Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium
real GDP is Y = $1,600 billion, and the MPC = 0.8. In order to bring the economy to a
full-employment real GDP,
a. a recessionary gap must be bridged by increasing aggregate expenditures by $80
billion.
b. an inflationary gap must be bridged by cutting aggregate expenditures by $80 billion.
c. nothing is needed to bring the economy into full employment equilibrium.
d. a recessionary gap must be bridged by increasing aggregate expenditures by $400
billion.
e. an inflationary gap must be bridged by cutting aggregate expenditures by $400
billion.
When the Fed buys federal government securities on the open market from commercial
banks, then, over time, the:
a. assets of these banks fall.
b. assets of the banks stay the same.
c. assets of the banks rise.
d. liabilities of the bank rise.
e. liabilities of the bank fall.
If the rate of inflation in a given time period turns out to be lower than lenders and
borrowers anticipated, then the effect will be:
a. a redistribution of wealth from borrowers to lenders.
b. a redistribution of wealth from lenders to borrowers.
c. a net loss in purchasing power for lenders relative to borrowers.
d. a net gain in purchasing power for borrowers relative to lenders.
Exhibit 18-4 Coffee and tea output (pounds per hour) Country CoffeeTea
Brazil 10 5
China 8 8 As shown in Exhibit 18-4, if each country produced according to its
comparative advantage, Brazil would produce:
a. tea and China would produce coffee.
b. coffee and China would produce tea.
c. both coffee and tea.
d. neither coffee nor tea.
Each year around Valentine’s Day, we would expect:
a. the demand for roses to increase.
b. the price of roses to increase.
c. the quantity of roses sold to increase.
d. all of these.
Intermediate goods are goods and services used:
a. by the ultimate user.
b. by state and local governments.
c. as inputs.
d. both as inputs and final goods.
Which of the following helps explain why real GDP is inversely related to the price
level within the framework of the AD-AS model?
a. As prices fall, domestic consumers have an incentive to buy more of the cheaper
goods and services.
b. As prices fall, the monetary authorities will have to increase the money supply, which
will lead to an increase in the quantity of goods and services purchased.
c. As prices fall, the government will have to reduce taxes, which will lead to an
increase in the quantity of goods and services purchased.
d. As prices fall, the wealth of people holding the fixed quantity of money increases,
causing them to expand their purchases of goods and services.
At the point where the consumption function crosses the 45-degree line:
a. consumption is equal to disposable income, and therefore, saving is zero.
b. consumption is less than income, and saving is present.
c. consumption is greater than income, and dissaving is present.
d. planned saving equals actual saving minus disposable income.
Assume that consumers expect the price of gasoline to rise sharply in the future. Which
of the graphs in Exhibit 3-3 depicts this effect?
a. Graph A.
b. Graph B.
c. Graph C.
d. Graph D.
If the government accelerates money supply growth and enlarges the budget deficit to
stimulate aggregate demand, the rational expectations hypothesis indicates that decision
makers will:
a. ignore the policy until it exerts an observable impact on prices, output, and
employment.
b. quickly take steps to adjust their decision making in light of the more expansionary
policies.
c. be fooled at the outset but eventually adjust their decision making in accordance with
the change in policy.
d. be unaware that this policy change has been implemented until a higher rate of
inflation is observed.
In Exhibit 5-10, using the expenditure approach, compute business investment spending
(I). Which of the following is correct?
a. $950 billion.
b. $50 billion.
c. $600 billion.
d. $1,000 billion.
Which of the following is not a common effect of imposing a rent control?
a. Discriminatory practices by landlords.
b. More time on waiting lists and searching for housing.
c. A “black market” for rentals.
d. An excess supply of rentals at the controlled price.
According to monetarists, which of the following would be most important for the
control of inflation?
a. a steady increase in federal expenditures
b. the imposition of price controls
c. keeping the growth rate of the money supply low and steady
d. a steady increase in the size of the budget deficit
After a hurricane in Florida knocked out the regional water supply for several days, the
demand for bottled water increased sharply. In a market economy, how will this
increase in demand affect the equilibrium price and quantity of bottled water?
a. Price will increase, and quantity will decrease.
b. Price will decrease, and quantity will decrease.
c. Price will decrease, and quantity will increase.
d. Price will increase, and quantity will increase.
Exhibit 10-4 Aggregate supply and demand curves
As the economy moves to the
right in Exhibit 10-4 along the upward-sloping aggregate supply curve the:
a. unemployment rate rises.
b. unemployment rate falls.
c. inflation rate falls.
d. none of these.
Who owns the Fed?
a. The federal government.
b. The states.
c. The District Federal Reserve Banks.
d. All banks.
e. Member banks.
Which of the following compose the M2 money supply?
a. Currency only.
b. Currency, checkable deposits, and traveler’s checks.
c. M1 plus large denomination time deposits and Eurodollar deposits.
d. M1 plus savings deposits and small-denomination time deposits.