Macroeconomics, Fall 2005, Exam 3
Read these Instructions carefully! You must follow them exactly!
I) On your Scantron card please print three things:
1) Print your full name clearly;
2) Print the day and time of your section (for example MW 1:25);
3) Print the number I have written in ink on the upper right corner of your copy of
this test. (This number tells me which version of the test you have. Without it your
test cannot be graded properly and you get no credit for your answers.)
II) Answer on your Scantron card, using a #2 pencil.
Warning: SOME QUESTIONS MUST BE ANSWERED SEVERAL TIMES!
Such questions will begin with a phrase such as this:
(Repeat answer on Scantron lines 37, 38 and 39)
---Remember to do it!
III) Please turn in this printed exam along with your Scantron card, otherwise
your score on this exam is "F".
____ 1. The first paper currency issued by the U.S. government was known as the
a. Federal Reserve note
b. treasury bill
e. gold certificate
____ 2. (Repeat your answer on Scantron lines 29 and 30.) In the United States between 1790 and the Civil
War, who issued paper currency?
a. the Federal Reserve System
b. the U.S. Treasury Department
c. the U.S. Congress
d. the British government
e. private banks
____ 3. In what year was the Federal Reserve System created?
____ 4. When the value of a payment is adjusted in proportion to changes in the CPI, economists refer to that as
____ 5. The index used to translate nominal GDP into real GDP is the
a. Consumer Price Index
b. Wholesale Price Index
c. GDP Price Index
d. Producer Price Index
e. Manufacturer's Input Price Index
____ 6. When the inflation rate ends up being lower than expected,
a. everyone benefits because money is cheaper
b. everyone benefits because prices do not increase
c. lenders of fixed-rate mortgages generally benefit because they will make higher profits
than they had calculated
d. borrowers with fixed-rate loans will benefit because their purchasing power will not
decline as much
e. no one benefits because everyone made financial calculations based on the projected
____ 7. The Bureau of Labor Statistics reconsiders the items that go into the typical market basket approximately
b. quarter (i.e., three months)
e. two years
____ 8. (Repeat your answer on Scantron line 31.) In 1996, an advisory committee of economists that studied
the CPI found
a. no bias in the CPI
b. that in a typical year the CPI overstates the inflation rate by at least 1.1 percent per year
c. that the CPI consistently overestimates the inflation rate by less than 1 percent per year
d. that the CPI typically underestimates the inflation rate
e. that the CPI is somewhat erratic; it occasionally underestimates and occasionally
overestimates the inflation rate
____ 9. Substitution bias
a. is one factor that causes the Consumer Price Index to underestimate the inflation rate
b. is caused by the poor quality of many products
c. is one of the primary causes of inflation
d. involves consumer behavior that helps explain why the Consumer Price Index
overestimates the inflation rate
e. suggests most economists substitute other price indices for the flawed Consumer Price
____ 10. During the 1990s, which of the following components of government outlays decreased the most as a fraction
a. non-military purchases
b. transfer payments
c. interest payments on the national debt
d. retirement benefits
e. all of these components decreased as fractions of GDP
____ 11. (Repeat your answer on Scantron lines 32 and 33.) The two largest sources of revenue for the federal
a. corporate income taxes and personal income taxes
b. sales taxes and corporate income taxes
c. Social Security taxes and sales taxes
d. property taxes and sales taxes
e. personal income taxes and Social Security taxes
____ 12. Which of the following describes a progressive tax system?
a. People with higher incomes pay less taxes than those with lower incomes.
b. Everyone pays the same tax rate.
c. People with higher incomes pay lower rates than those with lower incomes.
d. People with higher incomes pay higher rates than those with lower incomes.
e. Everyone pays the same amount of taxes.
____ 13. (Repeat your answer on Scantron line 34.) Which of the following explains why Social Security taxes
have increased relative to GDP?
a. excessive spending by Washington bureaucrats
b. an increase in the ratio of retirees to workers
c. the tax rate has been increased to build up reserves for the coming decades
d. there is a relatively small number of retirees compared with the number of workers
e. GDP has decreased and Social Security taxes have remained constant
____ 14. In an expansion,
a. federal budget deficits tend to rise
b. federal budget deficits tend to fall
c. the federal debt tends to rise faster than in a recession
d. federal government tax receipts tend to fall
e. there is pressure on the Fed to monetize the debt
____ 15. A recession causes
a. transfer payments and corporate profits to increase
b. military spending and corporate profits to increase
c. unemployment to increase and transfer payments to decrease
d. transfer payments to increase and corporate profits to decrease
e. household income and government transfer payments to decrease
____ 16. Which of the following components of government spending and revenue serves as an automatic stabilizer?
a. the wealth effect
b. the multiplier
c. unemployment insurance
d. military spending
e. property taxes
____ 17. The government can safely take on more debt
a. as long as private firms are taking on more debt
b. as long as the debt involves no interest payments
c. if GDP is growing faster than the debt is growing
d. if the interest rate is below 3 percent
e. as long as the debt is growing by less than 3 percent per year
____ 18. (Repeat your answer on Scantron line 35.) Which of the following is a definition of the consumption
a. a functional relationship between real consumption spending and real disposable income
b. a functional relationship between real consumption spending and the interest rate
c. a functional relationship between real consumption spending and wealth
d. a functional relationship between real consumption spending and total spending
e. a functional relationship between real consumption spending and net taxes
____ 19. Approximately how long does it take for the successive increases in spending and output to be completed
after an initial increase in investment spending?
