Sample Exam

Principles of Economics
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Exhibit
Year
1
2
3
4
5

6-1
CPI
217
220
225
231
240

1. _____ Refer to Exhibit 6-1. Prices rose by __________ percent from Year 1 to Year 2.
a. 1.38
b. 0.14
c. 1.29
d. 1.94
e. 3.00
2. _____ Look at the following data: The frictional unemployment rate is 1.5 percent, the
natural unemployment rate is 4.5 percent, and the cyclical unemployment rate is -1
percent. The structural unemployment rate is _________ percent and the actual
unemployment rate (in this economy) is ___________ percent.
a. 6; 3.5
b. 3; 5.5
c. 3; 3.5
d. 6; 5.5
3. _____ Suppose there are 50 million persons in the population, 25 million persons in the
civilian labor force, and 20 million persons are employed. The number of people
unemployed is _______ million and the unemployment rate is ___________ percent.
a. 25; 50
b. 5; 10
c. 5; 20
d. 10; 10
4. _____ At the time of Kelseys 20 year high school reunion she was earning $50,000 and
the CPI was 120. Now that it is time for her to attend her 30 year high school reunion,
Kelseys income has risen to $97,000 and the CPI is 230. At her 30 year reunion, can
Kelsey rightfully brag that her real income has risen since the last time she saw her
former classmates ten years ago?
a. Yes, Kelseys real income rose during that 10 year period.
b. No, Kelseys real income fell during that 10 year period.
c. No, Kelseys real income remained constant during that 10 year period.
d. It is impossible to determine what happened to Kelseys real income.

Sample Exam
Principles of Economics
__________________________________________________________________________________________
5. _____ A plumber who quits his job in Indianapolis and moves to Orlando where
additional plumbers are needed is said to be ___________________ unemployed
a. frictionally
b. structurally
c. cyclically
d. underemployed
6. _____ You have data for compensation of employees, proprietors' income, rental
income, and net interest. Can you compute national income?
a. Yes.
b. No, since data on indirect business taxes are missing.
c. No, since data on corporate profits is missing.
d. No, since data on the capital consumption allowance is missing.
e. No, since net interest has not been adjusted for profits.
7. _____ What does annual economic growth refer to?
a. annual increases in GDP
b. annual increases in consumption spending
c. annual increases in investment spending
d. annual increases in Real GDP
e. none of the above
8. _____ Suppose that net exports are -$300 billion and exports are $500 billion. Imports
equals
a. $800 billion.
b. $400 billion.
c. $200 billion.
d. -$200 billion.
e. There is not enough information to answer this question.
9. _____ Which of the following is always a characteristic of the contraction phase of the
business cycle?
a. lower unemployment rates
b. a decline in Real GDP
c. higher inflation rates
d. a decline in GDP
e. all of the above

Sample Exam
Principles of Economics
__________________________________________________________________________________________
Exhibit 7-4
Economic Data for Country A
Year/Quarter
2012/Quarter 1
2012/Quarter 2
2012/Quarter 3
2012/Quarter 4

Real GDP
$450 billion
$430 billion
$425 billion
$439 billion

10. _____ Refer to Exhibit 7-4. Did Country A experience a recession (based on the
standard definition) in 2012?
a. Yes, because Real GDP declined during two consecutive quarters in 2012
b. No, because Real GDP did not decline during three consecutive quarters in 2012.
c. Yes, because Real GDP was lower at the end of the year than it was at the
beginning of the year.
d. This information cannot be determined because the determination of a recession
is based upon GDP not Real GDP.
11. _____ Here is a consumption function: C = C0 + MPC(Yd). The C0 term is usually
defined as
a. autonomous consumption.
b. point-zero consumption.
c. mandatory consumption.
d. propensitory consumption.
e. none of the above
12. _____ The larger the marginal propensity to save,
a. the smaller the multiplier.
b. the larger the multiplier.
c. the smaller the change in Real GDP, given a change in autonomous
consumption.
d. a and c
e. none of the above
13. _____ When the MPC = 0.9, the multiplier is
a. 0.20.
b. 1.25.
c. 2.50.
d. 5.00.
e. 10.00.

