MİDTERM 2 QUESTİONS (A)

MİDTERM 2 QUESTİONS

 (A)

There are three parts. In Part 1 and Part II; every question is 4 point and in Part III very question is 10 point.  There are 4 pages. You can use calculator in the exam. But using cell phone  will not be allowed. You can not borrow erases from each other. Please Read carefully and answer the questions. Good Luck.

PART I

1.  The consumption function shows the relationship between consumption  spending and

a. wealth

b. interest rates

c. expectations

d. disposable income

2.  Which of the following statements is most accurate?

a. most of the variation in consumption spending can be explained by changes in the interest rate

b. most of the variation in consumption spending can be explained by changes in disposable income

c. most of the variation in consumption spending can be explained by changes in wealth

d. most of the variation in consumption spending can be explained by changes in debt

3. The marginal propensity to consume (MPC) is

a. the change in consumption divided by the change in disposable  income

b. total consumption divided by total disposable income

c. the change in disposable income divided by the change in  consumption

d. total disposable income divided by total consumption

e. the change in disposable income minus the change in consumption

4 In the short-run Keynesian model, when aggregate expenditure is less than GDP, output will

a. decline as firms cut production to stop the buildup of inventories

b. decline as firms increase their prices to stop the buildup of  inventories

c. increase as firms increase production to try to stop depletion of  inventories

d. increase as firms cut their prices to try to stop depletion of  inventories

5. If income increases by $10,000, government purchases are fixed at  $1,000, investment spending is fixed at $2,000, and the marginal  propensity to consume is 0.70, by how much does aggregate expenditure  increase?

a. $700

b. $2,000

c. $7,000

d. $1,000

6. If the marginal propensity to consume is 0.75 and investment spending  increases by $200 billion, by how much will equilibrium output  increase?

a. $150 billion

b. $200 billion

c. $266.7 billion

d. $800 billion

7. For any value of the MPC (marginal propensity to consume), the formula for the  expenditure multiplier is

a. 1/(1 - MPC)

b. 1/MPC

c. 1/(MPC - 1)

d. (1 + MPC)/MPC

8. If the marginal propensity to consume is 0.6, what is the value of the  expenditure multiplier?

a. 1.0

b. 1.6

c. 2.0

d. 2.5

9. Equilibrium GDP is reached when

a. aggregate expenditure exceeds GDP

b. aggregate expenditure is less than GDP

c. aggregate expenditure equals the level of output

d. the level of output is greater than aggregate expenditure

10. Which of the following is a definition for inflation?

     a.  an increase in the value of the dollar over time

     b.  an increase in the overall price level

     c.  an increase in the price of a good or service

     d.  it takes fewer dollars to purchase other currencies

11. The Consumer Price Index (CPI)

     a.  measures the prices of all goods produced in the economy

     b.  includes prices of raw materials

     c.  is found by averaging the prices of all goods consumed in the economy

     d.  includes the prices of some used consumer goods

12. If the base year for an index is 1995 and the value of the index in 1998 is 165.1, by what percent has the measure grown over those 3 years?

     a.  165.1 percent

     b.  100 percent

     c.  6.51 percent

     d.  65.1 percent

13. Inflation can be defined as a

     a.  period of high prices

     b.  period of rising prices

     c.  period during which prices rise at an increasing rate

     d.  decline in the standard of living

14. Which of the following would be included in the GDP Price Index but not in the Consumer Price Index?

     a.  the price of a Chrysler automobile

     b.  the price of a fighter aircraft

     c.  the price of a used computer

     d.  the price of a tube of toothpaste

15. Which of the following is a reason why the Consumer Price Index (CPI) is not calculated as a simple average of all prices?

     a.  some goods experience large price changes and the CPI would be too variable if computed by a simple average

     b.  goods differ in their importance in the average consumer's budget

     c.  some goods never experience price changes and the CPI would not be variable enough if computed as a simple average

     d.  it would be difficult to compute a price index using a simple average of all prices

16. If firms decide to invest less at every interest rate, what will be the effect on the loanable funds market?

     a.  the interest rate will fall and households will save more

     b.  the interest rate will rise but the effect on saving will be ambiguous

     c.  the interest rate will rise and households will save more

     d  the interest rate will fall and households will save less

25. If you observed that the number of overtime hours was increasing far above normal levels, what would you say about the state of the economy?

a. the economy is heading toward a recession

b. the economy is in an expansion

c. the economy is in a recession

d. the economy is at the end of an expansion

27. Which of the following occurs during recessions?

a. employment falls below the full-employment level and firms temporarily operate at above-normal rates of utilization

b. employment rises above the full-employment level and firms temporarily operate at below-normal rates of utilization

c. employment falls below the full-employment level and firms temporarily operate at below-normal rates of utilization

d. employment rises above the full-employment level and firms permanently operate at below-normal rates of utilization

30. Which of the following is a common reaction to an increase in the interest rate?

a. a decline in oil prices

b. a war

c. a decrease in spending on new homes

d. an increase in military spending

4. To be considered unemployed, a person must be jobless, willing and able to work, and have actively searched for work during the previous

a. two weeks

b. four weeks

c. six weeks

d. eight weeks

5. The official measure of unemployment may underestimate actual unemployment because

a. people may lie when reporting they are looking for jobs

b. the treatment of involuntary part-time workers and discouraged workers is misleading

c. the population sample employed by the Labor Department is too small to be representative

d. some individuals who should be receiving unemployment benefits do not receive them

18. A rise in the interest rate tends to

a. reduce many kinds of spending

b. stimulate investment in high-profit industries

c. cause bond prices to increase

d. encourage confidence in the Fed's control over the economy

19. In the short-run Keynesian model, an open-market purchase of bonds by the Fed will

a. raise the interest rate, reduce spending, and increase output

b. lower the interest rate, increase spending, and increase output

c. lower the interest rate, reduce spending, and decrease output

d. lower the interest rate, increase spending, and decrease output

21. Which of the following will cause the aggregate demand curve to shift to the right?

a. an increase in the price level

b. a decrease in the price level

c. an increase in government purchases

d. an increase in the interest rate
23. In the short run, a decrease in government purchases will

a. decrease real GDP because of the multiplier effect and price level changes, but be offset somewhat by decreases in the interest rate

b. decrease real GDP because of the price level increase and increase in the interest rate

c. decrease real GDP because of the multiplier effect and increase in the interest rate, but be offset somewhat by decreases in the price level

d. decrease real GDP because of the multiplier effect, but be offset somewhat by decreases in the price level and the interest rate

28. Which of the following Federal Reserve policies would stabilize the price level in the short run following a large increase in oil prices?

a. sell bonds in the open market

b. buy bonds in the open market

c. decrease the required reserve ratio

d. decrease the discount rate


1. Money is                                                        

a. a highly liquid asset that is widely accepted as a means of payment

b. any asset that is convertible into cash

c. an asset that is backed by a precious metal such as gold or silver

d. any financial asset created and issued by government

e. anything used to pay for goods and services, including currency, checks, and credit cards

3. Which is the largest component of M1?

a. cash

b. demand deposits

c. other checkable deposits

d. travelers' checks

Question 8:

Following the development of new ‘smart cards’ as a way of paying for goods,

consumers decide to hold less money in the form of currency, and also decrease the

balances in their checking accounts. Which of the following statements about the effect

of these ‘smart cards’ on the velocity of money is correct?

a) The velocity of money increases, because money demand is lower.

b) The velocity of money decreases, because money demand is lower.

c) The velocity of money increases, because nominal income is higher.

d) The velocity of money decreases, because the interest rate is higher.

e) The velocity of money does not change, because the acceleration rate of money is

zero.

 Question 13:

The Gulf war in 1991 caused a sharp decrease in consumer confidence. Suppose that the

only effect of a future war with Iraq is a drop in consumer confidence. If the government

wants to neutralize the impact of the drop in consumer confidence on both GDP and the

interest rate, the following policies are correct:

a) Increase G and M.

b) Increase G, decrease M.

c) Decrease G, Increase M.

d)Increase G, leave M unchanged.

T. Young adults are more vulnerable for unemployment fluctuations than the adults in

their 40-50s.