Economic Issues in American History

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Econ_402_exam_2_2015_ANSWERS.pdf-Econ 402/604 Exam 2 2015 1)

Econ 203 TEST 1 Wednesday, Jul. 2, 2014 Last Name___________________________________ First Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Macroeconomics is the study of 1) _______ A) how households and firms make choices. B) the economy as a whole. C) how firms make choices. D) how households make choices. 2) The income - expenditure identity says that 2) _______ A) Y = C + S + T. B) Y = C + I + G + NX. C) Y = C + I + G + NX + CA. D) Y = C + I + G. 3) Rent control is an example of 3) _______ A) a price ceiling. B) a black market. C) a price floor. D) a subsidy for low - skilled workers. 4) Nominal GDP is GDP in a given year 4) _______ A) adjusted for inflation. B) adjusted for anticipated inflation. C) valued in the prices of that year. D) valued in the prices of the base year. 5) During a business cycle expansion, total production ________ and total employment ________. 5) _______ A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases 6) The purchase of a new automobile is included in 6) _______ A) consumption expenditures on nondurable goods B) consumption expenditures on durable goods. C) investment expenditures. D) consumption expenditures on services. 7) The best measure of the income households actually have available to spend is 7) _______ A) net national income. B) personal income. C) disposable personal income. D) national income. 8) Gross domestic product understates the total production of final goods and services because of the omission of 8) _______ A) intermediate goods. B) exports. C) household production. D) inflation. 9) The factors of production include 9) _______ A) capital. B) wages. C) investment. D) transfers. 10) The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector 10) ______ A) produce goods and services no one wants. B) do not pay taxes to the government. C) sell their goods and services to citizens in other countries. D) employ illegal immigrants from other countries. 11) Which of the following is not an example of a transfer payment? 11) ______ A) health insurance payments to an army private B) unemployment insurance payments C) social security payments to retirees D) social security payments to disabled persons 12) A sharp increase in the divorce rate increases the number of lawyers hired to determine divorce settlements. This will 12) ______ A) decrease GDP and increase well being in the economy. B) increase GDP and increase well being in the economy. C) increase GDP and decrease well being in the economy. D) decrease GDP and decrease well being in the economy. 13) The GDP deflator is a measure of the 13) ______ A) total production of the economy adjusted for inflation. B) average level of prices of intermediate goods and services in the economy. C) total production of the economy unadjusted for inflation. D) average level of prices of final goods and services in the economy. 14) Statistics on real GDP during World War II may give a misleading indication of whether World War II was a period of prosperity because 14) ______ A) inflation may have been considerably higher than estimated. B) government agents purposely inflated the production numbers to maintain American support for the war. C) most of the increased production was for military goods, not consumption goods. D) government agencies were shorthanded and did a particularly poor job of collecting data. 15) Which of the following is a positive economic statement? 15) ______ A) The government should mandate electric automobiles. B) Scarcity necessitates that people make trade - offs. C) People should not buy SUVs. D) Foreign workers should not be allowed to work for lower wages than the citizens of a country. 16) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is 16) ______ A) 105% higher in year 2 than in year 1. B) 5% higher in year 2 than in year 1. C) 105% higher in year 1 than in year 2. D) 5% higher in year 1 than in year 2. 17) The value of what a U.S. - owned McDonald's produces in South Korea is included in the U.S. ________ and the South Korean ________. 17) ______ A) GNP; GNP B) GNP; GDP C) GDP; GDP D) GDP; GNP

ECON | 203 | Principles of Macroeconomics | assessment | Econ 203 TEST 1 Wednesday  Jul

10) Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: C Ques Status: Previous Edition 11) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: D Ques Status: Previous Edition 12) An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant. A) reduce; financial B) reduce; real C) raise; financial D) raise; real Answer: B Ques Status: Previous Edition 13) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: D Ques Status: Previous Edition 14) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for antiques will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 3 Answer: C Ques Status: Previous Edition 15) If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Ques Status: Previous Edition 16) If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease Answer: D Ques Status: Previous Edition 17) The demand for Picasso paintings rises (holding everything else equal) when A) stocks become easier to sell. B) people expect a boom in real estate prices. C) Treasury securities become riskier. D) people expect gold prices to rise. Answer: C Ques Status: Revised 18) The demand for silver decreases, other things equal, when A) the gold market is expected to boom. B) the market for silver becomes more liquid. C) wealth grows rapidly. D) interest rates are expected to rise. Answer: A Ques Status: Revised 19) You would be less willing to purchase U.S. Treasury bonds, other things equal, if A) you inherit $1 million from your Uncle Harry. B) you expect interest rates to fall. C) gold becomes more liquid. D) stock prices are expected to fall. Answer: C Ques Status: Revised 4

