The inventories of a company that manufactures snow blowers increase in the summer
and decline in the winter. This example is most consistent with which of the following
explanations for holding inventories?
A) production smoothing
B) inventories as factors of production
C) stock-out avoidance
D) work in process
Credit cards:
A) are part of the M1 money supply.
B) are part of the M2 money supply.
C) are part of both the M1 and M2 money supply.
D) do not affect the money supply.
Analysis of the short and long runs indicates that the ______ assumptions are most
appropriate in ______.
A) classical; both the short and long runs.
B) Keynesian; both the short and long runs.
C) classical; the short run, whereas the Keynesian assumptions are most appropriate in
the long run.
D) Keynesian; the short run, whereas the classical assumptions are most appropriate in
the long run.
Use the model developed in Chapter 3 and assume that consumption does not depend
on the interest rate. In this case, when there is a technological advance that leads to an
increase in investment demand:
A) investment increases and the interest rate rises.
B) investment is unchanged and the interest rate rises.
C) investment and the interest rate are both unchanged.
D) investment increases and the interest rate falls.
The ex post real interest rate will be greater than the ex ante real interest rate when the:
A) rate of inflation is increasing.
B) rate of inflation is decreasing.
C) actual rate of inflation is greater than the expected rate of inflation.
D) actual rate of inflation is less than the expected rate of inflation.
Match the formula in List A with its title in List B.
List A List B
a. C = 5 + 0.8Y 1.LM function
b. I = 60 ” 6i 2.IS function
c. 3y– 20i-160=0 3. Consumption function
d. 3y +20i-160=0 4. Investment function
A woman marries her butler. Before they were married, she paid him $60,000 per year.
He continues to wait on her as before (but as a husband rather than as a wage earner).
She earns $1,000,000 per year both before and after her marriage. If GDP were changed
so that it truly measured the sum of all final economic activity, the marriage would:
A) decrease GDP.
B) increase GDP.
C) leave GDP unchanged.
D) first decrease and then increase GDP.
According to the definition used by the U.S. Bureau of Labor Statistics, a person is not
in the labor force if that person:
A) is going to school full time.
B) is temporarily absent from a job because of illness.
C) has been temporarily laid off.
D) is out of a job and looking for work during the previous four weeks.
If wage rigidity holds the real wage above the equilibrium level, an increase in the
supply of labor will ______ the number unemployed.
A) increase
B) decrease
C) not change
D) possibly increase, decrease, or leave unchanged
An increase in government spending generally shifts the IS curve, drawn with income
along the horizontal axis and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.
John Maynard Keynes believed that:
A) consumers would save more if the interest rate was high.
B) consumers would consume more if the interest rate was high.
C) if consumers consume less, the interest rate will be high.
D) the interest rate is relatively unimportant to the consumption decision.
In the Solow growth model, with a given production function, depreciation rate, saving
rate, and no technological change, lower rates of population growth produce:
A) lower steady-state ratios of capital per worker.
B) lower steady-state growth rates of output per worker.
C) lower steady-state growth rates of total output.
D) lower steady-state levels of output per worker.
The Solow residual equals the percentage change in output:
A) plus the percentage changes in factor inputs weighted by each factor’s share of
output.
B) minus the percentage changes in prices of factor inputs.
C) minus the percentage changes in factor inputs weighted by each factor’s share of
output.
D) plus the percentage changes in each factor’s share of output.
The monetary policy rule specified in the dynamic model of aggregate demand and
aggregate supply indicates that the central bank adjusts interest rates in response to
fluctuations in:
A) inflation expectations.
B) money supply and money demand.
C) inflation and output.
D) nominal and real exchange rates.
If the capital stock is fixed and something happens to raise the marginal product of
capital (MPK) for any given quantity of capital, then the real rental price of capital will:
A) remain the same.
B) rise.
C) fall.
D) fall and then rise.
