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[KEYS FOR PRACTICE EXAMS #1, #2, #3, and Macro Assessment Quiz GIVEN
BELOW AFTER #3]
EONOMICS 105 EXAMPLE QUESTIONS FOR PRACTICE EXAM #1
1. A "supply curve" provides information as to:
a. the amount of goods/services that folks want to buy at various prices.
b. the profit-maximizing amount of goods and services provided by firms at different
prices.
c. how investors feel about interest rates.
d. none of the above.
2. At a price below an "equilibrium" price, the sorts of economic forces that you would expect
tosee at work would lead you to expect to see:
a. real wages rising.
b. inventories falling below desired levels.
c. falling employment levels.
d. none of the above.
3. In a given market, I observe inventories rising above desired levels; there is downward
pressure on prices and the unemployment level seems to be rising. Such conditions are
consistent with conditions wherein:
a. prices are below equilibrium prices.
b. real wages are falling.
c. the supply of goods and services exceeds demand.
d. none of the above.
4.If the government imposes a price “ceiling,” in the market you will experience conditions of:
a. surplus production
b. scarcity.
c. equilibrium prices.
d. all of the above.
5. In the market, I see firms hiring more workers; from this I could reasonably conclude that
prices are such that:
a. current prices are below an equilibrium price.
b. demand exceeds supply.
c. real wages are less than the marginal product of labor.
d. all of the above.
6. The primary differences between “long-run” and “short-run” market equilibria are:
a. in the “short-run” firms may incur economic profits or incur losses.
b. in the long-run there is “perfect” entry and exit, so losing firms have exited the
industry.
c. in the long run firms do not earn “economic profit.”
d. all of the above.
7. The following is a "factor of production":
a. a share of AT&T.
b. money in my checking account.
c. a worker that I hire.
d. none of the above.
8. The "Principle of Diminishing Returns" says that, holding land and capital fixed, at some
point:
a. as I use more and more labor, total production falls.
b. as I use less and less labor, total production rises.
c. as I use more labor, each additional worker adds less to production than the preceding
worker.
d. none of the above.
9. When I add one more person to my labor force (the number of people that I employ), this last
person adds less to my revenues than did the person before him. This is a reflection of:
a. the principle of Says Law.
b. the Cambridge Equation.
c. the principle of Competitive Labor Markets.
d. none of the above.
10. "My wages increased this year, but the way that prices are increasing, I seem to be able to
buy less with my income now than I could last year when my wages were lower". In the above, I
am essentially describing a situation where:
a. Says Law is operating.
b. my real wage has fallen.
c. savings exceeds investment.
d. none of the above.
11. So long as money wages that I must pay workers are more than the amount that each worker
adds to my revenues, I should want to:
a. lay off workers.
b. hire more workers.
c. stay where I am.
d. none of the above.
12. If the marginal product of labor exceeds the real wage, I know that:
a. marginal revenue product is less than the money wage.
b. the value of the marginal product is greater than the money wage.
c. I am at an optimal level of employment.
d. none of the above.
13. Says Law says that:
a. demand is always greater than supply.
b. supply is always greater than demand.
c. people always save a given portion of their income.
d. none of the above.
Questions 14-18 are based on the following data:
Number of
Workers
4
5
6
7
8
9
Total Production
200
350
450
525
575
600
Wage = $100
Price = $2
th
14. What is the value of the 5 workers marginal product?
a. $150
b. $300
c. $350
d. none of the above
th
15. The marginal product of the 4 worker is:
a. 200
b. 100
c. 50
d. can’t tell; not enough information
16. The profit maximizing level of employment is:
a. 5 workers
b. 6 workers
c. 7 workers
d. none of the above
17. Suppose p falls to $1.00. The profit maximizing level of employment is:
a. 5 workers
b. 6 workers
c. 7 workers
d. none of the above
th
18. The marginal product of the 9 worker is:
a. 200
b. 100
c. 50
d. none of the above
19. Which of the following is a factor of production?
a. land
b. labor
c. capital
d. all of the above
20. In the Classical system, it is true that:
a. competition in the labor market always depresses wages below those which equate the
demand and supply of labor.
b. the economy always moves to full employment.
c. people's decisions as to whether or not to work are determined primarily by interest
rates.
d. none of the above.
21. In the Classical system, the price level:
a. changes in direct proportion to the money stock; i.e., when money stocks are
increased, prices rise proportionally.
b. is determined by competition between firms and workers in the labor market.
c. is set by Says Law.
d. none of the above.
22. In the Classical system, increases in government spending:
a. cannot affect prices but can affect employment levels.
b. can affect employment levels but not levels of production.
c. can’t affect prices or wages, but can production levels.
d. none of the above are true.
23. We refer to "Investment" as:
a. the purchase of stocks and bonds
b. the purchase of shares of mutual funds.
c. buying into a business with your brother-in-law.
d. none of the above.
24. The following is included in 1986 GNP:
a. the value of my time spent cleaning up my garage.
b. the value of your time spent cleaning up my garage, when I pay you for your work.
c. the value of my girlfriend's time spent cleaning up my garage--she is not paid (money)
for her time.
d. none of the above.
