Econ 102 – Final Exam

This exam has 50 multiple choice questions, each worth 2 points.  You do not lose any points for incorrect answers.  You will have 2 hours to complete the exam.  Make sure you fill in your name and form number on your scantron sheet.  If you do not, you will lose 5 points for each item you neglect.

1. The nominal interest rate on a one year loan was 8% and both borrowers and lenders anticipated an inflation rate of 3%.  Reality didn’t match expectations, however, and the economy experienced deflation of 2%. The real interest rate the borrower expected to pay was _______, the real interest rate she actually paid was _______, and the Fisher effect will drive the nominal interest rate at the end of the year to _______.
a. 11%;  9%;  11%
b. 5%;  11%;  10%
c. 10%; 11%; 3%
d. 9%;  5%;  10%
e. 5%,; 10%;  3%
2. If currency in circulation is $100 million, checkable deposits are $500 million, savings deposits are $300 million and travelers’ checks are $10 million, M1 is:
a. $610 million
b. $900 million
c. $410 million
d. $910 million
e. $100 million
3. Liquidity traps arise when
a. Nominal interest rates are low and the Fed tries to increase the money supply.
b. Real interest rates are low and the Fed tries to decrease the money supply.
c. Inflation rates are low and the Fed tries to decrease the money supply.
d. Nominal interest rates are low and the Fed tries to decrease the money supply.
e. Real interest rates are low and the Fed tries to increase the money supply.
4. The classical model of prices is a better description of the economy when
a. unemployment is near the NAIRU level.
b. rates of inflation are unusually high.
c. the aggregate supply curve is upward-sloping, not vertical.
d. changes in the money supply serve to boost rGDP.
e. wages and prices are slow to adjust to changes in the money supply.

5. Consider the markets for ethanol in the closed economy countries of Naboo and Dagobah.  In autarkic equilibrium, the price of ethanol is $3/gallon in Naboo and $2/gallon in Dagobah.  Trade opens between them, but Naboo levies a $0.50 per gallon tariff on imported ethanol. Naboo’s domestic ethanol supply curve is given by Qs=10P and its demand is QD=60-10P. How much revenue does the Naboo government receive from the tariff?
a. 8
b. 4
c. 7
d. 6
e. 5
6. Suppose you are told that the short-run Phillips curve has shifted upward. Which of the following must have happened?
a. The SRAS curve has shifted to the right.
b. The AD curve has shifted to the left.
c. The SRAS curve has shifted to the left.
d. The AD curve has shifted to the right.
e. The LRAS curve has shifted to the left.
7. In our standard model of the money market,
a. the Taylor rule is equivalent to only caring about the interest rate.
b. buying T-bills is equivalent to raising the interest rate.
c. expansionary monetary policy is equivalent to decreasing aggregate demand.
d. inflation targeting is equivalent to targeting the money supply.
e. monetary policy and fiscal policy are equivalent.
8. Suppose the government deficit increases, but the interest rate remains the same. Which of the following things might have happened simultaneously to keep interest rates the same?
a. Individuals decide that real estate provides the highest rates of return and put all their extra disposable income into real estate.
b. Consumers decide to decrease consumption and work more.
c. Because they are optimistic about the future of the economy, firms desire to borrow more to purchase physical capital.
d. The government reduces the amount that people may put into tax-exempt savings accounts.
e. Foreigners become distrustful of American goods and stop buying them.
9. The demand for beets is given by Qd=60-2P and the supply of beets is given by Qs=4P.  If a $3 tax on beets is implemented, the equilibrium quantity of beets will ____________ and the price of beets will ________________.
a. increase by $2; increase by 8
b. increase by $3; increase by 12
c. decrease by $0.50; increase by 1
d. increase by $3; decrease by 8
e. increase by $2; decrease by 4

10. The economy of Macronia is characterized by the following variables:
A=700, MPC=.8, Ip=200, G=50, T=100
If the government of Macronia decides to implement a 10% income tax (previously there was no income tax), equilibrium rGDP will change by
a. -33.4%
b. -28.6%
c. -10%
d. -21.7%
e. -26.3%
11. Which of the following statements about real and nominal interest rates is correct?
a. If the nominal interest rate is 4% and the inflation rate is 3%, then the real interest rate is 7%.
b. An increase in the real interest rate is necessarily accompanied by either an increase in the nominal interest rate, an increase in the inflation rate, or both.
c. When the nominal interest rate is falling, the real interest rate is necessarily rising; when the nominal interest rate is falling, the real interest rate is necessarily falling.
d. The real interest rate can never be negative, but the nominal interest rate can be.
e. When the expected and actual inflation rates are both positive, the nominal interest rate is necessarily greater than the real interest rate.
12. Consider the economy of Cheezburg.  Suppose that the reserve requirement in Cheezburg is 20%, the interest rate is 5%, inflation is 3.5%, the currency in circulation is $80 billion, bank reserves are $100 billion, checkable deposits are $220 billion, and no one holds any traveler’s checks.  The estimated actual money multiplier is:
a. 4.25
b. 1.67
c. 5
d. .8
e. 2.33
13. In the long run the economy will always revert back to the long-run equilibrium following a negative demand shock due to
a. discouraged workers deciding to re-enter the labor force.
b. consumers responding to lower prices and increasing their demand.
c. nominal wages adjusting downwards.
d. firms deciding to hire more workers.
e. increasing exports.
14. If the money supply has increased 30%, the real money supply is $150 billion, and the price level is 120, what is real seignorage?
a. $37.5 billion
b. $500 billion
c. $36 billion
d. $400 billion
e. $45 billion

15. The citizens of Scroogeville are so frugal that they save any extra disposible income entirely, so their consumption function looks like C=A.  In the context of the Keynesian Cross model of a closed economy without government, what should happen to Scroogeville’s GDP if there is an autonomous increase in investment spending of $1000?
a. GDP will go up by $1000.
b. It cannot be determined from the information given.
c. GDP will continue going up forever.
d. GDP will fall by $1000.
e. GDP will not change.
16. According to the classical model:
a. the aggregate supply curve is horizontal.
b. increases in the money supply lead to proportional increase in the price level, but no change in real output.
c. oncreases in the money supply lead to proportional changes in output, but no change in the price level.
d. we’re all dead in the long run.
e. only fiscal policy can have long run effects.
17. Which of the following would NOT shift LRAS to the left?
a. A decrease in the average education level of Americans.
b. A decrease in average worker productivity.
c. Depletion of all the US oil and coal deposits.
d. High unemployment.
e. Women dropping out of the labor force in large numbers.
18. Assume the economy is open to trade in goods and capital investment. If exports are $225 million, imports are $80 million, the government is running a deficit of $200 million and investment is $350 million, what is private savings in this economy?
a. $295 million
b. $5 million
c. $695 million
d. $405 million
e. -$5 million
19. rGDP is $335 billion and potential output is $250 billion, the marginal propensity to consume is .8 and the income tax rate is 50%.  If the government has already committed to reducing government spending by $15 billion, but cannot get congressional approval to reduce it further, by how much do lump-sum taxes have to change to close the gap?
a. T = $36 billion
b. T = $45 billion
c. T = -$60 billion
d. T = -$45 billion
e. T = -$36 billion

20. Import protections are often imposed because:
a. the loss in consumer surplus is usually very small.
b. import protections increase total surplus, even though some groups are harmed.
c. benefits to producers outweight the costs to the consumer.
d. the harm to foreign producers outweighs the harm to domestic producers.
e. groups representing import-competing industries are more cohesive than consumer groups.
21. Consider an economy where all banks hold no excess reserves.  The required reserve ratio is 10%.  Allison’s mother gives her $200 from her sock drawer and gives it to Allison.  The Federal Reserve takes $200 from its asset reserves and gives it to Bianca. Both immediately deposit their money into checking accounts.  Which of the following statements is true?
a. Allison’s gift creates $200 less money than Bianca’s money from the Fed.
b. Bianca’s money from the Fed creates $20 more money than Allison’s gift.
c. Both transactions create the same amount of money in the long run.
d. Allison’s gift creates $20 more money than Bianca’s money from the Fed.
e. Allison’s gift creates $200 more money than Bianca’s money from the Fed.
22. Suppose the MPC is .8 and the income tax rate is 20%.  An autonomous $100 increase in investment spending will lead to a
a. $100 increase in spending in the first round, and a total increase in spending of $200.
b. $80 increase in spending in the first round, and a total increase in spending of $200.
c. $100 increase in spending in the first round and a total increase in spending of $500.
d. $80 increase in spending in the first round, and a total increase in spending of $500.
e. $100 increase in spending in the first round, and a total increase in spending of $250.
23. If the economic growth rate is -1%, prices are falling at an annual rate of 5%, and the real rate of interest is 2%, then the nominal rate of interest will be:
a. 7%
b. 0%
c. -3%
d. -6%
e. 3%
24. In the long run, the equilibrium interest rate
a. can only be increased by changes in the money supply.
b. can only be decreased by changes in the money supply.
c. is not affected by changes in the money supply.
d. can be negative.
e. is always equal to the short-run equilibrium interest rate.

