ECO 561 FINAL EXAM 100%
1 In the theory of comparative advantage, a good should be produced in that nation where:
the production possibilities line lies further to the right than the trading possibilities line
its cost is least in terms of alternative goods that might otherwise be produced
its absolute cost in terms of real resources used is least
its absolute money cost of production is least
2 The simple circular flow model shows that:
businesses are on the selling side of both product and resource markets.
businesses are on the buying side of the product market and on the selling side of the resource market.
households are on the selling side of the resource market and on the buying side of the product market.
households are on the buying side of both product and resource markets.
3 Suppose you have a limited money income and you are purchasing products A and B, whose prices happen to be the same. To maximize your utility, you should purchase A and B in such amounts that:
their total utilities are the same
their marginal and total utilities are proportionate
the income and substitution effects associated with each are equal
their marginal utilities are the same
4 Contractionary fiscal policy is so named because it:
is expressly designed to expand real GDP
involves a contraction of the nation’s money supply
necessarily reduces the size of government
is aimed at reducing aggregate demand and thus achieving price stability
5 If the Federal Reserve System buys government securities from commercial banks and the public:
the money supply will contract
commercial bank reserves will decline
commercial bank reserves will be unaffected
it will be easier to obtain loans at commercial banks
6 In order for mutually beneficial trade to occur between two otherwise isolated nations:
each nation must face constant costs in the production of the good it exports
one nation’s production must be labor-intensive while the other nation’s production is capitalintensive
each nation must be able to produce at least one good relatively cheaper than the other
each nation must be able to produce at least one good absolutely cheaper than the other
7 Countercyclical discretionary fiscal policy calls for:
surpluses during both recessions and periods of demand-pull inflation
deficits during both recessions and periods of demand-pull inflation
surpluses during recessions and deficits during periods of demand-pull inflation
deficits during recessions and surpluses during periods of demand-pull inflation
8 The two basic markets shown by the simple circular flow model are:
household and business
capital goods and consumer goods
product and resource
free and controlled
9 A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from:
high entry barriers
the likelihood of collusion
10 Macroeconomics approaches the study of economics from the viewpoint of:
the entire economy
the operation of specific product and resource markets
11 Mrs. Arnold is spending all her money income by buying bottles of soda and bags of pretzels in such amounts that the marginal utility of the last bottle is 60 utils and the marginal utility of the last bag is 30 utils. The prices of soda and pretzels are $.60 per bottle and $.40 per bag respectively. It can be concluded that:
the two commodities are substitute goods
Mrs. Arnold should spend more on pretzels and less on soda
Mrs. Arnold should spend more on soda and less on pretzels
Mrs. Arnold is buying soda and pretzels in the utility-maximizing amounts
12 Which of the following will generate a demand for country X’s currency in the foreign exchange market?
The desire of foreigners to buy stocks and bonds of firms in country X
Travel by citizens of country X in other countries
Charitable contributions by country X’s citizens to citizens of developing nations
The imports of country X
13 Research for industrially advanced countries indicates that:
there is no relationship between the degree of independence of a country’s central bank and its inflation rate.
the more independent the central bank, the higher the average annual rate of unemployment.
the more independent the central bank, the lower the average annual rate of inflation
the more independent the central bank, the higher the average annual rate of inflation
14 Which of the following statements best describes the 12 Federal Reserve Banks?
They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry.
They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.
They are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities.
They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners.
15 Which of the following have substantially equivalent effects on a nation’s volume of exports and imports?
Exchange rate depreciation and domestic inflation
Exchange rate appreciation and a decrease in the domestic supply of money
Exchange rate depreciation and domestic deflation
Exchange rate appreciation and domestic deflation
16 The term “recession” describes a situation where:
an economy’s ability to produce is destroyed
government takes a less active role in economic matters
output and living standards decline
inflation rates exceed normal levels
17 Buyers will opt out of markets in which:
there are only foreign sellers
there are significant negative externalities
standardized products are being produced
there is inadequate information about sellers and their products
18 The fact that international specialization and trade based on comparative advantage can increase world output is demonstrated by the reality that:
a nation’s production possibilities and trading possibilities lines coincide
a nation’s trading possibilities line lies to the right of its production possibilities line
the production possibilities curves of any two nations are identical
a nation’s production possibilities line lies to the right of its trading possibilities line
19 As output increases, total variable cost:
increases at a constant rate
increases more rapidly than does total cost
increases continuously at a decreasing rate
increases at a decreasing rate and then at an increasing rate
20 Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:
directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.
not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million.
directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million.
directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million.
21 Why are economists concerned about inflation?
Inflation generally causes unemployment rates to rise
Real GDP is necessarily falling when there is inflation
Inflation increases the value of peoples’ saving and encourages overspending on goods and services
Inflation lowers the standard of living for people whose income does not increase as fast as the price level
22 If an unintended increase in business inventories occurs at some level of GDP, then GDP:
is too high for equilibrium
may be either above or below the equilibrium output
entails a rate of aggregate expenditures in excess of the rate of aggregate production
is too low for equilibrium
23 If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal and real GDP?
Nominal and real GDP would both be unchanged
Nominal and real GDP would both rise
Nominal GDP would rise, but real GDP would be unchanged
Real GDP would rise, but nominal GDP would be unchanged
24 Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates:
the adverse selection problem
the moral hazard problem
the special interest effect
25 All else equal, a large decline in the real interest rate will shift the:
investment demand curve rightward
investment schedule upward
investment schedule downward
investment demand curve leftward
26 Normal profit is:
the average profitability of an industry over the preceding 10 years
determined by subtracting explicit costs from total revenue
determined by subtracting implicit costs from total revenue
the return to the entrepreneur when economic profits are zero
27 The business cycle depicts:
the evolution of technology over time
fluctuations in the general price level
the phases a business goes through from when it first opens to when it finally closes
short-run fluctuations in output and employment
28 The primary gain from international trade is:
more goods than would be attainable through domestic production alone
increased employment in the domestic import sector
increased employment in the domestic export sector
29 Pure monopolists may obtain economic profits in the long run because:
marginal revenue is constant as sales increase
of barriers to entry
of rising average fixed costs
30 Two major virtues of the market system are that it:
results in price level stability and a fair personal distribution of income
allocates resources efficiently and allows economic freedom
eliminates discrimination and minimizes environmental pollution
results in an equitable personal distribution of income and always maintains full employment