Figure: Inflationary and Recessionary Gaps
Look at the figure Inflationary and Recessionary Gaps. If the economy is in short-run
equilibrium at Y1 in panel (b), to return to potential output at YP policy makers should
use:
A) contractionary stabilization policy.
B) expansionary stabilization policy.
C) policies to shift the SRAS to the left.
D) policies to shift the LRAS to the left.
Since the 1950s, the natural unemployment rate in the United States has:
A) remained relatively constant.
B) increased steadily.
C) decreased steadily.
D) risen and fallen.
In the foreign exchange market, when the demand for the euro increases, the
equilibrium U.S. dollar price of the euro _____ and the U.S. dollar _____.
A) rises; appreciates
B) falls; depreciates
C) falls; appreciates
D) rises; depreciates
If planned investment is $50 billion and unplanned inventory investment is $10 billion,
then actual investment is $40 billion.
A) True
B) False
One factor frequently cited for slow growth in India until the 1990s is:
A) reliance on the drug trade.
B) too little government intervention in the economy.
C) dependence of foreign capital flows.
D) corruption among government officials.
Real GDP is nominal GDP adjusted for:
A) double counting.
B) changes in prices.
C) population.
D) imports.
If capital inflow is negative, then a country:
A) borrows more than it lends to other countries.
B) lends more than it borrows from other countries.
C) has balanced trade.
D) imports more than it exports.
Aggregate demand will increase in all of the following cases EXCEPT when:
A) household wealth rises but prices are constant.
B) government purchases of goods rise.
C) the quantity of money increases.
D) interest rates increase.
Fiscal policy is the use of taxes, government transfers, or government purchases to shift
the aggregate demand curve.
A) True
B) False
Governments can save when:
A) taxes are less than expenditures.
B) taxes are greater than expenditures.
C) the government borrows to finance its expenditures.
D) the president insists that Congress balance the budget.
Assume the nominal exchange rate is 0.593 per dollar, the price level in the United
States is 250, and the price level in Britain is 225. The real exchange rate is 0.659 per
dollar.
A) True
B) False
Suppose that the stock market crashes, which causes a large decrease in the value of
many households’ financial assets. The most likely outcome is a _____ the aggregate
demand curve.
A) right-shift in
B) left-shift in
C) movement up
D) movement down
Scenario: Money Supply Changes II
Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this
semester. Assume that the reserve requirement is 20% and that banks do not hold excess
reserves.
Look at the scenario Money Supply Changes II. As a result of the withdrawal, loans
_____ by _____.
A) increase; $8,000
B) decrease; $8,000
C) decrease; $6,400
D) decrease; $1,600
Look at the table ABC Bank’s Balance Sheet. The bank is holding excess reserves of:
A) $17 million.
B) $15 million.
C) $5 million.
D) $25 million.
Figure: Loanable Funds
Look at the figure Loanable Funds. Which of the following might produce a new
equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $75
billion?
A) Capital inflows from foreign citizens decline.
B) The federal government runs a budget deficit rather than a surplus.
C) Profit expectations for business investments become less optimistic.
D) The government eliminates taxes on income from interest earned.
The consumption function will shift up if:
A) households expect an increase in the minimum wage.
B) households expect a decrease in the minimum wage.
C) the marginal propensity to consume decreases.
D) the marginal propensity to save increases.
Economists claim that the unemployment rate can understate the true level of
unemployment because none of the following groups is included EXCEPT:
A) discouraged workers.
B) marginally attached workers.
C) underemployed workers.
D) workers without jobs who have looked for work in the past four weeks.
Economists say that long-run economic growth is almost entirely due to:
A) rising productivity.
B) population growth.
C) a democratically elected government.
D) a balanced budget.
Shoe-leather costs may be especially important in the tax system when inflation distorts
the measures of income on which taxes are collected.
A) True
B) False
The price determined in the market for loanable funds is:
A) the margin call.
B) the profit rate.
C) the transaction fee.
D) the interest rate.
According to the principle of purchasing power parity, if a 20-ml bottle of Diet Coke
costs €0.80 in Paris, 0.50 in London, and $1.10 in Chicago, the exchange rate between
the:
A) euro and the pound should be €0.40 = 1.
B) U.S. dollar and the euro should be $0.72 = €1.
C) U.S. dollar and the pound should be $0.45 = 1.
D) euro and the pound should be €1.60 = 1.
If a high inflation rate leads people to _____ their money holdings, this may lead to a
further increase in the money supply and _____ inflation.
A) reduce; lower
B) increase; lower
C) reduce; higher
D) increase; higher
Unit-of-account costs refer to the problem associated with high inflation rates that:
A) cause people to expend extra effort to reduce their holdings of money.
B) result in increased costs associated with necessary changes in the list price of items.
C) makes money a less reliable unit of measurement.
D) decrease the costs associated with holding less money.
The multiplier effect of changes in government transfers is:
A) greater than the multiplier effect of a change in government spending.
B) zero because transfer payments do not affect aggregate demand.
C) less than the multiplier effect of a change in government spending.
D) impossible to determine.
Figure: Output Gap
Look at the figure Output Gap. If the economy is producing at Y1, then it has a(n)
_____ gap, as _____ real GDP exceeds _____ real GDP, and the Federal Reserve
should use _____ monetary policy.
A) inflationary; actual; potential; contractionary
B) recessionary; potential; actual; expansionary
C) inflationary; potential; actual; contractionary
D) recessionary; actual; potential; expansionary
Bonds with a high risk of default usually:
A) have a longer maturity than bonds with a low risk of default.
B) have a shorter maturity than bonds with a low risk of default.
C) have to pay a high rate of interest to attract investors.
D) can pay a low rate of interest and still attract investors.
Scenario: Purchasing Power Parity
A car costs $30,000 in the United States and the exchange rate is $1 = 0.50. The same
car costs 12,000 in Britain.
Look at the scenario Purchasing Power Parity. To have purchasing power parity, the
pound must:
A) appreciate.
B) depreciate.
C) remain constant.
D) be purchased in foreign exchange markets.
According to the theory of new classical economics, if productivity decreases, the
aggregate supply curve shifts _____ and the price level rises, while aggregate
output_____.
A) right; increases
B) left; remains constant
C) right; decreases
D) left; decreases
The value, at current market prices, of the final goods and services produced during a
particular period is:
A) disposable personal product.
B) gross foreign factor output.
C) gross personal product.
D) gross domestic product.
The economy with the lowest opportunity cost of producing a particular good is said to
have:
A) a technological advantage.
B) a comparative advantage.
C) a production possibility frontier.
D) an increasing opportunity cost.
Production possibility frontiers:
A) illustrate the production choices available to an economy.
B) assume full employment but not maximum efficiency.
C) assume maximum efficiency but not full employment.
D) are used to illustrate the law of decreasing opportunity costs.
Fixed exchange rates are determined by the:
A) policies of the domestic government.
B) forces of demand and supply in the developed countries.
C) forces of demand and supply in the foreign exchange market.
D) forces of demand and supply in the domestic money market.
The exchange rate ensures that the balance of payments really does balance.
A) True
B) False
The chair of the Fed can serve only one four-year term.
A) True
B) False