Fiat money has
A) little to no intrinsic value but is backed by the quantity of gold held by the central
bank.
B) great intrinsic value because it can be exchanged for gold at the central bank.
C) little to no intrinsic value and is authorized by the central bank or governmental
body.
D) great intrinsic value that is independent of its use as money.
Assume that the Fed has a target inflation rate of 2% and that the values for how much
the nominal target federal funds rate responds to a deviation of inflation from its target,
g, and how much the nominal target federal funds rate responds to real GDP, h, are both
0.5. According to the Taylor rule, if inflation decreases by 2%, the Fed should decrease
the target nominal federal funds rate by
A) 0%.
B) 2%.
C) 3%.
D) 4%.
When the United States sends money to Japan to help earthquake survivors, in which
account is this transaction recorded?
A) the financial account
B) the capital account
C) the foreign services account
D) the current account
The actions that the Federal Reserve takes to ________ to pursue macroeconomic
policy XOAXOAs refer to monetary policy.
A) manage the money supply and interest rates
B) set tax rates
C) regulate imports and exports
D) establish exchange rates
Figure 11.2
Refer to Figure 11.2. Assume the economy is in equilibrium at 1, where real GDP
equals potential GDP. The economy experiences a positive demand shock, and the Fed
responds by increasing real interest rates to bring real GDP and inflation back to their
original levels. Other things equal, the positive demand shock is best represented by am
initial movement from
A) point A to point B.
B) point A to point C.
C) point D to point B.
D) point D to point C.
Ramona has decided that she will only purchase a one-year Treasury bill with a face
value of $15,000 if she receives an interest rate of 125%. How much will Ramona end
up paying for this Treasury bill?
A) $12,447.66
B) $14,381.25
C) $14,405.76
D) $15,618.75
Other things equal, if the Fed increases the discount rate,
A) the monetary base will decrease and the money supply will remain constant.
B) the monetary base and the money supply will both decrease.
C) the money supply will decrease and the monetary base will remain constant.
D) the monetary base will decrease and the money supply may increase or remain
constant.
A decrease in the real interest rate outside of the United States will cause the dollar to
________ relative to other currencies and ________ net exports and real GDP.
A) appreciate; increase
B) appreciate; reduce
C) depreciate; increase
D) depreciate; reduce
Over the long run and across countries, there is evidence of ________ between the
growth rate of the money supply and the inflation rate.
A) no relationship
B) a weak link
C) a strong link
D) a negative relationship
Which of the following is not one of the three key services provided by the financial
system to savers and borrowers?
A) risk sharing
B) credit counseling
C) liquidity
D) information
The relationship among interest rates on bonds that all mature at the same time is
known as the
A) term structure of interest rates.
B) risk structure of interest rates.
C) term premium.
D) Treasury yield.
According to the AK growth model, taxes on corporate income and capital gains
________ the incentive for firms to accumulate capital and ________ the steady-state
growth rate.
A) increase; increase
B) reduce; reduce
C) increase; do not change
D) reduce; do not change
Bonds with ________ tend to have lower interest rates than bonds with ________.
A) high liquidity; low liquidity
B) high default risk; low default risk
C) longer maturity; shorter maturity
D) high tax burdens on their interest; low tax burdens on their interest
If the MPC = 0.75, a decrease in personal taxes from $100 billion to $80 billion will
increase real GDP by
A) $20 billion.
B) $40 billion.
C) $60 billion.
D) $80 billion.
An increase in the real interest rate outside of the United States will cause the dollar to
________ relative to other currencies and ________ net exports and real GDP.
A) appreciate; increase
B) appreciate; reduce
C) depreciate; increase
D) depreciate; reduce
Which of the following goods is directly counted in GDP?
A) the ground beef that Taco Bell purchases for use in its burritos
B) the tortillas that Taco Bell purchases for its burritos
C) the paper wrap that Taco Bell purchases to wrap its burritos
D) the Burrito Supreme that Sondra purchases for lunch at Taco Bell
Figure 8.2
Refer to Figure 8.2. Holding other variables constant, an increase in the real wage will
result in a
A) movement from point A to point B.
B) movement from point B to point A.
C) shift from curve S1 to curve S2.
D) shift from curve S2 to curve S1.
Holding other factors constant, the increase in African Americans and Hispanics in the
labor force in the United States has
A) decreased structural and frictional unemployment.
B) increased cyclical unemployment declined.
C) decreased cyclical unemployment increased.
D) increased the natural rate of unemployment.
One reason why, in reality, prices are sticky in the short run is because
A) there are often costs to firms from changing prices.
