Econ 2 Final

Front 1

The period of modern economic growth, in which the economy grew faster than the population, began with what event

A. Middle Ages. B. Renaissance. C. French Revolution. D. Industrial Revolution.

Back 1

D. Industrial Revolution

Front 2

What is the ideal long term growth rate for the United States based on its historic average?
A. 1%. B. 3%. C. 5%. D. 6%.

Back 2

B. 3%

Front 3

If one country has a growth rate that is one percent larger than another country that has an equally large economy, over the
course of decades that small difference will result in the country having a much larger economy because of …
A. Sum of the difference. B. Exponenting. C. Compounding. D. Rounding.

Back 3

C. Compounding.

Front 4

4._____ Based on the production function [ Y = f(L,K)], if the amount of capital increases, then the economy can produce ____
output with the ____ amount of labor.
A. Same, same. B. Less, same. C. More, same. D. Less, less.

Back 4

C. More, same

Front 5

5._____ In the production function [ Y = f(L,K)], what is denoted by “f”?
A. Technology or the production process. C. Competitive impact of the market.
B. Cultural willingness to change. D. Preferences for alternative technology.

Back 5

A. Technology or the production process.

Front 6

6._____ The Solow Growth model is shown in the diagram to the right. What economic idea is
demonstrated by increasing the amount of capital available to workers?
A. Increasing returns. C. Economies of scale.
B. Diminishing returns. D. Diseconomies of scale

Back 6

B. Diminishing returns.

Front 7

7._____ The Solow or the Neoclassical Growth model explains why China has a faster growth
rate than the United States and that, in the long run, level of Chinese economic development will
______________ the level of the United States.
A. Surpass. B. Converge with. C. Fall short of. D. Not be comparable to

Back 7

B. Converge with.

Front 8

8._____ According to the Solow or Classical or the Neoclassical Growth model, why will capital poor (developing) countries attract
investment from capital rich (developed) countries?
A. Developing countries have lower rates of taxation than developed countries.
B. Developing countries have lower levels of legal regulation than developed countries.
C. Developing countries have higher levels of accessible natural resources than developed countries.
D. Developing countries have higher rate of rates of growth than developed countries.

Back 8

D. Developing countries have higher rate of rates of growth than developed countries

Front 9

9._____ Economists (including Robert Solow) consider _______ to be the largest factor in driving growth.
A. Capital. B. Labor. C. Technological change. D. Cultural willingness to adapt.

Back 9

C. Technological change.

Front 10

10._____ The Solow growth model does not consider technological change to be part of the economic process (i.e. it is not accounted
for the model). Economists call the Solow growth model …
A. An exogenous model. B. An endogenous model. C. A static model. D. A dynamic model.

Back 10

A. An exogenous model.

Front 11

11._____ What term did Joseph Schumpeter use to describe the process in economic growth where new technology renders older
technology obsolete and worthless?
A. Culling the heard. B. Mechanical evolution. C. Technological Tsunami. D. Creative destruction.

Back 11

D. Creative destruction.

Front 12

12._____ New Growth Theory says the government can encourage economic growth through all of the following activities except…
A. Providing public education. C. Building infrastructure, such as roads.
B. Supporting scientific research. D. Replace investment markets with government planning.

Back 12

D. Replace investment markets with government planning.

Front 13

13._____ The implication of Nordhous’ study of light (and computing power) is that impact of economic growth on people’s standard
of living has been _________ what is shown by economic statistics.
A. Less than. B. Equivalent to. C. Greater than. D. Variable compared to.

Back 13

C. Greater than.

Front 14

Aggregate Expenditures is represented by the equation the sum of C + I + G + (X – IM). What do each of the variables represent?
Write your answer in the space next to the variable.
14. C :
15. I:
16. G:
17. X – IM:

Back 14

14. C : Consumption
15. I: Investment
16. G: Government Spending
17. X – IM: Net Exports

Front 15

18._____ The term Marginal Propensity to Consume (MPC) can be described as…
A. The way people tend to average out consumption spending over the course of a lifetime.
B. How much of an additional dollar of income will be spent on consumption.
C. The tendency of people to borrow to maintain consumption if interest rates are low.
D. How people adjust their spending to reflect changes in inflation expectations.