ECON | 303 | Money and Banking | study guides | 10) Everything else held const

8) Which of the following price indices comes closest to measuring the cost of living of the typical household? 8) _______ A) consumer price index B) GDP deflator C) household price index D) producer price index 9) Which of the following would be a consequence of substitution bias in the CPI? 9) _______ A) Social Security payments would not adequately compensate retired workers for inflation. B) The inflation rate based on the CPI would under - estimate the true level of inflation. C) Businesses would over - compensate employees for inflation when giving the cost of living rises. D) Judges would award child support payments that would not adequately keep up with the true cost of inflation. 10) Which of the following would increase the unemployment rate? 10) ______ A) a decrease in the minimum wage B) an increase in unemployment insurance payments C) a cut in unemployment compensation D) a law making it illegal to work more than 35 hours per week Figure 11 - 1 11) Refer to Figure 11 - 1. Diminishing marginal returns is illustrated in the per - worker production function in the figure above by a movement from 11) ______ A) B to C . B) C to D . C) D to C . D) A to C . 12) Refer to Figure 11 - 1. Technological change is illustrated in the per - worker production function in the figure above by a movement from 12) ______ A) B to C . B) B to A . C) A to B . D) D to C . 13) According to new growth theory, 13) ______ A) technological change is influenced by economic incentives. B) growth in real GDP per capita occurs only if there are increasing returns. C) economic growth is determined by forces outside the control of the market system. D) centrally - planned economies are the most efficient. 14) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would 14) ______ A) increase. B) decrease. C) equal 20%. D) remain the same. 15) Efficiency wages cause unemployment because 15) ______ A) firms pay wages that are above the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied. B) firms pay wages that are below the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied. C) firms pay wages that are below the market wage, causing the quantity of labor demanded to be greater than the quantity of labor supplied. D) firms pay wages that are above the market wage, causing the quantity of labor demanded to be greater than the quantity of labor supplied. 16) If inflation is positive and is perfectly anticipated, 16) ______ A) no one in the economy loses. B) those that hold paper money lose. C) those that lend money lose. D) those that borrow money lose. 17) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation 17) ______ A) equal to 0 percent. B) equal to 7 percent. C) greater than 7 percent. D) less than 7 percent. 18) The cost to firms of changing prices 18) ______ A) is small even when there is rapid inflation. B) is called a menu cost. C) does not exist if inflation is perfectly anticipated. D) all of the above 19) Firms free ride on the research and development of other firms when they 19) ______ A) use knowledge other firms have developed without paying for that knowledge. B) buy a firm's newly developed product, and then give it away to consumers. C) choose a level of research and development that is inefficiently high. D) license a new technology from a firm that developed the new technology. 20) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest? 20) ______ A) - 9.5% B) - 3.5% C) 1.5% D) 3.5% E) 9.5% 21) Suppose that in 2011 real GDP grew in Estonia by 3% and that the population increased by 5%. Therefore in 2011, Estonia experienced 21) ______ A) no economic growth and no increase in living standards. B) economic growth, but not an increase in living standards. C) economic growth and an increase in living standards. D) no economic growth, but an increase in living standards.

ECON | 203 | Principles of Macroeconomics | assessment | 8) Which of the following pric

21) Changes in stock prices A) do not affect people's wealth and their willingness to spend. B) affect firms' decisions to sell stock to finance investment spending. C) occur in regular patterns. D) are unimportant to decision makers. Answer: B Ques Status: Previous Edition 22) An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, everything else held constant. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease Answer: A Ques Status: Previous Edition 23) Low stock market prices might ________ consumers willingness to spend and might ________ businesses willingness to undertake investment projects. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Ques Status: New 24) Fear of a major recession causes stock prices to fall, everything else held constant, which in turn causes consumer spending to A) increase. B) remain unchanged. C) decrease. D) cannot be determined. Answer: C Ques Status: Previous Edition 25) A share of common stock is a claim on a corporation's A) debt. B) liabilities. C) expenses. D) earnings and assets. Answer: D Ques Status: Revised 5 26) On ________, October 19, 1987, the market experienced its worst one-day drop in its entire history with the DIJA falling by more than 500 points. A) "Terrible Tuesday" B) "Woeful Wednesday" C) "Freaky Friday" D) "Black Monday" Answer: D Ques Status: Previous Edition 27) The decline in stock prices from 2000 through 2002 A) increased individuals' willingness to spend. B) had no effect on individual spending. C) reduced individuals' willingness to spend. D) increased individual wealth. Answer: C Ques Status: Previous Edition 28) The Dow reached a peak of over 11,000 before the collapse of the ________ bubble in 2000. A) housing B) manufacturing C) high-tech D) banking Answer: C Ques Status: Previous Edition 29) What is a stock? How do stocks affect the economy? Answer: A stock represents a share of ownership of a corporation, or a claim on a firm's earnings/assets. Stocks are part of wealth, and changes in their value affect people's willingness to spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment. Ques Status: Previous Edition 30) Why is it important to understand the bond market? Answer: The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined. Ques Status: New 6

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