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PART A - MULTIPLE CHOICE QUESTIONS 1. Real GDP is nominal GDP adjusted for: A) double counting. B) changes in prices. C) population. D) imports. 2. What do a rubbernecking traffic jam and the paradox of thrift have in common? A) In both cases, individual behavior has large negative consequences for the whole of society. B) In both cases, seemingly bad behavior ends up harming everyone. C) In both cases, seemingly careless behavior leads to good times for all. D) In both cases, government intervention can only make matters worse. 3. Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect: A) the money demand curve to shift outward. B) the money demand curve to shift inward. C) a downward movement along a fixed money demand curve. D) an upward movement along a fixed money demand curve. 4. The course packet and the class lecture contrasted historical growth in real GDP per capita in the US compared to Argentina to A) slower: Argentina does not have such severely cold winter weather B) faster; Argentina has a tropical climate with poor soil and tropical diseases C) slower; Argentina encouraged land ownership by new immigrants but the US "robber barons" owned all the land in the US D) faster; the US encouraged land ownership by new immigrants but in Argentina Spanish colonists had large land holdings 5. Sam, who is 55 years old and has been a steelworker for 30 years, is unemployed because the steel plant in his town closed and moved to Mexico. Sam is experiencing: A) cyclical unemployment. B) permanent unemployment. C) frictional unemployment. D) structural unemployment. 6. Planned investment spending is: A) actual investment in a period. B) investment spending minus depreciation in a period. C) investment spending that businesses plan to undertake during a period. D) always equal to saving 7. The marginal propensity to consume is: A) increasing if the marginal propensity to save is increasing. B) the proportion of total disposable income that the average family consumes. C) the change in consumer spending divided by the change in aggregate disposable income. D) the change in consumer spending minus the change in aggregate disposable income. 8. As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n): A) increase in short-run aggregate sup B) decrease in the quantity of aggregate output supplied in the short run. C) increase in aggregate demand. D) decrease in the quantity of aggregate output demanded. 9. The money demand curve is: A) downward-sloping because the opportunity cost of holding money is inversely related to the interest rate. B) downward-sloping because the opportunity cost of holding money rises as the interest rate rises. C) downward-sloping because the opportunity cost of holding money rises as the interest rate falls. D) upward-sloping because the opportunity cost of holding money rises with the10. If technology advances, then: A) more output can be obtained from the same inputs. B) more inputs are needed to produce the same output. C) less output can be obtained from the same inputs. D) less output can be produced even with more inputs. 11. A course packet reading discussed in class attributed the slower adoption of smart cards for transactions in the US compared to rapid adoption in Europe to: A) Telephone calls were much more expensive in Europe in the 1980s B) Telephone calls were much less expensive in Europe in the 1980s C) Europeans have adopted new inventions of the electronic age faster than Americans D) Europeans have adopted new inventions of the electronic age slower than Americans 12. Long-run economic growth has been mostly dependent on: A) rising productivity. B) a low unemployment rate. C) an increase in the population which eventually leads to an increase in the labor population. D) countries following the rule of 70. 13. Rising inventories usually indicate: A) an economy that grows unexpectedly. B) an economy that slows unexpectedly. C) an unexpected spurt in sales. D) an inflationary cycle. 14. Banks create money when they: A) make loans. B) take deposits. C) hold excess reserves. D) pay withdrawals to depositors. 15. An example of the frictionally unemployed is a(n): A) autoworker who is temporarily laid off because of a decline in sales. B) geologist who is permanently laid off from an oil company due to a new technological advance. C) worker at a fast-food restaurant who quits work and attends college. D) real estate agent who leaves a job in Texas and searches for a similar, higher- paying job in California. Use the following to answer question 16: Figure: Loanable Funds Interest rate 6% $100 Quantity of loanable funds (billions of dollars) 16. (Figure: Loanable Funds) The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150 billion? A) Consumers increase consumption as a fraction of disposable income. B) Businesses become more optimistic about the return on investment spending. C) The federal government has a budget surplus rather than a budget deficit. D) There is an increase in capital inflows from other nations.17. An example of a government transfer is a(n): A) expenditure on an interstate highway. B) bequest from a deceased relative. C) Social Security payment. D) salary for a member of the armed forces. 