Multiple Choice Questions on Principles of Economics

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```					             ECO/212 Principles of Economics Final Exam

Due Day 7 (Monday): GDP, Unemployment & Inflation, Monetary Policy & Fiscal Policy,
International Trade & Foreign Exchange Rates (Chapters 3, 9, 23-24. 28-36)
Final Exam (50 multiple-choice questions: 15 points):
This is an open book test.

1. Academic Integrity standards apply to the completion of this
assignment. This final exam must be completed on an individual
basis. No collaboration with other people is permitted.
2. If you are approached by another student for help or to compare
3. Post the completed assignment in your individual forum. The quiz is
due by 11:59 PM (MST) of 9-14-2009 (Monday).
4. Post questions about the quiz in the Questions Thread of the Main
forum.
5. Please note this final exam is worth 15 points (15%) out of 100 points
for the entire class.

Multiple Choice Questions

Q1. If the total adult population is 220 million and if 99 million workers are employed and 11
million unemployed, then the total labor force is
a. 220 million.
b. 110 million.
c. 99 million.
d. impossible to determine from the data given.
ANS: ____

Q2. The U.S. Bureau of Labor Statistics counts discouraged workers as
a. unemployed, so they are included in the unemployment rate.
b. not in the labor force, so they are included from the unemployment rate.
c. not in the labor force, so they are excluded from the unemployment rate.
d. in the labor force but neither employed nor unemployed, so they are excluded from the
unemployment rate.
ANS: ____
Q3. Inflation attributed to an increase in world oil prices would be classified as
a. demand-side inflation.
b. supply-side inflation.
c. hyper inflation.
d. structural inflation.
ANS: ____

Q4. If a loan of \$1,000 pays \$80 per year in interest and the inflation rate is 5 percent, then the
real rate of interest on the loan is
a. 8 percent.
b. 5 percent.
c. 3 percent.
d. impossible to determine from the data given.
ANS: ____

Q5. Which of the following would be most likely to gain from a higher-than-anticipated
inflation rate?
a. A retired worker.
b. A government employee.
c. A debtor.
d. A creditor.
ANS: ____

Q6. If the nominal interest rate is 10 percent and if the inflation rate is 8 percent in one year, a
\$1,000 loan will pay back (in terms of the worth of tomorrow’s goods) approximately
a. \$900.
b. \$1,020.
c. \$1,100.
d. \$1,118.
ANS: ____

Q7. A high anticipated rate of inflation reduces the desirability of money as
a. an instrument of credit.
b. a store of value.
c. a medium of exchange.
d. a unit of value.
ANS: ____
Q8. When pure silver quarters are driven out of circulation by hoarding so that only less
valuable, bimetallic quarters are used, this situation is an example of
a. the law of diminishing returns.
b. the law of comparative advantage.
c. Friedman’s law.
d. Gresham’s law.
ANS: ____

Q9. If the U.S. government were willing to convert dollars into gold at a fixed price, then dollars
would be
a. fiat money.
b. commodity money.
c. bank money.
d. both fiat and commodity money.
ANS: ____

Q10. Which of the following does not result from an increase in the expected rate of inflation?
a. The short-run Phillips curve shifts upward.
b. Workers increase their expectations about market wages.
c. Each actual rate of inflation leads to lower unemployment.
d. The long-run Phillips curve is unaffected.
ANS: ____

Q11. When an increase in inflation is correctly anticipated,
a. the unemployment rate increases.
b. unemployment is at the natural rate.
c. the unemployment rate decreases.
d. the natural rate of unemployment decreases.
ANS: ____

Q12. The modern concept of full employment is called
a. the structural unemployment rate.
b. the zero-percent unemployment rate.
c. the tree-percent rule.
d. the natural unemployment rate.
ANS: ____
Q13. In economy A, government spending is \$50 billion, consumption is \$150 billion, exports
are \$30 billion, imports are \$50 billion, investment is \$20 billion, and taxes are \$40 billion.
GDP in economy A is
a. \$280 billion.
b. \$240 billion.
c. \$220 billion.
d. \$200 billion.
ANS: ____

Q14. The Federal Reserve System does not
a. control the U.S. money supply.
b. approve commercial bank loans.
c. conduct open market operations.
d. lend money to commercial banks.
ANS: ____

Q15. The Federal Open Market Committee (FOMC) is in charge of
a. buying and selling government securities for the Fed.
b. printing money.
c. advising the Senate on monetary issues.
d. all of the above.
ANS: ____

Q16. Commercial banks are able to create money by
a. printing Federal Reserve Notes.
b. making loans.
c. making customers pay back their loans.
d. exchanging their reserves at the Fed for vault cash.
ANS: ____

