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Contents
Chapter7
TheMacroeconomy:Unemployment,Inflation,andDeflation.................................1
Chapter8
MeasuringtheEconomysPerformance.....................................................................97
Chapter9
GlobalEconomicGrowthandDevelopment...........................................................195
Chapter10
RealGDPandthePriceLevelintheLongRun.......................................................264
Chapter11
ClassicalandKeynesianMacroAnalyses.................................................................339
Chapter12
Consumption,RealGDP,andtheMultiplier...........................................................435
Chapter13
FiscalPolicy..................................................................................................................547
Chapter14
DeficitSpendingandthePublicDebt.......................................................................620
Chapter15
Money,Banking,andCentralBanking.....................................................................657
Chapter16
DomesticandInternationalDimensionsofMonetaryPolicy................................772
Chapter17
StabilizationinanIntegratedWorldEconomy........................................................864
Chapter18
PoliciesandProspectsforGlobalEconomicGrowth..............................................953
Chapter7
TheMacroeconomy:Unemployment,Inflation,andDeflation
7.1Unemployment
1) Whichofthefollowingistrueofunemployment?
A) Itisdefinedasthenumberofpeopleactivelylookingforworkwhodonothavejobs.
B) Theresultisthattheeconomyoperatesinsideitsproductionpossibilitiescurve.
C) Therearepsychologicalconsequencesassociatedwithunemployment.
D) Alloftheabove.
Answer: D
Diff:2
Topic: 7.1Unemployment
AACSB: Analyticskills
QuestionStatus: PreviousEdition
2) Whichofthefollowingistrueaboutthelaborforce?
A) Itincludesthoseover16agesoldandareemployed.
B) Itincludesthoseover16agesoldandareunemployed.
C) BothAandBarecorrect.
D) Noneoftheaboveiscorrect.
Answer: C
Diff:2
3) Acountryslaborforceisequalto
A) thepopulationbetweentheagesof16and65.
B) thenumberofemployedpeople.
C) thetotalnumberofemployedandunemployedpeople.
D) thetotalnumberofemployedpeople,unemployedpeople,anddiscouragedworkers.
Answer: C
Diff:2
4) Whichofthefollowingpeoplewouldbeconsidered unemployed?
A) Homer,wholosthisjobatthepowerplantandisnotlookingforwork
B) Lenny,whoisworkingparttimeatafastfoodrestaurant
C) Abe,whoisretired
D) Edna,wholostherjobasateacherandiscurrentlysearchingforanewjob
Answer: D
Diff:2
2MillerEconomicsToday,17 thEdition
5) Thetermunemploymentisbestdescribedasthetotalnumberof
A) peoplenotworking.
B) peoplewhohavebeenlaidoffandhavestoppedlookingforwork.
C) adultswhoworkfewerhoursthantheywishtowork.
D) adultswhoarelookingforworkbuthavenotfoundajob.
Answer: D
Diff:1
6) Accordingtothetext,duringwhichtimeperioddidtheUnitedStateshavethehighest
unemploymentrates?
A) 1930s
B) 1950s
C) 1980s
D) 2000s
Answer: A
Diff:2
7) Individualswhohavestoppedlookingforworkbecausetheyareconvincedthattheywillnot
findajobareconsidered
A) structurallyunemployed.
B) discouragedworkers.
C) partofthelaborforce.
D) underemployed.
Answer: B
Diff:2
8) WhichfederalagencypublishestheUnitedStatesunemploymentfigures?
A) HealthandHumanServices
B) TheBureauofLaborStatistics
C) TheFederalReserve
D) TheSenateCommitteeonLaborRelations
Answer: B
Diff:1
9) Overthelast125yearsintheUnitedStates,unemploymentreacheditshighestrate
A) inthePanicof1893.
B) inthe1930s.
C) intheperiodbetweenWorldWarIIandtheKoreanWar.
D) intheGreatRecessionofthelate2000s.
Answer: B
Diff:1
Chapter7TheMacroeconomy:Unemployment,Inflation,andDeflation 3
10) WhendidtheUnitedStatesregisteritslowestunemploymentrate?
A) Inthe1920s
B) Intheeconomicboomofthe1990s
C) IntheRoaringNineties(1890s)
D) AttheendofWorldWarII
Answer: D
Diff:1
11) Thepopulationofindividualsatleast16yearsofagecanbebrokeninto3groups.Theyare
A) theunemployed,discouragedworkers,andretirees.
B) thoseemployedfull-time,thoseemployedonlypart-time,andtheunemployed.
C) thoseworkinginthefor-profitsector,thoseworkinginthenonprofitsector,and
individualswhoareunemployed.
D) noneoftheabove.
Answer: D
Diff:1
12) Therateofunemploymentiscalculatedasthenumberof
A) unemployedworkersdividedbythenumberofemployedworkers.
B) peopleinthecivilianlaborforcedividedbythenumberofunemployed.
C) unemployeddividedbythenumberofpeopleinthecivilianlaborforce.
D) employedworkersdividedbythenumberofunemployedworkers.
Answer: C
Diff:1
13) AccordingtotheBureauofLaborStatistics,ifyouvoluntarilyleaveyourjobtosearchfor
anotherjob,thenyou
A) areclassifiedasunemployed.
B) areeligibleforunemploymentcompensation.
C) maynotre-enterthelaborforceforsixmonths.
D) areclassifiedasajobloser.
Answer: A
Diff:1
14) Officialunemploymentratesmayunderestimatethetruerateofunemploymentbecausethe
officialrate
A) includesthoseworkerswhoonlyworkparttime.
B) mayincludesomeindividualswhoarenotactuallyinthelaborforce.
C) doesnotincludeindividualsreceivinganytypeofunemploymentcompensation.
D) failstoincludediscouragedworkers.
Answer: D
Diff:1
15) Theofficialunemploymentratemayunderstatethetruerateofunemploymentbecauseof
A) workerswhoholdtwojobs.
B) increasesinworkerproductivity.
C) changesinwagerates.
D) discouragedworkerswhonolongerareactivelyseekingworkandareexcludedfromthe
statistics.
Answer: D
Diff:1
16) Historically,theUnitedStateshasexperienced
A) continuousdecreasesintheunemploymentratesinceWorldWarII.
B) periodsofbothincreasesanddecreasesintheunemploymentratesinceWorldWarII.
C) continuousincreasesintheunemploymentratesinceWorldWarII.
D) nochangesintheunemploymentratesinceWorldWarII.
Answer: B
Diff:1
17) WhenJoe,whoisamongthehighest-paidworkersinafieldinwhichtherearenumerousjob
openingsacrossthenation,recentlybecameunemployed,hisopportunitycostofjobsearchis
A) average,sothelengthofhisperiodofunemploymentislikelytobelong.
B) relativelyhigh,sothelengthofhisperiodofunemploymentislikelytobeshort.
C) relativelylow,sothelengthofhisperiodofunemploymentislikelytobelong.
D) relativelyhigh,sothelengthofhisperiodofunemploymentislikelytobelong.
Answer: B
Diff:1
18) IftheU.S.economyentersarecession,the
A) economyexperiencesfullemployment.
B) unemploymentratetendstoincrease.
C) laborforcetendstoincrease.
D) entirepopulationwillbepartiallyunemployed.
Answer: B
Diff:1
19) Thetotalcivilianlaborforceiscomprisedof
A) theunemployedandtheemployed.
B) onlytheemployed.
C) allindividualsover16yearsofage,whetherornottheyworkorareseekingwork.
D) onlyfull-timeemployedindividualsbetweentheagesof18and55.
Answer: A
Diff:1
20) Thelaborforceincludesindividualswhoare:
I. Employed
II. Unemployed
III. Discouragedworkers
A) Ionly.
C) BothIandIII.
B) BothIandII.
D) AllI,IIandIII..
Answer: B
Diff:2
21) Whichofthefollowingbestfitsthedefinitionofunemployed?
A) Retiredandnotworking
B) Workinglessthanafullworkweek
C) Notworkingbutlookingforajob
D) Notworkingatagainfulpursuit,eitherinoroutofthehome
Answer: C
Diff:1
22) Bydefinition,thelaborforceparticipationrateis
A) thepercentageofinstitutionalizedworking-ageindividualswhoareemployedorseeking
employment.
B) thepercentageofnoninstitutionalizedworking-ageindividualswhoareemployedor
seekingemployment.
C) theannualrateofgrowthinthenumberofpeoplewhoareeitheremployedorsearching
foravailablejobs.
D) theannualrateofgrowthinthenumberofpeoplewhoareunemployedandsearchingfor
availablegovernment-providedunemploymentbenefits.
Answer: B
Diff:1
23) Therateofunemploymentisfoundby
A) dividingthenumberunemployedbythenumberofpeopleinthelaborforce.
B) dividingthenumberunemployedbythenumberemployed.
C) dividingthenumberemployedbythenumberofpeopleinthelaborforce.
D) dividingthenumberemployedbythenumberunemployed.
Answer: A
Diff:1
24) Includingdiscouragedworkersinthecalculationoftheunemploymentratewould
A) increasethereportedrate.
B) lowerthereportedrate.
C) notchangethereportedrate.
D) changethereportedrate,butinanunpredictablemanner.
Answer: A
Diff:1
25) Unemploymentismeasuredas
A) allteensandadultsinthecivilianlaborforcewhoarenotworking.
B) alladultsinthecivilianlaborforcewhoarewillingandabletoworkandwhoareactively
lookingforwork,buthavenotfoundajob.
C) alladultsinthecivilianlaborforce,regardlessofwhetherornottheyhavebeenengaged
inactivelyseekingemployment,whodonothavethejobtheywant.
D) alladultsinthecivilianlaborforcewhoarenotworking.
Answer: B
Diff:1
26) Thelaborforceisdefinedasthenumberof
A) employedplusthenumberofunemployed.
B) peoplewhoareworking.
C) peoplewhoareworkinginlabor-typejobs.
D) unionmemberswhoareworking.
Answer: A
Diff:1
27) TheU.S.DepartmentofLaborclassifiesallindividualsintheUnitedStatesas
A) laborforceparticipants.
B) eitheremployed,unemployed,ornotinthelaborforce.
C) eitheroveremployedorunderemployed.
D) potentialemployees.
Answer: B
Diff:1
28) Apersonwhopreviouslyhadafull-timejobhasbeenparoledfromprisonandhasappliedfor
ajobisconsidered
A) areentrant.
B) ajobloser.
C) anewentrant.
D) notinthelaborforce.
Answer: A
Diff:2
29) Increasesinthedurationofunemploymentmay
A) reflectageneraldownturnineconomicactivitythatdepressesjobopenings.
B) increasethenumberofdiscouragedworkers.
C) increasetheunemploymentrate.
D) alloftheabove.
Answer: D
Diff:1
30) Whichcategoryofunemployedindividualsmakesupthegreatestshareofthosewhoare
unemployed?
A) Newentrants
B) Reentrants
C) Joblosers
D) Jobleavers
Answer: C
Diff:1
31) Whichofthefollowingisastockvariable?Thenumberof
A) unemployedpeople.
B) reentrants.
C) joblosers.
D) jobleavers.
Answer: A
Diff:1
32) Thenumberofpeoplethatarefiredinamonthis
A) astock.
C) bothastockandaflow.
B) aflow.
D) neitherastocknoraflow.
Answer: B
Diff:1
33) Whenthereisanincreaseinthedurationofunemployment,theU.S.Congresstypically
respondsby
A) loweringincometaxes.
B) extendingunemploymentbenefits.
C) encouragingunemployedU.S.workerstoseekemploymentoverseas.
D) redefiningunemployedsotheunemploymentratedoesnotlooksobad.
Answer: B
Diff:1
34) Thelabor-forceparticipationrateshowsthepercentageof
A) peoplenotworking,butwhowanttowork.
B) peoplewhoarenotactivelyparticipatinginmeaningfuleconomicactivity.
C) newentrantsintothelaborforce.
D) non-institutionalizedworking-agepeoplewhoareactuallyworkingorseeking
employment.
Answer: D
Diff:1
35) ThelargestmajorchangeintheU.S.laborforceparticipationrateduringthelastfewdecades
hasbeen
A) thenumberofprisonersdroppingoutofthelaborforce.
B) theincreaseinthenumberofworkingwomen.
C) thedecreaseinthenumberofworkingwomen.
D) theincreaseinthenumberofillegalimmigrantsintheUnitedStates.
Answer: B
Diff:2
36) IntheUnitedStates,thelabor-forceparticipationratesince1960hasbeen
A) increasingforfemales.
B) decliningforfemales.
C) decliningforbothmalesandfemales.
D) unchangedforbothmalesandfemales.
Answer: A
Diff:1
37) Ifapersonislaidofffromajob,heisconsideredbytheBureauofLaborStatisticstobea
A) jobloser.
B) reentrant.
C) jobleaver.
D) newentrant.
Answer: A
Diff:1
38) IfIvoluntarilyendmyemployment,theBureauofLaborStatisticswouldconsidermetobe
A) ajobloser.
B) ajobleaver.
C) adiscouragedworker.
D) areentrant.
Answer: B
Diff:1
39) WhichofthefollowingwouldNOTbeconsideredunemployed?
A) Anewentranttothelaborforce
B) Ajobleaverwhoislookingforabetterjob
C) Anindividualfiredbyheremployer
D) Anewlyretiredworker
Answer: D
Diff:1
40) Thelargestcategoryoftheunemployedare
A) joblosers.
B) reentrants.
C) jobleavers.
D) newentrants.
Answer: A
Diff:1
41) Whichofthefollowingcancauseofficialunemploymentfigurestounderestimatethetrue
unemploymentrate?
A) Somepeoplegetdiscouragedandquitlookingforajob.
B) Somepeopleengageinillegalactivities.
C) Somepeopleworkoffthebooks.
D) Somepeopleworkovertime.
Answer: A
Diff:2
42) Theunemploymentratewillrisewhen
A) peoplegetdiscouragedandquitlookingforajob.
B) theaverageworkweekfallsfrom40hoursto39hours.
C) thedurationofunemploymentincreases.
D) thesizeofthelaborforceincreaseswithoutanincreaseinemployment.
Answer: C
Diff:2
43) Inrecentyearsthelaborforceparticipationratehasbeenfairlystable,
A) ashasthelaborforceparticipationrateformales,females,minorities,andnonminorities.
B) althoughthefemalelaborforceparticipationratehasfallenwhilethemalelaborforce
participationratehasincreased.
C) althoughthemalelaborforceparticipationratehasfallenwhilethefemalelaborforce
participationratehasincreased.
D) althoughthelaborforceparticipationrateofyoungadultshasincreasedwhilethelabor
forceparticipationrateofthoseinthe40-55ageclassificationhasfallen.
Answer: C
Diff:2
44) Ifthedurationofunemploymentinacountryincreasesfrom16weeksto18weeks,then
A) theunemploymentratewilldecrease.
B) theunemploymentratewillincrease.
C) thesizeofthelaborforcewillincrease.
D) thesizeofthelaborforcewilldecrease.
Answer: B
Diff:1
45) Thedurationofunemploymenttendsto
A) increasewhenbusinessactivitydecreases.
B) increasewhenemploymentincreases.
C) increasewhenthelaborforceshrinks.
D) stayconsistentlythesameoverlongperiodsoftime.
Answer: A
Diff:1
46) Peoplewhohavedroppedoutofthelaborforceandwhoarenolongerlookingforajobbecause
theybelievethejobmarkethaslittletoofferthemareclassifiedbytheLaborDepartmentas
A) unemployed.
B) non-participants.
C) discouragedworkers.
D) wage-ratebusters.
Answer: C
Diff:1
47) WhichofthefollowingpeoplewouldbeconsideredunemployedbytheBureauofLabor
Statistics?
I. Mrs.Xretiresfromherjobanddoesnotlookforanotherjob.
II. Mr.Ywaslaidofffromhisjobasawelder,butexpectstoberehiredin8months.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: B
Diff:1
48) Tobeofficiallycountedasunemployed,apersonmustbe
A) atleast16yearsold.
B) atleast18yearsold.
C) atleast21yearsold.
D) anyage,solongasyouarelookingforwork.
Answer: A
Diff:1
49) Whoisconsideredofficiallyunemployed?
A) Sixmonthsafterfailingtogetajob,Abbaquitlooking.
B) Monicagraduatedfromcollegelastsummerbutisstillunemployeddespiteherspirited
search.
C) Kariukiisaretiredteacher.
D) Chenisgoingtoschoolfulltime.
Answer: B
Diff:1
50) Costsofunemploymentinclude
A) structuralunemployment.
B) theoutputlostduetothefactthattheeconomyisnotrunningatfullemployment.
C) reductioninthelaborforce.
D) higherwages.
Answer: B
Diff:1
51) Jasimevoluntarilyquitherjobandisnowsearchingforanewposition.Jasimeisclassifiedasa
A) jobloser.
B) jobreentrant.
C) jobleaver.
D) newentrant.
Answer: C
Diff:1
52) Ifthereisunemploymentandallbusinessesareoperatingatlessthanfullcapacity,then
A) therearetoomanyworkers,andsomepeopleoughttoleavethelaborforce.
B) wearenotexperiencinganetsocialcosttounemploymentbecauseitisoffsetbythe
capacitylevelsofthefactories.
C) societyisproducinginsideitsproductionpossibilitiescurve.
D) societyisatthewrongpointontheproductionpossibilitiescurve.
Answer: C
Diff:2
53) Thelaborforceparticipationrateincludes
A) onlythosewhoareemployed.
B) onlythoseemployedbutlookingforajob.
C) bothemployedworkersanddiscouragedworkersnotseekingjobs.
D) bothemployedworkersandthoseunemployedbutseekingemployment.
Answer: D
Diff:2
54) Onemajorreasonthateconomistsareconcernedaboutunemploymentisthat
A) unemploymentalwaysleadstofrictionalunemployment.
B) unemploymentreducesthesizeofthelaborforce.
C) unemploymentshiftstheproductionpossibilitiescurveoutward.
D) theeconomyisproducinglessoutputthaniftherewerefullemployment.
Answer: D
Diff:1
55) WhichofthefollowingindividualsisNOTcountedasunemployed?
A) Jamil,whorecentlyquithisjobandislookingforanewposition
B) Jackie,whowasrecentlyfiredandisnowapplyingforanotherjob
C) Jack,whohasbecomediscouragedabouteverfindingajobandhasstoppedlooking
D) Jennifer,whojustgraduatedfromcollegeandisnowseekingemploymentwiththe
companyofherdreams.
Answer: C
Diff:1
56) Tobeconsideredofficiallyunemployed,apersonmustbeatleast16yearsold
A) andnotworking.
B) andnotinschoolandnotworking.
C) andbeadiscouragedworker.
D) andnotworkingbutisactivelyseekingemployment.
Answer: D
Diff:1
57) Overthelast100yearsintheUnitedStates,unemploymentreacheditshighestrate
A) inthe1920s.
B) inthe1930s.
C) inthe1970s.
D) inthe1980s.
Answer: B
Diff:1
58) Thepopulationis1,200million,thelaborforceis150million,andthenumberofunemployedis
15million.Whatistheunemploymentrate?
A) 7.5percent
B) 4.3percent
C) 10percent
D) 5percent
Answer: C
Diff:1
59) Tobeofficiallyclassifiedasunemployed,apersonmustbe
A) collectingunemploymentbenefits.
B) atleast18andnotworking.
C) atleast16,notworkingandactivelyseekingemployment.
D) laidofforfired.
Answer: C
Diff:1
60) Thelaborforceisdefinedas
A) allindividualswhoarecurrentlyemployed.
B) allindividualswhoareatleast16yearsoldandarecurrentlyemployed.
C) allindividualswhoareatleast16yearsoldandarecurrentlyemployedorunemployed.
D) allindividualswhoareatleast16yearsoldandareemployed,lookingforworkornot
lookingforwork.
Answer: C
Diff:1
61) Thelaborforceincludesallofthefollowingindividualswhoare16yearsorolderEXCEPT
A) peoplewhohaveneverbeeninthelaborforcebuthavejustfoundajob.
B) theemployed.
C) theunemployed.
D) peoplewhoareretiredandnotactivelyseekingwork.
Answer: D
Diff:2
62) Thedefinitionoftheadultpopulationisthosewhoare16yearsandolderandwhoare
A) employedorunemployed.
B) inthelaborforce.
C) inthelaborforceornotinthelaborforce.
Answer: C
Diff:1
63) Apersonwhohastakenmedicalleaveis
A) inthelaborforce.
C) unemployed.
B) notinthelaborforce.
D) ajobleaver.
Answer: A
Diff:2
64) Bythelegaldefinitionofunemployment,apersonwhohasquithisjobtotakecareofhis
childrenfulltimeis
A) unemployed.
B) employed.
C) inthelaborforce.
Answer: D
Diff:1
65) Thelaborforceisdefinedas
A) thenumberofpeopleover16yearsofage.
B) thenumberofpeoplewhoareworking.
C) thesumoftheemployedandtheunemployed.
D) thenumberofpeopleinblue-collarjobs.
Answer: C
Diff:1
66) Unemploymentisa________concept,measuringthe________.
A) flow;numberofpeoplewhoarefirstenteringthelaborforce.
B) flow;numberofpeoplewholosttheirjobswithinthelastweek.
C) stock;numberofpeoplewhoarenotworking.
D) stock;numberofpeopleatapointintimewhoarenotworkingbutwhoarelookingfor
work.
Answer: D
Diff:2
67) Unemploymentisa
A) flowconcept.
C) bothaflowandastockconcept.
B) stockconcept.
D) neitherastocknoraflowconcept.
Answer: B
Diff:2
68) Supposethatlastweek100,000peoplelosttheirjobsorquit.Wecansaythat
A) thenumberofunemployedincreasedby100,000people.
B) thenumberofunemployedincreasedbylessthan100,000peoplebecauseweshouldnot
countthosewhoquittheirjobs.
C) the100,000peoplerepresentaflowknownasjobdepartures.
D) the100,000peoplerepresentastockknownasthenewunemployed.
Answer: C
Diff:3
69) Lastmonth100millionpeoplewereinthelaborforcewith6millionbeingunemployed.200,000
peoplelosttheirjobslastmonthand300,000foundjobs.Distinguishingbetweenstockmeasures
andflowmeasures,thestockmeasuresare
A) thelaborforceonly.
B) thenumberofpeoplewholosttheirjobsandthenumberofpeoplewhofoundjobsonly.
C) thetotalnumberofpeoplewhoareunemployedonly.
D) thetotalnumberinthelaborforceandthetotalnumberofpeoplewhoareunemployed
only.
Answer: D
Diff:2
70) Lastmonth100millionpeoplewereinthelaborforcewith6millionbeingunemployed.200,000
peoplelosttheirjobslastmonthand300,000foundjobs.Distinguishingbetweenstockmeasures
andflowmeasures,theflowmeasuresare
A) thelaborforceonly.
B) thenumberofpeoplewholosttheirjobsandthenumberofpeoplewhofoundjobsonly.
C) thetotalnumberofpeoplewhoareunemployedonly.
D) thetotalnumberinthelaborforceandthetotalnumberofpeoplewhoareunemployed
only.
Answer: B
Diff:2
71) Supposethereare100millioninthelaborforce,and6millionunemployedpeople.Duringthe
nextmonth,200,000peoplelosetheirjobsand300,000findjobs.Thenewtotalofemployedis
________andthenewunemploymentrateis________.
A) 100.1million;5.8percent.
B) 100million;6.1percent.
C) 94.1million;5.9percent.
D) 93.9million;6.1percent.
Answer: C
Diff:2
72) SupposethepopulationofElCampois120,000.Ofthepopulation16yearsandolder,50,000are
employed,10,000haveneverworkedandarenotlookingforwork,5,000arenotworkingand
arelookingforwork,and15,000areretiredandnotlookingforwork.Thelaborforceequals
A) 50,000.
B) 55,000.
C) 65,000.
D) 80,000.
Answer: B
Diff:2
QuestionStatus: Revised
73) SupposethepopulationofElCampois120,000.Ofthepopulation16yearsandolder,50,000are
employed,10,000haveneverworkedandarenotlookingforwork,5,000arenotworkingand
arelookingforwork,and15,000areretiredandnotlookingforwork.Thenumberunemployed
equals
A) 5,000.
B) 10,000.
C) 15,000.
D) 20,000.
Answer: A
Diff:2
74) Inasmallcountry,thepopulationequals5,000.Thereare4,000peopleinthelaborforceand
3,000peopleareemployed.Theunemploymentrateequals
A) 0.25
B) 0.6
C) 0.75
D) anundeterminedamountgiventhelackofinformation.
Answer: A
Diff:3
75) Inasmallcountry,theadultpopulationis10,000.Inthatcountry,7,000peopleareinthelabor
forceand6,300peopleareemployed.Theunemploymentrateequals
A) 0.63percent.
B) 7percent.
C) 10percent.
Answer: C
Diff:2
76) Inasmallcountry,theadultpopulationequals10,000.Inthatcountry,8,000peopleareinthe
laborforceand200peopleareunemployed.Theunemploymentrateequals
A) 2.5percent.
B) 2percent.
C) 4percent.
Answer: A
Diff:2
77) Ajobloserisanindividual
A) inthelaborforcewhoseemploymentwasinvoluntarilyterminated.
B) whousedtoworkfulltimebutleftthelaborforceandhasnowreentereditlookingfora
job.
C) inthelaborforcewhoquitsvoluntarily.
D) whohasneverheldafull-timejoblastingtwoweeksorlongerbutisnowseeking
employment.
Answer: A
Diff:1
78) Areentrantisanindividual
job.
employment.
Answer: B
Diff:1
79) Ajobleaverisanindividual
job.
employment.
Answer: C
Diff:1
80) Anindividualinthelaborforcewhoseemploymentwasinvoluntarilyterminatedis
A) ajobleaver.
B) ajobloser.
C) ajobreentrant.
D) partofthePPI.
Answer: B
Diff:1
81) AllofthefollowingareconsideredtobeunemployedEXCEPT
A) jobleavers.
B) discouragedworkers.
C) jobreentrants.
D) newjobentrants.
Answer: B
Diff:2
82) Newentrantstothelaborforceusuallyaccountforaround________percentofthe
unemployed.
A) ten
B) twenty
C) twenty-five
D) thirty
Answer: A
Diff:1
83) Anewentrantisanindividual
job.
employment.
Answer: D
Diff:1
84) Theunemploymentratecanincreasewhen
A) thenumberofjobfindersincreases.
B) thesizeofthemilitaryincreases.
C) theproportionof18-22yearoldsthatgotocollegeincreases.
D) thenumberofunemployedworkersincreases.
Answer: D
Diff:1
85) Thedurationofunemploymenttendstorisewhen
A) peopleleavetheirjobsratherthanlosetheirjobs.
B) thenumberofentrantsexceedsthenumberofreentrants.
C) businessactivitystartsbackupafteralongperiodofdecline.
D) businessactivitygoesintoadownturn.
Answer: D
Diff:2
86) Discouragedworkers
A) areconsideredpartoftheunemployedbecausetheyarenotworking.
B) areconsideredpartoftheunemployedbecausetheyarestillinthelaborforce.
C) arenotconsideredpartoftheunemployedbecausetheyquittheirjobsvoluntarily.
D) arenotconsideredpartoftheunemployedbecausetheyarenotactivelyseekingwork.
Answer: D
Diff:2
87) Adiscouragedworkerissomeonewho
A) hasbeenfired.
C) isnotinthelaborforce.
B) isunemployed.
D) isemployed.
Answer: C
Diff:1
88) Onecriticismoftheunemploymentrateisthatit
A) doesnotincludethenumberofdiscouragedworkersasunemployed.
B) doesnotincludepeoplewhoarenotworkingandarenotlookingforwork.
C) countsanewentrantthatisactivelyseekingworkasunemployed.
D) isastockmeasure.
Answer: A
Diff:1
89) Theunemploymentratewilldecreasewhen
A) thedurationofunemploymentincreases.
B) theaverageworkweekfallsfrom40to39hours.
C) theageofthelaborforceincreases.
D) peoplegetdiscouragedandquitlookingforwork.
Answer: D
Diff:2
90) Thepercentageofthenoninstitutionalizedworking-ageindividualswhoareemployedor
seekingworkisknownas
A) thelaborforce.
B) thelaborforceparticipationrate.
C) discouragedworker.
D) thestockofemployedandunemployedworkers.
Answer: B
Diff:1
91) Anincreaseinthelaborforceparticipationrate
A) impliesthattheunemploymentratemustfall.
B) impliesthattheunemploymentratemustrise.
C) meanstherearemorediscouragedworkers.
D) isconsistentwitheitherariseorafallintheunemploymentrate.
Answer: D
Diff:2
92) Thelaborforceparticipationrateisthe
A) proportionofthenoninstitutionalizedadultpopulationinthelaborforce.
B) proportionofthelaborforcethatisemployed.
C) proportionofthelaborforcethatisunemployed.
D) proportionofthenoninstitutionalizedadultpopulationthatisemployed.
Answer: A
Diff:1
93) ThemajorchangeinAmericanlabormarketsthiscentury is
A) thesteadyriseoftheunemploymentrate.
B) thesteadyriseoftheemploymentrate.
C) theincreaseinthefemalelabor-forceparticipationrate.
D) theincreaseinthelabor-forceparticipationrate.
Answer: C
Diff:2
94) WhichofthefollowingwouldNOTbeafactorthathascontributedtotherisingfemalelabor
forceparticipationrate?
A) Greateraccesstoeducation
B) Greateraccesstotraining
C) Increasingfamilysize
D) Reductionofbarrierstocompetingwithmenforjobs
Answer: C
Diff:3
95) Inasmallcountry,theadultpopulationequals5,000.Thereare4,000peopleinthelaborforce
and3,000peopleareemployed.Thelaborforceparticipationrateequals
A) 25percent.
B) 80percent.
C) 30percent.
Answer: B
Diff:3
96) Inasmallcountry,theadultpopulationequals10,000.Thereare3,000peopleunemployedand
4,000peopleareemployed.Thelaborforceparticipationrateequals
A) 70percent.
B) 57percent.
C) 40percent.
Answer: A
Diff:3
97) Inasmallcountry,thereare5,000peopleinthelaborforceand3,000peopleareemployed.The
laborforceparticipationrateequals
A) 40percent.
B) 60percent.
C) 62.5percent.
Answer: D
Diff:3
98) Tobecountedinthelaborforce,
A) apersonhastobeworkingatleast40hoursperweek.
B) apersonhastobeatleast16orolder,haveajob,orifunemployedhastobeactively
seekingemployment.
C) aperson,irrespectiveofhisorherage,hastobeworkingor,ifoutofwork,actively
seekingemployment.
D) apersonhastobeover16yearsofage,irrespectiveofwhethersheorheisactivelyseeking
work.
Answer: B
Diff:1
99) TobecountedasunemployedintheUnitedStatesapersonhastobe
A) atleast16andoutofwork.
B) atleast16,outofwork,andactivelyseekingemployment.
C) atleast16andlessthan65andactivelyseekingemployment.
D) outofworkandactivelyseekingemployment.
Answer: B
Diff:2
100) AllofthefollowingareexamplesofaflowEXCEPT
A) anewentrantintothelaborforce.
B) anindividualwhovoluntarilyleavesthelaborforce.
C) apersonwhoisfiredfromajob.
D) thecurrentunemploymentrate.
Answer: D
Diff:1
101) Apersonwhoiscurrentlynotworkingandhasstoppedlookingforajobbecauseheorsheis
convincedthereisnojobavailableisclassifiedasa
A) discouragedworker.
B) disgruntledworker.
C) depressedworker.
D) dissatisfiedworker.
Answer: A
Diff:2
102) Thelaborforceparticipationrateis
A) thepercentageofthepopulationwhoareinthelaborforce.
B) thepercentageofthenon-institutionalizedworkingagepopulationwhoisinthelabor
force.
C) thepercentageofthenon-institutionalizedpopulationwhoisinthelaborforce.
D) thepercentageoftheentirepopulationwhoisinthelaborforce.
Answer: B
Diff:2
103) Since1950,thelaborforceparticipationrateintheUnitedStates
A) ofmenandwomenbothincreased.
B) ofmenincreasedandwomendecreased.
C) ofmenandwomenbothdecreased.
D) ofmendecreasedandforwomenincreased.
Answer: D
Diff:2
104) Whichoneofthefollowingstatementsistrue?
A) Theexistenceofunemploymentplacestheeconomyatapointinsideitsproduction
possibilitiescurve.
B) Theunemploymentrateisthepercentageofthepopulationnotworking.
C) Tobecountedaspartofthelaborforce,anindividualmustbeworkingmorethan40
hoursaweek.
D) Thesumofwageslostbyallunemployedworkersgivesanaccurate,comprehensive
estimateofthetotalcostofunemployment.
Answer: A
Diff:2
105) DuringtheGreatDepression,
A) theunemploymentratewasnotunusuallyhigh,butwagelevelswerelow.
B) unemploymentstatisticswerenotcollected.
C) theU.S.unemploymentratereacheditshistoricalhighest.
D) mostpeoplewhocouldntfindworkleftthelaborforce,sotheofficialunemploymentrate
remainedlow.
Answer: C
Diff:1
106) WhichoneofthefollowingindividualsisNOTcountedasunemployed?
A) arecentcollegegraduatecurrentlywithoutanyemploymentandlookingforherfirst
full-timejob
B) a35-year-oldwomanfiredfromherpriorworkbecauseofpoorperformanceandlooking
foranotherjob
C) a50-year-oldwomanlaidofffromherformerjobbecauseofadownturninthe
companyssalesandlookingforanotherjob
D) a22-year-oldaspiringactresscurrentlywithoutanyshowbusinessemployment,but
workingtemporarilyasawaitresswhilesheauditionsforactingjobs
Answer: D
Diff:1
107) Theaveragedurationofunemploymentacrossthelaborforceisabout
A) 25weeks.
B) 15weeks.
C) 8weeks.
D) 4weeks.
Answer: B
Diff:1
108) Whatisthedefinitionofadiscouragedworker?
A) amemberofthelaborforcewhoisworkingbutisdiscouragedabouthisprospectsfor
advancementwithinthecompany
B) amemberofthelaborforcewhoisworkingbutisdiscouragedabouttheperformanceof
hiscompanywithintheindustry
C) apersonwhohasdroppedoutofthelaborforcebecauseheisdiscouragedabouthis
prospectsforemployment
D) anemployedmemberofthelaborforcewhoisdiscouragedabouthispay
Answer: C
Diff:2
109) WhichoneofthefollowingaccuratelydescribesthetrendsinU.S.laborforceparticipationover
thepast50years?
A) Thelaborforceparticipationrateofmenhasclimbedfromabout75percentto90percent.
B) Thelaborforceparticipationrateofwomenhasclimbedfrombelow40percenttoabout60
percent
C) Thelaborforceparticipationratesforbothmenandwomenhavedeclined.
D) Theoveralllaborforceparticipationratehasheldsteadyatabout85percent.
Answer: B
Diff:1
110) Isitpossiblefortheunemploymentratetoriseatthesametimethatthenumberofpeople
workingincreases?
A) No
B) Yes,ifthenewworkersareemployedlessthanfulltime
C) Yes,iflaborforcegrowthoutpacesgrowthinthenumberofpeopleworking
D) Yes,ifestablishedworkerskeeptheirjobsbutnolongerhavetheoptionofworking
overtime
Answer: C
Diff:3
111) Whichoneofthesefactorsplaysaroleindeterminingtheextentanddurationoffrictional
unemployment?
A) theeasewithwhichjobseekerscanobtaininformationaboutjobopenings
B) thedegreetowhichtheoveralllevelofbusinessactivityfluctuatesupanddown
C) theextenttowhichgovernmentlegislationrequiresfirmstoprovidehealthinsurancefor
employees
D) theeducationandskilllevelsoflaborforceparticipants
Answer: A
Diff:2
112) ThelaborforceintheUnitedStatesincludes
A) discouragedworkers.
B) thoseovertheageof16whoareemployedorareseekingemployment.
C) thosebetweenages12and16whoareactuallyworking.
D) alloftheabove.
Answer: B
Diff:2
Totalpopulation
Workingagepopulation
Numberemployed
Numberofunemployed
745,000
550,000
361,000
19,000
113) Usingtheabovetable,theemploymentrateis
A) 65.6percent.
B) 48.5percent.
Answer: C
Diff:2
C) 95.0percent.
D) 69.1percent.
114) Usingtheabovetable,theunemploymentrateXis
A) 2.6percent.
B) 5.0percent.
C) 3.5percent.
D) 2.1percent.
C) 930,000.
D) 569,000.
Answer: B
Diff:2
115) Usingtheabovetable,thelaborforceis
A) 380,000.
B) 911,000.
Answer: A
Diff:2
116) Usingtheabovetable,thelaborforceparticipationrateis
A) 65.6percent.
B) 73.8percent.
C) 81.8percent.
D) 69.1percent.
Answer: D
Diff:2
117) Unemploymentstatisticsareoftencriticizedfor
A) understatingthenumberofpeopleoutofwork,becausediscouragedworkersare
excludedinthestatistics.
B) overstatingthenumberofpeopleoutofwork,becauseretireesareincludedinthe
statistics.
C) understatingthenumberpeopleoutofwork,becausefull-timecollegestudentsare
excluded.
D) overstatingthenumberofpeopleoutofwork,becausetheunemploymentstatistics
includealllow-incomeworkers.
Answer: A
Diff:2
118) IfTimworksathometakingcareofthehousehold,
A) heispartofthelaborforce.
B) heisnotpartofthelaborforce.
C) heisconsideredtobeemployed.
D) heisconsideredtobeunemployed.
Answer: B
Diff:2
119) Whichofthefollowingwouldbeconsideredamemberofthelaborforce?
A) anengineerwhohasbeenlaidoffayearagoandsincethenhasnotlookedforwork
B) aninmateinastateprisonmakinglicenseplates
C) apersoninamentalinstitution
D) acomputerprogrammerlookingforwork
Answer: D
Diff:2
120) Whichofthefollowingpeoplewouldbeconsideredunemployedassumingthattheyare
activelyseekingemployment?
A) thosewhowerefiredfromtheirjob
B) thosewhoresignedfromtheirjob
C) newentrantsintothejobmarket
D) Alloftheabovearecorrect.
Answer: D
Diff:2
121) ThehighestmeasuredrateofunemploymentintheUnitedStatesoccurredduring
A) thepost-WWIIyears.
B) thePanicof1893.
C) theCarteradministration.
D) theGreatDepression.
Answer: D
Diff:1
122) WhichofthefollowinggroupswouldNOTbeconsideredaspartofthecivilianlaborforce?
A) full-timestudentswhoarenotworkingorlookingforwork
B) thosealreadyemployed
C) thosewhoareunemployed
D) allindividualsonlyworkingpart-time
Answer: A
Diff:2
123) Assumingthereare150millionpeopleemployedintheUnitedStatesand5millionpeople
unemployed,theunemploymentratewouldthereforeapproximatelyequal
A) 2.22percent.
B) 3.23percent.
C) 4.4percent.
D) 10.1percent.
Answer: B
Diff:1
124) Discouragedworkers
A) wouldbeconsideredasunemployed.
B) wouldnotbeconsideredasunemployed.
C) wouldbeconsideredaspartofthelaborforce.
D) would,accordingtosome,tendtoskewtheunemploymentrateupward.
Answer: B
Diff:3
125) Thedefinitionofajobloserisanindividual
A) whoquitshisjobvoluntarily.
B) whoseemploymentwasterminatedinvoluntarilyduetoadownturnintheeconomy.
C) whocompetedforapromotionathiscompanyanddidnotgetit.
D) whoisunderemployed.
Answer: B
Diff:1
126) Thedefinitionofajobleaverisanindividual
A) whoterminateshisjobvoluntarilyinordertoworkforafamilybusiness.
B) whoseemploymentwasterminatedinvoluntarily.
C) whocompetedforapromotionathiscompanyanddidnotgetit.
D) whoisunderemployed.
Answer: A
Diff:1
127) Since1950,itcanbeobservedthatthefemaleparticipationrateinourlaborforcehas
A) increased.
B) decreased.
C) stayedconstant.
D) movederraticallyupanddown.
Answer: A
Diff:1
128) Anindividualwhohasstoppedlookingforajobbecauseheisconvincedthathecannotfinda
jobisreferredtoas
A) acontingentworker.
B) aproductiveworker.
D) anunemployedworker.
Answer: C
Diff:1
129) Anniehadajobasahumanresourcemanagerofarestaurantchainthatwentoutofbusiness
duetoadownturnintheeconomy.Shelookedforworkforsixmonthsandgaveupbecauseshe
wasconvincedthatshecouldnotfindasuitablejobtofitherskillset.Inthisinstanceshewould
becountedasa
A) jobleaver.
B) reentrant.
C) discouragedworker.
D) laborforceparticipant.
Answer: C
Diff:2
130) Withregardtoemploymentstatus,theadultpopulationisdividedintowhatthreegroups?
Howisitdeterminedwhethersomeoneisinthelaborforceornot?
Answer: Theadultpopulationisinoneofthreegroupstheemployed,theunemployed,andthose
notinthelaborforce.Tobeinthelaborforce,onemustbe16yearsoldorolder,and
eitherbeworkingoractivelylookingforwork.
Diff:1
131) WhatarethefourcriteriausedbytheBureauofLaborStatisticstodeterminewhetheran
individualisunemployedornot?
Answer: Firstarejoblosers,whobecameunemployedvoluntarilythroughterminationorlayoff.
Secondarereentrants,whicharepeoplewhoworkedatafull -timejobbeforebuthave
beenoutofthelaborforceforawhile.Thirdarejobleaverswhovoluntarilyleavetheir
jobs,andthelastarenewentrants,whoarepeoplewhoneverworkedafull -timejobfor
twoweeksorlonger.
Diff:1
132) Whoarediscouragedworkers,andhowdotheyaffectlaborforceparticipationand
unemploymentrates?
Answer: Discouragedworkersarepeoplewhohavedroppedoutofthelaborforcebecausethey
dontbelievetheycanfindajobthattheywouldwant.Tobeconsideredinthelabor
force,onemustbeactivelylookingforwork,soadiscouragedworkerisnotconsidered
inthelaborforceandisnotconsideredunemployed.Hence,theexistenceofdiscouraged
workersimpliesthatthepublishedunemploymentratesunderstatethetruelevelof
unemployment.
Diff:2
133) Distinguishbetweenastockandaflow.Howdotheseconceptsrelatetounemployment?
Answer: Astockisaquantityofsomethingmeasuredatagivenpointintime,whileaflowisa
quantitymeasuredperunitoftime.Unemploymentisastockconcepttherearesomany
peopleoutofworkatagivenpointintime.Overtime,itincreasesordecreases
dependingonwhathappenstoflowssuchasjobfindersandjoblosers.
Diff:2
134) Ifthedurationofunemploymentincreases,whathappenstotheunemploymentrate,other
thingsbeingequal?Why?
Answer: Anincreaseinthedurationofunemploymentincreasestheunemploymentrate.If
workersstayunemployedlonger,otherthingsconstant,therewillbemoreworkers
unemployedatanygivenpointintime.
Diff:2
135) Whatisunemploymentandwhatistheunemploymentrate?Whatarethecostsof
unemployment?
Answer: Unemploymentreferstosomeonewhoiswithoutajobbutwhoisactivelylookingfor
work.Theunemploymentrateistheproportionofthelaborforce,whichisthepeople16
andolderwhoeitherareworkingorarelookingforwork,thatisunemployed.Thecost
ofunemploymentisthereducedoutputthatcouldhavebeenmadewithfull
employment,aswellasthepsychologicalcoststotheunemployed.
Diff:1
7.2TheMajorTypesofUnemployment
1) Frictionalunemploymentwillalwaysexistsince
A) someworkerswillalwayswanttomakeajobtransition.
B) thecapitalistsystempromotesunemployment.
C) mismatchesinskillswillalwaysexist.
D) theU.S.economywillcontinuetoshrink.
Answer: A
Diff:1
Topic: 7.2TheMajorTypesofUnemployment
2) SupposethatMattquitsajobwiththeXYZCorporationinordertolookformorerewarding
employment.Mattwouldbe
A) countedasstillbeingemployed.
B) includedintheeconomyshiddenemployment.
C) countedasfrictionallyunemployed.
D) countedascyclicallyunemployed.
Answer: C
Diff:1
3) Ifapersonlosesherjobbecauseherabilitiesandskillsareapoormatchwithcurrent
requirementsofemployers,thispersonisconsidered
B) frictionallyunemployed.
D) seasonallyunemployed.
Answer: A
Diff:1
4) Ifapersonisfiredforpoorperformancebutpossessesskillsrequiredtoobtainanotherjobafter
somesearching,thispersonisconsidered
A) seasonallyunemployed.
C) structurallyunemployed.
D) adiscouragedworker.
Answer: B
Diff:2
5) Bobsassemblylinejobhasbeenreplacedbyrobots,andBoblacksabilitiesandskillsrequired
toattainotherjobs.Heisconsidered
C) seasonallyunemployed.
Answer: A
Diff:2
6) Collinhaslosthisjobwithatelemarketingcompany,whichhasmoveditsoperationtoIndia.
Collinisconsidered
C) seasonallyunemployed.
Answer: A
Diff:2
7) Manyeconomistswouldarguethatsomefrictionalunemployment
A) createsmassiveeconomicdisruptionsandshouldbeeliminatedasquicklyasfeasible.
B) shouldbeeliminatedwhateverthecost.
C) nolongerexistsbecauseincreasedunemploymentbenefitshavegenerallysolvedthis
problem.
D) cannotandprobablyshouldnotbeeliminated.
Answer: D
Diff:1
8) Frictionalunemploymentwouldincreasewhen
A) migrantworkersareunemployedafterharvestseason.
B) thenumberofindividualswhoquitonejobtofindanotherincreases.
C) discouragedworkersdropoutoftheworkforce.
D) workersarereplacedbymachinesinproduction.
Answer: B
Diff:1
9) Arecentaccountinggraduatefromamajorbusinessschoolissearchingforaplacetobeginhis
careerasanaccountant.Thisindividualis
B) seasonallyunemployed.
C) cyclicallyunemployed.
D) frictionallyunemployed.
Answer: D
Diff:1
10) Whenanindividualisfrictionallyunemployed,theunemploymentarisesfrom
A) ashort-termeliminationofjobsbecauseofaslowdowninbusinessactivity.
B) imperfectlabormarketinformationwhichrequiresindividualstosearchforappropriate
employment.
C) thepermanenteliminationofjobsbecauseofachangeinthestructureoftheeconomy.
D) areductionintheoveralldemandforlaborsskills.
Answer: B
Diff:1
11) Whichoneofthefollowingindividualswouldbeclassifiedasstructurallyunemployed?
A) Bennettlosthisconstructionjobbecausetherewasareductioninthenumberofhouses
builtduringthewinterof2010.
B) Gaillostherjobwiththestatebecausetherewasareductioninthestatebudget.
C) Tommylosthisjobwhenthesteelmillwhereheworkedclosedbecausedomestic
producerswouldnotproduceasefficientlyandcheaplyasforeignfirms.
D) FaylostherjobinearlyJanuarywhentheChristmasstorewheresheworkedclosed.
Answer: C
Diff:1
12) Thefactthatanumberoflifeguardslosetheirjobsattheendofeachsummerwouldbecounted
as
A) cyclicalunemployment.
B) frictionalunemployment.
C) seasonalunemployment.
D) structuralunemployment.
Answer: C
Diff:1
13) Alifeguardwhoisoutofworkinthewinteris
A) frictionallyunemployed.
B) structurallyunemployed.
Answer: D
Diff:1
14) Anexampleofafrictionallyunemployedindividualis
A) Charles,whohaslosthisjobasanautoworkerbecauseofincreasedimports.
B) Mary,whoquitherjobtofindworkclosertoherhome.
C) Sam,wholosthisjobasarealestatesalespersonwhenthehousingmarketwentsoft.
D) Cynthia,whohasfewskillsandisnolongerlookingforwork.
Answer: B
Diff:1
15) Cyclicalunemploymentoccurswhen
A) individualsenterthelabormarketandmaketheroundsofpotentialemployers.
B) individualswithskillsnolongervaluedinthedomesticlabormarketcannotfind
employment.
C) individualsgiveupthesearchforemployment.
D) adownturnineconomicactivitydecreasesemployment.
Answer: D
Diff:1
16) Anexampleofacyclicallyunemployedindividualis
A) Charles,wholosthisjobasarealestatesalespersonwhenthehousingmarketwentsoft.
B) Alice,whoquitherjobtoentercollege.
C) Mary,wholostherjobinthetextileindustryfollowingadecreaseinthetariffontextiles.
D) Bob,whohasjustgraduatedfromcollegeandisenteringthelabormarket.
Answer: A
Diff:1
17) Ifanoutdoorvendorlosesherjobwhenwinterweathercomes,thisindividualis
A) seasonallyunemployed.
B) cyclicallyunemployed.
C) structurallyunemployed.
D) chronicallyunemployed.
Answer: A
Diff:1
18) Structuralunemploymentresultswhen
A) areductioninconsumerincomereducesdemandforproducts.
B) individualsenterthelabormarketinJunefollowinggraduation.
C) workersfacelayoffsfollowingadecreaseineconomicactivity.
D) theintroductionofaproductsubstituteleadstoalargedeclineinthemarketdemandfora
productsothatworkersspecializingintheproductionofthatproductfindthemselvesout
ofwork.
Answer: D
Diff:1
19) Whichofthefollowingexplainswhyfrictionalunemploymentexists?
A) Someworkershaveskillsthathavebecomeobsolete.
B) Thereareindividualswhoworkpart-timebutprefertoworkfull-time.
C) Therearecostsassociatedwithsearchingforjobs.
D) Policymakershavebeenunabletopreventrecessions.
Answer: C
Diff:2
20) Unemploymentthatiscausedbybusinessrecessionsiscalled
A) frictionalunemployment.
B) cyclicalunemployment.
Answer: B
Diff:1
21) Apersonquitsherjobinordertospendtimelookingforabetterpayingjob.Thisisanexample
of
Answer: A
Diff:2
22) EnvironmentalregulationreducesthedemandforWestVirginiacoalandtheunemployment
rateinWestVirginiaincreases.Thisisanexampleof
C) structuralunemployment.
D) regulatoryunemployment.
Answer: C
Diff:2
23) Unemploymentduetothefactthatworkershavedifficultyinthesearchforappropriatejob
offersis
B) structuralunemployment.
C) cyclicalunemployment.
D) seasonalunemployment.
Answer: A
Diff:1
24) Unemploymentthatresultsfromamismatchofworkersabilitiesandskillswithcurrent
requirementsofemployersis
Answer: B
Diff:1
25) Unemploymentthatresultsfrombusinessrecessionsthatoccurwhenaggregatedemandis
insufficienttocreatefullemploymentis
Answer: C
Diff:1
26) Unemploymentthatresultsfromtheseasonalpatternofworkinspecificindustriesis
Answer: D
Diff:1
27) Frictionalunemploymentalwaysexistsbecause
A) someworkersquittheirjobswithouthavinganotherjobalreadylinedup.
B) thegovernmenthasneverinstitutedfullemploymentpolicies.
C) workersarelazyandrefusetoacceptcertainjobs.
D) recessionsarenecessarysometimestokeeptheeconomyhealthy.
Answer: A
Diff:2
28) Frictionalunemploymentis
A) relatedtojobsearchdifficultiesforpotentialworkers.
B) aresultofapoormatchofworkersabilitiesandskillswithcurrentrequirementsof
employers.
C) aresultofbusinessrecessionsthatoccurwhenaggregatedemandisinsufficienttocreate
fullemployment.
D) aresultoftheseasonalpatternofworkinspecificindustries.
Answer: A
Diff:1
29) Aworkerwhohasquitherjobtoobtainahigherpayingjobwouldbeincludedinwhich
unemploymentcategory?
A) Frictionalunemployment
B) Cyclicalunemployment
C) Structuralunemployment
D) Seasonalunemployment
Answer: A
Diff:1
30) Topreventfrictionalunemployment,wewouldhaveto
A) makesurethatmarketdemandforgoodsisstableovertime.
B) eliminatethebusinesscycle.
C) preventpeoplefromleavingtheirjobsbeforefindinganotherjob.
D) makesureeveryonewenttocollege.
Answer: C
Diff:2
31) Structuralunemploymentis
A) duetothefactthatworkersmustsearchforappropriatejoboffers.
employers.
fullemployment.
Answer: B
Diff:1
32) Cyclicalunemploymentis
A) relatedtojobsearchdifficultiesforpotentialworkers.
employers.
fullemployment.
Answer: C
Diff:1
33) Cyclicalunemploymentiscausedby
A) technologicalchange.
B) fluctuationsinthebusinesscycle.
C) adynamiceconomyinwhichpeoplewanttoswitchjobssometimes.
D) predictableshiftsinproductionassociatedwithdifferentseasons.
Answer: B
Diff:1
34) Seasonalunemploymentis
A) duetothefactthatworkersmustsearchforappropriatejoboffers.
employers.
fullemployment.
Answer: D
Diff:1
35) Theseasonallyadjustedunemploymentrate
A) reportsonlyseasonalunemployment.
B) removestheseasonalvariationfromtheunemploymentrate.
C) isimpossibletocomputesincenooneknowswhattheseasonalcomponentequals.
D) isanothernameforstructuralunemployment.
Answer: B
Diff:1
36) Whichofthefollowingstatementsistrueabouttheseasonallyadjustedunemploymentrate?
A) Theseasonallyadjustedunemploymentrateisthesumofthefrictionalunemployment
rate,structuralunemploymentrate,andcyclicalunemploymentrate.
B) Theseasonallyadjustedunemploymentrateshowshowtheunemploymentratefluctuates
withthevariousseasons.
C) Theseasonallyadjustedunemploymentrateisthesameasthenaturalrateof
unemployment.
D) TheseasonallyadjustedunemploymentrateistheratecomputedforFall,Spring,Summer
andWinter.
Answer: A
Diff:1
37) Apersongraduatesfromcollege,thenstartstolookforajob.Thisisanexampleof
Answer: B
Diff:2
38) Whentheautomobilereplacedthehorseastheprimarymeansoftransportation,the
unemploymentrateofblacksmithsincreased.Thiswasanexampleof
Answer: D
Diff:2
39) Acutbackinthespaceprogramduetoasloweconomycausesanincreaseinunemployment
amongaeronauticalengineers.Thisisanexampleof
Answer: A
Diff:2
40) Arecessioncausesadecreaseinthedemandforhousing,resultinginsubstantiallayoffsinthe
constructionindustry.Thisisanexampleof
Answer: A
Diff:2
41) TheUnitedStatesexperiencedadeeprecessionbetween2007and2009.Whichtypeof
unemploymentwouldmostlikelyincreaseduringthatperiodofrecession?
A) cyclicalunemployment
B) frictionalunemployment
C) seasonalunemployment
D) structuralunemployment
Answer: A
Diff:2
42) ReductionsinemploymentintheU.S.autoindustrycausedbytheincreasedadoptionofnew
technologiestoproducecarsmoreefficientlyisanexampleof
Answer: D
Diff:1
43) Apersonwhoisemployedintheconstructionindustrymayfrequentlyexperience
D) technologicalunemployment.
Answer: C
Diff:1
44) Corrinajustgraduatedfromcollege,isunemployed,andlookingforherfirstrealjob.Thisisan
exampleof
D) cyclicalunemployment.
Answer: A
Diff:2
45) LoisworkedforGeneralMotorsandwaslaidoffwhencarsalesfellduringarecessionwith
fallingincomes.Thisisanexampleof
Answer: D
Diff:2
46) Supposethatunemploymentincreasesbecausethegovernmentrequiresemployerstoprovide
morefundsfortheiremployeesretirementprograms.Theincreaseinunemploymentismost
likelyaresultofanincreasein
C) thenaturalrateofunemployment.
Answer: B
Diff:2
47) Mrs.Garcialostherjobatatextilemillduetocompetitionfromcheaperimportedgoods.She
wouldbeclassifiedas
D) structurallyunemployed.
Answer: D
Diff:2
48) Aftercompletingcollege,JohnSmithspenttwomonthslookingforajob.Duringthisperiodhe
wouldbeclassifiedas
D) structurallyunemployed.
Answer: A
Diff:2
49) UnemployedU.S.residentswhoare,ineffect,merelysearchingforworkbetweenjobs,are
definedas
Answer: A
Diff:2
50) Fredrecentlylosthisjobasatelleratthebank.Thebankexplainedthattheywerereplacing
FrankandotherswithATMmachines.Fredfallsintoacategoryofunemploymentknownas
Answer: B
Diff:3
51) In2009,policymakersintheUnitedStatesweredealingwitharecession.Workerswhowere
laidoffduetotheeconomicslowdownwouldbe
Answer: C
Diff:3
52) Anniehadajobasahumanresourcemanagerofarestaurantchainthatwentoutofbusiness
duetoadownturnintheeconomy.Thisisanexampleof
D) technologicalunemployment.
Answer: A
Diff:2
53) TheunemploymentratereportedbytheBureauofLaborStatisticsincludesallofthefollowing
typeofunemploymentwiththeexceptionof
C) hiddenunemployment.
Answer: C
Diff:1
54) Apersonwhoisunemployedbecauseofamismatchbetweenthepersonsskillsandcurrent
employmentrequirementsisexperiencing
Answer: B
Diff:2
55) Describethemajortypesofunemployment.
Answer: Frictionalunemploymentisthecontinuousflowofpeoplefromjobtojob.Seasonal
unemploymentreferstochangesinemploymentrelatedtoseasonal -typeofwork,such
asworkatsummerresortsorwinterskilodges.Structuralunemploymentrefersto
unemploymentofworkersoverlengthyintervalsresultingfromskillmismatchesof
prospectiveemployeesabilitiesandskillswithrequirementsofemployers,andfrom
fewerjobsbeingofferedbyemployersconstrainedbygovernmentregulationsandlabor
marketpolicies.Cyclicalunemploymenthastodowiththoseunemployedduetoa
downturninbusinessactivity.
Diff:1
7.3FullEmploymentandtheNaturalRateofUnemployment
1) TheestimateofthecurrentnaturalrateofunemploymentrateintheUnitedStatesis
approximately
A) 0percent.
B) 0.5percent.
C) 10percent.
D) noneoftheabove.
Answer: D
Diff:1
Topic: 7.3FullEmploymentandtheNaturalRateofUnemployment
2) Whichofthefollowingbestdescribesaneconomywithfullemployment?
A) Everyonewhoislookingforajobwillhaveone.
B) Nopersonisunemployedforwhateverreason.
C) Fullemploymentoccursonlywhentheeconomyhasazeropercentunemploymentrate.
D) Thelevelofunemploymentthatcorrespondstothenormalfrictioninthelabormarket.
Answer: D
Diff:1
3) Fullemploymentdoesnotnecessarilymeanthateveryadulthasajobbecause
A) studentsandhomemakersarealwayslookingforwork.
B) therearealwayssomediscouragedworkers.
C) policymakersneverwanttoachievefullemployment.
D) therearetransactioncostsinfindingajobinthelabormarket.
Answer: D
Diff:1
4) ThenaturalrateofunemploymentdoesNOTincludewhichofthefollowing?
A) cyclicalunemployment
B) frictionalunemployment
C) seasonalunemployment
D) alloftheabove
Answer: A
Diff:1
5) Anunemploymentrateofzerocannotbeexpectedsince
A) therearesomepeoplewhodonotwanttowork.
B) therewillalwaysbediscouragedworkers.
C) someportionofthelaborforcewillalwaysbebetweenjobs.
D) aggregatedemandcannevercreateenoughjobvacancies.
Answer: C
Diff:1
6) Whichofthefollowingstatementsaboutfullemploymentiscorrect?
I. Fullemploymentmeansthattheunemploymentrateislessthan1/2of1percent.
II. Fullemploymentmeansthatthetransactioncostsassociatedwithgettingajobarezero.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: D
Diff:1
7) Fullemploymentmeansthat
A) everyonewhowantsajobhasajob,althoughitmaynotbethejobtheyreallywant.
B) everyonewhowantsajobhasajob,andtheyhavethejobtheymostprefer.
C) takingseasonalfluctuationsintoaccount,onlyfrictionalandstructuralunemployment
exist.
D) thesumofstructuralandcyclicalunemploymentisgreaterthanfrictionalunemployment.
Answer: C
Diff:2
8) FullemploymentisdefinedbytheCouncilofEconomicAdvisersas
A) 4percent.
B) everyadultwhowantstoworkhasajob.
C) theunemploymentrateassociatedwithzeroinflation.
D) theunemploymentrateassociatedwiththenormalfrictionsinthelabormarket.
Answer: D
Diff:2
9) Thenaturalrateofunemploymentwhenseasonallyadjustedincludes
A) frictionalandstructuralunemploymentbutnotcyclical.
B) frictionalandcyclicalunemploymentbutnotstructural.
C) frictionalunemploymentonly.
D) cyclicalandstructuralunemploymentbutnotfrictional.
Answer: A
Diff:1
10) Inconditionsoffullemployment,
A) nooneinoroutofthelaborforceisunemployed.
B) theonlyunemploymentresultsfromanormalfrictionsandstructuralmismatchesinthe
labormarket.
C) theonlyunemploymentresultsfromcyclicalswingsineconomicactivity.
D) nooneinthelaborforceisunemployed.
Answer: B
Diff:1
11) Fullemploymentisnotzerounemploymentbecause
A) therearestatisticalerrorswhendeterminingtheunemploymentratethatcannotbe
overcome.
B) thereisnormalfrictionintheeconomymadeupofthoseworkerswhoarebetweenjobs
andthosenewentrantstothelaborforce.
C) thereareundocumentedworkersintheeconomywhoarenotcountedbytheBureauof
LaborStatistics.
D) governmentworkersarenotcountedinthelaborforce.
Answer: B
Diff:2
12) Currently,economistsestimatethatthenaturalrateofunemploymentintheUnitedStatesis
about
A) 10percent.
B) 2percent.
C) 5percent.
D) 0percent.
Answer: C
Diff:1
13) Fullemploymentis
A) zerounemployment.
B) whentheunemploymentlevelisreducedtothegoalsetbyCongress.
C) theunemploymentlevelwhenthenormalfrictionintheeconomyistakeninaccount.
D) whenalladultslookingforworkcanfindfulltimeoccupation.
Answer: C
Diff:1
14) Thenaturalrateofunemploymentistherateofunemploymentthat
A) allworkersandemployershavefullyadjustedtoanychangesintheeconomy.
B) occurswhenallworkersfindworkintheeconomy.
C) isanunrealisticgoalsetbypolicymakers.
D) occurswhenemployersfindmorethanonejobapplicantforeachjobavailable.
Answer: A
Diff:2
15) FullemploymentintheUnitedStatestoday
A) meansa100%employmentrate.
B) means0%unemploymentfor6months.
C) meansabouta95%employmentrate.
D) meansthatthecyclicalunemploymentrateisabout5%.
Answer: C
Diff:2
16) Thelevelofunemploymentthatisequaltothefrictionalandstructuralrateinthelongrunis
sometimesreferredtoas
A) cyclicalemployment.
B) thenaturalrateofunemployment.
C) thetotalrateofunemployment.
D) thezerounemploymentrate.
Answer: B
Diff:2
17) Whatismeantbyfullemployment?Whyisntthefullemploymentratezero?Whatcauses
frictionalunemployment?
Answer: Fullemploymentisthelevelofunemploymentthatcorrespondstonormalfrictioninthe
labormarket.Sinceadynamiceconomywillalwaysexperiencechangesindemandfor
goodsandservices,therewillalwaysbesomefrictionalunemployment.Frictional
unemploymentreferstotheunemploymentresultingfromthetimepeoplespend
betweenjobs,lookingforotherwork.
Diff:3
7.4InflationandDeflation
1) Amajorelementoftheconceptsofinflation anddeflation is
A) theideathatpricechangesaremeasureddaily.
B) theirdependenceonaverageratherthanindividualprices.
C) therequirementthatALLpricesmustbemovinginthesamedirection.
D) eachhouseholdswillingnesstoreportwhattheypayforgoodsandserviceseachmonth.
Answer: B
Diff:1
Topic: 7.4InflationandDeflation
2) Asustaineddecreaseintheaverageofallpricesofgoodsandservicesintheeconomyisknown
as
A) inflation.
B) disinflation.
C) deflation.
D) hyperinflation.
Answer: C
Diff:1
3) Thestatisticalmeasureofaweightedaverageofpricesofgoodsandservicesthatfirmsproduce
andsellisknownas
A) theinflationrate.
B) theconsumerpriceindex(CPI).
C) theproducerpriceindex(PPI).
D) theGrossDomesticProduct(GDP)deflator.
Answer: C
Diff:1
4) Inflationisbestdescribedasasituationinwhich
A) relativepricesarechanging.
B) somepricesarerisingfasterthanothers.
C) relativepricesarechanging,butthepurchasingpowerofthedollarisunchanged.
D) theaverageofallpricesareonasustainedriseoveraperiodoftime.
Answer: D
Diff:1
5) Deflationisdefinedasasituationinwhich
A) therateofinflationisbelow2percent.
B) theaverageofallpricesofgoodsandservicesinaneconomyisfalling.
C) thevalueofthedollarisrisingrelativetoothercurrencies.
D) theGrossDomesticProductsgrowthrateislessforagivenquarterthanitwasforthe
priorquarter.
Answer: B
Diff:1
6) Inflationisbestdefinedas
A) asustainedincreaseinthepriceofALLgoodsandservicesinaneconomy.
B) arelativepriceincrease.
C) asustainedincreaseintheaverageofallpricesofgoodsandservicesinaneconomy.
D) asustainedincreaseinthepriceofasinglegoodorservice.
Answer: C
Diff:1
7) Deflationreferstoasituationinwhich
A) theinflationratedecreases.
C) thereisarecessionandinflation.
B) theaverageofallpricesisfalling.
D) pricesarenotchanging.
Answer: B
Diff:1
8) Therateofinflationandthepurchasingpowerofmoneyare
A) positivelyrelated.
B) totallyunrelated.
C) inverselyrelated.
D) randomlyrelated.
Answer: C
Diff:2
9) Thefasterthedropinthepurchasingpowerofmoney,thefasterthe
A) dropintheinflationrate.
B) dropinthedeflationrate.
C) increaseinthedeflationrate.
D) increaseintheinflationrate.
Answer: D
Diff:2
10) Thevalueofyourmoneyincome,intermsofbuyinggoodsandservices,isreferredtoasyour
moneys
A) stayingpower.
B) rigidityfactor.
C) purchasingpower.
D) transactioncost.
Answer: C
Diff:1
11) Bydefinition,thepurchasingpowerofmoneyalwaysdropswhen
A) inflationoccurs.
B) deflationoccurs.
C) theeconomyisexperiencingfullemployment.
D) thereisapresidentialelectionyear.
Answer: A
Diff:1
12) Thenominalvalueofagoodis
A) thegoodsvalueexpressedinpurchasingpowerterms.
B) thegoodsanticipatedvalueoneyearfromnow.
C) thepriceofthegoodintodaysdollars,minusananticipatedinflationpremium.
D) thepriceofthegoodintodaysdollars.
Answer: D
Diff:1
13) Theformulaforcomputingabasicpriceindexis
A) (costofmarketbaskettoday/costofmarketbasketinbaseyear)100.
B) (costofmarketbasketinbaseyear/100) costofmarketbaskettoday.
C) (costofmarketbasketinbaseyear/costofmarketbaskettoday)100.
D) (100/costofmarketbasketinbaseyear) + costofmarketbaskettoday.
Answer: A
Diff:2
14) Ifthecurrentpriceofamarketbasketofgoodsis$850andthebaseyearpriceforthesame
marketbasketis$500,whatisthevalueofthepriceindex?
A) 140
B) 170
C) 120
D) 100
Answer: B
Diff:1
15) Assumethatthecurrentpriceofamarketbasketofgoodsis$2,500andthebaseyearpriceof
thesamemarketbasketis$1,340.Thepriceindexis
A) 53.6.
B) 40.0.
C) 138.3.
D) 186.6.
Answer: D
Diff:1
Year
Period
1
2
3
4
CurrentWidget
Price
$0.75
1.35
1.60
2.10
BaseWidget
Price
$0.75
0.75
0.75
0.75
16) Accordingtotheabovetable,inYear3,thepriceindexforwidgetsis
A) 100.
B) 213.3.
C) 46.9.
D) 180.
Answer: B
Diff:1
17) Accordingtotheabovetable,inthebaseperiod(Year1),thepriceindexis
A) 100.
B) 213.3.
C) 46.9.
Answer: A
Diff:1
D) 180.
18) TheConsumerPriceIndexmeasures
A) theaverageofrawmaterialpricespaidbyproducingfirms.
B) thelevelofpriceswithrespecttogoodsandservicespurchasedbyatypicalconsumerin
urbanareas.
C) theaverageofthepricesofallgoodsproducedinacountryandgoodsimportedfrom
othercountries.
D) hourlywageratesofmanufacturingworkers.
Answer: B
Diff:1
19) Whichofthefollowingpriceindexesisdesignedtomeasurechangesinthepricesofgoodsand
servicespurchasedbyatypicalindividual?
A) ProducerPriceIndex
B) GrossDomesticProduct(GDP)Deflator
C) IndexofLeadingEconomicIndicators
D) ConsumerPriceIndex
Answer: D
Diff:1
20) Apriceindexshows
A) thecurrentcostofabasketofgoods.
B) therelativepriceofnecessities.
C) thepriceofgoodsinthefuture.
D) thecostoftodaysgoodsexpressedintermsofthecostofgoodsinabaseyear.
Answer: D
Diff:1
21) Assumethattherewasa10percentincreaseinthepriceofallgoodsin2010;ifthebaseyearis
2009,thenthepriceindexin2010willbe
A) 90.
B) 110.
C) 200.
D) 1100.
Answer: B
Diff:1
22) Thestatisticalmeasureoftheweightedaverageofpricesofgoodspurchasedbyatypical
individualiscalledthe
A) ProducerPriceIndex.
B) GrossDomesticProduct(GDP)deflator.
C) ConsumerPriceIndex.
D) PersonalConsumptionExpenditureIndex.
Answer: C
Diff:1
23) Thebroadestindicationofeconomy-wideinflationiscapturedbythe
A) ConsumerPriceIndex.
B) GrossDomesticProduct(GDP)deflator.
C) ProducerPriceIndex.
Answer: B
Diff:1
24) Whichofthefollowingmeasuresgivestheearliestwarningofincreasinginflation?
A) TheConsumerPriceIndex
B) TheProducerPriceIndex
C) ThePersonalConsumptionExpenditureIndex
D) Alloftheseshouldsignalthesameshort-runinflation
Answer: B
Diff:1
25) Lastyearthepriceofadozeneggswas$1,andthisyearthepriceis$1.30.Whichofthe
followingdoesNOTexpressthispricechangeaccurately?
A) Thepriceincreased30percent.
B) Thepriceincreasedby30cents.
C) Iflastyearwasthebaseyear,theindexnumberforthisyearwouldbe130.
D) Ifthisyearisthebaseyear,theindexnumberforlastyearwouldbe130.
Answer: D
Diff:2
26) Lastyearyoupurchased20CDsat$12apiece,10shirtsat$15each,and5sweatersat$30each
(totalspendingequals$540).Thisyearyoubuy18CDsat$15each,10shirtsat$16each,and6
sweatersat$36each(totalspendingequals$640).Iflastyearsindexwas100,thisyearsindex
A) is119.6.
B) is118.5.
C) is83.6.
D) is30.
Answer: B
Diff:3
27) Incomputingapriceindex,
A) themostrecentyearisalwayssetequalto100.
B) boththequantitiesinthemarketbasketandthepriceschangefromyeartoyear.
C) thequantitiesinthemarketbasketstaythesamewhilethepricesdiffer.
D) thebaseyearmustbeoneforwhichtheinflationratewaszero.
Answer: C
Diff:2
28) ThepriceindexthatmeasuresthechangesinpricesofALLgoodsandservicesproducedbythe
economyisthe
A) CPI.
B) PPI.
C) GrossDomesticProduct(GDP)deflator.
Answer: C
Diff:1
29) Theconsumerpriceindex(CPI)isameasureofinflationfor
A) farmers.
B) anelderlycouplerecentlyretiredtoYuma,Arizona.
C) AppleComputer.
D) atypicalconsumerofthemarketbasketusedtocalculatetheindex.
Answer: D
Diff:3
Market
Basket
CDs
Gasoline
Quantity
10
200 gal
2009
Price
$32
$2.00
2010
Price
$24
$2.50
30) If2009isthebaseyear,whatisthepriceindexforamarketbasketofgoodsfor2010inthe
abovetable?
A) 97.3
B) 102.8
C) 128.0
D) Zero,sincethepriceofCDsfellandthepriceofgasolineincreased
Answer: B
Diff:2
31) WhichofthefollowingisameasureofgeneralinflationthatisNOTbasedonafixedmarket
basketofgoodsandservices?
A) consumerpriceindex
B) producerpriceindex
C) personalconsumptionexpenditureindex
D) medicalpriceindex
Answer: C
Diff:1
32) Therelationshipbetweentheproducerpriceindex(PPI)andtheconsumerpriceindex(CPI)is
suchthat,intheshortrun,
A) theCPIusuallyincreasesbeforethePPI.
B) theCPIandthePPIusuallymovesimultaneously.
C) thePPIusuallyincreasesbeforetheCPI.
D) theCPIandthePPIusuallymoveinoppositedirections.
Answer: C
Diff:1
33) IftheBureauofLaborStatisticschangedthewayitcalculatestheconsumerpriceindex(CPI)so
astotakeintoaccountproductqualitychangesandthechangingmixofproductsandservices
purchasedbytheaveragefamily,theresultwouldmostlikely
A) showahigherrateofinflation.
B) showalowerrateofinflation.
C) causeanincreaseinSocialSecuritypayments.
D) causehigherwageincreasesforunionemployeeswithcontractsthatspecifyautomatic
wageboostswhentheCPIrises.
Answer: B
Diff:1
34) Inflationreferstothesituationwhen
A) thepricesofnecessitiesincrease.
B) theaverageofallpricesisincreasing.
C) allpricesrisebythesamerate.
D) therateatwhichpricesarerisingisrising.
Answer: B
Diff:1
35) Deflationisthesituationwhen
A) therateatwhichpricesincreasefalls.
B) theaverageofallpricesisdeclining.
C) therealrateofinterestisnegative.
D) somepricesareincreasingandsomearedeclining.
Answer: B
Diff:1
36) WhichofthefollowingstatementsisNOTtrueaboutinflation?
A) Inflationisasustainedincreaseintheaveragepricesofgoodsintheeconomy.
B) Duringaninflationaryperiod,thepricesofsomegoodswillincreasewhilethepriceof
somegoodswilldecrease.
C) Whenthereisinflation,thepurchasingpowerofadollardecreases.
D) Duringaninflationaryperiod,thepricesofallgoodswillincrease.
Answer: D
Diff:1
37) Thepurchasingpowerofmoneyincreaseswhen
A) theinflationrateincreases.
C) thereisdeflation.
B) thereisinflation.
D) therearemoredollarsintheeconomy.
Answer: C
Diff:2
38) Thevalueofmoneyforbuyinggoodsandservicesisknownas
A) inflation.
B) nomination.
C) nominalincome.
D) purchasingpower.
Answer: D
Diff:1
39) Whichofthefollowingstatementsistrueifyourmoneyincomestaysthesamebutthepriceof
onegoodthatyouarebuyinggoesup?
A) Youreffectivepurchasingpowerfalls.
B) Yournominalincomehasbeendecreased.
C) Youwillhavetoreducethequantitiesyoupurchaseofallgoods.
D) Yourrealincomehasincreased.
Answer: A
Diff:1
40) Thegreatertheinflationrate,the
A) fasterthedecreaseinthepurchasingpowerofmoney.
B) slowerthedecreaseinthepurchasingpowerofmoney.
C) betteritistoholdmoneyascash.
D) betteritistoputmoneyintosavingsaccounts.
Answer: A
Diff:2
41) Anincreaseinthepriceofelectricity,ceterisparibus,indicatesthat
A) thepurchasingpowerofmoneyisdecreasing.
B) thepurchasingpowerofmoneyisincreasing.
C) electricityisrelativelymorescarcethanitwasbefore.
D) inflationisincreasing.
Answer: C
Diff:2
42) Thevalueofanitemexpressedinpurchasingpowerthatvarieswiththeoverallpricelevelis
knownas
A) inflation.
B) deflation.
C) thenominalvalue.
D) therealvalue.
Answer: D
Diff:1
43) Thevalueofanitemexpressedintodaysdollarsisknownas
A) inflation.
B) deflation.
C) thenominalvalue.
D) therealvalue.
Answer: C
Diff:1
44) Robertreceiveda$100giftcertificatetoabookstoreayearago.Theeconomyhasbeeninan
inflationaryperiodforthelastyear.Thisgiftcertificateis
A) expressedinrealtermsandisworthmore.
B) expressedinnominaltermsandisworthless.
C) notexpressedineitherrealornominaltermssinceitisnotmoney.
D) adjustedintermsoftheCPI.
Answer: B
Diff:2
45) Apriceindexisthe
A) costofamarketbasketofgoodstoday.
B) costofamarketbasketofgoodsandservicesayearagoexpressedasapercentageofthe
costofthesamemarketbaskettoday.
C) costofamarketbasketofgoodsandservicestodayexpressedasapercentageofthecost
ofthesamemarketbasketduringabaseyear.
D) yearthatischosenasthepointofreferenceforcomparisonofpricesinotheryears.
Answer: C
Diff:1
46) Inthebaseyearthepriceindex
A) willbebetween1and100.
B) willalwaysequal100.
C) equals100timesthecostofthemarketbasketinthebaseyear.
D) willequaltheyear.
Answer: B
Diff:1
47) Theyearthatischosenasthepointofreferenceforcomparisonofpricesinotheryearsisknown
asthe
A) baseyear.
B) priceindex.
C) purchasingpower.
D) consumerpriceindex.
Answer: A
Diff:1
48) LastyearaCDhadapriceof$12andthisyearitis$15.WhichofthefollowingdoesNOT
expressthispricechangeaccurately?
A) Priceroseby25percent.
B) Priceroseby$3.
C) Ifthisyearisthebaseyear,theindexnumberforlastyearwouldbe80.
D) Iflastyearisthebaseyear,theindexnumberforthisyearwouldbe80.
Answer: D
Diff:2
49) Lastyearyoupurchased20shirtsat$15apiece,30CDsat$12each,and5sweatersat$25
apiece.Thisyearyoubuy20shirtsat$20apiece,30CDsat$12apiece,and5sweatersat$20a
apiece.Iflastyearsindexwas100,thisyearsindexis
A) 91.3.
B) 102.0.
C) 109.5.
D) 9.5.
Answer: C
Diff:3
2005
MarketBasket
Commodity
A
B
Quantity
50
75
2005
Price
3
2
2015
Price
4
3
50) Refertotheabovetable.YouaregiveninformationonJasminsconsumptionfor2005and2015.
Using2005asthebaseyear,computethepriceindexfor2015.Theindexequals
A) 1.5.
B) 70.588.
C) 141.667.
D) 107.143.
Answer: C
Diff:3
2005
MarketBasket
Commodity
A
B
Quantity
40
30
2005
Price
5
6
2015
Price
7
8
Using2005asthebaseyearcomputethepriceindexfor2015.Theindexequals
A) 0.75.
B) 73.007.
C) 87.50.
D) 136.842.
Answer: D
Diff:3
2005
MarketBasket
Commodity
A
B
Quantity
20
40
2005
Price
4
3
2015
Price
5
6
A) 170.
B) 58.823.
C) 0.5823.
D) 0.17.
Answer: A
Diff:3
2005
MarketBasket
Commodity
Quantity
A
30
B
80
2005
Price
7
6
2015
Price
9
18
A) 40.35.
B) 247.826.
C) 0.4035.
D) 0.2478.
Answer: B
Diff:3
54) Ifallpricesintheeconomygoupfromoneyeartothenext,theCPIindex,usingtheprevious
yearasthebasewould
A) belessthan100.
B) begreaterthan100.
C) notbeinfluencedsincequantitieshaveremainedunchanged.
D) notbedeterminedsinceenoughinformationisgiven.
Answer: B
Diff:1
55) Whencomputingapriceindex,thebaseyearis
A) theearliestyearforwhichdataareavailable.
B) theyearthatischosenasthepointofreferenceforcomparisonofpriceswithotheryears.
C) themostrecentyearforwhichdataareavailable.
D) themostrecentyearinwhichtheinflationratewasclosetozero.
Answer: B
Diff:1
56) TheGDPdeflatoris
A) anindexthatutilizesaconsumersmarketbasketofgoodsincalculatingtheinflationrate.
B) themostgeneralindicatorofinflationsinceitmeasureschangesinthepricesofallgoods
andservicesintheeconomy.
C) anindexusedtocalculateinflationatthewholesalelevel.
D) theleastusedindexbecauseitissocostlytocalculate.
Answer: B
Diff:2
57) TheConsumerPriceIndex(CPI)isa
A) statisticalmeasureofaweightedaverageofpricesofaspecificsetofgoodsandservices
purchasedbyconsumersinurbanareas.
B) statisticalmeasureofaweightedaverageofpricesofcommoditiesthatfirmsproduceand
sell.
C) priceindexmeasuringthechangesinpricesofallnewgoodsandservicesproducedinthe
economy.
D) statisticalmeasureofaveragepricesusingannuallyupdatedweightsbasedonsurveysof
consumerspending.
Answer: A
Diff:1
58) TheProducerPriceIndex(PPI)isa
purchasedbywageearnersinurbanareas.
sell.
economy.
D) priceindexthattracksthepriceleveeofcommoditiesthatfirmspurchasefromotherfirms.
Answer: B
Diff:1
59) ThePersonalConsumptionExpenditureIndex(PCE)isa
sell.
economy.
D) statisticalmeasureofaveragepricesusingannuallyupdatedweightsbasedonsurveysof
consumerspending.
Answer: D
Diff:1
60) TheGDPdeflatorisa
sell.
economy.
D) priceindexthattracksthepricelevelofcommoditiesthatfirmspurchasefromotherfirms.
Answer: C
Diff:1
61) Supposemedicalcaremakesup5percentoftheCPIindex,andthatpricesriseinthemedical
careareafasterthanintherestoftheeconomy.Anelderlycouplespends15percentoftheir
incomeonmedicalcare.Forthiscouple,theCPI
A) understatestheinflationratebecauseoftheimportanceofmedicalcareforthisfamily.
B) overstatestheinflationratebecausethisfamilyisnottypicalofthecountryasawhole.
C) understatestheinflationratebecausetheCPIalwaysunderstatesinflation.
D) isagoodmeasureofinflationsincethebiasinherentintheCPIisoffsetbytheincreased
emphasisonhealthcareforthisfamily.
Answer: A
Diff:3
62) FortheCPI.thevalueoftheindexinthebaseyear
A) alwaysequals100.
B) dependsuponpriceandquantitythatareconstantlychanging.
C) isalwaysgreaterthan100.
D) dependsuponwhatpricesdidtheyearbefore.
Answer: A
Diff:1
63) Theindexthatisnotbasedonafixedmarketbasketofgoodsandservicesisthe
A) CPI.
B) PPI.
C) WholesalePriceIndex.
D) GDPPriceDeflator.
Answer: D
Diff:1
64) Theindicesthatarebasedonafixedmarketbasketofgoodsandservicesare
A) CPIandGDPdeflator.
B) PPIandGDPdeflator.
C) CPIandPPI.
D) CPI,PPIandGDPdeflator.
Answer: C
Diff:1
65) TheCPItendstooverstatethetrueinflationratebecause
A) wecannotknowwhatthetrueinflationrateis.
B) itfailstoconsidertheeffectsofnewproductsinthemarketplace.
C) themarketbasketactuallyselectedisinappropriate.
D) themarketbasketfailstoweighhousingcostssufficiently.
Answer: B
Diff:2
66) WhichofthefollowingisNOTacriticismoftheCPI?
A) TheCPIdoesnotaccountforthewayconsumersubstitutelessexpensiveitemsforhigher
priceditems.
B) TheCPIignoreschangesinconsumptionpatternsthatoccurbetweenyearsinwhichit
revisestheindex.
C) TheCPIignoressuccessfulnewproductsuntillongaftertheyhavebeenintroduced.
D) TheCPIignoresthechangesofpricesofgoodsthatfirmsproduceandselltoeachother.
Answer: D
Diff:1
67) ThroughoutU.S.history,inflationhasbeenhighest
A) rightafterarecession.
B) rightbeforearecession.
C) duringperiodsofwar.
D) duringRepublicanadministrations.
Answer: C
Diff:1
5textbooks
100pens
Year1Prices
$75/book
$2/pen
Year2Prices
$80/book
$2.50/pen
68) Usingtheabovetable,thefollowingistheoutputofatwo -producteconomy.Thepriceindexin

