Douglas, Spring 2007

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Econ 202 Final Exam

Optimism: Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved
international relations and increased confidence in policy makers, people become more optimistic about the
future and stay this way for some time.
1. Refer to Optimism. In the short run, which curve shifts and in which direction?
a. aggregate demand shifts right
b. aggregate demand shifts left
c. aggregate supply shifts right.
d. aggregate supply shifts left.
2. Refer to Optimism. In the long run, the change in price expectations created by optimism shifts
a. long-run aggregate supply right.
b. long-run aggregate supply left.
c. short-run aggregate supply right.
d. short-run aggregate supply left.
3. Refer to Optimism. In the short run what happens to the price level and real GDP?
a. both the price level and real GDP rise.
b. both the price level and real GDP fall.
c. the price level rises and real GDP falls.
d. the price level falls and real GDP rises.
4. Which of the following transactions would have increased U.S. GDP for 2006?
a. In 2006, Ashley sells a car that she bought in 2002 to William for $5,000.
b. An American management consultant works in Mexico during the summer of 2006 and

earns the equivalent of $30,000 during that time.

GM produces a car in December 2006, but doesnt ship it to dealers until January 2007.
None of the above transactions adds to GDP for 2006.
5. In which case does the aggregate demand curve shift right?
a. the price level rises, making the interest rate drop
b. the price level falls, making the interest rate drop
c. the money supply increases, making the interest rate drop
d. the money supply decreases, making the interest rate drop
6. For an economy as a whole,
a. wages must equal profit.
b. consumption must equal saving.
c. income must equal expenditure.
d. household spending on goods must equal household spending on services.
7. In 2001, Congress and President Bush instituted tax cuts. According to the short-run Phillips curve this
change should have
a. reduced inflation and unemployment.
b. raised inflation and unemployment.
c. reduce inflation and raised unemployment.
d. raised inflation and reduced unemployment.
c.
d.

Econ202 Final Exam, Spring 2007

Douglas

Figure 35-1

8. Refer to Figure 35-1. If the economy starts at c and 1, then in the short run, an increase in government

9.

10.

11.

12.

13.

expenditures moves the economy to

a. b and 2.
b. b and 3.
c. d and 3.
d. None of the above is correct.
In a small closed economy investment is $20 billion and private saving is $22 billion. What is public saving
and national saving?
a. $24 billion and $2 billion
b. $20 billion and -$2 billion
c. $2 billion and $24 billion
d. -$2 billion and $20 billion
In the long run, if the Fed decreases the rate at which it increases the money supply,
a. inflation and unemployment will be higher.
b. inflation will be higher and unemployment will be lower.
c. inflation will be lower and unemployment will be higher.
d. inflation will be lower and unemployment will stay the same.
The most important reason for the slope of the aggregate demand curve is that as the price level
a. increases, interest rates increase, and investment decreases.
b. increases, interest rates decrease, and investment increases.
c. decreases, interest rates increase, and investment increases.
d. decreases, interest rates decrease, and investment decreases.
Which of the following events would cause a movement upward along the supply curve for tomatoes?
a. The number of sellers of tomatoes increases.
b. There is an advance in technology that reduces the cost of producing tomatoes.
c. The price of fertilizer increases, and fertilizer is an input in the production of tomatoes.
d. The price of tomatoes rises.
When Ghana sells chocolate to the United States, U.S. net exports
a. increase, and U.S. net capital outflow increases.
b. increase, and U.S. net capital outflow decreases.
c. decrease, and U.S. net capital outflow increases.
d. decrease, and U.S. net capital outflow decreases.

Econ202 Final Exam, Spring 2007

Douglas

14. All else equal, when people become more optimistic about a company's future, the
a. supply of the stock and the price will both rise.
b. supply of the stock and the price will both fall.
c. demand for the stock and the price will both rise.
d. demand for the stock and the price will both fall.
15. Suppose the Fed purchases $20 million in government bonds. If the reserve ratio is 10 percent, bank reserves
a. increase by $20 million and the money supply may increase by up to $200 million.
b. decrease by $20 million and the money supply may increase by up to $200 million.
c. increase by $20 million and the money supply may decrease by up to $200 million.
d. decrease by $20 million and the money supply may decrease by up to $200 million.
16. Which of the following policies would Keynesians support when the economy is experiencing unemployment

above the natural rate?

a. a decrease in the money supply
b. a reduction in tax rates
c. a decrease in government purchases
d. None of the above is correct.
17. The primary advantage of mutual funds is that they
a. always make a return that "beats the market."
b. allow people with small amounts of money to diversify.
c. provide customers with a medium of exchange.
d. All of the above are correct.
18. How would a decrease in the natural rate of unemployment affect the long-run Phillips curve?
a. It would shift the long-run Phillips curve right.
b. It would shift the long-run Phillips curve left.
c. There would be an upward movement along a given long-run Phillips curve.
d. There would be a downward movement along a given long-run Philips curve.

