1. society
2. work
3. unemployment

PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
1. The primary emphasis in macroeconomics is on:
A) how firms set prices.
B) the national economy.
C) marginal analysis.
D) bits and pieces of the economy.
Ans: B Level: E Page: 4 Topic: Introduction
2. Which of the following would be a part of macroeconomics?
A) a study of the change in automobile sales due to a change in the price of automobiles
B) a study of the impact of a tax reduction on the profits of a business
C) a study of recessions
D) a study of the unemployment of workers displaced by technological change in the typesetting
industry
Ans: C Level: E Page: 4 Topic: Introduction
3. The basic concern of economics is:
A) to keep business firms from losing money.
B) to prove that capitalism is better than socialism.
C) to study the choices people make.
D) to use unlimited resources to produce goods and services to satisfy limited wants.
Ans: C Level: M Page: 6 Topic: Resources Are Scarce
4. Although water is very abundant in most places, it is scarce because:
A) it has no alternative uses.
B) there is not enough of it to meet all needs.
C) it is a free good.
D) scarce goods in general are not all that costly.
Ans: B Level: M Page: 6 Topic: Resources Are Scarce
5. A resource is:
A) anything that can be used in production.
B) anything that you pay for.
C) anything that is in scarce supply.
D) all of the above.
Ans: A
Level: E
Page: 6
Topic: Resources Are Scarce
6. We have to make choices because:
A) we have unlimited income.
B) resources are scarce.
C) choices involve a trade-off.
D) of both b and c.
Ans: D
Level: E
Page: 6
Topic: Resources Are Scarce
1
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
7. A new start-up airline is offering free round-trip tickets to anywhere to the first 600 people who enter
the office on the airlines' first day of business. You arrive 24 hours before they are scheduled to open
to be sure to get the free tickets and buy food from vendors while waiting in line. The cost of the
tickets to you is
A) zero.
B) just the cost of food while you wait in line.
C) the cost of food while you wait in line and the opportunity cost of your time.
D) none of the above.
Ans: D
Level: M
Page: 7
Topic: Opportunity Cost
8. A friend comes up to you and offers to give you a free ticket to the local professional team's baseball
game that night. You decide to attend the game. It takes five hours to go to the game and costs you
$15 for transportation. If you had not attended the game, you would have worked at your part-time
job for $8 an hour. What is the cost of you attending the game?
A) zero—The ticket is free.
B) $65
C) $40
D) $55
Ans: D
Level: M
Page: 7
Topic: Opportunity Cost
9. The cost of going to college is:
A) tuition and the cost of housing.
B) tuition, the cost of housing, and the cost of books.
C) tuition, the cost of books, and forgone income.
D) forgone income only.
Ans: C
Level: M
Page: 7
Topic: Opportunity Cost
10. For which of the following decisions would marginal analysis be most relevant?
A) Should I go to college or work after graduating from high school?
B) Should I eat another donut?
C) Should I use $20,000 as a down-payment on a house or buy a car?
D) Should I get married?
Ans: B Level: M Page: 9 Topic: “How Much?”
1. With trade, a country may:
A) consume outside its production possibilities frontier.
B) consume inside its production possibilities frontier.
C) find its production possibilities frontier will shift outward.
D) do none of the above.
Ans: A
Level: M
Page: 23
Topic: Tradeoffs: The Production Possibility Frontier
2. Consider a possible production possibilities frontier for Iraq. If in 2005 Iraq's resources are not being
fully utilized, Iraq will be somewhere ______________ of its production possibilities frontier.
A) inside
B) outside
C) near the bottom
D) near the top
Ans: A
Level: M
Page: 23
Topic: Tradeoffs: The Production Possibility Frontier
2
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
Use the following to answer the questions:
Table: Production Possibilities Schedule 1
Alternatives
Consumer goods per period
Capital goods per period
A
0
30
B
1
28
C
2
24
D
3
18
E
4
10
F
5
0
3. (Table: Production Possibilities Schedule 1) If the economy produces 2 units of consumer goods per
period, it also can produce at most _______ units of capital goods per period.
