1) A major source of inefficiency in barter economies is that they require
A) a double coincidence of wants in exchange.
B) more liquid stores of value than do monetary economies.
C) a standard of deferred payment to make trade possible.
D) All of the above are correct.
2) The economic growth model predicts that
A) Governments must centrally direct the economy for growth to occur.
B) GDP per capita of rich countries will grow more rapidly than in poor countries.
C) GDP per capita of poor countries will grow more rapidly than in rich countries.
D) GDP per capita of poor countries will never change.
3) The Soviet Union consistently increased the amount of capital available to its workers, but found that increases in capital resulted in progressively smaller and smaller increases in GDP per worker. This phenomenon is referred to as
A) a rising standard of living.
B) a shift of the per-worker production function.
C) new growth theory.
D) diminishing returns to capital.
4) A decrease in aggregate demand results in a(n) ________ in the ________.
A) expansion; short run
B) recession; short run
C) expansion; long run
D) recession; long run
5) Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?
A) the rightward shift of the short-run aggregate supply curve that occurs after a recession
B) the leftward shift of the aggregate demand curve that occurs after a recession
C) the rightward shift of the aggregate demand curve that occurs after a recession
D) the leftward shift of the short-run aggregate supply curve that occurs after a recession
6) Lower personal income taxes
A) decrease disposable income.
B) decrease aggregate demand.
C) increase aggregate demand.
D) increase transfer payments.
7) According to the "wealth effect", when the ________ falls, the ________ rises.
A) price level; the real value of household wealth
B) price level; Donald Trump's stock
C) inflation rate; nominal value of household assets
D) unemployment rate; average level of household income
8) Ceteris paribus, a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to ________. I.e., the dollar ________ in value against the yen.
A) increase; depreciates
B) decrease; depreciates
C) increase; appreciates
D) decrease; appreciates
9) What is human capital?
A) labor productivity
B) the accumulated knowledge and skills that workers acquire from education, training, and their life experiences
C) buildings, equipment, and machinery owned by individuals rather than firms
D) buildings, equipment, and machinery owned by firms
10) The best measure of the standard of living is
A) real GDP per capita.
B) real GDP.
C) nominal GDP.
D) nominal GDP per capita.
12) The Federal Open Market Committee consists of
A) the seven member Board of Governors of the Federal Reserve.
B) the Board of Governors plus five of the Federal Reserve Bank Presidents.
C) five of the Federal Reserve Bank Presidents.
D) the 12 Federal Reserve Bank Presidents.
13) Which of the following is not a reason why low-income countries might experience low economic growth?
A) The country has a good education system.
B) The country has a low rate of saving and investment.
C) The country has endured extended periods of war.
D) The country fails to enforce a rule of law.
14) If taxes are less than transfers plus government spending, then
A) there is a balanced budget.
B) there is public dissaving.
C) there is a budget surplus.
D) there is positive saving.
15) If property rights are not enforced in a country,
A) that country will grow more rapidly because of the reduction of law suits.
B) that country's growth rate will not be affected.
C) the market system will still work smoothly.
D) entrepreneurs are unlikely to risk their own funds investing in such an economy.
16) The balance of payments includes all of the following accounts except
A) the national debt account.
B) the capital account.
C) the current account.
D) the financial account.
17) The federal budget deficit and the trade balance deficit are often referred to as the
A) dueling depreciators.
B) national debt.
C) balance of payments.
D) twin deficits.
18) ________ are financial securities that represent promises to repay a fixed amount of funds.
A) Interest rates
D) Mutual funds
19) If the bank of Waterloo receives a $10,000 deposit, and the reserve requirement is 10 percent, how much can the bank loan out? (Assume that before the deposit this bank is just meeting its legal reserve requirement.)
20) Workers and firms both expect that prices will be 3% higher next year than they are this year. As a result,
A) the purchasing power of wages will rise if wages increase by 3%.
B) the short-run aggregate supply curve will shift to the left as wages increase.
C) workers will be willing to take lower wages next year.
D) aggregate demand will increase by 3%
21) If, in a closed economy, real GDP is $30 billion, consumption is $20 billion, and government purchases are $5 billion, what is total saving in the economy?
