Question 1

Which of the following is true?

Accepted Answer

A)  Real federal spending per person was approximately 50 times higher in 1900 than 1800. 
B)  Real federal spending per person grew more rapidly during the 19th century than during the 20th century. 
C)  Real federal spending per person was approximately 60 times greater in 1990 than in 1916. 
D)  Real federal spending per person has decreased significantly since 1964.

Question 2

The increase of sub-prime (including Alt-A) loans as a share of the total from 2001-2005 was an important contributing factor to the economic crisis of 2008 because

Accepted Answer

A)  these loans initially reduced the demand for housing. 
B)  these loans initially reduced housing prices. 
C)  the default and foreclosure rates on these loans are several times higher than conventional loans to prime borrowers. 
D)  the default and foreclosure rates on these loans are considerably lower than conventional loans to prime borrowers.

Question 3

When natural resources are not traded, or where markets are not allowed to function as well as they can under a system of well-defined property rights, the problems of ____ and ____ are common.

Accepted Answer

A)  higher taxes; increased regulation 
B)  waste; scarcity 
C)  inflation; unemployment 
D)  slow growth; fluctuating currency values

Question 4

Economic analysis indicates that the increasing government expenditures and growth of third-party payments accompanying the Medicare and Medicaid programs

Accepted Answer

A)  reduced the demand for healthcare services. 
B)  reduced the incentive of consumers to economize on their use of healthcare. 
C)  increased the incentive of consumers to economize on their use of healthcare. 
D)  placed downward pressure on the prices of healthcare services.

Question 5

In his book The Road to Serfdom, Friedrich Hayek argued that the growth of government

Accepted Answer

A)  was essential if the ups and downs of the business cycle were going to be controlled. 
B)  must be increased if western democracies were going to survive. 
C)  could only be achieved if monetary policy-makers were willing to expand the supply of money more rapidly. 
D)  endangered freedom and moved Western democracies toward tyranny, just as it had done in Nazi Germany and the Soviet Union.

Question 6

What was the original stated purpose of Fannie Mae and Freddie Mac?

Accepted Answer

A)  to allow the government to extend loans directly to low-income and minority households 
B)  to help provide liquidity in the secondary mortgage markets 
C)  to operate as non-profit entities that would provide competition for for-profit mortgage companies 
D)  to take on mortgages going into default in order to prevent them from going into foreclosure

Question 7

On average, persons with more education tend to draw Social Security benefits for a

Accepted Answer

A)  longer period of time than average 
B)  shorter period of time than average 
C)  period of time that is comparable to the U.S. average 
D)  longer period of time if they have a master's degree but a shorter period of time if they have a Ph.D.

Question 8

Why is it NOT surprising that men make up the minority of college graduates?

Accepted Answer

A)  Because of discrimination against women, men are able to get good jobs with only a high school degree. 
B)  Men are smarter than women and they do not need a higher education to be attractive to employers. 
C)  Given their greater physical strength, many men accept high-paying but physically demanding jobs instead of going to college. 
D)  Many men decide to pursue jobs in professional sports and this significantly reduces the number of males who go to college.

Question 9

The leverage ratio of an investment firm refers to

Accepted Answer

A)  the ratio of its investment holdings relative to its vault cash. 
B)  the ratio of its investment holdings relative to its capital. 
C)  the percentage of deposits held by the firm relative to its deposits with Federal Reserve banks. 
D)  the percentage of down payments made to the investment firm relative to the size of mortgages issued by the firm.

Question 10

Which of the following accurately describes the relationship between mortgage default rates and the 2008 recession?

Accepted Answer

A)  The recession of 2008 triggered the initial increase in the mortgage default rate. 
B)  The rise in the mortgage default rate preceded the recession and it was a major cause of the 2008 economic downturn. 
C)  Both the increase in the mortgage default rate and the economic recession were the result of the stock market crash of 2008. 
D)  The rise in the mortgage default rate and the economic recession were separate issues and there was no relationship between the two.

Question 11

Which of the following would be an expected result of substantially higher wages in the U.S. automobile industry?