A) 30
B) 28
C) 24
D) 18
Ans: C Level: E Page: 23 Topic: Trade-offs: The Production Possibilities Frontier
4. (Table: Production Possibilities Schedule 1) If the economy produces 10 units of capital goods per
period, it also can produce at most _______ unit(s) of consumer goods per period.
A) 5
B) 4
C) 3
D) 2
Ans: B Level: E Page: 23 Topic: Trade-offs: The Production Possibilities Frontier
Use the following to answer the questions:
Figure: Guns and Butter
5. (Figure: Guns and Butter) On this figure, points A, B, E, and F:
A) indicate combinations of guns and butter that society can produce using all of its factors
efficiently.
B) show that the opportunity cost of more guns increases, but that of more butter decreases.
C) indicate that society wants butter more than guns.
D) indicate constant costs for guns and increasing costs for butter.
Ans: A Level: M Page: 24 Topic: Trade-offs: The Production Possibilities Frontier
3
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
6. (Figure: Guns and Butter) This production possibilities curve is:
A) bowed out from the origin because of increasing opportunity costs.
B) bowed in toward the origin because of increasing opportunity costs.
C) bowed in toward the origin because of constant cost of guns and butter.
D) linear because of constant costs.
Ans: A Level: M Page: 24 Topic: Trade-offs: The Production Possibilities Frontier
7. (Figure: Guns and Butter) If the economy were operating at point B, producing 16 units of guns and
12 units of butter per period, a decision to move to point E and produce 18 units of butter:
A) indicates you can have more butter and guns simultaneously.
B) makes it clear that this economy experiences decreasing opportunity costs.
C) involves a loss of 8 units of guns per period.
D) involves a loss of 4 units of guns per period.
Ans: C Level: M Page: 24 Topic: Trade-offs: The Production Possibilities Frontier
8. (Figure: Guns and Butter) The combination of guns and butter at point H:
A) can be obtained, but would cost too much.
B) cannot be attained, given the level of technology and the factors of production available.
C) has no meaning since it does not relate to the preferences of consumers.
D) is attainable but would increase unemployment.
Ans: B Level: M Page: 23 Topic: Trade-offs: The Production Possibilities Frontier
9. Roommates Sarah and Zoe are hosting a Halloween party and have to make food for their guests and
costumes for themselves. To finish both tasks as quickly as possible, Sarah and Zoe know that each of
them should focus on just one task, but they don't know who should do what. To decide which
roommate should do the cooking, Sarah and Zoe should determine which roommate:
A) has the absolute advantage in cooking.
B) has the comparative advantage in cooking.
C) has the largest production possibilities frontier in cooking.
D) can complete the cooking in the least amount of time
Ans: B
Level: M
Page: 28
Topic: Comparative Advantage and Gains from Trade
10. If the opportunity cost of manufacturing machinery is higher in the United States than in Britain and
the opportunity cost of manufacturing sweaters is lower in the United States than in Britain, then the
United States will:
A) export both sweaters and machinery to Britain.
B) import both sweaters and machinery from Britain.
C) export sweaters to Britain and import machinery from Britain.
D) import sweaters from Britain and export machinery to Britain.
Ans: C Level: M Page: 29 Topic: Comparative Advantage and Gains from Trade
11. When a nation experiences economic growth:
A) its production possibilities curve shifts outward.
B) its production possibilities curve shifts inward.
C) it has been able to reach full employment.
D) it has moved to a more consumer-oriented position on its production possibilities curve.
Ans: A Level: E Page: 29 Topic: Comparative Advantage and Gains from Trade
4
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
12. The circular-flow diagram illustrates how households _______ goods and services and _______
factors of production.
A) buy; sell
B) buy; buy
C) own; buy
D) own; sell
Ans: A Level: M Page: 31 Topic: Transactions: The Circular-Flow Diagram
13. An example of a positive statement is:
A) The rate of unemployment should be 4 percent.
B) A high rate of economic growth is good for the country.
C) The federal government spends half of its budget on national defense.
D) Everyone in the country needs to be covered by national health insurance.
