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256 terms

Economics

Macroeconomics
STUDY
PLAY
1. Refer to the above diagrams. Other things equal, curve B will shift upward when:
A. the level of GDP increases.
B. the interest rate increases.
C. curve A shifts to the left.
D. curve A shifts to the right.
D. curve A shifts to the right.
2. Refer to the above diagrams. Other things equal, an interest rate decrease will:
A. shift curve A to the right and shift curve B upward.
B. shift curve A to the left and shift curve B downward.
C. leave curve A in place but shift curve B downward.
D. leave curve A in place but shift curve B upward.
D. leave curve A in place but shift curve B upward.
3. In the data above for a private closed economy, if gross investment is $12 billion, equilibrium GDP is:
A. $380.
B. $370.
C. $360.
D. $350.
C. $360.
4. In the above diagram for a private closed economy, at the equilibrium level of GDP, investment and saving are both:
A. $50.
B. $100.
C. $20.
D. $40.
A. $50.
5. For a private closed economy, an unintended decline in inventories suggests that:
A. aggregate expenditures are less than the business sector expected them to be.
B. aggregate expenditures exceed production.
C. actual investment exceeds saving.
D. planned investment is greater than consumption.
B. aggregate expenditures exceed production.
6. In the above diagram for a private closed economy, equilibrium GDP is:
A. $60 billion.
B. $180 billion.
C. between $60 and $180 billion.
D. $60 billion at all levels of GDP.
B. $180 billion.
7. In the above diagram for a private closed economy, investment:
A. decreases as GDP increases.
B. increases as GDP increases.
C. is $40 billion at all levels of GDP.
D. is $60 billion at all levels of GDP.
C. is $40 billion at all levels of GDP.
8. The equilibrium level of income (Y) is:
A. 360.
B. 225.
C. 200.
D. 135.
B. 225.
9. In equilibrium the level of consumption spending will be:
A. 170.
B. 270.
C. 160.
D. 195.
D. 195.
10. In the aggregate expenditures model, technological progress will shift the investment schedule:
A. downward and increase aggregate expenditures.
B. downward and decrease aggregate expenditures.
C. upward and increase aggregate expenditures.
D. upward and decrease aggregate expenditures.
C. upward and increase aggregate expenditures.
11. In the above diagram for a private closed economy, the upward shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig)2 reflects:
A. an increase in investment expenditures.
B. a decrease in consumption expenditures.
C. an increase in the MPC.
D. an increase in the APS.
A. an increase in investment expenditures.
12. In the above diagram for a private closed economy, the multiplier is:
A. GF/DE.
B. GF/GB.
C. FE/GF.
D. AB/GF.
D. AB/GF.
13. For the open economy shown above the equilibrium GDP and the multiplier are:
A. $300 and 2.5.
B. $450 and 5.
C. $400 and 4.
D. $400 and 5.
D. $400 and 5.
14. An upward shift of the aggregate expenditures schedule might be caused by:
A. a decrease in exports, with no change in imports.
B. a decrease in imports, with no change in exports.
C. an increase in exports, with an equal decrease in investment spending.
D. an increase in imports, with no change in exports.
B. a decrease in imports, with no change in exports.
15. Other things equal, serious recession in the economies of U.S. trading partners will:
A. have no perceptible impact on the U.S. economy.
B. cause inflation in the U.S. economy.
C. depress real output and employment in the U.S. economy.
D. stimulate real output and employment in the U.S. economy.
C. depress real output and employment in the U.S. economy.
16. Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by:
A. $100 billion.
B. $90 billion.
C. $40 billion.
D. $50 billion.
C. $40 billion.
17. If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause:
A. a rightward shift in the investment demand schedule.
B. an $8 billion downshift in the consumption schedule.
C. a $4 billion upshift in the consumption schedule.
D. a $12 billion downshift in the consumption schedule.
B. an $8 billion downshift in the consumption schedule.
18. The equilibrium level of GDP for this economy is:
A. $600.
B. $530.
C. $415.
D. $400.
B. $530.
19. The multiplier for this economy is:
A. 4.
B. 3.
C. 2.
D. 2.33.
A. 4.
20. If government desired to raise the equilibrium GDP to $650, it could:
A. raise G by $45 and reduce T by $10.
B. raise G by $40 and reduce T by $30.
C. raise G by $30 or reduce T by $40.
D. raise both G and T by $40.
C. raise G by $30 or reduce T by $40.
21. A recessionary expenditure gap is:
A. the amount by which the full-employment GDP exceeds the level of aggregate expenditures.
B. the amount by which equilibrium GDP falls short of the full-employment GDP.
C. the amount by which investment exceeds saving at the full-employment GDP.
D. the amount by which aggregate expenditures exceed the full-employment level of GDP.
B. the amount by which equilibrium GDP falls short of the full-employment GDP.
22. In the above table, the after-tax MPC in the economy shown is:
A. .5.
B. .67.
C. .75.
D. .8.
B. .67.
23. In the above table, equilibrium GDP is:
A. $40.
B. $70.
C. $100.
D. $130.
B. $70.
24. In the above table, if the full-employment real GDP is $100 the:
A. inflationary expenditure gap is $30.
B. inflationary expenditure gap is $10.
C. recessionary expenditure gap is $30.
D. recessionary expenditure gap is $10.
D. recessionary expenditure gap is $10.
25. In the above table, an increase in net exports of $10 would:
A. increase real GDP by $10.
B. increase real GDP by $30.
C. decrease real GDP by $10.
D. decrease real GDP by $30.
B. increase real GDP by $30.
26. In the above diagram, if the full-employment level of GDP is B and aggregate expenditures are at AE1, the:
A. inflationary expenditure gap is BC.
B. recessionary expenditure gap is BC.
C. inflationary expenditure gap is zero.
D. inflationary expenditure gap is ei.
D. inflationary expenditure gap is ei.
27. In the above diagram, the value of the multiplier for this economy is:
A. BC/hg.
B. BC/AB.
C. ed/di.
D. df/BC.
A. BC/hg.
28. The recessionary expenditure gap associated with the recession of 2007-2009 resulted from:
A. the government's attempt to control hyperinflation.
B. a major increase in personal and corporate taxes.
C. a rapid decline in investment spending.
D. a rapid increase in imports resulting from large tariff reductions.
C. a rapid decline in investment spending.
29. In The General Theory of Employment, Interest, and Money:
A. Adam Smith stated his idea of the invisible hand.
B. Thorstein Veblen poked fun at the leisure class.
C. John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.
D. J. B. Say developed "Say's law."
C. John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself.
1. The aggregate demand curve is:
A. vertical under conditions of full employment.
B. horizontal when there is considerable unemployment in the economy.
C. downsloping because of the interest-rate, real-balances, and foreign purchases effects.
D. downsloping because production costs decrease as real output rises.
C. downsloping because of the interest-rate, real-balances, and foreign purchases effects.
2. Which of the following is incorrect?
A. As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise.
B. As the price level falls, the demand for money declines, the interest rate declines, and interest-rate sensitive spending increases.
C. When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending.
D. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level.
