Econ 102 Final Exam Name ID Section Number 1. Over time, contractionary monetary policy nominal wages and causes the short-run aggregate supply curve to shift. A) raises; leftward B) lowers; leftward C) raises; rightward D) lowers; rightward 2. The main idea behind monetarism is that: A) the aggregate output will grow steadily at a constant rate if the money supply also grows at a constant rate. B) the government budget will have a deficit if the government spending grows at a constant rate. C) the aggregate output will be even greater than equal potential output if the money supply grows at a constant rate. D) the aggregate price level will increase proportionally if the money supply grows at a constant rate. 3. Discretionary fiscal policy may be counterproductive because: A) the countercyclical nature of such policies sometimes reduces their effectiveness. B) in the short run, only monetary policy is effective. C) the various lags in fiscal policy mean that it may take effect when the economy has already recovered. D) increases in the government budget deficit affect economic growth in the long run. 4. According to the short-run Phillips curve, when actual real GDP is potential output, the price level and the unemployment rate falls. A) below; decreases B) above; decreases C) below; increases D) above; increases Version 3 Page 1
5. The U.S. trade balance deteriorated over the last few months. Which of the following factors is not a determinant of a countries' trade balance? A) relative economic growth rates B) the U.S. dollar exchange rate C) relative inflation rates D) federal budget deficits 6. Monetary policy is often ineffective in a banking crisis because: A) businesses and consumers borrow large amounts because interest rates are so low, but they are unwilling to spend the money that they have borrowed. B) businesses and consumers aren't willing to borrow and spend because interest rates are so high. C) businesses and consumers borrow too much because interest rates are so low and increase spending so much that inflation results. D) businesses and consumers aren't willing to borrow and spend even though interest rates are very low. 7. The United States dollar Mexican peso exchange market is initially in equilibrium. Suppose there is a decrease in demand for U.S. dollars. Holding everything else constant, this will result in: A) a movement along the demand for U.S. dollars and an increase in the number of pesos in a dollar. B) a movement along the supply of U.S. dollars and a decrease in the number of pesos in a dollar. C) a movement along the demand of U.S. dollars and a decrease in the number of pesos in a dollar. D) a movement along the supply of U.S. dollars and an increase in the number of pesos in a U.S. dollar. 8. As a result of a downturn in the economy, a firm cuts back on workers' hours but does not fire workers. Following Okun's law, this is one reason: A) a positive output gap is associated with an unusually high unemployment rate. B) the relationship between the output gap and the unemployment is negative and less than a one-to-one relationship. C) a negative output gap is associated with an unusually low unemployment rate. D) the relationship between the output gap and the unemployment rate is positive. Version 3 Page 2
9. The Great Moderation consensus regarding the use of monetary or fiscal policy to reduce unemployment in the long run is that: A) the concept of the nonaccelerating inflation rate of unemployment, or NAIRU, was a mistake. B) unemployment can be constantly decreased as long as expectations of inflation are kept low. C) the only effective policy is to maintain a constant growth rate of the money supply. D) the natural rate of unemployment limits what monetary and fiscal policy can accomplish. 10. The current account responds to changes in: A) the interest rate B) the nominal exchange rate. C) both the nominal and real exchange rates. D) the real exchange rate. 11. A negative output gap is associated with: A) an unusually high unemployment rate. B) a natural rate of unemployment. C) an unusually low unemployment rate. D) no changes in the unemployment rate. 12. Before the Great Depression in the 1930s, the government: A) lent money to banks that were in poor financial condition. B) nationalized all banks that were close to failure. C) guaranteed deposits of individuals. D) allowed banks to fail, believing that free-market forces should be allowed to work. 13. When long-term interest rates are higher than short-term rates, as they were in 2010: A) it implies that inflation will fall. B) it implies that short-term interest rates are expected to fall. C) it implies that short-term interest rates are expected to rise. D) it has no implication for short-term interest rates. 14. Real business cycle theory suggests the business cycle is caused by: A) animal spirits. B) protectionism. C) fluctuations in the rate of productivity. D) discretionary monetary policy. Version 3 Page 3
