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Practice Exam
first semester fInal exam as practice for second semester practice exam
61
Agriculture
Undergraduate 2
05/01/2012
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Term
1. World War II price controls created a need for rationing of consumer products because
 Definition
increases in demand created shortages at controlled prices, so rationing was needed to allocate goods fairly
Term
2. After World War II, the U.S. Treasury effectively controlled monetary policy. They did this by
 Definition
setting the interest rates on Treasury bonds, then requiring the Federal Reserve to adjust the money supply to reach those interest rates.
Term
3. Three ways to equilibriate the exchange market are
 Definition
adjustments in fiscal & monetary policy, capital controls, & flexible exchange rates.
Term
4. Many people accused the Federal Reserve of being being "behind the curve" during the 1970's, when they Fed was trying to reduce inflation. They meant that
 Definition
the Fed increased interest rates, but inflation increased more, so real interest rates fell.
Term
5. Productivity growth slowed during the 1970s & 1980s. Among the reasons offered for this slowdown were
 Definition
inexperienced baby boom workers entering the labor force & energy price increases that made machinery obsolete.
Term
6. Housing prices fell substantially from 2007 to 2009. Among the effects of this drop were
 Definition
households were less wealthy & spent less, & banks became pessimistic & lent less. Both changes reduced aggregate demand.
Term
7. The United States faces a fiscal policy choice in 2011. This choise is
 Definition
tax cuts & spending increases are required to stimulate the economy, but these policies add to deficits that eventually could cause inflation or crowding out.
Term
8. According to the trendline or its equation, how much must real GDP grow in order to hold the unemployment rate stable from one year to the next? (page 3)
 Definition
2.7%
Term
9. The Congressional Budget Office expects real GDP to grow by 2.7% over the next year. The unemployment rate is currently 8.6%. What does the trendline or its equation predict will be the unemployment rate one year from now? (page 3)
 Definition
8.6%
Term
10. This graph is used to represent "Okun's Law." It implies that a one percentage point drop in the unemployment rate results in (page 3)
 Definition
a 1.7% increase in the real GDP growth rate.
Term
11. As of the end of 2011, the unemployment rate is 8.6%, and the core inflation rate is 2.0%. The unemployment rate when output equals potential, known as the natural rate of unemployment, is about 5%. When the unemployment rate is higher than the natural rate, the inflation rate tends to fall. If real GDP grows by 4% a year for the next three years,
 Definition
the unemployment rate will remaind above 5%, and the inflation rate is likely to decline.
Term
12. Consumer Price Index inflation rate from October 2010 to October 2012 was
 Definition
3.6%
Term
13. As of December 20122, the exchange rate between the European euro and the U.S. dollar was about
 Definition
1.34 dollars per euro, and 0.75 euros per dollar
Term
14. If banks are charging an interest rate of 8%, and the expected inflation rate is 2%, the real interest rate is
 Definition
6%
Term
15. To calculate real GDP from nominal GDP,
 Definition
first divide the GDP deflator by 100, then divide the nominal GDP by the result
Term
16. The July 1973 New York Times article, "Phase 4 is Racing the Bad News" reports on the price controls imposed during the 1970's by the Nixon administration. Among the problems that the price controls caused were
 Definition
shortages of consumer goods, like pork & chicken, resulting from prices controlled at levels less than business costs.
Term
17. The New York Times articles "US Solar Panel Makers Say China Violated Trade Rules" and "China Charges Protectionism in Call for Solar Panel Tariffs" report that U.S. companies are asking for big tarrifs on imported solar panels from China. China objects. According to the articles, some people in the U.S. oppose the tariffs, too, including
 Definition
business people who install of solar panels & develop of solar-powered products, who claim that higher costs of solar panels would bring their sales to a halt.
Term
18. In his testimony before Congress on October 23, 2008, former Federak Reserve chair Alan Greenspan offered an explanation for the global financial crisis. He said that
 Definition
interest rates were high on subprime mortgages, & default rates were low because of rising home values. International investors underestimated risks, demand for morgage-backed securities exploded, & lenders relaxed their lending standards.
Term
19. The December 2, 20122 New York Times artcle, "Jobless Rate Dips to Lowest Level in More than 2 Years" twice mentions a list of three shocks that slowed economic growth in mid-2011. These three shocks were
 Definition
"higher oil prices, the Japanese earthquake, & the stalemate over the United States debt ceiling."
