If the marginal propensity to consume equals 0.75, then based on the simple model
presented in this chapter, one would expect a $100 decrease in investment spending to
lead to a total _____ in spending of _____.
A) increase; $100.
B) increase; $400.
C) decrease; $100.
D) decrease; $400.
Most of the value added included in GDP in the United States is added by businesses
rather than consumers.
A) True
B) False
The banking crises in Finland, Sweden, and Japan in the early 1990s were caused by
numerous bank runs in each country.
A) True
B) False
Using increased government spending and tax cuts to fight a recession is consistent
with _____ economics.
A) classical
B) classical and monetarist
C) classical and Keynesian
D) Keynesian and Great Moderation consensus
When the value of a pound sterling changes from US$1.50 to US$2, it follows that the:
A) U.S. dollar has depreciated.
B) pound sterling has depreciated.
C) U.S. dollar has appreciated.
D) value of a U.S. dollar has gone from 0.5 to 0.6.
Long-run economic growth will be sustainable:
A) because pollution and urban sprawl are not real problems.
B) because there are plenty of natural resources left to be consumed in the future.
C) if it can continue in spite of the limited supply of natural resources and the impact of
growth on environment.
D) because the natural resource scarcity and other environmental issues are not really as
serious as they seem.
If a country with a floating exchange rate follows a contractionary monetary policy,
with everything else remaining unchanged, it leads to a(n) _____ in interest rates and
a(n) _____ in the currency.
A) increase; depreciation
B) decrease; appreciation
C) decrease; depreciation
D) increase; appreciation
Figure: Production Possibilities and Circular-Flow Diagram
Look at the figure Production Possibilities and Circular-Flow Diagram. Assume the two
figures represent the same economy. Suppose that in the circular-flow diagram most
firms undergo a significant increase in productivity. This results in a significant increase
in the output of both coconuts and fish. If all other variables remain unchanged, then the
adjustment in this economy would be best represented in the production possibilities
figure by a movement from point A toward:
A) point A (no movement).
B) point B (a decrease in coconut production and an increase in fish production).
C) point C (a decrease in coconut production).
D) point D (an outward shift of the entire curve).
The peak of the business cycle provides evidence that the recession is over.
A) True
B) False
According to the convergence hypothesis, differences in GDP per capita among
countries tend to narrow over time because countries that start with a lower real GDP
per capita tend to have negative growth rates.
A) True
B) False
High rates of savings and investment and a lack of consumption spending have
contributed to the recent stagnant economic growth in Latin America.
A) True
B) False
Figure: Aggregate Supply
Look at the figure Aggregate Supply. At point F, potential output is _____ than actual
output and unemployment is _____.
A) less; high
B) less; low
C) higher; high
D) higher; low
A bank makes a loan for one year. The nominal annual interest rate is 7.5%. The real
rate is 4%. Over the course of the year, overall prices increase by 4%. This rate of
inflation hurt the _____ because the actual rate of inflation was _____ than the
anticipated rate.
A) borrower; lower
B) borrower; higher
C) lender; higher
D) lender; lower
Long-term interest rates apply to financial assets that mature a number of years in the
future.
A) True
B) False
If a bank has deposits of $10,000 and reserves of $5,000 and if the reserve requirement
is 20%, it can make loans of $5,000.
A) True
B) False
A country wants to maintain a fixed exchange rate with the dollar, but at the current
exchange rate its currency is in excess. The country can adopt all of the following
policies to maintain its exchange rate EXCEPT:
A) buy domestic currency and sell U.S. dollars in the foreign exchange market.
B) sell domestic currency and buy U.S. dollars in the foreign exchange market.
C) impose foreign exchange controls.
D) contract the money supply to raise domestic interest rates.
If a market is in disequilibrium:
A) it will continue unless there is government intervention.
B) no individual will be better off doing something different.
C) there are opportunities for people to make themselves better off.
D) it must be because the government has intervened in the market, resulting in the
market’s failure to reach equilibrium.
To put an end to the vicious cycle of bank failures during the early 1930s:
A) President Franklin Roosevelt declared a bank holiday, temporarily closing all banks.
B) the Federal Reserve System was established.
C) a system of shadow banks was developed to replace the troubled commercial banks.
D) the government nationalized all commercial banks.
Figure: The Market for Roses
Look at the figure The Market for Roses. Assume that PAis the autarky price and PWis
the world price. Producer surplus with international trade would be area:
A) X+ Y+ Z.
B) W+ X+ Y.
C) X+ Y.
D) Y.
If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%
sellers of interest-bearing financial assets _____ interest rates to find willing buyers.
A) must offer higher
B) can offer lower
C) can offer 2%
D) Sales of financial assets do not depend on the rate offered.
The equation that breaks GDP down by the four sources of aggregate spending is:
A) GDP = C + I + G + X + IM.
B) GDP = C + I + G ” X ” IM.
C) GDP = C ” I ” G ” X + IM.
D) GDP = C + I + G + X ” IM.
If disposable income increases by $1,000 and consumer spending increases by $800,
then the marginal propensity to consume is:
A) 0.8.
B) 1.
C) 1.25.
D) 0.75.
The reserve ratio is defined as the ratio of:
A) bank assets to bank liabilities.
B) bank assets to bank reserves.
C) customers’ bank deposits to bank assets.
D) bank reserves to customers’ checkable bank deposits.
States that are required by their constitution to have annually balanced budgets are
likely to _____ than those not required to balance their budget.
A) have less severe business cycles
B) have more severe business cycles
C) grow faster
D) have a better quality of life
How many members are there on the Federal Reserve Board of Governors?
A) 3
B) 7
C) 100
D) 435
Figure: AD”ASModel
Look at the figure AD”AS Model. Suppose the economy is at YEwith a price level of P1.
Which of the following would represent the new long-run equilibrium position if the
aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase
in the money supply?
A) YE and P2
B) YEand P1
C) Y1 and P2
D) YE and P3
In the circular-flow diagram firms receive money for _____ in the _____ market.
A) selling goods and services; product
B) selling resources; product
C) selling resources; factor
D) selling goods and services; factor
All of the following are regulations designed to prevent bank runs EXCEPT:
A) asset bubbles.
B) capital requirements.
C) reserve requirements.
D) provisions that allow banks to borrow from the Fed’s discount window.
A market is composed of three individuals, Nicholas, Benjamin, and Alexander. Their
individual demand schedules are given below and are as follows:
Based on this information, which of the following market demand schedules accurately
portrays this market?
A)
B)
C)
D)
Good X and good Y are related goods. Holding everything else constant, if the price of
X decreases and the demand for Y increases, X and Y are probably:
A) complements.
B) substitutes.
C) inferior.
D) normal.
According to purchasing power parity, if the price of a Big Mac is lower in India and
China than in Europe, then the currencies of India and China are undervalued.
A) True
B) False
The present value of a painting that you expect to sell for $500 in three years is $405.22
if the annual interest rate is 5%.
A) True
B) False
Figure: Technological Progress and Productivity Growth
Look at the figure
Technological Progress and Productivity Growth. If there is significant technological
progress (all other factors remaining unchanged), it is best indicated by a move from:
A) A to B.
B) B to A.
C) C to B.
D) B to C.
Which of the following do economists view as investment spending?
A) stocks
B) bonds
C) spending on physical capital
D) mutual fund investing
When the government invests resources in a nation’s educational system, it is investing
in:
A) private property.
B) human capital.
C) political stability.
D) infrastructure.