25. The value of a new Packard produced in 1940 but not sold until 1941 belongs in:
a. 1941 GNP
b. GNP for the year in which the Packard is sold.
c. GNP for 1942.
d. none of the above.
26. A firm has sales of $10,000. It pays $4,000 in wages to it's employees and buys $4,000 in
materials and services from other people. Based on this information, you would conclude that the
value added by this firm is:
a. $2,000
b. $4,000
c. $6,000
d. none of the above.
27. GNP differs from GNP in the following way: (IGNORE: not discussed in class)
a. GNP is not measured in dollars.
b. GNP includes the value of non-market transactions.
c. GNP includes a “net foreign factor income.”
d. none of the above.
The following data are to be used in responding to questions 28 through 30.
Total Number of
Total Number of
Number
Bottles of
Number of Bottles of
of
Workers Wine Produced
Workers Wine Produced
50
600
55
1300
51
800
56
1350
52
975
57
1375
53
1125
58
1385
54
1225
The wage paid to workers is $200.00; wine sells for $2.00 per bottle.
28. The value of the 58th worker's marginal product is:
a. $25.00
b. $20.00
c. $100.00
d. none of the above.
29. The marginal product of the 52nd worker is:
a. $350.00
b. $25.00
c. $100.00
d. none of the above.
30. The optimum, or profit maximizing, level of employment is:
a. 52
b. 54
c. 56
d. none of the above.
31. GNP or GNP can be calculated with: (IGNORE: not discussed in class)
a. the expenditures method.
b. the income method
c. either (a) or (b).
d. neither (a) nor (b).
32. When I assume perfect mobility of the factors of production in talking about market
equilibrium, I am necessarily talking about:
a. short-run equilibrium.
b. competitive results in the short run.
c. long-run equilibrium.
d. none of the above.
33. In the “Keynsian” labor market, it is assumed that:
a. the economy always moves to full employment.
b. money wages respond immediately to changes in the demand and/or supply of labor.
c. money wages are fixed in the short-run.
d. none of the above.
34. The Keynsian labor market differs from the Classical view of the labor market in that:
a. in the Classical view real wages will always equate the demand and supply of labor.
b. in the Keynsian view of the labor market, the labor market could be at equilibrium at
any level of employment.
c. in the short run, the major determinant of employment in the Keynsian model is
prices; in the Classical model it is money wages (with prices fixed).
d. all of the above.
ECONOMICS 105 QUESTIONS FOR PRACTICE EXAM #2
1. In an economy where savings fall by 100 million whenever incomes fall by 400 million:
a. the marginal propensity to consume is two-thirds.
b. the marginal propensity to save is two-thirds.
c. the tax multiplier is minus three.
d. none of the above.
2. I know that the tax multiplier for a given economy is -4. I then also know that:
a. the MPC is four-fifths.
b. the "balanced budget" multiplier is 1.
c. the expenditures multiplier is five.
d. all of the above.
3. If the marginal propensity to save is one-eighth, it must be true that:
a. the MPC is eight-tenths.
b. the expenditures multiplier is 10.
c. when incomes rise by eight dollars, expenditures rise by one dollar.
d. none of the above.
QUESTIONS 4 THROUGH 8 ARE BASED ON THE FOLLOWING INFORMATION.
_____Y_______C_______
$3,000
$2,000
4,000
2,900
I = 500
5,000
3,800
T = 1,000
6,000
4,700
G = 1,000
7,000
5,600
8,000
6,500
9,000
7,400
4. In the above-described economy, the equilibrium level of income is:
a. 3,000
b. 7,000
c. 8,000
d. none of the above.
5. In the above described economy, the marginal propensity to consume is:
a. 2,000 divided by 3,000, or two-thirds.
b. I can't tell from the information that is provided.
c. 6500 divided by 8,000.
d. none of the above.
6. In the above described economy, suppose that taxes fall by 500. The resulting change in the
equilibrium level of income would be:
a. 5,000.
b. -1200.
c. -9,000.
d. none of the above.
7. In the above described economy, suppose that government expenditures rise by 1,000 and that,
at the same time, suppose that taxes are increased by 1,000. You would then expect to see the
equilibrium level of income to:
a. rise by 1,000.
b. rise by 2,000.
c. remain the same.
d. none of the above.
8. In the above-described economy, when the level of income is $5,000, the sum of savings,
taxes and consumption will equal $5,000.
a. This statement is false.
b. This statement is would be true only if $5,000 is an
equilibrium level of income.
c. I have insufficient information to answer this question.
d. None of the above statements are true.
9. I read in the paper that when incomes rise by $5,000, consumption expenditures increase by
$4,000. From this I know that:
a. the expenditures multiplier is 4.
b. the tax multiplier is -4.
c. the balanced-budget multiplier is 4.
d. none of the above.
10. If the tax multiplier in an economy is -8, I would then conclude that:
a. the the expenditures multiplier is .9 (nine-tenths).
b. the marginal propensity to save is 1/8.
c. the marginal propensity to consume is 8/9.
d. none of the above.
11. I know that when government expenditures increase by $500, incomes rise by $3,000. From
this I would conclude that:
a. the marginal propensity of consume is five-sixths (5/6).
b. the tax multiplier is -5.
c. the balanced budget multiplier is 1.
d. all of the above.
12. Which of the statements given below are consistent with the Keynesian "consumption
function"?
a. as interest rates rise, consumption expenditures will fall.
b. a change in taxes can be expected to result in a change in savings.
c. as income falls consumption expenditures will fall.
d. none of the above.
13. In an economy with a MPC of .75, suppose that G and T fall by $2 billion. You would expect
the equilibrium level of income to:
a. fall by 4 (the reciprocal of one-fourth) times $2 billion.
b. rise by 4 times $2 billion.
c. fall by two billion.
d. none of the above.
14. In an economy with an MPS of one-fourth, the
budget multiplier is:
balanced
a. 5.
b. -4.
c. 4.
d. none of the above.
15. In an economy with an MPC of 2/3, a increase in taxes of $100 would result in income:
a. falling by $100.
b. falling by $200.
c. rising by $200.
d. none of the above.
16. With excess reserves of $3 million and a reserve requirement of 20%, Ron's Bank, which is a
single bank in a mulitbank system, can expand the money supply by a maximum amount of:
a. $15 million.
b. $5 million.
c. $3 million.
d. none of the above.
17. When we refer to the "money supply", we refer to :
a. coins, currency and legal reserves.
b. coins, currency and excess reserves.
c. coins, currency and required reserves.
d. none of the above.
18. In Ron's bank, one finds $3 million in cash in the vault, and folks have $50 million in
demand deposits at the bank. The reserve requirement is 10%, and Ron's Bank has $2 million on
deposit with the Fed. The maximum amount by which Ron's bank can expand the money supply,
assuming that Ron's Bank is a monopoly bank (or is the banking system), is:
a. $20 million.
b. $30 million.
c. $5 million.
d. none of the above.
19. A particular bank has $3 million in excess reserves. Their demand deposits are $40 million
and the reserve requirement is 25%. How much does this bank have in legal reserves?
a. $3 million.
b. $13 million.
c. $15.5 million
d. none of the above.
Questions 20, 21, and 22 are drawn from the following information:
BANK A
Accts. Receivable
$3 million
Notes Payable
Cash in vault
$4 million
Accounts payable
Treasury notes
$10 million
Demand deposits
Dep. At Fed
$16 million
Goodwill
Notes Receivable
$67 million
RESERVE REQUIREMENT = 20%
$5 million
$3 million
$80 million
$12 million
20. Assume that Bank A is a single bank in a multibank system; what is the maximum amount by
which Bank A can expand the supply of money?
a. $20 million
b. $16 million
c. $4 million.
d. none of the above.
21. Ignore (20); assume that Bank A is the Banking System. What is the maximum amount by
whichthis banking system can expand the money supply?
a. $20 million.
b. $16 million.
c. $4 million.
d. none of the above.
22. The answer to 21 differs from the answer to 20:
a. because Bank A has no excess reserves.
b. because all national banks must belong to the Fed.
c. because of adverse clearing balances; a single bank can have them, the banking system
cannot.
d. None of the above.
23. The Fed’s mandate is to adopt policies designed to:
a. maintain stable prices only.
b. maintain stable prices and economic growth, only..
c. maintain full employment and stable prices and economic growth.
d. none of the above.
24. Banks create money:
a. when they make deposits with the Federal Reserve Bank (the "Fed").
b. when they make loans.
c. when they accept your new checking account (demand deposit).
d. none of the above.
25. Legal Reserves include:
a. U.S. government bonds which are purchased because of their security.
b. the reserve requirement multiplied times demand deposits.
c. the difference between excess reserves and the bank's demand deposits.
d. none of the above.
26. If the reserve requirement is 20% (or one-fifth, the reciprocal of which is 5), then a bank
which can have adverse clearing balances and which has excess reserves of $1 million can:
a. expand the money supply by 5 times $1 million.
b. can expand the money supply by a multiple of it's excess reserves.
c. can make loans of up to $5 million.
d. all of the above.
e. none of the above.
27. If the Fed wishes to follow a “tight money policy,” you would expect to see:
a. a decrease in taxes.
b. the Fed actually increasing the reserve requirement.
c. the Fed to announce that they are increasing the discount rate.
d. none of the above.
28. Following an easy money policy, the Fed engages in open market operations in the amount of
$5 million. The reserve requirement is 20%. You would then expect to see:
a. legal reserves to increase by $4 million
b. excess reserves to increase by $4 million.
c. demand deposits to fall by $5 million.
d. none of the above.
29. The Fed sells $10 million in the open market. The reserve requirement is 25%. The resulting
maximum amount by which the money supply could change would be:
a. an increase of $40 million.
b. a decrease of 25% of $10 million, or $7.5 million.
c. a decrease of $40 million.
d. none of the above.
30. Following a tight money policy, the Fed engages in open market operations in the amount of
$50 million. The reserve requirement is 10%. The results would be:
a. an immediate decrease in demand deposits of $50 million.
b. an immediate decrease in legal reserves of $50 million.
c. an immediate decrease in excess reserves of $45 million.
d. all of the above.
31. The mandate given to the Fed by the Federal Reserve Act of 1915 is to:
a. maintain full employment
b. maintain stable prices.
c. promote economic growth.
d. all of the above.
32. Which of the following is NOT a tool available to the Fed for their conduct of monetary
policy?
a. changing the discount rate.
b. raising taxes.
c. buying/selling securities in the open market.
d. none of the above.
33. The reserve requirement is 20%. The Fed sells securities in the open market in the amount
$10 million. The maximum potential effect on the money supply is:
a. a decrease of $50 million.
b. an increase of $50 million.
c. a decrease of $10 million.
d. none of the above.
34. The major difference between the Classical macroeconomic model and the Keynesian model
is:
a. the Classical model is based on the notion of laissez-faire.
b. the Keynsian model relies on government activism via monetary and fiscal policies.
c. both (a) and (b) are true.
d. neither (a) nor (b) is true.
ECONOMICS 105 QUESTIONS FOR PRACTICE EXAM #3
1. I read in the newspaper that we are experiencing inflationary pressures AND that interest rates
appear to be falling. These circumstances be consistent with:
a. An expansionary fiscal policy.
b. A contractionary fiscal policy.
c. The Fed’s use of an easy money policy.
d. None of the above.
2. Inventory levels in the economy are falling, and there is an apparent increase in the supply of
income earning assets. These developments are consistent with:
a. A decrease in taxes.
b. The Fed’s use of a tight money policy.
c. The Fed’s use of an easy money policy.
d. None of the above.
3. Both the Full Employment Act of 1946 and The Federal Reserve Act of 1915 provide a
mandate for the government to adopt policies designed to provide:
a. Only full employment, and low prices for income earning assets.
b. Only stable prices and economic growth.
c. Full employment, or stable prices, or economic growth.
d. None of the above are correct.
4. I read in the paper that we are experiencing increases in the rate of economic growth, and that
employment levels are rising. These observations are consistent with:
a. An increase in government spending.
b. A tight money policy being adopted by the Fed.
c. An easy money policy being adopted by the Fed.
d. None of the above.
For questions (5) through (9):
There has been an increase in government spending. As a result, I would expect to see:
5. a. Falling interest rates.
b. Rising inventories.
c. An increase in the demand for money.
d. None of the above.
6. a. A rise in the general price level.
b. Falling inventories.
c. Increases in the level of employment.
d. All of the above.
7. a. A fall in the general price level.
b. An increase in the demand for income earning assets.
c. Falling real wages.
d. None of the above.
8. a. Rising income levels.
b. An increase in the rate of economic growth.
c. An increase in the supply of money.
d. None of the above.
9. a. Higher real wages.
b. A fall in incomes.
c. A rise in consumption expenditures.
d. All of the above.
For questions (10) through (14): The Fed is following an easy money policy. As a result, I would
expect to see:
10. a. Rising interest rates.
b. Rising inventories.
c. A decrease in the supply of money.
d. None of the above.
11. a. A fall in the general price level.
b. Falling inventories.
c. Reductions in the level of employment.
d. None of the above.
12. a. A rise in the general price level.
b. An increase in investment expenditures.
c. Falling real wages.
d. All of the above.
13. a. Rising income levels.
b. An increase in the rate of economic growth.
c. An increase in employment.
d. All of the above.
14. a. Higher real wages.
b. A decline in incomes.
c. A decline in consumption expenditures.
d. None of the above.
For questions (15) through (19): there has been an increase in taxes. As a result I would expect
to see:
15. a. Falling interest rates.
b. Rising inventories.
c. A decrease in the demand for money.
d. All of the above.
16. a. A fall in the general price level.
b. Rising inventories.
c. Decreases in the level of employment.
d. All of the above.
17. a. A rise in the general price level.
b. An increase in the demand for income earning assets.
c. Falling real wages.
d. All of the above.
18. a. Rising income levels.
b. An increase in the rate of economic growth.
c. An increase in the supply of money.
d. None of the above.
19. a. Higher real wages.
b. A decline in incomes.
c. A decline in consumption expenditures.
d. All of the above.
For questions (20) through (24): The Fed is following a tight money policy. As a result, I would
expect to see:
20. a. Falling interest rates.
b. Rising inventories.
c. An increase in the supply of money.
d. None of the above.
21. a. A fall in the general price level.
b. Falling inventories.
c. Increases in the level of employment.
d. None of the above.
22. a. A rise in the general price level.
b. An increase in investment expenditures.
c. Rising real wages.
d. None of the above.
23. a.
b.
c.
d.
Rising income levels.
An increase in the rate of economic growth.
An increase in employment.
None of the above.
24. a.
b.
c.
d.
Higher real wages.
A decline in incomes.
A decline in consumption expenditures.
All of the above.
25. In terms of the effectiveness of the government’s economic tools  monetary and/or fiscal
policy  the following appears to be the case.
a.
Using fiscal policy alone, we can increase employment levels AND achieve increases in
the rate of economic growth.
b.
Using monetary policy alone, we can increase employment levels AND achieve stable
prices.
c.
Using either monetary or fiscal tools, we can achieve full employment but only at the cost
of inflationary pressures; we may or may not be able to increase the rate of economic growth.
d.
None of the above are true.
26. I read in the paper that people seem to be selling off a lot of income earning assets, and that
real wages seem to be falling. These observations are consistent with:
a.
An increase in taxes.
b.
The Fed’s use of a tight money policy.
c.
A fall in government spending.
d.
None of the above.
27. I am told that consumer expenditures (C) are rising and that investment expenditures (I) are
falling. These observations are consistent with:
a.
The Fed’s use of an easy money policy.
b.
An increase in government expenditures.
c.
The Fed’s use of a tight money policy.
d.
None of the above.
28. As a result of an increase in taxes, I would expect to see:
a.
b.
c.
d.
An increase in the supply of income earning assets.
Upward pressure on the general price level.
A reduction in the rate of economic growth.
None of the above.
29. As a result of the Fed’s use of an easy money policy, I would expect to see:
a.
A fall in the level of employment.
b.
A decline in investment expenditures.
c.
Falling real wages.
d.
None of the above.
30. The demand for money increases as:
a. Income falls
b. Interest rates rise
c. The money supply falls
d. None of the above
31. A major problem associated with long-term deficit spending is:
a. An increase in savings.
b. A decrease in the supply of gold
c. “Crowding-out” of private investment expenditures.
d. None of the above
32. Under a gold standard, trade imbalances give rise to:
a. dramatic, unlimited changes in the exchange rate.
b. prosperity among all trading partners.
c. a flow of gold from the deficit to the surplus country.
d. none of the above.
33. As the price of income-earning assets rise, you expect:
a.a rise in interest rates
b.A decline in interest rates.
c.An increase in private investment expenditures.
d.None of the above.
34. Under a system of flexible exchange rate, trade imbalances between countries would result
in:
a. flows of gold from trade-deficit countries.
b. changes in exchange rates.
c. depressed economies in trade-surplus countries.
d. none of the above.
35. A major strength claimed for a gold standard is:
a. it promotes economic stability.
b. it allows for correction of trade imbalances by changing exchange rates.
c. market “discipline” is imposed on a country’s money supply.
d. none of the above.
36. A major characteristic of a system of flexible exchange rates is that:
a. Gold does not impose a discipline on the money supply..
b. unpredictable exchange rates introduce uncertainty in international trade.
c. relative to a gold standard, trade imbalances may result in lesser economic instability.
d. all of the above.
KEY FOR PRACTICE EXAM #1
1. A "supply curve" provides information as to:
b. the profit-maximizing amount of goods and services provided by firms at different
prices.
2. At a price below an "equilibrium" price, the sorts of economic forces that you would expect
tosee at work would lead you to expect to see:
b. inventories falling below desired levels.
3. In a given market, I observe inventories rising above desired levels; there is downward
pressure on prices and the unemployment level seems to be rising. Such conditions are
consistent with conditions wherein:
c. the supply of goods and services exceeds demand.
4. With a price “ceiling,” price is below an equilibrium price, thus you will have conditions of:
b. scarcity
of the best foregone alternative use of a factor of production.
5. In the market, I see firms hiring more workers; from this I could reasonably conclude that
prices are such that:
d. all of the above.
6. The primary differences between “long-run” and “short-run” market equilibria are:
d. all of the above.
7. The following is a "factor of production":
c. a worker that I hire.
8. The "Principle of Diminishing Returns" says that, holding land and capital fixed, at some
point:
c. as I use more labor, each additional worker adds less to production than the preceding
worker.
9. When I add one more person to my labor force (the number of people that I employ), this last
person adds less to my revenues than did the person before him. This is a reflection of:
d. none of the above.
10. "My wages increased this year, but the way that prices are increasing, I seem to be able to
buy less with my income now than I could last year when my wages were lower". In the above, I
am essentially describing a situation where:
b. my real wage has fallen.
11. So long as money wages that I must pay workers are more than the amount that each worker
adds to my revenues, I should want to:
a. hire fewer workers.
12. If the marginal product of labor exceeds the real wage, I know that:
b. the value of the marginal product is greater than the money wage.
13. Says Law says that:
d. none of the above.
th
14. What is the value of the 5 workers marginal product?
b. $300
th
15. The marginal product of the 4 worker is:
d. can’t tell; not enough information
16. The profit maximizing level of employment is:
d. none of the above (it’s 8 workers)
17. Suppose p falls to $1.00. The profit maximizing level of employment is:
b. 6 workers
th
18. The marginal product of the 9 worker is:
d. none of the above (it’s 25)
19. Which of the following is a factor of production?
d. all of the above
20. In the Classical system, it is true that:
b. the economy always moves to full employment.
21. In the Classical system, the price level:
a. changes in direct proportion to the money stock; i.e., when money stocks are
increased, prices rise proportionally.