Term
20. Hamburgers & pizza are substitute goods. When the price of hamburgers falls, people eat more hamburgers, so the demand for pizza should decrease. In our pizza poll, though, some people said they would buy more pizza if hamburger prices fell. A reason for this might be
 Definition
the decline in hamburger prices increases their real incomes, meaning that these people have more income left over to buy pizza.
Term
21. Suppose widgets are normal goods. If the incomes of consuers in the widget market increase,
 Definition
the demand for widgets increases.
Term
22. Data from our pizza poll showed that the elasticity of demand for pizza by this class was about -2. This means that
 Definition
A 10% decrease in the price of pizza would increase pizza purchases by 20%.
Term
23. According to demand & supply analysis of the labor market, if the demand for labor is inelastic (yet in perfectly inelastic), an increase in the minimum wage above the equilibrium wage is likely to
 Definition
increase the total earnings of less-skilled workers, & increase unemployment.
Term
24. Suppose in a market, supply increases & the quantity demand increases. Which of the following could be true?
 Definition
Technologu improved, so equilibrium price fell & equilibrium quantity increased.
Term
25. Suppose the price of taco chips increases. Which of the above diagrams describes what will happen in the market of salsa. (page 8)
 Definition
B
Term
26. Suppose recovery raises the income of consumers. Which of the above diagrams describes what will happen in the market for pizza, which is a normal good? (page 8)
 Definition
A
Term
27. Suppose the price of crude oil decreases. Which of the above diagrams shows what is likely to happen in the market for gasoline. (page 8)
 Definition
C
Term
28. Suppose property taxes are one of the costs of providing rental housing. Which of the above diagrams describes what will happen in the market for rental housing if the property tax decreases. (page 8)
 Definition
C
Term
29. In the equation of exchange, (QM) x V = P x Q, the phrase "too much money chasing too few goods causes inflation" can be represented by
 Definition
A big increase in QM, a small increase in Q, and a rise in P.
Term
30. An increase in the minimum wage shifts real income from more-skilled, higher wage workers to less-skilled, lower wage workers. This happens because
 Definition
the higher minimum wage reduces the supply of products, raising their prices, which reduces the purchasing power of higher wage workers.
Term
31. An increase in spending on imports by consumers is likely to 
 Definition
decrease aggregate demand, reducing GDP growth & inflation.
Term
32. In the three-market model, if the Federal Reserve increases the supply of money, & second shift #2 follows,
 Definition
the real interest rate falls & aggregate demand in the goods market increases.
Term
33. The consumption function can be written as
 Definition
C=A+b(Y-T+R)
Term
34. During the 1960's tax cuts, government spending increases & the Federal Reserve's low interest rate policy started the Great Inflation. Which diagram whos the results of these policies? (page 10)
 Definition
B
Term
35. During the 1970's, the US economy experienced stagflation, due to rising inflationary expectations & oil shocks. Which diagram best represents the results of these events? (page 10)
 Definition
D
Term
36. During the 1990's technological advances increases productivity in the US economy. Which diagram best represents the result of more rapid productivity growth? (page 10)
 Definition
C
Term
37. The year 2008 was falling home prices, falling stock market values, reduced lending by banks, & a higher value of the dollar. Which diagram best represents the results of these events? (page 10)
 Definition
A
Term
38. Sometime during the next few years, bank lending & consumers spending will resume. Then, the Fed's very large monetary base increases of the past two years could threaten the economy with inflation. Which diagram best represents this posibility? (page 10)
 Definition
B
Term
39. In the three-market model, if the demand for the dollar in the exchange market increases,
 Definition
the exchange value of the dollar rises & aggregate demand in the goods market decreases.
Term
40. In the three-market model, if banks reduce their reserves & increase loans in the money market,
 Definition
the real interest rate falls & aggregate demand in the goods market increases.
