The most important automatic stabilizer is
a. open-market operations.
b. the tax system.
c. unemployment compensation.
d. welfare benefits.
In a market economy, supply and demand are important because they
a. are direct policy tools used by government agencies to regulate the economy.
b. illustrate when an market is in equilibrium, but they are not helpful when a market is
out of equilibrium.
c. can be used to predict the impact on the economy of various events and policies.
d. All of the above are correct.
According to the classical dichotomy, when the money supply doubles, which of the
following also doubles?
a. the price level and nominal wages
b. the price level, but not the nominal wage
c. the nominal wage, but not the price level
d. neither the nominal wage nor the price level
If per capita real income grows by 2 percent per year, then it will double in
approximately 20 years.
a. True
b. False
A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the
reserve requirement. It follows that the reserve requirement is
a. 2.5 percent.
b. 33.3 percent.
c. 25 percent.
d. 75 percent.
U.S.-based John Deere sells machinery to residents of South Africa who pay with South
African currency (the rand).
a. This increases U.S. net capital outflow because the U.S. acquires foreign assets.
b. This decreases U.S. net capital outflow because the U.S. acquires foreign assets.
c. This increases U.S. net capital outflow because the U.S. sells capital goods.
d. This decreases U.S. net capital outflow because the U.S. sells capital goods.
A basis for the slope of the short-run Phillips curve is that when unemployment is high
there are
a. downward pressures on prices and wages.
b. downward pressures on prices and upward pressures on wages.
c. upward pressures on prices and downward pressures on wages.
d. upward pressures on prices and wages.
Identify each of the following acts as representing either saving or investment.
a. Fred uses some of his income to buy government bonds.
b. Julie takes some of her income and buys mutual funds.
c. Alex purchases a new truck for his delivery business using borrowed funds.
d. Elaine uses some of her income to buy stock in a major corporation.
e. Henrietta hires a builder to construct a new building for her bicycle shop.
The CPI differs from the GDP deflator in that
a. the CPI is a price index, while the GDP deflator is an inflation index.
b. substitution bias is not a problem with the CPI, but it is a problem with the GDP
deflator.
c. increases in the prices of foreign produced goods that are sold to U.S. consumers
show up in the CPI but not in the GDP deflator.
d. increases in the prices of domestically produced goods that are sold to the U.S.
government show up in the CPI but not in the GDP deflator.
Kathleen is considering expanding her dress shop. If interest rates rise she is
a. less likely to expand. This illustrates why the supply of loanable funds slopes
downward.
b. more likely to expand. This illustrates why the supply of loanable funds slopes
upward.
c. less likely to expand. This illustrates why the demand for loanable funds slopes
downward.
d. more likely to expand. This illustrates why the demand for loanable funds slopes
upward.
If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what
is the real interest rate?
a. 10.5 percent
b. 20 percent
c. 5.5 percent
d. 3.2 percent
A country has $40 billion of domestic investment and net capital outflows of -$20
billion. What is the country’s saving?
a. -$60 billion
b. -$20 billion
c. $20 billion
d. $60 billion
In December 1999 people feared that there might be computer problems at banks as the
century changed. Consequently, people wanted to hold relatively more in currency and
relatively less in deposits. In anticipation banks raised their reserve ratios to have
enough cash on hand to meet depositors’ demands. These actions by the public
a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size
of the money supply, it could have sold bonds.
b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size
of the money supply, it could have bought bonds.
c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size
of the money supply, it could have sold bonds.
d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size
of the money supply, it could have bought bonds.
Figure 2-2
Refer to Figure2-2. If the owners of land, labor, and capital are represented by Box B
of this circular-flow diagram, then
a. households are represented by Box A.
b. firms are represented by Box C.
c. firms are represented by Box A.
d. firms are sellers in Box B.
Table 29-9
Metropolis National Bank is currently holding 2% of its deposits as excess reserves.
RefetoTable29-9. Metropolis National Bank is currently holding 2% of deposits as
excess reserves. Assuming that all banks have the same required reserve ratio, and then
none want to hold excess reserves what is the value of the money multiplier?
a. 8.25
b. 10
c. 12
d. 20
Table 3-26
Assume that Japan and Korea can switch between producing cars and producing
airplanes at a constant rate.
Refer to Table3-26. Suppose Japan decides to increase its production of cars by 45.
What is the opportunity cost of this decision?
a. 9 airplanes
b. 15 airplanes
c. 135 airplanes
d. 225 airplanes
During the financial crisis it was proposed that firms be provided with a tax credit for
investment projects. Such a tax credit would
a. raise both the interest rate and the real exchange rate.
b. raise the interest rate and reduce the real exchange rate.
c. reduce the interest rate and raise the real exchange rate.
d. reduce both the interest rate and the real exchange rate.
The price of a bond is equal to the sum of the present values of its future payments.
Suppose a certain bond pays $50 one year from today and $1,050 two years from today.
What is the price of the bond if the interest rate is 5 percent?
a. $1,050.00
b. $1,045.35
c. $1,000.00
d. $945.35
If the inflation rate is zero, then the nominal and real interest rate are the same.
a. True
b. False
When a U.S. citizen buys $500 of Chinese-made parts for a motorcycle,
a. U.S. consumption falls by $500, U.S. net exports decline by $500, and U.S. GDP
declines by $1000.
b. U.S. consumption does not change, U.S. net exports decline by $500, and U.S. GDP
declines by $500.
c. U.S. consumption increases by $500, U.S. net exports remain the same, and U.S.
GDP increases by $500.
d. U.S. consumption increases by $500, U.S. net exports decline by $500, and U.S.
