Advertisement Upgrade to remove ads

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures
a. capital investment.
b. investment in human capital.
c. business consumption expenditures.
d. personal saving.

A

Institutions that help to match one person's saving with another person's investment are collectively called the
a. Federal Reserve system.
b. banking system.
c. monetary system.
d. financial system.

D

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,
a. their consumption expenditures are being financed by someone else's saving.
b. their consumption expenditures are being financed by someone else's investment.
c. their investments are being financed by someone else's saving.
d. their saving is being financed by someone else's investment.

C

When a large, well-known corporation wishes to borrow directly from the public, it can
a. sell bonds.
b. sell shares of stock.
c. go to a bank for a loan.
d. All of the above are correct.

A

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that
a. the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
b. Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation.
c. Bond A has a term of 20 years and Bond B has a term of 2 years.
d. All of the above are correct.

C

The economy's two most important financial markets are
a. the investment market and the saving market.
b. the bond market and the stock market.
c. banks and the stock market.
d. financial markets and financial institutions.

B

If the government's expenditures exceeded its receipts, it would likely
a. lend money to a bank or other financial intermediary.
b. borrow money from a bank or other financial intermediary.
c. buy bonds directly from the public.
d. sell bonds directly to the public.

D

If the government's expenditures exceeded its receipts, it would likely
a. lend money to a bank or other financial intermediary.
b. borrow money from a bank or other financial intermediary.
c. buy bonds directly from the public.
d. sell bonds directly to the public.

B

Which of the following is not a nonsensical headline?
a. British perpetuities about to mature.
b. Disney issues new bonds with term of 7 percent.
c. Corporate bonds currently pay higher interest rates than government bonds.
d. Standard and Poor's judges new junk bond to have very low credit risk.

C

Which of the following is not correct?
a. If you buy a bond from a corporation, you can sell the bond to someone else before it matures.
b. Term refers to the scheduling of periodic interest rate payments on a bond.
c. A bond is an IOU.
d. There are millions of different bonds in the U.S. economy.

B

Stock represents
a. a claim to a share of the profits of a firm.
b. ownership in a firm.
c. equity finance.
d. All of the above are correct

D

Which of the following people purchased the correct asset to meet his or her objective?
a. Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza.
b. Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.
c. Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
d. All of the above are correct.

B

All or part of a firm's profits may be paid out to the firm's stockholders in the form of
a. retained earnings.
b. dividends.
c. interest payments.
d. capital accounts.

B

The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial matters:
a. "Buy low-risk bonds."
b. "Use a medium of exchange."
c. "Diversify."
d. "Intermediate."

C

Which of the following is correct?
a. In the national income accounts, investment and private saving refer to the same thing.
b. In a closed economy if national saving is greater than zero, then everyone must be saving.
c. The financial system channels funds from savers to borrowers.
d. People whose consumption exceeds their income are savers.

C

In a closed economy, what does (Y - T - C) represent?
a. national saving
b. government tax revenue
c. public saving
d. private saving

D

In which of the following cases would it necessarily be true that national saving and private saving are equal for a closed economy?
a. Private saving is equal to government expenditures.
b. Public saving is equal to investment.
c. After paying their taxes and paying for their consumption, households have nothing left.
d. The government's tax revenue is equal to its expenditures.

D

The purchase of a new house is the one form of
a. investment that is financed by private saving rather than public saving.
b. household spending that is not counted as part of investment in the national income accounts.
c. household spending that is investment rather than consumption.
d. household spending that does not contribute to GDP.

C

Which of the following lists correctly identifies the four expenditure categories of GDP?
a. consumption, government purchases, investment, net-exports
b. consumption, investment, depreciation, net-exports
c. consumption, saving, investment, depreciation,
d. consumption, government purchases, investment, savings

A

Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 1,500, consumption equals 7,500, and government purchases equal 2,000. What is national saving?
a. -500
b. 0
c. 2,000
d. None of the above is correct.

D

The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $4 billion worth of goods and services each year, collects $6 billion in taxes, and provides $1 billion in transfer payments to households. Private saving in Cedarland is $4 billion. For Cedarland,
a. investment is $6 billion and consumption is $9 billion.
b. investment is $6 billion and consumption is $8 billion.
c. investment is $5 billion and consumption is $8 billion.
d. investment is $5 billion and consumption is $7 billion.

C

Which of the following is not always correct for a closed economy?
a. National saving equals private saving plus public saving.
b. Net exports equal zero.
c. Real GDP measures both income and expenditures.
d. Private saving equals investment.