19.

This chart, which you saw several times in class, shows the recent history of the
a. US Unemployment Rate
c. Discount Rate
b. US Inflation Rate
d. Federal Funds Rate
20. If excess demand exists in a market we know that the actual price is
a. below equilibrium price and quantity demanded is greater than quantity supplied.
b. above equilibrium price and quantity demanded is greater than quantity supplied.
c. above equilibrium price and quantity supplied is greater than quantity demanded.
d. below equilibrium price and quantity supplied is greater than quantity demanded.

Econ202 Final Exam, Spring 2007

Douglas

21. If the Fed raises the money supply, then 1/P

a. falls, so the value of money falls.
b. falls, so the value of money rises.
c. rises, so the value of money falls.
d. rises, so the value of money rises.
22. According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in
a. the price level.
b. the interest rate.
c. the exchange rate.
d. real wealth.
23. Assuming no crowding-out, a $100 billion increase in government expenditures shifts aggregate
a. demand right by more than $100 billion.
b. demand right by less than $100 billion.
c. supply left by more than $100 billion.
d. supply left by less than $100 billion.
24. The table below pertains to an economy with only two goods -- books and calculators.

25.

26.

27.

28.

Year
Price of books
Price of calculators
2006
$20
$10
2007
30
10
2008
35
15
The fixed basket consists of 5 books and 2 calcultors. If 2006 is the base year, the CPI is
a. 120 in 2006, 170 in 2007, and 205 in 2008.
b. 100 in 2006, 150 in 2007, and 185 in 2008.
c. 100 in 2006, 142 in 2007, and 310 in 2008.
d. 200 in 2006, 284 in 2007, and 620 in 2008.
In the 1970s in response to recessions caused by an increase in the price of oil, the central banks in many
countries increased the money supply. The central banks might have done this by
a. selling bonds on the open market, which would have raised the value of money.
b. purchasing bonds on the open market, which would have raised the value of money.
c. selling bonds on the open market, which would have raised the value of money.
d. purchasing bonds on the open market, which would have lowered the value of money.
During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action
a. increases the reserve ratio, the money multiplier, and the money supply.
b. increases the reserve ratio, which decreases the money multiplier and the money supply.
c. does not change the reserve ratio or money multiplier, but increases the money supply.
d. does not change the reserve ratio or money multiplier, but decreases the money supply.
Which of the following events would definitely cause a decrease in the price of college?
a. an increase in the number of high school graduates and a decrease in professors salaries.
b. a decrease in the number of high school graduates and a decrease in professors salaries.
c. a decrease in the number of high school graduates and an increase in professors salaries.
d. an increase in the number of high school graduates and a decrease in professors salaries.
Which of the following statements about the Federal Reserve is NOT correct?
a. The members of the Board of Governors are also presidents of the Federal Reserve's
regional banks.
b. The Federal Open Market Committee makes monetary policy.
c. The Fed most often manipulates the money supply through open market operations.
d. The Federal Reserve serves as a bank regulator.

Econ202 Final Exam, Spring 2007

Douglas

29. An economic contraction caused by a shift in AD corrects itself over time as the expected price level
a. rises, shifting aggregate demand right.
b. rises, shifting aggregate demand left.
c. falls, shifting aggregate supply right.
d. falls, shifting aggregate supply left.
30. According to liquidity preference theory, the slope of the money demand curve is explained as follows:
a. interest rates rise as the Fed reduces the quantity of money demanded.
b. interest rates fall as the Fed reduces the supply of money.
c. people will want to hold less money as the cost of holding it falls.
d. people will want to hold more money as the cost of holding it falls.
31. Angela reads financial advice columns and concludes the following. Which of her conclusions are WRONG?
a. Higher average returns come at the price of higher risk.
b. People who are risk averse should never hold stock.
c. Diversification cannot eliminate all of the risk in stock portfolio.
d. All of her conclusions are wrong.
32. According to the crowding-out effect, an increase in government spending
a. increases the interest rate and so increases investment spending.
b. increases the interest rate and so decreases investment spending.
c. decreases the interest rate and so increases investment spending.
d. decreases the interest rate and so decreases investment spending.
33. The Peapod Restaurant uses these things to produce vegetarian meals. Which of them is physical capital?
a. The owner's knowledge of how to prepare vegetarian entrees.
b. The money in the owner's account at the bank she borrowed money from.
c. The tables and chairs in the restaurant.
d. The land the restaurant was built on.
34. Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices
a. and output are higher than in the original long-run equilibrium.
b. and output are lower than in the original long-run equilibrium.
c. are higher and output is the same as the original long-run equilibrium.
d. are the same and output is lower than in the original long-run equilibrium.
35. Other things the same, automatic stabilizers tend to
a. raise expenditures during expansions and recessions.
b. lower expenditures during expansions and recessions.
c. raise expenditures during recessions and lower expenditures during expansions.
d. raise expenditures during expansions and lower expenditures during recessions.
36. Other things the same, if a country increased its saving rate, in a few years it would likely have
a. higher productivity, and a higher growth rate of real GDP.
b. higher productivity, but not a higher growth rate of real GDP.
c. the same productivity and growth of real GDP it began with.
d. lower productivity, but a higher growth rate of real GDP.
37. If the short-run Phillips curve never moves, which of the following would be surprising?
a. an increase in government spending and a fall in unemployment
b. an increase in inflation and an increase in unemployment.
c. a decrease in the inflation rate and a rise in the unemployment rate
d. a decrease in the money supply and a rise in unemployment.

