ECO 561 FINAL EXAM
1. Countercyclical discretionary fiscal policy calls for:
Answer: Deficits during recessions and surpluses during periods of demand-pull inflation
2. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million
of U.S. securities from the public, which deposits this amount into checking accounts.
As a result of these transactions, the supply of money is:
Answer: directly increased by $4 million and the money-creating potential of the
commercial banking system is increased by an additional $12 million.
3. Because the federal government typically provides disaster relief to farmers,
many farmers do not buy crop insurance even through it is federally subsidized. This
illustrates:
Answer: the moral hazard problem
4. Normal Profit is:
Answer: the return to the entrepreneur when economic profits are zero
5. The simple circular flow model shows that:
Answer: households are on the selling side of the resource market and on the buying
side of the product market
6. Which of the following will generate a demand for country X's currency in the
foreign exchange market?
Answer: The desire of foreigners to buy stocks and bonds of firms in country X
7. Two major virtues of the market system are that it:
Answer: allocates resources efficiently and allows economic freedom
8. The two basic markets shown by the simple circular flow model are:
Answer: product and resource.
9. If the prices of all goods and services rose, but the quantity produced remained
unchanged, what would happen to nominal and real GDP?
Answer: Nominal GDP would rise, but real GDP would be unchanged
10. The term "recession" describes a situation where:
1. Countercyclical discretionary fiscal policy calls for:
Answer: Deficits during recessions and surpluses during periods of demand-pull inflation
2. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million
of U.S. securities from the public, which deposits this amount into checking accounts.
As a result of these transactions, the supply of money is:
Answer: directly increased by $4 million and the money-creating potential of the
commercial banking system is increased by an additional $12 million.
3. Because the federal government typically provides disaster relief to farmers,
many farmers do not buy crop insurance even through it is federally subsidized. This
illustrates:
Answer: the moral hazard problem
4. Normal Profit is:
Answer: the return to the entrepreneur when economic profits are zero
5. The simple circular flow model shows that:
Answer: households are on the selling side of the resource market and on the buying
side of the product market
6. Which of the following will generate a demand for country X's currency in the
foreign exchange market?
Answer: The desire of foreigners to buy stocks and bonds of firms in country X
7. Two major virtues of the market system are that it:
Answer: allocates resources efficiently and allows economic freedom
8. The two basic markets shown by the simple circular flow model are:
Answer: product and resource.
9. If the prices of all goods and services rose, but the quantity produced remained
unchanged, what would happen to nominal and real GDP?
Answer: Nominal GDP would rise, but real GDP would be unchanged
10. The term "recession" describes a situation where:
