Practice Exam III Fall 2012
Student:
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1. Which of the following statements best depicts laypeople's explanation of the Depression at
that time?
A. Government policies kept prices too high.
B. An oversupply of goods had glutted the market.
C. Unions were keeping the good jobs for themselves.
D. An oversupply of goods is impossible.
2. The reason why the AS/AD model does not depend upon the concepts of substitution and
opportunity cost is that:
A. in groups, people do not make the same choices as when they are alone.
B. the AS/AD model considers total output. There are no goods to substitute.
C. the AS/AD model considers the effects of other countries' decisions.
D. other things remain constant in the AS/AD model.
3. If the price level falls but people don't feel richer because of that fall, then the AD curve would
likely:
A. shift in.
B. shift out.
C. be flatter than it otherwise would be.
D. be steeper than it otherwise would be.
4. When aggregate demand is declining and the price level needs to fall to bring about
equilibrium, pressure for the price level to fall brings expectations of falling aggregate demand,
lower asset prices, and financial panics triggered by the decline in the value of financial assets. If
these forces are strong enough, these dynamic effects can create a:
A. leftward shift in the aggregate demand curve.
B. leftward shift in the short-run aggregate supply curve.
C. rightward shift in the aggregate demand curve.
D. a rightward shift in the long-run aggregate supply curve.
5. A fall in a foreign country's income will most likely cause:
A. a reduction in U.S. exports, so the U.S. aggregate demand curve shifts left.
B. a reduction in U.S. exports, so the U.S. aggregate demand curve shifts right.
C. an increase in U.S. exports, so the U.S. aggregate demand curve shifts left.
D. an increase in U.S. exports, so the U.S. aggregate demand curve shifts right.
6. A change in the distribution of income affects the AD curve because:
A. workers are more likely than stockholders to spend the income they receive.
B. stockholders are more likely than workers to spend the income they receive.
C. workers and stockholders are equally likely to spend the income they receive.
D. the distribution of income is always shifting in favor of stockholders.
7. During the Vietnam War, Congress increased government expenditures while raising taxes. As
a result:
A. the AD curve likely shifted to the left.
B. the AD curve likely shifted to the right.
C. the AD curve likely remained unchanged.
D. what happened to the AD curve is unclear.
8. In the early 2000s the European Central Bank warned that higher oil prices were a threat to
economic growth. The Bank President called the higher prices "a sizeable adverse shock" to the
economy. In terms of the AS-AD framework, this shock would be represented as a shift:
A. up (to the left) of the AS curve.
B. down (to the right) of the AS curve.
C. left of the AD curve.
D. right of the AD curve.
9. A shift in the long run aggregate supply curve will change:
A. output but not the price level.
B. the price level but not output.
C. both output and the price level.
D. neither output nor the price level.
10. An economy's resources:
A. can never be over-utilized.
B. can always be over-utilized.
C. are always fully employed.
D. can be over-utilized, but only temporarily.
11. Refer to the graph above. In the graph, a recessionary gap exists if the price level is:
A. P0 and the aggregate demand curve is AD0.
B. P0 and the aggregate demand curve is AD1.
C. P1 and the aggregate demand curve is AD0.
D. P1 and the aggregate demand curve is AD1.
12. Refer to the graph above. In the graph, if the price level is P1 and the aggregate demand curve
is AD0 then the economy is:
A. in a recessionary gap.
B. in an inflationary gap.
C. in a long-run equilibrium.
D. fully employed.
13. Fiscal policies are policies that directly affect:
A. interest rates.
B. government spending and taxes.
C. the money supply.
D. the price level.
14. Suppose the target rate of unemployment is 5 percent but the actual rate of unemployment is
4 percent. Given this information, which of the following policies is most appropriate according
to the AS/AD model?
A. A tax cut.
B. An increase in government spending.
C. A tax increase.
D. No change in taxes or government spending.
15. A fiscal policy in which the government attempts to offset any change in aggregate
expenditures that would create a business cycle is called a:
A. supply side policy.
B. regulatory policy.
C. countercyclical fiscal policy.
D. laissez-faire policy.
16. Engineering models:
A. are deductive in their approach to understanding the economy and their policy
recommendations.
B. have no formal foundations because they are based on observed relationships in the data only.
C. have carefully specified formal foundations; their purpose is to understand the economy for
the sake of understanding.