22. In the Classical system, increases in government spending:
d. none of the above are true.
23. We refer to "Investment" as:
d. none of the above.
24. The following is included in 1986 GNP:
b. the value of your time spent cleaning up my garage, when I pay you for your work.
25. The value of a new Packard produced in 1940 but not sold until 1941 belongs in:
d. none of the above.(belongs in 1940 GNP)
26. A firm has sales of $10,000. It pays $4,000 in wages to it's employees and buys $4,000 in
materials and services from other people. Based on this information, you would conclude that the
value added by this firm is:
c. $6,000
27. GNP differs from GNP in the following way:
c. GNP includes a “net foreign factor income.”
28. The value of the 58th worker's marginal product is:
b. $20.00
29. The marginal product of the 52nd worker is:
d. none of the above.
30. The optimum, or profit maximizing, level of employment is:
b. 54
31. GNP or GNP can be calculated with:
c. either (a) or (b).
32. When I assume perfect mobility of the factors of production in talking about market
equilibrium, I am necessarily talking about:
c. long-run equilibrium.
33. In the “Keynsian” labor market, it is assumed that:
c. money wages are fixed in the short-run.
34. The Keynsian labor market differs from the Classical view of the labor market in that:
d. all of the above.
KEY FOR PRACTICE EXAM #2
1. In an economy where savings fall by 100 million whenever incomes fall by 400 million:
c. the tax multiplier is minus three.
2. I know that the tax multiplier for a given economy is -4. I then also know that:
d. all of the above.
3. If the marginal propensity to save is one-eighth, it must be true that:
d. none of the above.
4. In the above-described economy, the equilibrium level of income is:
c. 8,000
5. In the above described economy, the marginal propensity to consume is:
d. none of the above. (its
C ($900)/Y($1,000), or .9)
6. In the above described economy, suppose that taxes fall by 500. The resulting change in the
equilibrium level of income would be:
d. none of the above ([-9] x [-500], or +4,500).
7. In the above described economy, suppose that government expenditures rise by 1,000 and that,
at the same time, suppose that taxes are increased by 1,000. You would then expect to see the
equilibrium level of income to:
a. rise by 1,000.
8. In the above-described economy, when the level of income is $5,000, the sum of savings,
taxes and consumption will equal $5,000.
d. None of the above statements are true. (Y always equals C+S+T)
9. I read in the paper that when incomes rise by $5,000, consumption expenditures increase by
$4,000. From this I know that:
b. the tax multiplier is -4.
10. If the tax multiplier in an economy is -8, I would then conclude that:
c. the marginal propensity to consume is 8/9.
11. I know that when government expenditures increase by $500, incomes rise by $3,000. From
this I would conclude that:
d. all of the above.
12. Which of the statements given below are consistent with the Keynesian "consumption
function"?
c. as income falls consumption expenditures will fall.
13. In an economy with a MPC of .75, suppose that G and T fall by $2 billion. You would expect
the equilibrium level of income to:
c. fall by two billion.
14. In an economy with an MPS of one-fourth, the balanced
budget multiplier is:
d. none of the above (its always 1).
15. In an economy with an MPC of 2/3, a increase in taxes of $100 would result in income:
b. falling by $200.
16. With excess reserves of $3 million and a reserve requirement of 20%, Ron's Bank, which is a
single bank in a mulitbank system, can expand the money supply by a maximum amount of:
c. $3 million.
17. When we refer to the "money supply", we refer to :
d. none of the above. (Coins, currency, and demand deposits)
18. In Ron's bank, one finds $3 million in cash in the vault, and folks have $50 million in
demand deposits at the bank. The reserve requirement is 10%, and Ron's Bank has $2 million on
deposit with the Fed. The maximum amount by which Ron's bank can expand the money supply,
assuming that Ron's Bank is a monopoly bank (or is the banking system), is:
d. none of the above. (Excess reserves, in this case, are zero; thus, bank can’t expand M).
19. A particular bank has $3 million in excess reserves. Their demand deposits are $40 million
and the reserve requirement is 25%. How much does this bank have in legal reserves?
b. $13 million.(required reserves are $10 million [.25x40], plus $3 million in excess reserves)
20. Assume that Bank A is a single bank in a multibank system; what is the maximum amount by
which Bank A can expand the supply of money?
c. $4 million (its excess reserves: $4 million + $16 million - $16 million [20% of demand
deposts] = $20-$16 = 4 million)
21. Ignore (20); assume that Bank A is the Banking System. What is the maximum amount by
whichthis banking system can expand the money supply?
a. $20 million. (excess reserves times reciprocal of reserve requirement, 4x 1/[1/5] = 4 X 5 = 20)
22. The answer to 21 differs from the answer to 20:
c. because of adverse clearing balances; a single bank can have them, the banking system
cannot.
23. The Fed’s mandate is to adopt policies designed to:
c. maintain full employment and stable prices and economic growth.
24. Banks create money:
b. when they make loans.
25. Legal Reserves include:
d. none of the above.
