Which of the following sequence of events would follow an open market purchase of
bonds?
A) interest rate investment aggregate demand real GDP
B) interest rate investment aggregate demand real GDP
C) interest rate investment aggregate demand real GDP
D) interest rate investment aggregate demand real GDP
When the Fed conducts open market operations, the Fed buys and sells government
securities to:
A) the private sector.
B) foreign countries only.
C) state and local government agencies only.
D) the U.S. Treasury.
Automatic stabilizers dampen economic fluctuations during recessions because
________ decrease while ________ increase.
A) unemployment rates; inflation rates
B) tax payments; tax revenues
C) tax revenues; tax payments
D) tax payments; transfer payments
The Clinton administration inherited a budget deficit from its predecessor. President
Clinton instituted major tax increases that
A) increased the budget deficit during his entire term.
B) brought the budget into balance and eventually into a surplus.
C) reduced the budget deficit but increased the federal debt.
D) reduced the size of the deficit but could not eliminate it.
In an aggregate supply and aggregate demand diagram, the short-run aggregate supply
curve is represented by
A) a downward sloping line relating prices and output.
B) a steeply upward sloping line relating prices and output.
C) an upward sloping but relatively flat line.
D) a vertical line at full employment.
As a result of the deflation experienced by Japan in the 1990s:
A) many borrowers including large corporations defaulted on their debts.
B) the Japanese government defaulted on their debts.
C) banks made lots of profits from their loans.
D) the U.S. government borrowed more from the Chinese government.
If a power plant that pollutes the air produces $10 million in electricity. It the pollution
causes a decline of $100 million to the value of the air we breathe, then this activity will
cause a(n) ________ in real GDP and a(n) ________ in social welfare.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
According to this Application, the volatility of energy prices can contribute to
uncertainty in the economy. An increasingly uncertain future will tend to cause firms to
A) delay their investment decisions.
B) wait for significant GDP growth before reducing investments.
C) rely on the government to make their investment decisions for them.
D) continue with a stable flow of investment spending so as not to get trapped by a
downturning economy.
If the banking system has a required reserve ratio of 25 percent, then the money
multiplier is
A) 2.
B) 4.
C) 5.
D) 10.
Suppose the economy is at full employment. An increase in the money supply will
________ in the short run and ________ in the long run.
A) decrease interest rates, increase the price level
B) decrease interest rates, decrease the price level
C) increase interest rates, increase the price level
D) increase interest rate, have no effect on the price level
Suppose there are three economies with 3 different consumption functions:
Country A: C = 100 + 0.8Y
Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y In which of these countries is the multiplier the largest?
A) Country B
B) Country A
C) Country C
D) All countries have the same multipliers.
Taxes are reduced by $50 billion and income increases by $1,000 billion. The value of
the tax multiplier is:
A) -4.
B) -20.
C) -10.
D) -5.
A market exchange rate which has been adjusted for inflation is called a
A) foreign market price index.
B) real exchange rate.
C) domestic exchange factor.
D) nominal exchange rate.
Suppose the required reserve ratio is 20%. A $5 million deposit allows commercial
banks to create a maximum total of ________ in deposits.
A) $25 million
B) $20 million
C) $10 million
D) $50 million
Recall Application 3, “Can Labor Market Policies Account for the Great Depression,” to
answer the following questions:
According to the application, what was observed during the Great Depression that
contradicts the basic real business cycles?
A) Real wages increased during the Great Depression, but the basic real business cycle
models predicted it to decline.
B) Real wages decreased during the Great Depression, but the basic real business cycle
models predicted it to increase.
C) Unemployment rates decreased during the great depression, but the basic real
business cycle models predicted it to increase.
D) Gold prices decreased during the great depression, but the basic real business cycle
models predicted it to increase.
Suppose that the quantity of cars supplied exceeds the quantity of cars demanded. We
would expect that
A) the price of cars will increase.
B) the price of cars will decrease.
C) the supply will increase (supply will shift to the right) to meet the demand.
D) the demand will decrease (demand will shift to the left) to meet the supply.
The marginal propensity to import (mpi), where M = imports, is defined as
A) M * Y.
B) M * Y.
C) M – Y.
D) M/Y.