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Practice Final Exam Macroeconomics Newton 1.

The primary focus of the study of economics is with: A) expanding the production of goods and services. B) equalizing the distribution of consumer income and wealth. C) making the most efficient use of scarce productive resources. D) reallocating resources from consumption to production in the economy. 2. Macroeconomics is best defined by which statement? A) Macroeconomics is the study of the entire economy. B) Macroeconomics is the study of how firms maximize their profits. C) Macroeconomics is the study of how individual prices are determined. D) Macroeconomics is the study of the consumption patterns of low-income households. 3. If opportunity costs were constant, then the production possibilities curve would be: A) vertical. B) horizontal. C) a straight line. D) bowed outward. 4. The value of the best alternative to any action you undertake is referred to as its: A) production cost. B) opportunity cost. C) resource cost. D) increasing cost.

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Use the following to answer question 5:


P

5 4 3 2 1 2 4 6 ( t h o 8 u 1 a b D D
3 1

P ric e (p e r p o u n d )

Q 01 2 1 4 1 6 1 8 2 0 Q u a n t i t y d e m a n s a n d s o f b u s h e l s

d p

e d e r

e e k

5. Refer to the above diagram, which shows three demand curves for coffee. Which would cause the change in the demand for coffee illustrated by the shift from D1 to D2? A) a decrease in the price of tea B) an increase in consumer incomes C) an increase in the price of sugar D) a technological improvement in the production of coffee Use the following to answer question 6:
P $ 5 4 3 2 1 0 2 4 6 o 8 u 1 0 1 21 41 6 1 82 0 Q Q u a n t i t y s u p p l i e d s a n d s o f b u s h e l s p e r b a S
3

P ric e (p e r p o u n d )

( t h

e e k

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6. Refer to the above diagram, which shows three supply curves for corn. Which of the following would cause the change in the supply of corn illustrated by the shift from S1 to S3? A) a decrease in the price of fertilizer B) an increase in the price of irrigation equipment C) an increase in consumer incomes D) a change in consumer tastes in favor of cornbread 7. On a graph, an increase in quantity demanded is represented by a: A) leftward shift of the demand curve. B) rightward shift of the demand curve. C) movement upward and to the left along the demand curve. D) movement downward and to the right along the demand curve. 8. A television station reports that the price of orange juice has declined but the quantity sold has increased. This situation would be caused by a(n): A) increase in demand. B) increase in supply. C) decrease in demand. D) decrease in supply. 9. To avoid multiple counting in national income accounts, only: A) final goods and services should be counted. B) intermediate goods and services should be counted. C) both final and intermediate goods and services should be counted. D) primary, intermediate, and final goods and services should be counted. 10. GDP tends to underestimate the productive activity in the economy because it excludes: A) spending by the government on military goods. B) spending by businesses to reduce the level of pollution. C) the work done by construction companies to remodel homes. D) the personal labor time homeowners spend on home repairs.

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11. Structural unemployment differs from cyclical unemployment in that: A) Structural would include people who quit their jobs because they took up new occupations, cyclical would not. B) Cyclical would include people who are unemployed because of a recession while structural would include those unemployed because they had recently entered the workforce and not yet found a job. C) Structural would include only those unemployed in the construction industry while cyclical would include those unemployed in the bicycle industry. D) None of the above. Use the following to answer question 12:

12. Refer to the above diagram. The phases of the business cycle from points A to D are, respectively: A) peak, recession, recovery, trough. B) trough, recovery, expansion, peak. C) expansion, recession, trough, peak. D) peak, recession, trough, recovery. 13. If the Consumer Price Index was 166.6 in one year and 172.2 in the next year, then the rate of inflation from one year to the next was: A) 3.4%. B) 4.1%. C) 5.4%. D) 6.0%. 14. A worker would be hurt least by inflation when the: A) worker anticipates inflation and increases savings at the bank. B) worker is protected by a cost-of-living adjustment clause in an employment contract. C) worker is protected by fixed annual increases in wages and benefits in an employment contract. D) government increases the level of social security retirement benefits to correct for the effects of anticipated inflation.

