Economics II Exam Solutions
Course Introduction
Economics II builds on the foundational concepts introduced in Economics I, delving deeper into both microeconomic and macroeconomic theories. The course examines advanced topics such as market structures, general equilibrium, externalities, international trade, monetary and fiscal policy, and economic growth. Students will engage in analytical discussions and practical applications to understand the complexities of modern economies and the implications of economic policies. Emphasis is placed on the use of economic models and real-world case studies to develop critical thinking skills and effective problem-solving strategies for economic issues.
Recommended Textbook
Macroeconomics 4th Edition by Paul Krugman
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Page 2
Chapter 1: First Principles
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Sample Questions
Q1) Because one person's spending is another person's income, if one group in the economy spends more, they increase their share of income and decrease the incomes of other groups.
A)True
B)False
Answer: False
Q2) Specialization and trade usually lead to:
A)lower economic growth.
B)the exchange of goods and services in markets.
C)lower living standards.
D)higher prices.
Answer: B
Q3) Florida schools offered cash bonuses to students who scored high on the state's standardized exams. The cash bonuses are an example of this economic principle:
A)Resources are scarce.
B)The real cost of something is what you must give up to get it.
C)There are gains from trade.
D)People usually take advantage of opportunities to make themselves better off.
Answer: D
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Page 3
Chapter 2: Economic Models
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Sample Questions
Q1) If they produce only hamburgers, in a single day Sarah can produce 10 hamburgers, and Abe can produce 5 hamburgers. If they make milkshakes only, in a single day Sarah can produce 10 milkshakes, and Abe can produce 4 milkshakes. Therefore, _____ has an absolute advantage and a comparative advantage in making _____.
A)Sarah; hamburgers
B)Sarah; milkshakes
C)Abe; hamburgers
D)Abe; milkshakes
Answer: B
Q2) (Table: Production of Good Z and Good X in Urbanville) Look at the table Production of Good Z and Good X in Urbanville. If this table shows the production possibility frontier and Urbanville is producing at combination F, what is the opportunity cost of a move to combination E?
A)5 of Z
B)20 of Z
C)25 of X
D)0 of X
Answer: A
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Chapter 3: Supply and Demand
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Sample Questions
Q1) If consumer tastes for electric cars increase over the next 10 years, we will see an increase in the demand for electric cars, higher electric car prices, and an increase in the equilibrium quantity of electric cars.
A)True
B)False
Answer: True
Q2) Which of the following factors would result solely in a movement along the demand curve for a particular good?
A)a change in the prices of related goods
B)a change in the price of that good
C)a change in the size of the population
D)both a change in the price of that good and a change in the size of the population
Answer: B
Q3) Explain the law of demand. What does it tell us about the shape of a demand curve?
Answer: The law of demand states that when all other variables are held constant, a higher price of a good will tend to decrease the quantity demanded of that good. Graphically we see this as a downward-sloping demand curve.
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Chapter 5: International Trade 5
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Sample Questions
Q1) Lower wages in China reflect _____ labor productivity in China than in the United States. This means that if the United States moved high-tech industries to China, the overall cost of production would be _____ in China than in the United States.
A)lower; higher
B)lower; lower
C)higher; higher
D)higher; lower
Q2) (Table: The Production Possibilities for Tractors and Crude Oil) Look at the table The Production Possibilities for Tractors and Crude Oil. _____ has (have) an absolute advantage in producing crude oil.
A)The United States
B)Mexico
C)Both the United States and Mexico
D)Neither the United States nor Mexico
Q3) Explain the difference between comparative advantage and absolute advantage.
Q4) In autarky, the amount of a country's production and consumption of a good must be identical.
A)True
B)False
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Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) What are Keynesian policies?
Q2) Between 1980 and 2014, inflation wiped out most of the wage gains of the typical worker.
A)True
B)False
Q3) The point on a business cycle when real GDP stops falling and begins rising is a(n):
A)peak.
B)expansion.
C)trough.
D)recession.
Q4) In recent times, the U.S. government has been trying to help the economy through one of the worst economic slumps ever. The policies used are based on _____ theory.
A)Keynesian
B)classical
C)supply-side
D)trickle-down
Q5) You read a newspaper article that says the unemployment rate rose this month. Are we in a recession? Explain.
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) GDP excludes all of the following EXCEPT:
A)the value of leisure.
B)damage to the environment.
C)the value of housework.
D)the value of owner-occupied housing.
Q2) The producer price index usually responds to price changes more quickly than the consumer price index.
