EC102 .04            NAME: _________________ 
              ID #: ___________________ 
Spring 2014      

FINAL EXAM 
GROUP A 
June 2, 2014 

Instructions:  
 You have 80 minutes to complete the exam. There will be no extensions. 
 The exam consists of 40 multiple choice questions. Each multiple choice 
question is worth 1 point for a total of 30 points.  
 Use a pencil to mark your answers on the answer sheet. Make sure you 
write your name and ID number on the answer sheet as well. 
 Please mark the group of your test on the answer sheet under “Test Form.” 
 No calculators, dictionaries or formula sheets are allowed. 
 The use of cell phones is strictly prohibited. Make sure your cell phone is 
turned off and inside your bag. Do NOT use your cell phone even for 
timekeeping purposes. 
 This is a closed books/notes exam.  
 Choose only one answer for each question.  
 2 wrong answers will take away one correct answer. 
 There is absolutely no talking during the exam.  
 The proctors will NOT answer any questions.  
 There are 12 pages in this exam booklet. 

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1) The greater the extent of crowding out of private spending by government, the

a. smaller the rightward shift in Aggregate Demand from an increase in investment

spending.
b. smaller the rightward shift in Aggregate Demand from an increase in taxes.
c. smaller the rightward shift in Aggregate Demand from an increase in
government spending.
d. all of the above.

2) Nominal GDP is defined as GDP:

a. minus taxes and subsidies
b. corrected for price changes.
c. measured at prices that prevailed during the year GDP was measured.
d. measured by using quantities only.

3) Which of the following represents a way in which the CPI differs from the GDP
deflator measures of inflation?
a. CPI uses a fixed past basket of goods, while the GDP deflator does not.
b. CPI includes goods purchased by firms, while the GDP deflator does not.
c. CPI includes homes, while the GDP deflator does not.
d. CPI includes changes in the value of leisure time, while the GDP deflator does
not.

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4) An unexpected increase in inflation (of both wages and prices) will:

a. benefit banks which made long term loans at fixed interest rates and hurt those
who borrowed
b. benefit both banks which made long term loans at fixed interest rates and those
who borrowed
c. hurt banks which made long term loans at fixed interest rates and benefit those
who borrowed
d. hurt both banks which made long term loans at fixed interest rates and those
who borrowed

5) The table above gives the production and prices for a small nation that produces
only bread and soda. The base year is 2003. What is nominal GDP in 2003?
a. $425
b. $320
c. $205
d. $640

6) The table above gives the production and prices for a small nation that produces
only bread and soda. The base year is 2003. What is nominal GDP in 2004?
a. $240
b. $320
c. $425
d. $300

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7) Which of the following statements is correct?

a. An increase in the price level will shift the aggregate demand curve rightward.
b. An increase in the price level will shift the aggregate demand curve leftward.
c. An increase in the quantity of the money in the economy will shift the aggregate
demand curve rightward.
d. An increase in the interest rate will shift the aggregate demand curve rightward.

8) Sid and Nancy have opened a small shop selling tea and crumpets. Sid takes one
hour to brew one pitcher of tea, and three hours to bake one plate of crumpets.
Nancy also takes one hour to brew one pitcher of tea, and two hours to bake one
plate of crumpets. From this information, we know that:
a. Sid's opportunity cost of brewing one pitcher of tea is 3 plates of crumpets.
b. Sid's opportunity cost of brewing one pitcher of tea is 1/3 of a plate of crumpets.
c. Both have comparative advantage in brewing tea.
d. between the two of them, neither Sid nor Nancy has a comparative advantage in
brewing tea.

9) When the world price of a good exceeds the domestic price, a country is MOST
likely to:
a. import the good.
b. export the good.
c. be made worse off by any kind of trade in that good.
d. experience lower wages for workers in that industry by engaging in trade.

