Practic Questions Econ 300, Summer Session II, 2005

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) A country is said to be experiencing inflation when

A) prices of most goods and services are rising over time.
B) prices of most goods and services are falling over time.
C) total output is rising over time.
D) total output is falling over time.
Topic: Section: 1.1

2) A closed economy is a national economy that

A) doesn't interact economically with the rest of the world.
B) has a stock market that is not open to traders from outside the country.
C) has extensive trading and financial relationships with other national economies.
D) has not established diplomatic relations with other national economies.
Topic: Section: 1.1

3) Positive analysis of economic policy

A) examines the economic consequences of policies but does not address the question of whether those
consequences are desirable.
B) examines the economic consequences of policies and addresses the question of whether those
consequences are desirable.
C) generates less agreement among economists than normative analysis.
D) is rare in questions of economic policy.
Topic: Section: 1.3

4) Classical economists argue that

A) the government should have an active role in the economy.
B) government policies will be ineffective and counterproductive.
C) the government should actively intervene in the economy to eliminate business cycles.
D) wages and prices don't adjust quickly, so the economy is slow to return to equilibrium.
Topic: Section: 1.3

5) Keynes assumed that wages and prices were slow to adjust in order to explain
A) persistently high unemployment.
B) high inflation.
C) the high level of interest rates.
D) why inflation fell in recessions.
Topic: Section: 1.3

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 6) How did Keynes propose to solve the problem of high unemployment?
A) Increase the growth rate of the money supply.
B) Allow wages to decline, so that firms will want to hire more workers.
C) Put on wage and price controls, so wages won't rise and firms won't have to lay people off to cut costs.
D) Have the government increase its demand for goods and services.
Topic: Section: 1.3

7) The value of a producer's output minus the value of the inputs it purchases from other producers is called the
producer's
A) surplus.
B) profit.
C) value added.
D) gross product.
Topic: Section: 2.1

8) Which of the following is included in U.S. GDP?

A) The sale of a new car from a manufacturer's inventory
B) The purchase of a watch from a Swiss company
C) The sale of a used car
D) A newly constructed house
Topic: Section: 2.2

9) Intermediate goods are

A) capital goods, which are used up in the production of other goods but were produced in earlier periods.
B) final goods that remain in inventories.
C) goods that are used up in the production of other goods in the same period that they were produced.
D) either capital goods or inventories.
Topic: Section: 2.2

10) Capital goods are

A) a type of intermediate good.
B) final goods, because they are not used up during a given year.
C) produced in the same year as the related final good, whereas intermediate goods are produced in different
years.
D) produced in one year, whereas final goods are produced over a period of more than one year.
Topic: Section: 2.2

11) GDP differs from GNP because

A) GDP = GNP - net factor payments from abroad.
B) GNP = GDP - net factor payments from abroad.
C) GDP = GNP - capital consumption allowances.
D) GNP = GDP - capital consumption allowances.
Topic: Section: 2.2

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12) National saving equals private saving plus government saving, which in turn equals
A) C + S + T.
B) GDP + C + G.
C) GDP + NFP.
D) GDP + NFP - C - G.
Topic: Section: 2.3

13) The uses-of-saving identity shows that if the government budget deficit rises, then one of the following must
happen.
A) Private saving must rise, investment must fall, and/or the current account must fall.
B) Private saving must rise, investment must fall, and/or the current account must rise.
C) Private saving must rise, investment must rise, and/or the current account must fall.
D) Private saving must rise, investment must rise, and/or the current account must rise.
Topic: Section: 2.3

14) The country of Old Jersey produces milk and butter, and it has published the following macroeconomic data,
where quantities are in gallons and prices are dollars per gallon.

2003 2004
Good Quantity Price Quantity Price
Milk 500 $2 900 $3
Butter 2000 $1 3000 $2

Between 2003 and 2004, nominal GDP grew by

A) 60.0%.
B) 65.5%.
C) 83.3%.
D) 190.0%.
Topic: Section: 2.4

15) The country of Old Jersey produces milk and butter, and it has published the following macroeconomic data,
where quantities are in gallons and prices are dollars per gallon.

