I. MULTIPLE CHOICE (40 questions 2 points each). Choose the one alternative that best completes the statement or answers the question.

1) All of the following are considered natural resources EXCEPT 1) _______ A) labor. B) a redwood forest. C) gold.D) a coral reef.

2) Which of the following is NOT a macroeconomic statement? 2) _______ A) The U.S. inflation rate was two percent in 2012. B) The price of cell phones decreased by 18 percent last year. C) Gross domestic product in Peru increased 4 percent from 2011 to 2012. D) Aggregate worker productivity decreased by three percent in 2012.

3) GDP understates the value of output produced by an economy because it A) excludes value added from the underground economy, such as tips taken “under the table.” B) includes environmental degradation caused by increased output production. C) excludes the value of the wages and benefits of government employees. D) includes transactions that do not take place in organized markets, such as home-cooked meals.

3) _______

4) Transfer payments are excluded from government purchases in GDP accounting because 4) _______ A) they are a reward to individuals who have been productive their entire lives. B) they are already included as part of investment. C) they are difficult to measure.

D) nothing is being produced in return for the payment.

Use the following information to answer the next several questions:

Scenario 1: Imagine that an economy produces two goods, flashlights and fishing lures. In 2011, the economy produced 70 flashlights and 40 fishing lures, and the prices of flashlights and fishing lures were $5 and $12, respectively. In 2012, the economy produced 85 flashlights and 50 fishing lures, and the prices of flashlights and fishing lures were $7 and $15, respectively.

5) Based on the information in Scenario 1, real GDP in 2012 (in 2011 dollars) in this economy was 5) _______ A) $830. B) $1,025. C) $1,090. D) $1,345.

6) The real-nominal principle can be stated as 6) _______ A) what matters to people is the purchasing power of money or income. B) production generates income. C) only the manufacture of real goods is production. D) only final goods and services should be counted in GDP.

7)WhatdoestheConsumerPriceIndex(CPI)measure? 7)_______ A) the cost of living over time B) prices of durable goods C) the cost of replacing lost items D) prices of non durable goods

8) Which one of the following statements is true of the Consumer Price Index? A) It does not take into account the price of used goods. B) It understates the true rate of inflation. C) It does not take account of the price of imported goods and services.

8) _______

D) It measures changes in prices of a fixed basket of goods. 9) Unemployment that naturally occurs during the normal workings of an economy as people change jobs and move

across the country is called

A) cyclical unemployment. C) frictional unemployment.

9) _______

B) structural unemployment. D) natural unemployment.

10) The economy needs some unemployment to operate efficiently, because without it A) firms will find it difficult to recruit workers, leading to reduced wages and prices. B) workers will find it difficult to find a job, leading to reduced wages and prices. C) workers will find it difficult to find a job, leading to increased wages and prices. D) firms will find it difficult to recruit workers, leading to increased wages and prices.

10) ______

11)RefertoFigure8A.1.Thestockofcapitalnolongerincreasesoncetheeconomyreachespoint 11)______ A) a. B) b. C) c. D) e.

12) Using the rule of 70, if the GDP per capita growth rate in the United States is 4.4 percent, real GDP per capita doubles every 12) ______

A) 6.72 years. B) 15.91 years. C) 44 years. D) 65.6 years.

13) The economic theory that emphasizes the role of difficulties in coordinating economic affairs as a cause of economic fluctuations is known as13) ______

A) real business cycle theory. B) Keynesian economics. C) investment cycle theory. D) technology shock theory.

14) To determine the equilibrium price level and equilibrium level of real GDP, the aggregate demand and aggregate supply must 14) ______

A) intersect. B) be considered separately. C) be disregarded. D) be considered as a multiplier.

15) Which one of the following statements is true? 15) ______ A) In the long run, the level of output is determined by demand. B) In the long run, the aggregate supply curve is horizontal. C) Where aggregate demand and aggregate supply intersect is always the full-employment level of output. D) In the short run, the level of output is determined by demand.

16) In the United States during the 1930s16) ______ A) government spending increased and taxes decreased, resulting in a fiscal expansion. B) government spending decreased and taxes increased, resulting in a fiscal contraction. C) government spending and taxes both increased, resulting in zero net fiscal expansion. D) government spending and taxes both decreased, resulting in a net fiscal contraction.

17) Policies taken to move the economy closer to potential output A) are lagging policies or automatic policies. B) must necessarily be expansionary policies. C) are called stabilization policies.

D) must necessarily be contractionary policies.

18) Automatic stabilizers 18) ______ A) decrease taxes during expansions. B) must be authorized by the President. C) increase welfare payments during expansions. D) minimize fluctuations in the economy.

