Scenario: A Small Economy
Suppose there is no trade and no government in a small economy. GDP is $25 trillion,
and consumption spending is $18 trillion this year.
Look at the scenario A Small Economy. There is a new government, and it imposes
taxes on its citizens to spend on infrastructure. Taxes and government spending are both
$2 trillion. What is the level of private saving now?
A) $11 trillion
B) $7 trillion
C) $5 trillion
D) $18 trillion
Figure: Change in the Demand for U.S. Dollars
Look at the figure Change in the Demand for U.S. Dollars. A movement from E2 to E1
in this foreign exchange market would cause Americans to purchase _____ goods and
services from Europe.
A) the same amount of
B) less
C) more
D) The answer cannot be determined from the information provided.
An increase in the supply of money will lead to a(n) _____ in equilibrium real GDP and
a _____ equilibrium interest rate.
A) increase; higher
B) increase; lower
C) decrease; higher
D) decrease; lower
According to the Great Moderation consensus today, an unemployment rate of 6%
when the natural rate is 4.5% should be countered by:
A) decreases in government spending.
B) increases in tax rates.
C) increases in the rate of growth of the money supply.
D) decreases in the rate of growth of the money supply.
When actual output is above potential output over time:
A) nominal wages will increase, and the short-run supply curve will shift to the right.
B) nominal wages will increase, and the short-run supply curve will shift to the left.
C) the aggregate demand curve will shift to the right.
D) the short-run aggregate supply curve will shift to the right.
Which of the following is a function of the Federal Reserve System?
I. collecting corporate income tax
II. setting personal income tax rates
III. holding bank reserves
A) I only
B) II only
C) III only
D) I, II, and III
Which of the following years is often described as the worst year of the Great
Depression?
A) 1913
B) 1933
C) 1953
D) 1973
Scenario: Productivity
The economy has grown by 4% per year over the past 30 years. During the same period
the labor force has grown by 1% per year and the quantity of physical capital has grown
by 5% per year. Each 1% increase in physical capital per worker is estimated to
increase productivity by 0.4%. Assume that human capital has not changed during the
past 30 years.Look at the scenario Productivity. How fast has physical capital per
worker grown?
A) 5%
B) 4%
C) 3%
D) 2%
Figure: The Market for Computers
Look at the figure The Market for Computers. Assume that PAis the autarky price
andPWis the world price. Consumer surplus with international trade is area:
A) W+ X+ Y.
B) W.
C) Y.
D) W+ X.
Sticky wages and prices occur:
A) in the long run.
B) in the short run.
C) in both the short and long run.
D) only when the economy is operating above its potential real GDP.
Because the aggregate price level has no effect on aggregate output in the long run, the
long-run aggregate supply curve is:
A) upward sloping.
B) vertical.
C) horizontal.
D) downward sloping.
The introduction of ATMs reduced the:
A) menu costs of inflation.
B) shoe-leather costs of inflation.
C) unit-of-account costs of inflation.
D) seignorage.
If suppliers expect prices for their product to rise next year, then one would expect:
A) a shift in the demand curve for the product this year.
B) a decrease in the quantity demanded this year.
C) a shift to the left in the supply curve for the product this year.
D) a shift to the right in the supply curve for the product this year.
According to the theory of rational expectations, individuals will respond to
expansionary monetary policy by predicting:
A) a lower rate of inflation.
B) a higher rate of inflation.
C) no change in the rate of inflation.
D) incorrectly what will happen to the price level and employment.
The Wall Street Reform and Consumer Protection Act, or Dodd-Frank:
A) decreases regulation of commercial banks and investment banks.
B) subjects ‘systemically important” institutions to high capital requirements and limits
the risks they can take.
C) requires all banks to become members of the Federal Reserve.
D) makes securitization illegal.
For which of the following decisions would marginal analysis be MOST relevant?
A) Should I invest all of my savings in real estate or should I keep it all in a savings
account?
B) After I graduate from college, should I go to graduate school or should I get a job?
C) After meeting my basic needs, how should I allocate the remainder of my monthly
budget?
D) Should I keep a pet?