2003 2004
Good Quantity Price Quantity Price
Milk 500 $2 900 $3
Butter 2000 $1 3000 $2

Between 2003 and 2004, the percent change in real GDP (based on 2003 as a base year) was
A) 58%.
B) 60%.
C) 130%.
D) 190%.
Topic: Section: 2.4

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16) The country of Old Jersey produces milk and butter, and it has published the following macroeconomic data,
where quantities are in gallons and prices are dollars per gallon.

2003 2004
Good Quantity Price Quantity Price
Milk 500 $2 900 $3
Butter 2000 $1 3000 $2

Between 2003 and 2004, the GDP deflator (based on 2003 as a base year) rose
A) 60.00%.
B) 81.25%.
C) 83.33%.
D) 123.00%.
Topic: Section: 2.4

17) You are given information on the consumer price index (CPI), where the values given are those for December
31 of each year.

Year CPI
1989 126.1
1990 133.8
1991 137.9
1992 141.9
1993 145.8

In which year was the inflation rate the highest?

A) 1990
B) 1991
C) 1992
D) 1993
Topic: Section: 2.4

18) By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and
interest totaling $436 one year later. During the year the CPI rose from 150 to 162, but he had thought the CPI
would be at 159 by the end of the year. By Marks had expected the real interest rate to be ___________, but it
actually turned out to be ___________.
A) 8%; 1%
B) 6%; 3%
C) 3%; 1%
D) 1%; 3%
Topic: Section: 2.5

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19) In the production function Y = AF(K, N), A is _____, K is _____, and N is _____.
A) total factor productivity; the capital stock; the number of workers employed
B) total factor productivity; investment; the number of workers employed
C) the productivity of labor; the capital stock; the size of the labor force
D) the productivity of labor; investment; the size of the labor force
Topic: Section: 3.1

20) The fact that the production function relating output to capital becomes flatter as we move from left to right
means that
A) the marginal product of labor is positive.
B) the marginal product of capital is positive.
C) there is diminishing marginal productivity of labor.
D) there is diminishing marginal productivity of capital.
Topic: Section: 3.1

21) One reason that firms hire labor at the point where w = MPN is
A) if w < MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they
should hire fewer workers.
B) if w > MPN, the cost (w) of hiring additional workers is less than the benefits (MPN) of hiring them, so they
should hire more workers.
C) if w < MPN, the cost (w) of hiring additional workers equals the benefits (MPN) of hiring them, so they
have the right number of workers.
D) if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they
should hire fewer workers.
Topic: Section: 3.2

22) The Widget Company has the following production function.

Number of Workers Number of Cases Produced

0 0
1 9
2 17
3 24
4 30
5 35

If widgets sell for $6 each and the wage rate is $33, how many workers will the company hire?
A) 0
B) 1
C) 2
D) 4
Topic: Section: 3.2

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23) A winter ice storm has paralyzed the entire east coast, reducing productivity sharply. This supply shock shifts
the marginal product of labor curve
A) up and to the right, raising the quantity of labor demanded at any given real wage.
B) down and to the left, reducing the quantity of labor demanded at any given real wage.
C) up and to the right, reducing the quantity of labor demanded at any given real wage.
D) down and to the left, raising the quantity of labor demanded at any given real wage.
Topic: Section: 3.2

24) A person is more likely to increase labor supply in response to an increase in the real wage, the _____ is the
income effect and the _____ is the substitution effect.
A) larger; larger
B) larger; smaller
C) smaller; larger
D) smaller; smaller
Topic: Section: 3.3

25) The equilibrium level of employment, achieved after the complete adjustment of wages and prices, is known as
the
A) zero-unemployment level of employment.
B) natural state.
C) invisible handshake.
D) full-employment level of employment.
Topic: Section: 3.4

26) What is the unemployment rate if there are 150 million people employed, 25 million people unemployed, and
25 million not in the labor force?
A) 14.3%
B) 13.4%
C) 12.5%
D) 25.0%
Topic: Section: 3.5

27) When a person receives an increase in wealth, what is likely to happen to consumption and saving?
A) Consumption increases and saving increases.
B) Consumption increases and saving decreases.
C) Consumption decreases and saving increases.
D) Consumption decreases and saving decreases.
Topic: Section: 4.1