A)True
B)False
Q3) In the product markets:
A)households supply goods and services.
B)households demand goods and services.
C)firms demand resources.
D)firms supply resources.
Q4) (Table: Price and Output Data) Look at the table Price and Output Data. Between years 4 and 5, nominal GDP increased by:
A)33%.
B)75%.
C)50%.
D)13%.
Page 8
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) Cyclical unemployment:
A)occurs when people are between jobs.
B)is a lack of good matches between available jobs and skills.
C)is the normal unemployment around which the actual unemployment rate fluctuates.
D)is the deviation from the natural rate in the actual rate of unemployment.
Q2) The increased availability of automatic teller machines has decreased the shoe-leather costs of high inflation.
A)True
B)False
Q3) In 2002, the French adopted the British pound as their national currency.
A)True
B)False
Q4) According to official statistics, 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.
Q5) How is it possible for the unemployment rate to overstate the true level of unemployment?
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Chapter 9: Long-Run Economic Growth
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Sample Questions
Q1) Growth accounting estimates the contribution to economic growth of each factor in the aggregate production function.
A)True
B)False
Q2) The aggregate production function exhibits diminishing returns to labor but not to physical capital.
A)True
B)False
Q3) Convergence is most likely between:
A)Mexico and Ghana.
B)France and Germany.
C)Brazil and the United Kingdom.
D)Mexico and Ghana or Brazil and the United Kingdom.
Q4) Carbon taxes and cap and trade systems are market-based incentives that are likely to be effective in limiting greenhouse gas emissions.
A)True
B)False
Q5) A nation's real GDP per capita increased from $250 billion to $275 billion in one year. Calculate the nation's growth rate.
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Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) Net capital inflow equals:
A)national savings.
B)imports minus exports.
C)consumption.
D)consumption plus government spending.
Q2) (Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is private saving?
A)$4 trillion
B)$2.5 trillion
C)$3.5 trillion
D)-$0.5 trillion
Q3) Given an annual interest rate of 3%, the present value of a future payment of $2,080 to be paid in one year is:
A)$1,904.76.
B)$2,000.00.
C)$2,019.42.
D)$2,080.00.
Q4) Student loans, auto loans, and credit card loans are often securitized.
A)True B)False
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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Sample Questions
Q1) (Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a), the economy is initially at output level Y<sub>1</sub> and there is:
A)an inflationary gap.
B)a recessionary gap.
C)equilibrium at full employment.
D)no gap.
Q2) Fiscal experts in the United States are most concerned about the country's:
A)implicit liabilities.
B)high ratio of debt to GDP.
C)risk of debt default.
D)low ratio of debt to GDP.
Q3) For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is smaller than the multiplier effect of a tax cut of $100 billion.
A)True
B)False
Q4) Taxes increase as GDP rises. This is an example of an automatic stabilizer.
A)True
B)False
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Chapter 14: Money, Banking, and the Federal Reserve System
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Sample Questions
Q1) Currency, checkable deposits, and traveler's checks are about _____ of M1.
A)10%
B)55%
C)75%
D)100%
Q2) The problem with the paper money issued by private banks in the nineteenth century was that if the issuing bank failed, the money was worthless.
A)True
B)False
Q3) The Wall Street Reform and Consumer Protection Act, or Dodd-Frank:
A)decreases regulation of commercial banks and investment banks.
B)subjects "systemically important" institutions to high capital requirements and limits the risks they can take.
C)requires all banks to become members of the Federal Reserve.
D)makes securitization illegal.
Q4) Bank reserves are the currency banks hold in their vaults minus the deposits at the Federal Reserve.
A)True
B)False
Page 13
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Chapter 15: Monetary Policy
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Sample Questions
Q1) (Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run Determination of the Interest Rate. If the money supply is at MS<sub>1</sub> and the central bank buys Treasury bills, then in the short run the interest rate will:
A)increase above r<sub>1</sub>.
B)remain at r<sub>1</sub>.
C)decrease to r<sub>2</sub>.
D)fluctuate randomly.
Q2) If the equilibrium interest rate in the money market is 5%, at an interest rate of 2% the quantity of nonmonetary interest-bearing financial assets demanded is _____ the quantity supplied.
A)less than
B)greater than C)equal to
D)irrelevant to
Q3) According to the liquidity preference model:
A)an increase in the money supply lowers the equilibrium rate of interest.
B)a decrease in the money supply lowers the equilibrium rate of interest.
C)the money supply curve is a horizontal line.
D)the demand for money curve is a vertical line.
