ECON EXAM REVISED

Question 1

Chuck offers $370,000 for a house. The seller turns down the offer but says she will sell the house for $390,000. However, Chuck refuses to pay the higher price. If Chuck is following the economic decision rule, the marginal benefit of the house to:

a. Chuck must be less than $390,000.
b. Chuck must be greater than $390,000.
c. the seller must be greater than $390,000.
d. the seller must be less than $370,000.

Answer 1

a. Chuck must be less than $390,000.

Question 2

Any economic system:

a. can eliminate scarcity.
b. addresses the questions what is produced, how it is produced, and for whom it is produced.
c. provides all the goods people want and desire.
d. provides equal distribution of well-being among its participants.

Answer 2

b. addresses the questions what is produced, how it is produced, and for whom it is produced.

Question 3

A group of undergraduates has raised and spent $5 million developing a business thus far. Another $1 million has to be spent to finish the business. Once the business is fully developed, the group could sell the business for $3 million. Should these students proceed with the business?

A. Yes, they stand to gain $2 million dollars
b. Yes, they can build a 6-million-dollar business for just $1 million.
c. No, this is already a lost venture. There is no point in “doubling down”.
d. No, they will lose 3 million dollars if they keep going.

Answer 3

A. Yes, they stand to gain $2 million dollars

Question 4

In a market economy, ownership of the means of production resides with:

a. The Government
b. Businesses
c. Households
d. Land and labor are owned by households, but businesses own capital.

Answer 4

c. Households

Question 5

Which of the following is an example of a normative statement?

A. Persistent unemployment leads to higher rates of substance abuse and self-harm.
b. The unemployment rate is 3.6%.
c. Regular attendance at churches (and other religious institutions) is correlated with lower rates of suicide.
d. The government should focus on policies that lower the unemployment rate.

Answer 5

d. The government should focus on policies that lower the unemployment rate.

Question 6

6. In socialism:

a. Economic forces do not operate.
b. Individuals are encouraged to act for their own benefit.
c. Government planning, rather than the market, is relied upon to coordinate economic activity.
d. Distribution is determined by the individual’s ability.

Answer 6

c. Government planning, rather than the market, is relied upon to coordinate economic activity.

Question 7

8. Which of the following is not counted in GDP?

a. Rent for an apartment
b. The imputed value an owner-occupied house provides, equivalent to rent not paid.
c. Money spent to hire a plumber to fix a bathroom.
d. The imputed value of a homeowner fixing their own bathroom, equivalent to labor costs not paid.

Answer 7

d. The imputed value of a homeowner fixing their own bathroom, equivalent to labor costs not paid.

Question 8

9. Suppose a business makes 50 rocking chairs, but only sells 25. The rest are put in inventory to be sold next year. In which category of GDP are those unsold chairs counted this year?

a. Consumption
b. Investment
c. None, the chairs were not sold so they are not counted.
d. Positively in consumption but negatively in investment, which cancels out to zero.

Answer 8

b. Investment

Question 9

In 2018, an economy experienced consumption spending of $5 trillion, investments of $3trillion, government spending of $1 trillion, imports of $3 trillion, and exports of $4trillion. What is the economy’s GDP in 2018?

a. $9 trillion
b. $10 trillion
c. $12 trillion
d. $16 trillion

Answer 9

b. $10 trillion

Question 10

A US household purchases a washing machine built in Japan. How will this be counted in the components of GDP?

a. Not at all, since the washing machine was not produced in the US.
b. Positively in consumption
c. Negatively in net exports
d. Both b and c.

Answer 10

d. Both b and c.

Question 11

13. Which of the following correctly captures the relationship between inflation and borrowing/lending?

A. When inflation is high and predictable, lenders benefit more than borrowers.
b. When inflation is low and predictable, lenders benefit more than borrowers.
c. When inflation is volatile, lenders benefit more than borrowers.
d. When inflation is volatile, bother borrowers and lenders are worse off.

Answer 11

d. When inflation is volatile, bother borrowers and lenders are worse off.

Question 12

A country has a population of 187 million. 151 million are civilian, adult and institutionalized. If 100 million are employed and 6 million of the people who are not employed are looking for work, what is the unemployment rate?

A. 3.2%
b. 4%
c. 5.7%
d. 6%

Answer 12

c. 5.7%

Question 13

How large is the labor force of Grand Fenwick?

a. 3900
b. 4000
c. 6400
d. 7000

Answer 13

b. 4000

Question 14

What is the unemployment rate for Grand Fenwick?

A. 2.50%
b. 2.56%
c. 3.33%
d. 3.45%

Answer 14

A. 2.50%

Question 15

How many people would be considered “marginally attached”?

a. 100
b. 300
c. No more than 500
d. Not enough information

Answer 15

d. Not enough information

Question 16

17. How are marginally attached and discouraged workers related?

A. If a worker is marginally attached, then they must be discouraged.
b. If a worker is discouraged, then they must be marginally attached.
c. Both (a) and (b)
d. No worker can be both marginally attached and discouraged.