18. An important source of changes of income inequality over the past decade is: A) The stock market crash of 2008-09 B) Loss of jobs by corporate executives indicted for their role in the financial crisis C) Loss of jobs by middle-income clerical workers and unionized manufacturing workers D) Reduction in the unemployment rate from 10% in late 2009 to 7% in November 2013. 19. The wealth effect is reflected in: A) increases in interest rate to savers. B) the upward slope in aggregate supply. C) the upward slope in aggregate demand. D) the downward slope in aggregate demand. 20. An increase in the demand for money would result from: A) a decrease in nominal GDP. B) a decrease in real GDP. C) a decrease in the price level. D) an increase in the price level. Use the following to answer questions 21-22: Scenario: Aggregate Consumption Equation Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. 21. (Scenario: Aggregate Consumption Equation) If disposable income is $500, aggregate consumption is: A) SO. B) $200. C) $400 D) $600. 22. (Scenario: Aggregate Consumption Equation) If disposable income is $500, autonomous consumption is: A) $0. B) $200. C) $400. D) $600. 23. During the four years between late 2009 and late 2013, the unemployment rate in the US fell from 10.0 to 7.0 percent, despite the fact that real GDP only grew by 2 percent per year during that 4 year period. What were the reasons cited in lecture for this paradox? A) falling labor-force participation rate, slower productivity growth B) rising labor-force participation rate, slower productivity growth C) falling labor-force participation rate, faster productivity growth D) rising labor-force participation rate, faster productivity growth 24. When an economy's overall production grows faster than its population, it is referred to as: A) long-run growth per capita. B) an increase in nominal GDP. C) deflation. D) the paradox of thrift. 25. Deviations from the natural rate of unemployment are known as: A) frictional unemployment. B) structural unemployment. C) random unemployment. D) cyclical unemployment. 26. Anticipated inflation affects: A) borrowers only. B) lenders only. C) all aspects of the economy.27. A fact reported in a course packet reading suggested that 90 percent of new mortgages go to borrowers with high credit scores. The lecture interpreted this as suggesting A) A low impact of interest rates on consumption B) A low impact of interest rates on investment C) A decline in the wealth effect on consumption D) A decline in the wealth effect on investment 28. When countries replaced gold and silver coins with paper money exchangeable for certain amounts of precious metals, the monetary system evolved from: A) using commodity money to using fiat money. B) using commodity-backed money to using fiat money. C) using commodity money to using commodity-backed money. D) using fiat money to using commodity-backed money. Use the following to answer questions 29-32: Scenario: Real GDP Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each. 29. (Scenario: Real GDP) The growth rate of nominal GDP from year 1 to year 2 is (use the In formula): A) 10%. B) 7.8% C) 18%. D) 8.8%. 30. (Scenario: Real GDP) Using year 1 as the base year, real GDP in year 2 is: A) $900. B) $970. C) $1,000. D) $1,077.50. 31. (Scenario: Real GDP) The value of nominal GDP in years 1 and 2 respectively is: A) $900; $1,077.50. B) $900; $990. C) $180,000; $257,400. D) $1,000; $1,005. 32. (Scenario: Real GDP) Using year 1 as the base year, the growth rate of real GDP from year 1 to Year 2 is (use the In formula): A) 10%. B) 7.5% C) 19.7%. D) 8.8%. 33. Quality of life indicators supplement international comparisons of real GDP per capita. For France and Germany real GDP per capita is about 72% of the US level. In quality of life indicators France and Germany rate than 72% of the US level because of A) lower; higher inequality and lower life expectancy B) higher: higher inequality and higher life expectancy C) higher; lower inequality and higher life expectancy D) lower; lower inequality and lower life expectancy 34. The money supply curve is: A) downward sloping B) vertical. C) upward rising. D) horizontal. 35. According to the wealth effect, when prices decrease, the purchasing power of assets: A) decreases and consumption decreases. B) increases and consumption decreases. C) decreases and consumption increases. D) increases and consumption increases.36. Changes in aggregate demand can be caused by changes in: A) wages. B) business costs. C) raw materials costs. D) government spending. 37. Which of the following do economists view as investment spending? A) stocks B) bonds C) spending on physical capital D) mutual fund investing 38. The term "consumer deleveraging" refers to A) households adding debts in order to make consumption purchases B) households paying off debts and reducing their consumption purchases C) the Federal Reserve selling mortgage-backed securities in 2010-2013 D) the Federal Reserve buying mortgage-backed securities in 2010-2013 39. Suppose that the economy is in long-run macroeconomic equilibrium and aggregate demand increases. As the economy moves to short-run macroeconomic equilibrium, there is: A) a recessionary gap with high inflation. B) a recessionary gap with low inflation. C) an inflationary gap with high unemployment. D) an inflationary gap with low unemployment. 