15. It has been pointed out by economists that capital flows as a share of world savings and investment today are much smaller than they were over a century ago. Which of the following is a likely explanation? A) greater economic integration in the present B) restrictions on migration C) political risks D) restrictions on migration and political risks 16. U.S. manufacturing recently went through a soft patch due to all the following except: A) weak overseas demand B) rising interest rates C) inventory correction D) stronger dollar 17. Historical evidence has led economists to conclude that during periods of high inflation, the model of the price level is a good approximation of reality because nominal wages and prices adjust more than during periods of low inflation. A) modern; quickly B) modern; slowly C) classical; slowly D) classical; quickly 18. The money demand curve shows the relationship between the: A) aggregate price level and the nominal quantity of money demanded. B) real GDP and the nominal quantity of money demanded. C) money supply and the quantity of money demanded. D) interest rate and the nominal quantity of money demanded. 19. The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to: A) economists today the adjustment of prices to changes in the money supply is instantaneous, while classical economists argued that this adjustment process took some time. B) classical economists money is neutral in the long run, while economists today do not consider money to be neutral in the long run. C) economists today money is neutral in the long run, while classical economists did not consider money to be neutral in the long run. D) classical economists the adjustment of prices to changes in the money supply is instantaneous, while economists today argue that this adjustment process takes some time. Version 3 Page 4
20. Contractionary fiscal measures, such as less government spending and tax increases designed to reduce budget deficits, are called: A) fiscal austerity. B) fiscal stimulus. C) maturity transformation. D) automatic stabilizers. 21. When economists state that there is a zero bound on nominal interest rates, they mean that: A) the nominal interest rate cannot go below zero. B) the real interest rate can very well be negative. C) the nominal interest rate can always go below zero. D) the real interest rate cannot go below zero. 22. When borrowers don't respond to short-term interest rates of zero, the economy is experiencing: A) hyperinflation. B) maturity transformation. C) a liquidity trap. D) an asset bubble. 23. Import prices fell 10.7% over the last year due to all the following factors except: A) excess capacity in developing countries B) weak global economic growth C) lower imported fuel prices D) falling value of the dollar 24. If a country has a current account deficit, it must have a: A) balance of payments deficit. B) balance of payment surplus. C) financial account deficit. D) financial account surplus. 25. The Friedman Phelps hypothesis claimed that the apparent trade-off between unemployment and inflation would NOT survive an extended period of: A) rising prices. B) increases in the money supply. C) rising unemployment. D) rising interest rates. Version 3 Page 5
26. Liquidity traps are most likely to occur when the: A) economy is going through a recovery. B) public expects inflation. C) economy is booming. D) public expects deflation. 27. The Index of Lending Economic Indicators signals a recession if the 6-month growth rate falls below: A) -2% B) 2% C) -1% D) 4% 28. A country that pursues a contractionary monetary policy will MOST likely have a(n): A) a lowering of its interest rate. B) increase in the supply of its currency in the foreign exchange market. C) increase in the level of investment spending. D) increase in the demand for its currency in the foreign exchange market. 29. All else equal, if the Federal Reserve decreases the money supply, interest rates will and the dollar will against other currencies. A) increase; appreciate B) increase; depreciate C) decrease; depreciate D) decrease; appreciate 30. An increase in the demand for money would result from: A) an increase in the price level. B) a decrease in the price level. C) a decrease in nominal GDP. D) a decrease in real GDP. 31. If the monetary authorities decide to increase the nominal money supply by 10% when the economy is at its full-employment level of output, in the long run the aggregate price level increases by and real GDP. A) 5%; increases by 20%, given a marginal propensity to consume of 0.5 B) 10%; returns to the potential level of output C) 10%; increases by 10% D) 5%; increases by 5%, according to Okun's law Version 3 Page 6
32. A major drawback of adopting a floating exchange rate is the: A) opportunity cost associated with the accumulation of foreign exchange reserves. B) distorted incentives imposed on the normal flow of imports and exports. C) increased discipline brought on monetary policy. D) uncertainty about the value of goods traded internationally. 33. The macroeconomic theory that because workers and firms take all information into account, only unexpected changes in the money supply affect aggregate output is called: A) rational expectations theory. B) real business cycle theory. C) new classical theory. D) supply-side theory. 34. Classical macroeconomics was based largely on the foundation of: A) government intervention in the market. B) Adam Smith's model of imperfectly competitive markets. C) persistent unemployment. D) flexible wages and prices. 35. To determine the real exchange rate, one needs to know: A) the balance of payments. B) the amount of exports and imports. C) the nominal exchange rate and the aggregate price level in both countries. D) the purchasing power parity. 36. If the natural rate of unemployment, the NAIRU, and the long-run Phillips curve shifts to the left. A) rises; rises B) falls; rises C) rises; falls D) falls; falls 37. When the Fed purchases short-term government securities from banks, excess reserves: A) increase. B) remain constant. C) fluctuate randomly. D) decrease. Version 3 Page 7