Ans: C Level: E Page: 34 Topic: Positive versus Normative Economics
1. In much of the country, homeowners choose to heat their houses with either natural gas or home
heating oil. Which of the following could cause the demand for natural gas to change?
A) a change in the price of home-heating oil
B) a change in income
C) an increase in consumer tastes for natural gas as an energy source
D) all of the above
Ans: D
Level: M
Page: 60
Topic: The Demand Curve
2. When the price of gas goes up and the demand for tires goes down, this means tires and gas are:
A) substitutes.
B) complements.
C) both expensive.
D) both inexpensive.
Ans: B Level: D Page: 61 Topic: The Demand Curve
3. A good is normal if:
A) when income increases, demand remains unchanged.
B) when income increases, demand decreases.
C) when income increases, demand increases.
D) none of the above.
Ans: C
Level: M
Page: 62
Topic: The Demand Curve
4. A shift to the left of a supply curve is caused by:
A) an increase in the number of sellers.
B) a technological improvement.
C) an increase in the cost of an input.
D) an increase in the number of buyers.
Ans: C Level: M Page: 65 Topic: The Supply Curve
5. Which of the following will NOT cause an increase in supply of good X?
A) an increase in the technology used to produce good X
B) an increase in the price of good X
C) an increase in the price of inputs used to produce good X
D) both b and c
Ans: D Level: M Page: 65 Topic: The Supply Curve
5
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
6. What is the difference between a shortage and scarcity?
A) Scarcity will always exist because choices must be made, but a shortage will only exist if the
price is kept below the equilibrium level.
B) Scarcity is a result of two or more alternative uses and will always exist, and quantities of supply
and demand adjusting to flexible prices will create shortages.
C) A surplus will exist when a good is scarce.
D) There is no distinction between the two. They are the same thing.
Ans: A Level: D Page: 71 Topic: Supply, Demand, and Equilibrium
7. Consider two competing motorcycle manufacturers: Harley-Davidson and Honda. If Harley-Davidson
raises the price that it charges for its motorcycles, we can expect:
A) a shift to the right in the supply curve of Hondas and lower prices for Hondas.
B) a shift to the left in the supply curve of Hondas and higher prices for Hondas.
C) a shift to the right in the demand curve for Hondas and higher prices for Hondas.
D) a shift to the left in the demand curve for Hondas and lower prices for Hondas.
Ans: C
Level: M
Page: 72
Topic: Changes in Supply and Demand
8. Which of the following always results in an increase in price and quantity?
A) an increase in supply and a decrease in demand
B) an increase in demand with no change in supply
C) an increase in supply with no change in demand
D) all of the above
Ans: B Level: D Page: 73 Topic: Changes in Supply and Demand
9. Many public utilities burn oil to generate electricity. If the price of oil increases, we would expect:
A) there will be a shift to the right in the supply curve of electricity and a lower price for electricity.
B) there will be a shift to the left in the supply curve of electricity and a higher price for electricity.
C) there will be a shift to the right in the demand curve for oil and a higher price for electricity.
D) there will be a shift to the left in the demand curve for oil and a lower price for electricity.
Ans: B
Level: M
Page: 73
Topic: Changes in Supply and Demand
10. It is certain that the equilibrium price will rise when:
A) the supply curve and the demand curve both shift to the right.
B) the supply curve shifts to the right and the demand curve shifts to the left.
C) supply and demand both increase.
D) supply decreases and demand increases.
Ans: D Level: D Page: 75 Topic: Changes in Supply and Demand
1) Recessions are periods when:
A) output rises
B) the aggregate price level rises
C) the unemployment rate is falling
D) output and employment are falling
Ans: D
Topic: The business cycle
Level: E
2) If a country has a working age population of 200 million, 135 million people with jobs and 15 million
people unemployed and seeking employment, then its unemployment rate is:
A) 4%
B) 7.5%
C) 10%
D) 67.5%
Ans: C
Topic: The business cycle
Level: M
6
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
3) In calculating the unemployment rate, discouraged workers are
A) included in the employment statistics.
