Figure: The Market for Loanable Funds II
Look at the figure The Market for Loanable Funds II. Other things being equal, if there
is an increase in the interest rate above 8%, _____ quantity of loanable funds will be
demanded.
A) the same
B) a larger
C) a smaller
D) at first a smaller and then a larger
The paradox of thrift highlights:
A) the role of investment in the macroeconomy.
B) how individual decisions to save more may worsen a recession.
C) how an increase in spending occurs during recessions.
D) irrational behavior on the part of households.
An economy is said to have a comparative advantage if it:
A) can produce more of all goods than another economy.
B) can produce less of all goods than another economy.
C) has the highest cost of producing a particular good.
D) has the lowest cost of producing a particular good.
The owner of the Dismal Philosopher, one of five bookstores on College Road, asks
you to make a graph showing each College Road bookstore’s share of all five stores’
book purchases. The best way to show this information is with:
A) a scatter diagram.
B) a pie chart.
C) a time-series graph.
D) an independent graph.
Explain why each of the following transactions would or would not be counted in the
GDP of the United States.
a. American auto producer Ford builds a factory in Canada.
b. You buy a blueberry muffin at your coffee shop.
c. A Ford dealership in Ohio has 15 unsold new cars at the end of 2011.
The Danish krone is a fixed exchange rate currency. If Denmark intervenes in the
foreign exchange market to change the krone from $0.18 to $0.15, the krone has:
A) depreciated.
B) been devalued.
C) appreciated.
D) been revalued.
Figure: International Capital Flows
Look at the figure International Capital Flows. At an interest rate of 4%, the shortage of
loanable funds available to _____ borrowers will be satisfied by _____ lenders.
A) U.S.; British
B) British; U.S.
C) U.S. or British; British or U.S.
D) British; worldwide
Which of the following is an index of 30 leading companies, such as Microsoft,
Walmart, and General Electric?
A) the Dow Jones Industrial Average
B) the producer price index
C) the S&P 500
D) the NASDAQ
Figure: International Capital Flows
Look at the figure International Capital Flows. At an interest rate of 4%, the quantity of
loanable funds supplied by U.S. lenders is _____ the quantity of loanable funds
demanded by U.S. borrowers.
A) greater than
B) less than
C) equal to
D) not related to
During an inflationary gap:
A) the unemployment rate is less than the natural rate of unemployment.
B) actual output is less than potential output.
C) the unemployment rate is equal to the natural rate of unemployment.
D) wages and prices must fall to restore the economy to its potential output.
The concept of the monetary policy rule is based on the assumption that:
A) discretionary fiscal policy crowds out investment spending.
B) the natural rate of unemployment is constant in the long run.
C) monetary policy lags are shorter than fiscal policy lags.
D) the velocity of money is constant in the short run.
Real business cycle theory contends that the:
A) aggregate supply curve is vertical, and it shifts to the left in a recession.
B) aggregate demand curve is vertical, and it is the main factor that causes the business
cycle.
C) aggregate supply curve is horizontal, indicating that business cycles have been
stabilized.
D) aggregate demand curve is downward sloping, which shows that productivity
growth is slowing down, causing the business cycle.
A jobless recovery occurs when GDP is decreasing and unemployment is rising.
A) True
B) False
Firms demand resources in the factor markets.
A) True
B) False
Savings and loans are financial institutions that accept savings and use them to fund
long-term mortgages for home buyers.
A) True
B) False
Securitization is the process of setting up assets by pooling individual loans and selling
shares in the pool.
A) True
B) False
Which of the following contributes to economic development?
A) low saving and investment rates
B) a command socialist economic system
C) investment in infrastructure
D) complete absence of government involvement
A survey reveals that on a small island initially 40 people have jobs, 10 people are not
working but looking for jobs, and 30 people are neither working nor looking for work.
Suppose that 10 of the 30 people who weren’t working or looking for work now begin
looking for work. There are now 20 people without jobs but looking for work and 40
people working. The unemployment rate:
A) rises to 33.3%.
B) rises to 50%.
C) falls to 25%.
D) Nothing happens to the unemployment rate, because these people weren’t working
before and they aren’t working now.
A negative externality is a good or a service that the government or a private business
provides to a foreign country.
A) True
B) False
Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in
your checking account:
A) M1 increases by $50.
B) M2 increases by $50.
C) M1 and M2 both increase by $50.
D) there is no change in M1 or M2.
Figure: Sugar and Freight Trains
Look at the figure Sugar and Freight Trains. Suppose the economy is operating at point
B. The opportunity cost of producing the third freight train would be _____ tons of
sugar.
A) 6
B) 19
C) 45
D) 80
Per capita economic growth is:
A) growth per unit of capital.
B) growth per person.
C) always accelerated during a business cycle.
D) a sustained increase in interest rates.
The tool of monetary policy with which the Federal Reserve buys and sells government
bonds is called:
A) moral suasion.
B) reserve requirements.
C) the discount rate.
D) open-market operations.
Figure: Classical Model of the Price Level
Look at the figure Classical Model of the Price Level. If the central bank increases the
money supply such that aggregate demand shifts from AD1 to AD2, according to this
classical model, the equilibrium point will:
A) not change.
B) immediately move from E1 to E2.
C) immediately move from E2 to E1.
D) immediately move from E1 to E3.
Table: Pizza Economy III
Look at the table Pizza Economy III. Considering 2010 as the base year, real GDP
between 2010 and 2011 grew at a rate of:
A) 53.19%.
