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Exhibit 16A-1 Policy Alternatives
Assume that the economy depicted in Panel (b) of Exhibit 16A-1 is in short-run
equilibrium where AD1 equals SRAS1. Keynesian theory argues:
a. nominal wages will fall as long as employment remains above the natural level of
unemployment.
b. lower wages will result in a shift from SRAS1 to SRAS2.
c. long-run equilibrium will be established at Y and P1.
d. government intervention must shift AD1 rightward to AD2.
A normative economic statement:
a. is a model used to collect data.
b. is a statement of fact.
c. is a statement of what ought to be, not what is.
d. indicates what will occur if certain assumptions are true.
The federal funds rate is the interest rate that:
a. the government charges banks to borrow money
b. the Fed charges banks to borrow money
c. the federal government pays to borrow money
d. federally chartered banks charge their customers for commercial loans.
e. banks charge other banks for short-term loans.
Exhibit 5-8 GDP data (billions of dollars) Personal consumption expenditures $850
Interest 90
Corporate profits 150
Government spending 400
Depreciation 100
Rental income 70
Gross private domestic investment 120
Compensation of employees 830
Exports 120
Imports 70
Indirect business taxes 80
Proprietors' income 120
Personal income taxes 110
Social Security taxes 50
Transfer payments 160 In Exhibit 5-8, national income (NI) equals:
a. $2,330 billion.
b. $1,350 billion.
c. $1,320 billion.
d. $2,360 billion.
e. $1,440 billion.
While waiting in line to buy a cheeseburger for $2 and a drink for 75 cents, Aaron
notices that the restaurant has a value meal containing a cheeseburger, drink, and
French fries for $3. For Aaron, the marginal cost of purchasing the French fries:
a. would be zero.
b. would be 25 cents.
c. would be 50 cents.
d. cannot be determined because the information about the price of the French fries is
not provided.
Following the principle of comparative advantage, specialization:
a. permits greater levels of total production than would be attained without it.
b. increases the dependency of countries on trade.
c. both of the above.
d. neither of the above.
Monetarists accept the idea that velocity is not constant; nonetheless, they believe that it
is still highly:
a. constant.
b. unpredictable, ill-behaved, and independent of money supply.
c. unpredictable, well-behaved, and dependent of money supply.
d. predictable.
e. variable.
The consumption function shows the relationship between:
a. planned consumption expenditures and disposable income.
b. permanent income and savings.
c. business inventory and real GDP.
d. aggregate demand and aggregate consumption.
If a nation remains poor over time, it could be that:
a. c and e.
b. d and e.
c. the population growth rate is at least as much as the national GDP growth rate.
d. the per capita real GDP growth rate is larger than the population growth rate.
e. the national real GDP growth rate is lower than the population growth rate.
Which economic theory argues that changes in velocity are predictable and the
crowding-out effect is substantial?
a. Classical theory.
b. Keynesian theory.
c. Monetarist theory.
d. Marxist theory.
Which of the following will not shift the aggregate demand cure to the left?
a. Consumers become more optimistic about the future.
b. Government spending decreases.
c. Business optimism decreases.
d. Consumers become pessimistic about the future.
Which of the following is correct?
a. People whose nominal incomes rise faster than the rate of inflation gain purchasing
power.
b. Real income equals nominal income divided by the CPI as a decimal.
c. The percentage change in real income equals the percentage change in nominal
income minus the percentage change in CPI.
d. All of these.
Which of the following statements about crowding out is false?
a. It is not caused by a budget surplus.
b. It is caused by a budget deficit.
c. It can completely offset the multiplier.
d. It affects interest rates and not economic growth.
A tariff differs from a quota in that a tariff is:
a. levied on imports, whereas a quota is imposed on exports.
b. levied on exports, whereas a quota is imposed on imports.
c. a tax levied on exports, whereas a quota is a limit on the number of units of a good
that can be exported.
d. a tax imposed on imports, whereas a quota is an absolute limit to the number of units
of a good that can be imported.
In its function of controlling the money supply, the Fed does which one of the
following?
a. Controls the money supply.
b. Clears checks.
c. Regulates banks.
d. Holds gold belonging to foreign governments.
e. All of these.
The real interest rate is the annual percentage amount of money that is earned on a sum
loaned or deposited in a bank.
An increase in the marginal propensity to consume (MPC) leads to a increase in the
spending multiplier.
The consumer price index (CPI) is computed as the ratio of nominal GDP to real GDP.
A principal cause of the business cycle is the changes in total spending that occur in the
overall economy.
A black market may arise when government imposes a price ceiling.
A traditional system operates based on the self interest of buyers and sellers.
The greater the marginal propensity to consume in the economy, the smaller the
spending multiplier.