Answer 16

b. If a worker is discouraged, then they must be marginally attached.

Question 17

18. What is the price of money?

a. The interest rate
b. Money is used to price other things; it prices things so it cannot be priced.
c. One divided by the price level
d. Time

Answer 17

a. The interest rate

Question 18

If your nominal wage goes up by 3% and prices go up by 8%, by how much did your real income change?

a. -5%
b. 5%
c. 3%
d. Not enough information

Answer 18

a. -5%

Question 19

If you deposit $5,000 cash into your savings account, and the bank holds the cash in reserves, what happens to M1?

a. It decreases by $5,000
b. Nothing
c. It increases by $5,000
d. It depends on the reserve ratio

Answer 19

b. Nothing

Question 20

Continuing from {20}; suppose the bank keeps 10% of your deposit in reserve and lends out the other 90% which is then held in cash. How much has M1 changed as a result of your deposit and the bank’s lending?

a. M1 has not changed.
b. M1 has increased by $4,500
c. M1 has increased by $5,000
d. M1 has increased by $45,000

Answer 20

b. M1 has increased by $4,500

Question 21

Continuing from {20, 21}; suppose the money loaned out by your bank is deposited another banks and reloaned out again and again ad infinitum. Each time banks hold 10% of the deposits in reserve. How much has M1 changed as a result of your deposit and there lending process?

a. M1 has not changed.
b. M1 has increased by $5,000
c. M1 has increased by $45,000
d. M1 has increased by $50,000

Answer 21

c. M1 has increased by $45,000

Question 22

In the Supply and Demand model, what happens when there is an increase in supply and a decrease in demand?

a. Price and quantity increase
b. Price decreases and quantity increases
c. Price may increase or decrease, quantity decreases
d. Price decrease, quantity may increase of decrease

Answer 22

d. Price decrease, quantity may increase of decrease

Question 23

When the price of apples falls, what should happen to the demand for apples?

a. It will decrease
b. It will not change
c. It will increase
d. Any of the above could happen

Answer 23

b. It will not change

Question 24

Which of the following is necessary in order for the competitive equilibrium in the supply and demand model to be efficient?

a. Firms have the freedom to charge whatever price they want, and know that there will be some customers willing to buy at any finite price.
b. Buyers must have identical incomes.
c. All parties act with the general welfare in mind, not just self-interest.
d. Buyers and sellers are price takers

Answer 24

d. Buyers and sellers are price takers

Question 25

Saul worked as a criminal lawyer in Albuquerque for several years before he suddenly decided to move to Nebraska and find a job that was inconspicuous. He has submitted several applications and is waiting to hear back from those businesses, who really better call him. What is Saul?

a. Cyclically unemployed
b. Institutionally unemployed
c. Structurally unemployed
d. Frictionally unemployed

Answer 25

d. Frictionally unemployed

Question 26

Over time, Saul finds himself unable to stand working at anything other than his old legal profession and quits his job at Cinnabon. He is looking for a job as a lawyer, but can’t find a law office that will hire him due to his past disagreements with bar associations. How do economists describe this misalignment between Saul’s abilities and desires and prospective employers’ needs?

a. Cyclical unemployment
b. Institutional unemployment
c. Structural unemployment
d. Frictional unemployment

Answer 26

c. Structural unemployment

Question 27

29. Suppose the interest rate you can freely borrow or save at is 5%. Given the choice between receiving $950 today or $1000 one year from now, which should you pick?

A. The options are equivalent
b. Take the money today
c. Take the money in a year
d. Not enough information

Answer 27

c. Take the money in a year

Question 28

Raising tax rates will have what effect on tax revenue?

a. Decrease
b. Not change
c. Increased.
d. Any of the above could happen

Answer 28

d. Any of the above could happen

Question 29

How did I say workers respond to a real pay cut?

a. They will often begrudgingly accept it.
b. They will often quit or strike.
c. Workers will borrow money (or decrease savings)
d. B or C could both be true, but not A.

Answer 29

a. They will often begrudgingly accept it.

Question 30

Sally lost her job almost a year ago and looked for a new one for several months before deciding to become a homemaker. How would economists describe Sally right now?

a. Unemployed
b. Discouraged
c. Marginally Attached
d. More than one of the above.

Answer 30

c. Marginally Attached

Question 31

What effect will Sally’s decision to become a homemaker have on GDP? (Assuming she otherwise would have found a job)

a. GDP will be higher
b. GDP will be lower
c. GDP will be unchanged
d. Sally’s decision has no direct effect on GDP.

Answer 31

b. GDP will be lower

Question 32

What effect will Sally’s decision to be a homemaker have on national income? (Assumes she would otherwise have found a job.)

a. National income will be higher.
b. National income will be lower.
c. National income will be unchanged.
d. Any of the above are possible

Answer 32

b. National income will be lower.

Question 33

Odysseus has been out of the country for several years fighting a war. Upon his return, rather than find a job or starting a business, he begins cleaning up his house. While he was out of the country, he was not counted in any labor statistics. How will his arrival affect the unemployment rate? (Assume no one dies as a result of the housecleaning.)

a. It will increase
b. It will not change
c. It will decrease
d. Not enough information

Answer 33

b. It will not change

Question 34

Odysseus has been out of the country for several years fighting a war. Upon his return, rather than find a job or starting a business, he begins cleaning up his house. While he was out of the country, he was not counted in any labor statistics. How will his arrival affect the labor force participation rate? (Assume nobody1 dies as a result of the housecleaning.)

a. It will increase
b. It will not change
c. It will decrease
d. Not enough information

Answer 34

c. It will decrease

Question 35

If a household is receiving more total utility from home production than from leisure, what should they do?

a. Spend more time on leisure
b. Spend more time of home production
c. Spend more time on leisure only if some time is already being spent on leisure.
d. Not enough information

Answer 35

d. Not enough information

Question 36

When the government taxes a labor market, what happens?

a. Workers end up paying all of the tax, since firms just take it out of their wages.
b. Firms end up paying all of the tax, since they are the ones directly sending in the money.
c. Only one side, workers or firms, will lose, but it is impossible to tell which without more information.
d. Both workers and firms lose, and it doesn’t matter who has to send the government the money.

Answer 36

d. Both workers and firms lose, and it doesn’t matter who has to send the government the money.

Question 37

The federal income tax system in the US is:

a. Progressive
b. Regressive
c. Neither a nor b
d. Both a and b

Answer 37

a. Progressive

Question 38

Suppose you receive $400,000 in an inheritance from a long-lost great uncle. What will happen to your marginal utility from working?

A. It will increase
b. It will not change
c. It will decrease
d. Not enough information

Answer 38

c. It will decrease

Question 39

According to the Economic Decision Rule, you should keep doing an activity until:

a. The total cost is just equal to the total benefit
b. The marginal cost is just equal to the marginal benefit
c. The average cost is equal to the average benefit
d. The marginal cost is equal to the average benefit.

Answer 39

b. The marginal cost is just equal to the marginal benefit

Question 40

A government requiring firms to pay for health insurance for full time workers is an example of which kind of system?

a. Traditional
b. Mercantilist
c. Centrally Planned
d. Market

Answer 40

c. Centrally Planned

Question 41

Quantum Computing Incorporated had a recent breakthrough in generating entanglement. As a result, people expect their profits to go up substantially over the next few years and find the stock more appealing. Seeing the opportunity for growth, the board decides to sell many of the shares held by the firm in order to raise money. What is likely to happen to the equilibrium price and quantity of outstanding shares?

A. Price and quantity increase
b. Price increases, quantity may increase or decrease
c. Quantity increases, price may increase or decrease
d. Price decreases, quantity increases.

Answer 41

c. Quantity increases, price may increase or decrease

Question 42

I and my neighbor own and live in our own houses. If we decided to move and rent out our houses to one another at the market rate in our area, what effect would that have on GDP?

a. None, because the value of imputed rent was included before the change
b. None, because the rent payment you make to one another cancel out.
c. GDP would decrease by the amount of the total rent payments
d. GDP would increase by the amount of the total rent payments

Answer 42

a. None, because the value of imputed rent was included before the change

Question 43

James used to work in a downtown peach cannery, but he decided to move out into the country. He applied for some jobs in the new area, and even has several interviews scheduled. What is James?

a. Cyclically unemployed
b. Institutionally unemployed
c. Structurally unemployed
d. Frictionally unemployed

Answer 43

d. Frictionally unemployed

Question 44

Suppose nominal GDP is lower than real GDP, what can we conclude?

a. Inflation is positive
b. Inflation is negative (deflation)
c. Inflation is constant
d. Not enough information

Answer 44

d. Not enough information

Question 45

Which of the following did I say was the most significant cost of volatile inflation?

a. Menu costs
b. Price illusion
c. Shoe-leather costs
d. Risk to borrowers and lenders

Answer 45

d. Risk to borrowers and lenders

Question 46

Of the economic growth models covered in class, which is most like the logistic model of biological growth?

a. Malthusian
b. Solow
c. Romer
d. Pinkerton

Answer 46

a. Malthusian

Question 47

A pattern of population growth due to technological advancement followed by a partial population collapse due to population having surpassed the land’s carrying capacity is known as a.

A Demographic Cycle
b. A Malthusian Cycle
c. A Lockean Cycle
d. A Poverty Cycle

Answer 47

b. A Malthusian Cycle

Question 48

Which modern researcher most closely reflects Malthus’ views?
a. Simon
b. Ehrlich
c. Solow
d. Romer

Answer 48

b. Ehrlich

Question 49

According to the environmental Kuznets Curve, as nations experience economic growth:

a. Environmental quality worsens as resources are consumed and land is used for growth.
b. Environmental quality improves as wealthy individuals are willing to make larger sacrifices to improve the environment.
c. Environmental quality increases, but only in countries with inclusive institutions.
d. (a) for poor countries, but (b) for rich countries.

