C) Calculate value added at each stage of production

MACROECONOMICS

Mock Exam

April 8, 2005
SECTION I

Time - 70 minutes

Directions: Each of the sixty questions below is followed by five suggested answers. Select the one that is best in each case and then circle around the corresponding letter in your blank of answers. Good Luck!

1. All of the following are a flow except:

(A) Depreciation

(B) Government budget deficit

(C) Saving

(D) Labor supply

(E)Business expenditures on plant and equipment

2. In a closed economy, ceteris paribus, if taxes rise:

(A) Consumption rises.

(B) National saving falls.

(C) Personal saving rises.

(D) Investment rises.

(E) Interest rate rises.

3. Which of the following is not an important variable in growth accounting calculations?

(A) Productivity growth

B) Money supply growth

(C) Labour growth

(D) Capital growth

(E)Output growth

4. If disposable income is 4,000, consumption is 3,500, government spending is 1,000 and tax revenues are 800, national saving equals to:

(A) 300 (B) 500 (C) 700 (D) 1,000 (E) 2,000

5. Which of the following item(s) should not be added to total final production when measuring GDP?

I. The new car sold by mother to her son.

II. The country house build by a carpenter for his family.

III. The gas bought by the driver of a taxicab.

IV. The oil bought to heat your house.

(A) Only I and II

(B) Only I, II and III

(C) Only I and III

(D) Only I, II and IV

(E) I, II, III and IV.

6. To avoid double counting when the GDP is estimated, economists

(A) Use the GDP deflator

(B) Calculate the GDP at factor costs

C) Calculate value added at each stage of production

(D) Count goods for sale at retailed shops only

(E) All of the above

7. Which of the following is considered an imputed value in the GDP?

(A) The salary paid to a federal judge.

(B) The value of housing services enjoyed by homeowners.

(C) The value of automobile services enjoyed by car owners.

(D) The value-added of a shipping company that transports goods from the factory to retail stores.

(E) All of the above.

8. In which case is total expenditure in an economy not equal to total income?

(A) If total saving is larger than total investment.

(B) If net exports are not zero.

(C) If inventory investment is negative.

(D) If there is budget deficit.

(E) None of the above - they are always equal.

9. If there is an increase in the price of apples which causes consumers to purchase fewer pounds of apples and more pounds of oranges, the CPI will suffer from

(A) Base year bias.

(B) Substitution bias.

(C) Bias due to the introduction of new goods.

(D) Bias due to unmeasured quality change.

(E) None of the above.

10. Investors A, B and C each have $1000 to invest in the bond market. Investors A, B, and C believe the long-run normal rate of interest is 12%, 8%, and 7%, respectively. If the current market rate of interest is 9%, then

(A) Investor A will purchase bonds.

(B) Investors A and B will purchase bonds.

(C) Investors B and C will purchase bonds.

(D) Investor B will purchase bonds.

(E) Investors A, B, and C hold money for speculative purposes.

11. When aggregate demand exceeds output

(A) Injections exceeds leakages

(B) A recessionary gap exists

(C) An inflationary gap exists

(D) Leakages exceeds injections

(E) Keynes would call for a decrease in government spending

12. According to Keynesian theory, decreasing taxes and government spending by the same amount will most likely change consumption expenditures and investment in which of the following ways?

Consumption ExpendituresInvestmentUnemployment

(A) Decrease Increase Increase

(B) Decrease No change Increase

(C) Increase Decrease Decrease

(D) Decrease No change Decrease

(E) No change No change No change

13. In the economy with trade balance a reduction in planned invest­ment would probably lead to

(A) A decline in output and a trade surplus

(B) A decline in output and a trade deficit

(C) No change in output and a trade balance

(D) A decrease in output and no change in trade balance

(E) An increase in output and a trade deficit

14. The effect of a government surplus upon the equilibrium level of GDP is substantially the same as an increase in:

(A) Net exports

(B) Unplanned inventory investment

(C) Consumption

(D) Saving

(E) Fixed investment

15. In a closed economy with Keynesian unemployment and with fixed demand for investment and government expenditures a fall in the rate of the proportional tax will bring to:

(A)An increase in output and either increase or decrease in tax receipts;

(B) A decrease in output and a fall in tax receipts;

(C) An increase in output and no change in tax receipts;

(D) A decrease in output;

(E) None of the above.