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28) With a nominal interest rate of 4%, an expected inflation rate of 1%, and interest income taxed at a rate of 25%,
what is the expected after-tax real interest rate?
A) 3%
B) 2%
C) 1%
D) 0%
Topic: Section: 4.1

29) The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut
A) causes inflation.
B) causes a current account deficit.
C) raises interest rates.
D) doesn't affect consumption.
Topic: Section: 4.1

30) Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a rate of 25%, when the
expected real interest rate is 5%.
A) $150
B) $500
C) $1500
D) $5000
Topic: Section: 4.2

31) What is the difference between gross investment and net investment?
A) Net investment = gross investment minus taxes
B) Net investment = gross investment minus net factor payments
C) Net investment = gross investment minus inventory accumulation
D) Net investment = gross investment minus depreciation
Topic: Section: 4.2

32) Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How
much is net investment?
A) $1.5 million
B) $2.0 million
C) $2.5 million
D) $3.5 million
Topic: Section: 4.2

33) The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve
A) raises the profitability of investment for firms.
B) causes the amount of firms' investment to increase.
C) increases the total amount of saving because of the increase in the real interest rate.
D) causes the total amounts of saving and investment to fall.
Topic: Section: 4.3

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34) A curve that connects all the consumption combinations that yield the same level of utility is known as
A) an isoquant.
B) a yield curve.
C) a budget line.
D) an indifference curve.
Topic: App. 4.A

35) Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in
present value to the tax cut. This causes a consumer's saving to
A) decrease.
B) increase.
C) remain unchanged.
D) increase if the person was a lender and decrease if the person was a borrower.
Topic: App. 4.A

36) The substitution effect of a decrease in real interest rates is to cause a consumer to
A) increase future consumption and decrease current consumption.
B) decrease future consumption and increase current consumption.
C) increase current consumption and increase saving.
D) decrease current consumption and increase saving.
Topic: App. 4.A

37) The elasticity of output with respect to capital

A) is the increase in output resulting from an increase in the capital stock.
B) is the percentage increase in output resulting from a 1 % increase in the capital stock.
C) is always greater than one.
D) is the inverse of the elasticity of output with respect to labor.
Topic: Section: 6.1

38) Suppose the current level of output is 5000 and the elasticity of output with respect to capital is 0.4. A 10%
increase in capital would increase the current level of output to
A) 5020.
B) 5050.
C) 5200.
D) 5500.
Topic: Section: 6.1

39) Total factor productivity growth is that part of economic growth due to
A) capital growth plus labor growth.
B) capital growth less labor growth.
C) capital growth times labor growth.
D) neither capital growth nor labor growth.
Topic: Section: 6.1

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40) In the Solow model, if productivity doesn't change,
A) the economy must eventually reach a steady state.
B) the capital-labor ratio must decline.
C) the capital-labor ratio must rise.
D) there can be no saving.
Topic: Section: 6.2

41) The Golden Rule capital-labor ratio is the level of the capital-labor ratio that, in the steady state,
A) maximizes output per worker.
B) maximizes investment per worker.
C) maximizes consumption per worker.
D) maximizes capital per worker.
Topic: Section: 6.2

42) The idea that saving equals investment in the Solow model means that a steady state can be reached only when
A) s = k.
B) s = n + d.
C) sf(k) = (s + d)k.
D) sf(k) = (n + d)k.
Topic: Section: 6.2

43) An increase in the growth rate of population in a steady-state economy would cause
A) a parallel shift upward in the investment line.
B) a pivot up and to the left in the investment line.
C) a pivot down and to the right in the investment line.
D) a parallel shift downward in the investment line.
Topic: Section: 6.2

44) The empirical evidence on convergence suggests that

A) there is support for conditional convergence.
B) there is support for unconditional convergence.
C) there is no support for any type of convergence.
D) there is support for unconditional convergence among all English-speaking countries.
Topic: Section: 6.2

45) Government policies to raise the rate of productivity growth include all of the following EXCEPT
A) improving infrastructure.
B) encouraging research and development.
C) reducing the government budget surplus.
D) improving human capital development.
Topic: Section: 6.3

