Final Practice Exam

In an illustrative two-country model with 20 worker-days in all, world output is 117 bags of rice and 23 pairs of shoes before trade and 120 bags of rice and 30 pairs of shoes after each country specializes. What does the change show?

Select one.

• One country gained exactly what the other lost, so world output is unchanged
• Only Southland gained, because it holds the absolute advantage in rice
• Prices went up, so the larger figures are nominal rather than real
• World output grew by 3 bags of rice and 7 pairs of shoes with the same 20 worker-days

A Phillips curve plots the inflation rate up its vertical axis. What does that inflation rate measure?

Select one.

• The value of the Consumer Price Index in one particular year
• The percent change in a price index from one period to the next
• The gap between two price-index values, counted in index points
• The price level P that appears in the quantity equation

In an illustrative national account, exports are 220 and imports are 190, in billions of dollars, with no income or transfer flows. Which pair of balances fits the balance-of-payments identity?

Select one.

• CA = +30 and FA = +30
• CA = +30 and FA = −30
• CA = −30 and FA = +30
• CA = +30 and FA = 0, because the surplus stays abroad

In an illustrative economy, two points on the short-run Phillips curve are (u = 5%, π = 6%) and (u = 7%, π = 2%), and the natural rate of unemployment lies halfway between them. Where is the long-run Phillips curve?

Select one.

• A vertical line at 5% unemployment
• A horizontal line at 6% inflation
• A downward-sloping line through both short-run points
• A vertical line at 6% unemployment

A rate cut that leads firms to invest more shifts the aggregate demand curve to the right instead of moving the economy along it.

True or false.

• True
• False

In an illustrative economy, investment climbs by ΔI = 50 billion dollars. The marginal propensity to consume is 0.6, and the money multiplier is 10. At the original price level, how far does aggregate demand shift right?

Select one.

• 500 billion dollars
• 30 billion dollars
• 20 billion dollars
• 125 billion dollars

To cool an overheating economy, the central bank shrinks the money supply. Which chain describes what follows?

Select one.

• The interest rate falls, investment rises, and aggregate demand shifts to the left
• The interest rate rises, investment rises, and aggregate demand shifts to the right
• The interest rate rises, investment falls, and aggregate demand shifts to the left
• The interest rate falls, investment falls, and aggregate demand shifts to the right

In an illustrative quantity equation, the money supply is M = 800, velocity is V = 3, and real output is Q = 1,600. What is the price level P?

Select one.

• 0.5
• 2⁄3
• 1.5
• 2,400

Nominal GDP and real GDP are equal in the base year, which is why the GDP deflator sits at its benchmark level in that year.

True or false.

• True
• False

In an overheating year, an illustrative economy's actual output reaches 2,060 billion dollars while its potential output is 2,000 billion dollars. Which report of the gap is right?

Select one.

• An inflationary gap of 60 billion dollars, or 3% of potential output
• A recessionary gap of 60 billion dollars, or 3% of potential output
• An inflationary gap of 3 billion dollars, or 60% of potential output
• An inflationary gap of 2,060 billion dollars, or 103% of potential output

Per worker-day, Northland can make 9 bags of rice or 3 pairs of shoes, and Southland can make 12 bags of rice or 2 pairs of shoes (an illustrative two-country model). Northland has 10 worker-days. It specializes fully in shoes, then trades 12 pairs for rice at 4 bags of rice per pair. What does Northland end up with?

Select one.

• 48 bags of rice and 30 pairs of shoes
• 48 bags of rice and 18 pairs of shoes
• 36 bags of rice and 18 pairs of shoes
• 48 bags of rice and 12 pairs of shoes

Which developments would move the entire aggregate demand curve to a new position? Choose every one that does.

Select every option that applies.

• A drought raises farm costs across the country
• The government launches a large school-building program
• Better tools raise each worker's output
• Foreign incomes climb and buyers abroad order more of the country's goods
• The price level rises with nothing else changing
• Households grow worried about layoffs and cut their spending

On an illustrative frontier 4x + 2y = 32, an economy that moves from the inside point (3, 4) to the frontier point (3, 10) puts idle labor-hours to work but does not achieve long-run economic growth.

True or false.

• True
• False

In an illustrative quantity equation, M = 300, V = 6, and Q = 900, so P = 2. The money supply rises to 360 while V and Q stay fixed. What is the new price level, the long-run result both schools accept?

Select one.

• 2.0
• 2.4
• 2.2
• 4.8

An art collector's painting counts toward the collector's wealth, and since a grocery store will take it at the checkout for a week of food, it also counts as money.

True or false.

• True
• False

A government weighs four moves. Which one is fiscal policy?

Select one.

• The central bank raises its interest-rate target
• A credit union lends its excess reserves to a homebuyer
• The legislature raises spending on highway repair
• The central bank sells government bonds to banks

A town argues over a proposed tariff on imported steel. Which of these claims is normative?

Select one.

• A tariff on imported steel raises the price of steel at home
• Keeping the local steel mill open is worth paying more for steel
• Trade by comparative advantage lets both partners consume more
• Ending all trade sends world output back to its pre-trade level

Per worker-day, Northland can make 9 bags of rice or 3 pairs of shoes, and Southland can make 12 bags of rice or 2 pairs of shoes (an illustrative two-country model). Which assignment follows comparative advantage?

Select one.

• Northland specializes in rice, and Southland specializes in shoes
• Southland makes both goods, because it makes more rice per worker-day
• Neither country specializes, because each has an absolute advantage
• Northland specializes in shoes, and Southland specializes in rice

Which claim in the argument over rules versus fine-tuning is normative rather than positive?

Select one.

• Policy should follow a fixed rule even if that means a slower recovery
• The inside lag includes the time it takes to recognize a downturn
• An open-market sale of bonds raises the equilibrium interest rate
• The effect of a rate cut on spending arrives after a delay that varies

An illustrative government begins a year with a debt of 1,200 and runs a deficit of 75 during the year, while GDP stays at 1,500, all in billions of dollars. What is the debt-to-GDP ratio at the end of the year?

Select one.

• 80%
• 5%
• about 106%
• 85%

Which of these central bank moves tend to expand the money supply? Select every one that applies.

Select every option that applies.

• Selling government bonds in the open market
• Cutting the rate charged on discount-window loans to banks
• Buying government bonds in the open market
• Raising the share of deposits banks must keep as reserves
• Paying banks a higher rate on the reserves they keep
• Reducing the share of deposits banks must keep as reserves

Holding the money supply constant, which event moves the money demand curve rightward and pushes the equilibrium interest rate up?

Select one.

• The interest rate itself falls along the demand curve
• The central bank sells government bonds to banks
• The central bank raises the reserve requirement
• The price level rises, so each purchase takes more money

Following a central bank bond purchase, firms borrow more and buy more new equipment. What does the AD–AS diagram show?

Select one.

• Aggregate demand moves to the right, raising both the price level and real output
• Aggregate demand moves to the left, lowering both the price level and real output
• Short-run aggregate supply moves to the right, lowering the price level and raising output
• Neither curve moves, and the economy slides along aggregate demand

In an illustrative economy, the money supply grows 6% a year and real output grows 2.5% a year, while velocity holds steady. About what inflation rate does the approximation predict?

Select one.

• 3.5%
• 8.5%
• 6%
• 2.5%

Which of these events adds spending to the circular flow from outside the loop between domestic households and firms?

Select one.

• A household moves part of its income into a savings account
• A firm pays its yearly business taxes to the government
• A household buys a laptop that was made abroad
• A foreign buyer purchases wheat grown on domestic farms

A U.S. tractor sells for 40,000 dollars. In an illustrative example, the dollar moves from 1 dollar = 110 yen to 1 dollar = 130 yen, and the maker keeps its dollar price. What does the tractor cost a buyer in Japan after the move?

Select one.

• 4,400,000 yen
• 5,200,000 yen
• about 308 yen
• 52,000,000 yen

In an illustrative economy, the marginal propensity to consume is 0.9, so the tax multiplier is −9. If the legislature lowers taxes by 10 billion dollars, how much does real output rise in the simple model?

Select one.

• 100 billion dollars
• 90 billion dollars
• 10 billion dollars
• 9 billion dollars

Under the simple deposit-expansion model, new reserves can support deposits up to the money multiplier, one divided by the required reserve ratio, times their size. Which conditions make real-world expansion fall short of that maximum? Select all that apply.

Select every option that applies.