Econ202 Final Exam, Spring 2007

Douglas

38. If wages rise in the automobile industry, we would expect the

a. equilibrium price of cars to increase and equilibrium quantity sold to decrease.
b. equilibrium price of cars to decrease and equilibrium quantity sold to increase.
c. equilibrium price of cars and equilibrium quantity both to increase.
d. equilibrium price of cars and equilibrium quantity both to decrease.
39. Which of the following is WRONG?
a. In the short run, policymakers face a tradeoff between inflation and unemployment.
b. Events that shift the Phillips curve right shift the aggregate supply curve left.
c. Unemployment can be changed only by the use of government policy.
d. The sacrifice ratio from disinflation policy is less if the policy change is credibly
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announced ahead of time.

One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to
consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three
transactions into account, what is the effect on GDP?
a. GDP increases by $1.50.
b. GDP increases by $3.50.
c. GDP increases by $6.00.
d. GDP increases by $7.50.
According to the assumptions of the quantity theory, if the money supply increases 5%
a. both the price level and real GDP would rise by 5%.
b. the price level would rise by 5% and real GDP would be unchanged.
c. the price level would be unchanged and real GDP would rise by 5%.
d. both the price level and real GDP would be unchanged.
At which interest rate is the present value of $95.40 one year from today equal to $90?
a. 5.4 percent
b. 5 percent
c. 6 percent
d. 7 percent
A production possibilities frontier will shift outward if
a. government increases the amount of money in the economy.
b. there is a technological improvement.
c. resources are shifted from producing one good to another good.
d. the unemployment rate falls.
Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity
preference theory there is an excess
a. supply of money until the interest rate increases.
b. supply of money until the interest rate decreases.
c. demand for money until the interest rate increases.
d. demand for money until the interest rate decreases.
The minimum wage
a. creates frictional unemployment. Efficiency wages create structural unemployment.
b. creates structural unemployment. Efficiency wages create frictional unemployment.
c. and efficiency wages both create structural unemployment.
d. and efficiency wages both create frictional unemployment.

Econ202 Final Exam, Spring 2007

Douglas

Short Answer.
Answer both questions in the space provided.
PRINT NAME:
Your grade will be based on your careful use of analytical tools developed in this class. Use graphs, equations, and c hain
of arrows causation analysis as appropriate. BRIEFLY BUT FULLY JUSTIFY ANY CURVE SHIFTS. Be sure to label
all axes and curves on graphs.
By 1993 investment was weak, in part because of concerns about the federal budget deficit, which was large and
projected to increase over the coming decade. In that year, through a combination of upper-bracket income tax
increases, military cuts, and relative restraint in other areas of the budget, the federal government markedly
reduced current and projected deficits.
1. What would you expect to be the effects of the 1993 deficit reduction effort on interest rates, exchange rates,

investment, and the balance of trade? Are your predictions supported by the facts?

Econ202 Final Exam, Spring 2007

Douglas

2. In fact, following the 1993 deficit reduction legislation, the U.S. economy went into a sustained boom with

low inflation. Some claimed that the legislation aided the boom and discouraged inflation. Others said that
the boom occurred in spite of the legislation. Take a side in this debate, using analytical tools that we
developed in Econ 202 to explain how the tax increases, budget cuts, changes in investors attitudes, (perhaps
in the context of other 1990s economic factors) affected prices, output, and unemployment. Label all curves
and axes, and justify all curve shifts.

ID: A

Econ 202 Final Exam

Answer Section
MULTIPLE CHOICE
1.
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A
D
A
C
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B
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A
A
B
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B
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D
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B

ID: A
44. B
45. C

SHORT ANSWER
1. Tax increase, budget cuts: increase SLF, lower r, increase I, increase NCO, dollar depreciates, NX rises.
Increased confidence: Increase I, increase r, lower NCO, dollar appreciates, NX falls.
2. Background: AS shifted rightward because of baby boom, computers, peace. Caused higher GDP, lower prices.
Legislation Aided Boom: Increased confidence increased I, increasing AD and GDP, lowering U but mitigating
AS-driven fall in prices.
Legislation Reduced Boom: Higher taxes, lower G reduced AD and GDP, mitigating the effect of the AS shift on GDP
and U, but helping keep inflation down.