C. When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending.
3. If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:
A. leftward by $50 billion at each price level.
B. rightward by $10 billion at each price level.
C. rightward by $50 billion at each price level.
D. leftward by $40 billion at each price level.
C. rightward by $50 billion at each price level.
4. In the above diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines:
A. 4 and 3.
B. 4 and 1.
C. 2 and 4.
D. 2 and 3.
A. 4 and 3.
5. The aggregate supply curve (short-run) is upsloping because:
A. wages and other resource prices match changes in the price level.
B. the price level is flexible upward but inflexible downward.
C. per-unit production costs rise as the economy moves toward and beyond its full-employment real output.
D. wages and other resource prices are flexible upward but inflexible downward.
C. per-unit production costs rise as the economy moves toward and beyond its full-employment real output.
6. In the above diagram, a shift from AS3 to AS2 might be caused by an increase in:
A. business taxes and government regulation.
B. the prices of imported resources.
C. the prices of domestic resources.
D. productivity.
D. productivity.
7. In the above diagram, a shift from AS2 to AS3 might be caused by a (n):
A. decrease in interest rates.
B. increase in business taxes and costly government regulation.
C. decrease in the prices of domestic resources.
D. decrease in the price level.
B. increase in business taxes and costly government regulation.
8. The determinants of aggregate supply:
A. are consumption, investment, government, and net export spending.
B. explain why real domestic output and the price level are directly related.
C. explain the three distinct ranges of the aggregate supply curve.
D. include resource prices and resource productivity.
D. include resource prices and resource productivity.
9. Other things equal, an improvement in productivity will:
A. increase the equilibrium price level.
B. shift the aggregate supply curve to the left.
C. shift the aggregate supply curve to the right.
D. shift the aggregate demand curve to the left.
C. shift the aggregate supply curve to the right.
10. The short-run aggregate supply curve represents circumstances where:
A. both input and output prices are fixed.
B. both input and output prices are flexible.
C. input prices are fixed, but output prices are flexible.
D. input prices are flexible, but output prices are fixed.
C. input prices are fixed, but output prices are flexible.
11. The equilibrium price level is:
A. 150.
B. 200.
C. 250.
D. 300.
B. 200.
12. If the price level is 250 and producers supply $450 of real output:
A. a shortage of real output of $150 will occur.
B. a shortage of real output of $100 will occur.
C. a surplus of real output of $150 will occur.
D. neither a shortage nor a surplus of real output will occur.
C. a surplus of real output of $150 will occur.
13. If the amount of real output demanded at each price level falls by $200, this might have been caused by:
A. an increase in net exports.
B. a worsening of business expectations.
C. an increase in consumer wealth.
D. a decrease in the personal income tax.
B. a worsening of business expectations.
14. Graphically, demand-pull inflation is shown as a:
A. rightward shift of the AD curve along an upsloping AS curve.
B. leftward shift of the AS curve along a downsloping AD curve.
C. leftward shift of AS curve along an upsloping AD curve.
D. rightward shift of the AD curve along a downsloping AS curve.
A. rightward shift of the AD curve along an upsloping AS curve.
15. If aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, it is most likely that:
A. the money supply has declined.
B. the price level is inflexible downward and a recession has occurred.
C. cost-push inflation has occurred.
D. productivity has declined.
B. the price level is inflexible downward and a recession has occurred.
16. A decrease in aggregate demand will cause a greater decline in real output the:
A. less flexible is the economy's price level.
B. more flexible is the economy's price level.
C. steeper is the economy's AS curve.
D. larger is the economy's marginal propensity to save.
A. less flexible is the economy's price level.
17. In the above diagram, if the aggregate supply curve shifted from AS0 to AS1, and the aggregate demand curve remains at AD0 we could say that:
A. aggregate supply has increased, equilibrium output has decreased, and the price level has increased.
B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.
C. an increase in the amount of output supplied has occurred.
D. aggregate supply has increased and the price level has risen to G.
B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased.
18. In the above diagram, if aggregate supply is AS1 and aggregate demand is AD0, then:
A. at any price level above G a shortage of real output would occur.
B. F represents a price level that would result in a surplus of real output of AC.
C. a surplus of real output of GH would occur.
D. F represents a price level that would result in a shortage of real output of AC.
D. F represents a price level that would result in a shortage of real output of AC.
19. In the above diagram, a shift of the aggregate demand curve from AD1 to AD0 might be caused by a(n):
A. decrease in aggregate supply.
B. decrease in the amount of output supplied.
C. increase in investment spending.
D. decrease in net export spending.
C. increase in investment spending.
20. In the above diagram and other things equal, a shift of the aggregate supply curve from AS0 to AS1 might be caused by a(n):
A. increase in government regulation.
B. increase in aggregate demand.
C. increase in productivity.
D. decline in nominal wages.
A. increase in government regulation.
21. If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium:
A. output would necessarily rise.
B. output would necessarily fall.
C. price level would necessarily fall.
D. price level would necessarily rise.
A. output would necessarily rise.
22. In which of the following sets of circumstances can we confidently expect inflation?
A. aggregate supply and aggregate demand both increase
B. aggregate supply and aggregate demand both decrease
C. aggregate supply decreases and aggregate demand increases
D. aggregate supply increases and aggregate demand decreases
C. aggregate supply decreases and aggregate demand increases
23. When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may:
A. reduce per unit production costs.
B. reduce worker morale and work effort, and thus lower productivity.
C. increase the firms' cost of raising financial capital.
D. reduce the demands for their products.
B. reduce worker morale and work effort, and thus lower productivity.
24. When aggregate demand declines, the price level may remain constant, at least for a time, because:
A. firms individually may fear that their price cut may set off a price war.
B. menu costs rise.
C. price cuts tend to increase efficiency wages.
D. product markets are highly competitive.
A. firms individually may fear that their price cut may set off a price war.
25. (Last Word) In recent years:
A. significant changes in the price of oil have had much less effect on the U.S. economy than did similar changes in oil prices in previous decades.
B. large increases in the price of oil have reduced U.S. aggregate supply and caused significant cost-push inflation.
C. large decreases in the price of oil have increased U.S. aggregate supply and caused deflation.
D. the United States has become a net exporter of oil.
A. significant changes in the price of oil have had much less effect on the U.S. economy than did similar changes in oil prices in previous decades.
1. Countercyclical discretionary fiscal policy calls for:
A. surpluses during recessions and deficits during periods of demand-pull inflation.
B. deficits during recessions and surpluses during periods of demand-pull inflation.
C. surpluses during both recessions and periods of demand-pull inflation.
D. deficits during both recessions and periods of demand-pull inflation.
B. deficits during recessions and surpluses during periods of demand-pull inflation.
2. An economist who favors smaller government would recommend:
A. tax cuts during recession and reductions in government spending during inflation.
B. tax increases during recession and tax cuts during inflation.
C. tax cuts during recession and tax increases during inflation.
D. increases in government spending during recession and tax increases during inflation.
A. tax cuts during recession and reductions in government spending during inflation.
3. If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by:
A. reducing government expenditures by $12 billion.
B. reducing government expenditures by $60 billion.
C. increasing taxes by $15 billion.
D. increasing taxes by $20 billion.
D. increasing taxes by $20 billion.
4. Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?
A. A Congressional proposal to incur a Federal surplus to be used for the retirement of public debt.
B. Reductions in agricultural subsidies and veterans' benefits.
C. Postponement of a highway construction program.
D. Reductions in Federal tax rates on personal and corporate income.
D. Reductions in Federal tax rates on personal and corporate income.
5. Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to:
A. increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD2.
B. reduce taxes on businesses to shift the aggregate supply curve leftward.
C. reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.
D. do nothing since the economy appears to be achieving full-employment real GDP.
C. reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.
6. Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to:
A. do nothing since the economy appears to be achieving full-employment real output.
B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.
C. increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level.
D. increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1.
B. increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2, assuming downward price flexibility.
7. Refer to the above diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with:
A. an expansionary fiscal policy.
B. a major recession.
C. a contractionary fiscal policy.
D. severe demand-pull inflation.
A. an expansionary fiscal policy.
8. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should:
A. increase government expenditures by $80 billion.
B. reduce government expenditures by $40 billion.
C. reduce taxes by $40 billion.
D. reduce taxes by $80 billion.
D. reduce taxes by $80 billion.
9. Refer to the above diagram. If the full-employment level of GDP is D, then it would be appropriate fiscal policy for government to:
A. decrease spending and increase taxes.
B. decrease spending and decrease taxes.
C. increase spending and increase taxes.
D. increase spending and decrease taxes.
D. increase spending and decrease taxes.
10. Refer to the above diagram. If the full-employment level of GDP is A, then it would be appropriate fiscal policy for government to:
A. decrease spending and increase taxes.
B. decrease spending and decrease taxes.
C. increase spending and increase taxes.
D. increase spending and decrease taxes.
A. decrease spending and increase taxes.
11. Built-in stability means that:
A. an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy.
B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
C. Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
D. government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.
B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
12. Which of the following best describes the built-in stabilizers as they function in the United States?
A. The size of the multiplier varies inversely with the level of GDP.
B. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.
D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
13. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit:
A. at all levels of GDP.
B. at any level of GDP above $400.
C. at any level of GDP below $400.
D. only when GDP is stable.
C. at any level of GDP below $400.
14. If the economy has a cyclically-adjusted budget surplus, this means that:
A. the public sector is exerting an expansionary impact on the economy.
B. tax revenues would exceed government expenditures if full employment were achieved.
C. the actual budget is necessarily also in surplus.
D. the economy is actually operating at full employment.
B. tax revenues would exceed government expenditures if full employment were achieved.
15. Suppose the government purposely changes the economy's cyclically-adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n):
A. expansionary fiscal policy.
B. contractionary fiscal policy.
C. neutral fiscal policy.
D. low-interest rate policy.
A. expansionary fiscal policy.
16. The immediate primary cause of the swing from Federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was:
A. the tax cuts of 2001.
B. spending increases relating to the wars in Afghanistan and Iraq.
C. the recession of 2001.
D. the acceleration of inflation in 2001 and 2002.
C. the recession of 2001.
17. The American Recovery and Reinvestment Act of 2009:
A. created a $700 billion rescue package for financial institutions.
B. cut taxes by $152 billion, distributed primarily as rebate checks to taxpayers.
C. implemented a $787 billion package of tax cuts and government expenditure increases.
D. substantially lowered interest rates in an attempt to stimulate investment spending.
C. implemented a $787 billion package of tax cuts and government expenditure increases.
18. Which of the following best describes the idea of a political business cycle?
A. Politicians are more willing to cut taxes and increase government spending than they are to do the reverse.
B. Fiscal policy will result in alternating budget deficits and surpluses.
C. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
D. Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.
C. Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
19. The crowding-out effect of expansionary fiscal policy suggests that:
A. tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
C. it is very difficult to have excessive aggregate spending in the U.S. economy.
D. consumer and investment spending always vary inversely.
B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
20. Which of the following fiscal policy actions is most likely to increase aggregate supply?
A. An increase in personal income tax rates.
B. A reduction in interest rates that encourages consumers to purchase more durable goods.
C. An increase in transfer payments to unemployed workers.
D. An increase in government spending on infrastructure that increases private sector productivity.
B. A reduction in interest rates that encourages consumers to purchase more durable goods.
21. Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:
A. increased by $90 billion.
B. increased by $20 billion.
C. decreased by $70 billion.
D. decreased by $20 billion.
B. increased by $20 billion.
22. If year 1 is the first year of this nation's existence and year 4 is the present year, the public debt as a percentage of GDP in year 4 is:
A. 7.5 percent.
B. 1.39 percent.
C. 2.5 percent.
D. 3.9 percent.
D. 3.9 percent.
23. The public debt declined in year:
A. 6.
B. 5.
C. 4.
D. 3.
A. 6.
24. Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions?
A. 56 percent
B. 71 percent
C. 43 percent
D. 29 percent
D. 29 percent
25. To say that "the U.S. public debt is mostly held internally" is to say that:
A. only interest payments on the public debt are an economic burden.
B. official figures understate the size of the public debt.
C. the bulk of the public debt is owned by U.S. citizens and institutions.
D. the public debt is equal to the land and buildings assets owned by the Federal government.
C. the bulk of the public debt is owned by U.S. citizens and institutions.
26. The most likely way the public debt burdens future generations, if at all, is by:
A. reducing the current level of investment.
B. causing future unemployment.
C. causing deflation.
D. reducing real interest rates.
A. reducing the current level of investment.
27. Which of the following is the best example of public investment?
A. salaries of Senators and Representatives
B. government expenditures on food stamps
C. construction of highways
D. funding of regulatory agencies
C. construction of highways
28. Which of the following would not help to relieve the Social Security and Medicare shortfalls?
A. Extending the Social Security tax to a higher level of earnings.
B. Restricting immigration of skilled working-age adults.
C. Increasing the retirement age for collecting Social Security and Medicare benefits.
D. Reducing Social Security and Medicare benefits for wealthier individuals.
**B. Restricting immigration of skilled working-age adults.
1. To say money is socially defined means that:
A. money has been defined in a Constitutional amendment.
B. whatever performs the functions of money extremely well is considered to be money.
C. the money supply includes all public and private securities purchased by society.
D. society, acting through Congress, specifies what shall be included in the money supply.
B. whatever performs the functions of money extremely well is considered to be money.
2. If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as:
A. a medium of exchange.
B. a store of value.
C. a unit of account.
D. an economic investment.
A. a medium of exchange.
3. When economists say that money serves as a unit of account, they mean that it is:
A. a way to keep wealth in a readily spendable form for future use.
B. a means of payment.
C. a monetary unit for measuring and comparing the relative values of goods.
D. declared as legal tender by the government.
C. a monetary unit for measuring and comparing the relative values of goods.
4. In the United States, the money supply (M1) is comprised of:
A. coins, paper currency, and checkable deposits.
B. currency, checkable deposits, and Series E bonds.
C. coins, paper currency, checkable deposits, and credit balances with brokers.
D. paper currency, coins, gold certificates, and time deposits.
A. coins, paper currency, and checkable deposits.
5. Checkable deposits are classified as money because:
A. they can be readily used in purchasing goods and paying debts.
B. banks hold currency equal to the value of their checkable deposits.
C. they are ultimately the obligations of the Treasury.
D. they earn interest income for the depositor.
A. they can be readily used in purchasing goods and paying debts.
6. Paper money (currency) in the United States is issued by the:
A. United States Mint.
B. Federal Reserve Banks.
C. United States Treasury.
D. national banks.
B. Federal Reserve Banks.
7. The difference between M1 and M2 is that:
A. the former includes time deposits.
B. the latter includes small-denominated time deposits, non-checkable savings accounts, money market deposit accounts, and money market mutual fund balances.
C. the latter includes negotiable government bonds.
D. the latter includes cash held by commercial banks and the U.S. Treasury.
B. the latter includes small-denominated time deposits, non-checkable savings accounts, money market deposit accounts, and money market mutual fund balances.
8. Refer to the above information. Money supply M1 for this economy is:
A. $60.
B. $70.
C. $130.
D. $140.
C. $130.
9. Refer to the above information. Money supply M2 for this economy is:
A. $480.
B. $130.
C. $490.
D. $630.
A. $480.
10. The money supply is backed:
A. by the government's ability to control the supply of money and therefore to keep its value relatively stable.
B. by government bonds.
C. dollar-for-dollar by gold and silver.
D. by gold reserves representing a fraction of the total value of dollars in circulation.
A. by the government's ability to control the supply of money and therefore to keep its value relatively stable.
11. Which of the following does not explain what backs the money supply in the United States?
A. It is backed by gold.
B. It is widely accepted in transactions.
C. It is designated "legal tender" by the Federal government.
D. It is relatively scarce.
A. It is backed by gold.
12. Suppose that the Federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?
A. The value of the "wheat dollar" would be unstable depending on crop yields from year to year.
B. Farmers would replace corn and soy crops with wheat.
C. Wheat would function as money so long as people accept it in exchange for goods and services.
D. All of these are possible outcomes.
D. All of these are possible outcomes.
13. If the price index rises from 100 to 120, the purchasing power value of the dollar:
A. may either rise or fall.
B. will rise by one-sixth.
C. will fall by one-sixth.
D. will rise by 20 percent.
C. will fall by one-sixth.
14. During periods of rapid inflation, money may cease to work as a medium of exchange:
A. unless it has been designated legal tender.
B. unless it is backed by gold.
C. because it is too scarce for everyone to have enough for transactions.
D. because people and businesses will not want to accept it in transactions.
D. because people and businesses will not want to accept it in transactions.D. because people and businesses will not want to accept it in transactions.
15. Other things equal, an excessive increase in the money supply will:
A. increase the purchasing power of each dollar.
B. decrease the purchasing power of each dollar.
C. have no impact on the purchasing power of the dollar.
D. reduce the price level.
B. decrease the purchasing power of each dollar.
16. The Federal Open Market Committee (FOMC) is comprised of:
A. the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks.
B. the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank.
C. the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers.
D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.
D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.
17. Which one of the following is true about the U.S. Federal Reserve System?
A. There are 12 regional Federal Reserve Banks.
B. The head of the U.S. Treasury also chairs the Federal Reserve Board.
C. There are 14 members of the Federal Reserve Board.
D. The Open Market Committee is smaller in size than the Federal Reserve Board.
A. There are 12 regional Federal Reserve Banks.
18. Which of the following statements best describes the twelve Federal Reserve Banks?
A. They are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities.
B. They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry.
C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.
D. They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners.
C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.
19. Research for industrially advanced countries indicates that:
A. the more independent the central bank, the lower the average annual rate of inflation.
B. the more independent the central bank, the higher the average annual rate of inflation.
C. there is no relationship between the degree of independence of a country's central bank and its inflation rate.
D. the more independent the central bank, the higher the average annual rate of unemployment.
A. the more independent the central bank, the lower the average annual rate of inflation.
20. "Subprime mortgage loans" refer to:
A. high-interest rate loans to home buyers with above average credit risk.
B. home-buying loans that charge interest rates below the prime interest rate.
C. loans to buyers of homes that are in need of substantial repair.
D. loans from the Federal Reserve to home mortgage lenders to support a greater volume of home-buying loans at affordable interest rates.
A. high-interest rate loans to home buyers with above average credit risk.
21. Banks lost money during the mortgage default crisis because:
A. of defaulted loans to investors in mortgage-backed securities.
B. they held mortgage-backed securities they had purchased from investment firms.
C. homebuyers defaulted on mortgages held by the banks.
D. of all of these reasons.
D. of all of these reasons.
22. Which of the following statements is true as a result of Federal Reserve efforts to rescue the financial industry from the financial crisis of 2007 and 2008?
A. From February 2008, to May 2009, the Fed oversaw the consolidation of 20 major financial institutions into fewer than a dozen.
