FNCE 1010 Final Practice Questions

Question 1

Which of the following would NOT be counted as final goods?

a) A family of 4 builds a second house
b) A city gets a new road built by the state government
c) A local business installs technology that improves environmental quality
d) A firm sells rare earth elements that are made into computer chips

Answer 1

D

Question 2

Which of the following would not be counted in American GDP?

a) An American firm builds computers using silver purchased from a foreign country

b) An Indonesian firm develops a soda product based on the patent of an American soda

c) A national government invests in a transportation infrastructure project titled ‘TRANSFER’

d) An American firm produces silicon to be made into iPads, but all iPad production occurs in
Taiwan

Answer 2

B; good is produced in Indonesia

Question 3

Which of the following would count in Brazil’s GNP but not their GDP?

a) A Brazilian firm produces rubber and exports it to Vietnam
b) A Brazilian national works abroad but sends money to their family in Brazil every year
c) A Brazilian state government transfers funds to a Brazilian local government
d) A Brazilian family purchases a new car that was produced in the United States

Answer 3

B; Workers abroad count for gnp

Question 4

Which of the following can cause prices to change?

a) Rise in nominal costs
b) Household beliefs
c) Technological innovation
d) All answers are correct

Answer 4

D; Consumer Preferences

Question 5

If the Consumer Price Index changes by 3% year-over-year and the nominal interest rate available to small businesses and households is 6%, then what is the real interest rate?

a) 2%
b) 3%
c) -1%
d) 9%

Answer 5

B; Real interest rate = nominal interest rate - inflation rate

Question 6

Which of the following statements is true about the difference between the GDP deflator and the CPI?

a) CPI accounts for changing prices of exports while the GDP deflator does not
b) GDP deflator measures the change in prices of both investments and government spending
while the CPI does not
c) GDP deflator measures the changes in prices of consumption while the CPI does not
d) Both the CPI and the GDP deflator account for changes in the price of imports

Answer 6

B

Question 7

Loans available to large corporations offer a 3% interest rate. Which of the following
statements is true?

a) If inflation is positive, then the real interest rate will be negative
b) If the real interest rate equals 4%, then the inflation rate is 1%
c) If there is deflation, then the real interest rate will be less than 3%
d) If inflation is at 2%, then the real interest rate is 1%

Answer 7

D; Real Interest Rate = 3% (nominal rate) - 2% (inflation rate) = 1%

Question 8

Which of the following are counted in PCE but not in core PCE?

a) Energy and stock market returns
b) Food and volatile consumer goods
c) Food and energy prices
d) The difference stems from differences in measurement, not differences in content

Answer 8

C; PCE Definition

Question 9

Which of the following is correct?

a) Nominal GDP reflects only changes in price
b) Real GDP incorporates changes in the interest rate
c) Real GDP reflects only changes in quantities
d) Real GDP reflects changes in both prices and quantities

Answer 9

C

Question 10

The United States is a leading producer of silicon computer chips. Computer chips are crucial components of computers. What type of goods are they?

a) Capital goods
b) Intermediate goods
c) Consumer goods
d) Investment goods

Answer 10

B

Question 11

Which component of GDP makes up the largest share of output in the United States?
a) Consumption
b) Investment
c) Government spending
d) Net Exports

Answer 11

A

Question 12

With a permanent decrease in the real wage, the substitution effect leads to ______, the
income effect leads to ________, and _______.

a) a higher labor supply; a lower labor supply, the income effect is greater than the substitution
effect
b) a higher labor supply; a lower labor supply, income effect is less than the substitution effect
c) a lower labor supply; a higher labor supply, income effect is greater than the substitution
effect
d) a lower labor supply; a higher labor supply, the income effect is less than the substitution effect

Answer 12

C

Question 13

Okun’s Law states that the gap between full employment and actual output is equal to _____
times the ______ .

a) 2; structural unemployment rate
b) 2; cyclical unemployment rate
c) ½; structural unemploymentrate
d) ½; cyclical unemploymentrate