a. one day
b. ten years
c. one month
d. one year
e. one hour
____ 20. What is the approximate value for the marginal propensity to consume in the U.S.?
____ 21. Which of the following is considered to be the major cause of the recession of 2001?
a. decrease in consumption spending
b. decrease in investment spending
c. decrease in government spending
d. none of the above
____ 22. (Repeat this answer on Scantron lines 36 and 37.) Which of the following statements are true about "the
multiplier" and "autonomous spending"?
a. If the Keynesian model is correct, if the multiplier gets larger GDP will get smaller.
b. If the Keynesian model is correct, if the multiplier gets larger autonomous spending will
c. Government spending is part of autonomous spending in a simple Keynesian model, but
exports are not.
d. no other answer is true.
e. all other answers are true (except “no other answer is true”).
____ 23. (Repeat this answer on lines 38 and 39.) Your instructor probably believes the following:
1) As a general rule, the government not borrow money to pay for current consumption expenditures, and
instead should pay for them with taxes.
2) As a general rule the government should not borrow money to fight a war, and instead should pay for
them with taxes.
a. 1 and 2 are both true.
b. 1 and 2 are both false
c. Only statement 1 is true.
d. Only statement 2 is true.
____ 24. (Repeat your answer on Scantron lines 40 and 41.) Evaluate the following numbered statements,
then choose the best answer from a. through d.
1) For the U.S. from 1950 through 2003, annual unemployment rates of 5% or higher have
occurred fairly often but annual inflation rates of 5% or higher have occurred less often.
2) Compared to the historical record, it is unusual for the U.S. unemployment rate to be below
a. The above statements 1) and 2) are both true.
b. Neither statement 1) nor 2) is true.
c. Only statement 1) is true.
d. Only statement 2) is true.
____ 25. (Repeat your answer on Scantron lines 42 and 43.) Choose the best answer. According to lecture,
inflation, even if fully anticipated by everyone,
a. is harmful because it is more difficult for people to make rational economic decisions
when prices are changing over time
b. is harmful primarily because it causes sellers' costs to increase
c. is harmful primarily because it causes nominal wages to fall
d. is harmful primarily because it causes consumers' purchasing power to decline
e. is not harmful, since fully anticipated inflation does not redistribute purchasing power in
____ 26. (Repeat your answer on Scantron lines 44 and 45.) Here is a Keynesian model question: Assume
governement tax revenues come entirely from taxes similar to “property taxes” (not at all from revenue
sources which vary with income); also assume the MPC = .9; also assume the “marginal propensity to
import” = .1. If local governments cut property taxes by $10 billion dollars, and no other variables
a. economic activity will decrease by $9 billion
b. economic activity will increase by $9 billion
c. economic activity will be unchanged, or will change, but not by an amount listed in the
d. economic activity will decrease by $45 billion
e. economic activity will increase by $45 billion
____ 27. (Repeat your answer on Scantron lines 46, 47 and 48.) Using the Keynesian model as developed
in recent lectures, if "the multiplier" = 2, gross investment, Ig, increases by $15 billion, exports, X,
increase by $5 billion, and government spending, G, drops by $10 billion, then economic activity, Y,
a. remain unchanged.
b. decrease by $20 billion.
c. decrease by $10 billion.
d. increase by $20 billion.
e. no other answer is correct.
____ 28. (Repeat your answer on Scantron lines 49 and 50.) (You may refer to the equation above.) In
the Keynesian multiplier model, if the marginal propensity to consume falls, the economy will
c. not change
d. may either expand or contract
Macroeconomics, Fall 2005, Exam 3
1. ANS: C
2. ANS: E
3. ANS: D
4. ANS: C
5. ANS: C
6. ANS: D
7. ANS: E
8. ANS: B
9. ANS: D
10. ANS: C
11. ANS: E
12. ANS: D
13. ANS: C
14. ANS: B
15. ANS: D
16. ANS: C
17. ANS: C
18. ANS: A
19. ANS: D
20. ANS: C
21. ANS: B
22. ANS: D
23. ANS: C
24. ANS: A
25. ANS: A
26. ANS: E
27. ANS: D
28. ANS: B
Refer To: Keynesian Multiplier Equation