D

Larry buys stock in A to Z Express Company. Curly Corporation builds a new factory. Whose transaction would be an act of investment in the language of macroeconomics?
a. only Larry's
b. only Curly Corporation's
c. Larry's and Curly Corporation's
d. neither Larry's nor Curly Corporation's

B

Kathleen is considering expanding her dress shop. If interest rates rise she is
a. less likely to expand. This illustrates why the supply of loanable funds slopes downward.
b. more likely to expand. This illustrates why the supply of loanable funds slopes upward.
c. less likely to expand. This illustrates why the demand for loanable funds slopes downward.
d. more likely to expand. This illustrates why the demand for loanable funds slopes upward.

C

The supply of loanable funds slopes
a. upward because an increase in the interest rate induces people to save more.
b. downward because an increase in the interest rate induces people to save less.
c. downward because an increase in the interest rate induces people to invest less.
d. upward because an increase in the interest rate induces people to invest more.

A

If the demand for loanable funds shifts to the left, then the equilibrium interest rate
a. and quantity of loanable funds rise.
b. and quantity of loanable funds fall.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.

B

If the nominal interest rate is 5 percent and the rate of inflation is 2 percent, then the real interest rate is
a. 7 percent.
b. 3 percent.
c. 2.5 percent.
d. .4 percent.

B

Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?
a. the interest rate and quantity of loanable funds would increase
b. the interest rate and quantity of loanable funds would decrease.
c. the interest rate would increase and the quantity of loanable funds would decrease.
d. the interest rate would decrease and the quantity of loanable funds would increase.

D

If the government institutes policies that diminish incentives to save, then in the loanable funds market
a. the demand for loanable funds shifts rightward.
b. the demand for loanable funds shifts leftward.
c. the supply of loanable funds shifts rightward.
d. the supply of loanable funds shifts leftward.

D

Other things the same, a government budget deficit
a. reduces public saving, but not national saving.
b. reduces national saving, but not public saving.
c. reduces both public and national saving.
d. reduces neither public saving nor national saving.

C

Which of the following counts as part of the supply of loanable funds?
a. bank deposits and purchases of bonds
b. bank deposits but not purchases of bonds
c. purchases of bonds but not bank deposits
d. neither purchases of bonds nor bank deposits

A

A nation's standard of living is best measured by its
a. real GDP.
b. real GDP per person.
c. nominal GDP.
d. nominal GDP per person.
e. inflation and unemployment rates.

B

Productivity is defined as
a. the amount of difficulty that is involved in producing a given quantity of goods and services.
b. the quantity of labor that is required to produce one unit of goods and services.
c. the quantity of goods and services produced from each unit of labor input.
d. the quantity of goods and services produced over a given amount of time.
e. the quantity of labor required to produce GDP per person.

C

Cedar Valley Furniture uses five workers, each working eight hours, to produce eighty rocking chairs. What is the productivity of these workers?
a. two chairs per hour
b. ten chairs per hour
c. sixteen chairs per hour
d. eighty chairs
e. one hour per chair

A

The saws, lathes, and drill presses that woodworkers at Cedar Valley Furniture use to produce furniture are called
a. human capital.
b. physical capital.
c. natural resources.
d. technological knowledge.
e. fixed physical inputs.

B

Which of the following is considered human capital?
a. the comfortable chair in your dorm room where you read economics texts
b. the amount you get paid each week to work at the library
c. the things you have learned this semester
d. any capital goods that require a human to be present to operate
e. the amount of money you have spent on education

C

An understanding of the best ways to produce goods and services is called
a. human capital.
b. physical capital.
c. technology.
d. productivity.
e. capital stock.

C

An economy's production function has the constant-returns-to-scale property. If the economy's labor force doubled and all other inputs stayed the same, then real GDP would
a. stay the same.
b. increase by exactly 50 percent.
c. increase by exactly 100 percent.
d. increase, but not necessarily by either 50 percent or 100 percent.
e. increase, by more than 100 percent.

D

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?
a. Output will rise by more than it did when the previous unit was added.
b. Output will rise but by less than it did when the previous unit was added.
c. Output will fall by more than it did when the previous unit was added.
d. Output will fall but by less then it did when the previous unit was added.
e. Output cannot rise unless additional amounts of labor are added to the increased capital.

B

Suppose that a new government is elected in Lawrencia. The new government takes steps toward improving the court system and reducing government corruption. The citizens of Lawrencia find these efforts credible and outsiders believe these changes will be effective and long lasting. These changes will probably
a. raise real GDP per person and productivity in Lawrencia.
b. raise real GDP per person but not productivity in Lawrencia.
c. raise productivity but not real GDP per person in Lawrencia.
d. raise neither productivity nor real GDP per person in Lawrencia.
e. lower productivity but raise real GDP per person in Lawrencia.

