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Final Exam Review Questions


Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. The total sales oI all Iirms in the economy Ior a year

a. equals GDP Ior the year.
b. is larger than GDP Ior the year.
c. is smaller than GDP Ior the year.
d. equals GNP Ior the year.

NSWER: B

2. The local Chevrolet dealership has an increase in inventory oI 25 cars in 2006. In

2007 it sells all 25 cars. Which oI the Iollowing statements is correct?
a. The Iull value oI the increased inventory will be counted as part oI
GDP in 2006, and the value oI the cars sold in 2007 will not cause
2007 GDP to increase.
b. The value oI the increased inventory will not aIIect 2006 GDP;
instead, the Iull value oI the inventory will be counted as part oI
2007 GDP.
c. The value oI the increased inventory will be counted as part oI
2006 GDP and the value oI the cars sold in 2007 will increase
2007 GDP.
d. One-halI oI the value oI the increased inventory will be counted as
part oI 2006 GDP and the other one-halI oI the value will be
counted as part oI 2007 GDP.

NSWER: A

3. Suppose that dairy products have risen in price relatively less than prices in general
over the last several years. To which problem in the construction oI the CPI is this
'low rate oI price increase most relevant?
a. substitution bias
b. introduction oI new goods
c. unmeasured quality change
d. income bias

NSWER: A

4. In the small closed economy oI San Lucretia, the currency is the denar. Statistics Ior
last year show that private saving was 60 billion denars, taxes were 70 billion denars,
government purchases oI goods and services were 80 billion denars, there were no
transIer payments by the government, and GDP was 400 billion denars. What were
consumption and investment in San Lucretia?
a. 270 billion denars, 50 billion denars
b. 260 billion denars, 60 billion denars
c. 250 billion denars, 70 billion denars
d. None oI the above is correct.

NSWER: A

5. Suppose that a government that taxed all interest income changed its tax law so that
the Iirst $5,000 oI a taxpayer`s interest income was tax Iree. This would shiIt the
a. supply Ior loanable Iunds right making interest rates Iall.
b. supply oI loanable Iunds leIt making interest rates rise.
c. demand Ior loanable Iunds right making the interest rate rise.
d. demand Ior loanable Iunds leIt making the interest rate Iall.

NSWER: A

6. Which oI the Iollowing is correct concerning a risk-averse person?

a. She would not play games where the probability oI winning and
losing a dollar are the same.
b. She might not buy health insurance iI she thinks her risks are low.
c. Her marginal utility oI wealth decreases as her income increases.
d. All oI the above are correct.

NSWER: D

7. Which oI the Iollowing is a source oI market risk?

a. Holding stocks in many companies carries the risk oI a reduced
average return.
b. Real GDP varies over time and sales and proIits move with real
GDP.
c. When a paper producer has declining sales, it is likely that so will
other paper producers.
d. II stockholders become aggravated with the way a CEO runs a
company, the price oI that company`s stock might Iall in the stock
market..

NSWER: B

8. Suppose the United States exports cars to France and imports cheese Irom
Switzerland. This situation suggests that
a. the United States has a comparative advantage relative to
Switzerland in producing cheese, and France has a comparative
advantage relative to the United States in producing cars.
b. the United States has a comparative advantage relative to France in
producing cars, and Switzerland has a comparative advantage
relative to the United States in producing cheese.
c. the United States has an absolute advantage relative to Switzerland
in producing cheese, and France has an absolute advantage relative
to the United States in producing cars.
d. the United States has an absolute advantage relative to France in
producing cars, and Switzerland has an absolute advantage relative
to the United States in producing cheese.

NSWER: B

9. Opponents oI Iree trade oIten want the United States to prohibit the import oI goods
made in overseas Iactories that pay wages below the U.S. minimum wage.
Prohibiting such goods is likely to
a. cause these Iactories to pay the U.S. minimum wage.
b. increase the rate oI technological advance in poor countries so that
they can aIIord to pay higher wages.
c. increase poverty in poor countries and beneIit U.S. Iirms which
compete with these imports.
d. harm U.S. Iirms which compete with these imports.

NSWER: C

10. Ted is working part time. Alice is on temporary layoII. Who is counted as employed
by the BLS?
a. only Ted
b. only Alice
c. both Ted and Alice
d. neither Ted nor Alice

NSWER: A

11. There will be structural unemployment iI

a. some wages are kept above their equilibrium level.
b. some people choose not to work at the equilibrium wage.
c. some wages are below their equilibrium level.
d. There can be structural unemployment under all the possibilities
above.

NSWER: A

12. The agency responsible Ior regulating the money supply in the United States is
a. the Comptroller oI the Currency.
b. the U.S. Treasury.
c. the Federal Reserve.
d. the U.S. Bank.

NSWER: C

13. Velocity is
a. Y/(M P) and increases iI dollars are exchanged less Irequently.
b. Y/(M P) and increases iI dollars are exchanged more Irequently.
c. (P Y)/M and increases iI dollars are exchanged less Irequently.
d. (P Y)/M and increases iI dollars are exchanged more Irequently.