25. Suppose the banking system does NOT hold excess reserves and the reserve ratio is 20%. If Sam deposits $500 in cash into his checking account, the banking system can increase the money supply by:
a. $400
b. $2,500
c. $2,000
d. $500
e. $5,000
26. Suppose the Federal Reserve has set a target for the Fed funds rate.  If initially the equilibrium interest rate happens to be higher than the target interest rate, then the Fed should:
a. Purchase T-bills on the open market, increase the money supply and shift the money supply curve to the right.
b. Raise the required reserve ratio.
c. Sell T-bills on the open market, decrease the money supply, and shift the money supply curve to the left.
d. Purchase T-bills on the open market, decrease the money supply, and shift the money supply curve to the left.
e. Sell T-bills on the open market, increase the money supply, and shift the money supply curve to the right.
27. The figure below shows the PPFs for two countries, Jackson and Tahoe.  In autarky, Jackson produces and consumes 30 units of cattle and 80 units of wheat, while Tahoe produces and consumes 80 units of cattle and 60 units of wheat. With complete specialization according to comparative advantage, the two nations’ production of wheat will:
 
a. decrease by 120 units.
b. increase by 60 units.
c. decrease by 60 units.
d. remain constant.
e. increase by 120 units.

28. Debt deflation is:
a. the increase in interest rates caused by government debt.
b. the process of printing money to pay down government debt.
c. the reduction in total loans offered to consumers as a result of deflation.
d. the reduction in aggregate demand caused by deflation.
e. the increase in government debt brought about by deflation.
29. According to the rule of 70, if a country’s real GDP per capita grows at a rate of 2% instead of 3%, it would take _______ additional years for that country to double its level of real GDP per capita.
a. 11.67
b. 35
c. 23.3
d. 30
e. 10.22
30. If Arthur Dent takes $500 from his savings account and deposits it in his checking accounty, M1 will _________ and M2 will _____________.
a. Increase; decrease.
b. Remain constant; remain constant.
c. Increase; increase.
d. Increase; remain constant.
e. Decrease; decrease.
31. Which of the following statements are true?
(1) The aggregate demand curve is downward sloping because nominal wages are sticky in the short run.
(2) Both in the short and long run, all prices are sticky.
(3) Stagflation is the combination of inflation and falling demand.
(4) Economic fluctuations occur because of aggregate demand shocks or short-run aggregate supply shocks.
(5) As capital stocks or household durable goods rise, there is more desire to spend/invest more.
a. (1) and (3)
b. (1), (2) and (5)
c.  (3) and (4)
d. (1), (2) and (4)
e. (4) and (5)
32. Which of the following does NOT shift AD?
a. Changes in the physical capital stock.
b. Changes in the quantity of money.
c. Changes in expectations about future GDP.
d. Changes in wealth.
e. Changes in the human capital stock.
33. The velocity of money is equal to:
a. Nominal GDP/money supply
b. rGDP/aggregate price level
c. nominal wages/aggregate price level
d. rGDP * money supply
e. nominal GDP * money supply
34. Suppose the economy is in short-run equilibrium and the level of aggregate output is less than potential output.  It must be true that:
a. over time the SRAS curve will shift to the left.
b. over time nominal wages will fall.
c. the economy is also in long-run equilibrium.
d. government will increase spending.
e. unemployment is relatively low.
35. Which of the following could cause stagflation?
a. Consumer confidence decreases.
b. Unplanned inventory growth turns negative.
c. Government raises taxes on all individuals and firms.
d. Congress increases the minimum wage.
e. Government starts printing money to pay down its debts.
36. If the economy is at equilibrium below potential output:
a. There is an inflationary gap, and the government should not intervene.
b. There is an inflationary gap, and expansionary fiscal policy is appropriate.
c. There is an inflationary gap, and contractionary fiscal policy is appropriate.
d. There is a recessionary gap, and expansionary fiscal policy is appropriate.
e. There is a recessionary gap, and contractionary fiscal policy is appropriate.
37. As people get used to inflation:
a. the long-run aggregate demand curve adjusts more slowly.
b. the long-run Phillips curve ceases to apply.
c.  wages adjust faster, and the short-run aggregate supply shifts quickly to the right.
d. wages adjust faster, and the short-run aggregate supply shifts quickly to the left.
e. the short-run aggregate demand curve adjusts more rapidly.
38. According to Okun’s law, if actual unemployment is 6% and natural unemployment is 4%, the output gap is
a. -2%
b. 10%
c. 2%
d. -4%
e. -10%
39. If we live in a world of rational expectations, where everyone is fully informed of all economic variables and everyone is able to correctly predict the impact of policy changes, a $200 million tax cut will have the following effect:
a. no change in any macroeconomic variables.
b. no change in the rate of unemployment and an increase in inflation.
c. a decrease in the rate of unemployment and an increase in inflation.
d. a decrease in the rate of unemployment and no change in inflation.
e. no change in the rate of unemployment and no change in inflation.