Answer 13

B; full employment - actual employment = 2(cyclical unemployment)

Question 14

An increase in the minimum wage leads, according to the classical model, to _____ in the
labor demand curve, ____ in the labor supply curve, and _______ in unemployment.

a) Decrease, increase, increase
b) Decrease, increase, no change
c) Decrease, decrease, increase
d) No change, no change, increase

Answer 14

A; fuck prof. answer

Question 15

Suppose the marginal product of labor is MPN = 400 - 0.4N where N is aggregate
employment. The aggregate quantity of labor supplied is 200 + 10w, where w is the real
wage. What is the equilibrium real wage?
a) 40
b) 49
c) 70
d) 64

Answer 15

D; Set equal and solve

Question 16

Everyone’s wealth increases in a country. All else equal, in the labor market, which of the
following is INCORRECT?

a) Equilibrium level of marginal productivity of labor will be higher
b) Labor demand curve shifts right
c) Labor supply will decrease
d) Equilibrium real wage increases

Answer 16

B

Question 17

With optimal labor supply, which of the following is true?

a) The increase in output per additional worker is equal to the nominal wage
b) Marginal product of capital equals real wage
c) Marginal product of labor equals nominal wage
d) None of the other answers are correct

Answer 17

D

Question 18

There is a decrease in real wages and labor increases. Which of the following is true?
a) Substitution effect dominates
b) Income effect dominates
c) Neither substitution nor income effect dominates
d) None of the other answers are true

Answer 18

B; labor increases despite a decrease in real wages, it indicates that the income effect is dominating

Question 19

A manufacturing company obtains more machines for its factory. How would this affect
the labor demand curve?
a) No change
b) Shifts right
c) Shifts left
d) Not enough information

Answer 19

B

Question 20

Suppose a semiconductor company uses silicon in the production process. If silicon prices increase, how would the price change appear in the production function?

a) An increase in level of capital, K
b) A decrease in level of capital, K
c) An increase in productivity level, A
d) A decrease in productivity level, A

Answer 20

D; The productivity level (A) in a production function typically refers to how effectively inputs are converted into output.

Question 21

Which of the following factors affect total factor productivity?
a) Machine learning
b) Discrimination
c) Entrepreneurial ability
d) All other answers are correct

Answer 21

D

Question 22

A firm producing car parts uses capital and labor. If the firm buys more welding
machines, what is the effect on labor supply and labor demand?

a) Labor supply doesn’t change, labor demand increases
b) Labor supply doesn’t change, labor demand decreases
c) Labor supply decreases, labor demand increases
d) Labor supply decreases, labor demand decreases

Answer 22

A

Question 23

An individual receives a holiday bonus pay. What do we expect to happen to the
individual’s consumption and savings?

a) Consumption will go up, saving will go down.
b) Consumption will go up, saving will go up.
c) Consumption will go down, saving will go down.
d) Consumption will go down, saving will go up.

Answer 23

B

Question 24

An individual learns that their job will be terminated in the next year. What do we expect
to happen to current levels of the individual’s consumption and saving?

a) Consumption will go up, saving will go down.
b) Consumption will go up, saving will go up.
c) Consumption will go down, saving will go down.
d) Consumption will go down, saving will go up.

Answer 24

D

Question 25

An individual inherits a large sum of money from a distant relative. What do we expect to
happen to the individual’s consumption and saving?

a) Consumption will go up, saving will go down.
b) Consumption will go up, saving will go up.
c) Consumption will go down, saving will go down.
d) Consumption will go down, saving will go up.

Answer 25

A

Question 26

Which of the following statements is correct?

a) Ricardian equivalence is an argument that suggests households should smooth
consumption over time.
b) The savings rate is decreasing in household income.
c) The marginal propensity to consume is larger for low-income households.
d) All other answers are true.

Answer 26

C

Question 27

Suppose that the real interest rate in the economy is declining, what happens to the
aggregate saving curve?

a) Shifts right.
b) Shifts left.
c) No change.
d) Not enough information.

