h econ sample exam 2

Sample Exam #21. When economists say that people act rationally in their self interest, they mean that individuals:

A) look for and pursue opportunities to increase their utility.B) generally disregard the interests of others. C) are mainly creatures of habit.D) are unpredictable.

2. Purposeful behavior suggests that: A) everyone will make identical choices. B) resource availability exceeds economic wants. C) individuals will make different choices because of different desired outcomes. D) an individual's economic goals cannot involve tradeoffs.

3. The term "ceteris paribus" means: A) that if event A precedes event B, A has caused B. B) that economics deals with facts, not values. C) other things equal. D) prosperity inevitably follows recession.

4. Microeconomics is concerned with: A) the aggregate or total levels of income, employment, and output. B) a detailed examination of specific economic units that make up the economic system. C) positive economics, but not normative economics.D) the establishing of an overall view of the operation of the economic system.

5. Ben says that "An increase in the tax on beer will raise its price." Holly argues that "Taxes should be increased on beer because college students drink too much." We can conclude that:

A) Ben's statement is normative, but Holly's is positive. B) Holly's statement is normative, but Ben's is positive. C) Both statements are normative. D) Both statements are positive. Answer: B

Use the following to answer the next question:

6. Refer to the budget line shown in the diagram above. If the consumer's money income is $20, which of the following combinations of goods is unattainable?

A) 4 units of C, and 6 units of D. B) 5 units of C, and no units of D. C) 1 unit of C, and 8 units of D. D) 2 units of C, and 6 units of D .

7. Other things equal, an increase in a consumer's money income: A) increases the amount of utility a consumer receives from a given quantity of a good. B) shifts her budget line rightward because she can now purchase more of both products. C) eliminates the individual’s economizing problem. D) causes the consumer to choose a different combination of goods along a given budget line.

8. Money is not an economic resource because: A) money, as such, is not productive. B) idle money balances do not earn interest income. C) it is not scarce. D) money is not a free gift of nature.

9. A production possibilities curve illustrates:A) scarcity. B) market prices. C) consumer preferences. D) the distribution of income.

10.Refer to the above table. As compared to production alternative D, the choice of alternative C would: A) tend to generate a more rapid growth rate. B) be unattainable. C) entail unemployment.D) tend to generate a slower growth rate.

11.Which of the following is assumed in constructing a typical production possibilities curve? A) the economy is using its resources inefficiently. B) resources are perfectly shiftable among alternative uses. C) production technology is fixed. D) the economy is engaging in international trade.

Use the following to answer this question:

12.Refer to the above diagram. This production possibilities curve is constructed so that: A) resources are presumed to be perfectly shiftable between bread and tractors. B) the opportunity cost of bread diminishes as more bread is produced. C) the opportunity cost of tractors diminishes as more bread is produced. D) the opportunity cost of both bread and tractors increases as more of each is produced.

13.In drawing a production possibilities curve we hold constant: A) the money supply. B) the consumer price index.C) both technology and resource supplies.

D) resource supplies only.

14.Refer to the above diagram. As it relates to production possibilities analysis, the law of increasing opportunity cost is reflected in curve:

A) A B) B C) C D) D

15.The marginal cost curve is: A) upsloping because of increasing marginal opportunity costs. B) upsloping because successive units of a specific product yield less and less extra utility. C) downsloping because of increasing marginal opportunity costs. D) downsloping because successive units of a specific product yield less and less extra utility.


16.Technological advance that is useful in producing capital goods but not in producing consumer goods is shown by the shift of the production possibilities curve from AB to:

A) CD. B) BE. C) AF. D) GH.Answer: B


17.Refer to the above diagram. An improvement in technology will:A) shift the production possibilities curve from PP1 to PP2. B) shift the production possibilities curve from PP2 to PP1. C) move the economy from A to C along PP1. D) move the economy from A, B, or C on PP1 to D.

18.The fallacy of composition states that: A) because economic systems are composed of so many diverse economic units, economic laws are

necessarily inexact. B) the anticipation of a particular event can affect the composition of that event when it occurs. C) what is true for the individual must necessarily be true for the group. D) because event A precedes event B, A is necessarily the cause of B.