thiseconomyinYear2,assumingYear1isthebaseyear,is
A) 113.0.
B) 88.5.
C) 107.1.
D) 106.7.
Answer: A
Diff:2
69) Inflationcanbedefinedas
A) anincreaseinthepurchasingpowerofmoney.
B) adecreaseinthepurchasingpowerofmoney.
C) nochangeinthepurchasingpowerofmoney.
D) anincreaseinrealincome.
Answer: B
Diff:1
70) WhichofthefollowingisNOTameasureofthegenerallevelofprices?
A) ConsumerPriceIndex
B) ProducerPriceIndex
C) GDPDeflator
D) PersonalSalesDeflatorIndex
Answer: D
Diff:1
71) Anincreaseininflationwillcauseareductioninwhichofthefollowing?
A) thenominalvalueofmoney
B) theProducerPriceIndex
C) theGDPdeflator
D) therealvalueofmoney
Answer: D
Diff:1
72) Whichoneofthefollowingistrue?
A) Inflationincreasestherealvalueofmoney.
B) Inthebaseyear,thevalueofapriceindexis100.
C) Theconsumerpriceindexmeasureschangesintheaverageincomeofconsumers.
D) Themarketbasketdefinedfortheconsumerpriceindexcontainsmoreitemsthandoesthe
marketbasketdefinedfortheGDPdeflator.
Answer: B
Diff:2
73) EconomistsagreethatthestructureoftheConsumerPriceIndexhassomeproblemsthatlimit
itsusefulnessasareliablemeasureofinflation.Whatisoneofthesedrawbacks?
A) Itisbasedonthefaultyassumptionthateachconsumerbuysonlyoneunitofeachitem.
B) Itisbasedonthefaultyassumptionthatconsumptionchoicesarenotinfluencedby
incomelevels.
C) Itignoreschangesinconsumptionpatternsbroughtaboutbychangesintherelativeprices
ofconsumergoods.
D) Itisbasedonamarketbasketofmail-orderitemsanddoesnotincludethegoodsthat
consumerstypicallypurchase.
Answer: C
Diff:3
74) Whichgovernmentagencycompilestheconsumerpriceindex?
A) theCongressionalBudgetOffice
B) theGovernmentAccountingOffice
C) theBureauofLaborStatistics
D) Itisnotcompiledbyagovernmentagency,butratherbyanindependentresearch
institutioncalledtheConferenceBoard.
Answer: C
Diff:1
75) WhichisthebroadestpriceindexreportedintheUnitedStates?
A) theCPI-U
B) theGDPdeflator
C) theconsumerpriceindex
D) theproducerpriceindex
Answer: B
Diff:1
76) TheGDPdeflatorisnotafixed-quantitypriceindex,buttheCPIis.Whatisthesignificanceof
thisfact?
A) TheGDPdeflatordoesnotincludeenoughitemsinitsmarketbasket.
B) AbaseyearcannotbedefinedfortheGDPdeflator.
C) TheGDPdeflatorreflectsnotonlychangesinprices,butalsochangesinconsumption
patternsasconsumerssubstitutebetweengoods.
D) TheGDPdeflatoroverstatesthetruerateofinflation,whereastheCPIunderstatesit.
Answer: C
Diff:3
77) HowhasthepatternofmovementsintheU.S.pricelevelchangedsinceWorldWarII?
A) Periodsofinflationhavelargelybeeneliminated.
B) Periodsofdeflationhavelargelybeeneliminated.
C) Theannualrateofinflationhasneverrisenabove3percent.
D) Thepricelevelhasbecomemorevolatile.
Answer: B
Diff:2
78) Thepriceindexforanydesignatedbaseyearmustalwaysequal
A) theCPIforthatyear.
B) 0.
C) 100.
D) onedividedbythenominalpricechangefortheyear.
Answer: C
Diff:1
79) ThegovernmentagencywhichhasbeengiventhetaskofcalculatingtheConsumerPriceIndex
(CPI)is
A) theBureauofEconomicResearch.
B) theDepartmentofState.
C) theCouncilofEconomicAdvisors.
D) theBureauofLaborStatistics.
Answer: D
Diff:1
80) Thepurchasingpowerofthedollar
A) increasesasthepriceofbasicgoodsandservicesincreases.
B) istheamountofgoodsandservicesthatcanbepurchasedwiththedollar.
C) hasbeenrisingintheUnitedStatessince1945.
D) hasremainedunchangedinthelast20years.
Answer: B
Diff:1
CommodityMarket
2010Price CostofMarket2015PriceCostofMarket
BasketQuantity perUnit Basketin2010perUnitBasketin2015
Milk
10gallon
2.00
20.00
2.50
25.00
Eggs
10dozen
2.00
20.00
3.00
30.00
Bread
10loaves
2.00
20.00
3.00
30.00
81) Inthetableshownabove,thetotalcostofthemarketbasketin2010was
A) $6.00.
B) $8.50.
C) $60.00.
D) $85.00.
Answer: C
Diff:2
82) Inthetableshownabove,thetotalcostofthemarketbasketin2015was
A) $6.00.
B) $8.50.
C) $60.00.
D) $85.00.
Answer: D
Diff:2
83) If2010isthebaseyearinthetableshownabove,whatisthepriceindexfortheyear2010?
A) 100.0
B) 121.3
C) 147.1
D) 141.7
Answer: A
Diff:2
84) If2010isthebaseyearinthetableshownabove,whatisthepriceindexfortheyear2015?
A) 100.0
B) 114.7
C) 147.1
D) 141.7
Answer: D
Diff:2
85) Consideringthedatainthetableshownaboveand2010asthebaseyear,whatistheinflation
ratebetweenyears2010and2015?
A) 0.0percent
B) 41.7percent
C) 17.1percent
D) 3.4percent
Answer: B
Diff:3
Item
LightBulbs
Volleyballs
ATwo-GoodMarket
MarketBasket
2010Price
Quantity
perUnit
500
$1.00
1,000
$5.00
2015Price
perUnit
$2.00
$7.00
86) Inthetableshownabove,assumingthatthemarketbasketcostoflightbulbsandvolleyballsin
thebaseyearwas$4500,whatwouldthepriceindexforthistwo -goodmarketequalintheyear
2010?
A) 104.86
B) 100.00
C) 112.52
D) 122.22
Answer: D
Diff:3
87) Consideringthedatafromthetableshownabove,assumingthatthemarketbasketcostoflight
bulbsandvolleyballsinthebaseyearwas$4500,whatwouldbethepriceindexfortheyear
2015?
A) 177.78
B) 156.30
C) 100.00
D) 92.70
Answer: A
Diff:3
88) IntheUnitedStates,mostoftenthe________changesfirst,andthe________follows.
A) CPI;PPI
B) GDPdeflator;CPI
C) PPI;CPI
D) PCE;CPI
Answer: C
Diff:2
89) Thetermmarketbasketmeansa
A) collectionofgoodsthatcanfitintoanaverageshoppingcart.
B) collectionofgoodsthatchangeseveryyearandisdefinedbyCongress.
C) collectionofgoodsthatisusedbyatypicalfamily.
D) collectionofgoodsthatispurchasedduringaholidayseason.
Answer: C
Diff:1
90) Themarketbasketcost$300in2013,whileitcost$250inthebaseyear.Therefore,theprice
indexfor2013is
A) 83.
B) 120.
C) 80.
D) cannotbecalculatedbecausetheinflationrateisnotgiven.
Answer: B
Diff:2
91) Youreceiveafivepercentraiseinyourhourlywage.Theinflationrateisfourpercent.Your
purchasingpowerhas
A) increased.
B) decreased.
C) stayedthesame.
D) isindeterminate.
Answer: A
Diff:1
92) Youreceivea5percentraiseinyoursalary.Theinflationrateis6percent.Thepurchasing
powerofyoursalaryhas
A) increasedby1percent.
B) decreasedby1percent.
C) increasedby11percent.
D) decreasedby11percent.
Answer: B
Diff:1
93) In2013,thepriceforamarketbasketofconsumergoodsis$1,600.Inthebaseyear,thecostof
theidenticalmarketbasketwas$1,000.Thepriceindexinthiscaseis
A) 16.0.
B) 130.0.
C) 200.0.
D) 160.0.
Answer: D
Diff:2
94) In2013,thepriceforamarketbasketofconsumergoodsis$800.Inthebaseyear,thecostofthe
identicalmarketbasketwas$1,000.Thepriceindexinthiscaseis
A) 80.0.
B) 130.0.
C) 800.0.
D) 180.0.
Answer: A
Diff:3
95) Accordingtoyourtext,duringthe2000s,theinflationratewasinwhichrangeofpercentages?
A) 0-5%
B) 5-10%
C) 10-15%
D) 15-20%
Answer: A
Diff:1
96) Howareinflationandthepurchasingpowerofmoneyrelated?
Answer: Inflationisthesituationinwhichtheaveragepriceofallgoodsandservicesisrising.The
purchasingpowerofmoneyisthevalueofmoneyforbuyinggoodsandservices.The
fastertheinflationratethegreaterthedropinthepurchasingpowerofmoney.
Diff:1
97) Inwhatwaysistheconsumerpriceindexflawed?
Answer: ThereareatleastthreeproblemswiththeCPI.First,itisafixed-quantityindex,which
meansthatitdoesnttakeintoconsiderationthewaypeoplechangetheirpurchasesof
goodsandserviceswhentherearerelativepricechanges.Second,itfailstoaccountfor
qualitychangesingoods.Third,itignorestheintroductionofnewgoods.
Diff:3
98) Whatisapriceindex?HowdotheCPI,thePPI,thePCEIndexandtheGDPdeflatordiffer?
Answer: Apriceindexisthecostoftodaysmarketbasketofgoodsandservicesexpressedasa
percentageofthecostofthesamemarketbasketduringabaseyear.TheCPI,PPI,and
GDPdeflatordifferinthegoodsandservicestheycover.TheCPImeasurespricechanges
forgoodsandservicespurchasedbyconsumers.ThePPImeasurespricechangesfor
goodsandserviceschargedbyfirms.ThePCEIndexmeasuresaweightedaverageof
pricesofconsumergoodsandservicesbasedoncontinuouslyupdatedsurveysof
consumerspurchases.TheGDPdeflatormeasureschangesinpricesofeverything
producedintheeconomy.
Diff:2
7.5AnticipatedversusUnanticipatedInflation
1) Typically,nominalinterestratesandanticipatedinflationrates
A) moveinoppositedirections.
B) arenotrelated.
C) moveinthesamedirection.
D) aresuchthatthenominalrateisone-halftheanticipatedrate.
Answer: C
Diff:1
Topic: 7.5AnticipatedversusUnanticipatedInflation
2) Unanticipatedpositiveinflationwillcreate
A) lossesforcreditorsandgainsfordebtors.
B) lossesforbothcreditorsanddebtors.
C) gainsforbothcreditorsanddebtors.
D) gainsforcreditorsandlossesfordebtors.
Answer: A
Diff:1
3) Mostoftheproblemscausedbyinflationarecausedbythefactthat
A) therearenowaysavailableforpeopletoprotectthemselvesagainstinflation.
B) anticipatedinflationinducespeopletoprotectthemselvesagainstinflation.
C) inflationcausesthepurchasingpowerofthedollartoincrease.
D) theinflationisoftenunanticipatedandthereforecomesasasurprisetoindividualsinthe
economy.
Answer: D
Diff:2
4) Fullyanticipatedinflationoccurswhen
A) theactualinflationrateequalstheanticipatedinflationrate.
B) theactualinflationrateislessthantheanticipatedinflationrate.
C) theinflationrateiszero.
D) theanticipatedinflationrateandtheunanticipatedinflationrateareequal.
Answer: A
Diff:2
5) Therealrateofinterestisthe
A) nominalrateofinterestminustheanticipatedrateofinflation.
B) currentrateactuallypaidbytheborrower.
C) differencebetweenthebankslendingandsavingsrates.
D) currentratewhichthegovernmentpaysonitsdebt.
Answer: A
Diff:1
6) Iftherateofinflationis4percentandtherealinterestrateis3percent,thenominalinterestrate
shouldbe
A) 1percent.
B) 4percent.
C) 7percent.
D) 11percent.
Answer: C
Diff:1
7) Underwhichoneofthefollowingsituationswouldyoubebetteroff?
A) Youhave$10,000inyoursavingsaccountpaying5percentperyearandunanticipated
inflationis8percentperyear.
B) Youhavepaid$500fora$1,000U.S.savingsbondthatmaturesin10yearsand
unanticipatedinflationis10percentperyear.
C) Youlendafriend$1,000at6percenttoberepaidinoneyearandunanticipatedinflationis
7percentduringtheyear.
D) Youborrowed$2,500at7percenttopayforthisyearscollegeexpensesandunanticipated
inflationis12percentduringtheyear.
Answer: D
Diff:2
8) Supposethatyouborrow$5,000fromthebanktopurchasesomelandandyouagreetopay9
percentinterestontheloan.Iftheloanmustberepaidin12monthsandtheinflationrateis13
percentduringtheyear,then
A) youwillrepaythebankwithdollarswithmorepurchasingpowerthanyouinitially
borrowed.
B) youwillrepaythebankwithfewerdollarsthanthebankinitiallyloanedyou.
C) youwillrepaythebankwithdollarswithlesspurchasingpowerthanitinitiallyloaned
you.
D) thebankwillreceivefewerdollars,becauseofinflation,thanithadinitiallyexpectedto
receive.
Answer: C
Diff:2
9) Therealrateofinterestisdefinedas
A) zero.
B) thenominalrateofinterest.
C) thenominalrateofinterestminustheanticipatedinflationrate.
D) thenominalrateofinterestplustheanticipatedinflationrate.
Answer: C
Diff:2
10) Theannualrateofinflationaveraged2percentduringthepastdecade,butborrowersand
lendersanticipatethatthepricelevelwillriseatarateof3percentnextyear.Thecurrent
nominalinterestrateis7percent.Therealrateofinterestis
A) 10percent.
B) 9percent.
C) 5percent.
D) 4percent.
Answer: D
Diff:2
11) Assumeyouborrowfundstobuyanewcarat10percentinterestandyouthinkthatthe
economy-widerateofinflationoverthelifeoftheloanwillbe8percent.Ifyouarecorrectin
yourassumption,yourrealrateofinterestonthecarloanwillbe
A) 2percent.
B) 8percent.
C) 10percent.
D) 18percent.
Answer: A
Diff:1
12) Whostandstogainasaresultofunanticipatedinflation?
A) Creditors
B) Debtors
C) Personslivingonafixedincome
D) Retiredindividuals
Answer: B
Diff:1
13) Duringaperiodofunanticipatedinflation,thegroupthatismostlikelytobenefitis
A) debtors.
B) savers.
C) creditors.
D) retiredindividuals.
Answer: A
Diff:1
14) Whentheunanticipatedinflationrateiszero,
A) creditorsgainattheexpenseofdebtors.
B) debtorsgainattheexpenseofcreditors.
C) neithercreditorsnotdebtorsgainorlose.
D) bothcreditorsanddebtorsloseattheexpenseofthegovernment.
Answer: C
Diff:2
15) Thecostofinflationtosocietyincludes
I. Theopportunitycostsofresourcesusedbypeopletoprotectthemselvesagainstinflation
II. Thecostsassociatedwithrecalculatingprices
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:3
16) Inflationcancauseamisallocationofresourcesbecause
A) inflationdoesntproceedevenlywhichmeansthatpeoplehaveadifficulttime
determiningwhenapricechangesignalsachangeinrelativeprices.
B) firmshavetochangetheirpricelabelsatunusualtimes.
C) thenominalrateofinflationdoesntequaltherealrateofinflation.
D) peopleareencouragedtoborrowtoomuch.
Answer: A
Diff:3
17) Anunexpectedreductionininflationwouldtendtobenefitwhichofthefollowing?
A) creditors
B) debtors
C) creditorsanddebtors
D) neithercreditorsnordebtors
Answer: A
Diff:1
18) Formostpeople,theproblemsofinflationarecausedbythefactthat
A) theinflationisunanticipated.
B) theinflationisanticipated.
C) theinflationratecausesthepurchasingpowerofmoneytoincrease.
D) allpriceschangesothereisnowaytoprotectthemselvesagainstthedeclineintheir
wealth.
Answer: A
Diff:2
19) Unanticipatedinflationoccurswhen
A) everyoneknowsperfectlythetruerateofinflation.
B) theactualinflationratediffersfromtheanticipatedinflationrate.
C) theinflationrateiszero.
D) thereisnochangeinthepurchasingpowerofmoney.
Answer: B
Diff:1
20) Supposetheactualinflationrateislessthantheanticipatedinflationrate.Giventhis
information,weknowwithcertaintythattherealrateofinterest
A) isnegative.
B) ismorethanthenominalrateofinterest.
C) equalsthenominalrateofinterest.
D) noneoftheabove(i.e.,moreinformationisneededtoanswerthisquestion).
Answer: D
Diff:2
21) Thenominalrateofinterestis
A) CPIminusaninflationarypremium.
B) PPIminusaninflationarypremium.
C) themarketrateofinterestexpressedintodaysdollars.
D) therealrateofinterestminustheanticipatedrateofinflation.
Answer: C
Diff:1
22) Therealrateofinterestis
A) thenominalrateofinterestdividedbytheanticipatedrateofinflation.
B) negativeiftheanticipatedrateofinflationiszero.
D) thenominalrateofinterestminustheanticipatedrateofinflation.
Answer: D
Diff:1
23) Withrespecttotheinterestrate,theinflationarypremium
A) isaddedtothenominalrateofinteresttoobtaintherealrateofinterest.
B) istheinterestrateexpressedintodaysdollars.
C) coversanticipateddepreciationinpurchasingpower.
D) isderivedfromtheCOLA.
Answer: C
Diff:1
24) Thepricelevelhasbeenrising5percentayearfortwentyyearsandisexpectedtocontinueto
doso.Thenominalrateofinterestis8percent.Therealrateofinterestis
A) 0percent.
B) 8/5= 1.6percent.
C) 3percent.
D) 5percent.
Answer: C
Diff:2
25) Theinflationratehasbeen4percentfortwentyyears,andthenominalinterestratehasbeen8
percentduringthissametimeperiod.Suddenly,thepublicanticipatesthattheinflationratewill
be8percentthiscomingyear.Therealrateofinterestforthecomingyearis
A) 0percent.
B) 2percent.
C) 4percent.
D) 6percent.
Answer: A
Diff:2
26) Thenominalrateofinterestis
A) theinterestrateobservedintodaysmarket.
B) theinterestrateobservedinthemarketminustheinflationpremium.
C) notinfluencedbyinflation.
D) avaluethatdependsuponthestockmarket.
Answer: A
Diff:1
27) Therealrateofinterestis
A) theinterestrateobservedinthemarket.
B) theinterestrateobservedinthemarketminustheanticipatedinflationrate.
C) notinfluencedbyinflation.
D) avaluethatdependsuponthestockmarket.
Answer: B
Diff:1
28) Therealrateofinterestequals5%andtheexpectedrateofinflationequals2%.Thenominalrate
ofinterestequals
A) 2%.
B) 3%.
C) 5%.
D) 7%.
Answer: D
Diff:1
29) Therealrateofinterestequals8%,andtheexpectedrateofinflationequals2%.Thenominal
rateofinterestis
A) 2%.
B) 6%.
C) 8%.
D) 10%.
Answer: D
Diff:1
30) Debtorsgainandcreditorslosewhen
A) theanticipatedrateofinflationisgreaterthantheactualrateofinflation.
B) theanticipatedrateofinflationislessthantheactualrateofinflation.
C) theanticipatedrateofinflationisthesameastheunanticipatedrateofinflation.
D) theunanticipatedrateofinflationiszero.
Answer: B
Diff:2
31) Themenucostofinflationinvolves
A) themistakesproducersmakeinadjustingprices.
B) themistakepeoplemakewhentheydonotknowtheactualrateofinflation.
C) cost-of-livingadjustments.
D) thecostsassociatedwithchangingpricelists.
Answer: D
Diff:1
32) Unanticipatedpositiveinflation
A) hurtseveryone.
C) hurtsdebtors.
B) hurtscreditors.
D) benefitsbanks.
Answer: B
Diff:1
33) ACOLAis
A) unanticipatedpositiveinflation.
B) unanticipatednegativeinflation.
C) thecostassociatedwithrecalculatingpricesandprintingnewpricelistswhenthereis
inflation.
D) anautomaticincreaseinwagesthattakesintoaccountincreasesinthepricelevel.
Answer: D
Diff:1
34) Aclauseinacontractthatautomaticallyincreaseswagestoaccountforincreasesintheprice
levelis
A) theGDPdeflation.
B) thePCEindex.
C) aCOLA.
D) therealrateofinterest.
Answer: C
Diff:1
35) ThepurposeofCOLAsistoprotect
A) lenders.
B) borrowers.
Answer: C
Diff:1
C) workers.
D) businesses.
A) Thenominalrateofinterestistherealrateplustheanticipatedrateofinflation.
B) Therealrateofinterestisthenominalrateplustheanticipatedrateofinflation.
C) Increasesinanticipatedinflationincreasetherealinterestrate.
D) IncreasesintheCPIincreasetherealinterestrate.
Answer: A
Diff:2
37) Therealrateofinterestcanbedefinedasthe
A) nominalinterestratelesstheanticipatedrateofinflation.
B) anticipatedrateofinflationlessthenominalinterestrate.
D) nominalrateofinterestlesstheunanticipatedrateofinflation.
Answer: A
Diff:2
38) Empiricalevidenceshowsthatthenominalinterestratetypicallyrisesatthesametimethe
inflationrateincreases.Whatdoesthissuggest?
A) Therealrateofinterestiszero.
B) Increasesinthecurrentinflationrateleadborrowersandlenderstoexpectthatinflationin
thefuturewillbehigherthanpreviouslythought.
C) InterestratechangesarethemaincomponentoftheCPI.
D) InterestratechangesarethemaincomponentoftheGDPdeflator.
Answer: B
Diff:3
39) Whichoneofthefollowingwouldbenefitfinanciallyfromunanticipatedinflation?
A) aborrowerwhoseloanhasafixednominalinterestrate
B) aborrowerwithanadjustableratemortgage
C) abankthathasmadeloansatafixednominalinterestrate
D) afirmwhoseworkersarecoveredbyaCOLAagreement
Answer: A
Diff:2
40) Supposetherateofinflationunexpectedlydecreasesfrom7%to4%.Whichoneofthe
followingwouldmostlikelybenefitfromthisunexpectedreductionintherateofinflation?
A) creditors.
B) aborrowerwhoseloanhasafixednominalinterestrate.
C) debtors.
D) workerswhoarecoveredbyaCOLAagreement.
Answer: A
Diff:2
41) Unanticipatedinflationbenefits
A) peopleorbusinesseswhoowefunds.
B) peopleorbusinesseswholendfunds.
C) peoplewholiveonafixedincome.
D) peoplewithCDs(certificatesofdeposits)inthebank.
Answer: A
Diff:1
42) Whoislikelytobehelpedbyunanticipatedinflation?
A) lenders
B) borrowers
C) allconsumers
D) allproducers
Answer: B
Diff:2
43) Whyistherearesourcecostassociatedwithinflation?
A) becauseunemploymentincreaseswhenthereisinflation
B) becausemostworkersendupworkingfewerhoursduringperiodsofinflation
C) becauseconsumers,workers,andfirmsdevoteresourcestoprotectingthemselvesfrom
thefinancialcostsofinflation
D) becausetheexistenceofinflationdiscouragespeoplefromplacingtheirsavingsin
interest-bearingaccounts,whereitisneededtofundcapitalinvestment
Answer: C
Diff:2
44) Ifabankadvertises3percentinterestforacheckingaccountandtheanticipatedrateofinflation
is3.5percent,
A) therealrateofinterestearnedontheaccountis0.5percent.
B) therealrateofinterestearnedontheaccountis-0.5percent.
C) therealrateofinterestearnedontheaccountis6.5percent.
D) therealrateofinterestearnedontheaccountis3.25percent.
Answer: B
Diff:1
45) Howmuchshouldabankchargeforaloan,iftheanticipatedinflationrateis4percent,andthe
bankwantstoearn3percentonthis$1,000,000loan?
A) $30,000
B) $40,000
C) 7percent
D) 1percent
Answer: C
Diff:2
46) Ifyourincomerisesat5percentandinflationhasrisenat2percent,thenthepurchasingpower
ofyourincomehas
A) eroded.
B) stayedthesame.
C) fallen,butwillincreaseduetoindexing.
D) increased.
Answer: D
Diff:2
47) Ifyouanticipatethattheinflationrateisgoingtorisefromthreepercentto10percentnextyear
,youshould
A) saveyourfundsatafixedrateofinterest.
B) borrowfundsatafixedrateofinterest.
C) keepyourfundsinyoursockdrawer.
D) waittobuyahouseuntilnextyear.
Answer: B
Diff:2
48) Therealinterestrateis
A) thenominalinterestrateplustheanticipatedinflationrate.
B) thenominalinterestrateminustheanticipatedinflationrate.
C) thenominalinterestrateplusaCOLA.
D) thenominalinterestrateplustheGDPdeflator.
Answer: B
Diff:1
49) Ifthenominalinterestrateis9percentandtheanticipatedinflationrateis4percent,then
A) therealinterestrateis5percent.
B) therealinterestrateis13percent.
C) therealinterestrateis-5percent.
D) therealinterestrateis2.25percent.
Answer: A
Diff:2
50) Duringanunanticipatedinflation
A) creditorsarehelpedanddebtorsarehurt.
B) creditorsarehurtanddebtorsarehelped.
C) bothcreditorsanddebtorsarehurt.
D) bothcreditorsanddebtorsarehelped.
Answer: B
Diff:1
51) Anautomaticincreaseinawageratefoundinsomecontractsisknownasa
A) changeoflaboragreement.
B) costoflaborarrangement.
C) costoflivingadjustment.
D) chargeforlivingamendment.
Answer: C
Diff:2
52) Howisinflationrelatedtointerestrates?
Answer: Peoplebasetheirdecisionsonborrowing,lending,andinvestingonthebasisofthereal
interestrate.Ifthereisanticipatedinflation,thenominalrateofinterestwillequalthereal
rateofinterestplustheanticipatedinflationrate.So,interestratesvarydirectlywith
anticipatedinflation.Unanticipatedinflationleadstoarealinterestratedifferentfrom
whatpeoplethought,andthedecisionspeoplemadeturnouttobemistaken.
Diff:2
53) Whatarethecoststosocietyofinflation?Whoisharmedbyinflationandwhobenefits?
Answer: Theresourcesusedbypeopletoprotectthemselvesagainstinflationisthemajorcostof
inflationtosocietyasawhole.Thereisresourcemisallocationduetopeoplemaking
decisionsbasedonfaultyinformationaboutthetruerateofinflation.Ingeneral,creditors
areharmedbyunanticipatedinflationanddebtorsbenefit.
Diff:2
7.6ChangingInflationandUnemployment:BusinessFluctuations
1) Thetermbusinessfluctuationsrefersto
A) changesinoverallbusinessactivity,asevidencedbychangesinnationalincome,
employment,andthepricelevel.
B) changesinthegeneralpricelevelfrominflationtodeflation,orviceversa.
C) changesinthefullemploymentlevelofeconomicactivity.
D) changesinthevalueofthedollar.
Answer: A
Diff:1
Topic: 7.6ChangingInflationandUnemployment:BusinessFluctuations
2) Insequentialorder,thefourphasesofthebusinesscycleare
A) trough,peak,expansion,contraction.
B) peak,contraction,trough,expansion.
C) expansion,contraction,peak,trough.
D) contraction,trough,peak,expansion.
Answer: B
Diff:1
3) Thepeakphaseofthebusinesscyclerepresents
A) atemporarymaximumoutputlevelofGrossDomesticProduct(GDP).
B) anincreaseinforeigninvestment.
C) alaborsurplus.
D) fallingprices.
Answer: A
Diff:2
4) Wheneconomy-widebusinessactivitiesareincreasing,theyarereferredtoas
A) contractions.
B) expansions.
C) anti-cycles.
D) corrections.
Answer: B
Diff:1
5) Arecessionmaybedefinedas
A) aperiodduringwhichtherateofgrowthofbusinessactivityisconsistentlylessthanits
long-termtrend.
B) anincreaseinrealeconomicoutputfromoneperiodtothenext.
C) nochangeinrealeconomicoutputoveraperiodoftime.
D) nochangeinthedollar(money)valueofeconomicoutputoveraperiodoftime.
Answer: A
Diff:1
6) AllofthefollowingaresignalsofarecessionEXCEPT
A) acyclicalreductioninemploymentoflabor.
B) aslightreductioninacurrentlyhighrateofgrowthineconomicactivity.
C) increasingunemployment.
D) afallinglevelofeconomicactivity.
Answer: B
Diff:2
7) Aneconomyrecoveringfromarecessionmoves
A) upfromitstroughtoaperiodofexpansion.
B) upfromitspeaktoaperiodofexpansion.
C) downfromitstroughtoaperiodofdepression.
D) downfromitspeaktoaperiodofexpansion.
Answer: A
Diff:1
8) Duringarecession
A) incomesriseandemploymentdecreases.
B) incomesfallandunemploymentincreases.
C) incomesfallandunemploymentfalls.
D) incomesriseandunemploymentincreases.
Answer: B
Diff:1
9) Wheneconomy-widebusinessfluctuationsarenegative,theyarereferredtoas
A) contractions/recessions.
B) booms.
C) expansions.
D) peaks.
Answer: A
Diff:1
10) Contractionsarecharacterizedby
A) increasesintherateofgrowthofeconomicactivity.
B) anupwardmovementtowardapeakineconomicactivity.
C) adownwardmovementtowardatroughineconomicactivity.
D) alongperiodinwhichnocyclesareobservedineconomicactivity.
Answer: C
Diff:2
11) Thebusinesscyclephasethatmustcomebeforethepeakisa(n)
A) trough.
B) expansion.
C) recession.
D) contraction.
Answer: B
Diff:1
12) When,overasustainedperiodoftime,thegrowthofaggregatebusinessactivityfallsbelow
whatisconsideredthenormalgrowthrate,theeconomynecessarilyexperiences
A) inflation.
B) deflation.
C) anexpansion.
D) arecession.
Answer: D
Diff:1
13) Aperiodoftimeinwhichtheoverallbusinessactivityisrisingatarapidrateisknownas
A) inflation.
B) hyperinflation.
C) anexpansion.
D) acontraction.
Answer: C
Diff:1
14) Theofficialdatingofrecessionsisdoneby
A) thePresident.
B) theCongress.
C) theNationalBureauofEconomicResearch.
D) theCouncilofEconomicAdvisors.
Answer: C
Diff:1
15) Anextremelysevererecessionisknownasa
A) trough.
B) peak.
C) contraction.
D) depression.
Answer: D
Diff:1
16) Aperiodoftimeinwhichtheoverallpaceofbusinessactivityisfallingisknownas
A) inflation.
B) deflation.
C) anexpansion.
D) acontraction.
Answer: D
Diff:1
17) Aperiodinwhichthelevelofbusinessisconsistentlylessthanitslong-termtrendisknownas
A) depression.
B) recession.
C) businesscycle.
D) growthtrend.
Answer: B
Diff:1
18) Aperiodoftimeinwhichtheoverallpaceofbusinessactivityisrisingisknownas
A) inflation.
B) deflation.
C) anexpansion.
D) acontraction.
Answer: C
Diff:1
19) Theofficialdatingofrecessionsisdoneby
A) theCouncilofEconomicAdvisors.
B) theNationalBureauofEconomicResearch.
C) theGovernmentAccountingOffice.
D) theSecretaryoftheTreasury.
Answer: B
Diff:1
20) Thelong-runtrendinbusinessactivityis
A) downward.
B) constant.
C) upward.
D) suchthatitcannotbedescribedasatrend.
Answer: C
Diff:1
21) Businessfluctuations
A) influenceunemploymentbutnotinflation.
B) influenceinflationbutnotunemployment.
C) caninfluenceinflationandunemployment.
D) havenoinfluenceoninflationandunemployment.
Answer: C
Diff:1
22) Whichofthefollowingwouldbeconsideredanexternalshock?
A) Adeclineintaxrevenuesduringarecession
B) Arecession
C) Adepression
D) Awar
Answer: D
Diff:1
23) Whichofthefollowingisatruestatement?
A) Allrecessionsareduetoexternalshocks.
B) Ultimately,norecessionhasbeenduetoanexternalshock.
C) Therehavebeenrecessionsthatcannotbeexplainedbyexternalshocks.
D) Allrecessionsandallexpansionsareduetoexternalshocks.
Answer: C
Diff:2
24) Refertotheabovefigure.PointBisknownas
A) apeak.
B) atrough.
C) anexpansion.
D) acontraction.
Answer: B
Diff:2
25) Refertotheabovefigure.PointCisknownas
A) apeak.
B) atrough.
C) anexpansion.
Answer: A
Diff:2
D) acontraction.
26) Refertotheabovefigure.ThepointsbetweenAandBareknownas
A) apeak.
B) atrough.
C) anexpansion.
D) acontraction.
Answer: D
Diff:2
27) Refertotheabovefigure.ThepointsbetweenBandCareknownas
A) apeak.
B) atrough.
C) anexpansion.
D) acontraction.
Answer: C
Diff:2
28) Refertotheabovefigure.Arecessionisbestdescribedas
A) theupwardlinearline.
B) theperiodbetweenPointBandPointC.
C) theperiodbetweenPointAandPointB.
D) noneoftheabove.
Answer: C
Diff:2
29) Refertotheabovefigure.AtPointB,theactualunemploymentrate
A) willdecreaseovertime.
B) isnegative.
C) tendstobehigherthanthenaturalunemploymentrate.
D) tendstobelowerthanthenaturalunemploymentrate.
Answer: C
Diff:3
30) Upsanddownsinbusinessactivityarereferredtoas
A) ebbandflow.
B) contractions.
C) variability.
D) businessfluctuations.
Answer: D
Diff:1
31) BusinessfluctuationsintheUnitedStatesare
A) smoothandsteady.
C) controllable.
B) predictable.
D) irregularandunpredictable.
Answer: D
Diff:2
32) ExamplesofexternalshocksareallofthefollowingEXCEPT
A) war.
B) drought.
C) oilshock.
D) U.S.federaltaxpolicies.
Answer: D
Diff:2
33) Whentheeconomyisexperiencingacontraction,thereisanincreasein
Answer: D
Diff:2
34) Thetroughofacontractionis
A) thepointintimeatwhichthelevelofnationalbusinessactivityreachesaminimumbefore
expandingagain.
B) thepointintimeatwhichthelevelofnationalbusinessactivityreachesamaximumbefore
contractingagain.
C) therateatwhichthelevelofbusinessactivityisdeclining.
D) anexternalshockthatcauseseconomicactivitytodecline.
Answer: A
Diff:2
35) HowhasthepatternoffluctuationsinoverallU.S.businessactivitychangedsinceWorldWar
II?
A) Ithasbecomelessvolatile.
B) Expansionshavebeeneliminated.
C) Contractionshavebeeneliminated.
D) Recessionshavebeeneliminated.
Answer: A
Diff:1
36) Changesinbusinessactivityare
A) referredtoasbusinessfluctuations.
B) referredtoastheebbandflowofbusiness.
C) alwaysundesirable.
D) causedbythechangingseasonseveryyear.
Answer: A
Diff:1
37) Adeclineinbusinessactivityiscalled
A) arecession.
B) atrough.
C) anexpansion.
D) apeak.
Answer: A
Diff:1
38) Whichofthefollowingwouldbealeadingindicator?
A) thenumberofunemploymentclaims
B) therealinterestrate
C) personalincomeintheUnitedStates
D) anincreaseinstockprices
Answer: A
Diff:3
39) Whichofthefollowingstatementsiscorrect?
A) Thedepthandthelengthofallbusinesscyclesareidentical.
B) Thedepthandthelengthofallbusinesscyclesaredifferent.
C) Businesscyclesarecausedbyseasonalunemploymentchanges.
D) Businesscyclesarecausedbyunanticipatedinflation.
Answer: B
Diff:2
40) Asevereandprolongedrecessioniscalled
A) aslump.
B) astagnation.
C) atrough.
Answer: D
Diff:1
D) adepression.
41) Historicallyspeaking,businessfluctuationsinaneconomyweremorecommonlyreferredtoas
A) inflationarypressures.
B) economicgrowth.
C) theGDPdeflator.
D) businesscycles.
Answer: D
Diff:2
42) Accordingtobusinessactivitychartsforthelast100years,thepointofthehighestbusiness
activityintheUnitedStatesoccurred
A) duringthe1920sbullmarketboom.
B) duringWorldWarII.
C) duringtheVietnamWar.
D) duringtheClintonadministration.
Answer: B
Diff:1
43) Abusinessfluctuationwhenthepaceofeconomicactivityisslowingdowniscalled
A) areduction.
B) acontraction.
C) adepression.
D) aslowdown.
Answer: B
Diff:1
44) Typicallyduringarecession,
A) incomesfall,andunemploymentfalls.
B) incomesandunemploymentrise.
C) incomesfall,andunemploymentrises.
D) incomesincrease,andunemploymentfalls.
Answer: C
Diff:1
45) Changesinleadingindicatorssignal
A) thechangesinthefrictionalandseasonalunemploymentrate.
B) thechangesthatwilloccurintheeconomy.
C) thechangesinthefrictionalunemploymentrateandthechangesintheinflationrate.
D) thechangesinthemarketbasket.
Answer: B
Diff:2
46) TheNationalBureauofEconomicResearchis
A) fundedbyCongressandevaluatesthebudgetappropriations.
B) fundedbytheFederalReserveBanksandanalyzesthebankingsystem.
C) anonprofitorganizationandevaluatesthebusinesscycles.
D) anonprofitorganizationandevaluatestheU.S.monetarypolicy.
Answer: C
Diff:1
47) Theperiodbetweenthetroughandthepeakofabusinessfluctuationiscalled
A) thegrowthphase.
B) thespreadingout.
C) thedevelopment.
D) theexpansion.
Answer: D
Diff:1
48) Refertheabovefigure.Stage1oftheeconomyiscalled
A) thetop.
B) thepeak.
C) thetrend.
D) theclimax.
Answer: B
Diff:1
A) acontraction.
B) apeak.
C) atrough.
Answer: A
Diff:1
D) anexpansion.
50) Refertotheabovefigure.Stage3oftheeconomyiscalled
A) adevelopment.
B) apit.
C) atrough.
D) ahole.
Answer: C
Diff:1
A) amaturity.
B) aspreadingout.
C) anexpansion.
D) adevelopment.
Answer: C
Diff:1
52) Abusinessfluctuationwhenthepaceofbusinessactivityisspeedingupisknownas
A) acontraction.
B) atrough.
C) anexpansion.
D) arecession.
Answer: C
Diff:1
53) AwarintheMiddleEastthatdisruptsU.S.economicactivityisknownas
A) anexternalshock.
B) anexpansion.
C) ademandshock.
D) aninternalshock.
Answer: A
Diff:2
54) Whatisthebusinesscycle?Howcyclicalisit?Whatcausesthebusinesscycle?
Answer: Thebusinesscyclereferstotheupsanddownsinoverallbusinessactivityovertime.Itis
cyclicalinthesensethatexpansionseventuallygivewaytocontractions,whichare
followedagainbyanexpansion.But,thepatternoftheexpansionsandcontractionsare
neithersymmetricalnorrepeating.Externalshocksareimportantinexplainingthe
businesscycle,althoughtheyareinsufficientalonetoexplainthecycle.
Diff:2
Chapter8
MeasuringtheEconomysPerformance
8.1TheSimpleCircularFlow
1) Thesimplecircularflowofincomeshowsthatthetotalincomeinaneconomyequals
A) totalprofitsearnedbyfirms.
B) alltaxespaidbyhouseholds.
C) thetotalamountofmoneysuppliedbythegovernment.
D) totalexpenditures.
Answer: D
Diff:2
Topic: 8.1TheSimpleCircularFlow
2) Theobservationthatgoodsandservicesflowinonedirectionandmoneypaymentsflowin
anotherdirectionistheprinciplebehind
A) thedoublecoincidenceofwants.
B) abartereconomy.
C) apurecommandeconomy.
D) thecircularflowofincome.
Answer: D
Diff:1
3) Whichofthefollowingistrueaboutproductmarkets?
A) Goodsandservicesflowfromhouseholdstofirms.
B) Goodsandservicesflowfromfirmstohouseholds.
C) Factors(land,labor,capital,andentrepreneurialability)flowfromhouseholdstofirms.
D) Factors(land,labor,capital,andentrepreneurialability)flowfromfirmstohouseholds.
Answer: B
Diff:1
4) Accordingtothecircularflow,thedollarvalueofanationsoutputisequalto
A) profits.
B) totalincome.
C) netincomeminustaxes.
D) wages.
Answer: B
Diff:1
5) Inthefactormarket,households
A) sellresources.
B) buyresources.
C) areneitherbuyersnorsellersofresources.
D) arebothbuyersandsellersofresources.
Answer: A
Diff:1
6) SupposeanindividualbuysanewCDofherfavoritemusicalartist.Thispurchasehastaken
placeinthe
A) productmarkets.
B) factormarkets.
C) labormarkets.
D) resourcemarkets.
Answer: A
Diff:1
7) Intheproductmarkets,households
A) arethebuyersofgoodsandservices.
B) arethesellersofresources.
C) areneitherbuyersnorsellersinthemarket.
D) noneoftheaboveiscorrect.
Answer: A
Diff:1
8) Whichofthefollowingwouldmostlikelybesoldintheproductmarkets?
A) Anewcar
B) Stocksandbonds
C) Ironore
D) Entrepreneurialability
Answer: A
Diff:1
9) Thevalueoftotaloutputandtotalincomeinthesimplecircularflowmodel
A) aremeasuresoftheeconomyslevelofsavings.
B) includeonlyintermediategoods.
C) areequaltoeachother.
D) arerelatedinthesensethatnationalincomeislessthannationalproduct.
Answer: C
Diff:1
Chapter8MeasuringtheEconomysPerformance99
10) WhichofthefollowingstatementsisFALSE?
A) Onedefinitionoftotalincomeisthatitistheannualcostofproducingtheentireoutputof
finalgoodsandservices.
B) Transactionsinwhichhouseholdsbuyfinalgoodsandservicesoccurinthefactormarket.
C) Thevalueoftotaloutputisidenticaltototalincome.
D) Savingisthedifferencebetweenconsumerincomeandexpenditures.
Answer: B
Diff:1
A) Thevalueoftotalincomeisequalinvaluetototaloutputbecauseprofitisacostof
production.
B) Inthecircularflowmodel,householdssellfactorservicestobusinessesinreturnforfactor
payments.
C) Businessessellgoodsandservicestohouseholdswhousetheirincometopayforthem.
D) Totalincomeisalwaysgreaterthantotaloutput.
Answer: D
Diff:1
12) Whichofthefollowingisconsistentwiththecircularflowofincome?
I. Goodsandservicesflowinonedirection.
II. Paymentsandincomesflowinonedirection.
III. Sellersreceivelessthanwhatbuyersspend.
A) Ionly
B) IIonly
C) IIIonly
D) BothIandII
Answer: D
Diff:1
13) Accordingtothecircularflow,thevalueoftotaloutputproducedandtotalincome
A) shoulddifferbythevalueofintermediategoods.
B) shouldincreasebytheunanticipatedrateofinflation.
C) willalwaysbeincreasinginacapitalisteconomy.
D) willbeequal.
Answer: D
Diff:1
14) Oneoftheprinciplesbehindtheconceptofthecircularflowisthat
A) ineveryeconomicexchange,thesellerreceivesexactlythesameamountthatthebuyer
spends.
B) ineveryeconomicexchange,thesellerreceiveslessthantheamountthatthebuyer
spends.
C) thesellerofgoodsreceivesexactlythesameamountthatthebuyerspends,buttheseller
ofresourcesreceiveslessthanthebuyerspends.
D) inexchangeinvolvingproducts,thesellerreceiveslessthantheamountthebuyerspends,
butinresourcemarketsthesellerreceivesmorethanthebuyerspends.
Answer: A
Diff:1
15) Thecircularflowofincomeshows
A) goods,services,andmoneypaymentsflowinginthesamedirection.
B) goodsandmoneypaymentsflowinginonedirectionandservicesflowingintheopposite
direction.
C) goodsandservicesflowinginonedirectionandmoneypaymentsintheotherdirection.
D) goodsflowinginonedirectionandservicesandmoneypaymentsflowingintheother
direction.
Answer: C
Diff:1
16) Inthesimplecircularflowmodel,
A) householdsspendtheincometheyreceivefromlaborservicesbutsavetheincomethey
receivefromsellingtheotherfactorsofproduction.
B) businessesbuylaborservicesfromhouseholds,butsupplyotherfactorsofproduction
themselves.
C) householdsspendtheirentireincomeonconsumerproducts.
D) profitsareatypeofincomethatisnotreceivedbyhouseholds.
Answer: C
Diff:2
17) Inthecircularflowmodel,profitsareconsideredtobe
A) asubtractionfromtheGrossDomesticProduct(GDP).
B) acostofdoingbusiness.
C) equaltozero,orelsethecircularflowwouldbeoutofbalance.
D) aformofinterestpayment.
Answer: B
Diff:1
18) Economistsconsiderprofittobe
A) acostofproducinggoodsandservices.
B) thesameasasalary.
C) arewardforincurringlosses.
D) somethingthatshouldbeeliminatedbyantitrustlaws.
Answer: A
Diff:1
19) Profitsrepresent
A) theincomeearnedfromabond.
B) thepaymentsfirmsmaketotheiremployees.
C) arewardtoentrepreneurs.
D) thedifferencebetweentotaltaxrevenueandtotalgovernmentspending.
Answer: C
Diff:1
20) Howdoeconomistsviewprofits?
A) Profitsareanassetthebusinessholds.
B) Profitsareoneofthecostspaidtoafactorofproduction.
C) Profitsareguaranteedaslongasafirmoperatesethically.
D) Thefirmsprofitequalsthesumofallpaymentstothe5factorsofproduction.
Answer: B
Diff:1
21) Inthecircularflow,________providethefactorservices.
A) households
B) businesses
C) producers
D) businessesandhouseholds
Answer: A
Diff:1
22) Thecircularflowofincomeinvolvestheideathat
A) ineveryeconomicexchangeonepartytakesadvantageoftheotherparty.
B) thesellerofagoodreceiveslessthanthebuyerspends.
C) thesellerofagoodreceivesmorethanthebuyerspends.
D) thesellerofagoodreceivesexactlythesameamountasthebuyerspends.
Answer: D
Diff:1
23) Thecircularflowofincomeshows
A) thedollarvalueofoutputislessthanthetotalincome.
B) thedollarvalueofoutputismorethanthetotalincomebecauseoftheexistenceofprofits.
C) thedollarvalueofoutputisexactlyequaltothetotalincome.
D) thedollarvalueofoutputismoreorlessthanthetotalincome,dependingonwhether
profitsarepositiveornegative.
Answer: C
Diff:1
24) Thecircularflowofincomeassumesthat
A) profitisnotacostofproduction.
B) thenationalincomeaccountingapproachisnotanadequatewaytomeasurethe
economysperformance.
C) goodsandservicesflowinonedirectionandmoneypaymentsflowintheother.
D) totalincomeisthesumofthevalueofintermediategoodsandfinalgoodsandservices.
Answer: C
Diff:1
25) Inthecircularflowmodel,
A) householdsdemandgoodsandserviceswhicharesuppliedbyfirms,andthefirms
demandresourcesthataresuppliedbyintermediatefirms.
B) householdsdemandgoodsandservicesthataresuppliedbyfirms,whilesupplying
resourcesthataredemandedbyfirms.
C) householdsbuygoodsandservicesandfirmssupplygoods.Resourcesaresuppliedby
otherfirms.
D) householdsbuygoodsandserviceswhilefirmssellgoodsandservices.Firmsobtainlabor
fromhouseholds,capitalfromgovernment,andrawmaterialsfromfirms.
Answer: B
Diff:1
26) Goodsandservicesaresold
A) intheproductmarkets.
C) byhouseholds.
B) inthefactormarkets.
D) onlyasintermediategoods.
Answer: A
Diff:1
27) Resourcescanbepurchased
A) intheproductmarkets.
C) exclusivelythroughthegovernment.
B) inthefactormarkets.
D) atagrocerystore.
Answer: B
Diff:1
28) Totalincome
A) istheyearlyamountearnedbyownersofthenationsresources.
B) includesonlywagesreceivedbyworkers.
C) includesonlywagesandinterestpayments.
D) excludesprofits.
Answer: A
Diff:1
29) Theamountearnedbyownersofthenationsfactorsofproductionis
A) thewagesandfringebenefitsreceivedbythenationsworkers.
B) allprofitsreceivedbybusinesses.
C) totalincome.
D) privateandgovernmenttransferpayments.
Answer: C
Diff:2
30) Profits
A) areacostofdoingbusinessbecauseentrepreneurswouldnotincurtheriskofstartinga
businessiftheydidntexpecttoearnprofits.
B) areacostofdoingbusinessbecausetheyarepaymentstoothers.
C) arenotacostofdoingbusinessbecausetheyareowedtoresourceowners.
D) arenotacostofdoingbusinessbecausetheyareoftenzeroornegative.
Answer: A
Diff:2
31) Whichofthefollowingstatementsistrueaboutprofits?
A) Profitsareexcludedfromthecircularflowoftheincomediagram.
B) Theonlyportionofprofitsthatareincludedinthecircularflowdiagramaretheportion
paidoutintheformofdividends.
C) Profitsareconsideredoneoftheresourcesnecessaryforproduction.
D) Profitsareconsideredacostofdoingbusiness.
Answer: D
Diff:1
32) Totalincomeisdefinedas
A) thetotalreceiptsoffirmsbeforetaxes.
B) thetotalamountearnedbyallresourceowners.
C) thesumofthetotalreceiptsoffirmsandtheamountearnedbyhouseholds.
D) thesumofthetotalreceiptsoffirmslesstheamountoftaxthatmustbepaid.
Answer: B
Diff:1
33) AllofthefollowingareincomesearnedinthefactormarketEXCEPT
A) wages.
B) pricesofgoodsandservices.
C) profits.
D) rents.
Answer: B
Diff:1
34) Theannualcostofproducingtheentireoutputofgoodsandservicesintheeconomy
A) includesfinancialtransactions.
B) canbecalculatedentirelyonthebasisoffinancialtransactions.
C) includesdurablegoodsbutexcludesnondurablegoods.
D) istotalincome.
Answer: D
Diff:1
35) Householdsreceivetheirincomeinthecircularflowdiagramby
A) sellingtheuseoftheirproperty.
B) sellingthegoodstheyproduceathome.
C) obtainingdividendsandinterestpayments.
D) sellingresourcestheyowntobusinessfirms.
Answer: D
Diff:1
36) Inthesimplecircularflowmodel,thefundsreceivedbyacarmakerwhenitsellsacargoesto
A) theworkerswhohelpedbuildthecar.
B) theownersoffirmswhosoldmaterialstothecarmaker,andthereststayswiththefirm.
C) onlytheownersofthecarmaker.
D) theownersofalloftheresourcesusedtomakethecar.
Answer: D
Diff:2
37) WhichofthefollowingisNOTafinalgoodorservice?
A) anautomobile
B) bread
C) flour
Answer: C
Diff:1
D) acookie
38) Refertotheabovefigure.Thetoptwoarrowsofthefigurerefertotheproductmarkets.The
bottomarrowsrefertothefactormarkets.Whicharrowrepresentsthetotalmonetaryvalueof
allgoodsandservices?
A) ArrowA
B) ArrowB
C) ArrowC
D) ArrowD
Answer: A
Diff:3
bottomarrowsrefertothefactormarkets.Whicharrowrepresentsthefinalconsumergoods
andservices?
A) ArrowA
B) ArrowB
C) ArrowC
D) ArrowD
Answer: B
Diff:3
bottomarrowsrefertothefactormarkets.Whicharrowrepresentsfactorservices?
A) ArrowA
B) ArrowB
C) ArrowC
D) ArrowD
Answer: C
Diff:3
bottomarrowsrefertothefactormarkets.Whicharrowrepresentstotalincome?
A) ArrowA
B) ArrowB
C) ArrowC
D) ArrowD
Answer: D
Diff:3
42) Refertotheabovefigure.Whicharrowsrepresentitemsthataremeasuredindollarterms?
A) ArrowsAandB
B) ArrowsCandD
C) ArrowsAandD
D) ArrowsBandC
Answer: C
Diff:3
43) Refertotheabovefigure.Whicharrowsrepresentitemsthatarenotmeasuredindollarterms?
A) ArrowsAandB
B) ArrowsCandD
C) ArrowsAandD
D) ArrowsBandC
Answer: D
Diff:3
44) Afirmproducesagoodandgenerates$5millioninreceipts.Wagesare$3million,rentis
$500,000,andinterestpaymentsare$1million.Then
A) profitsare$500,000,thecostofproductionis$4.5million,andhouseholdsreceiveincome
equalto$4.5million.
B) profitsare$500,000,thecostofproductionis$5million,andhouseholdsreceiveincome
equalto$4.5million.
C) profitsare$500,000,thecostofproductionis$5million,andhouseholdsreceiveincome
equalto$5million.
D) profitsare$500,000,thecostofproductionis$5million,andhouseholdsreceiveincome
equalto$3.5million.
Answer: C
Diff:3
45) Householdsreceiveatotalincomeof$5million.Ofthis,$3.5millionarewagesreceivedfor
laborservices,$1millionarerentalpayments,and$250,000areinterestpaymentsreceived.
Whatarethecostsofproductionandprofitsequaltorespectively?
A) $5million;$500,000
B) $5million;$250,000
C) $4.75million;$250,000
D) $4.75million;0
Answer: B
Diff:3
46) Thedollarvalueoffinaloutput
A) islessthantotalincome.
C) isgreaterthantotalincome.
B) isequaltototalincome.
D) equalsprofits.
Answer: B
Diff:1
47) WhichofthefollowingstatementsisNOTtrueabouttherelationshipbetweenthedollarvalue
oftotaloutputandtotalincome?
A) Thedollarvalueoftotaloutputequalstotalincomebecausethespendingofonegroupis
theincomeofanother.
B) Thedollarvalueoftotaloutputequalstotalincomebecauseprofitisconsideredacostof
production.
C) Thedollarvalueoftotaloutputequalstotalincomebecauseprofitisnotconsideredacost
ofproduction.
D) Thedollarvalueoftotaloutputequalstotalincomebecauseoftheeconomicdefinitionof
profit.
Answer: C
Diff:2
48) Howmuchofeachdollarspentbyaconsumerultimatelybecomesincometosomeoneelse?
A) 100percent
B) 67percent
C) Itdependsonhowmuchlaborwasneededtoproducethegoodtheconsumerbuys.
D) Itdependsonhowmuchoverheadthereisinthedistributionchannelthatdeliversthe
goodfromthemanufacturertotheconsumer.
Answer: A
Diff:1
49) Thetwosectorsoftheeconomyinthesimplecircularflowmodelare
A) theemployedandtheunemployed.
B) foreignmarketsanddomesticmarkets.
C) householdsandbusinesses.
D) theprivatesectorandthepublicsector.
Answer: C
Diff:2
50) Inthesimplecircularflowmodel,totalincomeintheUnitedStatesmustequal
A) wages+rents+interest+ profits.
B) thetotalmonetaryvalueofallfinalgoodsandservices.
C) theyearlyamountearnedbyournationsresources.
Answer: D
Diff:2
51) Whichofthefollowingwouldmostlikelybedefinedasafinalgoodorservice?
A) ironore
B) wheat
C) apersonalcomputer
D) lumber
Answer: C
Diff:1
52) Inthesimplecircularflow,
A) businessestradegoodsandservicesforresourcesintheproductmarket.
B) consumerstraderesourcesforgoodsandservicesinthefactormarket.
C) consumerstradegoodsandservicesformonetarypaymentsinthefactormarket.
D) producerstradegoodsandservicesformonetarypaymentsintheproductmarket.
Answer: D
Diff:2
53) Intheproductmarket,
A) businessestradegoodsandservicesforresources.
B) consumerstraderesourcesforgoodsandservices.
C) consumerstradegoodsandservicesforresources.
D) consumerstrademonetarypaymentsforgoodsandservices.
Answer: D
Diff:1
54) Whichofthefollowingoccursinthefactormarket?
A) firmsexchangegoodsandservicesforresources.
B) householdsexchangeresourcesforgoodsandservices.
C) householdsexchangemoneyforgoodsandservices.
D) firmsexchangemoneyforresources.
Answer: D
Diff:1
55) Profitsarepartofthe
A) totalincome.
C) finalconsumergoods.
B) monetaryvalueofoutput.
D) factorservices.
Answer: A
Diff:1
56) Explaintheconceptofthecircularflow.
Answer: Thecircularflowreferstotheinterrelationshipsbetweenincomeandoutput.Inevery
exchangethesellerreceivesexactlywhatthebuyerpays.Thisalsomeansthatsomeones
receiptissomeoneelsespayment.Goodsandservicesflowinonedirectionandmoney
paymentsintheother.Thetotalincomereceivedbypeoplemustequalthetotalspending
ofpeople.Businessesprovidegoodsandservicesandsellthemtohouseholds,and
householdsprovidetheresourcesusedbyfirmsinexchangeforincome.
Diff:2
57) Whymusttotalincomebeidenticaltothedollarvalueoftotaloutput?
Answer: Totalincomemustbeidenticaltothedollarvalueoftotaloutputbecausespendingby
onepersonisincomeforanother.Further,thedefinitionofprofitisimportant.Profitis
theamountleftoverfromtotalbusinessreceiptsafterallothercostshavebeenpaid.
Hence,profitistheresidualthatmakestotalincomeequaltothedollarvalueoftotal
output.
Diff:2
58) Wheredoesprofitenterinthecircularflow?Why?
Answer: Profitisapaymentmadetoentrepreneursjustaswagesareapaymentmadetolabor.
Entrepreneursmustberewardedforprovidingtheirservices,andprofitisthereward.
Hence,profitisacostofproduction.
Diff:1
8.2NationalIncomeAccounting
1) Thedollarvalueoftotaloutput
A) equalsthevalueofallphysicalgoodssoldintheUnitedStates.
B) equalsthemarketvalueofallfinalgoodsandservicesproducedintheUnitedStates.
C) equalsonlythevalueofstocksontheNewYorkStockExchange.
D) equalsonlythevalueofnewservicesintheeconomy.
Answer: B
Diff:2
Topic: 8.2NationalIncomeAccounting
2) ThemeasurementsystemusedbytheU.S.governmenttoestimatenationalincomeis
A) theGDPdeflator.
B) nationalincomeaccounting.
C) thesumoffinancialtransactions,transferpaymentsandsecondhandgoods.
D) thesumofconsumptionplusinvestmentexpenditures.
Answer: B
Diff:1
3) TheapproachusedintheU.S.tomeasuretheeconomysaggregateperformanceis
A) nationalincomeaccounting.
B) toaddupthevalueofintermediategoods.
C) thetotalvalueofsecurities.
D) toaddupthetotalvalueoffinancialtransactions,transferpayments,andsecondhand
goods.
E) alloftheabove
Answer: A
Diff:1
4) WhichofthefollowingwouldbeincludedinthecalculationofGrossDomesticProduct(GDP)?
A) Thevalueoftransferpayments
B) Thevalueofthesaleofausedguitar
C) Thevalueofthesaleof1,000sharesofIBMstock
D) Thevalueofspendingonnewmachineryandequipment
Answer: D
Diff:1
5) U.S.GrossDomesticProduct(GDP)doesNOTincludewhichofthefollowing?
A) businessinvestment
B) thevalueofgoodsproducedinCanadabyU.S.ownedfirms
C) netexports
D) thepurchaseofallfinalgoodsandservicesbyU.S.households
Answer: B
Diff:2
6) WhichofthefollowingbestdescribesanationsGrossDomesticProduct?
A) Themarketvalueofallgoodsandservicesproducedintheeconomy,including
intermediategoods
B) Thetotalmarketvalueofallfinalgoodsandservicesproducedintheeconomyduringa
year
C) Theconstantdollarvalueofallgoodsproducedintheeconomyduringayearperiod
D) Themarketvalueofallgoodsandserviceslessdepreciation
Answer: B
Diff:1
7) Thetotalmarketvalueoffinalgoodsandservicesproducedinaneconomyduringaone -year
periodis
A) GrossDomesticProduct.
B) netnationalproduct.
C) profit.
D) personalincome.
Answer: A
Diff:1
8) GrossDomesticProductmeasures
A) thetotalvalueoflaborusedintheeconomy.
B) thetotalmarketvalueoffinalgoodsandservicesproducedwithinanationsborders.
C) thetotalincomereceivedbyresidentsofanation.
D) thetotalworthofallgoodsconsumedwithinthebordersofanation.
Answer: B
Diff:1
9) GrossDomesticProductisbestdefinedas
A) thetotalmarketvalueofallfinalgoodsandservicesproducedduringayearbyfactorsof
productionlocatedwithinanationsborders.
B) thetotalmarketvalueofallintermediategoodsandservicesproducedduringayearby
factorsofproductionlocatedwithinanationsborders.
C) thevalueaddedtoallgoodsproducedinaneconomyduringayear.
D) thetotalmarketvalueofallfinalgoodsandservicesthatexistinaneconomyatagiven
pointintime.
Answer: A
Diff:1
10) SupposethetotalvalueofallassetsintheCountryXis$10trillion.In2013,thetotalvalueofall
finalservicesproducedinCountryXwas$150billion,thetotalvalueofallfinalgoodsproduced
inCountyXwas$350billion,andthetotalvalueofallfinalgoodsandservicesproducedby
CountyXsfirmsinothercountrieswas$100billion.Inthissituation,CountryXsGross
DomesticProductfor2013was
A) $600billion.
B) $510billion.
C) $500billion.
D) $10.5trillion.
Answer: C
Diff:3
11) WhichofthefollowingtransactionsisincludedinGrossDomesticProduct?
A) ASocialSecuritycheckreceivedbyaretiredcouple
B) Agiftcardthatamothergivesherson
C) AusedtextbookthatonestudentgivesanotherstudentinexchangeforaniPod
D) TipsreceivedbyawaitresswhoreportsthemtotheIRS
Answer: D
Diff:2
12) Whichofthefollowingisincluded indeterminingGrossDomesticProduct?