Answer 27

C

Question 28

The price of capital is $2,000, the rate of depreciation is 3% per year, the annual expected
real interest rate is 5%, and expected inflation is 2%. What is the user cost of capital?

a) $100
b) $120
c) $160
d) $200

Answer 28

C

Question 29

The equation for the marginal productivity of capital in the following period is 500 − 20𝐾.
Suppose the price of a unit of capital is $200, the depreciation rate is 10% per year, and the
real interest rate is 10% per year. The desired capital stock is: 40 = 500 - 20K
K = 23

a) $23
b) $24
c) $25
d) $26

Answer 29

A

Question 30

Which of the following statements is correct?

a) The difference between gross investment and net investment is corporate taxes.
b) Consumption is the most volatile component of GDP.
c) Higher price of capital increases the demand for capital.
d) All other answers are incorrect.

Answer 30

D

Question 31

Suppose current productivity is increasing and is expected to revert back to its original
level in the following period. What is the impact on the equilibrium level of real interest
rate, consumption, and investment?

a) Real interest rate goes up, consumption declines, investment declines.
b) Real interest rate goes down, consumption increases, investment increases.
c) Real interest rate goes up, consumption increases, investment increases.
d) Real interest rate goes down, consumption declines, investment declines.

Answer 31

B

Question 32

A firm chooses its level of investment so that
a) The average productivity of capital equals the user cost of capital.
b) The marginal productivity of capital equals the real interest rate.
c) Its revenues are maximized.
d) Its profits are maximized.

Answer 32

D

Question 33

In February 2020, Abdou earned $9,000 and his consumption was $6,000. In March 2020,
Abdou earned $9,000 but received a stimulus check for $1,000, and his consumption
went up to $6,500. What is the marginal propensity to consume of Abdou?

a) 50% - only count extra income
b) 55%
c) 60%
d) 65%

Answer 33

A

Question 34

Suppose the capital depreciation rate is increasing. What happens to investment?

a) Net investment surely declines.
b) Gross investment surely declines.
c) Net investment is ambiguous.
d) Gross investment surely increases.

Answer 34

A

Question 35

Suppose households move money from their checking accounts to their savings deposits.
What is the effect on M1 and M2?

a) Both M1 and M2 will increase.
b) M1 will decline, and M2 will increase
c) M1 will not change, and M2 will not change.
d) M1 will increase, and M2 will decline.

Answer 35

A

Question 36

Suppose that the annual yield on a 1-year treasury bond is 5% and the annual yield on a 3-
year treasury bond is 7%. According to the expectations theory of the term structure, what is
the expected annual yield on a 2-year treasury a year from now?

a) 6%
b) 7%
c) 8%
d) 9%

Answer 36

C; 21-5 = 16/2 = 8

Question 37

Which of the following statements is correct?

a) An inverted yield curve implies that the market expects future interest rates to decline.
b) During recessions, the yield curve is often inverted.
c) A few months after a recession, the yield curve is downward sloping.
d) The yield curve is usually downward sloping.

Answer 37

A

Question 38

Suppose that the real amount of money (M/P) is 10, real GDP (Y) is 1000, and that the price
level (P) is 10. What is the velocity of money?

a) 10
b) 100
c) 1000
d) 10000

Answer 38

B; V= (P×Y) / M
​

Question 39

Suppose that the nominal interest rate increases. What is the expected effect on the
demand for money?

a) Money demand declines.
b) Money demand increases.
c) Money demand does not change.
d) Money demand increases only if the money supply is constant.

Answer 39

A

Question 40

Suppose that the real interest rate in the economy goes up and money supply does not
change. What is the expected effect on the price level?

a) Price level increases.
b) Price level declines.
c) The price level doesn’t change.
d) The effect is ambiguous.