19.The French term "laissez-faire" means:A) "there is no free lunch." B) "let it be." C) "circular flow." D) "public ownership."

20.Copyrights and trademarks are examples of:A) capital goods. B) human capital. C) property rights. D) public goods.

21.Specialization in production is important primarily because it: A) results in greater total output. B) allows society to avoid the coincidence-of-wants problem. C) allows society to trade by barter. D) allows society to have fewer capital goods.

22.If competitive industry Z is making substantial economic profit, output will: A) fall in industry Z, and firms will likely leave the market. B) fall in all industries except industry Z. C) expand in industry Z, as more resources will move to that industry. D) expand in industry Z, but no new firms will enter the market.

23.If competitive industry Y is incurring substantial losses, output will: A) expand as resources move toward industry Y. B) contract as resources move toward industry Y. C) contract as resources move away from industry Y. D) expand as resources move away from industry Y.

Answer the next question using the following data which show all available techniques for producing 20 units of a particular commodity:

24.Refer to the above data. Assuming that the firm is motivated by self-interest and that the 20 units which can be produced with each technique can be sold for $2 per unit, the firm will:

A) realize an economic profit of $10. B) realize an economic profit of $4. C) not earn any economic profit. D) close down rather than incur a loss by producing.

25.The market system's answer to the fundamental question "How will the system accommodate change?" is essentially:

A) "Through government leadership and direction."B) "Through the guiding function of prices and the incentive function of profits."C) "Through training and retraining programs."D) "Through random trial and error."

26.The invisible hand refers to the: A) fact that the U.S. tax system redistributes income from rich to poor. B) notion that, under competition, decisions motivated by self-interest promote the social interest. C) tendency of monopolistic sellers to raise prices above competitive levels. D) fact that government controls the functioning of the market system.

27.The incentive problem under communist central planning refers to the idea that: A) planners had to direct required inputs to each enterprise. B) workers, managers, and entrepreneurs could not personally gain by responding to shortages or

surpluses or by introducing new and improved products. C) the immediate effect of more investment was less consumption. D) exports had to be equal to imports for a central plan to work.

28.The two basic markets shown by the simple circular flow model are: A) capital goods and consumer goods. B) free and controlled.C) product and resource.

D) household and business. 29.According to economist Donald Boudreaux, the world's tens of billions of individual resources get arranged

productively:A) because government has become highly effective at central planning.B) because private property encourages people to consider the alternative uses of their resources and

select those that provide the most rewards.C) because people tend to be creative and orderly.D) through random trial and error.

30.Economists use the term demand to refer to: A) a particular price-quantity combination on a stable demand curve. B) the total amount spent on a particular commodity over a stipulated time period. C) an upsloping line on a graph that relates consumer purchases and product price. D) a schedule of various combinations of market prices and amounts demanded.

31.If X is a normal good, a rise in money income will shift the: A) supply curve for X to the left. B) supply curve for X to the right.C) demand curve for X to the left.

D) demand curve for X to the right. 32.By an increase in demand we mean that :

A) product price has fallen so consumers move down to a new point on the demand curve. B) the quantity demanded at each price in a set of prices is greater. C) the quantity demanded at each price in a set of prices is smaller. D) a leftward shift of the demand curve has occurred.


33.Refer to the above diagram. An increase in quantity supplied (as distinct from an increase in supply) is depicted by a:

A) move from point y to point x.B) shift from S1 to S2.C) shift from S2 to S1.

D) move from point x to point y.34.Suppose that at prices of $5, $4, $3, $2, and $1 for product Z, the corresponding quantities supplied are 3, 4, 5,

6, and 7 units, respectively. Which of the following would increase the quantities supplied of Z to, say, 6, 8, 10, 12, and 14 units at these prices?

A) improved technology for producing ZB) an increase in the prices of the resources used to make ZC) an increase in the excise tax on product ZD) increases in the incomes of the buyers of Z

Answer the next question on the basis of the given supply and demand data for wheat:

35.Refer to the above data. If the price in this market was $4: A) the market would clear; quantity demanded would equal quantity supplied.B) buyers would want to purchase more wheat than is currently being supplied. C) farmers would not be able to sell all their wheat. D) there would be a shortage of wheat.

