Economics 201

NAME ______________________

Prof. Robert J. Gordon

Final Exam

Fall 2009

Put your name on the answer sheet and circle your T.A. Section!
Answer the multiple choice questions in the space provided below.
Each multiple choice question is worth 1 point and has a single best answer. There is no guessing penalty so
answer all the questions.
TA:

Heffner

Kent

Time:

9am

3pm

O'Quinn

Roy

WRITE YOUR MULTIPLE CHOICE ANSWERS IN CAPITAL LETTERS!

If we can't read it, it's wrong.
1
11
21
31
41

51

12

22

32

42

52

13

23

33

43

53

14

24

34

44

54

15

25

35

45

55

16

26

36

46

56

17

27

37

47

57

18

28

38

48

58

19

29

39

49

59

10

20

30

40

50

60

MC Total:

______

Section 1: Multiple Choice (60 points)

(In this section each question is worth 1 point)
1. In 2008, consumption spending is $7,000, government purchases are $2,000 and investment
spending is $1,500. If GDP for 2008 is $10,300, then:
A) exports are $400 and imports are $200.
B) exports are $100 and imports are $200.
C) exports are $600 and imports are $800.
D) exports are $500 and imports are $300.
2 In general, a change in the price level, all other things unchanged, causes:
A) a movement along the aggregate demand curve.
B) a shift of the aggregate demand curve.
C) both a movement along the aggregate demand curve and a shift in the curve.
D) no change in the purchasing power of assets.
3 Other things being equal, investment spending __________ when __________.
A) decreases; firms expect sales to fall
B) increases; firms have excessive production capacity
C) increases; the rate of growth of real GDP is low
D) decreases; the obsolete or worn out physical capital increases
4 If the MPC is 0.8, t=0, and government spending decreases by $50 million, then equilibrium
GDP will decrease by:
A) $40 million
B) $50 million
C) $200 million
D) $250 million
5 Inflation affects people adversely because:
A) nominal income falls during inflation
B) purchasing power tends to increase during inflation
C) budget deficit increases during inflation
D) inflation causes money to lose its value over time if the overall price level is rising
6 The main difference between a tariff and a quota is:
A) a quota reduces imports more sharply than a tariff.
B) a tariff will cause higher prices than a quota.
C) a tariff generates tax revenue for the government, while a quota generates rents to the
license-holders.
D) a tariff will cause lower prices than a quota.
7 In an open economy suppose that GDP is $12 trillion. Consumption is $8 trillion and
government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion and imports
are $3 trillion. How much is national saving?
A) $4 trillion
B) $3.5 trillion
C) $2 trillion
D) $5.5 trillion

8 Which of the following were the major bubbles discussed in this course?
A) Stock market bubble of 1927-29.
B) Housing price bubble of 1975-79
C) Stock market bubble of 1996-2000
D) Housing price bubble of 2000-06
9 Which of the following did not occur during the Great Depression of 1929-33?
A) Fiscal stimulus
B) Stock market crash
C) Bank failures
D) Federal deposit insurance
10 A course packet reading distinguished between pocketbook spending and total consumer
spending Which of the following is NOT a component of pocketbook spending?
A) Lumber bought at Home Depot
B) A beer bought at Tommy Nevins pub
C) A co-payment for a medical procedure
D) Rent paid on owner-occupied housing
Use the following to answer question 11:
Figure: Circular Flow Model

11 What is GDP in this economy?

A) $100
B) $400
C) $500
D) $600
12 If nominal wages fall, then the short-run aggregate:
A) supply curve shifts to the right.
B) supply curve shifts to the left.
C) demand curve shifts to the right.
D) demand curve shifts to the left.

