Economics 201
Spring 2004
Practice Final Exam

Section #1
1)  Suppose that the U.S. economy is in a recession.
a)  Using an aggregate supply and aggregate demand diagram, show what happens when monetary policy is used to get rid of the recessionary gap.  (Note: make sure that you show equilibrium output and the general price level before and after the fiscal policy and show full-employment output).

b)  What would happen to the level of output, the interest rate, and the level of investment with this monetary policy?

c)  What are the three monetary policy actions that can be used to get rid of the recession?

2)  Consider the market for orange juice.  Graphically show what happens to the market for orange juice if the price of apple juice increases.  Describe what happens to the price of orange juice and the quantity of orange juice sold.

3)  Describe how the FDIC program prevents runs on banks.

Put your answer for each multiple choice question on the following table.

1._____ 7.______  13.______  19.______   25.______

2._____ 8.______  14.______  20.______   26.______

3._____ 9.______  15.______  21.______    27.______

4._____ 10._____  16.______  22.______    28.______

5._____ 11._____  17.______  23.______    29.______
6._____ 12._____  18.______  24.______    30.______

Multiple Choice

1. Money is almost always used to quote prices.  This illustrates the function of money as a
a.  Medium of exchange.
b.  Store of value.
c.  Unit of account.
d.  Commodity value.

2. In order for barter trades to occur, there must be a
a.  Singularity of interest.
b.  Bargaining intermediary.
c.  Double coincidence of wants.
d.  Sufficient supply of cash.

3. The fractional reserve banking system of banking evolved because
a.  Goldsmiths did not have safes large enough to hold all of their deposits.
b.  There was always a dire need for additional money.
c.  Goldsmiths knew that on any given day, only a few depositors would come to claim their deposits.
d.  Goldsmiths knew that they would not be prosecuted for lending out money that they did not have.

4. If expansionary monetary policy were used when the economy was producing at the full-employment output,
a.  In the short run there would be deflation but in the long run there would be inflation.
b.  In the short run output would decrease but in the long run there would be inflation.
c.  In the short run output would increase but in the long run there would be inflation.
d.  In the short run output would remain the same but in the long run there would be inflation.

5. If the Federal reserve decreases the discount rate the money supply will
a. Increase.
b. Decrease.
c. Not change.
d. None of the above.

6. A student has a chance to see the Dave Mathews Band in concert.  The student also has a major economics exam in the morning.  If the student goes to the concert,
a. He or she will get a lower grade on the economics exam (probably).
b. The opportunity cost of the concert is time spent studying.
c. This decision involves a trade-off.
d. All of the above are correct.

7. What is a way that the government could encourage technological progress?
a. tax at very high rates
b. build roads
c. have strong property rights
d. have strong patent laws
e. spend on foreign aid

8. The process of focusing on only the most important factors to explain a phenomenon is called
a. Abstraction.
b.  Marginal analysis.
c.  Rational choice.
d.  Controlled experimentation.

9. Which of the following groups benefit from a price ceiling?
a.  All producers.
b.  All consumers.
c.  Consumers that can buy the product.
d.  Producers that can sell the product.
e.   Nobody benefits.

10. Frictional unemployment occurs
a. Naturally during the normal workings of an economy, as people change jobs, move across the country, etc.
b. With economic fluctuations; it increases during bad times and decreases during good times
c. Because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs
d. Because the government labels some people who aren’t really in the labor force as unemployed.

11. If government spending is $900 billion while government revenue is $750 billion, the government is said to have
a. a $150 billion budget surplus.
b. a $150 billion budget deficit.
c. a $150 billion budget balance.
d. a $150 billion decrease in government debt.
e. a $900 billion budget deficit.

12. When equilibrium real GDP falls short of potential GDP, there is a (an)
a. Inflationary gap.
b. Potential gap.
c. Recessionary gap.
d. Precautionary gap.

13. If the Federal reserve bank purchases government bonds the money supply will
a.  Increase.
b.  Decrease.
c.  Not change.
d.  None of the above.