40. Assume the economy’s production function is Y/L = .25*(K/L), so that in year 1, the $400 per-capita capital stock generates a $100 per-capita output.  In that year, one-fifth of the output is invested.  Per-capita output in year 2 will be
a. $105
b. $140
c. $100
d. $120
e. $115
41. The value of fiat money arises from
a. its ability to be redeemed in precious metals.
b. its usefulness as a commodity.
c. its historical reputation as a currency that maintains its value.
d. its inability to be counterfeited.
e. its official status as a means of exchange.
42. Which of the following statements is true?
a. The slope of the consumption function is equal to 1-1/MPS.
b. A change in autonomous consumer spending will cause the slope of the consumption function to change.
c. An increase in income taxes shifts the entire consumption function downwards.
d. A decrease in the total amount of transfers slides expenditures along the consumption function.
e. The slope of the consumption function is the change in consumption divided by the change in disposable income.
43. Which of the following would NOT cause the short-run Phillips Curve to shift downwards?
a. An increase in real seignorage.
b. A leftward shift in SRAS.
c. The expectation that the short-run Phillips curve will soon shift downwards.
d. A credible threat by the Federal Reserve to enact contractionary policy.
e. An unexpected increase in oil prices.
44. Which of the following is not an automatic stabilizer?
a. Total payments to the unemployed increase in a recession.
b. The government is more likely to pass stimulus bills in recessions.
c. Corporate tax payments increase in an expansion.
d. More people enroll in welfare during recessions.
e. The average personal income tax rate rises in expansions.
45. Christina is an economist who believes that shifts in aggregate demand cause both a change in real output and the price level. She believes that an economic recession will not necessarily self-correct in the long run, and therefore she believes that active fiscal and monetary policy is justified to smooth out the business cycle.  Christina is best described as a:
a. Supply-side economist.
b. Neoclassical economist.
c. Monetarist.
d. Keynesian economist.
e. Classical economist.
46. If the rGDP of Tatooine is $120 million, and the marginal propensity to consume is .9, if the Emperor decides to increase both lump-sum taxes and government spending by $60 million, the final rGDP of Tatooine will be:
a. $720 million
b. $120 million
c. $660 million
d. $180 million
e. $60 million
47. In 2009, there were 10 million people who did not have a job but were actively looking for employment and 85 million people who had either a full-time or a part-time job.  Based on this information, the unemployment rate in 2009 was:
a. 10%
b. 10.5%
c. 9.5%
d. 8.5%
e. 11.7%
48. If Lorchland’s real GDP is $50 million below potential output, and the government of Lorchland wants to keep the deficit as low as possible, the best option to close the gap, given a marginal propensity to consume of .75, would be:
a. to increase G by $50 million.
b. to increase T by $50 million.
c. to decrease T by $16.67 million.
d. to increase both G and T by $50 million.
e. to increase G by $12.5 million.
49. Zaphod Beeblebrox decides to ban credit cards throughout the galaxy, because they were very widely used and he thought them evil.  At the same time, inflation increased. What will be the effect in the money market in the galaxy?
a. Nothing happens in the money market.
b. The interest rate will rise.
c. The dolphins will rise up and take over the universe.
d. The interest rate will fall.
e. The effect is ambiguous.
50. When a person makes price comparisons among products, money is being used as:
a. an expander of economic activity.
b. a unit of account.
c. a medium of exchange.
d. a commodity.
e. a checkable deposit.