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10) What is the effect of the quota imposed on sugar imports into the United
States?
a. Consumers pay a lower price for sugar than they would otherwise.
b. Poor countries are able to grow and export more sugar than they would
otherwise.
c. Both consumers and producers in US will face higher prices.
d. Consumers in the US and abroad will pay higher prices.

11) Banks and other monetary institutions perform which of the following
functions?
a. lower costs of borrowing
b. pool the risks of lending
c. create liquidity
d. All of the above answers are correct.

12) The Central Bank’s policy tools include

a. holding deposits for the U.S. government, reserve requirements, and the
discount rate.
b. required reserve ratios, the discount rate, and open market operations.
c. setting regulations for lending standards and approving or rejecting loans
banks make to large corporations.
d. supervision of the banking system and buying and selling commercial banks.
13) The money multiplier is used to determine how much the
a. monetary base increases when the Fed purchases government securities.
b. quantity of money increases when the monetary base increases.
c. monetary base increases when the quantity of money increases.
d. quantity of money increases when the required reserve ratio increases.
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14) Which of the following statements is correct?

a. Real GDP is the total market value of the final goods and services produced
in America for sale in a year valued in the prices of base year.
b. Your buying stock in the stock market is an example of investment spending
c. Potential Real GDP is always greater than Equilibrium Real GDP
d. Social security and welfare are examples of spending on infrastructure.

15) Consider three consumer goods: 100 of Good A, 100 of Good B, and 100 of
Good C. In the base year, Good A sold at a price of $1, Good B sold at a price
of $1, and Good C sold at a price of $1. In the current year, Good A sold at a
price of $3, Good B sold at a price of $5, and Good C sold at a price of $10.
The Consumer Price Index (CPI) for the current year is:
a. 100 b. 300 c. 500 d. 600

16) A large increase in oil prices, such as the ones occurring in 1973 and 1979, will
cause
a. inflation and expansion c. inflation and recession
b. recession and disinflation d. expansion and deflation

17) Assume that production in the United States is valued at $10,000. National
income is therefore $10,000. Of their income, workers pay $1,000 in taxes, save
$500, spend $8,000 on consumer goods, and spend $500 on imports. Businesses
spend $1,000 in new investment spending. And, foreigners spend $500 on
exports. In order for the aggregate expenditure to be equal to output the
government should have a budget deficit or surplus of:
a. 0 b. $500 surplus c. $500 deficit d. $1,000 deficit

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18) In 3 years you are to receive $5,000. If the interest rate were to suddenly
increase, the present value of that future amount to you would
a. fall.
b. rise.
c. remain unchanged.
d. cannot be determined without more information.

19) Assume that net exports increase by $1 billion. Equilibrium Real GDP will rise
by more than $1 billion. Explain why. (i.e., why is there a multiplier?).
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 induced
consumption
d. an increase in net exports causes an increase in the money supply

20) Assume that Equilibrium GDP is $4,000 billion. Potential GDP is $5,000
billion. The marginal propensity to consume is 4/5 (0.8). By how much and in
what direction should government purchases be changed?
a. increase by $1,000 billion c. increase by $100 billion
b. decrease by $1,000 billion d. increase by $200 billion

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21) An increase in the money supply causes:

a. interest rates to fall, investment spending to rise, and aggregate demand to
rise
b. interest rates to rise, investment spending to rise, and aggregate demand to
rise
c. interest rates to rise, investment spending to fall, and aggregate demand to
fall
d. interest rates to fall, investment spending to fall, and aggregate demand to
fall

22) If individuals forecast future prices and hence adjust their decisions
accordingly, this would support theory of:
a. adaptive expectations c. inflationary expectations
b. rational expectations d. structural expectations

23) According to the monetarists, in the long-run, the Phillips Curve is:
a. vertical c. downward-sloping
b. horizontal d. upward-sloping

24) Compared to the no-trade situation, when a country imports a good

a. domestic consumers gain, domestic producers lose, and the gains outweigh the
losses.
b. domestic consumers lose, domestic producers gain, and the gains outweigh the
losses.
c. domestic consumers gain, domestic producers lose, and the losses outweigh the
gains.
d. domestic consumer gain, but domestic producers lose an equal amount.

