Economics 155 Final Exam
Spring 1999

1.     All except one of the following are in the area of macroeconomics.  Which is the exception?

        a.     Why unemployment rises during recession.

        b.     Effects of inflation on people and economic activity.

        c.     The cycles of recession and expansion since World War II.

        d.     Expansion of the application of computers to health care diagnoses.

        e.     None of the above.

2.     Normative statements in economics are

        a.     the result of the scientific method.

        b.     derived by the inductive method.

        c.     based upon careful observation and testing, though such statements have not yet gained the status of a 'law'.

        d.     based upon subjective values or opinions.

        e.     related to macroeconomics but not microeconomics.

3.     "If you can gain more business and profit by lowering your price by 10%, so can all the others in your line of business."  This statement is vulnerable to

        a.     the post hoc fallacy.

        b.     the law of diminishing returns.

        c.     Occam's Razor.

        d.     the fallacy of composition.

        e.     normative fallacy limitation.

 4.     Consider the production possibilities table at the right. As wheat production is increased from 8 to 12 bushels, each added bushel of wheat requires the sacrifice of how much corn output?

        a.     12







Wheat (bushels)






Corn (bushels)






        b.     4

        c.     3

        d.     1.6         

        e.     1/3  

5.     All except one of the following will cause the production possibilities curve to shift.  Which is the exception?

        a.     Recovery from a recession.

        b.     Decrease in skilled labor.

        c.     Increased capital stock.

        d.     Discovery of new inexpensive energy sources.

        e.     None of the above.

6.     Points outside the production possibilities curve indicate

        a.     inflation.

        b.     combinations of outputs that can be achieved only when prices rise.

        c.     outputs that can be produced only if prices fall.

        d.     output combinations that cannot be produced currently.

7.     The demand for cabbage would be expected to shift to the right if

        a.     people's incomes fall and cabbage is a normal good.

        b.     the price of a complement such as corned beef falls.

        c.     good weather increases cabbage production and cabbage prices fall.

        d.     there is a subsidy given to cabbage producers.

        e.     the prices of substitutes for cabbage decline.

8.     When moving along a fixed demand curve, all of the following except one is being held constant.  Which is the exception?

        a.     The prices of substitute goods.

        b.     Incomes and wealth.

        c.     The price of the good itself.

        d.     Prices and availability of complementary goods.

        e.     Expectations as to the future price and availability of the good itself.

9.     According to the law of supply

        a.     higher prices mean higher profits.

        b.     higher prices result in a shift of the supply curve to the right.

        c.     greater quantities will be supplied at higher prices.

        d.     increased costs shift the supply curve to the right.

        e.     all of the above.

10.  If beans are inferior goods, then

        a.     decreased bean prices result in people buying less beans.

        b.     there is no relationship between bean purchases and prices of complements.

        c.     the demand for beans falls as income rises.

        d.     people will substitute other goods for beans as the prices of substitutes rise.

        e.     beans are a necessity.

11.  In the graph to the right, if a $4 ceiling price is imposed by the government, there will be a

        a.     shortage of 60.

        b.     tendency for the price to fall.

        c.     surplus of 80.

        d.     shortage of 80.

        e.     shift in the supply curve to the right.  








12.  Assume leather is an input in the production of belts. An increase in the price of leather would be expected to

        a.     increase the supply of belts.

        b.     decrease the demand for belts.

        c.     decrease the price of belts.

        d.      increase the price of belts.

        e.     increase the demand for belts.

13.  If both the demand and supply for a good increase, the equilibrium price will _____ and equilibrium quantity will _____

        a.     rise, rise.

        b.     rise, fall.

        c.     be indeterminate, fall.

        d.     be indeterminate, rise.

        e.     rise, be indeterminate.

14.  The non exclusion characteristic, as it applies to public goods, means that

        a.     the producer of the good is unable to keep people from consuming the good once it is produced.

        b.     only people with high incomes can afford the good.

        c.     taxes will prevent consumption of such goods.

        d.     no person benefits from this good, for example, pollution.

        e.     there is an abundance of the good.

15.  A progressive tax is a tax that

        a.     takes more dollars of taxation from those with higher incomes.

        b.     is on luxuries but not necessities.

        c.     follows the benefits received principle of taxation.

        d.     has a higher average tax rate at higher income levels.

        e.     has a lower marginal tax rate as income rises.

16.  The natural rate of unemployment is the unemployment rate associated with

        a.     zero inflation.

        b.     a balanced budget.

        c.     a stable rate of inflation.

        d.     no unemployment at all.

        e.     maximum economic growth.

17.  Mary lost her job as a drill press operator when computer assisted drilling equipment was installed by her former employer. Mary is now seeking medical training.  Mary's unemployment is

        a.     frictional.

        b.     secular.

        c.     structural.

        d.     natural.

        e.     cyclical.

18.  The inflation rate can be found by

        a.     subtracting real income from nominal income.           

        b.     subtracting last year's price index from this year's price index.

        c.     calculating the percent change in real income.

        d.     subtracting last year's price index from this year's price index and dividing this difference by last year's price index.

        e.     subtracting real income from nominal income and dividing this difference by nominal income.

19.  Which of the following would be excluded from GDP?

        a.     The purchase price of 200 shares of WalMart stock.

        b.     The output of clothing bought by the Defense Department for members of the Air Force.

        c.     The value of trucks exported to Germany.

        d.     The purchase of tractors by farmers.

        e.     None of the above.

20.  Which of the following is a transfer payment as that term is used in economics?

        a.     Salary received by IRS employee.

        b.     Profits earned by an entrepreneur.

        c.     Tips earned by a waiter.

        d.     Unemployment compensation benefits.

        e.     Commissions earned by a salesperson.

