If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent,
and the foreign price level rises 6 percent, the real exchange rate will fall:
A) 0 percent.
B) 8 percent.
C) 10 percent.
D) 12 percent.
Macroeconomists call assets used to make transactions:
A) real income.
B) nominal income.
C) money.
D) consumption.
Loans made to subprime borrowers in the early 2000s had the immediate impact of
______ housing demand and ______ housing prices.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; decreasing
D) decreasing; increasing
A 5 percent reduction in the money supply will, according to most economists, reduce
prices 5 percent:
A) in both the short and long runs.
B) in neither the short nor long run.
C) in the short run but lead to unemployment in the long run.
D) in the long run but lead to unemployment in the short run.
Proponents of restricting the size of financial institutions believe this policy will _____,
while opponents believe this policy will _____.
A) allow firms to take advantage of economies of scale; increase the volatility of the
financial system.
B) reduce the number of financial institutions; give institutions the incentive to take
excessive risks.
C) eliminate the need for deposit insurance; encourage imprudent risk taking
D) make the financial system more stable; lead to higher costs
The relationship between the quantity of goods and services supplied and the price level
is called:
A) aggregate demand.
B) aggregate supply.
C) aggregate investment.
D) aggregate production.
Economist David Laibson suggests that people end up saving less than they wish
because of:
A) an increasing marginal propensity to consume over time.
B) the pull of instant gratification.
C) rarely receiving transitory income.
D) unpredictable changes in consumption.
If an individual should subtract the present value of future tax obligations due to the
government deficit from his or her disposable income, this situation suggests that, in
aggregate analysis, the government deficit should be subtracted from disposable
income. That is, instead of C = a + b(Y ” T), we should use: C = a + b((Y ” T ” (G ” T)),
or = a + b(Y ” G).
a. Using this consumption function and the further relations:
I = I
G = G
T = T
Y = C + I + G
write the equilibrium equation determining Y as a function of a, I, G, and T.
b. If b equals 5, what are the numerical values of the multipliers for I, G, and T,
respectively?
The size of monetary base is determined by:
A) the Federal Reserve.
B) the Federal Reserve and banks.
C) preferences of households about the form of money they wish to hold.
D) business policies of banks and the laws regulating banks.
All of the following are measures of GDP except the total:
A) expenditures of all businesses in the economy.
B) income from all production in the economy.
C) expenditures on all final goods and services produced.
D) value of all final production.
Suppose an economy is initially in a steady state with capital per worker exceeding the
Golden Rule level. If the saving rate falls to a rate consistent with the Golden Rule, then
in the transition to the new steady state, consumption per worker will:
A) always exceed the initial level.
B) first fall below then rise above the initial level.
C) first rise above then fall below the initial level.
D) always be lower than the initial level.
Business cycles are:
A) regular and predictable.
B) irregular but predictable.
C) regular but unpredictable.
D) irregular and unpredictable.
In a time of inflation when the government budget is balanced in the conventional
sense, the real (i.e., deflated) value of the government debt is:
A) growing at the rate of inflation.
B) growing, but at a rate less than the rate of inflation.
C) constant.
D) decreasing at the rate of inflation.
Macroeconomists cannot conduct controlled experiments, such as testing various tax
and expenditure policies, because:
A) it is against the law.
B) they tried it once and it did not work.
C) they must make use of the data history gives them.
D) economists already know the answers that would come out of the experiments.
Starting from a short-run equilibrium greater than the natural rate of output, as the
economy returns to a long-run equilibrium:
A) both output and the price level will increase.
B) output will decrease, but the price level will increase.
C) output will increase, but the price level will decrease.
D) both output and the price level will decrease.
The theory of liquidity preference implies that:
A) as the interest rate rises, the demand for real balances will fall.
B) as the interest rate rises, the demand for real balances will rise.
C) the interest rate will have no effect on the demand for real balances.
D) as the interest rate rises, income will rise.
The inventories as a factor of production motive for holding inventories suggests that:
A) firms hold inventories in order to produce more output.
B) when sales are low, firms produce more than they sell and put the extra goods in
inventories.
C) firms hold inventories to avoid paying wages to labor.
D) when a product is only partly completed, its components are counted as part of the
firm’s inventory.
