If a project costs $600 today and returns $630 next year, the highest interest rate at
which the project should still be undertaken is five percent.
An increase in checking account balances equals the initial deposit multiplied by total
reserves.
Aggregate demand will be affected by the purchasing power of money.
Deposit insurance is a protection for bank depositors up to a certain amount which is
guaranteed by the federal government.
The model of supply and demand is the most important tool of economic analysis.
Friedman believed that economic policies are ineffective because they don’t affect the
aggregate demand in the economy.
Positive economics answers the question, “What ought to be?” Normative economics
predicts the consequences of alternative actions, answering the questions, “What is?” or
“What will be?”
When you take $100 from your saving account and deposit it in your checking account,
decreases.
An unexpected increase in inventories is usually observed before a recession.
We ADD to the GDP when goods produced abroad are sold in the United States.
A Fed sale of government bonds will cause a reduction in the interest rate and an
increase in the equilibrium quantity of money.
In a graph where the interest rate is on the y-axis and the quantity of money is on the
x-axis, a money supply curve that is independent of the interest rate is drawn as:
A) a vertical line.
B) a horizontal line.
C) an upward sloping line.
D) a 45 degree line from the origin.
Between 1996 and 1997, the budget deficit in Egypt fell dramatically. Other things
being constant, this decline should have made interest rates ________ and investment
________.
A) fall; rise
B) rise; rise
C) fall; fall
D) rise; fall
Scenario 12.1: Jennifer has decided to give up her pack-a-day smoking habit and invest
the money she would have spent on cigarettes in a retirement account. At $6.00 a pack,
Jennifer is currently spending $2,190 per year on cigarettes. Jennifer is 25 years old and
plans to retire in 35 years, at age 60. She has chosen a retirement account that will earn
a long-term average return of 5 percent per year. Jennifer is currently earning $40,000
annually. Assume that the average annual inflation rate will be 5 percent per year, that
the cost of cigarettes will increase with inflation, and that Jennifer’s income will also
rise with the inflation rate.Refer to Scenario 12.1 At the assumed annual inflation rate
of 5 percent, approximately how much will the $6.00 pack of cigarettes cost in 10
years, when Jennifer reaches the age of 35?
A) $8
B) $10
C) $16
D) $23
Because taxes and transfer payments such as unemployment insurance act to change
GDP without the need for policymakers to take explicit action, then these taxes and
transfer payments are called:
A) automatic stabilizers.
B) discretionary stabilizers.
C) mandatory stabilizers.
D) fluctuation stabilizers.
Saving account balances are included in:
A) M1 only.
B) M2 only.
C) neither M1 nor M2.
D) both M1 and M2.
Table 3.1
Table 3.1 illustrates Willy and Blythe’s hourly production for apples and carrots. From
the table, we can conclude that:
A) Willy has an absolute advantage in producing apples but not carrots.
B) Willy has an absolute advantage in producing carrots but not apples.
C) Willy has an absolute advantage in producing both goods.
D) Willy does not have an absolute advantage in producing either good.
A voluntary export restraint is a trade policy by which a nation agrees to limit its:
A) exports of a good in order to avoid more restrictive trade policies.
B) imports of a good, but only under the threat of more restrictive trade policies.
C) exports of a good in order to increase employment.
D) imports of a good.
The tax multiplier is negative because an increase in taxes ________ disposable
income, which then ________ consumption and GDP.
A) decreases; decreases
B) increases; increases
C) increases; decreases
D) decreases; increases
Assuming the price level has not changed, how would an increase in the aggregate
demand affect real GDP?
A) It decreases.
B) It increases.
C) It only changes with changes in imports.
D) It only changes with changes in exports.
The Q-theory of investment:
A) says that an increase in real interest rates will cause an increase in investment.
B) links investment spending to stock prices.
C) suggests that taxes and the real interest rate are the most important determinants of
investment spending.
D) was developed by John Maynard Keynes.
Which of the following is an example of a commodity money?
A) gold
B) stocks
C) bonds
D) a $20 bill
Suppose that there are only three consumers of a product. At a price of $3 per unit, the
first consumer would buy 6 units of the product, the second consumer would buy 5
units, and the third consumer would buy 7 units of the product. If you drew a market
demand curve for this product, the quantity demanded at a price of $3 would be:
A) 18 units.
B) 11 units.
C) 13 units.
D) unable to be determined based on the information provided.
An increase in the price level results in a decline in aggregate demand because higher
prices will cause the nominal interest rates to increase and GDP to drop. This effect is
called the:
A) wealth effect.
B) income effect.
C) interest rate effect.
D) trade effect.
Net international investment position refers to:
A) domestic holdings of foreign assets minus the purchase of foreign goods and
services by domestic residents.
B) domestic holdings of foreign assets minus foreign holdings of domestic assets.
C) foreign holdings of domestic assets minus the purchase of domestic goods and
services by foreigners.
D) foreign holdings of domestic assets minus domestic holdings of foreign assets.
Suppose that the price of fertilizer, an input in the production of corn, falls. We would
predict that the equilibrium quantity of corn will ________ and the equilibrium price of
corn will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
If a government currently has a budget deficit:
A) it does not necessarily have a debt.
B) its debt is increasing.
C) government expenditures exceed revenues.
D) all of the above
What is a broad definition for an investment?
Assume the money market is initially in equilibrium. Now suppose there is an increase
in real GDP. Explain what effect this increase in income will have on the equilibrium
interest rate. Also explain what the Fed would have to do if it wants to prevent this
change in real GDP from affecting the interest rate.
What is the current WTO policy regarding environmental standards and trade?
Graphically illustrate an increase in labor demand and explain its impact on the
equilibrium wage rate and quantities.
Distinguish between fixed and flexible exchange rate systems.
Explain what is meant by the terms “labor force,” “unemployment rate,” and “labor
force participation rate.”
What are three options a company has when it wants to finance a new project?