Econ 102 Introductory Macroeconomic Analysis

Practice Final

Note: There will be 3 questions on the final concerning the articles which you were assigned
this semester. They could be on any of the following 3 articles:

Jeffrey Sachs, “Institutions Matter, but Not for Everything,” Finance and Development, June,
2003.
“The poor and the rich,” The Economist, May 25, 1996
Tim Harford, The Undercover Economist, Chap. 8, “Why Poor Countries are Poor”

I hope you read these long ago, when they were originally assigned. But if not, this is your last
chance!
________________________________________
____ 1. Which of the following examples of production of goods and services would count as part of U.S. GDP?
a. Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery
store in Canada.
b. Ian, an American citizen, grows peaches for his family in the back yard of their Atlanta
home.
c. Brian, an American citizen, grows marijuana in Mexico and sells it in Europe
d. None of the above examples of production would count as part of U.S. GDP.

____ 2. If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what is real GDP?
a. $312.5 billion
b. $207.5 billion
c. $31.25 billion
d. None of the above is correct.

____ 3. The economy's inflation rate is the

a. price level in the current period.
b. change in the price level from the previous period.
c. change in the gross domestic product from the previous period.
d. percentage change in the price level from the previous period.

____ 4. In the CPI, goods and services are weighted according to

a. how long a market has existed for each good or service.
b. the extent to which each good or service is regarded by the government as a necessity.
c. how much consumers buy of each good or service.
d. the number of firms that produce and sell each good or service.
 Table 24-1
Year Peaches Pecans
2005 $11 per bushel $6 per bushel
2006 $9 per bushel $10 per bushel
____ 5. Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels
of pecans. Using 2005 as the base year, the CPI for 2006 is
a. 100.
b. 120.
c. 200.
d. 240.

____ 6. Assume an economy experienced a higher inflation rate, as measured by the CPI, between 2004 and 2005
than it experienced between 2003 and 2004. Which of the following scenarios is consistent with this
assumption?
a. The CPI was 100 in 2003, 110 in 2004, and 120 in 2005.
b. The CPI was 100 in 2003, 110 in 2004, and 124 in 2005.
c. The CPI was 110 in 2003, 150 in 2004, and 200 in 2005.
d. All of the above are correct.

____ 7. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931
and 195 for 2005. Ruth's 1931 salary was equivalent to a 2005 salary of about
a. $536,000.
b. $828,000.
c. $1,026,000.
d. $1,216,000.

____ 8. During the past century the average growth rate of U.S. real GDP per person was about 2%. This implies that
it doubled about every
a. 100 years on average.
b. 70 years.
c. 35 years.
d. 25 years.

____ 9. The level of real GDP per person

a. differs widely across countries, but the growth rate of real GDP per person is similar
across countries.
b. is very similar across countries, but the growth rate of real GDP per person differs widely
across countries.
c. and the growth rate of real GDP per person are similar across countries.
d. and the growth rate of real GDP per person vary widely across countries.
____ 10. If a country’s saving rate declined, then other things the same, in the long run it would have
a. lower productivity, but not lower real GDP per person.
b. lower productivity and lower real GDP per person.
c. lower real GDP per person, but not lower productivity
d. neither lower productivity nor lower real GDP per person.

____ 11. An increase in the saving rate would, other things being equal,
a. increase growth more for a poor country than a rich country, and raise growth
permanently.
b. increase growth more for a poor country than a rich country, but raise growth temporarily.
c. increase growth more for a rich country than a poor country, and raise growth
permanently.
d. increase growth more for a rich country than a poor country, but raise growth temporarily.

____ 12. Refer to the figure above. Technological change is shown in the figure above by the movement
from:
a. B to E
b. B to A
c. B to C
d. B to D

____ 13. If the marginal propensity to consume (MPC) goes up, then
a. a given increase in government spending will have less impact on equilibrium GDP.
b. a given increase in taxes will have less impact on equilibrium GDP.
c. a given increase in government spending will have more impact on equilibrium GDP.
d. a given increase in the money supply will result in a smaller increase in total deposits.
____ 14. The nominal interest rate is the
a. interest rate corrected for inflation.
b. interest rate as usually reported by banks.
c. real rate of return to the lender.
d. real cost of borrowing to the borrower.

____ 15. When an economy faces diminishing returns,

a. the per-worker production function shifts to the left.
b. the per-worker production function shifts to the right.
c. the slope of the per-worker production function becomes steeper as capital per hour
worked increases.
d. the slope of the per-worker production function becomes flatter as capital per hour worked
increases.