B) purely competitive firms have no control over the price of their product and
therefore cannot change the price, even if the market warrants a price change.
C) in the short run, the cost to changing prices always outweighs any benefit.
D) firms do not have time to react to macroeconomic shocks in the short run.
The purchase by the Canadian government of a fighter jet produced in the United States
is included in U.S.
A) consumption spending.
B) investment spending.
C) government purchases.
D) net exports.
If the federal government tries to make fiscal policy sustainable by decreasing
expenditure on transfer programs such as Social Security, Medicare, and Medicaid,
________ will bear the burden of adjusting fiscal policy, and this will result in a lower
standard of living for those who bear the burden.
A) high-income households
B) individuals in the labor force
C) middle class taxpayers
D) the elderly and poor
If Alberto Reyes increases his work hours when his real wage increases, then
A) the substitution effect of the wage increase outweighs the income effect.
B) the income effect of the wage increase outweighs the substitution effect.
C) leisure is an inferior good to Alberto.
D) the substitution effect of the wage increase is completely offset by the income effect.
When the nominal interest rate is not constant, an increase in the growth rate of the
money supply ________ the inflation rate, and ________ the debt-to-GDP ratio.
A) increases; increases
B) increases; decreases
C) increases; has an ambiguous effect on
D) decreases; increases
Firms are able to expand their operations by acquiring funds from households. They can
do this directly through financial markets such as ________, or indirectly through
financial intermediaries such as ________.
A) stock markets; bond markets
B) stock markets; banks
C) banks; bond markets
D) bond markets; stock markets
Suppose that you intend to invest $10,000 in one-year government bonds. You are
looking for the highest return on your investment and do not care whether you invest in
the United States or Japan, but as a U.S. resident, you want your investment return to be
in U.S. dollars. Assume the current interest rate on one-year government bonds is 3% in
the United States and 7% in Japan, the current exchange rate is ¥100 = $1, and the
expected exchange rate in one year is ¥110 = $1.
a. What is your return on Japanese bonds?
b. Would you have been better off investing in Japanese bonds or U.S. bonds? Explain.
c. For the interest parity condition to hold, what would have to happen to the interest
rate on Japanese bonds, assuming all other data remains the same?
Suppose you purchase a new home for $150,000, making a down payment of 10% and
taking out a mortgage on the balance. What is the return on your investment in your
home if one year later the price of your home decreases by 20%?
A) -10%
B) -30%
C) -50%
D) -200%
The Vuvuza Corporation currently has 10 million shares of stock outstanding, the stock
is trading for $42 per share, and its stock of capital goods is valued at $70 million.
Based on the Tobin’s q value for the Vuvuza Corporation, we would expect Vuvuza to
A) increase its capital stock.
B) depreciate more of its assets.
C) issue more shares of stock to be able to afford to finance investment expenditures.
D) cut back on current production.
The substitution effect of a real wage increase is observed when
A) the higher wage causes workers to take more leisure and work more hours.
B) the higher wage causes workers to take more leisure and work fewer hours.
C) leisure’s higher opportunity cost causes workers to take less leisure and work more
hours.
D) leisure’s higher opportunity cost causes workers to take more leisure and work fewer
hours.
Figure 13.2
Refer to Figure 13.2. Assume the economy is initially in equilibrium with real GDP
equal to potential GDP. Other things equal, if the economy enters a recession, the
inflation rate would ________ and the output gap would ________ if there are, as
opposed to are not, automatic stabilizers in the economy.
A) decrease less; decrease less
B) decrease more; decrease more
C) decrease more; decrease less
D) not change; not change
Figure 14.3
Refer to Figure 14.3. Suppose the economy is initially at long-run equilibrium and the
Fed increases the target inflation rate, and to hit this rate, it must reduce the real interest
rate. The economy then reaches a new, short-run equilibrium point. Assuming
expectations are adaptive, the next movement is best represented as a movement from
A) point C to point B.
B) point C to point A.
C) point D to point C.
D) point B to point C.
If the demand for the Ford Mustang increases, we would expect Ford to
A) keep the price of Mustangs constant, regardless of the cost or benefit of a price
change.
B) increase the price of Mustangs to keep pace with the increase in demand.
C) increase the price of Mustangs only if the benefit of a price increase outweighs the
cost.
D) decrease the price of Mustangs to maintain the increase in demand.
The cyclically adjusted budget deficit or surplus measures what the deficit or surplus
would be if the economy was
A) in the recession phase of the business cycle.
B) in the expansion phase of the business cycle.
C) at potential GDP.
D) no longer in a business cycle.