13 Which of the following does NOT come under the rubric of fiscal policy?
A) taxes
B) government transfers
C) government purchases of goods and services
D) changes in the money supply
14 A sale of bonds by the Fed:
A) raises interest rates and increases the money supply
B) raises interest rates and reduces the money supply
C) lowers interest rates and reduces the money supply
D) lowers interest rates and increases the money supply
15 Which of the following may lead to lower productivity because of a lack of incentives?
A) a stable political system
B) protection of property rights
C) government subsidies
D) public education
16 Crowding out is a phenomenon:
A) where an increase in government's budget surplus decreases the overall investment
spending
B) where overproduction in the goods market leads to a sharp drop in the aggregate price level
C) where an increase in government's budget deficit causes the overall investment spending to
fall
D) where an increase in imports causes the overall domestic production to fall
17 If the Federal Reserve wants to increase the monetary base, the Fed might:
A) engage in an open market purchase of Treasury bills
B) engage in an open market sale of Treasury bills
C) purchase Treasury bills from the U.S. Treasury
D) sell Treasury bills back to the U.S. Treasury
18 Which of the following increased by the greatest percentage between 2007 and 2009?
A) Monetary base
B) Currency
C) Excess reserves
D) Total reserves
19 The aggregate demand curve is negatively sloped in part because of the impact of:
A) the wealth effect on consumption.
B) a changing exchange rate on potential output.
C) the stickiness of nominal wages and salaries.
D) the flexibility of nominal wages and salaries.
20 If your disposable income increases from $10,000 to $15,000 and your consumption increases
from $9,000 to $12,000, your MPC is
A) 0.2
B) 0.4
C) 0.6
D) 0.8

21 We hold money to
A) earn interest
B) reduce transaction costs
C) increases transaction costs
D) protect out purchasing power
22 In the "paradox of thrift":
A) firms that are pessimistic about the future lay off the most savings-conscientious workers
B) when families and business are feeling pessimistic about the future, they spend more today
C) increased saving by individuals increases their chances of becoming unemployed
D) profligate behavior during economic tough times has large negative consequences for
society
23 A capital inflow into a country is associated with:
A) imports exceeding exports
B) a decreased source of funds available for domestic investment
C) imports equaling exports
D) imports less than exports
24 A bank run can break a bank because:
A) borrowers default on their loans, and the bank's assets become worthless
B) banks can not convert quickly illiquid loans into liquid assets without facing a large
financial loss
C) depositors' panic spreads to borrowers, who want to take additional loans from the bank
D) the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury
bonds
25 Which of the following numbers is relevant to the back of the dollar bill, as discussed in the
course packet and in class
A) 7
B) 11
C) 13
D) 711
26 What is the Great Unwinding as argued by an op-ed writer in the course packet?
A) Deleveraging
B) Securitization
C) Unwinding the system of welfare and unemployment benefits
D) Unwinding the social security system
27 If the aggregate consumption equals $100,000,000 + .75 YD, then the marginal propensity to
consume is:
A) 0.75
B) 0.25
C) $75,000,000.00
D) $100,000,000.00
28 If real GDP rises while nominal GDP falls, then prices on average have:
A) risen.
B) fallen.
C) stayed the same.
D) Real GDP can not rise when nominal GDP falls.

29 An expansionary fiscal policy:

A) usually decreases a government budget deficit or increases a government budget surplus
B) may include decreases in government spending
C) may include increases in taxes
D) may include decreases in taxes
30 Monetary neutrality implies that in the long run:
A) monetary policy does not affect the level of economic activity
B) aggregate supply is independent from monetary policy
C) changing the money supply does not have any effect on the aggregate price level
D) aggregate demand is independent from monetary policy
E) both B) and D)
31 All of the following are factors that drive productivity growth EXCEPT:
A) growth convergence
B) physical capital
C) technological progress
D) human capital
32 If interest rates on bonds rise, holding other things constant, stock prices will:
A) increase
B) decrease
C) not change
D) it is impossible to say how stock prices will change
33 Mortgage loans granted almost quadrupled between 2000 and 2003. In the course packet
readings, which of the following is NOT cited as a cause of this remarkable event?
A) Bush tax cuts
B) Monetary policy
C) Tax-free capital gains for sales of residential property
D) Lowered lending standards
34 Which of the following is NOT a factor of production in the expanded production function of
the lecture that is missing in the production function of the textbook?
A) Political capital
B) Infrastructure capital
C) Geography
D) Human capital.
35 Which one of the following is correct?
A) Unemployment Rate = Unemployed / Employed
B) Unemployment Rate = Unemployed / Population
C) Unemployment Rate = Employed / Labor Force
D) Unemployment Rate = Unemployed / Labor Force
36 Which of the following is NOT a determinate of consumer spending?
A) current disposable income
B) expected future disposable income
C) wealth
D) investment spending