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Use the following to answer question 15:

F G A B 4 0 5 C 1 D E 2 i s p o 3 s a b H l e i n c o m e D
C o n s u m p t io n

C o n s u m p tio n

15. Refer to the above graph. The break-even level of income would be at income level: A) 0. B) 1. C) 2. D) 3. 16. If Sara Thomas' disposable income increases from $4,000 to $4,500 and her level of saving increases from $200 to $325, it may be concluded that her marginal propensity to: A) consume is .80. B) consume is .75. C) consume is .60. D) save is .30. 17. If businesses feel more optimistic about the state of the economy, then this change is likely to: A) cause a movement up the investment demand curve. B) cause a movement down the investment demand curve. C) shift the investment demand curve to the left. D) shift the investment demand curve to the right. 18. Over time, an increase in the real output and incomes of the trading partners of the United States will: A) increase U.S. exports and U.S. imports. B) decrease U.S. exports and U.S. imports. C) increase U.S. exports and decrease U.S. imports. D) decrease U.S. exports and increase U.S. imports.

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Use the following to answer question 19: The table shows a private, closed economy. All figures are in billions of dollars.
E x p e c t e d o f r e t u I rn n v 1 0 % $ 8 1 6 2 4 3 2 4 0 5 r a t e e s t m C 0 0 0 0 0 0 0 0 0 0 0 oe n st u m G p $ 4 0 0 $ 5 0 0 6 6 0 0 8 7 0 0 1 8 0 0 1 9 0 0 1 Dt i oP 4 0 0 0 0 0 0 0 2 0 4 0 n 0 0 0 0

19. Refer to the above table. The autonomous expenditures (or spending) multiplier for this economy is: A) 2.00. B) 2.50. C) 3.00. D) 3.33. 20. The downward slope of the aggregate demand curve is best explained by the: A) interest rate, real-balances, and foreign purchases effects. B) rate of inflation and the natural rate of unemployment. C) policies to stabilize prices and reduce unemployment. D) household indebtness, business taxes, and exchange rates. 21. If a lump-sum tax of $40 billion is levied and the MPS is .25, then the saving schedule will shift: (NOTE: the ONLY kind of tax we have discussed in this class is a lump sum tax. HINT: Consider what would happend to the consumption schedule). A) upward by $10 billion. B) upward by $25 billion. C) downward by $10 billion. D) downward by $25 billion. 22. The short-run aggregate supply curve shows the: A) inverse relationship between the price level and real GDP purchased. B) inverse relationship between the price level and real GDP produced. C) direct relationship between the price level and real GDP produced. D) direct relationship between the price level and real GDP purchased.

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Use the following to answer question 23: Answer the next question(s) based on the following list of items that are related to aggregate demand and/or aggregate supply.
1 2 3 4 5 ) ) ) ) ) e n t r e p r e n e u r i6 c o n s u m e r e x p7 d e g r e e o f e x c8 p e r s o n a l i n c o 9 p r o d u c t i v i t y 1 a ) l n aa e) b c ut e ) sd s o m) p e r 0 p) r bt i i o l i n t ya l i n a s ti in o e n s s s t a cm a e p s a t c i c i t yr i t oc a ef x s i rm a pt e o s o f i t e x p e c o m e a b r o a d x e s e s o u r c e a v a i l a b i l i t y r t e d p r o d u c t s c t a t i o n s o n i n v e s t m

e n

t s

23. Refer to the above list. Changes in which combination of factors best explain why the aggregate supply curve would shift? A) 1 and 2 B) 2 and 10 C) 3 and 6 D) 7 and 8 24. If the Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n): A) supply-side fiscal policy. B) expansionary fiscal policy. C) contractionary fiscal policy. D) nondiscretionary fiscal policy. 25. A new member of Congress notes that: "Personal income tax collections automatically fall and transfers and subsidies automatically rise as national income declines." This observation best describes how the personal income tax, and transfers and subsidies: A) serve as built-in stabilizers. B) produce the full-employment budget. C) cause crowding-out and reduce equilibrium GDP. D) contribute to the recognition lag with fiscal policy. 26. In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is .4, then it could increase government spending by: A) $10 billion. B) $20 billion. C) $31.25 billion. D) $40.50 billion.

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27. What function is money serving when you take it on a trip and keep it in your wallet or purse in case you need it? A) a flow of funds B) a unit of account C) a store of value D) a medium of exchange Use the following to answer question 28:
I t e m C h e c k S m a l l C u r r e n L a r g e S a v i n g M o n M o n e y a b l t i m c y t i m s d e y m e B i l l i o n e p o s i t $s 5 9 e d e p o s i t s8 1 8 6 3 9 e d e p o s i t2s , 6 9 e p o s i t s , i n c l u M a r k e t D 2 e , 8p 6o a r k e t m u t 9u 7a l9 d s 7 6 d i n g 6s i t A f u n d c c o s u n t s o f d o l l a r s