• Households hold more of their spending money as currency instead of deposits
• Banks keep some excess reserves rather than lending them out
• Every loan is spent and redeposited in full somewhere in the banking system
• The required reserve ratio is lowered from 0.20 to 0.10

Which of these is a value judgment, and so a normative statement rather than a positive one?

Select one.

• Along a single short-run Phillips curve, higher inflation comes with lower unemployment.
• Over the long run, unemployment drifts back to its natural rate at any inflation rate.
• If velocity and real output hold steady, 6% faster money growth means 6% faster inflation.
• Policymakers ought to put low inflation ahead of low unemployment.

Per worker-day, Northland can make 9 bags of rice or 3 pairs of shoes, and Southland can make 12 bags of rice or 2 pairs of shoes (an illustrative two-country model). Which statement about absolute advantage is accurate?

Select one.

• Southland has the absolute advantage in both rice and shoes
• The two countries tie in shoes, and Southland leads in rice
• Southland has the absolute advantage in rice, and Northland has it in shoes
• Northland has the absolute advantage in rice, since rice costs it fewer shoes

Asked how far a new deposit of 600 dollars can expand deposits when banks must hold 0.20 of every deposit in reserve, a learner instead multiplies by the spending multiplier implied by an MPC of 0.75. What figure does the learner reach, and what is the correct ceiling?

Select one.

• 3,000 dollars, against a correct ceiling of 2,400 dollars
• 450 dollars, against a correct ceiling of 3,000 dollars
• 2,400 dollars, against a correct ceiling of 600 dollars
• 2,400 dollars, against a correct ceiling of 3,000 dollars

A camera lens made in Japan is priced at 390,000 yen. In an illustrative example, the dollar moves from 1 dollar = 110 yen to 1 dollar = 130 yen. What does the lens cost a buyer in the United States after the move?

Select one.

• about 3,545 dollars
• 50,700,000 dollars
• 3,000 dollars
• 300 dollars

Which of these would raise output per worker through one of the three sources of productivity growth? Select all that apply.

Select every option that applies.

• A larger workforce in which each person produces no more than before
• Insurance-claims software that lets each clerk process files faster
• Evening classes that sharpen each worker's skills
• A higher price level that lifts nominal GDP
• More delivery vans for each driver to use

A central bank buys bonds to change the money supply. In what sequence does the effect travel through the transmission mechanism to aggregate demand?

Select one.

• Money supply, then investment, then the interest rate, then the spending multiplier, then aggregate demand
• Money supply, then the interest rate, then investment, then the spending multiplier, then aggregate demand
• Money supply, then the spending multiplier, then the interest rate, then investment, then aggregate demand
• Money supply, then the interest rate, then aggregate demand, then the spending multiplier, then investment

A wave of pessimism leads households and firms to spend less. Afterward, the economy's AD–AS crossing lies to the left of the long-run aggregate supply line, and the price level has fallen. Which curve most likely moved, and which way?

Select one.

• Short-run aggregate supply shifted to the left
• Aggregate demand shifted to the right
• Long-run aggregate supply shifted to the right
• Aggregate demand shifted to the left

A trade deficit shows only that a country bought more goods and services from abroad than it sold abroad; on its own, it does not show a loss of national income.

True or false.

• True
• False

When aggregate demand shifts left against an unchanged short-run aggregate supply curve, real output falls while the price level rises.

True or false.

• True
• False

Per worker-day, Northland can make 9 bags of rice or 3 pairs of shoes, and Southland can make 12 bags of rice or 2 pairs of shoes (an illustrative two-country model). What is Northland's opportunity cost of one pair of shoes?

Select one.

• 1⁄3 of a bag of rice
• 3 bags of rice
• 6 bags of rice
• 9 bags of rice

At an illustrative bakery, 8 bakers turn out 960 loaves a day after the bakery installs a larger oven. What is the bakery's productivity?

Select one.

• 960 loaves a day
• 96 loaves per baker a day
• 120 loaves per baker a day
• 7,680 loaves per baker a day

In the aggregate demand and aggregate supply model, which measure does the letter P on the vertical axis stand for?

Select one.

• The economy-wide price level, an index such as the GDP deflator
• The percentage rate of inflation over the past year
• The price charged for one leading product in the economy
• The interest rate commercial banks charge on loans