B) included in the labor force.
C) not included in the labor force.
D) treated just like the underemployed.
Ans: C
Topic: The business cycle
Level: E
4) The value of all the following goods is included in the calculation of aggregate output except:
A) the value of Firestone tires sold at your local garage.
B) the value of a new shower installed in a recently purchased 1920’s house.
C) the value of the 6-CD player installed to replace the factory-mounted radio-cassette in your new
car.
D) the value of Firestone tires installed on brand-new Volvo station wagons.
Ans: D
Topic: The business cycle
Level: D
5) The value of all the following goods is included in the calculation of aggregate output except:
A) the value of Firestone tires sold at your local garage.
B) the value of a new shower installed in a recently purchased 1920’s house.
C) the value of the 6-CD player installed to replace the factory-mounted radio-cassette in your new
car.
D) the value of Firestone tires installed on brand-new Volvo station wagons.
Ans: D
Topic: The business cycle
Level: D
6) If wages grew at a 5% rate last year and average prices grew at a 3% rate, then the average worker is:
A) better off
B) worse off
C) no better or worse off
D) unaffected
Ans: A
Topic: Inflation and deflation Level: M
7) A closed economy is one which
A) only trades with its neighbors.
B) trades goods but not services or assets with other countries.
C) does not trade goods, services or assets with other countries.
D) has a centrally planned economy.
Ans: C
Topic: The open economy
Level: E
7
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
Figure: Demand and Supply of Gasoline
11. (Figure: Demand and Supply of Gasoline) A factor that may have changed supply from S1 to S2 is:
A) better technology in the production of gasoline.
B) increased demand.
C) lower labor productivity.
D) increased prices of substitutes for gasoline.
Ans: A Level: M Page: 73 Topic: Supply, Demand, and Equilibrium
12. (Figure: Demand and Supply of Gasoline) Given the equilibrium after a change in supply from S1 to
S2:
A) at the old price of $2.50, there will be pressure for the price to fall.
B) the new price will be $2.00.
C) the new quantity will be 600.
D) all of the above are true.
Ans: A Level: E Page: 73 Topic: Supply, Demand, and Equilibrium
1. Which of the following would not be included in this year's GDP?
A) the production of a television show
B) the purchase of a new work truck
C) the hiring of a new police officer
D) your purchase of your neighbor's 1998 Toyota
Ans: D
Topic: The national accounts
Level: M
2. An example of a public transfer payment is a (n)
A) expenditure on an interstate highway.
B) bequest from a deceased relative
C) Social Security payment.
D) salary for members of the armed forces
Ans: C
Topic: The national accounts
Level: M
3. Investment spending represents spending on
A) productive physical capital
B) stocks
C) mutual funds
D) corporate bonds
Ans: A
Topic: The national accounts
Level: E
8
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
4. An example of a good that would be counted as Consumption, C, in the national accounts is
A) a new computer purchased by Federal Express for one of its corporate executives.
B) a storage facility for a moving company.
C) a new car purchased by an employee of a company for personal use.
D) a dump truck purchased by a demolition company.
Ans: C
Topic: The national accounts
Level: M
5. Which of the following would be an example of an intermediate good?
A) Stocks and bonds purchased by a business executive.
B) A cellular telephone purchased by a college student.
C) A wedding ring purchased by an engineer for his fiancée
D) Motor oil purchased by a taxi driver for his cab.
Ans: D
Topic: The national accounts
Level: M
6. Suppose that a doctor who lives alone hires the services of a maid and pays her $15,000 a year to
clean his house. Suppose that he marries her the following year. How would this marriage affect the
reported official GDP the following year?
A) It would increase GDP.
B) It would decrease GDP.
C) It would not affect GDP.
D) There is not enough information to evaluate the impact that it would have on GDP.
Ans: B
Topic: The national accounts
Level: M
7. A stock in a company is:
A) a share of ownership of a company held by a shareholder
B) an IOU that pays interest
C) a portion of a firms profits paid to stock owners
D) part of private savings
Ans: A
Topic: The national accounts
Level: E
8. The reason the dollar value of only final goods and services are counted in GDP is that:
A) we can only measure the value of final goods and services and can not measure the value of
inputs
B) if we counted the value of all goods we would count inputs like the value of steel in a new
automobile more than once.
