ECO 314 Exam Practice Questions and
Correct Answers
Question 1
Countries with greater central-bank independence can achieve lower rates of
inflation?
A. At the cost of higher levels of unemployment
B. At the cost of slower growth rates of real GDP
C. At the cost of greater volatility of real GDP
D. With no apparent real economic costs
Correct Answer
D. With no apparent real economic costs
Question 2
The Lucas critique argues that because the way people form expectations is based on
______ government policies, economists _____ predict the effect of a change in policy
without taking changing expectations into account.
A. Partly; cannot
B. Only partly; can
C. In no way; can
D. In no way; cannot
Correct Answer
A. Partly; cannot
Page 1 of 106
,Question 3
Assuming velocity is constant, the aggregate demand curve tells us possible?
A. Combinations of M and Y for a given value of P
B. Combinations of M and P for a given value of Y
C. Combinations of P and Y for a given value of M
D. Results if the Federal Reserve reduces the money supply
Correct Answer
C. Combinations of P and Y for a given value of M
Question 4
Conditional convergence occurs when economies converge to?
A. The same steady-state as other economies
B. The Golden Rule steady state
C. The balanced-growth steady state
D. Their own individual steady states
Correct Answer
D. Their own individual steady states
Question 5
The government can lower inflation with a low sacrifice ratio if the?
A. Money supply is reduced slowly
B. Public has adaptive expectations
C. Short-run aggregate supply schedule is relatively flat
D. Public rationally believe that policymakers are committed to reducing inflation
Correct Answer
D. Public rationally believe that policymakers are committed to reducing inflation
Page 2 of 106
,Question 6
Which of the following is an example of adverse selection?
A. A careful driver buys extra insurance protection when renting a car
B. The sickest people buy health insurance
C. A person with health insurance rides a motorcycle without wearing a helmet
D. A person with life insurance exercises daily and eats healthy foods
Correct Answer
B. The sickest people buy health insurance
Question 7
A monetary policy rule that targets nominal GDP would ______ money growth when
nominal GDP rises above the target and ______ money growth when nominal GDP falls
below the target.
A. Reduce; raise
B. Raise; reduce
C. Reduce; reduce
D. Raise; raise
Correct Answer
A. Reduce; raise
Question 8
The basic aggregate supply equation implies that output exceeds natural output
when the price level is?
A. Low
B. High
C. Less than the expected price level
D. Greater than the expected price level
Correct Answer
D. Greater than the expected price level
Page 3 of 106
, Question 9
Some firms do not instantly adjust the prices they charge in response to changes in
demand for all of the following reasons except?
A. It is costly to alter prices
B. They do not want to annoy their frequent customers
C. Prices do not adjust when there is perfect competition
D. Some prices are set by long-term contracts between firms and customers
Correct Answer
C. Prices do not adjust when there is perfect competition
Question 10
The logic of Ricardian equivalence implies that?
A. Tax cuts do not influence consumer spending but changes in government spending
do
B. Neither tax cuts nor changes in government spending affect consumer spending
C. Tax cuts combined with future decreases in government spending will decrease
consumer spending
D. If the government cuts taxes and increases current government spending,
consumer spending will increase
Correct Answer
D. If the government cuts taxes and increases current government spending,
consumer spending will increase
Question 11
Capital budgeting is a procedure that?
A. Adjusts the deficit for inflation
B. Estimates what the deficit would be if the economy were operating at the natural
rate of output
C. Accounts for assets as well as liabilities
D. Measures the impact of fiscal policy on the lifetime incomes of individuals of
different ages
Correct Answer
C. Accounts for assets as well as liabilities
Page 4 of 106
Correct Answers
Question 1
Countries with greater central-bank independence can achieve lower rates of
inflation?
A. At the cost of higher levels of unemployment
B. At the cost of slower growth rates of real GDP
C. At the cost of greater volatility of real GDP
D. With no apparent real economic costs
Correct Answer
D. With no apparent real economic costs
Question 2
The Lucas critique argues that because the way people form expectations is based on
______ government policies, economists _____ predict the effect of a change in policy
without taking changing expectations into account.
A. Partly; cannot
B. Only partly; can
C. In no way; can
D. In no way; cannot
Correct Answer
A. Partly; cannot
Page 1 of 106
,Question 3
Assuming velocity is constant, the aggregate demand curve tells us possible?
A. Combinations of M and Y for a given value of P
B. Combinations of M and P for a given value of Y
C. Combinations of P and Y for a given value of M
D. Results if the Federal Reserve reduces the money supply
Correct Answer
C. Combinations of P and Y for a given value of M
Question 4
Conditional convergence occurs when economies converge to?
A. The same steady-state as other economies
B. The Golden Rule steady state
C. The balanced-growth steady state
D. Their own individual steady states
Correct Answer
D. Their own individual steady states
Question 5
The government can lower inflation with a low sacrifice ratio if the?
A. Money supply is reduced slowly
B. Public has adaptive expectations
C. Short-run aggregate supply schedule is relatively flat
D. Public rationally believe that policymakers are committed to reducing inflation
Correct Answer
D. Public rationally believe that policymakers are committed to reducing inflation
Page 2 of 106
,Question 6
Which of the following is an example of adverse selection?
A. A careful driver buys extra insurance protection when renting a car
B. The sickest people buy health insurance
C. A person with health insurance rides a motorcycle without wearing a helmet
D. A person with life insurance exercises daily and eats healthy foods
Correct Answer
B. The sickest people buy health insurance
Question 7
A monetary policy rule that targets nominal GDP would ______ money growth when
nominal GDP rises above the target and ______ money growth when nominal GDP falls
below the target.
A. Reduce; raise
B. Raise; reduce
C. Reduce; reduce
D. Raise; raise
Correct Answer
A. Reduce; raise
Question 8
The basic aggregate supply equation implies that output exceeds natural output
when the price level is?
A. Low
B. High
C. Less than the expected price level
D. Greater than the expected price level
Correct Answer
D. Greater than the expected price level
Page 3 of 106
, Question 9
Some firms do not instantly adjust the prices they charge in response to changes in
demand for all of the following reasons except?
A. It is costly to alter prices
B. They do not want to annoy their frequent customers
C. Prices do not adjust when there is perfect competition
D. Some prices are set by long-term contracts between firms and customers
Correct Answer
C. Prices do not adjust when there is perfect competition
Question 10
The logic of Ricardian equivalence implies that?
A. Tax cuts do not influence consumer spending but changes in government spending
do
B. Neither tax cuts nor changes in government spending affect consumer spending
C. Tax cuts combined with future decreases in government spending will decrease
consumer spending
D. If the government cuts taxes and increases current government spending,
consumer spending will increase
Correct Answer
D. If the government cuts taxes and increases current government spending,
consumer spending will increase
Question 11
Capital budgeting is a procedure that?
A. Adjusts the deficit for inflation
B. Estimates what the deficit would be if the economy were operating at the natural
rate of output
C. Accounts for assets as well as liabilities
D. Measures the impact of fiscal policy on the lifetime incomes of individuals of
different ages
Correct Answer
C. Accounts for assets as well as liabilities
Page 4 of 106
