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Figure: Circular-Flow Model
Look at the figure Circular-Flow Model. If the circular-flow model is in equilibrium
(the sum of money flowing into each box is equal to the sum of the money flowing out
of it) and there is a decrease in consumer spending, which of the following is likely to
happen?
A) an increase in the nominal GDP
B) an increase in the real GDP
C) an increase in the unemployment rate
D) an increase in the inflation rate
The convergence hypothesis is:
A) wrong, because Latin American and African countries have not been able to grow.
B) not wrong, but education, infrastructure, and the rule of law are not equal among
nations.
C) not wrong, but because poorer nations are involved in so many destabilizing
incidents like wars, disease, and famines, they will never be able to catch up with the
rest of the world.
D) wrong, because poorer nations' income seems to get worse over time and the richer
nations' income get better.
Beth promises to do Alice's taxes, and in exchange, Alice will set up several
spreadsheets for Beth's household budget. This trade will most likely:
A) be beneficial to both individuals.
B) hurt both individuals.
C) help Beth but hurt Alice.
D) help Alice but hurt Beth.
If the average retirement age decreases:
A) implicit liabilities will increase.
B) implicit liabilities will decrease.
C) implicit liabilities will be unaffected.
D) the public debt will immediately increase.
The Great Moderation consensus is that expansionary monetary policy affects only
prices, not output.
A) True
B) False
According to the Great Moderation consensus, the effectiveness of economic policy is
limited by the political business cycle.
A) True
B) False
If a country's loanable funds market is initially in equilibrium and then there are capital
outflows, this will result in a _____ in the equilibrium interest rate, while the
equilibrium quantity of loanable funds will _____.
A) fall; increase
B) rise; decrease
C) fall; decrease
D) rise; increase
The price index in the base year is normalized so that it equals 100 in the base year.
A) True
B) False
A minimum wage of $7.25 per hour can cause structural unemployment if the
equilibrium wage is:
A) $7.25.
B) $8.00.
C) $6.85.
D) $7.30.
An economy has achieved _____ if it _____ pass up any opportunities to make some
people better off without making others worse off.
A) efficiency; does not
B) equity; does
C) efficiency; does
D) equity; does not
According to the accelerator principle:
A) a higher growth rate of real GDP leads to higher planned investment spending.
B) a higher growth rate of real GDP increases immigration.
C) higher budget deficits lead to even larger deficits.
D) the more money people make, the faster they spend it.
If prices are constant, but the value of financial assets increases, aggregate _____ shifts
to the _____.
A) supply; left
B) supply; right
C) demand; left
D) demand; right
If a country has the comparative advantage in producing wooden furniture, then with
free trade:
A) the country will import wooden furniture.
B) producer surplus in the market for wooden furniture will increase.
C) consumer surplus in the market for wooden furniture will increase.
D) the domestic quantity supplied will be less than the domestic quantity demanded.
A household's wealth is:
A) what it earns each period.
B) what it saves each period.
C) the value of its accumulated savings.
D) the value of its financial assets.
The beginning of a recession is declared by the:
A) National Bureau of Economic Research.
B) Treasury Department.
C) Fed.
D) president.
Which of the following is (are) a tool(s) of monetary policy used by the Federal
Reserve?
I. reserve requirements
II. the discount rate
A) I only
B) II only
C) I and II
D) neither I nor II
The multiplier is:
A) 1 / (1 " MPC).
B) MPS/ MPC.
C) 1 / (MPC).
D) 1(1 + MPC).
If MPC= 0.9, the multiplier is:
A) 10.
B) 90.
C) 9.
D) 1.
Research and development is what we call spending to develop and implement new
technologies.
A) True
B) False
Which of the following is NOT true?
A) Resources are scarce when they can satisfy everyone's wants.
B) The real cost of a choice is what you must give up to enjoy that choice.
C) People typically make choices that will make them better off.
D) Rational people use marginal analysis when making "how much" decisions.
Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the
aggregate demand curve would cause a(n):
A) decrease in the level of income.
B) increase in the unemployment level.
C) change in the long-run aggregate supply curve.
D) increase in employment, production, and income.
Inventories are counted as investment because inventories are a source of future sales.
A) True
B) False
Between 2000 and 2006, there was a housing bubble in the United States. A bubble is:
A) a fluctuation in asset prices that leads to inherent instability.
B) an increase in asset prices driven by unrealistic expectations about future prices.
C) individuals reselling assets rapidly to make quick profit.
D) speculation by unscrupulous investors.
Since the 1930s, following banking crises, if financial institutions are not able to
borrow in private credit markets:
A) the Federal Reserve takes a laissez-faire attitude, allowing market forces to
determine which institutions will survive.
B) the Federal Reserve may act as a lender of last resort.
C) the U.S. Treasury may make short-term loans to them.
D) they are not allowed to engage in maturity transformation until their financial
condition improves.
If a country has a current account deficit, it must have a:
A) financial account surplus.
B) balance of payment surplus.
C) financial account deficit.
D) balance of payments deficit.
Which of the following is a normative statement?
A) Government has grown too large and should be reduced.
B) The rate of inflation has increased.
C) Government is subject to the same rules as all other institutions.
D) The money supply grew by 3% last year.
Since the adoption of the euro in 2001, monetary policy has become much more
effective in individual European countries.
A) True
B) False
In the long run, the aggregate price level has:
A) no effect on the quantity of aggregate output.
B) a positive effect on the quantity of aggregate output.
C) a negative effect on the quantity of aggregate output.
D) an effect on aggregate output but none on employment.
Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used
to close a(n) _____ gap.
A) right; inflationary
B) right; recessionary
C) left; inflationary
D) left; recessionary
Evidence shows that increased international trade has increased the wages of unskilled
workers in the United States.
A) True
B) False
In the market for tacos, each of the following shifts the supply curve to the left
EXCEPT:
A) an increase in the price of beef.
B) an increase in the wages of taco shop workers.
C) fewer taco shops.
D) a decrease in the price of tacos.
When a country's currency undergoes a real appreciation:
A) exports fall and imports rise.
B) exports rise and imports fall.
C) the merchandise trade balance becomes positive.
D) exports and imports do not change.
In 2011, 10 million people did not have a job but were actively looking for
employment, and 85 million people had either a full-time or a part-time job. The
unemployment rate in 2011 was:
A) 10%.
B) 9.5%.
C) 10.5%.
D) 8.5%.
When you discover money in your coat that you put there last winter, you unexpectedly
find you were using money primarily as a(n):
A) medium of exchange.
B) expander of economic activity.
C) factor of production.
D) store of value.