Answer 49

d. (a) for poor countries, but (b) for rich countries.

Question 50

Which of the following is not one of the Kaldor facts?

a. Population grows steadily over time
b. Capital per worker grows steadily over time
c. Output per worker grows steadily over time
d. The ratio of capital to output has been steady over time

Answer 50

a. Population grows steadily over time

Question 51

Which of Kaldor’s Stylized Facts appears in retrospect to have the weakest evidence?

a. The labor and capital shares of income have been steady.
b. The rate of profit on capital has been steady
c. There is considerable variation in rates of growth across countries
d. Human capital has been steadily increasing

Answer 51

b. The rate of profit on capital has been steady

Question 52

According to Jones and Romer’s new growth facts, in the last 50yrs international trade:

a. Has decreased
b. Has remained about the same
c. Has increased
d. Jones and Romer didn’t say anything about this.

Answer 52

c. Has increased

Question 53

In the Solow model, a decrease in capital per worker will lead to:

a. An increase in output per worker
b. A decrease in output per worker
c. An increase or decrease in output per worker
d. An increase in output per worker, only if capital is above the steady state level

Answer 53

b. A decrease in output per worker

Question 54

Which of the following is a stock variable?

a. Capital per worker
b. Net investment
c. Gross investment
d. The production function

Answer 54

a. Capital per worker

Question 55

In the Solow model, endogenous growth comes from:

a. Human capital accumulation
b. Physical capital accumulation
c. Ideas
d. Both (a) and (b)

Answer 55

b. Physical capital accumulation

Question 56

In the Lucas model, endogenous growth comes from:

a. Human capital accumulation
b. Physical capital accumulation
c. Ideas
d. Both (a) and (b)

Answer 56

d. Both (a) and (b)

Question 57

In the Romer model, endogenous growth comes from:

a. Human capital accumulation
b. Physical capital accumulation
c. Ideas
d. Both (a) and (b)

Answer 57

c. Ideas

Question 58

A lower rate of capital depreciation will lead to:

a. A lower steady state level of output
b. A lower steady state level of capital
c. A higher steady state level of output
d. Both (a) and (b)

Answer 58

c. A higher steady state level of output

Question 59

A lower savings rate will definitely lead to

a. Lower steady state output, thus less consumption
b. A higher portion of income used for consumption, thus more consumption
c. Lower gross investment
d. Any of the above might be true, but none must be true

Answer 59

c. Lower gross investment

Question 60

Suppose the Solow model is accurate and that a country is at its steady state. There is an increase in technology. What happens to output per worker?

a. Output per worker does not initially change, but slowly increases over time.
b. Output per worker does not initially change, but slowly decreases over time.
c. Output per worker initially increases, then slowly increases more over time.
d. Output per worker initially increases, then slowly decreases over time.

Answer 60

c. Output per worker initially increases, then slowly increases more over time.

Question 61

Suppose the Solow model is accurate and that a country is at its steady state. There is an increase in technology. What happens to capital per worker?

a. Capital per worker does not initially change, but slowly increases over time.
b. Capital per worker does not initially change, but slowly decreases over time.
c. Capital per worker initially increases, then slowly increases more over time.
d. Capital per worker initially increases, then slowly decreases over time.

Answer 61

a. Capital per worker does not initially change, but slowly increases over time.

Question 62

According to the Solow model (extended to include population growth), high population growth leads to:

a. Higher rates of economic growth
b. Lower rates of economic growth
c. No effect on economic growth
d. Solow makes no predictions about this

Answer 62

b. Lower rates of economic growth

Question 63

Suppose a country has per capita income of $120k and $400k worth of capital per person. Assume no population growth or technological development. If people save 10% of their income and the capital depreciation rate is 2.5%, what can we say about the prospects of growth for this economy?

a. Incomes are likely to increase over time.
b. Incomes are likely to decrease over time.
c. This economy is currently in its steady state.
d. Not enough information.

Answer 63

a. Incomes are likely to increase over time.

Question 64

The Solow residual:

a. Increases with population
b. Is the exogenous variation in economic growth across countries and over time.
c. Was almost entirely eliminated by Lucas’ use of human capital formation
d. Is the same as net investment. It is the remaining new capital produced after subtracting off what is lost to depreciation.

Answer 64

b. Is the exogenous variation in economic growth across countries and over time.

Question 65

What “scale effect” was initially seen as a major flaw in Romer’s model?

a. His model suggests that large countries should grow faster than small countries, which does not happen.
b. His model suggests that large countries should grow slower than small countries, which does not happen.
c. His model suggests that rich countries should grow faster than poor countries, which does not happen.
d. His model suggests that rich countries should grow slower than poor countries, which does not happen.