A

On a production function, as capital per worker increases, output per worker
a. increases. This increase is larger at larger values of capital per worker.
b. increases. This increase is smaller at larger values of capital per worker.
c. decreases. This decrease is larger at larger values of capital per worker.
d. decreases. This decrease is smaller at larger values of capital per worker.
e. decreases. This decrease is smaller at smaller values of capital per worker.

B

Last year, real GDP per person in the imaginary nation of Olympus was 4,500. The year before it was 4,250. By about what percentage did Olympian real GDP per person grow during the period?
a. 4.6 percent
b. 5.2 percent
c. 5.9 percent
d. 6.5 percent
e. 9.5 percent

C

Technological knowledge refers to
a. human capital.
b. available information on how to produce things.
c. resources expended transmitting society's understanding to the labor force.
d. All of the above are technological knowledge.

B

Which of the following would increase productivity?
a. an increase in the physical capital stock per worker
b. an increase in human capital per worker
c. an increase in natural resources per worker
d. All of the above are correct.

D

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?
a. Output will rise by more than it did when the previous unit was added.
b. Output will rise but by less than it did when the previous unit was added.
c. Output will fall by more than it did when the previous unit was added.
d. Output will fall but by less then it did when the previous unit was added.

B

Country A and country B are the same except country A currently has a lower level of capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then
a. output in country A increases by more than in country B.
b. output in country A increases by the same amount as in country B.
c. output in country A increases by less than in country B.
d. None of the above is necessarily correct.

A

Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital per worker and so it has more real GDP per worker than the other. Finally, suppose that the saving rate in both countries increases from 4 percent to 7 percent. Over the next ten years we would expect that
a. the growth rate will not change in either country.
b. the country that started with less capital per worker will grow faster.
c. the country that started with more capital per worker will grow faster.
d. both countries will grow and at the same higher rate.

B

Real GDP per person is $30,000 in Country A, $20,000 in Country B, and $11,000 in Country C. Saving per person is $1,000 in all three countries. Other things equal, we would expect that
a. all three countries will grow at the same rate.
b. Country A will grow the fastest.
c. Country B will grow the fastest.
d. Country C will grow the fastest.

D

Which of the following statements is correct?
a. In an economy-wide sense, property rights are an important prerequisite for the price system to work.
b. Property rights give people the ability to exercise authority over the resources they own.
c. Based on the available evidence, the existence of well-established and well-enforced property rights appears to be associated with an enhanced standard of living.
d. All of the above are correct.

D

Malthus predicted that the power of population
a. was greater than the power of the earth to produce subsistence. His forecast was on the mark.
b. was greater than the power of the earth to produce subsistence. His forecast was off the mark.
c. was less than the power of the earth to produce subsistence. His forecast was on the mark.
d. was less than the power of the earth to produce subsistence. His forecast was off the mark.

B

Which part of real GDP fluctuates most over the course of the business cycle?
a. consumption expenditures
b. government expenditures
c. investment expenditures
d. net exports

C

The average price level is measured by
a. any real variable.
b. the rate of inflation.
c. the level of the money supply.
d. the CPI or the GDP deflator.

D

The model of aggregate demand and aggregate supply explains the relationship between
a. the price and quantity of a particular good.
b. unemployment and output.
c. wages and employment.
d. real GDP and the price level.

D

Which of the following would not be included in aggregate demand?
a. additions of newly produced goods to inventory
b. purchases of U.S. services by foreigners
c. the purchase of newly produced capital goods
d. government transfer payments such as Social Security payments

D

Changes in the price level affect which components of aggregate demand?
a. only consumption and investment
b. only consumption and net exports
c. only investment
d. consumption, investment, and net exports

D

The aggregate quantity of goods and services demanded changes as the price level falls because
a. real wealth falls, interest rates rise, and the dollar appreciates.
b. real wealth falls, interest rates rise, and the dollar depreciates.
c. real wealth rises, interest rates fall, and the dollar appreciates.
d. real wealth rises, interest rates fall, and the dollar depreciates.

D

In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,
a. the real value of money decreases; in turn, the real value of the dollar increases in foreign exchange markets, which decreases net exports.
b. the real value of money decreases; in turn, interest rates increase, which decreases net exports.
c. households increase their holdings of money; in turn, interest rates decrease, which reduces spending on investment goods.
d. households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

D

When the dollar appreciates, U.S.
a. exports decrease, while imports increase.
b. exports and imports decrease.
c. exports and imports increase.
d. exports increase, while imports decrease.

