ECON 101 FINAL EXAM PRACTICE QUESTIONS

2. Suppose you are forced to take a pay cut of 5% when the economy is experiencing overall deflation of 5%. If in response to your pay cut you also reduce your consumption by 5%, then economists would say: A) the quantity theory of money held. B) you are exhibiting money illusion. C) you made a rational decision. D) your real wage decreased by 5%. - JB I3. Continued long-run economic growth requires that economies: A) continue to increase their investment rates. B) reach their steady-state levels of capital and output. C) have high levels of capital stock. D) have institutions in place that encourage research and development of new ideas. - JD I4. The average rate of inflation in the United States over the past 10 years has been around 2.4%. If this trend continues, prices in the United States will double in about _____ years. A) 29 B) 10 C) 18 D) 39 - JA I5. Which of the following is NOT true regarding the natural rate of unemployment? A) The natural rate of unemployment equals the sum of the frictional and structural rates. B) If the economy is operating at the natural rate of unemployment, cyclical unemployment is equal to zero. C) The natural rate of unemployment correlates positively with the level of GDP growth in an economy. D) The actual rate of unemployment varies around the natural rate over time. - JA I7. Because of spillovers, the social benefit of research and development: A) is greater than the private benefit, therefore the private market produces less than the socially efficient quantity. B) is greater than the private benefit, therefore the private market produces more than the socially efficient quantity. C) is less than the private benefit, therefore the private market produces more than the socially efficient quantity. D) is less than the private benefit, therefore the private market produces less than the socially efficient quantity. - JA I8. In the Solow model, if a country's saving rate increased from 10% to 12% and it was operating at its steady state before the change, we would expect to see: A) a decrease in both the capital stock and output. B) an increase in the capital stock only. C) an increase in output only. D) an increase in both the capital stock and output. - JD I9. In nations that have large underground, or illegal, sectors: A) poverty will be significantly greater than in countries with fewer illegal market activities. B) official measures GDP will provide an accurate account of production in the economy. C) official measures of GDP will underestimate total production in the economy. D) official measures of GDP will overestimate total production in the economy. - JC I10. An investment tax credit will cause the interest rate to _____ and the quantity of borrowing to _____. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase - JA I11. Jordan loaned Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2% over the 1-year period. What is the real interest rate that Taylor paid? A) 5% B) 7% C) 2% D) 3% - JD I13. Collaboration with Congress during the Clinton Administration allowed for an aggressive deficit-cutting plan to pass. As a result, the government was able to reach a balanced budget at the end of the 1990's after running deficits for roughly 10 years. As a result, A) Private investment should have increased as the cost of borrowing increased. B) Private investment should have increased because the cost of borrowing decreased. C) Private investment should have decreased as the cost of borrowing increased. D) Private investment should have decreased as the cost of borrowing decreased. - JB I14. Diminishing returns to capital implies that _____ diminishes as more capital is added. A) the marginal product of capital B) technological knowledge C) the cost of producing goods and services D) output - JA