Economics II Practice Exam
Course Introduction
Economics II builds upon foundational economic principles, exploring both microeconomic and macroeconomic theories in greater depth. Topics include market structures, consumer and producer behavior, pricing strategies, fiscal and monetary policy, national income determination, inflation, unemployment, and international trade. The course emphasizes analytical tools, graphical analysis, and real-world applications to develop a robust understanding of how economic forces shape markets and influence societal well-being. This advanced study prepares students to critically evaluate economic issues and policies in a global context.
Recommended Textbook
Macroeconomics 9th Edition by Andrew B. Abel
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Page 2
Chapter 1: Introduction to Macroeconomics
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73 Verified Questions
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Sample Questions
Q1) Many people perceive erroneously that most macroeconomists spend a lot of time engaged in A)forecasting.
B)macroeconomic research.
C)macroeconomic analysis.
D)data development.
Answer: A
Q2) Short-run contractions and expansions in economic activity are called A)recessions.
B)expansions.
C)deficits.
D)the business cycle.
Answer: D
Q3) In the 1980s,1990s,and 2000s,the United States has had a A)small trade surplus.
B)small trade deficit.
C)large trade deficit.
D)large trade surplus.
Answer: C
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Page 3
Chapter 2: The Measurement and Structure of the National Economy
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110 Flashcards
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Sample Questions
Q1) Because government services are not sold in markets, A)they are excluded from measurements of GDP.
B)the government tries to estimate their market value and uses this to measure the government's contribution to GDP.
C)they are valued at their cost of production.
D)taxes are used to value their contribution.
Answer: C
Q2) In a given year,a country's GDP = $9841,net factor payments from abroad = $889,taxes = $869,transfers received from the government = $296,interest payments on the government's debt = $103,consumption = $8148,and government purchases = $185.The country had government saving equal to A)$285.
B)$3850.
C)$2397.
D)$2112.
Answer: A
Q3) How are net exports,net factor payments from abroad,and the current account balance related?
Answer: NX + NFP = CA.
Page 4
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Chapter 3: Productivity, output, and Employment
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Sample Questions
Q1) A decrease in the number of workers hired by a firm could result from
A)an increase in the marginal product of labor.
B)an increase in the marginal revenue product of labor.
C)an increase in the real wage.
D)a decrease in the real wage.
Answer: C
Q2) A decrease in the real wage would result in a
A)movement along the labor demand curve, causing an increase in the number of workers hired by the firm.
B)shift of the labor demand curve, causing an increase in the number of workers hired by the firm.
C)movement along the labor demand curve, causing a decrease in the number of workers hired by the firm.
D)shift of the labor demand curve, causing a decrease in the number of workers hired by the firm.
Answer: A
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5
Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) The user cost of capital is given by the following formula,where p<sub>K</sub> is the real price of capital goods,d is the depreciation rate,and r is the expected real interest rate.
A)uc = (r + d)/p<sub>K</sub>
B)uc = p<sub>K</sub>/(r + d)
C)uc = dp<sub>K</sub>/r
D)uc = (r + d)p<sub>K</sub>
Q2) Suppose the nominal interest rate is 6%,the tax rate on interest income is 30%,and expected inflation is 3%.
(a)Calculate the expected real after-tax interest rate.
(b)Calculate the expected real after-tax interest rate if the nominal interest rate falls to 4%.
(c)Calculate the expected real after-tax interest rate if the tax rate increases to 50% (with the nominal interest rate at its original value of 6%).
(d)Calculate the expected real after-tax interest rate if expected inflation increases to 5% (with the nominal interest rate at its original value of 6% and the tax rate at its original value of 30%).
Q3) What is the marginal propensity to consume,and why is it always less than one?
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6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) Which of the following would be part of the nation's financial account?
A)A night club show seen by an American in Mexico City
B)A dividend from a British equity owned by an American
C)A payment to the Philippine government for the use of military bases in their country
D)One hundred shares of British Petroleum stock purchased by an American
Q2) A small open economy has a current account balance of zero.A rise in its investment demand causes
A)a current account surplus.
B)a financial account deficit.
C)income to exceed absorption.
D)net borrowing from abroad.
Q3) Suppose a wealthy Canadian donates $10 million to charities in Mexico.Mexican net exports ________ and the current account balance ________.
