Economic Analysis Exam II
Dr. E. Djimopoulos
Spring 2019
I. MULTIPLE CHOICE Do all (60 points)
1. A certain amount of unemployment is due to new entrants in the labor force. This is called:
a. cyclical unemployment
b. structural unemployment
c. frictional unemployment
d. imaginary unemployment
2. The power of the Federal Reserve to expand the total money supply is considerably restricted if:
a. banks wish to hold no vault cash.
b. banks are holding large cash reserves.
c. banks are holding just the required level of reserves.
d. all banks are members of the Federal Reserve.
3. Other things being equal, if the required reserve ratio is raised from 10 percent to 20 percent,
a. maximum potential value of the money multiplier rises from 10 to 20.
b. maximum potential value of the money multiplier falls from 10 to 5.
c. minimum potential value of the money multiplier falls from 100 to 50.
d. minimum potential value of the money multiplier rises from 0.10 to 0.20.
4. During a period of unexpected high inflation:
a. debtors suffer because they have to repay fixed-rate loans with more money.
b. Debtors are better off because they can be forced to repay fixed-rate loans immediately and be done with
them.
c. Lenders are worse off because nobody wants to borrow money.
d. The government is better off because it can repay part of its debt in devalued currency.
5. The term “value added” refers to the dollar value of
a. the intermediate goods purchased by an industry
b. an industry’s sales less the dollar value of the intermediate goods purchased by the industry
c. an industry’s sales plus profits
d. the intermediate goods purchased by an industry plus the profits of the industry
6. An asset that can be easily disposed of with relative certainty as to its value is called:
a. fiduciary.
b. a liquid asset.
c. a non-durable good.
d. a disposable good.
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7. The "marginal propensity to consume" is:
a. at any income level the ratio of total consumption to total income.
b. at any income level the change in consumption spending total caused by a small income change (increase or
decrease).
c. for each and all income levels, a schedule showing amount of consumption spending at that level.
d. at any income level, and concerning a small change in the level, the ratio of the resulting change in
consumption to change in the income level.
8. When a family's income is low, and it is spending more on consumption than it is receiving in income:
a. the marginal propensity to consume must be greater than one.
b. the marginal propensity to consume must be equal to one.
c. the marginal propensity to consume is increasing.
d. none of the above statements regarding the marginal
propensity to consume is necessarily true.
9. A constant marginal propensity to save means that:
a. the absolute amount saved is constant at every income level.
b. at every income level, the percentage of income saved is constant.
c. the same percentage will be saved from an increase in income at all income levels.
d. there is no "break-even" point, that is, there is always some positive saving.
10. Autonomous consumption is
a. consumption spending that is earned rather than transferred from the government.
b. consumption spending that does not depend on the level of income.
c. the amount spend on consumption when saving is zero.
d. consumption spending when the marginal propensity to consume is 1.
11. If a bank is holding excess reserves of $5 million and has total reserves of $25 million, and the reserve
requirement is 20%, what is the level of customer deposits?
a. $200 million.
b. $250 million.
c. $100 million.
d. $125 million.
12. Open Market Operations involve
a. the Fed's control of retail store credit.
b. the Fed’s buying and selling of government securities.
c. the Fed's control of the discount rate.
d. the Fed’s changing of reserve requirements.
13. The discount rate is:
a. the rate the Fed charges member banks for any reserves the member banks borrow.
b. the lowest rate of interest at which a bank is willing to lend.
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c. usually the same as the prime rate.
d. the interest that discount department stores charge for installment credit.
14. Nominal GDP is:
a. the total value of goods and services net of exports
b. the total value of goods and services at prices corrected for inflation.
c. the total value of goods and services measured at current prices.
d. the total value of goods and services produced during periods of low unemployment.
15. Which of the following is not necessarily true with respect to a "bank run"?
a. the bank's problem arises from the fact that it has turned most of its cash into "earning assets"- bonds, loans,
etc.
b. the bank's depositors are simply trying to convert their assets from one form of money to another form of
money.
c. the bank has been operating on a fractional reserve system.
d. the bank must be insolvent when the run begins.
16. A contractionary monetary policy involves the Federal Reserve's
a. selling bonds, raising the discount rate, lowering the reserve requirements.
b. selling bonds, increasing reserve requirements, increasing the discount rate.
c. buying bonds, lowering the discount rate, lowering the reserve requirements.
d. buying bonds, raising reserve requirements, lowering the discount rate.
17. An inflationary recession (stagflation) occurs when:
a. prices are rising and unemployment is high.
b. employment is high and prices are falling.
c. prices are falling and unemployment is falling.
d. unemployment is high and prices are falling.
18. The Federal Reserve authorities' most important stabilizing weapon is:
a. consumer credit controls.
b. discount rate policy.
c. changes in bank reserve requirements.
d. open market operations.
19. A family spends $32,000 on consumption when its income is $32,000, and $36,000 on consumption when its
income is $38,000. The marginal propensity to consume is constant and is equal to
a. 0
b. 1/2
c. 2/3
d. ¾
20. When you buy a hamburger for lunch you are using money as a
a. unit of accounting.
b. standard of deferred payment.
c. store of value.
d. medium of exchange.
