When the aggregate price level falls, the purchasing power of assets rises, which leads
to:
A) an increase in the quantity of aggregate output demanded.
B) a decrease in the quantity of aggregate output demanded.
C) a shift in the AD curve to the right.
D) a shift in the AD curve to the left.
The classical model of the price level is associated with:
A) John Maynard Keynes.
B) economists who followed Keynes’s work.
C) economists who came before Adam Smith.
D) economists who came after Adam Smith but before Keynes.
Look at the figure Wine and Wheat. If this economy is producing at point A and wants
to produce at point B, it must:
A) trade with another country.
B) increase its resources.
C) decrease production.
D) use its existing resources efficiently.
The school of thought that monetary policy should be the main tool of stabilization
policy, that is skeptical about the use of fiscal policy, and that recognizes constraints on
policy imposed by the natural rate of unemployment and the political business cycle is:
A) classical macroeconomics.
B) Keynesian macroeconomics.
C) monetarism.
D) the Great Moderation consensus.
Figure: The DVD Rental Market
Look at the figure The DVD Rental Market. The figure shows the weekend rental
market for DVDs in Collegetown. The equilibrium price for DVD rentals is _____ and
the equilibrium quantity is _____.
A) $5; 50
B) $3; 30
C) $9; 90
D) $6; 40
Figure: Seasonally Adjusted Unemployment Rate
Look at the figure Seasonally Adjusted Unemployment Rate. The distance between
each labeled point on the horizontal axis is one year. What is the approximate slope of
the graph between 1/2004 and 1/2006?
A) 1/2
B) 1
C) “1/2
D) “2
In 2013, _____ spending was the largest component of U.S. GDP, at approximately
70% of aggregate spending.
A) government
B) consumer
C) investment
D) net export
Debt overhang is the result of:
A) maturity transformation.
B) a vicious cycle of deleveraging.
C) falling unemployment.
D) rising inflation.
Look at the scenario Assets and Liabilities of the Banking System. Suppose that the
reserve ratio is 10% and the Federal Reserve sells $25,000 worth of U.S. Treasury bills
to the banking system. If the banking system does NOT want to hold any excess
reserves, _____ will be _____ the money supply.
A) $110,000; added to
B) $110,000; subtracted from
C) $250,000; subtracted from
D) $250,000; added to
Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to
increase real GDP by the largest amount.
A) decrease in taxes
B) increase in government purchases
C) increase in transfer payments
D) increase in government purchases, paid for by a $100 billion increase in taxes
Most of Facebook’s investment spending is for scholarships for its employees to study
the latest social media technology.
A) True
B) False
Suppose Poland is producing on its production possibilities frontier, and it decides to
increase the production of steel and decrease the production of vodka. The bowed-out
production possibility frontier suggests that there will be a(n) _____ opportunity cost of
producing more steel.
A) increasing
B) decreasing
C) nonexistent
D) unchanged
A tariff _____ the price received by domestic producers and _____ the price paid by
domestic consumers.
A) decreases; increases
B) increases; decreases
C) decreases; decreases
D) increases; increases
Rational expectations theory suggests that:
A) monetary policy that is expected will have the greatest impact on changing output
levels.
B) policies that are expected will have no effect on output or unemployment.
C) economic agents take into account past actions only to make their current decisions.
D) discretionary policies are best at bringing about changes in output.
Scenario: Closed Economy S= I
GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and
government spending is $2 trillion. Taxes are $0.5 trillion.
Look at the scenario Closed Economy S = I. How much is private saving?
A) $4 trillion
B) $2.5 trillion
C) $3.5 trillion
D) “$0.5 trillion
Figure: Fiscal Policy I
Look at the figure Fiscal Policy I. Suppose that this economy is in equilibrium at E1. If
there is an increase in government purchases,_____ will shift to the _____, causing a(n)
_____ in the price level and a(n) _____ in real GDP.
A) AD2; left; increase; decrease
B) AD2; left; decrease; decrease
C) AD1; right; increase; increase
D) AD1; right; decrease; increase
Which of the following is NOT an example of government transfers?
A) Medicaid-paid prescription drugs for low-income individuals
B) unemployment insurance
C) a Social Security disability pension
D) a reimbursement of personal income tax withheld from wages
Scenario: Linear Production Possibility Frontier
Largetown has a linear production possibility frontier, and it produces socks and shirts
with 80 hours of labor. The table shows the number of hours of labor necessary to
produce one pair of socks or one shirt.
Look at the scenario Linear Production Possibility Frontier. What is the maximum
number of pairs of socks Largetown can produce?
