520--
Final Exam
Professor John Blair
1		When output is below potential, policies maker would be advised to
	A)		Cut taxes or increase government spending.
	B)		Increase the interest rate by law.
	C)		Decrease bank excess reserves.
	D)		Find ways to shift the AS curve to the left.
2.		Crowding out will be more likely to occur when:
	A)		interest rates fall due to weak investor confidence.
	B)		interest rates fall when the budget deficit increases.
	C)		When business desire to make investments is strong.
	D)		Business investment rises as interest rates rise.

3.		One reason the budget does not balance over the business cycle is that:
	A)		“Baby boomers” will take a larger percent of the budget.
	B)		The social imbalance theory is believed by the majority.
	C)		Politicians like to increase spending and decrease taxes to help get reelected.
	D)		The number of recession years is greater than the number of expansion years.

4.		Using monetary policy to stabilize the economy is difficult for which of the following reasons?
	A)		Potential income is known but actual output is unknown.
	B)		Political and institutional factors make it difficult to get the federal budget increased.
	C)		Fiscal policy can be implemented too quickly.
	D)		Low interest rates do not force investors to invest.

5.		A motivation for reducing trade barriers is that:
	A)		Trade can potentially make all of the participants better off.
	B)		Trade can make one country better off, but will make the other worse off.
	C)		Trade doesn't make any country better off, but it does create more jobs.
	D)		legally-binding treaties between nations require that they engage in trade with each other.

6.		What is the principle of comparative advantage?
	A)		As long as the relative opportunity costs of producing goods differ among countries, there no gains from trade possible
	B)		As long as the relative opportunity costs of producing goods (what must be given up in one good in order to get another good) is the same among countries, there significant gains from trade.
	C)		As long as the relative opportunity costs of producing goods (what must be given up in one good in order to get another good) differ among countries, there can be gains trade.
	D)		As long as the relative opportunity costs of resources differ among countries, there seldom potential gains from trade.

7. Suppose that Country A can produce product X at a cost of 4 units of resources and Y at a cost of 8 units of resources. Country B can produce X at a cost of 8 resources and Y at a cost of 24 resources. Under these conditions:

A) Country A has a comparative advantage in Y but B has a comparative advantage in X

B) Country A can produce both goods cheaper than B so trade will not be beneficial

C) Country B can produce both goods cheaper than A, so trade will not be possible

D) Country B has a comparative advantage in production on Y.

8. The idea of competitive advantage differs from comparative advantage in that

A) Comparative advantage is concerned only with land

B) Competitive advantage in concerned only with being the low cost producer

C) Comparative advantage is concerned only with absolute cost differences

D) Competitive advantage is concerned with dynamic processes as well as relative costs

12.		How do quotas differ from tariffs?
	A)		Quotas can reduce the volume of imports, tariffs cannot.
	B)		Tariffs increase the price of imports, quotas cannot.
	C)		Tariffs generate tax revenue, quotas cannot.
	D)		Quotas reduce consumer surplus, tariffs do not.
13.		Which of the following is a variant of the infant industry argument for tariffs?
	A)		An industry needs some protection in order to get started just like an infant.
	B)		Tariffs protect national security so we are protected.
	C)		Tariffs and quotas make the economy more efficient.
	D)		Tariffs may not be fair but they are efficient.

14.		When the difference between exports of goods and services and imports of goods and services is negative it is called the:
	A)			Capital account balance deficit.
	B)			Budget balance.
	C)			Balance of payments deficit.
	D)			Balance of trade deficit.
			15.			Imagine the supply and demand for Euros. (Value of Euros in dollars). A decrease in European income would:
					A)		shift the supply of Euros in (left) and cause the Euro to gain value.
					B)		shift the supply of Euros out (right) and cause the Euro to lose value.
					C)		shift the demand for Euros out and cause the Euro to gain value.
					D)		shift the demand for Euros in and cause the Euro to lose value.

16.		Refer to the graph above. A decrease in incomes in the U.S. would:
	A)		shift demand for Euros out (right), causing an appreciation of the Euro.
	B)		shift the demand for Euros in (left), causing a depreciation of the Euro.
	C)		shift supply of Euros in, causing an appreciation of the Euro.
	D)		shift S1 out, causing a depreciation of the Euro.

17.		Refer to the graph above. A decrease in the European price level would:
	A)		shift the demand or Euros out and the supply of Euros in, causing an appreciation(value increase) of the Euro.
	B)		shift demand for Euros in and the supply of Euros out, causing a depreciation (value decrease) of the Euro.
	C)		shift the demand for Euros out and the supply of Euros out, causing a depreciation of the Euro.
	D)		shift the demand for Euros in and the supply of Euros in, causing an appreciation of the Euro.

18. One reason the negative balance of trade is a problem for the United States today is that:

A) Countries will not continue to provide a greater value of goods and services to the United States than is received by the United States unless they receive something else in return.

B) The productive ability of the United States to produce goods and services will decline

C) The supply of productive resources will fall

D) Law prevents a deficit of more than 2.5 billion dollars

19.		Other things equal, a reduction in European interest rates relative to U.S. interest rates should __________ the U.S. capital account and __________ the dollar:
	A)		improve; weaken.
	B)		improve; strengthen.
	C)		worsen; weaken.
	D)		worsen; strengthen.

