Economics Chapter 9 B—An Introduction to Basic Macroeconomic Markets
MULTIPLE CHOICE
197. The macroeconomy is said to be in long-run equilibrium only if
a.
the resource, loanable funds, foreign exchange, and goods and services markets are all in
equilibrium.
b.
prices were incorrectly estimated by decision makers.
c.
the output of the economy exceeds the full-employment level of output.
d.
the economy is operating along its short-run aggregate supply curve.
198. Fiscal policy is
a.
the deliberate control of the money supply to achieve macroeconomic goals.
b.
the use of the government’s regulatory powers to improve economic efficiency.
c.
the operation of business enterprises by the government.
d.
the use of government taxation and expenditures to achieve macroeconomic goals.
199. When the loanable funds and foreign exchange markets are in equilibrium,
a.
there are no leakages from the circular flow of income.
b.
macro equilibrium cannot occur.
c.
the leakages from the circular flow will equal the injections into it.
d.
injections into the circular flow will exceed leakages from it.
200. Within the framework of the AS/AD model, which of the following is a true statement regarding
short-run aggregate supply?
a.
An increase in prices temporarily improves profit margins because important components
of costs are fixed in the short run.
b.
An increase in prices leads to higher interest rates, which temporarily improves profit
margins.
c.
An increase in prices leads to an expansion in the money supply, which stimulates
additional output.
d.
An increase in prices increases real wage rates and thereby expands the size of the
economy’s resource base.
201. In the short run, if prices were above equilibrium,
a.
excess aggregate demand for goods and services would place downward pressure on
prices.
b.
excess aggregate supply of goods and services would place upward pressure on prices.
c.
excess aggregate demand for goods and services would place upward pressure on prices.
d.
excess aggregate supply of goods and services would place downward pressure on prices.
202. The inflationary premium is that portion of the interest rate that reflects
a.
the real return derived by lenders.
b.
the rush to buy goods before prices rise.
c.
the expected annual rate of decline in the purchasing power of money while a loan is
outstanding.
d.
the price that one must pay for earlier availability of goods and services during a period of
price stability.
203. When the economy is in macro equilibrium,
a.
the sum of savings plus investment must equal the sum of imports plus exports.
b.
the sum of savings plus imports plus taxes must equal the sum of investment plus
government purchases plus exports.
c.
the sum of savings plus government purchases must equal exports minus imports.
d.
the government’s budget must be in balance.
204. As prices rise, consumers and businesses will want to hold larger money balances. This will lead to
a.
a reduction in the demand for resources and reduced resource prices.
b.
an increase in the amount of goods and services demanded due to the real balance effect.
c.
an increase in exports due to the international substitution effect.
d.
a reduction in the supply of loanable funds and an increase in the interest rate.
205. As the real interest rate in the domestic loanable funds market increases,
a.
the cost of purchasing goods and services during the current period will decrease.
b.
the net inflow of capital from abroad will increase.
c.
the inflationary premium will rise and the money rate of interest will decline.
d.
a trade surplus will occur.
206. The exchange rate is
a.
the price of one nation’s currency in terms of the currency of another nation.
b.
the amount households will spend on imports.
c.
the amount of foreign capital a nation receives when there is a trade surplus.
d.
the amount charged by bankers for loanable funds
207. Which of the following are leakages from the circular flow of income?
a.
Savings, taxes, and imports
b.
Investment, government purchases, and exports
c.
Investment, taxes and bonds
d.
Imports, wages and taxes
208. Monetary policy can be most accurately described as
a.
the use of government taxation and expenditures to achieve macroeconomic goals.
b.
the use of the government’s regulatory powers to improve economic efficiency.
c.
the government provision of goods to improve economic efficiency.
d.
the deliberate control of the money supply to achieve macroeconomic goals.
209. A depreciation in the U.S. dollar on the foreign exchange market will
a.
make U.S. exports more expensive to foreigners.
b.
make imports less expensive for U.S. consumers.
c.
make U.S. exports cheaper for foreign consumers.
d.
encourage U.S. consumers to travel abroad.
ESSAY
210. How does the aggregate goods and services market differ from the regular supply and demand graph in
Chapter 3? Address the measures of price, quantity, and the demand and supply curve(s).
211. Why do we use two supply curves in the aggregate goods and services market? What is the difference
between them, and why do they have different slopes?
212. What are the three reasons why the aggregate demand curve slopes downward? Give an example of
each.
213. What is the difference between short-run equilibrium and long-run equilibrium in the goods and
services market?
214. Suppose that severe floods destroyed farms, homes, and businesses in the Midwest. Use the aggregate
demand/aggregate supply model, to explain the changes you would expect to take place and the effects
you would expect these floods to have on both output and prices. (Include both short-run and long-run
effects.)
215. In 2000, a major U.S. oil company began exploration off the southeastern coast of the United States.
Suppose the company discovers huge reserves of natural gas. Using the aggregate demand/ aggregate
supply model, predict what shifts will occur and what will happen to output and prices in both the long
and short runs.
216. Suppose that your bank pays 5 percent interest on your savings account balance. Is this the nominal or
real interest rate? What would be your real interest rate?
217. Under what circumstances will inflation help borrowers at the expense of lenders? Under what
circumstances will both parties be unaffected? Which scenario would you expect in the long run?
218. Answer the following questions:
a.
What is a bond?
b.
If bonds make fixed payments every year, explain how a reduction in market interest rates will
increase the price of the bond in the market.
interest payments every year and return the principal at the maturity date, or they pay both
already in the market. This will cause demand for bonds already in the market to rise, thus,
raising their price.
219. Beginning in the latter part of 1999, the Federal Reserve raised interest rates. What do you predict
happened to the prices of bonds already in the market? How can you explain this behavior?