Economics 207: Introduction to Macroeconomics
Final Exam
Instructions: You have 120 minutes to complete the following exam. Be sure to write your anme and student id ON YOUR SCANTRON and BELOW. Failure to do so will result in the loss of points from your total score. When you are complete, please slip your scantron behind the first page of this test book and turn both in at the front of class. This exam is to be taken without the aid of notes, books, friends, neighbors or outside sources of information. This includes programmable calculators with notes typed into its memory. All multiple choice questions are worth 4 points. Points possible are in parenthesis at the end of each open ended question.
Name:______Student ID:______
1. In order from largest to smallest (in absolute value), which list best describes the aggregate expenditures of the U.S. economy:
a. Investment, consumption, government spending, exports, imports.
b. Consumption, government spending, investment, exports, imports.
c. Consumption, government spending, investment, imports, exports.
d. Government spending, consumption, investment, imports, exports.
e. Consumption, taxation, government spending, investment, imports, exports.
2. The United States makes approximately:
a. One-twentieth of world GDP.
b. One-tenth of world GDP.
c. One-fifth of world GDP.
d. One-third of world GDP.
e. Substantially more than one-third of world GDP or substantially less than one-twentieth of world GDP.
3. The price of bonds and the interest rate are:
a. not related.
b. positively related.
c. negatively related.
d. sometimes positively and sometimes negatively related, depending upon the bond payments.
4. An example of a contractionary monetary policy is:
a. An increase in taxes paid by firms.
b. An increase in taxes paid by households.
c. A reducing in the discount rate.
d. An increase in the required reserve ratio.
e. When the Fed buys government securities on the open market.
5. When the price level rises,
a. investment rises as a result of the real wealth effect.
b. consumption increases as a result of the multiplier effect.
c. money supply falls as a result of the money multiplier.
d. consumption falls as a result of the real balances effect.
e. None of the above.
Refer to the information provided in Figure 1 to answer the three questions that follow.
Figure 1
6. Refer to Figure 1. An aggregate demand shift from AD2 to AD0 can be caused by
a. an increase in the price level.
b. a decrease in the price level.
c. an increase in the quantity of aggregate output.
d. a decrease in the money supply.
e. a decrease in taxes.
7. Refer to Figure 1. Suppose the economy is at point A. A decrease in government purchases can cause a movement to
a. E
b. B
c. C
d. D
e. None of the above.
8. Refer to Figure 1. Suppose the economy is at point A. An exogenous positive shock to the price level can cause a movement to
a. E
b. B
c. C
d. D
e. None of the above.
Refer to the information provided in Figure 2 to answer the three questions that follow.
Figure 2
9. Refer to Figure 2. Suppose the economy is currently at Point A producing output Y0. If the Fed makes substantial purchases of securities from the public, the economy would move to Point ______in the short-run and to Point ______in the long run.
a. D;E.
b. B,C.
c. B,A.
d. C,B.
e. D,A.
10. Refer to Figure 2 and Problem #9 where the Fed makes substantial purchases of securities from the public. Which of the following combination of graphs best explains the outcomes expected:
A B C
d. None of the above.
11. Refer to Figure 2. Suppose this economy is producing at point A. For this economy to produce Y1 and sustain it without inflation
a. The government must implement an expansionary fiscal policy.
b. The government must implement an expansionary monetary policy.
c. The price of oil must increase.
d. Inputs to production must increase.
e. None of the above.
12. Diminishing returns to a factor implies that with capital fixed
a. as labor increases, labor productivity decreases.
b. as output increases, labor increases.
c. as labor increases, output decreases.
d. as labor increases, capital utilization decreases.
e. None of the above.
13. At an income of $100,000 I spent $90,000 on consumer goods. When my income rose to $200,000, I spent $160,000 on consumer goods. My marginal propensity to consume is
a. .9
b. .8
c. .7
d. 7.
e. None of the above.
14. Assume that net exports increase by $1 billion. Equilibrium real GDP will rise by more than $1 billion. Explain why.
a. An increase in net exports appreciates the dollar causing a further increase in net exports.
b. An increase in net exports causes an increase in tax revenues which increases government spending.
c. An increase in net exports increases income causing an increase in consumption.
d. An increase in net exports causes an increase in the money supply.
e. An increase in net exports depreciates the dollar increases net exports.
15. Which of the following statements is true about the national debt?
a. In total, it is now higher than it has ever been before.
b. Most of it is owed by the federal government foreigners.
c. It means that a tremendous burden is being passed to our children.
d. Because of it, the United States is on the verge of bankruptcy.
e. All of the above.
16. The Phillips Curve describes the relationship between
a. The federal budget deficit and the trade deficit.
b. The unemployment rate and real GDP.
c. Savings and investment.
d. Marginal tax rates and tax revenues.
e. None of the above.