A

Which of the following effects provide incentives for consumers to spend less when the price level rises?
a. the wealth effect and the interest-rate effect
b. the wealth effect but not the interest-rate effect
c. the interest-rate effect but not the wealth effect
d. neither the wealth-effect nor the interest rate effect

A

Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to
a. decrease consumption, shown as a movement to the left along a given aggregate-demand curve.
b. increase consumption, shown as a movement to the right along a given aggregate-demand curve.
c. decrease consumption, shown by shifting the aggregate-demand curve to the left.
d. increase consumption, shown by shifting the aggregate-demand curve to the right.

C

Other things the same, an increase in the amount of capital firms wish to purchase would initially shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.

A

Which of the following shifts aggregate demand to the right?
a. an increase in the money supply
b. an increase in net exports due to something other than a change in domestic prices
c. an investment tax credit
d. All of the above are correct.

D

In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?
a. only the increased funding for states
b. only the tax cuts
c. both the increased funding for states and the tax cuts
d. neither the increased funding for states nor the tax cuts

C

Some countries have high minimum wages and require a lengthy and costly process to get permission to open a business
a. Reducing either the minimum wage or the time and cost to open a business would have no effect on the long-run aggregate supply curve.
b. Reducing the minimum wage and the time and cost to open a business would both shift the long-run aggregate supply curve to the right.
c. Reducing the minimum wage would shift long-run aggregate supply to the right. Reducing the time and cost to open a business would have no affect on the long-run aggregate supply curve.
d. Reducing the minimum wage would have no affect on the long-run aggregate supply curve. Reducing the time and cost to open a business would shift the long-run aggregate supply curve to the right.

B

Wages tend to be sticky
a. because of contracts, social norms, and notions of fairness.
b. because of contracts, but not social norms or notions of fairness.
c. because of social norms and notions of fairness, but not contracts.
d. None of the above are correct.

A

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
a. relative to prices wages are higher and employment rise.
b. relative to prices wages are higher and employment falls.
c. relative to prices wages are lower and employment rises.
d. relative to prices wages are lower and employment falls.

B

Which of the following can explain the upward slope of the short-run aggregate supply curve?
a. nominal wages are slow to adjust to changing economic conditions
b. as the price level falls, the exchange rate falls
c. an increase in the money supply lowers the interest rate
d. an increase in the interest rate increases investment spending

A

Other things the same, if workers and firms expected inflation to be 2%, but it is only 1% then
a. employment and production rise.
b. employment rises and production falls.
c. employment falls and production rises.
d. employment and production fall.

D

Which of the following shifts short-run aggregate supply left?
a. an increase in the actual price level
b. an increase in the expected price level
c. an increase in the capital stock
d. None of the above is correct.

B

If aggregate demand shifts left, then in the short run
a. the price level and real GDP both rise.
b. the price level rises and real GDP falls.
c. the price level falls and real GDP rises.
d. the price and real GDP both fall.

D

In which case can we be sure real GDP rises in the short run?
a. the money supply increases and taxes rise
b. the money supply increases and taxes fall
c. the money supply decreases and taxes rise
d. None of the above are correct.

B

If aggregate demand shifts right then in the short run
a. firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the right.
b. firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.
c. firms will decrease production. In the long run increased price expectations shift the short-run aggregate supply curve to the right.
d. firms will decrease production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.

B

If output is above its natural rate, then according to sticky-wage theory
a. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve right.
b. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
c. workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve right.
d. workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve left.

B

Which of the following has been suggested as a cause of the Great Depression?
a. a decline in the money supply
b. a decrease in stock prices
c. the collapse of the banking system
d. All of the above are correct.

D

Keynes explained that recessions and depressions occur because of
a. excess aggregate demand.
b. inadequate aggregate demand.
c. excess aggregate supply.
d. inadequate aggregate supply.

B

A household's net wealth is the value of
a. its current income minus the value of all its liabilities
b. all its assets minus their tax liabilities
c. all its assets minus the value of all its liabilities
d. all its assets minus its income
e. its current income minus its tax liabilities

C

Which of the following is not an example of a government purchase?
a. schools and teacher salaries
b. Chinese toys to be sold in discount department stores
c. aircraft carriers
d. interstate highway construction
e. All the answers are correct

B

If the economy is currently at equilibrium at $1 trillion and the MPC is 0.6, a $100 decrease in government purchases of goods and services will result in a new equilibrium at
a. $600 billion
b. $400 billion
c. $750 billion
d. $1.4 trillion
e. $1.6 trillion

C

Increases in the marginal propensity to consume, other things constant,
a. increase the value of the multiplier
b. decrease the value of the multiplier
c. never change the value of the multiplier
d. shift the aggregate expenditure curve downward
e. cause a downward movement along an aggregate expenditure curve

A

If the simple multiplier is 8, the marginal propensity to consume is
a. 1/8
b. 1/4
c. 4/5
d. 7/8
e. 8

D

If autonomous consumption rises by $0.8 trillion and the marginal propensity to consume (MPC) equals 3/4, the equilibrium level of output demanded will rise by
a. $0.2 trillion
b. $0.6 trillion
c. $1.07 trillion
d. $2.4 trillion
e. $3.2 trillion

E

Which of the following is not true about a change in the price level?
a. It will shift the aggregate demand curve.
b. It will shift the aggregate expenditure curve.
c. It will result in a new value of equilibrium real GDP demanded.
d. It will change the real value of dollar-denominated assets.
e. It will shift the consumption function.

