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					       Review Questions

Economics 201-20 & 21 (9:25 MW)
  Economics 201-30 (8:00 TTh)
  Economics 201-60 (2:25 TTh)

           Fall 2010
                                        Review Questions, ECO 201, Fall ’10, p. 2


                Review Question Assignments
                ECO 201-20 & 21 (9:25 MW)
                        Fall 2010
Assignment   Due Date                  Review Questions

    I        September 8

    II       September 15

   III       September 22

   IV        September 29

    V        October 6

   VI        October 13

   VII       October 20

   VIII      October 27

   IX        November 3

    X        November 10

   XI        November 17

   XII       November 24

   XIII      December 1

   XIV       December 8
                                        Review Questions, ECO 201, Fall ’10, p. 3


                Review Question Assignments
                  ECO 201-30 (8:00 TTh)
                        Fall 2010
Assignment   Due Date                  Review Questions

    I        September 7

    II       September 14

   III       September 21

   IV        September 28

    V        October 5

   VI        October 12

   VII       October 19

   VIII      October 26

   IX        November 2

    X        November 9

   XI        November 16

   XII       November 23

   XIII      November 30

   XIV       December 7
                                        Review Questions, ECO 201, Fall ’10, p. 4


                Review Question Assignments
                  ECO 201-60 (2:25 TTh)
                        Fall 2010
Assignment   Due Date                  Review Questions

    I        September 7

    II       September 14

   III       September 21

   IV        September 28

    V        October 5

   VI        October 12

   VII       October 19

   VIII      October 26

   IX        November 2

    X        November 9

   XI        November 16

   XII       November 23

   XIII      November 30

   XIV       December 7
                                                                       Review Questions, ECO 201, Fall ’10, p. 5


                             Review Questions, ECO 201, Spring 2010

1.   According to J. M. Keynes, economics is
     A. an easy subject at which very few excel
     B. an easy subject at which very many excel
     C. a difficult subject at which very few excel
     D. a difficult subject at which very many excel

2.   According to F. A. Hayek,
     A. Keynes was the greatest economist of the 20th century
     B. Keynes was not a good economist

3.   “The social science that studies the choices that individuals, businesses, governments, and entire societies
     make as they cope with scarcity …,” is the authors’ definition of
     A. political science
     B. history
     C. management
     D. marketing
     E. economics

4.   According to the opportunity cost principle, obtaining or doing something
     A. may be accomplished without giving up something else
     B. cannot be accomplished without giving up something else

5.   According to your instructor, societies choose economic systems to address which of the following ques-
     tions?
     A. What goods and services should be produced?
     B. How should these goods and services be produced?
     C. For whom should these goods and services be produced?
     D. According to your instructor, societies choose economic systems to address all of the questions listed
          above.

6.   A ________________________ answers the basic economic questions the way they have always been an-
     swered.
     A. market based system
     B. centrally planned economy
     C. traditional economy

7.   A _________________________ relies heavily on the profit motive to address the questions of what, how,
     and for whom to produce.
     A. market based system
     B. centrally planned economy
     C. traditional economy

8.   “The work time and work effort that people devote to producing goods and services,” is the definition of
     A. labor
     B. capital
     C. land
     D. entrepreneurship

9.   Payments (residual) to entrepreneurs are called
     A. interest
     B. rent
     C. profits
     D. wages
                                                                      Review Questions, ECO 201, Fall ’10, p. 6



10. ______________________________ is the study of the choices that individuals and businesses make and
    the way these choices interact and are influenced by governments.
    A. Normative economics
    B. Positive economics
    C. Macroeconomics
    D. Microeconomics

11. Macroeconomics addresses the economic problem of scarcity by placing emphasis on
    A. efficiency in the production and distribution of goods and services
    B. increasing total (aggregate) output and reducing unemployment

12. “_________________________________ statements are about what ought to be.”
    A. normative
    B. positive
    C. macroeconomic
    D. microeconomic

13. Which of the following items represents a positive statement?
    A. If Congress passes an economic stimulus package, the unemployment rate will decrease.
    B. Congress should pass an economic stimulus package because such an action will reduce the unem-
       ployment rate.

14. Which of the following items represents a normative statement?
    A. If Congress passes an economic stimulus package, the unemployment rate will decrease.
    B. Congress should pass an economic stimulus package because such an action will reduce the unem-
       ployment rate.

15. Which of the following items represents a step(s) in building a theory?
    A. Observation and measurement
    B. Model building
    C. Testing
    D. All of the items listed above represent steps in building a theory.
    E. Only items A and B above represent steps in building a theory.

16. The theory we developed in this class predicted the unemployment rate will ___________________ when
    the economic growth rate decreases.
    A. increase
    B. decrease
    C. not be affected

17. “The boundary between the combinations of goods and services that can be produced and the combinations
    that cannot be produced, given the available factors of production and the state of technology,” is the defi-
    nition of
    A. a demand curve
    B. a supply curve
    C. a community indifference curve
    D. a production possibility frontier
                                                                          Review Questions, ECO 201, Fall ’10, p. 7


Base your answers to the next four questions on the following production possibility frontier (PPF).

