Economics II
Review Questions
Course Introduction
Economics II builds upon foundational concepts introduced in introductory economics, delving deeper into macroeconomic principles and the analysis of aggregate economic activity. The course explores topics such as national income determination, economic growth, unemployment, inflation, fiscal and monetary policy, open economy macroeconomics, and international trade. Students learn to apply key models and analytical techniques to evaluate government policies and understand the impact of global economic interdependence. Real-world case studies and data analysis exercises reinforce theoretical concepts, preparing students for advanced economics courses and practical policy discussions.
Recommended Textbook
Macroeconomics 12th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics?
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Sample Questions
Q1) A positive relationship exists between two variables if
A) one variable has "positively" no effect on the other variable.
B) a reduction in one variable is associated with an increase in the other variable.
C) a reduction in one variable is associated with a decrease in the other variable.
D) both variables are inflation-distorted.
Answer: C
Q2) All economic questions are about
A) how to make money.
B) what to produce.
C) how to cope with scarcity.
D) how to satisfy all our wants.
Answer: C
Q3) Microeconomics is the study of ________.
A) the choices that individuals and businesses make
B) all aspects of scarcity
C) the global economy
D) the national economy
Answer: A
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3
Chapter 2: The Economic Problem
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Sample Questions
Q1) Country A can produce 1 cello by giving up the production of 5 guitars. Country B can produce 1 guitar by giving up the production of 4 cellos. In which good does country A have a comparative advantage?
A) guitars
B) cellos
C) both goods
D) neither good
Answer: A
Q2) "If Mexico is currently operating at a point inside its production possibilities frontier, then there are unemployed resources in Mexico." Is this statement true or false? Briefly explain your answer.
Answer: The statement is True. Points within the production possibilities frontier are attainable, so it is possible for Mexico to be producing at a point within its frontier. At points within the production possibilities frontier, there are unemployed resources.
Q3) As long as technology increases, economic growth is free.
A)True
B)False
Answer: False
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4
Chapter 3: Demand and Supply
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Sample Questions
Q1) The law of demand states that the quantity of a good demanded varies
A) inversely with its price.
B) inversely with the price of substitute goods.
C) directly with income.
D) directly with population.
Answer: A
Q2) Apples are a normal good, so if the price of an apple increases from 50¢ to 60¢, the quantity of apples demanded decrease because of
A) the substitution effect only.
B) the income effect only.
C) a change in income.
D) the substitution and income effects.
Answer: D
Q3) In the figure above, if the price is $8 a unit, is there a shortage or surplus and what is the amount of any shortage or surplus? What is the equilibrium price and quantity?
Answer: At a price of $8 there is a surplus because the quantity supplied exceeds the quantity demanded. The amount of the surplus is 4 units per month. The equilibrium price is $4 a unit and the equilibrium quantity is 3 units per month.
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Chapter 4: Measuring GDP and Economic Growth
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Q1) Valuing the quantities of goods produced in consecutive years using prices in both years and then averaging the percentage changes in the value of output is part of the ________ method of calculating real GDP.
A) base-year
B) moving-base-year
C) chain-weighted output index
D) fixed quantities/variable prices
Q2) Real GDP
A) fluctuates from year to year but is always below potential GDP.
B) fluctuates around potential GDP.
C) grows at a constant 3 to 4 percent per year.
D) can be called potential GDP when it is adjusted for price changes.
Q3) Explain the relationship between real GDP and potential GDP during the two phases of the business cycle.
Q4) How does the income approach measure GDP?
Q5) In the national income accounts, the purchase of a new house counts as A) consumption expenditure.
B) investment.
C) a transfer.
D) an addition to inventory.
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Chapter 5: Monitoring Jobs and Inflation
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Q1) Frictional, structural and cyclical unemployment are three classifications of unemployment.
A)True
B)False
Q2) Suppose the labor force in Tiny Town is 100 people. If the ________ in Tiny Town is 150 people, the labor force participation rate equals ________ multiplied by 100.
A) working age population; 100/150
B) working age population; 100/250
C) number of employed persons; 100/250
D) number of employed persons; 100/150
Q3) An individual who has stopped looking for a job but has looked in the past and still wants a job is referred to as
A) a contingent worker.
B) a productive worker.