GDP remains the same.
When the money market is drawn with the value of money on the vertical axis, an
increase in the money supply creates an excess
a. supply of money, causing people to spend more.
b. supply of money, causing people to spend less.
c. demand for money, causing people to spend more.
d. demand for money, causing people to spend less.
Who asserted that “the Federal Reserve’s job is to take away the punch bowl just as the
party gets going?”
a. president George W. Bush
b. president John F. Kennedy
c. economist John Maynard Keynes
d. former chairman of the Federal Reserve System William McChesney Martin
You are given three options. You may have the balance in an account that has been
collecting 5 percent interest for 20 years, the balance in an account that has been
collecting 10 percent interest for 10 years, or the balance in an account that has been
collecting 20 percent interest for five years. Each account had the same original
balance. Which account now has the lowestbalance?
a. the first one
b. the second one
c. the third one
d. They all have the same balance.
If people had been expecting prices to rise but in fact prices fell, then who among the
following would benefit?
a. lenders and people holding a lot of currency
b. lenders but not people holding a lot of currency
c. people holding a lot of currency but not lenders
d. neither lenders nor people holding a lot of currency
An increase in capital increases productivity only if it is purchased and operated by
domestic residents.
a. True
b. False
Which of the following can the Fed do to change the money supply?
a. change reserves or change the reserve ratio
b. change reserves but not change the reserve ratio
c. change the reserve ratio but not change the reserve ratio
d. neither change reserves nor change the reserve ratio
When looking at a graph of aggregate demand, which of the following is correct?
a. There are nominal variables on both the vertical and the horizontal axes.
b. There are real variables on both the vertical and horizontal axes.
c. The variable on the vertical axis is nominal; the variable on the horizontal axis is real
d. The variable on the vertical axis is real; the variable on the horizontal axis is nominal
Suppose ice cream cones costs $3. Molly holds $60. What is the real value of the
money she holds?
a. $60. If the price of ice cream cones rises, to maintain the real value of her money
holdings she need to hold more dollars.
b. $60. If the price of ice cream cones rises, to maintain the real value of her money
holdings she need to hold fewer dollars.
c. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of
her money holdings she needs to hold more dollars.
d. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of
her money holdings she needs to hold fewer dollars.
According to the open-economy macroeconomic model, if the U.S. government budget
deficit increases, then both U.S. domestic investment and U.S. net capital outflow
decrease.
a. True
b. False
Table 3-8
Assume that England and Spain can switch between producing cheese and producing
bread at a constant rate.
Refer to Table3-8. Which of the following combinations of cheese and bread could
England not produce in 24 hours?
a. 5 units of cheese and 3 units of bread.
b. 6 units of cheese and 4 units of bread.
c. 8 units of cheese and 3 units of bread.
d. 7 units of cheese and 2 units of bread.
Figure27-2. The figure shows a utility function for Britney.
RefertoFigure27-2. From the appearance of the utility function, we know that
a. Britney is risk averse.
b. Britney gains more satisfaction when her wealth increases by Xdollars than she loses
in satisfaction when her wealth decreases by Xdollars.
c. the property of increasing marginal utility applies to Britney.
d. All of the above are correct.
GDP can measure either the total income of everyone in the economy or the total
expenditure on the economy’s output of goods and services, but GDP cannot measure
both at the same time.
a. True
b. False
The deviation of unemployment from its natural rate is called cyclical unemployment.
a. True
b. False
If the U.S. price level is increasing by 3 percent annually and the Japanese price level is
increasing by 1 percent annually, then according to purchasing-power parity, by about
what percent would the nominal exchange rate be changing?
a. decreasing by 4 percent
b. decreasing by 2 percent
c. increasing by 4 percent
d. increasing by 2 percent
If income rises in the market for an inferior good, will the demand curve for the inferior
good shift to the right or to the left?
What does “random walk” mean? According to the efficient markets hypothesis, should
stock prices follow a random walk?
Figure 28-6
RefetoFigure28-6. What type of unemployment is measured by the differences
between lines A and B?
What are the two reasons for the government to intervene in a market?
Use the data on U.S. real GDP below to compute real GDP per person for each year.
Then use these numbers to compute the percentage increase in real GDP per person
from 1993 to 2012.
The Federal Reserve sets _____ policy, while the president and Congress set _____
policy. These two policies influence aggregate _____.
If there were a favorable supply shock and the central bank wanted to offset the change
in the unemployment rate, what would it do?
Give an historical example of an efficiency wage that was considered by the firm to be
“one of the finest cost cutting moves we ever made.”
Figure 4-28
RefertoFigure4-28.Using the points on the figure, describe the change that would
occur if consumer incomes increase and this is an inferior good.
Table 3-41
RefertoTable3-41.What is England’s opportunity cost of one compass?
An open-market purchase by the Federal Reserve creates an excess _____ of money.
This causes interest rates to _____ and investment to _____. The change in investment
causes aggregate demand to shift to the _____.
Figure 25-1
RefertoFigure21-1. In what way is the figure relevant to the catch-up effect?
Can purchasing-power parity be used to explain the fact that the U.S. dollar depreciated
by more than 50 percent against the German mark between 1970 and 1998, but
appreciated by more than 100 percent against the Italian lira during the same period?
Defend your answer.
A central bank raises the money supply growth rate and keeps it higher. As the economy
moves from the short-run equilibrium created by the increase in the money supply
growth back to long-run equilibrium what happens to the unemployment rate?
List a few of the characteristics of workers who typically earn at or below the minimum
wage.
Explain how a change in the expected price level would shift the short-run and long-run
aggregate-supply curves.