    18. The opportunity cost of moving from point B to point C on
        this PPF is
        A. 80 tons of capital goods
                                                                              . .
                                                                              Capital Goods (tons)
                                                                        350
        B. 200 tons of capital goods                                              E
        C. 200 tons of consumer goods
        D. 400 tons of consumer goods
                                                                        300

                                                                        250
                                                                                               D

                                                                                                             .C
                                                                                                               .               G

    19. Moving from a point on an economy’s PPF (e.g., point B)         200

        to a point inside its PPF (e.g., point F)
        A. may occur in the short run as a result of inefficient
             production, under-utilized technology, or unemployed
                                                                        150

                                                                        100
                                                                                                             . .
                                                                                                               F              B

             resources
        B. may only occur in the long run as a result of the devel-
             opment of new technology or additional resources
                                                                         50

                                                                          0
                                                                              0               200            400
                                                                                                     Consumer Goods (tons)
                                                                                                                             600
                                                                                                                                   .
                                                                                                                                   A
                                                                                                                                   800


    20. Moving from a point on an economy’s PPF (e.g., point B) to a point outside its PPF (e.g., point G)
        A. may occur in the short run as a result of inefficient production, under-utilized technology, or unem-
           ployed resources
        B. may only occur in the long run as a result of the development of new technology or additional re-
           sources

    21. Other things being equal, the economy represented by the PPF above will grow more rapidly in the long
        run if it operates at ______________________ in the short run.
        A. point A
        B. point B

    22. Your instructor defines a market as
        A. any institutional arrangement that brings buyers and sellers together
        B. a physical location where buyers and sellers meet

    23. In the supply-demand model, buyers are represented by the force we call
        A. demand
        B. supply
        C. equilibrium

    24. Supply and demand analysis simulates real-world markets by
        A. implementing complex computer programs
        B. plotting the demand and supply curves for a good or service on the same set of axes

    25. In a market economy we rely on prices to
        A. ration available goods and services among competing buyers
        B. provide incentives to producers
        C. distribute incomes among individuals
        D. In a market economy we rely on prices to perform all of the tasks listed above.
        E. In a market economy prices perform only tasks A and B above.

    26. The term, “demand” refers to the quantities of a good or services buyers are willing and able to purchase at
        different ______________________, other things being equal.
        A. income levels
        B. preference levels
        C. populations
        D. prices
                                                                      Review Questions, ECO 201, Fall ’10, p. 8


27. According to the law of demand,
    A. price and quantity demanded are directly related
    B. price and quantity demanded are inversely related
    C. income and demand are directly related
    D. income and demand are inversely related

28. Buyer response to a change in price is called a change in quantity demanded and is shown as
    A. a shift of the demand curve
    B. a movement along the demand curve
    C. a shift of the supply curve
    D. a movement along the supply curve

29. Assume air travel represents a normal good. Other things being equal, we predict an increase in consumer
    incomes will
    A. increase the demand for air travel
    B. decrease the demand for air travel
    C. increase the supply of air travel
    D. decrease the supply of air travel

30. If pinto beans represent an inferior good, we predict an increase in consumer incomes will
    A. increase the demand for pinto beans
    B. decrease the demand for pinto beans
    C. increase the supply of pinto beans
    D. decrease the supply of pinto beans

31. Assume bottled water and soft drinks are substitutes in consumption. Other things being equal, an increase
    in the price of soft drinks will
    A. shift the bottled water demand curve rightward
    B. shift the bottled water demand curve leftward
    C. shift the bottled water supply curve rightward
    D. shift the bottled water supply curve leftward

32. If new cars and gasoline are complements in consumption we predict a decrease in the price of gasoline
    will
    A. increase the demand for new cars
    B. decrease the demand for new cars
    C. increase the supply of new cars
    D. decrease the supply of new cars

33. Assume a Surgeon General’s report links consumption of chicken to baldness. If this report reduces con-
    sumers’ preferences for chicken, we predict
    A. the demand curve for chicken will shift rightward
    B. the demand curve for chicken will shift leftward
    C. the supply curve for chicken will shift rightward
    D. the supply curve for chicken will shift leftward

34. Other things being equal, if consumers expect the price of gasoline to increase in the near future,
    A. the demand for gasoline will increase
    B. the demand for gasoline will decrease
    C. the supply of gasoline will increase
    D. the supply of gasoline will decrease
                                                                           Review Questions, ECO 201, Fall ’10, p. 9


    35. According to the law of supply,
        A. an improvement in productivity will result in an increase in supply
        B. an improvement in productivity will result in a decrease in supply
        C. an increase in price will result in an increase in quantity supplied
        D. an increase in price will result in a decrease in quantity supplied

    36. Economists show seller response to a change in a nonprice supply determinant with
        A. a shift of the demand curve
        B. a movement along the demand curve
        C. a shift of the supply curve
        D. a movement along the supply curve

    37. Jet fuel is a major resource used in the production of air travel. Other things being equal, we predict a de-
        crease in the price of jet fuel will
        A. increase the demand for air travel
        B. decrease the demand for air travel
        C. increase the supply of air travel
        D. decrease the supply of air travel