A) Thepurchaseofanewcar
B) Thepurchaseofausedcar
C) Ahousewifepreparingbreakfast
D) Agardenercanningvegetablesforconsumptionduringthewinter
Answer: A
Diff:1
13) Goodsthatareusedupentirelyintheproductionoffinalgoodsareknownas
A) durablegoods.
B) valueaddedgoods.
C) intermediategoods.
D) capitalgoods.
Answer: C
Diff:1
14) WhichofthefollowingwouldbeincludedwhencalculatingGrossDomesticProduct?
A) Thepurchaseofapreviouslyownedhousefor$70,000
B) Thepurchaseofaused$10,000automobile
C) ASocialSecuritycheckfor$800
D) noneoftheabove
Answer: D
Diff:1
15) IntermediategoodsareNOTincludedinGrossDomesticProduct(GDP)calculationsbecause
A) theyareusedintheproductionoffinalgoodsandwouldthenbecountedtwice.
B) theyareproducedoverseas.
C) theyaremadefromforeignrawmaterials.
D) theyhaveverylowvalueadded.
Answer: A
Diff:2
16) IfJackrefinishedhisbasementhimself,thevalueofhiswork
A) isnotincludedinGrossDomesticProduct(GDP).
B) isincludedinGrossDomesticProduct(GDP).
C) isonlyincludedinGrossDomesticProduct(GDP)ifheusesU.S.madecomponents.
D) isincludedinthenextyearsGrossDomesticProduct(GDP).
Answer: A
Diff:2
17) Wheatusedforproducingbreadis
A) afinalgood.
C) anintermediategood.
Answer: C
Diff:1
B) notgoingtogenerateanyemployment.
D) adurablegood.
18) WhichofthefollowingtransactionswouldbeincludedinthecalculationofGrossDomestic
Product(GDP)?
A) Thepurchaseoflegalservices
B) ThepurchaseofashareofstockinGeneralMotors
C) Thepurchaseofwheattomakebread
D) Thepurchaseofasecond-handlawnmowerfromyourneighbor
Answer: A
Diff:1
19) Whichofthefollowingisafinalgood?
A) Seedusedforcorn
B) Wheatusedforbread
C) Electricityusedforproducingautomobiles
D) Alawnmowerpurchasedbyahousehold
Answer: D
Diff:1
20) Thefarmerpays20centsfortheseedthatissoldtothemillerfor35cents;themillermakesflour
andsellsittothebakerfor55cents.Thebakermakesbreadandsellsittothegrocerystorefor
80centsandthestoresellsittoconsumersfor$1.00.ThecontributiontoGrossDomestic
Product(GDP)is
A) $2.90.
B) $1.90.
C) $1.
D) 20cents.
Answer: C
Diff:2
21) Afarmerbuysseedfor20centsthatisusedtogrowwheat.Thefarmersellsthewheattothe
millerfor35cents,andthemillermakesflour,whichisthensoldtothebakerfor55cents.The
bakermakesbreadandsellsittothegrocerfor80cents,andthegrocersellsthebreadtoa
familyfor$1.Whatisthevalueaddedofthebakerandwhatisthesumofthevalueaddedat
eachstageofproduction?
A) 80cents;$1
B) 80cents;$2.90
C) 25cents;$2.90
D) 25cents;$1
Answer: D
Diff:2
22) Thetermvalueaddedreferstothedollarvalueof
A) anindustryssalesplusprofits.
B) theintermediategoodsandservicespurchasedbyanindustry.
C) anindustryssaleslessthedollarvalueoftheintermediategoodspurchasedbythe
industry.
D) theintermediategoodspurchasedbyanindustryplustheprofitsoftheindustry.
Answer: C
Diff:1
23) TheownerofanoilwellinTexassells1000barrelsofoiltoarefineryinMexicofor$12,000for
refining.Thistransaction
A) willincreaseGrossDomesticProduct(GDP)by$12,000.
B) hasnoeffectonGrossDomesticProduct(GDP)becausetherefineryisinMexico.
C) decreasesGrossDomesticProduct(GDP)becauseoilreserveshavefallenby1000barrels.
D) hasnoeffectonGrossDomesticProduct(GDP)becausethisisthesaleofanintermediate
product.
Answer: D
Diff:2
24) Intermediategoodsaregoodsthatareusedupentirelyintheproductionoffinalgoods.As
such,intermediategoods
A) areexcludedincalculatingGrossDomesticProduct(GDP)becausetheyarenotvaluable.
B) areexcludedincalculatingGrossDomesticProduct(GDP)becausetodosowouldbeto
doublecountthem.
C) makeuponlyasmallportionofGrossDomesticProduct(GDP).
D) areincludedinGrossDomesticProduct(GDP)onlyifproducedwithinthebordersofthe
UnitedStates.
Answer: B
Diff:1
25) WhymightahomemakerbeupsetwiththewayGrossDomesticProduct(GDP)iscalculated?
A) Becausethegovernmentalwaysunderestimatesthedollarvalueofthehouseholdservices
producedathomeandoutsidethemarketthatareincludedintheGrossDomesticProduct
(GDP)statistic
B) Becausehouseholdservicesproducedathomeandoutsidethemarketareonlyincludedin
GrossDomesticProduct(GDP)ifthehomemakerisaman
C) Becausehouseholdservicesproducedathomeandoutsidethemarketthataresoldto
othersarenotincludedinGrossDomesticProduct(GDP)
D) Becausenoneofthehouseholdservicesproducedforathomeandoutsidethemarketare
includedinGrossDomesticProduct(GDP)eventhoughtheycontributegreatlytothe
welfareofthefamily
Answer: D
Diff:1
26) SocialSecuritypaymentsare
A) includedinGrossDomesticProduct(GDP).
B) notincludedinGrossDomesticProduct(GDP),butareincludedinGrossDomestic
Incomeaccounts.
C) notincludedinGrossDomesticProduct(GDP).
D) notincludedinGrossDomesticProduct(GDP),butareincludedinNetDomesticProduct.
Answer: C
Diff:1
A) GrossDomesticProduct(GDP)measuresthemarketvalueoffinalgoodsandservices
producedduringaparticulartimeperiod.
B) TransfersofusedgoodsarenotincludedinGrossDomesticProduct(GDP).
C) Privatetransferpayments,suchasaninheritance,areincludedintheGrossDomestic
Product(GDP).
D) Ifstatisticianscountedintermediategoods,theestimateofGrossDomesticProduct(GDP)
wouldbetoohigh.
Answer: C
Diff:1
28) Acarsoldfromausedcarlot
A) wouldbecountedinGrossDomesticProduct(GDP).
B) wouldfallundernetexports,andwouldthenbecountedinGrossDomesticProduct
(GDP).
C) wouldnotbecountedinGrossDomesticProduct(GDP).
D) wouldonlybecountedinGrossDomesticProduct(GDP)ifitwasaforeignmadecar.
Answer: C
Diff:2
29) WhichofthefollowingisincludedinGrossDomesticProduct(GDP)?
A) Thebuyingandsellingofsecurities
B) Governmenttransferpayments
C) Privatetransferpayments
D) Thesaleofusedgoods
E) Noneoftheabove
Answer: E
Diff:1
30) AvalidrationaleforthedecisionNOTtoincludenon-compensatedhouseworkinGross
DomesticProduct(GDP)calculationsisthat
A) itwoulddecreasetheemploymentratefordomesticwork.
B) thereissomedifficultyinmeasuringqualityandquantity.
C) itisnotaproductorservice.
D) itwouldunderstatethevalueofproductionintheeconomy.
Answer: B
Diff:2
31) WhichofthefollowingisNOTincludedinthecalculationofGrossDomesticProduct(GDP)?
A) ThepurchaseofaraincoatbyMr.Z
B) Mrs.Tsuseofalawyer
C) Mr.JspurchaseofashareofGeneralMotorsstock
D) Allofthesewouldbeincluded
Answer: C
Diff:1
32) ThepurchaseofashareofstockisexcludedinthecalculationofGrossDomesticProduct(GDP)
becauseit
A) isanintermediategood.
B) producesvalueadded.
C) onlyrepresentsthetransferofownershiprights.
D) isafinalserviceandnotagood.
Answer: C
Diff:1
33) WhichofthefollowingtransactionswouldbeincludedinGrossDomesticProduct(GDP)?
A) Thepurchaseofnewtiresbyafamilytoreplacewornouttiresonthefamilycar
B) Thepurchaseofausedcar
C) Thepurchaseof100sharesofGeneralMotorsstock
D) Thepurchaseof2gramsofcocaine
Answer: A
Diff:2
34) Ifyoubuystocksandbonds,thedollarvalueofthosestocksandbondsis
A) includedinGrossDomesticProduct(GDP)underinvestment.
B) includedinGrossDomesticProduct(GDP)underconsumerexpenditures.
C) notincludedincalculatingGrossDomesticProduct(GDP)fortheymerelyrepresenta
transferofownership.
D) includedinGrossDomesticProduct(GDP)ifthestocksandbondswereissuedby
businessfirmsbutnotiftheywereissuedbygovernments.
Answer: C
Diff:2
35) GrossDomesticProduct(GDP)figuresmayunderstatethevalueofgoodsandservicesdueto
A) theexclusionoftheundergroundeconomy.
B) theinclusionofhouseholdproduction.
C) theinclusionoflegalnon-reported,non-taxedincome.
D) theexclusionofthevalueofstocks.
Answer: A
Diff:1
36) WhichofthefollowingwouldNOTbeincludedinanationsGrossDomesticProduct(GDP)?
A) Thegovernmentpurchases100newtrucksfortheArmy.
B) Theinventoryofpapertowelsgoesup.
C) Alandlordrentsanapartment.
D) Inapokergameastudentwins$500thathedoesnotreportasincome.
Answer: D
Diff:1
37) Nationalincomeaccountingis
A) howtheamountofunemploymentinthesystemismeasured.
B) usedonlytodeterminethegovernmentdeficit.
C) anapproachtomeasuringaneconomysaggregateperformance.
D) thesystemthatmeasuresthevalueoftheDowJonesaverage.
Answer: C
Diff:1
38) WhichofthefollowingitemsareincludedinGDP?
A) ausedcars
B) alltransactionsinvolvingbonds
C) allnewhomes
D) allfoodstamps
Answer: C
Diff:1
39) WhichofthefollowingisincludedinGDP?
A) Acomputermanufacturerproducesandsellsacomputer.
B) Awomanmowsherownyardandtrimsherownhedges.
C) Anindividualsmugglesillegaldrugsintothecountryandsellsthem.
D) Anillegalgamblingoperationprofitsfromsecretbettingactivities.
Answer: A
Diff:1
40) WhichofthefollowingitemsisexcludedfromGDP?
A) Servicesabarberperformsincuttinghair
B) Productionandsaleofhair-cuttingequipment
C) Servicesabarberperformsinrepairinghisownhair-cuttingequipment
D) Theconstructionofanewbarbershop
Answer: C
Diff:1
41) GrossDomesticProduct(GDP)is
A) thetotalwholesalevalueofallfinalgoodsandservicesproducedbyfactorsofproduction
ownedbycitizensofanation.
B) thetotalmarketvalueofallservicesproducedbyfactorsofproductionlocatedwithina
nationsborders.
C) thetotalmarketvalueofallgoodsproducedwithinanationsborders.
D) thetotalmarketvalueofallfinalgoodsandservicesproducedbyfactorsofproduction
locatedwithinanationsborders.
Answer: D
Diff:1
42) Thetotalvalueofallfinalgoodsandservicesproducedbyfactorsofproductionlocatedwithin
anationsbordersis
A) GDP.
B) NI.
C) PI.
D) netinvestment.
Answer: A
Diff:1
43) Supposethatin2013,thetotalvalueofallfinalservicesproducedinanationwas$300billion;
thetotalvalueofallfinalgoodsproducedinthatnationwas$400billion;andthetotalvalueof
allfinalgoodsandservicesproducedbythatnationsfirmsinothercountrieswas$200billion.
Grossdomesticproductwas
A) $600billion.
B) $500billion.
C) $900billion.
D) $700billion.
Answer: D
Diff:2
44) GDP
A) isastockmeasuresinceitrepresentsthetotalmarketvalue.
B) isaflowmeasuresinceitrepresentsthevalueofaflowofproductionoverayearsperiod.
C) isneitherastockorflowmeasuresinceitismeasuredindollars.
D) couldbeeitherastockorflowmeasuredependinguponwhetheritismeasuredindollars
orunitsofproduction.
Answer: B
Diff:1
45) GDPisa
A) stockbecauseitmeasuresincomefortheentirecountry.
B) stockbecauseitmeasureswealthatadistinctpointintime.
C) flowbecausedollarvaluesareused.
D) flowbecauseitmeasuresincomeoveraperiodoftime.
Answer: D
Diff:2
46) Whendealingwithanythingthatismeasuredasaflow,onemust
A) usedollarvalues.
B) makesurethethingcanbemeasuredaccurately.
C) specifyatimeperiod.
D) specifyonedayintime.
Answer: C
Diff:1
47) Intermediategoodsare
A) goodsthatareusedupentirelyintheproductionoffinalgoods.
B) thestockofallresourcesexcludinglabor.
C) goodsthatgetsoldtotheU.S.government.
D) equaltothereceiptsoffirms.
Answer: A
Diff:1
48) GDPdoesNOTincludeintermediategoodsbecause
A) intermediategoodsarenotvaluable.
B) intermediategoodsarenotusefultoconsumers.
C) thatwouldcountthevalueofintermediategoodstwice.
D) thatwouldunderstatethetruesizeofGDP.
Answer: C
Diff:1
49) Thefarmerpays15centsforwheatseeds.Whenthewheatisgrownandharvested,thefarmer
sellsittothemillerfor30cents,whomakesflourandsellstheflourtothebakerfor60cents.
Thebakermakesbreadandsellsittothegrocerfor90cents,andthegrocersellsittoafamily
for$1.25.ThecontributiontoGDPis
A) 35cents.
B) $1.25.
C) $1.95.
D) $3.20.
Answer: B
Diff:2
50) Valueaddedis
A) thepriceofanintermediateproduct.
B) theamountofdollarvaluecontributedtoaproductateachstageofitsproduction.
C) thesumofthepricesofintermediateproducts.
D) thedollarvaluecontributedtoaproductatthelaststageofitsproduction.
Answer: B
Diff:1
51) Thedollarvalueofanindustryssalesminusthevalueofintermediategoodsis
A) GDP.
B) NDP.
C) transferpayments.
D) valueadded.
Answer: D
Diff:1
52) Thetotalvalueadded
A) equalstheretailprice.
B) equalsthewholesaleprice.
C) equalsthesumofthepricesontheintermediategoods.
D) equalstheretailpricelessthewholesaleprice.
Answer: A
Diff:1
StageofProduction
DollarValueofSale
ValueAdded
---------0.08
Stage1
Stage2
Stage3
Stage4
0.08
0.10
0.25
0.32
0.75
53) Refertotheabovetable.Theproductionofthisgoodgoesthrough4differentstagesof
production.WhatisthevalueaddedatStage2?
A) $0.02
B) $0.08
C) $0.10
D) $0.75
Answer: A
Diff:1
54) Refertotheabovetable.Theproductionofthisgoodhasbeenthroughthefirst3stagesof
production.WhatisthetotalvalueaddedinStage1through3?
A) $0.75
B) $0.43
C) $0.07
D) Cannotbecomputedwithoutmoreinformation.
Answer: B
Diff:1
production.Whatisthetotaldollarvalueaddedwhenproductioniscompleted?
A) $0.07
B) $0.32
C) $0.75
Answer: C
Diff:1
production.Whatdoesthetotalvalueaddedequal?
A) $0.07
B) $0.32
C) $0.75
Answer: C
Diff:1
millerfor30cents,whomakesflour.Theflourissoldtothebakerfor60centsandthebaker
makesbread,whichissoldtothegrocerfor90cents.Thegrocersellsthebreadfor$1.25.What
isthevalueaddedforthemiller?
A) 60cents
B) 45cents
C) 30cents
D) 90cents
Answer: C
Diff:2
58) Theproductionofacertaingoodinvolves5stages.Thevalueaddedafterthefirststageof
productionoccursisis$1.20.Thesalepriceofthegoodis$2.50.Whatamountisusedto
measureGDP?
A) $0.025
B) $1.20
C) $1.30
D) $2.50
Answer: D
Diff:1
millerfor30cents,whomakesflour.Theflourissoldtothebakerfor60centsandthebaker
makesbread,whichissoldtothegrocerfor90cents.Thegrocersellsthebreadfor$1.25.What
isthevalueaddedforthegrocer?
A) 15cents
B) 30cents
C) 35cents
D) $1.25
Answer: C
Diff:2
60) Agoodgoesthroughthreestagesofproduction.Thevalueaddedatstage1is$3;thevalue
addedatstage2is$5;thevalueaddedatstage3is$2.Whatistheretailpriceofthegood?
A) $2
B) $10
C) $20
D) Cannotbedeterminedbasedontheinformationgiven.
Answer: B
Diff:1
61) WhichofthefollowingtransactionswouldNOTbeincludedinGDP?
A) thepurchaseof100sharesofnewlyissuedMicrosoftstock
B) thepurchaseofanewlyissuedgovernmentbond
C) thepurchaseofpreviouslyissuedcorporatebond
D) alloftheabove
Answer: D
Diff:2
62) WhichofthefollowingtransactionsisincludedinGDP?
A) fundsgiventoacollegestudentbyherparents
B) fundsreceivedbyacollegestudentforworkinginthecollegedininghall
C) fundsgiventoafamilyonwelfare
D) SocialSecuritycheckreceivedbyanelderlycouple
Answer: B
Diff:2
63) WhichofthefollowingisincludedinmeasuringGDP?
A) Thevalueaddedateachstageofproductionofafinalproduct
B) Thebuyingandsellingofsecurities
C) Thetransferofsecondhandgoods
D) Householdservicesrenderedbyhomemakers
Answer: A
Diff:1
64) WhichofthefollowingitemsisincludedinGDP?
A) ThenewcarthatJamesjustbought
C) Proceedsforagaragesale
B) Thevalueofastay-at-homemom
D) Purchaseofagovernmentbond
Answer: A
Diff:1
65) WhichofthefollowingitemsisNOTincludedinGDP?
A) purchaseofahamburgeratafast-foodrestaurant
B) salesatagrocerystore
C) saleofMicrosoftstock
D) downloadsofnewmusicalbumschargedtoacreditcard
Answer: C
Diff:1
66) GDPisameasureofallofthefollowingEXCEPT
A) theoveralllevelofeconomicactivity
C) overallwelfare
B) thetotalofproduction
D) thetotalvalueofexpenditures
Answer: C
Diff:1
67) Afamilysellsthehousetheyhavelivedinfortwoyearstoafriend.Theyreceived$150,000and
paid$120,000twoyearsago.Thistransaction
A) increasesGDPby$150,000
B) increasesGDPby$30,000
C) hasnoeffectonGDPbecausethehousewasnotmadethisyear
D) hasnoeffectonGDPbecausethehouseisanintermediategood
Answer: C
Diff:2
68) WhichofthefollowingstatementsisNOTtrueofGDP?
A) GDPexcludesnonmarketproduction.
B) TherearenosignificantweaknessesinusingGDPasameasureofthenationseconomic
performance.
C) GDPisthevalueoffinalgoodsandservicesproducedintheeconomy.
D) GDPisnotameasureofanationsoverallwelfare.
Answer: B
Diff:1
69) WhichofthefollowingisasignificantweaknessofGDPasameasureofthenationseconomic
performance?
A) GDPexcludesthesecondhandgoodmarketbecauseitisimpossibletoobtainanestimate
oftheamountsold.
B) GDPexcludesthevalueofthebuyingandsellingofsecurities.
C) GDPconsidersproductandfactormarketsbutnotservices.
D) GDPexcludesnonmarketproduction,suchasblackmarketactivities.
Answer: D
Diff:1
70) GDPdoesNOTmeasurethewell-beingofanationsresidentsbecauseit
A) excludesthesaleofsecondhandgoods.
B) excludesthevalueofintermediategoods.
C) includesthevalueoffinalgoodsandservicesproducedintheeconomy.
D) excludesnonmarkettransactions.
Answer: D
Diff:1
71) WhenconsideringGDPasameasureofthenationseconomicperformance,whichofthe
followingstatementsisNOTtrue?
A) GDPisagoodmeasureofanationsoverallwelfare.
B) GDPisusefultomapchangesintheeconomysdomesticeconomicperformanceover
time.
C) GDPisunderestimatedbecauseitdoesnotincludeillegalactivities.
D) GDPwouldbeabettermeasureofeconomicperformanceifitincludednonmarket
activities.
Answer: A
Diff:2
72) WhichofthefollowingisamainlimitationofGDP?
A) GDPfiguresaregrosslyinaccurateduetosamplingerrors.
B) TherealdefinitionofwhatisandisnotincludedinGDPisunclear.
C) GDPisnotagoodmeasureofanationsoverallwelfare.
D) GDPincludessomeproducts,whichbytheirverynaturearebadproducts,suchas
militaryweapons.
Answer: C
Diff:2
73) WhichoneofthefollowingisNOTincludedinGDP?
A) Youpayaroofer$3,000torepairyourroofafteritisdamagedinahailstorm.
B) Youpayaroofer$3,000torepairyourroofafteryoudiscoverleakshaveappeareddueto
normalwearandtear.
C) Yougiveupaweekendofleisuretorepairyourroofyourself.
D) Youpurchase$60worthoffirstaidsuppliesatthelocaldrugstoretotreatthecutsand
scrapesyousufferedwhilecrawlingaroundontheroof.
Answer: C
Diff:1
A) Youlookafteryourneighborsplantsduringhervacationinexchangeforheragreement
tofeedyourfishwhileyouaregone.
B) Ahomeownerhiresacleaningservicetotakecareofhouseholdchoresshechoosesnotto
dobecauseofthedemandsofherjob.
C) Abicyclemanufacturerpaysanadvertisingagencytodevelopanewpromotional
campaign.
D) Youpurchasenewtiresforyouroldcar.
Answer: A
Diff:2
75) WhichofthefollowingisincludedinGDP?
A) Anewlylaid-offworkerreceiveshis$400unemploymentcompensationcheckfromthe
stategovernment.
B) Acollegeseniorreceivesa$1,000graduationgiftfromagrandparent.
C) Youbuya$12snowshoveltohaveonhandforthenextsnowstorm.
D) Youpurchase$300worthofclothesfromathriftshopsellingsecond-handclothing.
Answer: C
Diff:2
76) GDPisameasureof
A) production.
C) inflation.
B) innovation.
D) theamountofmoneyavailable.
Answer: A
Diff:2
77) Thetotalmarketvalueofthenationsannualfinalproductsproduceddomesticallybestdefines
the
A) GDP.
B) GNP.
C) CPI.
D) PPI.
Answer: A
Diff:1
78) Grossdomesticproductisameasureof
A) thetotalvalueofalltransactionsinU.S.markets.
B) theaddedvalueofproduction.
C) thedollarvalueoffinalgoodsandservicesproducedintheUnitedStates.
D) thedollarvalueoftheaggregatemeasureofbusinessasmeasuredbytheDowJones
IndustrialAverage.
Answer: C
Diff:1
79) WhichofthefollowingisNOTincludedwhencalculatingGDP?
A) thedollarvalueofanewbook
B) thedollarvalueofanewiPod
C) thedollarvalueofanewlyissuedcorporatebond
D) thedollarvalueoftuitionexpendituresatacommunitycollege
Answer: C
Diff:2
80) WhichofthefollowingiscountedintheGDPinagivenyear?
A) thesaleofMicrosoftstock
B) thesaleofausedMustangconvertible
C) thedollarvalueofthehouseworkdonebyastay -at-homemom
D) thesaleofanewhandmadeukulele
Answer: D
Diff:2
81) Supposeyoudrivedowntown,payforparkingataprivateparkinggarage,andgotoseean
investmentadvisor.Hechargesyoua$100feetoadviseyoutopurchase500sharesofstock,
whichyoudo.WhichofthesetransactionsisNOTincludedinGDP?
A) thepurchaseofgasforthetrip
B) payingtheparkingfee
C) payingthe$100feetotheinvestmentadvisor
D) yourpurchaseofthestock
Answer: D
Diff:2
A) Thefederalgovernmentpaysadefensecontractortodevelopanewweaponssystem.
B) Youvolunteertoorganizeaneighborhoodwatchgrouponyourblock.
C) Youpayyourmonthlyapartmentrent.
D) Amail-orderfirmconstructsanewwarehouseinKansasasacentraldistributionfacility.
Answer: B
Diff:1
83) Nationalincomeaccountingis
A) usedbybusinessestocalculatetheirprofitsduringagivenyear.
B) asystemutilizedtomeasuremacroeconomicactivity.
C) ameasureofconsumerincome.
D) usedbyaccountantstocalculatethetaxobligationsofmultinationalcorporations.
Answer: B
Diff:1
84) Grossdomesticproductisthe
A) marketvalueofallintermediateandfinalgoodsproducedinayear.
B) marketvalueofallfinalgoodsproducedinayear.
C) totalspendinginaneconomyinayear.
D) valueoftotalexportsinayear.
Answer: B
Diff:1
85) ThevalueaddedmethodofcalculatingGDPmeans
A) addingupthemarketvaluesofallintermediategoods.
B) calculatingthepercentagechangesintheGDPbetweentwoyears.
C) addinguptheincomesofallbusinessesinagivenyear.
D) addingupthedifferencebetweenthesalepriceandthevalueofintermediategoodsof
eachproductateverystageofproduction.
Answer: D
Diff:1
86) Yourparentssurpriseyouwitha$500check.Asaresult,theU.S.GDP
A) increasesbecausethisisunexpectedincometoyou.
B) decreasesbecauseyouwillspenditonuselessgoods.
C) remainsunchangedbecauseitwascountedwhenyourparentsearnedit.
D) decreasesbecauseyouhavetopaytaxesonthisincome.
Answer: C
Diff:2
ProductionStep
Purchaseoftimber
Convertingtimbertopaper
Shippingpapertoprinter
Printing
Shippingbookstobookstores
Retailsalespriceoftextbook
SalesValue/Textbook
$2.50
$8.40
$10.00
$26.00
$32.00
$40.00
87) Usingabovetable,howmuchiscontributedtotheGDPfromtheproductionofthetextbook?
A) $118.90
B) $32.00
C) $78.90
D) $40.00
Answer: D
Diff:2
88) Usingabovetable,themarketpriceofthetextbookis
A) $118.90.
B) $32.00.
C) $78.90.
Answer: D
Diff:1
D) $40.00
89) Considerthefollowing:
FarmerJonesboughtseedandfertilizerfor$100.
HegrewwheatthathesoldtotheAcmeBreadCompanyfor$200.
AcmeBreadproducedandsoldbreadtotheABCGroceryStorefor$250.
Consumersboughtthebreadfromthegroceryfor$350.
HowmuchwasaddedtotheGDP?
A) $700
B) $800
C) $350
D) $600
Answer: C
Diff:2
90) WhichofthefollowingtransactionswouldNOTcontributetotheGDP?
A) thepurchaseof100sharesofGeneralMotorsstock
B) thepurchaseofanewChevroletautomobile
C) thepurchaseofapackageofchewinggumfromtheconveniencestore
D) thepurchaseofgasolineforyourautomobile
Answer: A
Diff:2
91) WhichofthefollowingwouldNOTbeincludedinthecalculationoftheGDP?
A) thevalueoftheserviceoflegallyproducedgamblingservicesinLasVegas
B) thevalueoftheservicesofahomemaker
C) thevalueoflegallyproducedliquor
D) thevalueoftheproductionofnuclearweapons
Answer: B
Diff:2
92) TheSocialSecuritycheckreceivedbyyourgrandmother
A) isincludedintheGDPbecauseitwillbespentongoodsandservices.
B) isexcludedfromGDPcalculationsbecauseincludingitwouldresultindoublecounting.
C) isincludedintheGDPbecausesheisentitledtoitasacitizen.
D) isincludedintheGDPbecauseitispartofherincome.
Answer: B
Diff:2
93) WhichofthefollowingwillbeincludedinthisyearsGDP?
A) aPabloPicasso(1881-1973)paintingpurchasedthisyearbytheartmuseum
B) thepurchaseofausedtextbookbyyourfriend
C) thepurchaseof100sharesofIBMstockthroughyourbroker
D) thepurchaseofaninsurancepolicyforausedcar
Answer: D
Diff:2
94) GDPmeasures
A) thenationseconomicwelfare.
B) thenationseconomicactivity.
C) thechangesintheunemploymentrateinagivenyear.
D) theamountofundergroundactivityinanation.
Answer: B
Diff:1
95) GDPmeasures
A) theannualtotalvalueofallservicesproducedbyfactorsofproductionlocatedwithina
nationalborder.
B) theannualvalueoffinalgoodsandservicesproducedbyfactorsofproductionlocated
withinanationalborder.
C) theannualvalueofgoodsandservicesproducedbyfactorsofproductionownedby
companiesheadquarteredinagivencountry.
D) thevalueofallgoodsandservicessoldinagivencountry.
Answer: B
Diff:2
96) Goodsusedupentirelyintheproductionoffinalgoodsare
A) intermediategoods.
B) productiongoods.
C) processgoods.
D) inventorygoods.
Answer: A
Diff:1
97) IncalculatingGDP,thevalueofintermediategoodsiseliminatedbyusingthe
A) distributivemethod.
B) valueassociationmethod.
C) valueaddedmethod.
D) FederalReservemethod.
Answer: C
Diff:1
98) Thesumofthevalueaddedatallstagesofproductionforaproductis
A) theproductsfinalprice.
B) theproductspriceplusthevalueofintermediategoods.
C) theproductspriceminusthevalueofintermediategoods.
D) thesumofallthetransactionsintheproductionoftheproduct.
Answer: A
Diff:1
99) WhichofthefollowingtransactionsisincludedinGDP?
A) salesofusedgoods
B) buyingandsellingofstocksandbonds
C) thesalesofhousesproducedinthatgivenyear
D) governmenttransferpayments
Answer: C
Diff:2
100) ConsumptionexpendituresdoNOTincludepurchasesof
A) durablegoods.
B) nondurablegoods.
C) intermediategoods.
D) services.
Answer: C
Diff:1
101) ManyeconomistsarguethatrealGDPis
A) notagoodmeasureofeconomicwell-beingbecauseitovervaluesincreasesinleisure
time.
B) notagoodmeasureofeconomicwell-beingbecauseitexcludesincreasesinleisuretime.
C) agoodmeasureofeconomicwell-beingbecauseitincludesincreasesinleisuretime.
D) agoodmeasureofeconomicwell-beingbecauseitincludeschangesinpersonalsafety.
Answer: B
Diff:2
102) ManyeconomistsarguethatrealGDPisnotagoodmeasureofeconomicwell-beingbecause
A) itovervaluestheincreasesinnonmarkettransactions.
B) itexcludesSocialSecuritypaymentsmadetoretirees.
C) itincludesthetaxeswepaytothefederalgovernment.
D) itexcludestheenvironmentalqualityoflife.
Answer: D
Diff:2
103) WhichofthefollowingtransactionsisincludedintheGDP?
A) payingalawyertocreateafamilytrust
B) givingyourfriend$20
C) sellingyour2004ToyotaCamry
D) cleaningyourhouse
Answer: A
Diff:2
104) SupposeyoubuyanewFordFusion.Thetiresthatcomewiththecarare
A) finalgoods.
B) intermediategoods.
C) transfergoods.
D) financialgoods.
Answer: B
Diff:1
105) WhatisvalueaddedandhowisitrelatedtoGrossDomesticProduct(GDP)?
Answer: Valueaddedisthedollarvalueofanindustryssalesminusthevalueofintermediate
goodsusedinproduction.BothGrossDomesticProduct(GDP)andvalueaddeddonot
includethevalueofintermediategoods.GrossDomesticProduct(GDP)canbecalculated
byaddingupthevalueaddedateachstageofproduction.
Diff:2
106) SupposeGrossDomesticProduct(GDP)figureswerechangedtoreflecthouseholdproduction.
HowwouldthesizeofhouseholdproductionrelativetoGrossDomesticProduct(GDP)have
changedoverthelastfiftyyears?
Answer: Therelativesizeofhouseholdproductionwouldbelessaspeoplehavesubstituted
marketproductionforhouseholdproduction.Fiftyyearsago,peopledidnoteatoutas
muchasnow.Asthelaborforceparticipationrateofwomenhasincreased,familieshave
reliedlessonhouseholdproductionandmoreonmarketproduction.
Diff:3
107) Defineandexplaingrossdomesticproduct.
Answer: Grossdomesticproductisthetotalmarketvalueofallfinalgoodsandservicesproduced
byfactorsofproductionlocatedwithinacountrysborders.GDPdoesnotcount
intermediategoodsbutcountsonlyfinalgoodsandservices.GDPisalsomeasuredfora
givenperiodoftime,usuallyayear,soitisaflowconcept.Italsocountsonlymarket
transactions,sothevalueofhomeproductionisnotincluded.
Diff:1
108) Whyarentfinancialtransactions,salesofsecondhandgoods,andhouseholdproduction
includedinmeasuringGDP?
Answer: Financialtransactionsdonotinvolvetheproductionoffinalgoodsandservices,sothey
arenotincluded.Secondhandgoodsalsowerenotproducedintherelevanttimeperiod.
TheywerecountedinGDPwhentheyweresoldasnewproducts.Hence,includingthem
whentheyarenotnewwouldbedouble-countingthem.Householdproductionisnot
includedbecauseitisanonmarketactivity.
Diff:2
8.3TwoMainMethodsofMeasuringGDP
1) ThetwoprinciplemethodsofmeasuringGrossDomesticProductarethe
A) flowapproachandthestockapproach.
B) expendituresapproachandtheincomeapproach.
C) intermediateapproachandthevalue-addedapproach.
D) domesticapproachandtheinternationalapproach.
Answer: B
Diff:1
Topic: 8.3TwoMainMethodsofMeasuringGDP
2) WhichofthefollowingstatementsisTRUE?
A) ThevalueofillegalactivitiesisincludedinGrossDomesticProduct(GDP).
B) ThevalueofahomemakersservicesisincludedinGrossDomesticProduct(GDP).
C) ThevalueofintermediategoodsisincludedinGrossDomesticProduct(GDP).
D) GrossDomesticProduct(GDP)maybecalculatedusingtheincomeortheexpenditure
approach.
Answer: D
Diff:1
3) WhichoneofthefollowingstatementsaboutGDPistrue?
A) GDPcanbecalculatedusingtheincomeapproach.
B) ThevalueofhouseholdproductionisexcludedfromGDP.
C) GDPcanbecalculatedusingtheexpendituresapproach.
D) alloftheabove.
Answer: D
Diff:2
4) Whenweusethetermfixedinvestment,weincludeininvestment
A) thepurchaseofstocksandbonds.
B) thepurchaseofconsumergoods.
C) thepurchaseofprivatebonds,butnotgovernmentbonds.
D) thepurchaseofequipmentandothercapitalgoods.
Answer: D
Diff:1
5) Whenoneusestheexpenditureapproach tocalculateGrossDomesticProduct(GDP),whichofthe
followingwouldbeincluded?
A) governmentspendingatthestatelevel
B) householdpurchasesoflegalservices
C) inventoryinvestment
D) alloftheabove
Answer: D
Diff:1
6) SupposethatfortheeconomyofSpringfield,wehavethefollowinginformationfor2013:
consumptionexpenditures=$4,000;wages=$3,500;grossprivatedomesticinvestment=
$1,300;governmentexpenditures=$2,000;exports=$900;imports=$1,100.Usingthe
expenditureapproachwhatwouldtheGrossDomesticProduct(GDP)beforSpringfieldin2013?
A) $6,200
B) $7,100
C) $7,500
D) $10,600
E) $12,800
Answer: B
Diff:1
7) WhichofthefollowingspendingcomponentsmakesupthelargestpercentageofGross
DomesticProduct(GDP)?
A) Consumptionexpenditures
B) Governmentexpenditures
C) Grossprivatedomesticinvestmentexpenditures
D) Expendituresonnetexportsofgoodsandservices
Answer: A
Diff:1
8) DurableconsumergoodsincludeallofthefollowingEXCEPT
A) anautomobile.
B) stockinIBM.
C) acomputer.
D) acompactdiscplayer.
Answer: B
Diff:1
9) ExamplesofnondurableconsumergoodsincludeallofthefollowingEXCEPT
A) apizzadeliveredtoyourhome.
B) acupofcoffee.
C) astereosystem.
D) atickettothemovies.
Answer: C
Diff:1
10) ServicesincludeallofthefollowingEXCEPT
A) paymentforadoctorsvisit.
C) schooltuition.
B) thepurchasepriceofashareofstock.
D) paymentsforautorepair.
Answer: B
Diff:1
11) Whichofthefollowingisanexampleofthegrossprivatedomesticinvestmentcomponentof
GrossDomesticProduct(GDP)?
A) YoubuyashareofGMstock.
B) GMbuysanewdrillpress.
C) Youputmoneyintoyoursavingsaccount.
D) Youputmoneyintoyourcheckingaccount.
Answer: B
Diff:1
12) Whichofthefollowingareexamplesofthegrossprivatedomesticinvestmentcomponentof
I. Thepurchaseofproductionmachinery
II. Anincreaseinfinishedgoodsinventory
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:1
13) Whichofthefollowingispartofgrossprivatedomesticinvestment?
A) Purchasesofstocksandbonds
B) Adeclineinconsumerdebt
C) Purchasesofhamburgersforafamilydinner
D) Apositivechangeinbusinessinventories
Answer: D
Diff:1
14) Whichoneofthefollowingisadurableconsumergood?
A) Furniture
B) Gasoline
C) Food
D) Officesuppliesthatwillbeusedupthisyear
Answer: A
Diff:1
15) WhenthetotalquantityofunsoldnewChevroletsincreasesfrom50,000to75,000,
A) theeconomyexperiencesaperiodofdisinvestment.
B) theeconomyslevelofcompetitionincreases.
C) thereisanincreaseintherateofaggregateoutput.
D) theproducerengagesinaninventoryinvestment.
Answer: D
Diff:2
16) Inventoryinvestmentoccurswhen
A) grocerssellstocksofcannedgoodsofftheirshelves.
B) individualsinvestinaninvention.
C) shopkeeperschecktheirinventories.
D) automobiledealersaddtotheirstocksofunsoldcars.
Answer: D
Diff:1
17) Durableconsumergoodsaregoodsthat
A) lastformorethanthreeyears.
C) areusedupwithinthreeyears.
B) lastformorethanoneyear.
D) areusedupwithinoneyear.
Answer: A
Diff:1
18) Foodandgasolinecanbeclassifiedas
A) nondurablegoods.
C) capitalgoods.
B) durablegoods.
D) long-termgoods.
Answer: A
Diff:2
19) CalculatingGrossDomesticProduct(GDP)bytheexpenditureapproachrequiressummingthe
valueof
A) allincomepaidtoindividuals.
B) alltransactionsintheeconomy.
C) allfinalgoodsandservicesproducedintheeconomy.
D) allexpendituresbyindividuals.
Answer: C
Diff:1
20) Whichofthefollowingisincludedingrossprivatedomesticinvestment?
I. Thepurchaseofnewcapitalgoods
II. Anincreaseinbusinessinventories
A) Ionly
B) IIonly
C) BothIandII
Answer: C
Diff:1
D) NeitherInorII
21) Ifafirmproducesmoreoutputthanitsells,therewillbe
I. Anincreaseinthefirmsinventories
II. Anincreaseinthegrossprivateinvestmentofthenation
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:2
22) Fixedinvestmentincludes
A) businessspendingonplantandequipment.
B) businessspendingonprintingpaper.
C) businesssalaries.
D) laborunioncontracts.
Answer: A
Diff:2
23) WhichofthefollowingisanexampleofinvestmentincomputingGrossDomesticProduct
(GDP)?
A) Anincreaseofinventorystockinanautodealership
B) Adepositof$2,000inabank
C) Alaptoppurchasedbyastudent
D) Thepurchaseofgovernmentbondsbyaretiree
Answer: A
Diff:2
24) WhichofthefollowingisincludedinGrossDomesticProduct(GDP)?
A) Purchasesofstocksandbondsbyindividuals
B) Purchasesofstocksandbondsbyfirms
C) Salesoffinancialassetstoforeignfirms
D) Investmentspendingoncapitalgoods
Answer: D
Diff:1
25) Depreciationis
A) addedtoGrossDomesticProduct(GDP)toreachNetDomesticProduct(NDP).
B) thereductioninthevalueofcapitalgoodsduetophysicalwearandtear.
C) notincludedinGrossDomesticProduct(GDP)fromtheincomeside.
D) alwayshigherthanthecapitalconsumptionallowance.
Answer: B
Diff:1
26) Netdomesticproduct(NDP)is
A) GrossDomesticProduct(GDP)minusdepreciation.
B) GrossDomesticProduct(GDP)minusprivateinvestment.
C) GrossDomesticProduct(GDP)minustheforeignsector.
D) GrossDomesticProduct(GDP)minusgovernmenttransfers.
Answer: A
Diff:1
27) ThecomponentsoftheexpenditureapproachtomeasuringGrossDomesticProduct(GDP)
includeallofthefollowingEXCEPT
A) governmentpurchasesofgoodsandservices.
B) governmentSocialSecuritypayments.
C) durableconsumergoods.
D) nondurableconsumergoods.
Answer: B
Diff:1
28) Anexampleofanincreaseingrossprivatedomesticinvestmentspendingthatalsoincreases
GrossDomesticProduct(GDP)iswhen
A) afamilysellsitshomebecauseofatransfer.
B) afarmerbuysausedtractor.
C) inventoriesofnewcarsaccumulateonthelotsofcardealers.
D) governmentincreasesspendingoninfrastructure.
Answer: C
Diff:3
29) Acapitalgoodis
A) oneproducedbythegovernment.
B) partofinvestmentspendingwhenpurchasedbyeitherprivatebusinessesorbythefederal
government.
C) onethatispurchasedinordertomakeothergoodsandservices.
D) notpartofGrossDomesticProduct(GDP)becauseitisanintermediateproduct.
Answer: C
Diff:1
30) Ifallotherfactorsareheldconstant,anincreaseinimports
A) causesanincreaseinexportsofthesamesize.
B) causesGrossDomesticProduct(GDP)toincrease.
C) causesGrossDomesticProduct(GDP)todecrease.
D) cancauseGrossDomesticProduct(GDP)toincreaseordecrease,dependingonwhether
theimportsarepurchasedbyconsumersorbybusinessfirms.
Answer: C
Diff:2
31) IfGrossDomesticProduct(GDP)equals$1trillion,grossprivateinvestmentexpendituresare
$200billion,exportsequalimports,andgovernmentspendingis$400billion,then
A) consumptionexpendituresare$200billion.
B) consumptionexpendituresare$400billion.
C) spendingonconsumerdurablesmustbe$400million.
D) wecannotdeterminewhatexpendituresonconsumptionarewithoutmoreinformation.
Answer: B
Diff:2
32) Becauseofimprovedproductivity,wagesincrease10percent.Asaresult,grossdomestic
incomeincreases.WhathappenstoGrossDomesticProduct?
A) GrossDomesticProductalsoincreasessinceconsumptionexpenditureswouldincrease.
B) GrossDomesticProductdecreasesaspeoplepaymoretaxesontheirhigherincomes.
C) GrossDomesticProductwouldnotchangesinceconsumptionexpenditureswouldrise
butinvestmentspendingwouldfall.
D) GrossDomesticProductwoulddecreasebecausebusinessesarespendingmoreonwages.
Answer: A
Diff:3
33) AdecreaseinU.S.incomeearnedabroadwillmakeallofthefollowingsmallerEXCEPT
A) nationalincome.
B) netdomesticproduct.
C) personalincome.
D) disposablepersonalincome.
Answer: B
Diff:2
34) IfNetDomesticProduct(NDP)is$50lessthanGrossDomesticProduct(GDP),weknowthat
A) inventoriesincreasedovertheyear.
B) inventoriesdecreasedovertheyear.
C) netinvestmentequals$50.
D) depreciationequals$50.
Answer: D
Diff:2
35) IfC=consumption,G=governmentexpenditures,andI= grossprivateinvestment

expenditures,themathematicalrepresentationofGrossDomesticProduct(GDP)usingthe
expenditureapproachis
A) GrossDomesticProduct(GDP)= C+ I+ G+ Transfers.
B) GrossDomesticProduct(GDP)= C+ I+ G+ Imports.
C) GrossDomesticProduct(GDP)= C+ Imports.
D) GrossDomesticProduct(GDP)= C+ I+ G+ Netexports.
Answer: D
Diff:1
36) OnemethodofcalculatingGrossDomesticProduct(GDP)istoaddtogether
A) investment,consumption,grossprofits,andnetexports.
B) consumption,investment,governmentspending,andnetexports.
C) wages,grossprofits,netinvestment,andnetexports.
D) consumption,wages,interest,rentalincome,andexports.
Answer: B
Diff:1
37) GrossDomesticProduct(GDP)exceedsnetdomesticproductbyanamountequalto
A) indirectbusinesstaxes.
B) corporateprofitspluspersonaltaxes.
C) thecapitalconsumptionallowance(depreciation).
D) transferpaymentsminuspersonaltaxes.
Answer: C
Diff:1
Consumptionexpendituresongoodsandservices
Totalgovernmentspendingongoodsandservices
Grossprivatedomesticinvestment
Imports
Exports
Depreciation(capitalconsumptionallowance)
NetU.S.incomeearnedabroad
$1,500
590
355
50
70
200
-75
38) Accordingtotheabovetable,GrossDomesticProduct(GDP)is
A) $2,190.
B) $2,840.
C) $2,465.
D) $2,750.
Answer: C
Diff:1
39) WhichofthefollowingisincludedwhenmeasuringGrossDomesticProduct(GDP)?
A) Thevalueofservicesofdurablegoodspurchasedinpreviousyears
B) Thevalueofleisuretime
C) Thevalueofservicesprovidedbyhomemakers
D) Therentalincomereceivedbyalandlord
Answer: D
Diff:1
40) WhenusingtheincomeapproachtoestimateGrossDomesticProduct(GDP),whichofthe
followingwouldNOTbeincluded?
A) Theimplicitrentalvalueofowner-occupiedhousing
B) Proprietorsincome
C) Personalconsumptionexpenditures
D) Netinterestreceivedbyhouseholds
Answer: C
Diff:1
41) ThevalueofGrossDomesticProduct(GDP),whenestimatedbytheincomeapproach,isthe
sumof
A) consumptionexpenditures,investmentspending,andprofits.
B) consumption,wages,rents,interest,andprofits.
C) incomeearnedbyallfactorsofproduction,indirectbusinesstaxes,corporateincometaxes,
andpersonalincometaxes.
D) depreciation,businessincomeadjustmentslessindirectbusinesstaxes,U.S.netincome
earnedabroadandincomeearneddomesticallybyfactorsofproduction.
Answer: D
Diff:1
Netinterest
Wagesandsalaries
Rentalincome
Otherbusinessincome
adjustmentslessbusinesstransfers
Changeinbusinesspayments
Inventories
Personalconsumption
Proprietorialincome
Grossinvestmentspending
Indirectbusinesstaxes
Corporateprofitsbeforetaxes
Exports
Depreciation
$739
36
8,735
237
1,202
262
14
1,250
1,128
1,479
1,059
1,194
249
1,833
42) Accordingtotheabovetable,GrossDomesticProductascalculatedbytheincomeapproachis
A) $10,121billion.
B) $10,646billion.
C) $14,925billion.
D) $15,619billion.
Answer: C
Diff:2
43) Accordingtotheabovetable,netdomesticproductis
A) $8,813billion.
B) $12,603billion.
C) $13,092billion.
Answer: C
Diff:1
D) $13,750billion.
44) Accordingtotheabovetable,nationalincomeis
A) $13,271billion.
B) $11,917billion.
C) $10,770billion.
D) $10,646billion.
Answer: A
Diff:1
IndirectBusinessTaxes
GrossCorporateProfitsplusProprietorsIncome
RentalIncome(includingimplicitrents)
NetInterest
WageandSalaryIncome
$1,200
$2,140
$175
$650
$1,775
$8,200
45) Accordingtotheabovetable,GrossDomesticProductis
A) $14,140.
B) $13,965.
C) $13,315.
D) $12,115
Answer: A
Diff:1
A) $14,390.
B) $13,190.
C) $12,540.
D) $12,365.
Answer: D
Diff:1
47) CalculatingGrossDomesticProduct(GDP)bytheincomeapproachwouldrequireincluding
A) alltransferpaymentsbythegovernment.
B) allwagespaid.
C) allrestaurantsales.
D) themarketvalueofallfinalgoodsandanyprofits.
Answer: B
Diff:1
48) WhichofthefollowingisincludedinthecalculationofGrossDomesticProduct(GDP)usingthe
incomeapproach?
I. Wagesandsalaries.
II. Netexports.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: A
Diff:1
49) Non-incomeexpenseitemsincludedintheGrossDomesticProduct(GDP)calculationinclude
A) depreciationandindirectbusinesstaxes.
B) depreciationandcorporateprofits.
C) corporateprofitstaxandindirectbusinesstaxes.
D) indirectbusinesstaxesandcorporateprofits.
Answer: A
Diff:1
50) Indirectbusinesstaxesreferto
A) depreciationexpenses.
C) paymentsforlow-skilledlabor.
B) salesandlocaltaxespaidbybusiness.
D) dividendtaxespaidbythecorporation.
Answer: B
Diff:1
51) Thelargestcategoryofgrossdomesticincomeis
A) interest.
B) rent.
C) wages.
D) profits.
Answer: C
Diff:1
52) Ifhouseholdspay$1,000ininterestpaymentsandreceive$1,200ininterest,wagesequal$8,000,
rentalreceiptsonlandare$200,totalbusinessprofitsbeforetaxesare$2,200,depreciationis
$1,750,andindirectbusinesstaxesare$1,000,thengrossdomesticincomeis
A) $15,350.
B) $13,350.
C) $13,150.
D) $11,400.
Answer: B
Diff:3
53) ThetwomainmethodsofmeasuringGDPare
A) theincomeapproachandtheexpenditureapproach.
B) theincomeapproachandthereceiptsapproach.
C) thegoodsapproachandtheservicesapproach.
D) thesavingapproachandtheinvestmentapproach.
Answer: A
Diff:1
54) TheexpenditureapproachtomeasuringGDP
A) addsthedollarvalueoffinalgoodsandservices.
B) addstheincomereceivedbyallfactorsofproduction.
C) excludesdurableconsumergoodssincetheylastmorethanayear.
D) excludesprofitssinceprofitsareacostofproduction.
Answer: A
Diff:1
55) ThecomputationofGDPbyaddingupthedollarvalueatcurrentmarketpricesofallfinal
goodsandservicesis
A) theexpenditureapproach.
B) theincomeapproach.
D) thevalueofallsecurities.
Answer: A
Diff:1
56) ThecomponentsoftheexpenditureapproachtomeasuringGDPincludeallofthefollowing
EXCEPT
A) netexports.
B) governmentpurchasesofgoodsandservices.
C) expendituresforbusinessinvestments.
D) theimplicitpaymentsforunpaidhouseholdwork.
Answer: D
Diff:1
57) IncalculatingGDP,yourtuitionexpendituresatcollegeareclassifiedas
A) consumerexpendituresonservices.
B) consumerexpendituresongoods.
C) consumerexpendituresondurablegoods.
D) investmentspending.
Answer: A
Diff:2
58) Aconsumergoodthathasalifespanofmorethanthreeyearsisa(n)
A) durableconsumergood.
B) nondurableconsumergood.
C) service.
D) investment.
Answer: A
Diff:1
59) Aconsumergoodthatisusedupwithinthreeyearsisa(n)
C) service.
D) investment.
Answer: B
Diff:1
60) Mentalorphysicallabororhelppurchasedbyconsumersisa(n)
C) service.
D) investment.
Answer: C
Diff:1
61) Durableconsumergoodsaregoodsthatlastmorethan
A) oneyear.
B) threeyears.
C) fiveyears.
Answer: B
Diff:1
D) sevenyears.
62) WhichofthefollowingwouldNOTbeincludedinconsumptionexpenditureswhencalculating
GDP?
A) anindividualspurchaseofanewcar
B) anindividualspurchaseofmedicalservices
C) anindividualspurchaseofnewlyissuedsharesofIBMstock
D) anindividualspurchaseoflegalservices
Answer: C
Diff:1
63) Anondurablegood
A) hasalifespanofmorethan3years.
C) appliesonlytoservices.
B) isusedupwithin3years.
D) isanintangiblecommodity.
Answer: B
Diff:1
64) Adurablegood
A) hasalifespanofmorethan3years.
C) appliesonlytoservices.
B) isusedupwithin3years.
D) isanintangiblecommodity.
Answer: A
Diff:1
65) Anexampleofadurablegoodis
A) itemspurchasedatagrocerystore.
C) thepurchaseoflaborforabusiness.
B) arefrigerator.
D) theservicesofacleaningperson.
Answer: B
Diff:1
66) Anexampleofanondurablegoodis
A) itemspurchasedatagrocerystore.
C) thepurchaseoflaborforabusiness.
Answer: A
Diff:1
B) arefrigerator.
D) theservicesofacleaningperson.
67) WhichofthefollowingisincludedingovernmentexpenditureswhenmeasuringGDP?
A) SocialSecuritypayments
B) Unemploymentexpenditures
C) GoodsimportedintotheUnitedStates
D) ThePresidentsincome
Answer: D
Diff:2
68) Wheneconomistsrefertoinvestmentexpenditurestheymeanthe
A) purchaseofaconsumernondurablegoods.
B) purchaseofstocksorbonds.
C) useoftodaysresourcestoexpandtomorrowsproductionorconsumption.
D) productionofintermediategoods.
Answer: C
Diff:1
69) Supposeafirmpurchasesnewequipmenttoreplaceworn-outequipmentatitsfactory.This
purchaseofnewequipmentisconsidered
A) durableconsumptiongoods.
B) inventoryinvestment.
C) grossprivatedomesticinvestment.
D) noneoftheabove.
Answer: C
Diff:1
70) Anyuseoftodaysresourcestoexpandtomorrowsproductionorconsumptionisa(n)
C) service.
D) investment.
Answer: D
Diff:1
71) AnincreaseinfixedinvestmentspendingthatincreasesGDPoccurswhen
A) afamilypurchasesanewcar.
B) abusinessbuysanewcomputer.
C) inventoriesofnewcarsaredrawndownonthelotsofcardealers.
D) thegovernmentbuildsanewofficebuilding.
Answer: B
Diff:2
72) Acapitalgoodis
A) agoodthatlastsmorethanthreeyears.
B) agoodthatisusedtomakeothergoodsandservices.
C) anintermediateproductandthereforenotpartofGDP.
D) agoodthatshouldincreaseinvalueovertime.
Answer: B
Diff:1
73) Capitalpurchasesbybusinessesofnewlyproduceddurablesisknownas
C) fixedinvestment.
D) inventoryinvestment.
Answer: C
Diff:1
74) Changesinthestocksoffinishedgoodsandgoodsinprocessaswellaschangesintheraw
materialsthatbusinesseskeeponhandisknownas
C) fixedinvestment.
Answer: D
Diff:1
75) Fixedinvestmentis
A) thechangeinstocksoffinishedgoods.
B) thechangeinthestocksofgoodsinprocess.
C) capitalpurchasebybusinessesofnewlyproduceddurables.
D) purchasesbyconsumersofnewlyproducedconsumerdurables.
Answer: C
Diff:1
76) Anincreaseinnetexports
A) causesGDPtoincrease.
B) causesGDPtodecrease.
C) causesanincreaseinimportsofthesamesize.
D) cancauseGDPtoeitherincreaseordecrease,dependingonwhethertheexportsare
durableornondurable.
Answer: A
Diff:2
77) Netexportsequalthe
A) totalvalueofallexports.
B) totalvalueofallgovernmentproducedexports.
C) valueofexportsminusthevalueofimports.
D) valueofimportsminusthevalueofexports.
Answer: C
Diff:1
78) Usingtheexpenditureapproach,GDPiscalculatedas
A) wages+interest+rent+ profits
B) consumptionexpenditures+ wages
C) consumptionexpenditures+ wages+ interest
D) consumptionexpenditures+ investmentexpenditures+ governmentexpenditures+ net
exports
Answer: D
Diff:1
79) ThecomponentsofGDPusingtheexpendituremethodare
A) consumptionexpenditures,investmentexpenditures,andgovernmentexpenditures.
B) consumptionexpenditures,investmentexpenditures,governmentexpenditures,andnet
exports.
C) wagesandinterest.
D) wages,interest,rents,andprofits.
Answer: B
Diff:1
80) C+I+G+Xequals
A) GDP.
B) DPI.
C) NDP.
D) PI.
C) NDP.
D) PI.
Answer: A
Diff:1
81) C+netI+G+Xequals
A) GDP.
B) DPI.
Answer: C
Diff:1
82) Ifimportsare$100millionlessthanexports,governmentspendingis$500million,consumer
expendituresare$1billion,andinvestmentspendingis$500million,thenGDPis
A) $1billion.
B) $1.9billion.
C) $2billion.
D) $2.1billion.
Answer: D
Diff:2
83) Ifconsumptionexpendituresare$500million,spendingonfixedinvestmentis$100million,the
increaseininventoriesequals$5million,importsare$50million,exportsare$55million,
governmentspendingongoodsandservicesis$200million,thanGDPis
A) $790million.
B) $800million.
C) $810million.
D) $830million.
Answer: C
Diff:3
84) Grossdomesticproductis
A) NDPplusnetexports.
C) NDPplusdepreciation.
Answer: C
Diff:1
B) NDPplustaxes.
D) NDPlesschangesininventories.
85) Netinvestmentrefersto
A) thechangeinthecapitalstockaftersubtractingoutdepreciation.
B) thechangeininventoriesovera1-yearperiod.
C) thechangeininvestmentspendingandthechangeingovernmentexpenditureson
infrastructure.
D) exportsminusimports.
Answer: A
Diff:1
86) Ifconsumptionexpendituresare$100million,netinvestmentis$50million,importsare$20
million,exportsare$10million,governmentspendingongoodsandservicesis$40million,
SocialSecurityspendingis$15million,andsalesofexistinghomesequals$40million,then
whatisthemeasureofGDP?
A) GDP=$225million
B) GDP= $180million
C) GDP=$295million
D) GDP= $195million
Answer: B
Diff:3
87) ThecomponentsofGDPusingtheincomemethod(excludingindirectbusinesstaxesand
depreciation)are
A) consumptionexpenditures,investmentexpenditures,andgovernmentexpenditures.
B) consumptionexpenditures,investmentexpenditures,governmentexpenditures,andnet
exports.
C) wagesandinterest.
D) wages,interest,rents,andprofits.
Answer: D
Diff:1
88) Allofthefollowingareincludedinthecalculationofgrossdomesticincome(GDI)EXCEPT
A) consumerexpenditures.
B) wages.
C) profits.
D) indirectbusinesstaxes.
Answer: A
Diff:1
89) Excludingindirectbusinesstaxesanddepreciation,GrossDomesticIncome(GDI)
A) isthesumofallincomepaidtothefactorsofproduction.
B) neverequalsGDP.
C) wouldequalGDPiftherewasnodepreciation.
D) cannotbecomputed.
Answer: A
Diff:1
90) Whichofthefollowingstatementsistrue?
A) GDP=NDP
B) GDP= NI
C) GDP= GDI
D) GDP=PI
Answer: C
Diff:3
91) TheincomeapproachtomeasuringGDP
A) addsthedollarvalueoffinalgoodsandservices.
B) addstheincomereceivedbyallfactorsofproduction.
C) excludesdurableconsumergoodssincetheylastmorethanayear.
D) excludesprofitssinceprofitsareacostofproduction.
Answer: B
Diff:1
92) ThecomputationofGDPbyaddingupallcomponentsofnationalincomeincludingwages,
interest,rentandprofitsis
D) thevalueofallsecurities.
Answer: B
Diff:1
93) Thelargestcomponentofgrossdomesticincomeis
A) interestpayments.
B) wages.
C) profits.
D) taxes.
Answer: B
Diff:1
94) IndirectbusinesstaxesincludeallofthefollowingEXCEPT
A) salestaxes.
B) taxesonbusinessproperty.
C) taxesoncorporateprofits.
D) taxesonbusinessequipment.
Answer: C
Diff:1
95) Ifhouseholdsreceive$100ininterestpaymentsandmakeinterestpaymentsof$110,wages
equal$500,rentalreceiptsare$200,royaltiesare$100,profitsare$200,depreciationis$50,and
indirectbusinesstaxesare$50,thengrossdomesticincomeis
A) $1090.
B) $1110.
C) $1180.
D) $1280.
Answer: A
Diff:3
96) Becauseofterriblewinterstorms,grossdomesticproductforthefirstquarterofthecalendar
yearfallsby10percent.Asaresult,grossdomesticincome
A) fallsbylessthan10percent.
B) alsofallsby10percentbecausetheyalwayshavetobeequal.
C) fallsbymorethan10percentbecauseincomesalwaysvarymorethanGDP.
D) wouldnotchangesincethetimespanislessthanayear.
Answer: B
Diff:3
97) WhichofthefollowingisfromthecalculationofinvestmentforGDPpurposes?
A) thepurchaseofnewcapitalgoods
B) changesinbusinessinventories
C) newhomeconstruction
D) alloftheabove
Answer: D
Diff:2
98) Netexportsisequalto
A) totalexportsminustotalimports.
C) totalexportsadjustedforpricechanges.
Answer: A
Diff:1
B) totalimportsminustotalexports.
D) totalexportsminustransferpayments.
99) Indirectbusinesstaxesinclude
A) propertytaxesandcorporateincometaxes.
B) salestaxesandincometaxes.
C) businesspropertytaxesandsalestaxes.
D) incometaxesandSocialSecuritytaxes.
Answer: C
Diff:2
100) Ifnoothernationalincomevariableschangewhen________increase,thenGDPwilldecrease.
A) inventories
B) imports
C) investments
D) levelsofpollution
Answer: B
Diff:2
101) GDPcanbecalculatedusing
A) theexpenditureapproachandtheproductionapproach.
B) theexpenditureapproachandtheincomeapproach.
C) theexpenditureapproachandthefactorofproductionapproach.
D) theexpenditureapproachandtheresourceapproach.
Answer: B
Diff:1
102) Whyareexportsaddedto(ratherthansubtractedfrom)theotherexpenditurecomponentsto
arriveatGDPusingtheexpendituremethod?
A) becauseexportsaccountforthosegoodsthatwereproducedintheeconomybutthatwere
notdevotedtodomesticconsumption,usedfordomesticinvestment,orprovidedas
governmentgoods
B) becauseexportshaveahigherprofitmarginformanufacturersthandosimilarproducts
soldindomesticmarkets
C) becauseexportedgoodsarenotvaluedproperly,duetoproblemswiththepurchasing
powerparityindex
D) becauseitisonlythroughexportingthatwecangeneratejobsinourowneconomy
Answer: A
Diff:2
A) Netinvestmentisnegativewhengrossinvestmentisgreaterthandepreciation.
B) Ourproductivecapacitydeclineswhennetinvestmentislessthanzero.
C) Negativenetinvestmentoccurswhenimportsarelessthanexports.
D) Negativenetinvestmentoccurswhenexportsarelessthanimports.
Answer: B
Diff:3
104) Inventoryinvestmentcanbedefinedas
A) changesinthestocksoffinishedgoodsandrawmaterials.
B) thesystemofaccountsthatisusedtocountcertaingoods.
C) goodsthatmustbeexcludedfromtheGDPtoavoiddoublecounting.
D) thevalueofmonetarytransactionsbybusinesses.
Answer: A
Diff:1
105) NetexportsfortheUnitedStates
A) arealwayspositivenumbers.
B) maybenegative.
C) arearesultofdecreasinginvestmentinthemanufacturingindustries.
D) arearesultofdecreasingdomesticconsumption.
Answer: B
Diff:1
106) Theexpenditureapproachtoderivinggrossdomesticproductsumsthefollowingcategoriesof
spending:
A) consumption,investment,governmentspending,andnetexports.
B) consumption,income,governmentspending,andnetexports.
C) consumption,savings,investment,andgovernmentspending.
D) consumption,governmentspending,transferpayments,andnetexports.
Answer: A
Diff:1
107) Usingtheexpenditureapproachtoderivinggrossdomesticproduct,ifU.S.importsriseand
exportsremainthesame
A) GDPrises.
B) GDPremainsthesame.
C) GDPfalls.
D) GDPindicatesarecession.
Answer: C
Diff:2
108) Grossdomesticincomecanbedefinedas
A) thesumofallincomesearnedbyallfactorsofproductioninayear.
B) thesumofallincomesearnedbyindividuals.
C) thesumofallprofitsearnedbybusinessesinayear.
D) thesumofallprofitsearnedminusdepreciation.
Answer: A
Diff:2
109) ThetwomainapproachestomeasuringGDParethe
A) conceptapproachandtherealityapproach.
B) flowapproachandthestockapproach.
C) governmentapproachandtheconsumerapproach.
D) incomeapproachandtheexpenditureapproach.
Answer: D
Diff:1
110) WhatistheproperformulaforcomputingtheGDPusingtheexpenditureapproach?
A) S+I+G+X
B) C+I+ G+ X
C) C+ O+ G+ S
D) 0.5(w+r)+k
Answer: B
Diff:2
111) Giventhefollowingdata,calculatetheGDP.
wages=$500
governmentspending=$2,500
privateinvestment=$2,100
rent=$100
consumerspending=$7,800
netexports=$-400
A) GDP=$11,400
B) GDP= $12,000
C) GDP= $12,400
D) GDP=$13,000
Answer: B
Diff:3
112) TheappropriateformulaforcomputingGrossDomesticProductusingtheincomeapproach
(excludingdepreciationandindirectincometaxes)is
A) consumption+investment+ governmentspending+ netexports
B) wages+rent+interest+ profits
C) wages+rent+interest+ profits+ indirectbusinesstaxes
D) wages+rent+interest+ profits+ indirectbusinesstaxes+ depreciation
Answer: D
Diff:2
113) TocalculateGDPoncenationalincomehasbeencomputed,wemust
A) addindirectbusinesstaxesandtransfersandsubtractprofits.
B) adddepreciationandsubtractindirectbusinesstaxes.
C) adddepreciationandindirectbusinesstaxesandtransferpaymentsandsubtractother
businessincomeadjustmentsandnetU.S.incomeearnedabroad.
D) addindirectbusinesstaxesandtransfersandsubtractdepreciation,otherbusinessincome
adjustments,andnetU.S.incomeearnedabroad.
Answer: C
Diff:2
114) ThedifferencebetweenGrossDomesticIncome(GDI)andGrossDomesticProduct(GDP)is
that
A) GDIisGDPlessindirectbusinesstaxesanddepreciation.
B) GDPisGDIlessindirectbusinesstaxesanddepreciation.
C) GDIisequaltoGDP.
D) GDPisalwayssmallerthanGDI.
Answer: C
Diff:3
115) Whichsectorofoureconomyaccountsforthelargestpercentagetototalspending?
A) households
B) businesses
C) government
D) exports
Answer: A
Diff:1
116) IncalculatingGDPusingtheexpenditureapproach,thelargestcomponentis
A) consumptionspending.
B) governmentspending.
C) investmentspending.
D) spendingondurablegoods.
Answer: A
Diff:1
117) Whatconstitutesinvestmentwhenmeasuringgrossprivatedomesticinvestment?
Answer: Investmentistheuseoftodaysresourcestoexpandtomorrowsproductionor
consumption.Itincludesthepurchaseofcapitalgoods,whichcanincreasefuture
productionandconsumption,andinventoryinvestmentswhichcanincreasefuture
consumption.Itdoesnotincludefinancialtransactionssuchasbuyingstocksandbonds.
Diff:2
118) Ifwesumupallfactorpayments,wewillgetgrossdomesticincome.Doyouagreeordisagree
withthisstatement?Why?
Answer: Disagree.Thesumofallfactorpaymentsleavesoutnon-incomeexpenseitemsthatmust
beincluded.Theseitemsareindirectbusinesstaxesanddepreciation.
Diff:2
119) ExplainthetwomainmethodsusedtomeasureGDP.
Answer: ThetwomethodsusedtomeasureGDParetheexpenditureapproachandtheincome
approach.TheexpenditureapproachmeasuresGDPbyaddinguptheflowsof
expendituresconsumption,government,grossprivatedomesticinvestment,andnet
exports.TheincomeapproachmeasuresGDPbyaddinguptheflowsofincome wages,
interest,rent,andprofits.
Diff:1
120) HowdoGDPandNDPdiffer?Whatdoesitmeanifnetinvestmentisnegative?
Answer: NetdomesticproductequalsGDPminusdepreciation,whichisalsoknownasthecapital
consumptionallowance.Inthecourseofayear,machinesandplantsdeteriorate.
Depreciationistheestimateofthevalueofthiswearandtearoncapitalgoods.Net
investmentisgrossinvestmentminusdepreciation,andmeasuresthechangeinthe
capitalstock.Ifdepreciationisgreaterthantheadditionofnewcapital,thecapitalstock
getssmaller.Whenthishappens,futureproductionand/orconsumptionpossibilitieswill
bediminished.
Diff:3
121) HowisinterestmeasuredwhenusedinderivingGDP?
Answer: Interestisexpressedinnetterms.Itistheinterestreceivedbyhouseholds,lessthe
interesttheypay.Italsoincludesthenetinterestreceivedfromforeigners.
Diff:1
8.4OtherComponentsofNationalIncomeAccounting
1) AllofthefollowingstatementsarecorrectEXCEPT
A) NDP=GrossDomesticProduct(GDP)- depreciation(capitalconsumptionallowance).
B) NI=NDP+indirectbusinesstaxes.
C) Netexports=totalexports- totalimports.
D) GrossDomesticProduct(GDP)= NDP+ capitalconsumptionallowance(depreciation).
Answer: B
Diff:1
Topic: 8.4OtherComponentsofNationalIncomeAccounting
2) Ifconsumptionexpendituresare$500,spendingonfixedinvestmentis$100,importsare$40,
exportsare$75,thecapitalconsumptionallowanceis$25,governmentspendingis$50,and
inventorieshavefallenby$5,thenGrossDomesticProduct(GDP)is
A) $25greaterthanNDP.
B) $20greaterthanNDP.
C) $50greaterthanNDP.
D) thesameasNDP.
Answer: A
Diff:3
3) NationalincomeincludesallofthefollowingEXCEPT
A) proprietorsincome.
B) netinterest.
C) corporateprofits.
D) depreciation.
Answer: D
Diff:1
4) Theamountofincomehouseholdsreceiveafterpersonalincometaxeshavebeenpaidisknown
as
A) nationalincome.
B) personalincome.
C) disposablepersonalincome.
D) grossdomesticincome.
Answer: C
Diff:1
5) Nationalincomeisequalto
A) GrossDomesticProduct(GDP)plusdepreciationandindirectbusinesstaxes.
B) thesumofallfactorpaymentstoresourceowners.
C) GrossDomesticProduct(GDP)minusindirectbusinesstaxes.
D) GrossDomesticProduct(GDP)minusNDP.
Answer: B
Diff:2
6) Theannualcostofproducingtheentireoutputoffinalgoodsandservicesinaneconomyis
A) equaltothequantityoftotaloutputproduced.
B) greaterthanthetotalincomeofhouseholdsintheeconomy.
C) equaltototalincome.
D) equaltothetotalincomeofhouseholdsintheeconomyonlyifprofitsarezero.
Answer: C
Diff:2
7) Thetotalfactorpaymentstoallresourceownersiscalled
A) netdomesticproduct.
B) personalincome.
C) nationalincome.
D) grossdomesticincome.
Answer: C
Diff:2
8) Supposenetdomesticproductis$4.8billion,netincomeearnedabroadis$0.7billion,other
businessincomeadjustmentsnetofindirectbusinesstaxesandtransfersare$0.4billion,and
personalincometaxesare$0.8billion.Then,nationalincomeequals
A) $2.9billion.
B) $3.6billion.
C) $5.9billion.
D) $6.7billion.
Answer: C
Diff:2
9) GrossDomesticProduct(GDP)=$13.0trillion,consumption= $9.5trillion,depreciation=$1.8
trillion,otherbusinessincomeadjustmentslessindirectbusinesstaxes=$0.2trillion,andnet
U.S.incomeearnedabroad=$0.1trillion.Usethisinformationtocalculatenationalincome(NI).
A) NI=$11.0billion
B) NI= $11.3billion
C) NI=$11.4billion
D) NI= $11.5billion
Answer: D
Diff:3
10) Nationalincomeisincome________thefactorsofproduction.
A) paidby
B) earnedby
C) investedin
D) householdsoweto
Answer: B
Diff:1
11) Personalincomeisequalto
A) NDPminusnationalincome.
B) disposablepersonalincomepluspersonalincometaxes.
C) disposablepersonalincomepluspersonalandcorporateincometaxes.
D) nationalincomeminus(corporateincometaxesandSocialSecurity).
Answer: B
Diff:1
12) Ifyoutakenationalincomeandaddtransferpayments,thensubtractincomeearnedbutnot
received,theresultwillbe
A) netnationalproduct.
B) disposablepersonalincome.
C) personalincome.
D) wages.
Answer: C
Diff:1
13) Thedifferencebetweenpersonalincomeanddisposablepersonalincomeisthat
A) disposablepersonalincomeincludesonlythefundsavailabletospendonnon-necessities.
B) personalincometaxesarenotincludedindisposablepersonalincome.
C) personalincomeincludespersonalincometaxesandindirectbusinesstaxes,whicharenot
includedindisposablepersonalincome.
D) personalincomedoesnotincludetransferpayments,suchasSocialSecuritypaymentsor
welfarepaymentsanddisposablepersonalincomeincludesthem.
Answer: B
Diff:3
14) Theamountofincomereceivedbyhouseholdspriortothepaymentofpersonalincometaxesis
called
A) disposablewages.
B) personalincome.
C) nationalincome.
D) netdomesticproduct.
Answer: B
Diff:2
15) Ifdisposablepersonalincome(DPI)= $800andpersonalincometaxes= $80,thenwhatis