38. Expansionary fiscal measures, such as more government spending and tax cuts designed to reduce unemployment, are called: A) automatic stabilizers. B) fiscal austerity. C) maturity transformation. D) fiscal stimulus. 39. In the foreign exchange market, an increase in the rate of return available in the European Union, all other things equal, will shift the, and the euro will. A) supply curve for the euro to the right; depreciate B) demand curve for the euro to the left; depreciate C) demand curve for the U.S. dollar to the right; appreciate D) demand curve for the euro to the right; appreciate 40. The long-run Phillips curve shows the relationship between: A) potential aggregate output and the natural rate of unemployment at a given rate of expected inflation. B) expected inflation and actual inflation after the expectation becomes embedded in people's minds. C) unemployment and inflation after expectations of inflation have had time to adjust to experience. D) the aggregate output and the aggregate price level in the economy at a given rate of expected inflation. 41. In order to prevent deflation in November 2010, the Fed began: A) lending money to the central bank of China. B) buying long-term bonds. C) closing banks that had too much invested in the risky foreign exchange market. D) to consider joining the European Union. 42. If the government guarantees not only the deposits but also the other liabilities of a failing bank, the government usually: A) merges it with the Federal Reserve. B) closes the bank permanently. C) merges it with the Treasury. D) temporarily takes over the bank but then reprivatizes it as soon as possible. Version 3 Page 8
43. In response to the Great Depression, the classical economists: A) stressed the use of fiscal policy over monetary policy. B) did not advocate any action because of the lack of consensus about the consequences of policy. C) tried to tame the animal spirits that caused the recession in the first place. D) stressed the use of monetary policy over fiscal policy. 44. A country has a capital account deficit if the balance on the: A) financial account is negative. B) current account is negative. C) financial account is positive. D) current account is zero. 45. To expand the money supply, the Federal Reserve would have to do which of the following? A) engage in an open purchase of Treasury bills B) engage in an open sale of Treasury bills C) get approval from Congress D) raise interest rates 46. The Fed measures the expected rate of inflation as the difference between the: A) actual and potential output. B) consumer price index and the core rate of inflation. C) interest rate on ordinary government bonds and the interest rate on government bonds whose yield is protected from inflation. D) the actual and natural rates of unemployment. 47. Okun's law is less than a 1-to-1 ratio because some: A) workers are not counted as unemployed when they are actively seeking work. B) employers change the hours worked of current employees as demand changes. C) employees act to job share. D) employers quickly lay off workers. 48. The theory of rational expectations contends that policy activism is: A) warranted, because expectations are rational only in the short run. B) not warranted; the public defeats discretionary policies because everyone expects them and therefore their effectiveness is thwarted. C) warranted, because discretionary policies have a strong effect on real output. D) not warranted, because we don't know enough about the workings of the economy to stabilize it. Version 3 Page 9
49. If we use the Empire State Manufacturing Survey to determine what is taking place with manufacturing across the United States, then we are using which of the following? A) causal inference B) fallacy of division C) statistical generalization D) fallacy of composition 50. In a liquidity trap: A) fiscal policy becomes ineffective because of the high budget deficit. B) increase in government spending drives out planned investment spending. C) the aggregate price level becomes downwardly sticky. D) monetary policy becomes ineffective because the nominal interest rate is close to the zero bound. Version 3 Page 10
Answer Key 1. D 2. A 3. C 4. D 5. D 6. D 7. B 8. B 9. D 10. D 11. A 12. D 13. C 14. C 15. D 16. B 17. D 18. D 19. D 20. A 21. A 22. C 23. D 24. D 25. A 26. D 27. A 28. D 29. A 30. A 31. B 32. D 33. A 34. D 35. C 36. D 37. A 38. D 39. D 40. C 41. B 42. C 43. B 44. A Version 3 Page 11
45. A 46. C 47. B 48. B 49. C 50. D Version 3 Page 12