B. From March 2008, to February 2009, the Fed experienced a 50 percent decline in the value of assets held.
C. From February 2008, to March 2009, Fed assets more than doubled to nearly $2 trillion.
D. From February 2008, to March 2009, Fed lending caused the U.S. public debt to rise by over $1 trillion.
C. From February 2008, to March 2009, Fed assets more than doubled to nearly $2 trillion.
23. The various lender-of-last-resort programs implemented by the Fed in response to the financial crisis of 2007 and 2008:
A. severely depleted the assets of the Federal Reserve.
B. have been little used, and therefore ineffective.
C. increased the moral hazard problem by limiting losses from bad financial decisions.
D. were designed to offset the moral hazard created by the TARP and other bailout programs.
C. increased the moral hazard problem by limiting losses from bad financial decisions.
24. TIAA-CREF, Teamsters' Union, and CalPERS, are all primarily:
A. commercial banks.
B. thrifts.
C. insurance companies.
D. pension funds.
D. pension funds.
25. Firms whose central business is providing individual account shares of collections of stocks, bonds, or both are known as:
A. insurance companies.
B. thrifts.
C. commercial banks.
D. mutual funds companies.
D. mutual funds companies.
26. Credit card balances are:
A. a component of M1.
B. a component of M2 but not of M1.
C. a component of M1 but not of M2.
D. not a component of M1 or M2.
D. not a component of M1 or M2.
1. When the receipts given by goldsmiths to depositors were used to make purchases:
A. the gold standard was created.
B. existing banking laws were violated.
C. the receipts became in effect paper money.
D. a fractional reserve banking system was created.
C. the receipts became in effect paper money.
2. A bank that has assets of $85 billion and a net worth of $10 billion must have:
A. liabilities of $75 billion.
B. excess reserves of $10 billion.
C. liabilities of $10 billion.
D. excess reserves of $75 billion.
A. liabilities of $75 billion.
3. The reserves of a commercial bank consist of:
A. the amount of money market funds it holds.
B. deposits at the Federal Reserve Bank and vault cash.
C. government securities that the bank holds.
D. the bank's net worth.
B. deposits at the Federal Reserve Bank and vault cash.
4. This commercial bank has excess reserves of:
A. $0.
B. $3,000.
C. $12,000.
D. $5,000.
D. $5,000.
5. This bank can safely expand its loans by a maximum of:
A. $7,000.
B. $25,000.
C. $12,000.
D. $5,000.
D. $5,000.
6. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit, and has a check cleared against it for that amount, its reserves and checkable deposits will now be:
A. $25,000 and $122,000 respectively.
B. $22,000 and $110,000 respectively.
C. $32,000 and $115,000 respectively.
D. $22,000 and $105,000 respectively.
B. $22,000 and $110,000 respectively.
7. If the original balance sheet was for the commercial banking system, rather than a single bank, loans and checkable deposits could have been expanded by a maximum of:
A. $8,000.
B. $15,000.
C. $48,000.
D. $25,000.
D. $25,000.
8. Commercial banks create money when they:
A. accept cash deposits from the public.
B. purchase government securities from the central banks.
C. create checkable deposits in exchange for IOUs.
D. raise their interest rates.
C. create checkable deposits in exchange for IOUs.
9. Which of the following is correct?
A. Both the granting and repaying of bank loans expand the aggregate money supply.
B. Granting and repaying bank loans do not affect the money supply.
C. Granting a bank loan destroys money; repaying a bank loan creates money.
D. Granting a bank loan creates money; repaying a bank loan destroys money.
D. Granting a bank loan creates money; repaying a bank loan destroys money.
10. Banks create money when they:
A. allow loans to mature.
B. accept deposits of cash.
C. buy government bonds from households.
D. sell government bonds to households.
C. buy government bonds from households.
11. In prosperous times commercial banks are likely to hold very small amounts of excess reserves because:
A. the Fed wants commercial banks to increase the money supply during economic expansions.
B. it is very costly to transfer funds between commercial banks and the central banks.
C. the Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves.
D. the Federal Reserve Banks want to minimize their interest payments on such deposits.
C. the Federal Reserve Banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reserves.
12. Which of the following would reduce the money supply?
A. Commercial banks use excess reserves to buy government bonds from the public.
B. Commercial banks loan out excess reserves.
C. Commercial banks sell government bonds to the public.
D. A check clears from Bank A to Bank B.
C. Commercial banks sell government bonds to the public.
13. The Federal funds market is the market in which:
A. banks borrow from the Federal Reserve Banks.
B. U.S. securities are bought and sold.
C. banks borrow reserves from one another on an overnight basis.
D. Federal Reserve Banks borrow from one another.
C. banks borrow reserves from one another on an overnight basis.
14. The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to:
A. the reciprocal of the required reserve ratio.
B. 1 minus the required reserve ratio.
C. the reciprocal of the income velocity of money.
D. 1/MPS.
A. the reciprocal of the required reserve ratio.
15. The commercial banking system has excess reserves of:
A. $0 billion.
B. $30 billion.
C. $60 billion.
D. $70 billion.
A. $0 billion.
16. After a deposit of $10 billion of new currency into a checking account in the banking system, excess reserves will increase by:
A. $0 billion.
B. $7 billion.
C. $9 billion.
D. $10 billion.
C. $9 billion.
17. After the deposit of $10 billion of new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is:
A. $9 billion.
B. $45 billion.
C. $36 billion.
D. $90 billion.
D. $90 billion.
18. When the legal reserve ratio is 30 percent, the monetary multiplier is:
A. 5.
B. 4.
C. 3.33.
D. 2.5.
C. 3.33.
19. If the legal reserve ratio falls from 25 percent to 10 percent, excess reserves of this single bank will:
A. rise by $6,000 and the monetary multiplier will increase from 4 to 10.
B. rise by $60,000 and the monetary multiplier will increase from 4 to 10.
C. fall by $6,000 and the monetary multiplier will decline from 30 to 10.
D. fall by $2,000 and the monetary multiplier will decline from 10 to 4.
A. rise by $6,000 and the monetary multiplier will increase from 4 to 10.
20. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1,000.
B. liabilities are $1,000.
C. net worth is zero.
D. profit is $1,000.
B. liabilities are $1,000.
21. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1,100.
B. liabilities are $1,100.
C. net worth is $300.
D. profit is $1,000.
A. assets are $1,100.
22. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's:
A. assets are $1000.
B. liabilities are $300.
C. net worth is $100.
D. annual profit is $200.
C. net worth is $100.
23. Refer to the above information. If Moolah Bank is legally "loaned up," the reserve requirement must be:
A. 10 percent.
B. 15 percent.
C. 20 percent.
D. 25 percent.
A. 10 percent.
24. Refer to the above information. If Moolah Bank is legally "loaned up," the banking system's monetary multiplier must be:
A. 5.
B. 8.
C. 10.
D. 20.
C. 10.
25. Refer to the above information and assume that Moolah bank is "loaned up." If it receives a $100 deposit of currency, it could safely expand its loans by:
A. $100.
B. $90.
C. $900.
D. $1,000.
B. $90.
26. Refer to the above information and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by:
A. $100.
B. $90.
C. $900.
D. $1000.
C. $900.
27. Which of the following resulted from the financial crisis of 2007-2008?
A. A national bank holiday was declared that shut down banks for one week.
B. The Fed raised reserve requirements to keep cash from flowing out of banks.
C. The Fed raised interest rates to entice depositors to keep their money in banks.
D. FDIC insurance was increased from $100,000 to $250,000 per account.
D. FDIC insurance was increased from $100,000 to $250,000 per account.
28. Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics of 1930-1933?
A. banks are more cautious lenders
B. banks keep large amounts of excess reserves on hand
C. the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw money when individual banks have financial problems
D. the President now has the authority to close banks whenever panics occur
C. the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw money when individual banks have financial problems
1. The desire to hold money for transactions purposes arises because:
A. receipts of income and expenditures are not perfectly synchronized.
B. people fear that prices will rise.
C. households want money on hand in case a good financial investment opportunity arises.
D. low interest rates reduce the opportunity cost of holding money.
A. receipts of income and expenditures are not perfectly synchronized.
2. The asset demand for money:
A. is unrelated to both the interest rate and the level of GDP.
B. varies inversely with the rate of interest.
C. varies inversely with the level of real GDP.
D. varies directly with the level of nominal GDP.
B. varies inversely with the rate of interest.
3. In which of the following situations is it certain that the quantity of money demanded by the public will decrease?
A. nominal GDP decreases and the interest rate decreases
B. nominal GDP increases and the interest rate decreases
C. nominal GDP decreases and the interest rate increases
D. nominal GDP increases and the interest rate increases
C. nominal GDP decreases and the interest rate increases
4. An increase in nominal GDP increases the demand for money because:
A. interest rates will rise.
B. more money is needed to finance a larger volume of transactions.
C. bond prices will fall.
D. the opportunity cost of holding money will decline.
B. more money is needed to finance a larger volume of transactions.
5. Refer to the above diagram of the market for money. The vertical money supply curve Sm reflects the fact that:
A. bond prices and interest rates are inversely related.
B. the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
C. the rate at which money is spent is zero.
D. lower interest rates result in lower opportunity costs of supplying money.
B. the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.
6. Refer to the above diagram of the market for money. Given Dm and Sm, an interest rate of i3 is not sustainable because the:
A. supply of bonds in the bond market will decline and the interest rate will rise.
B. supply of bonds in the bond market will increase and the interest rate will decline.
C. demand for bonds in the bond market will decline and the interest rate will rise.
D. demand for bonds in the bond market will rise and the interest rate will fall.
D. demand for bonds in the bond market will rise and the interest rate will fall.
7. Refer to the above diagram of the market for money. Other things equal, the money demand curve in the diagram would shift leftward if:
A. the asset demand for money increased.
B. the transactions demand for money increased.
C. nominal GDP decreased.
D. the overall price level rose.
C. nominal GDP decreased.
8. Initially, the bond price = $1000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent. If the price of this bond increases to $1250, the interest rate will:
A. fall to 9 percent.
B. fall to 8 percent.
C. rise to 11 percent.
D. rise to 12 percent.
B. fall to 8 percent.
9. At equilibrium in the above market for money, the total amount of money demanded is:
A. $500.
B. $480.
C. $460.
D. $440.
C. $460.
10. The equilibrium interest rate is:
A. 2 percent.
B. 4 percent.
C. 6 percent.
D. 8 percent.
D. 8 percent.
11. An increase in the money supply of $20 billion will cause the equilibrium interest rate to:
A. fall by 4 percentage points.
B. fall by 2 percentage points.
C. rise by 4 percentage points.
D. rise by 2 percentage points.
B. fall by 2 percentage points.
12. Federal Reserve Notes in circulation are:
A. an asset as viewed by the Federal Reserve Banks.
B. a liability as viewed by the Federal Reserve Banks.
C. neither an asset nor a liability as viewed by the Federal Reserve Banks.
D. part of M1, but not of M2.
B. a liability as viewed by the Federal Reserve Banks.
13. Which of the following will increase commercial bank reserves?
A. the purchase of government bonds in the open market by the Federal Reserve Banks
B. a decrease in the reserve ratio
C. an increase in the discount rate
D. the sale of government bonds in the open market by the Federal Reserve Banks
A. the purchase of government bonds in the open market by the Federal Reserve Banks
14. The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits:
A. of commercial banks are unchanged, but their reserves increase.
B. and reserves of commercial banks both decrease.
C. of commercial banks are unchanged, but their reserves decrease.
D. of commercial banks are both unchanged.
B. and reserves of commercial banks both decrease.
15. The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits:
A. of commercial banks are unchanged, but their reserves increase.
B. and reserves of commercial banks both decrease.
C. of commercial banks are unchanged, but their reserves decrease.
D. and reserves of commercial banks are both unchanged.
A. of commercial banks are unchanged, but their reserves increase.
16. The four main tools of monetary policy are:
A. tax rate changes, the discount rate, open-market operations, and the Federal funds rate.
B. tax rate changes, changes in government expenditures, open-market operations, and the term auction facility.
C. the discount rate, the reserve ratio, the term auction facility, and open-market operations.
D. changes in government expenditures, the reserve ratio, the Federal funds rate, and the discount rate.
C. the discount rate, the reserve ratio, the term auction facility, and open-market operations.
17. 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:
A. not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million.
B. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million.
C. directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million.
D. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.
D. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.
18. Refer to the above data. Suppose the Fed sold $10 billion of U.S. securities to the banks. This would:
A. increase bank reserves to $70 billion, reduce bank-held securities to $130 billion, and ultimately increase the money supply (checkable deposits) by $100 billion.
B. increase bank reserves to $70 billion, reduce bank-held securities to $130 billion, and ultimately decrease the money supply (checkable deposits) by $100 billion.
C. reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and ultimately increase the money supply (checkable deposits) by $100 billion.
D. reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and ultimately decrease the money supply (checkable deposits) by $100 billion.
D. reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and ultimately decrease the money supply (checkable deposits) by $100 billion.
19. Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy. Assuming that the money multiplier is operating to full effect, to accomplish the desired increase the Fed could:
A. sell $20 billion of U.S. securities to the banks.
B. buy $20 billion of U.S. securities from the banks.
C. sell $40 billion of U.S. securities to the banks.
D. buy $40 billion of U.S. securities from the banks.
D. buy $40 billion of U.S. securities from the banks.
20. When the required reserve ratio is increased, the excess reserves of member banks are:
A. reduced, but the multiple by which the commercial banking system can lend is unaffected.
B. reduced and the multiple by which the commercial banking system can lend is increased.
C. increased and the multiple by which the commercial banking system can lend is increased.
D. reduced and the multiple by which the commercial banking system can lend is reduced.
D. reduced and the multiple by which the commercial banking system can lend is reduced.
21. The discount rate is the interest:
A. rate at which the central banks lend to the U.S. Treasury.
B. rate at which the Federal Reserve Banks lend to commercial banks.
C. yield on long-term government bonds.
D. rate at which commercial banks lend to the public.
B. rate at which the Federal Reserve Banks lend to commercial banks.
22. Suppose that, for every 1-percentage point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will:
A. increase by $1 billion and the money supply will increase by $5 billion.
B. decline by $1 billion and the money supply will decline by $10 billion.
C. increase by $1 billion and the money supply will increase by $10 billion.
D. increase by $10 billion and the money supply will increase by $100 billion.
C. increase by $1 billion and the money supply will increase by $10 billion.
23. Which of the following tools of monetary policy is flexible, and able to affect bank reserves quickly and by relatively specific amounts?
A. the discount rate
B. the reserve ratio
C. open market operations
D. the Federal funds rate
C. open market operations
24. Which of the following actions by the Fed will increase commercial bank lending potential?
A. Raising the reserve ratio.
B. Increasing the Federal funds rate target.
C. Expanding the amount of reserves available through the term auction facility.
D. Selling bonds to commercial banks and the public.
C. Expanding the amount of reserves available through the term auction facility.
25. Which of the following statements is true?
A. The Federal Reserve sets the Federal funds rate.
B. The Federal Reserve sets the target for the Federal funds rate, and then uses the reserve ratio to push banks toward that target.
C. The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations.
D. The Federal Reserve will set a higher target for the Federal funds rate if pursuing an expansionary monetary policy.
C. The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations.
26. The Fed directly sets:
A. the prime interest rate but not the Federal funds rate.
B. both the Federal funds rate and the prime interest rate.
C. neither the Federal funds rate nor the prime interest rate.
D. the discount rate and the prime interest rate.
C. neither the Federal funds rate nor the prime interest rate.
27. Refer to the above diagram for the Federal funds market. If the Fed supplies $300 billion in reserves, the equilibrium Federal funds rate is:
A. 6.0 percent.
B. 5.5 percent.
C. 5.0 percent.
D. undeterminable with the information given.
C. 5.0 percent.
28. Refer to the above diagram for the Federal funds market. If the Fed supplies $200 billion in reserves, the equilibrium prime interest rate is:
A. 6.0 percent.
B. 5.5 percent.
C. 5.0 percent.
D. undeterminable with the information given.
D. undeterminable with the information given.
29. Refer to the above diagram for the Federal funds market. If the Fed wants to increase reserves from $200 billion to $300 billion it should:
A. buy bonds from banks and the public.
B. sell bonds to banks and the public.
C. buy bonds from banks and sell them to the public.
D. buy bonds from the public and sell them to banks.
A. buy bonds from banks and the public.
30. Refer to the above diagram for the Federal funds market. If the Fed wants to raise the Federal funds rate by one-half of a percentage point, it should:
A. act to increase reserves by $50 billion.
B. act to reduce reserves by $50 billion.
C. pursue an expansionary monetary policy.
D. buy bonds from banks and the public.
B. act to reduce reserves by $50 billion.
31. The prime interest rate:
A. affects investment spending while the Federal funds rate affects consumption spending.
B. affects consumption spending while the Federal funds rate affects investment spending.
C. has no affect on exchange rates and net exports.
D. affects investment spending while the Federal funds rate affects overnight borrowing of bank reserves.
D. affects investment spending while the Federal funds rate affects overnight borrowing of bank reserves.
32. Other things equal, which of the following would increase the Federal funds rate?
A. a decrease in loan demand in the Federal funds market
B. a decrease in the reserve ratio
C. Fed purchases of government securities from banks
D. a decline in excess reserves in the banking system
D. a decline in excess reserves in the banking system
33. According to the Taylor rule:
A. for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2 percentage point gap between potential and actual GDP.
B. growth in the money supply should be limited to the long-run average growth rate of real GDP.
C. if inflation rises by 1 percentage point above its target, then the Fed should raise the real Federal funds rate by one-half a percentage point.
D. the rate of money growth should be set at 4 percent per year.
C. if inflation rises by 1 percentage point above its target, then the Fed should raise the real Federal funds rate by one-half a percentage point.
34. Which of the following best describes the cause-effect chain of an expansionary monetary policy?
A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D. An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
D. An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
35. If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:
A. sell government securities, raise reserve requirements, raise the discount rate, and reduce the amount of reserves available through the term auction facility.
B. buy government securities, raise reserve requirements, raise the discount rate, and reduce the amount of reserves available through the term auction facility.
C. sell government securities, lower reserve requirements, lower the discount rate, and increase the amount of reserves available through the term auction facility.
D. sell government securities, raise reserve requirements, lower the discount rate, and increase the amount of reserves available through the term auction facility.
A. sell government securities, raise reserve requirements, raise the discount rate, and reduce the amount of reserves available through the term auction facility.
36. Which of the following best describes the cause-effect chain of a restrictive monetary policy?
A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D. An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.
B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
37. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:
A. selling government securities, raising the reserve ratio, lowering the discount rate, increasing reserves available through the term auction facility, and a budgetary surplus.
B. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the term auction facility, and a budgetary deficit.
C. buying government securities, raising the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary surplus.
D. buying government securities, reducing the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary deficit.
B. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the term auction facility, and a budgetary deficit.
38. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If the money supply is MS1 and the goal of the monetary authorities is full-employment output Qf, they should:
A. increase the money supply from $80 to $100.
B. increase the money supply from $80 to $120.
C. maintain the money supply at $80.
D. decrease the money supply from $80 to $60.
A. increase the money supply from $80 to $100.
39. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. Which of the following would shift the money supply curve from MS1 to MS3?
A. an increase in the discount rate
B. purchases of U.S. securities by the Fed in the open market
C. sales of U.S. securities by the Fed in the open market
D. an increase in the reserve ratio
B. purchases of U.S. securities by the Fed in the open market
40. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If the MPC for the economy described by the figures is 0.8:
A. an increase in the money supply from $80 to $100 will shift the aggregate demand curve rightward by $50 billion at each price level.
B. an increase in the money supply from $80 to $100 will shift the aggregate demand curve leftward by $40 billion at each price level.
C. a decrease in the interest rate from 9 percent to 6 percent will shift the aggregate demand curve leftward by $100 billion at each price level.
D. a decrease in the interest rate from 6 percent to 3 percent will shift the aggregate demand curve leftward by $50 billion at each price level.
A. an increase in the money supply from $80 to $100 will shift the aggregate demand curve rightward by $50 billion at each price level.
41. Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Fed:
A. will have to increase interest rates to keep the price level from falling.
B. will have to reduce the money supply to keep the price level from rising.
C. will have to increase the money supply to keep the price level from falling.
D. can keep the price level stable without altering the money supply or interest rate.
C. will have to increase the money supply to keep the price level from falling.
42. Between March 2001 and November 2002, the Fed reduced the Federal funds rate from 5 percent to just above 1 percent. The Fed's purpose was to:
A. prevent rising inflation.
B. reduce the public debt.
C. promote recovery from recession.
D. strengthen the international value of the dollar.
C. promote recovery from recession.
43. From 2004 to 2006 the Fed raised the Federal funds rate gradually in a series of steps. The Fed's purpose was to raise the prime interest rate so that:
A. high inflation rates would fall.
B. aggregate demand would continue to grow consistently and with low inflation.
C. aggregate supply would grow, increasing output and lowering the price level.
D. banks would reduce lending that was building up unmanageable consumer debt.
B. aggregate demand would continue to grow consistently and with low inflation.
44. From September 2007 to April 2008 the Fed lowered the Federal funds rate from 5.25 percent to 2 percent in a series of steps. The Fed's actions were largely in response to:
A. threats to the financial system from the mortgage default crisis.
B. forecasts of higher inflation rates.
C. Chinese refusal to allow their exchange rate to reflect market conditions.
D. pressure from the President to offset contractionary effects of a tax increase.
A. threats to the financial system from the mortgage default crisis.
45. One of the strengths of monetary policy relative to fiscal policy is that monetary policy:
A. can be implemented more quickly.
B. is subject to closer political scrutiny.
C. does not produce a net export effect.
D. entails a larger spending income multiplier effect on real GDP.
A. can be implemented more quickly.
46. The problem of cyclical asymmetry refers to the idea that:
A. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply.
B. the monetary authorities have been less willing to use an expansionary monetary policy than they have a restrictive monetary policy.
C. cyclical downswings are typically of longer duration than cyclical upswings.
D. an expansionary monetary policy can force an expansion of the money supply, but a restrictive monetary policy may not achieve a contraction of the money supply.
A. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply.
47. An expansionary monetary policy may be frustrated if the:
A. demand-for-money curve shifts to the left.
B. investment-demand curve shifts to the left.
C. saving schedule shifts downward.
D. investment-demand curve shifts to the right.
B. investment-demand curve shifts to the left.
48. In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of:
A. the crowding-out effect.
B. "pulling on a string."
C. the Taylor rule.
D. the liquidity trap.
D. the liquidity trap.
49. (Consider This) During and immediately following the severe recession of 2007-2009, commercial bank reserves held on deposit in Federal Reserve banks:
A. rose to a high of 50 percent of total checkable deposits held by banks.
B. fell significantly as commercial banks withdrew reserves to pay off heavy debt obligations.
C. increased significantly because of Fed purchases of securities from commercial banks, and the paying of interest on bank reserves.
D. increased significantly because the Fed increased the required reserve ratio.
C. increased significantly because of Fed purchases of securities from commercial banks, and the paying of interest on bank reserves.
1. In recent years the United States has:
A. exported more services abroad than it has imported.
B. had a small goods trade surplus with Japan.
C. had a large goods trade surplus with the rest of the world.
D. maintained an overall trade surplus (goods and services combined) with the rest of the world.
A. exported more services abroad than it has imported.
2. Which of the following statements is false?
A. In recent years the United States has had large annual trade deficits in goods and services.
B. The United States imports some of the same categories of goods as it exports.
C. China has the largest share of world exports.
D. As a percentage of GDP, U.S. exports are the highest among the industrially advanced nations.
D. As a percentage of GDP, U.S. exports are the highest among the industrially advanced nations.
3. Which of the following is an example of a capital-intensive commodity?
A. clothing
B. wool
C. sunflower seeds
D. chemicals
D. chemicals
4. Differences in production efficiencies among nations in producing a particular good result from:
A. different endowments of fertile soil.
B. different amounts of skilled labor.
C. different levels of technological knowledge.
D. all of these.
D. all of these.
5. On the basis of the above information:
A. Gamma should export both tea and pots to Sigma.
B. Sigma should export tea to Gamma and Gamma should export pots to Sigma.
C. Gamma should export tea to Sigma and Sigma should export pots to Gamma.
D. Gamma should export tea to Sigma, but it will not be profitable for the two nations to exchange pots.
C. Gamma should export tea to Sigma and Sigma should export pots to Gamma.
6. Refer to the above data. Assume that before specialization and trade Gamma and Sigma both chose production possibility "C." Now if each specializes according to comparative advantage, the gains from specialization and trade will be:
A. 40 tons of pots.
B. 20 tons of tea and 20 tons of pots.
C. 20 tons of tea.
D. 40 tons of tea.
D. 40 tons of tea.
7. Assume that by devoting all of its resources to the production of X, nation Alpha can produce 40 units of X. By devoting all of its resources to Y, Alpha can produce 60Y. Comparable figures for nation Beta are 60X and 40Y. We can conclude that:
A. the terms of trade will be 3X equals 1Y.
B. Alpha should specialize in Y and Beta in X.
C. Alpha should specialize in X and Beta in Y.
D. there is no basis for mutually beneficial specialization and trade.
B. Alpha should specialize in Y and Beta in X.
8. In the theory of comparative advantage, a good should be produced in that nation where:
A. the production possibilities line lies further to the right than the trading possibilities line.
B. its cost is least in terms of alternative goods that might otherwise be produced.
C. its absolute cost in terms of real resources used is least.
D. its absolute money cost of production is least.
B. its cost is least in terms of alternative goods that might otherwise be produced.
9. The production possibilities curves above suggest that:
A. West Mudville should specialize in, and export, baseball bats.
B. West Mudville should specialize in, and export, both baseballs and baseball bats.
C. East Mudville should specialize in, and export, baseball bats.
D. workers will try to immigrate from West Mudville to East Mudville.
A. West Mudville should specialize in, and export, baseball bats.
10. Assuming labor forces of equal size, the production possibilities curves above suggest that workers in West Mudville will have:
A. lower wages than workers in East Mudville before trade but equal wages after trade.
B. higher wages than workers in East Mudville both before and after trade.
C. lower wages than workers in East Mudville both before and after trade.
D. higher wages than workers in East Mudville before trade but lower wages after trade.
B. higher wages than workers in East Mudville both before and after trade.
11. If a nation has a comparative advantage in the production of X, this means the nation:
A. cannot benefit by producing and trading this product.
B. must give up less of other goods than other nations in producing a unit of X.
C. has a production possibilities curve identical to those of other nations.
D. is not subject to increasing opportunity costs.
B. must give up less of other goods than other nations in producing a unit of X.
12. The above data show that:
A. Beta has a comparative advantage in producing chips.
B. Alpha has a comparative advantage in catching fish.
C. Alpha is subject to constant costs and Beta is subject to increasing costs.
D. Beta is more efficient than Alpha both in catching fish and in producing chips.
D. Beta is more efficient than Alpha both in catching fish and in producing chips.
13. Refer to the above data. The domestic opportunity cost of:
A. producing a ton of chips in Alpha is 1/5of a ton of fish.
B. producing a ton of chips in Beta is 6 tons of fish.
C. catching a ton of fish in Alpha is 5 tons of chips.
D. catching a ton of fish in Beta is 6 tons of chips.
B. producing a ton of chips in Beta is 6 tons of fish.
14. Refer to the above data. Beta:
A. should specialize in catching fish and trade with Alpha for chips.
B. should specialize in producing chips and trade with Alpha for fish.
C. will not realize gains from specialization and trade.
D. will export both fish and chips to Alpha.
A. should specialize in catching fish and trade with Alpha for chips.
15. The impact of increasing, as opposed to constant, costs is to:
A. intensify and prolong the comparative advantages that any nation may have initially.
B. expand the limits of the terms of trade.
C. cause the bases for further specialization to disappear as nations specialize according to comparative advantage.
D. cause nations to realize economies of scale in those products in which they specialize.
C. cause the bases for further specialization to disappear as nations specialize according to comparative advantage.
16. In the real world, specialization is rarely complete because:
A. nations normally experience increasing opportunity costs in producing more of the product in which they are specializing.
