ECO 372 Final Exam Guide 2018
1. Martha lends $200 to a friend who promises to return it after a year. Instead of lending it to her friend, Martha could have put the money in a bank where she could have earned an interest rate of 2 percent per annum. Martha’s opportunity cost of lending the money is _____.
2. The exhibit given below shows the short-run aggregate demand and supply curves in an economy, AD1 and AS1, and the long-run aggregate supply curve, LRAS. The economy was initially in equilibrium when there was a decrease in aggregate demand, causing a shift of the aggregate demand curve from AD1 to AD2. Which of the following is true in this case?
The economy will move from point B to point A in the short run and then to point C in the long run
The economy will move from point C to point B in the short run and then eventually to point A
The economy will move from point D to point A in the short run and then to point C in the long run
The economy will move from point D to point C in the long run.
3. Suppose an economy is in long-run equilibrium. An increase in consumption expenditure will:
shift the short-run aggregate supply curve rightward and increase both the price level and real output in the long run.
decrease both the price level and real gross domestic product in the long run.
increase the price level in the long run but have no effect on real gross domestic product.
shift the aggregate demand curve rightward and increase the real output in the long run.
4. In the long run, a higher saving rate:
always leads to a higher level of productivity because of increasing returns to scale.
does not lead to a higher level of income because of deterioration in labor productivity.
always leads to a higher growth rate of output because of improvement in the stock of human capital.
does not always lead to a higher growth rate of output because of diminishing returns to capital.
5. Suppose the net foreign investment in Italy is positive. This implies that
Italians are buying more foreign assets than foreigners are buying Italian assets
foreigners are buying relatively more Italian assets.
Italy is experiencing a net capital inflow
foreign direct investment in Italy is higher than foreign portfolio investment in the country.
6. The circular-flow diagram shows that
firms receive wages and profits from households in the products market
households sell the factors of production to firms in the inputs market
households supply resources to firms in the products market
firms supply labor and other resources to the government in the factor market.
7. The table given below shows the total amount of spending in the country of Mesodonia. Mesodonia’s gross domestic product is:
8. The country of Merilya exported goods and services worth $1.2 million and imported goods and services worth $2.7 million. The net exports of the country was _____.
$2 million, and it had a trade surplus
−$3.9 million, and it had a trade deficit
$3.9 million, and it had a trade surplus
−$1.5 million, and it had a trade deficit
9. Suppose the Fed purchases government bonds through open-market operations. All other things remaining equal, this is likely to
decrease the price level and increase the real wealth of consumers.
decrease the price level and make domestic goods less expensive relative to foreign goods.
increase the price level and eventually decrease the interest rate and investment spending.
increase the price level and eventually decrease the demand for money as well as goods and services.
10. A rise in the price of bacon from $14 per pound to $16 per pound will reduce the purchasing power of the dollar by
0.55 pounds of bacons
0.06 pounds of bacon
5 pounds of bacon
2 pounds of bacon.
11. A difference between commodity money and fiat money is that:
fiat money cannot be used as a unit of account
commodity money is used in a barter economy
fiat money does not have any intrinsic value.
commodity money cannot be used as a unit of account.
12. Suppose the net capital outflow from Zenovia is negative. This implies that
the real interest rate in Zenovia is high
the real interest rate in foreign countries is higher than in Zenovia
foreigners are not interested in buying assets in Zenovia
the citizens of Zenovia are investing more in foreign assets than foreigners are investing in assets in Zenovia.
13. There is an increase in human capital when
Shiroh persuades the management of her company to offer more perks to
Sue rents a laser printer to teach her employees how to fix
Samantha receives training in quality management after joining a new firm
Susie puts in more than 8 hours of work at her workplace every day
14. After retirement, Molly deposits $500,000 in a local bank in Merrina. At an interest rate of 4 percent, she will receive approximately _____ after 3 years.
15. Ruth wants to calculate the present value of a sum of money that she will receive after the demise of her grandparents. To calculate the present value, she should use the:
16. The buyers and sellers in the country of Perylia use corn as a medium of exchange. This means that
Perylia uses commodity money
corn cannot be used as a store of value or as a unit of account in Perylia
Perylia uses fiat money
corn can be used as a store of value but not as a unit of account in Perylia
17. Scarcity occurs because of
the excess of quantity supplied over quantity demanded
overutilization of labor
limited human needs and wants
the limited supply of resources.