The inclusion of a tax rate in the model results in a new multiplier that is:
A) larger than the original multiplier.
B) the same as the original multiplier if the economy is in a recession.
C) smaller than the original multiplier.
D) not affected by automatic stabilizers.
Which of the following financial assets belongs to M2 but not to M1?
A) a savings account
B) a checkable deposit
C) currency
D) traveler’s checks
An increase in the value of GDP over time:
A) is always due to an increase in prices.
B) is always due to an increase in the production of goods and services.
C) may be due to an increase in prices, in the production of goods and services, or both.
D) may be due to a decrease in prices, in the production of goods and services, or both.
If crowding out occurs:
A) increases in consumption are offset by decreases in government spending.
B) increases in the money supply are offset by dollar outflows in foreign trade.
C) increases in government spending cause higher interest rates and decreased
investment spending.
D) decreases in government spending cause lower interest rates and decreased
investment spending.
Banks are financial intermediaries that:
A) have customer deposits as the primary asset and loans to borrowers as the primary
liability.
B) provide liquid assets to lenders and long-term financing to borrowers.
C) are types of mutual funds.
D) have customer deposits as the primary asset and that provide liquid assets to lenders.
The Arcadia Entertainment Co. produced 20,000 DVDs of the movie Thor in 2011.
Only 4,000 copies remained unsold at the end of 2011. As a result:
A) only 16,000 DVDs should be included in GDP in 2011 as consumption expenditure.
B) all 20,000 DVDs will be included in GDP in 2011, 16,000 as consumption
expenditure and 4,000 as investment expenditure
C) only 16,000 DVDs are included in GDP of 2011; the remaining 4,000 are counted in
GDP of 2012.
D) all 20,000 DVDs are initially counted in 2011 GDP as consumption expenditure, but
they will be subtracted and added to 2012 GDP as the merchandise gets sold.
Which of the following principles underlies the gains from trade?
A) Resources are scarce.
B) Marginal analysis is used for “how much” decisions.
C) Resources should be used as efficiently as possible to achieve society’s goals.
D) People usually exploit opportunities to make themselves better off.
If the currency in circulation is $100 million, checkable bank deposits are $500, savings
deposits are $300 million, and traveler’s checks are $10 million, then M1 is:
A) $100 million.
B) $410 million.
C) $610 million.
D) $900 million.
The euro was devised in 1944.
A) True
B) False
Scenario: Exchange Rate between the United States and India
Suppose that initially the nominal exchange rate was 40 rupees per dollar but it is now
50 rupees per dollar.
Look at the scenario Exchange Rate between the United States and India. If the nominal
exchange rate is 50 rupees per dollar and the inflation rate in India is 25%, while the
aggregate price level has remained unchanged in the United States, the real exchange
rate between the U.S. dollar and the Indian rupee:
A) remains unchanged at 40.
B) remains unchanged at 50.
C) increases from 40 to 50.
D) increases by more than 25%.
According to the convergence hypothesis, differences in GDP per capita among
countries tends to narrow over time because countries that start with a _____ real GDP
per capita tend to have _____ growth rates.
A) lower; higher
B) lower; lower
C) higher; higher
D) higher; negative
Donna was laid off at the beginning of 2011. She looked for a job for three months but
could not find anything suitable. She then decided to volunteer for a soup kitchen and
stopped looking for a job. Donna is considered to be:
A) unemployed.
B) underemployed.
C) a discouraged worker.
D) a part-time worker.
A normative statement deals with:
A) the facts.
B) what was, is, or will be.
C) what ought to be.
D) the scientific method.
As a result of a downturn in the economy, a firm cuts back on workers’ hours but does
not fire workers. Following Okun’s law, this is one reason:
A) the relationship between the output gap and the unemployment rate is positive.
B) the relationship between the output gap and the unemployment is negative and less
than a one-to-one relationship.
C) a negative output gap is associated with an unusually low unemployment rate.
D) a positive output gap is associated with an unusually high unemployment rate.
Which of the following is a LIKELY response to inflation?
A) People choose to carry higher money balances.
B) People tend to make fewer transactions.
C) People tend to make more transactions.
D) People tend to hold on to fewer interest-bearing assets.