17. Which of the following transactions would represent an addition to a nations’s current gross domestic product?
a. Ms. Smith purchases a share of stock in an automobile company.
b. A retailer increases her stock of imported shoes.
c. The government increases its domestic purchases of food for use by the military.
d. A corporation sells shoes from last year’s inventory.
e. A mother sells her car to her daughter.
18. If on receiving a checking deposit of $300 a bank’s excess reserves increased by $255, the required reserve ratio must be
a. 5%.
b. 10%.
c. 15%.
d. 45%.
e. None of the above.
19. It is often true that as the economy begins to recover from a recession the unemployment rate rises. Which of the following statements would be the best explanation for this?
a. The unemployment rate seems to rise as the economy begins to recover from a recession because of errors in the way the data are collected.
b. The unemployment rate would rise because as the economy initially recovers from a recession the demand for goods and services falls, so the demand for workers falls.
c. As the economy begins to recover from a recession, workers who were previously discouraged about their chances of finding a job begin to look for work again.
d. As the economy initially recovers from a recession, firms do not immediately increase the number of workers they hire. Firms wait to hire more individuals until they are convinced that the recovery is strong.
e. None of the above.
20. Crowding out due to government borrowing occurs when
a. lower interest rates increase private sector investment.
b. lower interest rates decrease private sector investment.
c. higher interest rates decrease private sector investment.
d. a smaller money supply decreases private sector investment.
e. None of the above.
21. In 2006, the U.S. Federal government expended $2.3 trillion however these expenditures accounted for only 7% of American GDP. Which of the following explains this discrepancy?
a. Federal military expenditures do not count when computing GDP.
b. Federal expenditures on transfer payments such as social security do not count in GDP.
c. Federal expenditures made in foreign countries do not count in GDP.
d. GDP in 2006 was approximately $33 trillion.
e. None of the above.
22. Consider James who owns an accounting business. For each tax return he works on, he makes purchases of one piece of tax software for $20, uses electricity to light his office ($2), and charges one lunch ($7) as a business expense. He also charges the customer $142 for filling out the tax return. For each tax return, how much did GDP increase?
a. $113.
b. $29.
c. $142.
d. $171.
e. None of the above.
23. Increasing capital and labor at the same percentage rate will
a. Increase output per capita and increase output.
b. Keep output per capita unchanged but increase output.
c. Increase output per capita but keep output unchanged.
d. Keep both output and output per capita unchanged.
e. None of the above.
24. Current U.S. nominal GDP is closest to:
a. $20,000,000.
b. $20,000,000,000.
c. $20,000,000,000,000.
d. $20,000,000,000,000,000.
e. $20.
25. At an interest rate of 6% will double my bank account in:
a. 24 years.
b. 12 years.
c. 6 years.
d. 3 years.
e. None of the above.
1. Consider an economy whose banking system holds $2,000 of required reserves and no excess reserves, has made $18,000 of loans and has granted $20,000 of checking accounts. Finally, imagine that the public is holding $750 of cash.
a. What is this economy’s Money Base and M1? (8)
b. Imagine that the public deposited all $750 cash into their savings accounts. After this, what is the economy’s Money Base and M1? (8)
c. Instead of depositing their cash into their savings accounts (as in part b), imagine instead that the public deposited all $750 of cash into their checking accounts and their bank, after receiving this deposits, makes one loan in the legally maximum amount. What is this economy’s Money Base and M1? (8)
d. After making the loan of part c, imagine that the recipient of the loan spent the money which was then deposited, re-lent, deposited, re-lent until the process is completed. What is the final value of the Money Base and M1 at the completion of this process? (8)
e. In general, what are the tools a central bank can use to increase interest rates? (9)
2. Consider a macroeconomy described by the following equations:
C = 400 + .9(Y – T) I = 300 – 20r G = 200 T = 200 r = 5 NX = 0
a. Solve for the equilibrium levels of Y and C. (20)
b. Imagine that the Federal Reserve raised the required reserve ratio in an amount that exactly changed r by one unit (i.e., it either increased r to 6 or decreased it to 4—you decide). What is the new value of Y? (12)
c. Given your answers to a and b and the increase in the required reserve ratio, how much did the aggregate demand curve shift? (Hint, you should be able to answer this in terms of units of Y). (8)
d. Consider your answer to c. In the short-run, does real GDP change by this much, more or less? Explain. (8)
e. Consider your answer to c. In the long-run, does real GDP change by this much, more or less? Explain. (8)
f. Consider a revision to the equations given at the beginning of this problem:
C = 400 + .9Y – τY
where τ is an income tax rate (confined to be between zero and one). All other equations remain unchanged. What is this economy’s spending multiplier? (8)