Answer 40

A

Question 41

Suppose that there is $2B currency in circulation, $200M in bank vaults, $5.2B public
deposits, and commercial banks hold $800M deposits at the Federal Reserve system.
What is the money multiplier (round to 2nd digit)?

a) 1.73
b) 2.40
c) 2.50
d) 2.57

Answer 41

B;

1 + cu / cu + res
Res = 1000/5200 = 1/26 = .1923
Cu: 2 / 5.2 = 1 / 2.6 = .3846

1.3846 / .5769 = 2.40

Question 42

What is the Federal Funds interest rate?

a) The interest rate in which commercial banks can borrow from the Federal Reserve bank.
b) The interest rate the Federal Reserve Bank pays commercial banks on their excess reserves.
c) The interest rate the Federal Reserve Bank pays commercial banks on their required
reserves.
d) The interest rate commercial banks borrow and lend their excess reserves to each other.

Answer 42

D

Question 43

What is the primary interest rate that the Fed targets by executing open market
Operations?

a) The Fed Funds rate.
b) The discount window lending rate.
c) The interest rate the Federal Reserve bank pays commercial banks on their excess reserves.
d) The long-term interest rate.

Answer 43

A

Question 44

Suppose the Fed purchases short-term U.S. treasuries from the public. Which statement
is correct?
a) This is a form of forward guidance.
b) This is a form of quantitative easing.
c) This is a form of conventional monetary policy.
d) None of the other statements are correct.

Answer 44

C

Question 45

Suppose that unemployment is at its natural level, and the inflation rate is 2%.
According to Taylor rule, what should the central bank set the nominal interest rate to?
a) 0%
b) 2%
c) 4%
d) 8.5%

Answer 45

4% (put taylor rule in calculator)

Question 45

Suppose the natural level of unemployment is 2%, and expected inflation is 2%. If
unemployment is 5%, what should be the actual level of inflation according to the
expectations-augmented Phillips curve?
a) Inflation is equal to 5%.
b) Inflation is greater than 2%.
c) Inflation is lower than 2%.
d) Inflation is equal to 2%.

Answer 45

C

Question 46

Suppose that inflation was expected to be 5%, and instead, it ended up being 3%. According
to the expectations-augmented Phillips curve, what can you say about the unanticipated
inflation rate and the cyclical unemployment rate?

a. Both the unanticipated inflation rate and cyclical unemployment are positive.
b. The unanticipated inflation rate is negative and cyclical unemployment rate is
positive.
c. The unanticipated inflation rate is positive and cyclical unemployment is negative.
d. Both unanticipated inflation rate and cyclical unemployment rate are negatives.

Answer 46

B

Question 47

Hurricane Sandy caused significant damage in the US, including the destruction of 3.5%
of the state’s infrastructure and equipment used by local businesses. Which of the following
statements is correct regarding the economic impact of Hurricane Sandy?

a. The marginal productivity of capital declines.
b. The marginal productivity of capital increases.
c. The marginal productivity of labor declines.
d. Both (a) and (c) are correct.
e. Both (b) and (c) are correct.

Answer 47

E

Question 48

Hurricane Sandy caused significant damage in the US, destroying 3.5% of the state’s
business infrastructure and equipment. Concurrently, many households faced major
damage to their homes, leading to a substantial decrease in household wealth. Considering
these combined impacts on capital and household wealth, what is the effect of Hurricane
Sandy on the equilibrium levels of the real wage and labor?

a. The real wage decreases, while labor increases.
b. The real wage decreases, while the effect on labor is ambiguous.
c. Both the real wage and the effect on labor are ambiguous.
d. The real wage increases, while labor decreases.