Back 15

B. How much of an additional dollar of income will be spent on consumption.

Front 16

19._____ The nation’s disposable income increases by $400 billion and, as a result, consumer spending increases by $320 billion.
Therefore, the MPC equals…
A. 0.16. B. 0.20. C. 0.60. D. 0.80.

Back 16

D. 0.80

Front 17

22._____ If the real interest rate rises significantly, what is most likely to happen to the consumption function?
A. It will shift upward.
B. It will shift downward.
C. It will not shift, but people will move downward along the consumption function.
D. It will not shift, but people will move upward along the consumption function.

Back 17

B. It will shift downward

Front 18

23._____ Based on the ideas of the Aggregate Expenditure model, existence of both inflationary and recessionary periods when the
economy is not at General Equilibrium can be attributed to …
A. Shifts in potential GDP. C. Coordination failures.
B. Technological change. D. One time asymmetric shocks.

Back 18

C. Coordination failures

Front 19

24._____ When equilibrium real GDP greater than potential GDP, there is
a(n)…
A. Inflationary gap. C. Recessionary gap.
B. Potential gap. D. Precautionary gap.

Back 19

A. Inflationary gap

Front 20

25._____ Recessionary gaps are most likely to be accompanied by…
A. inflation.
B. inventory reductions.
C. unemployment.
D. expanding output.

Back 20

C. unemployment.

Front 21

26. _____ The economy depicted in the graph to the right is currently
experiencing ….
A. An inflationary gap shown by the line EB.
B. Full employment without inflation.
C. A recessionary gap, shown by the line EB.
D. A recessionary gap, shown by the line EF.

Back 21

C. A recessionary gap, shown by the line EB

Front 22

27._____ How does the economy self-adjust from either an inflationary gap or a recessionary gap back to General Equilibrium?
A. Through investment or disinvestment in capital. C. Changes in the price level.
B. Through opening itself to more foreign trade. D. The economy cannot do this.

Back 22

C. Changes in the price level.

Front 23

1._____ Based on the ideas of the Aggregate Supply – Aggregate Demand model, existence of both inflationary and
recessionary periods can be attributed to …
A. Shifts in potential GDP. C. Technological change.
B. Coordination failures. D. One time asymmetric shocks.

Back 23

B. Coordination failures.

Front 24

2._____ When equilibrium real GDP greater than potential GDP, there is a(n)…
A. Inflationary gap. B. Stagnation Gap. C. Recessionary Gap D. Precautionary Gap.

Back 24

A. Inflationary gap.

Front 25

9._____ What makes it hard for an economy to return to general equilibrium during a recession and explains why the
economy tends to high price levels over time?
A. Wage and price stickiness. C. Foreign exchange depreciation.
B. Resource price ratcheting. D. Financial market re-alignment.

Back 25

A. Wage and price stickiness.

Front 26

16._____ If the level of government spending increases by $100 and the MPC
in the economy is 0.8, then the total amount of increase in GDP should be…
A. $ 100. B. $250. C. $400. D. $500.

Back 26

D. $500.

Front 27

17._____ If the level of taxation decreases by $100 and the MPC in the economy is 0.8, then the total amount of the
increase in GDP should be…
A. $ 100. B. $250. C. $400. D. $500.

Back 27

C. $400.

Front 28

18._____ If an economy has an inflationary gap of $1 billion and an MPC of 0.75, how much the government have to
increase taxes to close the gap?
A. $1 billion. B. $500 million. C. $333 million. D. $250 million

Back 28

C. $333 million

Front 29

19._____ The multiplier effect in the 2009 economic stimulus was lower than it could have been because of all the
following factors except…
A. Increased globalization meant that some of the stimulus went to foreign countries.
B. It caused significant inflation, which reduced the impact of the stimulus on real GDP.
C. A large part of the stimulus was in the form of tax breaks.
D. Many of the people who were employed by the stimulus paid income tax.

