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ECON 2100
Quiz 4
Due 4/25/16
10 points
Name:__________________________________________
CLEARLY WRITE YOUR ANSWERS ON THE LINES PROVIDED.
TRUE/FALSE (0.5 POINTS EACH)
1. Fiat money is paper money that is backed by gold, silver or some other commodity.
2. When you voluntarily cook dinner for your family every Sunday night, the value of that service is included in
gross domestic product (GDP).
3. Total household income will be equal to total output in an economy.
4. If the marginal propensity to consume (MPC) is 0.4, then when disposable income rises by $1 consumption
spending will increase by $0.40.
MULTIPLE CHOICE (0.5 POINTS EACH)
_____5. We discussed 3 problems with our measurement of GDP. Which of the following will NOT affect the accuracy of
our measurement?
a. Underground Economy
b. Inflation
c. Quality Changes
d. Household Production
_____6. Which of the following is NOT a component of private investment (I)?
a. Human capital investment
b. Changes in inventories
c. New home construction
d. Purchases of plant, equipment & software
_____7. Which variable has the most influence on consumption spending (C)?
a. Interest rate
b. Wealth
c. Disposable income
d. Expectations/Consumer Confidence
_____8. Which of the following goods/services could be included in the CPI but not the GDP deflator?
a. A new couch for your dorm room
b. New textbooks for your spring classes
c. Cable internet service from Charter Communications
d. A (used) Coach purse bought at a consignment shop
_____9. Which of the following is not a way the CPI is used to measure the performance of the economy?
a. To index payments
b. To determine profits
c. To translate from nominal to real values
d. As a policy target (gauge inflation)
_____10. Suppose that real wages increased from 2010 to 2015. We would conclude that
a. Inflation decreased
b. Inflation increased
c. Purchasing power increased
d. Purchasing power decreased
e. Purchasing power stayed the same
SHORT ANSWER
11. (0.5 POINTS) What is the unit of account in the United States?
12. (1 POINT) Match the factor of production with its appropriate factor payment.
A. Wages and Salaries
_____ Entrepreneurship
B. Rent
C. Interest
_____ Labor
D. Profit
_____ Capital
_____ Land
13. (1 POINT) If the nominal interest rate on a loan is 14%, and inflation is expected to be 5%, what is the real interest
rate?
Who would benefit if inflation were actually 8%? (circle your answer)
Borrower
Lender
14. (0.5 POINTS) Suppose the demand for Euros increases. Will the Euro appreciate or depreciate against the dollar? (You
can use the graph below to help determine your answer)
Exchange market for Euros (in terms of US dollars)
$ per Euro
Seuros
1.14
Deuros
500
millions of Euros
15. (2 POINTS) Graph the MONEY MARKET in equilibrium with $85 billion (cash) in circulation and interest rate of 4%.
Interest
Rate
Billions $

Suppose the Federal Reserve decides to DECREASE the money supply. How might they do this? (Choose ONE
policy tool and tell how they would use it.) Also be sure to show the decrease in money supply on the graph,
being sure to label your new equilibrium.

How will this affect spending in the economy? (Will it increase or decrease?)

What will be the impact on real GDP? (Will it increase or decrease?)