    38. Other things being equal, we predict an improvement in the productivity of crude oil production will
        A. shift the crude oil demand curve rightward
        B. shift the crude oil demand curve leftward
        C. shift the crude oil supply curve rightward
        D. shift the crude oil supply curve leftward

    39. Assume corn and soybeans represent substitutes in production. Other things being equal, an increase in the
        price of soybeans will
        A. increase the demand for corn
        B. decrease the demand for corn
        C. increase the supply of corn
        D. decrease the supply of corn

    40. Other things being equal, if producers expect the price of gasoline to increase in the near future, we predict
        A. the gasoline demand curve will shift rightward
        B. the gasoline demand curve will shift leftward
        C. the gasoline supply curve will shift rightward
        D. the gasoline supply curve will shift leftward

    41. In this class, we defined a market as
        A. a physical location where buyers and sellers meet
        B. any institutional arrangement that brings buyers and sellers together

    42. According to your instructor, economists simulate the operation of markets by
        A. constructing elaborate computer models
        B. drawing the demand and supply curves for goods and services on the same set of axes

Use the demand-supply model to predict changes in equilibrium price and quantity in the next six questions.

    43. Assume air travel represents a normal good. Other things being equal, an increase in consumer incomes
        will
        A. increase the price and quantity of air travel
        B. decrease the price and quantity of air travel
        C. increase the price and decrease the quantity of air travel
        D. decrease the price and increase the quantity of air travel
                                                                      Review Questions, ECO 201, Fall ’10, p. 10


44. Assume bottled water and soft drinks are substitutes in consumption. Other things being equal, an increase
    in the price of soft drinks will
    A. increase the price and quantity of bottled water
    B. decrease the price and quantity of bottled water
    C. increase the price and decrease the quantity of bottled water
    D. decrease the price and increase the quantity of bottled water

45. Assume a Surgeon General’s report links consumption of chicken to baldness. If this report reduces con-
    sumers’ preferences for chicken, we predict
    A. the price and quantity of chicken will increase
    B. the price and quantity of chicken will decrease
    C. the price of chicken will increase, and the quantity will decrease
    D. the price of chicken will decrease, and the quantity will increase

46. Jet fuel is a major input used in the production of air travel. Other things being equal, we predict a decrease
    in the price of jet fuel will
    A. increase the price and quantity of air travel
    B. decrease the price and quantity of air travel
    C. increase the price and decrease the quantity of air travel
    D. decrease the price and increase the quantity of air travel

47. Assume corn and soybeans represent substitutes in production. Other things being equal, an increase in the
    price of soybeans will
    A. increase the price and quantity of corn
    B. decrease the price and quantity of corn
    C. increase the price and decrease the quantity of corn
    D. decrease the price and increase the quantity of corn

48. Other things being equal, if producers expect the price of gasoline to increase in the near future, we predict
    A. the price and quantity of gasoline will increase
    B. the price and quantity of gasoline will decrease
    C. the price of gasoline will increase, and the quantity will decrease
    D. the price of gasoline will decrease, and the quantity will increase

49. The authors define ___________________________ as “the study of the aggregate (or total) effects on the
    national economy and the global economy of the choices that individuals, businesses, and governments
    make.”
    A. microeconomics
    B. macroeconomics

50. Which of the following historical events is associated with the time period from 1929-1939?
    A. The Great Awakening
    B. The War of 1812
    C. The Civil War
    D. World War II
    E. The Great Depression

51. Observation of economic output data for the past 39 years leads to which of the following inferences?
    A. A tendency for real GDP to increase over time
    B. a tendency for actual GDP to fluctuate around potential GDP
    C. Observation of economic output data for the past 39 years leads to both of the inferences listed above.
    D. Observation of economic output data for the past 39 years leads to neither of the inferences listed
       above.
                                                                  Review Questions, ECO 201, Fall ’10, p. 11


52. Our authors define economic growth as
    A. the tendency for actual GDP to fluctuate around potential GDP in the short run
    B. the sustained expansion of production possibilities

53. According to your instructor, which of the following forces contribute to economic growth?
    A. Increases in the labor force
    B. Increases in the capital stock
    C. Expansion of the technological base
    D. All of the forces listed above contribute to economic growth.
    E. Only forces A and B above contribute to economic growth.

54. Real GDP is declining during the _________________________ stage of the business cycle.
    A. trough
    B. expansion
    C. peak
    D. recession

55. Rising unemployment is typically associated with the ______________________ stage of the business cy-
    cle.
    A. expansion
    B. recession

56. According to your instructor, changes in ____________________________ cause the business cycle.
    A. aggregate demand and short-run aggregate supply
    B. the labor force, the capital stock, and the level of technology

57. ____________________________ is the market value of all the final goods and services produced within a
    country within a given time period.
    A. The unemployment rate
    B. The consumer price index
    C. Gross domestic product (GDP)
    D. National income

58. __________________________ is the total income earned by all U.S. citizens in the production of goods
    and services.
    A. The unemployment rate
    B. The consumer price index
    C. Gross domestic product (GDP)
    D. National income

59. Macroeconomists use ________________________________ to measure economic growth.
    A. the unemployment rate
    B. the consumer price index
    C. real GDP
    D. None of the answers listed above is correct. Macroeconomists do not attempt to measure economic
       growth.
                                                                        Review Questions, ECO 201, Fall ’10, p. 12


Base your answers to the next five questions on the following national income and product data for 2003 (all dollar
figures are in billions).