17) ______

19) A federal budget ________ occurs when the government spends less than it collects in taxes. A)floorB)surplus C)equilibrium D)deficit

19) ______

C = 400 + 0.75(y – T)

I = 150

G = 200

T = 160

X = 80

M = 0.15y

Table 11.1

20) Refer to Table 11.1. What is the value of the marginal propensity to save? A) 0.15 B) 0.25 C) 0.75 D) 0.9

21) The marginal propensity to save (MPS) is the21) ______ A) fraction of income that is saved. B) savings that is not based on the level of income. C) the ratio of additional savings to additional income.

D) the ratio of savings to consumption.

20) ______

22) Let C = 120 + 0.8y. Assume no government or foreign sectors. At the equilibrium level of income, y* = 200, the level of saving is 22) ______

A) -80. B) -30. C) 96. D) 160.

23) Refer to Figure 11.5. An increase in the level of investment is best illustrated by diagram A)A. B)B. C)C. D)D.

24) Financial intermediaries reduce the costs of negotiation by 24) ______ A) gaining expertise in evaluating and monitoring investments. B) pooling funds. C) investing in a large number of projects with independent returns.

D) investing in a small number of projects with independent returns.

23) ______

25)TheQ-theoryofinvestment 25)______ A) suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. B) emphasizes that current investment spending depends positively on the expected future growth of GDP. C) emphasizes the role of real interest rates and taxes. D) links investment spending to stock prices.

26) When a firm has earnings it has not yet paid out to the owners, those earnings are called 26) ______ A) cash reserves. B) retained earnings. C) surplus capital. D) unearned income.

27) When money is accepted as payment for a good or service, it is being used as a A) store of value. B) a mechanism for transforming current purchases into future purchases. C) medium of exchange.

D) unit of account.

28) Which of the following can be used as money? 28) ______ A) cigarettes B) checks C) precious stones D) all of the above

29) In order for a barter transaction to be successful, there must be a 29) ______

27) ______

A) high demand for a certain item. B) market for the goods. C) federal tax law in effect. D) double coincidence of wants.

30) The exchange rate is 30) ______ A) the price at which one currency trades for another currency. B) the rate at which one can translate money into consumption goods. C) the slope of the investment function. D) the rate at which banks can borrow from the Fed.

31) The federal funds rate is the interest rate that 31) ______ A) the Fed pays on bank reserves. B) banks charge each other for borrowed money. C) banks charge the Fed for using their reserves.

D) the Fed charges to banks that borrow from it.

32) An open market sale by the Fed 32) ______ A) increases the money supply and decreases output. B) increases the money supply and increases output. C) decreases the money supply and decreases output. D) decreases the money supply and increases output.

33) Refer to Figure 15.1. At point a 33) ______ A) unemployment is below the natural rate. B) GDP is below potential output. C) unemployment is above the natural rate. D) GDP is equal to potential output.

34) Suppose Venezuela experiences economic growth in 2013, yet its unemployment rate is 15 percent, which is above the South American average. This indicates that Venezuela’s 2013 output is 34) ______

A) above potential output. B) below potential output. C) above actual output. D) below actual output.

35) In the short run 35) ______ A) prices are flexible. B) the level of GDP is determined by the demand and supply for labor, the supply of capital, and technological progress. C) the economy always operates at full employment. D) increases in the money supply increase GDP.

36) If the velocity of money is 2 and nominal GDP is $10 trillion, then the money supply is 36) ______ A)$0.2trillion. B)$5trillion. C)$8trillion. D)$12trillion.

37) To stop hyperinflations, a nation must 37) ______ A) decrease taxes. B) increase spending. C)eliminatethebudgetdeficit. D)increasethebudgetdeficit.

38) If the velocity of money is 6 and the money supply is $4 trillion, then nominal GDP is 38) ______ A) $24 trillion. B) $2 trillion. C) $1.5 trillion. D) $0.667 trillion.

39) Government expenditures are defined as 39) ______ A) the excess of total revenues over total expenditures. B) government spending on goods and services plus transfer payments. C) the excess of total expenditures over total revenues. D) the sum of all past borrowing by the government.

40) The federal government ran a budget deficit of approximately ________ in fiscal year 2010. A) $800 billion B) $250 billion C) $1.3 trillion D) $14 trillion

40) ______

II. SHORT ANSWER. (5 questions 4 points each). Write the paragraph to answer the question.

41) Critically evaluate the statement “Honolulu is an expensive place to live. Therefore the inflation rate must be high in Honolulu.”

42) Why is it difficult to implement fiscal policies?

43) How do automatic stabilizers work to mitigate fluctuations in the level of economic activity?

44) Define “money illusion” and explain its cause.

45) In what ways is the government debt a burden on future generations?