ECO 104 Final Exam Practice Questions with Answers

Summer 2020

MCQ’s

1. Fill in the blank: MV represents the ___________.

a. Total expenditures of buyers in the economy.
b. Inflation rate.
c. Natural Real GDP.
d. Both a. and b. above.

2. According to the simple quantity theory of money, which of the following will cause the
aggregate demand
curve to shift to the right?
a. An increase in the money supply.
b. An increase in velocity.
c. An increase in the price level.
d. Both a. and b. above.

3. Which of the following correctly describes the monetarist view of the economy?
a. Velocity is unstable and unpredictable.
b. Velocity is constant.
c. Real GDP is constant.
d. None of the above.
4. According to monetarists, if the economy is in long-run equilibrium and the money supply
is increased, then
which of the following will occur?
a. Aggregate demand will increase, yielding a short-run equilibrium in which Real GDP
exceeds Natural Real GDP, creating an inflationary gap.
b. The short-run equilibrium described in answer (a) will revert back to the Real Natural
GDP when the short-run aggregate supply curve shifts leftward, generating a decline in Real
GDP and an increase in the price level.
c. Aggregate demand will decrease, yielding a short-run equilibrium in which Real GDP falls
below
Natural Real GDP, creating a recessionary gap.
d. Both (a) and (b) above.

5. According to the monetarists, if the economy fell into a recessionary gap because of a
decline in aggregate demand, which of the following will occur?
a. The economy will remain stuck in the recessionary gap because wages and prices are
inflexible
downward.
b. The economy will slip even deeper into a recessionary gap as prices fall but wages remain
high.
c. The economy will revert back to long-run equilibrium due to an increase in short-run
aggregate
supply.
d. None of the above.

6. Starting at long-run equilibrium, which of the following will lead to one-shot inflation?
a. A one-time increase in aggregate demand.
b. A one-time increase in short-run aggregate supply.
c. A one-time increase in long-run aggregate supply.
d. All of the above.

7. Which of the following can turn one-shot inflation into continued inflation?
a. Continued increases in aggregate demand.
b. Continued increases in short-run aggregate supply.
c. Continued increases in long-run aggregate supply.
d. All of the above.

8. Fill in the blank: On the demand side, continued inflation can be caused by _________.
a. continued decreases in the money supply.
b. continued increases in the money supply.
c. continual technological innovation.
d. continual deregulation and business tax rate reductions.

9. Which of the following offers the best economic explanation for why people demand
money (i.e., hold currency and checking account balances)?
a. Holding money balances serves as a way of protecting one's assets from the effects of
inflation.
b. Some amount of money is demanded for everyday market transactions like parking fees,
lunch, and
buying groceries.
c. Holding financial wealth in money balances generally earns a higher return than other
financial
investments.
d. All of the above are correct.

10. Which of the following correctly describes equilibrium in the money market?
a. Output equals Natural Real GDP and the price level is constant.
b. Aggregate supply equals long-run aggregate supply.
c. An interest rate at which the quantity of money demanded equals the quantity supplied.
d. None of the above.

11. What is the Keynesian link between the money market and the goods and services
market?
a. Decreasing the money supply causes the long-run aggregate supply curve to shift to the
right until
the investment supply curve is crossed by the total expenditure curve.
b. Increasing the money supply reduces the equilibrium interest rate, increasing investment
expenditures and shifting the aggregate demand curve to the right.
c. Decreasing the money supply leads to a strictly proportionate decline in the price level
because
according to the Keynesian model, Real GDP and velocity are fixed.
d. Increasing the money supply has no impact on the economy because the economy is
capable of
instantaneous self-regulation via flexible wages and prices.

12. In the Keynesian view, which of the following stands between the money market and the
goods and services market?
a. The national debt.
b. The equation of exchange.
c. The tax multiplier.
d. The investment goods market.

13. Fill in the blank: A liquidity trap occurs when ___________.

a. the demand curve for money is horizontal.
b. the supply curve for money is a vertical line
c. the investment demand curve is downward-sloping.
d. there is a balanced federal budget.

