Final Exam ECON 201 OL4 US2 Fall 2014 I. MULTIPLE CHOICE (40 questions 2 points each). Choose the one alternative that best completes the statement or answers the question. 1) ________ is a situation in which resources are limited in quantity and can be used in different ways. 1) _______ A) Choice B) Economics C) Supply and demand D) Scarcity 2) The single largest expenditure component in GDP is: 2) _______ A) consumption expenditures. B) private investment expenditures. C) net exports. D) government purchases. 3) In the circular flow diagram, the different payments made by firms to households are: 3) _______ A) rent on office and factory buildings. B) interest on borrowed money. C) wages and salaries. D) all of the above. 4) ________ is commonly defined as six consecutive months of declining real GDP. 4) _______ A) A recession B) An expansion C) A peak D) A trough 5) If gross investment in 2009 is $600 billion and depreciation in 2012 is $50 billion, net investment in 2012 is: 5) _______ A) $600 billion. B) $50 billion. C) $550 billion. D) none of the above. 6) The number of people classified as employed is 220,000 and the number of people classified as unemployed is 30,000. The size of the labor force: 6) _______ A) equals 250,000. B) equals 200,000. C) equals 300,000. D) cannot be determined from this information. 7) Unanticipated inflation arbitrarily redistributes income because: 7) _______ A) medical costs rise faster than health insurance premiums. B) nominal interest rates fall below real interest rates. C) actual tax revenue decreases and so do government subsidies. D) people forecast relative prices incorrectly and either gain or lose purchasing power. 8) A ʺshoe‐leather costʺ is the cost associated with: 8) _______ A) trying to reduce holdings of cash when there is inflation. B) changing price lists when there is inflation. C) designing a new basketball sneakers when there is inflation. D) buying new shoes when there is inflation.Table 6.11 9) Refer to Table 6.11. If 1999 is the base year, the price index in 2001 is: 9) _______ A) 100. B) 1998. C) 121.7. D) 138.7. 10) Refer to Table 6.11. If 1999 is the base year, then the inflation rate (i.e., the growth rate of the price index) between 1999 and 2000 is: 10) ______ A) 121.7 percent. B) zero percent. C) 2.17 percent. D) 17.8 percent. Figure 8.1 11) Refer to Figure 8.1. If the saving rate is s2, the economy reaches the long run equilibrium at: 11) ______ A) pt. E. B) pt. A.C) pt. D. D) pt. C. 12) If the economy experiences an increase in the amount of capital stock per worker, then we say that the economy is experiencing: 12) ______ A) capital deepening. B) capital depreciation. C) capital widening. D) technological progress. 13) Using a production possibility curve, a shifting of the curve outward illustrates: 13) ______ A) economic growth. B) a lower level of production. C) a decrease in the unemployment rate.D) fewer inputs. 14) Steel rod prices are an example of: 14) ______ A) ...

1. Final Exam ECON 201 OL4 US2 Fall 2014
I. MULTIPLE CHOICE (40 questions 2 points each). Choose
the one alternative that best completes
the statement or answers the question.
1) ________ is a situation in which resources are limited in
quantity and can be used in different ways. 1) _______
A) Choice B) Economics
C) Supply and demand D) Scarcity
2) The single largest expenditure component in GDP is: 2)
_______
A) consumption expenditures. B) private investment
expenditures.
C) net exports. D) government purchases.
3) In the circular flow diagram, the different payments made by
firms to households are: 3) _______
A) rent on office and factory buildings. B) interest on borrowed
money.
C) wages and salaries. D) all of the above.
4) ________ is commonly defined as six consecutive months of
declining real GDP. 4) _______
A) A recession B) An expansion C) A peak D) A trough
5) If gross investment in 2009 is $600 billion and depreciation
in 2012 is $50 billion, net investment in 2012 is: 5)
_______
A) $600 billion. B) $50 billion.
C) $550 billion. D) none of the above.
6) The number of people classified as employed is 220,000 and
the number of people classified as unemployed is 30,000.
The size of the labor force: 6) _______
A) equals 250,000.
B) equals 200,000.
C) equals 300,000.
D) cannot be determined from this information.
7) Unanticipated inflation arbitrarily redistributes income

