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Exam 2 (EC 2251)

Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Gross domestic product measures a. income and expenditures. b. income but not expenditures. c. expenditures but not income. d. neither income nor expenditures. 2. Which of the following statements about GDP is correct? a. GDP measures two things at once: the total income of everyone in the economy and the unemployment rate of the economys labor force. b. Money continuously flows from households to government and then back to households, and GDP measures this flow of money. c. GDP is to a nations economy as household income is to a household. d. All of the above are correct. 3. According to the circular-flow diagram GDP a. can be computed as the total income paid by firms or as expenditures on final goods and services. b. can be computed as the total income paid by firms, but not as expenditures on final goods and services. c. can be computed as expenditures on final goods and services, but not as the total income paid by firms. d. cannot be computed as either total income paid by firms or expenditures on final goods and services. 4. GDP is defined as the a. value of all goods and services produced within a country in a given period of time. b. value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. c. value of all final goods and services produced within a country in a given period of time. d. value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. 5. Gross domestic product adds together many different kinds of goods and services into a single measure of the value of economic activity. To do this, GDP makes use of a. market prices. b. statistical estimates of the value of goods and services to consumers. c. prices based on the assumption that producers make no profits. d. the maximum amount consumers would be willing to pay. 6. Over time, people have come to rely more on market-produced goods and services and less on goods and services they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has a. caused measured GDP to fall. b. not caused any change in measured GDP. c. caused measured GDP to rise. d. probably changed measured GDP, but in an uncertain direction; the direction of the

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change depends on the difference in the quality of the cleaning that has resulted. ____ 7. If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal, GDP a. decreases. b. increases. c. doesn't change because both legal and illegal production are included in GDP. d. doesn't change because these activities are never included in GDP. 8. Als Aluminum Company sells $1 million worth of aluminum to Shiny Foil Company, which uses the aluminum to make aluminum foil. Shiny Foil Company sells $4 million worth of aluminum foil to households. The transactions just described contribute how much to GDP? a. $1 million b. $3 million c. $4 million d. $5 million 9. A U.S. publisher purchases new computers that were manufactured in the U.S. This purchase by itself makes a. a positive contribution both to investment and to GDP. b. a positive contribution both to consumption and to GDP. c. a positive contribution to GDP, but it does not affect investment or consumption. d. a positive contribution to investment, but it does not affect GDP.

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____ 10. The value of goods added to a firm's inventory in a certain year is treated as a. consumption, since the goods will be sold to consumers in another period. b. intermediate goods, and so is not included in that years GDP. c. investment, since GDP aims to measure the value of the economy's production that year. d. spending on durable goods, since the goods could not be inventoried unless they were durable. ____ 11. If net exports is a negative number for a particular year, then a. the value of firms inventories declined over the course of the year. b. consumption exceeded the sum of investment and government purchases during the year. c. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year. d. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year. ____ 12. When an American household purchases a bottle of Italian wine for $100, a. U.S. consumption does not change, U.S. net exports decrease by $100, and U.S. GDP decreases by $100. b. U.S. consumption does not change, U.S. net exports increase by $100, and U.S. GDP increases by $100. c. U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change. d. U.S. consumption increases by $100, U.S. net exports do not change, and U.S. GDP increases by $100. ____ 13. If total spending rises from one year to the next, then a. the economy must be producing a larger output of goods and services. b. goods and services must be selling at higher prices. c. either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both.

d. employment or productivity must be rising. ____ 14. If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise? a. both real GDP and nominal GDP b. real GDP but not nominal GDP c. nominal GDP but not real GDP d. neither nominal GDP nor real GDP ____ 15. Which of the following statements about GDP is correct? a. Nominal GDP values production at current prices, whereas real GDP values production at constant prices. b. Nominal GDP values production at constant prices, whereas real GDP values production at current prices. c. Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process. d. Nominal GDP values production at the cost of the resources used in the production process, whereas real GDP values production at market prices.. ____ 16. In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct? a. The base year is always the first year among the years for which computations are being made. b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is not necessary to designate a base year. c. The value of the consumer price index is always 100 in the base year. d. The base year is always the year in which the cost of the basket was highest among the years for which computations are being made. ____ 17. If 2004 is the base year, then the inflation rate for 2005 equals a. b. c. d. ____ 18. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the baskets cost was $50; in 2004, the baskets cost was $52; and in 2006, the baskets cost was $54.60. The value of the CPI in 2004 was a. 96.2. b. 102.0. c. 104.0. d. 152.0. ____ 19. The price index was 220 in one year and 260 in the next year. What was the inflation rate? a. 9.0 percent b. 114.6 percent c. 18.2 percent d. 40.0 percent

____ 20. Economists use the term money to refer to a. all wealth. b. all assets, including real assets and financial assets. c. all financial assets, but not real assets. d. those types of wealth that are regularly accepted by sellers in exchange for goods and services. ____ 21. Which of the following is a function of money? a. a unit of account b. a store of value c. medium of exchange d. All of the above are correct. ____ 22. A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $100. If customers deposit $50 into the bank, what is the value of the money supply? a. $50 b. $100 c. $150 d. $200 ____ 23. A banks reserve ratio is 10 percent and the bank has $2,000 in deposits. Its reserves amount to a. $20. b. $200. c. $400. d. $1,800. ____ 24. If the central bank in some country lowered the reserve requirement, then the money multiplier for that country a. would increase. b. would not change. c. would decrease. d. could do any of the above. ____ 25. If the reserve ratio is 4 percent, then the money multiplier is a. 25. b. 20. c. 4. d. 2. ____ 26. If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would a. rise from 10 to 20. b. rise from 5 to 10. c. fall from 10 to 5. d. not change. ____ 27. The value of money falls as the price level a. rises, because the number of dollars needed to buy a representative basket of goods rises. b. rises, because the number of dollars needed to buy a representative basket of goods falls. c. falls, because the number of dollars needed to buy a representative basket of goods rises. d. falls, because the number of dollars needed to buy a representative basket of goods falls.