C) intermediate goods reduce GDP
D) only final goods and services matter for the economy
Ans: B
Topic: The national accounts
9
Level: M
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
9. If during 2005, the country of Sildavia recorded a GDP of $65 billion, interest payments of $15
billion, imports of $13 billion, profits of $7 billion, exports of $15 billion, and rent of $7 billion,
wages during 2005 in Sildavia were
A) $36 billion.
B) $38 billion.
C) $51 billion.
D) $64 billion.
Ans: A
Topic: The national accounts
Level: D
10. Which of the following is included in GDP?
A) the purchase of 100 shares of Microsoft stock
B) the purchase of a 1965 Ford Mustang
C) Social security payments from the U.S. government to retired people
D) the purchase of a ticket to a Rolling Stones concert
Ans: D
Topic: The national accounts
Level: M
11. Real GDP is nominal GDP adjusted for:
A) double counting
B) changes in prices
C) population
D) imports
Ans: B
Topic: Real GDP and aggregate output
Level: D
12. 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
Ans: B
Topic: Real GDP and aggregate output
Level: D
Exhibit: Real GDP
Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for
$8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that
sell for $9 each.
13. (Level: Exhibit: Real GDP) The value of nominal GDP in years 1 and 2 respectively is:
A) $900; $1077.50
B) $900; $990
C) $180,000; $257,400
D) $1000; $1005
Ans: A
Topic: Real GDP and aggregate output
10
Level: M
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
14. (Scenario: real GDP) Using year 1 as the base year, real GDP in year 2 is
A) $900
B) $970
C) $1000
D) 1077.50
Ans: B
Topic: Real GDP and aggregate output
15. (Scenario: real GDP)
A) 10%
B) 7.8%
C) 19.7%
D) 8.8%
Ans: C
Level: M
The growth rate of nominal GDP from year 1 to year 2 is
Topic: Real GDP and aggregate output
Level: D
16. (Scenario: real GDP) Using year 1 as the base year, the growth rate of real GDP from year 1 to year
2 is
A) 10%
B) 7.8%
C) 19.7%
D) 8.8%
Ans: B
Topic: Real GDP and aggregate output
Level: D
17. The official unemployment rate ignores:
A) people with professional jobs
B) people who work on commission
C) discouraged workers who have given up looking for a job
D) all of the above
Ans: C
Topic: The unemployment rate
11
Level: M
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
Exhibit: Price Index
Suppose that in the base period a college student buys 20 gallons of gasoline at $2.00 per gallon, 2 CDs
for $13 each, and 4 movie tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon,
CDs cost $12.50, and the price of a movie ticket is $7.50
18. (Level: Exhibit: Price Index) The price index for the second month is
A) 94
B) 106.4
C) 100
D) impossible to determine without more information
Ans: B
Topic: Price indexes and the aggregate price level
Level: D
19. (Level: Exhibit: Price Index) The change in prices for the month is
A) 7.6%
B) 94%
C) 6.4%
D) -6%
Ans: C
Topic: Price indexes and the aggregate price level
Level: D
Scenario: Growth Rates
Suppose that the current real GDP per capita of the U.S. is $32,000, and its growth rate is 2% per year.
Assume that the real GDP per capital of China is $4000, and its annual growth rate is 7%
1. (Scenario: Growth Rates) How long will it take the real per capita GDP of the U.S. to double?