Answer 65

a. His model suggests that large countries should grow faster than small countries, which does not happen.

Question 66

How did Michael Kramer address that flaw in Romer’s model?

a. He argued that ideas cross borders, so the scale effect is global.
b. He argued that ideas cross borders, so the scale effect does not exist.
c. He argued that some capital can cross borders, so capital goods like tractors and computers will be sent to the countries where they will earn the highest return.
d. He argued that people and food cross borders, so countries’ food consumption and food production do not have to be equal.

Answer 66

a. He argued that ideas cross borders, so the scale effect is global.

Question 67

Which of the following is an example of an inclusive institution?

a. A law requiring all new discoveries be immediately publicly shared so that anyone can benefit, not just those who can afford to fund research.
b. Government funded R&D grants allocated primarily to those universities which have a pattern of hiring former government employees.
c. A system where judges can prevent landlords from evicting delinquent tenants as long as the social contributions of those tenants are significant enough.
d. Temporary monopoly rights in the form of a patent or copyright.

Answer 67

d. Temporary monopoly rights in the form of a patent or copyright.

Question 68

Suppose world leaders believe that Malthusian and Solow models are accurate and complete descriptions of economic growth. What will policy makers likely choose to do in regards to population growth?

a. They will discourage population growth.
b. They will encourage population growth.
c. There is no clear policy prescription for population growth.
d. If the economy is below the steady state, they will encourage population growth; if it is above the steady state, they will discourage population growth.

Answer 68

a. They will discourage population growth.

Question 69

Suppose world leaders believe that Malthusian and Solow models are accurate and complete descriptions of economic growth.
Now suppose that those world leaders are wrong, and that Romer and Kramer’s models are a better explanation of economic growth. What will be the effect of those leaders ’erroneous decisions on growth?

a. Economic growth per capita will be faster, but overall economic growth will be slower
b. Economic growth per capita will be slower, but overall economic growth will be faster
c. Economic growth both per capita and overall will be slower
d. Economic growth both per capita and overall will be faster

Answer 69

c. Economic growth both per capita and overall will be slower

Question 70

Which of the following is not an example of a pro-growth government institution?

a. Stable prices
b. Low taxes
c. Decentralization
d. International Trade Barriers

Answer 70

d. International Trade Barriers

Question 71

31. Countries and regions colonized by Europeans which were poorer and less urban are today generally richer than those that were richer and more urban. This “reversal of fortunes” can be attributed to:

a. Inclusive institutions being set up in population-sparse colonies to attract European settlers.
b. Extractive institutions being set up in densely populated regions because there was sufficient labor to be used by the colonizers.
c. Europeans being unable to set up inclusive institution in places where extractive institutions were already strongly entrenched.
d. All of the above.

Answer 71

d. All of the above.

Question 72

If a foreign worker in the US sends $1000 to his family abroad, what effect will this have on the Balance of Payments?

a. This will not be counted because no good or service crossed the border, no assets changed ownership, and no factors of production were traded.
b. This will count positively in the balance of payments.
c. This will count negatively in the balance of payments.
d. Not enough information.

Answer 72

c. This will count negatively in the balance of payments.

Question 73

Remittances, money sent by non-citizen residents of a country back to family in their home country, are part of which account?

a. Balance of Trade
b. Current Account
c. Financial Account
d. More than one or none of the above are true.

Answer 73

b. Current Account

Question 74

Suppose incomes in many foreign countries begins to rise suddenly, what is likely to happen to US net exports and the US dollar?

a. Net exports will fall and the dollar will depreciate.
b. Net exports will rise and the dollar will depreciate.
c. Net exports will fall and the dollar will appreciate.
d. Net exports will rise and the dollar will appreciate.

Answer 74

d. Net exports will rise and the dollar will appreciate.

Question 75

Suppose incomes in the US begin to rise suddenly due to lower costs of producing non-tradeable goods, what is likely to happen to US net exports and the US dollar?

a. Net exports will fall and the dollar will depreciate.
b. Net exports will rise and the dollar will depreciate.
c. Net exports will fall and the dollar will appreciate.
d. Net exports will rise and the dollar will appreciate.

Answer 75

a. Net exports will fall and the dollar will depreciate.

Question 76

A trade deficit:

a. Is always bad.
b. Is always good.
c. Is never really good or bad.
d. Is a lot like borrowing on a national scale.

Answer 76

d. Is a lot like borrowing on a national scale.

Question 77

Which of the following is not an argument we covered for restricting international trade?

a. Shipping costs
b. National security
c. Specific factors
d. Distributional effects

Answer 77

a. Shipping costs

Question 78

What happens when a country imposes a tariff? Assume other countries do not raise tariffs in response.

