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CORNELL ECON 102 - Second Prelim

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Name: Second Prelim ECON 102 – 11 April 2006Section Number:This exam has 20 multiple choice questions, 4 short answer questions and 2 essayquestionsMultiple Choice QuestionsOne point per question.Write the answers on the separate sheet provided. 1. The aggregate demand curve _____ a market demand curve _____ it _____ the sumof all market demand curves in the economy.a) is not; and; is notb) is; and; isc) is; but; is notd) is not; but; isAnswer: a2. An increase in money supply will causea) a rightward shift in the AD curveb) a leftward shift in the AS curvec) a rightward shift in the AS curved) a leftward shift in the AS curveAnswer: a3. When an economy produces at its ____ level of output, the aggregate supply curvebecomes ______a) maximum; horizontalb) maximum; verticalc) minimum; verticald) minimum; relatively flat and negatively slopedAnswer: b4. If there were no time lag between the input and output price changes the _____aggregate supply curve would be almost entirely ______a) long-run, horizontalb) long-run, negatively slopedc) short-run, verticald) short-run, horizontalAnswer: c5. Which of the following factors will shift the aggregate supply curve to the left?a) supply of better educated laborb) late monsoon rains in an agricultural nation like Indiac) investment in infrastructured) good weatherAnswer: b1Name: Second Prelim ECON 102 – 11 April 2006Section Number:6. One possible explanation for involuntary unemployment isa) the wage rate does not adjust immediately to changes in the labor demandb) the labor market is perfectly competitivec) the firms, knowing the supply and demand curve for labor, implement the equilibrium wage, which happens to be so low that many people prefer to stay at homed) maximum wages which are implementedAnswer: a7. If inflationary expectations _____, the results will be a(n) _______ in the rate of inflation even though the unemployment rate _____ have changeda) increase; decrease; may notb) increase; decrease; mayc) decrease; increase; may notd) decrease; decrease; may notAnswer: d8. Whether government debt is considered a good/bad thing by economists does not depend ona) the relative size of the debtb) the absolute size of the debtc) the proportion spent on consumption spending versus capital spendingd) whether the bonds issued were bought by foreigners vs. domestic residentsAnswer: b9. Which of the following components of government spending can be categorized as a consumption expenditure (CE) and which can be categorized as an investment expenditure (IE) respectively?a) CE: spending on unemployment payments; IE: salaries of the soldiers in the Iraq warb) CE: paying gardeners to maintain the White House grounds; IE: construction of a libraryc) CE: construction of new conference halls; IE: research and development expenditured) CE: senators’ fringe benefits; IE: purchase of consumables for defenseAnswer: bRead the following scenario and answer the following 3 questions:In April data collected about the first quarter of 2010 indicates that the economy is in arecession. The Fed’s economists reach a consensus in July as to what the best course ofaction required to restore full employment would be. The corrective policy isimplemented at the end of July. The economy only registers the full impact of the policyin December. 2Name: Second Prelim ECON 102 – 11 April 2006Section Number:10. The time period between April and July is defined as ______ and the time period between July and December is defined as ______.a) response lag; implementation lagb) recognition lag; response lagc) implementation lag; response lagd) recognition lag; implementation lagAnswer: c11. Which of the following policies could the Fed’s economists recommend?I. FOMC (Federal Open Market Committee) should buy back securitiesII. The Fed should decrease the supply of the US DollarIII. The discount rate should be increasedIV. The treasury should increase taxesa) I, II and IVb) I, II and IIIc) I and IVd) I only.Answer: d12. Assume that the economists in the Fed are geniuses and that they implementmonetary policy that is just enough to offset the recessionary gap of April and movethe economy to full employment, though the full effect isn’t felt until December.Assume also that in September there is an unexpected rise in oil prices which raisesinput prices. In this event, policy implemented by the Fed will result in an equilibriumwhich is:a) at full employmentb) below full employmentc) above full employmentd) in line with the NAIRUAnswer: b13. Which one is NOT TRUE about bonds?a) if bond prices decrease, bond yields would increaseb) when interest rates rise, bond holders will suffer a loss (in value of securities they own)c) bondholders do not have right to share in firm’s profitd) a bond is a fixed income security as it offers a fixed annual percentage return no matter which year it is purchasedAnswer: d14. According to the life-cycle theory of consumption, peoplea) consume less than they earn in the beginning of their life cycleb) consume less than they earn in their retirement yearsc) consume more than they earn between their early working years and retirementd) tend to save the most during their working yearsAnswer: d3Name: Second Prelim ECON 102 – 11 April 2006Section Number:15. Knowing about substitution and income effects one can predict thata) an increase in the wage rate will increase the labor supplyb) an increase in the wage rate will decrease the labor supplyc) winning the lottery will decrease my labor supplyd) winning the lottery will have an ambiguous effect on my labor supplyAnswer: c16. The accelerator effect refers to the effects ofa) interest rate on investmentb) changes in economy activity (i.e. output) on investmentc) the money supply on inflationd) wages on inflation (i.e. cost-push inflation)Answer: b 17. An _______ in inventories has _______ effect on future productiona) unexpected decrease; a negativeb) unexpected decrease; a positivec) expected increase; a positived) expected decrease; noAnswer: b18. The Laffer Curve……a) shows the positive relationship between tax rates and tax revenuesb) shows the negative relationship between tax rates and tax revenuesc) is used by supply-side economists to argue that it is possible to generate higher tax revenues by decreasing tax ratesd) illustrates how a decrease in taxes, which are reflected in an increase of the disposable income of the


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