A) $5 billion
B) $15 billion
C) $45 billion
D) $55 billion
22) Which of the following is an example of foreign direct investment?
A) American Airlines builds a hub in China.
B) You buy a plane that was made in China.
C) You purchase a plane ticket to China on American Airlines.
D) A stock broker from China sells you a Chinese government savings bond.
23) The current account includes records of a country's
A) net transfers.
B) net investment income.
C) net exports.
D) All of the above are included in an economy's current account.
24) If net foreign investment is positive, which of the following must be true?
A) Capital outflows are less than capital inflows.
B) Net exports are negative.
C) Domestic investment must be less than national saving.
D) None of the above are true when net foreign investment is positive.
25) Stagflation occurs when inflation ________ and GDP ________.
A) rises; rises
B) falls; falls
C) falls; rises
D) rises; falls
26) Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run?
A) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
B) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise.
C) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
D) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall.
27) The level of long-run aggregate supply is affected by all of the following except
A) changes in the capital stock.
B) changes in the price level.
C) changes in the number of workers.
D) changes in the technology.
28) You're traveling in Japan and are thinking about buying a new kimono. You've decided you'd be willing to pay $175 for a new kimono, but kimonos in Japan are all priced in yen. If the exchange rate is 89 yen per dollar, what is the highest price in yen you'd be willing to pay for a kimono? (Assume no taxes or duties are associated with the purchase.)
A) 1.97 yen
B) 330.75 yen
C) 15,575 yen
D) 19,425 yen
29) An increase in the government budget deficit will shift the ________ curve for loanable funds to the ________ and the equilibrium interest rate will ________.
A) supply; right; fall
B) supply; left; rise
C) demand; left; fall
D) demand; right; rise
30) If the Federal Open Market Committee wants to decrease the money supply through open market operations it will
A) buy U.S. Treasury Securities.
B) sell U.S. Treasury Securities.
C) decrease the discount rate.
D) increase the discount rate.
31) If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will
A) increase M1 and decrease M2.
B) decrease M1 and not change M2.
C) decrease M1 and decrease M2.
D) decrease M1 and increase M2.
32) According to the quantity theory of money, inflation is caused by
A) the money supply growing faster than real GDP.
B) GDP growing faster than the money supply.
C) GDP growing at the same rate as the money supply.
D) the money supply growing slower than real GDP.
33) Which of the following will result in an increase in labor productivity?
A) a decline in the capital stock per hour worked
B) a decline in the amount of human capital per worker
C) a decrease in the number of people attending institutions of higher education
D) an increase in technology
34) The Industrial Revolution
A) marked the beginning of significant economic growth in the world.
B) had no impact on standards of living in the world.
C) started in France around the year 1750.
D) produced goods exclusively using human or animal power.
35) If GDP grows at a rate of 3% per year, approximately how long will it take for GDP to double in size?
A) 12 years
B) 21 years
C) 23 years
D) 35 years
36) If foreign holdings of U.S. securities decrease, holding all else constant,
A) the balance on the U.S. capital account will decrease.
B) the balance on the U.S. financial account will decrease.
C) the U.S. balance of trade will decrease.
D) the balance on the U.S. current account will decrease.
1) An increase in aggregate demand results in a(n) ________ in the ________.
A) expansion; short run
B) expansion; long run
C) recession; short run
D) recession; long run
2) Disease, poor nutrition, and substandard health care in developing nations can reduce growth in an economy by
A) reducing physical capital.
B) reducing human capital.
C) increasing technological change.
D) increasing labor productivity.
3) Commodity money
A) can be used to purchase commodities, but not services.
B) has little to no value independent of its use as money.
C) is backed by a valuable commodity such as gold.
D) has value independent of its use as money.
4) The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as
A) real GDP.
B) human capital.
D) labor productivity.
5) The "New Economy" that emerged in the mid-1990s is based on
A) retail sales.
C) information technology.
D) financial services.
6) What two factors are the keys to determining labor productivity?
A) the growth rate of real GDP and the interest rate
B) the business cycle and the growth rate of real GDP
C) the average level of education of the workforce and the price level
D) technology and the quantity of capital per hour worked
7) Which of the following would you expect to increase the equilibrium interest rate?
A) a decrease in the profitability of investment projects firms are considering
B) an increase in the budget deficit
C) a change from an income tax to a consumption tax
D) an increase in the percentage of income after net taxes that households save
8) Which of the following would increase the current account balance of the United States?
A) an increase in the balance of trade
B) an increase in imports
C) an increase in the amount of income U.S. companies pay out to foreigners who own investments in the United States.
D) an increase in the amount of money the U.S. government sends in foreign aid to other countries
9) According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%?
A) less than 1 year
B) 5 years
C) 14 years
D) 35 years
10) Which of the following best describes the "wealth effect"?
A) When the price level falls, the real value of household wealth falls.
B) When the price level falls, the real value of household wealth rises.
C) When the price level falls, the private investment rises.
D) When the price level falls, the private investment falls.
11) The current account does not include which of the following?
A) net investment income.
B) net transfers.
C) net exports.
D) U.S. holdings of foreign assets
12) Refer to Figure 22-3. Based on the "catch-up line" drawn above, poorer countries are more likely to be at a point like ________, where growth in GDP is relatively ________, while richer countries are more likely to be at a point like ________, where growth in GDP is relatively ________.
A) B; low; A; high
B) A; low; B; high
C) B; high; A; low
D) A; high; B; low
13) In a closed economy public saving plus private saving is equal to
A) the budget deficit.
C) the budget surplus.
D) taxes minus transfers.
14) Workers expect inflation to rise from 3% to 5% next year. As a result, this should
A) move the economy up along a stationary short-run aggregate supply curve.
B) shift the short-run aggregate supply curve to the right.
C) shift the short-run aggregate supply curve to the left.
D) move the economy down along a stationary short-run aggregate supply curve.
15) The basic aggregate demand and aggregate supply curve model helps explain
A) long term growth.
B) output fluctuations in an individual market.
C) short term fluctuations in real GDP and the price level.
D) price fluctuations in an individual market.
16) Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
A) a decrease in disposable income
B) an increase in interest rates
C) a decrease in expected profits for firms
D) an increase in net exports
17) If net foreign investment is negative, which of the following must be true?
A) Private saving is greater than public saving.
B) Domestic investment must be greater than national saving.
C) Capital outflows are greater than capital inflows.
D) Net exports are positive.
18) The required reserves of a bank equal its ________ the required reserve ratio.
A) loans multiplied by
B) deposits divided by
C) deposits multiplied by
D) loans divided by
19) To decrease the money supply, the Federal Reserve could
A) conduct an open market sale of Treasury securities.
B) raise transfer payments.
C) raise income taxes.
D) lower the discount rate.
E) lower the required reserve ratio.
20) Which of the following can explain why some countries have not experienced relatively high growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita?
A) Countries that are relatively poor are more likely to experience wars and revolutions.
B) Countries that are relatively poor are likely to have a lower quality of health care.
C) Many of these developing countries do not have a functioning court system that can enforce laws.
D) all of the above
21) When the economy enters a recessionary phase of the business cycle, unemployment tends to
A) be unchanged.
D) change in the same direction as the rate of inflation.
22) Because of diminishing returns, an economy can continue to increase real GDP per hour worked only if
A) there is technological change.
B) there continue to be decreases in capital per hour worked.
C) there are decreases in human capital.
D) None of the above.
23) Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?
A) Unemployment will decline.
B) Output will decline.
C) Prices will decline.
D) The aggregate demand curve will shift to the left.
24) Actual real GDP will be above potential GDP if
A) firms are producing at capacity.
B) firms are producing below capacity.
C) firms are producing above capacity.
D) inflation is rising.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%.
25) Refer to Scenario 25-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of
26) Currency traders expect the value of the dollar to fall. What effect will this have on the demand for dollars and the supply of dollars in the foreign exchange market?
A) Demand for dollars will decrease, and supply of dollars will increase.
B) Demand for dollars will increase, and supply of dollars will increase.
C) Demand for dollars will decrease, and supply of dollars will decrease.