Sample Exam
Principles of Economics
__________________________________________________________________________________________
14. _____ A rise in MPC makes the total expenditures (TE) curve __________ and __________
the multiplier.
a. steeper; raises
b. steeper; lowers
c. flatter; raises
d. flatter; lowers
15. _____ Keynes argued that
a. monopolistic elements in the economy will prevent an immediate sharp fall in
prices as a result of decreasing demand.
b. wages and prices are not flexible in a downward direction.
c. a and b
d. none of the above
16. _____ Which of the following is not an aspect of Keynesian economics?
a. Wages and prices tend to be inflexible downward.
b. Supply does not necessarily generate its own demand.
c. The interest rate is important in determining the level of investment, but not as
important as other variables.
d. Unemployment above natural unemployment is always a temporary
phenomenon.
17. _____ According to efficiency wage models, labor productivity depends on
a. the number of employees at a firm; the smaller the number of employees, the
more productive each employee is.
b. the amount of capital that employees have to work with.
c. the wage rate the firm pays its employees; a cut in wages can cause labor
productivity to decline.
d. whether or not the economy is currently producing Natural Real GDP.
e. none of the above
18. _____ Inventory levels unexpectedly fall and firms increase the quantity of goods and
services they produce. Which of the following is consistent with these two
occurrences?
Instructors Note You can reason this out. Total production is TP while Total Expenditures
is TE. We this in the Aggregate Demand and Aggregate Supply functions.
a. TP is greater than TE.
b. TP is less than TE.
c. TE is equal to TP minus the rise in inventories above the optimum inventory level.
d. TP is equal to TE.
e. b and c

Sample Exam
Principles of Economics
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19. _____ Government purchases rise by $100 billion and the MPC is equal 0.75.
Assuming that idle resources exist at each expenditure round, and the multiplier is
operative, the change in Real GDP equals
a. $40 billion.
b. $75 billion.
c. $400 billion.
d. $750 billion.
e. $250 billion.
20. _____ In the simple Keynesian model, an increase in aggregate demand leads to an
increase in
a. Real GDP and the price level.
b. the price level and no change in Real GDP for levels of Real GDP below Natural
Real GDP.
c. the price level and a decrease in Real GDP.
d. Real GDP and no change in the price level for levels of Real GDP below Natural
Real GDP.
e. There is not enough information to answer the question.
21. _____ If consumption changes because of a change in the price level, then the
a. economy moves from one point on an AD curve to another point on the same
curve.
b. AD curve shifts.
c. economy moves from one point on a SRAS curve to another point on the same
curve.
d. SRAS curve shifts.
e. none of the above
22. _____ A rise in wage rates
a. causes the AD curve to shift leftward.
b. causes the short-run aggregate supply (SRAS) curve to shift rightward.
c. does not affect the present position of the SRAS curve.
d. causes the AD curve to shift rightward.
e. causes the SRAS curve to shift leftward.
23. _____ If aggregate quantity demanded is greater than aggregate quantity supplied at
a particular price level, then
a. consumers will bid prices upward, and a greater quantity of output will be
supplied.
b. the shortage will likely be eliminated.
c. a and b
d. none of the above

Sample Exam
Principles of Economics
__________________________________________________________________________________________
24. _____ In the short run, a decrease in wage rates, ceteris paribus, shifts the
a. AD curve to the right, causing equilibrium price level to rise and equilibrium
GDP to increase.
b. AD curve to the left, causing equilibrium price level to fall and equilibrium Real
to decrease.
c. SRAS curve to the right, causing equilibrium price level to fall and equilibrium
GDP to increase.
d. SRAS curve to the left, causing equilibrium price level to rise and equilibrium
GDP to decrease.