20.		Exchange rate expectations:
	A)		do not affect exchange rates in the short run or the long run.
	B)		affect exchange rates primarily in the short run.
	C)		affect exchanges rates primarily in the long run.
	D)		affect exchange rates only in the very long run.

21. The equation of exchange is:

a. the money supply is part of real GDP

b. MP= PQ

c. MV = PQ

d. Velocity and prices are fixed.

22.		An exchange rate is:
	A)		the rate the Fed charges commercial banks for loans.
	B)		the rate the Fed charges individuals for loans.
	C)		the rate at which one country's currency can be exchanged for another country's currency.
	D)		the speed at which exchange occurs.

23.		The higher the value of the dollar:
	A)		the lower is U.S. inflation and the greater is the trade deficit.
	B)		the lower is U. S. inflation and the smaller is the trade deficit.
	C)		the higher is U.S. inflation and the greater is the trade deficit.
	D)		the higher is U. S. inflation and the smaller is the trade deficit.

24.		A balance of trade deficit tends to exert:
	A)		An expansionary effect on the economy.
	B)		A concretionary effect on the economy.
	C)		When a country's exchange rate is too low.
	D)		When a country's imports are too expensive.

25.		Expansionary fiscal policy in or near stage 3 tends to:
	A)		Decrease the price of imports.
	B)		Increase the price of exports.
	C)		Increase the price of both exports and imports.
	D)		Decrease the price of exports and increase the price of imports.

27. Under which circumstance is a deficit most likely to cause crowding out?

A. a recession B. “normal times” C. a period of full employment D. none of above

28. Among other things, fine tuning is difficult because

A) There are many lags in the process

B) Politicians like to keep the economy on an even keel

C) Statistics on unemployment and inflation are very accurate

D) All of the above

30. Lower tariffs, reduced quotas and freer international trade tend to

A) hurt many producers

B) create lower prices

C) result in a bigger economic pie

D) all of the above can be true.

31. Automatic stabilizers

A) cause government spending to increase during inflation

B) require the president’s signature

C) cause counter cyclical fiscal policy

D) are intended to alter the exchange rate

32. A government deficit is most likely to cause inflation if

A) it is small

B) it occurs during a recession

C) it is spent on military

D) it occurs when the economy is at full employment

33. According to Keynes,

A) The government should not run a deficit

B) The government should intervene in the economy when “laissez faire” fails

C) Markets always fail

D) “Pure” consumption spending is not influenced by income.

34. The AD curve is equal to:

A) C + G – I +(X-M) C) C + I -G – (X-M)

B) C+I+G+X-M D) all of the above.

35. The social imbalance theory states that:

A) more spending will stimulate the economy

B) too much is spent on private goods (partly because of advertising) and too little on priorities that the government can best provide

C) too little is spent on personal services and too much is spent on “things” (due to advertising).

D) other things equal the larger the deficit, the smaller the spending

36. If a bank acquires excess reserves and lends them out, the money supply:

A. does not increase.

B. decreases.

C increases.

D may increase or decrease depending on how the loan is used.

37. Supply side economics suggests that:

A . Increases in the aggregate supply curve can be achieved by government actions or inactions

B . The exchange rate will cause the number of workers to increase

C . Increases in the value of the dollar will reduce imports

D . Increases in the value of the dollar will decrease imports

38. According to Schumpeter the biggest danger to capitalism is

A . The ideas of Marx

B . The ideas of Keynes

C . The bureaucratization of the entrepreneurial role

D . The increasing scope of government

39. Which of the following best describes the monetary policy chain?

A . Fed sales bonds®I → higher bond price and ¯i® GDP.

B . Fed purchase of bonds ®i and ¯ bond prices ® I ® GDP.

C . Fed sales banks ® i®¯ Iinterest rates→ loans → I(multiplier)®¯GDP.

D . Fed purchase of bonds® ¯i ® loans →I (multiplier) → GDP.

Answer questions 40 -43 based on the following answers:

A . Equilibrium price falls, and quantity sold (and purchased) increases.

B . Equilibrium price falls, and quantity sold (and purchased) decreases.

C . Equilibrium price increases, and quantity sold (and purchased) increases.

D. Equilibrium price increases, and quantity sold (and purchased) decreases.

E . No possible effect

40. The intended effect of paying a sports star to wear a brand of athletic wear:

41. A production process is developed to produce bicycles cheaper without changing quality:

42. A “hidden camera” shows pictures of rats running around the tables at a local Taco Bell restaurant and that makes the news:

43. A new government regulation requires that only low sulfur coal be used in the production of electricity:

44. According to followers of Adam Smith, which of the following would not contribute towards economic progress?

A) pursuit of self interest

B) division of labor

C) capital accumulation

D) government direction of the economy.

45. Joseph Schumpeter felt that the role of _______ was the key to capitalistic success

A) capital

B) entrepreneurship

C) labor

D) land (natural resources)

46. According to Pareto (Pareto’s Law) a change is unambiguously good is and only if:

A. everyone is better off and no one is worse off

B. the greatest good for the greatest number is achieved

C. a majority is made better off

D. at least one person is made better off and absolutely no one is worse off