Suppose that the country of Aquilonia has an inflation rate of about 5 percent per year
and a real growth rate of about 5 percent per year. Suppose also that it has nominal GDP
of about 200 billion units of currency and current nominal national debt of 150 billion
units of domestic currency. Which of the following government spending and taxation
figures will not raise the debt-to-income ratio?
a. government spending equal to 50 billion units and tax collections equal to 76 billion
units
b. government spending equal to 50 billion units and tax collections equal to 14 billion
units
c. government spending equal to 50 billion units and tax collections equal to 10 billion
units
d. government spending equal to 50 billion units and tax collections equal to 8 billion
units
Using separate graphs, demonstrate what happens to the money supply, money demand,
the value of money, and the price level if:
a. the Fed increases the money supply.
b. people decide to demand less money at each value of money.
Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After
Elwood repaid the loan in full, Jake complained that he could buy 4 percent fewer
goods with the money Elwood gave him than he could before he loaned Elwood the
$5,000. From this, we can conclude that the rate of inflation during the year was
a. -4 percent.
b. 4 percent.
c. 6 percent.
d. 14 percent.
Marcus puts a greater proportion of his portfolio into government bonds. Marcus’s
action
a. increases both risk and the average rate of return.
b. decreases both risk and the average rate of return.
c. increases risk, but decreases the average rate of return.
d. decreases risk, but increases the average rate of return.
Which of the following shifts aggregate demand to the right?
a. The price level rises.
b. The price level falls.
c. The money supply falls.
d. None of the above is correct.
Relative-price variability
a. rises with inflation, leading to an improved allocation of resources.
b. rises with inflation, leading to a misallocation of resources.
c. falls with inflation, leading to an improved allocation of resources.
d. falls with inflation, leading to a misallocation of resources.
If nominal GDP doubles and the GDP deflator doubles, then real GDP
a. remains constant.
b. doubles.
c. triples.
d. quadruples.
Assuming the market for loanable funds is in equilibrium, use the following numbers to
determine the quantity of loanable funds supplied.
GDP $8.7 trillion
Consumption Spending $3.2 trillion
Taxes Net of Transfers $2.7 trillion
Government Purchases $3.0 trillion
a. $2.2 trillion
b. $2.5 trillion
c. $3.9 trillion
d. $5.2 trillion
Optimism
Imagine that the economy is in long-run equilibrium. Then, perhaps because of
improved international relations and increased confidence in policy makers, people
become more optimistic about the future and stay this way for some time.
Refer to Optimism. In the long run, the change in price expectations created by
optimism shifts
a. long-run aggregate supply right.
b. long-run aggregate supply left.
c. short-run aggregate supply right.
d. short-run aggregate supply left.
From 2006 to 2008 there was a dramatic fall in the price of houses. If this fall made
people feel less wealthy, then it would have shifted
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
Other things the same, which of the following would both make foreigners more willing
to engage in U.S. portfolio investment?
a. U.S. interest rates rise, the default risk of U.S. assets rise
b. U.S. interest rates rise, the default risk of U.S. assets fall
c. U.S. interest rates fall, the default risk of U.S. assets rise
d. U.S. interest rates fall, the default risk of U.S. assets fall
Figure 9-18. On the diagram below, Q represents the quantity of peaches and P
represents the price of peaches. The domestic country is Isoland.
Refer to Figure 9-18. Suppose Isoland changes from a no-trade policy to a policy that
allows international trade. If the world price of peaches is $5, then the policy change
results in
a. a decrease in consumer surplus.
b. an increase in producer surplus.
c. an increase in total surplus.
d. All of the above are correct.
If firms were faced with greater uncertainty because of concern that oil prices might
rise, they might decrease expenditures on capital. In response to this change, someone
who advocated “lean against the wind” policies might advocate
a. decreasing the money supply.
b. increasing taxes.
c. increasing government expenditures.
d. decreasing government expenditures.
Dakota rearranges her portfolio so that it has a higher average return. In doing this
rearranging, she
a. raised both firm-specific risk and market risk.
b. raised firm-specific risk, but not market risk.
c. raised market risk, but not firm-specific risk.
d. None of the above is correct.
The production possibilities frontier is a graph that shows the various combinations of
output that an economy can possibly produce given the available factors of production
and
a. society’s preferences.
b. the available production technology.
c. a fair distribution of the output.
d. the available demand for the output.
