Careetha has just taken a fixed-rate loan and agreed to pay a nominal interest rate of 6
percent. If the inflation rate during the first year of the loan was 2 percent, her real
interest rate that first year was
a. 6 percent
b. 8 percent
c. 4 percent
d. 12 percent
e. impossible to calculate without additional information
If there is a positive demand shock, which of the following would represent the most
likely short and long-run outcomes? (Assume the economy was initially at full
employment)
a. In the short run, real GDP and the price level would increase; in the long run, real
GDP would return to its original level while the price level would rise even further.
b. In the short run, real GDP and the price level would increase; in the long run, real
GDP and the price level would return to their original level.
c. In the short run, real GDP would increase and the price level would decrease; in the
long run, real GDP would return to its original level while the price level would rise
even further.
d. In the short run, real GDP and the price level would decrease; in the long run, real
GDP would return to its original level while the price level would rise even further.
e. In the short run, real GDP and the price level would increase; in the long run, real
GDP would increase while the price level would return to its original level.
If the Fed conducted an open market sale of bonds, what would most likely happen in
the bond market?
a. The excess demand for bonds would cause the price of bonds to fall.
b. The excess supply of bonds could cause the price of bonds to rise.
c. There would be no effect in the bond market.
d. The excess supply of bonds would cause the price of bonds to fall.
e. The excess demand for bonds would cause the price of bonds to rise.
In a recession, tax payments tend to increase and transfer payments tend to decrease.
If the interest rate decreases, there will be
a. a movement leftward from one point on the money demand curve to another point on
the same curve
b. no change in the quantity of money demanded
c. a leftward shift of the entire money demand curve caused by a demand shock
d. a rightward shift of the entire money demand curve
e. a movement rightward from one point on the money demand curve to another point
on the same curve
Say’s law assures us that in the classical model, total spending is always enough to
purchase the economy’s total output.
If net taxes are cut, consumer
a. spending is not affected
b. spending increases by the amount of the tax cut
c. spending increases by an amount less than the full amount of the tax cut
d. saving increases by the full amount of the tax cut
e. spending increases by two-thirds of the amount of the tax cut and consumer saving
increases by one-third of the amount of the tax cut
When banks create money, they
a. increase wealth at a pace equal to the rate of money creation
b. destroy wealth at a pace equal to the rate of money creation
c. increase wealth at a rate exceeding the rate of money creation
d. increase wealth at a rate less than the rate of money creation
e. do not create wealth
Which of the following occurs during a recession?
a. Output falls, employment rises, and unemployment rises.
b. Output rises, employment falls, and unemployment falls.
c. Output falls, employment falls, and unemployment rises.
d. Output rises, employment rises, and unemployment falls.
e. Output falls, employment falls, and unemployment falls.
What is the role of the Federal Deposit Insurance Corporation?
a. To insure bank deposits
b. To act as a lender of last resort
c. To establish regulations for commercial banks
d. To monitor the actions of commercial banks
e. To insure the assets of commercial banks
Which of the following does not usually occur when there is an increase in government
spending?
a. Government purchases crowd out private-sector spending.
b. Total spending decreases.
c. The interest rate increases.
d. Investment spending declines.
e. Household saving increases.
The existence of recessions highlights
a. the strengths of the Federal Reserve
b. the need for the “other things equal” assumption
c. our failure to consider differences between the short run and long run
d. how confusing the economy can become
e. the interdependence between production and income
Which of the following dampens the effect on GDP of a change in government
spending?
a. The money supply changes when real income changes.
b. Taxes change when government spending changes.
c. Money demand changes when real income changes.
d. People do not expect much from the government.
e. Aggregate spending does not respond to changes in the interest rate.
The resource cost of inflation refers to
a. the opportunity cost of the resources spent coping with inflation
b. the redistribution of resources due to inflation
c. the lost purchasing power due to inflation
d. the lost real income due to inflation
e. the resources lost due to asking for higher nominal wage increase
Unemployment that has an entirely macroeconomic cause is called
a. frictional unemployment
b. seasonal unemployment
c. structural unemployment
d. cyclical unemployment
e. short-term unemployment