Real
GDP
Real
Real

25. _____ Starting from short-run equilibrium, wage rates rise. What is the effect on the
price level and Real GDP in the short run?
a. The price level rises and Real GDP falls.
b. The price level falls and Real GDP rises.
c. The price level rises and Real GDP rises.
d. The price level falls Real GDP falls.
26. _____ When the economy is in a recessionary gap, Keynesian economists will often
advocate expansionary policy measures. Why?
a. Keynesians believe the economy sometimes gets stuck in a recessionary gap and
can't get itself out without government intervention.
b. Keynesians believe the economy itself sometimes takes too long to eliminate the
recessionary gap and return to full-employment output.
c. Keynesians are generally in favor of increasing taxes.
d. a and b
e. a and c
27. _____ An example of contractionary fiscal policy is
a. an increase in government expenditures, or an increase in taxes, or both.
b. a decrease in government expenditures, or a decrease in taxes, or both.
c. an increase in government expenditures, or a decrease in taxes, or both.
d. a decrease in government expenditures, or an increase in taxes, or both.
e. increasing government expenditures while holding taxes constant.
28. _____ To eliminate an inflationary gap, Keynesian theory indicates that government
should
a. increase taxes.
b. decrease taxes.
c. increase government purchases.
d. decrease government purchases.
e. either a or d
Exhibit 15-3
6

Sample Exam
Principles of Economics
__________________________________________________________________________________________

29. _____ Refer to Exhibit 15-3. The economy is currently at point 7. If the economy selfregulates, it will end up at point __________, whereas if contractionary monetary policy is
effective, it will end up at point __________.
a. 8; 6
b. 9; 6
c. 9; 5
d. 9; 3
e. 3; 9
30. _____ Which of the following factors can shift the AD curve?
a. net exports
b. government purchases
c. the money supply
d. b and c
e. a, b, and c
31. _____ If peanuts were widely accepted for purposes of exchange, then
a. peanuts would be money.
b. peanuts would be less valuable than they are currently.
c. we would observe people using peanuts to purchase cars.
d. a and c
e. a and b

Sample Exam
Principles of Economics
__________________________________________________________________________________________
32. _____ Compared to barter, money __________ transaction costs, making transactions
__________ time-consuming.
a. increases; more
b. increases; less
c. reduces; more
d. reduces; less
33. _____ M1 is comprised of currency held outside banks + travelers checks +
__________.
a. credit cards
b. savings deposits
c. Gold
d. checkable deposits
e. money market mutual funds
34. _____ Fractional reserve banking is a term used to describe a banking system
whereby
a. individual banks share a fraction of the total funds deposited in the whole banking
system.
b. banks are required to quote interest rates in fractions.
c. banks hold reserves equal to only a fraction of their deposit liabilities.
d. banks hold reserves equal to a multiple of their deposit liabilities; that is, fractional
in this case really means multiple.
e. banks are required to maintain a certain fraction of their deposits in the form of
checkable deposits, a certain fraction of their deposits in the form of savings
deposits, etc.
35. _____ Required reserves are the amount of
a. reserves a bank must hold against its deposits as mandated by the Federal Reserve.
b. cash a bank must hold against its deposits as mandated by the Federal Reserve.
c. checkable deposits a bank must hold against all other deposits as mandated by the
U.S. Treasury.
d. reserves a bank must hold against all its assets as mandated by the Federal
Reserve.
36. _____ If checkable deposits in Bank A total $300 million and the required reserve ratio
is 10 percent, then required reserves at Bank A equal
a. $3.0 million.
b. $30.0 million.
c. $3.3 million.
d. $300,000

Sample Exam
Principles of Economics
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37. _____ Bank A has checkable deposits of $800,000 and total reserves of $200,000. If
the required reserve ratio is 0.15, the bank has required reserves of
a. $600,000.
b. $120,000.
c. $90,000.
d. $30,000.
38. _____ M2 includes M1 plus all of the following except
a. savings deposits.
b. retail money market mutual funds.
c. short-term U.S. government securities.
d. small-denomination time deposits.
39. _____ Inflation does the greatest harm to money's function as a
a. medium of exchange.
b. unit of account.
c. store of value.
d. liquid asset.
40. _____ Which of the following is not a major responsibility of the Fed?
a. controlling the money supply
b. serving as the federal government's banker
c. determining tax rates
d. acting as a lender of last resort
41. _____ Open market operations are the
a. buying and selling of Federal Reserve Notes in the open market.
b. means by which the Fed supplies the economy with currency.
c. means by which the Fed acts as the government's banker.
d. buying and selling of government securities by the Fed.
e. buying and selling of government securities by the Treasury.
42. _____ If the Fed wants to increase the money supply through an open market
operation, it will
a. purchase government securities.
b. sell government securities.
c. first purchase, then sell, government securities.
d. lend more reserves to commercial banks.

