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The financial meltdown in 2008"2009 was partially the result of a faulty economic
model that underestimated the risk of mortgage-backed securities.
A) True
B) False
Scenario: Gizmovia
The Republic of Gizmovia wants to maintain the exchange rate of its currency, the
gizmo, at $0.50, but the current exchange rate for the gizmo is $0.40.
Look at the scenario Gizmovia. If Gizmovia uses monetary policy to bring the
exchange rate for the gizmo to $0.50, it should _____ interest rates by _____ the money
supply.
A) decrease; decreasing
B) decrease; increasing
C) increase; increasing
D) increase; decreasing
When disinflation occurs:
A) the natural rate of unemployment rises.
B) and inflationary expectations do not change, an economy may have a recession.
C) and inflationary expectations do not change, unemployment rates will fall.
D) with inflationary expectations unchanging, aggregate output will rise.
Owners of stock may receive income in the form of:
A) interest.
B) dividends and profit from selling the stock for more than its purchase price.
C) transfer payments.
D) rent.
If a country has a positive balance of payments on the current account, then it must:
A) be exporting too much.
B) be importing too much.
C) have a surplus on the financial account.
D) have a deficit on the financial account.
According to official statistics for the United States, since the Great Depression:
A) economists are confident that the business cycle has been tamed.
B) the economy has constantly had positive real GDP growth rates.
C) the economy had longer recessions than expansions only during the 1960s and
1990s.
D) the economy has not had another severe and prolonged economic downturn
comparable to it.
Scenario: Growth Rates
Suppose that real GDP per capita of the United States is $32,000 and its growth rate is
2% per year. Real GDP per capita of China is $4,000, and its annual growth rate is 7%.
Look at the scenario Growth Rates. According to the rule of 70, how large will China's
real GDP per capita be in 20 years?
A) $5,600
B) $8,000
C) $16,000
D) $28,000
An example of a tariff is a:
A) limit on the total number of Honda automobiles imported from Japan.
B) regulation specifying that each imported Honda automobile must meet certain
emission exhaust guidelines.
C) tax of $500 on each Honda automobile produced in the United States.
D) tax of 10% of the value of each Honda automobile imported from Japan.
The law of demand implies that:
A) consumers are not responsive to price changes.
B) consumers will buy more at lower prices.
C) sellers will offer more on the market at higher prices.
D) sellers will offer less on the market at lower prices.
The nominal interest rate equals the real interest rate:
A) times the rate of inflation.
B) minus the rate of inflation.
C) plus the rate of inflation.
D) when inflation is correctly anticipated.
In the long run, the only effect of monetary policy is on:
A) the long-run aggregate supply.
B) the interest rate.
C) the aggregate output level.
D) the aggregate price level.
Which of the following is the largest source of tax revenue for the U.S. federal
government?
A) personal income taxes
B) corporate profit taxes
C) sales taxes
D) social insurance taxes
A decrease in the price of a good will result in:
A) an increase in demand.
B) an increase in supply.
C) an increase in the quantity demanded.
D) an increase in the quantity supplied.
Which of the following is an asset that most people would consider money?
A) a house
B) shares of stock in a company
C) a checking account balance
D) a car
The present value (PV) of a payment n years in the future (FV), given an interest rate
(r), is given by the equation:
A) PV = FVn.
B) PV = 1 / FVn.
C) PV = FV / (1 + r).
D) PV = FV / (1 + r)n.
The convergence hypothesis:
A) apparently applies only to wealthy countries.
B) seems to hold only when other things such as education and infrastructure are held
equal.
C) suggests that relatively poor countries will continue to be poor regardless of their
level of saving.
D) states that countries' growth depends upon the amount of government intervention in
the marketplace.
Table: Price and Output Data
Look at the table Price and Output Data.
Between years 4 and 5, _____ of the increase in nominal GDP was due to inflation.
A) none
B) 58%
C) 92%
D) all
Suppose the equilibrium aggregate price level is rising and the equilibrium level of real
GDP is falling. Which of the following MOST likely caused these changes?
A) an increase in short-run aggregate supply
B) an increase in aggregate demand
C) a decrease in short-run aggregate supply
D) a decrease in aggregate demand
Normally the discount rate is below the federal funds rate to encourage banks to borrow
from the Fed rather than from other banks.
A) True
B) False
The functions of money are:
A) expander of economic activity, medium of exchange, and store of value.
B) medium of exchange, store of value, and factor of production.
C) store of value, medium of exchange, and determinant of investment.
D) store of value, unit of account, and medium of exchange.
If real GDP falls when nominal GDP increases, then prices have fallen.
A) True
B) False
The main problem facing the government of Greece in 2009 was that it had a large
budget surplus.
A) True
B) False
According to the Glass-Steagall Act of 1933:
A) investment banks could accept deposits, which were covered by deposit insurance.
B) commercial banks could set up and trade financial assets, such as stocks and bonds.
C) investment banks could set up and trade financial assets, such as stocks and bonds,
but commercial banks could not trade stocks and bonds.
D) there was no difference between commercial banks and investment banks.
An increase in the level of business opportunity will generally _____ the loanable funds
demand curve.
A) not change
B) left-shift
C) cause a movement along
D) right-shift
When a corporation borrows money from lenders in exchange for a fixed share of the
firm's assets and potential profits, the corporation is:
A) taking out a loan.
B) issuing bonds.
C) issuing stocks.
D) liquidating a bank deposit.
Table: Investment Projects
Look at the table Investment Projects. If the market interest rate is 15%, the last project
undertaken is:
A) F.
B) G.
C) H.
D) I.
Which of the following is an example of maturity transformation?
A) Jordan borrows $15,000 to buy a car.
B) Aaron buys new running shoes and pays for them with his American Express credit
card.
C) Angela gives Russell $100 in cash for a graduation gift.
D) Tyler lends $1,000 to his roommate Nick for a year.
Subprime mortgages:
A) carry an interest rate below the prime rate.
B) are in default.
C) are made to buyers who do not qualify for a standard mortgage.
D) can be made only by the government.
Recessions tend to be _____, and expansions tend to be _____.
A) short; short
B) long; long
C) short; long
D) long; short
The best measure of the opportunity cost of any choice is:
A) the monetary cost of that choice.
B) whatever you have given up to make that choice, even if no monetary costs are
involved.
C) the cost associated with not taking full advantage of the opportunity offered by that
choice.
D) your hourly wage.
Interest rates and planned investment spending:
A) have a positive relationship.
B) exhibit a negative relationship.
C) have no relationship, since planned investment is fixed.
D) have no relationship if the firm has retained earnings.
