(c) borrowers benefit; and in the other, savers benefit.
(d) businesses benefit; and in the other, householders benefit.
(e) inflation is temporary; and in the other, inflation is permanent.
33. Wartime inflation is generally:
(a) cost-overrun inflation.
(b) sedentary-spending inflation.
(c) supply-side inflation.
(d) demand-side inflation.
(e) parity price inflation.
34. The supply-side inflation episodes of the 1970s:
(a) occurred during periods of full employment of both human and capital resources.
(b) shifted the aggregate supply curve downward to the right.
(c) were largely the result of Arab oil embargoes.
(d) were touched off by a sharp decline in the money supply.
(e) were caused, in part, by the lack of market power of labor unions and large corporations.
35. Historically, the inverse relationship between the level of unemployment and the rate of increase of wages is known as the:
(a) consumption function.
(b) aggregate supply curve.
(c) Phillips curve.
(d) Laffer curve.
(e) production possibilities curve.
36. From the standpoint of society, a stable Phillips curve indicates that:
(a) it is possible to have lower rates of inflation and unemployment simultaneously.
(b) policies to increase employment will also increase the price level.
(c) wages increases, which exceed productivity increases, will result in lower prices.
(d) government policy makers need make no fundamental choices between price stability and unemployment.
(e) full employment can be defined as the unemployment rate at which price increases equal productivity increases.
37. The direct exchange of goods produced for goods consumed is called:
(a) managed float.
(b) appreciation
(c) fractional reserve banking
(d) fiduciary displacement.
(e) barter.
38. To be considered money, a financial asset must be:
(a) convertible into gold or silver.
(b) coins, currency, or fractional reserve.
(c) issued by the Federal Reserve System.
(d) serving as a medium of exchange, store of value, and standard of value.
(e) kept in banks.
39.
The largest component of the
(a) coins.
(b) currency.
(c) demand and other checkable deposits.
(d) savings deposits.
(e) credit cards.
40. To say that all American currency is presently “first money” means that:
(a) it is money by government decree.
(b) its metallic value exceeds its face value.
(c) the government will redeem that money with gold.
(d) money serves as a store of value.
(e) checking accounts are a preferred way to hold currency.
41. The sum of coins, currency, and checkable deposits is called:
(a) GDP.
(b) nominal NNP.
(c) fractional reserves.
(d) M-1.
(e) cash.
42. The basic distinction between M-1 and M-2 is that:
(a) M-2 excludes all checkable deposits.
(b) M-1 is the money supply broadly defined to include large certificates of deposit.
(c) M-2 is the money supply expressed in current dollars, whereas M-1 is expressed in constant dollars.
(d) M-1 includes credit car balances on bank issued credit cards.
(e) M-2 equals M-1 plus savings, small time deposits, money market mutual fund balances, and money market deposit accounts.
43. The bank practice of lending money and therefore holding less cash than what is owed its depositors is called:
(a) fractional reserve banking.
(b) Federal Reserve banking.
(c) cash flow banking.
(d) creative banking.
(e) deposit ratio banking.
44. The assets of a commercial bank include:
(a) net worth.
(b) demand deposits.
(c) loans.
(d) time deposits.
(e) savings accounts.
45. The basic principle behind fractional reserve banking is that:
(a) the probability of all depositors withdrawing funds at the same time is extremely low.
(b) loans and investments are made with funds advanced by bank owners.
(c) banks hold reserves either in the form of cash or deposits with the Federal Reserve banks.
(d) a bank’s assets are equal to its liabilities plus net worth.
(e) there is a legal limit on the amount of reserves banks must retain against their loans.
46.
In the
(a) the fact that most banks keep 50 percent of their deposits as reserves.
(b) government ownership of commercial banks.
(c) the stock of gold owned by the government.
(d) the ability of commercial banks to create money when needed.
(e) the FDIC.
47. A bank typically makes loans from its:
(a) federal reserves.
(b) excess reserves.
(c) partial reserves.
(d) fractional reserves.
(e) required reserves.
48. A bank creates money when it:
(a) adds to its required reserves.
(b) receives a deposit of currency.
(c) raises its interest rates.
(d) becomes a member of the Federal Reserve System.
(e) lends its excess reserves.
Answer Key to Exam 2 Practice Questions
1. d 31. e
2. c 32. a
3. c 33. d
4. c 34. c
5. b 35. c
6. e 36. b
7. a 37. e
8. a 38. d
9. e 39. c
10. e 40. a
11. b 41. d
12. d 42. e
13. a 43. a
14. e 44. c
15. b 45. a
16. b 46. e
17. e 47. b
18. d 48. e
19. c
20. d
21. c
22. e
23. a
24. d
25. b
26. e
27. c
28. b
29. a
30. b
STUDY
GUIDE FOR ECO 102-080, EXAM 3
MAKE
SURE THAT YOU KNOW THE FOLLOWING BEFORE TAKING THE THIRD EXAM.
·
WHAT IS MONETARY POLICY?
·
WHAT ARE THE FUNCTIONS OF THE FEDERAL RESERVE?
·
HOW CAN THE FED INCREASE OR DECREASE THE MONEY SUPPLY?
·
WHAT ARE OPEN MARKET OPERATIONS?
·
WHAT ARE LEGAL RESERVE REQUIREMENTS?
·
WHAT IS THE DISCOUNT RATE?
·
HOW QUICKLY DOES MONETARY POLICY WORK?
·
WHAT IS SUPPLY-SIDE INFLATION?
·
WHAT IS THE PHILLIPS CURVE?
·
WHAT IS STAGFLATION?
·
WHAT IS THE VIEW OF FRIEDMAN AND PHELPS DEALING WITH THE LONG RUN
VERTICAL PHILLIPS CURVE?
·
WHAT IS MEANT BY THE “NATURAL” RATE OF UNEMPLOYMENT?
·
WHAT ARE INCOMES POLICIES?
·
WHAT DOES IT MEAN FOR THE FED TO “ACCOMMODATE” SUPPLY-SIDE INFLATION?
·
WHAT IS PRODUCTIVITY?
·
HOW DO WE MEASURE PRODUCTIVITY?
·
WHAT DID THE WORK OF
·
WHAT ARE THE CONSEQUENCES AND CAUSES OF THE PRODUCTIVITY SLOWDOWN IN
THE
·
WHAT HAS HAPPENED TO R&D EXPENDITURES AND INNOVATION RATES IN THE
·
WHAT DO “SUPPLY-SIDERS” ADVOCATE?
·
WHAT IS THE LAFFER CURVE?
·
WHAT IS THE DIFFERENCE BETWEEN THE NATIONAL DEBT AND THE DEFICIT?
·
WHAT ARE SOME OF THE PROBLEMS THAT DEFICITS CAN CAUSE?
·
WHAT IS THE “CROWDING OUT” IDEA?
·
WHAT IS THE “CROWDING IN” IDEA?
·
WHAT ARE THE ALTERNATIVE VIEWS REGARDING THE FEDERAL BUDGET?
·
HOW IS THE NATIONAL DEBT DIFFERENT FROM PRIVATE DEBT?
·
WHAT IS THE PREVAILING ATTITUDE ABOUT THE DEBT?
·
WHAT HAS BEEN THE RECENT EXPERIENCE WITH DEFICITS?
PRACTICE FOR EXAM 3, ECO 102-080
1. Exercising the Federal Reserve Bank’s control over the quantity of money and interest rates is called:
a. fiscal policy.
b. commercial banking.
c. monetary policy.
d. functional finance.
e. incomes policy.
2. If monetary authorities tighten credit or money:
a. the price level will rise.
b. interest rates will rise.
c. the money supply will rise.
d. aggregate demand will rise.
e. excess reserves will rise.
3. Reducing bank reserves would be an appropriate measure:
a. during a recession.
b. to balance the government budget.
c. to contain strong inflationary pressures.
d. to promote an increased level of business borrowing.
e. to increase the M-1 money supply.
4. Monetary policy is carried out primarily through actions taken by the:
a. president of the
b. large member banks of the Federal Reserve System.
c. Treasury Department on advice from the Board of Governors of the Federal Reserve System.
d. Federal Reserve Board and Federal Open Market Committee.
e. Chairman of the Board of Governors of the Federal Reserve System.
5. The most important function of a central bank is to:
a. set interest rates.
b. make loans to the Federal Reserve System.
c. hold time and demand deposits.
d. control the quantity of money.
e. lend out money to large corporations.
6. Responsibilities of the Federal Reserve System include all but which of the following?
a. collecting federal taxes.
b. supplying the public with currency.
c. acting as fiscal agents for the federal government.
d. providing facilities for check collection.
e. supervising the operation of the member commercial banks.
7. The Federal Reserve’s most important tool for controlling the amount of reserves in the banking system is:
a. changing the discount rate.
b. moral suasion.
c. establishing margin requirements.
d. open market operations.
e. buying and selling gold certificates.
8. The Fed can decrease the money supply by:
a. selling government securities.
b. raising taxes.
c. lowering reserve requirements.
d. lowering discount rates.
e. decreasing government spending.
9. The interest rate charged by the Fed for loans to commercial banks is called the:
a. prime rate.
b. required reserve ratio.
c. discount rate.
d. Q-rate.
e. T-bill rate.
10. In December 1991 the Fed cut the discount rate by a full percentage point to 3.5%, the lowest discount rate in 27 years. This move clearly reflects the Fed’s:
a. concern that inflation is getting out of control.
b. desire to reduce bank reserves.
c. effort to eliminate the large government budget deficit.
d. need to borrow more money from abroad.
e. attempt to send a clear signal to the banking system that it is time to expand credit.
11. It has been estimated that the full economic effects of monetary policy are:
a. realized almost immediately.
b. realized in slightly over one year.
c. realized in about 1-3 months.
d. unnoticed because money policy has little overall economic effect.
e. imperceptible because of the relatively minor nature of these policies.
12. The Federal Reserve System was established by Congress in:
a. 1887.
b. 1907.
c. 1913.
d. 1929.
e. 1934
13. Supply-side inflation:
a. generally occurs during periods of full employment of both human and capital resources.
b. shifts the aggregate supply curve downward to the right.
c. causes the prices of important inputs to fall.
d. is caused by large decreases in the money supply.
e. reflects, in part, the market power of labor unions and large corporations.
14. Leftward shifts in the aggregate supply curve would be expected to:
a. reduce real output and raise unemployment.
b. increase real output but raise the price level.
c. increase the price level unless the money supply is allowed to increase to bring down prices.
d. leave output and employment unchanged when the aggregate demand curve intersects the aggregate supply curve’s vertical range.
e. reduce output but leave the price level unchanged if the economy is at full employment.
15. The Phillips curve illustrates the relationship between:
a. the interest rate and the money supply.
b. the interest rate and the level of investment.
c. aggregate demand and aggregate supply.
d. the production of consumption goods and capital or investment goods.
e. unemployment and inflation.
16. Some economists such as Milton Friedman and Edmund Phelps argue that there is a “natural” rate of unemployment which is determined by:
a. a downward-sloping Phillips curve.
b. the C + I + G line.
c. the rate of inflation.
d. the length of time workers search for new jobs.
e. government proclamation.
17. Those who hold that the downward sloping Phillips curve is a short run relationship argue that it is futile for government to try to reduce the unemployment rate below:
a. zero.
b. its “natural” state.
c. the Phillips curve.
d. the levels mandated by the Kennedy-Johnson guidelines.
e. the rate of labor productivity.
18. The importance of the vertical long run Phillips curve hypothesis is its implication that:
a. any increase in the rate of inflation caused by monetary and fiscal policies designed to reduce unemployment is temporary.
b. price controls can do no good
c. monetary and fiscal policies designed to reduce unemployment will cause an increase in the rate of inflation, and any reduction in unemployment will be temporary.
d. to solve the inflation-unemployment problem, labor unions must recognize that their wage gains are being eroded by inflation.
e. effective monetary or fiscal policy will shift the short-run Phillips curve down.
19. Simultaneous high rates of inflation and unemployment are referred to as:
a. a recession or mild depression.
b. demand-pull inflation.
c. stagflation.
d. cost-push inflation.
e. prosperity.