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46) The use of money is more efficient than barter because the introduction of money
A) reduces the need for economic specialization.
B) reduces the need to exchange goods.
C) reduces the need for other stores of value.
D) reduces transaction costs.
Topic: Section: 7.1

47) Money's primary role in the economy comes from the benefits of lowering transactions costs and allowing
specialization. This function of money is called
A) store of value.
B) medium of exchange.
C) standard of deferred payment.
D) unit of account.
Topic: Section: 7.1

48) Why do people keep currency in their pockets when bank deposits pay interest?
A) Because banks might steal your money.
B) Because currency is more liquid.
C) Because bank deposits lose value due to inflation.
D) Because bank deposits lose value due to changes in interest rates.
Topic: Section: 7.1

49) Which of the following measures is the best measure of money as a medium of exchange?
A) M1
B) M2
C) M3
D) None of the above
Topic: Section: 7.1

50) We shouldn't be concerned about U.S. currency held abroad because

A) the currency will never return to the United States.
B) foreigners use it to buy U.S. bonds.
C) it represents an interest-free loan to the United States.
D) foreigners can't spend it in their own countries.
Topic: Section: 7.1

51) What's the most common way for a central bank to reduce the money supply?
A) Collect higher taxes
B) Sell bonds to the public
C) Buy bonds from the government
D) Buy bonds from the public
Topic: Section: 7.1

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52) AAA Company stock has a higher expected rate of return than ZZZ Company stock. All else being equal, you
would expect that relative to ZZZ, AAA company stock provides
A) less risk and less liquidity.
B) less risk and more liquidity.
C) more risk and less liquidity.
D) more risk and more liquidity.
Topic: Section: 7.2

53) The opportunity cost of holding currency decreases when

A) income decreases.
B) the interest rate on bonds decreases.
C) the interest rate on money decreases.
D) wealth decreases.
Topic: Section: 7.3

54) If the interest elasticity of money demand is -0.1, by what percent does money demand change if the nominal
interest rate rises from 2% to 3%?
A) -0.1%
B) 5%
C) 0%
D) -5%
Topic: Section: 7.3

55) Velocity is defined as

A) nominal money stock/nominal GDP.
B) nominal GDP/nominal money stock.
C) real money stock/real GDP.
D) mc2.
Topic: Section: 7.3

56) If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, then velocity is
A) 0.1.
B) 1.
C) 10.
D) 100.
Topic: Section: 7.3

57) If the quantity of money demanded exceeds the quantity of money supplied, then
A) the quantity of nonmonetary assets demanded exceeds the quantity supplied.
B) the quantity of nonmonetary assets supplied exceeds the quantity demanded.
C) the quantity of nonmonetary assets demanded will still equal the quantity supplied, all else being equal.
D) you can make no conclusions about the relative supply and demand of nonmonetary assets.
Topic: Section: 7.4

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58) If real money demand doubles while the nominal money supply is unchanged, what happens to the price level?
A) The price level increases by a factor of four.
B) The price level doubles.
C) The price level is unchanged.
D) The price level falls by one-half.
Topic: Section: 7.5

59) Large differences in inflation rates among countries are almost always the result of large differences in
A) productivity.
B) real income growth.
C) the growth rates of real money demand.
D) the growth rates of nominal money supplies.
Topic: Section: 7.5

60) When a government prints money to finance its expenditures, it is likely to cause
A) unemployment.
B) inflation.
C) deflation.
D) reductions in the use of barter.
Topic: Section: 7.5

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Answer Key
Testname: PRACTICEQ1

1) A
2) A
3) A
4) B
5) A
6) D
7) C
8) D
9) C
10) B
11) A
12) D
13) A
14) D
15) B
16) B
17) A
18) C
19) A
20) D
21) D
22) D
23) B
24) C
25) D
26) A
27) B
28) B
29) D
30) C
31) D
32) A
33) D
34) D
35) B
36) B
37) B
38) C
39) D
40) A
41) C
42) D
43) B
44) A
45) C
46) D
47) B
48) B
49) A
50) C
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Answer Key
Testname: PRACTICEQ1

51) B
52) C
53) B
54) D
55) B
56) C
57) B
58) D
59) D
60) B

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