Figure: Classical Versus Keynesian Macroeconomics
Look at the figure Classical Versus Keynesian Macroeconomics. According to the
classical view, if this economy shifts from AD2 to AD1, perhaps because of a large
increase in government spending, the price level will _____ and real GDP will _____.
A) rise; fall
B) rise; not change
C) not change; rise
D) fall; fall
Scenario: Japan and the United States
Suppose that the interest rate in the United States is 4%, in Japan it is 7%, and financial
assets in the two countries are equal in risk.
Refer to the scenario Japan and the United States. As a result:
A) capital will flow from Japan to the United States.
B) capital will flow from the United States to Japan.
C) capital will not flow between Japan and the United States.
D) Japan will export more goods to the United States.
The relation between two variables that move in opposite directions is said to be:
A) independent.
B) positive.
C) direct.
D) negative.
Corner offices in high-rise office buildings usually cost more to rent than other offices.
This best illustrates the economic principle of:
A) marginal analysis.
B) scarce resources.
C) resources being used as efficiently as possible to achieve society’s goals.
D) opportunity costs.
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. By how much will the money supply
contract as a result of the withdrawal?
A) $40,000
B) $0
C) $8,000
D) $32,000
Fixed exchange rates are set by the market.
A) True
B) False
The incentives built into the market economy ensure that resources are put to good use
and that opportunities to make people better off are not wasted. This means that:
A) people usually are not selfish enough to exploit opportunities to make themselves
better off.
B) markets move toward equilibrium.
C) resources should be used as efficiently as possible to achieve society’s goals.
D) markets usually lead to efficiency.
Figure: Short- and Long-Run Equilibrium
Look at the figure Short- and Long-Run Equilibrium. The government should _____
aggregate demand by _____ taxes to close the _____ gap.
A) expand; increasing; inflationary
B) reduce; cutting; inflationary
C) expand; cutting; recessionary
D) reduce; increasing; recessionary
If the economy is at equilibrium above potential output, there is a(n) _____ gap, and
_____ fiscal policy is appropriate.:
A) recessionary; expansionary
B) inflationary; contractionary
C) recessionary; contractionary
D) inflationary; expansionary
The budget balance equals:
A) taxes plus government spending.
B) taxes minus government spending.
C) consumption plus investment.
D) imports minus exports.
Purchases and sales of short-term Treasury bills by the Fed is called quantitative easing.
A) True
B) False
All other things unchanged, a general decrease in the amount of government borrowing
will typically:
A) have no effect on the demand for loanable funds.
B) increase interest rates.
C) shift the loanable funds demand curve to the left.
D) raise the level of demand for loanable funds.
Jim is being paid $7.25 an hour to work at a restaurant. In the circular flow this is an
example of a:
A) business selling goods and services in the product market.
B) household buying goods and services in the product market.
C) household buying goods and services in the factor market.
D) household selling a resource in the factor market.
If the marginal propensity to save is 0.2, the multiplier is:
A) 0.8.
B) 0.2.
C) 1.25.
D) 5.
A cyclically adjusted budget balance:
A) shows what the budget balance would be with a significant amount of cyclical
unemployment.
B) is an estimate of what the budget balance would be if real GDP were equal to
potential output.
C) is a good indicator of the structural deficit in the economy.
D) is the same as the national debt, and it rises as interest cost is accrued.
Stabilization policies have:
A) not reduced the effects of business cycles caused by either demand shocks or supply
shocks.
B) reduced the economic fluctuations caused by demand shocks but have not been
effective against supply shocks.
C) reduced the economic costs of supply shocks but have not been so successful against
demand shocks.
D) reduced economic fluctuations by neutralizing the effects of both supply and
demand shocks.
Scenario: Japan and the United States
Suppose that the interest rate in the United States is 4%, in Japan it is 7%, and financial
assets in the two countries are equal in risk.