20. Wage and price controls have been proposed primarily as a means for dealing with:
a. severe recessionary conditions.
b. decreases in the price level.
c. incomes policies.
d. situations resulting from irresponsible decreases in the money supply.
e. supply-side inflation.
21. A supply-side inflation which the Fed “accommodates” is best illustrated by a:
a. leftward shift in the aggregate demand curve.
b. rightward shift in the aggregate supply curve.
c. leftward shift in the aggregate demand curve with a rightward shift in the aggregate supply curve.
d. leftward shift in both the aggregate demand and aggregate supply curves.
e. leftward shift in the aggregate supply curve and a rightward shift in the aggregate demand curve.
22. Productivity is measured by the:
a. rate of growth of output per hour of labor.
b. rate of growth in the money supply.
c. rate of unemployment.
d. rate of accelerated depreciation.
e. Laffer curve.
23. In 1840,the country with the highest per capita output was:
a. the
b.
c.
d.
e.
24. In their study on the resurgence of growth in the late 1990’s, Oliner and Sichel identified three sources of growth that were more than twice as important in the late 1990’s as in the 1970’s, which were:
a. Money supply, labor hours, and output.
b. Information technology capital, labor quality, and greater efficiency.
c. Population growth, research and development, and other capital
d. Foreign imports, the federal budget deficit, and technological change.
e. New products, tax rate reductions, and labor hours.
25.
A slowdown in
a. reduces our dependency on imports.
b. may contribute to a higher rate of inflation.
c. shifts the Phillips curve downward to the left.
d. forces interest rates too low.
e. makes foreign producers less competitive.
26. Among the reasons cited for the productivity slowdown during the 1970’s and 80’s in our society:
a. is the increased rate of incorporating new technology in capital equipment.
b. are changed in the composition of both the labor force and national output.
c. is the increased rate of growth of the capital-labor ratio.
d. is the devotion of too great a share of our resources to research and development.
e. are the increases of resource mobility and competitiveness in our market economy.
27.
Increased government regulation is said to have
contributed to the slowdown in
a. has led to the substitution of research and development for goods and services available to consumers.
b. reduces the labor force by requiring limited resources to be used for compliance.
c. generates both litigation and uncertainty, discouraging business investment.
d. has reduced the quality of the work environment, lowering worker morale.
e. lowers the cost of production, making many goods unprofitable.
28. High rates of inflation discourage research and development by:
a. making long run forecasting more hazardous, thus increasing the risk on longer term programs.
b. raising the price of bonds sold to finance new investment.
c. forcing the government to lower taxes to fight inflation.
d. reducing the amount of discretionary money households and businesses have to spend on research and development.
e. encouraging investors to seek opportunities in areas where the return is high but the outcome is less predictable than in basic research.
29. Which of the following would be the most effective public policy for encouraging research and development?
a. subsidizing industries which are at a competitive disadvantage.
b. maintaining price stability and encouraging saving and investment.
c. increasing interest rates to make investment more profitable.
d. reducing resource mobility to ensure an adequate labor supply.
e. increasing the scope and extent of industrial regulation.
30. “Supply-siders” typically advocate:
a. tax increases to balance the federal budget.
b. tax reductions for households and tax increases for businesses to stimulate national output.
c. a steeply progressive personal income tax structure.
d. tax reductions to increase both the labor force participation and saving rates.
e. tax reductions for low-income workers in order to stimulate consumption.
31. The Laffer curve:
a. shows the relationship between sales taxes and incomes taxes
in the
b. indicates that tax revenues will be greatest when marginal tax rates are greatest.
c. relates the size of the government debt to the level of national output.
d. shows an inverse relationship between tax revenue and government spending.
e. has been used to demonstrate that a decline in the marginal tax rate may cause a rise in total tax revenue.
32. The difference between the federal deficit and the federal debt is that the deficit is:
a. financed by borrowing; the debt by selling bonds.
b. a long-term concept; the debt, a short-term concept.
c. the difference between the size of the debt and the amount of government revenues in a given year.
d. the amount the government must raise to create full employment.
e. the difference between expenditures and revenues; the debt, the total amount owed by the government.
33. The ways the federal government can finance its expenditures:
a. require selling the Treasury’s gold holdings.
b. number only two, namely raising and lowering taxes.
c. are raising taxes, borrowing, and creating new money.
d. requires exporting more than we import.
e. all lead to an increase in the national debt.