16. The conversion of a barter economy to one that uses money increases efficiency by reducing

(A)Prices

(B) The need to specialize

(C) The need to employ team production methods

(D)Transactions costs

(E) All of the above

17. A difference between Ml and M2 is that

(A) Ml is a first mortgage and M2 is a second mortgage

(B) M2 is Ml plus assets that are more liquid

(C) M2 includes savings deposits

(D) M2 is always double Ml

(E) All of the above

18. Which of the following portfolio allocation decisions represents the best individual response to an increase in the interest rate on non-monetary assets?

(A) Sell some stocks and use the money to buy bonds.

(B) Sell some bonds and use the money to buy stocks.

(C) Reduce your assets and increase your liabilities.

(D) Trade some money for non-monetary assets.

(E) Sell some land and use the money to buy stocks and bonds.

19. Which of the following is most likely to increase if the public decides to increase its holdings of currency?

(A) The price level

(B) The interest rate

(C) Disposable personal income

(D) Employment

(E) Personal wealth

20. When the banking system receives $400 in additional reserves and the reserve requirement is 0.25, maximum check-writing deposit expansion is

(A) $2000, (B) $1600 (C) $1200, (D) $375, (E) $100.

21. The less sensitive money demand is to changes in the interest rate, the more an increase in the money stock will

(A) Increase aggregate demand and raise interest rates

(B) Increase aggregate demand and lower interest rates

(C) Decrease aggregate demand and lower interest rates

(D) Decrease aggregate demand and raise interest rates

(E) none of the above

22. If the government simultaneously engages in expansionary monetary and a contractionary fiscal policy, which of the following is the likely effect on interest rates and unemployment

Interest ratesUnemployment

(A) Increase Might either increase or decrease

(B) Increase Decrease

(C) Decrease Might either increase or decrease

(D) Might either increase or decrease Decrease

(E) Might either increase or decrease Increase

23. If the public's demand for currency decreased relative to its demand for deposits, the:

(A) Reserve requirement ratio would decrease.

(B) Currency-deposit ratio would increase.

(C) Reserve-deposit ratio would increase.

(D) Money multiplier would increase.

(E) Money multiplier would decrease.

24. When the Central Bank makes an open-market sale, it:

(A) Increases the money multiplier.

(B) Increases the currency to deposit ratio.

(C) Increases the monetary base.

(D) Decreases the monetary base.

(E) Decreases the money multiplier.

25. Which of the following policy combinations is most likely to cure a severe recession?

Open-Market OperationsTaxesDiscount Rate

(A) Buy securities Increase Decrease

(B) Buy securities Decrease Decrease

(C) Buy securities Decrease Increase

(D) Sell securities Decrease Decrease

(E) Sell securities Increase Increase

26. The aggregate demand curve is

(A) A horizontal summation of market demand curves

(B) A horizontal summation of firm demand curves

(C) A simple aggregation of demand curves for individual goods

(D) A vertical summation of firm demand curves

(E) Not found by adding product demand curves horizontally or vertically

27. Which of the following will cause the aggre­gate demand curve to shift to the left?

(A) Expectations of deficit of goods in the future

(B) A decrease in income taxes

(C) An increase in government spending

(D) A decrease in foreign income

(E) An expected inflation

28. According to the imperfect-information model, when the price level falls and the producer did not expect it to fall, the producer:

(A) Increases production.

(B) Does not change production.

(C) Decreases production.

(D) Hires more workers.

(E) Decreases nominal wages.

29. Which of the following will shift the aggregate supply curve to the right?

(A) A successful wage push by workers

(B) Expectations of a higher aggregate price level

(C) An increase in the availability of education and training

(D) An increase in the money supply

(E) All of the above

30. An aggregate supply curve may be horizontal over some range because within this range

(A) A higher price leads to higher interest rates, which reduce the money supply and consumer spending

(B) Changes in aggregate price level do not induce substitution

(C) Output can not be increased unless prices and wages increase

(D) Resources are underemployed and an increase in demand will be satisfied without any pressure on the price level

(E) Rigid prices prevent employment from fluctuating

31. Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If the policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

(A) Prices rise, output is unchanged from its initial value.

(B) Prices fall, output is unchanged from its initial value.

(C) Output rises, prices are unchanged from the initial value.