37 The largest source of federal tax revenues is:

A) property taxes
B) personal income taxes
C) corporate income taxes
D) sales taxes
38 The lecture highlighted __________ as an example of a country that had converged and
________ and __________ as examples of countries that had not converged
A) Korea, Venezuela, Argentina
B) Hong Kong, Korea, Argentina.
C) United States, Taiwan, Argentina
D) Argentina, United States, Hong Kong
39 The trough of the business cycle:
A) comes right after the expansion phase
B) comes right before the recession phase
C) is a temporary maximum level of real GDP
D) is a temporary minimum level of real GDP
40 Honduras exports clothing to the United States, and the United States exports bulldozers to
Honduras. Proponents of the Heckscher-Ohlin model would explain this pattern of trade by
stating that:
A) Honduras has an advantage in the technology used in clothing production, while the United
States has an advantage in the technology used in bulldozer production.
B) Honduras has a climate that is more conducive to producing clothing, while the United
States has a climate more conducive to producing bulldozers.
C) Honduras has a relatively larger endowment of factors of production that are suited to
making clothing, while the United States has a relatively larger endowment of factors of
production that are suited to making bulldozers.
D) Honduras has a factor intensity in capital and the United States has a factor intensity in
labor.
41 The primary difference between M1 and M2 is that:
A) the dollar amount of M1 is much larger than the dollar amount of M2
B) M1 includes checkable deposits, but M2 does not
C) M2 includes checkable deposits, but M1 does not
D) M2 includes savings deposits and time deposits, but M1 does not
42 Which of the following terms discussed in the course lectures IS related to the conduct of
monetary policy over the last two years?
A) Zero lower bound
B) Saving glut
C) Irrational exuberance
D) Obama stimulus
43 The lectures solution to global warming and the environment was
A) Maintain the status quo
B) Emulate what Europe has already achieved
C) Emulate what China has already achieved
D) Set new standards to require higher fuel efficiency for American cars

44 The Boeing Corporation buys $3 million worth of aluminum from the Aluminum manufacturers,
$2.5 million worth of computerized hardware and software, and $1 million worth of mechanical
tools to manufacture a certain model of aircraft. Boeing Corporation sells this particular model
of aircraft at $10 million. The value-added by Boeing is equal to:
A) $3.5 million.
B) $16.5 million.
C) $13 million.
D) $15.5 million.
45 The short-run aggregate supply curve is positively sloped because:
A) wages and other costs of production respond immediately to changes in prices.
B) profit is lower when prices increase, so output decreases.
C) workers are willing to work for lower wages rather than be laid off.
D) higher prices lead to higher profit and higher output.
46 A downward shift in the consumption function can be caused by:
A) a decrease in disposable income
B) an increase in disposable income
C) expectations of higher permanent income
D) a decrease in wealth
47 In the notation of the class handout, which of the following is true?
A) KI = I
B) KI = I NS
C) KI = IM X
D) KI = X IM
E) B) and C)
F) B) and D)
48 When the short-term interest rate ______, the opportunity cost of holding money _____, and the
quantity of money individuals want to hold ______.
A) falls; falls; falls
B) falls; falls; rises
C) rises; falls; falls
D) rises; falls; rises
49 Human capital is:
A) the improvement in labor created by education and knowledge that is embodied in the work
force
B) the machinery and tools that each individual owns
C) robots that can perform tasks that only humans could do in the past
D) not as important as physical capital
50 A business decision to borrow to fund its projects should be based on whether:
A) the rate of return on the project is less than the interest rate on the loan
B) the project will produce a good or service that is in high demand
C) the rate of return on the project is at least as great as the interest rate on the loan
D) it is going to be a project where minimum efficient scale is attained