Term
41. If the opportunity cost of butter in Argentina is 2 guns, & the opportunity cost of butter in Zambia is 4 guns, then
 Definition
world resources are allocated more efficiently if Zambia exports guns to Argentina & Argentina exports butter to Zambia
Term
42. Kennedy administration economist James TObin proposed a policy strategy that was eventually used by the Clinton administration in the 1990's. This "financial markets policy"
 Definition
cut the budget deficit to reduce money demand, which reduced the real interest rate & increased investment, adding to long run real GDP growth
Term
43. Sustained inflation can't happen unless there is excess growth in the quantity of money. But wars & supply shocks can lead to inflation because
 Definition
such events create economic conditions that cause the Federal Reserve to increase the money supply.
Term
44. The baby boom is likely to create financial problems for the Social Security program because
 Definition
benefits are financed primarily by current taxes, & there will be fewer working people to support each retiree once the boomers retire.
Term
45. In the early 1990s Argentina fixed the exchnage rate between the peso & the US dollar. They did this because
 Definition
the naton had suffered from hyperinflation, but a fixed exchange rate would mean that independent monetary policy would have to be abandoned.
Term
46. Comparative advantage in trade implies that
 Definition
worl output will be increased if nations try to specialize in their relatively most efficient industries.
Term
47. In the exchnage market, (page 13)
 Definition
the value of the dollar increased because concern about the possibility of default on Greek & Italian treasury bonds caused an increase in demand for US Treasury bonds, which increased the demand for the dollar en exchnage markets.
Term
48. In the monetary market, (page 13)
 Definition
the Federal Reserve increased the money supply, which held real interest rates low.
Term
49. In the goods market, (page 13)
 Definition
equilibriuk output is growing slowly, but is still less than potential output, which indicates high unemployment.
Term
50. How did the shifts in the money & exchange markets influence the shift in the goods market? (page 13)
 Definition
The decreased real interest rate increased investment spending (second shift #2), but the increased exchnage rate reduced export spending.
Term
51. This cartoon shows that (page 15)
 Definition
increases in consumer spending provided by shoppers could keep the economy from declining.
Term
52. During the 1890's, "hot money" left the United States because
 Definition
foreign investors feared that bimetalism would reduce the exchange rate value of the dollar.
Term
53. When the Federal Reserve was founded in 1913, one if its purposes was to provide an "elastic" currency. This means that
 Definition
when money demand increased during the Fall harvest, causing interest rates to rise, the Fed would increase the money supply.
Term
54. The Fed tried to curb stock market speculation in 1928-29 by
 Definition
increasing interest rates to restrain borrowing for stock purchases, but investment spending fell instead.
Term
55. The Hoover administration increased taxes in 1932 to try to balance the Federal budget. This is now seen as a policy mistake because
 Definition
higher taxes reduced disposable income, cutting consumption & reducing aggregate demand.
Term
56. Among the causes of the Great Depression were
 Definition
a large tax hike, bank failures & the Federal Reserve's failure to cut interest rates substantially.
Term
57. During the 1980's the Federal Budget deficit & the trade deficit were sometimes called the "twin deficits" because
 Definition
the Federal budget deficit resulted in high real interest rates because of the Fed's tight monetary policy, the igh interest rates increased the exchange market demand for the dollar which increased the exchange rate, & the higher exchnage rate increased imports & decreased exports
Term
58. On September 22, 1985 at the Plaza Hotel in New York City, US Secretary of the Treasury James Baker & his counterparts from other developed nations issued the following statement: (page 17)
 Definition
it meant that these governments thought that the US trade deficit was too big because the value of the dollar was too high, & they intended to supply dollars into the exchange markets to reduce its value.
Term
59. In a February 2009 speech, Federal Reserve chairman Ben Bernanke said "By carefully monitoring our balance sheet & developing tools to drain bank reserves as needed, we will ensure that policy accommodation can be reversed at the appropriate time to avoid risks of future inflation." The difficulties with this policy are
 Definition
if bank resevres are drained too slowly, inflation will develop but if they are drained too quickly, th economy could fall back into recession.
Term
60. The adoption of the euro in 1999 affected Greece's economy because
 Definition
the euro's exchange value was kept high by demand for Germany's exports, but this reduced demand for Greece's exports. Greece supported its spending with borrowing.
Term
61. In the movie Ferris Bueller's Day Off, the boring high school lecture was given by
 Definition
Ben Stein, son of council of Economic Advisors chair Herbert Stein, on the Hawley-Smoot Tariff.
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