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Page 14
Chapter 16: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) The problem of debt deflation deepens during an economic slump because:
A)borrowers have to reduce spending to pay off debts.
B)the Fisher effect raises the nominal interest rate during deflation.
C)lenders have to reduce spending to accommodate higher returns from loans.
D)the zero bound on the nominal interest rate is broken.
Q2) As a consequence of the existence of a nonaccelerating inflation rate of unemployment:
A)cyclical unemployment can never be zero.
B)there is no short-run trade-off between unemployment and inflation.
C)money is neutral.
D)there is no long-run trade-off between unemployment and inflation.
Q3) If the money supply grows by 4% and the real money supply is $100 billion, real seignorage is:
A)$4 billion.
B)$25 billion.
C)$400 billion.
D)$2.5 trillion.
Q4) Explain how the output gap is related to the unemployment rate and the natural unemployment rate.
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Chapter 17: Crises and Consequences
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Sample Questions
Q1) In a recession, the Fed usually purchases short-term government securities to decrease interest rates and increase spending.
A)True
B)False
Q2) Investment banks differ from commercial banks because commercial banks _____, but investment banks _____.
A)are allowed to advertise; must not advertise.
B)can have offices only in one state; can have offices in many countries
C)do not sell foreign currencies; sell foreign currencies
D)accept deposits from customers; do not accept deposits
Q3) Which of the following is an explanation of banking crises?
A)Many banks make the same mistake: investing in an asset bubble.
B)Banks engage in maturity transformation.
C)The Federal Reserve, acting as a lender of last resort, introduces too much competition into the system.
D)Banks are paying low interest rates on deposits and charging high interest rates on loans.
Q4) Describe the financial contagion that occurred during the Irish banking crisis in 2008.
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Page 16
Chapter 18: Events and Ideas
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Sample Questions
Q1) Purchases and sales of short-term Treasury bills by the Fed is called quantitative easing.
A)True
B)False
Q2) Under rational expectations, government policy can be effective:
A)if it is rationally thought out before implementation.
B)if it is anticipated, so people can make realistic preparations.
C)if it surprises people.
D)whenever the economy reacts rationally to the decision.
Q3) Classical economics is based primarily on the works of John Maynard Keynes.
A)True
B)False
Q4) According to the Great Moderation consensus, the effectiveness of economic policy is limited by the political business cycle.
A)True
B)False
Q5) Keynesian theory argued that monetary policy could be very effective during a depression.
A)True
B)False
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Chapter 19: Open-Economy Macroeconomics
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Sample Questions
Q1) A reduction in the value of a fixed rate currency is called a devaluation.
A)True
B)False
Q2) In the early twenty-first century, the United States has had a current account: A)surplus.
B)deficit.
C)balance equal to zero.
D)deficit and a capital account deficit.
Q3) A devaluation of a currency tends to decrease the current account deficit.
A)True
B)False
Q4) An argument against Britain's adopting the euro was that using the euro would make monetary policy less effective.
A)True
B)False
Q5) A devaluation can help reduce an inflationary gap.
A)True
B)False
Q6) What are the costs of fixing the exchange rate?
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Q7) What are the advantages and disadvantages of fixed and floating exchange rates?
Chapter 20: Graphs in Economics
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Sample Questions
Q1) (Figure: Demand and Supply) Look at the figure Demand and Supply. The slope of the curve labeled D is:
A)-1.
B)0.
C)1.
D)1.3.
Q2) (Figure: Demand and Supply) Look at the figure Demand and Supply. The curve labeled S indicates that a price of $2 is related to a quantity of:
A)1
B)2
C)3
D)3.
Q3) (Table: Wages and Hours Worked) Look at the table Wages and Hours Worked. Graphing the relation with wages on the vertical axis and hours worked on the horizontal axis, the slope between point D and point E is:
A)0.5.
B)5.
C)45.
D)2.
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Page 19
Chapter 21: toward a Fuller Understanding of Present Value
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Sample Questions
Q1) The net present value (NPV) of an activity or project is equal to the _____ value of all of the revenues minus the _____ value of all of the costs associated with it. A)future; present B)present; present C)present; future D)future; future
Q2) You have heard about a new light bulb that is costly to purchase but uses little electricity and thus allows you to save money on your utility bill. Suppose the new light bulb costs $10 today but next year your electricity bill will be $50 lower. If the interest rate is 10%, what is the net present value of buying this new light bulb and using it for one year?
A)$40
B)-$45.45
C)$55
D)$35.45
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