personalincome(PI)?
A) $720
B) $800
C) $880
D) canttellfromtheinformationprovided
Answer: C
Diff:2
16) Whichofthefollowingwillbethesmallestinvalue?
A) Nationalincome
B) Netdomesticproduct
C) Personalincome
D) Disposablepersonalincome
Answer: D
Diff:2
17) Disposablepersonalincomeisfoundbytaking
A) personalincometaxesminuspersonalincome.
B) personalincomeminuspersonalincometaxes.
C) personalincometaxespluspersonalincome.
D) personalincometimespersonalincometaxes.
Answer: B
Diff:1
18) Disposablepersonalincomeisequalto
A) nationalincomeminuspersonalincometaxes.
B) personalincomeplustransferpayments.
C) GrossDomesticProduct(GDP)minusdepreciation.
D) personalincomeminuspersonalincometaxpayments.
Answer: D
Diff:1
19) Incomeearnedbythefactorsofproductioniscalled
A) grossdomesticincome.
C) personalincome.
D) nationalincome.
Answer: D
Diff:1
20) Whichofthefollowingaccuratelydescribesrepresentsincomeearnedbyallfactorsof
production?
A) NationalIncome
B) PersonalIncome
C) DisposablePersonalIncome
D) Wagesandsalaries
Answer: A
Diff:1
21) Incomereceivedbythefactorsofproductioniscalled
C) personalincome.
D) nationalincome.
Answer: C
Diff:1
22) Theincomethatindividualshaveafterpersonalincometaxeshavebeenpaidiscalled
C) personalincome.
D) nationalincome.
Answer: B
Diff:1
23) Onekeydifferencebetweennationalincomeandnetdomesticproductis
A) netdomesticproductdoesnotincludeincomeearnedbythefactorsofproductionwhile
nationalincomedoes.
B) netdomesticproductrepresentsincomethatisavailabletoindividualswhilenational
incomedoesnot.
C) netdomesticproductincludesindirectbusinesstaxesandtransferswhilenationalincome
doesnot.
D) netdomesticproductonlyincludesthenetadditionstotheeconomysstockofcapital
whilenationalincomedoesnot.
Answer: C
Diff:1
24) Individualsreceiveincomeandpaytaxesoverthecourseofayear.Thedifferencebetweenthe
incometheyreceiveandthetaxestheypayisreferredtoas
A) netnationalincome.
C) percapitarealGDP.
Answer: D
Diff:1
25) Thedifferencebetweenpersonalincomeanddisposablepersonalincomeis
A) disposablepersonalincomeiswhatisleftafterpersonalincometaxeshavebeenpaid
whilepersonalincomeincludespersonalincometaxes.
B) personalincomeiswhatisleftafterpersonalincometaxeshavebeenpaidwhile
disposableincomeincludespersonalincometaxes.
C) personalincomeincludestransferpaymentswhiledisposablepersonalincomedoesnot.
D) personalincomeincludesindirectbusinesstaxeswhiledisposableincomedoesnot.
Answer: A
Diff:1
26) Supposegrossdomesticproductis$5billion,governmenttransferpaymentsare$1billion,
indirectbusinesstaxesandtransfersare$0.5billion,anddepreciationis$0.5billion.Then
nationalincomeequals
A) $5billion.
B) $4billion.
C) $3billion.
D) $2.7billion.
Answer: B
Diff:2
27) Whichofthefollowingwillhavethesmallestdollarvalue?
A) Personalincome.
B) Disposablepersonalincome.
C) Nationalincome.
D) Netdomesticproduct.
Answer: B
Diff:1
28) Onedifferencebetweennetdomesticproductandnationalincomeisthat
A) netdomesticproductincludesdepreciation.
B) nationalincomeincludesgovernmentandbusinesstransferpayments.
C) netdomesticproductincludesindirectbusinesstaxesandtransfers.
D) netdomesticproductdoesntincludeSocialSecuritytaxesorcorporateretainedearnings.
Answer: C
Diff:3
29) AnincreaseinSocialSecuritycontributionswillmake
A) netdomesticproductsmaller.
B) nationalincomelarger.
C) nationalincomesmaller.
D) personalincomesmaller.
Answer: D
Diff:2
30) Personalincometaxesarethedifferencebetween
A) nationalincomeandpersonalincome.
B) personalincomeanddisposablepersonalincome.
C) nationalincomeanddisposablepersonalincome.
D) netdomesticproductandpersonalincome.
Answer: B
Diff:2
31) Nationalincomeis$500,corporatetaxesare$20,SocialSecuritycontributionsare$60,retained
earningsare$10,personaltaxesare$100,andtransferpaymentsare$80.Disposableincomeis
A) $510.
B) $450.
C) $410.
D) $390.
Answer: D
Diff:3
32) Anincreaseincorporateincometaxeswouldreduce
A) netdomesticproduct.
B) grossdomesticproduct.
C) nationalincome.
D) personalincome.
Answer: D
Diff:2
33) SupposeSocialSecuritycontributionsriseby$1billionwhileSocialSecuritybenefitsalsoriseby
$1billion.Further,personalincometaxesfallby$500million.Asaresult,
A) bothpersonalanddisposablepersonalincomeshouldincrease.
B) nationalincome,personalincome,anddisposableincomeshouldincrease.
C) disposableincomeshouldincreasewhilepersonalincomeandnationalincomeare
unchanged.
D) personalincome,disposablepersonalincome,andnationalincomeremainunchanged.
Answer: C
Diff:3
34) Whatisthedifferencebetweenpersonalincomeanddisposablepersonalincome?
A) theamountofpersonalincometaxes
B) indirectpersonaltaxesandtransfers
C) netU.S.incomeearnedabroad
D) depreciation
Answer: A
Diff:2
35) Transferpaymentsareincludedin
A) grossdomesticproduct.
C) nationalincome.
D) personalincome.
Answer: D
Diff:2
Governmentspending
SocialSecuritycontributions
Corporatetaxes
Personalincometaxes
Rent
Wages
Consumptionexpenditures
GrossPrivateDomesticInvestment
50
20
5
8
54
231
250
40
Profit
Indirectbusinesstaxes
Imports
Exports
Interest
Depreciation
Governmenttransferpayments
36) Usingtheabovetable,theGrossDomesticProduct(GDP)forthecountryis
A) 662.
B) 84.
C) 746.
Answer: D
Diff:2
28
10
5
3
5
10
8
D) 338.
37) Usingtheabovetable,theNetDomesticProduct(NDP)forthecountryis
A) 662.
B) 84.
C) 328.
D) 338.
Answer: C
Diff:2
38) Usingtheabovetable,theNationalIncome(NI)forthecountryis
A) 338.
B) 228.
C) 318.
D) 662.
Answer: C
Diff:2
39) Usingtheabovetable,thePersonalIncome(PI)forthecountryis
A) 84.
B) 228.
C) 155.
D) 301.
Answer: D
Diff:2
40) Usingtheabovetable,theDisposablePersonalIncome(DPI)forthecountryis
A) 78.
B) 220.
C) 147.
D) 293.
Answer: D
Diff:2
41) Personalincomeis
A) thesumofallincomesreceivedbyhouseholdsonwelfare.
B) theincomehouseholdshaveafterpayingfederaltaxes.
C) thesumofallincomesreceivedbyhouseholds.
D) thesumofallincomesearnedbysoleproprietorshipsandpartnerships.
Answer: C
Diff:1
42) WhichofthefollowingwouldNOTbeapartofpersonalincome?
A) indirectbusinesstaxes
B) paymentsreceivedfromSocialSecurity
C) retirementchecks
D) corporatedividendpaymentstoshareholders
Answer: A
Diff:1
43) Theamountofincomethathouseholdsactuallyreceivebeforetheypaypersonalincometaxes
defines
A) nationalincome(NI).
B) personalincome(PI).
C) disposablepersonalincome(DPI).
D) netdomesticproduct(NDP).
Answer: B
Diff:2
Consumption
Governmentspendinglesstransferpayments
Imports
Exports
Depreciation
Indirectbusinesstaxesandtransfers
BillionsofDollars
6,500
1,900
1,200
600
500
1,500
750
44) Usingtheabovetable,theGDPis(inbillionsofdollars)
A) 10,200.
B) 8,200.
C) 8,900.
D) 9,500.
Answer: D
Diff:3
45) Usingtheabovetable,thenetdomesticproductis(inbillionsofdollars)
A) 8,000.
B) 9,700.
C) 8,300.
Answer: A
Diff:3
D) 6,500.
46) Usingtheabovetable,thenationalincomeis(inbillionsofdollars)
A) 8,950.
B) 7,250.
C) 6,850.
D) 8,050.
Answer: B
Diff:3
47) GDPminusdepreciationequals
A) nationalincome.
C) personalincome.
B) aggregatespending.
Answer: D
Diff:1
48) Whichoneofthefollowingaccountingidentitiesistrue?
A) Disposablepersonalincomeplusindirectbusinesstaxesequalspersonalincome.
B) Disposablepersonalincomeplusnon-incomeexpenseitemsequalspersonalincome.
C) Disposablepersonalincomepluspersonalincometaxesequalspersonalincome.
D) Nationalincomeplusprofitequalspersonalincome.
Answer: C
Diff:2
49) SocialSecuritypaymentsreceivedbyyourgrandmother
A) areexcludedfromGDP,butareincludedinpersonalincome.
B) areincludedinbothGDPandpersonalincome.
C) areincludedinGDP,butareexcludedfrompersonalincome.
D) areexcludedinbothGDPandpersonalincome.
Answer: A
Diff:2
50) Nationalincomeis
A) thetotaloffactorpaymentstoownersofresources.
B) thedollarvalueofallfinalgoodsandservicesproducedinacountryinayear.
C) theamountofmonetarypaymentshouseholdsactuallyreceivebeforepayingpersonal
incometaxes.
D) theamountofmonetarypaymentshouseholdsactuallyreceiveafterpayingpersonal
incometaxes.
Answer: A
Diff:2
51) Disposablepersonalincomeis
A) thetotaloffactorpaymentstoownersofresources.
B) thedollarvalueofallfinalgoodsandservicesproducedinacountryinayear.
C) theamountofmonetarypaymentshouseholdsactuallyreceivebeforepayingpersonal
incometaxes.
D) theamountofmonetarypaymentshouseholdsactuallyreceiveafterpayingpersonal
incometaxes.
Answer: D
Diff:2
Consumptionexpendituresongoodsandservices
Totalgovernmentspendingongoodsandservices
Imports
Exports
$1,500
590
355
50
70
200
-75
52) Accordingtotheabovetable,netdomesticproduct(NDP)is
A) $1,995.
B) $2,265.
C) $2,550.
D) $2,850.
Answer: B
Diff:1
A) $2,190.
B) $2,550.
C) $2,465.
D) $2,750.
Answer: A
Diff:1
54) Whichofthefollowingisacomponentofnetdomesticproduct(NDP),butNOTofnational
income?
A) Capitalconsumptionallowance
B) Indirectbusinesstaxes
C) Corporatetaxes
D) Personaltaxes
Answer: B
Diff:1
55) Tocomputenationalincome,whichofthefollowingitemsareaddedtonetdomesticproduct
(NDP)?
I. businessincomeadjustmentsnetofindirectbusinesstaxesandtransfers
II. capitalconsumptionallowance
III. U.S.netincomeearnedabroad
A) Ionly
B) IIonly
C) bothIandIII
D) bothIIandIII
Answer: C
Diff:1
(amountsinbillionsofdollars)
Exports
Dividends
Consumptionexpenditures
Businessincomeadjustmentsnetof
indirectbusinesstaxesandtransfers
U.S.netincomeearnedabroad
Undistributedcorporateprofits
Personalincometaxes
Imports
Federalgovernmentexpenditures
Changesinbusinessinventories
Corporatetaxes
Depreciation
Stateandlocalgovernmentexpenditures
SocialSecuritygovt.contribution
233
81
9163
2163
106
51
148
1386
720
2520
16
103
1806
258
250
56) Accordingtotheabovetable,GrossDomesticProductascalculatedbytheexpenditure
approachis
A) $14,337billion.
B) $13,617billion.
C) $13,384billion.
D) $13,278billion.
Answer: B
Diff:1
A) $12,531billion.
B) $11,998billion.
C) $11,892billion.
Answer: D
Diff:1
D) $11,811billion.
A) $12,637billion.
B) $11,968billion.
C) $11,943billion.
D) $11,866billion.
Answer: B
Diff:1
59) ExplainhowdisposablepersonalincomeisderivedfromGrossDomesticProduct.
Answer: Grossdomesticproductisthesamethingasgrossdomesticincome.Nationalincomeis
foundbytakingNDPandaddingnetU.S.incomeearnedabroadandotherbusiness
incomeadjustmentslessindirectbusinesstaxesandtransfers.Personalincomeisfound
bysubtractingincomeearnedbutnotreceived(corporatetaxes,SocialSecurity
contributions,andcorporateretainedearnings)andaddingingovernmenttransfer
payments.Subtractingallpersonalincometaxesandnontaxpaymentsgenerates
disposablepersonalincome.
Diff:2
8.5DistinguishingBetweenNominalandRealValues
1) Wheneconomistsdiscussthenominalvalueofaneconomicvariable,thevariableis
A) expressedincurrentdollars.
B) expressedasanindexfigure.
C) adjustedforachangingpricelevel.
D) expressedasapercentage.
Answer: A
Diff:1
Topic: 8.5DistinguishingBetweenNominalandRealValues
2) Supposethatin2011,nominalGrossDomesticProduct(GDP)fortheeconomyofChiconiawas
$10trillionandtheGrossDomesticProduct(GDP)priceindexwas200.0.WhatisChiconias
realGrossDomesticProduct(GDP)in2011?
A) $5trillion
B) $10trillion
C) $20trillion
D) $200trillion
Answer: A
Diff:1
3) WhichofthefollowingstatementsdoesNOTdescribetherealvalueofaneconomicvariable?
A) Itisadjustedforchangesinthepricelevel.
B) Itisexpressedinconstantdollars.
C) Itisameasureofthepurchasingpowerofthevariable.
D) Itisthevariablesnominalvalueadjustedforunemployment.
Answer: D
Diff:1
4) IfnominalGrossDomesticProduct(GDP)in2005was$500billionwithapriceindexof100,
whatwouldbetherealGrossDomesticProduct(GDP)in2013ifthe2013nominalGross
DomesticProduct(GDP)was$900billionandthe2013priceindexwas140?
A) $900billion
B) $540billion
C) $800billion
D) $643billion
Answer: D
Diff:1
5) IfnominalGrossDomesticProduct(GDP)in2001was$1trillion,nominalGrossDomestic
Product(GDP)in2013was$2trillion,andthe2001and2013priceindexeswere100and250
respectively,
A) realGrossDomesticProduct(GDP)increasedbetween2001and2013.
B) realGrossDomesticProduct(GDP)decreasedbetween2001and2013.
C) realGrossDomesticProduct(GDP)remainedconstant.
D) wecannotdrawanyconclusionsaboutchangesinrealGrossDomesticProduct(GDP).
Answer: B
Diff:1
6) IfnominalGrossDomesticProduct(GDP)in2013was$3,000billion,andthepricelevelindex
was330(1985=100),thenrealGrossDomesticProduct(GDP)intermsofthepricelevelin2013
wasabout
A) $105billion.
B) $4,220billion.
C) $909billion.
D) $537billion.
Answer: C
Diff:1
7) Thedifferencebetweennominalandrealvaluesisthatrealvaluestakeintoaccount
A) depreciation.
B) changesinthecompositionofoutput.
C) changesinpricesbetweenyears.
D) thepresenceofdurablegoods.
Answer: C
Diff:1
8) ThenominalvalueofGrossDomesticProduct(GDP)isexpressedin
A) inflation-adjustedprices.
B) constantdollars.
C) base-yeardollars.
D) noneoftheabove.
Answer: D
Diff:1
9) AdjustingnominalGrossDomesticProduct(GDP)forpricechangesfromabaseyearyields
A) currentGrossDomesticProduct(GDP).
B) realGrossDomesticProduct(GDP).
C) constantdisposableincome.
D) GrossDomesticProduct(GDP)netofrelativepricechanges.
Answer: B
Diff:1
10) ConstantdollarGrossDomesticProduct(GDP)
A) isthesameasnominalGrossDomesticProduct(GDP).
B) isnominalGrossDomesticProduct(GDP)dividedbythepriceindex.
C) isequaltorealGDPmultipliedbytheoverallpricelevel.
D) alloftheabove.
Answer: B
Diff:1
11) Suppose2009isthebaseyear.From2009to2010,thepriceindexincreasesfrom100to102.5.If
nominalGrossDomesticProduct(GDP)is$2,800in2010,thentherealGrossDomesticProduct
(GDP)in2010is
A) $2,700.
B) $2,800.
C) $2,732.
D) $2,870.
Answer: C
Diff:2
12) IfGrossDomesticProduct(GDP)andothernationalincomeaccountsareexpressedinnominal
values,thentheyare
A) measuredinrealvalues.
B) measuredinmarketpricesatwhichgoodsactuallysold.
C) measuredinconstantpricesinsteadofactualmarketprices.
D) readilycomparabletoGrossDomesticProduct(GDP)figuresforotheryears.
Answer: B
Diff:1
13) Theprice-correctedvalueforGrossDomesticProductis
A) realGrossDomesticProduct(GDP).
B) netGrossDomesticProduct(GDP).
C) netnationalproduct.
D) percapitaincome.
Answer: A
Diff:2
14) NominalincomeperpersonintheUnitedStatesin1960wasabout$2,800peryear,whilein
1990nominalincomeperpersonwasabout$21,000.Thisindicatesthat
A) nominalincomewasabout7.5timesgreaterin1990,butwecanttellifthisincreaseisdue
toinflation,economicgrowth,oracombinationofthetwo.
B) peopleenjoyedastandardoflivingabout7.5timeshigherin1990thanin1960.
C) adollarin1960wasworthlessthanadollarin1990.
D) theaveragepersonwouldconsiderhim/herselfabout7.5timeshappierin1990thanin
1960.
Answer: A
Diff:2
15) IfdeflationisoccurringandnominalGrossDomesticProduct(GDP)isincreasingovertime,
thenrealGrossDomesticProduct(GDP)is
A) decreasing.
B) increasingatthesamerateasnominalGrossDomesticProduct(GDP).
C) increasingmoreslowlythannominalGrossDomesticProduct(GDP).
D) increasingfasterthannominalGrossDomesticProduct(GDP).
Answer: D
Diff:3
16) Todeterminehowwellaneconomyisdoing,itisbettertouse
A) nominalGrossDomesticProduct(GDP)figures.
B) realGrossDomesticProduct(GDP)figures.
C) GrossDomesticProduct(GDP)figuresmeasuredbytheexpenditureapproach.
D) GrossDomesticProduct(GDP)figuresmeasuredbytheincomeapproach.
Answer: B
Diff:1
17) Nominalvaluesare
A) measuredintermsofactualmarketpricesatwhichthegoodsaresold.
B) basedoninflation-adjustments.
C) basedonGrossDomesticProduct(GDP)percapita.
D) measuredintermsoftotalpurchasingpower.
Answer: A
Diff:2
18) PercapitarealGrossDomesticProduct(GDP)is
A) realGrossDomesticProduct(GDP)dividedbythepopulation.
B) realGrossDomesticProduct(GDP)dividedbyapriceindex.
C) realGrossDomesticProduct(GDP)minusdepreciation.
D) populationdividedbyrealGrossDomesticProduct(GDP).
Answer: A
Diff:1
19) PercapitarealGrossDomesticProduct(GDP)
A) doesnottellusthewelfarelevelinthecountry.
B) tellsustheoverallwelfareconditionsofallthecountryscitizens.
C) givesonlythewelfareofthecountryscorporations.
D) givesonlythewelfareoftherichestareasofthecountry.
Answer: A
Diff:2
20) SupposeCountryAandCountryBeachhavethesamerealGrossDomesticProduct(GDP),
equalto$440billion.CountryAhas100millionpeopleandCountryBhas175millionpeople.
Inthissituation,percapitarealGrossDomesticProduct(GDP)is
A) thesameinbothcountries.
B) higherinCountryA.
C) higherinCountryB.
D) anirrelevantfactor.
Answer: B
Diff:1
21) Supposethatthefollowingoccurredintwocountriesduringthepastdecade.CountryA,real
GrossDomesticProduct(GDP)rose40percentandpopulationrose46percent;CountryB,real
GrossDomesticProduct(GDP)increased80percentandpopulationincreased75percent.Based
onthisinformation,whichistrue?
A) BothcountrieshaveexperiencedgrowthinpercapitarealGrossDomesticProduct(GDP).
B) NeithercountryhasexperiencedgrowthinpercapitarealGrossDomesticProduct(GDP).
C) ChancesforanimprovedstandardoflivingaregreaterinCountryA.
D) OnlyCountryBhasexperiencedgrowthinitspercapitarealGrossDomesticProduct
(GDP).
Answer: D
Diff:2
Year
2010
2011
2012
2013
NominalGDP
500
600
700
800
PriceDeflator
95.4
100.0
102.5
103.1
22) Refertotheabovetable.RealGDPin2010is
A) 190.8.
B) 477.
C) 500.
D) 524.1.
C) 700.
D) 717.5.
Answer: D
Diff:2
A) 146.4.
B) 682.9.
Answer: B
Diff:2
A) 103.1.
B) 128.9.
C) 775.9.
D) 824.8.
Answer: C
Diff:1
25) Refertotheabovetable.AllrealGDPnumbersareexpressedintermsofthepurchasingpower
ofdollarsin
A) 2010.
B) 2011.
C) 2012.
D) 2013.
Answer: B
Diff:1
26) WhenGDPandothernationalincomeaccountsaremeasuredinnominalvalues,thenthey
A) aremeasuredincurrentmarketprices.
B) aremeasuredinrealvalues.
C) arenotcomparablebecausetheyarenotinrealterms.
D) shouldbeconvertedintomoneyvaluesbeforecomparingthemovertime.
Answer: A
Diff:1
27) Betweentwoyears,GDPatconstantpricesincreasedby5percentwhileGDPatcurrentprices
increasedby8percent.Basedonthisinformation,thepricelevel
A) increasedby3percent.
B) increasedby13percent.
C) decreasedby3percent.
D) decreasedby13percent.
Answer: A
Diff:1
28) TheGDPdeflatorisequalto.
A) nominalGDPdividedbyrealGDP.
C) nominalGDPminusrealGDP.
Answer: A
Diff:1
B) nominalGDPmultipliedbyrealGDP.
D) nominalGDPplusrealGDP.
29) WhichofthefollowingrepresentshowrealGDPiscalculated?
A) nominalGDPmultipliedbytheGDPdeflator
B) nominalGDPdividedbythepopulation
C) nominalGDPdividedbythePPI,theproducerpriceindex
D) nominalGDPdividedbytheGDPdeflator
Answer: D
Diff:1
30) Thenominalvalueofaneconomicvariableis
A) theconsumerpriceindex.
B) theproducerprice.
C) expressedintermsofactualmarketpricesatwhichgoodsaresold.
D) computedbytakingthenominalvalueanddividingbytheappropriatepriceindex.
Answer: C
Diff:1
31) Therealvalueofaneconomicvariableis
A) theconsumerpriceindex.
B) theproducerprice.
C) expressedintermsofactualmarketpricesatwhichgoodsaresold.
D) computedbytakingthenominalvalueanddividingbytheappropriatepriceindex.
Answer: D
Diff:1
32) Constantdollarsare
A) thesameascurrentdollars.
B) dollarscorrectedforgeneralpricelevelchanges.
C) whatnominalGDPismeasuredin.
D) whenanindividualdoesnotreceiveacostoflivingincrease.
Answer: B
Diff:1
33) ThevaluesofvariablessuchasGDPexpressedincurrentdollarsarereferredtoas
A) thepriceindex.
B) adeflator.
C) nominalvalues.
D) realvalues.
Answer: C
Diff:1
34) Measurementofeconomicvaluesafteradjustmentshavebeenmadeforchangesintheaverage
ofpricesbetweenyearsinknownas
A) thepriceindex.
B) adeflator.
C) nominalvalues.
D) realvalues.
Answer: D
Diff:1
35) RealGDPis
A) thenominalvalueofallrealgoodsproducedinthenationinayear.
B) GDPcorrectedforchangesintheaverageofoverallprices.
C) amisnomersinceallGDPfigureshavetobeindollarvalues.
D) thevalueofoutputincurrentdollars.
Answer: B
Diff:1
36) ComparingtwocountriesnominalGDPovertimeislikelytobemisleadingifonewantsto
determinewhetherstandardsoflivingarebetterinonecountrybecause
A) thefiguresmustbeadjustedfordifferenttypesofcurrency.
B) thefiguresmustbeadjustedforpricechangesandpopulationdifferences.
C) thefiguresmustbeadjustedtoaccountforproductiondifferences.
D) NDPinsteadofGDPshouldbeused.
Answer: B
Diff:3
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Nominal
GDP
$3405.0
4038.7
4539.9
4900.4
5222.2
5967.1
6158.8
Price
Deflator
87.2
91.0
94.4
96.9
103.9
108.5
113.1
117.8
Real
GDP
$4146.2
4405.2
4539.9
4839.4
4819.6
4923.6
122.9
37) Refertotheabovetable.ThevalueoftheGDPdeflatorin2009is
A) 121.2.
B) 122.1.
C) 122.9.
D) uncertainwithoutmoreinformation.
Answer: A
Diff:3
38) Refertotheabovetable.Between2009and2010realGDP
A) increasedby$191.7billion.
B) increasedby$1.7billion.
C) increasedby$87.6billion.
D) increasedby$158.2billion.
Answer: C
Diff:3
39) Refertotheabovetable.ThenominalGDPfor2008is
A) $4819.6.
B) $4091.3.
C) $5677.5.
D) Uncertainwithoutmoreinformation.
Answer: C
Diff:3
40) Refertotheabovetable.RealGDPforyear2007was
A) $4819.6billion.
B) $5222.2billion.
C) $4617.3billion.
D) uncertainwithoutmoreinformation.
Answer: C
Diff:3
41) IfanationsnominalGDPis$3,257millionanditspricelevelis132,thenitsrealGDPis
A) $4.05million.
B) $24.67million.
C) $4299.24million.
D) $2467.42million.
Answer: D
Diff:1
42) SupposenominalGDPinCanadaincreasedby5%in2013.Giventhisinformation,weknow
withcertaintythat
A) theaggregatepricelevelinCanadaincreasedin2013.
B) realGDPinCanadaincreasedin2013.
C) boththeaggregatepricelevelANDrealGDPincreasedinCanadain2013.
D) moreinformationisneededtoanswerthisquestion.
Answer: D
Diff:3
43) NominalGDPiscalculatedusing
A) themarketpricesduringtheyearunderconsideration.
B) thepricesfromsomebaseyeartoadjustforpricechanges.
C) theaverageofpricesfromthethreeprecedingyears.
D) thepricesfromtheprecedingyear.
Answer: A
Diff:1
44) RealGDPis
A) nominalGDPadjustedfordepreciation.
B) nominalGDPadjustedforpricechanges.
C) nominalGDPadjustedfortransferpayments.
D) nominalGDPadjustedforindirectbusinesstaxes.
Answer: B
Diff:1
45) Measuringtotalaggregateproductionincurrentdollarsuseswhichofthefollowingmeasures?
A) realpersonalincome
B) realgrossdomesticproduct
C) nominalgrossdomesticproduct
D) nominalnetdomesticproduct
Answer: C
Diff:2
46) AssumethatthenominalGDPforagivenyearisequalto$12,400billionandtheGDPdeflator
equals112.RealGDPforthatyearisapproximately
A) $13,888.0billion.
B) $12,512.0billion.
C) $11,071.4billion.
D) $12,228.1billion.
Answer: C
Diff:3
47) Constantdollarsaredollars
A) correctedforgeneralpricelevelchanges.
B) measuredintermsofcurrent-yearprices.
C) issuedbytheU.S.Treasurywithvaluesthatfailtochangeeveninthefaceofinflationor
deflation.
D) issuedbytheFederalReservewithvaluesthatfailtochangeeveninthefaceofinflationor
deflation.
Answer: A
Diff:2
48) WhenoneconvertsnominalGDPtorealGDP,onetakesintoaccountwhichofthefollowing?
A) changesinthepopulation
B) changesinthequalityofgoods
C) changesinthedistributionofincome
D) noneoftheabove
Answer: D
Diff:1
49) Measuringtotalaggregateproductioninconstantdollarsuseswhichofthefollowingmeasures?
A) realpersonalincome
B) realgrossdomesticproduct
C) nominalgrossdomesticproduct
D) nominalnetdomesticproduct
Answer: B
Diff:2
Year
2005
2013
NominalGDP
(billionsofdollarsperyear)
8,950
9,250
PriceLevelIndex
(baseyear2005=100)
100
120
50) Usingthedataintheabovetable,whatistherealGDPforyear2005(inbillionsofconstant
dollars)?
A) 9,250
B) 8,500
C) 7,708
D) 8,950
Answer: D
Diff:2
51) Usingthedataintheabovetable,whatistherealGDPforyear2013(inbillionsofconstant
dollars)?
A) 9,250
B) 8,500
C) 7,708
D) 8,950
Answer: C
Diff:3
A) Duringperiodsofinflation,nominalGDPincreasesmorerapidlythandoesrealGDP.
B) Nominalvaluesareexpressedinconstantdollars.
C) Realvaluesareexpressedincurrentdollars.
D) IncreasesinrealGDPareevidencethatthedistributionofwealthisbecomingmoreequal.
Answer: A
Diff:3
53) Islookingatchangesingrossdomesticproductovertimeagoodwaytodeterminewhetherthe
peopleinacountryareexperiencinganincreaseintheirstandardsofliving?Whyorwhynot?
Answer: No.GDPfiguresneedtobecorrectedforinflation,sorealGDPandnotnominalGDP
shouldbeused.ButevenusingrealGDPmaybeincorrectbecauseincreasesinrealGDP
willnotmeanahigherstandardoflivingifpopulationisgrowingfasteryet.Abetter
measureispercapitarealGDP.Eventhisisnotperfectbecausetherearemanyimportant
economicactivitiesthatarenotincludedinrealGDP,andrealGDPfiguresignore
householdproductionandthevalueofleisuretime.
Diff:3
8.6ComparingGDPThroughouttheWorld
1) Themostaccuratewaytocomparestandardsoflivingthroughouttheworldistolookat
A) totalGrossDomesticProduct(GDP).
B) GNP.
C) purchasingpowerparity.
D) foreignexchangerates.
Answer: C
Diff:1
Topic: 8.6ComparingGDPThroughouttheWorld
2) Theforeignexchangerateis
A) anadjustmentthattakesintoaccountdifferencesinthetruecostoflivingacrosscountries.
B) thepriceofonecurrencyintermsofanother.
C) anothernameforpurchasingpowerparity.
D) partofthecircularflowdiagram.
Answer: B
Diff:1
3) ComparingGDPacrosscountriesisunrealisticunlesswemakeadjustmentinexchangeratesto
takeintoaccountdifferencesinthecostoflivingvia
A) realGDP.
B) purchasingpowerparity.
C) priceindex.
D) internationalGDP.
Answer: B
Diff:1
4) Purchasingpowerparityrefersto
A) adjustmentsinGDPfigurestoputeverythingintoonecommoncurrencyforcomparison
sake.
B) adjustmentsinexchangerateconversionsthattakeintoaccountdifferencesininflation
ratesacrosscountries.
C) adjustmentsinexchangerateconversionsthattakeintoaccountthedifferencesintruecost
oflivingacrosscountries.
D) calculatingreal,percapitaGDPindollars.
Answer: C
Diff:1
5) TheproblemwithusingforeignexchangeratestoconvertonecountrysGDPintodollarsisthat
A) thevaluesofcurrenciesarenotcomparable.
B) exchangeratesdonotreflectdifferencesininflationrates.
C) notallgoodsandservicesaresoldonworldmarkets.
D) thedollarhasbeenlosingvalueoverthelasttwentyyears.
Answer: C
Diff:2
6) TofindtheU.S.dollarequivalentofagivenamountofMexicanpesos,youwouldhavetoknow
A) percapitaGDPinMexico.
B) percapitaGDPintheUnitedStates.
C) percapitaGDPinboththeUnitedStatesandMexico.
D) theforeignexchangeratebetweendollarsandpesos.
Answer: D
Diff:2
7) Apurchasingpowerparityindexwouldhelpyou
A) predictchangesinU.S.realGDP.
B) identifythosegoodsandservicesthatarebecomingrelativelymoreimportantin
chain-weightedGDP.
C) makeinternationalcomparisonsoflivingstandards.
D) estimatethegrowthrateofU.S.personalincome.
Answer: C
Diff:3
8) Theforeignexchangerate
A) isthepriceofonegoodorserviceascomparedtoasimilargoodorservice.
B) isthesameasthepriceofaproductinU.S.dollars.
C) isnotrelevantwhencomparingtheGDPsofvariouscountries.
D) isthepriceofonecurrencyintermsofanother.
Answer: D
Diff:2
9) Ofthefollowing,whichcountryhasthehighestannualrealGDPpercapitaaccordingtothe
InternationalMonetaryFundandWorldBank?
A) China
B) Italy
C) UnitedStates
D) Brazil
Answer: C
Diff:2
10) Purchasingpowerparityexistswhendomesticcurrency
A) maintainsafixedexchangeratewithaforeigncurrency.
B) isnotconvertibletoaforeigncurrency.
C) buysmoregoodsathomethanabroad.
D) buysasmanygoodsabroadasathome.
Answer: D
Diff:1
11) AssumethataGMcarsellsfor$20,000intheUnitedStatesandthattheexchangerateis$1 = 1.3

