Section I: Microeconomics
The questions below test you on material covered during the first half (weeks 1-5) of the course.
For multiple choice questions, select the best, most correct answer from the choices presented.
For true/false questions, select true if the statement is true, or false if the statement is false.
------page one------
Time Remaining:
1. The principle of diminishing returns implies that as one input increases while the other inputs are held fixed, output: (Points: 5)
increases at an increasing rate.
increases at a decreasing rate.
decreases at a decreasing rate.
decreases at an increasing rate.
2. The total economic cost of a college education equals only the cost of tuition and textbooks. (Points: 5)
True
False
3. Suppose that the quantity demanded for cars exceeds the quantity supplied of cars. We would expect that: (Points: 5)
the price of cars will increase.
the price of cars will decrease.
the supply will increase to meet the demand.
the demand will decrease to meet the supply.
4. If a product has few acceptable substitutes, demand for the product is likely to be (Points: 5)
supply-side.
elastic.
very elastic.
inelastic.
5. Fixed costs do not vary in the short-run. (Points: 5)
True
False
6. The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity, is known as the: (Points: 5)
marginal principle.
principle of opportunity cost.
principle of diminishing returns.
spillover principle.
7. A perfectly competitive industry is an industry where a large number of firms produce a differentiated version of the good. (Points: 5)
True
False
8. A monopoly is defined as an industry where a firm is: (Points: 5)
one of a small number of firms and there is a barrier to entry.
one of a large number of firms and there is a barrier to entry.
one of a large number of firms and there are no barriers to entry.
the single seller of a good and there is a barrier to entry.
9. A firm considering the strategic actions of its competitors when choosing price and quantity is an example of an oligopoly market. (Points: 5)
True
False
10. A spillover is a cost or benefit experienced by people who; (Points: 5)
do not decide how much of the good to produce or consume.
did not know they existed.
make direct decisions about producing or consuming the good.
consume the good.
page two
Section II : True/False Questions
For each question, indicate whether the statement is true or false. If the question is true, select true. If the question is false, select false.
Time Remaining:
1. The price system always works instantaneously. (Points: 5)True
False
2. As real rates of interest increase in the economy, real investment spending increases. (Points: 5)
True
False
3. In the short run, the level of GDP is determined primarily by demand. (Points: 5)
True
False
4. A sustained period during which economic growth is too rapid can cause damage to the economy. (Points: 5)
True
False
5. If the dollar depreciates against the mark it means that German-made goods become more expensive in the United States. (Points: 5)
True
False
6. To increase the level of output, the Fed should conduct an open market purchase. (Points: 5)
True
False
7. An increase in government spending or a decrease in taxes are examples of contractionary fiscal policy. (Points: 5)
True
False
8. Capital deepening is the only mechanism by which economies can grow. (Points: 5)
True
False
9. The quantity of money demanded will decrease as interest rates increase. (Points: 5)
True
False
10. If a person has an absolute advantage in some activity, she must have a comparative advantage in that activity as well. (Points: 5)
True
False
page three
Section III: Multiple-Choice Questions
For each questions, read the statement carefully and select the best, most correct answer from the choices provided.
Time Remaining:
1. An increase in U.S. interest rates will cause: (Points: 5)an increase in the demand for U.S. dollars and an increase in the exchange rate.
a decrease in the demand for U.S. dollars and a decrease in the exchange rate.
an increase in the supply of U.S. dollars and a decrease in the exchange rate.
a decrease in the supply of U.S. dollars and an increase in the exchange rate.
an increase in the demand for U.S. dollars and a decrease in the exchange rate.
2. Actions by the Federal Reserve to influence the level of GDP are known as: (Points: 5)
monetary policy.
fiscal policy.
cyclical policy.
procyclical policy.
none of the above.
3. An open market sale by the Fed: (Points: 5)
decreases the total amount of reserves in the banking system.
increases the total amount of reserves in the banking system.
does not change the total amount of reserves in the banking system.
causes the reserve requirement to fall.
occurs at the request of Congress.
4. Frictional unemployment occurs: (Points: 5)
naturally during the normal workings of an economy, as people change jobs, move across the country, etc.
with economic fluctuations; it increases during bad times and decreases during good times.
because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs.
because the government labels some people who aren't really in the labor force as unemployed.
None of the above is correct
5. If a nation with a low level of GDP per capita converges to a richer nation, the poor nation: (Points: 5)
experiences low growth rates.
enters into a free trade agreement with the richer nation.
experiences a rate of low growth such that its GDP per capita increases relative to that of the richer nation.
experiences a rate of high growth such that its GDP per capita increases relative to that of the richer nation.
none of the above.
6. Which of the following does not shift the aggregate demand curve? (Points: 5)
an increase in the supply of money
an increase in GDP in Japan
a decrease in taxes
an increase in consumer confidence
a decrease in the price level
7. During expansionary fiscal policy, the government may spend more than it brings in via tax revenues, running a ______. (Points: 5)
budget deficit
budget surplus.
budget negotiation.
budget decline.
none of the above.