28. Refer to the above table. The size of the M2 money supply is: A) $2,054 billion. B) $2,696 billion. C) $5,899 billion. D) $6,792 billion. 29. Checkable deposits are: A) accounts payable (liabilities) of commercial banks and savings institutions. B) accounts receivable (assets) of the Federal government and government agencies. C) accounts payable (liabilities) of the Federal government and government agencies. D) accounts receivable (assets) of commercial banks and savings institutions. Use the following to answer question 30:

30. Which line in the above graph would best reflect the slope of the transactions demand for money curve? A) line 1 B) line 2 C) line 3 D) line 4

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31. Which varies directly with the interest rate? A) the opportunity cost of holding money B) the transactions demand for money C) the asset demand for money D) the level of investment 32. In the Federal Reserve Banks' consolidated balance sheet, the largest asset is: A) loans to commercial banks. B) Federal Reserve Notes. C) Treasury deposits. D) securities. 33. During the 1980s and 1990s, the financial services industry experienced a relative increase in the shares of assets held by: A) banks. B) thrifts. C) (money market) mutual funds. D) savings and loans. 34. The legal length of a term for a Federal Reserve Governor is: A) 2 years. B) 4 years. C) 6 years. D) 14 years. 35. The Federal Reserve: A) supervises and regulates banks; insures deposits; controls the money supply. B) clears checks; holds checking accounts but only for big corporations; keeps reserves of foreign currencies. C) controls the money supply; supervises and regulates banks; determines exchange rates. D) controls the money supply; supervises and regulates banks; clears checks. 36. When cash is deposited in a checkable-deposit account in a commercial bank, there is: A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in checkable deposits.

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37. A bank is in the position to make loans when required reserves: A) equal actual reserves. B) equal excess reserves. C) are less than actual reserves. D) are greater than actual reserves. 38. An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by: A) $11,000. B) $10,800. C) $9,600. D) $6,000. 39. When commercial banks and thrift institutions make loans, they: A) buy government securities from the Federal Reserve. B) sell government securities to the Federal Reserve. C) monetize the credit extended to borrowers. D) decrease their balance-sheet liabilities. 40. Assume the required reserve ratio is 162/3 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of money which the banking system could create is: A) $110 million. B) $330 million. C) $660 million. D) $1,353 million. 41. Only one commercial bank in the banking system has an excess reserve, and its excess reserve is $500,000. This bank makes a new loan of $400,000 and keeps an excess reserve of $100,000. If the required reserve ratio for all banks is 20%, the potential expansion of the money supply from this $80,000 loan is: A) $500,000. B) $900,000. C) $2,000,000. D) $3,000,000.

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42. If the monetary authority wished to follow a tight money policy, it would buy government securities in the open market. A) True B) False 43. The Federal funds rate is the interest rate banks charge their most credit-worthy customers. A) True B) False 44. The most frequently used instrument of the Federal Reserve System to control changes in the money supply is the required reserve ratio. A) True B) False 45. Since 1975, imports and exports as a percentage of U.S. GDP have generally: A) increased. B) decreased. C) remained at the same percentages. D) risen and fallen cyclically, with no general trend. 46. The law of comparative advantage indicates that mutually beneficial international trade can take place only when: A) tariffs are eliminated. B) transportation costs are almost zero. C) relative costs of production differ between nations. D) a country can produce more of some product than other nations can.

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47. Nations Quirk and Turk can produce aluminum and oil in the following maximum quantities when all other resources are fully employed.
N O u t p u t ( u a t i Ao nl u m i nO u i lm Q u i r k 2 0 4 0 T u r k 3 0 9 0 n i t s )

Which one of the following terms of trade is most likely to produce exchange between the two nations? A) .5 unit of oil for 1 unit of aluminum B) .5 unit of oil for 2 units of aluminum C) 1 unit of oil for .4 unit of aluminum D) 1 unit of oil for 4 units of aluminum 48. Which statement is true? A) Comparative advantage means that total world output will be greatest when each good is produced by the nation that has the highest domestic opportunity cost. B) Comparative advantage means that total world output will decline when each good is produced by the nation with the lowest domestic opportunity cost. C) Specialization is complete among nations when opportunity costs rise as any given nation produces more of a particular product. D) Specialization is less than complete among nations when opportunity costs rise as any given nation produces more of a particular product. 49. An excise tax on imported commodities is known as a(n): A) quota. B) tariff. C) export restriction. D) price ceiling. 50. The major beneficiaries of a tariff on a product are the: A) domestic producers of the product. B) domestic consumers of the product. C) foreign consumers of the product. D) foreign producers of the product.

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

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45. 46. 47. 48. 49. 50.

A C C D B A

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