euros.Forpurchasingpowerparitytohold,thesamecarinItalyshouldsellfor
A) 20,000euros.
B) 15,385euros.
C) 26,000euros.
D) 16,542euros.
Answer: C
Diff:1
12) HowmanyU.S.dollarsdoesaU.S.importerneedtopayforaninvoiceof1millionyenwhen
thepriceof1yenis$0.006?
A) $1,666million
B) $1.66million
C) $166.7
D) $6,000
Answer: D
Diff:2
13) Whichofthefollowingallowsustocompareaveragelevelsofrealproductionperpersonin
differentnationsinawaythatadjustsfordifferencesintruecostsofliving?
A) nominalGDPbasedonpurchasingpowerparity
B) percapitarealGDPbasedonpurchasingpowerparity
C) realGDPbasedonforeignexchangerates
D) percapitanominalGDPbasedonforeignexchangerates
Answer: B
Diff:2
14) Supposeyouknowthatacertaincountrywithagrowingpopulationhasexperiencedsteady
growthinrealpercapitaGDP.Whatdoyouthenalsoknowtobetrue?
A) Thedistributionofincomeinthiscountryhasbecomerelativelymoreequal.
B) Thegrowthingoodsandservicesproducedandexchangedinthemarketplacehas
outpacedthegrowthinpopulation.
C) Thiscountryexportsmorethanitimports.
D) Thiscountryimportsmorethanitexports.
Answer: B
Diff:2
15) Theadjustmentinexchangerateconversionsthattakesintoaccountdifferencesinthetruecost
oflivingacrosscountriesiscalled
A) nominalpurchasingpower.
B) purchasingpowerparity.
C) rawpurchasingpower.
D) currency-adjustedpurchasingpower.
Answer: B
Diff:1
16) ThemostmeaningfulwaytocomparepercapitaGrossDomesticProduct(GDP)across
countriesisto
A) useforeignexchangeratestoconverteachcountryspercapitaGrossDomesticProduct
(GDP)intodollars.Thencompare.
B) firstadjusteachcountryspercapitaGrossDomesticProduct(GDP)toexcludeallthe
goodsandservicesthatarenotexchangedwithothercountries.
C) assumethatthecostoflivingineachcountryisthesameastheUnitedStatescostof
living.
D) firstusepurchasingpowerparitytofactorineachcountrystruecostofliving.
Answer: D
Diff:2
17) Howcanwecomparestandardsoflivingacrosscountries?
Answer: Itisdifficulttocomparestandardsoflivingacrosscountries.PercapitaGrossDomestic
Product(GDP)isagoodstartingpoint,butfiguresusingdifferentcurrenciesmustbe
convertedtoonecurrencyifcomparisonsaretobemade.Thereareproblemswithusing
theexchangeratetomaketheseconversionsbecausenotallgoodsandservicesaresold
inworldmarkets.Thebestmeasureistousepurchasingpowerparitycomparisons,but
thishasdrawbacks,too,becausethevalueofleisureandthevalueofhousehold
productionarenotincluded.
Diff:3
Chapter9
GlobalEconomicGrowthandDevelopment
9.1HowDoWeDefineEconomicGrowth?
1) Anincreaseingrowthrateswillcausetheproductionpossibilitiescurveto
A) shiftinward.
B) becomesteeper.
C) becomeflatter.
D) shiftoutward.
Answer: D
Diff:1
Topic: 9.1HowDoWeDefineEconomicGrowth?
2) Anoutwardshiftoftheproductionpossibilitiescurverepresents
A) economiccontraction.
B) economicgrowth.
C) economicrecession.
D) economicinflation.
Answer: B
Diff:1
3) Whichofthefollowingvariablesisusedtomeasureeconomicgrowth?
A) nominalGDP
B) nominalGDPpercapita
C) realGDP
D) realGDPpercapita
Answer: D
Diff:1
4) Accordingtoyourtext,whichofthefollowingcountriescurrentlyhasthehighestannualper
capitaGrossDomesticProduct(GDP)growthrate?
A) China
B) Japan
C) Germany
D) UnitedStates
Answer: A
Diff:1
5) Thetermeconomicgrowthreferstoincreasesin
A) resourcesuse.
C) satisfaction.
Answer: D
Diff:1
B) nominalincome.
D) productivecapacity.
6) Economicgrowthisusuallydefinedas
A) therateofincreaseinoutputdividedbytheincreaseinlabor.
B) theincreaseinoutputovertime,asmeasuredbyrealpercapitaGrossDomesticProduct
(GDP).
C) theincreaseininputavailability.
D) thereductionintherealcostofnecessities.
Answer: B
Diff:1
7) Usingaproductionpossibilitiescurve,economicgrowthisrepresentedby
A) anoutwardshiftinthecurve.
B) amovementalongthecurve.
C) aninwardshiftofthecurve.
D) apivotofthecurve.
Answer: A
Diff:1
8) Economicgrowthisbestmeasuredbyincreasesin
A) nominalpersonalincome.
B) nominalGrossDomesticProduct(GDP).
C) percapitarealGrossDomesticProduct(GDP).
D) percapitanominalGrossDomesticProduct(GDP).
Answer: C
Diff:1
9) WhenCountryXhashigheconomicgrowth,thiscountryhas
A) ahighlevelofrealGrossDomesticProduct(GDP).
B) ahighlevelofpercapitarealGrossDomesticProduct(GDP).
C) alargeincreaseinpercapitarealGrossDomesticProduct(GDP).
D) alargeincreaseinpersonalincome.
Answer: C
Diff:2
Chapter9GlobalEconomicGrowthandDevelopment197
Country
A
B
C
D
2012
RealGDP
(Millions)
$280,000
235,000
28,200
5,200,000
2013
RealGDP
(Millions)
$300,000
260,000
33,400
5,445,000
2012
Population
(Millions)
832.5
14.8
2.7
248.8
2013
Population
(Millions)
849.5
14.9
3.0
250.0
10) Refertotheabovetable.Whichcountryexperiencedthegreatesteconomicgrowthfrom2012to
2013?
A) A
B) B
C) C
D) D
Answer: B
Diff:2
11) Refertotheabovetable.WhichcountryhadthehighestgrowthrateofrealGrossDomestic
Product(GDP)from2012to2013?
A) A
B) B
C) C
D) D
Answer: C
Diff:2
12) Economicgrowthmayunderstatechangesinstandardsoflivingif
A) thegrowthisaccompaniedbyincreasingcongestion.
B) leisuretimeisalsoincreasing.
C) thetypesofjobsgeneratedfeelingsofalienation.
D) deflationistakingplace.
Answer: B
Diff:2
13) Thereareanumberofbenefitsthatusuallyaccompanyeconomicgrowth.Thefollowingare
suchbenefitsEXCEPT
A) increaseinliteracy.
B) increasedexpectedlife-spans.
C) politicalstability.
D) urbancongestion.
Answer: D
Diff:2
14) CostsassociatedwitheconomicgrowthincludeallofthefollowingEXCEPT
A) environmentalpollution.
B) psychologicalproblemssuchasdepression.
C) urbancongestion.
D) improvedhealthcare.
Answer: D
Diff:1
15) ThegrowthrateofpercapitarealGrossDomesticProduct(GDP)isareasonablemeasureof
A) inflation.
B) productiveactivity.
C) personalwell-being.
D) qualityoflife.
Answer: B
Diff:2
16) Whichofthefollowingbestrepresentseconomicgrowth?
A) amovementdownagivenproductionpossibilitiescurve.
B) amovementupagivenproductionpossibilitiescurve.
C) anoutwardor,equivalently,arightwardshiftoftheproductionpossibilitiescurve.
D) aninwardor,equivalently,leftwardshiftoftheproductionpossibilitiescurve.
Answer: C
Diff:1
17) Thefastereconomicgrowthis,the
A) steepertheslopeoftheproductionpossibilitiescurve.
B) farthertheproductionpossibilitiescurveshiftsout.
C) closertotheorigintheproductionpossibilitiescurvebecomes.
D) morebowedtheproductionpossibilitiescurvebecomes.
Answer: B
Diff:2
18) WhichofthefollowingisNOTanimportantfactoraffectingeconomicgrowth?
A) Therateofsaving
B) Thegrowthofleisure
C) Therateofgrowthofcapital
D) Therateofgrowthinlaborproductivity
Answer: B
Diff:1
19) Whichofthefollowingistrue?
A) Realstandardsoflivingcanincreasewithoutanypositiveeconomicgrowth.
B) Realgrowthratesfailtoaccountforbypricelevelchanges.
C) Realandnominalvaluesarenotrelated.
D) Realstandardsoflivingdecreasewithpositiveeconomicgrowth.
Answer: A
Diff:3
20) WhenanationsrealpercapitaGrossDomesticProduct(GDP)increases,whichofthefollowing
istrue?
A) Everyindividualinthatnationsharesintheeconomicgain.
B) Anationmustchannelmostoftheeconomicgainstoitspoorestcitizens.
C) Lowincomepeopleareguaranteedtolose;theynevershareintheirnationseconomic
gains.
D) Wedontknowwhohasmostbenefitedfromeconomicgrowthunlesswelookatthe
distributionofincome.
Answer: D
Diff:2
21) Isitpossibletoseegainsinanationsrealstandardoflivingwithoutanypositiveeconomic
growth?
A) No.Withouteconomicgrowthanationsstandardoflivingcannotimprove.
B) Yes,butonlyifthegovernmentprintsmoremoneysopeoplefeelwealthier.
C) Yes.Ifworkerscanproducethesamelevelofoutputinfewerworkhours,leisuretime
gainscouldpushuptherealstandardofliving.
D) Noneoftheabove.
Answer: C
Diff:2
22) Anationstechnologicalgainshaveincreasedlaborproductivityand,asaresult,theaverage
numberofhoursworkedeachweekhasbeenfalling.HowdoGrossDomesticProduct(GDP)
calculationsaccountforthisshorteningoftheaverageworkweek?
A) RealGrossDomesticProduct(GDP)doesnotfactorinanincreaseinleisuretimebutper
capitarealGrossDomesticProduct(GDP)does.
B) NeitherrealGrossDomesticProduct(GDP)norpercapitarealGrossDomesticProduct
(GDP)includestheincreaseinleisuretimethatresults,sothenationsactualeconomic
growthwillbeoverstated.
C) Gainsinleisuretimearedollar-valuedandincludedinrealpercapitaGrossDomestic
Product(GDP)gains.
D) GainsinleisuretimearenotincludedinGrossDomesticProduct(GDP),soanyincreasein
realpercapitaGrossDomesticProduct(GDP)willunderstatethenationsactualeconomic
growth.
Answer: D
Diff:3
23) HowshouldpercapitarealGrossDomesticProduct(GDP)beused?
A) Itisanaccuratemeasureofeconomicwell-being.
B) Itisareasonablygoodmeasureofproductiveactivity.
C) PercapitarealGrossDomesticProduct(GDP)isagoodgaugeofanationsqualityoflife
becauseittakesintoaccountanationsculturalandspiritualvalues.
D) Alloftheabove.
Answer: B
Diff:2
24) Doeseconomicgrowthhaveanynegativesideeffects?
A) No.Everypersoninanationexperiencingeconomicgrowthwillbenefit.
B) No,becausewherenegativesideeffectsdooccur,anationsgovernmentisrequiredto
neutralizethem.
C) Quitepossibly.Somesayeconomicgrowthputspeopleonanever-endingquesttosatisfy
newlycreatedwants,sowealwaysfeeldisappointedwithourlives.
D) Yes,butonlyforthepoorestsegmentofanationspopulation.
Answer: C
Diff:2
25) Countriesareconcernedaboutsmallchangesintheiraverageannualgrowthratesinpercapita
incomebecause
A) growthratestendtodeclineovertime.
B) thepowerofcompoundingmeanssmallchangeshavelargeeffectsovertime.
C) thefasteracountrygrowstoday,thelessitwillbeabletoconsumeinthefuture.
D) growthratesareafactorinU.N.participation.
Answer: B
Diff:2
26) SupposethatCountryAandCountryBeachhadthesamepercapitarealGrossDomestic
Product(GDP)of$10,000in2008.CountryAspercapitalrealGrossDomesticProduct(GDP)
hadagrowthrateof3percentperyearandCountryBspercapitalrealGrossDomesticProduct
(GDP)hadagrowthrateof4percentperyear.By2013,theper -capitarealGrossDomestic
Product(GDP)forthetwocountries,respectively,were
A) $11,941and$12,653.
B) $11,593and$12,167.
C) $10,300and$10,400.
D) $14,000and$16,000.
Answer: B
Diff:2
27) Economicgrowthismeasuredby
A) increasesinGDP.
B) increasesinpercapitarealGDP.
C) increasesinthepopulation.
D) increasesinthevalueofthetotaloutputofsociety.
Answer: B
Diff:1
28) Economicgrowthcanbedepictedas
A) amovementupontheproductionpossibilitiescurve.
B) amovementdownontheproductionpossibilitiescurve.
C) anoutwardshiftontheproductionpossibilitiescurve.
D) aninwardshiftontheproductionpossibilitiescurve.
Answer: C
Diff:1
29) Economicgrowthcanbedefinedasapercentageincreasein
A) percapitarealGDP.
B) realGDP.
C) nominalGDP.
D) consumptionbyhouseholds.
Answer: A
Diff:1
30) WhichofthefollowingstatementsisNOTtrueabouteconomicgrowth?
A) Whengrowthoccurstheproductionpossibilitiescurveshiftsoutward.
B) Growthrepresentsanincreaseinanationsproductivecapacity.
C) GrowthismeasuredastheoveralllevelofrealGDP.
D) Growthgenerallymeansthatoverallthemembersofthenationarebetteroffmaterially.
Answer: C
Diff:1
31) Whichofthefollowingnationshasexperiencedthehighestaverageannualrateofgrowthofper
capitarealGDPsince1990?
A) India
B) UnitedStates
C) China
D) Germany
Answer: C
Diff:1
32) PercapitarealGDPisaserviceablemeasureof
A) economicwelfare.
C) culturalsuperiority.
B) costoflivingstandards.
D) productiveactivity.
Answer: D
Diff:2
33) Whichofthefollowingisabenefitofeconomicgrowth?
A) reductioninilliteracy
B) reductioninpoverty
C) improvedhealth
D) alloftheabove
Answer: D
Diff:1
34) TherealGDPinanationhasjustincreasedfrom$2billionto$2.1billion.
A) Thiscountryhasexperiencedeconomicgrowthbecausethereisa$.1billionincreasein
realGDP.
B) Wedonotknowifthiscountryexperiencedeconomicgrowthsincetheincreaseinthe
populationwasnotgiven.
C) Wedonotknowifthiscountryexperiencedeconomicgrowthsinceinformationon
nominalGDPwasnotgiven.
D) Thiscountrydidnotexperienceeconomicgrowthsince$.1billionisnotalargenumber.
Answer: B
Diff:1
35) ThehistoricalrecordfortheUnitedStatessince1900shows
A) mostlypositiveeconomicgrowth,withtwosubstantialperiodsofnegativeeconomic
growth.
B) economicgrowthforabouthalftheyearsandeconomicdeclinefortheotherhalf.
C) growthuntil1970andthenaperiodofconstantpercapitarealGDP.
D) continuouseconomicgrowth,althoughatdifferentrates,throughouttheentirecentury.
Answer: A
Diff:1
36) SupposepercapitarealGDPgrowsby7%peryear.BasedontheRuleof70,approximately
howmanyyearswillittakeforthelevelofpercapitarealGDPtodouble?
A) 4.9years
B) 7years
C) 10years
D) noneoftheabove
Answer: C
Diff:2
37) Whichofthefollowingisatruestatementconcerningeconomicgrowth?
A) ChangesinpercapitanominalGDPareusedtomeasureeconomicgrowthbecause
populationgrowthcandistortthefiguresandwewanttousethenominalamountssince
thatiswhatpeopleidentifywith.
B) ChangesinpercapitanominalGDPareusedtomeasureeconomicgrowth,butthereare
seriousproblemsconcerningthedesirabilityofusingfiguresthatdonotaccountfor
pollutionandurbansprawl.
C) ChangesinpercapitarealGDPareusedtomeasureeconomicgrowthbecausethis
accuratelymeasuresallthedifferencesinlivingstandardsacrosscountries.
D) ChangesinpercapitarealGDPareusedtomeasureeconomicgrowthbecauseinflation
andpopulationgrowthcandistortnominalGDPfiguresortotalGDPfigures.
Answer: D
Diff:2
38) WhichofthefollowingstatementsisNOTtrueaboutusingpercapitarealGDPtomeasurea
nationseconomicgrowth?
A) Thedefinitiondoesnotindicatehowtheincreaseingrowthisbeingdisturbedamongthe
nationspopulation.
B) Thedefinitionassumesthatsomeoftheincreaseinproductivitygoestothepoor.
C) Thedefinitionhasunderstatedactualeconomicgrowthbecauseitdoesnottakeinto
considerationchangesinleisure.
D) Thedefinitionisnotperfectformeasuringincreasesinanationsproductivecapacity.
Answer: B
Diff:2
39) Whenexaminingthegrowthrecordofanynation
A) allthatmustbeexaminedisincreasesinpercapitalrealGDP.
B) noconsiderationshouldbegiventothechangeintheaverageamountofleisuretimein
thenation.
C) increasesinpercapitarealGDPmustbeconsideredalongwithhowfartheproduction
possibilitiescurvehasshifted.
D) wemustconsiderwhichincomegroupshavebenefitedmostfromthegrowth.
Answer: D
Diff:1
Country
A
B
C
D
2012
RealGDP
(Millions)
$214,200
164,300
166,700
200,800
2013
RealGDP
(Millions)
$256,300
174,700
184,300
222,500
2012
Population
(Millions)
767.70
37.20
6.53
114.49
2013
Population
(Millions)
798.40
37.80
7.00
114.85
40) Refertotheabovetable.WhichcountryhadthelargestincreaseinpercapitarealGDPbetween
2012and2013?
A) A
B) B
C) C
D) D
Answer: C
Diff:2
41) Refertotheabovetable.WhichcountryhasthelowestincreaseinpercapitarealGDPbetween
2012and2013?
A) A
B) B
C) C
D) D
Answer: A
Diff:2
42) Ifweareinterestedinknowingwhetherapoorcountryisimprovingeconomically,wewantto
knownotonlywhattheeconomicgrowthrateis,butalso
A) whethertheeconomicgrowthrateisfasterthanothernationsgrowthrates.
B) whethergovernmentspendingisgrowingatthesamerate.
C) whethertheeconomicgrowthrateisgreaterthanlastyearsrate.
D) whetherthelowestincomegroupsarebenefitingfromthegrowth.
Answer: D
Diff:3
43) Realstandardsoflivingcanincrease
A) ifthecountryisproducingthesameamounttheytraditionallyhaveandareenjoyingmore
leisuretime.
B) onlyifthereispositiveeconomicgrowth.
C) ifthereispositivegrowthinthemanufacturingsector.
D) onlyatthecostofincreasedurbancongestion.
Answer: A
Diff:1
44) Economicgrowthmayoverstatechangesinthestandardoflivingif
A) peopleareretiringatayoungerage.
B) theaverageworkweekisincreasing.
C) thenumberofstudentsattendingcollegeisincreasing.
D) expectedlifespansareincreasing.
Answer: B
Diff:2
45) AcountryhashaditspercapitalrealGDPremainconstantforseveralyears.Duringthisperiod
thiscountry
A) hasnotexperiencedanyeconomicgrowth.
B) mayhaveexperiencedeconomicgrowthiftheaveragehoursworkedperweekhave
fallen.
C) willhaveexperiencedaninwardshiftoftheproductionpossibilitiescurve.
D) willhaveanincreaseinthenumberofpoorpeople.
Answer: B
Diff:2
46) Anexampleofacostofeconomicgrowthis
A) longerlifespans.
C) alienation.
B) politicalinstability.
D) increasesinilliteracy.
Answer: C
Diff:2
47) Themeasurementofeconomicgrowthcannottakeintoaccount
A) theservicesectorofaneconomy.
B) productiveactivityinaneconomy.
C) culturalaspectsoflifeinacountry.
D) differencesininflationratesacrosscountries.
Answer: C
Diff:2
48) SupposetwocountrieshaveidenticalgrowthratesofrealGDPandthesameinitialvalueofper
capitarealGDP.Weknow,then,that
A) lifeexpectanciesarethesameinbothcountries.
B) economicwellbeingisthesameinbothcountries.
C) livingstandardsmaydifferinthetwocountriesbecausewedontknowhowincomeis
distributedinthecountries.
D) livingstandardsinthetwocountriesareprobablyidentical,orveryclosetoeachother.
Answer: C
Diff:3
49) Thereasonthatdifferencesineconomicgrowthratesareimportantinthelongrunisthat
A) growthcompoundsovertime.
B) populationnaturallyshrinksinmostcountries.
C) realGDPusuallydropswhenadjustedforinflation.
D) nominalGDPtypicallyincreasesfasterthanrealGDP.
Answer: A
Diff:1
50) Aonepercentagepointinthegrowthrate
A) doesnotmakemuchdifferenceinthelongrunpercapitarealGDP.
B) willnotinfluencetherealstandardoflivinginacountry.
C) canmakeabigdifferenceinthepercapitarealGDPbecauseofurbancongestion.
D) canmakeabigdifferenceinthepercapitarealGDPbecauseofcompounding.
Answer: D
Diff:1
51) Asmallreductioninacountrysgrowthrateisaconcerntopolicymakersbecause
A) asmallchangecanhavelargeeffectsonpercapitaGDPovertime.
B) areductionusuallyleadstofuturereductionsuntilfinallytheeconomystagnates.
C) policymakersfocustoomuchoneconomicgrowthandnotenoughonincreasingsavings
rates.
D) thelargerGDPisthebettertheeconomicwelfarewillbeinthefuture.
Answer: A
Diff:3
52) SupposetwocountrieshavepercapitarealGDPof$20,000in2010.CountryAhasagrowthrate
of4percentandCountryBhasagrowthrateof5percent.By2013,thepercapitarealGDPsfor
thetwocountries,respectively,are(rounded)
A) $21,630and$22,050.
B) $22,400and$23,000.
C) $22,500and$23,150.
D) $25,000and$26,500.
Answer: C
Diff:2
Years
1
2
3
4
5
6
7
8
9
10
20
30
40
50
3%
1.03
1.06
1.09
1.13
1.16
1.19
1.23
1.27
1.30
1.34
1.81
2.43
3.26
4.38
4%
1.04
1.08
1.12
1.17
1.22
1.27
1.32
1.37
1.42
1.48
2.19
3.24
4.80
7.11
5%
1.05
1.10
1.16
1.22
1.28
1.34
1.41
1.48
1.55
1.63
2.65
4.32
7.04
11.50
6%
1.06
1.12
1.19
1.26
1.34
1.41
1.50
1.59
1.68
1.79
3.20
5.74
10.30
18.40
8%
1.08
1.17
1.26
1.36
1.47
1.59
1.71
1.85
2.00
2.16
4.66
10.00
21.70
46.90
10%
1.10
1.21
1.33
1.46
1.61
1.77
1.94
2.14
2.35
2.59
6.72
17.40
45.30
117.00
20%
1.20
1.44
1.73
2.07
2.49
2.99
3.58
4.30
5.16
6.19
38.30
237.00
1470.00
9100.00
53) Accordingtotheabovetable,ifpercapitarealGDPiscurrently$1000,thenataconstantannual
rateofgrowthof8percent,percapitarealGDPtenyearsfromnowwillbeequalto
A) $2000.
B) $2140.
C) $2160.
D) $2590.
Answer: C
Diff:2
54) Refertotheabovetable.HowlongwouldittakeforacountrytotripleitsGDPiftheGDPgrew
ata20percentrate?
A) 2years
B) 4years
C) 6years
D) 10years
Answer: C
Diff:2
55) Refertotheabovetable.TwocountrieshavepercapitarealGDPsin2010of$5000.IfcountryA
hasa4percentgrowthrateandCountryBa5percentgrowthrate,whatwillthepercapitareal
GDPsofeachbeintheyear2060?
A) A:$40,000;B:$60,000
B) A:$35,550;B:$57,500
C) A:$24,000;B:$35,200
D) A:$15,000;B:$30,000
Answer: B
Diff:2
56) Refertotheabovetable.SupposeonecountryhasapercapitarealGDPof$1000andanother
hasapercapitarealGDPof$10,000,ortentimeslarger.Ifbothcountrieshaveagrowthrateof5
percent,howmuchlargerwillpercapitarealGDPbeinthesecondcountrybethanthefirst
after50years?
A) 4timeslarger
B) 5timeslarger
C) 8timeslarger
D) 10timeslarger
Answer: D
Diff:2
57) Refertotheabovetable.CountryAhasapercapitarealGDPof$1000andBhasapercapita
realGDPof$10,000.Aisgrowingatarateof5percentayearandBatarateof4percentayear.
After50years,howmuchlargerispercapitarealGDPinBthanA?Howmuchisthisinreal
dollars?
A) Bis8timeslarger,or$175,000largeronarealpercapitabasis.
B) Bis12timeslarger,or$230,000largeronarealpercapitabasis.
C) Bisalittleover6timeslarger,oralmost$60,000largeronarealpercapitabasis.
D) Bisalittlelessthan2timessmaller,oralmost$20,000smalleronarealpercapitabasis.
Answer: C
Diff:3
58) Refertotheabovetable.IfaneconomyscurrentpercapitarealGDPis$3,000,andifits
economygrowsatanconstantannualrateof5percentfor50years,whatwillbeitspercapita
realGDPattheendofthatperiod?
A) $13,140
B) $21,330
C) $34,500
D) $55,200
Answer: C
Diff:2
59) Refertotheabovetable.Youhaveachoiceamongfouralternatives.ChoiceAletsyouinvest
$250,000at4percent;Bletsyouinvest$125,000at6percent;Cletsyouinvest$62,500at8
percent,andDletsyouinvest$31,250at10percent.Whichchoicewillgetyouto$1million
faster?
A) A
B) B
C) C
D) D
Answer: A
Diff:3
60) AllofthefollowingwillcausethereportedgrowthrateinacountrytochangeEXCEPT
A) populationchanges.
B) changesinthenumberofpoorpeopleinthecountry.
C) ashiftoftheproductionpossibilitiescurve.
D) changesinproductivity.
Answer: B
Diff:2
61) Graphically,economicgrowthisrepresentedas
A) amovementalongtheproductionpossibilitiescurve.
B) amovementfromapointinsidetheproductionpossibilitiescurvetoapointonthecurve
itself.
C) aninwardshiftoftheproductionpossibilitiescurve.
D) anoutwardshiftoftheproductionpossibilitiescurve.
Answer: D
Diff:2
62) Oneoftheproblemswiththedefinitionofeconomicgrowthisthat
A) itoverstateseconomicgrowthbecauseitdoesnotaccountforleisuretime.
B) itdoesnotaccountforthedistributionofincome.
C) itoverstateseconomicgrowthbecauseitdoesnotaccountforthereductioninworktime.
D) itunderstateseconomicgrowthbecauseitdoesnotaccountforthereductioninworktime.
Answer: B
Diff:2
63) Economicgrowthis
A) anincreaseintheperpersonrealproductioninanation.
B) anincreaseinstockmarketvalues.
C) anincreaseinrealestatevalues.
D) anincreaseinthenumberofpeopleemployedinagriculture.
Answer: A
Diff:2
64) Thevariableusedtomeasureeconomicgrowthis
A) thegrowthofthemoneysupply.
C) thegrowthinpercapitarealGDP.
B) thetradesurplus.
D) thenumberofnewjobscreated.
Answer: C
Diff:1
65) Whydoverysmalldifferencesinannualgrowthratesamounttobigdifferencesinthedegreeof
long-termeconomicgrowth?
A) Becausethefaster-growingcountriesgainapoliticaladvantageoverpoorercountries,and
usethatadvantagefortheireconomicgain.
B) Becausetheannualgrowthrateiscompoundedovertime.
C) Becausetheslower-growingcountriessavetoomuch.
D) Becausetheslower-growingcountriesdontexportenough.
Answer: B
Diff:2
66) Anoutwardshiftoftheproductionpossibilitiescurvedemonstrates
A) arecession.
B) anincreasedrateofinflation.
C) economicgrowth.
D) acyclicalshock.
Answer: C
Diff:1
67) Economicgrowthisdefinedas
A) anincreaseinthesatisfactionofallpeoplewithinacountry.
B) anincreaseinpercapitarealGDPmeasuredbyitsrateofchangeperyear.
C) anyincreaseinpercapitanominalGDPmeasuredbyitsrateofchangeperyear.
D) anincreaseinthesupplyofmoneymeasuredbyitsrateofchangeperyear.
Answer: B
Diff:2
68) AccordingtotheWorldBankandtheInternationalMonetaryFund,whichofthefollowing
countrieshasshownthegreatestrateofeconomicgrowthinthepasttwodecades?
A) China
B) Germany
C) UnitedStates
D) Mexico
Answer: A
Diff:2
69) Whichofthefollowingwouldtypicallybeconsideredacostofeconomicgrowth?
A) increasedilliteracy
B) decreasedlevelsofhealth
C) increasedpoverty
D) urbancongestion
Answer: D
Diff:2
70) Asmallincreaseintheannualrateofeconomicgrowthcanleadtoalargerincreaseingrowth
overtimeduetotheeffectsof
A) themoneysupply.
B) compounding.
C) regressiontowardsthemean.
D) averaging.
Answer: B
Diff:1
71) Thedefinitionofeconomicgrowthistheannualpercentage
A) increaseinthepercapitarealGDP.
B) increaseinthepercapitanominalGDP.
C) increaseinthetotalnominalGDP.
D) increaseintotalexports.
Answer: A
Diff:1
72) Economicgrowthwill
A) shifttheproductionpossibilitiescurveinward.
B) shifttheproductionpossibilitiescurveoutward.
C) shiftalongtheproductionpossibilitiescurvetowardtheX-axis.
D) beamovementfrominsidetheproductionspossibilitiescurvetothecurveitself.
Answer: B
Diff:1
73) SupposepercapitarealGDPgrowsby3.5%peryear.BasedontheRuleof70,approximately
howmanyyearswillittakeforthelevelofpercapitarealGDPtodouble(i.e.,increaseby
100%)?
A) 3.5years
B) 10years
C) 20years
D) 35years
Answer: C
Diff:2
74) Assumeacountryproducestwotypesofgoods:manufacturedgoodsandagriculturalgoods.
Whenthiscountryexperienceseconomicgrowth,weknowthat
A) theproductionpossibilitiescurvewillshiftoutward.
B) theproductionpossibilitiescurvewillshiftinward.
C) therewillbeamovementalongthecurvetowardmoremanufacturedgoods.
D) therewillbemovementalongthecurvetowardmoreagriculturalgoods.
Answer: A
Diff:2
75) Whenlookingateconomicgrowthinacountry,thedistributionofoutputandincome
A) generallyfollowspredictablepatterns.
B) isnottakenintoconsideration.
C) isskewedtowardthelowestquintileofthepopulation.
D) issharedequally.
Answer: B
Diff:2
76) WhichofthefollowingisNOTabenefitofeconomicgrowth?
A) urbancongestion
B) reductioninilliteracy
C) improvedhealth
D) longerlives
Answer: A
Diff:2
77) Whichofthefollowingisanegativeeffectofeconomicgrowth?
A) higherinflation
B) higherunemployment
C) environmentalpollution
D) alloftheabove
Answer: C
Diff:1
78) Achangeinthegrowthrateofacountryofonepercentagepointannuallyhas
A) verylittleimpactontheeconomyofacountry.
B) alargeimpactinthefutureduetocompounding.
C) asmallimpactinthecurrentyear,andsmallerimpactinthefuturebecauseof
compounding.
D) alargeimpactontheeconomyinthecurrentyear,butnotinthefuture.
Answer: B
Diff:3
79) Themodificationofmanufacturingprocessessoastoreducetheresultingenvironmental
damageisanendeavorthatrequirescapitalinvestment,laborinputs,andtechnology.What
thenfollowsfromthisstatement?
A) Economicgrowthcanbenefittheenvironment.
B) Environmentaldamageisaregrettablebutnecessarysideeffectofeconomicgrowth.
C) Theconditionoftheenvironmentwillbebetterinslower-growingcountries.
D) Thewaytoreducepollutionistoeducatepeopleaboutitseffects.
Answer: A
Diff:3
80) WhatistherealGDPafterfouryearsifCountryXsaverageannualgrowthrateis8.6percent
andtheinitialrealGDPwas$2,756.0million?
A) $2,993.0million
B) $3,833.5million
C) $1,077.5million
D) $3,250.4million
Answer: B
Diff:3
81) ThepercapitaGDPforHungaryin2011was$12,000andin2012was$12,360.Howmuchdid
theeconomygrowin2012?
A) 97percent
B) 3percent
C) 2percent
D) 1percent
Answer: B
Diff:2
82) AconstantrateofU.S.economicgrowthoveragivenperiodofyearswouldinvolve
A) addingthesameamountofnominaldollarstorealGDPpercapitaeachyear.
B) addingthesameamountofrealdollarstorealGDPpercapitaeachyear.
C) compoundingthepercentageincreaseinrealGDPpercapitaovertheyears.
D) Noneoftheabovearecorrect.
Answer: C
Diff:2
83) Wheneconomicgrowthiscomparedbetweencountries,thebestmeasuretouseis
A) nominalGDP.
B) realGDP.
C) chain-weightedGDP.
D) realGDPpercapita.
Answer: D
Diff:2
84) Whatiseconomicgrowthandwhyaregrowthratessoimportant?
Answer: EconomicgrowthismeasuredbyincreasesinpercapitarealGrossDomesticProduct
(GDP).Economicgrowthresultsinahigherstandardofliving,measuredinproduction
ofnewfinalgoodsandservices,fortheaveragememberofsociety.Sustainedsmall
increasesinthegrowthrateofpercapitarealGrossDomesticProduct(GDP)canleadto
largeabsoluteincreasesinpercapitarealGrossDomesticProduct(GDP)duetothe
powerofannualgrowthcompounding.
Diff:1
85) Thereisadirectrelationshipbetweeneconomicgrowthratesandthewealthofanation.Do
youagreeordisagree?Why?
Answer: Disagree.Wealthiernationsoftenhavesmallergrowthratesthanpoorernations.Partof
thereasonisthatatwopercentgrowthrateforarichnationmeansalotmoreactual
growthofthelevelofpercapitarealGrossDomesticProduct(GDP)thanitdoesfora
poornation.
Diff:2
86) WhataretheshortcomingsofusingchangesinpercapitarealGDPtomeasureeconomic
growth?
Answer: GDPdoesnotincludeallgoodsandservicesthatpeopleconsidervaluable.Household
productionisleftout,asisthevalueofleisure.GDPalsodoesnottakeintoconsideration
culturalandspiritualaspectsoflife.Totheextenteconomicgrowthisaccompaniedby
environmentaldegradation,itisnotallagain.Andfinally,thelevelofpercapitareal
GDPdoesnotprovideinformationabouthowtheincomeisdistributedacrossthe
population.
Diff:2
9.2ProductivityIncreases:TheHeartofEconomicGrowth
1) Ifpopulationgrowthisgreaterthanthegrowthofrealoutput,
A) realpercapitaGrossDomesticProduct(GDP)growthwillbelessthanthegrowthofreal
GrossDomesticProduct(GDP).
B) theproductionpossibilitiescurveisshiftingtotheleft.
C) realpercapitaGrossDomesticProduct(GDP)growthwillbegreaterthanthegrowthof
realGrossDomesticProduct(GDP).
D) realpercapitaGrossDomesticProduct(GDP)andrealGrossDomesticProduct(GDP)will
begrowingatthesamerate.
Answer: A
Diff:1
Topic: 9.2ProductivityIncreases:TheHeartofEconomicGrowth
2) Laborproductivitycanbestbecalculatedas
A) realGrossDomesticProduct(GDP)/GrossDomesticProduct(GDP)priceindex.
B) realGrossDomesticProduct(GDP)/numberofworkers.
C) numberofworkers/hoursofwork.
D) realwages/hoursofwork.
Answer: B
Diff:1
3) WhichresourceisthemaincontributortoeconomicgrowthintheUnitedStates,LatinAmerica,
andSouthAsia?
A) growthinphysicalcapital
B) growthinhumancapital(education)
C) growthinlabor
D) growthinland
Answer: C
Diff:1
4) Whichofthefollowingvariablescanbeusedtomeasurelaborproductivity?
A) realGDP
B) numberofworkers
C) numberoflaborhours
D) alloftheabove
Answer: D
Diff:1
5) Themajorityofevidencepointstothefactthat,inthelastdecadeintheUnitedStates,labor
productivityhas
A) decreased.
B) increased.
C) stayedthesame.
D) decreasedinthemanufacturingsectorbutincreasedintheservicesector.
Answer: B
Diff:1
6) Laborproductivityriseswhen
A) averageworkeroutputfalls.
C) averageworkeroutputrises.
B) businessinvestmentfalls.
D) nominalwagesfall.
Answer: C
Diff:2
7) Laborproductivityincreaseswhen
A) theaveragenumberofhourspeopleworkgoesup.
B) theunemploymentratedecreases.
C) theaverageoutputproducedperworkerduringaspecifiedtimeperiodincreases.
D) theaverageoutputproducedperworkerduringaspecifiedtimeperioddecreases.
Answer: C
Diff:1
8) Supposeacountryexperiencesanincreaseinoutputperworker.Suchadevelopment
representswhichofthefollowing?
A) adecreaseineconomicgrowth
B) anincreaseinlaborproductivity
C) areductioninthesavingrate
D) anincreaseinpopulationgrowth
Answer: B
Diff:1
9) Whichofthefollowingwillcauseanincreaseineconomicgrowth?
A) anincreaseinhumancapital
B) areductioninthestockofphysicalcapital
C) areductionintheunemploymentrate
D) areductioninlaborforceparticipation
Answer: A
Diff:2
10) Laborproductivityiscomputedas
A) percapitarealGDPdividedbythenumberofworkers.
B) realGDPdividedbypopulation.
C) percapitarealGDPdividedbypopulation.
D) realGDPdividedbythenumberofworkers.
Answer: D
Diff:1
11) Laborproductivityis
A) theaverageamountproducedtimesthenumberofworkers.
B) theaverageamountproducedtimesthenumberofpeopleinthelaborforce.
C) theaverageamountproducedperworker.
D) therateofchangeinthetotalamountproducedperworker.
Answer: C
Diff:2
12) Themostimportantthingabouthigherlaborproductivityisthatitmeans
A) wearedoingbetterthananyoneelseis.
B) wecancompetewellwithothernations.
C) wecanachieveahappierpopulation.
D) wecanhaveahigherstandardofliving.
Answer: D
Diff:2
13) Economicgrowthcanbedefinedas
A) therateofgrowthintheproductivityoflabor.
B) therateofgrowthintheproductivityofcapital.
C) therateofgrowthoflaborplustherateofdepreciationofcapital.
D) therateofgrowthoflaborplustherateofgrowthofcapitalplustherateofgrowthinthe
productivityoflaborandcapital.
Answer: D
Diff:1
14) Productivityrelatesto
A) workingharderovertime.
B) workinglongerovertime.
C) producingthesameoutputwithfewerlaborhours.
D) producingthesameoutputwithmorelaborhours.
Answer: C
Diff:1
15) Whichofthefollowingisanexampleofameasureoflaborproductivity?
A) Farmworkersproduce30bushelsofwheatperworkerperday.
B) Autosget30gallonstothemile.
C) ThegrowthrateofpercapitarealGDPis3.5percentperyear.
D) Wagesincreaseby3.5percentperyearfor5years.
Answer: A
Diff:2
16) Laborproductivityincreaseswhen
A) thepopulationincreases.
B) outputincreasesevenifthelaborforcehasdecreased.
C) outputincreasesatthesamerateasthelaborforceincreases.
D) outputincreasesfasterthanpopulationincreases.
Answer: B
Diff:2
17) IntheUnitedStates,themaincontributortoeconomicgrowthisduetothegrowthin
A) physicalcapital.
B) education(humancapital).
C) laborresources.
D) capitalandlaborproductivity.
Answer: C
Diff:1
18) Improvementsinlaborproductivity
A) affectthelevelofwages,butdonotaffecttherateofeconomicgrowth.
B) affectthelevelofprofit,butdonotaffecttherateofeconomicgrowth.
C) hindereconomicgrowth,becausetheycauseunemployment.
D) contributetoeconomicgrowth.
Answer: D
Diff:3
19) Laborproductivityiscommonlymeasuredas
A) thenumberofworkersdividedbyrealGDP.
B) thechangeinrealGDPdividedbychangeinnumberofworkers.
C) nominalGDPdividedbynumberofworkers.
D) realGDPdividedbynumberofworkers.
Answer: D
Diff:1
20) Anincreaseinhumancapitalwilltendtocausewhichofthefollowing?
A) increaseeconomicgrowth
B) increasethestandardofliving
C) increaselaborproductivity
D) alloftheabove
Answer: D
Diff:1
21) WhichoneofthefollowingdoesNOTcontributetoeconomicgrowth?
A) thegrowthofcapitalandlaborproductivity
B) thegrowthofthecapitalstock
C) thegrowthofthelaborforce
D) increasesinthepricelevel
Answer: D
Diff:2
22) Theformulaforthecomputationoflaborproductivityis
A) realGDP/population.
B) realGDP/numberofworkers.
C) nominalGDP/population.
D) nominalGDP/numberofworkers.
Answer: B
Diff:2
23) Laborproductivityisdefinedas
A) theamountofoutputperworker.
B) theamountofinputperworker.
C) theamountofworkersperunitofinput.
D) theincreaseinoutputperunitofmachinery.
Answer: A
Diff:1
24) Laborproductivitycanbeincreasedif
A) peoplespendlesstimedevelopingskillsbeforeenteringtheworkforce.
B) thegovernmentmandatesit.
C) thereisanincreaseincapitalgoods.
D) thestandardoflivingdeclines.
Answer: C
Diff:2
25) Laborproductivitymeasures
A) thegrowthofpercapitarealGDP.
C) realoutputperlaborhour.
B) thegrowthofrealoutput.
D) thegrowthinthequantityoflabor.
Answer: C
Diff:2
26) Laborproductivitycanbeincreasedwith
A) educationandtrainingoftheworkforce.
B) anincreaseincapitalgoodsused.
C) improvementsinmanagement.
D) alloftheabove
Answer: D
Diff:2
27) Bydividingthevalueoftotaldomesticoutput(realGrossDomesticProduct(GDP))bythe
numberofworkers,economistsderive
A) thenetdomesticproduct.
B) laborproductivity.
C) thesizeofthelaborforce.
D) therateofcapitalaccumulation.
Answer: B
Diff:1
28) Wheneveraverageoutputproducedperworkerduringaspecifictime-periodincreases,then
A) leisuretimeincreases.
B) nominalGDPdecreases.
C) laborproductivityincreases.
D) thestandardoflivinggoesdown.
Answer: C
Diff:1
29) Improvementsininformationtechnologyoverthepastdecadehaveenhancedlabor
productivity.Whathasbeenalikelyresultofthischange?
A) Capitalproductivityhasdeclined.
B) Unemploymenthasincreased.
C) Therateofeconomicgrowthhasincreased.
D) Entrepreneursnolongerhaveanincentivetoinvestininformationtechnology.
Answer: C
Diff:2
30) Whichofthefollowingcontributestoeconomicgrowth?
A) increaseinlaborproductivity
B) increaseinconsumerspending
C) increaseinlaborregulationsrestrictingthehoursofovertimeallowed
D) increaseinenvironmentalprotectionpolicies
Answer: A
Diff:2
31) Explaintherelationshipbetweeneconomicgrowthandlaborproductivity.
Answer: Economicgrowthequalsthesumofthegrowthratesofallinputsplustherateofgrowth
intheproductivityoftheinputs.Hence,otherthingsconstant,anincreaseinlabor
productivityleadstoanincreaseineconomicgrowth.
Diff:2
9.3Saving:AFundamentalDeterminantofEconomicGrowth
1) Givingupconsumptiontodayforconsumptiontomorrowaccelerateseconomicgrowthby
A) havingtheeconomyproducenoconsumergoods.
B) increasingsavingoutofdisposableincome.
C) increasingtheexpectedrateofinflation.
D) rapidexpansionofthemoneysupply.
Answer: B
Diff:1
Topic: 9.3Saving:AFundamentalDeterminantofEconomicGrowth
2) Oneimportantfactorthataffectseconomicgrowthis
A) goldreserves.
B) therateofsaving.
C) whichpoliticalpartyisinpower.
D) thenumberofworkersinheavyindustry.
Answer: B
Diff:2
3) Accordingtothetext,EthiopiaprobablyhasalowpercapitarealGrossDomesticProduct
(GDP)because
A) ithastoomanyresources.
B) ithasacorruptgovernment.
C) ithasalowrateofsaving.
D) therearetoomanyskilledworkersinthecountry.
Answer: C
Diff:2
4) EconomicgrowthoccursasaresultofallofthefollowingEXCEPT
A) morelaborhours.
B) growthofcapital.
C) technologicalprogress.
D) lesssaving.
Answer: D
Diff:1
5) Ahigherrateofsavingshouldleadto
A) highercurrentconsumption.
B) lessgrowth.
C) moreinvestment,highercapitalgrowth,andmorefutureconsumption.
D) ahigherpricelevelandreducedfutureconsumption.
Answer: C
Diff:1
6) Therateofeconomicgrowthwillbefasterif
A) therateofgrowthofthemoneysupplyishigher.
B) therateofsavingishigher.
C) therateofgrowthofthepopulationishigher.
D) consumptionspendingisgreater.
Answer: B
Diff:2
7) Otherthingsbeingequal,ahighersavingrate
A) leadstohigherinterestrates.
B) meanshigherstandardsoflivinginthefuture.
C) meanshigherstandardsoflivingtoday.
D) isassociatedwithadeclineintherateofgrowthofthepopulation.
Answer: B
Diff:2
8) Otherthingsbeingequal,anincreaseinconsumptionspendingimplies
A) adeclineinsaving.
B) adeclineingovernmentspending.
C) ahigherstandardoflivinginthefuture.
D) thateconomicgrowthwillsoonincrease.
Answer: A
Diff:2
9) Economicgrowthtendstobehigherinacountrythat
A) hasalowsavingrate.
B) hasanopeneconomythatencouragestherapidspreadoftechnology.
C) hasanundevelopedsystemofpropertyrights.
D) doesnotgrantpatentstoinvestors.
Answer: B
Diff:1
10) Whencomparingacrosscountries,thehighertherateofsaving,
A) thelowerthelevelofpercapitarealGrossDomesticProduct(GDP).
B) thehigherthelevelofpercapitarealGrossDomesticProduct(GDP).
C) thelessindustrializedthecountry.
D) thelowertheproductivityrates.
Answer: B
Diff:1
11) Animportantfactorindeterminingacountrysrateofeconomicgrowthis
A) thediversityofitspopulation.
B) itsrateofsaving.
C) thesizeofitslaborforce.
D) theproportionoftheadultpopulationthatisworking.
Answer: B
Diff:2
12) Otherthingsheldconstant,highersavingratesleadto
A) alowerstandardofliving.
B) increasesinthenumberofhoursworkerswork.
C) decreasesinrealpercapitaGDP.
D) higherlivingstandards.
Answer: D
Diff:1
13) Savingisimportantforeconomicgrowthbecause
A) ahighersavingratereducesinvestmentspending.
B) ahighersavingrateincreasesinvestmentspending.
C) moresavingincreasesconsumptionimmediately.
D) ahighersavingratewilldecreasethestandardoflivinginthefuture.
Answer: B
Diff:1
14) Areductioninacountryssavingratewilltendtocausewhichofthefollowinginthelongrun?
A) anincreaseinthestandardofliving
B) areductionineconomicgrowth
C) anincreaseinlaborproductivity
D) anincreaseinpercapitarealGDP
Answer: B
Diff:2
15) TherelationshipbetweentherateofsavingandpercapitarealGDPis
A) positive.
B) negative.
C) constant.
Answer: A
Diff:1
D) notstable.
16) TherehasbeensomeconcernintheUnitedStatesthatpeoplearenotsavingenough.Thisisa
concernbecause
A) decreasesinsavingleadtodecreasesinlaborproductivity.
B) decreasesinsavingleadtodecreasesininvestment.
C) decreasesinsavingleadtoincreasesinthecapitalstock.
D) decreasesinsavingleadtoincreasesinconsumptioninthefuture.
Answer: B
Diff:2
17) Ifallincomeisconsumedinayear,then
A) investmentspendingwillincrease.
B) incomenextyearwillincrease.
C) investmentspendingwillbezero.
D) anyinvestmentspendingwillbedonebythegovernment.
Answer: C
Diff:2
18) Manycountriesfinditdifficulttoachieveeconomicgrowth.Thisisbecauseeconomicgrowth
A) isnotunderstoodwellbyeconomists,soitisdifficulttoadvisepolicymakersonthebest
policiestopursue.
B) requiressaving,andsavingmeanslessconsumptiontoday.Apoorcountrymayfindit
difficulttoconsumelesstoday.
C) appearstobepredeterminedandnotsubjecttofactorsthatpolicymakerscanhaveany
affecton.
D) dependsontechnologicalchangeandtechnologicalchangedependsonnoneconomic
factorssuchasthegrowthrateofscientificknowledge.
Answer: B
Diff:3
19) Itislikelythatasmallincreaseinacountryssavingratewillhave
A) alargeeffectonpercapitarealGDPmanyyearslaterbecausetheincreaseinsavingleads
toaslightlyhigherrateofeconomicgrowthwhichhaslargeeffectsovertime.
B) alargeeffectonpercapitarealGDPimmediatelybecausetheincreaseinsavingleadstoa
muchlargerrateofeconomicgrowth.
C) asmalleffectonpercapitarealGDPmanyyearslaterbecausetheincreaseinsavingwill
haveverylittleeffectonthegrowthrate.
D) asmalleffectonpercapitarealGDPmanyyearslaterbecausetheincreaseinsavingwill
beoffsetinlateryearsbyadecreaseinthesavingrate.
Answer: A
Diff:3
20) Countrieswithhigherratesofsaving
A) experiencelowergrowthratesinthefuture.
B) havealargepopulation.
C) haveagreaternumberofpoorpeople.
D) havehigherratesofgrowth.
Answer: D
Diff:1
21) Economicgrowthdependson
A) lowtaxrates.
B) highgovernmentspending.
C) highratesofconsumption.
D) increasesinthecapitalstockasaresultofsaving.
Answer: D
Diff:2
A) Savingdeterseconomicgrowth,becauseittakesmoneyoutofcirculation.
B) Savingenableseconomicgrowthbyprovidingforinvestmentinthecapitalstock.
C) Internationalcomparisonshavefoundnorelationshipbetweentherateofsavingandthe
levelofpercapitarealGDP.
D) Economieswithsophisticatedcreditmarkets,suchastheUnitedStates,havenoneedfor
saving.
Answer: B
Diff:3
23) Ofthefollowingnations,thecountrywiththehighestsavingrateis
A) theUnitedStates.
B) Japan.
C) Mexico.
D) Ethiopia.
Answer: B
Diff:2
24) Regardingtheroleofsavingineconomicgrowth,studiesindicatethat
A) thereisapositiverelationshipbetweeneconomicgrowthandsaving.
B) thereisnorelationshipbetweeneconomicgrowthandsaving.
C) thereisanegativerelationshipbetweeneconomicgrowthandsaving.
D) thereisbothapositiveandanegativerelationshipbetweeneconomicgrowthandsaving.
Answer: A
Diff:1
25) Whichofthefollowingisanimportantfactoraffectingeconomicgrowth?
A) therateofsaving
B) exchangerates
C) therateofinterest
D) thelevelofprices
Answer: A
Diff:1
26) Anincreaseinacountryssavingratewilltendtocausewhichofthefollowinginthelongrun?
A) areductioninpercapitarealGDP
B) anincreaseineconomicgrowth
C) anincreaseintheunemploymentrate
D) anincreaseintherateofinflation
Answer: B
Diff:1
27) Inordertobeabletoconsumemoreinthefuture,youhavetoconsume
A) lesstodayandsavethedifference.
B) moretodaytoincreasesupply.
C) moreconsumergoods.
D) fewercapitalgoods.
Answer: A
Diff:2
28) Highersavingratesmeanhigherfuturegrowthratesbecause
A) theinterestearnedfromsavingsgivesyoumorewealth.
B) thebankshavemoremoneytodistributetotheirshareholders.
C) savingcontributestolessinvestment,whichyieldsalargercapitalstock.
D) savingcontributestomoreinvestment,whichyieldsalargercapitalstock.
Answer: D
Diff:2
29) Inorderforanationtobeabletoconsumemoreinthefuture,itneedsto
A) consumelesstodayinaggregateandsavethedifferencebetweenconsumptionand
income.
B) consumemoretodayinaggregateandborrowthedifferencebetweenconsumptionand
income.
C) producemoretodayinaggregateandsavethedifferencebetweenconsumptionand
production.
D) producelesstodayinaggregateandsavethedifferencebetweenconsumptionand
income.
Answer: A
Diff:2
30) Whyareeconomicgrowthandsavingrelated?
Answer: Toconsumemoreinthefuturelessmustbeconsumedtoday.Thatis,savingisnecessary
forinvestmenttooccur,andinvestmentisnecessaryforeconomicgrowthtooccur.
Diff:1
9.4NewGrowthTheoryandtheDeterminantsofGrowth
1) Proponentsofthenewgrowththeoryarguethatwhichofthefollowingisadeterminantof
economicgrowth?
A) Aneffectivesystemofpatentprotection
B) Thequalityandsizeofthenationseducationalsystem
C) Theproportionofincomethatgoesintoresearchanddevelopment
D) alloftheabove.
Answer: D
Diff:1
Topic: 9.4NewGrowthTheoryandtheDeterminantsofGrowth
2) Whichofthefollowingarementionedasforcesofthe newgrowththeorythatinfluenceeconomic
growth?
I. Technology
II. Research
III. Innovations
A) Ionly
B) IandIIonly
C) IandIIIonly
D) IIandIIIonly
E) I,II,andIII
Answer: E
Diff:1
3) Akeyideaofthenewgrowththeoryisthat
A) technologyisnotanimportantdeterminantofeconomicgrowth.
B) economicgrowthisnotasimportantasleisuretimegrowth.
C) thegreatertherewardsfortechnologicaladvances,thegreaterthenumberoftechnological
advances.
D) therewardsassociatedwithtechnologicaladvanceshavelittletodowiththeactualrateof
inventionorinnovation.
Answer: C
Diff:1
4) Newgrowththeorysupportstheideathat
I. economicgrowthcancontinueaslongaswekeepfindingnewideas.
II. increasesinhumancapitalcanleadtogreaterratesofeconomicgrowth.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:1
5) Accordingtothenewgrowththeory,economicgrowthwillcontinuewith
A) thedevelopmentofnewideas.
B) increasesinpopulationgrowth.
C) increasesininterestrates.
D) anincreasedfocusonlabor-intensivejobs.
Answer: A
Diff:2
6) AllofthefollowingarefactorsthatraiseeconomicdevelopmentEXCEPT
A) establishingalegalsystem.
B) aneducatedworkforce.
C) reducingtradebarriers.
D) governmentcontrolofthecountrysresources.
Answer: D
Diff:2
7) Innovationtypicallyincreaseswhen
A) marketincentivesandprivatepropertyrightsareencouraged.
B) governmentcontrolstheresourcebase.
C) hightaxesarepresent.
D) thelegalsystemisweak.
Answer: A
Diff:2
8) Thedevelopmentofastrainofwheatthatwillyieldtwocropsperyearratherthanonecropper
yearisanexampleofeconomicgrowthresultingfrom
A) capitalaccumulation.
B) increasedgrossinvestment.
C) technologicalprogress.
D) anincreaseinpercapitarealincome.
Answer: C
Diff:1
9) Accordingtonewgrowththeory,astechnologybecomesmoreimportanttogrowth,sodoes
A) humancapital.
B) militaryspending.
C) increasingtaxes.
D) increasingtradebarriers.
Answer: A
Diff:2
10) Economiststypicallyagreethatthespecialprotectiongiventoownersofpatentstendsto
A) reduceexpendituresonresearchanddevelopment.
B) increaseexpendituresonresearchanddevelopment.
C) reduceeconomicgrowth.
D) reduceproductivity.
Answer: B
Diff:1
11) Thetransformationofaninventionintosomethingthatbenefitstheeconomyisknownas
A) aninnovation.
B) apatent.
C) anexternality.
D) acompounder.
Answer: A
Diff:1
12) Whenthegovernmentgrantsaninventorapatent,
A) hehastheexclusiverighttomake,sellorusehisinventionfor5years.
B) thepatentholderhaslessincentivetoinvestinR&Dbecauseonesuccessfulinvention
removestheneedtodevelopothers.
C) thepatentholderisguaranteedaprofitonhisinvention.
D) theprotectionofacurrentinventionwouldincreasespendingonR&D.
Answer: D
Diff:1
13) Regardingopeneconomies,economiststendtofindevidencethat
A) themoreclosedaneconomyis,thehighertherateofgrowththeeconomywillexperience.
B) tradetariffstendtoimproveeconomicgrowth.
C) freetradeencouragesamorerapidspreadoftechnology,andhenceincreaseseconomic
growth.
D) openeconomiestendtohaveaccesstosmallermarketsthandoclosedeconomies.
Answer: C
Diff:1
14) Accordingtothetext,datasupportstheconclusionthatlowertradebarriers
A) helpboostpercapitarealGrossDomesticProduct(GDP)growth.
B) helptoincreasewelfarepayments.
C) decreasethestandardoflivinginthecountry.
D) decreaselifeexpectancy.
Answer: A
Diff:2
15) Freetradeisviewedaskeytoeconomicdevelopmentbecause
A) itencouragesafasterspreadoftechnology.
B) itencouragesacountrysexportsonly.
C) itbringsinexpensivenewtechnology.
D) noneoftheaboveiscorrect.
Answer: A
Diff:2
16) Whichofthefollowingdoesfreetradeencourage?
A) Morerapidspreadoftechnology
B) Higherratesofeconomicgrowth
C) Domesticindustriesaccesstolargermarkets
D) Alloftheabove
Answer: D
Diff:2
17) PaulRomerstheoryontheimportanceofknowledgediffersfromtraditionaltheoryinthat
Romer
A) arguesthataninvestment-knowledgecycleallowsaonce-and-for-allincreasein
investmenttopermanentlyraiseacountrysgrowthrate,whiletraditionaltheoryargues
thataonce-and-for-allincreaseininvestmentleadstoahigherstandardoflivingbutnot
toahighergrowthrate.
B) argues,thatinvestmentisnotimportantinpromotinggrowth,butthattheacquisitionof
knowledgeisthesoledeterminantofeconomicgrowth.
C) argues,thataninvestment-knowledgecycleexistswhichrequiresthatinvestmentrates
keepincreasingorelsegrowthrateswillfall,whiletraditionaltheoryarguesthatgrowth
rateswillnotfall,althoughtheywillnotincreaseeither.
D) emphasizesinvestmentrateswhiletraditionaltheoryemphasizestheimportanceof
knowledgeasafactorofproduction.
Answer: A
Diff:3
18) AccordingtoeconomistPaulRomer,economiesthatwishtoexperiencegrowthmust
A) investmostoftheirsavingsinnationaldefense.
B) investinknowledge.
C) drasticallylowertheirstandardsofliving.
D) becomecommandeconomies.
Answer: B
Diff:1
19) Fordevelopingcountries,oneofthemoreeffectivewaystobecomemoredevelopedis
A) toinvestinsecondaryschools.
B) toinvestmoreinthemilitary.
C) toincreasetradebarriers.
D) toreducedirectforeigninvestment.
Answer: A
Diff:2
20) WhatdoesthefactthatU.S.studentsarefallingbehindothernationsstudentsinmathand
sciencehavetodowitheconomicgrowth?
A) Nothing.PeopleintheUnitedStatesjustdontliketofallbehindinanythingasamatterof
pride.
B) IfU.S.studentsdontexcelinmathandscience,thenationwillseefewerplayswrittenand
fewerpiecesofmusiccomposed.
C) Bettertechnology,akeytoeconomicgrowth,dependslargelyonmathandscienceskills.
D) Mathandscienceskillsdontfostereconomicgrowth,butittakesmathskillstocalculatea
nationsrateofeconomicgrowth.
Answer: C
Diff:2
21) Humancapitalis
A) thesavingdonebyhumanbeings.
B) theknowledgeandskillsthatpeopleintheworkforceacquirethrougheducationand
training.
C) ameasureofthelaborproductivityofworkers.
D) theinvestmentpeoplemakeinindustriesthatmakecapitalgoods.
Answer: B
Diff:1
22) WhichofthefollowingistrueoftrendsinthenumberofnewU.S.patents?
A) Therewasasteadyincreaseinnewpatentsthroughoutthe1970s.
B) Therewasasurgeinnewpatentsinthelatterpartofthe1990s.
C) Thenumberofnewpatentsgrantedeachyearhasremainedunchangedsincetheearly
1970s.
D) Thenumberofnewpatentsgrantedeachyeardeclinedbymorethan50percentafter2001.
Answer: B
Diff:2
23) Traditionally,economistsregardedimprovementsintechnologyas
A) themostimportantfactorthathelpedexplaineconomicgrowth,andbasicallytheonly
factorthatwouldcauseeconomicgrowth.
B) anoutsidefactorthathelpedexplaineconomicgrowth.
C) animportantfactorinexplainingeconomicgrowththatwasduetoeconomicforcesthat
alsocouldeasilybeexplained.
D) unrelatedtoeconomicgrowthinanysystematicway.
Answer: B
Diff:2
24) WhichofthefollowingisNOTassociatedwiththenewgrowththeory?
A) Naturalresources
B) Research
C) Technology
D) Innovation
Answer: A
Diff:1
25) Newgrowththeoryisconcernedwith
A) findingagoodwaytomeasureeconomicgrowth.
B) increasingthesavingsrateintheU.S.
C) understandingtheforcesthatincreaseproductivity.
D) understandinghowcompoundingworks.
Answer: C
Diff:1
26) Recentlyeconomistshaveaddedwhatfactorasamajorexplanationofeconomicgrowth?
A) Thegrowthrateoflabor
B) Thegrowthrateofcapital
C) Thegrowthrateinlaborandcapitalproductivity
D) Technology
Answer: D
Diff:1
27) Newgrowththeoryarguesthat
A) growthisduetothepropergovernmentpoliciesconcerninginterestrates.
B) growthreliesonmaintaininglowergrowthratesofpopulation,especiallyinless
developedcountries.
C) technologycannotbelookedatasanoutsidefactorwithoutanexplanationofwhatdrives
it.
D) technologyisthekeyfactorthatexplainsgrowthbuttechnologyisbeyondeconomic
explanationitself.
Answer: C
Diff:2
28) Animportantfoundationofthenewgrowththeoryisthat
A) wewillgetmoretechnologicaladvancesthemorethegovernmentisinvolved.
B) wewillgetmoretechnologicaladvanceswhentherewardsforproducingthemare
greater.
C) thegrowthrateofthecapitalstockismoreimportantthanthegrowthrateofnew
knowledgeingeneratingeconomicgrowth.
D) improvementsinlaborproductivityarepoormeasuresoftechnologicalgrowth.
Answer: B
Diff:2
29) Whichofthefollowingwilltendtocauseanincreaseintechnology?
A) anincreaseinresearchanddevelopmentexpenditures.
B) thedevelopmentofnewideas.
C) increasesinhumancapital.
D) alloftheabove.
Answer: D
Diff:1
30) Thedevelopmentofnewproductsthroughresearchanddevelopmentinnewgrowththeoryis
importantbecause
A) therecanbeapositiveimpactonfuturegrowth.
B) societysscarceresourcesarebeingusedwhentheycouldbeusedforcurrent
consumption.
C) itwillleadtoareductioninthesavingsrate.
D) newpatentsarecreated.
Answer: A
Diff:1
31) Firmsaremorelikelytodevoteresourcestoresearchanddevelopmentwhen
A) thecountryisinrecession.
B) theyexpecttoearnrewardsfromsuccessfulresearchanddevelopment.
C) itiseasytocopynewtechniquesofotherfirms.
D) thecountryhasbeenexperiencingsloweconomicgrowthinordertospureconomic
growth.
Answer: B
Diff:2
32) Apatentis
A) agovernmentprotectionthatgivesaninventortheexclusiverighttotheinventionfora
limitedtimeperiod.
B) agovernmentprotectionthatgivesaninventortheexclusiverighttotheinventionforan
unlimitedtimeperiod.
C) therighttomakeaproductandsellitatareasonableprice.
D) arecognizablerighttotheprofitsassociatedwithanewproductornewwayofmaking
goodsgrantedbybusinessassociations.
Answer: A
Diff:1
33) Thereasonthatpatentsaregrantedis
A) toencourageahighrateofconsumption.
B) toprotectnewtechniquesdevelopedthroughresearchanddevelopment.
C) toencouragefreetrade.
D) toincreasethelaborforce.
Answer: B
Diff:1
34) IntheUnitedStates,apatentlasts
A) 7years.
B) 14years.
C) 20years.
D) forever.
Answer: C
Diff:1
35) Patentsstimulatetechnologicaladvanceby
A) makingcapitalmoreproductive.
B) enablingthegovernmenttodeterminewhichpotentialtechnologicaladvancesfirms
shouldpursue.
C) providinginformationaboutthestatusoftechnicalknowledgeintheeconomy.
D) allowinginventorstocapturetheeconomicrewardsoftheirinventions.
Answer: D
Diff:3
36) Thebenefitsfromresearchanddevelopmentactivities
A) arelimitedtothefirmwinningapatent.
B) arelimitedtothefirmsinvestinginsimilarresearchanddevelopmentprojects.
C) arelimitedtothenationinwhichtheresearchanddevelopmentistakingplace.
D) spillovertoothers,includingforeignresidents.
Answer: D
Diff:2
37) ForeignresidentscanbenefitfromU.S.researchanddevelopmentactivitybecause
A) theyignoreU.S.patentlawsandstealthetechnology.
B) theycanimportthegoods,obtaininginputsatlowercostthantheywouldotherwise.
C) countriesusuallysharepatentedideas.
D) patentsdoapoorjobofprotectingtheinventor.
Answer: B
Diff:2
38) Onereasonthateconomistsencouragefreetradeisthat
A) itencouragesamorerapidspreadoftechnology.
B) itallowsustoexploittheworkersoflessdevelopedcountries.
C) wecansellmoregoods.
D) itincreasesourcapitalstock.
Answer: A
Diff:1
39) WhichofthefollowingisNOTareasonthatfreetradestimulateseconomicgrowth?
A) Freetradeencouragesamorerapidspreadoftechnology.
B) Industrieshavelargermarkets.
C) Theimportationoftechnicallyadvancedproductsenablesthecountrytoimitatethe
technology.
D) Freetradekeepsdomesticpricesup,enablingfirmstomakemoreprofitsthatcanbespent
onresearchanddevelopment.
Answer: D
Diff:2
40) Accordingtothetext,therelationshipbetweeneconomicgrowthandthedegreeofhowclosed
aneconomyis
A) positive.
B) negative.
C) constant.
D) unstable.
Answer: B
Diff:1
41) Accordingtothetext,anopeneconomyislikelytohaveallthefollowingEXCEPT
A) higheconomicgrowth.
B) relativelymoretradebarriers.
C) hightechnologicalprogress.
D) relativelymorerapidspreadofideas.
Answer: B
Diff:1
42) Innovationis
A) anothertermforsomethingnew.
B) thetransformationofaninventionintosomethingthatisusefultohumans.
C) thetermforinventionwhenafirmobtainsapatent.
D) thetermforinventionsintheelectronicandcomputerindustries.
Answer: B
Diff:1
43) WhichofthefollowingstatementsisNOTconsistentwithnewgrowththeoristsbeliefs?
A) Innovationcanleadtolowerproductivitycosts.
B) Inventionsaremuchmoreimportantthaninnovation.
C) Technologymustbeunderstoodintermsofwhatdrivesit.
D) Rewardsleadtotechnologicaladvances.
Answer: B
Diff:2
44) Newgrowththeoristsbelievethat
A) wealthcreationcomesfrominnovation.
B) wealthcreationcomesfromsaving.
C) wealthcreationisduetocapitalspendingandnotresearchanddevelopmentspending
sincemuchresearchanddevelopmentspendingfailstoproduceaninvention.
D) inventionsspreadveryrapidly,therebycurtailingtheneedformoreinnovations.
Answer: A
Diff:2
45) PaulRomerstheoryofeconomicgrowthdiffersfromtraditionaltheoriesinthat
A) Romerarguesthatinvestmentincapitalgoodsisnotimportantinencouraginggrowth
whileinvestmentinhumancapitalis,whereastraditionaltheoristsemphasizebothhuman
andphysicalcapital.
B) Romerarguesthatinvestmentinhumancapitalalwaysoccursbeforeinvestmentin
physicalcapital,whiletraditionaltheoriesemphasizethepriorityofphysicalcapital.
C) Romerarguesaninvestment-knowledgecyclecanexist,butrequiresconstantincreasesin
investmentrates,whiletraditionaltheoriesarguethatinvestmentratescanbeconstant.
D) Romerarguesaninvestment-knowledgecycleallowsaone-timeincreaseininvestmentto
permanentlyincreaseacountrysgrowthrate,whiletraditionaltheoryarguedsuchan
investmentwouldhaveonlyashort-termeffect.
Answer: D
Diff:3
46) AccordingtoRomer,
A) capitaldriveseconomicgrowth.
C) ideasdriveeconomicgrowth.
B) inventiondriveseconomicgrowth.
D) governmentdriveseconomicgrowth.
Answer: C
Diff:1
47) Accordingtonewgrowththeorists,moretechnologicalimprovementscanbebroughtaboutby
A) agovernmentpolicythatencouragesincreasedconsumption.
B) governmentpoliciesthatleadtoincreasesinhumancapital.
C) tougherimmigrationlaws.
D) thegovernmenttakingamoreactiveroleinregulatingindustries.
Answer: B
Diff:1
48) Whichoneofthefollowinghelpspreserveincentivestodevelopnewtechnologies?
A) patents
B) tariffs
C) quantityrestrictionsonimports
D) incometaxes
Answer: A
Diff:2
49) Accordingtothenewgrowththeory,
A) technologyshouldbeconsideredasafactorofproduction.
B) technologyplaysaminorroleineconomicdevelopment.
C) technologyprovidesfewrewardstothesociety.
D) technologyisanaturalby-productofinvention.
Answer: A
Diff:1
50) NewgrowththeoryemphasizesallofthefollowingEXCEPT
A) technology.
B) importrestrictions.
C) researchanddevelopment.
D) innovation.
Answer: B
Diff:1
51) Agovernmentprotectionforaninventorthatprovidestheinventorwiththerighttomakeuse
ofherinventioninanywayshedesiresis
A) aninnovation.
B) acopyright.
C) apatent.
D) atrademark.
Answer: C
Diff:1
52) Oneoftheimplicationsofnewgrowththeoryisthateconomicgrowtharisesfrom
A) limitsoninternationaltrade.
B) investmentsinknowledge.
C) financialsafetynetsforthepoor,suchasMedicaid.
D) reductionsinthebirthrate.
Answer: B
Diff:2
53) Newgrowththeoristsconcludethat
A) inventionismoreimportantthaninnovationinspurringeconomicgrowth.
B) theamountoftechnologicalinnovationinaneconomyisindependentoftherewards
offeredforinnovation.
C) ratesofglobaleconomicgrowtharelimitedbytheamountofrawmaterialsavailable.
D) economicgrowthcancontinueaslongaswekeepcomingupwithnewideas.
Answer: D
Diff:3
54) Thedevelopmentofhumancapital
A) isaformofinvestment.
B) doesnotappeartoenhanceeconomicgrowth.
C) enhanceseconomicgrowth,butitdoesnotimprovetheproductivityofthelaborforce.
D) enhanceseconomicgrowth,buttheindividualsacquiringthecapitalarenotmadebetter
offthemselves.
Answer: A
Diff:1
55) Whichofthefollowingfactorsareconsideredundernewgrowththeory?
A) technology
B) research
C) innovation
Answer: D
Diff:1
56) Whenconsideringinternationaltrade,whichofthefollowingwouldbemostconduciveto
domesticeconomicgrowth?
A) aclosedeconomy
B) aneconomyinwhichitsdomesticindustriesareprotectedbytariffs
C) aneconomywithfreeandopenmarketstotheoutsideworld
D) aneconomyinwhichmostdecisionsaremadebyacentralgovernmentalauthority
Answer: C
Diff:1
57) Thenewgrowththeoryexaminestheroleof
A) technologyineconomicgrowth.
C) exportsineconomicgrowth.
B) naturalresourcesineconomicgrowth.
D) governmentineconomicgrowth.
Answer: A
Diff:1
58) Thenewgrowththeoryofeconomicgrowthexaminestheinteractionof
A) laborandpopulation.
B) regulationsandcapitalexpansion.
C) resourcesandlaborproductivity.
D) technology,research,andinnovation.
Answer: D
Diff:2
59) Apatentisagovernmentprotectionthatgives
A) consumerstherighttosuewhenproductsareunsafe.
B) inventorsexclusiverightstotheirproductforatime.
C) monopoliestherighttobesoleproducersduetoeconomiesofscale.
D) companiestherighttoproduceanygoodtheychoose.
Answer: B
Diff:1
60) Thereasonthatthegovernmentoffersinventorsexclusiverightstotheirproductforaperiodof
timeisto
A) reducemarketconcentration.
B) increaseprofitsofcertaincompanies.
C) maximizeconsumerutility.
D) promoteinnovation.
Answer: D
Diff:2
61) Economicgrowthoccurswhenthereis
A) growthintechnologythatincreasesproductivity.
B) growthingovernmentspending.
C) lowertaxesonindividuals.
D) moreenvironmentalregulation.
Answer: A
Diff:1
62) Freetrade
A) hurtseconomicgrowthbecauseforeignersarenotboundbythesamepatentlawsaswe
are.
B) helpseconomicgrowthbyencouragingthesharingoftechnologyandindustrialideas.
C) hurtseconomicgrowthbecauseforeigncountriescanproducegoodswithlowerlabor
costs.
D) helpseconomicgrowthbyincreasingtariffs.
Answer: B
Diff:2
63) AllofthefollowingunambiguouslycontributetoeconomicgrowthEXCEPT
A) increaseinhumancapital.
B) increaseintechnology.
C) increaseinlaborproductivity.
D) increaseingovernmentspending.
Answer: D
Diff:2
64) Apatentis
A) abondissuedbythegovernment.
B) abondissuedbyastate.
C) themonopolyrightgiventoaproducer/company.
D) anagreementbetweenaunionandmanagementoncertainlaborissues.
Answer: C
Diff:1
65) Whichofthefollowingismostlikelytoreducetherateofeconomicgrowth?
A) ahighdomesticsavingrate
B) investmentinhumancapital
C) subsidiesforR&Dactivities
D) slowtechnologicalprogress
Answer: D
Diff:1
66) Innovationis
A) alwaysfinancedbythegovernment.
B) aninventionfinancedbythesaleofbonds.
C) thetransformationofaninventionintosomethinguseful.
D) aninventionfinancedbythesaleofstockcertificates.
Answer: C
Diff:1
67) Accordingtonewgrowththeory,economicgrowthisdrivenby
A) positiveexternalities.
B) thedivisionoflabor.
C) higherbirthrates.
D) newideas.
Answer: D
Diff:1
68) Agovernmentgrantthatgivesaninventortheexclusiverightorprivilegetomake,use,orsell
hisorherinventionisknownas
A) apositiveexternality.
B) anegativeexternality.
C) aprotectionismclause.
D) apatent.
Answer: D
Diff:1
69) Thefederalgovernmentawardsapatentholdertheexclusiverighttomake,use,andsellan
inventionforaperiodof
A) 20years.
B) 17years.
C) unlimitedperiod.
D) 100years.
Answer: A
Diff:2
A) Themostimportantsourcesofeconomicgrowtharethequantityandqualityoftheland
andothernaturalresourcesacountrycontrols.
B) Themostimportantsourceofeconomicgrowthistherateofpopulationgrowthsincea
growingpopulationstimulatesdemandforgoodsandservices,andprovidesthelaborto
producethegoodsandservices.
C) Themostimportantsourcesofeconomicgrowtharethenewideasgeneratedby
entrepreneursinaneconomicsystemthatpermitsthemtocapturetherewardsoftheir
entrepreneurialactivities.
D) Themostimportantsourceofeconomicgrowthistheextenttowhichthegovernment
directlyentersintodecisionswhereresearchanddevelopmentactivitiesshouldbe
directedandwhoshouldbeinvolvedinresearchanddevelopmentactivity.
Answer: C
Diff:3
71) WhichoneofthefollowingdoesNOTappeartocontributetoeconomicgrowth?
A) innovation
B) knowledge
C) protectionism
D) asystemofwell-definedpropertyrights
Answer: C
Diff:2
72) Whatistheeconomicroleofapatent?
Answer: Apatentgrantstheinventortheexclusiverighttomake,use,orsellaninventionfor20
years.Thisgivestheinventorpropertyrightsontheinvention,whichenablesthe
inventortoprofitfromtheinvention.Thenumberofinventionsshouldbegreaterif
peoplecanprofitfrominventiveactivity,sopatentshelpstimulateinvestmentinnew
technologyandeconomicgrowth.
Diff:2
73) Howdoesinnovationdifferfrominvention?Whyisinnovationrequiredforeconomicgrowth?
Answer: Innovationinvolvesthetransformationofaninventionintosomethingthatbenefitsthe
economybyloweringproductioncostsorbyprovidinganewgoodorservice.Itis
innovation,then,thatstimulateseconomicgrowth.
Diff:2
74) AccordingtoRomerandothernewgrowththeorists,whatcouldpoorcountriesdotostimulate
greatereconomicgrowth?
Answer: Accordingtonewgrowththeory,poorcountriescanstimulategreatereconomicgrowth
byinvestingmoreinhumancapitalaswellasphysicalcapital,bymovingtowardfreer
trade,andbyencouraginginnovation.
Diff:3
75) Explainhowthenewgrowththeorytreatstechnologydifferentlyfromthewayeconomists
usedtotreattechnology.
Answer: Technologyusedtobetreatedasanoutsidefactorofgrowththatcouldnotbeexplained
itself.Thenewgrowththeoryincludestechnologyasanotherfactorofproductionand
arguesthatthegreatertherewardtotechnologythegreaterwillbetechnological
advance.Firmsengageinresearchanddevelopmentactivitywiththeexpectationsof
increasingtheirprofitability.
Diff:2
76) WouldanewgrowththeoristexpecteconomicgrowthtobeveryrapidinoneoftheCommunist
nationsbeforethefallofCommunism?Whyorwhynot?
Answer: No.Thesecentrallyplannedeconomiesdidnotprovideforprivatepropertyrights,which
reducestheincentivespeoplehavetousetheassetsefficiently.Further,thelackof
propertyrightsreducestheincentivetoengageinresearchactivity.Finally,these
economiestendedtobemoreclosed,andthereisanegativerelationshipbetween
protectionismandeconomicgrowth.Freetradeencouragesamorerapidspreadofnew
technologyandideas.
Diff:3
77) ExplainPaulRomersideasconcerningeconomicgrowth.
Answer: Romerarguesthatknowledgeisafactorofproductionjustascapitalandlaborare.
Economiesmustinvestineducationastheydoincapital.Pastinvestmentsincapital
makeitprofitabletoacquiremoreknowledge,implyingthatinvestmentleadstonew
knowledgethatleadstonewinvestment.Therecanbeaninvestment -knowledgecycle
thatcontinuallystimulateseconomicgrowth.AccordingtoRomer,ideasdriveeconomic
growth.
Diff:3
9.5Immigration,PropertyRights,andGrowth
1) Ofthefollowingviewsontheeffectsofimmigrationonthereceivingnationseconomicgrowth,
whichhaveNOTbeensuggestedbyeconomistsMichaelKremerandJulianSimon?
A) Technologicalprogressisdrivenbypopulationgrowth.
B) Immigrantsraisethestandardoflivingofanationsnativepopulation.
C) Immigrationincreasesanationslaborpoolandencouragesingenuity.
D) Immigrationcoststhelocalpopulationjobsandgreatlylowerstheirincomes.
Answer: D
Diff:2
Topic: 9.5Immigration,PropertyRights,andGrowth
2) WhichofthefollowingwillNOTleadtoincreasedcapitalinvestmentwithinacountry?
A) Increaseduncertaintyaboutprivatepropertyrights
B) Increasedcertaintyaboutprivatepropertyrights
C) Thedecreasedpossibilityofnationalizationofprivateproperty
D) Increasedcertaintyaboutbeingabletoreapthegainsfrominvesting
Answer: A
Diff:1
3) Themorecertainprivatepropertyrightsare,
A) thelesspeopleneedtoinvestineducationorhumancapitaldevelopment.
B) thelessentrepreneurshiptherewillbe.
C) themorecapitalaccumulationtherewillbe.
D) themoreaneconomymustgrowtomaintainacertainlivingstandard.
Answer: C
Diff:2
4) Asystemofprivatepropertyrights
A) enhanceseconomicgrowthbycreatingincentivestotheFedtomaintainstableprices.
B) enhanceseconomicgrowthbyincreasingtheprobabilitythatapersoncangainfrom
makinginvestmentstoday.
C) retardseconomicgrowthbyservingtheinterestsofthewealthyonly.
D) retardseconomicgrowthbylimitingtheoptionsofpeoplewhoownnothing.
Answer: B
Diff:2
5) Entrepreneurshipfunctionsbetterwhen
A) thegovernmentperformstheentrepreneurialfunction.
B) thereisawell-definedpropertyrightssystem.
C) savingisrelativelylow.
D) mostofthepopulationhaslowlevelsofeducation.
Answer: B
Diff:2
6) Theimmediateeffectofincreasedpopulationgrowth,withrealGDPgrowthunchanged,isto
A) reduceeconomicgrowthbyreducingpercapitarealGDP.
B) increaseeconomicgrowthbystimulatingmoresaving.
C) increaseeconomicgrowthbyboostingthecapitalstock.
D) leaveeconomicgrowthunchanged.
Answer: A
Diff:2
7) AccordingtothelateJulianSimon,
A) legalimmigrantshaveafavorableimpactonthewelfareofAmericancitizens,butillegal
immigrantshaveanegativeimpact.However,thepositiveeffectofthelegalimmigrantsis
strongerthanthenegativeimpactoftheillegalimmigrants.
B) legalimmigrantshaveafavorableimpactonthewelfareofAmericancitizens,butillegal
immigrantshaveanegativeimpactthatalmostexactlyoffsetsthepositiveeffectofthe
legalimmigrants.
C) legalandillegalimmigrantshaveapositiveeffectonthewelfareofAmericancitizens.
D) legalandillegalimmigrantshaveanegativeeffectonthewelfareofAmericancitizens.
Answer: C
Diff:2
8) Asystemofprivatepropertyrights
A) encourageseconomicgrowthbycreatingincentivestoinvestincapitalandtobe
innovative.
B) discourageseconomicgrowthbydiscouragingthedevelopmentofnewideasandwaysof
doingthings.
C) reducestheefficiencyofgovernment,whichreducesthegrowthrateoftheeconomyover
time.
D) encouragesinvestmentbutdiscouragesentrepreneurialactivity,sotheeffectoneconomic
growthisuncertain.
Answer: A
Diff:2
9) Entrepreneurshipfunctionsbetterwhen
A) patentlawsarenotstronglyenforcedsincetheymakeimitationdifficult.
B) governmentprovidestechnicalsupporttoentrepreneurs.
C) asystemofprivatepropertyrightspermitsentrepreneurstocapturetherewardsfrom
theirentrepreneurialactivities.
D) universitiesprovideresearchthatiscloselyinterrelatedwiththeentrepreneurialactivities.
Answer: C
Diff:3
10) Theprotectionofpropertyrightsleadsto
A) morepoverty.
C) morecapitalformation.
B) moreilliteracy.
D) unemployment.
Answer: C
Diff:1
11) Entrepreneursoftenundertaketheinnovationsthatarenecessarytobringinventionstothe
marketplace.Accordingly,whatempiricalpatternshouldbeexpectedinaninternational
comparison?
A) Countrieswithhigherratesofentrepreneurshiphavehigherratesofpoverty.
B) Countrieswithhigherratesofentrepreneurshiphavelowerratesofimmigration.
C) Countrieswithhigherratesofentrepreneurshiphavelowerratesofeconomicgrowth.
D) Countriesthatprotectthepropertyrightsofentrepreneurswillhavehigherratesof
economicgrowth.
Answer: D
Diff:2
12) Intheabsenceofwell-definedpropertyrights,wewouldlikelyfind
A) peoplewithmoreincentivestotakerisks.
B) peoplewithlessincentivestotakerisks.
C) highereconomicgrowthrates.
D) increasesininvestmentactivity.
Answer: B
Diff:2
13) Well-definedpropertyrightsgiveentrepreneurstheincentiveto
A) engageinriskybusinessendeavorsinordertoaccumulatefuturewealth.
B) usetheeminentdomainlawstoseizepropertyforpublicuse.
C) lobbyCongressinordertoincreaseenvironmentalregulations.
D) evadetaxes.
Answer: A
Diff:2
14) Wouldoneexpecteconomicgrowthtobehigherorlowerinacountrythathadpoorlydefined
propertyrights?Why?
Answer: Lower,becauseentrepreneursaremorelikelytoengageinentrepreneurialactivitywhen
propertyrightsallowthemtocapturetherewardsfromtheseactivities.Further,
innovationismorelikelywhentherearepropertyrightsonideas.
Diff:2
15) Whymightpopulationgrowthandimmigrationstimulateeconomicgrowth?
Answer: Fasterpopulationgrowthmeansthepoolofinnovatorsislarger,andinnovationleadsto
moregrowth.Further,immigrantstendtobeentrepreneurialandhelpstimulate
innovationandgrowth.
Diff:2
9.6EconomicDevelopment
1) EconomistshavefoundthatasanationspercapitarealGrossDomesticProduct(GDP)
increases,
A) therateofpopulationgrowthdeclines.
B) therateofpopulationgrowthexperiencesdramaticincreases.
C) thereisnoeffectonpopulationgrowth.
D) therateofpopulationgrowthincreasesatthesamerateaseconomicgrowth.
Answer: A
Diff:2
Topic: 9.6EconomicDevelopment
2) AllofthefollowingarelistedinthetextasbeingkeystoeconomicdevelopmentEXCEPT
A) asystemofpropertyrights.
B) aneducatedpopulation.
C) anopeneconomy.
D) ahigherlevelofprotectionism.
Answer: D
Diff:1
3) WhatdidMalthussayaboutpopulationgrowth?
A) Populationgrowthisthekeytoanationseconomicgrowth.
B) Populationgrowthisnotaproblemiffoodproductionkeepsup,andMalthuspredicted
thatitwould.
C) Populationgrowthisahugeproblemifhousingandmedicalcaredontalsoincrease.
D) Thepopulationwouldgrowfasterthanfoodsupplies,whichwouldbearecipefor
disaster.
Answer: D
Diff:2
4) HaveMalthuspredictionsaboutpopulationgrowthcometrue?
A) No,becausemodernbirthcontrolhaslimitedpopulationgrowthinallnations.
B) Yes,asevidencedbythefamineandfoodshortagesaffectingeverynationtoday.
C) No,becausetheworldsfoodsupplyhasgrownmuchmorerapidlythanMalthusforesaw.
D) Yes.Theworldsfoodsupply,measuredbycaloriesperperson,continuestofall.
Answer: C
Diff:2
5) Thethreestagesofeconomicdevelopmentinclude
A) theagriculturestage,themanufacturingstage,andtheservicesectorstage.
B) thecomputerizedstage,theagriculturestage,andthemanufacturingstage.
C) thefeudalstage,theagriculturestage,andthetotalitarianstage.
D) theagriculturestage,themanufacturingstage,andthesocialiststage.
Answer: A
Diff:2
6) Whatoccursinthesecondstageofeconomicdevelopment?
A) Mostofthelaborforceworksinagriculture.
B) Theservicesectorcomestotheforefront.
C) Themanufacturingsectordeclinesinimportance.
D) Manufacturinggainsinimportanceandemploysalargeportionofthelaborforce.
Answer: D
Diff:1
7) Economistshavedeterminedthattherearefourfactorsthatseemtostronglyaffectanations
rateofeconomicdevelopment.WhichisNOToneofthesefourfactors?
A) Establishingasystemofpropertyrights
B) Developinganeducatedpopulation
C) Supportingcurrentindustriesandthejobstheyprovideinsteadofadoptingnew
technologythatbringsdisruptivesocialchanges
D) Limitingtheextenttowhichthegovernmentimposestradebarriers
Answer: C
Diff:2
8) Thestudyoffactorsthatcontributetotheeconomicgrowthofacountryisknownas
A) naturalresourceeconomics.
B) entrepreneurialeconomics.
C) developmenteconomics.
D) savingseconomics.
Answer: C
Diff:2
9) Thestudyoffactorsthatcontributetotheeconomicdevelopmentofacountryis
A) populationgrowtheconomics.
B) developmenteconomics.
C) thetheoryoftechnologicaladvancements.
D) thenewtechnologytheory.
Answer: B
Diff:1
10) Asmoreeconomicdevelopmentoccurs,
A) technologicalprogressslows.
C) thepopulationgrowthratedecreases.
B) capitalaccumulationdecreases.
D) thepopulationgrowthrateincreases.
Answer: C
Diff:1
11) WhichofthefollowingisNOTastageofdevelopmentthatmodernrichnationshavegone
through?
A) Servicestage
B) Agriculturalstage
C) Manufacturingstage
D) Inflationstage
Answer: D
Diff:1
12) Toraiseeconomicdevelopment,developingcountriesshould
A) focusontheircomparativeadvantage.
B) focusonproducingservicegoods.
C) producegoodsthatarecapitalintensiveandnotlaborintensive.
D) notfocusoneconomicgrowth.
Answer: A
Diff:1
13) ToencourageeconomicdevelopmentacountryshoulddoallofthefollowingEXCEPT
A) investinhumancapital.
B) limittheamountofimportsallowedintothecountry.
C) allowcreativedestructiontorunitscourse.
D) establishasystemofpropertyrights.
Answer: B
Diff:1
14) Creativedestructionrefersto
A) thedestructionofthegovernmentsystemwhichlimitseconomicgrowth.
B) themovementfromanagriculturalsocietytoaserviceeconomy.
C) themechanismforestablishingpropertyrights.
D) thecreationofnewjobsandeconomicgrowthafterdestroyingoldjobs.
Answer: D
Diff:1
15) Tradebetweencountriesshouldbe
A) encouragedfordevelopedcountriesbutnotfordevelopingcountries.
B) encouragedforbothdevelopedanddevelopingcountries.
C) discouragedfordevelopedcountriesbutencouragedfordevelopingcountries.
D) discouragedforbothdevelopedanddevelopingcountries.
Answer: B
Diff:1
16) WhichofthefollowingfactorswillNOTincreaseeconomicdevelopment?
A) Increasingtheamountofeducationinthepopulation.
B) Establishingasystemofpropertyrights.
C) Creativedestructionwhereoldjobs,companiesandindustriesaredestroyed.
D) Increasingtheamountofprotectionism.
Answer: D
Diff:1
17) Thetermcreativedestructionrefersto
A) theprocessbywhichimmigrantsbuildanewlifeintheircountryofdestination.
B) theprocessbywhichnewjobsarecreatedandoldonesdestroyed.
C) theeffectsofpopulationgrowthontheenvironment.
Answer: B
Diff:3
18) Aneconomythatisanactiveparticipantininternationaltradeis
A) anegalitarianeconomy.
B) aclosedeconomy.
C) aneconomywhosecurrencyvaluefluctuateswidely.
D) anopeneconomy.
Answer: D
Diff:1
19) Researchindicatesthat
A) countrieswithlowertariffratesexperiencehigherratesofeconomicgrowth.
B) countrieswithlowertariffratesexperiencelowerratesofeconomicgrowth.
C) thereisnorelationshipbetweentheleveloftariffratesandeconomicgrowth.
D) countrieswithhighertariffratesexperiencehigherratesofeconomicgrowth.
Answer: A
Diff:1
20) Theconceptofanopeneconomymeansthat
A) importsshouldbelimitedwhileexportsshouldbeexpanded.
B) anationsbordersareopentoflowsofimportsandexports.
C) exportsshouldbecontrolledbutimportsshouldbeallowedinwithoutrestriction.
D) importsandexportsshouldberestricted.
Answer: B
Diff:1
21) Whichoneofthefollowingisakeytoeconomicdevelopment?
A) theremovalofpropertyrights
B) thepreservationofestablishedmeansofproduction
C) aneducatedpopulation
D) ahighlevelofprotectionagainstimportedproducts
Answer: C
Diff:1
22) Thestudyofdevelopmenteconomicsistounderstand
A) whysomeproductsaresuccessfulinthemarketassoonastheyaredeveloped,whereas
othersdonotcatchonforyears.
B) whymostofthepatentsonrecordhavebeengiventomenratherthantowomen.
C) whysomecountriesarerichandothersarepoor.
D) thepersonalityfactorsthatleadpeopletobecomeentrepreneurs.
Answer: C
Diff:2
A) Asacountrybecomesmoreprosperous,itexperiencesahigherbirthrate.
B) Overthepastcentury,thesupplyoffoodhasgrownmorequicklythanhasthedemand
forfood.
C) Overthepastcentury,therealpriceoffoodhasrisen,reflectingthepressureofpopulation
growthonfoodsupplies.
D) Overthenexthalf-century,itisexpectedthatpopulationgrowthinindustriallyadvanced
nationswilloutpacepopulationgrowthindevelopingcountries.
Answer: B
Diff:2
24) WhichoneofthefollowingdescribesthecurrentstateofeconomicdevelopmentintheUnited
States?
A) TheUnitedStatesisrunningoutofnaturalresources,andthereforeitwillsoonexperience
adropintherateofeconomicgrowth.
B) Employmentisdeclininginthemanufacturingsectorandgrowingintheservicesector.
C) Employmentisdeclininginthemanufacturingsectorandgrowingintheagricultural
sector.
D) Thelackofwell-definedpropertyrightsintheUnitedStatesmeansthatentrepreneursdo
notexpecttocapturethebenefitsofinnovationstheybringtothemarketplace.
Answer: B
Diff:2
A) Investmentsinsecondaryeducationproducegainsintheformofeconomicgrowth.
B) Secondaryeducationdoesnotboosteconomicgrowthindevelopingnations,becauseso
muchoftheworkforceremainsinagriculture.
C) Newgrowththeorysuggeststhatthereisnoconnectionbetweenthelevelofeducationin
acountryanditsrateofeconomicgrowth.
D) Newgrowththeorysuggeststhateducationbenefitsonlythosepeoplewhoreceiveit,and
notthepopulationasawhole.
Answer: A
Diff:2
A) Foreverycountrythatexperiencesanincreaseinitsgrowthrate,theremustbeanother
experiencingadecline.
B) Smallchangesintheannualgrowthrateamounttoameasurabledifferenceinthe
long-termgrowthtrendofacountry.
C) Restrictingimportswillenhanceacountryseconomicgrowth.
D) Awell-definedsystemofpropertyrightsbenefitsonlythewealthy,andconsequentlyit
producesincomeinequalitythatwillstifleeconomicgrowth.
Answer: B
Diff:2
27) Whatcanbeexpectedtohappeninacountrythatenactstradebarriers?
A) Therateofimmigrationwillincrease.
B) Therateoftechnologicalinnovationwillincrease.
C) Therateofeconomicgrowthwilldecrease.
D) Therateofpopulationgrowthwilldecrease.
Answer: C
Diff:2
28) WhichofthefollowingisNOTanobstacletoeconomicdevelopment?
A) lackofentrepreneurship
B) politicalinstability
C) corruption
D) acentralbank
Answer: D
Diff:1
29) Whichofthefollowingisanobstacletoeconomicdevelopment?
A) poorlydefinedpropertyrights
B) foreigndirectinvestment
C) immigration
D) opennesstotrade
Answer: A
Diff:1
30) Agoodestimateoftheworldspopulationthatlivesonlessthananinflation -adjusted$1.5per

dayis
A) 20percent.
B) 40percent.
C) 50percent.
D) 80percent.
Answer: A
Diff:2
31) ThomasRobertMalthusbelieved
A) thatfoodsupplieswouldalwaysbemorethansufficienttofeedtheworldspopulation.
B) thattheworldspopulationwouldeventuallyoutstripfoodsupplies.
C) thatpopulationgrowthwasgoodfortheworld.
D) thatpopulationgrowthwouldeventuallyleadtoanincreaseinthequalityoflifefor
everyone.
Answer: B
Diff:1
32) Accordingtomanyeconomists,asnationsbecomewealthier,whathappenstofamilysizes?
A) Theyincrease.
B) Theydecline.
C) Thereisnoeffect.
D) Theyincrease,butlaterinlife.
Answer: B
Diff:2
33) WhenanalyzingstagesofeconomicdevelopmentintheUnitedStates,itappearsthatwehave
enteredthetertiarystage.Thisisastagemarkedbyashifttoward
A) agriculture.
B) manufacturing.
C) services.
D) populationincreases.
Answer: C
Diff:2
34) Whichofthefollowingfactorsareconsideredbyeconomistswhostudyeconomicdevelopment
tobedirectlyrelatedtotherateofeconomicgrowth?
A) plentifulnaturalresources
B) opennesstointernationaltrade.
C) aneducatedpopulation
Answer: D
Diff:2
35) AllofthefollowingarekeystoeconomicdevelopmentEXCEPT
A) aneducatedworkforce.
B) establishmentofasystemofpropertyrights.
C) minimizingcreativedestruction.
D) openeconomies.
Answer: C
Diff:2
36) Whichofthefollowingfactorswouldeconomistsconsiderkeytoeconomicdevelopment?
A) expansionarymonetarypolicy
B) establishingasystemofpropertyrights
C) policiesthatpromoteconsumptionexpendituresbyhouseholds
D) Alloftheabovearecorrect
Answer: B
Diff:2
37) Limitingprotectionismmeans
A) reducingtradebarriers.
C) reducingconsumerfraud.
Answer: A
Diff:1
B) reducingcorruption.
D) reducingpoliticaldishonesty.
38) WhichofthefollowingdodevelopmenteconomistsNOTrecommendtonationsseekingto
increasetheirratesofeconomicgrowth?
A) protectinghomeproducersfrominternationalcompetition
B) lettingcreativedestructionrunitscourse
C) promotingincreasededucation
D) promotingprivatepropertyrights
Answer: A
Diff:2
39) Aneducatedpopulacecontributestoeconomicgrowthbecause
A) schoolsprovidemanyjobsforteachers.
B) educationallowsworkerstodevelopskillsthatincreasetheirproductivecapabilities.
C) educatedpeoplearemorelikelytoliveinpoverty.
D) educatedpeopleunderstandtheimportanceofprotectionism.
Answer: B
Diff:1
40) Institutionsandlaws,suchaspatentprotection,thatfosterinnovationsleadtoeconomicgrowth
becausethey
A) allowthegovernmentcontroloftheinnovations.
B) giveconfidencetoinventorsthattheywillprofitfromtheirinnovation.
C) giveconfidencetoconsumersthattheproductstheybuyaresafe.
D) givebusinessesloanstobuynewmachinery.
Answer: B
Diff:2
41) AccordingtotheUnitedNations,thelargestexpectedgrowthinpopulationforthecoming
decadeswilloccuronwhichcontinent?
A) Europe
B) SouthAmerica
C) NorthAmerica
D) Africa
Answer: D
Diff:2
42) ItcanbearguedthatThomasMalthus AnEssayonthePrincipleofPopulationstatementthat

populationgrowthwillalwaysoutstripfoodproductionhasbeendiscrediteddueto
A) increaseintheworld-widefarmingpopulation.
B) lessworld-wideconsumptionofgrains.
C) improvementintechnologyoffoodproduction.
D) increaseinfoodprocessingfacilities.
Answer: C
Diff:2
43) Ofthefollowing,whichbestexplainswhyThomasMalthuswasincorrectinhispredictionthat
populationwouldoutstripfoodsupplies?
A) Malthusfailedtorealizethatthathumanpopulationwouldincreaseconsiderably.
B) Malthusfailedtorecognizethateconomicgrowthisaccompaniedbysmallerfamilysizes.
C) Malthusincorrectlybelievedthateconomicgrowthwouldreducebirthrates.
D) Malthusincorrectlypredictedthatmodernizationwouldincreasethedemandforchildren.
Answer: B
Diff:2
Chapter10
RealGDPandthePriceLevelintheLongRun
10.1OutputGrowthandtheLong-RunAggregateSupplyCurve
1) Theaggregatesupplycurve
A) showswhateachproduceriswillingandabletoproduceateachincomelevel.
B) relatesplannedaggregateproductiontopricelevel.
C) becomesverticalifthereisexcessproductioncapacitywithintheeconomy.
D) showsanegativerelationshipbetweenthepricelevelandrealGrossDomesticProduct
(GDP).
Answer: B
Diff:1
Topic: 10.1OutputGrowthandtheLong-RunAggregateSupplyCurve
2) Thetotalofallplannedproductionfortheentireeconomyisknownas
A) aggregateexpenditures.
B) aggregatedemand.
C) aggregatesupply.
D) aggregateinflation.
Answer: C
Diff:1
3) Thelongrunaggregatesupplycurve(LRAS)alsorepresents
A) thefull-informationlevelofoutput.
B) thefull-employmentlevelofoutput.
C) thefull-adjustmentlevelofoutput.
D) alloftheabove.
Answer: D
Diff:1
4) AllofthefollowingwouldshifttheLRAScurvetotherightEXCEPT
A) anincreaseinthesizeofthelaborforce.
B) anetinflowofhumancapital.
C) anincreaseintheoverallpricelevel.
D) animprovementintechnology.
Answer: C
Diff:1
Chapter10RealGDPandthePriceLevelintheLongRun265
5) Long-runaggregatesupplyreflects
A) totalproductionintheeconomyatfullemployment.
B) totalspendingintheeconomyatfullemployment.
C) bothproductionandspendingintheeconomy.
D) onlyforeignproductionfromU.S.subsidiaries.
Answer: A
Diff:1
6) Thelong-runaggregatesupplycurveis
A) horizontalatthefull-employmentlevelofrealGrossDomesticProduct(GDP).
B) verticalatthefull-employmentlevelofrealGrossDomesticProduct(GDP).
C) slopingupwardduetotheeffectsofpricelevelchangesonrealGrossDomesticProduct
(GDP).
D) thesameastheshortrunaggregatesupply(SRAS)curve.
Answer: B
Diff:1
7) Thelong-runaggregatesupplycurve
A) shiftstotherightwhenthereisataxincrease.
B) indicatesthelevelofoutput(GDP)thatoccurswhenresourcesarefullyemployed.
C) indicatesthatanincreaseintheoverallpricelevelwillcauseanincreaseinproduction.
D) shiftstotherightwhentheFederalReserveincreasesthemoneysupply.
Answer: B
Diff:1
8) Thelong-runaggregatesupplycurveisverticalbecause
A) theeconomyhasyettouseallitsavailableresources.
B) theeconomyhasreacheditspotentialrealGrossDomesticProduct(GDP)andisatfull
employment.
C) theeconomyhascontracted.
D) theeconomyhaslargenumbersofunemployed.
Answer: B
Diff:2
9) Thelong-runaggregatesupplycurve
A) showsthatathigherprices,potentialrealGrossDomesticProduct(GDP)increases.
B) slopesupandtotheright.
C) showsthatlong-runaggregatesupplyequalspotentialrealGrossDomesticProduct
(GDP).
D) isverysensitivetochangesinthepricelevel.
Answer: C
Diff:1
10) Whatismeasuredontheverticalaxisoftheaggregatedemand/aggregatesupplymodel?
A) RealGrossDomesticProduct(GDP)
B) Nominalincome
C) Thepricelevel
D) Theinterestrate
Answer: C
Diff:1
11) WhichofthefollowingstatementsisTRUE?
A) Thelong-runaggregatesupplycurveisupwardsloping.
B) Thelong-runaggregatedemandcurveisupwardsloping.
C) Theshort-runaggregatesupplycurveisvertical.
D) Thelong-runaggregatesupplycurveisvertical.
Answer: D
Diff:1
12) Long-runaggregatesupplyis
A) thesumofplannedexpendituresbyconsumersandfirms.
B) thelevelofoutputthatoccurswhentheeconomyisoperatingontheproduction
possibilitiescurve.
C) downwardsloping.
D) upwardsloping.
Answer: B
Diff:1
A) upwardsloping.
C) vertical.
B) downwardsloping.
D) horizontal.
Answer: C
Diff:1
14) Thelong-runaggregatesupplycurveofaneconomycorrespondsto
A) apointinsidetheproductionpossibilitiescurve.
B) apointoutsidetheproductionpossibilitiescurve.
C) apointontheproductionpossibilitiescurve.
D) noneoftheabove:thereisnorelationshipbetweenthelong -runaggregatesupplycurve
andtheproductionpossibilitiescurve.
Answer: C
Diff:2
15) Ifanationsproductionpossibilitiescurveshiftsoutward,weshouldexpectitslong -run

aggregatesupplycurveto
A) haveanupwardmovementalongthecurve.
B) haveadownwardmovementalongthecurve.
C) havearightwardshift.
D) havealeftwardshift.
Answer: C
Diff:2
16) Thefull-employmentandfull-adjustmentlevelofrealGrossDomesticProduct(GDP)inthe
economyisrepresentedby
A) theLRAScurve.
B) thehorizontallineatthepricelevel.
C) theADcurve.
D) thedistancebetweentheLRAScurveandtheADcurve.
Answer: A
Diff:1
17) Ahumanresourcesuchasingenuitycanbethoughtofas
A) apositiveforimports.
B) partofacountrysendowment.
C) partofgovernmentspendingprograms.
D) acausalfactorforaggregatesupplyshiftingleft.
Answer: B
Diff:1
18) WhichofthefollowingwillNOTcausealeftwardshiftintheLong-RunAggregateSupply
curve?
A) anetoutflowofhumancapital
B) areductionintheamountofoil
C) areductionintheamountofcapital
D) areductioningovernmentspending
Answer: D
Diff:2
19) Whichofthefollowingwillcausethelong-runaggregatesupplycurvetoshift?
I. Changesintechnology.
II. Changesingovernmentspending.
III. Changesinthemoneysupply.
A) Ionly
B) IIonly
C) I,II,andIII
D) onlyIandII
Answer: A
Diff:1
20) Asthecapitalstockgrowsandtechnologyimproves,wewouldexpectthelong -runaggregate

supplycurveto
A) shiftright.
B) shiftleft.
C) remainthesame.
D) firstshiftright,thenshiftleft.
Answer: A
Diff:2
21) Thelong-runaggregatesupplywillincreasewhen
A) laborsupplydecreases.
B) internationaltradebarriersareremoved.
C) thepricelevelincreases.
D) taxratesincrease.
Answer: B
Diff:2
22) Acountryslong-runaggregatesupplycurvewillshifttotheleftwhenthereis(are)
A) fewerregulatoryimpedimentstobusiness.
B) adiscoveryofnewoilreservesinthatcountry.
C) areductioninthelaborforce.
D) areductioninthemoneysupply.
Answer: C
Diff:2
23) Overtimeinagrowingeconomy,thelongrunaggregatesupplycurvewill
A) movesoastomatchtheshortrunaggregatesupply(SRAS)curve.
B) shiftoutwardtotheright.
C) shiftinwardtotheleft.
D) becomeincreasinglysteep.
Answer: B
Diff:1
24) Aggregatesupplyis
A) thesummationofallproductsupplycurves.
B) thehorizontalsummationofallsupplycurvesforservices.
C) thestockofallgoodsintheeconomy.
D) thesumofallplannedproductionintheeconomy.
Answer: D
Diff:1
25) Economicgrowthcanbedepictedas
A) ashiftoftheLRAScurvetotheleft.
B) aninwardshiftoftheproductionpossibilitiescurve.
C) ashiftoftheLRAScurvetotheright.
D) amovementalongtheproductionpossibilitiescurve.
Answer: C
Diff:1
26) AnassumptionontheLRAScurveis
A) technologyremainsunchanged.
B) anincreaseintheaveragepriceleveloccurs.
C) theeconomyisoperatingtotherightoftheproductionpossibilitiescurve.
D) laborproductivityisincreasing.
Answer: A
Diff:1
27) Thetotalofallplannedproductionfortheeconomyis
A) aggregatesupply.
B) aggregatedemand.
C) endowments.
D) real-balanceeffect.
Answer: A
Diff:1
28) Thetotalofallplannedproductionfortheeconomyis
A) determinedonlybyindividualsandfirms.
B) determinedonlybythegovernment.
C) aggregatedemand.
D) aggregatesupply.
Answer: D
Diff:1
29) Whentalkingaboutaggregatesupply,itisnecessaryto
A) focusontheshortrun.
B) focusonthelongrun.
C) distinguishbetweenthelong-runaggregatesupplycurveandtheshort-runaggregate
supplycurve.
D) distinguishbetweenthelong-runaggregatesupplycurveandthelongrunaggregate
demandcurvewhenalladjustmentstopricelevelchangeshavebeenmade.
Answer: C
Diff:1
30) Therealoutputoftheeconomyunderconditionsoffullemployment
A) islong-runaggregatesupply.
B) islong-runaggregatedemand.
C) happensonlywhenthereisnoinflation.
D) isdeterminedbythereal-balanceeffect.
Answer: A
Diff:1
31) Thefull-employmentlevelofGDPis
A) endowments.
C) long-runaggregatesupply.
B) long-runaggregatedemand.
D) economicgrowth.
Answer: C
Diff:1
32) Thepositionofthelong-runaggregatesupplycurveisdeterminedby
A) thelong-runaggregatedemandcurve.
B) theproductionpossibilitiescurve.
C) theopeneconomyeffect.
D) theinterestrateeffect.
Answer: B
Diff:1
33) Thelong-runaggregatesupplywhenresourcesarefullyemployed
A) hasnorelationshipwiththeproductionpossibilitiescurve.
B) willalwaysbeassociatedwithapointoutsidetheproductionpossibilitiescurve.
C) willalwaysbeassociatedwithapointontheproductionpossibilitiescurve.
D) isdeterminedbydemand.
Answer: C
Diff:1
A) horizontal.
C) upwardsloping.
B) vertical.
D) downwardsloping.
Answer: B
Diff:1
35) Thelongrunaggregatesupplycurveisverticalbecause
A) theproductionpossibilitiescurveisvertical.
B) theaggregatedemandcurveisdownwardsloping.
C) technologyincreasesataconstantrate.
D) achangeinthelevelofpriceswillhavenoeffectonrealoutputinthelong-run.
Answer: D
Diff:1
36) Thelong-runaggregatesupplycurveoccursatthelevelofrealGDPconsistentwith
A) individualstastesandpreferences.
C) noinflation.
D) lowlevelsofinflation.
Answer: B
Diff:1
37) WhichofthefollowingdoesNOTaffectthelong-runaggregatesupplycurve?
A) Technology
B) Productionpossibilitiescurve
C) Endowmentsofresources
D) Pricelevel
Answer: D
Diff:2
38) Anincreaseinthelevelofpricesofgoodsandserviceswilldowhattothelong-runaggregate
supplycurve?
A) Shiftittotheright
B) Shiftittotheleft
C) Notshiftthecurveatall
D) Dependsuponthelong-runaggregatedemandcurve
Answer: C
Diff:1
39) Thelong-runaggregatesupplycurveisdeterminedbyallofthefollowingEXCEPT
A) aggregatedemand.
B) endowments.
C) technology.
D) theamountofresourcesthatexistintheeconomy.
Answer: A
Diff:1
40) Thelong-runaggregatesupplycurvecanbethoughtofasthe
A) levelofoutputthatthenationiscurrentlyproducing.
B) full-employmentlevelofrealGDP.
C) levelofrealGDPassociatedwithaconstantpricelevel.
D) levelofoutputforwhichrealGDPequalsnominalGDP.
Answer: B
Diff:2
41) Thelong-runaggregatesupplycurvewillshifttotheleftwhen
A) populationdecreases.
B) thepricelevelincreases.
C) technologyimproves.
D) newsourcesofoilarediscovered.
Answer: A
Diff:2
42) Thelong-runaggregatesupplycurvewillshiftoutwardtotherightwhen
A) thereiseconomicgrowth.
B) thepriceleveldecreases.
C) thereal-balanceeffectincreases.
D) theamountoflabordecreases.
Answer: A
Diff:1
43) Thenaturalrateofunemploymentwillhelpdetermine
A) theopeneconomyeffect.
B) thepositionofthelong-runaggregatesupplycurve.
C) thelevelofeconomicgrowthintheeconomy.
D) lowlevelsofinflation.
Answer: B
Diff:1
44) Theabovefigureshowsa
A) short-runaggregatedemandcurve.
C) long-runaggregatedemandcurve.
B) short-runaggregatesupplycurve.
D) long-runaggregatesupplycurve.
Answer: D
Diff:1
45) Thecurveintheabovefigurewillshifttotherightwhen
A) thepricelevelfalls.
B) technologyincreases.
C) populationfalls.
D) theproportionofthepopulationthatiselderlyincreases.
Answer: B
Diff:2
46) WhichofthefollowingwillNOTleadtoarightwardshiftofthelong-runaggregatesupply
curve?
A) Increaseinlaborproductivity
B) Increaseinaggregatedemand
C) Increaseincapital
D) Increaseinlabor
Answer: B
Diff:1
47) Whichofthefollowingwouldcausethelong-runaggregatesupplycurvetoshifttotheright?
A) Anincreaseinwages
B) Anincreaseindemand
C) Anincreaseinproductivity
D) Anincreaseintaxesonprofits
Answer: C
Diff:1
48) Ifoureconomyisgrowingataconstantrateof5percentperyear,thenoveraperiodof10years
wewouldexpecttoseewhichofthefollowing?
A) Nice,steadyflat-linegrowth
B) Anupwardslopinggrowthpath
C) Adownwardslopinggrowthpath
D) Itisimpossibletosaywhatkindofgrowthpathwewouldsee.
Answer: B
Diff:1
49) Economicgrowthcanbethoughtofas
A) anincreaseinthepricelevel.
B) adecreaseinthepricelevel.
C) anincreaseinlong-runaggregatesupply.
D) anincreaseinaggregatedemand.
Answer: C
Diff:1
50) RealGDPwillincreaseoverthelongrunif
A) pricescontinuallygoup.
B) thelong-runaggregatesupplycurveshiftscontinuallytotheright.
C) thelong-runaggregatesupplycurveshiftscontinuallytotheleft.
D) thelong-runaggregatedemandcurveshiftscontinuallytotheleft.
Answer: B
Diff:1
51) Refertotheabovefigures.Whichpanel(s)representeconomicgrowth?
A) PanelAonly.
B) PanelsAandConly.
C) PanelDonly.
D) PanelsBandDonly.
Answer: B
Diff:1
52) Refertotheabovefigures.Whichpanel(s)representtheeffectofanincreaseinthepricelevel?
A) PanelAonly.
B) PanelsAandConly.
C) PanelDonly.
D) Noneofthepanels.
Answer: D
Diff:1
53) Refertotheabovefigures.Whichpanel(s)representtheeffectofadecreaseinlabor
productivity?
A) PanelAonly.
B) PanelsAandConly.
C) PanelDonly.
D) PanelsBandDonly.
Answer: D
Diff:2
54) Theaggregatesupplycurvecannottellus
A) anythingaboutthequantitydemandedofallcommoditiesandthepricelevel.
B) whattheeffectofchangesininterestrateswillbeonrealGDP.
C) howthetotaldollarvaluesofspendingwillultimatelybedividedbetweenoutputand
prices.
D) howchangesinthepricelevelaffectquantitydemandedofallcommodities.
Answer: C
Diff:2
55) Theaggregatesupplycurveshows
A) thetotalofallplannedproductionforaneconomy.
B) thevariousquantitiesofgoodsconsumerswillpurchase.
C) thatrealGDPcanonlyincreasewhenthepricelevelincreases.
D) whataneconomycanproduceifresourcepricesareconstant.
Answer: A
Diff:2
56) Aggregatesupply
A) isthetotalamountofrawmaterialsavailableinaneconomy.
B) istheoverallwealthwithinaneconomy.
C) isthetotalamountofmoneycirculatinginaneconomy.
D) isthetotalofallplannedproductioninaneconomy.
Answer: D
Diff:1
57) Wedrawthelong-runaggregatesupplycurveasaverticallinetoreflectthefactthat
A) theproductivecapacityoftheeconomyneverchangesafterfulladjustmenthasoccurred.
B) changesinthepriceleveldonotaltertheleveloflong-runrealGDPafterfulladjustment
hasoccurred.
C) technologyandresourceendowmentsdonotaffectlong-runrealGDPafterfull
adjustmenthasoccurred.
D) anaccuratedepictionoftheproductionpossibilitiescurveisverticalafterfulladjustment
hasoccurred.
Answer: B
Diff:3
58) ThelevelofrealGDPidentifiedbythelong-runaggregatesupplycurveis
A) thefull-employmentlevelofrealGDP.
B) thelevelofGDPatwhicheachbusinessfirmisexperiencinggrowthinsales.
C) thelevelofGDPatwhicheachindustryisexperiencinggrowthinsales.
D) thelevelofGDPatwhichnooneisbelowthepovertyline.
Answer: A
Diff:2
59) Whatismeasuredontheverticalaxiswhenwedrawagraphoflong -runaggregatesupply?