A

Which of the following would cause a rightward shift of the aggregate demand curve?
a. an increase in planned investment
b. a drop in the price level
c. a rise in the price level
d. a decrease in autonomous consumption
e. anything that causes an upward shift in the saving function

A

Which of the following is correct?
a. Short run fluctuations in economic activity happen only in developing countries.
b. During economic contractions most firms experience rising sales.
c. Recessions come at regular intervals and are easy to predict.
d. When real GDP falls, the rate of unemployment rises.
e. When real GDP falls, the rate of unemployment falls.

D

A relatively mild period of falling incomes and rising unemployment is called a
a. depression.
b. recession.
c. expansion.
d. business cycle.
e. inflation.

B

During recessions which type of spending falls?
a. consumption and investment
b. investment but not consumption
c. consumption but not investment
d. consumption and government
e. consumption, investment, and government

A

The aggregate demand and aggregate supply graph has
a. the price level on the horizontal axis. The price level can be measured by the GDP deflator.
b. the price level on the horizontal axis. The price level can be measured by real GDP.
c. the price level on the vertical axis. The price level can be measured by the GDP deflator.
d. the price level on the vertical axis. The price level can be measured by nominal GDP.
e. the price level on the vertical axis. The price level can be measured by real GDP.

C

Aggregate demand includes
a. only the quantity of goods and services households want to buy.
b. only the quantity of goods and services households and firms want to buy.
c. only the quantity of goods and services households, firms, and the government want to buy.
d. the quantity of goods and services households, firms, the government, and customers abroad want to buy.
e. the quantity of goods households, firms, the government want to buy.

D

Which of the following is true of the short-run aggregate supply curve?
a. It shows the relation between the inflation rate and the quantity of aggregate output firms supply, other things constant.
b. It shows the relation between the price of labor and the aggregate quantity of labor workers supply, other things constant.
c. It shows the relation between the interest rate and the quantity of capital goods firms supply, other things constant.
d. It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.
e. It displays an inverse relationship between the price level and real GDP.

D

Which of the following is true about real and nominal wages?
a. The nominal wage will be constant only if the inflation rate is constant.
b. The real wage will be constant only if the inflation rate is constant.
c. Changes in the nominal wage will be the same as changes in the real wage only if the price level is constant.
d. The real wage will be constant only if the price level is constant.
e. The real wage will be constant only if the nominal wage is constant.

C

Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage increased from $20 to $24. What is true about the price level?
a. It rose by 20 percent.
b. It rose by 25 percent.
c. It remained unchanged.
d. It fell by 10 percent.
e. It fell by 20 percent.

A

When the economy is at its potential output level, which of the following is not true?
a. Firms' and workers' expectations about the price level are realized.
b. The nominal wage is a good measure of the expected real wage.
c. The unemployment rate is about 2 percent.
d. The economy is producing its maximum sustainable output.
e. The actual price level equals the expected price level.

C

If an economy is at its potential output level, which of the following is not true?
a. The economy is at its full-employment output level.
b. Unemployment is at the natural level.
c. The price level is zero.
d. The output level being produced can be sustained indefinitely given the economy's resources and technology.
e. The only unemployment is frictional, structural, or seasonal.

C

If the actual price level is higher than the expected price level, the economy will expand in the short run.
a. True
b. False

True

If the actual price level is lower than the expected price level, the economy will contract in the short run.
a. True
b. False

True

For the purpose of aggregate supply analysis, the long run is the period of time during which
a. aggregate supply adjusts to equal aggregate demand
b. excess aggregate supply is bought
c. excess aggregate demand is fulfilled
d. real wages are constant
e. all resource prices can be varied

E

If the potential output is $10 million and the short-run output is $11.5 million, then there is:
a. An expansionary gap of $1.5 million
b. An expansionary gap of $11.5 million
c. A contractionary gap of $1.5 million
d. A contractionary gap of $11.5 million
e. A contractionary gap of $10 million

A

Which of the following would be strong evidence that an expansionary gap exists?
a. Rapid inflation during a period when plant capacity utilization is below average.
b. A steady price level and a 5 percent unemployment rate.
c. Help wanted advertising is higher than usual, and the consumer price index is up more than expected.
d. Inflation has slowed markedly and the Dow Jones average is at record levels.
e. The number of new unemployment claims has skyrocketed and the price level is falling.

