Name: _____________________________________  Directions:  Print your name on this Exam and the Scantron form. 

Answer key:  The questions are in numerical order for test A.  For test B, the question number is written in RED to the right of the test bank A number

 

 

1.   28

Other things equal, which of the following can happen to the trade balance if the domestic savings rate decreases and nothing else changes in the economy? Use the national savings and investment identity.

 

A)

the trade deficit will fall   

 

B)

the trade deficit will rise If the savings rate decreases, the funds needed in financial capital markets will come from imports and the trade deficit will rise

 

C)

the trade surplus will fall

 

D)

we cannot tell what will happen to the trade balance from the given information

 

2.     40

The four components of aggregate demand are:

 

A)

consumption, imports, government spending, and net exports

 

B)

consumer durables, investment, government spending, and net exports

 

C)

consumption, imports, government spending, and exports

 

D)

consumption, investment, government spending, and net exports.   C+I+G+(X-IM)

 

3.   21      

If workers received a 5 percent wage increase and the rate of inflation was 10 percent, then their real wage:

 

A)

increased.

 

B)

decreased.   Inflation was greater than the wage increase, so inflation adjusted, or real, wages decreased

 

C)

remained constant.

 

D)

equaled the nominal wage.   The real wage is the nominal wage minus the rate of inflation

 

E)

exceeded the nominal wage.

 

4.    9

The last official recession in the U.S.

 

A)

was longer than the average recession since 1950  It was shorter

 

B)

was deeper than the average recession since 1950  It was milder

 

C)

followed a record-long period of expansion   TRUE

 

D)

was in 2005 and ended in 2006.  It was in 2001

 

5.    4

Toolsville and Wally Land trade between themselves and with no other country in the world. Toolsville has an enormous trade surplus against Wally Land. Then

 

A)

since Toolsville is earning money from Wally Land, trade is beneficial for Toolsville but detrimental for Wally Land  Trade is not a zero sum game.

 

B)

since Toolsville is getting a net inflow of goods and services from Wally Land, trade is beneficial for Toolsville but detrimental for Wally Land

 

C)

Toolsville is earning money but Wally Land is getting a net inflow of goods and services, so it is hard to say who is benefiting most from this trade situation  True.  With a trade surplus, Toolsville is exporting more than it imports, so it is earning foreign currency and with more imports than exports, Wally Land is getting more goods and services than it can produce domestically.

 

D)

Toolsville is getting a net inflow of goods and services but Wally Land is earning money, so it is hard to say who is benefiting most from this trade situation

 

6.    19

Which of the following figures is closest to the U.S. inflation rate since the mid-eighties?

 

A)

0%

 

B)

3%  Correct

 

C)

8%

 

D)

15%

 

7.   27

A hyperinflation

 

A)

is currently being experienced by Zimbabwe.  True.  We heard a news report on this, and it was in your readings.

 

B)

was experienced in the U.S. during the Great Depression.  No.  We had deflation in the 1930s

 

C)

is defined as any time inflation is greater than 10% per year.   No, it is when inflation is huge.

 

D)

occurred in Germany in the 1920s  True (sorry about 2 correct answers.  I counted either a or d as correct.

 

8.    41

The government of a country wants to increase consumption in the current year by cutting the personal tax rate by 10%.  They are deciding whether to make the tax cut only last one year or to make it permanent.  We know that

 

A)

if they make the tax cuts only last one year, there will be a greater increase in consumption in the current year

 

B)

if they make the tax cuts permanent, there will be a greater increase in consumption in the current year   We talked about this in class.  A temporary tax cut will have less of an impact than a permanent one, based on the permanent income hypothesis.

 

C)

the increase in consumption in the current year will be the same if the tax cuts last one year or if they are permanent

 

D)

this plan will not work because tax cuts will not increase consumption    Sure they do.  The question is how much do they increase consumption.

 

9    38.

Imagine that Wally Land finds itself in the following situation: a government budget deficit of $900; total domestic savings of $2,000, and total domestic physical capital investment of $1,300. According to the national saving and investment identity, what is the current account balance?    There is 2,000 – 1,300 = $700 more savings than investment, but since the government needs $900 the country must import $200 of financial capital so it has current account deficit of $200 (A)

 

A)

deficit of $200

 

B)

surplus of $200

 

C)

deficit of $900

 

D)

surplus of $900

 

10.   36

Which of the following involves a financial inflow to the U.S. economy?

 

A)

Japanese car imports  This is an import

 

B)

British investors buying real estate in California  This is a financial inflow into the US

 

C)

foreign aid from the U.S. to Rwanda  This is a financial outflow from the US economy

 

D)

oil imports from Saudi Arabia This is an import

 

11.   15

During a recession

 

A)

the nation's production possibility frontier shifts inward to the left.  The PPF does not shift in a recession

 

B)

the nation's production possibility frontier shifts outward to the right. This occurs due to technological change or from more resources

 

C)

the nation's imports will usually rise. In a recession, people buy less of almost everything so imports fall.

 

D)

the nation's budget deficit will usually get worse. Yes, because tax revenues fall and spending rises.

 

12.   48

For a given price level, if a significant decline in housing prices makes consumers less willing to spend  then the _____ shifts _____.

 

A)

aggregate demand curve; right

 

B)

aggregate demand curve; left   Spending means aggregate demand is the curve of interest and less willing means for any price level there is less spending so it’s a leftward shift.

 

C)

aggregate supply curve; upward

 

D)

aggregate supply curve; downward

 

13.   42

The unemployment rate in the United States at the peak of the Great Depression was

 

A)

5%

 

B)

10%

 

C)

25% One quarter of the labor force was out of work

 

D)

50%

 

14.

Which of the following is true about the change in GDP and the per capita GDP in most countries?

 

A)

the change in per capita GDP is larger than the change in GDP

 

B)

the change in GDP is larger than the change in GDP per capita Mathematically, since population is growing, the change in GDP will be larger than the change in GDP per capita. 

 

C)

the change in GDP is approximately equal to the change in GDP per capita

 

D)

there is no general trend between the change in GDP and the change in per capita GDP

 

15.   14

The historical experience of inflation in the United States is

 

A)

that inflation in the 19th and 20th centuries followed a similar pattern.  No.  We saw a graph that showed that in the 19th century the price level at the end of the century was the same as it was at the start.

 

B)

inflation in the last half of the twentieth century was the lowest of any 50 year period in American history.  Just the reverse.

 

C)

in the 19th century, inflation occurred during wartime years and that was followed by a period of falling prices.  True, which makes the 19th century differen than the 20th.

 

D)

inflation accelerated in the 1930s in each decade since then inflation has been higher. There was deflation in the 1930s and inflation was relatively high in the 1970s but has subsided since then.

 

16.   45

Which of the following would not be included in GDP?

 

A)

the cost of hospital stays  That is a service that is produced and purchased so it is included.

 

B)

the cost of the pizza delivery guy delivering pizza That is a service that is produced so it is included.

 

C)

the cost of hiring a babysitter  That is a service that is produced so it is included.

 

D)

the cost of washing your own dishes at home Home produced services are not included.

 

17.   39

What will happen in an economy if the government increases government spending during a recession?

 

A)

output will increase and the price level will decrease slightly

 

B)

unemployment will increase and the price level will increase

 

C)

unemployment will increase and the price level will decrease

 

D)

unemployment will decrease and the price level will increase slightly  Using AD/AS the AD curve will shift to the right on the gently upward sloping part of the AS curve.

 

18.   16

How do we measure GDP?

 

A)

add up the value of raw materials, intermediate goods and final goods

 

B)

add up the value of intermediate goods and final goods

 

C)

add up the value of final goods  This is the definition.

 

D)

all of the above are different methods for measuring GDP

 

19.   47

Assume that the government raises taxes.  This policy lowers the price level, but does not affect output much.  Then we know that

 

A)

before the change in policy, the economy was very far from potential GDP 

 

B)

before the change in policy, the economy was close to potential GDP If the economy is close to its potential, AS is nearly vertical, so a decrease in AD (arising from an increase in taxes) will not affect output much, but will decrease price level.