B. production possibilities curves are straight lines rather than curves bowed outward as viewed from the origin.
C. one nation's imports are necessarily another nation's exports.
D. international law prohibits monopolies.
A. nations normally experience increasing opportunity costs in producing more of the product in which they are specializing.
17. If the world price for this product is $1.60, this nation will experience a domestic:
A. shortage of 160 units, which it will meet with 160 units of imports.
B. shortage of 160 units, which will increase the domestic price to $1.60.
C. surplus of 160 units, which it will export.
D. surplus of 160 units, which will reduce the world price to $1.00.
C. surplus of 160 units, which it will export.
18. If the world price for this product is $.50, this nation will experience a domestic:
A. shortage of 160 units, which it will meet with 160 units of imports.
B. shortage of 160 units, which will increase the domestic price to $1.60.
C. surplus of 160 units, which it will export.
D. surplus of 160 units, which will reduce the world price to $1.00.
A. shortage of 160 units, which it will meet with 160 units of imports.
19. If the world price of this product is $1, this nation will:
A. export all of the product.
B. import all of the product.
C. import some of the product and produce some of the product domestically.
D. neither export nor import the product.
D. neither export nor import the product.
20. At a world price of $5:
A. Alpha will want to import 50 units of steel.
B. Beta will want to import 60 units of steel.
C. Alpha will want to export 50 units of steel.
D. neither country will want to export steel.
C. Alpha will want to export 50 units of steel.
21. At a world price of $2:
A. Alpha will want to import 20 units of steel.
B. Beta will want to export 20 units of steel.
C. Alpha will want to export 20 units of steel.
D. neither country will want to import steel.
A. Alpha will want to import 20 units of steel.
22. Assuming that Alpha and Beta are the only two nations in the world, the equilibrium world price of steel must be between:
A. $5 and $4.
B. $4 and $3.
C. $3 and $2.
D. $2 and $1.
C. $3 and $2.
23. Tariffs:
A. may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs).
B. are also called import quotas.
C. are excise taxes on goods exported abroad.
D. are per unit subsidies designed to promote exports.
A. may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs).
24. Country A limits other nation's exports to Country A to 1,000 tons of coal annually. This is an example of a (n):
A. protective tariff.
B. export subsidy.
C. import quota.
D. voluntary export restriction.
C. import quota.
25. Which is an example of a nontariff barrier (NTB)?
A. an export subsidy
B. an excise tax on the physical volume of imported goods
C. box-by-box inspection requirements for imported fruit
D. an excise tax on the dollar value of imported goods
C. box-by-box inspection requirements for imported fruit
26. If the economy is opened to free trade, the price and quantity sold of this product would be:
A. Pc and v.
B. Pa and z.
C. Pt and y.
D. Pc and z.
D. Pc and z.
27. With free trade, that is, assuming no tariff, the outputs produced by domestic and foreign producers respectively would be:
A. v and vz.
B. w and wy.
C. w and wz.
D. vx and xz.
A. v and vz.
28. With a per unit tariff of PcPt, the total amount of tariff revenue collected on this product will be:
A. PaPt times wy.
B. PcPa times x.
C. PcPt times wy.
D. PcPt times z.
C. PcPt times wy.
29. Suppose the United States eliminates high tariffs on German bicycles. As a result, we would expect:
A. the price of German bicycles to increase in the United States.
B. employment to decrease in the German bicycle industry.
C. employment to decrease in the U.S. bicycle industry.
D. profits to rise in the U.S. bicycle industry.
C. employment to decrease in the U.S. bicycle industry.
30. With a $1 per unit tariff, price and total quantity sold will be:
A. $3 and 7 units.
B. $5 and 2 units.
C. $3 and 7 units.
D. $2 and 11 units.
D. $2 and 11 units.
31. With a $1 per unit tariff, the quantities sold by foreign and domestic producers respectively will be:
A. 1 unit and 15 units.
B. 7 units and 4 units.
C. 11 units and 4 units.
D. indeterminate.
C. 11 units and 4 units.
32. Other things equal, economists would prefer:
A. free trade to tariffs and tariffs to import quotas.
B. free trade to import quotas and import quotas to tariffs.
C. import quotas to tariffs and tariffs to voluntary export restrictions.
D. import quotas to free trade and free trade to tariffs.
A. free trade to tariffs and tariffs to import quotas.
33. In the above diagram Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. Sd + Q is the product supply curve after an import quota is imposed. The size of the import quota:
A. is vz.
B. is vy.
C. is wy.
D. cannot be determined.
C. is wy.
34. Which of the following statements is false?
A. Studies show that developing nations that have relied on import restrictions to protect domestic industries have had higher growth rates than similar nations pursuing more open economic policies.
B. The United States Constitution forbids individual states from levying tariffs.
C. The high tariffs of the Smoot-Hawley Act of 1930 and the retaliation they caused worsened the Great Depression.
D. The European Union has enhanced prosperity in Western Europe.
A. Studies show that developing nations that have relied on import restrictions to protect domestic industries have had higher growth rates than similar nations pursuing more open economic policies.
35. A high tariff on imported good X might reduce domestic employment in industry Y if:
A. X is an input used domestically in producing Y.
B. X and Y are substitute goods.
C. X is an inferior good.
D. Y is an inferior good.
A. X is an input used domestically in producing Y.
36. Which of the following arguments for trade protection is based on the premise that a nation should have a wide enough range of domestic industries to be self-sufficient if necessary?
A. the increase-domestic-employment argument
B. the cheap-foreign-labor argument
C. the diversification-for-stability argument
D. the infant-industry argument
C. the diversification-for-stability argument
37. A major difficulty with the argument that trade barriers are necessary because foreign workers are paid low wages is that:
A. labor costs and product prices are not related.
B. there is no discernible relationship between wage rates and labor productivity.
C. wage rates and labor productivity are directly related.
D. wage rates and labor productivity are inversely related.
C. wage rates and labor productivity are directly related.
38. Dumping of goods abroad:
A. constitutes a general case for permanent tariffs.
B. may be part of a firm's price discrimination strategy.
C. may be part of a nation's strategy to rectify its trade deficit.
D. drives up prices of the dumped goods.
B. may be part of a firm's price discrimination strategy.
39. The organization created to oversee the provisions of multilateral trade agreements, resolve disputes under the international trade rules, and meet periodically to consider further trade liberalization is called the:
A. International Monetary Fund (IMF).
B. World Trade Organization (WTO).
C. Common Market Organization (CMO).
D. International Trade Commission (ITC).
B. World Trade Organization (WTO).
40. The "Euro Zone":
A. is another name for the European Union.
B. refers to the common currency used by all European Union members.
C. is a geographic region in Europe with no national sovereignty, where free trade between European nations is allowed to occur.