14. Fill in the blank: If the economy is in a recessionary gap, ___________ can move the
economy to the Natural Real GDP level.
a. contractionary fiscal policy.
b. an increase in taxes
c. contractionary monetary policy.
d. expansionary monetary policy.

15. Why is it said that Keynesian monetary policy has an inflationary bias?
a. Because Keynesians are more likely to use expansionary monetary policy to close a
recessionary
gap than to use a contractionary monetary policy to close an inflationary gap.
b. Because Keynesians prefer higher inflation to lower inflation.
c. Because Keynesians are more likely to use contractionary monetary policy to close an
inflationary
gap than to use expansionary monetary policy to close a recessionary gap.
d. Both (b) and (c).

16. Under which of the following circumstances might monetary policy destabilize the
economy?
a. When expansionary monetary policy is able to fully close a recessionary gap and cause
equilibrium output to equal the Natural Real GDP level.
b. When contractionary monetary policy is able to fully close an inflationary gap and cause
equilibrium output to equal the Natural Real GDP level.
c. When self-regulation closes a recessionary gap during a lag in implementing expansionary
 monetary policy, causing the policy to overshoot and create an inflationary gap.
d. Both (a) and (b).

17. In what way is a barter system inefficient relative to money?

a. In barter transactions the gains from trade for buyers come at the expense of an equivalent loss
from trade for sellers.
b. Buyers and sellers frequently do not share a double coincidence of wants.
c. It is not possible to determine the quality of the goods being exchanged in a barter system.
d. There is unanticipated inflation in the money system, which increases a buyer's purchasing
power.

18. Fill in the blank: If money in the form of freshly cut flowers were widely accepted, easily
measurable, but was highly perishable, then the _____________ function of money would most
likely fail.
a. store of value.
b. medium of exchange.
c. unit of account.
d. None of the above.

19. How do commercial banks create money?

a. By lending out excess reserves to people or businesses who usually place a portion of it on
deposit in checkable or time accounts.
b. They convert their holdings of gold and silver into money by minting coins.
c. They are given the right to print U.S. currency.
d. Both (b) and (c) above.

20. Which of the following will tend to increase the size of "the" multiplier?
a. a higher marginal tax rate
b. a higher marginal propensity to import
c. a higher marginal propensity to consume
d. a higher level of government spending

21. In Keynesian theory, what is the effect of expansionary fiscal policy designed to close a
recessionary gap?
a. The short-run aggregate supply curve shifts to the right, causing the price level to fall and Real
GDP to increase.
b. The short-run aggregate supply curve shifts to the left, causing the price level to rise and Real
GDP to decrease.
c. The aggregate demand curve shifts to the right, causing the price level and Real GDP to both
increase.
d. The aggregate demand curve shifts to the left, causing the price level and Real GDP to both
decrease.
22. What happens to the money supply if the deficit is financed by selling bonds tothe central
bank?
a. the money supply increases
b. the money supply decreases
c. the money supply is unaffected
d. we cannot tell what will happen to the money supply

23. Of the following, which did Keynes believe was the most important factor affecting the level
of business investment?
a. Interest rates.
b. Consumer saving goals.
c. The ratio of U.S. foreign aid to the exchange rate of the dollar.
d. The expected rate of profit on investment.

24. A sale of government bonds by the central bank should cause

a. bond prices to rise
b. an increase in the supply of money
c. an increase in chartered banks loans
d. a decrease in reserves of the banking system

25. The money multiplier tells us the ultimate increase in

a. the income level due to an increase in the money base
b. the money supply due to an increase in the money base.
c. the money supply due to an increase in the income level
d. the income level due to an increase in the money supply

26. If the central bank prints more $10 bills and spends them, then as a direct result of this
action
a. M1 and M2 both increase
b. neither M1 nor M2 increase
c. M1 increases but M2 does not
d. M2 increases but M1 does not