 

C)

the AD curve shifted to the right as a result of this policy

 

D)

the AS curve shifted to the left as a result of this policy

 

20.   37

If an economy starts off with per capital of GDP of $3,000 and grows at an annual rate of 2% per year, per capita GDP will double in about  The rule of 72 says 72/2 = about 36 years to double, so B

 

A)

15 years

 

B)

35 years

 

C)

50 years

 

D)

100 years

 

21   2.

In a recession, the cyclical rate of unemployment:

 

A)

is positive.  Cyclical unemployment is when unemployment is due to the business cycle

 

B)

is zero.

 

C)

is negative.

 

D)

equals the natural rate of unemployment.

 

22  . 1

Which of the following transactions would be included in the GDP of the United States?

 

A)

Coca Cola produces soft drinks in England.

 

B)

Honda produces cars in Ohio. This is the only example of a good that is produced within the US.  It does not matter what the nationality is of the company that produces the product.

 

C)

McDonalds sells hamburgers in Russia.

 

D)

Ford Motors produces cars in Mexico.

 

23.   6

If the market interest rate is 10% and the inflation rate is 3%, then the real interest rate equals:

 

A)

3%

 

B)

7% The real interest rate is the market rate less inflation. 

 

C)

10%

 

D)

13%

 

24   46.

A key indicator of the hardship experienced during the Great Depression was a

 

A)

high rate of inflation.   There was deflation, not inflation

 

B)

high rate of unemployment.   Yes

 

C)

high rate of economic growth.   There was no, or very little,  economic growth

 

D)

both A and B

 

25.  3

The quality of digital cameras in the last few years has risen tremendously, while prices were more or less the same.  During this time period, the basket of goods used for calculating price indexes was fixed and included digital cameras. Then

 

A)

any increase in the price of the basket implies a higher cost of living  Not if you ignore quality increases that are embedded in the price increases

 

B)

people tend to substitute away from digital cameras and therefore buy fewer cameras, but the fixed basket of goods does not take this into account   If digital cameras were getting better and the price hadn’t changed, people would be buying more digital cameras.

 

C)

the price index underestimates the extent to which the lower price of digital cameras has helped reduce the cost of living  Yes.

 

D)

it is hard to capture the effects of quality increases, so government statisticians ignore this factor

 

26.  34

When an economy is far below potential GDP, The way to think about this is that this is where the AS curve is relatively flat…

 

A)

firms can increase output substantially as output prices rise

 

B)

firms can increase output substantially as output prices fall  …therefore this is true.

 

C)

increases in output will have a significant effect on the aggregate price level

 

D)

unemployment is low

 

27.  31

If you borrow money at what you believe is an appropriate interest rate for the level of expected inflation, but the actual inflation rate turns out to be much higher than you had expected:

 

A)

you will be paying the loan back with dollars that have much less purchasing power than you had expected.  YES.  So the lender can’t do as much with the dollars you give her.

 

B)

you will be paying the loan back with dollars that have much higher purchasing power than you had expected.

 

C)

you will be paying the loan back with dollars that have the same purchasing power as the dollars you borrowed.

 

D)

you, the borrower will unintentionally redistribute wealth to the lender.

 

28.  30

How would you best describe the level of the U.S. current account balance in the middle 2000s?

 

A)

moderate surplus

 

B)

near balance

 

C)

moderate deficit

 

D)

large deficit  There is a  large, by historical standards, current account deficit.

 

29.  44

If inflation rises unexpectedly by 3%, which of the following economic actors would be hurt?

 

A)

someone with a large amount of money in his checking account  The real value of your checking account falls.

 

B)

a bank lending money with an adjustable rate mortgage If the rate is adjustable, the bank does not get hurt.

 

C)

a large firm employee with a wage contract that includes a cost of living adjustment factor The employee is protected from an unanticipated increase in prices.