Exports                                                                                                $1,041.0
Imports                                                                                                 1,545.1
Rent                                                                                                      204.7
Net factor income from abroad                                                                              68.7
Federal Government expenditures                                                                           756.5
State and local government expenditures                                                                 1,356.1
Profit                                                                                                  2,748.8
Investment                                                                                              1,729.7
Depreciation                                                                                            1,354.1
Interest                                                                                                  504.1
Consumption                                                                                             7,804.0
Wages (compensation of employees)                                                                       6,382.6
Statistical discrepancy                                                                                    16.6

GDP deflator                                                                                                94.1

    60. Government expenditures equaled __________________ in 2003.
        A. minus $599.6 billion
        B. minus $504.1 billion
        C. $2,112.6 billion
        D. $2,586.1 billion

    61. Net exports equaled ______________ in 2003.
        A. minus $599.6 billion
        B. minus $504.1 billion
        C. $2112.6 billion
        D. $2,586.1 billion

    62. Gross domestic product (GDP) equaled ________________ in 2003.
        A. $9,629.2 billion
        B. $9,840.2 billion
        C. $11,142.2 billion
        D. $11,840.8 billion
        E. $14,232.4 billion

    63. Real GDP equaled _____________ in 2003.
        A. $9,629.2 billion
        B. $9,840.2 billion
        C. $11,142.2 billion
        D. $11,840.8 billion
        E. $14,232.4 billion

    64. National income equaled _______________ in 2003.
        A. $9,629.2 billion
        B. $9,840.2 billion
        C. $11,142.2 billion
        D. $11,840.2 billion
        E. $14,232.4 billion
                                                                  Review Questions, ECO 201, Fall ’10, p. 13


65. Real GDP equaled $11,553.0 billion in 2002. The economic growth rate between 2002 and 2003 was.
    A. minus 3.6 percent
    B. minus 1.7 percent
    C. minus 1.5 percent
    D. 2.5 percent
    E. 23.2 percent

66. The economic growth rate between 2002 and 2003 was
    A. above the target rate established in this class
    B. below the target rate established in this class

67. Macroeconomists use _____________________________ to determine the level of unemployment in the
    economy.
    A. the unemployment rate
    B. the consumer price index
    C. real GDP
    D. None of the answers listed above is correct. Macroeconomists do not attempt to determine the level of
        unemployment in the economy.

68. The Bureau of Labor Statistics defines _____________________ as that part of the civilian noninstitutional
    population that is working or actively seeking work.
    A. the total population
    B. employment
    C. unemployment
    D. the civilian labor force

69. A person is considered to be unemployed if he or she is working fewer than _______________ hour(s) per
    week for pay.
    A. one
    B. ten
    C. fifteen
    D. twenty
    E. forty

70. Economists refer to qualified persons who are temporarily between jobs as
    A. structurally unemployed
    B. frictionally unemployed
    C. seasonally unemployed
    D. cyclically unemployed

71. ______________________________ is unemployment that occurs because the economy is operating be-
    low its potential level.
    A. Structural unemployment
    B. Frictional unemployment
    C. Seasonal unemployment
    D. Cyclical unemployment

72. Persons who are unemployed because their job skills no longer match those demanded in job markets or
    who live in areas where labor demand is weak are
    A. structurally unemployed
    B. frictionally unemployed
    C. seasonally unemployed
    D. cyclically unemployed
                                                                    Review Questions, ECO 201, Fall ’10, p. 14


73. An economy is considered to be fully employed when it has eliminated
    A. structural unemployment
    B. frictional unemployment
    C. cyclical unemployment
    D. seasonal, structural, and frictional unemployment

74. The total U.S. population stood at 291.3 million in 2003. The civilian noninstitutional population was 221.2
    million; the civilian labor force was 146.5 million; 137.7 million were employed, and 8.7 million were un-
    employed. The 2003 unemployment rate was
    A. 1.0 percent
    B. 3.0 percent
    C. 3.9 percent
    D. 5.9 percent
    E. 6.3 percent

75. The value determined in the question above indicates
    A. the economy was fully employed in 2003
    B. the economy was not fully employed in 2003.

76. Macroeconomists use ______________________________________ to determine price changes.
    A. the unemployment rate
    B. the consumer price index
    C. real GDP
    D. None of the answers listed above is correct. Macroeconomists do not attempt to measure price chang-
       es.

