According to the traditional view of government debt (as in the Mundell”Fleming
model), if taxes are cut without cutting government spending, then the short-run effects
are a(n) ______ of the dollar and a(n) ______ in net exports.
A) appreciation; increase
B) appreciation; decrease
C) depreciation; increase
D) depreciation; decrease
According to the Mundell”Fleming model, in an economy with flexible exchange rates,
expansionary fiscal policy causes net exports to ______, and expansionary monetary
policy causes net exports to ______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
In a fractional-reserve banking system, banks create money when they:
A) accept deposits.
B) make loans.
C) hold reserves.
D) exchange currency for deposits.
Assume a simple economy where only burgers are traded. In a year, 100 burgers are
traded at the rate of $5 per burger. Assume two scenarios:
a. The economy has $100 in the form of 20 pieces of $5 bills.
b. The economy has $100 in the form of 100 pieces of $1 bills.
Calculate the velocity of money for both situations.
Every indifference curve shows combinations of first-period and second-period
consumption that:
A) are tangent to the intertemporal budget constraint.
B) have equal income and substitution effects.
C) are available to the consumer.
D) make the consumer equally happy.
Which of the following will shift the aggregate supply curve up to the left?
A) an increase in the price level
B) a decrease in the level of output
C) an increase in the expected price level
D) a decrease in the price level
“Crony capitalism” refers to situations in which banks make loans to those borrowers
with the most:
A) profitable investment projects.
B) political clout.
C) ability to repay the loans.
D) creditworthy borrowers.
Public saving is:
A) income minus consumption minus government spending.
B) disposable income minus consumption.
C) disposable income minus government spending.
D) government revenue minus government spending.
The life-cycle model predicts that if the proportion of the population that is elderly
increases over the next 20 years, then the national saving rate ______ over the next 20
years.
A) will increase
B) will remain unchanged
C) will decrease
D) may first increase and then decrease
Compared to periods of lower rates of inflation, during a hyperinflation all of the
following occur except:
A) shoeleather costs increase.
B) menu costs become larger.
C) relative prices do a better job of reflecting true scarcity.
D) tax distortions increase.
Chain-weighted measures of real GDP make use of prices from:
A) an unchanging base year.
B) a continuously changing base year.
C) a base year that is changed approximately every 5 years.
D) a base year that is changed approximately every 10 years.
Residential investment spending includes spending on:
A) new housing that people buy to live in and that landlords buy to rent out.
B) new and existing housing.
C) all houses purchased less the value of mortgages used to finance the houses.
D) only those houses that landlords buy to rent out.
A woman marries her butler. Before they were married, she paid him $60,000 per year.
He continues to wait on her as before (but as a husband rather than as a wage earner).
She earns $1,000,000 per year both before and after her marriage. The marriage:
A) does not change GDP.
B) decreases GDP by $60,000.
C) increases GDP by $60,000.
D) increases GDP by more than $60,000.
One reason for not requiring a balanced federal budget at all times is that with a
balanced-budget rule:
A) expenditures are not limited because, if the government wants to raise expenditures,
it just raises taxes.
B) in a recession even the automatic stabilizing powers of our system of taxes and
transfers could not work.
C) the distorting features of the tax system are minimized.
D) it is possible to shift the burden of a war from current to future generations.
Exhibit: Policy Interaction
(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest
rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that
shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the
new equilibrium combination of interest and income will be _____.
A) r1, Y2
B) r2, Y3
C) r3, Y3
D) r3, Y4
Net national product equals GNP:
A) plus net investment.
B) minus net investment.
C) plus depreciation.
D) minus depreciation.
If the exchange rate of currency A is fixed to a unit of currency B, then a potential
problem for the central bank in charge of currency A is:
A) running out of currency A.
B) running out of currency B.
C) generating excessive revenue from seigniorage.
D) ineffective fiscal policy.
An economic change that does not shift the aggregate demand curve is a change in:
A) the money supply.
B) the investment function.
C) the price level.
D) taxes.
The demand for loanable funds is equivalent to:
A) national saving.
B) private saving.
C) public saving.
D) investment.
The percentage of government revenue raised by printing money has usually accounted
for:
A) more than 10 percent of government revenue in the United States.
B) less than 3 percent of government revenue in the United States.
C) less than 3 percent of government revenue in Italy.
D) less than 3 percent of government revenue in Greece.
In Irving Fisher’s two-period consumption model, if Y1 = 15,000, Y2 = 20,000, the
interest rate r is 0.50 (50 percent), and there is a constraint on borrowing that is binding,
then C2 equals:
A) 20,000.
B) 22,500.
C) 35,000.
D) 42,500.
The concept of monetary neutrality in the classical model means that an increase in the
money supply will increase:
A) real GDP.
B) real interest rates.
C) nominal interest rates.
D) both saving and investment by the same amount.
In the IS“LM model under the usual conditions in a closed economy, an increase in
government spending increases the interest rate and crowds out:
A) prices.
B) investment.
C) the money supply.
D) taxes.
In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in
taxes increases planned expenditures by ______ and increases the equilibrium level of
income by ______.
A) $1 billion; more than $1 billion
B) $0.75 billion; more than $0.75 billion
C) $0.75 billion; $0.75 billion
D) $1 billion; $1 billion
Two types of problems that arise due to asymmetric information are:
A) systematic and idiosyncratic risk.
B) risk aversion and diversification
C) illiquidity and insolvency.
D) moral hazard and adverse selection.
If the U.S. production function is Cobb”Douglas with capital share 3, output growth is 3
percent per year, depreciation is 4 percent per year, and the Golden Rule steady-state
capital”output ratio is 4.29, to reach the Golden Rule steady state, the saving rate must
be:
A) 17.5 percent.
B) 25 percent.
C) 30 percent.
D) 42.9 percent.
In the Solow growth model with population growth and technological change, the
break-even level of investment must cover:
A) depreciating capital.
B) depreciating capital and capital for new workers.
C) depreciating capital and capital for new effective workers.
D) depreciating capital, capital for new workers, and capital for new effective workers.
The supply and demand for loanable funds determines the:
A) real wage.
B) real rental price of capital.
C) real interest rate.
D) nominal interest rate.
In Irving Fisher’s two-period model, if the consumer is initially saving in period one and
the real interest rate rises, then first-period consumption will:
A) certainly fall.
B) certainly rise.
C) remain constant.
D) either rise or fall.
In the classical model with fixed income, if the demand for goods and services is
greater than the supply, the interest rate will:
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease, depending on whether consumption is greater or less
than investment.
A reduction in the saving rate starting from a steady state with more capital than the
Golden Rule causes investment to ______ in the transition to the new steady state.
A) increase
B) decrease
C) first increase, then decrease
D) first decrease, then increase
Exhibit: IS*”LM*
(Exhibit: IS*”LM*) A small open economy with a floating exchange rate is initially at
equilibrium A with equilibrium exchange rate e2, and equilibrium output Y1.
If there is a monetary expansion to the new equilibrium will be at ____, holding
everything else constant.
A) A
B) B
C) C
D) D