Crowding out occurs when an increase in government spending ______ the interest rate
and investment ______.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
In the IS“LM model when the Federal Reserve decreases the money supply, people
______ bonds and the interest rate ______, leading to a(n) ______ in investment and
income.
A) buy; rises; increase
B) sell; falls; decrease
C) sell; rises; decrease
D) buy; rises; decrease
Assume that the production function is Cobb”Douglas with parameter a = 0.3. In the
neoclassical model, if the labor force increases by 10 percent, then output:
A) increases by about 10 percent.
B) increases by about 7 percent.
C) increases by about 3 percent.
D) does not increase since the new workers are unemployed.
In the Keynesian-cross model, actual expenditures equal:
A) GDP.
B) the money supply.
C) the supply of real balances.
D) unplanned inventory investment.
Consider the money demand function that takes the form (M/P)d= kY, where M is the
quantity of money, P is the price level, k is a constant, and Y is real output. If the money
supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is
constant, what is the average inflation rate in this economy?
A) 3 percent
B) 7 percent
C) 10 percent
D) 13 percent
The Keynesian cross shows:
A) determination of equilibrium income and the interest rate in the short run.
B) determination of equilibrium income and the interest rate in the long run.
C) equality of planned expenditure and income in the short run.
D) equality of planned expenditure and income in the long run.
In the IS“LM analysis, the increase in income resulting from a tax cut is usually ______
the increase in income resulting from an equal rise in government spending.
A) less than
B) greater than
C) equal to
D) sometimes less and sometimes greater than
A measure of the expected rate of inflation can be found by the:
A) yield on nominal bonds plus the yield on index bonds.
B) yield on nominal bonds minus the yield on index bonds.
C) observed rate of inflation minus the yield on real bonds.
D) observed rate of inflation minus the yield on nominal bonds.
A credit crunch reduces aggregate demand by:
A) increasing the exchange rate.
B) increasing interest rates.
C) reducing consumption and investment spending.
D) reducing the money supply.
Provide one argument in favor of and one argument against each of the following
proposals to prevent future financial crises.
a. require shadow banks to hold more capital,
b. give the FDIC resolution authority over shadow banks,
c. impose higher capital requirements on larger banks,
d. prohibit banks from making speculative investments.
The opportunity cost of holding inventories is the:
A) real interest rate.
B) nominal interest rate.
C) raw materials used up in the production of inventories.
D) labor used in the production of inventories.
Consider a closed economy to which the Keynesian-cross analysis applies.
Consumption is given by the equation C = 200 + 2/3(Y ” T). Planned investment is 300,
as are government spending and taxes.
a. If Y is 1,500, what is planned spending? What is inventory accumulation or
decumulation? Should equilibrium Y be higher or lower than 1,500?
b. What is equilibrium Y? (Hint: Substitute the values of equations for planned
consumption, investment, and government spending into the equation Y = C + I + G and
then solve for Y.)
c. What are equilibrium consumption, private saving, public saving, and national
saving?
d. How much does equilibrium income decrease when G is reduced to 200? What is the
multiplier for government spending?
Public policies in the United States designed to stimulate technological progress do not
include:
A) tax breaks to encourage homeownership.
B) the temporary monopoly granted by the patent system.
C) tax breaks for research and development.
D) subsidies given by the National Science Foundation.
If a short-run equilibrium occurs at a level of output above the natural rate, then in the
transition to the long run prices will ______ and output will ______.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
In Irving Fisher’s two-period consumption model, if Y1 = 20,000, Y2 = 15,000, and the
interest rate r is 0.50 (50 percent), then the maximum possible consumption in period
two is:
A) 15,000.
B) 25,000.
C) 35,000.
D) 45,000.
Indexed bonds produce all of the following benefits except:
A) less inflation risk.
B) more financial innovation.
C) better government incentives.
D) lower rates of inflation.
Discouraged workers are counted as:
A) part of the labor force.
B) out of the labor force.
C) employed.
D) unemployed.