Practice Exam V Fall 2012

Practice Exam V Fall 2012

Student: ______

1.Economists who believe in sound finance would say that in a recession, the government should:
A.run a budget deficit because the Ricardian equivalence theorem is true both in theory and in practice.
B.run a budget deficit despite the truth of the Ricardian equivalence theorem.
C.maintain a balanced budget because the Ricardian equivalence theorem is true in practice.
D.maintain a balanced budget for political and moral reasons.

2.A key difference between functional finance and sound finance is that in the functional finance approach the government has the potential for:
A.a more active role in spending and taxing decisions.
B.a less active role in spending and taxing decisions.
C.no role since functional finance holds that on moral principle the budget should be balanced.
D.more active role in spending and taxing but only during depressions.

3.Even as the U.S. government ran large budget deficits in the early 2000s, the interest rate did not rise substantially. Which of the following is among the reasons that crowding out did not raise interest rates at that time?
A.Americans increased their willingness to save at the same time that the budget deficits appeared.
B.The government spent the borrowed money in such a way that productivity and therefore the availability of savings dramatically increased.
C.The Federal Reserve decreased the money supply.
D.Foreigners were willing to finance the U.S. deficit with their abundant supply of savings.

4.Expansionary fiscal policy that raises the budget deficit may:
A.reduce business investment by increasing interest rates.
B.reduce business investment by reducing interest rates.
C.increase business investment by increasing interest rates.
D.increase business investment by reducing interest rates.

5.An increase in the budget deficit will have a:
A.more negative effect on income when crowding out is weak.
B.more positive effect on income when crowding out is strong.
C.less negative effect on income when crowding out is weak.
D.less positive effect on income when crowding out is strong.

6.Suppose one economist believes that the target rate of unemployment is 4 percent while another believes that it is 6 percent. If GDP is $10 trillion and the unemployment rate is 6 percent, then Okun's rule of thumb implies that the target output levels for these two economists will differ by:
A.$100 billion.
B.$200 billion.
C.$300 billion.
D.$400 billion.

7.Suppose one economist believes that the target rate of unemployment is 5 percent while another believes that it is 6 percent. If GDP is $10 trillion and the unemployment rate is 6 percent, then Okun's rule of thumb implies that the target output levels for these two economists will differ by:
A.$100 billion.
B.$200 billion.
C.$500 billion.
D.$600 billion.

8.Because reducing both unemployment and inflation simultaneously are conflicting goals:
A.there is a policy that will allow policymakers to achieve either objective.
B.aggregate demand policy will allow policymakers to achieve one of these objectives, but not both.
C.aggregate demand policy will allow policymakers to achieve both objectives, but only if it is expansionary.
D.aggregate demand policy will allow policymakers to achieve both objectives, but only if it is contractionary.

9.As the economy contracts, tax revenues:
A.fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.
B.rise and transfer payments rise, causing the economy to contract by more than it would in the absence of automatic stabilizers.
C.fall and transfer payments fall, causing the economy to contract by more than it would in the absence of automatic stabilizers.
D.rise and transfer payments fall, causing the economy to contract by less than it would in the absence of automatic stabilizers.

10.The introduction of "rainy-day funds" by states would:
A.decrease the pro-cyclical nature of current state budgeting procedures.
B.increase the pro-cyclical nature of current state budgeting procedures.
C.decrease the counter-cyclical nature of current state budgeting procedures.
D.increase the counter-cyclical nature of current state budgeting procedures.

11.The income tax is:
A.an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion.
B.an automatic stabilizer because income tax revenues rise as income increases, accelerating an economic expansion.
C.an automatic stabilizer because income tax revenues fall as income increases, accelerating an economic expansion.
D.not an automatic stabilizer.

12.Unemployment compensation is:
A.an automatic stabilizer because it rises as income increases, slowing an economic expansion.
B.an automatic stabilizer because it falls as income increases, slowing an economic expansion.
C.an automatic stabilizer because it falls as income decreases, slowing an economic contraction.
D.not an automatic stabilizer.