D. have loose formal foundations; their purpose is to guide thinking about policy.
17. Standard macro models are largely:
A. engineering models.
B. deductive scientific models.
C. outdated and no longer used.
D. those designed by current top macro theorists.
18. Keynesian economics was based on a concept known as:
A. the post-hoc fallacy.
B. the fallacy of causation.
C. the fallacy of composition.
D. perfect foresight.
19. What event in the 1930s challenged the Classical precepts and led to the development of the
Keynesian model?
A. Oil price shocks.
B. The adoption of trade tariffs.
C. The boom in the global monetary system.
D. A dramatic decline in output and rise in unemployment.
20. Suppose I am a rational consumer and base my current consumption on lifetime income. I
receive a one-time $3,000 tax rebate as part of the stimulus package. This would lead me to
consume:
A. more than $3,000 worth of goods and services immediately.
B. a substantial fraction of the rebate immediately.
C. a relatively small fraction of the rebate immediately.
D. exactly $3,000 worth of goods and services immediately.
21. Which of the following is a disadvantage of the standard macro model?
A. It assumes that people are not forward looking.
B. It makes highly-restrictive assumptions for the sake of mathematical tractability.
C. It is based on the fallacy of composition.
D. It assumes that people are infinitely lived.
22. Underlying the Lucas critique problem is that:
A. the standard macro models are based on patterns in historical data and not on what causes
those patterns.
B. the process of undertaking government policy is too long to be effective in addressing current
problems.
C. policymakers are too subject to efforts by lobbyists to take an objective view of policy.
D. models of the economy are necessarily complex and cannot take into account historical
patterns in the data.
23. A policy maker sees a tradeoff between inflation and unemployment. She tries to base policy
on this and discovers that the tradeoff no longer works. This observation can be best described
by:
A. the time inconsistency problem.
B. the credibility problem.
C. the Ricardian equivalence problem.
D. the Lucas critique problem.
24. When people copy other successful behavior even though the successful behavior might have
been luck, we call this:
A. predictable irrationality.
B. a nudge.
C. herding.
D. a push.
25. Multi-level pattern finding models are:
A. theoretical at this point; no models have been developed.
B. solved mathematically from which conclusions are drawn.
C. modeled with computers from which patterns emerge.
D. contrary to modern macroeconomic theory.
26. Every financial asset has a corresponding:
A. financial liability.
B. real liability.
C. real asset.
D. financial asset.
27. M1 consists primarily of cash in the hands of the public and:
A. savings account balances.
B. commercial paper.
C. checking account deposits.
D. certificates of deposit.
28. Suppose consumers shift money out of checking accounts and pay their credit cards. This
shift will affect:
A. M1.
B. M2.
C. M3.
D. L.
29. Checking account balances are:
A. not money.
B. not included in M1.
C. included in M2 but not M1.
D. included in M1 and serve as a medium of exchange.
30. If the reserves in U.S. banks totaled $8,000 and total deposits were $100,000, the banking
system's reserve ratio would be:
A. .08.
B. .10.
C. .80
D. .92
31. The formula for the simple money multiplier is:
A. 1/e where e is the excess reserve ratio.
B. 1/r where r is the reserve ratio.
C. 1/r where r is the required reserve ratio.
D. 1/c where c is the ratio of cash people hold to deposits.
32. As the reserve ratio goes up, the simple money multiplier goes:
A. up, and more money will be created.
B. down, and less money will be created.
C. up, and less money will be created.
D. down, and more money will be created.
33. Given a required reserve ratio of 20 percent for all banks and assuming individuals hold no
cash, total bank reserves of $300 billion could support maximum deposits of:
A. $60 billion.
B. $1,200 billion.
C. $1,500 billion.
D. $2,000 billion.
34. A month ago, you bought a one-year bond with a value of $100 that pays a fixed interest rate
of 5 percent per year. The interest rate of the economy was also 5 percent. Today you read in the
newspaper that the interest rate in the economy decreased to 3 percent. You are holding a bond
that is:
A. more desirable to other investors.
B. less desirable to other investors.
C. not desirable at all.
D. desirable to you.
35. Suppose an asset pays no interest. The expected change in price of an asset could be called
the:
A. explicit interest rate.
B. prime rate.
C. implicit interest rate.
D. benchmark interest rate.