Back 29

B. It caused significant inflation, which reduced the impact of the stimulus on real GDP

Front 30

20._____ Most economists prefer using monetary policy to fiscal policy for conducting macroeconomic policy for all of
the following reasons except…
A. It is timely – the Fed can respond to changes in the economy more quickly than Congress.
B. It affects both Aggregate Demand and Aggregate Supply, and not just Aggregate Demand.
C. It is targeted – it directly affects economic activity instead of being used on political pet projects.
D. It can adjust to changes in the economy – the Fed monitors and constantly changes policy.

Back 30

B. It affects both Aggregate Demand and Aggregate Supply, and not just Aggregate Demand.

Front 31

21._____ Expansionary fiscal policy based on increased government spending in an open economy has a …
A. greater effect than in a closed economy. C. smaller effect than in a closed economy.
B. similar effect in a closed economy. D. is never effective.

Back 31

C. smaller effect than in a closed economy.

Front 32

22._____ Expansionary monetary policy based on lowering interest rates in an open economy has a
A. greater effect than in a closed economy. C. smaller effect than in a closed economy.
B. similar effect in a closed economy. D. is never effective.

Back 32

A. greater effect than in a closed economy.

Front 33

1._____ The use of fiscal policy in conducting macroeconomic policy is limited by all of the following except…
A. The lag time between an economic event and when policy has its effect is long because of political conflict over
policy.
B. The “dead weight loss” that taxation causes for the economy.
C. The government does not create “real” jobs that create any value.
D. Government borrowing and high debt can “crowd out” private investment and slow future economic growth.

Back 33

C. The government does not create “real” jobs that create any value

Front 34

2._____ Keynes said the Great Depression was a result of low Aggregate Demand and described the problem as the
“paradox of thrift” which blamed the low Aggregate Demand on….
A. Too much investment. C. Too much government spending.
B. Too much savings. D. Too much consumption spending.

Back 34

B. Too much savings.

Front 35

3._____ One of the important insights that John Maynard Keynes made in his book “The General Theory of
Employment, Interest and Money” was that ____________ drove business cycles.
A. New Money. B. Credit. C. Psychology. D. New technology.

Back 35

C. Psychology.

Front 36

4._____ Milton Friedman, leader of the “Chicago School” of economics said that the problem of Stagflation in the
economy was the result of…
A. Activist economic policies. C. Yom Kippur War and dependence of foreign oil.
B. Free market economic policies. D. High marginal tax rates.

Back 36

A. Activist economic policies.

Front 37

5._____ Milton Friedman criticized Keynesian fiscal policy saying that people borrow and save at different points in their
lives to smooth out their consumption spending in an argument called…
A. The Lifetime Expectation Hypothesis. C. Lifetime Consumption Stabilization.
B. The Permanent Income Hypothesis. D. Credit Market Balancing.

Back 37

B. The Permanent Income Hypothesis

Front 38

6._____ The idea that fiscal policy is ineffective because people will see government deficits as a sign of future higher
taxes, and will save (not spend) in order to pay future taxes is called the ____________ Equivalence.
A. Keynesian. B. Hayek. C. Smithian. D. Ricardian.

Back 38

D. Ricardian.

Front 39

7._____ Based on the Quantity Theory of Money equation (MV = PQ) the primary causes of inflation and deflation are
…
A. Changes in price level. C. Changes in money velocity.
B. Changes in the money supply. D. Changes in the quantity of goods.

Back 39

B. Changes in the money supply.

Front 40

8._____ The Phillips curve shows the relationship between …
A. The rate of inflation and the rate of unemployment. C. The GDP growth rate and the rate of unemployment.
C. Real prices and real GDP. D. The rate of inflation and the rate of growth of real GDP.

Back 40

A. The rate of inflation and the rate of unemployment

Front 41

9._____ Keynesian economists believed that an expansionist monetary policy could be used to fight recessions because…
A. Money solves all problems.
B. People do not know the real value of money and see additional money as an increase in income.
C. It makes governments appear to be helping their people.
D. It causes people to have renewed faith in the financial industry.