C

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is not true?
a. The actual price level equals the expected price level.
b. Aggregate quantity supplied equals potential output.
c. Aggregate quantity demanded equals potential output.
d. Aggregate quantity supplied equals aggregate quantity demanded.
e. The aggregate demand curve is horizontal at the potential output level.

E

A contractionary gap may be closed in the long run by a(n)
a. rightward shift of the short-run aggregate supply curve
b. leftward shift of the short-run aggregate supply curve
c. rightward movement along a fixed short-run aggregate supply curve
d. decrease in aggregate demand
e. increase in aggregate demand

A

If nominal wages are sticky in the downward direction,
a. unemployment may persist for long periods of time
b. shortages of labor may persist for long periods of time
c. increases in real wages will happen too quickly to affect unemployment
d. nominal wage increases will reduce the price level
e. decreases in nominal wages will increase the inflation rate

A

Whether aggregate supply shifts quickly or slowly to restore equilibrium at potential output depends crucially on
a. how quickly planned investment spending adjusts to changes in population growth
b. how quickly planned consumption spending adjusts to changes in the price level and nominal wages
c. how quickly technology changes to increase aggregate supply
d. whether the economy is experiencing a contractionary gap or an expansionary gap
e. how quickly real wages adjust to restore full employment in the labor market

E

Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices. Which of the following is true?
a. The short-run aggregate supply curve shifts leftward and the long-run supply curve shifts rightward.
b. The short-run aggregate supply curve shifts rightward and the long-run supply curve shifts rightward.
c. The short-run aggregate supply curve does not shift and the long-run aggregate supply curve shifts rightward.
d. The short-run aggregate supply curve shifts rightward but the long-run aggregate supply curve does not shift.
e. There will be a movement to the left along the aggregate demand curve.

E

If the MPC is 0.75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by
a. $75 billion
b. $100 billion
c. $300 billion
d. $400 billion
e. $500 billion

C

A $200 increase in government purchases has a greater effect on the equilibrium level of real GDP than a $200 decrease in autonomous net taxes would.
a. True
b. False

True

The simple tax multiplier is
a. 1/MPC
b. 1
c. 1/(1 - MPC)
d. MPC/(1 - MPC)
e. -MPC/(1 - MPC)

E

Of the following fiscal programs, which has the smallest effect, per dollar, on aggregate demand?
a. defense spending
b. road construction
c. grants for scientific research and development
d. Social Security
e. government purchases of labor

D

Optimism
Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time.

21. Refer to Optimism. Which curve shifts and in which direction?
a. aggregate demand shifts right.
b. aggregate demand shifts left.
c. aggregate supply shifts right.
d. aggregate supply shifts left.
e. aggregate supply shifts left and aggregate demand shifts left.

A

Refer to Optimism. In the short run what happens to the price level and real GDP?
a. both the price level and real GDP rise.
b. both the price level and real GDP fall.
c. the price level rises and real GDP falls.
d. the price level falls and real GDP rises.
e. the price level falls and real GDP remains the same.

A

Refer to Optimism. What happens to the expected price level and what's the result for wage bargaining?
a. The expected price level falls. Bargains are struck for higher wages.
b. The expected price level falls. Bargains are struck for lower wages.
c. The expected price level falls. Bargains are struck for lower prices.
d. The expected price level rises. Bargains are struck for lower wages.
e. The expected price level rises. Bargains are struck for higher wages.

E

Refer to Optimism. In the long run, the change in price expectations created by optimism shifts
a. long-run aggregate supply right.
b. long-run aggregate supply left.
c. short-run aggregate supply right.
d. short-run aggregate supply left.
e. short-run aggregate supply left and long-run aggregate supply right.

D

Refer to Optimism. How is the new long-run equilibrium different from the original one?
a. both price and real GDP are higher
b. both price and real GDP are lower.
c. the price level is the same and GDP is higher.
d. the price level is higher and real GDP is the same.
e. the price level is higher and real GDP is lower.

D

Which of the following would increase output in the short run?
a. an increase in stock prices makes people feel wealthier.
b. government spending increases.
c. firms chose to purchase more investment goods.
d. foreigners buy more American goods.
e. All of the above are correct.

E

Which of the following would cause stagflation?
a. aggregate demand shifts right
b. aggregate demand shifts left
c. short-run aggregate supply shifts right
d. short-run aggregate supply shifts left
e. long-run aggregate supply shifts right

D

Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run
a. real GDP will rise and the price level might rise, fall, or stay the same.
b. real GDP will fall and the price level might rise, fall, or stay the same.
c. the price level will rise, and real GDP might rise, fall, or stay the same.
d. the price level will fall, and real GDP might rise, fall, or stay the same.
e. the price level will fall, and real GDP will fall.

