Economics Exam Questions and Answers

Exam Questions

GDP

GDP fails to measure changes in "the quantity of existing products that don't cause a change in price". Whenever there is inflation, the increase in nominal GDP will overstate growth in the economy

True

Unemployment

Assume the US unemployment rate is 4.9%. If 10,000 working age immigrants enter the country all looking for work and 9.000 find a job, what happens to the US unemployment rate?

Increases

Assume the US unemployment rate is 4.9%. If 10,000 working age immigrants enter the country all looking for work and 9.000 find a job, what happens to the US labor force participation rate?

Increases

A recent college graduate who is still looking for their first job would be considered as

Unemployed

The eligible population is: 200,000. Employed: 80,000. Unemployed: 15,000. What is the unemployment rate?

15.7% (80,000 + 15,000 = 95,000. 15,000 / 95,000 * 100)

The eligible population is: 200,000. Employed: 80,000. Unemployed: 15,000. What is the labor force participation rate?

47.5% (95,000 / 200,000 * 100)

Economic Growth

If China grows at a constant rate of 6.35% per year, how long will it take for China's standard of living to double?

11.02 years (70 / 6.35 = 11.02)

In 1950, a country had GDP of $100 billion. What would be the GDP of this country in 2006 assuming it maintained a constant growth rate of 2.5%?

$400 Billion

After 85 years, an economy's GDP grew from $2 trillion to $8 trillion. What was its growth rate?

1.64%

Investment

The decrease in the capital labor ratio means

Lower labor productivity because labor is working with relatively less capital

Which of the following is the best example of an investment as defined by economists?

A firm buying computers for its secretarial staff

Saving and Consumption

If income increases by $100 and the MPC is 3/4, then the additional amount saved equals

$25 (100 X 0.75 = 75. 100 - 75 = 25)

Assume an increase in consumer wealth increases consumption by $200 across all levels of income and the MPC is 0.6. After the increased spending makes the rounds in the economy, the resulting increase in GDP is

$500 (1 / 1 - MPC = 1 / 0.4 = 2.5 X 200 = 500)

Aggregate Supply and Demand

Suppose that the actual and expected price levels are initially equal, and the AD falls. What happens to SRAS in the long run?

The short-run aggregate supply curve will shift to the right

Which of the following would be strong evidence that an expansionary gap exists?

Help wanted advertising is higher than usual, and the consumer price index is up more than expected

Fiscal Policy

Would a progressive, regressive, or flat income tax work as an automatic stabilizer?

Progressive

Which set of policies could the government use to close an expansionary gap?

Increase taxes, decrease government purchases and transfer payments

Monetary Policy

Increasing the debt ceiling

Allows the government to borrow more money

The largest category of federal government expenditure is

Direct benefit payments to individuals

The entire US federal budget process, beginning with delivery of the president's budget to Congress and ending with the beginning of the fiscal year, takes about

Nine months

If bank A has $4,000 in reserves and $5,000 in deposits, the reserve ratio is

4/5 or 80% (4,000 / 5,000 = 0.8 = 80%)

If bank A has $4,000 in reserves and $5,000 in deposits, bank A has loaned out

$1,000 (5,000 - 4,000 = 1,000)

Assume the RR = 20% and the Fed increased money supply by $5,000. What is the final change in money supply?

$25,000 (5,000 X 5 = 25,000. Here, 5 is 1 / 0.2. 20% is 0.2)

Assume a bank holds $20,000 in reserves with no excess reserves. The Fed decides to lower the RR from 20% to 10%. What amount of reserves will this bank now hold?

$10,000

Banks earn a profit on the difference between

Interest charged on loans and interest paid on deposits

Which of the following is not one of the procedures the Fed uses to change the money supply?

Extending loans to the public

A perpetuity bond with face value of $500 and coupon rate of 6% will sell for how much if the interest rate drops to 4%?

$750