36.A surplus of a product will arise when price is: A) above equilibrium with the result that quantity demanded exceeds quantity supplied. B) above equilibrium with the result that quantity supplied exceeds quantity demanded. C) below equilibrium with the result that quantity demanded exceeds quantity supplied. D) below equilibrium with the result that quantity supplied exceeds quantity demanded.


37.Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market:

A) supply has decreased and equilibrium price has increased. B) demand has increased and equilibrium price has decreased. C) demand has decreased and equilibrium price has decreased. D) demand has increased and equilibrium price has increased.

38.Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good will:

A) increase equilibrium price and quantity. B) decrease equilibrium price and quantity. C) increase equilibrium price and decrease equilibrium quantity. D) decrease equilibrium price and increase equilibrium quantity.

39.Ticket scalping: A) imposes economic losses on both buyers and sellers. B) creates economic gains for both buyers and sellers. C) imposes losses on buyers, but creates gains for sellers. D) imposes losses on sellers, but creates gains for buyers.

40.The functional distribution of income refers to the: A) division of income between personal taxes, consumption expenditures, and saving. B) division of income on the basis of industry sources, for example, agriculture, transportation, mining,

etc. C) distribution of income to basic resource classes, that is, wages, rents, interest, and profits. D) way income is distributed among specific households or spending units.

41.A group of plants that is owned and operated by a single firm and that consists of oil fields, refineries, and gasoline stations best illustrates a:

A) trust. B) holding company. C) vertically integrated firm. D) multinational corporation.

42.In a competitive market: A) external benefits will always exceed external costs. B) resources will be misallocated if government does not properly adjust demand and supply for large

external costs and benefits. C) resources will be allocated efficiently only if external benefits equal external costs. D) an efficient allocation of resources is realized even where there are large external costs and benefits.

43.Rivalry and excludability are the main characteristics of:A) capital goods. B) private goods. C) public goods. D) consumption goods.

44.In performing its stabilization function, it may be appropriate for the nation's central bank (the Federal Reserve in the United States) to:

A) raise taxes to reduce inflation.B) increase government spending to reduce unemployment.C) increase subsidies to businesses to reduce unemployment.D) lower interest rates to stimulate private spending and reduce unemployment.

45.Which of the following is not an important source of revenue for the Federal government? A) corporate income taxes B) property taxes C) payroll taxes D) personal income taxes

46.Which of the following groups face a severe free-rider problem in providing their services?A) store clerks B) tax accountants C) college professors D) street entertainers

47.The purchase by an American firm of the right to produce a prescription drug patented in Germany best illustrates a:

A) trade flow. B) capital flow. C) goods and services flow. D) technology flow.

48.Mexican imports of U.S. goods: A) create a supply of pesos. B) create a supply of dollars. C) reduce the demand for dollars. D) have no effect on the peso-dollar exchange rate.

49.An important outcome of the Uruguay Round of GATT negotiations was: A) a worldwide reduction of agricultural export subsidies. B) establishment of the European Union. C) the elimination of all tariffs and quotas worldwide. D) establishment of the World Bank.

50.Madison, the CPA, is faster than Mason, the house painter, at both accounting services and painting. This means that:

A) There is no reason for them to trade services.B) Madison should trade her accounting services for Mason’s painting services, so long as Madison is

relatively more efficient at accounting services.C) Madison should trade her accounting services for Mason’s painting services, so long as Madison is

relatively more efficient at painting.D) Madison has the comparative advantage in both services.

51.The larger the coefficient of price elasticity of demand for a product, the: A) larger the resulting price change for an increase in supply. B) more rapid the rate at which the marginal utility of that product diminishes. C) less competitive will be the industry supplying that product. D) smaller the resulting price change for an increase in supply.

52.Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by:

A) 2 percent and total expenditures on bread will rise. B) 2 percent and total expenditures on bread will fall. C) 20 percent and total expenditures on bread will fall. D) 20 percent and total expenditures on bread will rise.