51 When financial institutions assemble pools of loans and sell shares in the income from these
pools, this process is known as:
A) loan funding
B) securitization
C) diversification
D) sharing the wealth
52 The Taylor Rule is discussed in the course lecture as related to which of the following?
A) Disinflation
B) Constant growth rate rule for the money supply
C) Fiscal policy rule to respond to long-term deficits
D) Too low for too long
53 According to a course packet reading, the benefits of economic growth do not include
A) Greater income equality
B) Cleaner water and air
C) Public support for the disadvantaged
D) Better health outcomes
54 The official unemployment rate reported by the government may tend to understate the amount
of unemployment by:
A) including discouraged workers in the calculations.
B) excluding discouraged workers who are not actively seeking employment.
C) including people over 65 who aren't retired in the calculations.
D) excluding teenagers from the calculations.
55 Potential output is:
A) the level of real GDP that exists when the economy is experiencing only cyclical
unemployment.
B) the level of real GDP that the economy would produce if all prices, including nominal
wages, were fully flexible.
C) the level of real GDP that exists when the actual rate of unemployment is zero.
D) the level of real GDP that the economy would produce if all prices, including nominal
wages, were sticky.
56 Discretionary fiscal policy involves:
A) changing the money supply to change interest rates and investment spending
B) using government spending or tax policy to affect aggregate demand
C) lifting trade barriers on imports
D) policy to raise the natural rate of unemployment
57 To fight inflation, the Fed should conduct ______ monetary policy to ______ interest rates and
shift aggregate demand to the _______.
A) contractionary; increase; left
B) contractionary; increase; right
C) expansionary; decrease; right
D) expansionary; increase; left

58 In the market for wooden furniture, if a countrys price in absence of international trade is lower
than the price with trade, the country must:
A) import wooden furniture
B) export wooden furniture
C) have absolute advantage in wooden furniture production
D) have a surplus of wooden furniture
59 Federal funds are:
A) government tax receipts
B) loans between banks
C) loans made from the discount window
D) bank deposits at the Federal Reserve
`
60 Which of the following terms discussed in the course lectures is NOT related to the residential
housing bubble and collapse of 2000-09?
A) Foreclosure
B) Under water
C) Securitization
D) Inflationary gap
E) NINJA loans

Section 2: Short Answer (60 points)

Question 1: 9 points total
International Trade
Suppose the United States has a domestic demand for helicopters described by the equation p = 1000 q.
Furthermore suppose domestic supply is described by p = q. Suppose the world price is 300 and the U.S.
economy is open. You can use the following space provided to sketch a graph. It wont be graded.

a) (1 pt.) With international trade, how many helicopters will be produced by the United States?

b) (1 pt.) With international trade, how many helicopters will be imported?

c) (2 pts.) In this economy, total consumer surplus is ____________ and total producer surplus is ____________.

d) (1 pt.) Throughout the rest of this question, suppose the U.S. imposes a $100 tariff on helicopters. How many
helicopters will be bought by U.S. consumers in total?

e) (1 pt.) How many helicopters will be made in the United States with the $100 tariff?

f) (1 pt.) What are the governments revenues from the $100 tariff?

g) (2 pts.) In the economy with the $100 tariff, total consumer surplus is ____________
and total producer surplus is ____________.