77. The largest expenditure item in the consumer price index market basket is
    A. food and drink
    B. transportation
    C. medical care
    D. housing
    E. apparel

78. The consumer price index value for 2003 was 184.0. The value of this variable in 2002 was 179.9. The in-
    flation rate between 2001 and 2002 was
    A. minus 4.1 percent
    B. minus 2.3 percent
    C. 2.3 percent
    D. 4.1 percent
    E. impossible to determine

79. The inflation rate determined in the question above was _________________________ the goal range es-
    tablished in this class.
    A. above
    B. below
    C. within

80. If your monthly take-home income increased from $2,000 to $2,100 over this span, then your material
    standard of living __________________________ between 2002 and 2003.
    A. improved
    B. declined
    C. remained constant
                                                                     Review Questions, ECO 201, Fall ’10, p. 15


81. The ___________________________ model uses a variation of the traditional supply-demand format to
    explain both long and short-run movements in real output and the price level.
    A. absolute advantage
    B. comparative advantage
    C. indifference curve
    D. Edgeworth box
    E. aggregate demand-aggregate supply (AD-AS)

82. The two macroeconomic variables represented on the axes of the aggregate demand-aggregate supply mod-
    el are
    A. the unemployment rate and the price level
    B. the unemployment rate and real GDP
    C. real GDP and the price level

83. According to our authors, the . . . “The value of real GDP when all the economy’s factors of production . . .
    are fully employed,” is the definition of
    A. demand (D)
    B. supply (S)
    C. aggregate demand (AD)
    D. aggregate supply (AS)
    E. potential GDP

84. The curve representing potential GDP is drawn
    A. as an upward sloping line
    B. as a downward sloping line
    C. as a perfectly elastic (horizontal) line
    D. as a perfectly inelastic (vertical) line

85. According to your instructor, the intersection of the AD and AS curves determines
    A. the level of potential GDP in any given year
    B. the level of actual GDP in any given year

86. The _________ curve shows “the relationship between the quantity of real GDP supplied and the price lev-
    el when all other influences on production plans remain the same.”
    A. AD
    B. AS
    C. potential GDP

87. When producers are able to increase the prices of the goods and services they sell faster than their costs in-
    crease, we predict the AS curve
    A. will have a positive slope
    B. will have a negative slope
    C. will be vertical
    D. will be horizontal

88. According to your instructor, increases in the labor force, increases in the capital stock, and improvements
    in technology
    A. shift only the AS curve rightward
    B. shift both the potential GDP and AS curves rightward

89. According to your instructor, declines in resource prices
    A. shift only the AS curve rightward
    B. shift both the potential GDP and SRAS curves rightward
                                                                     Review Questions, ECO 201, Fall ’10, p. 16




90. The ____________ curve reflects, “the relationship between the quantity of real GDP demanded and the
    price level when all other influences on expenditure plans remain the same.
    A. AD
    B. AS
    C. potential GDP

91. Other things being equal, an increase in the price level increases interest rates, decreases business expendi-
    tures for capital goods, decreases consumer durable purchases, and
    A. increases the quantity of goods and services demanded in the economy (causes a downward movement
         along the AD curve)
    B. decreases the quantity of goods and services demanded in the economy (causes an upward movement
         along the AD curve)

92. Other things being equal, a decrease in expected future business profits, which reduces investment spend-
    ing will
    A. shift the AD curve rightward
    B. shift the AD curve leftward
    C. shift the AS curve rightward
    D. shift the AS curve leftward
    E. shift the potential GDP curve rightward

93. “Changing taxes, transfer payments, and government expenditure on goods and services,” is the definition
    of
    A. monetary policy
    B. fiscal policy

94. Other things being equal, a decrease in taxes will
    A. shift the AD curve rightward
    B. shift the AD curve leftward
    C. shift the AS curve rightward
    D. shift the AS curve leftward
    E. shift the potential GDP curve rightward

95. Other things being equal, a decrease in transfer payments will
    A. shift the AD curve rightward
    B. shift the AD curve leftward
    C. shift the AS curve rightward
    D. shift the AS curve leftward
    E. shift the potential GDP curve rightward

96. Other things being equal, a decrease in government expenditures will
    A. shift the AD curve rightward
    B. shift the AD curve leftward
    C. shift the AS curve rightward
    D. shift the AS curve leftward
    E. shift the potential GDP curve rightward

97. Other things being equal, a decrease in the money supply will
    A. increase interest rates
    B. decrease interest rates
                                                                         Review Questions, ECO 201, Fall ’10, p. 17




    98. Other things being equal, a decrease in the money supply will
        A. shift the AD curve rightward
        B. shift the AD curve leftward
        C. shift the AS curve rightward
        D. shift the AS curve leftward
        E. shift the potential GDP curve rightward

    99. Other things being equal, a decrease in the value of the dollar in foreign exchange markets will
        A. shift the AD curve rightward
        B. shift the AD curve leftward
        C. shift the AS curve rightward
        D. shift the AS curve leftward
        E. shift the potential GDP curve rightward

    100. Other things being equal, a decrease in foreign national income levels will
         A. shift the AD curve rightward
         B. shift the AD curve leftward
         C. shift the AS curve rightward
         D. shift the AS curve leftward
         E. shift the potential GDP curve rightward

Use the short-run AD-AS model to answer the next four questions.

