Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their
income. There are no taxes and no foreign trade. Its currency is the arc. Potential output
is 600 billion arcs.
Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens.
The tax multiplier is:
A) greater than the government spending multiplier.
B) less than the government spending multiplier.
C) zero, because changes in taxes have no effect on aggregate demand.
D) impossible to determine.
Foreign exchange controls are the same thing as floating exchange rates.
A) True
B) False
If the price level decreases by 20%, the purchasing power of $1,000 will increase to
$1,200.
A) True
B) False
Equity means that:
A) everyone gets an efficient share of the goods and services produced.
B) everyone gets his or her fair share of the goods and services produced.
C) more of some goods and services can be produced only if the production of others is
reduced.
D) more of all goods and services may be produced.
In the short run changes in the money supply change interest rates but not real output
and prices.
A) True
B) False
In the product markets:
A) households supply goods and services.
B) households supply resources.
C) firms demand goods and services.
D) firms supply goods and services.
Investors will lose money on mortgage-backed securities if:
A) interest rates are too low.
B) homeowners don’t pay their mortgages.
C) homeowners pay off their mortgages early.
D) the average price of a house increases too rapidly.
Figure: Guns and Butter
Look at the figure Guns and Butter. On this figure, points A, B, E, and F:
A) indicate combinations of guns and butter that society can produce using all of its
factors efficiently.
B) indicate increasing opportunity costs for guns but decreasing opportunity costs for
butter.
C) indicate that society wants butter more than it wants guns.
D) indicate constant opportunity costs for guns and increasing costs for butter.
Which of the following oversees international trade agreements?
A) NAFTA
B) the World Trade Organization
C) the European Union
D) the Federal Reserve Bank
Figure: Unemployment Rate over Time
Look at the figure Unemployment Rate over Time. In the time-series graph, as we move
from 1997 to 2001, we see that the unemployment rate has _____ from approximately
_____ to approximately _____.
A) decreased; 5%; 4%
B) increased; 5.3%; 7.3%
C) decreased; 7.8%; 5.5%
D) increased; 4%; 6.3%
The cost of leaving the skating championship before it ends is _____, while the cost of
staying for the entire match is _____.
A) the opportunity cost of not seeing the perfect 10 performance; zerothe ticket to the
championship is already paid, so there is no cost
B) the opportunity cost of not seeing the perfect 10 performance; the opportunity cost
of whatever else you could have done during that time
C) zeroyou don’t have to pay to leave; zerothe ticket to the match is already paid so
there is no cost
D) the cost of the ticket; the cost of the ticket
Look at the table Price, Quantity Demanded, and Quantity Supplied. The data in the
figure suggest a nonlinear relation between:
A) price and quantity demanded.
B) price and quantity supplied.
C) quantity demanded and quantity supplied.
D) The table does not show a nonlinear relation.
A recessionary gap can be closed with:
A) contractionary monetary policy.
B) an increase in taxes.
C) a decrease in government purchases.
D) expansionary fiscal policy.
The marginal propensity to consume is:
A) equal to one.
B) between zero and one.
C) greater than one.
D) often negative.
During the financial crisis of 2008, the Federal Reserve bought not only Treasury bills
but also commercial paper issued by private companies and the debt of Fannie Mae and
Freddie Mac.
A) True
B) False
U.S. retailers import toys from China. In the U.S. balance of payments account, this
transaction is entered as a payment _____ foreigners in the _____ account.
A) to; financial
B) from; financial
C) to; current
D) from; current
Firms and businesses hold some of their assets in the form of money because:
A) it allows them to make purchases directly.
B) it is a form of M2.
C) bonds are more liquid.
D) interest rates on money tend to be lower than other types of assets.
A checking account with $500 is:
A) more liquid than a person’s new car.
B) less liquid than a checking account with $1,000.
C) as liquid as a stock share with a $500 value.
D) less liquid than a house with a market value of $250,000.
Your grandmother has promised you $1,000 when you graduate in two years. At a 6%
annual interest rate, you can borrow $890 and pay it all back with your grandmother’s
gift at graduation.
A) True
B) False
The U.S. economy recovered from the 2001 recession primarily because low interest
rates caused a boom in the housing market.
A) True
B) False
Goods that are produced in a particular period but not sold in that period:
A) count as consumption in the next year.
B) are included in investment.
C) are treated like exports.
D) are classified as purely financial transactions.
A hamburger costs $8 in the United States and 960 in Japan. The nominal exchange rate
is 110 per dollar. The inflation rates in the United States and in Japan are 2% and 4%,
respectively. The purchasing power parity is _____ per dollar.
A) 110
B) 120
C) 125
D) 112
France and England both produce wine and clothing with constant opportunity costs.
France will have a comparative advantage in wine production if:
A) it can produce more wine than England.
B) its labor productivity in wine production is greater than England’s.
C) the absolute cost of producing wine is lower in France than in England.
D) the opportunity cost of wine production is lower in France than in England.
Friedman argued that with a _____ money supply, velocity is so _____ that there’s not
much point in using monetary policy.
A) steady increase in the; large
B) constant; small
C) steady increase in the; constant
D) constant; large
When workers and firms become aware of a rise in the general price level:
A) they will not do anything, because they know they are powerless to counter any
economic changes.
B) they will incorporate higher prices into their expectations.
C) firms with sticky prices will ultimately adjust their prices downward.
D) they will agree to renegotiate wage contracts downward.
Roommates Sarah and Zoe are hosting a Halloween party and have to make food for
their guests and costumes for themselves. To finish both tasks as quickly as possible,
Sarah and Zoe know that each of them should focus on just one task, but they don’t
know who should do what. Sarah and Zoe should determine which roommate:
A) has the absolute advantage in cooking.
B) has the comparative advantage in cooking.
C) can cook the most in a given amount of time.
D) can complete the cooking in the least amount of time.
The interest rate is determined in the loanable funds market in the short run.
A) True
B) False
If the price level doubled and someone wanted to maintain the same level of purchasing
power, the nominal quantity of money demanded must:
A) also double.
B) increase by 50%.
C) stay the same.
D) decrease.
The TED spread is the interest rate that banks pay when they borrow reserves from the
Fed or another bank.
A) True
B) False
A current account deficit exists when:
A) the balance on current account is negative.
B) spending flowing out of the country is less than spending flowing into the country.
C) net exports are positive.
D) an economy buys less from foreigners than it sells to them.
If exports from the United States decrease because of a recession in Europe, all other
things equal, the demand for the dollar will decrease.
A) True
B) False
Which of the following is included in the calculation of GDP?
A) expenditure on new construction
B) a retiree’s monthly Social Security check
C) buying a house built 10 years ago
D) buying shares of Home Depot stock
If the target exchange rate of a fixed currency is above the equilibrium exchange rate, to
reach the target rate, the government should encourage capital inflows.
A) True
B) False
A fixed exchange rate means that the government keeps the exchange rate against some
other currency at or near a particular target.
A) True
B) False
If the ADcurve shifts to the right, in the short run there will be a(n) _____ in aggregate
output and a(n) _____ in the price level.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase