Economics 1010

Final Examination

Dr. Elroy M. Leach

1. Which of the following is not an instrument of monetary

policy?
a. raising reserve requirement ratio
b. reducing the discount rate
c. Open market Operations
d. increased government spending
Answer D
2. When the FRS buys government securities bank reserves
a. and the monetary base increase
b. increase and the monetary base decrease
c. decrease and the monetary base increase
d. and the monetary base decrease
Answer A
3.

When a person makes a deposit with a savings and loan

association that can be withdrawn on seven days' notice
and the $&L makes a mortgage loan for 30 years, the $&L
is
a. lending short and borrowing long
b. lending long and borrowing short
c. likely to be bankrupt, taking too much risk
d. violating banking laws
Answer B
4. If our imports are $498 billion and exports are $372
billion then our net exports are
a. +$126 billion
c. +$870 billion
b. -$126 billion
d. -$870 billion
Answer B
5. In the Keynesian system, an increase in the money supply
raises GDP by
a. lowering taxes
b. directly increasing consumer spending
c. increasing the budget deficit
d. reducing interest and increasing investments
Answer D
6. To control money supply, the FRS rarely uses
a. reserve requirements changes
b. open market sales
c. discount rate changes
d. tax changes
Answer A
7. Expansionary
a. increases
demand
b. increases
supply
c. increases
d. decreases
Answer A

monetary policy
the supply of money without changing its
the demand for money without changing its
both the demand for and supply of money
both the demand for and supply of money

8. An increase in money supply will increase aggregate demand

because it will stimulate
a. government spending
c. savings and interest rates
b. tax revenues
d. investments
Answer D
9.

If the currency/deposit ratio is .05 and the reserve

requirement ratio is .2, then the money multiplier is
a. 5 b. 20 c. 3 d. 3.5 e. unknowable
Answer A
10. Expansionary fiscal policy increases the
a. demand for but not the supply of money
b. supply of but not the demand for money
c. supply and demand for money
d. tax rates and money supplied and demanded
Answer A
11. One potential problem with monetary policy may be that
a. investments may not be responsive to interest rates
b. money is an effective store of value
c. money supply is too small
d. GDP will grow too fast is a short time period
Answer A
12. A bank has deposits totaling $6 mill and its total
reserves are $1.8 mill. If the reserve ratio is 20%,
this bank can safely lend
a. $200,000 b. $400,000 c. $600,000 d. $800,000
Answer C
13. One potential problem with fiscal policy is
a. the crowding out effect
b. interest rates may not be responsive to money supply
c. the full employment surplus or deficit
d. that it causes government bankruptcy
Answer A
14. If the price level falls, the value of your cash
holdings________ so you will __________consumption, which
causes the aggregate expenditure curve to shift_________.
a. decreases; increase; downward
b. increases; decrease; downward
c. increases; increase; upward
d. decreases; decrease; downward
Answer C
15. An increase in the price level will cause the aggregate
expenditure curve to shift _ which, in turn, will
cause the aggregate demand curve to shift_________.
a. upward; rightward
c. upward; leftward
b. downward; rightward
d. downward; leftward
e. none of the above
Answer E

16. If the level of real GDP increases, the ______ for money
will ______. Which?
a. demand, decrease c. supply, increase
b. demand, increase d. supply, decrease
Answer B
17. To
a.
b.
c.
d.
Answer

reduce aggregate demand, the FRS could

expand the money supply and raise interest rate
expand money supply and lower interest rate
contract money supply and lower interest rate
contract money supply and raise interest rate
D

18. Demand side inflation occurs when

a. prices rise faster than wages
b. wages rise faster than prices
c. the aggregate supply curve shifts to the right
d. the aggregate supply curve shifts to the left
e. the aggregate demand curve shifts to the right
Answer E
19. If when disposable income rose from $10,000 to $15,000
consumption increased from $8,000 to $11,000, then
a. the household in question is dissaving
b. the slope of the consumption is .6
c. the slope of the consumption function is .4
d. the APC is negative in this case
Answer B
20. Cost push inflation occurs when
a. prices and wages rise at the same
b. the aggregate supply curve shifts
c. the aggregate supply curve shifts
d. the aggregate demand curve shifts
e. the aggregate demand curve shifts
Answer C

rate
to the
to the
to the
to the

right
left
right
left

21. Structural unemployment is associated with

a. the changing of jobs in a dynamic economy
b. general downturns in the economy
c. the long term decline of specific industries
d. seasonal unemployment
Answer C
22. Say's law:
a. says demand creates its own supply
b. says the more supply there is, the lower prices are
c. says supply creates its own demand
d. assured Keynesian economists of full employment
Answer C
23. The recessionary gap for 1992 was expected to be $150
billion. If the MPS is .05, government spending should
have risen by ____ to reach full employment.
a. $30 billion
c. $7.5 billion
b. $25 billion
d. $150 billion
e. unknowable
Answer C

24. The consumption function shows the relationship between

consumption and:
a. disposable income
c. exports
b. interest rates
d. investment
Answer A
25. Net domestic product equals GDP minus
a. investment
c. disposable income
b. depreciation
d. taxes
e. consumption
Answer B
26. Capital differs from other resources used in the
productive process because capital
a. is typically less expensive than materials
b. is only partially consumed in production
c. requires labor to operate, materials do not
d. all the above
Answer B
27. In
a.
b.
c.
d.
Answer

computing GDP, it is essential to

avoid double counting
include transfer payments
include all intermediate goods
include second hand sales
A