B) 39.47%.
C) “39.47%.
D) “58.67%.
Look at the table Population Data for Estill County. If marginally attached workers are
included in the labor force and in the unemployment rate, the unemployment rate in this
economy is:
A) 10.6%.
B) 15.4%.
C) 23.1%.
D) 33.2%.
The short run in macroeconomic analysis is a period:
A) in which many production costs can be taken as fixed.
B) in which wages become fully flexible.
C) of two months, and the long run is more than 12 months.
D) in which interest rates are fixed.
Capital requirements for banks serve all of the following purposes EXCEPT:
A) to reduce a bank owner’s incentive for excessive risk taking.
B) to offset the change in incentives caused by deposit insurance.
C) to put to use the excess of a bank’s assets over its deposits and other liabilities.
D) to reduce deposits.
An hypothesis that individuals base their expectations on available information and act
on that information is called the:
A) irrational forecasts hypothesis.
B) rational information theory hypothesis.
C) rational expectations hypothesis.
D) rational abstention hypothesis.
As the opportunity cost of holding money changes from 5% to 3%, the quantity of
money demanded increases.
A) True
B) False
Figure: Circular-Flow Model
Look at the figure Circular-Flow Model. If the circular-flow model is in equilibrium
(the sum of money flowing into each box is equal to the sum of the money flowing out
of it) and there is a decrease in exports, which of the following is likely to happen?
A) a decrease in the nominal GDP
B) an increase in the real GDP
C) a decrease in the unemployment rate
D) an increase in the inflation rate
In the absence of minimum wages, efficiency wages, or labor unions, a decline in the
demand for labor will likely result in _____ if wages are flexible.
A) higher levels of employment
B) no changes in employment
C) a lower level of employment but likely no change in the unemployment rate
D) a lower level of employment and a higher unemployment rate
At various times, the nations that constitute the Organization of Petroleum Exporting
Countries (OPEC) have restricted the supply of oil to increase their profits. This is an
example of:
A) individual actions whose side effects are not properly taken into account by the
market.
B) one party preventing mutually beneficial trades in an attempt to capture a greater
share of resources for itself.
C) the unsuitability of some goods for efficient management by markets.
D) regulating self-interest.
How would each of the following events affect the demand for new textbooks?
I. The price of a used textbook rises.
II. The price of college tuition rises.
III. More high school graduates decide to attend college.
Explain the role of the housing market in the 2008 financial crisis.
Suppose the federal government has a balanced budget, the economy is open, and there
is a positive capital inflow from foreign citizens. Using the savings”investment
spending identity, explain how this affects investment spending.
The economy is under inflationary pressure. The head of the President’s Council of
Economic Advisers is a staunch Keynesian. What will this Keynesian recommend or
not recommend? Explain.
Explain what is meant by money neutrality. Use an example of expansionary monetary
policy, both in the short run and the long run.
Explain how an increase in the discount rate affects the economy.
Suppose the economy is initially in long-run equilibrium and there is a negative demand
shock. Describe the short-run effects of this demand shock and how the economy will
adjust in the long run.
How can autonomous consumption be greater than zero when disposable income equals
zero?
The economy is in a recession and Congress passes legislation to reduce income taxes.
Tom, seeing an increase in his take-home pay, goes to Best Buy and purchases a new
television. Why is the tax cut a macroeconomic issue, while Tom’s new TV is a
microeconomic issue?
What are the advantages and disadvantages of fixed and floating exchange rates?
Figure: Nations A and B
Look at the figure Nations A and B. Suppose that in 1960 each nation had $100 of
physical capital for each worker and in 2010 each nation had $400 of physical capital
per worker. Clearly in both 1960 and in 2010 nation A was producing more real output
per capita with the same amount of physical capital per worker. What could explain the
difference in these aggregate production functions?
Minimum wages and efficiency wages are both above the equilibrium market wage.
Briefly describe each type of wage. Do they have similar results in the labor market?
Look at the table Muffin Price Index. A college town has many small coffee shops, and
they all sell muffins. As an economics project you have been assigned to compile a
muffin price index (MPI). The base year is 2009. Use these data to compute the MPI for
each year.
Explain the difference between automatic stabilizers and discretionary fiscal policy
measures. Provide examples to clarify the distinctions.
Ted is looking to borrow money from a bank. He is told that the nominal rate is 8%;
that includes expected inflation of 5% and a real interest rate of 3%. If there is
unexpectedly high inflation over the term of this loan, will Ted be hurt or will the bank
be hurt? Explain your answer.
Suppose that fossil fuels become scarcer and scarcer in the next 50 years. With a
growing global demand for energy and the looming threat of rising global temperatures,
it would seem to be a recipe for a dramatic decrease in the growth rate of economic
activity. Why do many economists believe that economies can continue to grow even in
the face of resource scarcity?
Suppose that the inflation rate is 2.5%. The unemployment gap is 2%. Use the Taylor
rule to estimate the target Federal funds rate.
Briefly explain the four main elements of the Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act).
Suppose the annual inflation rate is at 2% and 8.5% of the labor force is unemployed. If
you were on the Federal Open Market Committee, what action would you prescribe?
How would this affect the economy, the inflation rate, and the unemployment rate?
In the Midwestern United States, the price of an ear of corn is always lowest in the
summer. This seems odd, because consumers really enjoy eating ears of corn in the
summer. Can you explain this?