Answer 48

B

Question 48

Suppose that inflation is 6% and the output gap is -2%. What should the Fed set the nominal
interest rate according to Taylor’s rule?

a. 10%
b. 9%
c. 7%
d. 6%

Answer 48

B (study taylor rule)

Question 49

Suppose future real wages are expected to decrease. What is the impact on the equilibrium
levels of the real wage and labor?

a. Real wage declines and labor increases
b. Real wage declines and labor declines
c. Real wage increases and labor increases
d. Real wage increases and labor declines

Answer 49

A

Question 50

When Siemens, a German engineering company, raises the price of its industrial machinery
imported by U.S. manufacturers, which of the following price indexes will be directly
affected in the U.S.?

a. The CPI and PCE increase.
b. The GDP deflator increases.
c. None of the above.
d. All of the above.

Answer 50

C

Question 51

In a fictional economy, the nominal GDP for the year 2020 was $12,000, and the real GDP
for the same year was $10,000. In 2021, the nominal GDP increased to $18,000, while the
real GDP increased to $12,000. Calculate the inflation rate from 2020 to 2021 using the
GDP deflator, rounding your answer to the nearest second decimal place.

a. -20%
b. 25%
c. 50%
d. 20%

Answer 51

B (relearn gdp deflator)

Question 52

In 2022, Amazon reported revenues of $300 billion. From this total, they spent $50 billion
on employee salaries, $40 million purchasing products from suppliers, and $20 million on
purchasing services essential to their production process. Additionally, they paid $90
billion in taxes. Given that both the purchased products and essential services are
intermediate inputs, what was Amazon’s value-added?

a. $300 billion
b. $240 billion
c. $250 billion
d. $100 billion

Answer 52

B

Question 53

Types of Employment

Answer 53

Frictional: short-lived. It occurs when people voluntarily change jobs.

Cyclical: variation in the number of unemployed workers over the course of economic upturns and downturns. Unemployment rises during recessionary periods and declines during periods of economic growth.

Structural: Technological changes can lead to unemployment among workers displaced from jobs that are no longer needed. Displaced workers often end up either unemployed for extended periods or leaving the labor force entirely.

Institutional: Can result from government policies, such as high minimum wage floors, generous social benefits programs, and restrictive occupational licensing laws. Or market factors.

Question 54

Suppose there is a major decline in the stock market, leading to a significant decrease in
household wealth. What is the impact on the equilibrium level of the real interest rate,
consumption, and investment?

a. Real interest rate falls; consumption declines; investment increases
b. Real interest rate falls; consumption increases; investment increases
c. Real interest rate rises; consumption declines; investment declines
d. Real interest rate falls; consumption is ambiguous; investment is ambiguous

Answer 54

A

Question 55

With a permanent increase in the real wage, the substitution effect leads to ____, the
income effect leads to _____, and _____.

a. A higher labor supply; a lower labor supply; income effect is weaker than the
substitution effect.
b. A higher labor supply; a lower labor supply; income effect is stronger than the
substitution effect.
c. A lower labor supply; a higher labor supply; income effect is weaker than the
substitution effect.
d. A lower labor supply; a higher labor supply; income effect is stronger than the
substitution effect.

Answer 55

B

Question 56

What would happen to money demand if the real interest rate (𝑟) on alternative assets
Increases?

Answer 56

b. Money demand decreases because higher interest rates make holding money more
costly in terms of foregone interest on alternative assets.

Question 57

Suppose that output (Y) goes up and the money supply stays the same. What do we expect
to happen to the price level in equilibrium?

a. P increases.
b. P declines.
c. P remains the same.
d. None of the answers are correct.

Answer 57

B; P declines

Question 58

Suppose that the price of capital (𝑝𝑘) decreases due to an excess supply of capital. What is
the effect on the investment curve?

a. No change
b. Shifts right
c. Not enough information
d. Shifts left

Answer 58

B - Shifts Right

Question 59

Identify the true statements concerning key interest rates:
I. The discount window lending rate is the interest rate at which commercial banks can
borrow directly from the Federal Reserve.
II. The federal funds rate is the interest rate at which commercial banks borrow and lend
their reserves to each other, typically overnight.
III. The federal funds rate is the interest rate that the Federal Reserve pays to commercial
banks on their excess reserves.
IV. The discount window lending rate is the preferential interest rate offered by commercial
banks to low-risk households compared to high-risk ones.

a. I and II only
b. II and III only
c. I, II, and III only
d. I, III, and IV only

Answer 59

A

Question 60

The equation for the marginal productivity of capital is given by 𝑀𝑃𝐾𝑓 = 200 ― 5𝐾.
Suppose the price of a unit of capital is $100, the depreciation rate is 1% per year, and the
real interest rate is 4% per year. The desired capital stock is

a. 45
b. 39
c. 20
d. 25

Answer 60

B

Question 61

Given the following economic data:
Nominal GDP: $1500
Real GDP: $900
Velocity of money: 5
Expected inflation rate: 10%

What is the money supply in this economy?
a. 180
b. 300
c. 4500
d. 7500

Answer 61

B; Money Supply = Nominal GDP / Velocity of Money

Question 62

During an economic slowdown, the Federal Reserve wishes to stimulate economic activity
using conventional monetary policy. They decide to conduct open market operations. What
action should they take, and what immediate effect would it have on the federal funds rate?

a. They should buy treasury securities, which will push the federal funds rate upwards.
b. They should sell treasury securities, which will push the federal funds rate
downwards.
c. They should buy treasury securities, which will push the federal funds rate
downwards.
d. They should sell treasury securities, which will push the federal funds rate upwards.

Answer 62

C

Question 63

During the conflict between Ukraine and Russia, the Federal Reserve observed distinct
trends in inflation indicators: the core PCE experienced a minor rise, whereas the overall
PCE saw a more pronounced increase. What factors might account for this disparity
between overall and core inflation rates?

a. The transition to remote work during the pandemic intensified housing demand,
driving up prices.
b. Chip shortages drove up the costs of capital goods.
c. Sanctions imposed on Russia resulted in a significant surge in oil prices.
d. All of the above factors.

Answer 63

C

Question 64

Tesla produced an electric car in 2020 and sold it in 2021. Which of the
following statements is true:

A. The car is counted in the U.S. GDP for 2020
B. The car is counted in the U.S. GDP in 2021
C. The car is counted in the U.S. investment in 2020
D. Both (B) and (C) are correct
E. Both (A) and (C) are correct

Answer 64

E

Question 65

Which of the following statements is correct?
A) Nominal GDP reflects only changes in prices.
B) Nominal GDP will increase because of a high inflation rate.
C) Nominal GDP reflects only changes in quantities
D) None of the above statement is correct

Answer 65

B

Question 66

If Caterpillar raises the price of the industrial tractors it manufactures at its Illinois
factory, which of the following price indexes will be affected?
A) The CPI increases
B) The GDP deflator increases
C) The PCE increases
D) All of the above

Answer 66

B

Question 67

If Armani raises the price of the Italian jeans it sells in the U.S., which of the
following price indexes will be affected?
A) The CPI increases
B) The GDP deflator increases
C) The PCE increases
D) Both (A) and (C)
E) All of the above

Answer 67

D; GDP Deflator not impacted by imported goods

Question 68

Suppose older workers are more efficient. How would the
aging of the workforce during the past decades appear in the
production function?
A. An increase in the level of labor, N
B. A reduction in the level of labor, N
C. An increase in the level of capital, K
D. An increase in the productivity level, A

Answer 68

D

Question 69

An earthquake destroys 10% of the capital in the
economy. How does this event affect the labor demand
curve?
A. No change.
B. Shifts right
C. Shifts left
D. Not enough information.

Answer 69

C

Question 70

The real wage in the economy increased by 20%. What
is the effect on the labor demand curve?

A. No change.
B. Shifts right
C. Shifts left
D.Not enough information.

Answer 70

A

Question 71

Due to a war in the Middle East, the price of oil goes up
by 20%. What is the effect on the labor demand curve?

A. No change.
B. Shifts right
C. Shifts left
D. Not enough information

Answer 71

C

Question 72

Future wages are expected to increase as the country is joining a
free-trade agreement. What is the effect on the aggregate labor
supply curve?

