If the economy is experiencing inflation, then nominal GDP is always greater than real
GDP.
The Asian financial crisis of 1997 was avoided thanks to the coordination of large scale
international lending.
Citibank is a financial intermediary.
If a country is currently engaged in a war with another country, it will experience
hyperinflation.
Quantitative easing and open market purchases of bonds are exactly one and the same.
Recall Application 2, “Do European Soccer Stars Change Clubs to Reduce Their
Taxes?” to answer the following questions:
According to the Application, if all countries had the same tax rates, then an increase in
tax rates in all countries will still trigger migration of high income individuals to other
countries in order to avoid paying more taxes.
When real interest rates are high, people want to take advantage of the high return on
bonds, so they choose to hold less money.
President Obama’s 2009 stimulus package greatly increased the budget deficit.
As more and more of a variable input is combined with some fixed inputs, additions to
the total output decline.
In the United States, the Federal Reserve pursues an inflation targeting policy of
keeping inflation below 2 percent.
Inflation cannot continue indefinitely without increases in the money supply.
In the income-expenditure model, firms stand ready to provide all the output that is
demanded.
Gross National Product (GNP) is equal to GDP minus net exports.
Recall Application 1, “How to Fight a Liquidity Trap,” to answer the following
questions:
According to the authors of the Application, what was the more likely reason why Ben
Bernanke resisted buying long-term government bonds?
A) group thinking
B) lack of support from the President
C) fear of long-term inflation
D) the total cost of the purchase of the bonds
Which of the following would not be considered part of the stock of capital?
A) a new factory
B) a new computer used in an office
C) a desk used in a secretary’s office
D) on-the-job training
As the national debt of the United States becomes larger, which component of the
Federal Spending would increase the most?
A) entitlements and mandatory spending
B) discretionary spending
C) defense spending
D) net interest
Recall Application 3, “The Broken Window Fallacy and Keynesian Economics,” to
answer the following questions:
In the Application, in what scenario would Hazlitt’s assertion that government spending
completely crowds out private spending be false?
A) when the economy is at full employment
B) always
C) never
D) when the economy is in a recession
Adam Smith used the metaphor “invisible hand” to explain that:
A) people acting in their own self interest may actually promote the interest of the
society as a whole.
B) people need a push from the government to do what the government thinks is right.
C) people always act with the interest of society in the back of their minds.
D) governments always act in the best interest of its citizenry.
Recall the Application about the U.S. “Locomotive Effect”: how U.S. growth affects
foreign economies and the demand for foreign products, to answer the following
question(s). From the early 1990s until quite recently, the U.S. economy grew faster
than the rest of the world, with its share of the world economy increasing from
approximately 26 percent in 1992 to over 32 percent in 2001. Because the U.S.
economy is such an important part of the world economy, its growth promoted growth
in foreign countries.According to this Application, from the early 1990s until quite
recently, the U.S. economy grew. This growth in the U.S economy
A) caused the level of U.S. exports to decline.
B) decreased foreign investment in the U.S.
C) increased the U.S. demand for foreign products.
D) decreased imports to the United States.
Borrowers and lenders make transactions based on the
A) real interest rate.
B) expected real interest rate.
C) expected nominal interest rate.
D) expected real interest rate less the expected rate of inflation.
If nominal GDP is $16 trillion and the money supply is $4 trillion, then the velocity of
money is
A) 0.25.
B) 4.
C) 12.
D) 20.
In the late 1970s, savings and loans institutions were in financial trouble because they
A) had to pay high interest rates to attract depositors, but were earning low interest rates
from past investments.
B) had to pay low interest rates to attract depositors, but were earning low interest rates
from past investments.
C) had to pay high interest rates to attract depositors, but were earning high interest
rates from past investments.
D) had to pay low interest rates to attract depositors, but were earning high interest rates
from past investments.
In the most basic model of the economy, equilibrium output is achieved when:
A) C + I expenditures are less than output.
B) C + I expenditures equals output.
C) C + I expenditures exceed output.
D) all of the above are correct.
The existence of discouraged workers will lead to an official unemployment rate that is
A) overstated.
B) understated.
C) either overstated or understated.
D) unbiased.
Suppose investment falls by $200 and equilibrium output falls by $500. Given this
information, we know that:
A) the marginal propensity to consume = 0.9.
B) the marginal propensity to consume = 0.8.
C) the marginal propensity to consume = 0.75.
D) none of the above
In the short run, the formal or informal contracts between firms mean that changes in
demand will be reflected primarily in changes in ________.
A) prices
B) future price
C) future equilibrium price
D) output
Net exports include goods produced
A) domestically that are sold domestically, less goods produced domestically that are
sold abroad.
B) domestically that are sold abroad, less goods produced domestically that are sold
domestically.
C) domestically that are sold abroad, less goods that are produced abroad that are sold
domestically.
D) abroad that are sold domestically, less goods that are produced domestically that are
sold abroad.
With the equation M=my, where M is the level of imports and y is real GDP, “m” is the:
A) marginal propensity to import.
B) net exports.
C) marginal propensity to consume.
D) marginal propensity to export.
Recall Application 2, “Economic Equality May Sustain Economic Growth,” to answer
the following questions:
According to the Application, why might more income equality help sustain economic
growth?
A) Improved income inequality allows the government to tax only the rich.
B) Consumption spending increases more when individuals have the same income
level.
C) Improved equality forces individuals to work harder to outdo his or her neighbor.
D) Improved equality allows the government to make tough choices to sustain growth.
According to the growth version of the quantity equation, a 4% increase in the money
supply, holding velocity constant, causes a 4% increase in:
A) real GDP.
B) nominal GDP.
C) output.
D) employment.
In the short run, increases in the money supply increase the level of output because
A) prices and wages are sticky.
B) prices and wages are flexible.
C) interest rates are sticky.
D) demand is fixed.
Is money a scarce factor of production? Explain.
What is the “good news” and the “bad news” about a lower value of the U.S. dollar?
What is Say’s Law?
Suppose planned expenditures exceed output. Explain how equilibrium is restored in
this economy.
Why do classical economists believe that the labor market always clears?
Use the Aggregate Demand – Aggregate Supply model to show how expansionary fiscal
policy increases the level of GDP and also raises the price level.
Why is the tax multiplier smaller (in absolute value) than the autonomous spending
multiplier?
Different people eat different amounts of food when they go to buffet restaurants, even
though they all pay the same price. Explain how this relates to the marginal principle.