2. because: 7) _______
A) medical costs rise faster than health insurance premiums.
B) nominal interest rates fall below real interest rates.
C) actual tax revenue decreases and so do government subsidies.
D) people forecast relative prices incorrectly and either gain or
lose purchasing power.
8) A ʺshoe‐leather costʺ is the cost associated with: 8) _______
A) trying to reduce holdings of cash when there is inflation.
B) changing price lists when there is inflation.
C) designing a new basketball sneakers when there is inflation.
D) buying new shoes when there is inflation.Table 6.11
9) Refer to Table 6.11. If 1999 is the base year, the price index
in 2001 is: 9) _______
A) 100. B) 1998. C) 121.7. D) 138.7.
10) Refer to Table 6.11. If 1999 is the base year, then the
inflation rate (i.e., the growth rate of the price index) between
1999
and 2000 is: 10) ______
A) 121.7 percent. B) zero percent. C) 2.17 percent. D) 17.8
percent.
Figure 8.1
11) Refer to Figure 8.1. If the saving rate is s2, the economy
reaches the long run equilibrium at: 11) ______
A) pt. E. B) pt. A.C) pt. D. D) pt. C.
12) If the economy experiences an increase in the amount of
capital stock per worker, then we say that the economy is
experiencing: 12) ______
A) capital deepening. B) capital depreciation.
C) capital widening. D) technological progress.
13) Using a production possibility curve, a shifting of the curve
outward illustrates: 13) ______
A) economic growth. B) a lower level of production.
C) a decrease in the unemployment rate.D) fewer inputs.
14) Steel rod prices are an example of: 14) ______
A) custom prices. B) regulated prices.

3. C) auction prices. D) personal prices.
15) If the marginal propensity to consume is 0.8, the value of
the marginal propensity to save is: 15) ______
A) 5. B) 1.25. C) 0.2. D) 0.8.
16) The economy moves from a short‐run equilibrium to the
long‐run equilibrium through: 16) ______
A) demand shocks. B) improvements in technology.
C) supply shocks. D) adjustments in wages and prices.Figure
9.2
17) Refer to Figure 9.2. Suppose the economy is at Point A, a
decrease in the price level causes a movement to Point:
17) ______
A) D. B) C. C) E. D) B.
18) A decrease in the money supply will cause output: 18)
______
A) to increase in the short run; increase in the long run.
B) to increase in the short run, decrease in the long run.
C) to decrease in the short run; not change in the long run.
D) to decrease in the short run; decrease in the long run.
19) Federal discretionary spending consists of: 19) ______
A) all the spending that Congress authorized by prior laws.
B) interest payments on government debt held by the public.
C) all the programs authorized by Congress on an annual basis.
D) all of the above.
20) In 2011, federal spending was about ________ percent of
GDP. 20) ______
A) 71 B) 25 C) 14.7 D) 33
21) The length of time that the U.S. Treasury Department takes
to print and mail tax rebate checks to help the economy
out of a recession is part of the: 21) ______
A) inside lag. B) outside lag.
C) identification lag. D) inside‐outside lag.
22) If the marginal propensity to consume is 0.75 and marginal
propensity to import is 0.15, then the multiplier in an open
economy is: 22) ______
A) 4. B) 8.3. C) 10. D) 2.5.

4. 23) If both government spending and taxes increase by an equal
amount at the same time, GDP will: 23) ______
A) decrease.
B) increase.
C) remain the same.
D) None of the above are true, it is impossible to say.
24) A $100 million increase in government spending causes: 24)
______
A) an equal amount of change in equilibrium output in an open
and a closed economy.
B) a larger change in equilibrium output in a closed economy
than in an open economy.
C) a larger change in equilibrium output in a closed economy
than in an open economy if the marginal propensity to
import is zero.
D) a larger change in equilibrium output in an open economy
than in a closed economy.
25) The boom period of the late 1990s was a good example of:
25) ______
A) the depressing effect on share prices of low expectations
about future dividends.
B) the Q‐theory of investment at work.
C) the irrationality of long‐term investments when share prices
are not high enough.
D) the impact that low interest rates have of investment
expenditure.
26) A ʺbank runʺ occurs when panicky depositors
simultaneously: 26) ______
A) withdraw their funds in order to invest in Treasury bills.
B) withdraw their funds from a bank they believe will fail.
C) chase a bank owner who has fled the country.
D) deposit their funds in a bank offering high deposit interest
rates.
27) According to the neoclassical theory of investment, the
important determinant of investment spending is: 27)
______

