PART I: Multiple
Choice. 10 points (each question worth ½ point)
1. Which of the following statements about gross domestic product (GDP) is correct?
a) GDP measures the market value of final goods and services produced within a country.
b)
GDP measures the market value of goods and
services produced by
c)
GDP measures physical quantity of goods produced
in the
d) GDP measures the market value of both intermediate and final goods and services produced within a country.
Ans: a
2. Which of the following is considered part of consumption spending in the calculation of GDP for 2001?
a)
The construction of a new house in
b) The purchase of bootleg CD’s of your favorite rock band on June 2001.
c)
The payment for a haircut on
d) The purchase of a baseball that was signed by legendary player Babe Ruth in 1920.
Ans: c
3. Nominal GDP is higher this year than last. We can conclude that:
a) Production levels are higher this year.
b) Price levels are higher this year.
c) There is less unemployment this year.
d) We need more information before commenting.
Ans: d
4. Which of the following measures is the best indicator of changes in the well-being of individuals in a country?
a) An increase in nominal GDP
b) An increase in real per-capita GDP
c) An increase in real GDP
d) An increase in the money supply
Ans: b
5. Every payment from one individual to another:
a) increases GDP
b) decreases GDP
c) increases national income
d) none of the above
Ans: d
6. The natural rate of unemployment is equal to:
a) The minimum unemployment rate consistent with price stability
b) The long-run average unemployment rate around which the short-run unemployment rate fluctuates
c) The deviation of the unemployment rate from its long-run average
d) The cyclical unemployment rate
Ans: a or b
7. Which type of unemployment is most likely to be affected by more information about available jobs?
a) Frictional
b) Structural
c) Cyclical
d) Seasonal
8. If CPI =132 for this quarter (Q1 2004), by how much have prices risen over the last decade. The base year is Q1 1994.
a) By 132%
b) By 1.32%
c) By 32%
d) We cannot tell, we need the CPI for Q1 1994.
Ans: c
9. Consider a closed, private economy, where GDP is composed of consumer spending and investment spending that is independent of the level of output. If investment spending increases by 10 million dollars and as a result aggregate output increases by 10 million dollars, then the slope of the planned aggregate expenditure curve is:
a)
vertical
b)
horizontal
c)
upward sloping
d)
Not enough information
Ans: b
10. When aggregate output equals planned aggregate expenditures, unplanned changes in inventories in the economy should be:
a) positive
b) zero
c) negative
d) It depends.
Ans: b
11. If inventories fall unexpectedly, a firm will most likely
a) reduce output
b) increase output
c) keep producing the same amount
d) none of the above
Ans: b
12. The government cuts taxes by $300 billion, but does not change spending. The MPS in the economy is .2. The effect on GDP will be:
a) an increase of $300 billion
b) a decrease of $300 billion
c) an increase of more than $300 billion
d) a decrease of less than $300 billion
Ans: c
13. Which of the following actions would successfully eliminate an inflationary tendency in the economy?
(I) Raise taxes
(II) Lower taxes
(III) Increase government purchases
(IV) Decrease government purchases
(V) Raise transfer payments
(VI) Lower transfer payments
a) (I), (III), and (V)
b) (II), (IV), and (VI)
c) (I), (IV), and (VI)
d) (II), (V), and (VI)
Ans: c
14. If government spending is increased by $500 and taxes are increased by $500, the equilibrium level of income will
a) decrease by $500
b) increase by $500
c) not change
d) it depends on the MPC
Ans: b
15. Assuming there is no foreign trade in the economy the leakages/injections approach to equilibrium can be written as
a) S + T + I = G
b) S – T = I + G
c) S + I = T + G
d) S + T= I +G
Ans: d
16. The deposit of $500 of currency when the required reserve ratio is 0.20 has which of the following IMMEDIATE effects?
a) Increases the money supply by $500
b) Increases the bank's required reserves by $400
c) Increases the bank's excess reserves by $400
d) Increases the transactions accounts in the bank by $400
Ans: c
17. The money multiplier process would come to a halt if:
a) No one borrowed from a bank
b) The banks' reserves were entirely cash in their vaults
c) Individuals held no currency and made all their transactions with checks
d) The assets of banks equaled their liabilities
Ans: a
18. Fill the blank
As the Fed engages in open market purchases of bonds we expect interest rates to ( fall )
19. Fill the blank
Suppose the reserve requirement is 5% and that all banks hold minimum reserves. Assume that there is a new deposit of $1,000 in a bank.
How much (new) money will the entire banking system be able to create?
$ 20,000
20. As the interest rate increases
a) planned investment decreases, but aggregate expenditure remains constant
b) planned investment increases, but aggregate expenditure remains constant
c) planned investment decreases and aggregate expenditure decreases
d) planned investment increases and aggregate expenditure increases
Ans: c
PART II: Short Answer Questions. 10 points (each question worth 2
points)
Answer each question fully and SHOW YOUR WORK!!! You will lose credit for correct answers which seemingly came out of nowhere.
1. “Being concerned about the recent recession, I decided to go out and spend money to help the recovery of the economy. This time I bought a second-hand Chevy 95. If everybody acted like me our economy would be out of the slump!” Comment.
No. Buying used goods
do not help raise today’s GDP, since GDP accounts only for goods produced this
year using factors of production located in
2. Mention one group that has been negatively affected by inflation in terms of their income loss.
One example is fixed
income earners. For instance, the elderly who receive a fixed pension every
month and hence inflation erodes their real income. Another example is given by
the poor, since welfare benefits have not raised as much as inflation over the
last decades.
3. If the government can expand output by the cutting taxes and expanding expenditures then why doesn’t it do it continuously to generate growth?
The expansionary tools of the government have limits. Not only output
will not grow forever due to productive limitations, but also budget deficit
will grow, and hence future generations will have to pay this debt by
sacrificing their consumption.
4. “If the Fed engages in open market purchases of bonds for 50 million dollars, the money supply will increase by 50 million dollars” Comment
No. An initial
increase in money supply of 50 million dollars will have a larger effect on the
total final supply of money due to the money multiplier effect. (Recall money
multiplier equals 1/Required Reserve Ratio)
5. “Commercial banks can only lend money to other private citizens or companies the dollars deposited with them. Therefore banks cannot create money. They can only transfer money from bank depositors to people who borrow from banks.” Qualify this statement.
False. Banks actually
create money by making loans out of its excess reserves. These loans are the
reason why an increase of the money supply by $1 will have an effect larger
than $1.
PART III: Essay – 10 points (each
question worth 5 points)
Essay
# 1
Budget
Deficit = Government Expenditures - Taxes
Keeping the budget deficit low will imply cutting on government expenditures and/or raising taxes. Both actions reduce aggregate expenditure and hence can lead to a fall in output in the economy.
Essay # 2
“There have been so many aborted take-offs that
-The Economist
GDP= C+I+G+(EX-IM)
-Exports
to
-Investment
has increased due to business cycles
Inflationary
monetary policies that favor borrowers (Japanese firms) has also freed up
investment since firms have to pay back less money in real terms than they
borrowed. Another accepted answer is that now Japanese firms can restructure
their debt, by borrowing at low interest rates to pay their old debts (that
were charging higher interests).
Of course second-round
effects could be included here too.