A. It makes consumers worse off.
b. It makes consumers worse off only if the country is a significant importer of the good.
c. It makes consumers worse off only if the country is relatively small importer of the good
d. It does not hurt consumers, because the tariff is paid by the foreign firms

Answer 78

A. It makes consumers worse off.

Question 79

What happens when a country imposes a tariff? Assume other countries do not raise tariffs in response.

a. It can cause a net increase in value to the country.
b. It can cause a net increase in value to the country only if the country is a significant importer of the good.
c. It can cause a net increase in value to the country only if the country is relatively small importer of the good.
d. It causes a net decrease in value to the country.

Answer 79

a. It can cause a net increase in value to the country.

Question 80

What is the smallest category (in absolute dollar terms) in the balance of payments for the US?

a. Balance of Trade
b. Current Account
c. Financial Account
d. None of the above

Answer 80

b. Current Account

Question 81

During a recession, unemployment tends to ______ and real GDP tends to _______.

a. Increase, increase
b. Increase, decrease
c. Decrease, increase
d. Decrease, decrease

Answer 81

b. Increase, decrease

Question 82

Your friend says, “they yield curve has been inverted for months, which means that We are about to enter a recession”. How should you respond?

a. Yield curve inversions have nothing to do with recessions.
b. Yes. A recession is definitely about to occur.
c. Maybe, but recessions are notoriously unpredictable.
d. No. We can be almost certain that a recession will not begin in the next 6 months because unemployment is currently low.

Answer 82

c. Maybe, but recessions are notoriously unpredictable.

Question 83

During a recession, the price level:

a. Always falls
b. Usually falls
c. Usually rises
d. Always rises

Answer 83

b. Usually falls

Question 84

The slope of the short run aggregate supply curve:

a. Increases as prices get higher
b. Decreases as prices get higher
c. Is constant
d. Increases first, then decreases

Answer 84

a. Increases as prices get higher

Question 85

In the aggregate demand-aggregate supply model, the short run equilibrium occurs:

a. Where aggregate demand and short run aggregate supply cross
b. Where aggregate demand and long run aggregate supply cross
c. Where short run aggregate supply and long run aggregate supply cross
d. Where aggregate demand, short run aggregate supply, and long run aggregate supply cross

Answer 85

a. Where aggregate demand and short run aggregate supply cross

Question 86

6. Suppose businesses expect that a fall in productivity will cause an economic downturn next year. What effect will this have in the AD-AS model today?

a. Aggregate demand will decrease, casing output to fall and prices to rise.
b. Aggregate demand will decrease, casing output and prices to fall.
c. Aggregate supply will decrease, casing output to fall and prices to rise.
d. Aggregate supply will decrease, casing output and prices to fall.

Answer 86

b. Aggregate demand will decrease, casing output and prices to fall.

Question 87

Continuing from the previous question, suppose those businesses expectations were in error and the full employment output has not changed. What will happen in the AD-ASmodel over time?

a. Aggregate demand will increase, causing output to return to normal and prices to rise back their original level
b. Aggregate demand will increase, causing output to return to normal and prices to rise above their original level.
c. Aggregate supply will increase, causing output to return to normal and prices to fall back to their original level.
d. Aggregate supply will increase, causing output to return to normal and prices to fall below their original level.

Answer 87

d. Aggregate supply will increase, causing output to return to normal and prices to fall below their original level.

Question 88

In the aggregate demand-aggregate supply model, the long-run equilibrium occurs:

a. Where aggregate demand and short run aggregate supply cross
b. Where aggregate demand and long run aggregate supply cross
c. Where short run aggregate supply and long run aggregate supply cross
d. Where aggregate demand, short run aggregate supply, and long run aggregate supply cross

Answer 88

d. Where aggregate demand, short run aggregate supply, and long run aggregate supply cross

Question 89

Aggregate demand is ____________ sloped in the short-run and _________ sloped in the long-run.

a. Positively; positively
b. Negatively; positively
c. Positively; negatively
d. Negatively; negatively

Answer 89

d. Negatively; negatively

Question 90

assume the economy was initially in full employment equilibrium and use the following scenario: Suppose households are troubled by political news and conclude that bad economic times are coming. Consumer sentiment falls. Which curve shifts which way?

a. Aggregate demand shifts left
b. Aggregate demand shifts right
c. Aggregate supply shifts left
d. Aggregate supply shifts right

Answer 90

a. Aggregate demand shifts left

Question 91

assume the economy was initially in full employment equilibrium and use the following scenario: Suppose households are troubled by political news and conclude that bad economic times are coming. Consumer sentiment falls. What happens to the price level and output in the short run?

a. Output falls and prices rise
b. Output and prices fall
c. Output rises and prices fall
d. Output and prices rise

Answer 91

b. Output and prices fall

Question 92

assume the economy was initially in full employment equilibrium and use the following scenario: Suppose households are troubled by political news and conclude that bad economic times are coming. Consumer sentiment falls. Over time, what shift will occur if there is no government intervention?

a. Aggregate demand shifts left
b. Aggregate demand shifts right
c. Short run aggregate supply shifts left
d. Short run aggregate supply shifts right

Answer 92

d. Short run aggregate supply shifts right

Question 93

Now, suppose the government responds to this scenario by engaging in expansionary fiscal policy rather than waiting for those long run results you described in (12). From a saltwater perspective, what will be the long-run result of this policy?

a. Output and prices will return to their original level.
b. Output will return to its original level, but prices will be higher.
c. Output will only partially recover, and prices will be higher.
d. Prices will return to their original level, but output will be lower.