D. is the subset of the EU that uses a common currency.
B. refers to the common currency used by all European Union members.
41. According to Dallas Federal Reserve economist W. Michael Cox, taken to its extreme, the logic of "buying American" implies that:
A. we should buy everything from abroad.
B. people should only consume what they can produce themselves.
C. consumers should only buy goods from other states.
D. the best quality goods are found in the United States.
B. people should only consume what they can produce themselves.
1. International transactions fall into what two broad categories?
A. Manufacturing trade and services trade.
B. International trade and international asset transactions.
C. Currency transactions and services trade.
D. Newly created assets and preexisting assets.
B. International trade and international asset transactions.
2. In international financial transactions, what are the only two things that individuals and firms can exchange?
A. currency and real assets.
B. services and manufactured goods.
C. preexisting assets and currently produced goods and services.
D. currency and currently produced goods and services.
C. preexisting assets and currently produced goods and services.
3. The current account in a nation's balance of payments includes:
A. its goods exports and imports, and its services exports and imports.
B. foreign purchases of domestic assets.
C. purchases of foreign assets.
D. all of these.
A. its goods exports and imports, and its services exports and imports.
4. A nation's capital and financial account:
A. contains inpayment items, but not outpayment items.
B. includes service exports and service imports.
C. includes both inpayments and outpayments.
D. includes net investment income and net transfers.
C. includes both inpayments and outpayments.
5. If a nation has a current account deficit and it does not have to make any inpayments or outpayments of official reserves, it must have a:
A. surplus in its capital and financial account.
B. balance of payments deficit.
C. balance of payments surplus.
D. deficit in its capital and financial account.
A. surplus in its capital and financial account.
6. Which of the following combinations is plausible, as it relates to a nation's balance of payments?
A. current account = $+40 billion; capital account = $+20 billion; financial account = $-50 billion.
B. current account = $-50 billion; capital account = $+20 billion; financial account = $+30 billion.
C. current account = $+10 billion; capital account = $+40 billion; financial account = $+50 billion.
D. current account = $+30 billion; capital account = $-20 billion; financial account = $-50 billion.
B. current account = $-50 billion; capital account = $+20 billion; financial account = $+30 billion.
7. Which of the following would contribute to a United States balance of payments deficit?
A. Kawasaki builds a motorcycle manufacturing plant in Kansas City
B. United States tourists travel in large numbers to Europe
C. a wealthy Mexican citizen builds a mansion in Beverly Hills
D. Zaire pays interest on its debt to the United States
B. United States tourists travel in large numbers to Europe
8. It may be misleading to label a trade deficit as unfavorable or adverse because:
A. the multiplier does not apply to a trade deficit.
B. a trade deficit increases a nation's aggregate output and employment.
C. a nation's consumers benefit from a trade deficit during the period it occurs.
D. a trade deficit precludes inflation.
C. a nation's consumers benefit from a trade deficit during the period it occurs.
9. Refer to the above data. Zabella's balance on goods and services shows a:
A. $5 billion deficit.
B. $5 billion surplus.
C. $10 billion surplus.
D. $15 billion deficit.
B. $5 billion surplus.
10. Refer to the above data. Zabella's balance on capital and financial account shows a:
A. deficit of $5 billion.
B. surplus of $10 billion.
C. deficit of $10 billion.
D. surplus of $5 billion.
A. deficit of $5 billion.
11. Suppose the balance on the financial account is -$300 billion and the balance on the capital account is +$5 billion. The size of the current account is:
A. +$295 billion.
B. -$295 billion.
C. +$305 billion.
D. +$5 billion.
A. +$295 billion.
12. Which of the following statements is true regarding why the balance on the current account and the balance on the capital and financial account must always sum to zero?
A. Any deficit or surplus in the current account automatically creates an offsetting entry in the capital and financial account.
B. People can only trade one of two things with each other; currently produced goods and services or preexisting assets.
C. If trading partners have an imbalance in their trade of currently produced goods and services, the only way to correct that imbalance is with a net transfer of assets from one party to the other.
D. All of these are true statements.
D. All of these are true statements.
13. The following are hypothetical exchange rates: $1 = 140 yen; 1 Swiss franc = $.10. We can conclude that:
A. 1 yen = 280 Swiss francs.
B. 1 yen = 14 Swiss francs.
C. 1 Swiss franc = 28 yen.
D. 1 Swiss franc = 14 yen.
D. 1 Swiss franc = 14 yen.
14. If the equilibrium exchange rate changes so that fewer dollars are needed to buy a South Korean won, then:
A. Americans will buy fewer Korean goods and services.
B. the won has appreciated in value.
C. fewer U.S. goods and services will be demanded by the South Koreans.
D. the dollar has depreciated in value.
C. fewer U.S. goods and services will be demanded by the South Koreans.
15. Appreciation of the Canadian dollar will:
A. intensify an existing disequilibrium in Canada's balance of payments.
B. make Canada's exports less expensive and its imports more expensive.
C. make Canada's exports more expensive and its imports less expensive.
D. make Canada's exports and imports both more expensive.
B. make Canada's exports less expensive and its imports more expensive.
16. The U.S. supply of Japanese yen is:
A. downsloping because a lower dollar price of yen means U.S. goods are cheaper to the Japanese.
B. upsloping because a higher dollar price of yen means U.S. goods are cheaper to the Japanese.
C. upsloping because a lower dollar price of yen means U.S. goods are cheaper to the Japanese.
D. downsloping because a higher dollar price of yen means U.S. goods are cheaper to the Japanese.
B. upsloping because a higher dollar price of yen means U.S. goods are cheaper to the Japanese.
17. The U.S. demand for euros is:
A. downsloping because, at lower dollar prices for euros, Americans will want to buy more European goods and services.
B. downsloping because, at higher dollar prices for euros, Americans will want to buy more European goods and services.
C. downsloping because the dollar price of euros and the euro price of dollars are directly related.
D. upsloping because a higher dollar price of euros makes European goods and services more attractive to Americans.
A. downsloping because, at lower dollar prices for euros, Americans will want to buy more European goods and services.
18. Refer to the above diagram. At the equilibrium exchange rate:
A. $8 will buy 1 euro.
B. 0.8 euros will buy $1.
C. 1.25 euros will buy $1.
D. $1 will buy 8 euros.
C. 1.25 euros will buy $1.
19. Refer to the above diagram. Other things equal, a leftward shift of the supply curve would:
A. appreciate the euro.
B. cause a shortage of euros.
C. increase the equilibrium quantity of euros.
D. appreciate the dollar.
A. appreciate the euro.
20. Under a system of freely flexible (floating) exchange rates a U.S. trade deficit with Mexico will tend to cause:
A. the United States government to ration pesos to U.S. importers.
B. a flow of gold from the United States to Mexico.
C. an increase in the peso price of dollars.
D. an increase in the dollar price of pesos.
D. an increase in the dollar price of pesos.
21. Between 1985 and 2003 the:
A. dollar appreciated in value relative to the yen.
B. yen appreciated in value relative to the dollar.
C. dollar price of yen fell.
D. yen price of dollars rose.
B. yen appreciated in value relative to the dollar.
22. Which one of the following might be a plausible explanation for the change in the dollar-yen exchange rate from 1985 to 2003?
A. Japan exported much more to the United States during this period than it imported from the United States.
B. Japan greatly increased its purchases of military equipment from the United States during this period.
C. Japan's economy grew far faster than the U.S. economy during this period.
D. Japan's government devalued the yen during this period.
A. Japan exported much more to the United States during this period than it imported from the United States.
23. Assume that Brazil and Mexico have floating exchange rates. Other things unchanged, if the price level is stable in Mexico but Brazil experiences rapid inflation:
A. gold bullion will flow into Brazil.
B. the Brazilian real will depreciate.
C. the Mexican peso will depreciate.
D. the Brazilian real will appreciate.
B. the Brazilian real will depreciate.
24. Refer to the above diagram where D and S are the United States' demand for and supply of Swiss francs. At the equilibrium exchange rate, E, the United States' balance of payments is in equilibrium. A shift of the demand curve to D' might be the result of:
A. a relative decline in interest rates in Switzerland.
B. a reduction in the United States' relative price level.
C. a recession in the United States which slows its rate of growth.
D. a relative decline in interest rates in the United States.
D. a relative decline in interest rates in the United States.
25. Under a system of fixed exchange rates, a nation that has chronic balance of payments deficits may:
A. initiate protectionist trade policies.
B. run short of international monetary reserves.
C. be forced to invoke contractionary monetary and fiscal policies.
D. do all of these.
D. do all of these.
26. If the United States has full employment and the dollar dramatically depreciates in value, we can expect (other things equal):
A. both U.S. imports and U.S. exports to rise.
B. both U.S. imports and U.S. exports to fall.
C. U.S. exports to fall and U.S. imports to increase.
D. inflation to occur.
D. inflation to occur.
27. In saying that the present system of floating exchange rates is managed we mean that:
A. countries that allow their exchange rate to move freely will lose their borrowing privileges with the IMF.
B. the value of any IMF member's currency can only vary 2 percent from its par value.
C. IMF officials determine exchange rates on a day-to-day basis.
D. the central banks of various countries sometimes buy and sell foreign exchange to alter undesirable trends in exchange rates.
D. the central banks of various countries sometimes buy and sell foreign exchange to alter undesirable trends in exchange rates.
28. Relatively rapid U.S. growth between 1999 and 2000, and from 2003 to 2007, contributed to large U.S. trade deficits by:
A. increasing U.S. national income, which decreased U.S. exports.
B. reducing real interest rates in the United States.
C. increasing U.S. tax revenues and reducing the Federal budget deficit.
D. increasing U.S. national income, which increased U.S. imports.
D. increasing U.S. national income, which increased U.S. imports.
29. Which of the following has contributed to large U.S. trade deficits in recent years?
A. China fixing its exchange rate.
B. Rapid increases in the price of oil.
C. A declining U.S. saving rate.
D. All of these have contributed.
D. All of these have contributed.
30. Present consumption supported by large trade deficits may come at the expense of:
A. permanent debt to foreign interests.
B. permanent foreign ownership of formerly U.S. owned assets.
C. large sacrifices of future consumption.
D. all of these.
D. all of these.