26. If the reserve requirement is 20% (or one-fifth, the reciprocal of which is 5), then a bank
which can have adverse clearing balances and which has excess reserves of $1 million can:
e. none of the above. (It can expand M only by the amount of its excess reserves, $1 million)
27. If the Fed wishes to follow a “tight money policy,” you would expect to see:
c. the Fed to announce that they are increasing the discount rate.
28. Following an easy money policy, the Fed engages in open market operations in the amount of
$5 million. The reserve requirement is 20%. You would then expect to see:
b. excess reserves to increase by $4 million. (ER increases by 1- rr [1-.2, or .8] times
the purchase of $5 million).
29. The Fed sells $10 million in the open market. The reserve requirement is 25%. The resulting
maximum amount by which the money supply could change would be:
c. a decrease of $40 million ($10 million times 1/[1/4], or 10 x 4).
30. Following a tight money policy, the Fed engages in open market operations in the amount of
$50 million. The reserve requirement is 10%. The results would be:
d. all of the above.
31. The mandate given to the Fed by the Federal Reserve Act of 1915 is to:
d. all of the above.
32. Which of the following is NOT a tool available to the Fed for their conduct of monetary
policy?
b. raising taxes.
33. The reserve requirement is 20%. The Fed sells securities in the open market in the amount
$10 million. The maximum potential effect on the money supply is:
a. a decrease of $50 million.
34. The major difference between the Classical macroeconomic model and the Keynesian model
is:
c. both (a) and (b) are true.
KEY FOR PRACTICE EXAM #3
1. I read in the newspaper that we are experiencing inflationary pressures AND that interest rates
appear to be falling. These circumstances be consistent with:
c. The Fed’s use of an easy money policy.
2. Inventory levels in the economy are falling, and there is an apparent increase in the supply of
income earning assets. These developments are consistent with:
a. A decrease in taxes.
3. Both the Full Employment Act of 1946 and The Federal Reserve Act of 1915 provide a
mandate for the government to adopt policies designed to provide:
d. None of the above are correct.
4. I read in the paper that we are experiencing increases in the rate of economic growth, and that
employment levels are rising. These observations are consistent with:
c. An easy money policy being adopted by the Fed.
For questions (5) through (9):
There has been an increase in government spending. As a result, I would expect to see:
5. c. An increase in the demand for money.
6. d. All of the above.
7. c. Falling real wages.
8. a. Rising income levels.
9. c. A rise in consumption expenditures.
For questions (10) through (14): The Fed is following an easy money policy. As a result, I
would expect to see:
10. d. None of the above.
11. b. Falling inventories.
12. d. All of the above.
13. d. All of the above.
14. d. None of the above.
For questions (15) through (19): there has been an increase in taxes. As a result I would expect
to see:
15. d. All of the above.
16. d. All of the above.
17. b. An increase in the demand for income earning assets.
18 b. an increase in the rate of economic growth.
19. d. All of the above.
For questions (20) through (24): The Fed is following a tight money policy. As a result, I would
expect to see:
20. b. rising inventories
21. a. A fall in the general price level.
22. c. Rising real wages.
23. d. None of the above.
24. d. All of the above.
25. In terms of the effectiveness of the government’s economic tools  monetary and/or fiscal
policy  the following appears to be the case.
c.
Using either monetary or fiscal tools, we can achieve full employment but only at the
cost of inflationary pressures; we may or may not be able to increase the rate of economic
growth.
26. I read in the paper that people seem to be selling off a lot of income earning assets, and that
real wages seem to be falling. These observations are consistent with:
d.
None of the above.
27. I am told that consumer expenditures (C) are rising and that investment expenditures (I) are
falling. These observations are consistent with:
b.
An increase in government expenditures.
28. As a result of an increase in taxes, I would expect to see:
d.
None of the above.
29. As a result of the Fed’s use of an easy money policy, I would expect to see:
c.
Falling real wages.
30. The demand for money increases as:
d. None of the above
31. A major problem associated with long-term deficit spending is:
c. “Crowding-out” of private investment expenditures.
32. Under a gold standard, trade imbalances give rise to:
c. a flow of gold from the deficit to the surplus country.
33. As the price of income-earning assets rise, you expect:
b.A decline in interest rates.
34. Under a system of flexible exchange rate, trade imbalances between countries would result
in:
b. changes in exchange rates.
35. A major strength claimed for a gold standard is:
c. market “discipline” is imposed on a country’s money supply.
36. A major characteristic of a system of flexible exchange rates is that:
d. all of the above.
Practice Exam for Macro Assessment Quiz
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. Suppose a new study finds that eating carbohydrate calories (bread, pasta, cookies, etc.) makes you get
fat, but eating protein calories (meat, poultry, fish, cheese) does not. (This is the premise of the Atkins
diet that was all the rage among middle-aged people a few years ago.) Which of the following describes
how the market for bread is most likely to respond?
a. Bread prices will rise because firms will need to make more money from fewer sales.
b. The price of bread AND the amount of bread produced will both decline.
c. The price of bread will rise and the amount of bread produced will fall.
d. At first there will be a bread shortage or excess demand, but the market will return to the
original equilibrium price and quantity.
e. The price of bread will rise and the amount of bread produced will stay the same.
The following graph shows the market for plywood in a coastal Florida town.
____
2. A hurricane has been spotted headed directly toward the town in which this market is located. The
residents know that the best way to protect their homes is to board up all of their windows with plywood.
You would expect _____ for plywood to shift _______ , and the price of plywood to _______.
a. demand; rightward; increase
b. supply; rightward; increase
c. both supply and demand; rightward; remain the same
d. demand; leftward; decrease
e. supply; leftward; increase
____
3. Consider the market for loans (also known as the credit market or the market for loanable funds).
Suppose the government provides a new tax credit for business investment. Which of the following is the
most likely outcome? HINT: Think about a supply and demand framework, where businesses demand
loanable funds, savers supply loanable funds, and the price is the interest rate.
a. Business investment will fall, saving will rise proportionately and the interest rate will
remain constant.
b. Business investment will rise and the interest rate will fall.
c. Business investment and the interest rate will both rise.
d. There will be a credit surplus.
e. None of the above is correct.
____
4. Suppose the US economy slumps into a recession. What is the likely effect on big ticket items like cars?
a.
b.
c.
d.
Car prices will rise because of increased scarcity.
Car prices will fall because demand falls (shifts to the left).
Car prices will fall because supply falls (shifts to the left).
Car prices will rise because supply falls (shifts to the left).
____
5. In a closed economy with no trade and no foreign savings, an increase in the budget deficit
a. may increase, decrease or have no effect on investment.
b. does not affect investment.
c. causes investment to rise.
d. causes investment to fall.
____
6. If the Federal Reserve raises interest rates, then in the short run output will be
a. lower.
b. higher.
c. unchanged.
d. The effect cannot be dtermined iwthout information about unemployment.
____
7. In the current recession, both the Federal Reserve and the federal government are pursuing
expansionary policies. Expansionary policies aim to restore growth in the short run and include
a. high interest rates and government spending cuts.
b. low interest rates and more government spending.
c. low interest rates and cuts in government spending.
d. tax increases and cuts in government spending.
e. tax cuts, government spending cuts and stable interest rates.
____
8. Which of the following policies would immediately reduce the federal budget deficit?
I. Higher tax rates
II. Government spending cuts
III. Consumer spending cuts
IV. Higher interest rates
a.
b.
c.
d.
e.
____
I & II only.
II only.
I, II & III only.
I, II, III & IV would all reduce the deficit.
IV only.
9. Why can’t we have fiscal expansionary policy all the time?
a. If we did, we’d get more inflation.
b. If we did, demand for money would rise and interest rates would rise and aggregate
demand would fall (shift left).
c. If we did, firms would expect higher inflation and the Short Run Aggregate Supply curve
would shift left and output would not rise.
d. All of the above answers are correct.
e. Only a and b above are correct.
____ 10. High rates of saving today contribute to _______ in the future.
a. higher tax rates
b. more unemployment
c. a higher standard of living
d. lower tax rates
____ 11. Which of the following factors will increase long-run growth?
a.
b.
c.
d.
e.
I. Investment in physical and human capital.
II. Technological advances.
III. Current consumption.
IV. Expansionary monetary policy.
I, II, III & IV.
I & II only.
I, II & IV only.
I, II & III only.
II & IV only.
____ 12. According to economic theory, productivity in New Mexico is low relative to the national average because:
a. Human and physical capital investments are lower.
b. New Mexicans work fewer hours.
c. Much of the rest of the country thinks you need a passport to travel here.
d. All of the above are correct.
____ 13. Because Congress fixes the minimum wage in nominal terms, when there is inflation, the nominal
minimum wage _____ and the real minimum wage _____.
a. remains constant; falls
b. remains constant; remains constant
c. remains constant; increases
d. increases; falls
____ 14. It is midterm of your last semester in college before you graduate. You hear on the news that the Federal
Reserve Board plans to raise interest rates by ¼ of a percent to combat the threat of inflation. Is the
Fed’s action good or bad for your job prospects?
a. Good, because higher interest rates stimulate the economy and expanding firms are more
likely to hire.
b. Bad, because higher interest rates slow the economy and firms will be reluctant to hire.
c. Good, because higher interest rates mean more investment and growth.
d. Bad, because the money supply will be expanding, meaning that real wages will fall.
____ 15. Suppose that a stock market boom causes a large increase in aggregate demand and rising prices. You
are paying off a student loan with an 8 percent interest rate. Higher inflation means
a. Both you and the bank are losing money on the loan.
b. You pay a higher real interest rate than you would pay if inflation was lower.
c. You pay a lower real interest rate than you would pay if inflation was lower.
d. The bank benefits and you are hurt financially, no matter what inflation is.
Essay
16.
What are the pros and cons of running a federal government budget deficit?
Answers For Macro Assessment Quiz
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
B
A
C
B
D
A
B
A
D
C
B
A
A
B
C
ESSAY
16. ANS:
Pros—stimulates aggregate demand – spending -- in short run, can pay for investments in capital and
human capital; can pay for wars that benefit future generations. Cons—may crowd out private investment