5. A) taxes and the real interest rate.
B) nominal interest rates and taxes.
C) the business climate.
D) government spending.
Additional Application
COPING WITH A STOCK MARKET CRASH: BLACK
MONDAY, 1987
How did the Fed successfully respond to the major stock market
crash in 1987?
On October 19, 1987, known as ʺBlack Monday,ʺ the Dow Jones
index of the stock market fell a dramatic 22.6 percent in one
day. Similar declines were felt in other indexes and stock
markets around the world. These declines shocked both
businesses and investors. In just 24 hours, many people and
firms found themselves much less wealthy. The public began to
worry that banks and other financial institutions—to protect
their own loans and investments—would call in
borrowersʹ existing loans and stop making new ones. A sharp
drop in available credit could, conceivably, plunge the economy
into a deep recession.
Alan Greenspan had just become chairman of the Federal
Reserve that year. As a sophisticated economist with historical
knowledge of prior financial crises, he recognized the
seriousness of the situation. He quickly issued a public
statement in which he said that the Federal Reserve stood ready
to provide liquidity to the economy and the financial system.
Banks were told that the Fed would let them borrow liberally. In
fact, the Fed provided liquidity to such an extent that interest
rates even fell. As a result of Greenspanʹs action, ʺBlack
Mondayʺ did not cause a recession in the United States.
28) The dramatic drop in stock values on October 19, 1987,
known as ʺBlack Monday,ʺ was potentially catastrophic for the
economy because: 28) ______
A) the Fed could not execute any open market operations and
the required reserve ratio had been set too low by the previous

6. administration.
B) banks and financial institutions might have called in existing
loans and stop making new ones.
C) the value of the U.S. dollar was likely to fall too and that
would create a massive trade deficit.
D) the federal government found itself on the brink of default,
so ruining millions of public debt holders.
29) First National Bank has liabilities of $1 million and
ownersʹ equity of $300,000. First National Bankʹs assets are:29)
______
A) $700,000.
B) $100,000.
C) $1.3 million.
D) $900,000.
30) Which of the following is included in M1, but not included
in M2? 30) ______
A) travelers checks
B) checking deposits
C) currency
D) All assets in M1 are included in M2.
Figure 14.3
31) Refer to Figure 14.3. At an interest rate of 10%, there is:
31) ______
A) an excess supply of money of $500.
B) an excess demand for money of $300.
C) an excess supply of money of $300.
D) an excess demand for money of $500.
32) Fed actions that increase the money supply: 32) ______
A) tend to lead to a depreciation of the currencies of other
nations.
B) usually have no effect on a currencyʹs exchange value.
C) tend to lead to a depreciation of a nationʹs currency.
D) tend to lead to an appreciation of a nationʹs currency.
33) When the economy is in a boom, the interest rates ________

7. and the bond prices ________. 33) ______
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase
34) One implication of Sayʹs Law is that: 34) ______
A) unemployment will always persist.
B) there will always be a recession, as not all goods in the
economy will be purchased.
C) inflation will always exist, as all goods in the economy will
be purchased.
D) there is no recession, as all goods produced in the economy
will be purchased.
35) When an incumbent politician uses expansionary fiscal and
monetary policy to increase the chance of re‐election, that
politician is generating a(n): 35) ______
A) political business cycle.
B) a sociological depression.
C) economically sound campaign.
D) political dynasty.
36) In the long run, without government intervention, the
economy responds to a decrease in aggregate demand with:
36) ______
A) a decrease in short‐run aggregate supply.
B) an increase in short‐run aggregate supply.
C) an increase in aggregate demand.
D) a second decrease in aggregate demand.
37) Inflation in the long run is positively correlated with: 37)
______
A) nominal wage growth, but not nominal interest rates.
B) neither nominal wages nor nominal interest rates.
C) nominal wages and nominal interest rates.
D) nominal interest rates, but not nominal wages.
38) If the Fed is credible or believable in its desire to fight
inflation, it can deter the private sector: 38) ______
A) from taking aggressive actions that drive prices down.