Three people go to the bank to cash in their accounts. Amy had her money in an
account for 25 years at 4 percent interest. Bill had his money in an account for 20 years
at 5 percent interest. Celia had her money in an account for 5 years at 20 percent
interest. If each of them originally deposited $500 in their accounts, which of them gets
the most money when they cash in their accounts?
a. Amy
b. Bill
c. Celia
d. They each get the same amount.
Liquidity preference theory is most relevant to the
a. short run and supposes that the price level adjusts to bring money supply and money
demand into balance.
b. short run and supposes that the interest rate adjusts to bring money supply and money
demand into balance.
c. long run and supposes that the price level adjusts to bring money supply and money
demand into balance.
d. long run and supposes that the interest rate adjusts to bring money supply and money
demand into balance.
Which of the following is correct?
a. The classical dichotomy separates real and nominal variables.
b. Monetary neutrality is the proposition that changes in the money supply do not
change real variables.
c. When studying long-run changes in the economy, the neutrality of money offers a
good description of how the world works.
d. All of the above are correct.
For the U.S. economy, which of the following is the most important reason for the
downward slope of the aggregate-demand curve?
a. the wealth effect
b. the interest-rate effect
c. the exchange-rate effect
d. the real-wage effect
The six debates over macroeconomic policy exist mostly because
a. economists disagree over basic issues such as the importance of saving for economic
growth.
b. there are tradeoffs and people disagree about the best way to deal with them.
c. politicians offer misleading information.
d. people fail to clearly see the benefits or the costs of most changes.
If the multiplier is 6.25, then the MPC is
a. 0.2.
b. 0.6.
c. 0.75.
d. 0.84.
The real interest rate tells you
a. how fast the number of dollars in your bank account rises over time.
b. how fast the purchasing power of your bank account rises over time.
c. the number of dollars in your bank account today.
d. the purchasing power of your bank account today.
When the price level increases, the real value of people’s money holdings
a. falls, so they buy more.
b. falls, so they buy less.
c. rises, so they buy more.
d. rises, so they buy less.
Figure 2-4
Refer to Figure 2-4. The opportunity cost of obtaining 20 additional lamps by moving
from point W to point V is
a. 0 notepads.
b. 10 notepads.
c. 50 notepads.
d. None of the above; the economy cannot move from point W to point V.
According to the doctrine of purchasing-power parity, which of the following should
depreciate if over the next year the inflation rate is higher in the U.S. than in the Euro
area?
a. both the U.S. real exchange rate and the U.S. nominal exchange rate
b. the U.S. real exchange rate, but not the U.S. nominal exchange rate
c. the U.S. nominal exchange rate, but not the U.S. real exchange rate
d. neither the U.S. nominal exchange rate nor the U.S. real exchange rate
President Ronald Reagan once joked that a Trivial Pursuit game designed for
economists would
a. have no questions but hundreds of answers.
b. have 100 questions and 3,000 answers.
c. have 1,000 questions but no answers.
d. never produce a winner.
A company that produces golf clubs is considering buying some new equipment that it
expects will increase future profits. If the interest rate falls the present value of these
future earnings
a. rises. The company is more likely to buy the equipment.
b. rises. The company is less likely to buy the equipment.
c. falls. The company is more likely to buy the equipment.
d. falls. The company is less likely to buy the equipment.
Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 1,500,
consumption equals 7,500, and government purchases equal 2,000. What is national
saving?
a. -500
b. 0
c. 2,000
d. None of the above is correct.
According to the liquidity preference theory, an increase in the overall price level of 10
percent
a. increases the equilibrium interest rate, which in turn decreases the quantity of goods
and services demanded.
b. decreases the equilibrium interest rate, which in turn increases the quantity of goods
and services demanded.
c. increases the quantity of money supplied by 10 percent, leaving the interest rate and
the quantity of goods and services demanded unchanged.
d. decreases the quantity of money demanded by 10 percent, leaving the interest rate
and the quantity of goods and services demanded unchanged.
A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800
euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods
costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has
purchasing-power parity with the U.S.?
a. both
b. Belgium but not Japan
c. Japan but not Belgium
d. neither Belgium nor Japan
Which of the following is not correct?
a. Market power can cause markets to be inefficient.
b. When the decisions of buyers and sellers affect nonparticipants, markets may be
inefficient.
c. The tools of welfare economics cannot help economists when markets are inefficient.
d. Externalities can cause markets to be inefficient.