____ 16. If the per-worker production function shifts down,

a. an economy can increase its real GDP per hour worked without changing the level of
capital per hour worked.
b. positive technological change has occurred in the economy.
c. the per-worker production function becomes steeper.
d. it now takes more capital per hour worked to get the same amount of real GDP per hour
worked.

____ 17. According to new growth theory,

a. physical capital is nonexcludable.
b. knowledge capital is rival and excludable.
c. knowledge capital is subject to increasing returns.
d. knowledge capital is excludable.

____ 18. All other things being equal, if the Fed buys bonds
a. aggregate expenditure will decrease.
b. aggregate demand will decrease.
c. aggregate expenditure will increase
d. aggregate demand will increase

____ 19. Ted is working part time. Alice was laid off, and has not worked for several weeks. Who is counted as
employed by the BLS?
a. only Ted
b. only Alice
c. both Ted and Alice
d. neither Ted nor Alice
____ 20. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Italian adult non-
institutionalized population was 45.020 million, the labor force was 24.065 million, and the number of
people employed was 22.105 million. According to these numbers, the Italian labor-force participation rate
and unemployment rate were about
a. 45.1%, 8.1%
b. 45.1%, 4.4%
c. 53.5%, 8.1%
d. 53.5%, 4.4%

____ 21. The natural rate of unemployment includes

a. both frictional and structural unemployment.
b. neither frictional nor structural unemployment.
c. structural, but not frictional unemployment.
d. frictional, but not structural unemployment.

____ 22. Which of the following causes of unemployment is not associated with a wage rate above the equilibrium
level?
a. Unions
b. efficiency wages
c. job search
d. minimum-wage laws

____ 23. Suppose the reserve requirement is 10%, and a bank has $4,000 in checking deposits and has loaned out all it
can given the reserve requirement.
a. It has $40 in reserves and $3,960 in loans.
b. It has $400 in reserves and $3,600 in loans.
c. It has $444 in reserves and $3,556 in loans.
d. None of the above is correct.

____ 24. The banking system currently has $50 billion of reserves, none of which are excess. People hold only
deposits and no currency, and the reserve requirement is 10%. If the Fed raises the reserve requirement to
12.5% and at the same time sells $10 billion dollars of bonds, then by how much does the money supply
change?
a. It falls by $20 billion.
b. It falls by $110 billion.
c. It falls by $180 billion.
d. None of the above is correct.

____ 25. The Federal Funds rate is the interest rate

 a. the Federal Reserve charges for loans it makes to the federal government.
b. the Federal Reserve charges banks for short-term loans.
c. banks charge each other for short-term loans of reserves.
d. on newly issued one-year Treasury bonds.

____ 26. When the money market is drawn with the nominal interest rate (i) on the vertical axis, a decrease in the
reserve requirement would tend to shift the money supply curve to the
a. right, lowering the interest rate.
b. right, raising the interest rate.
c. left, raising interest rate.
d. left, lowering the interest rate.

____ 27. Which of the following is not part of the reason that the AD curve slopes down?
a. As the price level increases, the real value of wealth declines.
b. As the price level decreases, the real exchange rate decreases.
c. As the price level increases, the real interest rate increases.
d. As the price level decreases, the money supply curve shifts to the right.

____ 28. According to the quantity equation if P = 4 and Y= 800, which of the following pairs could M and V be?
a. 800, 4
b. 600, 3
c. 400, 2
d. 200, 1

____ 29. If money growth does not affect real GDP, and velocity is stable, an increase in the money supply creates a
proportional increase in
a. real GDP only.
b. nominal GDP only.
c. the price level only.
d. Both the price level and nominal GDP.
____ 30. If the economy is in long-run equilibrium and then the Fed sells bonds,
a. the price level will increase and real GDP will decrease.
b. the real exchange rate will increase in the short run.
c. the price level will decrease and real GDP will be unchanged in the long run.
d. the price level will decrease and unemployment will decrease in the long run.
____ 31. If GDP equals $2,450 billion, consumption expenditure equals $1,390 billion, government expenditure equals
$325 billion, and investment equals $510 billion. What is net exports?
a. $225 billion
b. $510 billion
c. $735 billion
d. $1,390 billion
____ 32. If the economy is currently in short-run equilibrium at a level of GDP that is above potential GDP,
which of the following would move the economy back to potential GDP?
a. A decrease in the value of the dollar relative to other currencies
b. A decrease in interest rates
c. An increase in business confidence
d. A decrease in wealth

____ 33. If the CPI in the US is 175, the CPI in Sweden is 210, and the real exchange rate is 5, what is the nominal
exchange rate, expressed as the number of Swedish krona per US dollar?
a. 1/6
b. 5
c. 6
d. Cannot be determined from the information given

____ 34. If purchasing-power parity holds, a dollar will buy

a. more goods in foreign countries than in the United States.
b. as many goods in foreign countries as it does in the United States.
c. fewer goods in foreign countries than it does in the United States.
d. None of the above is implied by purchasing-power parity.