Back 41

B. People do not know the real value of money and see additional money as an increase in income.

Front 42

10._____ In the 1960’s and early 1970’s, Keynesian economists and policy makers thought the Phillips curve was…
A. Interesting but had no theory to support it. C. Invalid and of no use to policy makers.
B. Of no interest in making macroeconomic policy. D. Provided a structure to formulate economic policy

Back 42

D. Provided a structure to formulate economic policy

Front 43

11._____ What economic event represented the breakdown of the Phillips Curve?
A. Great Depression. B. Stagflation. C. Great Moderation. D. Information Revolution.

Back 43

B. Stagflation.

Front 44

12._____ While Friedman accepted that the relationship of the Phillips Curve held in the short run, he believed that in the
long run, the economy would …
A. Suffer hyper-inflation. C. Return to a liquidity trap.
B. Return to the natural rate of unemployment. D. Grow GDP at the inverse of Okun’s Law.

Back 44

B. Return to the natural rate of unemployment.

Front 45

13._____ The Luca’s idea of Rational Expectations and its impact on monetary policy was based on …
A. The Efficient Market Hypothesis. C. Friedman-Posner Regression to Mean.
B. Forward Looking Market Hypothesis. D. Non-Accelerating Inflation Rate of Unemployment.

Back 45

A. The Efficient Market Hypothesis.

Front 46

14._____ The theory of rational expectations says that…
A. People do not have enough information to recognize inflation and this will negate any monetary policy.
B. People are able to use available information to anticipate inflation and weaken the effect of monetary policy.
C. Monetary policy is only effective if the general population understands how monetary policy works – which it doesn’t.
D. Monetary policy unfairly rewards people in financial markets at the expense of the general population.

Back 46

B. People are able to use available information to anticipate inflation and weaken the effect of monetary policy.

Front 47

15._____ The period of the “Great Inflation”, marked by activist government macroeconomic policy and Stagflation
which ended when Fed Chairman Paul Volker raised short term interest rates to 20%, was followed by a period lasting
from the early 1980’s to 2008 which was marked by low inflation, low unemployment and strong economic growth, that
is called….
A. The Great Moderation. C. The Great Expansion.
B. The Return to Value. D. The Return to Growth.

Back 47

A. The Great Moderation

Front 48

16._____ The New Keynesian monetary policy rule that balances off issues of inflation with GDP growth is called…
A. The Lucas Rule. B. The Taylor Rule. C. The Cambridge Rule. D. The Chicago Rule.

Back 48

B. The Taylor Rule.

Front 49

17._____ One benefit of a central bank’s commitment to low inflation (or an inflation target) is that it ________ people’s
expectations of inflation, which can mean that a rise in inflation is unlikely to be sustained.
A. Leverages. B. Floats. C. Anchors. D. Undermines.

Back 49

C. Anchors.

Front 50

18._____ Keynesian economists say that in the current recession monetary policy has lost its effectiveness because the
economy is stuck in …
A. An Inflation trap. B. A Debt trap. C. A Liquidity trap. D. An Unemployment trap

Back 50

C. A Liquidity trap.

Front 51

19._____ After the large fiscal stimulus in 2009, governments around the world began to enact austerity programs
because of fears of large government debts and the Rienhart-Rogoff paper that said government debts in excess of 90%
GDP would result in slower economic growth. All the following have shown that this was a bad policy move except…
A. An IMF study that showed that austerity actually caused GDP to decline.
B. An IMF study that showed that fiscal multipliers were large for countries in recession.
C. An IMF study that showed that significant increases in inflation have had the same impact as additional
stimulus.
D. A UMass graduate student showed that Rienhart and Rogoff made an Excel spread sheet error.

Back 51

C. An IMF study that showed that significant increases in inflation have had the same impact as additional
stimulus.

Front 52

20._____ What term describes the Federal Reserve’s policy of saying how long it will keep interest rates low so as to
inform people of Fed policy goals so to fix expectations and confidence?
A. Forward guidance. B. Beyond the horizon. C. Bending the Curve. D. Periscoping.

Back 52

A. Forward guidance.

Front 53

21._____ What term is being used to describe the situation in which a depressed economy is the norm and that there is
not enough Aggregate Demand to push the economy back to full employment and inflation much above zero – that
deflation will be an on-going problem.
A. Hypo-inflation. C. Stagployment.
B. Sub-optimal Stagnation. D. Secular Stagnation.

Back 53

D. Secular Stagnation.