Economics 1B, Winter 2019
Professor Caramp
Final Exam
Total Points Possible: 90
45 questions
100 minutes to complete the exam
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ECN1B
03/18/19
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A
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Multiple Choice (2 points each)
Indicate the answer that best completes the statement or answers the question.
1. The real interest rate tells you
a. how fast the number of dollars in your bank account rises over time.
b. how fast the purchasing power of your bank account rises over time.
c. the number of dollars in your bank account today.
d. the purchasing power of your bank account today.
e. None of the above is correct.
2. Gramp’s Potato Chips produces 2560 bags of potato chips a day. Each employee at Gramp’s works 8 hours. If the
company’s productivity is 20 bags per hour, how many people does Gramp’s employ?
a. 8
b. 16
c. 24
d. 30
e. None of the above is correct.
3. If the Federal Reserve increased the minimum reserve requirement from 10 percent to 20 percent, the money multiplier
would
a. rise from 10 to 20.
b. rise from 5 to 10.
c. fall from 10 to 5.
d. not change.
e. None of the above is correct.
4. In examining the national income accounts of the closed economy of Nepotocracy you see that this year it had taxes of
$100 billion, transfers of $20 billion, and government purchases of goods and services of $70 billion. You also notice that
last year it had private saving of $70 billion and investment of $50 billion. In which year did Nepotocracy have a budget
deficit of $20 billion?
a. this year and last year
b. this year but not last year
c. last year but not this year
d. neither this year nor last year
e. None of the above is correct.
5. In 1931 the price of a movie ticket was $0.25. The consumer price index was 15.2 in 1931, and 210 in 2008. In 2008
dollars, the price of a movie in 1931 was
a. $13.82.
b. $52.50.
c. $1.81.
d. $3.45.
e. None of the above is correct.
6. What is the future value of $750 one year from today if the interest rate is 2.5 percent?
a. $766.50
b. $768.75
c. $770.23
d. $810.75
e. None of the above is correct.
7. The dictator of a country requires that companies planning to open or expand must pay a large fee to file an application
one year prior to building new factories or expanding existing ones. Other things the same, in the long run this
requirement would
a. reduce real GDP per person and productivity.
b. reduce real GDP per person but not productivity.
c. reduce productivity but not real GDP per person.
d. Increase productivity but not real GDP per person.
e. None of the above is correct.
The table below pertains to Napandsnack, an economy in which the typical consumer’s basket consists of 2 pillows and
15 hotdogs.
Year
2009
2010
2011
Price of a
Pillow
$40
$45
$50
Price of a
Hotdog
$3
$4
$3
8. Refer to the table. If the base year is 2010, then the economy’s inflation rate in 2010 was
a. 10.5 percent.
b. 15.0 percent.
c. 20.0 percent.
d. 25.00 percent.
e. None of the above is correct.
9. A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It also reported a GDP deflator of
125 in 2010 and 120 in 2009. Between 2009 and 2010,
a. real output and the price level both rose.
b. real output rose and the price level fell.
c. real output fell and the price level rose.
d. real output and the price level both fell.
e. None of the above is correct.
10. A bank’s reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to
a. $8.
b. $80.
c. $92.
d. $920.
e. None of the above is correct.
11. Which of the following would, by itself, reveal the most about a country’s standard of living?
a. its level of capital
b. the number of hours worked
c. its availability of natural resources
d. its productivity
e. None of the above is correct.
12. Frictional unemployment results from
a. job searching. It is often thought to explain relatively short spells of unemployment.
b. job searching. It is often thought to explain relatively long spells of unemployment
c. a surplus in some labor markets. It is often thought to explain relatively short spells of unemployment.
d. a surplus in some labor markets. It is often thought to explain relatively long spells of unemployment.
e. None of the above is correct.
13. Caroline is the owner of a hair-styling salon and spa. She decides to raise the wages of her workers even though she
faces an excess supply of labor. Her decision
a. might increase profits if it attracts a better pool of workers to apply for jobs at her salon.
b. will increase the excess supply of labor.
c. may increase the quality of her work force.
d. All of the above are correct.
e. None of the above is correct.
14. Assuming the interest rate is 6 percent, which of the following has the greatest present value?
a. $300 paid in two years
b. $150 paid in one year plus $140 paid in two years
c. $100 paid today plus $100 paid in one year plus $100 paid in two years
d. $285 today
e. None of the above is correct.
15. Which of the following is not correct?
a. Most people who become unemployed will soon find jobs.
b. In an ideal labor market, wages would adjust to ensure that all workers are always fully employed.
c. The unemployment rate occasionally falls to zero.
d. There are always some workers without jobs, even when the overall economy is doing well.
e. None of the above is correct.
16. Money demand refers to
a. the total quantity of financial assets that people want to hold.
b. how much income people want to earn per year.
c. how much wealth people want to hold in liquid form.
d. how much currency the Federal Reserve decides to print.
e. None of the above is correct.