D

Keynes believed that economies experiencing high unemployment should adopt policies to
a. reduce the money supply.
b. reduce government expenditures.
c. increase aggregate demand.
d. increase aggregate supply.

C

If expected inflation is constant and the nominal interest rate increases by 2 percentage points, then the real interest rate
a. increases by 2 percentage points.
b. increases, but by less than 2 percentage points.
c. decreases, but by more than 2 percentage points.
d. decreases by 2 percentage points.
e. decreases, but by less than 2 percentage points.

A

In the graph of the money market, the money supply curve is
a. vertical. It shifts rightward if the Fed buys bonds.
b. vertical. It shifts rightward if the Fed sells bonds.
c. horizontal. It shifts downward if the Fed sells bonds.
d. upward sloping. It shifts rightward if the Fed sells bonds.
e. upward sloping. It shifts rightward if the Fed buys bonds.

A

When the Fed sells government bonds, the reserves of the banking system
a. increase, so the money supply increases.
b. increase, so the money supply decreases.
c. increase, but the money supply remains the same.
d. decrease, so the money supply decreases.
e. decrease, so the money supply increases.

D

When the interest rate increases, the opportunity cost of holding money
a. increases, so the quantity of money demanded increases.
b. increases, so the quantity of money demanded decreases.
c. decreases, so the quantity of money demanded increases.
d. decreases, so the quantity of money demanded decreases.
e. decreases, so the quantity of money supplied decreases.

B

In the short run, an increase in the money supply causes interest rates to
a. increase, and aggregate demand to shift right.
b. increase, and aggregate demand to shift left.
c. decrease, and aggregate demand to shift right.
d. decrease, and aggregate demand to shift left.
e. decrease, and aggregate supply to shift left.

C

Open-market purchases
a. increase the price level, investment, and real GDP.
b. decrease the price level, investment, and real GDP.
c. increase the price level, increase investment, and decrease real GDP.
d. decrease the price level, increase investment, and increase real GDP.
e. increase the price level, decrease investment, and decrease real GDP.

A

A decrease in government spending initially and primarily shifts
a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.
d. aggregate supply to the left.
e. neither aggregate demand nor aggregate supply.

B

Permanent tax cuts shift the AD curve
a. farther to the right than do temporary tax cuts.
b. not as far to the right as do temporary tax cuts.
c. farther to the left than do temporary tax cuts.
d. not as far to the left as do temporary tax cuts.
e. the same amount to the right as do temporary tax cuts.

A

During recessions, automatic stabilizers tend to make the government's budget
a. move toward deficit.
b. move toward surplus.
c. move toward balance.
d. move toward less debt.
e. not necessarily move the budget in any particular direction.

A

If the unemployment rate rises, which policies would be appropriate to reduce it?
a. increase the money supply, increase taxes
b. increase the money supply, cut taxes
c. decrease the money supply, increase taxes
d. decrease the money supply, cut taxes
e. decrease the money supply, increase spending

B

The Fed lowered interest rates in 2001 and 2002. This implies, other things the same, that the Fed
a. increased the money supply because it was concerned about unemployment.
b. increased the money supply because it was concerned about inflation.
c. decreased the money supply because it was concerned about unemployment.
d. decreased the money supply because it was concerned about inflation.
e. decreased the money supply because it was concerned about stagflation.

A

The economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession?
a. increase the money supply, increase taxes, increase government spending
b. increase the money supply, increase taxes, decrease government spending
c. increase the money supply, decrease taxes, increase government spending
d. decrease the money supply, increase taxes, decrease government spending
e. decrease the money supply, decrease taxes, decrease government spending

C

Fluctuations in employment and output result from changes in
a. aggregate demand only.
b. aggregate supply only.
c. aggregate demand and aggregate supply.
d. neither aggregate demand nor aggregate supply.
e. only long-run aggregate supply.

C

The economy goes into a period of inflation. Which of the following lists contains things policymakers could do to try to end the inflation?
a. increase the money supply, increase taxes, increase government spending
b. increase the money supply, increase taxes, decrease government spending
c. increase the money supply, decrease taxes, increase government spending
d. decrease the money supply, increase taxes, decrease government spending
e. decrease the money supply, decrease taxes, decrease government spending

D

The existence of money leads to
a. greater specialization in production, but not to a higher standard of living.
b. a higher standard of living, but not to greater specialization.
c. greater specialization and to a higher standard of living.
d. neither greater specialization nor to a higher standard of living.
e. a higher standard of living, but to less specialization.