    101. Other things being equal, a decrease in resource prices will
         A. increase actual GDP, decrease the price level, and decrease the unemployment rate
         B. decrease actual GDP, increase the price level, and increase the unemployment rate
         C. increase actual GDP, increase the price level, and decrease the unemployment rate
         D. decrease actual GDP, decrease the price level, and increase the unemployment rate

    102. Other things being equal, a decrease in expected business profits, which decreases investment spending will
         A. increase actual GDP, decrease the price level, and decrease the unemployment rate
         B. decrease actual GDP, increase the price level, and increase the unemployment rate
         C. increase actual GDP, increase the price level, and decrease the unemployment rate
         D. decrease actual GDP, decrease the price level, and increase the unemployment rate

    103. Other things being equal, a decrease in the value of the dollar in foreign exchange markets will
         A. increase actual GDP, decrease the price level, and decrease the unemployment rate
         B. decrease actual GDP, increase the price level, and increase the unemployment rate
         C. increase actual GDP, increase the price level, and decrease the unemployment rate
         D. decrease actual GDP, decrease the price level, and increase the unemployment rate

    104. Other things being equal, a decrease in foreign national incomes will
         A. increase actual GDP, decrease the price level, and decrease the unemployment rate
         B. decrease actual GDP, increase the price level, and increase the unemployment rate
         C. increase actual GDP, increase the price level, and decrease the unemployment rate
         D. decrease actual GDP, decrease the price level, and increase the unemployment rate

    105. The decrease in actual GDP, the increase in the price level, and the increase in the unemployment rate that
         occurred in the United States between 1973 and 1975 are consistent with
         A. a rightward shift of the AD curve
         B. a leftward shift of the AD curve
         C. a rightward shift of the AS curve
         D. a leftward shift of the AS curve
                                                                        Review Questions, ECO 201, Fall ’10, p. 18




    106. According to the self-correcting mechanism, when actual GDP is greater than or less than potential GDP,
         A. automatic forces exist to pull actual GDP toward potential GDP in the long run
         B. governmental policy actions must be implemented to push actual GDP toward potential GDP in the
            long run

    107. According to the self-correcting mechanism,
         A. shifts in the potential GDP curve always pull actual GDP toward potential GDP in the long run
         B. shifts in the AS curve always pull actual GDP toward potential GDP in the long run
         C. shifts in the AD curve always pull actual GDP toward potential GDP in the long run
         D. government policy actions must be implemented to push actual GDP toward potential GDP in the long
            run

Base your answers to the next two questions on the assumption the self-correcting mechanism is present.

    108. Beginning from a position of long-run equilibrium, assume an increase in expected inflation increases con-
         sumption expenditures and shifts the AD curve rightward. Which of the following short-run reactions will
         result from this shift?
         A. Actual GDP will increase; an inflationary gap will open; the price level will increase, and the unem-
              ployment rate will fall below the full-employment level.
         B. Actual GDP will decrease; a recessionary gap will open; the price level will decrease, and the unem-
              ployment rate will rise above the full-employment level.
         C. Actual GDP will increase; an inflationary gap will open; the price level will decrease, and the unem-
              ployment rate will fall below the full-employment level.
         D. Actual GDP will decrease; a recessionary gap will open; the price level will increase, and the unem-
              ployment rate will rise above the full-employment level

    109. According to the self-correcting mechanism, which of the following long-run actions will follow the short-
         run reactions determined in the question above?
         A. Decreasing wage rates and other resource prices will shift the AD curve rightward. Actual GDP will
              increase toward potential GDP; the price level will increase, and the unemployment rate will decrease
              toward the full-employment level.
         B. Increasing wage rates and other resource prices will shift the AD curve leftward. Actual GDP will de-
              crease toward potential GDP; the price level will decrease, and the unemployment rate will increase
              toward the full-employment level.
         C. Decreasing wage rates and other resource prices will shift the AS curve rightward. Actual GDP will
              increase toward potential GDP; the price level will decrease, and the unemployment rate will decrease
              toward the full employment level
         D. Increasing wage rates and other resource prices will shift the AS curve leftward. Actual GDP will de-
              crease toward potential GDP; the price level will increase, and the unemployment rate will increase
              toward the full employment level

    110. According to your instructor, which of the following items represents a problem(s) with the self-correcting
         mechanism?
         A. The economy may not be self-correcting.
         B. The economy may be self correcting, but voters and politicians may deem the time lags involved in the
            self-correcting process to be excessive.
         C. According to your instructor, both of the items listed above represent problems with the self-correcting
            mechanism.

    111. More than 90 percent of federal government tax revenues come from taxes based on
         A. incomes
         B. property values
         C. estate values
         D. retail sales
                                                                       Review Questions, ECO 201, Fall ’10, p. 19




112. The largest outlay item of the federal government is
     A. transfer payments
     B. government expenditures
     C. debt interest

113. Which of the following items is not a fiscal policy tool?
     A. Expected future profits
     B. Taxes
     C. Transfer payments
     D. Government expenditures
     E. All of the items listed above represent fiscal policy tools.