13.If taxes and government expenses did not vary with income, then income would:
A.be more stable.
B.not be more or less stable.
C.be less stable.
D.be closer to potential income.

14.Property taxes are:
A.not an automatic stabilizer because they do not vary with income.
B.not an automatic stabilizer because they vary with income.
C.an automatic stabilizer because they do not vary with income.
D.an automatic stabilizer because they vary with income.

15.The provisions in state constitutions requiring them to balance their budgets means that
A.state governments often behave procyclically because lower revenues during recessions mean lower state spending.
B.state government spending acts as an automatic stabilizer for the national economy.
C.state governments can follow a functional finance approach with greater consistency than the federal government, which has no such requirement.
D.state governments can only use monetary policy to affect their economies.

16.As income increases during the recovery from a recession, automatic stabilizers will:
A.increase taxes and increase government spending, increasing the overall size of the government.
B.reduce taxes and increase government spending, accelerating the recovery.
C.increase taxes and decrease government spending, slowing the recovery.
D.reduce taxes on high-income individuals and raise taxes on the poor, increasing economic inequality.

17.In contrast to the functional finance view, Classical sound-finance macroeconomics assumes that individuals:
A.do not adjust their spending to account for future tax payments.
B.adjust their spending to account for future tax payments.
C.do not adjust their spending to account for future incomes.
D.adjust their spending to account for future incomes.

18.According to the Classical advocates of sound finance, if an economy is in a recession, the government should run:
A.a budget deficit and increase spending, which will increase output.
B.a budget surplus and decrease spending, which will increase output.
C.neither a surplus nor a deficit since changes in deficit spending do not affect output.
D.neither a surplus nor a deficit since changes in spending affect output.

19.Refer to the graph above. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy in an attempt to pull the economy out of the recession. An economist with a Classical view holding the Ricardian Equivalence theorem to be practically true would conclude that the economy will most likely end up at point:
A.A
B.B
C.C
D.D

20.Refer to the graph above. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy that shifts the AD curve from AD0 to AD1 in an attempt to pull the economy out of the recession. Not taking into account shifts in aggregate supply, an economist with a functional finance view who believes there will be no crowding out effect would conclude that the economy will end up at point:
A.A
B.B
C.C
D.D

21.As a country develops economically, what changes usually take place in the goods it exports?
A.There is little change because comparative advantage does not change.
B.Raw materials and agricultural products decline in importance and are replaced by services and manufactured goods.
C.Services and manufactured goods decline in importance and are replaced by raw materials and agricultural products.
D.Exports go from being diversified to being specialized in whatever the country finds to be its comparative advantage.

22.Immediately following World War II, the U.S. ran trade:
A.deficits and was an international lender.
B.deficits and was an international borrower.
C.surpluses and was an international lender.
D.surpluses and was an international borrower.

23.The social and cultural issues raised by international trade are:
A.largely ignored by economics because they are not important.
B.largely ignored by economics because economics is better suited to examine other issues.
C.stressed by economics because they are important.
D.stressed by economics because the economic way of thinking was designed to study them.

24.Assume that in Canada the opportunity cost of producing 1 television set is 2 bushels of wheat. Assume that in the U.S. the opportunity cost of producing 1 bushel of wheat is 2 television sets. If these two countries specialize according to comparative advantage and then trade with one another, then:
A.Canada will export both televisions and wheat.
B.Canada will export wheat and import televisions.
C.the U.S. will export wheat and import televisions.
D.the U.S. will export both televisions and wheat.

25.Myopia and Utopia are two countries with equivalent resources. The country of Myopia can produce up to 100 tons of yak butter or up to 5,000 prayer wheels, if it devotes all its resources to yak butter or all its resources to prayer wheels. Similarly, the country of Utopia can produce up to 500 tons of yak butter or up to 3,000 prayer wheels. We know that the production possibility curves for both Myopia and Utopia are straight lines. If international trade exists between Utopia and Myopia, we would expect to find:
A.Utopia exporting prayer wheels and Myopia exporting yak butter.
B.Myopia exporting prayer wheels and Utopia exporting yak butter.
C.Utopia exporting both goods to Myopia.
D.Myopia exporting both goods to Utopia.