 

D)

an investor who diversifies her portfolio in various real assets  Real assets tend to hold their value in inflation; financial assets do not.

 

30.  5

If a nation is running a balance of trade deficit

 

A)

exports are greater than imports.  Just the opposite

 

B)

the nation is experiencing a net capital outflow (to other nations).  No. it is experiencing an inflow of financial capital

 

C)

exports are negative.

 

D)

the nation as a whole is investing more than can be financed by domestic savings.  Yes

 

31  20.

Which of the following might be one reason why some countries with relatively low levels of per capita GDP were able to grow so much faster than countries already with high per capital GDP?

 

A)

abundant natural resources

 

B)

rapid increase of population

 

C)

low income countries can copy and adapt already available technologies  Yes

 

D)

low income countries have lower marginal returns to capital investment

 

32.  18

Which of the following would be counted as “unemployed” in the U.S. government survey?

 

A)

a college student working at a university bookstore

 

B)

a married working woman on maternity leave

 

C)

a retired politician

 

D)

a high school graduate looking for part-time jobs Yes.  If she is looking for a job she is unemployed, even though she is in school.

 

33.

Which of the following involves a financial outflow from the U.S. economy?

 

A)

U.S. computer exports to Russia

 

B)

returns paid on U.S. financial investment in Malaysia

 

C)

U.S. investors buying foreign assets in Thailand  Yes.  Dollars are flowing out of the U.S.

 

D)

Korean investors buying real estate in Manhattan

 

34.  7

Which of the following would be included in GDP?

 

A)

the sale of a used car  It is used, so it is not included.

 

B)

sales from a garage sale  It is used, so it is not included

 

C)

lawn care by a hired company  Yes, it is a service that is provided.

 

D)

better health due to improved medicine  GDP does not include better health, but better health is correlated with higher GDP.

 

35.  26

The aggregate supply curve

 

A)

is flat when resources in an economy are fully employed

 

B)

is flat when resources in an economy are not fully employed  Yes

 

C)

is steep when resources in an economy are not fully employed

 

D)

is flat for all levels of output

 

36.  12

Jim Brown would like to work, but has not looked for work in the past four weeks because he does not believe any jobs are available. In the official employment statistics, Jim is classified as:

 

A)

employed.

 

B)

unemployed. No, he is not looking for work so he is not officially counted as unemployed.

 

C)

out of the labor force.   Yes

 

D)

underemployed.

 

37.  29    

If an automobile manufacturer pays $200 for a car windshield, $400 for four car tires, $100 for a car CD player, and sells cars made with these parts for $20,000, then each car the automobile manufacturer sells contributes how much to GDP?   The $20,000 is the price of the final good, which includes all of the other parts, so the answer is $20,000.

 

A)

$19,300

 

B)

$20,000

 

C)

$20,200

 

D)

$20,400

 

38  50.

Although GDP is not the same as economic well being, high levels of GDP around the world are positively correlated with all of the following EXCEPT:

 

A)

longer life expectancies.

 

B)

higher rates of literacy.

 

C)

higher material standards of living.

 

D)

higher rates of infant mortality.  Just the opposite.Higher GDP is correlated with lower rates of infant mortality.

 

39  49.

Which of the following sounds the most correct about the U.S. economy and trade?

 

A)

the U.S. has the largest economy in the world, so trade must comprise a large portion of its GDP  The first part is true, but the second does not follow.

 

B)

although the U.S. is the biggest trader in the world, its economy is also so big that trade itself is not a very big portion of its GDP  Yes  Small countries tend to have a higher share of trade in its GDP

 

C)

U.S. citizens spend more money compared to other countries, so the level of trade must be small

 

D)

the U.S. government levies heavy tariffs on all imports, making the level of trade small  Tariffs in the US are very low.

 

40.  17

The largest expenditure component of U.S. GDP is:

 

A)

consumption   About 70%

 

B)

investment

 

C)

government purchases

 

D)

imports

 

41.  13

If the total expenditures of a typical family equaled $40,000 per year in 2000 and the exact same basket of goods and services cost $45,000 in the year 2003, the family's cost of living:

 

A)

increased by 8.8 percent.