53.The coefficient of price elasticity is 0.2. Demand is thus:A) perfectly inelastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic.


54.Refer to the above information. Over the $11-$9 price range, demand is: A) perfectly elastic. B) perfectly inelastic. C) elastic. D) inelastic.

55.Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences:

A) a consumer surplus of $12 and Nathan experiences a producer surplus of $3. B) a producer surplus of $9 and Nathan experiences a consumer surplus of $3. C) a consumer surplus of $9 and Nathan experiences a producer surplus of $3. D) a producer surplus of $9 and Nathan experiences a producer surplus of $12.

56.Accounting profits are typically: A) greater than economic profits because the former do not take explicit costs into account. B) equal to economic profits because accounting costs include all opportunity costs. C) smaller than economic profits because the former do not take implicit costs into account. D) greater than economic profits because the former do not take implicit costs into account.

Answer the next question on the basis of the following information:

57.Refer to the above data. When two workers are employed: A) total product is 20. B) total product is 18. C) average product is 10. D) total product cannot be determined from the information given.


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58.Refer to the above diagram, where variable inputs of labor are being added to a constant amount of property resources. The total output of this firm will cease to expand:

A) if a labor force in excess of Q1 is employed. B) if a labor force in excess of Q2 is employed. C) if a labor force in excess of Q3 is employed. D) only if the marginal product curve becomes negative at all levels of output.

59.If a technological advance increases a firm's labor productivity, we would expect its: A) average total cost curve to rise. B) average total cost curve to fall.C) total cost curve to rise.

D) average total cost curve to be unaffected.

Use the following data to answer the next question. The letters A, B, and C designate three successively larger plant sizes.

60.Refer to the above data. Economies of scale are realized over the ___ to ___ levels of output; diseconomies of scale exist over the ___ to ___ levels of output.

A) 10, 30; 40, 100 B) 10, 40; 80, 100 C) 10, 50; 60, 100 D) 10, 70; 80, 100

61.An industry comprised of 40 firms, none of which has more than 3 percent of the total market for a differentiated product is an example of:

A) monopolistic competition. B) oligopoly. C) pure monopoly. D) pure competition.

62.The demand schedule or curve confronted by the individual purely competitive firm is: A) relatively elastic, that is, the elasticity coefficient is greater than unity. B) perfectly elastic. C) relatively inelastic, that is, the elasticity coefficient is less than unity. D) perfectly inelastic.

63.Patents: A) give firms the exclusive right to produce or control a product for 100 years. B) discourage research and innovation. C) are a source of monopoly. D) are also called trademarks.

64.A pure monopolist's demand curve is: A) downsloping. B) upsloping. C) parallel to the vertical axis. D) parallel to the horizontal axis.

Answer the next question on the basis of the following demand and cost data for a pure monopolist:

65.Refer to the above data. The monopolist will realize a: A) profit of $8.50. B) profit of $7.50. C) profit of $16. D) loss of $14.

66.A single-price pure monopoly is economically inefficient: A) only because it produces beyond the point of minimum average total cost. B) only because it produces short of the point of minimum average total cost. C) because it produces short of minimum average cost and price is greater than marginal cost. D) because it produces beyond minimum average total cost and marginal cost is greater than price.

67.The dilemma of regulation refers to the idea that: A) the regulated price which achieves allocative efficiency is also likely to result in persistent economic

profits. B) the regulated price which results in a "fair return" restricts output by more than would unregulated

monopoly. C) regulated pricing always conflicts with the "due process" provision of the Constitution. D) the regulated price which achieves allocative efficiency is also likely to result in losses.

68.If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes:

A) the likelihood of realizing economic profits in the long run would be enhanced. B) individual firms would now be operating at outputs where their average total costs would be higher. C) the industry would more closely approximate pure competition. D) the likelihood of collusive pricing would increase.

69.Other things equal, if more firms enter a monopolistically competitive industry:A) the demand curves facing existing firms would shift to the right. B) the demand curves facing existing firms would shift to the left. C) the demand curves facing existing firms would become less elastic. D) losses would necessarily occur.

