Economics 155 Final Exam
Spring 1998

1. Which one of the following quotations provides the best example of a positive as opposed to a normative economic statement?

a. "General Motors is too large a company, and it would be better for everyone if it were broken up into competing firms."

b. " The government needs to do all that it can to provide economic assistance for the weak and the poor."

c. "The poor deserve better economic opportunities than they have had thus far."

d. "A general 5 percent reduction in the price of automobiles would increase the sale of automobiles by at least 2 percent."

e. "What this country needs is a 5 cent beer."

2. 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

3. The fundamental economic questions ("what", "how", and "for whom") must be solved in:

a. market economies

b. mixed economies

c. planned (command) economies

d. all of the above

e. none of the above

4. 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

5. A 'straight-line' production possibility curve differs from a concave (or 'bowed-out') production possibility curve in which of the following ways?

a. the 'bowed-out' production possibility curve has a constant opportunity cost, whereas the 'straight-line' production possibility curve does not

b. a 'straight-line' production possibility curve has a constant opportunity cost, whereas the 'bowed-out' production possibility curve does not

c. the 'straight-line' production possibility curve does not show scarcity, whereas the 'bowed-out' production possibility curve does

d. a 'straight-line' production possibility curve must be 'upward-sloping to the right' to reflect the law of increasing costs

6. Which of the following would not be an example of capital:

a. oil refinery in New Jersey

b. shipyard in San Francisco

c. Great Southern Savings and Loan building

d. undeveloped oil field in Oklahoma

e. steel mill in Pittsburgh

7. Assume that the Fairweather Shoe Company faces a downward sloping demand curve. In March it sold 1000 pairs of shoes at $30 a pair, but during the following month it was able to sell only 500 pairs at the same price. It may be concluded that during this time period the company had

a. an increase in the quantity demanded

b. an increase in demand

c. a decrease in demand

d. a decrease in the quantity demanded

e. none of the above

8. If the demand curve for product B shifts to the right as the price of product A declines, it can be concluded that:

a. A and B are substitute goods

b. A and B are complementary goods

c. A is an inferior good and B is a superior good

d. A is a superior good and B is an inferior good

e. both A and B are inferior goods

9. Which of the following will NOT shift the demand curve for grapefruit?

a. An announcement that eating grapefruit before every meal will induce weight loss.

b. An announcement that the workers who harvest grapefruit are demanding higher wages.

c. An announcement that eating lots of grapefruit causes complexion problems.

d. An announcement that grapefruit will definitely cost more next week.

e. A newspaper story reporting that the price of oranges has skyrocketed

10. When income increases and the demand for a particular good also increases, we call the good in question

a. an inferior good

b. a normal good

c. a substitute good

d. a complementary good

11. The establishment of an effective price floor (support) can be expected to bring about quantity supplied

a. equal to the quantity demanded

b. greater than the quantity demanded

c. less than the quantity demanded

d. none of these

12. An increase in the wage paid to grape pickers will cause the

a. demand curve for grapes to shift to the right -- resulting in higher price for grapes and a reduction in amount consumed

b. demand curve for grapes to shift to the left resulting in higher price for grapes and a reduction in amount consumed

c. supply curve for grapes to shift to the left -- resulting in lower price for grapes and reduction in amount consumed

d. supply curve for grapes to shift to right -- resulting in lower price for grapes and increase in amount consumed

e. supply curve for grapes to shift to left -- resulting in higher price for grapes and decrease in amount consumed

13. If the industry demand curve for sports cars shifts sharply to the left as the industry supply curve for sports cars moves to 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. Historically, real GDP has risen less rapidly than money GDP because:

a. exports to foreign nations have risen more rapidly than imports

b. the general price level has fallen

c. technological progress has resulted in more efficient production

d. the general price level has risen

e. price indices have not reflected improvements in product quality

15. If the price index is 225.1, this means that:

a. prices are 125.1 percent higher than in the base year

b. money GDP is the same as real GDP

c. the inflation rate is 225.1 percent higher than in the base year

d. any basket of goods costs $125.10 more in terms of a base year

16. Real income differs from money income in that real income:

a. refers to earned income, while money income refers to unearned income

b. refers to income minus the amount put into savings, while money income includes savings

c. reflects constant dollar purchasing power, while money income reflects current dollar purchasing power

d. represents the income value used in determining income taxes, while money income is the gross income actually received before taxes

17. A particular tax takes $400 from the Brown family which has an income of $16,000. The Millers have an income of $40,000 and the same tax takes $800 from them. Miller attempts to convince Brown that this tax is progressive. Is Miller correct?

a. yes, since the tax takes more from his family it is progressive

b. no, this is a proportional tax

c. no, the tax is actually regressive

d. no, the tax is degressive

e. uncertain, we need to know the tax in relation to wealth to be able to say if it is progressive, regressive, or proportional

18. Which of the following statements is correct?

a. Public goods are divisible among individual consumers, bought voluntarily out of private incomes, and yield widespread social benefits

b. Private goods are indivisible among individual consumers, bought voluntarily out of private incomes, and yield no significant social benefits

c. Public goods are indivisible among consumers, yield widespread social benefits, and may be purchased by government with tax revenues

d. Private goods are divisible among consumers, yield direct benefits to the purchaser and are financed by government

19. When full employment exists:

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. During a period of unanticipated high inflation

a. borrowers are better off because they can pay off their loans with currency that is worth less

b. borrowers are better off because they have to pay off their loans with currency that is worth more

c. lenders are worse off because they cannot find anyone who wants a loan

d. lenders are worse off because they are repaid with currency that is worth more

e. lenders are better off because they are repaid with currency that is worth less