C) a marginally attached worker.
D) an unemployed worker.
Q4) How does the Current Population Survey determine if a person should be counted in the labor force?
Q5) How does the unemployment rate change in a recession and in an expansion?
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Chapter 6: Economic Growth
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Q1) Which of the following has NOT been one of the primary sources of economic growth over the last 200 years?
A) investment in new capital
B) resource conservation
C) investment in human capital
D) discoveries of new technology
Q2) A movement along the aggregate production function is the result of a change in A) the quantity of labor.
B) technology.
C) capital.
D) interest rates.
Q3) Over the past 100 years real GDP per person in the United States, on average, has A) decreased by about 5 percent per year.
B) increased by about 2 percent per year.
C) increased by about 5 percent per year.
D) increased by about 10 percent per year.
Q4) Describe ways that governments can promote faster economic growth.
Q5) What is the main shortcoming of the neoclassical growth model and how does the new growth theory address this shortcoming?
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Chapter 7: Finance, Saving, and Investment
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Sample Questions
Q1) Facebook sold shares of stock for the first time in an IPO on May 18, 2012. The stock originally sold for $38 per share. As of October 19, 2012, a share of Facebook stock was valued at $19 per share. The decrease in the value of a share of Facebook purchased in May and still owned in October is called
A) a capital gain.
B) a capital loss.
C) gross investment.
D) net investment.
Q2) In 2007, Singapore's government ran a budget surplus of $4.5 billion. The budget surplus ________ loanable funds and ________ the real interest rate.
A) increased the supply of; lowered
B) decreased the demand for; lowered
C) increased the supply of; raised
D) increased the demand for; raised
Q3) The nominal interest rate approximately equals which of the following?
A) the real interest rate minus the inflation rate
B) the real interest rate plus the inflation rate
C) the real interest rate minus the growth rate of real GDP
D) the real interest rate plus the growth rate of real GDP
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Page 9
Chapter 8: Money, the Price Level, and Inflation
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Sample Questions
Q1) If an economy has no money, then all transactions must be conducted through the use of ________.
A) credit cards
B) barter
C) debit cards
D) tobacco or wampum
Q2) The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10 percent, how much does this bank have in excess reserves?
A) $60
B) $90
C) $40
D) $10
Q3) Controlling the quantity of money and interest rates to influence aggregate economic activity is called
A) foreign policy.
B) monetary policy.
C) fiscal policy.
D) bank antitrust policy.
Q4) Explain the process by which the banking system creates money.
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) In June 2008, the dollar bought 1.6 Brazilian reals and in October, the dollar bought 2.4 reals. This resulted in a
A) a movement upward along the supply curve for dollars.
B) a movement downward along the supply curve for dollars.
C) rightward shift in the supply curve for dollars.
D) leftward shift in the supply curve for dollars.
Q2) In October 2008, Iceland's central bank increased its lending rate to 18% in an "effort to prop up the country's frozen current and markets." (www.nytimes.com, October, 29, 2008)
As a result, there was ________, holding all else the same.
A) a movement upward along the supply curve for krona
B) a leftward shift in the supply curve for krona
C) a rightward shift in the supply curve for krona
D) an increase in the quantity supplied of krona
Q3) Which of the following statements is INCORRECT?
A) Net exports equals exports minus imports.
B) The government sector balance equals net taxes minus government expenditures on goods and services.
C) The private sector balance equals private investment minus private saving.
D) The sum of government sector and private sector balances equals net exports.
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Chapter 10: Aggregate Supply and Aggregate Demand
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Sample Questions
Q1) In the above figure, the shift from point C to point B might be the result of
A) an increase in the price level.
B) a decrease in the price level.
C) a decrease in government expenditures.
D) an increase in the quantity of money.
Q2) In the above figure, the economy will be at full employment if the price level
A) is 110.
B) is above 110.
C) is below 100.
D) All of the above are possible because the economy will be at full employment at any price level at, above, or below 110.
Q3) In the macroeconomic short run
A) actual real GDP may be less than or more than potential GDP.
B) the unemployment rate is zero.
C) by definition, the economy is always moving away from full employment.
D) actual real GDP always equals potential GDP.
Q4) The level of output when there is full employment is called actual GDP.