A) productionofcapitalgoods
B) outputofconsumergoods
C) thepricelevel
D) realGDP
Answer: C
Diff:1
60) Thevaluesontheaxesofthelong-runaggregatesupplydiagramare
A) realGDPperyearandthepricelevel.
B) nominalGDPandthepricelevel.
C) realGDPandinterestrates.
D) realGDPandnominalGDP.
Answer: A
Diff:1
61) Whentheproductionpossibilitiescurveshiftsoutward,
A) thelong-runaggregatesupplycurveshiftstotheleft.
B) thelong-runaggregatesupplycurveisunchanged.
C) thepricelevelrisesinthelongrun.
D) thelong-runaggregatesupplycurveshiftstotheright.
Answer: D
Diff:2
62) Whatismeasuredonthehorizontalaxiswhenwedrawagraphofthelong -runaggregate

supplycurve?
A) productionofcapitalgoods
B) productionofconsumergoods
C) thepricelevel
D) realGDP
Answer: D
Diff:1
63) Whatcausesthelong-runaggregatesupplycurvetoshiftright?
A) economicgrowth
B) inflation
C) unemployment
D) scarcity
Answer: A
Diff:1
64) Thelong-runaggregatesupplycurveshiftsrightatthesametimeas
A) theLaffercurveshiftsupward.
B) theproductionpossibilitiescurveshiftsoutward.
C) theproductionpossibilitiescurveshiftsinward.
D) theinflationrateincreases.
Answer: B
Diff:2
65) Arightwardshiftofthelong-runaggregatesupplycurveiscausedby
A) anincreaseintheminimumwage.
B) anincreaseintheaveragedurationofunemployment.
C) improvementsintechnologyandresourceendowments.
D) anincreaseintheGDPdeflator.
Answer: C
Diff:2
66) Thelong-runaggregatesupplycurveassumesthat
A) theunemploymentrateismorethan9percent.
B) allfactorsofproductionarefullyemployed.
C) onlylaborersarefullyemployed.
D) thereisnogovernmentpurchasingofgoodsandservices.
Answer: B
Diff:1
A) U-shaped.
C) upwardsloping.
B) horizontal.
D) vertical.
Answer: D
Diff:1
68) Long-runaggregatesupplycurvecorrespondsto
A) realGDPwhentheeconomyisabovefullemployment.
B) realGDPwhentheeconomyisatfullemployment.
C) theeconomyoutsideitsproductionpossibilitiescurve.
D) theeconomyinsideitsproductionpossibilitiescurve.
Answer: B
Diff:2
69) Theslopeofthelong-runaggregatesupplycurveis
A) positive.
B) negative.
C) zero.
D) undefined.
Answer: D
Diff:3
70) Whyisthelong-runaggregatesupplycurveaverticalline?
A) AtthatlevelofrealGDP,theunemploymentrateis0percent.
B) AtthatlevelofrealGDP,theinflationrateis0percent.
C) AtthatlevelofrealGDP,theproductioncostsareattheirlowestlevel.
D) AtthatlevelofrealGDP,productioncostshavefullyadjustedtopricechanges.
Answer: D
Diff:2
71) Long-runaggregatesupplyis
A) thepossiblecombinationsofrealGDPandinputsafterfulladjustmentshavebeenmade.
B) theextractionofnaturalresources.
C) therealproductionofgoodsandservicesafterfulladjustmentshavebeenmade.
D) allofthephysicalandhumanresourcesintheeconomy.
Answer: C
Diff:1
72) Long-runaggregatesupplyandacountrysproductionpossibilitycurve(PPC)
A) arecloselyrelated.
B) areinverselyrelated.
C) havenorelationship.
D) areexamplesofmicroeconomicmodels.
Answer: A
Diff:1
73) Along-runaggregatesupplycurvemaygraphicallyberepresentedasa
A) verticalline.
B) horizontalline.
C) anupwardslopingline.
D) adownwardslopingline.
Answer: A
Diff:2
74) Economicgrowthisrepresentedontheaggregatesupplymodelbya
A) shiftinthelong-runaggregatesupplycurvetotheleft.
B) shiftinthelong-runaggregatesupplycurvetotheright.
C) shiftintheshort-runaggregatesupplycurvetotheleft.
D) shiftintheshort-runaggregatesupplycurvetotheright.
Answer: B
Diff:2
75) Economicgrowthcanbeshownby
A) aleftwardshiftintheaggregatesupplycurve.
B) nochangeintheaggregatesupplycurve.
C) arightwardshiftintheaggregatesupplycurve.
D) aleftwardshiftintheproductionpossibilitiescurve.
Answer: C
Diff:1
76) EconomicgrowthisdemonstratedbytheLRASasit
A) shiftstotheright.
B) shiftstotheleft.
C) becomesmorehorizontal.
D) becomesmorevertical.
Answer: A
Diff:2
77) Economicgrowthcausesthe
A) productionpossibilitiescurvetoshiftrightwardandthelong-runaggregatesupplycurve
toshiftrightward.
B) productionpossibilitiescurvetoshiftleftwardandthelong-runaggregatesupplycurveto
shiftrightward.
C) productionpossibilitiescurvetoshiftrightwardandthelong-runaggregatesupplycurve
toshiftleftward.
D) productionpossibilitiescurvetoshiftleftwardandthelong-runaggregatesupplycurveto
shiftleftward.
Answer: A
Diff:2
78) Whatistheshapeofthelong-runaggregatesupplycurve?Why?
Answer: Thelong-runaggregatesupplycurveisverticalbecause,inthelongrun,peoplehavefull
informationaboutallrelevantfactsandmaketheirdecisionsbasedonlyonrelativeprices
andnotontheabsolutepricelevel.
Diff:1
10.2TotalExpendituresandAggregateDemand
1) Whichofthesequestionsdoesaggregatedemandhelpusanswer?
I. Whatdeterminesthetotalamountofouroutputthatindividuals,firms,governmentsand
foreignerswanttobuy?
II. Whatistheeconomyslong-runrealGrossDomesticProduct(GDP)?
III. Whatdeterminestheeconomysequilibriumpricelevelandtherateofinflation?
B) IandII
C) IIandIII
D) IandIII
A) Ionly
Answer: D
Diff:1
Topic: 10.2TotalExpendituresandAggregateDemand
2) Thetotallevelofallplannedexpendituresintheeconomybestdescribes
A) aggregatesupply.
B) aggregatedemand.
C) aggregateexpenditures.
D) bothBandCarecorrect.
Answer: D
Diff:1
3) AllofthefollowingexplainthedownwardslopeoftheaggregatedemandcurveEXCEPT
A) changesinthestockofrealwealthheldbyindividuals.
B) theeffectofchanginginterestratesonthequantitydemandedofinterest -rate-sensitive
goods.
C) theavailabilityofforeignsubstitutegoods.
D) thepresenceofunusedproductioncapacityandunemployment.
Answer: D
Diff:1
4) Otherthingsbeingequal,theeconomysaggregatedemandcurveshowsthat
A) asthepricelevelfalls,totalplannedexpendituresfallaswell.
B) achangeinthegeneralpricelevelcausesthecurvetoshift.
C) achangeinthegeneralpricelevelcausesachangeinthequantityoffinalgoodsand
servicespurchased.
D) realGrossDomesticProduct(GDP)andthepricelevelarenotrelated.
Answer: C
Diff:1
5) Aggregatedemandreflects
A) plannedtotalspendingintheeconomy.
B) plannedtotalproductionintheeconomy.
C) bothspendingandproductionintheeconomy.
D) planneddemandforconsumergoodsonly.
Answer: A
Diff:1
6) Whatismeasuredonthehorizontalaxisoftheaggregatedemand/aggregatesupplymodel?
A) Prices
B) RealGrossDomesticProduct(GDP)
C) Realwealth
D) Nominalincome
Answer: B
Diff:1
7) Thesumofallplannedexpendituresfortheentireeconomyateachpossiblepricelevelis
A) aggregatesupply.
B) effectivedemand.
C) aggregatedemand.
D) actualexpendituresbyconsumers.
Answer: C
Diff:1
8) Theaggregatedemandcurveplots
A) desiredexpendituresagainstproduction.
B) totalexpendituresagainstthelevelofemployment.
C) plannedexpendituresagainstthepricelevel.
D) employmentagainstthepricelevel.
Answer: C
Diff:1
9) Theaggregatedemandcurveisusually
A) vertical.
C) downwardsloping.
B) upwardsloping.
D) horizontal.
Answer: C
Diff:1
10) Thehorizontalaxisforanaggregatedemandcurvemeasures
A) quantitydemandedoftherepresentativegood.
B) realGrossDomesticProduct(GDP).
C) outputofallgoodsandservicesmeasuredasaquantityindex.
Answer: B
Diff:1
11) WhichofthefollowingisNOTareasonfortheslopeoftheaggregatedemandcurve?
A) Thesubstitutioneffect
B) Therealbalanceeffect
C) Theinterestrateeffect
D) Theopen-economyeffect
Answer: A
Diff:1
12) Ateachpricelevel,theaggregatedemandcurveindicates
A) thenominalvalueoftotalproductionofgoodsandservicesdomesticincomethatwillbe
produced.
B) thetotalamountofrealplannedexpenditures.
C) thenominalGrossDomesticProduct(GDP)thatwillbeproduced.
D) thetotalamountofrealGrossDomesticProduct(GDP)thatwillbeproduced.
Answer: B
Diff:1
13) Theaggregatedemandcurveshowsthat,ifotherfactorsareheldconstant,
A) higherpricelevelswillresultinlowertotalplannedspending.
B) higherpricelevelswillresultinhighertotalplannedspending.
C) higherpricelevelswillresultinlowerinterestrates.
D) lowerpricelevelswillresultininflationaryconditions.
Answer: A
Diff:1
14) Accordingtotheinterestrateeffect,anincreaseinthepricelevel,ifotherfactorsareheld
constant,willleadto
A) areductionintotalrealspendingoninterest-rate-sensitivegoods.
B) anincreaseinthestockofrealwealthheldbythepublic.
C) anoutwardshiftoftheaggregatedemandcurve.
D) anincreaseintherealinterestrate.
Answer: A
Diff:1
15) Thereal-balanceeffectimpliesthatwhen
A) thepriceleveldecreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersincreasesandspendingdecreases.
B) thepricelevelincreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersincreasesandspendingincreases.
C) thepricelevelincreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersdecreasesandspendingdecreases.
D) thepriceleveldecreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersdecreasesandspendingdecreases.
Answer: C
Diff:2
16) Thereal-balanceeffectrefersto
A) theeconomysresponsetointerestratechanges.
B) thechangeinthevalueofcashbalancesduetopricelevelchanges.
C) thechangeinnetexports.
D) theeconomysabilitytobalancerecessionandexpansion.
Answer: B
Diff:1
17) Whenpricesincrease,therealinterestrate
A) willincreaseandtotalplannedspendingongoodsandserviceswillincrease.
B) willincreaseandtotalplannedspendingongoodsandserviceswilldecrease.
C) willdecreaseandtotalplannedspendingongoodsandserviceswilldecrease.
D) willnotbeaffected.
Answer: B
Diff:1
18) Intheabovefigure,amovementfrompointAtopointBcanbeexplainedby
A) andecreaseinthequantityofmoneyincirculation.
B) adecreaseintherealvalueofcashbalances.
C) thedecreaseininterestrates.
D) theincreaseinexportstotheforeignsector.
Answer: B
Diff:2
19) Intheabovefigure,amovementfrompointBtopointAcanbeexplainedby
A) anincreaseinspendingduetoawar.
B) anincreaseinspendingduetoincreasesineducationexpenditures.
C) anincreaseinthedemandformanufacturinggoodsduetonewtechnology.
D) adropinthepricelevel.
Answer: D
Diff:1
20) Theinterestrateeffectoperatesthrough
A) creditmarketsbychangingborrowingcosts.
B) thepurchasingpowerofindividualscheckingaccounts.
C) governmentspendinglevels.
D) laborsupply.
Answer: A
Diff:2
21) Whenachangeinthepricelevelcausesachangeinthepurchasingpowerofcurrency,which
thenchangesplannedrealexpendituresatallincomelevels,itiscalled
A) thereal-balanceeffect.
B) thesubstitutioneffect.
C) theopen-economyeffect.
Answer: A
Diff:1
22) Onereasonthattheaggregatedemandcurveslopesdownwardisbecause
A) higherpricelevelsincreaserealwealthandconsumption.
B) higherpricelevelsreducenetexports.
C) higherpricelevelsreduceinterestrates.
D) higherpricelevelsincreaseinvestment.
Answer: B
Diff:2
23) Ariseinthepricelevelhasadirecteffectonspendingbecause
A) peopleliketospendmorewhenpricesarehigher.
B) therealvalueofthemoneypeoplehavevariesdirectlywiththepricelevel.
C) therealvalueofthemoneypeoplehavedecreasesandtheycanbuylesswithit.
D) ahigherpricegivespeoplemoremoney,andsothemoregoodsandservicestheycanbuy.
Answer: C
Diff:2
24) Thereal-balanceeffectshowsthat
A) aggregatedemandisupwardsloping.
B) ahigherpricelevelleadstohigherinterestrates.
C) alowerpricelevelwillincreasethepurchasingpowerofcurrencyandincreasepersonal
consumption.
D) consumptionandthepricelevelarepositivelycorrelated.
Answer: C
Diff:2
25) Anothertermforthereal-balanceeffectis
A) thesubstitutioneffect.
C) theindirecteffect.
B) thewealtheffect.
Answer: B
Diff:1
26) Ifotherfactorsareheldconstant,anincreaseinthepricelevel
A) causesdesirednetexportspendingtorise.
B) causesdesirednetexportspendingtofall.
C) causestherealvalueofthemoneytoincrease.
D) inducespeopletospendtheirmoneyfaster.
Answer: B
Diff:2
27) Theinterestrateeffectthathelpsexplaintheslopeoftheaggregatedemandcurvearises
because
A) interestratesandtotalplannedrealexpendituresareunrelated.
B) anincreaseinthepricelevelleadtodecreasesininterestrates,whichinducesmore
borrowingandhenceraisesplannedrealexpenditures.
C) anincreaseinthepricelevelboostsinterestrates,whichdiscouragesborrowingandhence
reducesplannedrealexpenditures.
D) adecreaseinthepricelevelboostsinterestrates,whichdiscouragesborrowingandhence
freesupincomeformoreplannedrealexpenditures.
Answer: C
Diff:2
28) Higherinterestratestendto
A) reducethetotalplannedspendingongoodsandservices.
B) lowerthecostsofbuildingnewplantsandequipment.
C) increasethequantitydemandedofgoodsandservices.
D) makeitlesscostlyforpeopletobuyhousesandcars.
Answer: A
Diff:2
29) Wheninterestratesrise,
A) borrowingcostsincrease,andtotalplannedrealexpendituresdecline.
B) borrowingcostsincreaseandtotalplannedrealexpendituresincrease.
C) borrowingcostsdecline,andtotalplannedrealexpendituresincrease.
D) borrowingcostsdecline,andtotalplannedrealexpendituresdecline.
Answer: A
Diff:1
30) WhentherelativepricesofU.S.-manufacturedgoodsgoup,theresultis
A) anincreaseinexports.
B) adecreaseinexports.
C) adecreaseinimports.
D) nonetchangeinimportsorexports.
Answer: B
Diff:1
31) Apricelevelincreasetendstoreducenetexports,therebyreducingtheamountofrealgoods
andservicespurchasedintheUnitedStates.Economistsrefertothisphenomenonas
A) thewealtheffect.
B) thebarriereffect.
C) theopen-economyeffect.
D) theGrossDomesticProduct(GDP)effect.
Answer: C
Diff:1
32) Ifthepricelevelincreases,
A) thebuyingpowerofyourcheckingaccountfalls.
B) thebuyingpowerofyourcheckingaccountsriseswithit.
C) thereisnoeffectonbuyingpower.
D) theeconomytendstogrowfaster.
Answer: A
Diff:2
33) Oneimpactofariseinthedollarsvalueisthat
A) importsbecomecheaperfortheU.S.consumer.
B) exportswillincreasesharply.
C) U.S.goodswillbecomecheaperoverseas.
D) U.S.goodsarecheaperdomestically.
Answer: A
Diff:2
34) Anindividualholds$10,000inanon -interest-earningcheckingaccount,andtheoverallprice

levelrisessignificantly.Otherthingsbeingconstant,wewouldexpect
A) theindividualsrealwealthtodecreaseandconsumptiontodecline.
B) theindividualsstockofrealwealthtodecreasebutrealnationalincometoincrease.
C) nochangeintheindividualsrealwealthbutadeclineinrealnationalproduct.
D) theindividualswealthtoincrease.
Answer: A
Diff:1
35) Ahigherdomesticpricelevelshould
A) decreasenetexports.
C) increaserealwealthandconsumption.
Answer: A
Diff:1
B) increasedesiredinvestment.
D) noneofthese.
36) Accordingtotheinterestrateeffect,adecreaseinthepricelevelwill
A) decreasetherealvalueofmoneybalances,whichcausestotalplannedrealexpendituresto
increase.
B) causeinterestratestofall,whichgeneratesanincreaseinborrowing,sothattotalplanned
realexpendituresincrease.
C) leadtoadecreaseinnetexports,whichcausestotalplannedrealexpenditurestodecrease.
D) increasetherealvalueofmoneybalances,whichcausesinterestratestoincrease,thereby
reducingtotalplannedexpenditures.
Answer: B
Diff:3
37) Whathappenswhenthepricelevelfalls?
A) Totalplannedrealspendingremainsconstant.
B) Totalplannedrealspendingincreases.
C) Totalplannedrealspendingalsofalls.
D) Plannedrealspendingongoodsincreasesbutplannedrealspendingonservicesfalls.
Answer: B
Diff:1
38) WhentheU.S.pricelevelfalls,theopeneconomyeffectindicatesthat
A) U.S.importswillrise.
B) U.S.residentswillmoveawayfromdomesticgoodsandbuymoreforeigngoods.
C) U.S.exportswillincrease.
D) foreignerswillbuyfewerU.S.goods.
Answer: C
Diff:1
39) Theaggregatedemandcurvediffersfromanindividualdemandcurveinthat
A) theaggregatedemandcurvemaynotslopedownwhileanindividualdemandcurvemust
alwaysslopedown.
B) theaggregatedemandcurvelooksattheentirecircularflowofincomeandproduct,while
anindividualdemandcurvelooksatonegood,holdingeverythingelseconstant.
C) priceschangealonganindividualdemandcurvebutpricesareheldconstantalongan
aggregatedemandcurve.
D) theaggregatedemandcurveslopesupwhileanindividualdemandcurveslopesdown.
Answer: B
Diff:3
40) Howdoesaggregatedemandcurve(AD)differfromanindividualdemandcurve(D)?
A) ADisgenerallyverticalwhileDisusuallydownwardsloping.
B) Drepresentstheprice-quantityrelationshipforasinglegoodorservicewhileADlooksat
theentireeconomicsystem.
C) LookforDinmacroeconomicanalysesandforADinmicroeconomics.
D) ADisgenerallyadownwardslopingcurvewhileDusuallyslopesupward.
Answer: B
Diff:1
41) Aggregatedemandis
A) thehorizontalsummationofalldemandcurvesforaproduct.
B) thesumofallplannedexpendituresfortheeconomy.
C) thetotalquantityofallgoodssoldinaneconomyinayear.
D) thehorizontalsummationofalldemandcurvesforstate,local,andfederalgovernments
andbusinessfirms.
Answer: B
Diff:1
42) Thetotalofallplannedexpendituresintheentireeconomyisthedefinitionof
A) aggregatesupply.
B) productionpossibilitiescurve.
C) aggregatedemand.
Answer: C
Diff:1
43) Theopeneconomyeffectsuggeststhat
A) adecreaseindomesticpricelevelwillcauseforeignresidentstobuyfewerdomestic
goods,increasingnetexports.
B) adecreaseindomesticpricelevelwillcauseforeignresidentstobuymoredomesticgoods,
increasingnetexports.
C) ariseindomesticpricelevelwillcauseforeignresidentstobuymoredomesticgoods.
D) ariseindomesticpricelevelwillcausedomesticresidentstobuyfewerimportedgoods.
Answer: B
Diff:1
44) Theinterestrateeffectsuggeststhat
A) anincreaseinthepriceleveldecreasestheinterestrate,whichcausesbusinessesand
consumerstoreducedesiredspending.
B) anincreaseinthepricelevelincreasestheinterestrate,whichcausesbusinessesand
C) adecreaseinthepriceleveldecreasestheinterestrate,whichcausesbusinessesand
D) anincreaseinthepricelevelincreasesthemoneysupply,whichcausesbusinessesand
consumerstoincreasedesiredspending.
Answer: B
Diff:1
45) Theaggregatedemandcurvegivesthe
A) plannedpurchasesforallgoodsandservicesintheeconomy,holdingotherthingssuchas
thepricelevelconstant.
B) plannedpurchaseratesforallgoodsandservicesintheeconomyatvariouspricelevels.
C) demandforgoodsandservicesbythegovernmentatvariouspricelevels.
D) amountofallgoodseveryonewantstobuyatvariousincomelevels.
Answer: B
Diff:1
46) Thetotalofallplannedexpendituresintheentireeconomyis
A) theopeneconomyeffect.
B) LRAS.
C) aggregatesupply.
D) aggregatedemand.
Answer: D
Diff:1
47) Thevariousquantitiesofallfinalcommoditiesdemandedatvariouspricelevels,ceterisparibus,
isthe
A) LRAS.
B) productionpossibilitiescurve.
C) aggregatedemandcurve.
D) aggregatesupplycurve.
Answer: C
Diff:1
48) Theaggregatedemandcurvegives
A) thetotalamountofrealdomesticoutputthatwillbepurchasedateachpricelevel.
B) thetotalamountofnominaldomesticincomethatwillbepurchasedateachpricelevel.
C) thetotalvalueofnominalGDPinaneconomyforayear,holdingincomeandtechnology
constant.
D) thetotalvalueofoutputproducedbyworkersinbothforeignanddomesticmarketsat
eachpricelevel.
Answer: A
Diff:1
49) AllofthefollowingarecomponentsofaggregatedemandEXCEPT
A) consumptionspending.
B) governmentpurchases.
C) theleveloftechnology.
D) netforeignspendingondomesticproduction.
Answer: C
Diff:1
50) Theaggregatedemandcurve
A) isverticalatthefull-employmentlevelofoutput.
B) ishorizontalatthefull-employmentlevelofoutput.
C) isdownwardsloping.
D) isupwardsloping.
Answer: C
Diff:1
51) Theaggregatedemandcurvehas
A) norelationshipbetweenthepricelevelandrealGDP.
B) anegativerelationshipbetweenthepricelevelandrealGDP.
C) apositiverelationshipbetweenthepricelevelandrealGDP.
D) apositiverelationshipbetweenthepricelevelandnominalGDP.
Answer: B
Diff:1
52) Whichofthefollowingexplainswhytheaggregatedemandcurveisdownwardsloping?
A) theinterestrateeffect
B) thereal-balanceeffect
C) theopeneconomyeffect
D) alloftheabove
Answer: D
Diff:1
53) Supposethatalongtheaggregatedemandcurve,realGDPequals$14.2trillionwhentheGDP
deflatoris90.IftheGDPdeflatorwere95,realGDPalongtheaggregatedemandcurvewould
equal
A) lessthan$14.2trillion.
B) $14.2trillion.
C) morethan$14.2trillionbutlessthan$14.8trillion.
D) morethan$14.8trillion.
Answer: A
Diff:2
54) Otherthingsbeingequal,alonganaggregatedemandcurve,ahigherpricelevelisassociated
with
A) ahigherrealGDP.
B) alowerrealGDP.
C) alowernominalGDP.
D) higherincomelevels.
Answer: B
Diff:1
55) Otherthingsbeingequal,thelowerareplannedrealexpendituresalonganaggregatedemand
curve,the
A) moretheproductionpossibilitiescureshiftstotheleft.
B) lowerthepricelevel.
C) higherthepricelevel.
D) lowerthelevelofendowments.
Answer: C
Diff:1
56) Whenthepricelevelincreases,totalplannedrealexpendituresongoodsandservicesfalls.All
ofthefollowingareresponsibleEXCEPT
A) thesubstitutioneffect.
B) thereal-balanceeffect.
C) theinterestrateeffect.
D) theopeneconomyeffect.
Answer: A
Diff:1
57) Whichofthefollowingisafactorthatdeterminestheshapeoftheaggregatedemandcurve?
A) Thereal-balanceeffect
B) Thenominal-balanceeffect
C) Thepriceleveleffect
D) Thewageeffect
Answer: A
Diff:1
58) Accordingtothereal-balanceeffect,anincreaseinthepricelevelwill
A) leavetotalplannedrealexpendituresunchangedsincethepricelevelofallgoodshas
increased.
B) decreasetotalplannedrealexpendituresbecauseofanincreaseininterestrates.
C) leadtoacorrespondingincreaseintotalplannedrealexpendituressincebusinessesare
nowearninghigherprofits.
D) decreasetotalplannedrealexpendituresasaresultofadecreaseintherealvalueof
moneybalances.
Answer: D
Diff:1
59) Thechangeintotalplannedrealexpendituresresultingfromachangeintherealvalueof
moneybalanceswhenthepricelevelchanges,allotherthingsheldconstant,is
B) theinterestrateeffect.
D) demandsideinflation.
Answer: A
Diff:1
60) Thereal-balanceeffectrefersto
A) therealinterestrate.
B) theproductionofrealgoodsandservicesasopposedtofinancialinstruments.
C) thepricesofgoodsandservices.
D) therealvalueofcashbalancesthatapersonisholding.
Answer: D
Diff:1
61) Ifyouhave$5000andtheGDPdeflatordecreasesfrom100to80
A) the$5000willbuy20percentlessofthegoodsandservicesproducedbysociety.
B) the$5000willbuy20percentmoreofthegoodsandservicesproducedbysociety.
C) thevalueofthe$5000decreases.
D) thevalueofthe$5000remainsconstant.
Answer: B
Diff:2
62) Thewealtheffectisanothertermforthe
A) substitutioneffect.
C) thereal-balanceeffect.
B) theindirecteffect.
Answer: C
Diff:1
63) Holdingnominalmoneybalancesconstant,adecreaseinthepricelevel
A) causestherealvalueofthemoneybalancestoincrease,inturnincreasingtotalplanned
realexpenditures.
B) causestherealvalueofthemoneybalancestodecrease,inturndecreasingtotalplanned
realexpenditures.
C) causestherealvalueofthemoneybalancestoincrease,therebyincreasingtheinterestrate.
D) generatesareductioninthevalueofthemoneybalances,leadingtohigherinterestrates
andadecreaseintotalplannedrealexpenditures.
Answer: A
Diff:3
64) Anindirecteffectofanincreaseinthepricelevelworksthrough
A) peoplesubstitutingoutofdomesticgoodsandintoforeigngoodsasexchangeratesrise.
B) changesintradebalancesasdomesticgoodsbecomemoreexpensive,causinginterest
ratestomoveintheoppositedirectionfromthechangeintheexchangerate.
C) interestratesaspeoplesavemoreasthehigherpricesmaketheirmoneybalancesless
attractive.
D) interestratesaspeopleborrowtomaintaintheirmoneybalances,biddingupinterestrates
andreducingtotalplannedrealexpenditures.
Answer: D
Diff:2
65) Theinterestrateeffectispartofthereason
A) theshort-runaggregatesupplycurveisupwardsloping.
B) thelong-runaggregatesupplycurveisvertical.
C) theaggregatedemandcurveisupwardsloping.
D) theaggregatedemandcurveisdownwardsloping.
Answer: D
Diff:1
66) Whichofthefollowingstatementsistrueabouttheinterestrateeffect?
A) Theinterestrateeffectiswhytheaggregatedemandcurveisupwardsloping.
B) Alowerpricelevellowerstheinterestrate,whichcausesbusinessesandconsumersto
increasetheirdesiredspending.
C) Ahigherpricelevellowerstheinterestrate,whichcausesbusinessandconsumersto
increasetheirdesiredspending.
D) Expenditureswillchangeasaresultofachangeintherealvalueofmoneybalanceswhen
thereisachangeinthepricelevel.
Answer: B
Diff:2
67) Higherinterestrates
A) reducetotalplannedrealexpendituresbecausetheyincreasethecostofborrowingfunds.
B) reducetotalplannedrealexpendituresbecausetheyreducetheincomeofbankersand
othercreditors.
C) increasetotalplannedrealexpendituresbecausetheyincreasetheincomesofallpeoplein
theeconomy.
D) increasetotalplannedrealexpendituresbecausetheylowerthecostsofbuildingnew
plantsandequipment.
Answer: A
Diff:1
68) Ifthepricelevelincreases,then
A) theexchangeratewillincrease,causingU.S.goodstobecomecheaperandincreasingtotal
plannedrealexpenditures.
B) importsincreasebutexportsdonotchange.Therefore,thereisnoeffectontotalplanned
realexpenditures.
C) foreignresidentsbuyfewerU.S.goods,leavingmoregoodsforU.S.residentsandan
increaseintotalplannedrealproductionbyfirms.
D) domesticgoodsaremoreexpensiverelativetoforeigngoods,whichreducestotalplaned
realexpenditures.
Answer: D
Diff:3
69) Theopeneconomyeffectreferstothefactthat
A) thepositionandshapeofthelongrunaggregatesupplycurveispartiallyduetothefact
thatweimportgoods.
B) theaggregatesupplycurveshiftswhentheeconomygrows.
C) theslopeoftheaggregatedemandcurveispartiallyexplainedbythereductioninthe
desiretobuyfewerU.S.goodsbyU.S.residentsandforeignresidentsasaresultofa
higherpricelevel.
D) theimmigrationpoliciesoftheUnitedStatesaredisruptivetolabormarkets.
Answer: C
Diff:1
70) Ashiftawayfromexpendituresondomesticgoodsandashifttowardexpendituresonforeign
goodswhenthedomesticpricelevelincreasesisknownas
D) demandsideinflation.
Answer: C
Diff:1
71) Supposeacountryhasnotradewithothercountriesandpeoplecanborrowasmanyfundsas
theywantatthecurrentinterestrate.Anincreaseinthepricelevelwillgenerate
A) adecreaseintotalplannedrealexpendituresbecauseofthereal -balanceeffect.
B) adecreaseintotalplannedrealexpendituresbecauseoftheopen -economyeffectandthe
indirecteffect.
C) adecreaseintotalplannedrealexpendituresbecausethereal -balanceeffectwillbe
strongerthantheindirecteffectandtheopen-economyeffect.
D) adecreaseintotalplannedrealexpendituresbecausetheindirecteffectwillbestronger
thanthereal-balanceeffect.
Answer: A
Diff:3
72) Afallinthepricelevel
A) increasestherealvalueofmoneybalances,whichcausesborrowingtodecrease,leadingto
adecreaseininvestmentandtotalplannedrealexpenditures.
B) causesexportstoriseandimportstofall,leadingtoanincreaseintotalplannedreal
expenditures.
C) leadstoanincreaseintotalplannedrealexpendituresbecauseoftheindirecteffect.
D) causestotalplannedrealexpenditurestoincreaseaslongasthefallislessthanthefallin
thepricelevelinothercountries.
Answer: B
Diff:3
73) Theaggregatedemandcurve
A) islikeindividualdemandcurvesinthatpricesofothergoodsareheldconstant.
B) islikeindividualdemandcurvesinthatincomeisconstant.
C) differsfromindividualdemandcurvesinthattheaggregatedemandcurveisnot
downwardsloping.
D) differsfromindividualdemandcurvesinthattheaggregatedemandcurvelooksatthe
entirecircularflowofincomeandproductwhiletheindividualdemandcurvelooksat
onlyonegood.
Answer: D
Diff:3
74) WhichofthefollowingisNOTtrueabouttheaggregatedemandcurve?
A) Theproductionpossibilitiescurvedeterminestheslopeoftheaggregatedemandcurve.
B) Theaggregatedemandcurveshowstotalplannedrealexpendituresatdifferentprice
levels.
C) Changesintheeconomicconditionsinothercountrieswillleadtoashiftoftheaggregate
demandcurve.
D) Theaggregatedemandcurveconsiderstheentirecircularflowofincome.
Answer: A
Diff:1
75) Whichofthefollowingistrueabouthowtheaggregatedemandcurvediffersfromthe
individualsdemandcurve?
A) Theindividualsdemandcurveshowstherelationshipbetweenpriceandquantity
demandedwhiletheaggregatedemandcurveisnotinfluencedbyprice.
B) Fortheindividualsdemandcurveequilibriumisdeterminedbytheintersectionofsupply
anddemandwhilefortheaggregatedemandcurveequilibriumisdeterminedbythereal
balanceeffect.
C) Theindividualsdemandcurveisjustforanindividualwhiletheaggregatedemandcurve
looksattheentirecircularflowofincome.
D) Theindividualsdemandcurvewillshiftwhenthereisachangeintaxeswhilethe
aggregatedemandcurvewillnot.
Answer: C
Diff:1
76) WhatdeterminesthetotalvalueofaggregatedemandforU.S.realGDP?
A) thespendingdecisionsofconsumers,firms,andgovernments
B) theCongressionalBudgetOffice
C) theFederalReserveBoard
D) WallStreet
Answer: A
Diff:1
77) Totalplannedexpendituresfordomesticallyproducedgoodsandservicesconsistof
A) governmentspending,businessspending,andimportspendingonly.
B) consumerspending,businessspending,andnetexportspendingonly
C) consumerspending,businessspending,governmentspending,andnetexportspending
D) consumerspending,businessspending,governmentspending,andimportspending.
Answer: C
Diff:2
78) WhichoneofthefollowingisNOTacomponentofaggregatedemand?
A) merchandiseinventories
B) consumptionspending
C) investmentexpenditures
D) governmentpurchases
Answer: A
Diff:1
79) Thetotalofallplannedrealexpendituresintheeconomyiscalled
A) aggregatedemand.
B) aggregatespending.
C) aggregateGDP.
D) aggregateconsumption.
Answer: A
Diff:1
80) Theaggregatedemandcurveshowstherelationshipbetweenplannedpurchasesof
A) allfinalgoodsandservicesandinterestrates.
B) allfinalgoodsandservicesandthepricelevel.
C) allfinalgoodsandservicesandnominalGDP.
D) allfinalgoodsandservicesandtotalplannedproduction.
Answer: B
Diff:1
81) Theaggregatedemandcurveshows
A) adirectrelationshipbetweenchangesinthepricelevelandchangesinrealGDP.
B) realGDPdoesnotchangeasthepricelevelchanges.
C) aninverserelationshipbetweenthepricelevelandrealGDP.
D) aninverserelationshipbetweenchangesinthepricelevelandchangesinnominalGDP.
Answer: C
Diff:1
82) WhichofthefollowingisNOTanexplanationfortheshapeoftheaggregatedemandcurve?
A) realbalanceeffect
B) interestrateeffect
C) openeconomyeffect
D) investmenteffect
Answer: D
Diff:2
83) Thedownwardslopeoftheaggregatedemandcurveshowsthat
A) anincreaseinaggregatedemandreducesthelong -runaggregatesupply.
B) anincreaseinaggregatedemandincreasesthelong-runaggregatesupply.
C) ahigherpricelevelwillcauseplannedpurchaseratesforfinalgoodsandservicestobe
higher.
D) alowerpricelevelwillcauseplannedpurchaseratesforfinalgoodsandservicestobe
higher.
Answer: D
Diff:3
84) Whatisoneimplicationofthereal-balanceeffect?
A) Thepartofyourwealththatyouholdintheformofcashlosessomeofitsvalueasthe
pricelevelrises.
B) Whenthepricelevelrises,peoplehaveanincentivetoworkharderinordertoearna
higherincome.
C) Whenthepricelevelfalls,mostconsumersreallocatetheirspendingsoastohaveanequal
balancebetweennecessitiesandluxuries.
D) Aggregatedemandandaggregatesupplycanneverreachlong -runequilibrium.
Answer: A
Diff:2
85) Theopeneconomyeffectandinterestrateeffectaretwoofthereasonswhy
A) higherpricelevelsincreaselong-runaggregatesupply.
B) theaggregatedemandcurveslopesdownward.
C) capitalformationdoesnotcontributetoeconomicgrowthinpoorcountries.
D) growthofthelaborforcedoesnotcontributetoeconomicgrowthinwealthycountries.
Answer: B
Diff:3
86) Theaggregatedemandcurveshowsthe
A) totalamountofplannedexpendituresongoodsandservicesateachpossiblepricelevel.
B) totalamountofnominalgoodsthattheparticipantsintheeconomywanttopurchase.
C) totalamountofrealgoodsthatforeignerswanttopurchase.
D) amountofgoodsproducerswillproduceasproductioncostsfall.
Answer: A
Diff:2
87) Theaggregatedemandcurveis
A) downwardsloping.
C) horizontal.
B) vertical.
D) Ushaped.
Answer: A
Diff:1
88) Theaggregatedemandcurveis
A) horizontaliffullemploymentexistsintheeconomy.
B) verticaliffullemploymentexistsintheeconomy.
C) downwardslopingbecauseofthereal-balance,interestrate,andopeneconomyeffects.
D) downwardslopingbecausemoregoodsareproducedasperunitcostofproducingeach
itemfalls.
Answer: C
Diff:1
89) Thereal-balanceeffectindicatesthatathigherpricelevels
A) therealvalueofmoneyholdingsfall,resultingindecreasedspending.
B) therealvalueofmoneyholdingsincrease,resultinginincreasedsaving.
C) thepurchasingpowerofmoneywillincrease.
D) thevalueofthedollarwillincrease.
Answer: A
Diff:1
90) Whichofthefollowingwilloccurwhenaneconomyspricelevelincreases?
A) Aggregatedemandwillincrease.
B) Thepurchasingpowerofmoneywillincrease.
C) Thepurchasingpowerofmoneywilldecrease.
D) Therealvalueofwealthwillincrease.
Answer: C
Diff:2
91) Theinterestrateeffectshowsthatifthepricelevelincreases,
A) consumersandbusinesseswillincreasetheirspendingtobuythesameamountofgoods
asbeforetomakeupforthehigherinterestrates.
B) consumersandbusinesseswilldecreasetheirspendingastheinterestrateincreases,
therebypushingupthecostofacquiringfunds.
C) U.S.exportsandimportswillbothdecrease.
D) therealvalueoffinancialassetswillincrease.
Answer: B
Diff:2
92) AdecreaseinU.S.pricesrelativetoEuropeanprices
A) willdecreaseEuropeanexportstotheUnitedStates.
B) willincreaseU.S.importsfromEurope.
C) willdecreaseU.S.exportstoEurope.
D) willnotaffectU.S.tradewithEurope.
Answer: A
Diff:1
93) AnincreaseinU.S.pricesrelativetoJapanesepriceswill
A) increasetotalplannedspendingonU.S.goodsandservices.
B) increaseU.S.importsanddecreaseU.S.exports.
C) decreaseU.S.importsandincreaseU.S.exports.
D) decreasebothU.S.exportsandimports.
Answer: B
Diff:2
94) Whenthepriceleveldeclines,
A) theinterestraterises,andconsumersborrowfewerfunds,whichcausesamovementup
theaggregatedemandcurve.
B) theinterestratefalls,andconsumersborrowmorefunds,whichcausesamovementdown
alongtheaggregatedemandcurve.
C) theinterestrateisnotaffected,sothereisnomovementalongtheaggregatedemand
curve.
D) interestratesfall,andconsumersborrowmorefunds,whichcausestheaggregatedemand
curvetoshifttotheleft.
Answer: B
Diff:2
95) Whenthepricelevelfalls,
A) importsincrease,andexportsdecrease,whichcausesamovementupalongtheaggregate
demandcurve.
B) thereisnoimpactonimportsorexports,sothereisnoassociatedmovementalongthe
C) importsdecreaseandexportsincrease,whichcauseamovementdownalongthe
D) importsdecreaseandexportsincrease,whichcauseamovementupalongtheaggregate
demandcurve.
Answer: C
Diff:2
96) Thecurvethatdisplaystotalplannedrealspendingongoodsandservicesateachpricelevelby
households,businesses,thegovernment,andforeignresidentsiscalled
A) theaggregatesupplycurve.
B) theaggregatedemandcurve.
C) thepricelevelcurve.
D) theemploymentcurve.
Answer: B
Diff:1
97) Whichofthefollowingcausetheaggregatedemandcurvetoslopedownwardandtotheright?
A) thepricesofkeygoods
B) theinterestrateeffect
C) militaryexpendituresofthegovernment
D) thedemand-shockeffect
Answer: B
Diff:1
98) Whenahigherpricelevelgeneratesanincreaseintheinterestratethatinducesconsumersto
borrowlessandbuyless,thischainofeventsisreferredtoas
D) thepriceleveleffect.
Answer: B
Diff:2
99) Totalplannedrealexpendituresmeasuredalongtheaggregatedemandcurvearemadeupof
A) consumptionspending,investmentspending,governmentspending,andnetexport
spending.
B) consumptionspending,income,governmentspending,andnetexportspending.
C) consumptionspending,saving,investmentspending,andgovernmentspending.
D) consumptionspending,factorpayments,investmentspending,andnetexportspending.
Answer: A
Diff:3
100) Whatismeasuredontheverticalaxisoftheaggregatedemandgraph?
A) nominalincome
B) realGDPperyear
C) thepricelevel
D) unemployment
Answer: C
Diff:1
101) Whatismeasuredonthehorizontalaxisontheaggregatedemandgraph?
A) nominalincome
B) realGDPperyear
C) thepricelevel
D) unemployment
Answer: B
Diff:1
102) Whenexpenditureschangeduetochangesintherealvalueofmoneycausedbyvariationsin
thepricelevel,thisisknownasthe
A) interestrateeffect.
B) real-balanceeffect.
C) openeconomyeffect.
D) aggregatebalanceseffect.
Answer: B
Diff:2
103) Whentotalplannedrealexpenditureschangeduetochangesinthecostofborrowingthatresult
fromvariationsinthepricelevel,thisisknownasthe
Answer: A
Diff:1
104) Whentotalplannedrealexpenditureschangeduetothechangesinnetexports,thisisknownas
the
Answer: C
Diff:1
105) Ifyourincomestaysthesameandthepricelevelincreases,youwillbuyfewergoodsand
servicesduetothe
Answer: B
Diff:2
106) Ifthedollarappreciatesandforeigngoodsbecomelessexpensive,thetotalplanned
expendituresondomesticgoodsandserviceswill
A) fallduetotheopeneconomyeffect.
B) fallduetotheinterestrateeffect.
C) increaseduetotheopeneconomyeffect.
D) increaseduetotheinterestrateeffect.
Answer: A
Diff:2
107) Whatistheaggregatedemandcurveandwhatdoesitrepresent?
Answer: Theaggregatedemandcurveshowstotalplannedrealspendingonallgoodsand
servicesintheeconomyatvariouspricelevels,otherthingsheldconstant.Itrepresents
thecomponentsofrealGrossDomesticProduct(GDP),includingconsumptionspending,
investmentexpenditures,governmentpurchases,andnetforeigndemandfordomestic
production.
Diff:1
108) Theaggregatedemandcurveslopesdownforthesamereasonthattheindividualdemand
curveforagoodslopesdown.Doyouagreeordisagreewiththisstatement?Why?
Answer: Disagree.Theaggregatedemandcurvedoesnotuseprice,butusesthepricelevel,and
quantitydemandedisnotforaspecificgood,butforthetotalexpendituresonrealgoods
andservices.Astherelativepriceofagoodfalls,individualswillsubstitutetowardthat
good.Thereareeconomy-widereasonsthatcausetheaggregatedemandcurvetoslope
downwards.Forexample,theloweraggregatepricelevelwillcauseareductioninthe
interestrateandanincreaseintheoveralldemandforgoods.
Diff:2
109) Whatistheinterestrateeffectofanincreaseinthepricelevel?
Answer: Higherpricelevelsindirectlyincreasetheinterestrate.Thehigherinterestratecause
peopletoreducedesiredrealspendingduetothehighercostofborrowing.Hence,the
higherpricelevelleadstoareductionintotalplannedrealspending.
Diff:2
110) Whatinformationisprovidedbytheaggregatedemandcurve?
Answer: Theaggregatedemandcurverelatestotalplannedrealexpenditurestoeachpricelevel.
ThepricelevelismeasuredbytheGDPdeflator.Theloweristhepricelevel,thehigher
aretotalplannedrealexpenditures,otherthingsbeingequal.
Diff:2
111) Whatisthereal-balanceeffectofanincreaseinthepricelevel?
Answer: Thereal-balanceeffectisthechangeintherealvalueofthemoneybalanceswhenthe
pricelevelchanges,allotherthingsconstant.Anincreaseinthepricelevelmeansthatthe
purchasingpowerofmoneybalancesisreduced.
Diff:2
112) Whatarethethreeforcesthatcausetheaggregatedemandcurvetoslopedown?Explain.
Answer: Thethreeforcesarethereal-balanceeffect,theinterestrateeffect,andtheopen-economy
effect.Anincreaseinthepricelevelcausesthepurchasingpowerofmoneybalancesto
fall,interestratestoincreaseandborrowingtofall,andimportstoincreaseandexportsto
decrease.Eachofthesecausetotalplannedrealexpenditurestodecrease.
Diff:3
10.3ShiftsintheAggregateDemandCurve
1) Whichofthefollowingwouldcauseaggregatedemandtodecrease?
A) Thegovernmentincreasestaxesonbothbusinessandpersonalincome.
B) Adropintheforeignexchangevalueofthedollar
C) TheFedincreasestheamountofmoneyincirculation.
D) Businessesandhouseholdsbelievethattheeconomyisheadedforgoodtimes,sothey
begintofeelincreasedsecurityabouttheirjobs.
Answer: A
Diff:1
Topic: 10.3ShiftsintheAggregateDemandCurve
2) Anaggregatedemandcurve
A) shiftstotherightwhenthepricelevelincreasesandtotheleftwhenthepricelevelfalls.
B) shiftstotherightwhenanynon-price-levelfactorincreasestotalplannedrealspending.
C) shiftstotherightwhenpopulationdecreasesandshiftstotheleftwhenpopulation
increases.
D) doesnotshift,unlikeindividualormarketdemandcurves.
Answer: B
Diff:2
I. Wheneconomistsderivetheaggregatedemandcurve,theyarelookingattheeffectofthe
pricelevelononecommodityonly.
II. Anynon-price-levelchangethatincreasestotalplannedrealspendingondomesticgoods
shiftstheADcurvetotheright.
D) NeitherInorII
A) Ionly
B) IIonly
C) BothIandII
Answer: B
Diff:1
4) EuropeandAsiabothfallintodeepeconomicrecessions.WhatimpactwillthishaveonU.S.
aggregatedemand?
A) None.Anationsaggregatedemandisonlyaffectedbyitsowneconomicconditions.
B) U.S.aggregatedemandwillremainunchanged.
C) U.S.aggregatedemandwilldecrease.
D) TheU.S.aggregatedemandcurvewillshifttotheright.
Answer: C
Diff:2
5) Anaggregatedemandcurve
A) shiftstotherightwhenanon-pricelevelchangeincreasestotalplannedrealexpenditures.
B) shiftstotherightwhenanon-pricelevelchangedecreasestotalplannedreal
expenditures.
C) shiftstotherightwhenthepricelevelfalls.
D) doesnotshifttotherightortotheleft.
Answer: A
Diff:2
6) Anincreaseintotalplannedrealexpendituresthatiscausedbyafactorotherthantheprice
levelwillleadtothe
A) aggregatesupplycurveshiftingtotheright.
B) aggregatedemandcurveshiftingtotheright.
C) aggregatesupplycurveshiftingtotheleft.
D) aggregatedemandcurveshiftingtotheleft.
Answer: B
Diff:1
7) Anincreaseinthemoneysupplywillcausewhichofthefollowingtooccur?
A) arightwardshiftoftheaggregatesupplycurve
B) aleftwardshiftoftheaggregatedemandcurve
C) aleftwardshiftoftheaggregatesupplycurve
D) arightwardshiftoftheaggregatedemandcurve
Answer: D
Diff:1
8) Theaggregatedemandcurvewouldshifttotherightasaresultof
A) adropinthepricelevel.
B) taxincreases.
C) anincreaseintheU.S.realinterestrate.
D) adecreaseintheamountofmoneyincirculation.
Answer: C
Diff:2
9) Whichofthefollowingwillcausealeftwardshiftintheaggregatedemandcurve?
A) areductioninthemoneysupply
B) anincreaseintaxes
C) areductioningovernmentspending
D) alloftheabove
Answer: D
Diff:3
10) WhichoneofthefollowingwouldNOTincreaseaggregatedemand?
A) anincreaseinlong-runaggregatesupply
B) areductioninrealinterestrates
C) taxdecreases
D) anincreaseintheamountofmoneyincirculation
Answer: A
Diff:2
11) AllofthefollowingwouldcausetheaggregatedemandcurvetoshiftEXCEPT
A) ariseinrealinterestrates.
B) anincreaseintaxes.
C) improvementsineconomicconditionsinothercountries.
D) adecreaseinthepricelevel.
Answer: D
Diff:2
12) WhichofthefollowingwillNOTshifttheaggregatedemandcurve?
A) achangeinthedomesticmarginaltaxrates
B) achangeingovernmentexpenditures
C) achangeinthedomesticpricelevel
D) depreciationinthevalueofthenationalcurrency
Answer: C
Diff:2
13) Theaggregatedemandcurvewillshifttotheleftif
A) peoplearemoreoptimisticabouttheirfuture.
B) areductioninthepricelevelpushesdownborrowingcosts.
C) governmentexpendituresincrease.
D) thenationalincomesofourtradingpartnersdecrease.
Answer: D
Diff:2
14) Aweakeninginconsumerconfidencecausesa
A) shiftoftheaggregatedemandcurvetotheright.
B) shiftoftheaggregatedemandcurvetotheleft.
C) movementupalongtheaggregatedemandcurve.
D) movementdownalongtheaggregatedemandcurve.
Answer: B
Diff:2
15) WhichofthefollowingwillNOTshifttheaggregatedemandcurve?
A) achangeinthepricelevel
B) achangeintaxrates
C) achangeintheamountofmoneyincirculation
D) achangeinrealinterestrates
Answer: A
Diff:2
16) Anincreaseintheamountofmoneyincirculationwouldcausea
A) shiftoftheaggregatedemandcurvetotheright.
B) shiftoftheaggregatedemandcurvetotheleft.
C) movementuptheaggregatedemandcurve.
D) movementdowntheaggregatedemandcurve.
Answer: A
Diff:2
17) AnincreaseintheU.S.pricelevelcausesa
A) shiftoftheU.S.aggregatedemandcurvetotheright.
B) shiftoftheU.S.aggregatedemandcurvetotheleft.
C) movementuptheU.S.aggregatedemandcurve.
D) movementdowntheU.S.aggregatedemandcurve.
Answer: C
Diff:2
18) Whichofthefollowingwouldlikelyresultinashiftoftheaggregatedemandcurvetotheright?
A) ataxcut
B) adecreaseinjobsecurity
C) ariseintherealinterestrate
D) adecreaseinthequantityofmoneyincirculation
Answer: A
Diff:2
19) Anincreaseinaggregatedemandisshownby
A) arightwardshiftintheaggregatedemandcurve.
B) aleftwardshiftintheaggregatedemandcurve.
C) amovementupalongtheaggregatedemandcurve.
D) themovementdownalongtheaggregatedemandcurve.
Answer: A
Diff:2
20) Whichofthefollowingwouldlikelyresultinadecreaseinaggregatedemand?
A) taxincreases
B) areductionintherealinterestrate
C) increasedjobandfutureincomesecurity
D) ariseinthequantityofmoneyincirculation
Answer: A
Diff:2
21) Otherthingsbeingequal,appreciationofthedollar
A) increasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
reducingthepricesofimportedresources.
B) increasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
C) decreasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
D) decreasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
increasingthepricesofimportedresources.
Answer: C
Diff:3
22) Otherthingsbeingequal,adepreciationofthedollar
A) increasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
B) increasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
C) decreasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
D) decreasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
Answer: B
Diff:2
23) Wheninvestorsbuymorecapitalgoodsbecausetheinterestrateshavefallen,theaggregate
demandcurve
A) shiftsright.
B) shiftsleft.
C) doesnotshift.
D) staysthesame.
Answer: A
Diff:1
24) Intheabovefigure,amovementfrompointBtopointCcouldbeexplainedby
A) anincreaseinthepricelevel.
B) adecreaseinthequantityofmoneyincirculation.
C) increasedgovernmentspending.
D) thereal-balanceeffect.
Answer: C
Diff:2
25) Whichofthefollowingwouldcauseanincreaseinaggregatedemand(AD)?
A) Adecreaseinpricelevels
B) Anincreaseininterestrates
C) Adecreaseintaxes
D) Ariseintheforeignexchangevalueofthedollar
Answer: C
Diff:1
I. Adropintheforeignexchangevalueofthedollarwoulddecreaseaggregatedemand
II. Adecreaseintheamountofmoneyincirculationwouldincreaseaggregatedemand
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: D
Diff:1
27) Whatcausestheaggregatedemandcurvetoshift?
Answer: Anythingthatcausestotalplannedrealexpendituresondomesticgoodstoincreaseor
decrease,otherthanchangesinthepricelevel,causesthecurvetoshift.Theseinclude
thingslikechangesintheexchangerate,changesineconomicconditionsinother
countries,changesintherealinterestrate(notassociatedwithpricelevelchanges),anda
changeintheamountofmoneyincirculation.
Diff:1
28) Howcanthelong-runequilibriumlevelofrealGrossDomesticProduct(GDP)increasewithout
thepricelevelchanging?
Answer: Sincethelong-runaggregatesupplycurveisvertical,theonlywayrealGrossDomestic
Product(GDP)canincreasewithoutthepricelevelchangingisifaggregatedemand
increasesandlong-runaggregatesupplyincreases.Forthelattertohappen,eitherthe
endowmentofinputsmustincreaseortechnologymustchange.
Diff:2
10.4Long-RunEquilibriumandthePriceLevel
1) Theshapeoftheaggregatedemandcurvedoesnottellusanythingabouthowthetotaldollar
valueofspendingwillultimatelybedividedbetweenoutputandprices.Forthisweneed
A) informationaboutthestandardoflivinginthecountry.
B) informationthatonlytheConsumersPriceIndexcanprovide.
C) anaggregatesupplycurve.
D) toknowhowfarfromtheorigintheaggregatedemandcurveis.
Answer: C
Diff:2
Topic: 10.4Long-RunEquilibriumandthePriceLevel
2) Tofindaneconomyslong-runequilibriumpricelevel,locatethepointwhere________and
________crossandlooktotheleft.
A) demand;supply
B) aggregatedemand;short-runaggregatesupply
C) aggregatedemand;pricelevel
D) long-runaggregatesupply;aggregatedemand
Answer: D
Diff:1
3) Supposetotalplannedexpendituresequal$14.4trillionwhenthevalueofthepricelevelis95.If
thepriceleveldroppedto90,totalplannedrealexpenditureswillequal
A) lessthan$14.4trillionbutmorethan$1trillion.
B) lessthan$14.4trillion.
C) morethan$14.4trillion.
D) $14.4trillion.
Answer: C
Diff:2
4) Ifyouhave$1,000andtheGrossDomesticProduct(GDP)deflatorincreasesfrom100to120,
then
A) the$1,000willbuy20percentlessofthegoodsandservicesproducedbysociety.
B) the$1,000willbuy20percentmoreofthegoodsandservicesproducedbysociety.
C) thevalueofthe$1,000increases.
D) youwillbeabletobuyfewergoods,buttherealvalueofthosegoodswillincrease.
Answer: A
Diff:2
5) Apersistentlydecliningpricelevelresultingfromeconomicgrowthandunchangedaggregate
demandiscalled
A) demand-sidedeflation.
B) supply-sidedeflation.
C) oziandeflation.
D) seculardeflation.
Answer: D
Diff:1
6) Howiseconomicgrowthgraphicallydepicted?
A) Theaggregatedemandcurveshiftstotheleft.
B) Aggregatedemandshiftstotheright.
C) Short-runaggregatesupplyshiftsleft.
D) Thelong-runaggregatesupplycurveshiftsright.
Answer: D
Diff:1
7) Whichofthefollowingwillresultinseculardeflation?
A) Aone-timerightwardshiftoftheaggregatedemandcurve.
B) Continuousrightwardshiftsoftheaggregatedemandcurve.
C) Aone-timerightwardshiftofthelong-runaggregatesupplycurve.
D) Continuousrightwardshiftsofthelong-runaggregatesupplycurve.
Answer: D
Diff:2
8) Seculardeflationoccurswhen
A) thereisnoeconomicgrowthandaggregatedemandfalls.
B) aggregatedemandincreasesatthesametimethereisnoeconomicgrowth.
C) aggregatedemandremainsunchangedwhileeconomicgrowthincreaseslong -run
aggregatesupply.
D) bothaggregatedemandandaggregatesupplyareshiftingleft.
Answer: C
Diff:1
9) Anincreaseintheamountofphysicalcapitalwillcause
A) anincreaseinbothaggregatedemandandrealGDP,buthavenoeffectonthepricelevel.
B) aggregatedemandandaggregatesupplytoincreasebythesameamounts,causingreal
GDPtoincreaseandthepriceleveltoremainconstant.
C) anincreaseinbothaggregatesupplyandrealGDP,buthavenoeffectonthepricelevel.
D) anincreaseinbothaggregatesupplyandrealGDPandareductioninthepricelevel.
Answer: D
Diff:2
10) TheU.S.hasexperiencedinflationeveryyearsince1959dueto
A) asustaineddecreaseinaggregatedemand.
B) asustainedincreaseinaggregatedemandaccompaniedbyanevenlargerdecreasein
LRAS.
C) asustaineddecreaseinaggregatesupply.
D) asustainedincreaseinaggregatesupplyaccompaniedbyanevenlargerincreasein
aggregatedemand.
Answer: D
Diff:2
11) Supply-sideinflationiscausedby
A) adecreaseinaggregatesupplyandnochangeinaggregatedemand.
B) adecreaseinaggregatedemandandnochangeinaggregatesupply.
C) anincreaseinaggregatesupplyandnochangeinaggregatedemand.
D) anincreaseinaggregatedemandandnochangeinaggregatesupply.
Answer: A
Diff:2
12) Iftheeconomygrowssteadilyoverseveralyearsandatthesametimemaintainstheaggregate
demandcurveinitspresentposition,thentheeconomywillexperiencewhichofthefollowing?
A) inflation
B) astablepricelevel
C) seculardeflation
D) Thepricelevelcannotbedeterminedwithoutmoreinformation.
Answer: C
Diff:2
13) SupposetheFederalReserveimplementsexpansionarymonetarypolicywherethemoney
supplyincreases.Whichofthefollowingwilltendtooccurinthelongrunasaresultofthis
monetarypolicyaction?
A) Outputandthepricelevelwillbothincrease.
B) Outputwillincreasewithnochangeinthepricelevel.
C) Anincreaseinthepricelevelandnochangeinoutput.
D) Nochangeineitherthepriceleveloroutput.
Answer: C
Diff:2
14) Whenthepricelevelisbelowthelevelatwhichtheaggregatedemandcurvecrossesthelong
runaggregatesupplycurve
A) therewillbenopricelevelchange.
B) therewillbepressuresthatwillleadtoashiftofeithertheaggregatedemandorthelong
runaggregatesupplycurves.
C) totalplannedrealexpenditureswillexceedactualrealGDP,andthepricelevelwill
increase.
D) totalplannedrealexpenditurewillbelowerthanactualrealGDP,andthepricelevelwill
increase.
Answer: C
Diff:1
15) Whenthepricelevelisbelowthelevelatwhichtheaggregatedemandcurvecrossesthelong
runaggregatesupplycurve,
A) therewillbenopricelevelchange.
B) therewillbepressuresthatwillleadtoashiftofeithertheaggregatedemandorthelong
runaggregatesupplycurves.
C) actualrealGDPwouldbelessthantotalplannedrealexpenditures,andthepricelevelwill
rise.
D) actualrealGDPwouldexceedtotalplannedrealexpenditures,andthepricelevelwillfall.
Answer: C
Diff:1
16) Economicgrowthwillbeassociatedwithaconstantpricelevelwhen
A) theincreaseinaggregatedemandexactlyequalstheincreaseinlong -runaggregate
supply.
B) theincreaseinaggregatedemandismorethantheincreaseinlong-runaggregatesupply.
C) theincreaseinaggregatedemandislessthantheincreaseinlong-runaggregatesupply.
D) theincreaseinaggregatedemandisaccompaniedbyareductioninshort -runaggregate
supply.
Answer: A
Diff:2
17) Overthelasttwentyyears,realGDPintheU.S.economyhasincreasedandtherehasbeen
inflation.Thisindicatesthat
A) aggregatedemandhasincreasedwhileaggregatesupplyhasbeenconstant.
B) aggregatedemandhasbeenconstantwhileaggregatesupplyhasincreased.
C) aggregatedemandhasincreasedmorethanaggregatesupply.
D) aggregatedemandhasincreasedlessthanaggregatesupply.
Answer: C
Diff:3
18) Economicgrowthtakesplace
A) onlywhenbothaggregatedemandandaggregatesupplyincrease.
B) whenaggregatesupplyincreases.
C) whenaggregatedemanddecreases.
D) onlyifthepricelevelisconstantorrising.
Answer: B
Diff:2
19) TheU.S.economyhashadpersistentinflationinrecentdecades.Apossibleexplanationforthe
inflationisthat
A) therehavebeendecreasesinthegrowthratewhileaggregatedemandhasremained
unchanged.
B) therehavebeenincreasesinthegrowthratewhileaggregatedemandhasremained
unchanged.
C) therehavebeendecreasesinaggregatedemandwhileaggregatesupplyhasremained
unchanged.
D) growthinaggregatedemandhasbeengreaterthangrowthinaggregatesupply.
Answer: D
Diff:3
20) Inthelongrun,anincreaseingovernmentspending,otherthingsequal,generates
A) ahigherrealGDPinthelongrun.
B) alowerrealGDPintheshortrun.
C) ahigherpricelevel.
D) bothahigherrealGDPandalowerpricelevel.
Answer: C
Diff:2
21) Refertotheabovefigure.Ifthepricelevelis80,
A) thetotalplannedrealexpendituresbyindividuals,businesses,andthegovernmentare
lessthantotalplannedproductionbyfirms.
B) thetotalplannedrealexpendituresbyindividuals,businesses,andthegovernmentexceed
totalplannedproductionbyfirms.
C) theeconomywillhaveeconomicgrowthandthenewequilibriumpricelevelwillbe80.
D) theaggregatedemandcurvewillautomaticallyshiftleadingtoastableequilibrium.
Answer: B
Diff:1
22) Theintersectionofaggregatedemandandlong-runaggregatesupplyidentifythepricelevelat
whichtotalplanned
A) realexpendituresequalactualnominalGDP.
B) realexpendituresequaltotalplannedproduction.
C) exportspendingequalstotalplannedimportspending.
D) governmentspendingequalstotalplannedtaxrevenues.
Answer: B
Diff:2
23) Whatwouldhappeninaneconomyiftotalplannedproductionexceededtotalplannedreal
expenditures?
A) Inventorieswouldbedepleted,andfirmswouldtendtolowerprices.
B) Inventorieswouldaccumulate,andfirmswouldtendtolowerprices.
C) Inventorieswouldbedepleted,andfirmswouldtendtoraiseprices.
D) Inventorieswouldaccumulate,andfirmswouldtendtoraiseprices.
Answer: B
Diff:2
24) Ifthecurrentpricelevelislowerthantheequilibriumpricelevel,thenitmustbetruethattotal
planned
A) governmentspendingislessthantotalplannedtaxrevenues.
B) governmentspendingexceedstotalplannedtaxrevenues.
C) realexpendituresarelessthantotalplannedproduction.
D) realexpendituresexceedtotalplannedproduction.
Answer: D
Diff:2
25) Considertheabovefigure.Atapricelevelof150,
A) totalplannedproductionexceedstotalplannedrealexpenditures.
B) totalplannedrealexpendituresexceedtotalplannedrealproduction.
C) inventoriesofunsoldgoodsdecline.
D) thepricelevelwouldrise.
Answer: A
Diff:3
26) Considertheabovefigure.Atapricelevelof120,
A) totalplannedrealexpendituresexceedtotalplannedproduction.
B) totalplannedproductionexceedstotalplannedexpenditures.
C) priceswouldfall.
D) inventorieswouldbegintoaccumulate.
Answer: A
Diff:3
27) Intheabovefigure,thelong-runequilibriumpricelevelis
A) 150.
B) 130.
C) 110.
D) notdisplayed.
Answer: B
Diff:1
28) Intheabovefigure,thelong-runequilibriumrealGDPis
A) $10trillion.
B) $11trillion.
C) $12.trillion
Answer: B
Diff:1
D) notdisplayed.
29) Intheabovefigure,ifthepricelevelis150,
A) totalplannedproductionexceedstotalexpenditures.
B) totalexpendituresexceedtotalplannedexpenditures.
C) totalplannedproductionequalstotalexpenditures.
D) totalplannedproductionislessthantotalexpenditures.
Answer: A
Diff:2
30) Ifconsumersconfidenceintheeconomyrises,
A) aggregatedemandwillshiftleftwardandthepricelevelwillrise.
B) aggregatedemandwillshiftleftwardandthepricelevelwillfall.
C) aggregatedemandwillshiftrightwardandthepricelevelwillrise.
D) aggregatedemandwillshiftrightwardandthepricelevelwillfall.
Answer: C
Diff:3
31) Apersistentdeclineinthepricelevelresultingfromeconomicgrowthinthepresenceofstable
aggregatedemandisknownas
A) demand-sidedeflation.
C) seculardeflation.
D) therealbalanceeffect.
Answer: C
Diff:1
32) Ifaggregatedemandisstableandthereiseconomicgrowth,theeconomywillexperience
A) seculardegeneration.
B) seculardeflation.
C) seculardecline.
D) seculardepreciation.
Answer: B
Diff:2
33) Arightwardshiftoflong-runaggregatesupplywithoutanychangeinaggregatedemand
A) willleaverealGDPunchanged.
B) resultsinalowerpricelevel.
C) increasesthepricelevelwithoutanychangeinrealGDP.
D) increasesthepricelevelalongwithanincreaseinrealGDP.
Answer: B
Diff:2
34) Aneconomyexperiencesrealgrowthovertimewithstableaggregatedemand.Thiswould
likelyresultin
A) increasingprices.
B) decreasingprices.
C) secularinflation.
D) increasedunemployment.
Answer: B
Diff:2
35) Whichofthefollowingisconsistentwithseculardeflation?
A) apersistentlydecreasingpricelevelcausedbyseveralperiodsofeconomicgrowthwith
stableAD
B) apersistentlyincreasingpricelevelcausedbyseveralperiodsofeconomicgrowthwith
decreasingAD
C) apersistentlydecreasingpricelevelcausedbyincreasesingovernmentexpenditures
D) apersistentlydecreasingpricelevelcausedbymoneybeingwithdrawnfromtheeconomy
Answer: A
Diff:1
36) Ifpersistentinflationwasduetodeclinesinlong-runaggregatesupply,whatpatternwouldbe
observed?
A) IncreasesinthepricelevelwouldoccursimultaneouslywithdecreasesinrealGDP.
B) IncreasesinthepricelevelwouldoccursimultaneouslywithincreasesinrealGDP.
C) Onlypricesofgoodswouldincrease;pricesofserviceswouldremainconstant.
D) Onlypricesofserviceswouldincrease;pricesofgoodswouldremainconstant.
Answer: A
Diff:3
37) Inaneconomyinwhichaggregatedemandisstableandaperiodofsustainedandsignificant
productivitygrowthoccurs,therewillbe
A) seculardeflation.
B) secularinflation.
C) aconstantpricelevel.
D) ashiftofaggregatesupplytotheleft.
Answer: A
Diff:3
38) WhatcouldcauseadecreaseinthepricelevelandsimultaneouslyanincreaseinGDPsimilarto
the1920sintheUnitedStates?
A) anincreaseininterestrates
B) adecreaseinconsumerconfidence
C) anincreaseinproductivity
D) adecreaseininterestrates
Answer: C
Diff:3
39) Long-runequilibriumwilloccuratthepricelevelatwhich
A) thelong-runaggregatedemandandshort-runaggregatesupplycurvesintersect.
B) theaggregatedemandandshort-runaggregatesupplycurvesintersect.
C) theaggregatedemandandlong-runaggregatesupplycurvesintersect.
D) theshort-runaggregatesupplyandlong-runaggregatesupplycurvesintersect.
Answer: C
Diff:1
40) Explainhowaneconomycanexperiencelong-runeconomicgrowthanddeflationatthesame
time.
Answer: Ifaggregatedemandremainsrelativelyconstantduringthegrowthperiods,thanasthe
LRASsupplycurveshiftsright,thenewequilibriumpointofADandtheLRAScurve
willbelower,indicatingdeflation.
Diff:2
41) Howcanacountryexperienceeconomicgrowthandstableprices?
Answer: Acountrycanexperienceeconomicgrowthandstablepricesifaggregatesupplyand
aggregatedemandincreasebythesameamount.Thenewequilibriumthenisatthesame
pricelevel,butrealGDPishigher.
Diff:2
10.5CausesofInflation
1) Overthepastseveraldecades,whathasbeentrueaboutinflationintheUnitedStates?
A) Inflationrateshavebeenconsistentlynegative.
B) Thenationhasexperiencedpersistentdeflation.
C) Inflationhasbeenverystable.
D) Inflationrateshavebeenconsistentlypositive.
Answer: D
Diff:2
Topic: 10.5CausesofInflation
2) Supply-sideinflationcouldbecausedbywhichofthefollowing?
A) Anincreaseinaggregatedemand
B) Adecreaseinaggregatedemand
C) Anincreaseinlong-runaggregatesupply
D) Adecreaseinlong-runaggregatesupply
Answer: D
Diff:2
3) Iftherearesteadydecreasesinaggregatesupply,theeconomywillexperience
A) aslowdecreaseinpricelevels.
B) demand-sideinflation.
C) anexpansionarygap.
D) supply-sideinflation.
Answer: D
Diff:1
4) WhathascausedpersistentinflationintheUnitedStates?
A) Thenationslong-runaggregatesupplycurvehasshiftedtotheleft.
B) Supply-sideinflation
C) Adecreaseinlaborproductivity
D) Noneoftheabove
Answer: D
Diff:2
5) Wheneverthegenerallevelofpricesrisesbecauseofcontinualincreasesinaggregatedemand,
wesaythattheeconomyisexperiencing
A) supply-sideinflation.
B) monetarystagflation.
C) demand-sideinflation.
D) aggregatesupplyshock.
Answer: C
Diff:1
6) Demand-sideinflationoccurswhen
A) increasesinaggregatedemandarenotmatchedbyincreasesinaggregatesupply.
B) increasesinaggregatesupplyoutstripincreasesinaggregatedemand.
C) aggregatedemandfallsmorerapidlythanaggregatesupply.
D) long-runaggregatedemandrisesfasterthanshort-runaggregatesupply.
Answer: A
Diff:1
7) Inlookingbackoverthepast40years,whichofthefollowinghastheU.S.economy
experienced?
A) Persistentdeflation
B) Consistentinflationataslowconstantrate
C) Persistentinflation
D) Yearsofbothinflationanddeflation
Answer: C
Diff:1
8) Whichofthefollowingfactorscouldcausetheeconomytoexperiencesupply-sideinflation?
A) Increasedsecurityaboutjobsandfutureincome.
B) Governmentlawswhichsaythattheaverageworkweekmustbereducedbyonehour
everyyear.
C) Increasethenumberofimmigrantsallowedintothecountry.
D) Developnewtechnologytoincreaseproductivity.
Answer: B
Diff:2
9) Supplysideinflationcanbecausedby
A) acontinualincreaseinaggregatesupplywhileaggregatedemandremainsunchanged.
B) acontinualdecreaseinaggregatesupplywhileaggregatedemandremainsunchanged.
C) acontinualdecreaseinaggregatesupplywhileaggregatedemandhassignificant
decreases.
D) acontinualincreaseinaggregatedemandwhileaggregatesupplyremainsunchanged.
Answer: B
Diff:1
10) Whichofthefollowingisthemaincauseofthepersistentinflationthatwehaveexperiencedin
theUnitedStates?
A) Supply-sideinflationaryfactors.
B) Demand-sideinflationaryfactors.
C) Acombinationofsupply-anddemand-sideinflationaryfactors.
D) Supply-sidesecularityfactors.
Answer: B
Diff:1
11) Areductiontheamountofoil(aresource)willtendtocausewhichofthefollowing?
A) areductioninoutputandareductioninthepricelevel
B) areductioninoutputwithnochangeinthepricelevel
C) areductioninoutputandanincreaseinthepricelevel
D) anincreaseinthepricelevelandnochangeinoutputifaccompaniedbyanincreaseinthe
moneysupply
Answer: C
Diff:1
12) Ifthereispersistentinflation,
A) long-runaggregatesupplyisgrowingatafasterratethanaggregatedemand.
B) long-runaggregatesupplyisgrowingataslowerratethanaggregatedemand.
C) thereisanexcessoftotalplannedexpenditures.
D) long-runaggregatesupplyisconstant.
Answer: B
Diff:2
13) Seculardeflation
A) hasbeenaseriousproblemduringthelastthreedecadesintheUnitedStates.
B) althoughpresent,hasnotbeenaproblemduringthelastthreedecadesintheUnited
States.
C) hasnotbeenpresentintheUnitedStatessince1959.
D) cannotexistinacapitalisticeconomy.
Answer: C
Diff:2
14) WhichofthefollowingisthemostlikelyexplanationforinflationintheUnitedStates?
A) increasesinaggregatesupply
B) decreasesinaggregatesupply
C) increasesinaggregatedemand
D) decreasesinaggregatedemand
Answer: C
Diff:2
15) Inthelongrun,persistentinflationintheUnitedStatesiscausedby
A) leftwardshiftsinboththelong-runaggregatesupplycurveandintheaggregatedemand
curve.
B) rightwardshiftsinthelong-runaggregatesupplycurveandtheleftwardshiftofthe
C) afasterrightwardshiftoftheaggregatedemandcurvethantherightwardshiftof the
long-runaggregatesupplycurve.
D) leftwardshiftsintheaggregatedemandcurvewhilethepositionofthelong-runsupply
curveisunchanged.
Answer: C
Diff:2
16) Forsupply-sideinflationtooccurinthelongrun,
A) theaggregatedemandcurvehastoshifttotheleft.
B) theaggregatedemandcurvehastoshifttotheright.
C) thelong-runaggregatesupplycurvehastoshifttotheright.
D) thelong-runaggregatesupplycurvehastoshifttotheleft.
Answer: D
Diff:1
17) Whichofthefollowingcancausesupply-sideinflation?
A) anincreaseinhumancapital
B) increasesinthemoneysupply
C) taxcuts
D) noneoftheabove
Answer: D
Diff:2
18) Supposethataneconomyisinitiallyproducingatthefull-employmentlevelofoutput.Now
supposethereisareductioninthemoneysupply.Otherthingsbeingequalwecanexpect
A) supply-sideinflation.
B) demand-sideinflation.
C) cost-pullinflation.
D) deflation.
Answer: D
Diff:1
19) Whatwillbetheresultinagrowingeconomyifincreasesinaggregatedemandoutpace
rightwardshiftsofthelong-runaggregatesupplycurve?
A) seculardeflation
B) inflationaccompaniedbydeclinesinrealGDP
C) inflationaccompaniedbyincreasesinrealGDP
D) adeclineinconsumptionspending
Answer: C
Diff:2
20) Refertotheabovefigure.Supposetheeconomysinitialequilibriumisrepresentedbythe
intersectionofLRAS 1andAD 1 .Supposethereisapersistentreductioninlaborforce
participation,whichreducestotalplannedproductionatanygivenpricelevel.Theresulting
changeintheeconomyslong-runequilibriumpositionwouldberepresentedbya
A) movementfromAtoC.
B) movementfromAtoB.
C) movementfromBtoC.
D) movementfromCtoA.
Answer: A
Diff:3
21) Refertotheabovefigure.AmovementfromBtoCwouldbeNOTbetheresultof
A) anincreaseinforeignincomelevels.
B) anincreaseingovernmentspending.
C) anincreaseinworkerproductivity.
D) anincreaseinconsumptionspending.
Answer: C
Diff:3
22) Refertotheabovefigure.AmovementfromBtoDwouldbearesultof
A) anincreaseinthequantityofmoneyincirculation.
B) anincreaseinlaborproductivity.
C) anincreaseingovernmentexpenditures.
D) anincreaseinthemarginalincometaxrate.
Answer: B
Diff:3
23) Refertotheabovefigure.Supposetheeconomysinitialequilibriumisrepresentedbythe
intersectionofLRAS1andAD 1 .Nowthereisanincreaseinlaborproductivitywhichincreases
totalplannedproductionatanygivenpricelevelandaggregatedemandremainsstable.The
resultingchangeintheeconomyslong-runequilibriumpositionwouldberepresentedbya
A) movementfromBtoD.
B) movementfromCtoD.
C) movementfromCtoB.
D) movementfromAtoB.
Answer: A
Diff:3
24) Whentheeconomyisinlong-runequilibrium,thepriceleveladjustssoastoequatewhichtwo
valueswithoneanother?
A) importandexportspending
B) theinflationrateandtheunemploymentrate
C) governmentspendingandtaxrevenues
D) totalplannedrealexpendituresandtotalplannedproduction
Answer: D
Diff:1
25) Whatpatternwouldyouobserveinaneconomyinwhichaggregatedemandisincreasingbutin
whichlong-runaggregatesupplyremainedthesame?
A) seculardeflation
B) inflationaccompaniedbynochangeinrealGDP
C) inflationaccompaniedbydeclinesinrealGDP
D) adeclineinconsumptionspending
Answer: B
Diff:3
26) Steadilyimprovingimprovementsintechnology,otherthingsbeingequal,willresultin
A) nochangeinthepricelevelandsteadilyincreasingoutput.
B) persistentdeflation
C) steadilyrisingpricelevel(inflation)andsteadilyincreasingoutput.
D) asteadilyfallingpricelevelwithnochangeinoutput.
Answer: B
Diff:2
27) Whentheaggregatedemandcurveshifts________thanthelong -runaggregatesupplyshifts