Sample Exam
Principles of Economics
__________________________________________________________________________________________
43. _____ The Fed can change the money supply by changing
a. the required reserve ratio.
b. marginal income tax rates.
c. federal excise taxes.
d. unemployment benefits.
44. _____ The larger the simple deposit multiplier,
a. the higher the required reserve ratio.
b. the higher the discount rate.
c. the larger the change in the money supply for a given change in deposits.
d. the less likely the Fed will be to use its monetary policy tools.
45. _____ Which of the following will increase the money supply?
a. an increase in the discount rate (relative to the federal funds rate)
b. a decrease in the required reserve ratio
c. an open market sale by the Fed
d. a and c
e. b and c
46. _____ The Federal Open Market Committee (FOMC)
a. has six members.
b. conducts open market operations.
c. is the policy-making body within the Treasury.
d. is the governing body of the Federal Reserve System.
e. a, b, and c
47. _____ The Board of Governors of the Federal Reserve
a. is made up of seven members.
b. is a group of advisers reporting to the President.
c. is located in New York City.
d. members are appointed to four-year terms by the President and confirmed by the
Senate.
e. all of the above
48. _____ Which of the following is not a monetary policy tool of the Fed?
a. changing the required reserve ratio
b. changing the discount rate
c. setting the price level and the market rate of interest
d. conducting open market operations

10

Sample Exam
Principles of Economics
__________________________________________________________________________________________
49. _____ A bank is less likely to borrow from the central bank when the __________ falls
relative to the __________.
a. discount rate; required reserve ratio
b. excess reserve; required reserves
c. discount rate; federal funds rate
d. federal funds rate; discount rate
50. _____ If reserves increase by $5 million, what is the difference in the resulting change
in checkable deposits when the required reserve ratio is 12.5 percent compared to when
it is 10 percent?
a. $12.5 million
b. $10 million
c. $2.5 million
d. $100 million
51. _____ If the interest rate increases, the opportunity cost of holding money __________,
and the quantity demanded of money __________.
a. does not change; does not change
b. increases; also increases
c. decreases; increases
d. increases; decreases
e. decreases; also decreases
52. _____ Which best describes the Keynesian transmission mechanism when the money
supply increases?
a. The interest rate rises; this in turn reduces investment spending, which in turn
raises total expenditures and shifts the AD curve rightward.
b. The interest rate falls; this in turn stimulates investment spending, which in turn
raises total expenditures and shifts the AD curve leftward.
c. The interest rate falls; this in turn stimulates investment spending, which in turn
raises total expenditures and shifts the AD curve rightward.
d. The interest rate falls; this in turn stimulates investment spending, which in turn
lowers total expenditures and shifts the AD curve leftward.

11

Sample Exam
Principles of Economics
__________________________________________________________________________________________
Exhibit 15-1

53. _____ Refer to Exhibit 15-1. Keynesians are often accused of having an "inflationary
bias." This is due at least in part to their advocacy of expansionary monetary policy when
they believe it is needed to take the economy from point
a. B to point C.
b. B to point A.
c. D to point C.
d. A to point B.
54. _____ A change in the money supply will change investment when
a. the money supply is a function of the price level.
b. investment is interest-sensitive.
c. investment depends only on the level of GDP.
d. investment is interest-insensitive.
e. the supply for money is a function of the interest rate.
55. ______ The demand-for-money curve illustrates the __________ relationship between
the quantity demanded of money and __________.
a. inverse; the interest rate
b. direct; GDP.
c. direct; the interest rate
d. inverse; GDP

12

Sample Exam
Principles of Economics
__________________________________________________________________________________________
Answer Key
1
2
3
4
5
6
7
8
9
10

A
C
C
A
A
C
D
A
B
A

11
12
13
14
15
16
17
18
19
20

A
D
E
A
C
D
C
B
C
D

21
22
23
24
25
26
27
28
29
30

A
E
C
C
A
D
D
E
D
E

13

31
32
33
34
35
36
37
38
39
40

D
D
D
C
A
B
B
C
C
C

41
42
43
44
45
46
47
48
49
50

D
A
A
C
B
B
A
C
D
B

51
52
53
54
55
56
57
58
59
60

D
C
A
B
A