114. Other things being equal, an increase in taxes
     A. shifts the AD curve rightward and increases actual GDP, decreases the unemployment rate, and in-
         creases the price level
     B. shifts the AD curve leftward and decreases actual GDP, increases the unemployment rate, and decreas-
         es the price level
     C. shifts the AS curve rightward and increases actual GDP, decreases the unemployment rate, and de-
         creases the price level
     D. shifts the AS curve leftward and decreases actual GDP, increases the unemployment rate, and increases
         the price level

115. Other things being equal, an increase in transfer payments
     A. shifts the AD curve rightward and increases actual GDP, decreases the unemployment rate, and in-
         creases the price level
     B. shifts the AD curve leftward and decreases actual GDP, increases the unemployment rate, and decreas-
         es the price level
     C. shifts the AS curve rightward and increases actual GDP, decreases the unemployment rate, and de-
         creases the price level
     D. shifts the AS curve leftward and decreases actual GDP, increases the unemployment rate, and increases
         the price level

116. Other things being equal, an increase in government expenditures
     A. shifts the AD curve rightward and increases actual GDP, decreases the unemployment rate, and in-
         creases the price level
     B. shifts the AD curve leftward and decreases actual GDP, increases the unemployment rate, and decreas-
         es the price level
     C. shifts the AS curve rightward and increases actual GDP, decreases the unemployment rate, and de-
         creases the price level
     D. shifts the AS curve leftward and decreases actual GDP, increases the unemployment rate, and increases
         the price level
                                                                           Review Questions, ECO 201, Fall ’10, p. 20




Base your answers to the next two questions on the following aggregate demand – aggregate supply model.

    117. The positions of this model’s curves indicate
         A. long-run equilibrium
         B. an inflationary gap                                 Price                  Potential
                                                                Level                  GDP 1
         C. a recessionary gap
                                                                                                         AS 1
    118. Which of the following items would represent
         an appropriate fiscal policy action to close the
         gap indicated by this model?
         A. An increase in taxes                                   P1
         B. An increase in transfer payments
         C. An increase in government expenditures
         D. Either an increase in taxes or an increase in
             government expenditures
         E. Either an increase in transfer payments or                                                  AD 1
             an increase in government expenditures
                                                                                GDP 1 GDP P                     Real GDP

    119. Other things being equal, which of the following items represents an appropriate fiscal policy action to off-
         set the effect of an increase in foreign income levels, which shifts the AD curve rightward?
         A. An increase in taxes
         B. An increase in transfer payments
         C. An increase in government expenditures
         D. Either an increase in taxes or an increase in government expenditures
         E. Either an increase in transfer payments or an increase in government expenditures

    120. “A fiscal policy action that is triggered by the state of the economy,” is the definition of
         A. discretionary fiscal policy
         B. automatic fiscal policy

    121. “The effects of fiscal policy on potential GDP and the economic growth rate,” is the definition of
         A. demand-side effects (demand-side fiscal policy)
         B. supply-side effects (supply-side fiscal policy)

    122. “The tendency for a government budget deficit to raise the real interest rate and decrease investment,” is
         the definition of
         A. Discretionary monetary policy
         B. Automatic monetary policy
         C. Discretionary fiscal policy
         D. Automatic stabilizers
         E. The crowding out effect

    123. “Time gaps between the origination of a problem in the macroeconomy and the ultimate solution to the
         problem,” is the definition of
         A. discretionary monetary policy
         B. discretionary fiscal policy
         C. lags
         D. deficit bias
         E. political gridlock
                                                                      Review Questions, ECO 201, Fall ’10, p. 21


124. “The natural tendency for fiscal policy actions to create government budget deficits,” is the definition of
     A. discretionary monetary policy
     B. discretionary fiscal policy
     C. lags
     D. deficit bias
     E. political gridlock

125. “Changing the quantity of money and the interest rate,” is the definition of
     A. supply-side economics
     B. crowding out
     C. fiscal policy
     D. monetary policy

126. The current Chairman of the Board of Governors of the Federal Reserve System is
     A. William McChesney Martin
     B. Arthur Burns
     C. William Miller
     D. Ben Bernanke
     E. Alan Greenspan

127. Other things being equal, an increase in the money supply
     A. increases interest rates and shifts the AD curve rightward
     B. increases interest rates and shifts the AD curve leftward
     C. decreases interest rates and shifts the AD curve rightward
     D. decreases interest rates and shifts the AD curve leftward
     E. has no effect on interest rates and shifts the AS curve rightward

128. “Any commodity or token [asset] that is generally accepted as a means of payment,” is the authors’ defini-
     tion of
     A. barter
     B. fiscal policy
     C. automatic stabilizers
     D. money

129. When you use a dollar bill to purchase a soft drink from a vending machine, you are using money primarily
     as
     A. a store of value
     B. a unit of account
     C. a medium of exchange

130. In order to be included in __________, a financial asset must perform all three functions of money.
     A. M1
     B. M2

131. According to your instructor, credit cards are found in which of the following money supply measures?
     A. M1
     B. M2
     C. Credit cards are found in both M1 and M2.
     D. Credit cards are found in neither M1 nor M2.