Answer 93

a. Output and prices will return to their original level.

Question 94

Now, suppose the government responds to this scenario by engaging in expansionary fiscal policy rather than waiting for those long run results you described in (12). From a freshwater perspective, what will be the long-run result of this policy?

a. Output and prices will return to their original level.
b. Output will increase, but not all the way to its original level, but prices will be higher.
c. Output will return to its original level, but prices will be lower.
d. Prices will return to their original level, but output will be higher

Answer 94

b. Output will increase, but not all the way to its original level, but prices will be higher.

Question 95

Suppose the marginal propensity to consume is 0.6 and the government decides to increase spending on infrastructure by $30 billion. If the saltwater school is correct, but how much will GDP increase in the short run?

a. Less than $30 billion.
b. $30 billion
c. $45 billion
d. $75 billion

Answer 95

a. Less than $30 billion.

Question 96

Suppose the marginal propensity to consume is 0.6 and the government decides to send out $30 billion in stimulus checks. If the saltwater school is correct, but how much will GDP increase in the short run?

a. Less than $30 billion
b. $30 billion
c. $45 billion
d. $75 billion

Answer 96

c. $45 billion

Question 97

The United States debt:

a. Is large and has grown under every president since Coolidge
b. Is partially owed to the US government itself.
c. Is mostly owed to other countries and foreign investors.
d. Two of the above.

Answer 97

d. Two of the above.

Question 98

Which of the following is a criticism of countercyclical fiscal policy made by the freshwater school?

a. Contractionary policy is almost never used in democracies.
b. Ricardian Equivalence
c. Policy Lags make it destabilizing
d. All of the above.

Answer 98

d. All of the above.

Question 99

19. Why does the aggregate demand curve naturally adjust to bring the economy back to long run equilibrium?

a. Households adjust their expectations about the price level
b. Firms adjust their expectations about the price level.
c. Both a and b
d. It does not.

Answer 99

d. It does not.

Question 100

Contractionary monetary policy ___________ interest rates, usually by _________ assets such as treasury bonds.

a. Lowers, selling
b. Lowers, buying
c. Raises, selling
d. Raises, buying

Answer 100

c. Raises, selling

Question 101

The Federal Reserve is a government agency, like the Department of Justice.

a. Yes, the Fed is a part of the executive branch.
b. Yes, Fed employees are government employees.
c. No, the Fed is totally independent from the government. It is an organization runby the major banks.
d. No, the Fed is a private organization. However, it is chartered by the Federal government and run by political appointees.

Answer 101

d. No, the Fed is a private organization. However, it is chartered by the Federal government and run by political appointees.

Question 102

The Federal Reserve System was set up to be a ______________ and politically______________ institution.

a. large; well connected
b. all powerful; neutral
c. decentralized; independent
d. wealthy; adversarial

Answer 102

c. decentralized; independent

Question 103

Which of these is no longer a tool used by the Federal Reserve?

a. Open market operations
b. Interest payments on reserves
c. Reserve requirements
d. Discount policy

Answer 103

c. Reserve requirements

Question 104

What effect did the Fed’s recent raising short-term interest rates have on the market value of long-term bonds, such as those held by the now-defunct Silicon Valley Bank?

a. The higher short-term rates made the bonds worth less
b. The higher short-term rates made the bonds worth more.
c. The higher short-term rates had no effect on the bond prices.
d. It may have increased or decreased them, but we can’t know

Answer 104

b. The higher short-term rates made the bonds worth more.

Question 105

How effective is discount policy?

a. Not very, banks almost never want to take loans from the Fed because it sends a bad signal.
b. Very, banks regularly borrow from the Fed in order to satisfy reserve requirements.
c. Not very, since the discount rate is only available to small banks.
d. Very, since the discount rate allows banks to reduce their tax liability on cash held in reserve.

Answer 105

a. Not very, banks almost never want to take loans from the Fed because it sends a bad signal.