17. The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells
$10,000 worth of bonds, what happens to the money supply?
a. it increases by $250,000
b. it increases by $200,000
c. it decreases by $200,000
d. it decreases by $250,000
e. None of the above is correct.
18. The Fed can reduce the federal funds rate by
a. decreasing the money supply. To decrease the money supply it could sell bonds.
b. decreasing the money supply. To decrease the money supply it could buy bonds.
c. increasing the money supply. To increase the money supply it could sell bonds.
d. increasing the money supply. To increase the money supply it could buy bonds.
e. None of the above is correct.
19. A good is produced by a firm in 2009, added to the firm’s inventory, and sold to a household in 2010. As a result,
a. 2009 GDP increased and 2010 GDP decreased.
b. 2009 GDP decreased and 2010 GDP increased.
c. 2009 GDP did not change and 2010 GDP increased.
d. 2009 GDP increased and 2010 GDP did not change.
e. None of the above is correct.
20. When money is neutral, which of the following increases when the money supply growth rate increases?
a. real output growth
b. real interest rates
c. nominal wages
d. the money supply divided by the price level
e. None of the above is correct.
21. You are planning a graduation trip to Mexico. Other things the same, if the dollar depreciates relative to the peso, then
a. the dollar buys fewer pesos. Your hotel room in Mexico will require fewer dollars.
b. the dollar buys fewer pesos. Your hotel room in Mexico will require more dollars.
c. the dollar buys more pesos. Your hotel room in Mexico will require fewer dollars.
d. the dollar buys more pesos. Your hotel room in Mexico will require more dollars.
e. None of the above is correct.
22. Other things the same, a country could move from having a trade deficit to having a trade surplus if either
a. saving rose or domestic investment rose.
b. saving rose or domestic investment fell.
c. saving fell or domestic investment rose.
d. saving fell or domestic investment fell.
e. None of the above is correct.
23. If a Big Mac costs $2.50 in the United States and 2 euros in the Euro area, then purchasing-power parity implies the
nominal exchange rate is how many euros per dollar?
a. .8 If the exchange rate is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area.
b. .8 If the exchange rate is less than this, it costs fewer dollars to buy a Big Mac in the U.S. then in the Euro
area.
c. 1.25 If the exchange rate is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro
area.
d. 1.25 If the exchange rate is less than this, it costs fewer dollars to buy a Big Mac in the U.S. than in the Euro
area.
e. None of the above is correct.
24. Egypt has exports of $500 million and imports of $750 million. Egypt
a. sells more overseas then it buys from overseas; it has a trade deficit.
b. sells more overseas then it buys from overseas; it has a trade surplus.
c. buys more from overseas than it sells overseas; it has a trade deficit.
d. buys more from overseas than it sells overseas; it has a trade surplus.
e. None of the above is correct.
25. A country has $3 billion of domestic investment and net exports of $2 billion. What is its saving?
a. $1 billion
b. $2 billion
c. $3 billion
d. $5 billion
e. None of the above is correct.
26. Which of the following statements is incorrect for an open economy?
a. A country can have a trade deficit, trade surplus, or balanced trade.
b. A country that has a trade deficit has positive net capital outflow.
c. Net exports must equal net capital outflow.
d. National saving equals domestic investment plus net capital outflow.
e. None of the above is correct.
27. If aggregate demand shifts right then in the short run
a. firms will increase production. In the long run increased price expectations shift the short-run aggregate supply
curve to the right.
b. firms will increase production. In the long run increased price expectations shift the short-run aggregate supply
curve to the left.
c. firms will decrease production. In the long run increased price expectations shift the short-run aggregate
supply curve to the right.
d. firms will decrease production. In the long run increased price expectations shift the short-run aggregate
supply curve to the left.
e. None of the above is correct.
28. Assume the MPC is 0.65. Assuming only the multiplier effect matters, a decrease in government purchases of $20
billion will shift the aggregate demand curve to the
a. left by about $30.77 billion.
b. left by about $57.1 billion.
c. right by about $57.1 billion.
d. right by about $30.77 billion.
e. None of the above is correct.
29. From 2001 to 2005 there was a dramatic rise in the price of houses. If this rise made people feel wealthier, then it
would have shifted
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
e. None of the above is correct.
30. A decrease in government spending initially and primarily shifts
a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.
d. neither aggregate demand nor aggregate supply.
e. None of the above is correct.
31. Which of the following lists includes only changes that shift aggregate demand to the right?
a. repeal of an investment tax credit, an increase in the money supply
b. repeal of an investment tax credit, a decrease in the money supply
c. passing of an investment tax credit, an increase in the money supply
d. passing of an investment tax credit, a decrease in the money supply
e. None of the above is correct.
32. Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the
following helps explain the logic of why the economy moves back to long-run equilibrium?
a. as people revise their price-level expectations upward, firms and workers strike bargains for higher nominal
wages.
b. as people revise their price-level expectations upward, firms and workers strike bargains for lower nominal
wages.
c. as people revise their price-level expectations downward, firms and workers strike bargains for higher nominal
wages.
d. as people revise their price-level expectations downward, firms and workers strike bargains for lower nominal
wages.
e. None of the above is correct.
33. Refer to the figure. The natural rate of output occurs at
a. Y1.
b. Y2.
c. Y3.
d. both Y1 and Y3.
e. None of the above is correct.
34. According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads
to
a. decreases in both the price level and real GDP.
b. an increase in real GDP and an increase in the price level.
c. a decrease in the price level but does not change real GDP.
d. an increase in the price level but does not change real GDP.
e. None of the above is correct.
35. Which of the following would shift the long-run aggregate supply curve right?
a. both an increase in the capital stock and an increase in the price level
b. an increase in the capital stock, but not an increase in the price level
c. an increase in the money supply, but not an increase in the capital stock
d. neither an increase in the money supply nor an increase in the capital stock
e. None of the above is correct.
In the following graph, the x-axis represents Y (real GDP) and the y-axis represents P (the Price Level).
36. Refer to the figure. If the economy is at A and there is a fall in aggregate demand, in the short run the economy
a. stays at A.
b. moves to B.
c. moves to C.
d. moves to D.
e. None of the above is correct.
37. Which of the following sequences best represents the crowding-out effect?
a. government purchases ↑ ⇒ GDP ↑ ⇒ supply of money ↓
⇒ equilibrium interest rate ↑ ⇒ investment ↓
b. government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓
⇒ equilibrium interest rate ↓ ⇒ investment ↓
c. government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑
⇒ equilibrium interest rate ↑ ⇒ investment ↓
d. taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑
⇒ investment ↓
e. None of the above is correct.
38. Other things the same, if the price level rises by 2% and people were expecting it to rise by 5%, then some firms have
a. higher than desired prices, which increases their sales.
b. higher than desired prices, which depresses their sales.
c. lower than desired prices, which increases their sales.
d. lower than desired prices, which depresses their sales.
e. None of the above is correct.
39. If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price
level and real GDP by
a. increasing the money supply, which raises interest rates.
b. increasing the money supply, which lowers interest rates.
c. decreasing the money supply, which raises interest rates.
d. decreasing the money supply, which lowers interest rates.
e. None of the above is correct.
40. Shifts in aggregate demand affect the price level in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short and long run.
d. neither the short nor long run.
e. None of the above is correct.
41. To decrease the interest rate the Federal Reserve could
a. buy bonds. The fall in the interest rate would increase investment spending.
b. buy bonds. The fall in the interest rate would decrease investment spending.
c. sell bonds. The fall in the interest rate would increase investment spending
d. sell bonds. The fall in the interest rate would decrease investment spending.
42. Refer to the figure. Suppose the economy is currently at point A. To restore the long run equilibrium, the appropriate
fiscal response
a. requires the central bank to purchase government bonds, which will increase the money supply.
b. is a reduction in government purchases.
c. is a reduction in taxes.
d. requires the central bank to sell government bonds, which will reduce the money supply.
e. None of the above is correct.
43. An Italian company builds and operates a pasta factory in the United States. This is an example of Italian
a. foreign direct investment that increases Italian net capital outflow.
b. foreign direct investment that decreases Italian net capital outflow.
c. foreign portfolio investment that increases Italian net capital outflow.
d. foreign portfolio investment that decreases Italian net capital outflow.
e. None of the above is correct.
44. Exchange rates are 100 yen per dollar, 0.8 euro per dollar, and 12 pesos per dollar. A bottle of beer in New York costs
6 dollars, 500 yen in Tokyo, 6 euro in Munich, and 84 pesos in Cancun. Where is the most expensive and the cheapest
beer, in that order?
a. Cancun, New York
b. Munich, Tokyo
c. Tokyo, Munich
d. New York, Cancun
e. None of the above is correct.
45. If over the next few years inflation is higher in Mexico than in the U.S., then according to purchasing-power parity
which of the following should rise?
a. the U.S. real exchange rate but not the U.S. nominal exchange rate
b. the U.S. nominal exchange rate but not the U.S. real exchange rate
c. the U.S. real exchange rate but not the U.S. nominal exchange rate
d. neither the U.S. real nor the U.S. nominal exchange rate
e. None of the above is correct.
Answer Key
1. b
2. b
3. c
4. c
5. d
6. b
7. a
8. c
9. a
10. b
11. d
12. a
13. d
14. d
15. c
16. c
17. d
18. d
19. d
20. c
21. b
22. b
23. b
24. c
25. d
26. b
27. b
28. b
29. a
30. b
31. c
32. d
33. b
34. c
35. b
36. d
37. c
38. c
39. b
40. c
41. a
42. b
43. a
44. b
45. b