Discretionary fiscal policy:
A) is not subject to lags and therefore is effective at controlling business cycles.
B) refers to changes in the money supply used to smooth out the economy’s ups and
downs.
C) is favored by monetarists.
D) is favored by Keynesians.
The inflation tax is equal to:
A) inflation multiplied by the demand for money.
B) inflation multiplied by the nominal money supply.
C) the money supply divided by the price level.
D) the nominal money supply divided by inflation.
The tools of conducting monetary policy include:
A) changes in the required reserve requirement.
B) changes in the prime rate.
C) open market purchases of corporate stock.
D) changes in tax rates.
Figure: Fiscal Policy II
Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If
there is a decrease in taxes, _____ will shift to the _____, causing a(n) _____ in the
price level and a(n) _____ in real GDP.
A) AD1; right; increase; increase
B) AD1; left; decrease; decrease
C) AD2; right; increase; increase
D) AD2; right; decrease; increase
Figure: Short-Run Phillips Curve
Look at the figure Short-Run Phillips Curve. SRPC1 is based on an expected inflation
rate of:
A) zero.
B) 1%.
C) 2%.
D) 3%.
Ireland’s rapid growth for much of the 1990s and 2000s came to an end as the result of
overbuilding in the railroad industry.
A) True
B) False
The sequence of business cycle phases is:
A) peak, trough, expansion, recession.
B) peak, expansion, trough, recession.
C) peak, recession, trough, expansion.
D) peak, expansion, recession, trough.
The threat of a financial crisis in Europe in 2011 and 2012 was based on problems with:
A) home loans in Germany.
B) political instability in France.
C) public debt problems in southern Europe and Ireland.
D) striking labor unions in northern Europe.
Suppose a consumer buys a Perfect Pizza frozen cheese pizza at the grocery store for
$10, Perfect Pizza purchased the dough and tomato sauce from a food processing
company for $2 and bought the cheese for $1. It sold the pizza to the store for $5. How
much has GDP increased?
A) $2
B) $5
C) $10
D) $18
Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation C= 200 +
0.8YD, where Crepresents consumption and YDrepresents disposable income.
Look at the scenario Aggregate Consumption Equation. If disposable income is $500,
autonomous consumption is:
A) $0.
B) $200.
C) $400.
D) $600.
When policies drop the inflation rate from 10% to 5%, the economy is undergoing
disinflation.
A) True
B) False
Restrictions on free international trade designed to insulate domestic industries from
competitive market forces that originate beyond the borders of the country are _____
policies.
A) competitive
B) protectionist
C) free-trade
D) antitrust
Use of monetary policy entails changes in:
A) government spending.
B) tax receipts.
C) the quantity of money.
D) tax rates.
In the product markets:
A) households supply goods and services.
B) households demand goods and services.
C) firms demand resources.
D) firms supply resources.
Look at the table The Market for Chocolate-Covered Peanuts. If the price of
chocolate-covered peanuts is $0.50, there is:
A) a surplus of 35 bags per month.
B) a shortage of 35 bags per month.
C) a surplus of 70 bags per month.
D) a shortage of 70 bags per month.
A default occurs when:
A) the borrower repays a bond or loan before its maturity date.
B) a borrower fails to make payments as specified by the loan or bond contract.
C) an asset can’t be converted to cash quickly with little or no loss of value.
D) transactions costs are minimized.
The medium-of-exchange function means that money is used:
A) as the common denominator of prices.
B) as the common denominator of future payments.
C) to pay for goods and services.
D) to accumulate purchasing power.
A monetarist rule would be to vary the money growth rate between set limits, such as
3% to 5% annual growth.
A) True
B) False
If the Fed increases the monetary base by $40 billion through open-market operations:
A) GDP will increase by $40 billion.
B) the price level will increase by $40 billion.
C) the U.S. government debt held by the public has been reduced by $40 billion.
D) government spending has increased by $40 billion.
The relationship between the output gap and cyclical unemployment is expressed by:
A) the real business cycle theory.
B) the Taylor rule.
C) the natural rate hypothesis.
D) Okun’s law.
A bank run occurs when:
A) too many people are trying to borrow more at one time.
B) many bank depositors are trying to withdraw their funds from the bank.
C) interest rates start to increase.
D) interest rates are higher than inflation rates.
The double coincidence of wants problem can be solved by:
A) more resources.
B) more production.
C) money.
D) economic growth.
All of the following scenarios are associated with government budget deficits EXCEPT
that:
A) the government becomes a borrower in the market for loanable funds.
B) the interest rate rises.
C) the total amount of borrowing decreases.
D) private investment spending is crowded out.
A decrease in supply is caused by:
A) a decrease in input prices.
B) an increase in the number of sellers in the market.
C) suppliers’ expectations of higher prices in the future.
D) an advancement in the technology for producing the good.
If a country runs a deficit on its balance of payments for goods and services, to pay for
its imports, it must:
A) raise taxes.
B) print new money.
C) sell assets to foreigners.
D) decrease its exports.
An increase in interest rates on business loans will _____ investment spending.
A) decrease planned
B) decrease unplanned
C) increase planned
D) increase unplanned
_____ will shift the aggregate demand curve.
A) An interest rate effect of an aggregate price level change
B) A wealth effect of an aggregate price level change
C) A demand expectation
D) A demand shock
Figure: Four Markets for DVDs
Look at the figure Four Markets for DVDs. Which of the graphs shows what may
happen if D1 or S1 is the original curve and D2 or S2 is the new curve and if some of the
stores that rent DVDs close?
A) A
B) B
C) C
D) D
A typical bowed-out production possibility frontier between two goods, guns and butter,
shows that the opportunity cost of butter in terms of guns increases as more butter is
produced. This implies that the opportunity cost of guns in terms of butter decreases as
more guns are produced.
A) True
B) False
Which of the following is a common argument for trade protection?
A) national security
B) increased efficiency
C) increased profitability
D) increased productivity
The idea that a 1% increase in the output gap will decrease the unemployment rate by
0.5% is known as _____ law.
A) Okun’s
B) Phillips’s
C) Greenspan’s
D) Keynes’s
Look at the table GDP II. Calculate the GDP deflator for 2011.
A) 111
B) 104
C) 90
D) 96
Most economists favor discretionary monetary policy because the velocity of money
has been very stable since the 1980s.
A) True
B) False
Figure: Supply and Demand in the Orange Juice Market
Look at the figure Supply and Demand in the Orange Juice Market. The market is
currently in equilibrium at point C. Suppose a hurricane hits Florida, where oranges are
grown. What will be the most likely new equilibrium point in the orange juice market?
A) A
B) B
C) D
D) E