26.If the relative opportunity costs of producing goods are identical across countries, then there are:
A.no gains from trade.
B.gains from trade if trade is based on absolute advantage.
C.gains from trade if trade is based on comparative advantage.
D.gains from trade that depend on the degree of competition between international traders.

27.The analysis of international trade suggests that trading companies earn higher than normal profits in:
A.the long-run, but not in the short-run.
B.the short-run, but not in the long-run.
C.both the short-run and the long-run.
D.neither the short-run nor the long-run.

28.The text mentions ten sources of U.S. comparative advantage. Which of the following is NOT one of them?
A.A large military
B.Skills of the labor force
C.A stable government
D.An extensive physical and technological infrastructure

29.The text mentions ten sources of U.S. comparative advantage. Which of the following is NOT one of them?
A.Wealth from past production
B.English is the international language of business
C.A high ratio of lawyers to the population
D.Extensive natural resources

30.The text calls the type of comparative advantage that is not easily changed, such as climate,
A.stable comparative advantage.
B.inherent comparative advantage.
C.equilibrium comparative advantage.
D.permanent comparative advantage.

31.After one cow in Alberta was found with mad cow disease, the U.S. banned all imports of Canadian cattle and beef. This action is an example of:
A.a tariff.
B.a quota.
C.a regulatory trade restriction.
D.an embargo.

32.Refer to the graph above. As a result of a tariff T imposed on speed boats, the price domestic consumers pay for speed boats will likely be:
A.P1.
B.P2.
C.P3.
D.P4.

33.Refer to the graph above for a small country that is a price-taker internationally. Assume the foreign supply of this product is perfectly elastic at a price of $4 per unit. Starting from a free trade equilibrium, a tariff in the amount of $2 per unit would be expected to cause domestic consumption to:
A.increase from 2,400 to 7,400.
B.increase from 2,400 to 3,600.
C.decrease from 4,800 to 3,600.
D.decrease from 7,400 to 6,100.

34.Which of the following groups would be most likely to benefit from a tariff on Japanese-manufactured light trucks (e.g., pickup trucks)?
A.U.S. domestic pickup truck manufacturers
B.Japanese auto workers
C.U.S. consumers of pickup trucks
D.U.S. firms that export products to Japan

35.Which of the following is not a regulatory trade restriction?
A.Vegetables prohibited because of excess pesticide usage.
B.Inspections designed to impede trade processes.
C.A limit on the number of imported cars.
D.Leather products banned because of tanning by urine.

36.Regulatory trade restrictions:
A.are always justified.
B.are never justified.
C.may be justified depending on the nature of the restriction.
D.are irrelevant since they are seldom used.

37.All of the following are arguments in support of protectionist legislation except:
A.supporting infant industries.
B.preserving domestic employment.
C.increasing global trade.
D.promoting national security.

38.A developing country can be expected to rely more on:
A.tariffs than quotas since tariffs are an easy way to raise tax revenue.
B.tariffs than quotas because tariffs are more effective means of reducing imports.
C.quotas than tariffs since quotas provide better protection for infant industries.
D.quotas than tariffs since quotas are easier to enforce and give rise to less corruption among officials.

39.Transshipments, which are commonly used in international trade, tend to:
A.undermine the effectiveness of an embargo.
B.strengthen the national security argument for trade restrictions.
C.increase the effectiveness of trade restrictions.
D.reduce the volume of world trade.

40.What problem do economists see with free trade areas such as NAFTA and the European Union?
A.They tend to lead to free trade rather than fair trade.
B.They can lead to regional trading blocs that restrict trade with outsiders.
C.They lead to globalization.
D.They encourage countries to rely on others rather than being self-sufficient