Download Spring 2007

Ecn. 120B
Spring 2007
Todd Easton
Little Exam
Please write your name in the upper right hand corner of this exam, so it can be returned to you later.
Turn in these sheets in with your answers
Answer the questions below on the answer sheet provided, using a #2 pencil. You should take a
maximum of 40 minutes for this section. Each question is worth 3 points; the entire section is worth 27
points.
1) What institution has formal responsibility for setting US monetary policy?
a) the Federal Open Market Committee (FOMC)
b) the Board of Governors
c) the Congress
d) Each Federal Reserve district sets policy for its region.
2) Which of the following has not been offered by economists as an explanation for the US productivity
slowdown of the late 1970s and 1980s?
a) an American moral and spiritual crisis
b) a low savings rate
c) increased regulation of businesses
d) diminished spending on research and development (R&D).
e) high energy costs
3) For the economy represented by the table at right,
the marginal propensity to consume is ________.
a) 80
b) .2
c) .8
d) .9
4 The larger the marginal propensity to consume (MPC), the
a) larger the value of the spending multiplier.
b) the steeper the slope of the saving function.
c) flatter the slope of the consumption function.
5) [Bad question]
Income
0
100
200
Consumption
100
180
260
2
6) The firm can add to its capital stock by
a) keeping depreciation low.
b) reducing its inventory levels.
c) investing in plant and equipment.
d) buying corporate bonds.
7) Following Edward Dennison’s approach, the following table gives data regarding the sources of
economic growth for a hypothetical country.
According to the table, in which period did productivity play the greatest role in growth?
a) Period 1
b) Period 2
c) Period 3
d) The table does not allow one to identify the period in which productivity’s contribution was greatest.
Annual US Budget Deficits
Budget Deficit (in billions of $)
8) The graph to the right shows US
budget deficits. What is the most
likely explanation of the path of
budget deficits between 1990 and
1992?
a) Stimulative monetary policy led
to an increase in government
borrowing.
b) A recession led to more
government spending and less tax
revenues.
c) Restrictive monetary policy led to
a decrease in government borrowing.
d) An expansion led to less
government spending and more tax
revenues.
350
300
250
200
150
100
50
0
-50 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-100
-150
Time
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Unemployment Rate and Inflation Rate
9
8
7
UR or Inflation Rate
9) The graph at right shows the
unemployment rate and the inflation rate in
an economy. In has a natural rate of
unemployment around 5%. Does the
relationship between unemployment and
inflation in the graph correspond to the
inflation theory I taught in lectures?
a) no
b) yes
6
5
UnRate
4
InfRate
3
2
1
0
1
2
3
4
5
6
7
8
9
10
Year
10) Suppose the central bank sells bonds. Those bond sales will cause all of the following except
a) a fall in bank reserves.
b) an increase in the interest rate.
c) a fall in the value of the money multiplier.
d) a fall in the money supply.
11) In 2001, the Maiden Record Company planned to invest $540,000 by spending $500,000 to upgrade
its recording facilities and $40,000 to increase inventories of CDs. However, in 2001 the actual amount of
investment made by Maiden Records was $600,000. Which of the following is the most likely
explanation for how planned and actual investment by Maiden Records could have been different?
a) Maiden Records was not able to upgrade its recording facilities because it could find no one willing to
do the work. Therefore, it purchased $500,000 of government bonds and earned $60,000 interest on the
bonds.
b) The price level rose during 1993, so the value of its investment increased from $540,000 to $600,000.
c) Sales of CDs were not as high as expected, so inventory accumulation equaled $100,000, not the
$40,000 that Maiden Records had planned.
12) Suppose the Treasury of the US issues bonds and sells them to the public to finance the deficit. What
happens to the money supply and why?
a) The money supply remains unchanged because every dollar the Treasury receives goes back into
circulation as government spending.
b) The money supply remains unchanged, because there is no effect on the spending multiplier.
c) The money supply decreases because government borrowing reduces banking system reserves.
d) The money supply increases because government borrowing increases banking system reserves.
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13) Suppose the inflation rate is rising sharply. Congress and the president agree that we should use fiscal
policy to respond. Which of the following would be an appropriate fiscal policy response to the rising
inflation?
a) increase the money supply and reduce interest rates
b) reduce the money supply and increase interest rates
c) reduce taxes or increase government spending
d) increase taxes or reduce government spending
14) Automatic stabilizers make the federal deficit _____ during recessions and _____ during expansions.
a) larger; larger
b) larger; smaller
c) smaller; larger
d) smaller; smaller
15) If people start holding a smaller proportion of their wealth as currency and a larger proportion as
checking deposits, the result will likely be
a) a rise in M1.
b) a fall in M1.
c) a rise in income tax rates.
d) a fall in income tax rates.
16) Which of the following statements is true?
a) A rise in the national debt means the budget deficit is rising.
b) A rise in the national debt means the budget deficit is falling.
c) The existence of a budget deficit means the national debt is rising.
d) The existence of a budget deficit means the national debt is falling.
17) A rise in bond prices would be most apt to cause a
a) rise in the money supply.
b) decline in the money supply.
c) rise in interest rates.
d) decline in interest rates.
18) Think about a two-sector economy. Aggregate output is currently less than planned aggregate
expenditure. We can predict that firms are experiencing unplanned ______ in their inventories and saving
is _______ than planned investment.
a) increases, greater
b) increases, less
c) decreases, greater
d) decreases, less
Correct Answers to the Little Exam
1)a
2)a
6)c
7)a
11)c
12)a
16)c
17)d
3)c
8)b
13)d
18)d
4)a
9)b
14)b
5)c
10)c
15)a
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Monday, November 2, 2015