Question 2: 10 points total

Aggregate Supply and Aggregate Demand

A)

B) P

Y
C)

Y
D) P

For each of the following questions clearly label all the curves you draw. All your curves can be drawn as
straight lines.
a) (2 pts.) In panel (A), draw an economy that is initially in long-run equilibrium. Label your curves AD1,
SRAS1 and LRAS1 and the equilibrium point 'A'.
b) (1 pt.) In panel (B), replicate your drawing from panel (A) and draw the effect of a negative supply shock.
Label your new short-run equilibrium point 'B'. (Be sure to clearly show which curve you are shifting)
(1 pt.) What type of gap is the economy experiencing? ___________________________
c) (2 pts.) In panel (C), replicate your drawing from panel (B) and draw the effect of the long-run self-correcting
mechanism, label your resulting equilibrium point 'C'. (Be sure to clearly show which curve you are shifting)
d) (2 pts.) In panel (D), replicate your drawing from panel (B) and draw the effect on equilibrium if the
government were to intervene through the use of fiscal or monetary policy to try to close the gap. Label your
resulting equilibrium point 'D'. (Be sure to clearly show which curve you are shifting)
Question 2 continues on next page

e) (2 pts.) Fiscal policy would seek to _______________________ government spending and

___________________________ taxes, while monetary policy would seek to __________________________
interest rates.

Question 3: 14 points total

Monetary Policy
The monetary base of Canada is $45 billion.
Of this, $30 billion is in currency.
The required reserves-to-deposits ratio is 10%.
There are no excess reserves.
a) (2 pts.) How much money is held as reserves at the central bank?

b) (2 pts.) How much money is deposited at banks in Canada?

c) (3 pts.) What is the money supply of Canada?

d) (1 pt.) The money demand equation is either M = 240 + 20 R or M = 240 - 20 R, where the interest rate R is
measured in percent. Circle the correct one.
e) (3 pts.) Suppose the Bank of Canada, Canada's central bank, moves the money supply to $160 billion.
(i) To accomplish this, to what level does it set the monetary base? Assume the desired currency-to-deposits ratio
doesn't change.

(ii)What is the new level of deposits?

f) (3 pts.) By how much does the interest rate change as a result of this monetary policy action?

Question 4: 6 points total

Aggregate Demand and the Income Expenditure Model

a) (1 pt.) Panel A refers to the Income-Expenditure diagram. Suppose the level of autonomous aggregate
expenditure is 150 and that the equilibrium level of GDP is 450. Draw the planned aggregate expenditure line for
this economy. Label the equilibrium point E1. (Don't forget to write down the level of AAE on the vertical axis
and of income in the horizontal axis.)
b) (1 pt.) Based on the information in (a), what is the multiplier for this economy?

c) (1 pt.) One of the determinants of the planned aggregate expenditure line is the price level. Suppose that the
aggregate expenditure line you drew in (a) corresponds to a price level of 100. Plot the (Y, P) combination in
panel B and label it E1. (Don't forget to write down the level of aggregate prices on the vertical axis and of
income in the horizontal axis.)
d) Suppose that the price level rises to 120. Show the effect of this on this on planned aggregate expenditures by
doing the following:
(i) (1 pt.) Assume that the change (in absolute terms) in AAE is equal to 50. Find the new level of equilibrium
GDP. (Hint: remember that you know what the multiplier for this economy is.)

(ii) (1 pt.) In panel A, draw the new planned aggregate expenditure line. Label the new equilibrium point E2.
(Don't forget to write down the level of aggregate prices on the vertical axis and of income in the horizontal
axis.)
Question 4 continues on next page

e) (1 pt.) Plot the new (Y-P) combination in panel B and label it E2. (Don't forget to write down the level of
aggregate prices on the vertical axis and of income in the horizontal axis). Finally, connect E1 and E2 to derive
the aggregate demand curve.