rightward,theresultwillbeinflation.
A) rightwardataslowerrate
B) leftwardataslowerrate
C) rightwardatafasterrate
D) leftwardatthesamerate
Answer: C
Diff:3
28) Whatwouldlikelyhappentothelong-runaggregatesupplycurveiftheU.S.federal
governmentincreasesmarginaltaxratesonwages?
A) TheLRAScurvewouldshiftrightward.
B) TheLRAScurvewouldshiftleftward.
C) TheLRAScurvewouldremainstablewhiletheADcurvewouldshiftleftward.
D) TheLRAScurvewouldremainstablewhiletheADcurvewouldshiftrightward.
Answer: B
Diff:2
29) Whichofthefollowingwouldunambiguouslygenerateinflation?
A) adecreaseinaggregatedemandaccompaniedbyanincreaseinaggregatesupply
B) anincreaseinaggregatedemandaccompaniedbyanincreaseinaggregatesupply
C) adecreaseinaggregatedemandaccompaniedbyadecreaseinaggregatesupply
D) anincreaseinaggregatedemandaccompaniedbyadecreaseinaggregatesupply
Answer: D
Diff:2
30) Iflong-runeconomicgrowthisnotaccompaniedbyachangeinaggregatedemand,theresult
willbe
A) persistentinflation.
B) seculardeflation.
C) devaluationofthedollar.
D) appreciationofthedollar.
Answer: B
Diff:2
31) Whatcausesdemand-sideinflation?Whatcausessupply-sideinflation?
Answer: Demand-sideinflationiscausedbyanincreaseinaggregatedemandwhilelong -run
aggregatesupplyisconstant.Supply-sideinflationiscausedbyareductioninshort-run
aggregatesupply.
Diff:3
32) Whatarethreecausesofsupply-sideinflation?
Answer: ShiftingtheLRAStotheleftcanbecausedbyanyofthefollowingfactors:areductionin
thelaborforce,areductioninthelaborforceparticipationrate,highermarginaltaxeson
businesses,andgovernmentprogramswhichactasincentivesforunemployedworkers
tonotgobacktowork.
Diff:2
Chapter11
ClassicalandKeynesianMacroAnalyses
11.1TheClassicalModel
1) Whomamongthefollowingwasaclassicaleconomist?
A) AdamSmith
B) A.C.Pigou
C) DavidRicardo
D) alloftheabove
Answer: D
Diff:1
Topic: 11.1TheClassicalModel
2) AllofthefollowingwereclassicaleconomistsEXCEPT
A) AdamSmith
B) A.C.Pigou
C) DavidRicardo
D) JohnMaynardKeynes.
Answer: D
Diff:1
3) WhichofthefollowingisNOTanassumptionoftheclassicalmodel?
A) Wagesandpricesarefixed.
B) Peoplearemotivatedbytheownself-interest.
C) Purecompetitionexists.
D) Buyersreacttochangesinrelativeprices.
Answer: A
Diff:1
4) Theideathatsupplycreatesitsowndemandisknownas
A) thelawofsupply.
B) thelawofdemand.
C) Keyneslaw.
D) Sayslaw.
Answer: D
Diff:1
5) Intheclassicalmodel,anincreaseinaggregatedemandwillcause
A) anincreaseinactualoutput,orGrossDomesticProduct(GDP).
B) adecreaseinactualoutput,orGrossDomesticProduct(GDP).
C) anincreaseinpricelevel.
D) adecreaseinpricelevel.
Answer: C
Diff:1
6) Classicaleconomistsassumedthat
A) pricesweresticky.
B) individualssufferedfrommoneyillusion.
C) wageswereinflexible.
D) noneoftheabove.
Answer: D
Diff:1
7) Thefirstsystematicattempttoexplainthedeterminantsofthepricelevelandnationallevelsof
income,employment,consumptionandrealGrossDomesticProduct(GDP)wasmadeby
________economists.
A) Keynesian
B) supply-side
C) monetarist
D) classical
Answer: D
Diff:1
8) Classicaleconomistswrotefromthe1770stothe________.
A) 1850s
B) 1890s
C) 1930s
D) 1960s
Answer: C
Diff:1
9) Supplycreatesitsowndemandisknownas
A) Smithslaw.
C) thecircularflow.
Answer: B
Diff:1
B) Sayslaw.
D) theRicardiandilemma.
Chapter11ClassicalandKeynesianMacroAnalyses341
10) Sayslawsaysthat
A) consumptionisgreaterthansupply.
B) desiredexpendituresalwaysequalactualexpenditures.
C) peopleproducethegoodstheyconsume.
D) peopleconsumethegoodstheyproduce.
Answer: B
Diff:1
11) Sayslawarguesthat
I. overproductionistypicalinamarketeconomy.
II. supplycreatesitsowndemand.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: B
Diff:1
12) Sayslawstatesthat
A) supplycreatesitsowndemand.
B) supplyanddemandareneverequal.
C) demandmaybegreaterthansupply.
D) supplywillusuallybegreaterthandemand.
Answer: A
Diff:1
13) Theclassicalmodelusestheassumptionthat
A) allwagesandpricesareflexible.
B) monopolyiswidespreadintheeconomy.
C) interestratesarenotflexible.
D) economicmarketsarefragileandhavenotendencytomovetowardsanequilibrium.
Answer: A
Diff:1
14) Accordingtotheclassicalmodel,theincomegeneratedbyproductionis
A) enoughtomeettheneedsofeveryoneinsociety.
B) enoughtopurchaseallthegoodsandservicesproduced.
C) fullyspentonsavings.
D) alwaysinsufficienttopurchaseallthegoodsandservicesproduced.
Answer: B
Diff:1
15) TheimplicationofSayslawisthat
A) GrossDomesticProductisthesamewhetherweusetheexpenditureapproachorthe
incomeapproach.
B) abartereconomyisthemostefficienteconomy.
C) increasedconsumptiontodayleadstoincreasedproductiontomorrow.
D) overproductioninamarketeconomyisnotpossible.
Answer: D
Diff:1
16) AllthefollowingareassumptionsoftheclassicalmodelEXCEPT
A) purecompetitionexists.
B) buyersandsellersreacttonominalmoneypricesratherthantorelativeprices.
C) peoplearemotivatedbyself-interest.
D) wagesandpricesareflexible.
Answer: B
Diff:2
17) Sayslawexplains
A) howlong-termrealGrossDomesticProduct(GDP)stabilityisachievedintheclassical
model.
B) howlong-runrealGrossDomesticProduct(GDP)stabilityisachievedintheKeynesian
model.
C) howtheeconomycangointorecession.
D) whyeconomiesexperiencebusinesscycles.
Answer: A
Diff:2
18) Ifaconsumerbuyslessgasolinebecausegaspricesincreasedby10percent,eventhoughall
otherpriceshavealsoincreasedby10percent,then
A) theconsumerispayingtoocloseattentiontochangesinrelativeprices.
B) wagesandpricesaretooflexible.
C) theconsumerhasbeenfooledbymoneyillusion.
D) inflationisnotaproblemintheeconomy.
Answer: C
Diff:1
19) Whichofthefollowingisanexampleofmoneyillusion?
A) Anindividualiswillingtoworkmorehourswhenthenominalwagerisesby5percent
andtheoverallpricelevelrisesby4percent.
B) Anindividualiswillingtoworkmorehourswhenthenominalwagerisesby5%andthe
overallpricelevelrisesby7percent.
C) Anindividualwillneitherincreasenordecreasethenumberofhourssheiswillingto
workwhenthenominalwagerisesby5percentandtheoverallpricelevelrisesby5
percent.
D) noneoftheabove.
Answer: B
Diff:2
20) Accordingtothecircularflowofincomeandoutput,savingcauses
A) totaloutputtofall.
B) consumptionexpendituresandtotaloutputtofall.
C) consumptionexpenditurestofallshortoftotaloutput.
D) investmentspendingtofall.
Answer: C
Diff:1
21) Onekeyassumptionoftheclassicalmodelis
A) governmentspendingplaysamajorrole.
B) moneyillusioncannotfoolworkers.
C) wagesaresticky.
D) pricesaresticky.
Answer: B
Diff:2
22) Classicaleconomiststendto
A) seeunemploymentasapersistenteconomicproblem.
B) believeinKeynesianeconomics.
C) rejecttheequalityofsavingsandinvestment.
D) supportSayslaw.
Answer: D
Diff:1
23) Intheclassicalmodel,anincreaseintheunemploymentrate
A) willpersistwhenthereductioninoutputiscausedbyareductioninaggregatedemand.
B) willresultinanincreaseinthepricelevelifthereductioninoutputiscausedbyachange
inaggregatedemand.
C) willlikelybetemporary.
D) isasignalofdemand-pullinflation.
Answer: C
Diff:2
24) Accordingtoclassicaleconomists,
A) Sayslawisnotvalid.
B) unemploymentwillnotbeaseriousprobleminamarketeconomy.
C) wagelevelsarealwayssticky.
D) demandstimulusisneededtoproducefullemployment.
Answer: B
Diff:1
25) Intheclassicalmodel,aggregatedemandandaggregatesupplywill
A) notexist.
B) intersectatlessthanfullemployment.
C) intersectatthepointoffullemployment.
D) notintersect.
Answer: C
Diff:1
26) Anindividualwhoissufferingfrommoneyillusionismoreconcernedwith
A) relativepricesthanwithnominalprices.
B) relativepricesthanwithrealprices.
C) nominalpricesthanwithrelativeprices.
D) realpricesthanwithnominalprices.
Answer: C
Diff:1
27) Anindividualwhosuffersfrommoneyillusionwill
A) feelthatadoublingofpricesandincomeimproveshiseconomicposition.
B) concentrateonrelativeprices.
C) neverbefooledbytheimpactofpricechangesonthepurchasingpowerofincome.
D) trytousecounterfeitmoney.
Answer: A
Diff:1
28) SupposeParisthinksa5percentincreaseinherhourlywageasanincentivetoworkmore
hourswhilethepricelevelalsoincreasesby5percent.Parisissaidtobesufferingfrom
A) moneyillusion.
B) rationality.
C) irrationality.
D) theeffectsofcompetition.
Answer: A
Diff:2
29) Theclassicalmodelassumesthat
A) imperfectcompetitionpredominatesinmostmarkets.
B) peoplehavemoneyillusion.
C) wagesandpricesareflexible.
D) wagesareflexiblebutpricesarenot.
Answer: C
Diff:1
30) AllofthefollowingareassumptionsoftheclassicalmodelEXCEPT
A) inflexiblewages.
B) absenceofmoneyillusion.
C) purecompetition.
D) self-interestofeconomicactors.
Answer: A
Diff:1
31) Onetenetofclassicaleconomicsisthat
A) theroleofthegovernmentshouldbelimited,sincethemarketwillalwaysbe
self-correcting.
B) thegovernmentshouldintervenewhenevernecessarytoavoidanyunemployment.
C) wagesandpricesarestickydownward.
D) thegovernmentshouldsetaminimumwageslightlyabovethenaturalmarket
equilibriumrate.
Answer: A
Diff:2
I. Ifotherfactorsareheldconstant,thelevelofemploymentintheeconomydeterminesreal
GrossDomesticProduct(GDP).
II. Accordingtoclassicaleconomists,onlyvoluntaryunemploymentexistsinthelongrun.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:1
33) WhichofthefollowingstatementsabouttheclassicalmodeloftheeconomyisFALSE?
A) Savingsandinvestmentwillalwaysbeequal.
B) Wagesandpricesareflexible.
C) Theeconomywillalwaysmovetoward,orbeat,fullemployment.
D) Individualspursuethepublicinterest,nottheirownself-interest.
Answer: D
Diff:1
34) Ifyoufeelyouarebetteroffbecauseyoureceivea20percentraiseevenwhenthepricelevel
alsoincreasesby20percent,thenyouareavictimofthe
A) realincomeeffect.
B) moneyincomeeffect.
C) moneyillusion.
D) realpurchasingpowereffect.
Answer: C
Diff:1
A) Wagesandpricesareflexible.
B) Peoplearemotivatedbyself-interest.
C) Moneyillusionexists.
D) Purecompetitionexists.
Answer: C
Diff:1
36) Aclassicalmodeloftheeconomypredicts
A) fullemploymentinthelongrun.
B) a15to20percentunemploymentlevelwhenevertheeconomyisinequilibrium.
C) thesameunemploymentratesastheKeynesianmodel.
D) cyclicalchangesintheunemploymentrate.
Answer: A
Diff:1
37) Akeyassumptionintheclassicalmodelis
A) stickywages.
B) purecompetitionexists.
C) stickyprices.
D) thegovernmentplaysamajorroleineconomicproblems.
Answer: B
Diff:1
38) Accordingtotheclassicalmodel,moresavingleadstomoreinvestmentbecause
A) thepeoplewhosavearethesamepeoplewhoinvest.
B) theinterestrateadjuststokeepinvestmentequaltosaving.
C) savingandinvestmentaretwosidesofthesameactivity.
D) theinterestrateissetbythefederalgovernment.
Answer: B
Diff:1
39) Athigherratesofinterest,
A) householdssavelessandbusinessesinvestmore.
B) householdssavelessandbusinessesinvestless.
C) householdssavemoreandbusinessesinvestless.
D) householdssavemoreandbusinessesinvestmore.
Answer: C
Diff:1
40) Theequilibratingforceinthecreditmarketintheclassicalmodelis
A) theinterestrate.
B) thepricelevel.
C) fullemployment.
D) fiscalpolicy.
Answer: A
Diff:2
41) Classicaleconomistsarguedthat
A) therewouldalwaysbeanexcessofsavingoverinvestment.
B) workershadmoneyillusion.
C) excesssavingswouldcreateunemployment.
D) aflexibleinterestratewouldmakesavingequaltoinvestment.
Answer: D
Diff:1
42) Accordingtoclassicaleconomists,adecreaseintherateofinterestwill
A) increaseunemployment.
B) increaseconsumersaving.
C) increasebusinessinvestment.
D) increasebusinessfailures.
Answer: C
Diff:1
43) Individualswillincreasetheirsavingas
A) theinterestratefalls.
C) therateofunemploymentincreases.
Answer: D
Diff:1
B) businessinvestmentfalls.
D) theinterestrateincreases.
44) Intheclassicalmodel,desiredsaving
A) exceedsinvestment.
C) isequaltodesiredinvestment.
B) isinverselyrelatedtorealincome.
D) islessthandesiredinvestment.
Answer: C
Diff:1
45) Theclassicaleconomistsarguedthatplannedsavingandplannedinvestmentwillalwaysbe
equalbecauseofchangesin
A) thelevelofrealdisposableincome.
B) theinterestrate.
C) thepricelevel.
D) wages.
Answer: B
Diff:1
46) Accordingtoclassicaltheory,desiredsavingalwaysequalsinvestmentduetochangesin
A) prices.
B) wages.
C) theinterestrate.
D) taxes.
Answer: C
Diff:1
47) Ineconomics,investmentisdefinedas
A) thespendingbybusinessesoncapitalgoodsandinventories.
B) thespendingbyhouseholdsonhumancapitalanddurablegoods.
C) disposableincomeminusconsumption.
D) disposableincomeplusconsumption.
Answer: A
Diff:1
48) Withrespecttounemployment,theclassicalmodelstatesthat
A) unemploymentofanykindcannotexist.
B) onlyvoluntaryunemploymentexists.
C) unemploymentfluctuateswiththeinterestrate.
D) involuntaryunemploymentwillalwaysexceedvoluntaryunemployment.
Answer: B
Diff:1
49) Accordingtoclassicaltheory,fullemploymentinthelabormarketoccurs
A) wheneveraggregatedemandislessthanaggregatesupply.
B) atawagerateatwhichquantitydemandedequalsquantitysupplied.
C) onlywhentheeconomyhasjustexperiencedademandshock.
D) onlywhenactualexpendituresaregreaterthandesiredexpenditures.
Answer: B
Diff:1
50) Intheclassicalmodel,whatoccursifawageof$20/hourresultsinunemployedworkers?
A) Theworkerswillgoonstriketodemandthatmorejobsbecreated.
B) Producerswillquicklycreatemorejobsandhiretheunemployedworkers,so
unemploymentisshort-lived.
C) Thewageratewilldrop,moreworkerswillbehired,andtheunemploymentratefalls.
D) Thegovernmentwillstepinandorderfirmstohiremoreworkers.
Answer: C
Diff:1
51) Accordingtoclassicaltheory,totalemploymentandrealGrossDomesticProduct(GDP)are
A) unrelated.
B) positivelyrelated.
C) inverselyrelated.
D) negativelyrelated.
Answer: B
Diff:2
52) Intheclassicalmodel,theaggregatesupplycurveis
A) upwardsloping.
B) downwardsloping.
C) horizontal.
D) vertical.
Answer: D
Diff:1
53) Intheclassicalmodel,realGrossDomesticProduct(GDP)peryearis
A) duetosupplyconditionsplustheextentofgovernmentinterventionintheeconomy.
B) determinedbysupplyanddemandconditionstogether.
C) supplydetermined.
D) demanddetermined.
Answer: C
Diff:1
54) Supposeaneconomyoriginallyinlong-runequilibriumexperiencesadecreaseinaggregate
demand.Accordingtotheclassicalmodel,
A) realGrossDomesticProduct(GDP)willnotchangebutthepricelevelwillfall.
B) realGrossDomesticProduct(GDP)willfall,andthenthepricelevelwillfallalso.
C) thepricelevelwillnotchangebutrealGrossDomesticProduct(GDP)willfall.
D) realGrossDomesticProduct(GDP)willfall,wageswillfall,butthepricesofgoodsand
serviceswillstaythesame.
Answer: A
Diff:1
55) Intheclassicalmodel,ashifttotherightinaggregatedemandwouldresultin
A) apermanentincreaseinunemployment.
B) apermanentincreaseinrealincomes.
C) anincreaseinthepricelevel.
D) apermanentshiftpastfullemployment.
Answer: C
Diff:2
56) Accordingtotheclassicaltheory,aninwardshiftinaggregatedemandwouldreduce
A) realGrossDomesticProduct(GDP)andthepricelevel.
B) thepricelevelbuthavenoeffectonrealGrossDomesticProduct(GDP).
C) realincomebuthavenoimpactonthepriceGrossDomesticProduct(GDP).
D) thepricelevelbutincreaserealGrossDomesticProduct(GDP).
Answer: B
Diff:1
57) Accordingtoclassicaltheory,ashiftinaggregatedemandwillaffect
A) thepricelevelonly.
B) realGrossDomesticProduct(GDP)only.
C) thelevelofemploymentonly.
D) bothrealGrossDomesticProduct(GDP)andthelevelofemployment.
Answer: A
Diff:1
58) Accordingtotheclassicalmodel,anincreaseinaggregatedemandwould
A) leadtheeconomytorecession.
B) leadtheeconomytoadeflationarycycle.
C) causeanadjustmenttoahigherpricelevel.
D) raiserealGrossDomesticProduct(GDP)butleavethepricelevelunchanged.
Answer: C
Diff:3
A) upwardslopingintheshortrunbutverticalinthelongrun.
B) alwaysvertical.
C) thesameastheaggregatesupplycurveintheKeynesianmodel.
D) flatatlowlevelsofoutputandtheneventuallyslopesupwardasoutputincreases.
Answer: B
Diff:1
60) Accordingtotheclassicaltheory,theaggregatesupplycurveis
A) downwardsloping.
B) horizontal.
C) upwardsloping.
D) vertical.
Answer: D
Diff:1
61) Accordingtoclassicaltheory,anychangesinaggregatedemandwill
A) leadtochangesinthepricelevel.
B) leadtochangesinrealGrossDomesticProduct(GDP),butnotinthepricelevel.
C) leadtochangesinbothrealGrossDomesticProduct(GDP)andthepricelevel.
D) havenoaffectonpricesorrealGrossDomesticProduct(GDP).
Answer: A
Diff:1
62) AccordingtoSayslaw,
A) desiredexpendituresarealwayslessthanactualexpenditures.
B) desiredexpendituresarealwaysmorethanactualexpenditures.
C) desiredexpendituresarealwaysequaltoactualexpenditures.
D) desiredexpenditurescannotbecomparedwithactualexpenditures.
Answer: C
Diff:1
63) Sayslawimpliesthat
A) thewillingnesstopurchaseothergoodsisunrelatedtotheproductionofgoodsand
services.
B) producinggoodsandservicesgeneratesthemeansandthewillingnesstopurchaseother
goodsandservices.
C) pricesandwagesarestickydownwards.
D) wagesandpricesareinflexible.
Answer: B
Diff:1
64) Inaclassicalmodel,
A) equilibriumrealGDPissupplydetermined.
B) equilibriumrealGDPisdemanddetermined.
C) equilibriumrealGDPisdeterminedbybothaggregatesupplyandaggregatedemand.
D) equilibriumrealGDPisneitherdeterminedbyaggregatesupplynorbyaggregate
demand.
Answer: A
Diff:1
65) Theconditionoffullyflexiblewagesandpriceswasassumedby
A) theclassicaleconomists.
B) theKeynesianeconomists.
C) moderneconomists.
D) noeconomists.
Answer: A
Diff:1
66) TheapproachtounderstandingthedeterminationofrealGDPandthepricelevelthat
emphasizesflexiblewagesandpricesandcompetitivemarketsis
A) theclassicalmodel.
B) theKeynesianmodel.
C) AdamSmithsLaw.
D) theaggregatedemandmodel.
Answer: A
Diff:1
67) Theclassicaleconomistsassumedthat
A) monopolywaswidespreadintheeconomy.
B) governmentinterventionintheeconomicsystemwasnecessaryandhelpful.
C) wagesandpriceswereinflexible,especiallydownward.
D) wagesandpriceswereflexible.
Answer: D
Diff:1
68) Accordingtotheclassicaleconomists,aneconomyproducing$15trillioningoodsandservices
A) maybeproducingtoomuchsincetheneedsofpeoplemaynotbethisgreat.
B) simultaneouslygeneratestheincomenecessarytopurchase$15trillioningoodsand
services.
C) issupplying$15trillioningoodsandservices,butcouldbedemandingmoreorlessthan
$15trillioningoodsandservicesforaverylongperiodoftime.
D) couldexperienceapermanentglutifnoonehasestimatedthedemandforgoodsand
servicesintheeconomy.
Answer: B
Diff:2
69) Accordingtotheclassicaleconomists,actualrealGDP
A) alwaysequalsactualaggregateincome.
B) sometimesequalsactualaggregateincome.
C) neverequalsactualaggregateincome.
D) isnotrelatedtoaggregateincome.
Answer: A
Diff:1
70) Supplycreatesitsowndemandisknownas
A) KeynesRule.
C) Smithslaw.
B) thecircularflow.
D) Sayslaw.
Answer: D
Diff:1
71) Theconceptthatproducinggoodsandservicesgeneratesthemeansandthewillingnessto
purchaseothergoodsandservicesis
A) theKeynesianapproach.
B) moneyillusion.
C) SaysLaw.
D) cost-pushinflation.
Answer: C
Diff:1
72) Sayslawstatesthat
A) desiredexpenditureswillequalactualexpenditures.
B) peopleproduceonlythegoodstheywant.
C) demandisalwayslessthansupply.
D) overproductionisneverpossiblebecauseoflimitedresources.
Answer: A
Diff:2
73) WhichofthefollowingstatementsisNOTtrueaboutSayslaw?
A) Desiredexpenditureswillequalactualexpenditures.
B) Surpluseswillbeeliminatedbyfallingpricesandshortageswillbeeliminatedby
increasingprices.
C) Peopleproducemoregoodsthantheywantfortheirownuseonlyiftheyseektotrade
themforothergoods.
D) Marketswouldberegularlyhitbysevereshortagesandsurpluses.
Answer: D
Diff:1
A) surplusesneveroccur.
B) surplusesorshortagesarepossible,butonlyforashorttime.
C) therewillalwaysbeunemployment.
D) shortagesneveroccur.
Answer: B
Diff:2
75) WhichofthefollowingisNOTtrueaccordingtoSayslaw?
A) Supplycreatesitsowndemand.
B) Nooverproductionispossibleinamarketeconomyinthelongrun.
C) Desiredexpenditureswillalwaysbehigherthanactualexpenditures.
D) Producinggoodsandservicesgeneratesthemeansandthewillingnesstopurchaseother
goodsandservices.
Answer: C
Diff:1
76) Anassumptionoftheclassicalmodelisthat
A) moneyillusioniswidespread.
B) peoplemakedecisionsbasedonnominalpricesratherthanrealprices.
C) pricesareflexiblewhilewagesareinflexible.
D) peoplearemotivatedbyself-interest.
Answer: D
Diff:1
A) Wagesandpricesareflexible.
B) Investmentwillleadtomoneyillusion.
C) Peoplearemotivatedbyself-interest.
D) Purecompetitionexists.
Answer: B
Diff:1
A) Buyersandsellersreacttochangesinrelativeprices.
B) Householdswanttomaximizeeconomicwellbeing.
C) Nosinglebuyerorsellerofacommoditycanaffectitsprice.
D) Wagesandpriceswillmovefreelyintheupwarddirectionbutnotthedownward
direction.
Answer: D
Diff:2
79) Giventheassumptionsoftheclassicalmodel,
A) theeconomywilloftenexperiencerecessionsandexpansions.
B) expansionwillbethenormalcondition,butrecessionswilloftenbesevereandrequire
governmentintervention.
C) themacroeconomyiserratic,andproblemswilloftenbeincreasedovertime.
D) themarketisaself-correctingmechanism.
Answer: D
Diff:2
80) Aconsumerwhobuysmorecoffeewhenthepriceofcoffeefalls5percent,whileallotherprices
fell5percenttoo,is
A) sufferingfrommoneyillusion.
B) worryingtoomuchaboutacomingrecession.
C) behavinginaccordancewithclassicaleconomictheory.
D) payingtoomuchattentiontochangesinrelativeprices.
Answer: A
Diff:2
81) Joesincreaseinwageshasbeenidenticaltotheincreaseinthepricelevel.Joethinksthatheis
betteroffandhasincreasedhisexpenditures.Joesbehaviorisconsistentwith
A) SaysLaw.
B) theclassicalmodel.
C) averticalaggregatesupplycurve.
D) moneyillusion.
Answer: D
Diff:1
82) Moneyillusionis
A) abasicconditionthatallclassicaleconomistsassumepeoplehave.
B) whenpeoplethinktheyarebetteroffwhentheirincomeincreaseseventhoughprices
haveincreasedbythesameamount.
C) whenpeoplearemotivatedbyself-interest.
D) couldnotexistiftheeconomydidnothavecompetitivemarkets.
Answer: B
Diff:1
83) Savingrepresents
A) asourceoffundsforbusinessinvestment.
B) anormalpartofthecircularflowofincomeandoutput.
C) aninjectiontothecircularflowofincomeandoutput.
D) acounter-exampletoSaysLawthattheclassicaleconomistsneverconsidered.
Answer: A
Diff:2
84) Leakagesinthecircularflowmodelare
A) causedbypeoplenotactingrational.
B) possiblewhenunemploymentexists.
C) reflectedintheverticallong-runaggregatesupplycurve.
D) causedbypeoplesavinginsteadofspending.
Answer: D
Diff:1
85) Inaneconomywithnogovernmentandnointernationaltrade,consumptionexpenditureswill
belessthanthetotalvalueofgoodsandserviceswhen
A) investmentiszero.
B) savingiszero.
C) peoplesavesomeoftheirincome.
D) peoplebarterratherthanusemoneyinmakingexchanges.
Answer: C
Diff:1
86) Savingisnotaproblemintheclassicalmodelbecause
A) theclassicaleconomistsassumethatsavingwasbeneficialtopeopleforretirement.
B) savingwouldbespentbyconsumerseventually.
C) interestratesareflexible,andsavingswerechanneledintoinvestment.
D) saversandinvestorsarethesamepeople.
Answer: C
Diff:2
A) Thereisadirectrelationshipbetweeninvestmentandtheinterestrate.
B) Thereisaninverserelationshipbetweeninvestmentandtheinterestrate.
C) Thereisnorelationshipbetweeninvestmentandtheinterestrate.
D) Investmentisalwayslessthansavings.
Answer: B
Diff:1
88) Athigherratesofinterest,
A) householdssavelessbecauseitismoreexpensivetosave.
B) householdssavemorebecausetheygetagreaterreturnontheirsavings.
C) businessesdemandmoreinvestmentbecausefutureprofitabilityislikelytobegreater.
D) businessesdemandmoreinvestmentbecausetherearemorefundsavailabletoinvest.
Answer: B
Diff:2
89) Regardingunemployment,theclassicalmodelimpliesthat
A) unemploymentalwaysexists.
B) unemploymentcannotexist.
C) voluntaryunemploymentiszero,butinvoluntaryunemploymentoftenisfairlyhigh.
D) onlyvoluntaryunemploymentexists.
Answer: D
Diff:1
90) Intheclassicalmodel,
A) unemploymentwillneverexistsinceworkerswillbewillingtoacceptlowerwagesand
willthenbeabletofindwork.
B) unemploymentwillneverexistbecauseemployerswillbewillingtopaythewagerate
demandedbytheworkers.
C) wageswillgoupbutnevergodown.
D) fullemploymentwillneverbereached.
Answer: A
Diff:1
91) Higherunemploymenttendstobeassociatedwith
C) highernominalGDP.
B) higherrealGDP.
D) lowerrealGDP.
Answer: D
Diff:1
92) Intheclassicalmodel,highunemploymentduetoachangeinaggregatedemand
A) canpersistforanindefiniteperiodoftime.
B) willreturntoitsnormallevelquicklyaswagesadjust.
C) willpersistifduetoasupplyshockbutnotifduetoademandshock.
D) neverexistsbecauseunemploymentcanneverdeviatefromitsnormallevel.
Answer: B
Diff:2
93) Theaggregatesupplycurveintheclassicalmodelis
A) horizontal.
B) vertical.
C) upwardsloping.
D) downwardsloping.
Answer: B
Diff:1
94) Whichofthefollowingstatementsistrueaboutthelong-runandshort-runaggregatesupply
curveintheclassicalmodel?
A) Thelong-runaggregatesupplycurveisvertical,andtheshort-runcurveishorizontal.
B) Thelong-runaggregatesupplycurveisnotdefined,andtheshortruncurveisvertical.
C) Thelong-runandshort-runcurvesstartouthorizontalandeventuallybecomevertical.
D) Thelong-runcurveisvertical,andthereisnoshort-runcurvesincealladjustmentsoccur
quickly.
Answer: D
Diff:2
95) Theclassicalmodelmakeslittledistinctionbetweenthelongrunandshortrunbecause
A) themodelhasnotbeenfullydevelopedyet.
B) theclassicaleconomistsknewthatwearealwaysoperatingintheshortrun.
C) currentchangesinfluencethelongrun,soitisnotpossibletoplanforthefuture.
D) wagesandpricesadjustsofastthattheeconomyisquicklymovingtowardsthelongrun.
Answer: D
Diff:1
96) Intheclassicalmodel,theaggregatesupplycurve
A) ishorizontal.
B) ispositivelysloped.
C) isconsistentwiththenaturalrateofunemployment.
D) isnotrelatedtotheemploymentrate.
Answer: C
Diff:1
97) Intheclassicalmodel,anincreaseinaggregatedemandwillleadtoanincreaseinwagerates
whileadecreaseinaggregatedemandwill
A) leavewagesunchangedsinceworkerswillnottakeacutinpay.
B) decreasewages.
C) increasewagessincebusinesswillbedesperateforlabor.
D) changethepriceofcapital.
Answer: B
Diff:1
A) Purecompetition.
D) Wagerigidity.
Answer: D
Diff:2
99) Intheclassicalmodel,achangeinaggregatedemand
A) causesachangeinlong-runrealGDPbutnotinthepricelevel.
B) causesachangeinthepricelevelbutnotinthelong-runrealGDP.
C) causeschangesinboththelong-runrealGDPandinthepricelevel.
D) hasnoeffectoneitherrealGDPorthepricelevel.
Answer: B
Diff:2
100) Aneconomyinlong-runequilibriumexperiencesanincreaseinaggregatedemand.According
totheclassicalmodel,
A) thepricelevelwillrisefirst,thenrealGDPwillincrease.
B) thepricelevelandrealGDPwillincreaseatthesametime.
C) thepricelevelwillincrease,butrealGDPwillnotchange.
D) thepricelevelwillincrease,butrealGDPwilldecrease.
Answer: C
Diff:3
A) thelevelofrealGDPperyeardoesnotdependonthelevelofaggregatedemand.
B) thelevelofGDPisdemanddetermined.
C) changesinaggregatesupplyaffectthepricelevel,notrealGDP.
D) thelevelofGDPdeterminespricesindependentofdemand.
Answer: A
Diff:1
A) adecreaseinaggregatedemandwillleadtoadecreaseinthepricelevelandadecreasein
realGDP.
B) changesinaggregatesupplyleaverealGDPunchanged.
C) adecreaseinaggregatedemandwillleadtoanincreaseinthepricelevelandadecreasein
realGDP.
D) changesinaggregatedemandaffectonlythepricelevel,notrealGDP.
Answer: D
Diff:2
103) WhichofthefollowingisNOTakeyassumptionoftheclassicalmodel?
A) Thereisasinglemonopolysellerinmanymarketsforgoodsandservices.
B) Peoplecannotbefooledbymoneyillusion.
D) Wagesandpricesareflexible.
Answer: A
Diff:2
A) wagesandpricesarenotflexible.
B) peoplesupplygoodsandservicestothemarketbecausetheywanttoconsumeother
goodsandservices.
C) governmentregulationisneededtopreventshortagesfrombecomingaproblem.
D) governmentregulationisneededtopreventsurplusesfrombecomingaproblem.
Answer: B
Diff:2
105) Intheclassicalmodel,theinterestratewilladjusttoequate
A) consumptionspendingwithrealGDP.
B) savingwithinvestment.
C) theeconomicgrowthratewiththegrowthrateofimportspending.
D) exportspendingwithimportspending.
Answer: B
Diff:2
106) WhyisthereNOpersistentunemploymentintheclassicalmodel?
A) Thewageleveladjuststoeliminateunemployment.
B) Theinterestrateadjuststoeliminateunemployment.
C) Therateofeconomicgrowthisalwayshighenoughtoallowthosewhowanttoworkat
currentwagestofindjobs.
D) Unionizationcreatesjobsecurityforworkers.
Answer: A
Diff:2
107) WhichofthefollowingisNOTanassumptionoftheclassicalsystem?
A) Purecompetitionexists.
B) Peoplearemotivatedbyselfinterest.
C) Wagesandpricesareinflexible.
D) Thereisnomoneyillusion.
Answer: C
Diff:1
108) Intheclassicalmodel,changesininterestrateswillalwaysensurethat
A) consumptionequalsproduction.
B) savingequalsinvestment.
C) consumptionequalsinvestment.
D) consumptionequalsincome.
Answer: B
Diff:2
109) TheconceptofSayslawcanbesummedupbythephrase,
B) demandcreatesitsownsupply.
C) supplyanddemandareequivalentconcepts.
D) supplyanddemandareirrelevantconcepts.
Answer: A
Diff:1
110) Fullemploymentintheclassicalmodelismaintainedby
A) flexibleinterestrates.
B) flexiblewagerates.
C) flexibleprices.
D) flexibleincome.
Answer: B
Diff:1
A) ahorizontalline.
B) anupwardslopingline.
C) averticalline.
D) acombinationofhorizontal,upwardsloping,andverticallines.
Answer: C
Diff:1
112) Intheclassicalmodel,arightwardshiftintheaggregatedemandcurvewill,inthelongrun,
A) increaserealGDPandthepricelevel.
B) increaserealGDPandwillnotchangethepricelevel.
C) decreaserealGDPandwillnotchangethepricelevel.
D) notchangerealGDPandwillincreasethepricelevel.
Answer: D
Diff:2
113) Whyiswageandpriceflexibilityanimportantassumptionoftheclassicalmodel?
A) Flexiblewagesandpricesguaranteethattherewillbenoscarcity.
B) Flexiblewagesandpricesallowbusinessfirmstofooltheirworkersthroughthemoney
illusion.
C) Flexiblewagesandpricesallowbusinessfirmstofooltheircustomersthroughthemoney
illusion.
D) Flexiblewagesandpricesallowmarketstoreachequilibrium.
Answer: D
Diff:2
114) WhichoneofthefollowingstatementsisNOTtrue?
A) Theclassicalmodelassumesthatpeoplesufferfrommoneyillusion.
B) Theclassicalmodelassumesthatpeoplearemotivatedbyself -interest.
C) Theclassicalmodelassumesthatpurecompetitionexists.
D) Theclassicalmodelassumesthatnosinglesellerofacommoditycanaffectitsprice.
Answer: A
Diff:1
115) Whatistruewhenthecreditmarketisinequilibrium?
A) Desiredsavingequalsdesiredinvestment.
B) Desiredemploymentequalsthenumberofjobsavailable.
C) Desiredconsumptionspendingequalsthetotalofsavingplusinvestment.
D) Thelegalminimumwageequalstheactualwage.
Answer: A
Diff:2
116) Whatistrueoftheaggregatesupplycurveintheclassicalmodel?
A) Theaggregatesupplycurveisdownwardsloping.
B) Theaggregatesupplycurveishorizontal.
C) Theaggregatesupplycurveisvertical.
D) Theaggregatesupplycurveisnotdeterminedbythelevelofemployment.
Answer: C
Diff:2
117) Long-runaggregatesupplycurveintheclassicalmodel
A) isthelevelofrealGDPcorrespondingto100percentlaborforceparticipation.
B) isthelevelofrealGDPcorrespondingtothenaturalrateofunemployment.
C) isadownwardslopingline.
D) isdeterminedbythecapitalstockoftheeconomy,notthelaborforce.
Answer: B
Diff:2
118) Intheclassicalmodel,whatistheresultofanincreaseinaggregatedemand?
A) RealGDPincreases,andthepricelevelremainsconstant.
B) RealGDPdecreases,andthepricelevelremainsconstant.
C) Thepricelevelincreases,andrealGDPremainsconstant.
D) Thepriceleveldecreases,andrealGDPremainsconstant.
Answer: C
Diff:2
A) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibrium
interestrateandanequilibriumwagelevel.
B) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibrium
interestrateandanequilibriumlevelofexports.
C) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibriumlevel
ofemploymentandanequilibriumlevelofinvestment.
D) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibrium
pricelevelandanequilibriumlevelofrealGDP.
Answer: D
Diff:2
120) Intheclassicalmodel,howdoshiftsinaggregatedemandaffectrealGDP?
A) RealGDPwillremainunchanged.
B) IncreasesinaggregatedemandincreaserealGDP.
C) IncreasesinaggregatedemanddecreaserealGDP.
D) DecreasesinaggregatedemandincreaserealGDP.
Answer: A
Diff:2
A) Governmentinterventionisnecessaryforeconomicstability.
B) Noonebuyerorsellerofagoodorservicecanaffectthepriceofthegoodorservice.
D) Peoplearenotfooledbythemoneyillusion.
Answer: A
Diff:2
122) Accordingtotheclassicalmodel,desiredsavingis
A) afunctionofrealGDP.
B) equaltodesiredinvestment.
C) identicaltothedemandforsavingateachlevelofrealGDP.
D) affectedbythemoneyillusionatlowincomelevels.
Answer: B
Diff:2
123) Accordingtotheclassicalmodel,investment
A) isafunctionofrealGDP.
B) isafunctionofthenominalGDP.
C) isinverselyrelatedtotheinterestrate.
D) isinfluencedbythemoneyillusionatlowincomelevels.
Answer: C
Diff:2
124) Theclassicalmodelindicatesthatattheequilibriuminterestrate,savingis
A) equaltoinvestment.
B) greaterthaninvestment.
C) unnecessaryforinvestment.
D) lessthaninvestment.
Answer: A
Diff:2
125) Ifyourincomeandthepricelevelbothriseby5percent,andyouthinkyounowhavemorereal
income,youaresufferingfrom
A) diminishingmarginalexpectations.
B) leakages.
C) injections.
D) moneyillusion.
Answer: D
Diff:1
126) Long-rununemploymentintheclassicalmodelisconsideredtobeimpossiblebecause
A) thegovernmentwillintervenetoaidtheunemployed.
B) jobplacementandtrainingprogramsarerampantintheUnitedStates.
C) flexiblepricesandwageskeepworkersfullyemployed.
D) thelaborsupplyishorizontal.
Answer: C
Diff:3
127) Theideathatsupplycreatesitsowndemandisattributedtowhichofthefollowing
economists?
A) AdamSmith
B) DavidRicardo
C) J.B.Say
D) A.C.Pigou
Answer: C
Diff:1
A) Purecompetitionexists.
C) Governmentspendingisnecessarytoachieveeconomicstability.
D) Peoplearemotivatedbyself-interest.
Answer: C
Diff:1
129) AccordingtoSayslaw,
B) demandcreatessupply.
C) changesinsupplycreatesupply-sideinflation.
D) changesindemandcreatedemand-sideinflation.
Answer: A
Diff:1
130) Accordingtotheclassicalmodel,
A) long-termunemploymentisunavoidable.
B) unemploymentisatemporaryphenomenon.
C) unemploymentonlyexistsduringperiodsofwar.
D) thenaturalrateofunemploymentiszero.
Answer: B
Diff:1
131) Accordingtotheclassicalmodel,pricesandwages
A) areflexible.
B) mustbesetbygovernment.
C) movedownwardeasily,butarestickyupward.
D) moveupwardeasily,butarestickydownward.
Answer: A
Diff:1
132) Accordingtoclassicaleconomists,thecreditmarketreachesanequilibriumwhen
A) plannedinvestmentequalsgovernmentexpenditures.
B) desiredinvestmentequalsplannedinvestment.
C) desiredinvestmentequalsplannedchangesinaggregatesupply.
D) desiredinvestmentequalsdesiredsaving.
Answer: D
Diff:1
133) Accordingtoclassicaleconomists,whenaggregatedemanddecreases,
A) unemploymentisreduced,thepricelevelincreases,andequilibriumrealGDPisreached.
B) unemploymentisreduced,thepriceleveldecreases,andequilibriumrealGDPisreached.
C) unemploymenttemporarilyincreases,thepricelevelincreases,andequilibriumrealGDP
isreached.
D) unemploymenttemporarilyincreases,thepriceleveldecreases,andequilibriumrealGDP
isreached.
Answer: D
Diff:2
134) Acongressmanstates,Ifagovernmentattemptstoincreaseemploymentthroughincreased
governmentspending,allwewillendupwithisahigherpricelevel.Thiscongressman
assumesthatthe
A) aggregatedemandcurveisahorizontalline.
B) aggregatedemandcurveisaverticalline.
C) aggregatesupplycurveisahorizontalline.
D) aggregatesupplycurveisaverticalline.
Answer: D
Diff:2
135) Q:Howmanyeconomistsdoesittaketoscrewinalightbulb?
A:None.Ifthelightbulbreallyneededchanging,marketforceswouldhavealreadycauseditto
happen.
Thisjokerepresentstheviewof
A) classicaleconomists.
B) Keynesianeconomists.
C) economistswhoconcludethatmoneyillusioniswidespread.
D) economistswhoconcludethatwagesandpricesareinflexible.
Answer: A
Diff:3
136) Classicaleconomistssuggestthatunemploymentisashort -livedphenomenonbecause

A) wagesadjustquicklytoequilibratequantityoflabordemandedwithquantityoflabor
supplied.
B) wagesremainunchangedwhenthequantityoflabordemandedexceedsthequantityof
laborsupplied.
C) wagesremainunchangedwhenthequantityoflaborsuppliedexceedsthequantityof
labordemanded.
D) wagestendtoriseslowlywhenthequantityoflabordemandedequalsthequantityof
laborsupplied.
Answer: A
Diff:1
137) Whichstatementbestcharacterizestheclassicaleconomistsviewofsavingandinvestment?
A) Savingequalsinvestment
B) Savingexceedsinvestment
C) Savingislessthaninvestment
D) Savingandinvestmentarenotrelatedtooneanother
Answer: A
Diff:2
138) Intheclassicalview,ifdesiredsavingexceedsdesiredinvestment,
A) governmentspendingmustfall.
B) governmentspendingmustrise.
C) theinterestratewoulddecline.
D) theinterestratewouldincrease.
Answer: C
Diff:2
139) Intheclassicalview,flexiblewagerateswouldassure
A) lowinflation.
B) highratesofunemployment.
C) highsecularinflationrates.
D) fullemployment.
Answer: D
Diff:1
140) Intheclassicalmodel,whathappenstothelevelofrealGDPifaggregatedemandincreases?
A) RealGDPincreases.
B) RealGDPdecreases.
C) RealGDPwouldincreaseatfirst,thendecrease.
D) RealGDPwouldremainthesame,atequilibrium.
Answer: D
Diff:2
141) Supplycreatesitsowndemandimpliesthat
A) theveryactofsupplyingaparticularlevelofgoodsandservicesnecessarilyequalsthe
levelofgoodsandservicesdemanded.
B) theveryactofdemandingaparticularlevelofgoodsandservicesnecessarilyequalsthe
levelofgoodsandservicessupplied.
C) thegovernmentwillbuyupanysurplusofgoodsandservicesinacountrytoavoid
economicproblems.
D) theveryactofsupplyingaparticularlevelofgoodsandserviceswillnotnecessarilyequal
thelevelofgoodsandservicesdemanded.
Answer: A
Diff:2
142) WhatisSaysLawandwhatdoesitmean?
Answer: SaysLawis:Supplycreatesitsowndemand.Itmeansthatageneralglutor
overproductionisnotpossible.Theveryprocessofproducingspecificgoodsisproofthat
othergoodsaredesired.Theincomereceivedfromsellingonesgoodsisusedto
purchaseothergoods.Whilesomegoodsmayhaveasurplus,otherswillhaveashortage,
andthesewouldbecorrectedbypricechanges.Therewillnotbeanexcessquantity
suppliedofallgoods.
Diff:2
143) Savingisaleakagefromthecircularflow.Whydidnttheclassicaleconomiststhinksaving
mightcauseconsumptionexpenditurestofallshortoftotaloutput?
Answer: Theclassicaleconomistsbelievedthateachdollarsavedwouldbeinvestedbyfirmsso
thattheleakageofsavingwouldbeexactlymatchedbyaninjectionofinvestment
spending.Theinterestratewouldadjusttoensurethatsavingequaledinvestment.
Diff:2
144) Intheclassicalmodel,theequilibriumlevelofrealGrossDomesticProduct(GDP)is
completelysupply-determined.Doyouagreeordisagree?Why?
Answer: Agree.Thelong-runaggregatesupplycurveisvertical,sotheequilibriumlevelofreal
GrossDomesticProduct(GDP)isdeterminedbythelocationoftheaggregatesupply
curve.Shiftsinaggregatedemandaffectonlythepricelevel.
Diff:3
145) Whydidtheclassicaleconomiststhinkthatlarge-scaleunemploymentwasnotpossibleina
marketeconomy?
Answer: TheclassicaleconomistsacceptedSaysLaw,whichindicatedthatdesiredexpenditures
willequalactualexpenditures.Theactofproducingindicatesonewantstobuyother
goods.Asurplusorshortageinonemarketwouldsoonbecorrectedbecausepricesand
wageswereassumedtobeflexible,andtheyassumedpeoplecouldnotbefooledby
moneyillusion.Theyalsoassumedpurecompetitionandthatpeopleweremotivatedby
self-interest.Combiningalltheseideas,theyconcludedthatfullemploymentwouldbe
thenorm.
Diff:3
146) ThelevelofemploymentinaneconomydeterminesitsrealGDP,otherthingsheldconstant.
Doyouagreeordisagree?Why?Whatassumptionsarenecessaryforyourconclusionbasedon
theclassicalmodel?
Answer: Agree.Productionrequiresworkerssothemoreworkersthatareemployedthegreater
totalproduction.Thisassumesthatworkerswhoareemployedactuallyworkandare
productive.
Diff:2
11.2KeynesianEconomicsandtheKeynesianShort-RunAggregateSupplyCurve
1) AccordingtotheKeynesianmodel,theshort -runaggregatesupply(SRAS)curveishorizontal
when
A) realGrossDomesticProduct(GDP)isatfullcapacitybutpricesarenotflexible.
B) therearenounemployedresourcesandwagesdonotchangewhenpriceschange.
C) pricesreacttoanaggregatedemandshockbutrealGrossDomesticProduct(GDP)does
not.
D) thereareunemployedresourcesandpricesdonotfallwhenaggregatedemandfalls.
Answer: D
Diff:1
Topic: 11.2KeynesianEconomicsandtheKeynesianShort-RunAggregateSupplyCurve
2) TheKeynesianmodelisbasically
A) along-runtheory.
B) ashort-runtheory.
C) acombinationoflong-andshort-runtheories.
D) atheoryabouttheeconomyinboththelongrunandtheshortrun.
Answer: B
Diff:2
3) AccordingtoKeynes,involuntaryunemploymentispossiblebecauseof
A) theexistenceofcapitalmarkets.
B) long-termlaborcontractsandtheexistenceoflaborunions.
C) governmentinterferenceinthemarketeconomy.
D) inflation.
Answer: B
Diff:1
4) Adecreaseinaggregatedemandwillcause
A) pricestofallaccordingtoclassicaleconomists,andunemploymenttoincreaseaccordingto
Keynes.
B) pricestofallandunemploymenttoincreaseaccordingtobothclassicaleconomistsand
Keynes.
C) aggregatesupplytofallaccordingtoclassicaleconomists,andpricestofallaccordingto
Keynes.
D) aggregatesupplytofallaccordingtoKeynes,andunemploymenttoincreaseaccordingto
classicaleconomists.
Answer: A
Diff:1
5) Involuntaryunemployment
A) occurswhenthewagerateisbelowtheequilibriumwagerate.
B) existswhenthereisanexcessquantityoflaborsupplied.
C) willincreaseasthewageratefalls.
D) existswhenthereisashortageoflabor.
Answer: B
Diff:1
6) IfashiftinaggregatedemandonlyaffectsrealGrossDomesticProduct(GDP),thenthe
short-runaggregatesupply(SRAS)curvemustbe
A) vertical.
B) upwardsloping.
C) horizontal.
D) downwardsloping.
Answer: C
Diff:1
7) TheKeynesianshort-runaggregatesupply(SRAS)curveis
A) upwardsloping.
B) vertical.
C) horizontal.
D) downwardsloping.
Answer: C
Diff:1
8) Theabovefigurepresentstheviewoftheeconomyaccordingto
A) Keynesianeconomics.
B) classicaleconomics.
C) microanalysis.
D) Ricardianeconomics.
Answer: A
Diff:1
9) Refertotheabovefigure.SupposethecurrentaggregatedemandisrepresentedbyAD 2 .If
aggregatedemandfallstolineAD 3 ,then
A) thenewequilibriumwillbeatj.
B) thenewequilibriumwillbeatk.
C) thenewequilibriumrealGrossDomesticProduct(GDP)willbex.
D) anewpricelevelwillbeestablishedata.
Answer: C
Diff:1
10) Keynesarguedthat
I. Capitalismdidnotalwaysleadtofullemployment.
II. Nominalpricesweremoreimportantthanrelativeprices.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: A
Diff:1
11) TheoriginalKeynesianeconomictheorystatesthat
A) theshort-runaggregatesupply(SRAS)curveisalwaysvertical.
B) manypriceswouldnotdeclineevenwhenaggregatedemanddecreases.
C) wagestendtofallmorequicklythantheoverallpricelevel.
D) theeconomynaturallyself-regulatessoastoreachfullemploymentquickly.
Answer: B
Diff:1
12) Keynesarguedthataneconomycouldbeinequilibriumwhentheeconomywas
A) operatingatmaximumpotentialcapacity.
B) operatingwithsomeunutilizedproductivecapacity.
C) tryingtooperateatsomeoutputlevelbeyonditspotentialcapacity.
D) operatingeitheratfullproductivecapacityoratlessthanfullcapacity.
Answer: D
Diff:1
13) Keynesandhisfollowersbelievedthat
A) capitalismwasoneeconomicsystemthatguaranteedfullemployment.
B) wagesandpricesintheshortrunwereflexible.
C) theeconomycouldnotoperateatanylevelofrealGrossDomesticProduct(GDP)lessthan
fullcapacity.
D) therewasnoguaranteethatacapitalisteconomywouldreachafullemployment
equilibrium.
Answer: D
Diff:1
14) AkeycomponentoftheKeynesianmodelisthat
A) pricesaresticky.
B) pricesareflexible.
C) wagesareflexible.
D) peoplearenotfooledbymoneyillusion.
Answer: A
Diff:1
15) AccordingtoKeynes,onceasystemattainsaneconomy -wideequilibrium,

A) theremayormaynotbeexcessproductivecapacity.
B) plannedconsumptionwillbezero.
C) plannedinvestmentwillbezero.
D) theeconomywillbeatfullproductivecapacity.
Answer: A
Diff:1
16) TheKeynesianportionoftheshort-runaggregatesupply(SRAS)curve
A) ishorizontal.
B) isvertical.
C) slopesupward.
D) slopesdownward.
Answer: A
Diff:1
17) ThesimpleKeynesianmodelassumesthat
A) grossprivatedomesticinvestmentexceedsnetinvestmentbythecapitalconsumption
allowance.
B) prices,especiallythepriceofwages,arestickydownward.
C) therewillneverbeanyexcesscapacityintheshortrun.
D) aggregatedemandwillalwaysequalaggregatesupply.
Answer: B
Diff:1
18) TheKeynesianportionoftheshort-runaggregatesupply(SRAS)curveimplies
A) anupwardslope.
B) nopricelevelchanges.
C) adownwardslope.
D) flexiblepricesandwages.
Answer: B
Diff:2
19) TheKeynesianshort-runaggregatesupply(SRAS)curve
A) showsthatrealGrossDomesticProduct(GDP)willincreaseonlyifthepricelevel
increases.
B) assumesafull-employmentlevelofrealGrossDomesticProduct(GDP).
C) ishorizontal.
D) doesnotreflectanychangesinnominalGrossDomesticProduct(GDP).
Answer: C
Diff:1
20) Inaneconomicdownturn,stickywagesandpricesreducetheeconomysspeedofadjustment
because
A) businessesareunabletoadjustquicklytochangesinaggregatedemand.
B) theycausedeflation.
C) hyperinflationwilllikelyoccur.
D) unionworkerswouldlikelyquitandlookforworkelsewhere.
Answer: A
Diff:2
21) Keynessuggestedthattheshort-runaggregatesupply(SRAS)curve
A) isvertical.
B) ishorizontal.
C) slopesdownward.
D) isnotarelevantconcept.
Answer: B
Diff:3
22) Keynesianeconomicspredictsthatifgovernmentpolicymakersdeemcurrentequilibriumreal
GrossDomesticProduct(GDP)tobetoolow,thenanappropriatepolicyactionwouldbeto
A) donothing,becausetheeconomyisself-adjusting.
B) raisegovernmentspending,therebyincreasingaggregatedemandandpushingupreal
GrossDomesticProduct(GDP)withlittleornoinflationaryconsequences.
C) increasetaxes,therebycausingaggregatedemandtoincreaseandinducingariseinreal
GrossDomesticProduct(GDP)withlittleornoinflationaryconsequences.
D) reducethemoneystock,therebycausingaggregatedemandtodecreaseandinducinga
riseinfallinthepricelevelthatgeneratesanincreaseintotalplannedexpenditures.
Answer: B
Diff:2
23) Theshort-runaggregatesupply(SRAS)curverepresentstherelationshipbetween
A) thepricelevelandtherealGrossDomesticProduct(GDP)withoutfulladjustmentorfull
information.
B) thepricelevelandtherealGrossDomesticProduct(GDP)withoutfulladjustmentbut
withfullinformation.
C) thepricelevelandthenominalGrossDomesticProduct(GDP).
D) thedecisionsofproducersandthedecisionsofconsumers.
Answer: A
Diff:1
24) Intheshortrun,anincreaseinthepricelevelinducesfirmstoexpandproductionbecause
A) pricesofinputsareheldconstant,sothehigherpricesforfirmsproductsimplythatitis
profitabletoexpandproduction.
B) eachfirmmustkeepitsproductionleveluptothelevelofitsrivals,andsomefirmswill
expandproductionasthepricelevelincreases.
C) higherpricesallowfirmstohiremoreinputsbyofferinghigherpricesforinputs,which
increasesproductivityandprofits.
D) theycanincreaseprofitsbyincreasingmaintenancecosts.
Answer: A
Diff:3
25) TherelationshipbetweenthepricelevelandtherealGrossDomesticProduct(GDP)without
fulladjustmentorfullinformationisrepresentedby
A) thelong-runaggregatesupplycurve.
B) theshort-runaggregatesupplycurve.
C) theaggregatedemandcurve.
D) thedistancebetweenthelong-runaggregatesupplycurveandtheshort-runaggregate
supplycurve.
Answer: B
Diff:1
26) AccordingtoKeynes,theclassicalmodelcouldnotexplain
A) arecessionordepression.
B) periodsofrisingunemployment.
C) along-termeconomicdecline.
D) periodsofrisinginterestrates.
Answer: C
Diff:1
27) InthesimpleKeynesianportionoftheupwardslopingshort -runaggregatesupplycurve,