A)fall; rises
B)rise; rises
C)are unchanged; is unchanged
D)fall; is unchanged
Q4) What determines the interest rate in a small open economy?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Steady-state consumption per worker is
A)larger in the short run than in the long run.
B)less than steady-state investment per worker.
C)less than steady-state saving per worker.
D)steady-state production per worker minus steady state investment per worker.
Q2) In the Solow model,if productivity doesn't change,
A)the economy must eventually reach a steady state.
B)the capital-labor ratio must decline.
C)the capital-labor ratio must rise.
D)there can be no saving.
Q3) All else being equal,a permanent decrease in the saving rate in a steady-state economy would cause
A)an increase in the capital-labor ratio and an increase in consumption per worker.
B)an increase in the capital-labor ratio and a decrease in consumption per worker.
C)a decrease in the capital-labor ratio and a decrease in consumption per worker.
D)a decrease in the capital-labor ratio and an increase in consumption per worker.
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Chapter 7: The Asset Market, money, and Prices
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Sample Questions
Q1) The amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset is known as the A)CDS spread.
B)risk premium.
C)VIX.
D)term spread.
Q2) For something to satisfy the medium-of-exchange function of money,it must be A)backed by gold.
B)readily exchangeable for other goods.
C)issued by a central bank.
D)an inherently valuable commodity.
Q3) People in other countries want to hold U.S.dollars as a A)medium of exchange.
B)store of value.
C)unit of account.
D)standard of deferred payment.
Q4) Why is per-capita U.S.currency demand so large? Who is holding large amounts of U.S.currency and why are they doing so? Should U.S.policymakers be concerned about this? Why?
Q5) Give five examples of factors that could reduce the demand for money.
Page 9
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Chapter 8: Business Cycles
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Sample Questions
Q1) Turning points in business cycles occur when
A)a new business cycle is initiated at the trough.
B)the economy hits the peak or trough in the business cycle.
C)the business cycle begins to follow a new pattern that differs from previous business cycles.
D)a new business cycle is initiated at the peak.
Q2) According to Keynesian macroeconomists,prices adjust ________ to shocks,so the government should ________.
A)slowly; do little
B)rapidly; do little
C)rapidly; fight recessions
D)slowly; fight recessions
Q3) The longest economic expansion in the United States occurred during the A)1940s.
B)1960s.
C)1980s.
D)1990s.
Q4) What are some of the problems with using the leading indicators to forecast recessions? If you were a policymaker,would you rely on them?
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Chapter 9: The Is-Lmad-As Model
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Sample Questions
Q1) Looking only at the asset market,an increase in output would cause
A)the LM curve to shift down and to the right.
B)the LM curve to shift up and to the left.
C)an increase in the real interest rate along the LM curve.
D)a decrease in the real interest rate along the LM curve.
Q2) A decrease in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.
A)rise; rise
B)remain unchanged; fall
C)remain unchanged; rise
D)fall; fall
Q3) The Fed has announced that it plans to lower the rate of monetary growth from 10% per year to 2% per year.You would expect this announcement to directly
A)increase money demand, shifting the LM curve up and to the left.
B)increase money demand, shifting the LM curve down and to the right.
C)decrease money demand, shifting the LM curve up and to the left.
D)decrease money demand, shifting the LM curve down and to the right.
Q4) Identify changes in three variables that would cause the FE line to shift to the right.
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Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) According to classical economists,the government should increase government purchases when
A)the benefits of the spending exceed the costs.
B)the economy is in a recession.
C)the economy is likely to go into a recession in the next six months to a year.
D)inflation is lower than its targeted level.
Q2) In the classical model,a temporary increase in government purchases causes the new equilibrium to have
A)more employment and a lower real wage than before.
B)more employment and a higher real wage than before.
C)less employment and a lower real wage than before.
D)less employment and a higher real wage than before.
Q3) The distinction between real and nominal shocks is that
A)real shocks directly affect only the IS curve, but not the FE line or LM curve.
B)real shocks directly affect only the FE line, but not the LM curve.
C)real shocks directly affect only the IS curve or the FE line, but not the LM curve.
D)real shocks have a large direct effect on the IS curve and the FE line, but only a small direct effect on the LM curve.
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Chapter 11: Keynesianism: the Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) In the Keynesian model,short-run equilibrium occurs
A)where the IS and LM curves intersect.
B)where the IS curve, LM curve, and FE lines intersect.
C)where the IS curve intersects the FE line.
D)where the LM curve intersects the FE line.
Q2) Do Keynesians and classicals agree on the effectiveness and desirability of macroeconomic stabilization? Briefly explain.
Q3) In the Keynesian model,an increase in government purchases affects output by
A)increasing labor supply, because workers feel effectively poorer.
B)increasing saving to pay for future taxes, lowering the real interest rate and shifting the IS curve to the left.
C)increasing the real interest rate due to crowding out, reducing aggregate demand.
D)increasing aggregate demand as national saving declines.
Q4) In the Keynesian model in the long run,a decrease in the money supply will cause
A)a decrease in output and an increase in the real interest rate.
B)an increase in the real interest rate but no change in output.
C)a decrease in the real interest rate and a decrease in output.
D)no change in either the real interest rate or output.
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Q5) Why might firms pay an efficiency wage rather than a market-clearing wage?
Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) State and briefly explain whether or not the empirical evidence generally supports the belief that there is a fixed trade-off between unemployment and inflation,such that monetary policymakers can achieve the combination they prefer.
Q2) When the economy goes into a recession,there's an increase in
A)frictional unemployment.
B)structural unemployment.
C)cyclical unemployment.
D)voluntary unemployment.
Q3) Suppose most people had anticipated that inflation would be 3% in the coming year because the Fed would increase the money supply by 3%.Instead,the Fed increases the money supply by 5%.In the short run,this would cause actual output to be ________ full-employment output and prices to increase by ________ 3%.
A)above; more than B)above; less than C)below; more than D)below; less than
Q4) Describe the major costs of inflation,being sure to distinguish between anticipated and unanticipated inflation.
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Page 14
Chapter 13: Exchange Rates, business Cycles, and Macroeconomic
Policy in the Open Economy
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Sample Questions
Q1) The real exchange rate is
A)the price of one currency in terms of another.
B)the price of domestic goods relative to foreign goods.
C)the quantity of gold that can be purchased by one unit of currency.
D)the difference in interest rates between two countries.
Q2) An increase in domestic output would cause a ________ in net exports and a ________ in the exchange rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) The J curve implies that a real depreciation will cause
A)the nominal exchange rate to appreciate in the short run and depreciate in the long run.
B)the nominal exchange rate to depreciate in the short run and appreciate in the long run.
C)net exports to fall in the short run and rise in the long run.
D)net exports to rise in the short run and fall in the long run.
Q4) What is purchasing power parity? Why might it not hold?
Page 15
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Chapter 14: Monetary Policy and the Federal Reserve System
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Sample Questions
Q1) Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations.It could try to get the public to ________ their currency-deposit ratio and ________ banks' reserve requirements,which would in turn change the banks' reserve-deposit ratio.
A)decrease; lower B)decrease; raise C)increase; lower D)increase; raise
Q2) The current chair of the Board of Governors of the Federal Reserve System is A)Janet Yellen.
B)Alan Greenspan.
C)Ben Bernanke.
D)Paul Volcker.
Q3) Which of the Fed's instruments is most frequently used?
A)Changing reserve requirements
B)Open-market operations
C)Changing the discount rate
D)Changing margin requirements for the stock market
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) What are the main reasons (give at least three)that Ricardian equivalence might not hold?
Q2) Suppose that the federal income tax on individuals is set up as follows:
Income above Income below Taxes
0 $8000 0.10 × income
$8000 $35,000 $800 + [0.15 × (income - $8000)]
$35,000 & up $4850 + [0.25 × (income - $35,000)]
Calculate the average tax rate and marginal tax rate for workers with the following levels of income:
(a)$6500
(b)$27,000
(c)$72,000
(d)$250,000
Q3) The political process by which fiscal policy is made
A)is relatively rapid, contributing to the effectiveness of fiscal policy.
B)requires only that the president approve changes to the budget, a decision that takes several months.
C)is efficient in reaching a decision within a year.
D)is slow and results in a long time lag for fiscal policy.
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Page 17