27. Which of the following is the Keynesian spending multiplier?

a. 1/(1-MPC).
b. MPC/(1-MPS).
c. (1-MPC).
d. MPC multiplied by (1-MPS)

28. Fill in the blank: If the economy is operating at a point below of the production possibilities
frontier, then we say that economic growth occurs from _________.
a. an inefficient level of production
b. an efficient level of production.
c. beyond the realm of production.
d. consumption rather than production.
29. How does technology promote economic growth?
a. Technological advances require a worker to spend more time on the job in order to
produce the same quantity of output.
b. Technological advances make people feel insecure and unwilling to learn new
computer skills that very will quickly become obsolete.
c. Technological advances, particularly the Internet, raise the cost of consumer search,
reduces competition, and increases the amount of time required to carry out exchanges.
d. Technological advances make it possible to obtain more output from the same
amount of resources.

30. Why would the development of a property rights system help promote economic growth?
a. Because economic growth is really generated by theft, and everyone knows that
property is theft.
b. Economic growth is promoted around the world by governments that take away
people's land and other resources and give them to corporations.
c. If people are able to keep a large share of the income that they earn from their labor
or from their capital, this income creates an incentive for further investment, risk-taking,
and for research and development.
d. None of the above.

31. Which of the following policies will help promote economic growth?
a. Reducing taxes on working and on saving.
b. Increasing taxes on working and saving.
c. Increasing the use of costly regulation.
d. Reducing government-subsidies for basic research having possible beneficial
technological applications.

32. Which of the following describes limitations of industrial policy?

a. Government may favor those industries with the most political influence rather than
the industries that it makes economic sense to help.
b. Government officials may not have enough information to know which industries will
be the leaders of the future.
c. Government officials who design and implement industrial policy are likely to hamper
economic growth if they provide protection to some industries.
d. All of the above.

33. Which of the following describes the shortcomings of economic growth?

a. Fewer open spaces.
b. More crowded cities.
c. More emphasis on material consumption and getting ahead.
d. All of the above.

34. If economic growth leads to the destruction of some resources, which of the following is
least likely to have an available substitute that can be developed or enhanced through
technology?
a. Petroleum.
b. Species diversity and intact ecosystems.
c. Wild stocks of salmon and shrimp.
d. Coal.
35. What is the basic idea underlying the new growth theory, and how does it relate to
neoclassical growth theory?
a. Neoclassical growth theory emphasized labor and capital resources, and had little to
say about the source and the role of technology.
b. The new growth theory holds that technology is endogenous; ideas and knowledge
are a central part of the economic system, and we can control the quantity and the
quality of technology.
c. The new growth theory emphasizes labor and capital resources, and has little to say
about the source and the role of technology.
d. Both a(.) and (b).

Answers

MCQS:
1d, 2a, 3d, 4d, 5c, 6d, 7a, 8b, 9b, 10c, 11b,12d, 13a, 14d, 15a, 16c
17b,18a,19a,20c, 21c, 22a,23d,24d,25b,26a,27a, 28a, 29d, 30b, 31a, 32d, 33d, 34b,
35d

Short Questions:
1. Define Fisher Effect and explain your answer with a diagram.

When there is an expectation of inflation (10% in

this case), borrowers are willing to borrow the same quantity of funds at a higher current interest rate
(14% in the example) as they assume fall in value of their borrowed fund and lenders are only willing to
lend at a higher interest rate(14% in this example) as they fear loss of value of their lent fund. As a
result, due to future expectation of inflation, current nominal interest rate increases (from 4% to 14%).
However, real interest rate remains the same. This is Fischer effect.
 2) Show the effect of a decrease in Money Supply on the following-
a) Aggregate output
b) Aggregate price level
c) Interest rate

Price level and output will fall but interest rate will increase.

3) Graphically illustrate Crowding out effect.

4) a) How is autonomous consumption different from consumption?

b) If the MPC is 0.70, what does the multiplier equal to?
c) What happens to the multiplier as the MPC falls?

5) Briefly describe any two causes of growth.