Q17. If banks have reserve requirements of 20 percent of their demand deposits, \$100 million in
excess reserves allows the banking system to create at most
a. \$100 million in new money.
b. \$20 million in new money.
c. \$500 million in new money.
d. \$80 million in new money.
ANS: ____
Q18. If the Fed wants to decrease the interest rate, it can
a. buy government securities on the open market.
b. sell government securities on the open market.
c. raise the required reserve ration.
d. instruct banks to print more money.
ANS: ____

Q19. Liabilities of commercial banks are
a. demand deposits.
b. vault cash.
c. outstanding loans.
d. deposits at the Fed.
ANS: ____

Q20. Fractional-reserve banking means that
a. banks can maintain as reserves only a fraction of outstanding deposits.
b. the money supply need not be backed by gold or silver.
c. bank reserves must equal outstanding demand-deposit liabilities.
d. bank assets and liabilities must always be equal.
ANS: ____

Q21. If Shawn can produce more donuts in one day than Sue can produce in one day, then
a. Shawn has a comparative advantage in the production of donuts.
b. Sue has a comparative advantage in the production of donuts.
c. Shawn has an absolute advantage in the production of donuts.
d. Shawn should produce donuts and Sue should spend her time on a different activity.
ANS: ____

Q22. Which of the following statements about comparative advantage is not true?
a. Comparative advantage is determined by which person or group of persons can produce
a given quantity of a good using the fewest resources.
b. The principle of comparative advantage applies to countries as well as to individuals.
c. Economists use the principle of comparative advantage to emphasize the potential
d. A country may have a comparative advantage in producing a good, even though it lacks
an absolute advantage in producing that good.
ANS: ____
Q23. Critics of free trade sometimes argue that allowing imports from foreign countries causes a
reduction in the number of domestic jobs. An economist would argue that
a. foreign competition may cause unemployment in import-competing industries, but the
effect is temporary because other industries, especially exporting industries, will be
expanding.
b. foreign competition may cause unemployment in import-competing industries, but the
increase in consumer surplus due to free trade is more valuable than the lost jobs.
c. the critics are correct, so countries must protect their industries with tariffs or quotas.
d. foreign competition may cause unemployment in import-competing industries, but the
increase in the variety of goods consumers can choose from is more valuable than the
lost jobs.
ANS: ____

Q24. Which of the following serves as an example of the underground or “shadow” economy?
a. A woman barters home repairs with her neighbor.
b. A teenager babysits regularly and fails to report her income.
c. A man sells illegal drugs and fails to report his income.
d. All of the above are correct.
ANS: ____

Q25. GDP is not a perfect measure of well-being; for example,
a. GDP excludes the value of volunteer work.
b. GDP does not address the distribution of income.
c. GDP does not address environmental quality.
d. All of the above are correct.
ANS: ____

Q26. The goal of the consumer price index is to measure changes in the
a. costs of production
b. cost of living.
c. relative prices of consumer goods.
d. production of consumer goods.
ANS: ____

Q27. The price index was 128.96 in 2006 and, between 2005 and 2006, the inflation rate was 24
percent. The price index in 2005 was
a. 30.95.
b. 104.00.
c. 104.96.
d. 106.67.
ANS: ____
Q28. In 2002, the demand for construction workers increased and the demands for textile and
steel workers diminished. This illustrates
a. frictional unemployment created by a sectoral shift.
b. structural unemployment created by a sectoral shift.
c. frictional unemployment created by efficiency wages.
d. structural unemployment created by efficiency wages.
ANS: ____

Q29. A decrease in the money supply might indicate that the Fed had
a. purchased bonds in an attempt to increase the federal funds rate.
b. purchased bonds in an attempt to reduce the federal funds rate.
c. sold bonds in an attempt to increase the federal funds rate.
d. sold bonds in an attempt to reduce the federal funds rate.
ANS: ____

Q30. Imagine that the Federal Funds rate was below the level the Federal Reserve had targeted.
To move the rate back towards its target the Federal Reserve could
c. sell bonds. This selling would increase the money supply.
d. sell bonds. This selling would reduce the money supply.
ANS: ____

Q31. When the Fed decreases the discount rate, banks will
a. borrow more from the Fed and lend more to the public. The money supply increases.
b. borrow more from the Fed and lend less to the public. The money supply decreases.
c. borrow less from the Fed and lend more to the public. The money supply increases.
d. borrow less from the Fed and lend less to the public. The money supply decreases.
ANS: ____

Q32. Which of the following actions would have the combined effect of raising the money
supply and raising the money multiplier?
a. The Fed sells bonds and raises the reserve requirement ratio.
b. The Fed sells bonds and lowers the reserve requirement ratio.
c. The Fed buys bonds and raises the reserve requirement ratio.
d. The Fed buys bonds and lowers the reserve requirement ratio.
ANS: ____
Q33. Wealth is redistributed from debtors to creditors when inflation is
a. high, but expected.
b. low, but expected.
c. unexpectedly high.
d. unexpectedly low.
ANS: ____