(D)Output falls, prices are unchanged from the initial value.

(E) Output and the price level are unchanged from their initial values.

32. An increase in government spending in the long run

(A) Causes higher interest rates, which change the composition of output

(B) Causes the nominal money supply to increase, which changes the composition of output

(C) Causes the real money supply to increase, which changes the composition of output

(D) Has no effect on the real money supply or the composition of output

(E) Has no effect on the rate of interest or the composition of output

33. Suppose that you purchase a new home for $150,000 and move in. In the national income accounts:

(A) Consumption expenditures rise by $150,000.

(B) Consumption expenditures rise by $150,000 divided by the number of years you expect to live in

the house.

(C) Consumption expenditures rise by the imputed rent on the house, which is equal to what the

market rent would be if it were rented

(D) Consumption expenditures are unchanged

(E) Not enough information to answer

34. Which of the following is not a type of investment?

(A) Construction of new office

(B) Inventory reduction

(C) Housing construction

(D) Purchase of a common stock

(E) All of the above are considered investment

35. How is the purchase by a U.S. citizen of a $25,000 Mazda, which was produced in Japan, recorded in the U.S. GDP accounts?

(A) Net exports decreases by $25,000.

(B) Investment increases by $25,000 and net exports increases by $25,000.

(C) Consumption increases by $25,000 and net exports decreases by $25,000.

(D) Net exports increases by $25,000.

(E) There is no impact because this transaction does not involve domestic production.

36. When a suit is sewed but put away for later sale, this act is called:

(A) Waste.

(B) Consumption.

(C) Saving.

(D) Dissaving.

(E) Investment.

37. The GDP Deflator differs from the CPI in that the GDP Deflator

(A) Is thought to slightly overestimate the inflation rate

(B) Uses base year quantities in its calculations

(C) Incorporates both current year prices and base year prices

(D) Incorporates current year quantities in its calculations

(E) Is the favored price index of the U.S. government

38. Assume that households experience a reduction in confidence that causes a reduction in autonomous consumption. This will cause

(A)an increase in the level of saving

(B) no change in output and no change in the final level of consumption

(C) a reduction in output and a reduction in the level of saving

(D)no change in output if the level of saving does not change

(E) no change in the level of saving

39. Kate would spend $50 per week even if she made no income. Her weekly income is $1,000 and her marginal propensity to consume is 0.6. How much does Kate save per week?

(A) $500; (B) $350; (C) $530; (D)$50; (E) $300

40. When aggregate demand is greater than output, there is unplanned

(A) Government purchases

(B) Inventory reduction

(C) Saving

(D) Consumption

(E) All of the above.

41. When planned saving equals -$50+0.20Yd and planned investment is $60, the

equilibrium level of income is

(A) $110 (B) $300 (C) $550 (D) $1100 (E) $2600.

42. When aggregate supply is positively sloped and the marginal propensity to consume is 0.80, a $20 increase in investment spending will result in

(A) A $20 increase in the equilibrium level of output,

(B) A $80 increase in the equilibrium level of output,

(C) A $100 increase in the equilibrium level of output,

(D) An increase in the equilibrium level of output greater than $100,

(E)An increase in the equilibrium level of output less than $100.

43. When equilibrium output exceeds full-employment output in the aggregate expenditure model/Keynesian cross,

(A) Injections exceed leakages

(B) A recessionary gap exists

(C) An inflationary gap exists

(D) Leakages exceed injections

(E) Keynes would call for an increase in government spending

44. Assume national output is at the full-employment level of output and the government budget is balanced. Under the lump-sum tax system in the absence of any policy measures taken, a reduction in business confidence would probably lead to

(A) A decline in output and a government budget deficit

(B) A decline in output and a government budget surplus

(C) A decline in output and no change in government budget

(D) An increase in output and a government budget deficit

(E) An increase in output and a government budget surplus

45. Built-in stabilizers are

(A) Discretionary fiscal actions available to the President,

(B) Increased government spending on public works projects,

(C) A change in the income tax rate,

(D) Changes in net tax revenues that are the result of a change in the level of economic activity

(E) A change in the unemployment insurance system

46. If the MPC = 0.8 and there is a $0.375 tax levied on each dollar of income, a $40 increase in government purchases will cause the budget surplus to

(A) Increase by $10

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