A) 35 years
B) 50 years
C) 2.25 years
D) 14 years
Ans: A
Topic: Comparing economies across time and space
Level: M
2. Which of the following would be considered the most important driver in productivity growth?
A) Educational Level of attainment
B) The amount of physical capital
C) Technology
D) The abundance of natural resources
Ans: C
Topic: The sources of long-run growth
Level: E
3. The aggregate production function discussed in class does not depend on which of the following?
A) The quantities of physical capital per worker
B) Human capital per worker
C) The state of technology
D) The amount of natural resources
Ans: D
Topic: The sources of long-run growth
12
Level: E
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
Exhibit: Technological Progress and Productivity Growth
Real GDP 140
per worker
130
(thousands
120
of 1990
110
dollars)
Productivity
using 2005
technology
C
●
100
90
Productivity
using 1935
technology
80
B
●
70
60
50
A
●
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
Physical capital per worker (thousands of 1990 dollars)
4. (Exhibit: Technological Progress and Productivity Growth) Which of the following moves would
have been most likely to result from an increase in domestic savings?
A) A to B
B) B to A
C) C to B
D) none of the above
Ans: A
Topic: The sources of long-run growth
Level: M
5. (Exhibit: Technological Progress and Productivity Growth) Which of the following moves could
have resulted from an increase in foreign investment spending? (Bearing in mind that foreigners may
or may not introduce advanced technologies.)
A) A to B
B) B to C
C) B to A
D) Both a and b.
Ans: D
Topic: The sources of long-run growth
Level: M
6. (Exhibit: Technological Progress and Productivity Growth) Which of the following moves would be
most likely to result from an increase in the quality (as well as quantity) of government spending on
education?
A) A to B
B) B to A
C) B to C
D) C to B
Ans: C
Topic: The sources of long-run growth
13
Level: M
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
7. Over the course of the 20th century, the real GDP per capita in the United States rose mostly as a
result of
A) rising population.
B) rising employment.
C) rising productivity.
D) reduced vacation time.
Ans: C
Topic: The sources of long-run growth
Level: E
8. Diminishing returns to physical capital means that as more and more physical capital is combined
with a fixed amount of human capital with a fixed technology eventually:
A) aggregate output or real GDP declines
B) aggregate output or real GDP grows
C) additions to aggregate output or real GDP decline
D) additions to aggregate output or real GDP increase
Ans: C
Topic: The sources of long-run growth
Level: D
9. A relatively low saving rate affects productivity growth by
A) depriving investment spending of the funds needed to increase the physical capital.
B) promoting consumption spending and depriving investment in human capital of the funds needed
for tuition.
C) reducing the tax base and preventing the government from providing public goods.
D) stimulating imports and increasing the trade deficit.
Ans: A
Topic: Why growth rates differ
Level: M
Scenario: Open economy S=I
In an open economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government
spending is $2 trillion. Taxes are $1.5 trillion and government transfers are $1 trillion. Exports are $1
trillion, and imports are $3.
1. (Scenario: Open economy S=I) How much is private saving?
A). $4 trillion
B). $2.5 trillion
C). $3.5 trillion
D). $1.5 trillion
-Ans: C-Topic: Matching up savings and investment spending -Level: D
2. (Scenario: Open economy S=I) What is the government budget balance?
A). a surplus of $1.5 trillion
B). a deficit of $1.5 trillion
C). a deficit of $0.5 trillion
D). a surplus of $3.5 trillion
-Ans: B-Topic: Matching up savings and investment spending -Level: D
14
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
3. (Scenario: Open economy S=I) How much is national saving?
A). $4 trillion
B). $3.5 trillion
C). $2 trillion
D). $5.5 trillion
-Ans: C-Topic: Matching up savings and investment spending -Level: D
4. (Scenario: Open economy S=I) How much is the net capital inflow?
A). $1 trillion
B). $2 trillion
C). $3 trillion
D). $4 trillion
-Ans: B-Topic: Matching up savings and investment spending -Level: D
5. (Scenario: Open economy S=I) How much is investment spending?
A). $2 trillion
B). $3 trillion
C). $3.5 trillion
D). $4 trillion
-Ans: D-Topic: Matching up savings and investment spending -Level: D
Figure: Loanable Funds Market
12
S
Interest rate (in percent)
10
8
6
E
4
D
2
0
0
1
2
3
4
5
6
Quanity of loanable funds (trillions of dollars)
6. (Figure: Loanable funds market) If the interest rate is 8%, people will want to save approximately:
A). $3 trillion
B). $2 trillion
C). $4 trillion
D). $1 trillion
-Ans: C-Topic: Matching up savings and investment spending -Level: E
15
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
7. According to the figure below, after an increase in government borrowing, the new equilibrium
interest rate will rise from ______ and the amount of private borrowing will _______.