Q34. When money is neutral, which of the following increases when the money supply growth
rate increases?
a. real output growth
b. real interest rates
c. nominal interest rates
d. the money supply divided by the price level
ANS: ____

Q35. Which of the following statements is incorrect for an open economy?
b. A country that has a trade deficit has positive net capital outflow.
c. Net exports must equal net capital outflow.
d. National saving must equal domestic investment plus net capital outflow.
ANS: ____

Q36. Purchasing-power parity implies that the nominal exchange rate given as foreign currency
per unit of U.S. currency must rise if the price levels in
a. foreign countries rise.
b. the United States rises.
c. both countries rise.
d. both countries fall.
ANS: ____

Q37. In the U.S. a candy bar costs 50 cents. The nominal exchange rate is 6 Chinese yuan per
dollar. If the real exchange rate is .60, what is the price of a candy bar in China?
a. 7.2 yuan
b. 6 yuan
c. 5 yuan
d. 3.6 yuan
ANS: ____
Q38. If a U.S. shirt maker purchases cotton from Egypt, U.S. net exports
a. increase, and U.S. net capital outflow increases.
b. increase, and U.S. net capital outflow decreases.
c. decrease, and U.S. net capital outflow increases.
d. decrease, and U.S. net capital outflow decreases.
ANS: ____

Q39. If interest rates rose more in France than in the U.S., then other things the same
a. U.S. citizens would buy more French bonds and French citizens would buy more U.S.
bonds.
b. U.S. citizens would buy more French bonds and French citizens would buy fewer U.S.
bonds.
c. U.S. citizens would buy fewer French bonds and French citizens would buy more U.S.
bonds.
d. U.S. citizens would buy fewer French bonds and French citizens would buy fewer U.S.
bonds.
ANS: ____

Q40. The quantity of money has no real impact on things people really care about like whether or
not they have a job. Most economists would agree that this statement is appropriate
concerning
a. both the short run and the long run.
b. the short run, but not the long run.
c. the long run, but not the short run.
d. neither the long run nor the short run.
ANS: ____

Q41. Other things the same, as the price level rises, the real value of a dollar
a. rises, and interest rates rise.
b. rises, and interest rates fall.
c. falls, and interest rates rise.
d. falls, and interest rates fall.
ANS: ____

Q42. When the Fed buys government bonds, the reserves of the banking system
a. increase, so the money supply increases.
b. increase, so the money supply decreases.
c. decrease, so the money supply increases.
d. decrease, so the money supply decreases.
ANS: ____
Q43. People own or hold money primarily because it
a. has a guaranteed nominal return.
b. serves as a store of value.
c. can directly be used to buy goods and services.
d. functions as a unit of account.
ANS: ____

Q44. An adverse supply shock will cause inflation to
a. rise and the short-run Phillips curve to shift right.
b. rise and the short-run Phillips curve to shift left.
c. fall and the short-run Phillips curve to shift right.
d. fall and the short-run Phillips curve to shift left.
ANS: ____

Q45. Suppose the Federal Reserve makes monetary policy more expansionary. In the long run
a. both inflation and the unemployment rate are higher than they were prior to the change
in policy.
b. inflation is higher and the unemployment rate is the same as it was prior to the change in
policy.
c. inflation is lower and the unemployment rate is lower than it was prior to the change in
policy.
d. inflation is lower and unemployment is the same as it was prior to the change in policy.
ANS: ____

Q46. If the natural rate of unemployment falls,
a. both the short-run and long-run Phillips curves shift left.
b. the short-run Phillips curve shifts left, the long-run Phillips curve is unchanged.
c. the short-run Phillips curve is unchanged, the long-run Phillips curve shifts right.
d. the short-run and the long-run Phillips curves shift right.
ANS: ____
Q47. In the long run, if the Fed increases the rate at which it increases the money supply,
a. inflation will be higher.
b. unemployment will be lower.
c. real GDP will be higher.
d. All of the above are correct.
ANS: ____

Q48. If the government raises government expenditures, in the short run, prices
a. rise and unemployment falls.
b. fall and unemployment rises.
c. and unemployment rise.
d. and unemployment fall.
ANS: ____

Q49. The principal reason that monetary policy has lags is that it takes a long time for
a. changes in the interest rate to change aggregate demand.
b. changes in the money supply to change interest rates.
c. the Fed to make changes in policy.
d. None of the above is correct.
ANS: ____

Q50. If the unemployment rate rises, which policies would be appropriate to reduce it?
a. increase the money supply, increase taxes
b. increase the money supply, cut taxes
c. decrease the money supply, increase taxes
d. decrease the money supply, cut taxes
ANS: ____

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