Economics 155 Final Exam
Spring 1997

1. The principal economic function of price is to

a. allocate scarce resources in the economy

b. make sure all businessmen make the same amount of profit

c. make certain only worthy people get products

d. make people work in order to buy things they want

e. prevent overproduction of important goods

2. Much of the faith in the results generated by the market (free enterprise) type economic system is based upon operation of the Invisible Hand as described by Adam Smith. What does the Invisible Hand refer to?

a. the tendency for the government sector to solve major problems

b. the tendency for efficient firms to pay factors of production more than their contribution to the firm's sales

c. the development of cooperation between unions and businesses leading to the best good for all

d. the tendency for resources to find their way into their most efficient uses

3. The safest way for an individual to leave a burning theater is to run for the nearest exist; it is therefore also the best means of escape for a large audience. This illustrates:

a. the fallacy of limited decisions

b. the fallacy of composition

c. Wagner's Law

d. the "after this, therefore because of this" fallacy

4. The production possibilities curve demonstrates the basic principle that

a. given full employment of all of a nation's resources, producing more of one good necessarily entails producing less of another

b. in a mixed capitalistic system with free markets, the economy will automatically employ all of its resources

c. exchange is a necessary corollary of specialization

d. given full employment, to produce more of one good a nation will eventually be forced to forgo production of other goods

5. On a production possibilities curve, the optimum or best combination of output is

a. at a point near the top of the curve

b. at a point near the middle of the curve

c. at the precise midpoint of the curve

d. at a point near the bottom of the curve

e. impossible to say as this is a value judgment to be made by society

6. The law of increasing opportunity costs states that:

a. if the prices of all the resources devoted to the production of goods increase, the cost of producing any particular good will increase at the same rate

b. if the sum of the costs of producing a particular good rises by a specified percent, the price of that good must rise by a greater relative amount

c. the sum of the costs of producing a particular good cannot rise above the current market price of that good

d. if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of other goods to do so

7. If as a result of an increase in the price of X the demand for Y declines, X and Y are:

a. substitute goods

b. complementary goods

c. inferior goods

d. normal goods

8. Assume that the demand curve for product C is downward sloping. If the price of C falls from $2.00 to $1.75:

a. the demand for C will decrease

b. the demand for C will increase

c. a larger quantity of C will be demanded

d. a smaller quantity of C will be demanded

e. none of the above

9. Four of the five events described below might reasonably be expected to shift the demand curve for beef to a new position. One would not shift that demand curve. That one is:

a. a rise in the price of a substitute for beef

b. a fall in the price of beef

c. an increase in the money incomes of beef consumers

d. a decrease in the money incomes of beef consumers

e. a change in people's tastes with respect to beef

10. A leftward shift in the demand curve for X might be caused by:

a. a decline in the price of product X

b. an increase in the price of substitute product Y

c. an increase in money incomes if X is a normal good

d. an increase in the price of complementary good Y

e. a decrease in income if X is an inferior good

11. Which of the following statements is incorrect? (Hint: draw diagrams)

a. if supply declines and demand remains constant, equilibrium price will rise

b. if demand decreases and supply increases, equilibrium price will rise

c. if supply increases and demand decreases, equilibrium price will fall

d. if demand increases and supply decreases, price will rise

e. if supply increases and demand remains constant, equilibrium price will fall

12. The complaint that there are not enough parking spaces in downtown areas indicates that

a. cities should build more parking places

b. everyone should ride mass transit into the city

c. the "market" for parking places is in equilibrium

d. the price of parking in downtown areas is below the market-clearing price

13. (I) In the corn market, demand often exceeds supply and supply sometimes exceeds demand.

(II) The price of corn rises and falls in response to changes in supply and demand.

In which of these two statements are the terms "demand" and "supply" being used incorrectly?

a. in both statements

b. statement I

c. statement II

d. in neither statement

14. Disposable 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. Intermediate goods are excluded from GDP because

a. intermediate goods go into inventories, and hence are not sold

b. their inclusion would lead to double counting

c. they remain within the business sector

d. none of the above

16. Which of the following items is excluded from the calculation of GDP:

a. the purchase of 100 shares of General Motors stock

b. the sale of 100 shares of General Motors stock

c. the value of a homemaker's services

d. the sale of unused military surplus

e. all of these

17. Sales taxes are usually regarded by economists as:

a. regressive taxes

b. proportional taxes

c. progressive taxes

d. property taxes

e. none of the above

18. Given that taxes are $2,000 when income is $10,000 and taxes are $4,000 when income is $15,000, then the marginal tax rate is:

a. 20 percent

b. 26.6 percent

c. 40 percent

d. none of the above

19. When economists say full employment exists, they mean

a. everybody is working

b. there is a very high level of employment, with the unemployed being largely frictionally unemployed

c. frictional unemployment is virtually zero

d. the only people who are unemployed are those who refuse to accept jobs at the going wage

20. The New York Times of September 9, 1979, reported that certain groups of people are out of work because "they lack the education, skills, experience or motivation to get a job and keep it." Such groups of people are called

a. frictionally unemployed

b. structurally unemployed

c. cyclically unemployed

d. underemployed

21. The Consumer Price Index rose from 340 in 1987 to 365 in 1988. The inflation rate from l987 to 1988 was:

a. 14 percent

b. 7.4 percent

c. 4.1 percent

d. 3.54 percent

e. less than 2 percent

Use the following table to answer question 22.