____ 28. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in a. nominal interest rates. b. real interest rates. c. the price level. d. the money supply. ____ 29. When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an a. excess demand for money, so the price level will rise. b. excess demand for money, so the price level will fall. c. excess supply of money, so the price level will rise. d. excess supply of money, so the price level will fall. ____ 30. When the money market is drawn with the value of money on the vertical axis, if the value of money is below the equilibrium level, a. the price level will rise. b. the value of money will rise. c. money demand will shift leftward. d. money demand will shift rightward.

Exam 2 (EC 2251) Answer Section


MULTIPLE CHOICE 1. ANS: NAT: TOP: 2. ANS: NAT: TOP: 3. ANS: NAT: TOP: 4. ANS: NAT: TOP: 5. ANS: NAT: TOP: 6. ANS: NAT: TOP: 7. ANS: NAT: TOP: 8. ANS: NAT: TOP: 9. ANS: NAT: TOP: 10. ANS: NAT: TOP: 11. ANS: NAT: TOP: 12. ANS: NAT: TOP: 13. ANS: NAT: TOP: 14. ANS: NAT: TOP: 15. ANS: A PTS: 1 DIF: 2 REF: 23-1 Analytic LOC: The study of economics and definitions in economics GDP MSC: Interpretive C PTS: 1 DIF: 2 REF: 23-1 Analytic LOC: The study of economics and definitions in economics GDP MSC: Interpretive A PTS: 1 DIF: 2 REF: 23-1 Analytic LOC: The study of economics and definitions in economics Circular flow MSC: Definitional C PTS: 1 DIF: 1 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Domestic production MSC: Definitional A PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Market value MSC: Interpretive C PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Household chores MSC: Applicative B PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Illegal goods MSC: Applicative C PTS: 1 DIF: 2 REF: 23-2 Analytic LOC: The study of economics and definitions in economics Intermediate goods MSC: Applicative A PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Investment MSC: Applicative C PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Inventory MSC: Interpretive D PTS: 1 DIF: 2 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Net exports MSC: Interpretive C PTS: 1 DIF: 3 REF: 23-3 Analytic LOC: The study of economics and definitions in economics Net exports MSC: Analytical C PTS: 1 DIF: 1 REF: 23-4 Analytic LOC: The study of economics and definitions in economics Real GDP | Nominal GDP MSC: Definitional C PTS: 1 DIF: 2 REF: 23-4 Analytic LOC: The study of economics and definitions in economics Real GDP | Nominal GDP MSC: Interpretive A PTS: 1 DIF: 2 REF: 23-4

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Analytic LOC: The study of economics and definitions in economics Real GDP | Nominal GDP MSC: Definitional C PTS: 1 DIF: 2 REF: 24-1 Analytic LOC: The study of economics and definitions in economics CPI MSC: Interpretive A PTS: 1 DIF: 2 REF: 24-1 Analytic LOC: Unemployment and inflation TOP: Inflation rate Interpretive C PTS: 1 DIF: 2 REF: 24-1 Analytic LOC: The study of economics and definitions in economics CPI MSC: Applicative C PTS: 1 DIF: 2 REF: 24-1 Analytic LOC: Unemployment and inflation TOP: Inflation rate Applicative D PTS: 1 DIF: 1 REF: 29-1 Analytic LOC: The role of money TOP: Money Definitional D PTS: 1 DIF: 1 REF: 29-1 Analytic LOC: The role of money TOP: Money Definitional B PTS: 1 DIF: 1 REF: 29-3 Analytic LOC: Monetary and fiscal policy 100-percent reserve banking | Money supply MSC: Definitional B PTS: 1 DIF: 1 REF: 29-3 Analytic LOC: Monetary and fiscal policy TOP: Reserve ratio Applicative A PTS: 1 DIF: 1 REF: 29-3 Analytic LOC: Monetary and fiscal policy TOP: Money multiplier Applicative A PTS: 1 DIF: 1 REF: 29-3 Analytic LOC: Monetary and fiscal policy TOP: Money multiplier Applicative C PTS: 1 DIF: 1 REF: 29-3 Analytic LOC: Monetary and fiscal policy TOP: Money multiplier Applicative A PTS: 1 DIF: 1 REF: 30-1 Analytic LOC: The role of money TOP: Value of money Interpretive C PTS: 1 DIF: 1 REF: 30-1 Analytic LOC: The role of money TOP: Money market Definitional B PTS: 1 DIF: 3 REF: 30-1 Analytic LOC: The role of money TOP: Money market Analytical B PTS: 1 DIF: 2 REF: 30-1 Analytic LOC: The role of money TOP: Money market Analytical

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