A. No change
B. Shift to the left
C. Shift to the right
D. Not enough information

Answer 72

B. Shift to the left

Question 73

A country finds large oil reserves on its domestic territory. The
revenues from oil will be redistributed to households, and the
large reserves are expected to reduce oil prices. What is the
impact on the equilibrium levels of real wage and labor?
A. Real wage declines, and labor declines
B. Real wage increases and labor declines
C. Real wage increases and labor increases
D. Real wage declines and labor increases

Answer 73

B. Real wage increases and labor declines

Question 74

An individual is furloughed for 3 months without pay
during a year. What do we expect to happen to the individual’s
consumption and savings?

A. Consumption will go up
B. Savings will go up
C. Savings will go down
D. Both (A) and (B)
E. Both (A) and (C)

Answer 74

C

Question 75

The boss tells the worker that they will get a promotion and a wage increase in the following year. What do we expect to happen to the individual’s consumption and savings?
A. Consumption will go up
B. Savings will go up
C. Savings will go down
D. Both (A) and (B)
E. Both (A) and (C)

Answer 75

E

Question 76

A household inherits a large sum of money. What do we expect to happen to the individual’s consumption and savings?
A. Consumption will go up
B. Savings will go up
C. Savings will go down
D. Both (A) and (B)
E. Both (A) and (C)

Answer 76

E

Question 77

If a household is a net-borrower, the income effect of an increase in the real interest rate tend to increase its savings.
A. True
B. False

Answer 77

A

Question 78

Suppose that the future income of households is expected to
decline. What is the effect on the aggregate savings curve?
A. No change
B. Shifts right
C. Shifts left
D. Not enough information

Answer 78

B. Shifts right

Question 79

Suppose that the real interest rate in the economy goes up. What
happens to the aggregate savings curve?
A. No change
B. Shifts right
C. Shifts left
D. Not enough information

Answer 79

A. No change

Question 80

Ricardian Equivalence is an argument suggesting

Answer 80

C: Government Spending financing methods don’t impact
consumption behavior

Question 81

Suppose that the depreciation rate of capital increases due to climate change. What is the
effect on the future level of capital and on investment demand?
A. 𝐾𝑓 goes down, but the effect on 𝐼 is uncertain
B. The effects on both 𝐾𝑓 𝑎𝑛𝑑 𝐼 are uncertain
C. Both 𝐾𝑓 and 𝐼 decrease
D. The effects on 𝐾𝑓 is uncertain, but 𝐼 decreases.

Answer 81

A. 𝐾𝑓 goes down, but the effect on 𝐼 is uncertain. explanation:

Question 82

Suppose that the price of capital increases due to limited supply.
What is the effect on the investment curve?
A. No change
B. Shifts right
C. Shifts left
D. Not enough information

Answer 82

C

Question 83

Current oil prices increase, but they are expected to return to their original
level in a year. What is the impact on the equilibrium level of real interest
rate, consumption, and investment?
A. 𝑟 ↓, 𝐶 ↓, 𝐼 ↑
B. 𝑟 ↑, 𝐶 ↓, 𝐼 ↓
C. 𝑟 ↑, 𝐶 ↑, 𝐼 ↓
D. 𝑟 ↓, 𝐶 ↓, 𝐼 ?
E. 𝑟 ↑, 𝐶 ?, 𝐼 ?

Answer 83

B. 𝑟 ↑, 𝐶 ↓, 𝐼 ↓

Question 84

Future oil prices are expected to rise, what is the impact on the equilibrium
level of real interest rate, consumption and investment?
A. 𝑟 ↑, 𝐶 ↓, 𝐼 ↑
B. 𝑟 ↑, 𝐶 ↑, 𝐼 ↑
C. 𝑟 ↓, 𝐶 ↑, 𝐼 ?
D. 𝑟 ↓, 𝐶 ↓, 𝐼 ↑
E. 𝑟 ↓, 𝐶 ?, 𝐼 ?