A) 40
B) 20
C) 2
D) 4
Most economists oppose an annually balanced budget because it would undermine
automatic stabilizers.
A) True
B) False
In a closed economy government spending was $30 billion, consumption was $70
billion, taxes were $20 billion, and GDP was $110 billion this year. Investment
spending was $10 billion. As a result:
A) private savings were $10 billion.
B) the government’s budget balance was a surplus of $10 billion.
C) there was no net savings.
D) private savings were $20 billion.
After a devaluation, all other things equal, probably exports will increase and imports
will decrease.
A) True
B) False
When markets fail:
A) government intervention may help.
B) the market realizes the maximum possible gains from trade given the available
resources.
C) there may still be an efficient allocation of resources.
D) no goods and services are produced.
Look at the table The Market for Chocolate-Covered Peanuts. A shortage of 210 bags of
chocolate-covered peanuts exists if the price is _____ per bag.
A) $0.80
B) $0.60
C) $0.40
D) $0.30
Your friend wants to borrow $2,000 and pay it back in one year. She is someone who
keeps her word. She agrees to repay you $2,080 in one year. The bank annual interest
rate is 5%. Which of the following statements is TRUE?
A) You will be financially worse off if you make the loan rather than deposit $2,000 in
the bank.
B) You will be financially better off if you make the loan rather than deposit $2,000 in
the bank.
C) The present value of $2,080 payable in one year with an interest rate of 5% is
$1,904.76, which is less than the value of the $2,000 you have been asked to lend.
D) None of the statements is true.
The marginal propensity to consume is the increase in consumer spending when _____
increase(s) by $1.
A) investment spending
B) taxes
C) disposable income
D) savings
Since the production of clothing is labor-intensive relative to the production of wheat
and China is labor-abundant relative to most countries, we expect China to export
clothing.
A) True
B) False
Figure: Illustrating Slope
Look at the figure Illustrating Slope. In the graph, line 3 depicts X and Y to be:
A) positively related.
B) unrelated.
C) negatively related.
D) both constants.
A devaluation can help reduce a(n):
I. inflationary gap.
II. deflationary gap.
A) I only
B) II only
C) I and II
D) neither I nor II
If a friend offers to pay you $1 five years from now, when the prevailing annual interest
rate is 5%, what is the net present value of that $1 today?
A) $0.95
B) $1.05
C) $0.78
D) $1.50
When people in Brazil engage in trade with people in Germany, the citizens of each
nation are made worse off.
A) True
B) False
Chain linking is a method used to measure the change in real GDP.
A) True
B) False
Suppose the federal government has a budget deficit and the economy is closed. Using
the savings”investment spending identity, explain how this affects investment spending.
A small private college increases tuition while a large public university in the same state
does not. What will happen to the demand (enrollment) for both schools?
Suppose the annual inflation rate is at 7% and 3% of the labor force is unemployed. If
you were on the Federal Open Market Committee, what action would you prescribe?
How would this affect the economy, the inflation rate, and the unemployment rate?
The economy is in a recession. The head of the President’s Council of Economic
Advisers is an ardent proponent of the real business cycle theory. What will this real
business cycle economist recommend or not recommend? Explain.
Explain the political asymmetry associated with policies that can cause or cure
inflation.
Some economists argue that the official unemployment rate understates the true level of
unemployment. Summarize these arguments.
How does an increase in the money supply affect interest rates if the economy is
operating at potential output?
Consider a nation with a large economy, like the United States, and a nation with a
small economy, like the Dominican Republic. How can the United States, with absolute
advantage in production of almost all goods, benefit from trade with the Dominican
Republic?
What are Keynesian policies?
Table: Disposable Income and Spending
Look at the table Disposable Income and Spending. Calculate the marginal propensity
to consume (MPC). Use this MPCto compute the spending multiplier.
If a labor market is in equilibrium at a wage that sets the quantity of labor demanded
equal to the quantity of labor supplied, how can there still be unemployment?
Suppose the economy is in short-run equilibrium. Use the AD”AS model to predict
short-run changes to real GDP and the aggregate price level if commodity prices
suddenly increase. Explain your reasoning.
The central bank of a government can print more money to pay for government deficits.
Why do some refer to this practice as imposing an inflation tax?
Explain how a commercial bank meets both the short-term and long-term needs of its
customers.
How was the financial crisis of 2008 similar to the Panic of 1907 and the S&L crisis?
What do economists mean by the natural rate of unemployment? How would it be
affected by a permanent influx of younger, predominantly unskilled immigrant
workers?