____ 35. As recessions begin, production

a. and unemployment both rise.
b. rises and unemployment falls.
c. falls and unemployment rises.
d. and unemployment both fall.

____ 36. As the price level rises

a. Interest rates fall.
b. consumption, investment and net exports will rise.
c. the money supply curve will shift to the left.
d. Interest rates rise.

____ 37. Other things being equal, as a country’s price level falls, the country's real exchange rate
a. falls.
b. rises.
c. is unaffected.
d. could either rise or fall.

____ 38. Other things being equal, an increase in the price level makes the dollars people hold worth
a. more, so they spend more.
 b. more, so they spend less.
c. less, so they spend more.
d. less, so they spend less.

____ 39. Other things being equal, aggregate expenditure increases if

a. real wealth falls.
b. the interest rate rises.
c. the dollar depreciates.
d. None of the above is correct.

____ 40. Refer to the figure above. Based on the "catch-up line" drawn above, poorer countries are more likely to be
at a point like ________, where growth in GDP is relatively ________, while richer countries are more likely
to be at a point like ________, where growth in GDP is relatively ________.
a. B, high; A, low
b. A, high; B, low
c. B, low; A, high
d. A, low; B, high

____ 41. An increase in the money supply

a. and a decrease in the income tax both cause aggregate demand to shift right.
b. and the investment tax credit both cause aggregate demand to shift left.
c. causes aggregate demand to shift right, while a decrease in taxes causes aggregate demand
to shift left.
d. causes aggregate demand to shift left, while a decrease in taxes causes aggregate demand
to shift right.
 Political Instability Abroad
Suppose that political instability in other countries makes people fear for the value of their assets in these
countries so that they desire to purchase more U.S assets.
____ 42. Refer to Political Instability Abroad. What would the change in the exchange rate make happen to U.S.
net exports and U.S. aggregate demand?
a. Net exports would rise and so U.S. aggregate demand would fall.
b. Net exports would rise and so U.S. aggregate demand would rise.
c. Net exports would fall and so U.S. aggregate demand would fall.
d. Net exports would fall and so U.S. aggregate demand would rise.

____ 43. A steep short-run aggregate supply (SRAS) curve

a. means the majority of prices in the economy are not flexible.
b. implies that expansionary fiscal policy will have a larger effect on GDP than if SRAS
were flatter.
c. implies that an expansionary open market operation by the Fed will have a bigger impact
on the price level than if SRAS were flatter.
d. means that a contractionary open market operation will have no impact on economy in the
short run.

____ 44. If the Fed conducts open-market purchases which of these three increases in the short run: interest rate, prices,
and investment spending?
a. interest rates, prices, and investment spending
b. interest rates and prices, not investment spending
c. prices and investment spending, not interest rates
d. interest rates, not prices nor investment spending

____ 45. In the short run, open-market purchases by the Fed

a. increase the price level and real GDP.
b. decrease the price level and real GDP.
c. increase the price level and decrease real GDP.
d. decrease the price level and increase real GDP.

____ 46. If the stock market booms

a. household spending increases. To offset the effects of this on the price level and real GDP,
the Fed would increase the money supply.
b. household spending increases. To offset the effects of this on the price level and real GDP,
the Fed would decrease the money supply.
c. household spending decreases. To offset the effects of this on the price level and real
GDP, the Fed would increase the money supply.
d. household spending decreases. To offset the effects of this on the price level and real
GDP, the Fed would decrease the money supply.
____ 47. Which of the following shifts aggregate demand to the right?
a. an increase in government expenditures or a decrease in the price level
b. a decrease in government expenditures or an increase in the price level
c. an increase in government expenditures, but not a change in the price level
d. a decrease in the price level, but not an increase in government expenditures

____ 48. Assuming no crowding-out, a $100 billion increase in government expenditures shifts aggregate demand
a. right by more than $100 billion.
b. right by $100 billion.
c. left by more than $100 billion.
d. left by $100 billion.

____ 49. Which of the following is correct concerning the long-run Phillips curve?
a. Its position is determined primarily by monetary factors.
b. If it shifts right, long-run aggregate supply shifts right.
c. It cannot be changed by any government policy.
d. Its position depends on the natural rate of unemployment.