8. B) from lowering real wages.
C) from developing rational expectations about inflation.
D) from taking aggressive actions that drive up prices.
Additional Application
INFLATION‐INDEXED BONDS IN THE UNITED STATES
Are there bonds that can protect your investments from
inflation?
In 1997, the U.S. Department of the Treasury created a new
financial instrument called the Treasury Inflation‐Protected
Security, or TIPS. The key feature of TIPS is that the payments
to investors adjust automatically to compensate for the actual
changes in the Consumer Price Index. Therefore, TIPS provide
protection to investors from inflation.
Like other government bonds, TIPS make interest payments
every six months and a payment of the original principal when
the bond matures. However, unlike other Treasury bonds, these
payments are automatically adjusted for changes in inflation.
Despite their obvious attractions, the market for TIPS is still
rather small. As of 2005, there were about $200 billion in TIPS
outstanding, compared to a total volume of about $4 trillion
($4,000 billion) total Treasury obligations.
Because TIPS compensate for actual inflation, the interest rate
on these bonds differs from conventional bonds by the expected
inflation rate. By comparing the interest rates on TIPS to other
government bonds of similar maturity, economists can estimate
the publicʹs expectations of inflation.
SOURCE: Simon Kwan, ʺInflation Expectations: How the
Market Speaks,ʺ Federal Reserve Bank of San Francisco
Economic
Letter, October 7, 2005.
39) According to the application, the difference between the
interest rates on TIPS and the interest rates on non‐inflation
indexed securities represents: 39) ______
A) the publicʹs expectation of inflation in the future.
B) the governmentʹs expectation of inflation in the future.
C) the publicʹs expectation of inflation in today.

9. D) the Fedʹs expectation of inflation in the today.
40) If what a government spends exceeds what it collects in
taxes in a year, then the government is experiencing a:40)
______
A) government budget surplus. B) government net revenue.
C) government budget deficit. D) government net expenditure.
SOLUTIONS GUIDE: Please reword to ensure originalty.
II. SHORT ANSWER. (5 questions 4 points each). Please write
a separate paragraph to explain
your answer to each of the following questions.
41) Explain why we must take into account changes in business
inventories when calculating GDP. 41)
42) If Year 1 is the base year, the price index for Year 2 is 105,
and the price index for Year 3 is 103. What is the inflation rate
in Years 2 and 3? Explain what has happened to the cost of
living between Years 1 and 2 and Years 2 and 3. 42)
Table 8.1
43) Refer to Table 8.1. Compute real GDP per capita for each of
the three countries. Why is it important to examine real GDP
per capita rather than real GDP? 43) _____________
Real GDP per capita
Country
A = 284,119 / 7 = $40,588
B = 580,872 / 30 = $19,362
C = 386,059 / 96 = $4,021
44) ʺThe budget surpluses incurred by the government during
the late 1990s were purely due to the major tax increase
implemented during Clintonʹs Administration.ʺ Do you agree or
disagree? And please explain why? 44)
45) Assume the money market is initially in equilibrium. Now,
suppose that the price level falls. Please explain what effect this
reduction in the aggregate price level will have on the money
market. 45) _____________

10. Sheet1Number of Immigrant Business Owners by
IndustryIndustry immigrant Business ownersAll Business
owners Non-Migrant Business owners Agriculture and
Mining26740730800704060construction
18703019459101758880Manufacturing73070535550462480whol
esale trade60900383370322470Retail
trade1828501176230993380Transportation71470423320351850I
nformation
16330177290160960Finance76900889800812900Professional
services
21983021156101895780Education15774012136201055880Arts1
44240683390539150Other services 21932012470201027700
Sheet2
Sheet3