 

B)

decreased by 8.8 percent.

 

C)

increased by 12.5 percent.   45,000 is slightly more than 10% of 40,000 so this is the answer, even if you did not have a calculator.

 

D)

decreased by 12.5 percent.

 

42.  22

Which of the following statements about trade surplus and capital flow is correct?

 

A)

a trade surplus means that there is a net inflow of capital

 

B)

a trade surplus means that there is a net outflow of capital  This is the example of China today.  It exports more than it imports and has a net capital outflow, much of it to the US.

 

C)

a trade surplus means that there is a net inflow of capital excluding foreign borrowing and lending

 

D)

a trade surplus means that there is a net outflow of capital excluding foreign borrowing and lending

 

43.  32

Suppose we observe a decrease in per capita GDP in country A. Most likely, this would be because

 

A)

country A's GDP has decreased

 

B)

country A's GDP has decreased, and population has increased

 

C)

country A's GDP has increased, but population has increased even more  This is the most likely situation.

 

D)

country A's GDP has increased, and population has decreased

 

44.  35

When jobs are easy to find, wage increases are frequently given, and businesses are doing well, the economy is most likely in a(n):

 

A)

expansion.  Yes

 

B)

depression.

 

C)

recession.

 

D)

surplus.

 

E)

shortage.

 

45  23.

What is an underlying factor that may prevent employers from cutting wages even during bad times?

 

A)

employers worry about the motivation and morale of their employees   Yes

 

B)

most wage contracts are set so that wage cuts are almost impossible

 

C)

even during bad times, the market equilibrium will never result in a lower wage

 

D)

in practice, unions can sue employers if they implement a wage cut

 

46.  43

Hyperinflations are:

 

A)

frequently experienced in the United States.

 

B)

extremely high rates of inflation.  Yes

 

C)

extremely low rates of inflation.

 

D)

inflations that are very high then very low.

 

47.   24

A government official announces that the nation will eliminate its trade deficit and also encourage financial investment from foreign firms. How should we evaluate this policy?

 

A)

the two objectives are such that any government should focus on implementing this policy

 

B)

the policy is self-contradictory since the two objectives are not simultaneously achievable  Yes

 

C)

we don't have to be too worried about trade deficit

 

D)

we don't have to be too worried about getting foreign investment

 

48.  25

If the government lowers taxes, then we should expect that

 

A)

output will decrease, the aggregate price level will increase, and unemployment will increase

 

B)

output will decrease, the aggregate price level will increase, and unemployment will decrease

 

C)

output will increase, the aggregate price level will increase, and unemployment will decrease  The AD curve shifts out to the right along a rising AS curve

 

D)

output will increase, the aggregate price level will decrease, and unemployment will increase

 

49. 33

Unemployment in country A increased from 2.2% in June 2006 to 7.7% by June 2007. This would be most likely due to

 

A)

cyclical unemployment  Most likely the nation’s economy is experiencin a recession so cyclical unemployment rises. 

 

B)

the natural rate of unemployment

 

C)

frictional unemployment

 

D)

we cannot tell which of the above is most likely

 

50.  10

The sum of the number of people unemployed and employed equals the:

 

A)

labor force.  This is the definition of the labor force.

 

B)

employment rate.

 

C)

unemployment rate.

 

D)

inflation rate.

 

Answer Key

 

1.

A

2.

D

3.

B

4.

C

5.

C

6.

B

7.

A

8.

B

9.

A

10.

B

11.

D

12.

B

13.

C

14.

B

15.

C

16.

D

17.

D

18.

C

19.

B

20.

B

21.

A

22.

B

23.

B

24.

B

25.

C

26.

A

27.

A

28.

D

29.

A

30.

D

31.

C

32.

D

33.

C

34.

C

35.

B

36.

C

37.

B

38.

D

39.

B

40.

A

41.

C

42.

B

43.

C

44.

A

45.

A

46.

B

47.

B

48.

C

49.

A

50.

A