Adam believes that in the long run all prices are flexible and that any increase in the
money supply will lead only to inflation, not to an increase in aggregate output.
Because the economy would self-correct to long-run equilibrium output, there is no role
for either fiscal or monetary policy. Adam is best described as a:
A) supply-sider.
B) Keynesian.
C) classical economist.
D) monetarist.
Classical macroeconomics was based largely on the foundation of:
A) flexible wages and prices.
B) persistent unemployment.
C) government intervention in the market.
D) Adam Smith’s model of imperfectly competitive markets.
Toyota’s factory in San Antonio is an example of direct foreign investment.
A) True
B) False
Figure: Short-Run Phillips Curve
Look at the figure Short-Run Phillips Curve. The natural rate of unemployment is:
A) 3%.
B) 5%.
C) 7%.
D) 8%.
Because of the opportunity cost, if the United States spends $87 billion in the rebuilding
of Iraq, it has to forgo the opportunity to spend $87 billion on some other program.
A) True
B) False
Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation C= 200 +
0.8YD, where Crepresents consumption and YDrepresents disposable income.
Look at the scenario Aggregate Consumption Equation. If housing prices throughout
the United States decrease rapidly because of an increase in mortgage foreclosures,
which of the following equations could represent the new aggregate consumption
function?
A) C= 100 + 0.8YD
B) C= 250 + 0.8YD
C) C= 200 + 0.9YD
D) C= 200 + 0.7YD
The savings”investment spending identity says that savings and investment spending
are always equal for the economy as a whole.
A) True
B) False
Figure: Shift of the Aggregate Demand Curve
Look at the figure Shift of the Aggregate Demand Curve. An increase in aggregate
demand is illustrated by a movement from:
A) AD1 to AD2.
B) point C to point A.
C) point B to point A.
D) point C to point E.
Table: Wages and Hours Willing to Work
Look at the table Wages and Hours Willing to Work, which shows data on wage per
hour and the number of hours someone is willing to work. Which variable would
economists put on the vertical axis?
A) Either variable
B) the wage, because even though it is the independent variable, it is a price
C) hours willing to work, because it is the dependent variable
D) neither variable
The Great Depression was caused by _____ shocks, and the stagflation of the 1970s
was caused by _____ shocks.
A) demand; demand
B) demand; supply
C) supply; demand
D) supply; supply
Figure: Income”Expenditure Equilibrium
Look at the table Income”Expenditure Equilibrium. If planned investment spending
increases by $100, income”expenditure equilibrium occurs at real GDP of:
A) $8,100.
B) $3,600
C) $2,250.
D) $4,000.
The cyclically adjusted budget balance refers to:
A) the size of the budget in the current year.
B) the average size of the budget over the long run.
C) the swings in the budget as the business cycle changes.
D) the budget balance if actual output were equal to potential output.
Keynesian economics promotes ideas:
A) that government intervention can be destabilizing.
B) that the government can help a depressed economy via fiscal and monetary policies.
C) that the private sector is perfectly capable of regulating itself.
D) that the free market system will always prevail.
A random walk occurs when an asset price:
A) moves in a predicable direction but with random error.
B) makes unpredictable movements.
C) moves in a predictable way with no error.
D) moves slowly but predictably.
If a country with floating exchange rates uses an expansionary monetary policy, the
domestic interest rate _____, demand for the domestic currency _____, supply of the
domestic currency _____, and the effect on the exchange rate is _____.
A) falls; falls; rises; ambiguous
B) rises; rises; falls; an increase
C) falls; falls; rises; a decrease
D) falls; remains unchanged; rises; a decrease
If aggregate consumption equals $100 million + 0.75 YD, then the marginal propensity
to save is:
A) 0.75.
B) 0.25.
C) “$75 million.
D) “$100 million.
In the book The Limits to Growth, The Club of Rome argued that:
A) free trade could make world growth sustainable.
B) the World Bank needed to establish a global currency.
C) the convergence hypothesis was invalid.
D) limited supplies of natural resources made long-run growth unsustainable.
Beginning in 1913, when the Federal Reserve was established, it had the power to make
loans to commercial banks.
A) True
B) False
The purchasing power of money increased during the oil crisis of 1979 because the
aggregate price level increased but the growth rate of the money supply was faster than
the increase in the price level.
A) True
B) False
If potential output is higher than actual output, then the unemployment rate is:
A) below the natural rate.
B) above the natural rate.
C) equal to the natural rate.
D) zero.
Scenario: Money Supply Changes
The reserve requirement is 10% and Jack withdraws $5,000 travel money from his
checkable deposit. Assume that banks do not hold any excess reserves and that the
public holds no currency, only checkable bank deposits.
Look at the scenario Money Supply Changes. By how much will the money supply
contract as a result of the withdrawal?
A) $0
B) $5,000
C) $45,000
D) $50,000
If Japan must give up the production of 75 computers to produce 25 additional cellular
telephones, the opportunity cost of producing 4 cellular telephones is _____ computers.
A) 4
B) 12
C) 71
D) 79
Contractionary monetary policy will, holding everything else constant, _____ the
interest rate and shift the ADcurve to the _____.
A) increase; right
B) increase; left
C) decrease; left
D) decrease; right
Goods and services that are produced in a foreign country but consumed domestically
are called:
A) exports.
B) imports.
C) investment goods.
D) consumer durables.
Table: International Transactions
Look at the table International Transactions. What additional capital inflows are needed
to equilibrate the balance of payments?
A) “$29,000
B) $20,000
C) $29,000
D) $80,000
A liability is:
A) having wronged someone and being held responsible in court.
B) a requirement to pay in the future.
C) inability to perform an agreed task.
D) the requirement that banks offer insurance to depositors.
The consensus is that the Great Depression was ended by:
A) imposing fiscal discipline and reducing budget deficits.
B) following Keynes’s analysis regarding the “animal spirits.”
C) increasing the money supply and lowering the interest rate.
D) applying expansionary fiscal policy on a large scale.
Which of the following is the most accurate statement?
A) Deficits increase economic growth.
B) Deficits decrease economic growth.
C) Deficits do not affect economic growth.
D) We cannot unambiguously say whether government spending that increases deficits
lowers or increases economic growth.
Pizza is a normal good. If students’ incomes at your college increase, the effect on pizza
will be:
A) an increase in the demand.
B) an increase in the quantity demanded.
C) a decrease in the demand.
D) no change in the demand.
Real GDP equals $400 billion, the government collects 25% of any increase in real
GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the
value of the multiplier?
A) 1
B) 2.5
C) 4
D) 5
After a revaluation, all other things equal, a country’s balance of payments on the
current account will likely increase.
A) True
B) False
Long-Term Capital Management made rates of return as high as 40% by:
A) buying oil from Canada and selling it to China.
B) managing professional sports teams and being paid with a share of their profit.
C) mining diamonds in Africa.
D) using computer models to take advantage of small differences in asset prices in
global financial markets.