21. The main difference between the consumer price index and the implicit GDP price deflator is that the former:

a. collects information on consumer goods only and the latter on producer goods only

b. measures price increases and the latter measures price decreases

c. deals with nondurable goods and the latter deals with durable goods

d. deals with a typical basket of consumer goods and the latter deals with the whole range of products produced in an economy

22. If disposable income rises from $600 billion in year 1 to $650 billion in year 2 and household consumption subsequently increases from $540 billion in year 1 to $570 billion in year 2, the average propensity to consume in year 1 was

a. 0.60

b. 0.70

c. 0.80

d. 0.90

e. none of the above

Use the following table to answer question 23

23. From the table above (quantities in $billions), we know that:

a. when GDP is less than 1,600, it will fall

b. when GDP is greater than 2,000, it will rise

c. the multiplier is 2.5

d. when GDP = 1900, the economy is in equilibrium

e. all the above are confirmed

24. The unplanned accumulation of inventory is a sign that:

a. aggregate expenditure exceeds current national income

b. planned investment exceeds planned saving

c. planned investment equals planned saving

d. current national income exceeds aggregate expenditure

25. Suppose the economy is in equilibrium when total spending is $3600 billion and the MPC is 0.60. Full employment can be achieved if total spending is $4200 billion. To achieve this, government spending should be increased by billion.

a. $500

b. $225

c. $100

d. $240

26. The tools of government fiscal policy include all of the following except:

a. government spending on goods and services

b. changes in the money supply

c. changes in tax rates

d. the imposition of new taxes

e. changes in welfare payments

27. If the MPC equals .75 and Government expenditures increase by $20 and Taxes decrease by $30, income will:

a. increase by $200

b. decrease by $200

c. increase by $170

d. decrease by $170

e. none of these are correct

28. An effective countercyclical fiscal policy would include:

a. raising government expenditures and raising taxes in times of expansion

b. raising government expenditures and cutting taxes in times of recession

c. raising government expenditures and cutting taxes in times of expansion

d. reducing government expenditures and raising taxes in times of recession

e. none of the above would be effective

29. In the most basic sense, 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

30. Suppose the required reserve ratio is 10 percent. Then, an increase in the banking system's excess reserves by $l,000 may result in a total expansion of the money supply for the banking system as a whole by as much as:

a. $1,000

b. $10,000

c. $100,000

d. $9,000

e. $90,000

31. To solve the demand-pull inflation problem, the "Monetarists" recommend the Federal Reserve

a. decrease the rate of growth of the money supply

b. increase interest rates and also increase the money supply

c. increase taxation and decrease government expenditure

d. increase interest rates and buy government securities

32. In the Keynesian view, the link between the money supply and changes in real macroeconomic variables is best described by

a. a change in interest rates that induces a change in investment spending, a change in aggregate demand, and thus an immediate and unavoidable change in real GDP.

b. a change in interest rates that induces a change in investment spending, a change in aggregate demand, and thus a potential change in real GDP.

c. a change in investment spending caused directly the Fed's adjusting its own investment portfolio and which translates into a change in aggregate demand and finally a change in GDP

d. a change in banker's interest rates by direct intervention that may or may not alter real GDP by altering investment spending

e. none of the above

33. In a particular year we were experiencing 8 percent unemployment, real GDP was decreasing by 0.5 percent and the rate of inflation was less than 1 percent. In this situation, appropriate fiscal and monetary policy would consist of:

a. a tax cut and sale of government securities on the open market

b. a tax cut and purchase of government securities on the open market

c. a tax increase and decrease of the discount rate

d. balance the federal budget and sale of government securities on the open market

e. a decrease in government spending and decrease reserve requirements

34. 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

35. Assume that today no bank has excess reserves and the reserve requirement is 20%. Tomorrow the Federal Reserve cuts the reserve requirement to half of its initial level. Which of the following is true after the reduction?

a. banks will be enabled to make new loans

b. excess reserves will exist in banks

c. the Fed exercised expansionary policy

d. all of the above

e. none of the above

Use the following graph to answer question 36

36. Suppose government ends its regulations for certain areas, fostering improvements in worker productivity. Initially, this shows up in the diagram as:

a. a leftward shift in curve 1

b. a leftward shift in curve 2

c. a rightward shift in curve 1

d. a rightward shift in curve 2

37. According to the Keynesian view, along which portion of the aggregate supply curve will a given increase in aggregate demand have the least inflationary and greatest employment effects?

a. the horizontal portion of the aggregate supply curve

b. the upward sloping portion of the aggregate supply curve

c. the vertical portion of the aggregate supply curve

d. none of the above

38. Stagflation is the combination of

a. high inflation and high employment

b. high inflation and high taxes

c. high inflation and high unemployment

d. high inflation and high interest rates

e. none of the above describe the term stagflation

39. An increase in US exports and/or a decrease in US imports will cause

a. an increase in aggregate expenditures

b. a decrease in aggregate expenditures

c. no impact on aggregate expenditures

d. no impact on the economy

40. Suppose that with the same resources, the U.S. can produce 50 barrels of oil or 50 tons of wheat; Saudi Arabia can produce 100 barrels of oil or 80 tons of wheat.

a. Saudi Arabia has comparative advantage in both goods

b. The U.S. has comparative advantage in both goods

c. The U.S. has comparative advantage in wheat

d. Saudi Arabia has comparative advantage in wheat

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