Economics 155 Final Exam
Fall 1997

1. If you buy the instructor lunch on exam day and also do very well on the exam later that day (A+) you may feel your good exam score was due to the lunch. Such thinking runs the risk of demonstrating:
a. the fallacy of composition
b. Murphy's Law
c. Samuelson's complex
d. the Law of Diminishing Returns
e. the post hoc (false cause) fallacy

2. The difference between microeconomics and macroeconomics is:
a. microeconomics arises because of individual scarcity and macroeconomics because of general scarcity
b. microeconomics is the economics of the private sector and macroeconomics that of the public sector
c. microeconomics deals with an unplanned economy or sector and macroeconomics with a planned one
d. microeconomics is analysis at the level of individual decision making units while macroeconomics is analysis of the operation of the system in the aggregate
e. macroeconomics is only an approximation to microeconomics

3. When Adam Smith spoke of the principle of the "invisible hand", he meant:
a. the pursuit of one's own self-interest will lead to the best good for all
b. cooperation among producers is necessary to minimize losses
c. governmental intervention in the marketplace may be necessary to have steady growth in national output
d. that the government regulates all firms in such a manner that the "social responsibility" of business is assured
e. that although the government dominates our economy, most of us are not aware of this fact

4. Regarding the production possibilities curve, a point below (or inside) the curve would represent:
a. growth
b. a point of technological efficiency
c. a point of technological and allocative efficiency
d. a point of market equilibrium
e. unemployment of resources

5. Which of the following is true of the basic economic problem of scarcity?
a. The problem is with us as long as resources are not available in unlimited amounts.
b. The problem exists only in highly industrialized economies as the U.S.
c. The problem will quite likely disappear as production increases.
d. The problem will be sure to disappear with the growth of technology.
e. The problem would not exist if man did not attempt to change basic economic laws through the machinery of government

6. The production possibilities (or transformation) curve illustrates the basic principle that:
a. an economy's capacity to produce increases in proportion to its population size
b. if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced
c. an economy will automatically seek that level of output at which all of its resources are employed
d. both (a) and (c)

7. If, as income increases, the demand for product X decreases, X is said to be (a/an):
a. substitute good
b. complementary good
c. inferior good
d. normal good

8. Which of the following statements is correct?
a. price and quantity supplied are inversely related
b. price and quantity supplied are directly related
c. quantity demanded and quantity supplied are independent of price
d. price and quantity demanded are directly related

9. If X and Y are complementary goods, a decrease in the price of X will result in:
a. an increase in the quantity demanded of Y
b. a decrease in the demand of Y
c. a decrease in the quantity demanded of X
d. an increase in the demand for Y

10. With an increase in profits in a particular industry, we might expect
a. firms to leave the industry
b. firms to produce less
c. firms to enter the industry
d. people to buy less
e. profits don't have anything to do with what firms do

11. If supply and demand schedules both shift to the right at every price, then
a. output will increase, but price may increase or decrease
b. both output and price will certainly increase
c. output will increase, but price will definitely fall
d. both price and output will decrease
e. price will definitely increase, but output may rise or fall

12. Rent control is practiced in some cities, notably New York City. Rent controls set apartment rentals below equilibrium rents. Supply and demand analysis tells us that these below equilibrium rents will result in
a. redistribution of income or wealth away from tenants to landlords
b. a decrease in the amount of racial and ethnic discrimination in housing markets
c. promotion of future growth of supply in housing markets
d. abandonment, low-quality service, and a decline in the maintenance of rental housing
e. promotion of a more ethnically balanced inner city

13.moves to If the industry demand curve for sports cars shifts sharply to the left as the industry supply curve for sports cars the right, we would expect:
a. the same price for sports cars to prevail
b. the same quantity of sports cars sold to prevail
c. price and quantity of sports cars to fall
d. price of sports cars to fall while the quantity sold may or may not change
e. quantity of sports cars to fall while the price may or may not change

14. Personal income is the
a. market value of the output of goods and services produced by the nation's economy
b. total earnings of labor and property from the production of goods and services
c. income remaining to persons after payment of personal taxes
d. total income received by persons from all sources

15. The Gross Domestic Product of an economy is the
a. total income received by persons from all sources
b. value of all personal consumption expenditures plus saving
c. market value of the annual output of final goods and services
d. income remaining to persons after payment of personal taxes
e. total earnings of labor and property from the production of goods and services

16. An example of a government transfer payment is:
a. the cost of electric power sold by the government-owned and operated TVA
b. the letter carrier's wage
c. payments to General Electric to develop nuclear energy
d. the salary of a Department of State employee
e. unemployment insurance compensation

17. A regressive tax is one which takes
a. a higher percentage from high-income persons than from low-income persons
b. the same percentage from high-income persons as from low-income persons
c. a higher percentage from low-income persons than from high-income persons
d. the same percentage from individuals as from corporations