C

Which of the following is not included in M1?
a. a $5 bill in your wallet
b. $100 in your checking account
c. $500 in your savings account
d. 100 pennies in your piggy bank
e. All of the above are included in M1.

C

Paper money
a. has a high intrinsic value.
b. is the primary medium of exchange in a barter economy.
c. is valuable because it is generally accepted in trade.
d. is valuable only because of the legal tender requirement.
e. is only valuable because it is backed by gold.

C

Paper money
a. has a high intrinsic value.
b. is the primary medium of exchange in a barter economy.
c. is valuable because it is generally accepted in trade.
d. is valuable only because of the legal tender requirement.
e. is only valuable because it is backed by gold.

A

Fiat money
a. is worthless.
b. has no intrinsic value.
c. may be used as a medium of exchange, but it is not legal tender.
d. performs all the functions of money except the unit-of-account function.
e. is not legal tender.

B

If the Federal Open Market Committee decides to decrease the money supply, then the Federal Reserve
a. creates dollars and uses them to purchase government bonds from the public.
b. buys government bonds from its portfolio to the public.
c. creates dollars and uses them to purchase various types of stocks and bonds from the public.
d. buys various types of stocks and bonds from its portfolio to the public.
e. destroys dollars by selling government bonds to the public.

E

In a system of 100-percent-reserve banking, the purpose of a bank is to
a. make loans to households.
b. influence the money supply.
c. give depositors a safe place to keep their money.
d. buy and sell gold.
e. accept deposits and make loans.

C

Suppose that banks desire to hold no excess reserves, the reserve requirement is 5 percent, and a bank receives a new deposit of $1,000. This bank
a. will increase its required reserves by $50.
b. will initially see its total reserves increase by $1,000.
c. will be able to make a new loan of $950.
d. All of the above are correct.
e. None of the above is correct.

D

A problem that the Fed faces when it attempts to control the money supply is that
a. because the United States has a fractional-reserve banking system, the amount of money in the economy depends in part on the behavior of depositors and bankers.
b. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools.
c. although the Fed has the ability to change the money supply by a large amount, it does not have the ability to change it by a small amount.
d. federal legislation in the 1950s stripped the Fed of its power to act as a lender of last resort to banks.
e. the Fed often has difficulty getting member banks to cooperate with policy changes.

A

Which of the following is correct? When there is a reserve requirement,
a. banks must hold exactly the required quantity of reserves.
b. banks may hold more than, but not less than, the required quantity of reserves.
c. banks may hold less than, but not more than, the required quantity of reserves.
d. banks must seek the Fed's permission whenever they wish to expand or contract their loans to customers.
e. only member banks of the Federal Reserve must comply.

B

If the reserve ratio is 5 percent, then the money multiplier is
a. 25.00.
b. 20.00.
c. 5.00
d. 2.50.
e. 1.25.

B

A budget surplus
a. occurs when government receipts are less than spending.
b. occurs when government spending is less than receipts.
c. occurs when government receipts are equal to spending.
d. is the accumulation of years of government overspending.
e. is the accumulation of all previous years' debts.

B

Bill deposits a $200 check in his checking account, the bank's:
a. Assets rise by $200 and liabilities fall by $200
b. Assets rise by $200 and liabilities rise by $200
c. Assets fall by $400 and liabilities rise by $400
d. Assets fall by $200 and liabilities rise by $200
e. Assets fall by $200 and liabilities fall by $200

B

Banks are permitted to lend all of their reserves.
a. True
b. False

False

Bank reserves can be held in the form of
a. loans and cash in the bank's vault
b. loans and deposits with the Fed
c. loans and checking accounts
d. deposits with the Fed and cash in the bank's vault
e. deposits with the Fed and checking accounts

D

If at the end of the business day a bank has $50,000 in excess reserves, and the required reserve ratio is 20 percent, the bank can maximize its profits if it
a. keeps the excess reserves
b. loans out $40,000
c. loans $50,000 to another bank
d. borrows $50,000 to remove the excess reserves
e. keeps $10,000 and deposits $40,000 with the Fed

C

Banks borrow excess reserves from each other on a day-to-day basis in the
a. federal reserve market
b. stock market
c. bond market
d. federal funds market
e. discount window at the Fed

D

The money expansion process continues until there are no more
a. required reserves in the system
b. demand deposits in the system
c. excess reserves in the system that banks are willing to lend
d. liabilities in the system
e. assets in the system

C

The simple money multiplier is defined as
a. the reciprocal of the interest rate
b. 1/required reserve ratio
c. excess reserves plus required reserves
d. the reciprocal of the federal funds rate
e. the reciprocal of the discount rate

B

See More

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

Star this term

You can study starred terms together

NEW! Voice Recording

Create Set