14. If interest rates decrease, what is most likely to happen to equilibrium GDP on the Keynsian cross diagram?
a.  It will increase because G decreases.
b.  It will decrease because I decreases.
c.  It will decrease because (X-IM) decreases.
d.  It will increase because I increases.

15. The money demand curve will shift with changes in
a.  Consumer tastes.
b.  Minimum wages.
c.  Central bank leadership.
d.  Prices or GDP.

16. The marginal propensity to consume is calculated by which formula?
a.  MPC = change in DI divided by change in C
b.  MPC = change in GDP divided by change in DI
c.  MPC = change in C divided by change in DI
d.  MPC = change in C divided by change in GDP

17. If total spending exceeds total output, then
a.  Inventory level will rise.
b.  Inventory levels will remain constant.
c.  Inventory levels will fall.
d.  Output will eventually decrease.

18. If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank’s reserve position if the required reserve ratio is 20 percent?
 a. The bank has $500,000 of required reserves and $500,000 of excess reserves.
 b. The bank has $600,000 of required reserves and $400,000 of excess reserves.
 c. The bank has $400,000 of required reserves and $600,000 of excess reserves.
 d. The bank has $200,000 of required reserves and $800,000 of excess reserves.

19. Proponents of Fed independence maintain that
 a. independence helps ensure low unemployment rates.
 b. money is too important to be left to the bankers.
 c. independence permits objective decisions not based on politics.
 d. only the Federal Reserve knows how to act wisely.

20. The narrowest definition of the money supply (M1) includes
 a. cash and travelers’ checks.
 b. cash, travelers’ checks, and savings account balances.
 c. cash, checking account balances, and travelers’ checks.
 d. cash, bank deposits, and money market accounts.

21. A major advantage of monetary policy over fiscal policy is that monetary
 a. policy affects all sectors of the economy equally.
 b. policy can be put into effect more quickly.
 c. policy, once implemented, takes effect more quickly.
 d. authorities see the need for policy more quickly.

22. Money is almost always used to quote prices. This illustrates the function of money as a
 a. medium of exchange.
 b. store of value.
 c. unit of account.
 d. commodity value.

23. Which of the following will shift the demand curve for milk?
 a. change in the income of buyers of milk
 b. change in the price of milk
 b. change in input prices for milk
 c. All of the above are correct. are correct

24. If the price of oil, a close substitute for coal, increases then the
 a. supply curve for coal will shift to the right.
 b. demand curve for coal will shift to the right.
 c. equilibrium price and quantity of coal will not change.
 d. demand curve for coal will shift to the left.
 e. supply curve of coal will shift to the left.

Figure 1
(This will be shown in class)

25. In Figure 1, the economy is experiencing a(n)
 a. inflationary gap equal to the gap between E and T.
 b. inflationary gap equal to the gap between F and T.
 c. recessionary gap equal to the gap between E and T.
 d. recessionary gap equal to the gap between F and T.

26. In 2000, many economists believed that the most serious macroeconomic problem confronting the U.S. economy was an inflationary gap. Which policies would be effective in dealing with this problem?
 a. Increase transfer payments.
 b. Increase government purchases.
 c. Decrease personal income taxes.
 d.  Increase personal income taxes.

27. Contractionary fiscal policy may have some undesirable consequences. Among these is
 a. higher unemployment.
 b. higher inflation.
 c. decreased net exports.
 d. a larger federal deficit.

28. The tool most frequently relied on by the Fed is
 a. interest rate changes.
 b. changing the money multiplier.
 c. changing the discount rate.
 d. open market operations.
 e. changing the reserve ratio.

29. The basic equation for a bank’s balance sheet is ___________.
 a. assets = liabilities – net worth
 b. net worth = assets – liabilities
 c. net worth = assets + liabilities
 d. liabilities = net worth + assets

30. If the MPC is .8, the true spending multiplier is equal to 3, and taxes are reduced by $100, how much will output change by?
 a. $300
 b. $400
 c. $240
 d. None of the above