A)True
B)False
Q5) How are potential GDP, full employment and the LAS curve related?
Page 12
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Chapter 11: Expenditure Multipliers
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Q1) The short-run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditure decreases by $200. The long-run effect of the decrease in government expenditure changes real GDP by A) a decrease of 600.
B) an increase of 600.
C) nothing; that is, in the long run real GDP equals $8,000.
D) a decrease of $200 because in the long-run, the multiplier is 1.
Q2) The MPC and MPS
A) sum to 1.
B) can sum to anything greater than 0.
C) sum to 100.
D) each are usually less than .5.
Q3) In the short run, the multiplier typically is less than 1.
A)True
B)False
Q4) When Audrey's disposable income is $40,000, her consumption expenditure is $39,000. When her disposable income is $50,000, Audrey's consumption expenditure is $47,000. What is Audrey's marginal propensity to consume?
Q5) List and explain factors that influence consumption expenditure.
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Chapter 12: The Business Cycle, Inflation, and Deflation
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Q1) Which of the following is the factor that creates business cycles in the real business cycle theory?
A) an unexpected change in aggregate demand
B) a change by the Fed in the growth rate of the quantity of money
C) a change in expectations about future sales and profits
D) a change in the growth rate of productivity
Q2) An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a long-run equilibrium with A) a higher price level but the same real GDP.
B) a higher price level and an increased level of real GDP.
C) the same price level and a lower level of real GDP.
D) None of the above answers are correct.
Q3) In the above figure, the economy is at point A. The inflation rate unexpectedly falls by two percentage points. As a result, the economy moves to point A) A, that is, there is no movement.
B) B.
C) C.
D) D.
Q4) What is the impulse in the real business cycle theory of the business cycle?
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Chapter 13: Fiscal Policy
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Sample Questions
Q1) Suppose that the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is equal to
A) -0.5 percent.
B) 3.5 percent.
C) 3.0 percent.
D) 4.0 percent.
Q2) If the government runs a surplus, the total amount of government debt is A) increasing.
B) decreasing.
C) constant.
D) zero.
Q3) When interest income is taxed and the inflation rate rises, the tax revenue collected by the government A) increases.
B) doesn't change. C) decreases.
D) could either increase or decrease.
Q4) How can discretionary fiscal policy be used to close a recessionary gap?
Q5) What are some of the limitations of fiscal policy? Briefly discuss them.
Page 15
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Chapter 14: Monetary Policy
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Questions
Q1) List and briefly explain the steps in how monetary policy affects real GDP in the AS/AD model. Tell what the impact is when the Fed eases monetary policy to fight a recession.
Q2) Uncertainty about monetary policy
A) was the factor that started the financial crisis in 2008.
B) can keep investment low.
C) is why the Fed does not use inflation rate targeting.
D) makes deposits in banks more desirable because they become safer.
Q3) The Federal Reserve monetary policy goals of maximum employment mean
A) a zero percent unemployment rate.
B) a zero percent natural unemployment rate.
C) keeping the unemployment rate close to the natural unemployment rate.
D) that cyclical unemployment should not necessarily be minimized.
Q4) The Fed engages in open market operations and sells government securities. The result is
A) a lower federal funds rate.
B) a higher federal funds rate.
C) an unchanged federal funds rate because other interest rates did not change.
D) More information is needed to determine what happens to the federal funds rate.
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Page 16
Chapter 15: International Trade Policy
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Q1) Who benefits from a tariff on a good?
A) domestic consumers of the good
B) foreign governments
C) domestic producers of the good
D) foreign producers of the good
Q2) Of the groups listed below, which is most likely to lobby for protection?
A) workers in the import industry
B) workers in the export industry
C) consumers in the import industry
D) producers in the export industry
Q3) Some observers opposing free trade argue that when we buy shoes from Brazil or shirts from Taiwan, U.S. workers lose their jobs. The fact of the matter is that
A) no U.S. worker has actually lost a job because of free trade.
B) most jobs lost because of free trade pay less than the poverty level.
C) free trade creates jobs in export industries.
D) the jobs lost are concentrated in restricted geographic areas.
Q4) "Because the United States is the largest economy in the world and can produce anything it needs domestically, there are no gains from trade for the United States." Is the previous statement correct or incorrect?
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