Fall 2004 Econ 3010 Final Exam Multiple Choice (100 points). 1.

GDP is the market value of all ______ goods and services produced within an economy in a given period of time. A) used B) intermediate C) consumer D) final 2. A) B) C) D) 3. A) B) C) D) 4. A) B) C) D) 5. A) B) C) D) Nominal GDP means the value of goods and services is measured in ______ prices. current real constant average The best measure of the economic satisfaction of the members of a society is: nominal GDP. real GDP. the rate of inflation. the value of corporate profits. Unlike the GDP deflator, the CPI includes the prices of: goods purchased by firms. goods purchased by governments. exported goods. imported goods. The labor force equals the: adult population. number of employed individuals. number of unemployed individuals. number of employed and unemployed individuals.

6. A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by the miller is: A) $1. B) $2. C) $3. D) $6.

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7. A) B) C) D)

A consumption function shows the relationship between consumption and: income. personal income. disposable income. taxes.

8. If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings: A) decreases by 0.85 unit. B) decreases by 0.15 unit. C) increases by 0.15 unit. D) increases by 0.85 unit. 9. A) B) C) D) Other things equal, an increase in the interest rate leads to: a decrease in the quantity of investment goods demanded. no change in the quantity of investment goods demanded. an increase in the quantity of investment goods demanded. sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.

10. In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease, depending on whether consumption is greater or less than investment. 11. If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and tax revenues are 800, national saving is equal to: A) 300. B) 500. C) 700. D) 1,000. 12. Crowding out occurs when an increase in government spending ______ the interest rate and investment ______. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

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13. A) B) C) D) 14. A) B) C) D) 15. A) B) C) D) 16. A) B) C) D)

The rate of inflation is the: median level of prices. average level of prices. percentage change in the level of prices. measure of the overall level of prices. The central bank in the United States is the: Bank of America. U.S. Treasury. U.S. National Bank. Federal Reserve. To reduce the money supply, the Federal Reserve: buys government bonds. sells government bonds. creates demand deposits. destroys demand deposits. The demand for real money balances is generally assumed to: be exogenous. be constant. increase as real income increases. decrease as real income increases.

17. If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M. A) prices B) income C) transactions D) nominal GDP 18. A) B) C) D) 19. A) B) C) D) The real interest rate is equal to the: amount of interest that a lender actually receives when making a loan. nominal interest rate plus the inflation rate. nominal interest rate minus the inflation rate. nominal interest rate. If nominal wages cannot be cut, then the only way to cut real wages is by: inflation. unions. legislation. productivity increases.

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20. If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______. A) positive; positive B) positive; negative C) negative; negative D) negative; positive 21. A) B) C) D) The nominal exchange rate between the U.S. dollar and the Japanese yen is the: number of yen you can get for lending one dollar in Japan for one year. number of yen you can get for one dollar. price of U.S. goods divided by the price of Japanese goods. price of Japanese goods divided by the price of U.S. goods.

22. In a small open economy, if the government adopts a policy that lowers imports, then that policy: A) raises the real exchange rate and increases net exports. B) raises the real exchange rate and does not change net exports. C) raises the real exchange rate and decreases net exports. D) lowers the real exchange rate. 23. A) B) C) D) 24. A) B) C) D) 25. A) B) C) D) When there is structural unemployment, the real wage is: rigid at a level below the market-clearing level. rigid at the market-clearing level. rigid at a level above the market-clearing level. flexible. The aggregate demand curve tells us possible: combinations of M and Y for a given value of P. combinations of M and P for a given value of Y. combinations of P and Y for a given value of M. results if the Federal Reserve reduces the money supply. In the long run, the level of output is determined by the: interaction of supply and demand. money supply and the levels of government spending and taxation. amounts of capital and labor and the available technology. preferences of the public.

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26. Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level. A) output decreases and prices are unchanged; rise B) output decreases and prices are unchanged; fall C) output and prices both decrease; rise D) output and prices both decrease; fall 27. If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ prices and ______ output in the short run. A) higher; lower B) lower; higher C) higher; higher D) lower; lower 28. The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. A) national income; goods and services B) the price level; goods and services C) national income; money D) the price level; money 29. In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases, but by less than 250. 30. A) B) C) D) The IS and LM curves together generally determine: income only. the interest rate only. both income and the interest rate. income, the interest rate, and the price level.

31. In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out: A) prices. B) investment. C) the money supply. D) taxes.

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32. In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case, the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls 33. According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase 34. The basic aggregate supply equation implies that output exceeds natural output when the price level is: A) low. B) high. C) less than the expected price level. D) greater than the expected price level. 35. The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output. A) positive; positive B) positive; negative C) negative; negative D) negative; positive 36. A) B) C) D) Active economic policy seeks to do all of the following except: offset fluctuations in real GDP. use monetary and fiscal policy to shift aggregate demand. respond to changing economic conditions. take a hands-off approach to macroeconomic policy.

37. Policy is conducted by rule if policymakers: A) announce in advance how policy will respond to various situations and commit themselves to following through on this announcement. B) are free to size up the situation case by case and choose whatever policy seems appropriate at the time. C) set policy according to election results, i.e., set policy by rule of the ballot box. D) manipulate policy to ensure both low inflation and unemployment on election day.

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38. A) B) C) D)

Government debt equals the: difference between current government purchases and taxes. difference between saving and investment. sum of past budget deficits and surpluses. M1 money supply.

39. If capital budgeting procedures were employed, then a budget deficit would be measured as: A) the sum of government debt. B) the change in government debt. C) the change in government debt minus the change in government capital assets. D) the change in government capital assets. 40. An estimate of what government spending and tax revenue would be if the economy were operating at its natural rate of output and employment is called the ______ budget. A) cyclically adjusted B) inflation adjusted C) capital asset D) generational accounting

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Short Answer Questions (100 total points). 41. (50 pts) Use IS-LM-LRAS model to answer the following question. Write a short paragraph explaining the effect of the event on the relevant macroeconomic variables in the short and long runs. On your graph (and in the paragraph) outline a plausible policy response by Congress. Be sure to label your graphs carefully and make your arguments clear and succinct. In response to the falling U.S. dollar, countries around the world increase their demand for American products.

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42. (50 pts) Use AD-SRAS-LRAS model to answer the following question. Write a short paragraph explaining the effect of the event on the relevant macroeconomic variables in the short and long runs. On your graph (and in the paragraph) outline a plausible policy response by the Fed. Be sure to label your graphs carefully and make your arguments clear and succinct. In his second term, President Bush successfully discovers large stocks of crude oil under the Arctic National Wildlife Refuge (ANWR), which in turn, drives down world oil prices.

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