21. GDP does not include
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a. net exports
c. overseas production of US subsidiaries
22.
a.
b.
c.
d.
b. business investment
d. consumption expenditures
One of the economic costs of holding currency is that
it is cumbersome to carry.
it requires constant attention.
it earns no interest income.
its real value always increases.
23. When you calculate the total value of your assets you are using money as:
a. unit of accounting.
b. standard of deferred payment.
c. store of value.
d. medium of exchange.
24.
The Fed funds rate is:
a. the interest rate charged to banks on their loans from the Federal Reserve.
b. the interest charged by banks to their best customers.
c. the interest rate at which banks borrow excess reserves from other banks.
d. none of the above.
25. If deflation is occurring and nominal GDP is increasing over time, then real GDP is
a. decreasing.
b. increasing at the same rate as nominal GDP.
c. increasing more slowly than nominal GDP.
d. increasing faster than nominal GDP.
26. Which of the following expresses the relationship between consumption, saving and disposable income?
a. disposable income = consumption - saving
b. saving + disposable income = consumption
c. disposable income -saving = consumption
d. disposable income + consumption = saving
27. Inflation is best defined as
a. a price decrease.
b. a relative price increase.
c. an increase in the general price level.
d. an increase in the price of a single necessity.
28.
A negative supply shock will lead to
a. a higher price level and increased output.
b. a lower price level and increased output.
c. a lower price level and decreased output.
d. a higher price level and decreased output.
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29. Other things being constant, the economy’s aggregate demand curve shows that
a. as the price level falls, so does national income.
b. any change in the general price level causes the curve to shift.
c. real GDP decreases when the price level rises.
d. real GDP and the price level are not related.
30. An expansionary monetary policy involves the Federal Reserve's
a. selling treasurys, raising the discount rate, lowering the reserve requirements.
b. selling treasurys, increasing reserve requirements, increasing the discount rate.
c. buying treasurys, lowering the discount rate, lowering the reserve requirements.
d. buying treasurys, raising reserve requirements, lowering the discount rate.
31. The Consumer Price Index (CPI-U) attempts to measure
a.
hourly wage rates of manufacturing workers.
b.
The level of prices with respect to goods and services purchased by retired couples in rural areas.
c.
The level of prices of goods and services purchased by wage earners in urban areas.
d.
The average of raw material prices paid by producing firms.
32. If population growth is less than growth of real output,
a. real per capita GNP and GNP will be growing at the same rate.
b. there can be no economic growth.
c. real per capita GNP growth will be less than the growth of GNP.
d. real per capita GNP growth will be greater than the growth of GNP.
33. The farmer pays 20 cents for the seed that is sold to the miller for 35 cents; the miller makes flour and sells
it to the baker for 55 cents. The baker makes bread and sells it to the supermarket for 80 cents, and it sells it to
the consumers for $1.00. The contribution to GDP is
a. $1.90
b. $1
c. $2.90
d. 20 cents
34.
An example of an increase in gross private domestic investment spending that also increases GDP is
when:
a. inventories of new cars accumulate on the lots of car dealers.
b. government increases spending on infrastructure.
c. a farmer buys a used tractor.
d. a family sells its home because of a transfer.
35.
The shape of the aggregate demand curve does not tell how the total dollar value of spending will
ultimately be divided between output and prices. For this we need in addition
a. information about the standard of living in the country.
b. information that only the CPI can provide.
c. to know how far from the origin the aggregate demand is.
d. an aggregate supply curve.
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II. Essays. DO TWO (16 points)
1. Discuss the various fiscal measures that the government can take to stimulate the economy during a period of
economic recession and evaluate their effectiveness.
2. Distinguish between liquidity and solvency. Why are banks vulnerable to liquidity problems and how can a
liquidity problem change into insolvency? How can the Fed prevent this from happening?
3. Distinguish between the federal government deficit and the debt. How did the debt arise? Does it make any
difference who holds the US debt and in what currency it is denominated? Discuss.
4. Define GDP and GNP and discuss the significance of the GNP/GDP ratio being greater than one.
III. Define and give example. (Illustrate) Do Four (16 points)
1. Phillips Curve
3. Aggregate Supply Curve
5. Paradox of Thrift
7. Automatic Fiscal Stabilizers
2. Government Transfer Payments
4. Income Velocity of Money
6. Quantitative Easing
8. Tax Incidence
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IV. True or False and Why - Do 3 (12 points)
1. If money is to perform its functions, some commodity which has value in and of itself (like gold) must serve
as the basis of the monetary system.
2. If the government deficit decreases, the level of the debt will decline.
3. An increase in inventories is always an indication that the overall level of sales and economic activity is
going to rise.
4. The overall Consumer Price Index (CPI-U) is an accurate measure of the change in the purchasing power of
both an electronics and computer fan's dollar and that of a retiree on social security, over the past decade.
5. A government bond is considered a safe investment because when the principal is repaid, it will necessarily
still have the same purchasing power as when the bond was purchased.
V.
Do one of the following:
(6 points)
A.
Compare and contrast the effectiveness of Monetary policy in fighting high inflation in 1980-81
and the Great Recession in 2008-11.
B.
“The Fed’s job is easy because it has just to follow the law that says that it should try to achieve
price stability and maximum employment.” Discuss why the statement minimizes the problems faced
by the Fed in its conduct of monetary policy.
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