18. The sales tax is held to be a regressive tax because the:
a. sales tax is an indirect, rather than a direct, tax
b. tax tends to reduce the total volume of consumption expenditures
c. percentage of income paid as taxes is constant as income rises
d. administrative costs associated with the collection of the tax are relatively high
e. percentage of income paid as taxes falls as income rises

19. A recession occurs when real GDP
a. increases greatly
b. increases slightly
c. does not change
d. decreases
e. none of the above, recession is not related to GDP

20. A person who left her job to look for another job would be classified as:
a. structurally unemployed
b. a discouraged worker
c. frictionally unemployed
d. cyclically unemployed
e. no longer in the labor force

21. The relative shares of income spent on particular components of a typical consumer's marketbasket of commodities are used to compute
a. the GDP deflator
b. the PPI
c. the CPI
d. the IPI
e. all of these

22. GDP is in equilibrium
a. whenever there is full employment
b. only if marginal propensity to save equals the marginal propensity to invest
c. whenever there is full employment without government interference
d. whenever desired saving equals desired investment
e. whenever actual saving equals actual investment

23. Investment spending is the
a. most stable component of aggregate demand
b. least stable component of aggregate demand
c. term omitted from aggregate demand
d. spending done by governments
e. spending done by stock brokers

24. If the value of the multiplier is 4, an increase in investment of $10 will induce an increase in consumption of:
a. $10
b. $20
c. $30
d. $40
e. none of the above

25. The numerical value of the simple multiplier will be smaller the
a. smaller the marginal propensity to consume
b. smaller the average propensity to consume
c. smaller the marginal propensity to save
d. larger the average propensity to save

26. Assume government spending increases by $1 billion and taxes are unchanged. If the
MPS is .25, the equilibrium GDP (income) will increase by billion
a. $2.5
b. $3
c. $4
d. $5
e. $1

27. During times of unemployment, the use of full-employment fiscal policy calls for
a. a surplus in the government's budget
b. a decrease in government expenditures
c. excise taxes to be raised
d. a deficit in the government's budget

28. If the full employment level of output is $500, the existing equilibrium level of output is $380, and the value of MPS is .25, full employment equilibrium can be achieved by additional
a. consumption of $90
b. government expenditures of $30
c. government expenditures of $120
d. investment of $120
e. none of the above

29. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20%. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:
a. $5,000
b. $800
c. $200
d. $2,000
e. $1,000

30. Demand deposits are money because they are:
a. legal tender
b. fiat money
c. acceptable in exchange
d. token money
e. full-bodied money

31. Suppose that the required reserve ratio is 20 percent. Then, an increase of $10,000 in the banking system's excess reserves may result in a total expansion of new deposits for the banking system as a whole by as much as:
a. $4,000
b. $5,000
c. $10,000
d. $40,000
e. $50,000

32. In the equation of exchange, if M = $200, P = $2, and Q = 300, then
a. V must be 3
b. V must be 4
c. V must be one-half
d. V cannot be calculated with the available information
e. the value of the goods and services produced in the economy must be $300

33. The most important economic function of the Federal Reserve is to:
a. lend money to banks
b. serve as a clearinghouse through which interbank payments can be made
c. control the money supply of the economy
d. store gold for the U.S. Treasury
e. insure depositors against the loss of their money should there be a run on a bank

34. In controlling the money supply, the Federal Reserve System most uses:
a. open market operations
b. changes in the discount rate
c. changes in reserve requirements
d. moral suasion
e. changes in Regulation Q

35. If the Federal Reserve authorities were attempting to reduce inflationary pressures,
the proper policies would be to government securities, reserve
requirements, and the discount rate.
a. sell; raise; lower
b. sell; lower; lower
c. buy; raise; raise
d. sell; raise; raise

36. A personal tax cut would be most effective in stimulating GDP if:
a. the aggregate supply curve were vertical as envisioned in the classical model
b. the aggregate supply curve were horizontal as envisioned in the Keynesian model
c. the aggregate supply curve were vertical as envisioned in the Keynesian model
d. the aggregate supply curve were horizontal as envisioned in the Classical model
e.none of the above; it could never work

37. The relationship between the total quantity of all goods and services demanded and a specific price level refers to the concept of:
a. aggregate demand
b. aggregate supply
c. total expenditures
d. total wealth

38. The Phillips Curve is a graphical representation of the relationship between:
a. the money supply and inflation
b. inflation and unemployment
c. interest rates and unemployment
d. unemployment and the government deficit
e. tax rates and tax revenues

39. According to the principle of comparative advantage, countries:
a. will specialize in producing goods which they can produce at lower input costs
b. should export goods they can produce at lower input costs
c. should specialize in producing goods they have lower opportunity cost for
d. should specialize in producing goods they have lower absolute costs for

40. The value of net exports is:
a. an injection into the economy if exports exceed imports
b. an injection into the economy if imports exceed exports
c. always positive
d. always larger than government expenditures

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