Accepted Answer

A)  an increase in the real wages of workers outside the industry 
B)  an increase in the price of automobiles produced in the United States 
C)  a reduction in the demand for foreign-produced automobiles 
D)  an increase in the profit rate of U.S. automobile producers

Question 12

Residential mortgages historically carried a capital requirement of 4 percent. Why did these mortgages, bundled as part of the mortgage-backed securities issued by investment banks, turn out to be far more risky than historically indicated?

Accepted Answer

A)  Rating agencies miscalculated the historical risk of traditional fixed-rate residential mortgages. 
B)  Investment banks leveraged these mortgage-backed securities more than was allowable under SEC rules. 
C)  Lower mortgage lending standards increased the likelihood that defaults would occur. 
D)  Investment banks held too much capital relative to these mortgage-backed securities.

Question 13

Economic theory suggests that controlling health-care costs through rules and regulations imposed by the government or another third party is generally

Accepted Answer

A)  more effective than using competition and the choices of consumers spending their own money to control costs. 
B)  less effective than using competition and the choices of consumers spending their own money to control costs. 
C)  only workable if the entire health-care sector is socialized (operated by the government). 
D)  possible to implement successfully because these rules and regulations tend to be in harmony with the interests of both consumers and health-care providers.

Question 14

In 1960, spending on income transfers and health care accounted for 21.5 percent of the federal budget. In 2010, these two items accounted for

Accepted Answer

A)  less than 15 percent of the federal budget. 
B)  approximately 25 percent of the federal budget. 
C)  approximately 32 percent of the federal budget. 
D)  approximately 62 percent of the federal budget.

Question 15

Which of the following would help control the future growth of healthcare prices and expenditures?

Accepted Answer

A)  an increase in the share of healthcare costs paid for either directly or from personal medical savings accounts 
B)  the substitution of catastrophic (high deductibility) health insurance for low co-payment plans 
C)  more reliance on expansion in the supply of medical services rather than stimulation of demand 
D)  all of the above

Question 16

A union representing a group of workers will tend to be stronger when

Accepted Answer

A)  there are no good substitutes for the labor services of the unionized workers. 
B)  the domestic producers of the good produced by the unionized workers face intense competition from foreign suppliers of the good. 
C)  the cost of employing the unionized workers is a large part of the total cost of the product that they produce. 
D)  the demand for the good produced by the unionized workers is highly elastic.

Question 17

During the Great Depression fiscal and monetary policy was characterized by

Accepted Answer

A)  an increase in tax rates and a contraction in the money supply. 
B)  a decrease in tax rates and a contraction in the money supply. 
C)  a decrease in tax rates and an expansion in the money supply. 
D)  an increase in tax rates and an expansion in the money supply.

Question 18

Compared to other investments such as bonds, historically a diverse set of stocks held over a lengthy time period (for example, 30 or 40 years) has yielded a

Accepted Answer

A)  low average real rate of return, and the variation in that return has been extremely high. 
B)  high average real rate of return, and the variation in that return has been relatively small. 
C)  low average real rate of return, and the variation in that return has been relatively small. 
D)  high average real rate of return, and the variation in that return has been extremely high.

Question 19

The mortgage default rate is

Accepted Answer

A)  the percentage of home mortgage loans in which the borrower has failed to make the current monthly payment. 
B)  equal to the foreclosure rate. 
C)  the percentage of home mortgages in which the borrower is 90 days or more late with the payment or it is in the foreclosure process. 
D)  the percentage of home mortgages in which the borrower owes more than the home is worth.

Question 20

What impact did the National Industrial Recovery Act (NIRA) of 1933 have on industrial output?

Accepted Answer

A)  Industrial output had been declining, but it stabilized during the months following passage of the NIRA. 
B)  Industrial output increased sharply after the passage of the NIRA. 
C)  Industrial output had begun to increase, but it fell sharply following the passage of the NIRA. 
D)  Industrial output and employment declined during the months prior to passage of the NIRA, and the legislation was unable to stop the decline.

Exam 16: Applying the Basics: Special Topics in Economics