Question 5: 6 points total

GDP and the GDP Deflator
a) (4 pts.) Complete the following table.
2007
Nominal GDP
Constant-2007 dollar GDP
Constant-2008 dollar GDP
GDP Deflator (base = 2007)
GDP Deflator (base = 2008)

2008
85

60
75
100

106.25
100

b) (1 pt.) What is the percentage change in the chained GDP deflator between 2007 and 2008? Calculate using
natural logs and round to the hundredth percentage point.

c) (1 pt.) If from 2000 to 2008, nominal GDP grew an average of 4% per year, how much was nominal GDP in
2000? Calculate using the natural log formula and round to the hundredth (2 decimal places).

Question 6: 15 points total

Income-Expenditure Equilibrium
Suppose the following holds for the economy of Albania. All currency amounts are given in billions of lek, the
currency of Albania. Currently there are no other taxes in place.
Autonomous consumption

10

Planned investment

Government purchases

Exports

1.5

Imports

Autonomous taxes

5.5

MPC

0.8

a) (2 pts.) What is the multiplier for the Albanian economy?

b) (3 pts.) What is equilibrium GDP for the Albanian economy?

c) (3 pts.) Suppose that oil is discovered in the Adriatic Sea off the coast of Albania, and exports increase by 3
billion lek. What is the change in GDP resulting from this export boom?

Now, suppose that the tax structure of Albania had been different. Instead of an autonomous tax amount of 5.5
billion lek, suppose that the Albanian government levied a proportional tax rate of 10%.
d) (3 pts.) What is the multiplier for the Albanian economy under this new tax scheme (give answer to three
decimal places)?

e) (3 pts.) What is the change in GDP resulting from the same oil export boom from before under this new tax
scheme (give answer to three decimal places)?

(f) (1 pt.) In this example, the more progressive tax scheme entailed a ______________(smaller/larger) response
of GDP to the export boom.

Multiple Choice
1
2
3
4
5
6
7
8
9
10

C
A
A
D
D
C
C
B
A
D

11
12
13
14
15
16
17
18
19
20

C
A
D
B
C
A
A
B
D
E

21
22
23
24
25
26
27
28
29
30

B
C
A
B
C
A
A
B
D
E

31
32
33
34
35
36
37
38
39
40

A
B
A
D
D
D
B
A
D
C

41
42
43
44
45
46
47
48
49
50

D
A
B
A
D
D
E
B
A
C

51
52
53
54
55
56
57
58
59
60

B
D
A
B
B
B
A
B
B
D

Question 1:
a)
300
b)
400
c)
(700^2)/2 + (300^2)/2 = 290,000
d)
600
e)
400
f)
200x100 = 20,000
g)
(600^2)/2 + (400^2)/2 + 20,000 = 280,000
Question 2:
a) Vertical LRAS, downward-sloping AD, upward sloping SRAS, all intersecting at point A.
b) SRAS shifts to the left, point B has higher P and lower Y. There's a recessionary gap.
c) Self-correcting mechanism shifts SRAS back to its original position. Point A = point C.
d) Active policy shifts AD to the right, point D has higher P and Y is back to Ypotential.
e) raise; lower; lower.
Question 3:
a)
$15 billion
b)
$150 billion
c)
$180 billion
d)
M = 240 - 20 R
e) (i) $40 billion
(ii)
$133.33 billion
f)
+1%
Question 4:
(a) A line with y-intercept at 150 and crossing the 45 line at 450.
(b) Mult=3
(c)
d) (i) dY=3*(-50) so Y=300
(ii)
New AEp line with y-intercept at 100 and crossing 45 line at 300.
(e)
Properly labeled downward-sloping demand curve.

Question 5:
a) (4 pts.) Complete the following table.
Nominal GDP
Constant-2007 dollar GDP
Constant-2008 dollar GDP
GDP Deflator (base = 2007)
GDP Deflator (base = 2008)

b)

2007

2008

60

85

60

80

75

85

100

106.25

80

100

14.19% =(ln(106.25/100) + ln(100/80))/2

Question 6:
(a)
5
(b)
55.5 billion lek
(c)
15 billion lek
(d)
3.571
(e)
10.714 billion lek
(f)
smaller