Economics 155 Final Exam
Fall 1998

1. Economics is best defined as the study of
a. how to make money.
* b. how people allocate scarce resources among unlimited wants.
c. how prices are determined.
d. how people attempt to maximize their satisfaction, given their limited incomes.

2. Incorrectly implying cause-and-effect relationship between two events is a logical fallacy called
a. fallacy of composition.
b. normative analysis.
c. rational self-interest.
* d. post hoc fallacy.

3. Opportunity cost is best defined as
* a. the highest valued alternative given up when a choice is made.
b. the cost of a good minus profits.
c. the sum of all alternatives given up when a choice is made.
d. the money spent once a choice is made.

4. A production possibilities curve is usually shown as bowed out (concave from the origin) because of
a. changes in unemployment of resources due to movement along a production possibilities curve.
* b. recognition that resources are not equally suited for the production of all goods.
c. inflation.
d. the tradeoff involved in all choices/decisions.
e. the laws of supply and demand.


Use the Following Table to Answer Question 5

Production Possibilities Schedule

5. As compared to the production possibility choice C in the Production Possibilities Schedule above, the choice of production possibility D would
* a. cost 3 units of consumption goods.
b. be unobtainable.
c. give rise to some unemployment.
d. be preferred by society.

6. A rightward shift of the production possibilities curve might be caused by
a. a decrease in technology.
b. a decrease in the population of the country.
* c. a general increase in worker productivity.
d. reduction in unemployment.

7. According to the law of demand, if the price of CDs decreased
* a. the quantity demanded of CDs would increase.
b. the demand for CDs would decrease.
c. the demand for CDs would increase.
d. the quantity demanded of CDs would decrease.

8. If an increase in the price of product X causes a decrease in the demand for product Y, we can conclude that
a. the price of Y will increase.
b. the quantity of Y sold will increase.
* c. they are complements.
d. they are substitutes.

9. Last year a firm made 1,000 units of its good available at a price of $5 per unit. This year the firm would be willing to make 1,000 units available but only if the price is $7 per unit. What has most likely happened?
a. Demand has decreased.
b. Demand has increased.
c. Supply has increased.
* d. Supply has decreased.

10. A change in supply cannot be caused by
a. a change in the price of inputs.
* b. an increase in the number of consumers.
c. changes in the profitability of producing other products.
d. an improvement in technology.

Use the Following Graph to Answer Question 11

11. According to the graph above, what price would result in a surplus of 100 units of this product?
a. $6
b. $2
* c. $10
d. None of the above.

12. If price is below equilibrium
* a. quantity demanded exceeds quantity supplied, and a shortage exists.
b. demand will increase.
c. demand is too low for equilibrium.
d. quantity supplied exceeds quantity demanded, and a shortage exists.

13. Assume standard supply and demand curves. There is a simultaneous decrease in demand and decrease in supply. What will be the effect on equilibrium price and quantity?
a. Both price change and quantity change are indeterminate.
* b. Price change is indeterminate and quantity decreases.
c. Price is stable and quantity decreases.
d. Price decreases and quantity change is indeterminate.
e. Price change is indeterminate and quantity is stable.

14. The distinguishing characteristic of a "public good" is that
a. only government employees benefit from the good, even though all taxpayers must help pay for it.
* b. it exhibits the non-exclusion principle.
c. it is divisible.
d. it will not be produced by the private market since no one wants it.

15. A tax which takes a greater percent of income as income increases is called
a. regressive.
b. poll tax.
* c. progressive.
d. proportional.

16. Structural unemployment
a. occurs when workers voluntarily leave jobs for which they are overqualified.
* b. can result when workers lose jobs that are becoming obsolete.
c. is considered less serious than frictional unemployment.
d. is a product of macroeconomic downturns.

17. When the economy is operating at full employment, increased spending will result in
a. profit-push inflation.
b. wage-push inflation.
c. cost-push inflation.
* d. demand-pull inflation.

18. Inflation would have benefited people
a. who saved at fixed interest rates.
* b. who borrowed at fixed interest rates.
c. who lent at fixed interest rates.
d. who received fixed incomes.

19. Personal Income differs from Disposable Income by
* a. personal taxes.
b. personal saving and personal taxes.
c. net exports.
d. personal saving.
e. the rate of inflation.

20. Which of the following would be included in this year's calculation of gross domestic product?
a. repairs on your car done by yourself.
* b. a $2,000 fee to an attorney for legal fees.
c. the purchase of a 1993 Corvette.
d. a barter transaction between two students.