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25) For any country, it will be true that:

a. total exports will equal total imports.
b. the sum of the current account and the financial account will be zero.
c. the sum of the merchandise trade balance and factor income will be zero.
d. the sum of the current account and factor income will be zero

26) A capital inflow is MOST likely to occur when domestic:

a. economic growth is relatively low.
b. inflation is relatively high.
c. real interest rates are relatively high.
d. unemployment is relatively high.

27) Leisure time is ignored when calculating GDP because leisure time:
a. does not effect our standard of living.
b. has been declining over time.
c. is not an economic good.
d. does not involve a measurable market transaction.

28) The investment demand curve shifts in response to changes in the

a. real interest rate.
b. amount of household savings.
c. level of expected profits.
d. level of past profits.

29) If the CPI changes from 163 in 1998 to 166.26 in 1999, then between these two
years inflation is measured as:
a. 16 % c. 3%
b. 2 % d. 1%
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30) Within the circular flow model presented in Chapter 2, there are two markets.
These markets are the
a. market for firms to sell goods, and the market for firms to sell services.
b. goods market and the factor (input) market.
c. market for households to buy goods and the market for households to buy
services.
d. market for intermediate goods (steel that goes into cars) and final goods (the
cars sold to consumers).

31) I equals investment, S equals saving, G equals government purchases, and NT

equals net taxes. Using these symbols, the formula showing how investment is
financed is
a. I = S + (G - NT).
b. I = (S - NT).
c. I = S + (NT - G).
d. I = G + S + NT.

32) If someone buries money in a tin can beneath a tree, the money is functioning
as a
a. medium of exchange.
b. store of value.
c. unit of account.
d. means of payment.

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33) What happens to labor force participation (LFP) and unemployment rate if
someone 35 years old who was not working but looking for a job dies?
a. unemployment rate and LFP both decrease.
b. unemployment rate and LFP both increase.
c. unemployment rate decreases and LFP increases.
d. unemployment rate increases and LFP decreases.

34) If the dollar appreciates against the euro:

a. then the euro will also appreciate against the dollar.
b. it will take fewer dollars to buy a given amount of euros.
c. it will take fewer euros to buy a given amount of dollars.
d. European-made goods will become relatively more expensive in the United
States.

35) Which of the following would lead to an appreciation of the Japanese yen
against the euro?
a. an increase in demand for euros by Japanese investors and consumers
b. an increase in demand for European-made goods by Japanese consumers
c. an increase in the supply of Japanese yen on the foreign exchange market
d. an increase in demand for Japanese-made goods by European consumers

36) A central bank trying to depress the value of its currency on the foreign
exchange market will follow a policy of:
a. reducing the supply of its currency on the foreign exchange market.
b. buying its own currency on the foreign exchange market.
c. buying foreign assets.
d. selling foreign assets.
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37) Autarky is a situation in which a country:

a. specializes according to its own comparative advantage.
b. experiences wage inequality as a result of free trade.
c. does not trade.
d. imports those goods for which the world price exceeds the domestic price.

38) Suppose that the Central Bank decides to decrease the growth rate of the
money supply in Turkey. What is most likely to happen to the Turkish trade
deficit, and to GDP?
a. The trade deficit will rise, GDP will rise.
b. The trade deficit will fall, GDP will rise.
c. The trade deficit will rise, GDP will fall.
d. The trade deficit will fall, GDP will fall.

39) What happens to the aggregate expenditure (AE) curve when interest rates
increase, all else constant?
a. it shifts downward
b. it shifts upward
c. it does not shift, but the economy moves leftward along it (so output declines).
d. it becomes steeper, as the marginal propensity to consume increases

40) What happens in the money market when aggregate income (Y) increases (all
else constant).
a. money demand shifts rightward
b. money demand shifts leftward
c. money supply shifts rightward
d. money supply shifts leftward
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