The TED spread is an indicator of :
A) expected defaults in the mortgage market.
B) expected inflation.
C) worries about the solvency of the banking system.
D) the ease or tightness of monetary policy.
Which of the following is an example of a demand shock?
A) a large oil-price increase
B) the introduction and greater availability of credit cards
C) a drought that destroys agricultural crops
D) unions obtain a substantial wage increase
Financing a budget deficit by ______ leads to inflation, and inflation ______ the real
value of government debt.
A) issuing debt; increases
B) issuing debt; decreases
C) printing money; increases
D) printing money; decreases
The Mundell”Fleming model assumes that:
A) prices are flexible, whereas the IS”LM model assumes that prices are fixed.
B) prices are fixed, whereas the IS”LM model assumes that prices are flexible.
C) as in the IS”LM model, prices are fixed.
D) as in the IS”LM model, prices are flexible.
Starting from the natural level of output, an unexpected monetary contraction will cause
output and the price level to ______ in the short run; and in the long run the expected
price level will ______, causing the level of output to return to the natural level.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
According to purchasing-power parity, if the dollar price of oil is higher in New York
than in London, arbitrageurs will ___ oil in New York and _____ oil in London to drive
_____ the price of oil in New York.
A) buy; sell; up
B) buy; sell; down
C) sell; buy; up
D) sell; buy; down
According to the traditional view of government debt (as in the IS”LM model), if taxes
are cut without cutting government spending, then in the short run interest rates will
______ and investment will ______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
An increase in the demand for money, at any given income level and level of interest
rates, will, within the IS“LM framework, ______ output and ______ interest rates.
A) increase; lower
B) increase; raise
C) lower; lower.
D) lower; raise
In the dynamic model of aggregate demand and aggregate supply, if the central bank
chooses a small value of qp, the responsiveness of nominal interest rates to inflation,
and a large value of qY, the responsiveness of nominal interest rates to output, then the
DAD curve will be relatively _____, and supply shocks will have relatively ____
impacts on inflation than output.
A) flat; larger
B) flat; smaller
C) steep; larger
D) steep; smaller
According to the theory of Ricardian equivalence, if consumers are forward-looking,
they will view a tax cut combined with no plans to reduce government spending as
______, so their consumption will ______.
A) additional disposable income; increase.
B) additional disposable income; remain unchanged.
C) a rescheduling of taxes into the future; increase.
D) a rescheduling of taxes into the future; remain unchanged.
In a closed economy, the components of GDP are:
A) consumption, investment, government purchases, and exports.
B) consumption, investment, government purchases, and net exports.
C) consumption, investment, and government purchases.
D) consumption and investment.
If the money supply is held constant, then an increase in the nominal interest rate will
______ the demand for money and ______ the price level.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
The preponderance of empirical evidence supports the hypothesis that economies that
are open to trade _____ than comparable closed economies.
A) grow more rapidly
B) have lower steady-state levels of income per worker due to foreign competition
C) have faster rates of population growth and technological progress
D) converge more slowly to a steady-state equilibrium
Net exports equal GDP minus domestic spending on:
A) all goods and services.
B) all goods and services plus foreign spending on domestic goods and services.
C) domestic goods and services.
D) domestic goods and services minus foreign spending on domestic goods and
services.
The price of housing relative to the price of other goods is determined in the short run
by the:
A) cost of construction.
B) demand for the services of homes.
C) supply of existing homes.
D) supply and demand for the existing stock of homes.
The Grameen Bank is:
A) the central bank of Bangladesh.
B) a lender of last resort.
C) a lending microfinance institution.
D) a subsidiary of the World Bank.
According to Goldin and Katz, the increasing income inequality of recent decades is the
result of:
A) increases in the rates of technological advance and educational attainment.
B) decreases in the rates of technological advance and educational attainment.
C) a steady pace of technological advance and a slowdown in educational advance.
D) a decrease in the rate of technological advance and an increase in the rate of
educational advance.
Exhibit: Supply Shock
(Exhibit: Supply Shock) Assume that the economy starts at point A and there is a
drought that severely reduces agricultural output in the economy for just one year. In
this situation, point ______ represents the short-run equilibrium immediately following
the drought and point ______ represents the eventual long-run equilibrium.
A) B; C
B) B; A
C) E; D
D) D; A