21. Suppose nominal GDP is $100 and the price index is 125. What is real GDP?
a. $100
b. $125
c. $40
* d. $80

22. The consumption function illustrates that
* a. consumption increases as disposable income increases.
b. consumption increases as disposable income decreases.
c. saving increases as disposable income decreases.
d. consumption increases as saving decreases.

23. The marginal propensity to consume is
a. the level of household spending associated with a given level of saving.
* b. the percentage of additional disposable income that households spend.
c. the same as autonomous consumption.
d. always equivalent to the marginal propensity to save.

Use the Following Graph to Answer Question 24

24. According to the graph above, the economy will contract when aggregate expenditures are at
* a. point C.
b. point D.
c. point A.
d. point B.
e. point E.

25. If equilibrium income is $500 billion, MPC = 0.8, and investment spending increases by $20 billion, the new equilibrium income will be
* a. $600 billion.
b. $700 billion.
c. $520 billion.
d. $550 billion.

26. Assume the economy is initially at full employment with stable prices. Next, two things occur: (1) businesses' expectations become more optimistic, and (2) consumers decide to save less. To maintain stable prices at full employment, appropriate discretionary fiscal policy would consist of
a. doing nothing as the two occurrences offset each other.
b. equal amounts of tax increase and government spending increase.
* c. a tax increase and/or government spending decrease.
d. a tax reduction and/or government spending increase.
e. a decrease in the money supply and increase in government spending.

27. Assume an MPC of 0.75 and a federal government balanced budget. Congress enacts a lump sum tax reduction of $40 billion. What will be the effect of this on GDP?
* a. $120 billion increase.
b. $120 billion decrease.
c. $40 billion increase.
d. $40 billion decrease.
e. $160 billion increase.

28. When the federal government is borrowing to finance a deficit,
a. there is no effect on GDP.
b. exports will rise.
c. the effect is to lower GDP.
* d. the effect is to increase GDP.

29. Which of the following is a reason why the U.S. dollar is money?
a. it has value as a commodity.
b. it is backed by gold.
* c. it is generally accepted as a medium of exchange.
d. it retains its value over time.

30. If a bank has deposits of $4,000,000, total reserves equal to $600,000, and the reserve ratio is equal to 0.15, what is the value of excess reserves?
a. $400,000.
b. -$90,000.
c. $600,000.
* d. $ 0.

31. The interest rate represents
a. the index of creditworthiness for investors.
b. the transactions demand for money.
* c. the opportunity cost of holding money.
d. the market demand for bonds.

32. In the Classical quantity theory of money represented by MV = PQ, a change in the money supply in the long run will
* a. only change the price level.
b. only change real GDP.
c. cause real GDP (Q) to decrease.
d. cause real GDP (Q) to increase.

33. Which of the following actions could the Fed take to attempt to decrease the money supply?
a. Decreasing the reserve requirement.
b. Purchasing bonds.
* c. Selling bonds.
d. Redefining the velocity of money.

34. The interest rate will decline when the Fed
a. sells government securities on the open market.
* b. reduces the reserve requirement.
c. increases the discount rate.
d. increases the federal funds rate.

35. Which of the following monetary policies will decrease spending?
* a. An increase in the reserve requirement.
b. An increase in loans to the U.S. Treasury.
c. Open market purchases of government securities.
d. A decrease in the discount rate.

36. A point on the aggregate demand curve represents
a. the amount of investment undertaken at a given interest rate.
* b. the level of output demanded at a given price level.
c. the amount of spending required to entice producers to achieve a given output level.
d. the cost of production associated with a given production level.

37. If the economy is operating on the Keynesian range of the Aggregate Supply curve, an increase in Aggregate Demand will
* a. increase output only.
b. increase output but decrease prices.
c. increase prices only.
d. increase both output and prices.

38. The Phillips curve suggests a short run trade-off between
a. monetary policy and fiscal policy.
* b. unemployment rates and inflation.
c. unemployment rates and tax rates.
d. inflation and the money supply.

39. When imports fall
* a. income rises.
b. the government deficit rises.
c. income falls.
d. exports rise.

40. According to comparative advantage, trade between two countries
a. will benefit all the industries in each of the countries.
b. maximizes the amount of inputs that are used in the production of all products.
* c. allows each of the trading countries to use its resources most efficiently.
d. guarantees that consumption levels will be equal in the two countries.

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