D) Demand for dollars will increase, and supply of dollars will decrease.
27) China runs a current account surplus with the United States. Which of the following must be true about China's balance of payments with the United States?
A) It must run a financial account deficit.
B) Its balance of payments must run a deficit.
C) Its net exports must be negative.
D) Its balance of trade must be in deficit.
28) According to the quantity theory of money, deflation will occur if the
A) money supply is more than real GDP.
B) money supply grows at a faster rate than real GDP.
C) money supply grows at a slower rate than real GDP.
D) money supply is less than real GDP.
29) If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will ________ and M2 will ________.
A) decrease: decrease
B) decrease; increase
C) not change; not change
D) increase; decrease
E) not change; increase
30) Significant economic growth did not begin in the world until
A) 1000 A.D.
B) 1750 A.D.
C) 1820 A.D.
D) the 20th century A.D.
31) The level of aggregate supply in the long-run is not affected by
A) changes in the price level.
B) changes in the capital stock.
C) changes in the number of workers.
D) changes in technology.
32) Based on the following information, what is the balance on the financial account?
Exports of goods and services = $5 billion
Imports of goods and services = $3 billion
Net income on investments = -$2 billion
Net transfers = -$2 billion
Increase in foreign holdings of assets in the United States = $4 billion
Increase in U.S. holdings of assets in foreign countries = -$1 billion
A) $3 billion
B) $2 billion
C) $1 billion
D) -$1 billion
33) The balance of payments includes which three accounts?
A) the capital flows account, the financial account, and the trade account
B) the balance of trade account, the net foreign investment account, and statistical discrepancy
C) the net investment account, the net exports account, and the net transfers account
D) the current account, the financial account, and the capital account
34) An economy can improve its standard of living by
A) increasing the amount of capital available per hour worked.
B) organizing production so that the quantity of goods produced per hour will decrease.
C) reducing the amount of human capital workers have.
D) all of the above
35) The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.
A) Council of Economic Advisors; four presidents from the 11 Federal Reserve banks
B) Federal Reserve's Board of Governors; four members of the Council of Economic Advisors
C) Federal Reserve's Board of Governors; four presidents from the other 11 Federal Reserve banks
D) Council of Economic Advisors; four members of the U.S. Banking Committee
36) The M1 measure of the money supply equals
A) paper money plus coins in circulation.
B) currency plus checking account balances plus traveler's checks plus savings account balances.
C) currency plus checking account balances plus traveler's checks.
D) currency plus checking account balances.
4) In a closed economy, public saving is equal to which of the following? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
A) Y - C - T + TR
B) Y - G - T
C) Y - C - T
D) T - G - TR
5) Refer to Figure 21-1. Which of the following is consistent with the graph depicted above?
A) The government runs a budget surplus.
B) Households become spendthrifts and begin to save less.
C) Technological change increases the profitability of new investment.
D) An expected recession decreases the profitability of new investment.
9) Which of the following government provisions would help increase the accumulation of knowledge capital?
C) education subsidies
D) All of the above are correct.
10) Which of the following is true regarding the productivity slowdown in the United States during the mid-1970s?
A) The productivity slowdown was unique to the United States as foreign countries experienced unprecedented rates of growth during that time.
B) The productivity slowdown occurred despite a rising quality of labor.
C) High oil prices raised the costs of doing business for markets worldwide, and reduced output worldwide as well.
D) The move toward a "New Economy" ended in the early 1970s, resulting in less technological progress in the United States during the mid-1970s.
18) The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly.
A) positive; final goods and services; inputs
B) infinite; inputs; final goods and services
C) positive; inputs; final goods and services
D) infinite; final goods and services; inputs
20) Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?
A) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
B) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall.
C) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise.
D) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
21) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
A) Prices will increase.
B) Unemployment will rise.
C) Short-run aggregate supply will shift to the right.
D) Output will decrease.
26) Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of
33) If the balance of the current account in the United States is -$900 billion, which of the following is most likely to be true?
A) The balance on the financial account is positive.
B) Net foreign investment is positive.
C) The trade balance is positive.
D) The balance on the capital account is negative.