NSWER: D

14. II money is neutral and velocity is stable, an increase in the money supply creates a
proportional increase in
a. real output only.
b. nominal output only.
c. the price level only.
d. Both the price level and nominal output.

NSWER: D

15. You put money in an account that earns a 5 percent nominal interest rate. The
inIlation rate is 3 percent, and your marginal tax rate is 20 percent. What is your
aIter-tax real rate oI interest?
a. 3.4 percent
b. 1.6 percent
c. 1 percent
d. None oI the above is correct.

NSWER: C

16. Which oI the Iollowing is accurate?

a. Monetary policy is neutral in both the short run and the long run.
b. Though monetary policy is neutral in the long run, it may have
eIIects on real variables in the short run.
c. Monetary policy has proIound eIIects on real variables in both the
short run and the long run.
d. Monetary policy has proIound eIIects on real variables in the long
run, but is neutral in the short run.

NSWER: B

17. II Argentina's domestic investment exceeds national saving, then Argentina has
a. positive net capital outIlows and negative net exports.
b. positive net capital outIlows and positive net exports.
c. negative net capital outIlows and negative net exports.
d. negative net capital outIlows and positive net exports.

NSWER: C

18. In an open economy, the market Ior loanable Iunds equates national saving with
a. domestic investment.
b. net capital outIlow.
c. national consumption minus domestic investment.
d. None oI the above is correct.

NSWER: D

19. Which oI the Iollowing would not be a consequence oI an increase in the U.S.
government budget deIicit?
a. U.S. interest rates rise.
b. U.S. net capital outIlow Ialls.
c. The real exchange rate oI the U.S. dollar depreciates.
d. The U.S. supply oI loanable Iunds shiIts leIt.

NSWER: C

20. Suppose that the United States imposes an import quota on automobiles. In the open-
economy macroeconomic model this quota shiIts the
a. U.S. supply oI loanable Iunds leIt.
b. U.S. demand Ior loanable Iunds leIt.
c. demand Ior U.S. dollars in the market Ior Ioreign-currency
exchange right.
d. supply oI U.S. dollars in the market Ior Ioreign-currency exchange
leIt.

NSWER: C

21. Suppose workers notice a Iall in their nominal wage but are slow to notice that the
price oI things they consume have Iallen by the same percentage. They may inIer
that the reward to working is
a. temporarily low and so supply a smaller quantity oI labor.
b. temporarily low and so supply a larger quantity oI labor.
c. temporarily high and so supply a smaller quantity oI labor.
d. temporarily high and so supply a larger quantity oI labor.

NSWER: A

22. The most important automatic stabilizer is

a. open-market transactions.
b. the tax system.
c. unemployment compensation.
d. welIare beneIits.

NSWER: B

23. In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg
the
a. unemployment rate.
b. inIlation rate.
c. growth rate oI real national income.
d. All oI the above are correct.

NSWER: B

24. A policy change that changes the natural rate oI unemployment changes
a. neither the long-run Phillips curve nor the long-run aggregate
supply curve.
b. both the long-run Phillips curve and the long-run aggregate supply
curve.
c. the long-run Phillips curve, but not the long-run aggregate supply
curve.
d. the long-run aggregate supply curve, but not the long-run Phillips
curve.

NSWER: B

25. Which oI the Iollowing explains the time-inconsistency oI policy explained by

Kydland and Prescott?
a. A contractionary monetary policy will lead to higher
unemployment in the short-run but not the long-run.
b. An expansionary monetary policy will lead to higher
unemployment in the short-run but not the long-run.
c. Expected inIlation is higher than otherwise iI the public believes
that policymakers will be tempted to raise inIlation to reduce
unemployment.
d. Expected inIlation is lower than otherwise iI the public believes
that policymakers will be tempted to lower inIlation to reduce
unemployment.

NSWER: C

26. II in response to an adverse aggregate supply shock the Fed increased the money
supply,
a. unemployment and inIlation would both rise.
b. unemployment and inIlation would both Iall.
c. unemployment would rise and inIlation would Iall.
d. unemployment would Iall and inIlation would rise.

NSWER: D

27. II the sacriIice ratio is 3, reducing the inIlation rate Irom 10 percent to 6 percent
would require sacriIicing
a. 2 percent oI annual output.
b. 5 percent oI annual output.
c. 6 percent oI annual output.
d. None oI the above is correct.

NSWER: D

28. Suppose that the central bank is required to Iollow a monetary policy rule to stabilize
prices. II the economy starts at long-run equilibrium and then aggregate supply shiIts
right the central bank would have to
a. increase the money supply, which causes output to move closer to
its long-run equilibrium.
b. increase the money supply, which causes output to move Iarther
Irom long-run equilibrium.
c. decrease the money supply, which causes output to move closer to
its long-run equilibrium.
d. decrease the money supply, which causes output to move Iarther
Irom long-run equilibrium.

NSWER: B

29. II a country had a rule that required the ratio oI debt to GDP to be constant, it would
necessarily have to run a surplus iI
a. real GDP rose and the inIlation rate were positive.
b. real GDP rose and the inIlation rate were negative.
c. real GDP Iell and the inIlation rate were positive.
d. real GDP Iell and the inIlation rate were negative.