Refer to the scenario Japan and the United States. Assuming that loans in India and the
United States carry equal risk, this implies that:
A) U.S. lenders will lend to borrowers in India.
B) Indian lenders will lend to U.S. borrowers.
C) the interest rate in India will increase further as compared to the U.S. interest rate.
D) the central bank of India has adopted a more expansionary monetary policy.
The infant industry argument for trade protection states that:
A) small, traditional industries such as handicrafts should be protected from foreign
competition or they would not be able to survive.
B) new industries should be protected from foreign competition until they become
established.
C) industries that provide day care for their employees’ children ought to be protected
from foreign competition.
D) industries that produce products essential for the well-being of infants (e.g., the baby
food industry) ought to be protected, since such products are essential for the good
health of future generations.
In Colorado, there has been a drought, and rural communities are fighting with urban
areas over water. This statement best represents this economic concept:
A) Resources are scarce.
B) Resources should be used as efficiently as possible to achieve society’s goals.
C) When markets don’t achieve efficiency, government intervention can improve
society’s welfare.
D) Government policies can change spending.
The aggregate production function exhibits _____ returns to _____ capital.
A) increasing; physical
B) decreasing; physical
C) constant; physical
D) increasing; financial
A change in _____ does NOT shift the money demand curve.
A) the interest rate
B) the price level
C) banking technology
D) real GDP
If interest rates increase, making bonds more attractive, the demand for stock will
_____ and the price of stock will _____.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
A rise in labor productivity will most likely result in:
A) an increase in aggregate demand.
B) a decrease in aggregate demand.
C) a decrease in aggregate supply.
D) an increase in aggregate supply.
The reserve ratio is the fraction of its:
A) deposits that a bank holds as reserves.
B) loans that a bank is required to hold as reserves.
C) loans that a bank holds as reserves.
D) assets that a bank is required to hold as reserves.
Which of the following would NOT cause the supply curve to shift?
A) a change in the technology of production
B) a change in factor costs
C) a change in the price of the good
D) a change in suppliers’ expectations of future prices
The _____ multiplier is equal to _____.
A) reserve; the required reserve ratio
B) bank loan; the required reserve ratio divided by 1
C) money; 1 divided by the required reserve ratio
D) excess reserve; change in reserves divided by the change in deposits
Scenario: Money Creation
The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and
deposits the money in his checking account. The bank does NOT want to hold excess
reserves.
Look at the scenario Money Creation. By how much did the monetary base change?
A) $0
B) $800
C) $1,000
D) $4,000
The monetary base is the sum of:
A) reserves held by the banks and currency in circulation.
B) checkable bank deposits and bank reserves.
C) savings deposits and currency in circulation.
D) checkable bank deposits and currency in circulation.
Producing a short-run level of aggregate output that exceeds the economy’s potential
output results in a(n) _____ adjustment in _____.
A) downward; nominal wages
B) downward; profits per unit of output
C) downward; production costs
D) upward; nominal wages
Exchange market intervention is government trading in the foreign exchange market to
maintain a target exchange rate for its currency.
A) True
B) False
The most painful consequence of a recession is:
A) rising unemployment.
B) increasing inflation.
C) increasing aggregate output.
D) higher interest rates.
Scenario: Growth Rates in Two Countries
India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500,
while the United States is growing at a rate of 3% per year, and its real GDP per capita
is about $47,000.Look at the scenario Growth Rates in Two Countries. About how
much will India’s real GDP per capita be in 20 years?
A) $19,600
B) $56,000
C) $14,000
D) $28,000
If a fixed currency is below its target exchange rate, the government will sell its own
currency in foreign exchange markets.
A) True
B) False
In the circular-flow diagram, government purchases of goods and services are financed
by:
A) tax revenues.
B) tax revenues net of transfer payments.
C) tax revenues net of transfer payments plus government borrowing from financial
markets.
D) tax revenues plus government borrowing from financial markets.