Answer 84

E

Question 85

The equation for the marginal productivity of capital is given by
𝑀𝑃𝐾𝑓 = 1000 − 10𝐾. Suppose the price of a unit of capital is
$1000, the depreciation rate is 5% per year, and the real interest
rate is 2% per year. The desired capital stock is
A. 70
B. 82
C. 93
D. 100
E. 110

Answer 85

C. 93; ________

Question 86

We would expect the interest rate of Bond A to be higher than the interest rate on Bond B if the
two bonds have identical characteristics except that

a) The credit risk associated with Bond A is lower than the credit risk associated with Bond B
b) Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation
c) Bond A has a term of 20 years and Bond B has a term of 2 years.
d) All of the above are correct

Answer 86

c) Bond A has a term of 20 years and Bond B has a term of 2 years.

Question 87

Suppose that the 1-year yield is 5% and the 2-year yield is 10%. According to the expectations theory of the term structure, what is the expected 1-year yield a year from now?

a) 0%
b) 5%
c) 10%
d) 15%
e) 20%

Answer 87

D) 15%

Question 88

Suppose that households sell bonds to the Fed and deposit the proceeds to their savings deposits. Which statement is true?
a) M1 declines.
b) M2 declines.
c) M1 increases.
d) M2 increases.
e) Both (a) and (b) are correct.

Answer 88

E

Question 89

Suppose that the 1-year yield is 7% and the 2-year yield is 5%. According to the expectations theory of the term structure, what is the expected 1-year yield a year from now?

a) 9%
b) 12%
c) -2%
d) 3%
e) 0%

Answer 89

D) 3%

Question 90

Suppose that the 2-year yield is 2% and the 4-year yield is 0%. According to the expectations theory of the term structure, what is the expected 2-year yield two years from now?
a) -4%
b) -2%
c) 0%
d) 2%
e) 4%

Answer 90

b) -2%

Question 91

Suppose that nominal GDP is $1,000, money supply is $100, and
the expected inflation rate is 10%. What is the velocity of money?
a) 0.1
b) 1
c) 10
d) 100
e) 100,000

Answer 91

c) 10

Question 92

The coefficient of the Taylor rule on the output gap is 0.5. Ben Bernanke thinks that the coefficient on the output gap should be 1, and not 0.5. Is Ben Bernanke more dovish than John Taylor?

a) True
b) False

Answer 92

a) True

Question 93

How does an open-market purchase of U.S. treasuries by the Fed affect its
balance sheet?
a) Assets increase, and liabilities decline
b) Assets decline, and liabilities increase
c) Both assets and liabilities increase
d) Both assets and liabilities decline

Answer 93

c) Both assets and liabilities increase

Question 94

Suppose that inflation is 5% and that the unemployment rate is at its natural
level. What should the Fed set the nominal interest rate to according to
Taylor’s rule?

a) 1.5%
b) 5%
c) 6.5%
d) 8.5%

Answer 94

D) 8.5%

Question 95

Suppose that there is $900M currency in circulation, $100M in bank vaults,
$2B public deposits, and commercial banks hold $900M deposits at the
Federal Reserve system. What is the money multiplier (round to 2nd digit)?
a) 1.50
b) 1.53
c) 1.56
d) 1.65

Answer 95

c) 1.56

Money multiplier= 𝑀/𝐵𝐴𝑆𝐸 = (𝐶𝑈+𝐷𝐸𝑃) / (𝐶𝑈+𝑅𝐸𝑆)

Question 96

What is the discount window lending rate?

a) The interest rate in which commercial banks can borrow from the Federal
Reserve bank
b) The interest rate the Federal Reserve bank pays commercial banks on
their excess reserves
c) The interest rate commercial banks borrow and lend their excess
reserves to each other
d) The favorable interest rate offered to low-risk households relative to
high-risk ones

Answer 96

a) The interest rate in which commercial banks can borrow from the Federal
Reserve bank