28. If business inventories were $450 billion at the end of

1985 and they were $500 billion at the beginning of 1985,
inventory investment was ___ for 1985. Which?
a. $500 billion
c. $450 billion
b. $50 billion
d. -$50 billion
e. unknowable
Answer D
29. Suppose Ms. Adams deposits $500 in Bank One. This bank and
others in the economy have a desired reserve ratio of 20
percent. As such how much new money can be created after
this $500 has passed through the system?
a. $1,600
b. $500
c. $2,000
d. $1,500
Answer C
30. Assume that the reserve requirement ratio is 20 percent
and that the FRS buys $100 million of securities from
banks. As such money supply can increase by as much as
a. $100 million
c. $20 million
b. $500 million
d. $80 million
Answer B
31. When the reserve requirement ratio was 5 percent, money
supply rose by $500 million after the FRS bought some
securities from banks. As such, the FRS must have bought
about _____million worth of securities from the banks.
a. $25
b. $500
c. $100
d. $80
Answer A

32. Suppose that in a country with a population of 200

million, there are 90 million employed and 10 million
unemployed. What is the unemployed rate?
a. 11 percent
c. 8 percent
b. 10 percent
d. 5 percent
e. none of these.
Answer B
33.

If the FRS pursues an expansionary monetary policy we

may expect
a. interest rates and investments to rise
b. interest rates and investments to decrease
c. interest rates to fall and investments to rise
d. no changes in the aggregate demand for goods
Answer c
34. Cost-push inflation may be caused by
a. an increase in resource availability
b. a decline in the per unit cost of production
c. a supply shock
d. a decrease in wage rates
Answer C
35. The short run Phillips curve shows the trade off between
a. unemployment rate and the rate of inflation
b. interest rate and the price level
c. the rate of saving and investing in the economy
d. quantity demanded and supplied
Answer A
36. If the MPC is equal to .9 for the economy, compute the
change in consumption if disposable income increases by
$200 million.
a. $20 mill b. $200 mill c. $180 mill d. $1,800 mill
Answer C
37. Consider a household with annual disposable income of
$20,000. If the household makes consumption expenditures
of $17,000 then its
a. MPC = .7 b. MPC = .85 c. APC = .7 d. APC = .85
Answer D
38. If the MPC is less than the APC, then, as disposable
income increases, the
a. APC falls b. APC rises c. APS falls d. MPC rises
Answer A
39.

Suppose you have $100,000 in a checking account for one

year that pays zero interest and does not charge any
fees because the minimum balance is met. In that case a
20 percent inflation rate would
a. impose a $120,000 opportunity cost on your account
b. impose a $80,000 opportunity cost on your account
c. impose a $20,000 opportunity cost on your account
d. not impose any opportunity on your account
Answer C

40. If aggregate production (AP) is less than aggregate

expenditures (AE) total leakages will be
a. greater than total injections
b. smaller than total injections
c. equal to total injections
d. absent from the macroeconomic system
Answer B
41. If aggregate production is less than aggregate
expenditures, then business firms:
a. have under-produced
b. will step up production
c. will raise prices and/or production
d. will experience negative unplanned inventory changes
e. all the above
Answer E
42. If aggregate expenditures are greater than aggregate
production, then:
a. total planned investment (TPI) is greater than
aggregate saving (TPS)
b. TPI < TPS
c. TPS = TPI
d. there are positive unplanned inventory changes
Answer A
43. Suppose that in 1991 depreciation was $479.4 bill, GDP
was $4,486.2 bill and national income was $3,635.9 bill.
Then the net domestic product for 1991 had to be
a. $4,965.6 billion
c. $4,006.8 billion
b. $4,115.3 billion
d. $3,156.5 billion
Answer C
44. These figures are for 1986: Consumption was $2,799 bill,
investments were $671 bill, exports were $376 bill,
imports were $481 bill, government spending were $869
bill, spending on durable goods were $383 bill and
personal income was $3,534 bill. What was GDP?
a. $4,234 billion
c. $4,813 billion
b. $5,196 billion
d. $4,299 billion
Answer A
45. If the average propensity to save (APS) is zero then the
a. APC is also zero
b. MPC is also zero, remember MPC has an effect on APS
c. saving function is horizontal
d. APC is equal to one
Answer D
46. If the Keynesian income multiplier is 8/3, one may
conclude that the
a. APC = 8/3
b. MPS = 8/3
c. MPC = 5/8 d. APS = 2.67
Answer C

47. Actually the Federal Reserve System has .... reserve

districts banks. How many?
a. 7
b. 12
c. 9
d. 13
e. 50
Answer B
48. The simple deposit multiplier or money multiplier is
the reciprocal of the
a. required reserve ratio
c. excess reserve ratio
b. marginal propensity to save d. tax rate
Answer A
49. Most of the gold reserves in the world are stored in the basement of
a. Fort Knox
b. the Federal Reserve District of New York
c. the White House
d. New York Stock Exchange
Answer B