132. Which of the following items represents the largest asset category on the commercial bank balance sheet?
     A. Deposits
     B. Borrowings
     C. Securities
     D. Loans
     E. None of the items listed above are found on the asset side of the commercial bank balance sheet.
                                                                    Review Questions, ECO 201, Fall ’10, p. 22



133. On which side of the commercial bank balance sheet is much (most) of the nation’s money supply found?
     A. Asset
     B. Liability

134. The Federal Reserve Banks are owned by
     A. the American people
     B. the U.S. government
     C. individual stockholders
     D. the member banks of their districts

135. The Federal Open Market Committee (FOMC)
     A. meets in Washington, D.C. every six weeks
     B. consists of twelve members
     C. contains representatives from both the Board of Governors and the Federal Reserve Banks
     D. issues general policy directives for open market operations
     E. is characterized by all of the items listed above

136. The largest asset item found on the Federal Reserve System balance sheet is
     A. securities
     B. loans to banks
     C. bank reserves
     D. Federal Reserve notes

137. Most of the nation’s money supply is found on or is supported by items found on the _______________
     side of the Federal Reserve balance sheet.
     A. asset
     B. liability

138. Under the assumptions of the simplified banking system, the level of bank reserves will
     ____________________, if the Fed purchases $1,000,000 in securities.
     A. increase by $1,000,000
     B. increase by $5,000,000
     C. decrease by $5,000,000
     D. increase by $20,000,000
     E. decrease by $20,000,000

139. Under the assumptions of the simplified banking system, the simple money multiplier equals
     ____________, when the required reserve ratio equals 5 percent.
     A. 0.05
     B. 0.5
     C. 2
     D. 5
     E. 20

140. Under the assumptions of the simplified banking system, the money supply will
     __________________________, if the Fed purchases $1,000,000 in securities and the required reserve ra-
     tio equals 5 percent.
     A. increase by $1,000,000
     B. increase by $5,000,000
     C. decrease by $5,000,000
     D. increase by $20,000,000
     E. decrease by $20,000,000
                                                                      Review Questions, ECO 201, Fall ’10, p. 23


141. Of the four players in the money supply process, who is responsible for introducing new reserves into the
     banking system?
     A. The Federal Reserve System
     B. Banks
     C. Borrowers
     D. Depositors
     E. Banks, borrowers, and depositors

142. Of the four players in the money supply process, who is responsible for converting newly introduced re-
     serves into a multiple increase in the money supply
     A. The Federal Reserve System
     B. Banks
     C. Borrowers
     D. Depositors
     E. Banks, borrowers, and depositors

143. Your instructor defines ___________________________ as the purchase or sale of U.S. government secu-
     rities by the Federal Reserve in the open market.
     A. the required reserve ratio
     B. the discount rate
     C. open market operations

144. Other things being equal, a sale of securities by the Federal Reserve
     A. increases bank reserves and the money supply
     B. decreases bank reserves and the money supply
     C. increases the simple money multiplier and the money supply
     D. decreases the simple money multiplier and the money supply

145. Your instructor defines __________________________ as the interest rate Federal Reserve Banks charge
     to banks on discount loans.
     A. the required reserve ratio
     B. the discount rate
     C. open market operations

146. Other things being equal, an increase in the discount rate
     A. increases bank reserves and the money supply
     B. decreases bank reserves and the money supply
     C. increases the simple money multiplier and the money supply
     D. decreases the simple money multiplier and the money supply

147. Your instructor defines __________________________ as the percentage of checkable deposits banks are
     required to hold as legal reserves.
     A. the required reserve ratio
     B. the discount rate
     C. open market operations

148. Other things being equal, an increase in the required reserve ratio
     A. increases bank reserves and the money supply
     B. decreases bank reserves and the money supply
     C. increases the simple money multiplier and the money supply
     D. decreases the simple money multiplier and money supply
                                                                        Review Questions, ECO 201, Fall ’10, p. 24


    149. Which of the three tools of monetary policy does the Federal Reserve use most to control the money sup-
         ply?
         A. The required reserve ratio
         B. The discount rate
         C. Open market operations

    150. According to your instructor, the actual power to determine monetary policy in the United States
         A. rests with the President of the United States
         B. rests with the Chairman of the Council of Economic Advisors
         C. rests with the Secretary of the Treasury
         D. rests with the Chairman of the Board of Governors of the Federal Reserve System
         E. is divided between the Board of Governors of the Federal Reserve System and the Federal Reserve
            Banks

Base your answer to the next two questions on the following graph.

    151. The positions of the curves on        Price                     Potential
         this graph indicate                   Level                     GDP 1
         ___________________ is pre-
         sent in this economy.                                                                      AS 1
         A. long-run equilibrium
         B. a recessionary gap
         C. an inflationary gap

    152. Which of the following monetary            P1
         policy actions is appropriate if
         the Federal Reserve wishes to re-
         turn actual output to its potential
         level?                                                                                     AD 1
         A. A purchase of securities in
              the open market
         B. A sale of securities in the                                    GDP P GDP 1            Real GDP
              open market
         C. An increase in the discount rate
         D. Either a purchase of securities in the open market or an increase in the discount rate
         E. Either a sale of securities in the open market or an increase in the discount rate

    153. Which of the following items did your instructor list as both a strength and a weakness of monetary policy?
         A. Monetary policy decisions are made outside the political process.
         B. Indirect and uncertain links exist between changes in the money supply and changes in output, em-
            ployment, and the price level.
         C. Monetary policy actions have uneven impacts on the economy.
         D. Only a short lag time is required for implementation.
         E. Monetary policy decisions are flexible and reversible.

				
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