Question 106

Compare three policy tools: federal spending, tax-rebate stimulus checks, and expansionary monetary policy. Rank them from fastest to slowest for their full effect:

a. federal spending, tax-rebate stimulus checks, then expansionary monetary policy
b. tax-rebate stimulus checks, federal spending, then expansionary monetary policy
c. tax-rebate stimulus checks, expansionary monetary policy, then federal spending
d. expansionary monetary policy, tax-rebate stimulus checks, then federal spending

Answer 106

b. tax-rebate stimulus checks, federal spending, then expansionary monetary policy

Question 107

How can the Federal Reserve lower inflation?

a. Set lower interest rates
b. Set higher interest rates
c. Engage in open market purchases
d. Engage in open market sales

Answer 107

d. Engage in open market sales

Question 108

When the Fed buys bonds, what should we expect to happen in the aggregate supply-aggregate demand model?

a. Short run aggregate supply shifts out
b. Long run aggregate supply shifts out
c. Aggregate demand shifts in
d. Aggregate demand shifts out

Answer 108

d. Aggregate demand shifts out

Question 109

What is the primary long-run effect of expansionary monetary policy?

a. inflation
b. Deflation
c. Higher unemployment
d. Lower unemployment

Answer 109

a. inflation

Question 110

According to the quantity theory of money:

a. M/V=PQ
b. V/M=PQ
c. MP=QV
d. MV=PQ

Answer 110

d. MV=PQ

Question 111

Which of these is a reason why the Fed doesn’t target 0% inflation?

a. Inflation is good for banks, because it reduces the real value of deposits, which are a liability.
b. Inflation is good for economic growth, since the money investors in new capital have to pay back isn’t worth as much.
c. If inflation were 0%, then people wouldn’t realize that inflation mattered so the would think the Fed isn’t doing anything important.
d. When inflation is 0%, it is very hard for the Fed to cut interest rates. Higher interest rates allow for policy space.

Answer 111

d. When inflation is 0%, it is very hard for the Fed to cut interest rates. Higher interest rates allow for policy space.

Question 112

Quantitative Easing:

a. Refers to loosening regulations on banks to encourage them to lend more money in an effort to stimulate the economy.
b. Has been attempted by the European Central Bank but never by the Federal Reserve.
c. Refers to the Fed reducing the size of the monetary base.
d. Refers to open market purchases with expanded scope and scale

Answer 112

d. Refers to open market purchases with expanded scope and scale

Question 113

Which of these is not an argument for discretionary policy?

a. Monetary policy should be unaffected by changes in Fed leadership
b. Recessions are not alike
c. Future circumstances cannot be addressed by a rule
d. Policy makers need flexibility to respond as conditions warrant

Answer 113

d. Policy makers need flexibility to respond as conditions warrant

Question 114

When the Fed sells bonds, what should we expect to happen in the aggregate supply-aggregate demand model?

a. Short run aggregate supply shifts out
b. Long run aggregate supply shifts out
c. Aggregate demand shifts in
d. Aggregate demand shifts out

Answer 114

c. Aggregate demand shifts in

Question 115

Suppose nominal GDP is $100 billion, inflation is 2.5%, and the velocity of money is 2. How large is the money supply?

a. $20 billion
b. $40 billion
c. $50 billion
d. $200 billion

Answer 115

c. $50 billion

Question 116

The chairman of the Board of Governors of the Federal Reserve:

a. Has no real power, this office is mostly ceremonial.
b. Is named Janet Yellen.
c. Is a political appointee.
d. Is elected by the rest of the Board of Governors.

Answer 116

c. Is a political appointee.

Question 117

Suppose the Fed decides to respond to high inflation by selling bonds, but that inflation is naturally falling by the time the Feds actions affect the economy. What will happen?

a. Inflation will shoot up
b. Deflation may occur
c. The Fed’s policy will end up having no effect
d. The president may fire the Chairman of the Board of Governors.

Answer 117

b. Deflation may occur

Question 118

How can the Federal Reserve increase inflation?

a. Set lower interest rates
b. Set higher interest rates
c. Engage in open market purchases
d. Engage in open market sales

Answer 118

c. Engage in open market purchases

Question 119

Which of these is not a property of recessions?

Unpredictability
Persistence
Regularity
Co-movement

Answer 119

Regularity

Question 119

Quantitative Tightening:

a. Refers to tightening regulations on banks to encourage them to lend more money in an effort to stimulate the economy.
b. Has been attempted by the European Central Bank but never by the Federal Reserve.
c. Refers to the Fed increasing the size of the monetary base.
d. Refers to open market sales with expanded scope and scale.

Answer 119

d. Refers to open market sales with expanded scope and scale.

Question 120

The Phillips curve shows a _________ relationship between __________ and __________.

Negative, unemployment, inflation
Negative, GDP, inflation
Positive, unemployment, inflation
Positive, GDP, inflation

Answer 120

Negative, unemployment, inflation

Question 121

Recessions involve a rise in unemployment. When does unemployment usually peak?

• Just before the recession officially begins.
• Just after the recession begins.
• About the midpoint of the recession
• Exactly at the midpoint of the recession, by definition.
• In the back half of the recession.
• At the end of a recession, and sometimes just after it has ended.

Answer 121

• At the end of a recession, and sometimes just after it has ended.