22. (Use table above for this question) The MPS is:

a. 0.05

b. 0.25

c. 0.20

d. 0.15

e. 0.10

23. If investment spending increases by $8 billion and the MPS equals .2, the level of GDP (income) will increase by ______ billion.

a. $14

b. $16

c. $28

d. $32

e. $40

24. Suppose we knew that a person with an income of $100 per week spent $90 per week on consumption. With this information alone we can conclude

a. that his/her marginal propensity to consume is 90%

b. that his/her marginal propensity to consume is 80%

c. that his/her marginal propensity to consume is 25%

d. nothing about the level of his/her marginal propensity to consume without additional information

25. Assume the MPC is 4/5. If investment spending increases by $2 billion, the level of GDP (income) will increase by $_____ billion?

a. 10

b. 5

c. 4

d. 2

e. 4/5

26. Which of the following statements best describes 'discretionary' fiscal policy?

a. A policy where Federal Reserve operations help to maintain aggregate demand near the full employment level of national income

b. A policy of varying the nature and level of governmental expenditures and rates of taxation in order to maintain aggregate demand near the full employment level of national income

c. A policy whereby governmental expenditures and rates of taxation are automatically geared to the level of national income

d. A combination of responses (a) and (b) correctly describe 'discretionary' fiscal policy

27. If the MPC equals .9 and Government expenditures increase by $20 and Taxes decrease by $30, income will:

a. increase by $470

b. decrease by $470

c. increase by $70

d. decrease by $70

e. none of these are correct

28. The deficit of the Federal government differs from the Federal debt in that:

a. the deficit is larger than the debt

b. the deficit is paid off each year while the debt is paid off each census year

c. the deficit is owned by Americans while the debt is owned by foreigners

d. the deficit is a flow while the debt is a stock

e. none of the above, these terms have the same meaning

29. Suppose that you deposit $2,000 cash in your checking account at a commercial bank. If the bank is fully loaned up, and if the required reserve ratio is 10 percent, what is the maximum amount that the bank can lend?

a. $200

b. $1,800

c. $2,000

d. $18,000

e. $20,000

30. Paper money and demand deposits are valuable because:

a. the government or central bank "prints" them

b. there is gold to back them

c. people think there is gold to back them

d. people can buy goods and/or services with them

e. people are ordered to use them

31. The money supply is "backed"

a. dollar-for-dollar with gold bullion

b. dollar-for-dollar with gold and silver

c. by government bonds

d. by the government's ability to control the supply of money and therefore to keep its value relatively stable

32. Suppose the S. O. Bank has excess reserves of $3,000 and outstanding demand deposits of $50,000. If the reserve requirement is 30 percent, what is the size of the bank's actual reserves:

a. $30,000

b. $18,000

c. $15,000

d. $12,000

e. not enough information to determine the reserves

33. Which of the following best describes the Keynesian cause-effect chain of an easy money policy?

a. an increase in the money supply will lower the interest rate, increase investment spending, and increase GDP

b. an increase in the money supply will raise the interest rate, decrease investment spending, and decrease GDP

c. a decrease in the money supply will raise the interest rate, decrease investment spending, and decrease GDP

d. a decrease in the money supply will lower the interest rate, increase investment spending, and increase GDP

34. How many Federal Reserve Banks are there in the U.S.?

a. 5

b. 7

c. 10

d. 12

e. 50

35. A decrease in legal reserve requirements will tend to ________ the money supply and

________ commercial bank loans.

a. reduce; reduce

b. reduce; increase

c. increase; increase

d. increase; decrease

e. none of the above

36. Which of the following would result in an increase in potential GDP? Curve:

a. AS shifts right

b. AS shifts left

c. Movement down AS

d. Movement up AD

e. none of the above

37. Which of the following statements best describes the relationship between total

output, total spending, and the general price level?

a. prices are stable until full employment is reached; then any additional spending will be purely inflationary

b. spending, output, and prices will always increase proportionately

c. for a time increases in spending will cause large increases in output and little or no increase in prices; but as full employment is approached prices begin to rise more rapidly

d. spending and output are directly related; but spending and prices are inversely related

38. In the Classical Model, the major determinant of saving is:

a. the interest rate

b. the level of income

c. the age composition of the population

d. the income tax rate

e. none of the above

39. One of the major advantages of international trade based on comparative advantage is:

a. both nations are able to consume beyond the limit of their own production possibilities

b. large, powerful nations can benefit at the expense of small, weak nations

c. a nation's comparative advantage does not change once it is engaged in international trade

d. once a nation discovers how its imports are made, it can manufacture them domestically at lower cost

40. A nation has a comparative advantage when it:

a. can produce a good at a lower opportunity cost than another nation

b. can produce a good with fewer resources than another nation

c. finds a new way to improve existing goods

d. can produce a good without using up any of its capital stock

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