A). 6% to 8%; stay the same.
B). 6% to 8%; rise.
C). 6% to 8%; fall.
D). 6% to 8%; be indeterminate.
-Ans: C-Topic: Matching up savings and investment spending -Level: M
8. If a one year project costs $100,000 and is expected to return the firm $105,000, then the rate of
return of the project is:
A). 4.8%
B). 5%
C). $5,000
D). $105,000
-Ans: B-Topic: Matching up savings and investment spending -Level: M
9. In the open economy of Sildavia during 2005, government spending was $30 billion, government
transfers were $15 billion, consumption was $70 billion, taxes were $35 billion, and GDP was $100
billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that Sildavia
registered
A). a net capital inflow of $10 billion.
B). capital inflows of $10 billion and capital outflows of $20 billion.
C). a trade surplus of $20 billion and a financial deficit of $20 billion.
D). a net capital outflow of $10 billion.
-A-Topic: Matching up savings and investment spending -Level: D
10. If the interest rate in the market for loanable funds is above the equilibrium interest rate, we know that
A). there is a shortage of loanable funds.
B). savings exceed investment spending.
C). the quantity demanded of loanable funds exceeds the quantity supplied of loanable funds.
D). consumption is smaller than savings.
-Ans: B-Topic: Matching up savings and investment spending -Level: M
16
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
11. When the government runs a budget deficit, all of the following happen except:
A). the government becomes a borrower in the market for loanable funds.
B). the interest rate rises.
C). the total amount of borrowing decreases.
D). private investment spending is crowded out.
-Ans: C-Topic: Matching up savings and investment spending -Level: M
12. Crowding out negatively affects the economy by
A). decreasing government borrowing.
B). decreasing consumption.
C). increasing private borrowing.
D). reducing investment spending on physical capital.
-Ans: D-Topic: Matching up savings and investment spending -Level: E
13. Which of the following government policies will be most likely to increase investment spending?
A). lower taxes on consumption, so that disposable income rises.
B). lower taxes on the returns from savings, so that total savings increase and the interest rate falls.
C). raise taxes on the returns from bonds while lowering taxes on stock dividends.
D). lower taxes on investment spending while raising taxes on savings, so that total tax revenue
remains constant
-Ans: B-Topic: Matching up savings and investment spending -Level: M
Exhibit: Market for loanable funds
interest rate
Supply
8%
n
E
Demand
$300 billion
Quantity of loans
14. Exhibit: Market for loanable funds) If the interest rate is greater than 8%, then the quantity supplied
of loanable funds will _______ the quantity of loanable funds demanded.
A). be greater than
B). be less than
C). equal
D). None of the above
-A-Topic: Matching up savings and investment spending -Level: M
17
PRACTICE ECON 202 EXAM QUESTIONS
Exam 1, Douglas
2005
15. (Exhibit: Market for loanable funds) If the interest rate is less than 8%, then the quantity supplied of
loanable funds will _______ the quantity of loanable funds demanded.
A). be greater than
B). be less than
C). equal
D). none of the above
-Ans: B-Topic: Matching up savings and investment spending -Level: M
16. Which of the following portfolios is the most diversified in terms of risk?
A). $100,000 worth of stock in ten different companies in the same industry.
B). $100,000 worth of stock in ten different companies in two different industries.
C). $100,000 worth of stock in ten different companies in five different industries.
D). $100,000 worth of stock in one company that sells ten different products.
-Ans: C-Topic: The financial system-Level: M
17. A loan is
A). a liability for the lender and an asset for the borrower.
B). a physical asset that is traded in financial markets.
C). a claim on a bank that obliges the bank to provide funds to a lender.
D). a liability for the borrower and an asset for the lender.
-Ans: D-Topic: The financial system-Level: E
18