70.Prices are likely to be least flexible:A) in oligopoly.B) in monopolistic competition.C) where product demand is inelastic.D) in pure competition.

71.If an oligopoly is faced with a kinked-demand curve that is relatively elastic above, and relatively inelastic below, the going price, then it will:

A) increase total revenue by increasing price, but lower total revenue by decreasing price. B) decrease total revenue by either increasing or decreasing price. C) increase total revenue by either increasing or decreasing price. D) increase total revenue by decreasing price, but lower total revenue by increasing price.

72.A one-firm industry is known as:A) monopolistic competition. B) oligopoly. C) pure monopoly. D) pure competition.

73.The first commercial introduction, as opposed to first discovery, of transparent tape is an example of: A) innovation. B) invention. C) creative destruction. D) diffusion.


74.In the above diagram, the optimal amount of R&D is: A) $20 million. B) $80 million. C) $40 million. D) $60 million.

75.Legal protections against direct copying of written material are called __________; legal protections against using a product's name are called __________.

A) patents; trademarks B) trademarks, patents C) copyrights, trademarks D) copyrights; patents

76.The productivity and real wages of workers in the industrially advanced economies have risen historically partly because:

A) workers have acquired less education and training over time. B) workers have been able to use larger quantities of capital equipment. C) over time the capital equipment used by workers has deteriorated in quality. D) the supply of labor has increased.

77.Wage differentials may result from all the following except:A) differences in the nonmonetary aspects of various occupations. B) differences in the education and skills of workers. C) geographic and sociological immobilities of workers. D) the tendency of qualified workers to move from lower pay jobs to higher pay jobs.

78.Interlocking directorates are: A) legal if the two firms have small market shares. B) illegal under provisions of the Federal Trade Commission Act of 1914. C) illegal under provisions of the Celler-Kefauver Act of 1950. D) illegal under provisions of the Clayton Act of 1914.

79.Which of the following best describes the short-run problem faced by farms?A) New technology has increased the productivity of farmers and therefore resulted in declining farm

prices and low farm incomes.B) The highly inelastic nature of agricultural demand, together with fluctuations in exports of farm

goods, has caused small year-to-year fluctuations in farm output to result in highly unstable farm incomes.

C) The supply of farm products has increased relative to the demand for them, and because demand is inelastic, prices of farm output and farm income have therefore declined.

D) The demand for farm products has increased relative to their supply, but the elastic nature of agricultural demand has caused these shifts to result in declining farm incomes.


80.Refer to the above diagram for the corn market. As the result of a supported corn price of B: A) a surplus of LG will result. B) a surplus of LH will result.C) a surplus of HG will result.

D) a shortage of LG will result. Answer the next question on the basis of the following Census data.

81.Which of the above distributions is closest to describing the United States? A) A B) B C) C D) D

82.Wealth represents: A) a stock of real and financial assets. B) a flow of income.C) financial assets only.

D) real assets only. 83.A major difference between social insurance and public assistance is that the:

A) former is regarded as an earned right while the latter is public charity. B) latter is regarded as an earned right while the former is public charity. C) latter is financed through earmarked payroll taxes and the former is financed by general tax revenues. D) former are state and local programs while the latter are Federal programs.

84.As a percentage of GDP, U.S. health care spending is:A) higher than that for Germany and Japan, but lower than that of the United Kingdom and Sweden.B) higher than for any other major industrial country.C) lower than that for Canada.D) nearly identical to that of the other major industrial nations.


85.Refer to the above diagram that shows the market for U.S. health care. Other things equal, which of the following would shift the demand curve for medical care from D1 to D2?

A) higher copayments and deductibles in insurance policies.B) an aging population.C) cutbacks in the government's Medicaid program.D) restrictions by firms on the eligibility of part-time workers for medical benefits.

86.In which of the following U.S. industries is the rate of unionization the lowest?A) transportation B) mining C) manufacturing D) finance

87.A major function of the National Labor Relations Board is to:A) monitor potentially inflationary increases in wages.B) provide compulsory arbitration so that strikes and lockouts do not occur.C) set annual wage increases on an industry-by-industry basis.D) investigate and rule on charges of unfair labor practices by either management or unions.