8. Which of the following curves reflects the idea that in the long run, output is determined only by the factors of production? (Points: 5)
the aggregate demand curve
the long-run aggregate supply curve
the market supply curve
the short-run aggregate supply curve
the potential output curve
9. Economists say that the economy is at "full employment" when the: (Points: 5)
structural unemployment rate is zero.
total unemployment rate is zero.
frictional unemployment rate is zero.
cyclical unemployment rate is zero.
none of the above.
10. Suppose Diane deposits $5,000 in her bank. If the reserve ratio is 5%, this will lead to an increase of ______in checking account balances by the banking system. (Points: 5)
$0
$5,000
$10,000
$100,000
none of the above
11. Increases in the stock of capital will lead to: (Points: 5)
decreases in wages and total GDP.
increases in wages and decreases in GDP.
decreases in wages and increases in GDP.
increases in wages and GDP.
The capital stock has no effect on wages or GDP.
12. If the GDP per capita growth rate in the United States is 2.3%, standards of living double every: (Points: 5)
29 years.
30.43 years.
2.3 years.
3.04 years.
70 years.
13. Macroeconomics differs from microeconomics in that: (Points: 5)
macroeconomics is the study of individual markets, while microeconomics deals with the nation's economy as a whole.
microeconomics is the study of individual markets, while macroeconomics deals with the nation's economy as a whole.
macroeconomics focuses principally on social and political issues, while microeconomics involves the study of a nation's monetary system.
microeconomics focuses principally on social and political issues, while macroeconomics involves the study of a nation's monetary system.
both macroeconomics and microeconomics focus on the study of the nation's economy as a while, but macroeconomics also involves study of individual markets.
14. Fiscal policy is related to: (Points: 5)
Federal Reserve policies.
taxes and consumer spending.
investment spending.
taxes and government spending.
none of the above.
15. As real GDP growth ______, investment spending ______. (Points: 5)
increases, decreases
increases, increases
decreases, decreases
decreases, increases
both B and C
page four
Section IV: Short-Answer and Problems
For all questions on this page, assume that you are an economist hired by the Bureau of Labor Statistics. The computer systems that normally generate GDP, unemployment, and inflation statistics are broken.
For questions 1-5, evaluate each transaction and assess whether or not the transaction would be included in the calculation of GDP. If you determine that the transaction would be included, type Yes; if you determine that the transaction would not be included, type No. If you determine that the item is included in GDP, also indicate whether the item would be considered Consumption, Investment, or Government Spending.
For questions 6 and 7, use the data provided to answer the question.
Time Remaining:
1. Mr. Smith pays a carpenter $500 to build new bookcases for his personal study. (Points: 3)2. The University of Cool Stuff purchases a new mainframe computer from IBM for $200,000. The mainframe is used to automate gradekeeping and class scheduling. (Points: 3)
3. John H. Student purchases a new copy of War and Peace from Waldenbooks for $15.00 (Points: 3)
4. Stuffworks Books purchases 500 reams of paper for $100,000 from StuffMade Paper Products, Inc. Stuffworks Books plans to use the paper to produce the latest Lord of the Harry Potter in Narnia book. (Points: 3)
5. An investor pays $1,000 to purchase a bond from UUU Corporation. (Points: 3)
6. The population of the United States is 250,000,000. The latest Labor Survey found that, in the most recent month, 7,500,000 people were unemployed, but 500,000 of these people were not actively looking for a job. The total size of the labor force is 140,000,000. What is the unemployment rate? (Points: 5)
7. Your supervisor calculated that the nominal interest rate in the economy is currently 8.5%. A leading economist has concluded that the real interest rate in the economy is currently 3.25%. What is the rate of inflation in the economy? (Points: 5)
page 5
Section IV: Short-Answer and Problems
Answer each question fully and completely.
Time Remaining:
1. The Federal Reserve has recently set the required reserve ratio at 7.5%. What would the money multiplier in the economy be? (Points: 10)2. Explain briefly why a decrease in taxes leads to an increase in output. (Points: 10)
3. John and Ed are able to produce two goods: Corn and Cotton.
In a day, John can produce 4 bushels of corn or 12 bushels of cotton.
In a day, Ed can produce 3 bushels of corn or 30 bushels of cotton.
If John and Ed were to trade, what good should each specialize in?
(Points: 10)
page 6
1. Suppose that the economy of Henricoland is initially at the long-run equilibrium displayed below.The government has recently enacted a tax increase. Describe what happens to the level of output and level of prices in Henricoland in the short-run and the long-run. Assume that the LRAS does not change.
(Points: 10)
2. The central bank of Henricoland is finding a large number of banks running low on reserves. The central bank has decided to raise the required reserve ratio.
Describe the effect that this action has on the money supply, interest rates, investment spending, and output in the economy. The money market is illustrated below:
(Points: 10)