NSWER: D

30. Which oI the Iollowing is included in the supply oI dollars in the market Ior Ioreign-
currency exchange in the open-economy macroeconomic model?
a. A retail outlet in Russia wants to buy semi-conductors Irom a U.S.
manuIacturer.
b. A U.S. bank loans dollars to Blair, a U.S. resident, who wants to
purchase a new house in the United States.
c. A U.S. based mutual Iund wants to purchase bonds issued by an
Italian corporation.
d. All oI the above are correct.

NSWER: C


Short nswer


31. U.S. real GDP is substantially higher today than it was 60 years ago. What does this
tell us, and what does it not tell us, about the well-being oI U.S. residents?

RESPONSE:
NSWER: Since this is in real terms, it tells us that the U.S. is able to make a lot
more stuII than in the past. Some oI the increase in real GDP is
probably due to an increase in population, so we could say more iI we
knew what had happened to real GDP per person. Supposing that
there was also an increase in real GDP per person, we can say that the
standard oI living has risen. Material things are an important part oI
well-being. Having suIIicient amounts oI things such as Iood, shelter,
and clothing are Iundamental to well-being. Other things such as
security, a saIe environment, access to saIe water, access to medical
care, justice, and Ireedom also matter. However, many oI these things
are more easily obtained by being able to produce more using Iewer
resources. Countries with higher real GDP per person tend to have
longer liIe spans, less discrimination towards women, less child labor,
and a higher rate oI literacy.


32. The table below uses data Ior the year 2003 provided by the BLS and adjusted to be
comparable to U.S. data. All values are in thousands. Fill in the blank entries in the
table. Show your work!


Labor-Force

Country
Adult
Population
Labor
Force

Employed

Unemployed
Unemployment
Rate
Participation
Rate
Japan 109,474

62,510 3,500

France

26,870

2,577

57.41
Germany 70,159 39,591

9.69


RESPONSE:
NSWER:


Country

Adult
Population

Labor
Force


Employed


Unemployed

Unemployment
Rate
Labor-Force
Participation
Rate
Japan 109,474 66,010 62,510 3,500 5.30 60.30
France 46,804 26,870 24,293 2,577 9.59 57.41
Germany 70,159 39,591 35,755 3,836 9.69 56.43



33. Following the recession oI 2001 there was a month where employment and the
unemployment rate rose. Assuming the computations were correct, how is it possible
Ior both to have increased?

RESPONSE:
NSWER: The rate oI unemployment is measured as the number oI people
unemployed divided by the labor Iorce. II the number oI people in the
labor Iorce rises, but a signiIicant portion oI the rise in the labor Iorce
is people who are unemployed, then both employment and
unemployment could rise.

(This likely happened because as the economy was improving, more
people began seeking employment, but not all immediately Iound
employment.)


34. Economists argue that the move Irom barter to money increased trade and
production. How is this possible?

RESPONSE:
NSWER: The use oI money allows people to trade more easily. When it is
easier to trade specialization increases. Increased specialization
increases production and the standard oI living.


35. Suppose that a country has $120 billion oI national savings, and $80 billion oI
domestic investment. Is this possible? Where did the other $40 billion oI national
savings go?

RESPONSE:
NSWER: This is possible Ior an open economy. The remaining $40 billion is Ior
net capital outIlow in the Iorm oI purchases oI Ioreign assets by U.S.
residents. U.S. citizens can save by buying U.S. assets or by buying
Ioreign assets.


36. Suppose that U.S. citizens start saving more. What does this imply about the supply
oI loanable Iunds and the equilibrium real interest rate? What happens to the real
exchange rate?

RESPONSE:
NSWER: The supply oI loanable Iunds increases, and the equilibrium real
interest rate Ialls. Because oI the lower interest rate, U.S. net capital
outIlow rises. This increase makes the supply oI dollars shiIt to the
right, and the real exchange rate oI the dollar depreciates.


37. Suppose that consumers become pessimistic about the Iuture health oI the economy.
What will happen to aggregate demand and to output? What might the president and
Congress have to do to keep output stable?

RESPONSE:
NSWER: As consumers become pessimistic about the Iuture oI the economy,
they cut their expenditures so that aggregate demand shiIts leIt and
output Ialls. The president and Congress could adjust Iiscal policy to
increase aggregate demand. They could either increase government
spending, or cut taxes, or both.


38. Describe three costs oI inIlation.

RESPONSE:
NSWER: There are several costs oI inIlation. Shoeleather costs are the
resources people spend to economize on their money holdings when
inIlation is high. Menu costs are the costs created by changing price
tags and prices in menus and catalogs. Increased relative price
variability Irom higher inIlation distorts signals provided by relative
price changes and so misallocates resources. Distortions created by
inIlation in the tax code discourage saving and so may lower the
standard oI living. Unexpected inIlation arbitrarily redistributes
wealth. In general a changing value oI the unit oI account creates
inconvenience.