88.Refer to the above diagram. Which of the following would be consistent with an increase in racial prejudice and thus an increase in the discrimination coefficients of employers, taken as a group?

A) a shift in the labor demand curve from D2 to D3.B) a shift in the labor demand curve from D2 to D1.C) an increase in African-American employment from Q2 to Q3.D) an increase in the African-American wage rage from W1 to W2.

89.Final goods and services refer to: A) goods and services that are unsold and therefore added to inventories. B) goods and services whose value has been adjusted for changes in the price level. C) goods and services purchased by ultimate users, rather than for resale or further processing. D) the excess of U.S. exports over U.S. imports.


Economy A: gross investment equals depreciationEconomy B: depreciation exceeds gross investmentEconomy C: gross investment exceeds depreciation

90.Other things equal, the above information suggests that the production capacity in economy: A) B is growing more rapidly than either A or C. B) A is growing more rapidly than either B or C.C) A is growing less rapidly than economy B.

D) C is growing more rapidly than economy B.

Answer the next question on the basis of the following national income data. All figures are in billions of dollars.

Personal taxes $ 23Net private domestic investment 33Net exports 6National income 278U.S. exports 20Gross private domestic investment 56Disposable income 220Taxes on production and imports 32Undistributed corporate profits 15Proprietors’ income 45Net foreign factor income 0Statistical discrepancy 0

91.Refer to the above data. The gross domestic product is: A) $328. B) $301. C) $382. D) $333.

92.Nominal GDP was $130 and $150 in years 1 and 2 respectively. Real GDP was $100 and $110 in years 1 and 2 respectively. On the basis of this information we can conclude that:

A) the price level increased between years 1 and 2. B) more intermediate goods were produced in year 1 than in year 2. C) the increase in nominal GDP between years 1 and 2 understated the increase in production which

occurred. D) the price level declined between years 1 and 2.


93.Refer to the above table. Between years 1 and 2, real GDP per capita grew by __________ percent in Alta:A) 3 B) 4 C) 5 D) 10

94.Part-time workers are counted as: A) unemployed and therefore the official unemployment rate may overstate the level of unemployment. B) unemployed and therefore the official unemployment rate may understate the level of

unemployment. C) fully employed and therefore the official unemployment rate may overstate the level of

unemployment. D) fully employed and therefore the official unemployment rate may understate the level of

unemployment. 95.If actual GDP is less than potential GDP:

A) potential GDP will fall. B) the price level will rise. C) investment spending will fall. D) the actual unemployment rate will be higher than the natural unemployment rate.

96.Inflation affects: A) both the level and the distribution of income. B) neither the level nor the distribution of income.C) the distribution, but not the level, of income.

D) the level, but not the distribution, of income. 97.A decline in disposable income:

A) increases consumption by moving upward along a specific consumption schedule. B) decreases consumption because it shifts the consumption schedule downward. C) decreases consumption by moving downward along a specific consumption schedule. D) increases consumption because it shifts the consumption schedule upward.

98.If the marginal propensity to consume is .9, then the marginal propensity to save must be: A) 1. B) .1. C) 1.1. D) .9.

Answer the next question on the basis of the following consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars.

99.Refer to the above data. The marginal propensity to consume: A) is highest in economy (1). B) is highest in economy (2).C) is highest in economy (3).

D) cannot be calculated from the data given. 100.A rightward shift of the investment demand curve might be caused by:

A) an increase in the price level. B) a decline in the real interest rate. C) an increase in the expected rate of return on investment. D) an increase in business taxes.

101.The multiplier effect indicates that: A) a decline in the interest rate will cause a proportionately larger increase in investment. B) a change in spending will change aggregate income by a larger amount. C) a change in spending will increase aggregate income by the same amount. D) an increase in total income will generate a larger change in aggregate expenditures.

102.The real-balances, interest-rate, and foreign purchases effects all help explain: A) why the aggregate demand curve is downsloping. B) why the aggregate supply curve is upsloping. C) shifts in the aggregate demand curve. D) shifts in the aggregate supply curve.

Answer the next question(s) on the basis of the following information: An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10, each unit of raw materials, $4, and each unit of labor, $3.