21.  If a country's stock of privately owned capital is greater at the end of the year than it was at the beginning of the year, it must be the case that

        a.     depreciation was less than net private domestic investment.

        b.     net private domestic investment exceeded gross private domestic investment.

        c.     interest rates have fallen.

        d.     net private domestic investment was positive.

        e.     the change in business inventories was positive.

22.  Use the table at the rightThe marginal propensity to consume is  











        a.     .3

        b.     .4

        c.     .5

        d.     .6

        e.     .7  







23.  Assume the MPC is .7.  Equilibrium GDP is $200 below natural or potential GDP. What change in investment will close this gap?

        a.     + $60.

        b.     + $66.7.

        c.     + $140.

        d.     - $66.7.

        e.     - $140.


24.  Use the table at the right. Assume no taxes or government. Which of the following is correct?

        a.     The MPS is .2.













        b.     The MPC is .2.

        c.     The multiplier is 2.5.

        d.     The multiplier is 4.

        e.     The multiplier is 5.  







25.  If actual investment exceeds planned (intended) investment, the most likely result is

        a.     a decrease in inventory investment.

        b.     an increase in inventory investment.

        c.     a decrease in the value of the multiplier.

        d.     imminent inflation.

        e.     increasing profits.

26.  Assume an MPS of .2, an increase in autonomous (lump-sum) taxes of $40 would be expected to lower income by

        a.     $40.

        b.     $80.

        c.      $160.

        d.     $180.

        e.     $200.

27.  Which would be the most appropriate discretionary fiscal policy in time of severe inflation?

        a.     Equal increases in taxes and government spending.

        b.     Lowering taxes and government spending by equal amounts.

        c.     Increasing taxes while reducing spending.

        d.     Increasing spending with my change in taxes.

        e.     Decrease in the money supply.

28.  Assume the economy is at an equilibrium income level of $600. The MPC is .6. Next the government increases taxes and spending by $75. The new equilibrium income level will be

        a.     $600.

        b.     $645.

        c.     $675.

        d.     $750.

        e.     None of these.

29.  When you put $.50 into a vending machine, you are using money as a

        a.     store of value.

        b.     standard of deferred payment.

        c.     standard of value.

        d.     medium of contract fulfillment.

        e.     medium of exchange.

30.  According to the quantity theory of money, the long term influence of money is on the

        a.     unemployment rate.

        b.     price level.

        c.     growth of real output.           

        d.     real interest rates.

        e.     budget deficit.

31.  Assume the Capital Bank initially has no excess reserves.  The required reserve ratio is 12.5% on checkable deposits.  Next, the Capital Bank receives a new $200 checkable deposit.  Excess reserves at this bank are now

        a.     $1600.

        b.     $200.

        c.     $175.

        d.     $125.

        e.     $25.

32.  Legal (actual) reserves of a bank consist of

        a.     cash in vault and U.S. government securities.

        b.     cash in vault and borrowing at the Federal Reserve.

        c.     cash in vault and deposits at the Federal Reserve.

        d.     cash in vault and time deposits.

        e.     gold and U.S. government securities.

33.  The Federal Funds rate is the rate of interest

        a.     a bank charges its biggest and best commercial customer.

        b.     the Federal Reserve charges a bank when the bank borrows reserves.

        c.     paid on U.S. Treasury Bills.

        d.     one bank pays another when borrowing its excess reserves.

        e.     the federal government charges banks for loans.

34.  When the required reserve ratio is 12.5% and the Federal Reserve buys $10 billion of government securities, bank actual/legal reserves _____ by $_____ and the potential money supply _____ by $_____.

        a.     rise,  10,  rises,  40.

        b.     rise,  10,  rises,  80.

        c.     rise,  10,  rises,  87.5. 

        d.     fall,  10,  falls,  12.5.

        e.     rise,  10,  rises,  125.

35.  The most expansionary monetary policy consists of

        a.     buying securities, lowering the reserve requirement, and lowering the discount rate.

        b.     selling securities, lowering the reserve requirement, and lowering the discount rate.

        c.     buying securities, lowering the reserve requirement, and raising the discount rate.

        d.     lowering the discount rate and lowering the reserve requirement.

        e.     increasing the Federal Funds rate, lowering the discount rate, and selling government securities.

Use the Following Graphs to Answer Question 36


36.  Which depicts an increase in exports?

        a.     Graph A.

        b.     Graph B.

        c.     Graph C.

        d.     Graph D.

        e.     None of these.

37.  Using the model of Aggregate Demand and a positively sloped short-run Aggregate Supply, assume equilibrium exists.  An increase in government spending will result in

        a.     increased output but decreased prices.

        b.     increased prices and output.

        c.     increased output and no change in prices. 

        d.     no change in output or prices.

        e.     increased prices but no change in output.

38.  The short run Phillips curve is _____ and the long run Phillips curve is _____.

        a.     positively sloped, negatively sloped.

        b.     vertical, negatively sloped.

        c.     negatively sloped, positively sloped.

        d.     negatively sloped, vertical.

        e.     horizontal, vertical.

39.  Free trade based upon comparative advantage is economically beneficial because

        a.     it promotes an efficient allocation of the world's scarce resources.

        b.     it increases competition.

        c.     it enables countries to consume beyond their respective production possibility frontiers.

        d.     of all the above reasons.

40.  Consider the two country, two good world given in the table to the right.  According to the principle of comparative advantage,

        a.     the US will import beef from Mexico and export pork to Mexico.

Output per unit of Labor










        b.     the US will export beef to Mexico and import pork from Mexico.

        c.     the US will export both goods to Mexico.

        d.     the US will import both goods from Mexico.

        e.     no trade will take place between the US and Mexico.





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