18. The Phillips curve shows:
the negative relationship between inflation and unemployment.
the positive relationship between the interest rate and the supply of money
the positive relationship between the price level and aggregate supply
the negative relationship between the interest rate and the demand for money
19. Ephlon Inc., an Italian bike manufacturer, opens a factory in the United States. This is an example of:
the accumulation of human capital
the catch-up effect
a foreign direct investment
a foreign portfolio investment.
20. Jack is an out-of-work sculptor. He has been looking for a job for the last two years. Unable to find any, he has given up his job search. Which of the following is true in this case?
This is an example of frictional unemployment
This is an example of structural unemployment
He is a part of the unemployed labor force.
He is a discouraged worker and will not be included in the calculation of the unemployment rate.
21. Suppose the central bank of a country undertakes an expansionary monetary policy. Which of the following is most likely to be the effect of such a policy, all other things remaining unchanged?
An increase in the price level that reduces the real value of households’ money holdings and stimulates consumer spending
An increase in the price level that stimulates spending on net exports and increases the demand for money
A decrease in the price level that reduces the amount of money that people want to hold and decreases the interest rate.
A decrease in the price level that reduces the interest rate and lowers the real value of the domestic currency foreign-exchange market.
22. Following the unexpected good performance of Leathex, all its employees were given a one-time bonus. This consequently led to a rightward shift of the demand curve for shoes manufactured by the company and a leftward shift of the demand curve for socks. This shows that shoes are:
23. A higher interest rate in a country:
encourages citizens to buy foreign assets.
makes domestic bonds less attractive to foreigners
lowers saving in the country and decreases the quantity of loanable funds supplied
discourages investment and decreases the quantity of loanable funds demanded
24. If the price level in an economy is 120 and the equilibrium price level is 100, _____
people will want to hold more money than is supplied by the central bank
the demand for money curve will shift to the left
the purchasing power of money will increase
the supply of money is likely to exceed the demand for money
25. A recent survey showed the health benefits of cranberry juice for treating heart and other respiratory disorders. The exhibit below shows that the initial demand curve for cranberry juice is D1. Which of the following is likely to be a consequence of the publication of the survey?
The demand curve will shift from D1 to D3.
There will be a movement from point A to point C on D1.
The demand curve will shift from D1 to D2.
There will be a movement from point A to point B on D1.
26. Keynesian economists believe that when an economy is in a recession, the government should:
decrease tax rates rather than increase government spending because households always view such tax cuts as permanent and increase their current consumption
increase its purchases rather than decrease taxes because households save a part of the increase in their income as a result of tax cuts
increase the money supply in the economy so that interest rates decline, reducing the cost of borrowing to finance new investment projects
increase the money supply in the economy so that an excess supply of money can induce households to increase their consumption expenditure
27. The Marions purchased a Persian rug worth $5,000 from an Iranian textile mill. Everything else remaining unchanged, this will:
decrease the consumption expenditure in the domestic country by $5,000
decrease the net imports of the domestic country by $5,000
reduce the net exports of the domestic country by $5,000
increase the gross domestic product of the domestic country by $5,000
28. As more capital is used in the production process, the amount of other inputs being fixed, the production function becomes:
flat because the extra output produced from an additional unit of capital decreases.
steep because the extra output produced from an additional unit of capital decreases.
steep because the extra output produced from an additional unit of capital increases.
flat because the extra output produced from an additional unit of capital increases
29. The natural rate of unemployment in a country is 4 percent. This implies that:
the country has an unemployment rate of 4 percent in the short run
the country has a 4 percent unemployment rate when the labor market is in equilibrium.
4 percent of the labor force is unemployed at any given point of time
the unemployment rate is constant at 4 percent over time
30. Which of the following is true according to the circular-flow diagram?
Firms receive wages, rent, and profit from the government
Firms receive income from households
Households receive revenue from the government
Households receive wages, rent, and profit from firms.