103. Refer to the above information. If the per unit price of raw materials rises from $4 to $8 and all else remains constant, the per-unit cost of production will rise by about:

A) 100 percent. B) 50 percent. C) 40 percent. D) 30 percent.


104.Refer to the above diagram. If the aggregate supply curve shifted from AS0 to AS1, we could say that: A) aggregate supply has increased, equilibrium output has decreased, and the price level has increased. B) aggregate supply has decreased, equilibrium output has decreased, and the price level has increased. C) an increase in the amount of output supplied has occurred. D) aggregate supply has increased and the price level has risen to G.

105.When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may:

A) reduce per unit production costs.B) reduce worker morale and work effort, and thus lower productivity.C) increase the firms' cost of raising financial capital.D) reduce the demands for their products.

106.If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by:

A) increasing government spending by $4 billion. B) increasing government spending by $40 billion.C) decreasing taxes by $4 billion.

D) increasing taxes by $4 billion. 107.Built-in stability means that:

A) an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy.

B) with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.

C) Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.

D) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.


Actual budget, Standardized budget,percent of GDP percent of GDP

Year (- deficits; + surpluses) (- deficits; + surpluses)1998 0 01999 - 3 02000 - 5 - 22001 - 2 - 22002 + 2 + 1

108.Refer to the above table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect:

A) demand-pull inflation.B) cost-push inflation. C) an expansion of real GDP and an automatic increase in tax revenues.D) a contractionary fiscal policy.

109.Which of the following best describes the idea of a political business cycle? A) Politicians are more willing to cut taxes and increase government spending than they are to do the

reverse. B) Fiscal policy will result in alternating budget deficits and surpluses. C) Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to

elections. D) Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.

110.As a percent of GDP, the United States public debt is: A) the highest among major industrial nations. B) the lowest among major industrial nations. C) lower than the public debts of several other major industrial nations. D) higher than the percentages for Canada, Germany, and Italy.

Answer the next question(s) on the basis of the following list of assets:1. Large ($100,000 and over) time deposits2. Noncheckable savings deposits3. Currency (coins and paper money)4. Small (under $100,000) time deposits5. Stock certificates6. Checkable deposits7. Money market deposit accounts8. Money market mutual fund balances held by individuals9. Money market mutual fund balances held by businesses

111.Refer to the above list. The M2 definition of money comprises: A) items 1, 2, 3, and 6. B) items 3, 4, 5, and 6.C) items 2, 3, 4, 6, 7, and 8.

D) items 1, 2, 3, and 4. 112.Research involving industrially advanced countries suggests that:

A) the more independent the central bank, the lower the average annual growth of real GDP. B) the more independent the central bank, the higher the average annual growth of real GDP. C) there is no relationship between the degree of independence of a country's central bank and the

growth rate of its real GDP. D) the less independent the central bank, the higher the average annual rate of inflation.

113.If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then:

A) m = E/D. B) D = E × m. C) D = E - 1/m. D) D = m/E.

Answer the next question on the basis of the following information about a banking system: new currency deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit = $0.

114.Refer to the above information. The $40 billion deposit of currency into checking accounts will initially create:

A) $8 billion of new checkable deposits. B) $10 billion of new checkable deposits.C) $40 billion of new checkable deposits.

D) $160 billion of new checkable deposits. 115.If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the

amount of money demanded for transactions purposes will be:A) $1800 billion. B) $600 billion. C) $200 billion. D) $1200 billion.

Answer the next question on the basis of the following table:

116.The total demand for money curve in the above market for money would graph as a: A) vertical line. B) horizontal line.C) line sloping upward to the right.

D) line sloping downward to the right. 117.Open-market operations change:

A) the size of the monetary multiplier, but not commercial bank reserves. B) commercial bank reserves, but not the size of the monetary multiplier. C) neither commercial bank reserves nor the size of the monetary multiplier. D) both commercial bank reserves and the size of the monetary multiplier.