____ 50. Refer to the figure above. Suppose the economy is at point A in the figure above. Which of the following is
true?
a. The economy will move from A to B.
b. The expected rate of inflation is 5.5%.
c. Actual inflation is 1%.
d. The current unemployment rate is equal to the natural rate of unemployment.
____ 51. Which of the following would not be associated with an adverse (or negative) supply shock?
a. the long-run Phillips curve shifts left
b. unemployment rises
c. the price level rises
d. output falls

____ 52. In the short run, an increase in the money supply causes interest rates to
a. increase, and aggregate demand to shift right.
b. increase, and aggregate demand to shift left.
c. decrease, and aggregate demand to shift right.
d. decrease, and aggregate demand to shift left.

____ 53. Assume that the MPC is 0.75. The government spending multiplier is
a. .75.
b. 4/3.
c. 4.
d. 7.5

____ 54. Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change
smaller than otherwise?
a. the multiplier effect
b. the crowding-out effect
c. the accelerator effect
d. None of the above is correct.
 Figure 34-2

____ 55. Refer to Figure 34-2. Which of the following is correct?

a. Unemployment rises as the economy moves from a to b.
b. Either fiscal or monetary policy could be used to move the economy from b to a.
c. If the economy is left alone, then as the economy moves from b to long-run equilibrium,
the price level will fall farther.
d. All of the above are correct.

____ 56. In the long run, changes in the money supply affect only
a. prices.
b. output.
c. unemployment rates.
d. All of the above.

____ 57. Foreign-produced goods and services that are sold domestically are called
a. imports.
b. exports.
c. net imports.
d. net exports.

____ 58. The Big Mac Index tests the accuracy of the purchasing power parity theory. In July 2009, The
Economist reported that the average price of a Big Mac in the U.S. was $3.57. In Mexico, the
average price of a Big Mac at that time was 33 pesos. What is the "implied exchange rate" between
the peso and the dollar?
a. 0.108 pesos per dollar
b. 8.25 pesos per dollar
c. 9.24 pesos per dollar
d. 11.78 pesos per dollar
____ 59. If money demand is extremely sensitive to changes in the interest rate, the money demand curve
becomes almost horizontal. If the Fed expands the money supply under these circumstances, then
the interest rate will
a. rise substantially and investment and consumer spending will rise substantially.
b. fall substantially and investment and consumer spending will change very little.
c. fall substantially and investment and consumer spending will fall substantially.
d. change very little and investment and consumer spending will change very little.

____ 60. Purchasing-power parity theory does not hold at all times because
a. many goods are not easily transported.
b. the same goods produced in different countries may be imperfect substitutes for each
other.
c. Both a and b are correct.
d. prices are different across countries.
EC 102
Practice Final
Answer Section

MULTIPLE CHOICE
1. A
2. D
3. D
4. C
5. B
6. B
7. C
8. C
9. D
10. B
11. B
12. A
13. C
14. B
15. D
16. D
17. C
18. D
19. A
20. C
21. A
22. C
23. B
24. C
Explanation of #24 on the 102 Practice Final Exam

There are two effects on the money supply to take into account:

(1) The Fed increased the reserve requirement from 10% to 12.5%; and
(2) The Fed sells $10B worth of bonds.

We are told that reserves before the changes are equal to $50B, and that banks hold no excess reserves, and the public
holds no cash.

Therefore, the total deposits (and, since the public holds no cash, the total money supply) before the changes, must equal
$50B / .1 = $500B.

(continued on next page)

Change (1)

Now, banks need to increase the reserves they hold by 2.5% of $500B = $500B x .025 = $12.5B.

And, with a reserve requirement (R) of 12.5%, the money multiplier equals
1/(R + E) = 1/(.125 + 0) = 8, where R is the required reserve ratio and E is the proportion of deposits banks hold as excess
reserves (0 in this problem).

So, to meet the new reserve requirement, banks must call in loans worth $12.5B, which will reduce the total deposits (and
hence the money supply—remember, money supply = deposits + cash held by the public; cash held by the
public here is zero by assumption) by

8 x --$12.5B = --$100B.

So, that is the change in the money supply coming from the change in the reserve requirement.

Change (2)

Now, the change which comes from selling the bonds (a contractionary OMO):

The Fed sells $10B worth of bonds, and the money multiplier is 8, so the change in deposits (and hence the money
supply) is:

– $10B x 8 = -- $80B.

So, in total, the money supply declines by –$100B + --$80B = --$180B.

25. C
26. A
27. D
28. A
29. D
30. C
31. A
32. D
33. C
34. B
35. C
36. D
37. A
38. D
39. C
40. B
41. A
42. C
43. C
44. C
45. A
46. B
47. C
48. A
49. D
50. D
51. A
52. C
53. C
54. B
55. D
56. A
57. A
58. C
59. D
60. C