40. Which of the following does NOT cause the money demand curve to shift? A) a change in the interest rate B) a change in the price level C) a change in banking technology D) a change in real GDP 41. The invention of ATMs reduced the: A) menu costs of inflation. B) shoe-leather costs of inflation. C) unit-of-account costs of inflation. D) seignorage. 42. Which of the following assets is the MOST liquid? A) a $50 bill B) a $50 Amazon.com gift certificate C) 100 shares of Microsoft stock D) an economics textbook 43. Enchante Inc., a designer clothing company, buys $400 worth of silk from a silk trader and $30 worth of accessories from AccessoriesRuS to produce each dress. If the value added by Enchante is equal to $200, then according to the value-added approach, the price of the designer dress should be: A) $630. B) $230. C) $200. D) $830. 44. People forgo interest and hold money: A) because they are required to. B) to reduce their transactions costs. C) because there are no substitutes for money. D) because banks are too risky. 45. Many Silicon valley entrepreneurs, including the late Steve Jobs, the current CEO of Apple Tim Cook, and the famous Mark Zuckerberg all endorse raising the quote of H1B visas for foreign nationals who complete degrees in the US in science, math, and engineering. We learned in lecture that this would do the following to the ratio of skilled to unskilled wages and employment. A) Raise the relative wage ratio and leave relative employment unchanged B) Raise the relative wage ratio and reduce relative skilled to unskilled employment C) Reduce the relative wage ratio and raise relative skilled to unskilled employment D) Reduce the relative wage ratio and leave relative employment unchanged.46. A business will want to borrow to undertake an investment project when the rate of return on that project is: A) lower than the interest rate. B) higher than the interest rate. C) higher than the exchange rate. D) equal to the inflation rate. 47. The trough of the business cycle: A) comes right after the expansion phase. B) comes before the recession phase. C) is a temporary maximum level of real GDP. D) is a temporary minimum level of real GDP. 48. All of the following are examples of bank regulations designed to prevent bank runs EXCEPT: A) reserve requirements. B) deposit insurance. C) the federal funds rate. D) capital requirements. 49. The short-run aggregate supply curve slopes upward because of: A) wage and price stickiness. B) wage and price flexibility. C) increasing technology. D) a reduction in resource availability at higher price levels. 50. In a simple closed economy, all investment spending must come from: A) saving. B) money creation. C) debt issuance. D) foreign borrowing. 51. Changing the level of government spending is an example of: A) fiscal policy. B) interest rate policy. C) monetary policy. D) exchange rate policy. 52. An important part of Ben Bernanke's "quantitative easing" policy is A) Buying government bonds B) Buying mortgage backed securities C) Selling government bonds D) Selling mortgage-backed securities E) A) and B) F) C) and D) Use the following to answer questions 53-54: Figure: Productivity GDP per worker Physical capital per worker 53. (Figure: Productivity) An increase in physical capital per worker with everything else remaining unchanged is shown on the diagram as: A) a movement from B to C. B) a movement from A to C. C) a movement from A to B. D) a movement from B to A.54. (Figure: Productivity) An improvement in technology with everything else remaining unchanged is shown on the diagram as: A) a movement from B to A. B) a movement from A to B. C) a movement from B to C. D) a movement from A to C. 55. The skills, training, and education possessed by workers that contribute to economic growth are known as: A) saving. B) human capital. C) natural resources. D) output of labor. 56. Alice's disposable income increases by $1,000, and she spends $600 of it. Alice's: A) MPS is 0.4 and she saves $400. B) MPC is 0.4 and she saves $400. C) MPS is 0.4 and she saves $600. D) MPC is 0.6 and she consumes $400. 57. If a country sold more goods and services to the rest of the world than it purchased from the other countries, then the country has a: A) trade deficit. B) budget deficit. C) trade surplus. D) budget surplus. 58. A source of the leftward shift in the Aggregate Demand curve in the Great Depression of 1929-33 as discussed in lecture was A) The decline in defense spending after the end of World War I B) Overbuilding in the 1920s due partly to the invention of the electric elevator C) Fear of an imminent war after Hitler took over political control of Germany D) An increase in imported goods which created unemployment for workers employed in the industries making the same kinds of products as the new imports 59. The present value of a future payment: A) decreases when the interest rate rises. B) decreases when the interest rate falls. C) decreases when the interest rate stays the same. D) never changes regardless of the interest rates. 60. Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function? A) The slope will get steeper. B) Autonomous consumption will increase. C) The function will shift upward. D) The slope will get steeper and autonomous consumption will increase.PART B - SHORT ANSWER QUESTIONS Problem 1 (13 pts) Age Don't have a Don't have a Have a full Have a part job but are job and are Total time job time job looking for not looking one for one