118.Which of the following statements is true?A) The Federal Reserve sets the Federal funds rate.B) The Federal Reserve sets the target for the Federal funds rate, and then uses the reserve ratio to push

banks toward that target. C) The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open

market operations.D) The Federal Reserve will set a higher target for the Federal funds rate if pursuing an expansionary

monetary policy.

119.Which of the following best describes the cause-effect chain of an expansionary monetary policy? A) A decrease in the money supply will lower the interest rate, increase investment spending, and

increase aggregate demand and GDP. B) A decrease in the money supply will raise the interest rate, decrease investment spending, and

decrease aggregate demand and GDP. C) An increase in the money supply will raise the interest rate, decrease investment spending, and

decrease aggregate demand and GDP. D) An increase in the money supply will lower the interest rate, increase investment spending, and

increase aggregate demand and GDP. 120.One of the strengths of monetary policy relative to fiscal policy is that monetary policy:

A) can be implemented more quickly. B) is subject to closer political scrutiny. C) does not produce a net export effect. D) entails a larger spending income multiplier effect on real GDP.

121.Differences in production efficiencies among nations in producing a particular good result from: A) different endowments of fertile soil. B) different amounts of skilled labor.C) different levels of technological knowledge.

D) all of the above. Answer the next question on the basis of the following production possibilities data for two countries, Alpha and Beta, which have populations of equal size.

122.Refer to the above data. Suppose that before specialization and trade Alpha chose production alternative C and Beta chose production alternative B. After specialization and trade the gains will be:

A) 20 tons of fish. B) 20 tons of chips.C) 20 tons of fish and 20 tons of chips.

D) 240 tons of fish and 20 tons of chips.


123.Refer to the above diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With free trade, that is, assuming no tariff, the outputs produced by domestic and foreign producers respectively would be:

A) v and vz. B) w and wy. C) w and wz. D) vx and xz.

124. “Offshoring:” A) is the movement of money to foreign bank accounts. B) is the shifting work previously done by domestic workers to workers located in other countries. C) applies only to manufactured goods. D) hurts all domestic industries in a country.

125.Which of the following would call for outpayments from the United States?A) U.S. exports computer softwareB) U.S. purchases assets abroadC) foreigners purchase assets in the United StatesD) foreign tourists spend money in the United States.

The plus items below are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo.

126.Refer to the above information. Zippo has a:A) current account surplus.B) financial account deficit.C) financial account surplus.D) surplus on goods and services.


The following diagram is a flexible exchange market for foreign currency:

Q u an tity o f eu ro s

Dol

lar

pric

e of

1 e

uro

$ .8 0

0 Q 1

S

D

127.Refer to the above diagram. Other things equal, a rightward shift of the demand curve would:A) depreciate the dollar.B) appreciate the dollar.C) reduce the equilibrium quantity of euros.D) depreciate the euro.

128.In saying that the present system of floating exchange rates is managed we mean that: A) countries that allow their exchange rate to move freely will lose their borrowing privileges with the

IMF. B) the value of any IMF member's currency can only vary 2 percent from its par value. C) IMF officials determine exchange rates on a day-to-day basis. D) the central banks of various countries sometimes buy and sell foreign exchange to alter undesirable

trends in exchange rates. 129.Which of these sets of nations are advanced industrial nations?

A) Brazil, Poland, South AfricaB) China, India, and RussiaC) Canada, Switzerland, and FranceD) United States, South Korea, and Mexico

130.In the DVCs underemployment frequently takes the form of: A) factory workers who are working longer hours than they would prefer. B) workers who are employed inefficiently in small industry when they could be highly productive in

agriculture. C) farmers whose productivity is very low. D) craftsworkers and artisans who are replaced by simple machinery and equipment.

131.Capital flight is a problem to DVCs because it: A) causes the value of an DVC's currency to appreciate. B) reduces the volume of DVC investment. C) reduces the flow of foreign aid from the IACs. D) causes inflation in the DVCs.

132.An example of direct foreign investment is:A) a U.S. bank granting a loan to a Guatemalan firm.B) General Motors building an auto production facility in China.C) a U.S. government foreign aid grant to Bangladesh.D) The purchase of debt issued by the Panamanian government.

h econ sample exam 2

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economic system

consumers money income

economic wants

economic resource