34. One generally recognized problem of large government budgetary deficits is:
a. that they crowd out private investment and lower
b. the fact that the debt is primarily “owed to ourselves.”
c. the burden any current government borrowing inevitably imposes on future generations.
d. the recessions that such government deficits simultaneously cause.
e. the addition to our country’s productive capacity as a result of the deficits.
35. If the government goes into the credit market to finance current budget deficit, the:
a. quantity supplied of loanable funds will fall.
b. interest rate will fall.
c. Treasury must print more currency.
d. private sector borrowing will also increase to pay for the bonds.
e. demand curve for loanable funds will shift to the right.
36. A government budget deficit:
a. will be more inflationary when financed by higher tax rates.
b. is generally considered undesirable in the Keynesian view of economic policy.
c. can never occur when the cyclically adjusted budget shows a surplus.
d. which is financed by creating new money, will draw funds that might otherwise have been spent on consumption and investment.
e. could result from recession-induced decreases in tax revenues rather than from increases in government spending.
37. The difference between tax revenues and government expenditures that would result if GDP were at its potential level is called the:
a. permanent income budget balance.
b. net relative expenditure differential.
c. Richardian equivalence.
d. balanced budget shortfall.
e. Structural deficit.
38. Our national debt:
a. is approximately $100 billion.
b. is the amount our government owes to foreign nations.
c. has been declining in absolute terms since World War II.
d. is composed of bonds, notes and other government IOUs of various kinds.
e. has been steadily increasing in relation to national output since World War II.
39. The national debt differs from private debt in that:
a. no interest is paid on the national debt.
b. the national debt is of no economic consequence.
c. most of the national debt is held by foreigners.
d. the national debt must be paid off at some fixed time in the future.
e. the national debt need never be paid off if it is held internally.
40. Balancing the government’s budget each and every year:
a. is necessary because all debts eventually come due.
b. is a fundamental tenet of Keynesian economics.
c. is sensible for the same reasons as is balancing the family budget.
d. makes it difficult to use fiscal policy to stabilize the economy.
e. will result in simultaneous inflation and unemployment.
41. In general, appropriate fiscal policy would involve a budget:
a. deficit during a recession; a surplus during periods of inflationary full employment.
b. which is balanced annually regardless of the economic climate.
c. surplus at all times.
d. which completely eliminates the national debt in a single year.
e. which makes the actual budget deficit equal to the full employment budget surplus.
42. Alternative policies regarding the federal budget include the:
a. annually and cyclically balanced budget policies and budgets that promote a socially optimal and attainable combination of inflation and unemployment.
b. seldom, rarely, and never balanced budget philosophies
c. actual, proposed, and cyclically adjusted budget philosophies.
d. executive, congressional, and treasure budget philosophies.
e. monthly, quarterly, and annually balanced budget philosophies.
43. The budget policy which requires revenues to equal expenditures each and every
year is called:
a. an annually balanced budget.
b. functional finance.
c. a full employment budget.
d. a conflict resolution budget.
e. a budget balanced over the course of the business cycle.
44. The federal budget surpluses experienced at the turn of the 21st century disappeared largely because of:
a. Tax cuts in both 2001 and 2003
b. Federal spending on homeland security
c. The
war and reconstruction of
d. The recession of 2001
e. All of the above, which contributed to the return of federal budget deficits
45. The fiscal policy recommendations of the Reagan administration generally
advocated:
a. small changes in existing government tax and spending programs.
b. significant increases in defense spending, coupled with increased taxes.
c. holding taxes constant while significantly increasing both defense and nondefense spending.
d. increases in nondefense spending matched dollar for dollar by decreases in defense spending.
e. reductions in both taxes and nondefense-related government programs.
46. During the Clinton Administration, fiscal policy was:
a. Successful in keeping the unemployment rate at about 4%.
b. The primary policy tool used to combat inflation.
c. Exercised through the monetary authorities.
d. Focused on reducing both tax rates and government spending.
e. Dominated by a desire to reduce budget deficits.
Answer Key to Exam 3 Practice Questions