A) equilibriumrealGDPisdemand-determined.
B) equilibriumrealGDPissupply-determined.
C) equilibriumrealGDPisneitherdeterminedbyaggregatesupplynorbyaggregate
demand.
D) equilibriumrealGDPisdeterminedbybothaggregatesupplyandaggregatedemand.
Answer: A
Diff:1
28) Theshort-runaggregatesupplycurveishorizontalwhen
A) pricesareinflexibleandtheeconomyisatfullemployment.
B) thereareunemployedresourcesandpricesdonotincreasewhenaggregatedemand
increases.
C) thereareunemployedresourcesandpricesdonotdecreasewhenaggregatesupply
increases.
D) therearenounemployedresourcesandpricesdonotincreasewhenaggregatedemandor
supplyincreases.
Answer: B
Diff:3
29) Refertotheabovefigure.Theclassicalaggregatesupplycurveisrepresentedby________and
theKeynesianshort-runaggregatesupplycurveisrepresentedby________.
A) curve2;curve1
B) curve2;curve3
C) curve3;curve4
D) curve2;curve4
Answer: D
Diff:2
30) RealGDPis________determinedintheclassicalmodeland________determinedinthe
Keynesianmodel.
A) supply;supply
B) supply;demand
C) demand;supply
D) demand;demand
Answer: B
Diff:2
31) IntheKeynesianmodel,tounderstandthedeterminationofincomeandemploymentitis
necessarytounderstand
A) howaggregatesupplyisdetermined.
B) howaggregatedemandisdetermined.
C) howlong-runaggregatesupplyisdetermined.
D) howinterestratesaredetermined.
Answer: B
Diff:2
32) AccordingtoKeynes,wagesareinflexiblebecause
A) oftheminimumwagesetbygovernment.
B) ofunionsandlong-termcontracts.
C) workersdonotbehaveintheirownself-interest.
D) theeconomyisneverinthelongrun.
Answer: B
Diff:1
A) Adecreaseinaggregatedemandwasnotpossibleaccordingtotheclassicaleconomistsbut
waspossibleaccordingtoKeynes.
B) Adecreaseinaggregatedemandhasnoshort-runeffectsaccordingtotheclassical
economistsbuthadsignificanteffectsaccordingtoKeynes.
C) ClassicaleconomistsbelievedrealGDPadjustedmorethanpriceswhenaggregate
demandfell,whileKeynesarguedthatpricesadjustedmorethanoutput.
D) Classicaleconomistsbelievedpriceadjustedmorethanoutputwhenaggregatedemand
fell,whileKeynesarguedrealGDPadjustedmorethanprices.
Answer: D
Diff:3
34) ThesimplifiedKeynesianmodel
A) holdsthepricelevelconstant.
B) holdsrealGDPconstant.
C) assumesinvestmentandsavingarealwaysequal.
D) assumesunemploymentisunrelatedtorealGDP.
Answer: A
Diff:1
35) AccordingtoKeynes,
A) theshort-runaggregatesupplycurveisvertical.
B) nominalwagesand/orpricesaresticky.
C) moneyillusiondoesnotexist.
D) marketsareperfectlycompetitive
Answer: B
Diff:1
36) TheapproachtounderstandingthedeterminationofrealGDPandthepricelevelthat
emphasizesincompleteadjustmentinthepricesofmanygoodsis
B) theKeynesianmodel.
C) SaysLaw.
D) theaggregatedemandmodel.
Answer: B
Diff:1
37) Toexplaintheexistenceofexcesscapacity,Keynesarguedthat
A) pricesandwagesareflexible,andeventuallymarketswouldgobacktoequilibrium.
B) thelongrunaveragecostcurveshouldnotoccuratthefullemploymentlevel.
C) theaggregatedemandcurvecanbemanipulatedbyadvertising.
D) pricesandwagesareinflexibleinthedownwarddirection.
Answer: D
Diff:1
38) Whichoftheofthefollowingisabasicdifferencebetweentheclassicalmodelandthe
KeynesianmodelinwhichtheKeynesianshort-runaggregatesupplycurveexists?
A) Theclassicalmodelassumesthatthelongrunaggregatesupplycurveisvertical,whilethe
Keynesianmodelassumesthelongrunaggregatesupplycurveishorizontal.
B) Theclassicalmodelassumesthatthepositionofthelongrunaggregatesupplycurveis
determinedbyfullemployment,whiletheKeynesianmodelassumesthatthelongrun
aggregatesupplycurvewillbetotheleftoffullemployment.
C) TheclassicalmodelassumesthatthelevelofrealGDPissupplydetermined,whilethe
Keynesianmodelassumesthatitisdemanddetermined.
D) TheclassicalmodelusesrealGDP,whiletheKeynesianmodelusesnominalGDP.
Answer: C
Diff:2
39) TheKeynesianshort-runaggregatesupplycurveishorizontalbecause
A) itrepresentsthefullemploymentlevelofrealGDP.
B) itreflectstheabsenceofmoneyillusion.
C) itreflectswageandpriceinflexibility.
D) itrepresentsSayslaw.
Answer: C
Diff:1
40) IntheKeynesianmodelinwhichtheKeynesianshort-runaggregatesupplycurveexists,
A) theshort-runaggregatesupplycurvedeterminesrealGDP.
B) theaggregatedemandcurvedeterminesthepricelevel.
C) unemploymentcannotpersistforlongperiodsoftime.
D) aggregatedemanddeterminesrealGDPperyear.
Answer: D
Diff:1
41) Q:Howmanyeconomistsdoesittaketochangealightbulb?
A:All.Becausethenyouwillgenerateemployment,moreconsumption,movingtheaggregate
demandcurvetotheright.
Thisjokerepresentstheviewof
A) classicaleconomists.
B) Keynesianeconomists.
C) economistswhocontendthatmoneyillusionneveroccurs.
D) economistswhoconcludethatwagesandpricesareveryflexible.
Answer: B
Diff:3
A) Theclassicalmodelcannotexplainperiodsofprolongedunemployment.
B) TheKeynesianmodelcannotexplainperiodsofprolongedunemployment.
C) TheKeynesianmodelassumescompleteflexibilityofwagesandprices.
D) TheKeynesianmodelshowsthatthelevelofrealGDPissupply-determined.
Answer: A
Diff:3
43) Keynesarguedthatbecauseofstickypricesandwages,
A) theshort-runaggregatesupplycurvecouldbehorizontal.
B) theshort-runaggregatesupplycurveisprobablyvertical.
C) thelong-runaggregatesupplycurveslopesdownward.
D) theaggregatedemandcurveisvertical.
Answer: A
Diff:2
44) IntheKeynesianmodelwhichincludestheKeynesianshort-runaggregatesupplycurve,
A) anincreaseinaggregatedemandwouldcausesthepriceleveltorise,butdoesnotchange
thelevelofrealGDP.
B) anincreaseinaggregatedemandcausesrealGDPtorisewithoutchangingthepricelevel.
C) anincreaseinaggregatedemandchangesneitherthepricelevelnorthelevelofrealGDP.
D) anincreaseinaggregatedemandcausesrealGDPandthepriceleveltodecrease.
Answer: B
Diff:2
45) Iftheeconomyisoperatingatapointatwhichshort-runaggregatesupplyishorizontal,then
A) realGDPcannotexpand.
B) realGDPcannotcontract.
C) increasesinaggregatedemanddonotincreasethepricelevel.
D) thenincreasesinaggregatedemanddonotincreaserealGDP.
Answer: C
Diff:3
46) WhyispersistentunemploymentapossibilityintheKeynesianmodelbutNOTintheclassical
model?
A) TheKeynesianmodelassumesthatpeopleworkformotivesotherthanthoseofearning
anincomeforthemselvesandsupportingafamily.
B) TheKeynesianmodelassumesthatnominalwagesareinflexibledownward.
C) TheKeynesianmodelassumesthatthelevelofrealGDPisinflexible.
D) TheKeynesianmodelassumesthatworkerscanlosetheirjobstoforeigncompetition
duringeconomicdownturns.
Answer: B
Diff:3
47) TheKeynesianshort-runaggregatesupplycurve
A) ishorizontal.
B) isvertical.
C) reflectsthefactthatrealGDPissupply-determined.
D) reflectsthefactthatrealGDPdoesnotvarywithchangesinaggregatedemand.
Answer: A
Diff:2
A) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatdomesticworkersareharmedbyimports.
B) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatthereisnocorrelationbetweenthelevelofrealGDPandtheemploymentlevel.
C) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatincreasesinaggregatedemandcanboostoutputintheshortterm.
D) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatincreasesinaggregatedemandwillincreasethepricelevel,butwillleaverealGDP
unaffectedintheshortterm.
Answer: C
Diff:3
A) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withtheclassicalmodel.
B) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withtheKeynesianmodel.
C) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withtheideathatincreasesinaggregatedemandwillincreasethepricelevelbutwillleave
realGDPunchanged.
D) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withaverticalshort-runaggregatesupplycurve.
Answer: B
Diff:2
50) Theshort-runaggregatesupplycurveishorizontalif
A) resourceswerefullyutilized.
B) thereareunutilizedresourcesintheeconomy.
C) resourcesareperfectlyadaptablebetweenproductionprocesses.
D) therearehighinflationrates.
Answer: B
Diff:2
51) TheKeynesiancontentionthattheshort-runaggregatesupplycurveishorizontalisbasedon
theassumptionthatthereare
A) stickyprices.
B) flexibleprices.
C) realprices.
D) upwardslopingprices.
Answer: A
Diff:2
52) Theshort-runaggregatesupplycurveisarelationshipbetween
A) unemploymentandrealGDP.
B) inflationandtime.
C) realGDPandpricelevel.
D) capitalgoodsandconsumergoods.
Answer: C
Diff:1
53) TheKeynesianshort-runaggregatesupplycurveisdemonstratedgraphicallyasa
A) verticalline.
B) horizontalline.
C) upwardslopingcurve.
D) downwardslopingcurve.
Answer: B
Diff:2
54) Keynesianeconomistsarguethat
A) equilibriumrealGDPisdemand-determined.
B) equilibriumrealGDPissupply-determined.
C) equilibriumrealGDPcanbereachedonlyinatheoreticaleconomy.
D) reachingequilibriumrealGDPalwaysresultsininflation.
Answer: A
Diff:2
A) pricesandwagesareflexible.
B) pricesandwagesmustbesetbygovernment.
C) pricesandwagesaresubjecttodownwardstickiness.
D) pricesandwagesdependonthedecisionsbytheFederalReserveBank.
Answer: C
Diff:2
A) thenaturalrateofunemploymentisbelowtheactualrate.
B) unemploymentisalong-lastingphenomenonintheeconomy.
C) unemploymentonlyexistsduringperiodsofwarintheeconomy.
D) thenaturalrateofunemploymentiszero.
Answer: B
Diff:1
57) JohnMaynardKeynesdevelopedhiseconomictheoriesinthe
A) 1870s.
B) 1900s.
C) 1930s.
D) 1960s.
Answer: C
Diff:1
58) Refertotheabovefigure.WhichofthegraphsisconsistentwiththeKeynesianshort -run

aggregatesupplycurve?
A) GraphA
B) GraphB
C) GraphC
D) GraphD
Answer: B
Diff:2
59) Refertotheabovefigure.Whichofthegraphsisconsistentwiththelong-runaggregatesupply
curve?
A) GraphA
B) GraphB
C) GraphC
D) GraphD
Answer: A
Diff:2
60) WhichofthefollowingwillNOTshifttheKeynesianshort-runaggregatesupplycurve?
A) achangeintechnology
B) achangeinprofitexpectations
C) achangeininputprices
D) achangeinthepricelevel
Answer: D
Diff:1
61) WhichofthefollowingwillshifttheKeynesianshort-runaggregatesupplycurvedownward
andtotheright?
A) ariseinthepricelevel
B) afallinthepricelevel
C) adecreaseininputcosts
D) anincreaseininputcosts
Answer: C
Diff:2
62) Thehorizontalshort-runaggregatesupplycurve
A) assumesthatwagesandallotherinputpricesareconstant.
B) showsthatrealGDPcanbeincreasedonlywhenpricesincrease.
C) assumesthatthereisfullemploymentintheeconomy.
D) assumesthatopportunitycostisconstant.
Answer: A
Diff:1
63) AccordingtoKeynes,thestickinessofwageratescouldbestbeexplainedby
A) minimumwagelaws.
B) unionsandlong-termlaborcontracts.
C) short-termlaborcontracts.
D) governmentinterference.
Answer: B
Diff:1
64) AccordingtoKeynesianeconomics,ifthereareunutilizedresourcesintheeconomyand
aggregatedemandincreases,
A) realGDPwillriseandpricelevelwillremainconstant.
B) realGDPwillfallandpricelevelwillremainconstant.
C) realGDPwillriseandpricelevelwillrise.
D) realGDPwillriseandpricelevelwillfall.
Answer: A
Diff:1
65) AccordingtoKeynesianeconomics,ifthereareunutilizedresourcesintheeconomyand
aggregatedemanddecreases,
A) realGDPwillriseandpricelevelwillremainconstant.
B) realGDPwillfallandpricelevelwillremainconstant.
C) realGDPwillriseandpricelevelwillrise.
D) realGDPwillriseandpricelevelwillfall.
Answer: B
Diff:1
66) Keynesianeconomistswouldlikelyarguethattheclassicalmodeliswhichofthefollowing?
A) along-runtheory
B) ashort-runtheory
C) bothalong-runandshort-runtheory
D) astickypricetheory
Answer: A
Diff:2
67) Someeconomistsbelievethatapositiveaggregatedemandshocktoaneconomywithlarge
amountsofexcesscapacityandunemploymentdoesnotnecessarilycauseanincreaseinprices.
Economistswhoadheretothisbeliefarefollowersof
A) classicaleconomics.
B) Sayslawsofeconomics.
C) Keynesianeconomics.
D) supply-sideeconomics.
Answer: C
Diff:1
68) Usingagraph,analyzetheGreatDepressionfromaKeynesianperspective.Whathappenedto
unemployment?
Answer: Inthebelowfigure,theequilibriumbeforethedepressionwasatapricelevelof100and
realGDPof$1trillion.Thedepressionwascausedbyareductioninaggregatedemandto
AD1933.Becausepriceswerenotflexible,realGDPfellto$700billion.Thereduced
outputwouldbeassociatedwithalargeincreaseinunemployment.
Diff:3
69) WhatisthemajordifferencebetweentheclassicalmodelandtheKeynesianmodel?Explain.
Answer: Themajordifferenceistheshapeoftheaggregatesupplycurve.Theclassicalviewisthat
itisvertical,whiletheKeynesianviewisthatitishorizontal,oratleastalmostso.The
differencesinshapeareduetodifferencesinassumptionsabouttheflexibilityofprices.
Classicaleconomistsassumedpricesandwageswereflexibleandwouldquicklyadjustto
bringaboutanewfull-employmentequilibrium,whiletheKeynesianmodelassumes
pricesarenotflexible.
Diff:3
70) Forseveralyears,theU.S.unemploymentratehasbeenbelowtheEuropeanunemployment
rate.OfferaKeynesianexplanationforthis.
Answer: TheaggregatesupplycurveinEuropeisclosertohorizontalthanisthecaseintheUnited
States.ThelabormarketislessflexibleinEuropeduetohigherunemploymentbenefits
thatreducetheincentivetowork,andduetohighercoststofirmsforhiringworkers.
Diff:3
71) Whatshapedidtheshort-runaggregatesupplycurvehaveduringthe1930s,accordingto
Keynes?Explain.
Answer: Keynesarguedtheshort-runaggregatesupplycurvewashorizontalduringthe1930s.
Therewassubstantialunemploymentandexcesscapacityduringthedepression,sothat
shiftsinaggregatedemandwouldaffecttotaloutputwithoutaffectingthepricelevel.
Keynesarguedthatpricesandwageswereinflexible,especiallydownward,andcould
notbereliedupontobringaboutafull-employmentequilibrium.
Diff:2
72) AccordingtoKeynes,theeconomyisessentiallyaself-regulatingsystem.Doyouagreeor
disagree?Why?
Answer: Disagree.Theinflexibilityofpricesmeantthatchangesinaggregatedemandwouldaffect
outputandemploymentratherthanthepricelevel.Involuntaryunemploymentwas
likelywhenaggregatedemanddecreasedbecausethewagelevelwouldnotadjustto
bringaboutanew,full-employmentequilibrium.Hence,theeconomyisnota
self-regulatingsystemaccordingtoKeynes.
Diff:3
11.3OutputDeterminationUsingAggregateDemandandAggregateSupply:Fixed
versusChangingPriceLevelsintheShortRun
1) Whatistheunderlyingassumptionoftheoriginal,simplifiedKeynesianmodel?
A) Therelevantrangeoftheshort-runaggregatesupplycurve(SRAS)isvertical.
B) Therelevantrangeoftheaggregatesupplycurve(AS)isvertical.
C) Therelevantrangeoftheshort-runaggregatesupplycurve(SRAS)ishorizontal.
D) Therelevantrangeofthelong-runaggregatesupplycurve(LRAS)ishorizontal.
Answer: C
Diff:1
Topic: 11.3OutputDeterminationUsingAggregateDemandandAggregateSupply:FixedversusChangingPrice
LevelsintheShortRun
2) Howdoestheoriginal,simplifiedKeynesianmodelcomparewithmodernKeynesiananalysis?
A) TheoriginalKeynesianmodelassumedpriceflexibilitywhereasthemodernanalysisdoes
not.
B) Inbothcases,theshort-runaggregatesupplycurve(SRAS)ishorizontal.
C) ModernanalysisshowsanupwardslopingSRAStoreflectsomepriceflexibility.The
originalKeynesianmodelsSRASishorizontalandassumesstickyprices.
D) Alloftheabove.
Answer: C
Diff:2
LevelsintheShortRun
3) TheKeynesianshort-runaggregatesupplycurveinthesimplifiedKeynesianmodelis
unrealisticbecause
A) averticalcurvedoesnotmakeeconomicsense.
B) pricesandwageswillneverdecrease.
C) theclassicalmodelisbetterinexplaininghowtheeconomyoperates.
D) somepriceadjustmentsdotakeplaceintheshortrun.
Answer: D
Diff:1
LevelsintheShortRun
4) Thehorizontalportionoftheshort-runaggregatesupplycurveinwhichthereisexcessive
unemploymentandunusedcapacityintheeconomyis
A) Sayslaw.
B) theclassicalshort-runaggregatesupplycurve.
C) theKeynesianshort-runaggregatesupplycurve.
D) existswhenpricesareflexible.
Answer: C
Diff:1
LevelsintheShortRun
5) Theshort-runaggregatesupplycurveinmodernKeynesiananalysisis
A) horizontal.
B) vertical.
C) upwardsloping.
D) downwardsloping.
Answer: C
Diff:1
LevelsintheShortRun
6) Theshort-runaggregatesupplycurveispositivelyslopedbecause
A) realinterestratesratherthannominalratesareused.
B) somepriceadjustmentstakeplaceintheshort-run.
C) nopriceadjustmentstakeplaceintheshort-run.
D) completepriceadjustmentstakeplaceintheshort-run.
Answer: B
Diff:1
LevelsintheShortRun
7) Theshort-runaggregatesupplycurveinmodernKeynesiananalysisrepresentstherelationship
between
A) therealoutputofgoodsandservicesintheeconomyandthepricelevel.
B) therealoutputofgoodsandservicesintheeconomyandthepricelevelwhenpeoplehave
fullyadjustedtheirbehavior.
C) therealoutputofgoodsandservicesintheeconomyandthepricelevelwhenpeoplehave
notfullyadjustedtheirbehavior.
D) thenominaloutputofgoodsandservicesandtherealoutputofgoodsandservices.
Answer: C
Diff:1
LevelsintheShortRun
8) Alongashort-runaggregatesupplycurve,whichofthefollowingis(are)heldconstant?
A) realGDP
B) aggregatedemand
C) inputprices.
D) profits
Answer: C
Diff:1
LevelsintheShortRun
9) Thefull-employmentrateofoutputcan
A) besurpassedinthelongrunonlyifinputpricesareflexible.
B) notbesurpassedineithertheshortrunorthelongrun.
C) besurpassedonlywhenfirmsarenotyetproducingatfullcapacity.
D) besurpassedonlyintheshortrun.
Answer: D
Diff:2
LevelsintheShortRun
10) Intheshortrun,realGDPcanincreasebeyondalevelconsistentwiththelong -rungrowthpath

if
A) existingcapitalandlaborareusedmoreintensely.
B) thepriceleveldecreasesaccordingly.
C) wemeasureinnominaltermsinsteadofrealterms.
D) thereisanincreaseinmarginaltaxrates.
Answer: A
Diff:1
LevelsintheShortRun
11) WhichofthefollowingisNOTareasonwhyrealGDPcanbeexpandedbeyondalevel
consistentwithitslong-rungrowthpathinmodernKeynesiananalysis?
A) Intheshortrun,existingworkerscanworkmorehours.
B) Pricesandwagesareflexible,allowingforneededadjustments.
C) Theexistingcapitalstockcanbeusedmoreintensively.
D) Higherpricesinducefirmstohiremoreworkers.
Answer: B
Diff:1
LevelsintheShortRun
12) Ifshort-runaggregatesupplyisupwardsloping,theassumptionisthat
A) pricesareperfectlysticky.
B) pricesaresetbygovernmentmandate.
C) pricesareconstant.
D) pricesadjustgradually.
Answer: D
Diff:2
LevelsintheShortRun
13) Anupwardslopingshort-runaggregatesupplycurvesuggeststhat
A) realGDPisdeterminedbyaggregatesupply.
B) pricesandwagesarecompletelyinflexible.
C) pricesandwagesarecompletelyflexible.
D) pricesandwagesadjustinparttoshort-rundemandchanges.
Answer: D
Diff:2
LevelsintheShortRun
14) InthemodernKeynesianmodel,overmuchofitsrangetheshort-runaggregatesupply(SRAS)
curveis
A) horizontal.
B) vertical.
C) upwardsloping.
D) downwardsloping.
Answer: C
Diff:1
LevelsintheShortRun
15) Theshort-runaggregatesupplycurveinmodernKeynesiananalysis
A) isahorizontallinethesameasintheKeynesianmodel.
B) isaverticallinethesameasintheclassicalmodel.
C) isanupwardslopingcurve.
D) isanegativelyslopedcurve.
Answer: C
Diff:1
LevelsintheShortRun
16) Thereisadistinctionbetweenthelong-runaggregatesupply(LRAS)curveandtheshort-run
aggregatesupply(SRAS)curve.Inthelongrun,
A) technologyisfixed,butnotintheshortrun.
B) thepricelevelisconstantinthelongrun,butfluctuatesintheshortrun.
C) theaggregatesupplycurveishorizontal,whileintheshortrunitisupwardsloping.
D) alladjustmentstochangesinthepricelevelhavebeenmade,butintheshortrunall
changesinthepriceleveldonotoccur.
Answer: D
Diff:2
LevelsintheShortRun
17) Ifthepricelevelkeptincreasing,theshort-runaggregatesupply(SRAS)curvewouldget
steeperbecause
A) alltheunemployedwouldeventuallybehired.
B) therearelimitstohowlongworkerscanworklonghoursandcapitalcangowithout
propermaintenance.
C) therateatwhichcapacitycanbeexpandedincreasesindefinitely.
D) thelong-runaggregatesupplycurveishorizontal.
Answer: B
Diff:3
LevelsintheShortRun
18) Intheshortrun,ifthepricelevelrises,thentheoveralleconomycantemporarilyproduce
beyonditsnominalcapacity.Onereasonforthisisthat
A) workerscanbeswitchedfromcountedtouncountedproduction.
B) existingcapitalequipmentcanbeusedmoreintensively.
C) wageratesrisealmostsimultaneouslywiththepricelevel.
D) theunemploymentrateusuallyrisesdramaticallyalongwiththepricelevel.
Answer: B
Diff:1
LevelsintheShortRun
19) Thelong-runaggregatesupplycurveisverticalat$10trillion,buttheshort-runaggregate
supplycurveintersectstheaggregatedemandcurveat$12trillion.Fromthis,weknowthat
A) theeconomyisoperatingbelowfullcapacityintheshortrun,andwillhavetoadjustby
hiringmoreworkers,thusreducingunemployment.
B) thepricelevelistoohigh.Theonlywaylong-runequilibriumcanberestoredistolower
thepricelevel.
C) adjustmentswillhavetooccursothatthelong -runaggregatesupplyequals$12trillion.
D) adjustmentswillhavetooccursothattheshort-runaggregatesupplyintersectsthe
aggregatedemandcurveat$10trillion.
Answer: D
Diff:3
LevelsintheShortRun
20) Identifythe3curvesintheabovefigure.
A) (1)islong-runaggregatesupply,(2)isshort-runaggregatesupply,(3)isaggregate
demand.
B) (1)isaggregatedemand,(2)isshort-runaggregatesupply,(3)islong-runaggregate
supply.
C) (1)isshort-runaggregatesupply,(2)islong-runaggregatesupply,(3)isaggregate
demand.
D) (1)islong-runaggregatesupply,(2)isaggregatedemand,(3)isshort -runaggregate
supply.
Answer: A
Diff:1
LevelsintheShortRun
21) Whichpointorpointsontheabovefigureillustrateashort-runequilibrium?
A) PointA
B) PointB
C) PointC
D) PointsAandC
Answer: B
Diff:2
LevelsintheShortRun
22) Accordingtotheabovefigure,whatwillthepricelevelbeinthenewlong-runequilibrium?
A) 115
B) 110
C) 100
D) Lessthan100
Answer: A
Diff:2
LevelsintheShortRun
23) Whatistheshapeofthemodernshort-runaggregatesupply(SRAS)curve?Why?
Answer: Theshort-runaggregatesupplycurveisinitiallyhorizontal,thenupwardsloping.Ifthe
pricelevelincreasesintheshortrun,somecostsforfirmsstayconstant.Thehigher
productpriceleadstohigherprofits,andthefirmsexpandproduction.Hence,aggregate
outputcanincreaseintheshortrun.
Diff:2
LevelsintheShortRun
24) Comparetheeffectsofanincreaseinaggregatedemandwhenthepricelevelisfixedversus
whenitcanchange.
Answer:
Theabovefigureshowstheeffects.AnincreaseinaggregatedemandfromAD 1 toAD2
causesrealGrossDomesticProduct(GDP)toincrease,butthesizeoftheincreaseis
greaterforAS1 thanforAS2 .Whenthepricelevelcanchange,someoftheimpactofthe
increaseinaggregatedemandfallsonthepricelevelinsteadofoutput,whereasallofthe
impactisonoutputwhenthepricelevelisfixed.
Diff:2
LevelsintheShortRun
25) Supposetheeconomyinthediagrambelowisinlong-runequilibrium.Ifgovernmentspending
decreasesandcausesamovementfrompointAtopointBinthediagrambelow,whatarethe
short-runeffects?Explainfully.
Answer:
Intheabovefigure,pointAistheoriginalequilibrium,withapricelevelof100andtotal
plannedexpendituresonfinalgoodsandservicesequalto$14trillion.Adecreasein
governmentspendingcausestheaggregatedemandcurvetoshifttotheleft.Intheshort
run,totalplannedexpendituresandequilibriumrealGrossDomesticProduct(GDP)falls
to$13.5trillion.Thepricelevelfallsto90.
Diff:3
LevelsintheShortRun
11.4ShiftsintheAggregateSupplyCurve
1) Economicgrowthduetolaborforceexpansionorcapitalinvestmentswillresultin
I. Aleftwardshiftofshort-runaggregatesupply.
II. Arightwardshiftinlong-runaggregatesupply.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: B
Diff:1
Topic: 11.4ShiftsintheAggregateSupplyCurve
2) Whichofthefollowingwillcauseanincreaseinaggregatesupply?
A) Decreasedcompetition
B) Anincreaseinthepricelevel
C) Anincreaseinmarginaltaxrates
D) Adecreaseininputprices
Answer: D
Diff:1
3) Refertotheabovefigure.AssumethatBisthecurrentlong-runaggregatesupply(LRAS)curve
andthatEisthecurrentshort-runaggregatesupply(SRAS)curve.Ifanewdiscoveryoflarge
oilfieldsinFloridaledtoanincreaseinthenationsproductivecapacities,thenwecouldexpect
theLRAScurveandtheSRAScurveto
A) remainBandE.
B) movetoAandD.
C) movetoCandF.
D) movetoAandF.
Answer: C
Diff:1
4) Refertotheabovefigure.AssumethatBisthecurrentlong-runaggregatesupply(LRAS)curve
andEisthecurrentshort-runaggregatesupply(SRAS)curve.Ifa90 -dayembargoofoilfrom
theMiddleEasttotheUnitedStateswereannounced,andifafterthat90 -dayperiodoilprices
wereexpectedtoreturntonormalpre-embargoprices,thenyouwouldexpect
A) theLRASandtheSRAStoremainatBandE,respectively.
B) theLRAStoremainatB,buttheSRAStoshifttoD.
C) theLRAStoremainatB,buttheSRAStoshifttoF.
D) theLRAStoshifttoC,andtheSRAStoshifttoF.
Answer: B
Diff:1
5) WhichofthefollowingisNOTaneventthatcausesBOTHtheshort-runaggregatesupply
(SRAS)curveandthelong-runaggregatesupply(LRAS)curvetoshift?
A) Achangeinaneconomysendowmentsofthefactorsofproduction
B) Technologicalchanges
C) Achangeinaneconomyslaborsupply
D) Atemporarychangeinthepriceofakeyinput
Answer: D
Diff:1
6) WhichofthefollowingwillNOTshifttheshort-runaggregatesupply(SRAS)curve?
A) Achangeinthewagerate
B) Technologicalprogress
C) Areductioninthepriceofarawmaterial
D) Achangeinthepricelevel
Answer: D
Diff:1
7) Allofthefollowingwillshifttheshort-runaggregatesupply(SRAS)curveEXCEPT
A) achangeinthepricelevel.
B) achangeinthepriceoflabor.
C) achangeinthepriceofaneededrawmaterial.
D) technologicalprogress.
Answer: A
Diff:2
8) AsrealGDPperyearincreasesalongtheshort-runaggregatesupply(SRAS)curve,theSRAS
curve
A) becomesincreasinglysteep.
B) beginstolevelout.
C) shiftsinward.
D) doesnotchange.
Answer: A
Diff:2
9) Boththelong-runandshort-runaggregatesupplycurveswillshiftwhen
A) thegovernmentincreasesdefensespending.
B) aneventoccurswhichisexpectedtolastonlyashortperiodoftime.
C) theyarebothupwardsloping.
D) theendowmentsofthefactorsofproductionchange.
Answer: D
Diff:1
10) Whichofthefollowingwouldincreaseaggregatesupply?
A) increasedtrainingandeducation
B) areductionininputprices
C) adiscoveryofnewrawmaterials
D) alloftheabove
Answer: D
Diff:1
11) Thediscoveryofnewironorefieldswillcause
A) thelong-runaggregatesupplycurvetoshifttotherightandtheshort-runaggregate
supplycurvetoshifttotheleft.
B) thelong-runaggregatesupplycurvetoshifttotheright,butnottheshort -runaggregate
supply.
C) theshort-runaggregatesupplycurvetoshifttotheright,butnotthelong -runaggregate
supplycurve.
D) boththelong-runandtheshort-runaggregatesupplycurvestoshifttotheright.
Answer: D
Diff:2
12) AmajorhurricanecausesproductionproblemsinGulfCoastregionoftheUnitedStates.This
wouldcause
A) theshort-runaggregatesupplycurvetoshifttotheleft,buttherewouldbenoeffecton
thelong-runaggregatesupplycurve.
B) theshort-runaggregatesupplycurvetoshifttotheleft,andthelong-runaggregate
supplycurvewouldshifttotheright.
C) boththeshort-runandthelong-runaggregatesupplycurvestoshifttotherightinequal
amounts.
D) boththeshort-runandthelong-runaggregatesupplycurvestoshifttotheleft,butthe
long-runaggregatesupplycurvewouldshiftmorethantheshort-runcurve.
Answer: A
Diff:2
13) Theshort-runaggregatesupplycurvewouldshiftandthelong-runaggregatesupplycurve
wouldremainfixedif
A) therewasatemporaryshocktoaggregatedemand.
B) therewasatemporaryshockthatinfluencedthesupplyside.
C) therewasapermanentincreaseinaggregatedemandalongwithapermanentdecreasein
aggregatesupply.
D) therewasapermanentincreaseinaggregatedemand.
Answer: B
Diff:1
14) Theshort-runaggregatesupplycurvewouldshiftandthelong-runaggregatesupplycurve
wouldremainfixedif
A) transportationworkerswentonstrikeforamonth.
B) therewasanincreaseinimmigration.
C) theretirementageincreasedbytwoyears.
D) toughnewenvironmentallawswerepassed.
Answer: A
Diff:2
15) Areductioninnominalwageswillcausewhichofthefollowing?
A) amovementalongtheshort-runaggregatesupplycurve
B) ashiftofboththeshort-runandlong-runaggregatesupplycurves
C) arightwardshiftintheshort-runaggregatesupplycurve
D) aleftwardshiftintheshort-runaggregatesupplycurvetoshifttotheleft
Answer: C
Diff:2
16) Apermanentreductionininternationaltradebarrierswould
A) decreaselong-runaggregatesupply.
B) increaselong-runaggregatesupply.
C) decreaseaggregatedemand.
D) increaseaggregatedemand.
Answer: B
Diff:1
17) Ashort-livedincreaseinoilpricescausedbydestructionofoil-producingandoil-refining
facilitiesbyalargehurricanewill
A) shifttheSRAScurvetotheright.
B) shifttheLRAScurvetotheright.
C) shifttheSRAScurvetotheleft.
D) shifttheADcurvetotheright.
Answer: C
Diff:2
18) IfthereisachangeintheU.S.endowmentoffactorsofproduction,thentherewouldbe
A) ashiftinjustLRAS.
B) ashiftinbothLRASandSRAS.
C) shiftsinjustSRAS.
D) amovementalongtheSRAScurve.
Answer: B
Diff:2
19) Allitemsbelowwilldecreaseshort-runaggregatesupplyEXCEPT
A) adecreaseinthemarginaltaxrates.
B) anincreaseinthepricesofinputs.
C) adecreaseintrainingandeducation.
D) adecreaseinlaborsupply.
Answer: A
Diff:1
20) Whichofthefollowingdecreasesaggregatesupply?
A) discoveriesofnewrawmaterials
B) anincreaseincompetition
C) anincreaseintrainingandeducation
D) adecreaseinlaborsupply
Answer: D
Diff:2
21) AtemporaryembargoonoilfromtheMiddleEastgoingintotheUnitedStateswould
A) shiftboththeshort-runandlong-runaggregatesupplycurvestotheleft.
B) shiftonlythelong-runaggregatesupplycurvetotheleft.
C) shiftthelong-runaggregatesupplycurvetotheright.
D) shiftonlytheshort-runaggregatesupplycurvetotheleft.
Answer: D
Diff:2
22) Anewdiscoveryoflargevolumesofpreviouslyunknowndepositsofnaturalgasin
Pennsylvaniawould
A) shifttheshort-runandlong-runaggregatesupplycurvestotheright.
B) shiftonlytheshort-runaggregatesupplycurvetotheright.
C) shiftonlythelong-runaggregatesupplycurvetotheright.
D) notaffecteithertheshort-runorlong-runaggregatesupplycurves.
Answer: A
Diff:2
23) Consideranationinwhichmostworkersareunionized.Ifallthenationsunionsbandtogether
andsucceedinboostingwagesestablishedbylong-termlaborcontracts,then
A) thereisaleftwardshiftinjustLRAS.
B) thereisaleftwardshiftinbothLRASandSRAS.
C) thereisarightwardshiftinjustSRAS.
D) thereisarightwardmovementalongtheSRAScurve.
Answer: B
Diff:2
24) AllofthefollowingwillcausetheaggregatesupplycurvetoshifttotherightEXCEPT
A) discoveriesofrawmaterials.
B) areductionininputprices.
C) anincreaseinmarginaltaxrates.
D) areductionininternationaltradebarriers.
Answer: C
Diff:2
25) Atemporaryincreaseinthepriceofoilwould
A) increasebothshort-runandlong-runaggregatesupply.
B) increaseshort-runaggregatesupplyanddecreaselong-runaggregatesupply.
C) decreaseshort-runaggregatesupplyandleavelong-runaggregatesupplyunchanged.
D) decreasebothshort-runandlong-runaggregatesupply.
Answer: C
Diff:2
11.5ConsequencesofChangesinAggregateDemand
1) Refertotheabovefigure.AnincreaseinaggregatedemandbetweenrealGrossDomestic
Product(GDP)levelsY0 andY1
A) wouldmostlikelyresultinsomeinflation.
B) wouldnotincreaseoutputsincetheeconomyisalreadyworkingatfullcapacity.
C) wouldhavenoeffectonthepricelevel.
D) wouldcausepricelevelstofall.
Answer: A
Diff:2
Topic: 11.5ConsequencesofChangesinAggregateDemand
2) Refertotheabovefigure.AnincreaseinaggregatedemandbeyondrealGrossDomestic
Product(GDP)levelY1 wouldresultin
A) higherrealGDPbutnotahigherpricelevel.
B) alowerpricelevelbutnochangeinrealGDP.
C) ahigherpricelevelbutnochangeinrealGDP.
D) alowerpricelevelandanincreasesinrealGDP.
Answer: C
Diff:1
3) ThegapthatexistswhenequilibriumrealGrossDomesticProduct(GDP)isgreaterthanfull
employmentrealGrossDomesticProduct(GDP)iscalleda(n)
A) employmentgap.
B) inflationarygap.
C) recessionarygap.
D) demandgap.
Answer: B
Diff:1
4) EconomicgrowthwillNOTresultindeflationifaggregatedemandshifts
A) outwardtotherightatthesamespeedasaggregatesupply.
B) inwardtotheleftatthesamespeedasaggregatesupply.
C) outwardtotherightasaggregatesupplyshiftsinwardtotheleft.
D) inwardtotheleftasaggregatesupplyshiftsoutwardtotheright.
Answer: A
Diff:1
5) Anunexpectedeventthatcausestheaggregatedemandcurvetoshiftinwardoroutwardisan
A) aggregatedemandshock.
B) aggregatesupplyshock.
C) aggregatesupplyincrease.
D) aggregatesupplydecrease.
Answer: A
Diff:1
6) Iftheeconomyisnearfullcapacity,theeffectofanegativeaggregatedemandshockisto
A) increasethelevelofaggregatedemand.
B) causethepriceleveltofall.
C) increasethefirmscostofproducingateverylevelofoutput.
D) increasethelevelofemployment.
Answer: B
Diff:2
7) Onepossibleresultofafallinaggregatedemandcoupledwithastableshort -runaggregate
supplyis
A) arecession.
B) anincreaseinemploymentlevels.
C) aneconomicexpansion.
D) ariseinthestockmarket.
Answer: A
Diff:1
8) IfequilibriumlevelofrealGrossDomesticProduct(GDP)islessthanthefull-employmentreal
GrossDomesticProduct(GDP)consistentwiththepositionoftheeconomyslong-run
aggregatesupply(LRAS)curve,thenthedifferencebetweenfull -employmentrealGross
DomesticProduct(GDP)andcurrentequilibriumrealGrossDomesticProduct(GDP)is
A) anaggregatedemandshock.
B) anaggregatesupplyshock.
C) arecessionarygap.
D) aninflationarygap.
Answer: C
Diff:1
9) Intheabovefigure,theinflationarygapcancorrectlybeidentifiedas
A) thedifferencebetween125and120.
B) thedifferencebetween12.2trillionand12trillion.
C) LRASminusSRAS.
D) AD1 .
Answer: B
Diff:1
10) Intheabovefigure,anincreaseinaggregatedemandhasresultedin
A) adeclineinthepricelevel.
B) economicgrowth.
C) aninflationarygap.
D) arecessionarygap.
Answer: C
Diff:1
11) ThereasonthatitispossiblefortheeconomyintheabovefiguretobeatE 2 ratherthanatE 1 is

that
A) inthelongrunthereisalwayslessthanfullemployment.
B) intheshortruntheeconomycanproducemorethanitcaninalong -runfull-adjustment
situation.
C) ADalwaysshiftsoutwardandnevershiftsinward.
D) theeconomymustbeinarecession.
Answer: B
Diff:1
12) Intheabovefigure,theeconomywouldmostlikelymovefromAD 1 toAD2 becauseof

A) anaggregatesupplyshock.
C) arecession.
B) anaggregatedemandshock.
D) adepression.
Answer: B
Diff:1
13) Ashort-runequilibriumoccurs
A) attheintersectionofthelong-runaggregatesupplycurveandtheaggregatedemand
curve.
B) attheintersectionoftheshort-runaggregatesupplycurveandthelong-runaggregate
supplycurve.
C) attheintersectionoftheshort-runaggregatesupplycurveandtheaggregatedemand
curve.
D) attherealGDPassociatedwithfullemployment.
Answer: C
Diff:1
14) AssumeequilibriumrealGDPperyearisequaltofull-employmentrealGDP.Whichofthe
followingwillcausearecessionarygap?
A) anincreaseinaggregatedemand
B) areductioninaggregatedemand
C) adiscoveryofanewrawmaterial
D) atemporaryreductioninthepriceofoil
Answer: B
Diff:1
15) IntheKeynesianmodel,anaggregatedemandshock
A) willcausetheaggregatedemandcurvetoshift,leadingtoachangeinthepriceleveland
realGDP.
B) willcausetheaggregatedemandcurvetoshift,leadingtoachangeinthepricelevelbut
notrealGDP.
C) willcausetheaggregatedemandcurvetoshift,leadingtoachangeinrealGDPbutnotthe
pricelevel.
D) willnotleadtoashiftoftheaggregatedemandcurve.
Answer: A
Diff:3
16) Thethreecurvesintheabovefigureare
A) (1)thelong-runaggregatesupplycurve,(2)theaggregatedemandcurve,and(3)the
short-runaggregatesupplycurve.
B) (1)thelong-runaggregatesupplycurve,(2)theshort-runaggregatesupplycurve,and(3)
theaggregatedemandcurve.
C) (1)theshort-runaggregatesupplycurve,(2)theaggregatedemandcurve,and(3)the
D) (1)theaggregatesupplycurve,(2)theshort-runaggregatedemandcurve,and(3)the
long-runaggregatedemandcurve.
Answer: C
Diff:1
17) Refertotheabovefigure.Whichpointorpointsrepresent(s)ashort -runequilibrium?

A) Aonly
B) Bonly
C) Conly
D) bothAandB
Answer: C
Diff:2
18) Refertotheabovefigure.Whichpointorpointsrepresent(s)along-runequilibrium?
A) Aonly
B) Bonly
C) Conly
D) bothAandB
Answer: A
Diff:2
19) Refertotheabovefigure.Attheinitiallong-runequilibrium,thepricelevelis________,andat
thenewlong-runequilibrium,thepricelevelwillbe________.
A) 20;45
B) 20;40
C) 40;45
D) 20;20
Answer: D
Diff:2
20) Refertotheabovefigure.Supposetheoriginallong-runequilibriumwasatpointB.Whatcould
havecausedthemovetothecurrentequilibrium?
A) Decreasesinthepricelevelcausedshort-runaggregatesupplytofall.
B) Inputpricesmusthaveincreased,causinglong-runaggregatesupplytoincrease.
C) Aggregatedemandmusthavedecreased.
D) Atemporaryreductioninproductionduetobadweather.
Answer: C
Diff:2
21) Supposethecurrentsituationissuchthatthepricelevelis120,realGDPis$14trillion,and
long-runaggregatesupplyis$13.6trillion.Wecanconcludethat
A) thepricelevelwillfalluntillong-runaggregatesupplyshiftsto$14trillion.
B) thepricelevelwillfallandinputpriceswillriseuntilrealGDPpullslong-runaggregate
supplyupto$14trillion.
C) inputpriceswillriseuntilrealGDPis$13.6trillion.
D) aggregatedemandwillincreaseuntilbothshort-runandlong-runaggregatesupplyequal
$14trillion.
Answer: C
Diff:3
22) Holdingthelevelofpricesfixedimpliesthatagivenincreaseinaggregatedemand
A) willhaveasmallereffectonrealGDPthanwouldbethecaseifpricesweremoreflexible.
B) willhavealargereffectonrealGDPthanwouldbethecaseifpricesweremoreflexible.
C) hasthesameeffectonrealGDPaswhenpricesaremoreflexible.
D) hasasmallereffectonnominalGDPthanwhenpricesaremoreflexible.
Answer: B
Diff:2
23) SupposeweobserverisingnominalGDP,arisingpricelevel,andconstantunemploymentasa
resultofanincreaseinaggregatedemand.Wewouldconcludethattheaggregatesupplycurve
is
A) upwardsloping.
B) downwardsloping.
C) vertical.
D) horizontal.
Answer: C
Diff:3
24) IfaggregatedemandandnominalGDPincreasewhilethepricelevelisconstant,wewould
concludethat
A) theeconomyisalreadyatfullemployment.
B) theaggregatesupplycurveisupwardsloping.
C) theaggregatesupplycurveishorizontal.
D) theaggregatedemandcurveisvertical.
Answer: C
Diff:2
25) IfweobserveanincreaseinrealGDPandanincreaseinthepricelevelafteranincreasein
aggregatedemand,wecanconcludethat
A) theaggregatesupplycurveisupwardsloping.
B) theaggregatesupplycurveishorizontal.
C) theaggregatesupplycurveisvertical.
D) theeconomyisnowatfullemployment.
Answer: A
Diff:2
26) AchangeintastesforU.S.producedgoodswill
A) shiftboththeaggregatedemandcurveandthelong-runaggregatesupplycurve.
B) shifttheaggregatedemandcurve.
C) shifttheshort-runaggregatesupplycurve.
D) shiftthelong-runaggregatesupplycurve.
Answer: B
Diff:1
27) AssumeequilibriumrealGDPperyearisequaltofull-employmentrealGDP.Ifaggregate
demandfalls,then
A) thepricelevelwillincreaseintheshortrunanddecreaseinthelongrun.
B) therewillbeanexpansionarygap.
C) therewillbearecessionarygap.
D) long-runaggregatesupplywilleventuallydecreasetoo.
Answer: C
Diff:2
28) Theshort-runandlong-runaggregatesupplycurvesremainstable,andadecreaseinaggregate
demandoccurs.Whatistheresultintheshortrun?
A) AnincreaseinthepricelevelandrealGDPwilloccur.
B) Aperiodofexpansionandariseintheunemploymentratecouldoccur.
C) Aperiodofrecessionandariseintheunemploymentratecouldoccur.
D) ThepricelevelwillfallbutrealGDPwillremainthesame.
Answer: C
Diff:2
29) Aninflationarygapoccurswhen
A) aggregatedemandfalls,butotherthingsremainconstant.
B) short-runaggregatesupplyfalls,butotherthingsremainconstant.
C) theshort-runequilibriumlevelofrealGDPisgreaterthanlong-runaggregatesupply.
D) theshort-runequilibriumlevelofrealGDPislessthanlong-runaggregatesupply.
Answer: C
Diff:1
30) ThegapthatexistswhenequilibriumrealGDPislessthanfull-employmentrealGDPis
A) theshort-runaggregatesupplycurve.
B) moneyillusion.
Answer: C
Diff:1
31) ThegapthatexistswhenequilibriumrealGDPisgreaterthanthelevelofrealGDPshownby
thepositionofthelong-runaggregatesupplycurveis
A) theshort-runaggregatesupplycurve.
B) moneyillusion.
Answer: D
Diff:1
32) Refertotheabovefigure.SupposetheeconomyhadbeenatpointAandnowisatB.What
couldhavecausedthemovementtoB?
A) Unusuallygoodweathercausesthewheatcroptobelargerthannormal.
B) Governmentspendingincreasedcausingaggregatedemandtoincrease.
C) Winterstormscausefactoriesinthenorthtobeshutdownforseveralweeks.
D) Boththelaborforceandthepopulationincreased.
Answer: B
Diff:3
33) Arecessionarygapoccurswhen
A) aggregatedemandfalls,butotherthingsremainconstant.
B) short-runaggregatesupplyfalls,butotherthingsremainconstant.
C) theshort-runequilibriumlevelofrealGDPisgreaterthanthelevelconsistentwiththe
D) theshort-runequilibriumlevelofrealGDPislessthanthelevelconsistentwiththe
Answer: D
Diff:1
34) Anexampleofanaggregatesupplyshockis
A) inflationcausedbyasurgeindemand.
B) thecutoffofoilbytheOPECnationsintheearly1970s.
C) theincreaseinthelaborforceduetothebaby-boomergenerationreachingworkingage.
D) theincreaseincandysaleseveryFebruary.
Answer: B
Diff:2
35) Arecessionarygapistheamountbywhich
A) totalplannedrealexpendituresexceedtotalplannedproductioninthelongrun.
B) theshort-runequilibriumlevelnominalGDPisabovetheshort-runrealGDP.
C) theshort-runequilibriumlevelnominalGDPisbelowtheshort-runrealGDP.
D) theshort-runequilibriumlevelofrealGDPisbelowthefull-employmentlevelofreal
GDP.
Answer: D
Diff:2
36) Aninflationarygapistheamountbywhich
A) totalplannedproductionexceedstotalplannedrealexpendituresinthelongrun.
B) theshort-runequilibriumlevelofnominalGDPisabovetheshort-runlevelofrealGDP.
C) theshort-runequilibriumlevelofnominalGDPisbelowtheshort-runlevelofrealGDP.
D) theshort-runequilibriumlevelofrealGDPisabovethefull-employmentlevelofreal
GDP.
Answer: D
Diff:2
37) IftheU.S.governmentweretorelaxitsrestrictionsonoffshoreoilwelldrillingandopen
drillinginAlaskannationalparks,theresulttoaggregatesupplywouldbeto
A) causeashiftintheSRAStotheleft.
B) causeashiftintheLRAStotheleft.
C) causenolong-termshiftsinAS.
D) causeashiftinbothLRASandSRAStotheright.
Answer: D
Diff:2
38) Intheshortrun,ifaggregatedemandshiftstotheleftwhilethepositionoftheshort -run

aggregatesupplycurvedoesNOTchange,then
A) thelevelofeconomicactivityrises.
B) arecessionarygapoccurs.
C) thereisnochangeinrealGDPandthepricelevel.
D) aninflationarygapoccurs.
Answer: B
Diff:2
39) Intheabovefigure,whatarethelong-runequilibriumpricelevelandrealGDP?
A) 130and$12trillion
B) 130and$11.5trillion
C) 120and$11.5trillion
D) 120and$12trillion
Answer: A
Diff:1
40) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whataretheshort-run

equilibriumpricelevelandrealGDP?
A) 130and$12trillion
C) 120and$11.5trillion
B) 130and$11.5trillion
D) 120and$12trillion
Answer: C
Diff:1
41) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whattypeofgapexistsand

howlargeisit?
A) inflationarygapof$500billion
C) recessionarygapof$1trillion
B) inflationarygapof$1trillion
D) recessionarygapof$500billion
Answer: D
Diff:2
42) Intheabovefigure,whatcouldcausetheshiftofaggregatedemandfromAD1 toAD2 ?

A) depletionofrawmaterials
B) anincreaseininputprices
C) adecreaseinconsumerconfidence
D) anincreaseininternationaltradebarriers
Answer: C
Diff:3
43) IftheequilibriumlevelofrealGDPperyearisgreaterthanthefull-employmentlevelofGDP,
then
A) arecessionarygapoccurs.
B) theeconomyisatfullemploymentwithnopricechanges.
C) theeconomyexpandsthelevelofrealGDP.
D) aninflationarygapoccurs.
Answer: D
Diff:1
44) Whichofthefollowingactionswouldcausetheaggregatedemandcurvetoshifttotheleft?
A) anincreaseinconsumerspendingcausedbyacutinthepersonalincometaxrate
B) anincreaseingovernmentspendingcausedbyincreasedspendingonhighwaysand
bridgeconstruction
C) adecreasenetexportspendingcausedbyanappreciationofthehomecurrency
D) anincreaseinexportscausedbyanincreaseineconomicactivityintheEuropeanUnion
Answer: C
Diff:2
45) Arecessionarygapresultswhen
A) aggregatedemandisbelowthelevelconsistentwithfullemployment.
B) aggregatedemandisabovethelevelconsistentwithfullemployment.
C) aggregatesupplyandaggregatedemandarenotinshort -runequilibrium.
D) aggregatesupplydecreases.
Answer: A
Diff:2
46) Ifthefull-employmentlevelofrealGDPisgreaterthantheequilibriumlevelofrealGDP,the
nationwouldbeexperiencinga(n)
A) inflationarygap.
B) recessionarygap.
C) demand-pullinflation.
D) risingprices.
Answer: B
Diff:2
47) Considertheabovefigure.IftheaggregatedemandfellfromAD 1toAD2 ,ournationwouldbe

experiencing
A) aninflationarygap.
C) overemployment.
B) arecessionarygap.
D) risingprices.
Answer: B
Diff:3
48) Considertheabovefigure.IftheaggregatedemandcurverosefromAD 1toAD3 ,ournation

wouldbeexperiencing
C) unemployment.
D) fallingprices.
Answer: A
Diff:3
49) Considertheabovefigure.IftheaggregatedemandwentfromAD 2toAD3 ,ournationwould

havegonefrom
A) arecessionarygaptoaninflationarygap.
B) arecessionarygaptofull-employmentrealGDP.
C) aninflationarygaptofull-employmentGDP.
D) full-employmentrealGDPtoaninflationarygap.
Answer: A
Diff:3
50) AccordingtomodernKeynesiananalysis,anincreaseinaggregatedemandleadstoahigher
pricelevelbecausethe
A) aggregatedemandcurveisupwardsloping.
B) short-runaggregatesupplycurveisupwardsloping.
C) aggregatedemandcurveisupwardhorizontal.
D) short-runaggregatesupplycurveisvertical.
Answer: B
Diff:2
51) Supposeaggregatedemandisincreasingovertime.WouldthemodernKeynesianmodel
assumethatthepricelevelwouldalwaysbeconstant?Explain.
Answer: No.Eventuallyfullemploymentwouldbereachedandfirmswouldbeproducingatfull
capacity.Thepricelevelwouldadjustaspriceswouldincrease.Thatis,theshort -run
aggregatesupplycurvecannotbehorizontalatallpossiblevaluesofrealGrossDomestic
Product(GDP).
Diff:3
11.6ExplainingShort-RunVariationsinInflation
1) Inflationthatiscausedbyanincreaseinaggregatedemandwhichisnotmatchedbyanincrease
inaggregatesupplyiscalled
A) demand-pushinflation.
B) demand-pullinflation.
C) cost-pushinflation.
D) cost-pullinflation.
Answer: B
Diff:3
Topic: 11.6ExplainingShort-RunVariationsinInflation
2) Thesignificantincreasesinoilpricesduringthelatter2000swasanexampleof
A) anaggregatedemandshockthatincreasedthepricelevelandincreasedtherateofgrowth
ofrealGrossDomesticProduct(GDP).
B) anaggregatedemandshockthatreducedthepricelevelandreducedtherateofgrowthof
C) anaggregatesupplyshockthatincreasedthepricelevelandreducedtherateofgrowthof
D) anaggregatesupplyshockthatreducedthepricelevelandincreasedtherateofgrowthof
Answer: C
Diff:1
3) Supposethatlastyear$1U.S.exchangedfor1.35euros.Ifthisyear$1exchangesfor1.25euros,
thenwecanconcludethat
A) thedollarisweakerthisyearthanitwaslastyearandthiswillcausetheUnitedStates
short-runaggregatesupply(SRAS)curvetoshifttotheleft.
B) thedollarisweakerthisyearthanitwaslastyearandthiswillcausetheUnitedStates
short-runaggregatesupply(SRAS)toshifttotheright.
C) thedollarisstrongerthisyearthanitwaslastyearandthiswillcausetheUnitedStates
short-runaggregatesupply(SRAS)curvetoshifttotheleft.
D) thedollarisweakerthisyearthanitwaslastyearbutthiswillhavenoimpactonthe
UnitedStatesshort-runaggregatesupply(SRAS)curve.
Answer: A
Diff:1
4) IftheU.S.dollarbecomesweakerininternationalforeignexchangemarkets,importedgoods
becomemoreexpensive.Oneresultofthisisthat
A) netexportsdecrease.
B) netexportsincrease.
C) domesticemploymentrises.
D) realGrossDomesticProduct(GDP)increases.
Answer: B
Diff:1
5) AstrongerU.S.dollarleadsto________inSRASand________inADsimultaneously.
A) aleftwardshift;arightwardshift
B) arightwardshift;aleftwardshift
C) arightwardshift;arightwardshift
D) aleftwardshift;aleftwardshift
Answer: B
Diff:1
6) IftheU.S.dollarbecomesweakerininternationalmarkets,theneteffectswillinclude
A) adecreaseinshort-runaggregatesupply(SRAS)andanincreaseinaggregatedemand.
B) anincreaseinshort-runaggregatesupply(SRAS)andadecreaseinaggregatedemand.
C) adecreaseinbothshortrunaggregatesupply(SRAS)andaggregatedemand.
D) anincreaseinbothshortrunaggregatesupply(SRAS)andaggregatedemand.
Answer: A
Diff:1
7) Demand-pullinflationis
A) inflationcausedbyincreasesinaggregatedemandthatgenerateanevenlargerincreasein
aggregatesupply.
B) inflationcausedbyincreasesinaggregatedemandthatarenotmatchedbyincreasesin
aggregatesupply.
C) inflationcausedbyreductionsinshort-runaggregatesupply.
D) inflationcausedbyreductionsinlong-runaggregatesupply.
Answer: B
Diff:1
8) Cost-pushinflationis
A) inflationcausedbyincreasesinaggregatedemandthatgenerateanevenlargerincreasein
aggregatesupply.
B) inflationcausedbyincreasesinaggregatedemandthatarenotmatchedbyincreasesin
aggregatesupply.
C) inflationcausedbydecreasesinaggregatesupplythatgenerateanevenlargerdecreasein
aggregatedemand.
D) inflationcausedbydecreasesinaggregatesupplythatarenotmatchedbydecreasesin
aggregatedemand.
Answer: D
Diff:1
9) Whichofthefollowingcancauseinflation?
A) Increasesinshort-runaggregatesupply
B) Increasesinlong-runaggregatesupply
C) Decreasesinshort-runaggregatesupply
D) Decreasesinaggregatedemand
Answer: C
Diff:2
10) Theinflationassociatedwiththeoilpriceshocksinthe1970safterOPECrestrictedthesupplyof
oilisanexampleof
A) cost-pushinflationduetoasupplyshock.
B) cost-pushinflationduetoademandshock.
C) demand-pullinflationduetoademandshock.
D) demand-pullinflationduetoasupplyshock.
Answer: A
Diff:2
11) AfterasmallhurricaneinFlorida,unemploymentislowasthereisagreatdealofconstruction
workandbusinessesrunatfullcapacity.Thissuggeststhat
A) theeconomyisoperatingabovethefull-employmentlevelandwilleventuallyadjustback
tolong-runaggregatesupply.
B) livingstandardsarefallingasemploymentandeconomicactivityaretoohigh.
C) theeconomyisoperatingbelowitslong-runlevelandlivingstandardsarelessthanthey
wouldhavebeenwithoutthehurricane.
D) thehurricaneisbeneficialsinceitisincreasingemploymentandreplacinglessefficient
capitalwithnewerandmoreefficientcapital.
Answer: A
Diff:3
12) AstrongerU.S.dollarinworldexchangemarketsmeansthat
A) adollarbuysmoreunitsofforeigncurrencythanitcouldbefore.
B) adollarbuyslessunitsofforeigncurrencythanitcouldbefore.
C) adollarbuysthesameamountofforeigncurrencythanitcouldbefore,withgoldbacking
upthevalueofthedollar.
D) foreignerssellthedollarsthattheyhave.
Answer: A
Diff:1
13) AstrongerdollarleadstocheaperinputpricesforU.S.firmsbecause
A) U.S.workersarewillingtoworkforlesspaybecauseofthestrongerdollar.
B) U.S.producersofintermediategoodslowerpricesinordertobenefitfromthestronger
dollar.
C) importsofrawmaterialsandintermediategoodsarecheaper.
D) exportsofrawmaterialsandintermediategoodsarecheaper.
Answer: C
Diff:2
14) Oneeffectofastrongerdollaris
A) anincreaseinU.S.exportsandareductioninU.S.imports.
B) areductioninU.S.exportsandanincreaseinU.S.imports.
C) anincreaseinnetexports.
D) anincreaseinbothimportsandexports.Theeffectonnetexportsisuncertain.
Answer: B
Diff:2
15) TheneteffectofastrongerdollaronrealGDPis
A) anincreaseinrealGDP.
B) adecreaseinrealGDP.
C) anincreaseinthepricelevel.
D) dependentonwhethertheincreaseinaggregatesupplyismoreorlessthanthedecrease
inaggregatedemand.
Answer: D
Diff:3
16) SupposeweobservethepricelevelincreasingandrealGDPdecreasing.Anexplanationforthis
isthat
A) thedollarweakenedandtheeffectonaggregatesupplywaslessthantheeffecton
aggregatedemand.
B) thedollarweakenedandtheeffectonaggregatesupplywasgreaterthantheeffecton
aggregatedemand.
C) thedollarstrengthenedandtheeffectonaggregatesupplywaslessthantheeffecton
aggregatedemand.
D) thedollarstrengthenedandtheeffectonaggregatesupplywasgreaterthantheeffecton
aggregatedemand.
Answer: B
Diff:3
17) EquilibriumrealGDPrisesafterthedollarstrengthened.Fromthis,wecanconcludethat
A) theincreaseinaggregatedemandwasgreaterthanthedecreaseinaggregatesupply.
B) thedecreaseinaggregatedemandwaslessthantheincreaseinaggregatesupply.
C) thedecreaseinaggregatedemandwasmorethantheincreaseinaggregatesupply.
D) theincreaseinaggregatedemandwaslessthanthedecreaseinaggregatesupply.
Answer: B
Diff:2
18) Refertotheabovefigure.SupposetheeconomyisatE.Astrongerdollarleadstoalowerreal
GDP.Whichoftheaggregatesupplycurvesmustbetherelevantcurveafterthechangeinthe
valueofthedollar?
A) 1
B) 2
C) 4
D) 5
Answer: B
Diff:2
19) Refertotheabovefigure.SupposetheeconomyisatEoriginally,whenthedollarincreasesin
value.WhichaggregatesupplycurveappliesifthevalueofrealGDPincreases?
A) 1
B) 2
C) 4
D) 5
Answer: A
Diff:2
20) Refertotheabovefigure.SupposeweareatE andthedollarweakens.Whichaggregatesupply

curvemustapplyifthepricelevelincreases?
A) 3only
B) 4only
C) 5only
D) 4or5
Answer: D
Diff:2
21) SupposetheJapaneseyenincreasesinitsvaluerelativetotheU.S.dollar.IntheU.S.economy,
A) thepricelevelwillincreaseandrealGDPwillfalliftheincreaseinaggregatedemandis
lessthanthedecreaseinaggregatesupply.
B) thepricelevelwillincreaseandrealGDPwillfallifthedecreaseinaggregatedemandis
morethantheincreaseinaggregatesupply.
C) thepricelevelwillfallandrealGDPwillincreaseiftheincreaseinaggregatesupplyis
greaterthanthedecreaseinaggregatedemand.
D) thepricelevelwillfallandrealGDPwilldecreaseifthedecreaseinaggregatedemandis
lessthantheincreaseinaggregatesupply.
Answer: A
Diff:3
22) Cost-pushinflationoccurs
A) whentheaggregatesupplycurveshiftstotheleft,whileaggregatedemandremains
stable.
B) whentheaggregatesupplycurveshiftstotheright,whileaggregatedemandremains
stable.
C) whentheaggregatedemandcurveshiftstotheleft,whileaggregatesupplyremains
stable.
D) whentheaggregatedemandcurveshiftstotheright,whileaggregatesupplyremains
stable.
Answer: A
Diff:2
23) Demand-pullinflationoccurs
A) whentheaggregatesupplycurveshiftstotheleft,whileaggregatedemandremains
stable.
B) whentheaggregatesupplycurveshiftstotheright,whileaggregatedemandremains
stable.
C) whentheaggregatedemandcurveshiftstotheleft,whileaggregatesupplyremains
stable.
D) whentheaggregatedemandcurveshiftstotheright,whileaggregatesupplyremains
stable.
Answer: D
Diff:2
24) Ifthepricelevelshouldincreaseintheneartermduetodecreasesintheshort-runaggregate
supply,theresultwouldbe
A) demand-pullinflation.
B) demand-pullrecession.
C) cost-pushinflation.
D) cost-pullexpansion.
Answer: C
Diff:2
25) SupposetheFederalReserveincreasesthemoneysupply.Whichofthefollowingwilltendto
occurasaresultofthispolicyinaKeynesianmodel?
A) aninflationarygap
B) demand-pullinflation
C) amovementalongtheshort-runaggregatesupplycurve
D) alloftheabove
Answer: D
Diff:2
26) Otherthingsbeingequal,ifinputpricesriseinacountry,thentherewouldbe
A) cost-pushinflation.
B) demand-pullinflation.
C) cost-pushdeflation.
D) moreproductionandalowerpricelevel.
Answer: A
Diff:2
27) Anincreaseinaggregatedemandwilltendtocausewhichofthefollowing?
A) adeflationarygap
B) arecessionarygap
C) cost-pushinflation
D) noneoftheabove
Answer: D
Diff:1
28) Inflationcausedbycontinuallydecreasingshort-runaggregatesupplyis
A) cost-pullinflation.
B) cost-pushinflation.
D) demand-pushinflation.
Answer: B
Diff:1
29) Oilpricesincreasedsignificantlyin2008.AccordingtotheKeynesianmodel,thisincreaseinoil
pricesshouldhavecausedwhichofthefollowingtooccur?
A) demand-pullinflation
B) demand-pushinflation
C) cost-pushinflation
D) cost-pullinflation
Answer: C
Diff:2
30) Cost-pushinflationcanbeshownonanaggregatesupplyaggregatedemanddiagramas
A) arightwardshiftoftheaggregatesupplycurvewithnochangeinaggregatedemand.
B) arightwardshiftintheaggregatedemandcurvewithnochangeinaggregatesupply.
C) aleftwardshiftintheaggregatedemandcurvewithnochangeinaggregatesupply.
D) aleftwardshiftintheaggregatesupplycurvewithnochangeinaggregatedemand.
Answer: D
Diff:2
31) Demand-pullinflationiscausedby
A) aggregatedemandincreasingalongahorizontalaggregatesupplycurve.
B) aggregatedemanddecreasingalongahorizontalaggregatesupplycurve.
C) aggregatedemanddecreasingalonganupwardslopingoraverticalaggregatesupply
curve.
D) aggregatedemandincreasingalonganupwardslopingoraverticalaggregatesupply
curve.
Answer: D
Diff:2
32) IntheoriginalAustinPowers,Dr.Eviliscryogenicallyfrozenforthirtyyears(fromthelate1960s
tothelate1990s).Uponhisreturnhehatchesaplantoextortonemilliondollarsfromvarious
worldgovernments.Hishenchmenareunimpressed.Whattype(s)ofinflationhavemadeDr.
Evilsproposedblackmailamountseemtoosmall?
A) cost-pushinflation
B) demand-pullinflation
C) bothcost-priceandprice-pullinflation
D) bothcost-pushanddemand-pullinflation
Answer: D
Diff:3
33) Naturaldisasterslikesevereearthquakesaredevastatingtotheeconomyaswellastothe
individualsharmeddueto
A) supplyshocks.
B) demandshocks.
D) demand-pulldeflation.
Answer: A
Diff:2
34) SupposetheU.S.dollargainsstrengthagainsttheeuro(andagainstothermajorcurrencies).
Thisstrengtheningofthedollarwillcausewhichofthefollowingtooccur?
A) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheright.
B) Theaggregatedemandcurvewillshifttotheleftandtheshort-runaggregatesupplywill
shifttotheright.
C) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheleft.
D) theaggregatedemandcurvewillshifttotheleftandtheshort -runaggregatesupplywill
shifttotheleft.
Answer: B
Diff:2
35) SupposetheU.S.dollarweakensagainsttheeuro(andagainstothermajorcurrencies).This
weakeningofthedollarwillcausewhichofthefollowingtooccur?
A) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheright.
B) Theaggregatedemandcurvewillshifttotheleftandtheshort-runaggregatesupplywill
shifttotheright.
C) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheleft.
D) Theaggregatedemandcurvewillshifttotheleftandtheshort-runaggregatesupplywill
shifttotheleft.
Answer: C
Diff:2
36) Theexchangeratelastmonthwas$1= 3.2Swissfrancs.Thismonthitis$1=3.12Swissfrancs.

Wecansaythatthevalueofthedollar
A) fell,causingnetexportstoincreaseandaggregatedemandtorise.
B) fell,causingnetexportstodecreaseandaggregatedemandtofall.
C) increased,causingnetexportstodecreaseandaggregatedemandtofall.
D) increased,causingnetexportstodecreaseandaggregatedemandtorise.
Answer: A
Diff:2
37) Theexchangeratelastmonthwas$1= 1.15euros.Thismonthitis$1=1.35euros.Wecansay

thatthevalueofthedollar
A) fell;causingnetexportstoincreaseandaggregatedemandtorise.
B) fell;causingnetexportstodecreaseandaggregatedemandtofall.
C) increased;causingnetexportstodecreaseandaggregatedemandtofall.
D) increased;causingnetexportstodecreaseandaggregatedemandtorise.
Answer: C
Diff:2
38) AnappreciationoftheU.S.dollar________thepriceofU.S.imports,and________thepriceof
U.S.exports.
A) lowers,lowers
B) increases,increases
C) increases,lowers
D) lowers,increases
Answer: D
Diff:1
39) SupposetheU.S.dollarweakensagainsttheeuro(andagainstothermajorcurrencies).We
knowwithcertaintythatthisweakeningofthedollarwillcausewhichofthefollowingto
occur?
A) arecessionarygap
B) aninflationarygap
C) adeflationarygap
D) noneoftheabove
Answer: D
Diff:2
40) Supposetheeuroappreciatesagainstthedollar.ThiscausesU.S.exportstobecomeless
expensiveforconsumersintheEuropeanUnion,whichwouldlikelycausetheU.S.
A) aggregatesupplytoshiftleftward.
B) aggregatesupplytoshiftrightward.
C) aggregatedemandtoshiftleftward.
D) aggregatedemandtoshiftrightward.
Answer: D
Diff:2
41) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,whichofthe

followingwouldweNOTexpect?
A) Strongdemand-pullinflation
B) NoincreaseinrealGrossDomesticProduct(GDP)
C) Strongandrapidincreasesinthepricelevel
D) Increasesinrealnetdomesticproduct
Answer: D
Diff:1
42) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,thentheeconomy

willexperience
A) demand-pullinflation.
C) structuralinflation.
Answer: A
Diff:1
B) cost-pushinflation.
D) stagflation.
43) Whenthevalueofthedollarincreases,theneteffectontheeconomy
A) willbeanincreaseinshort-runaggregatesupplyandadecreaseinaggregatedemand.
B) willbedecreaseinshort-runaggregatesupplyandanincreaseinaggregatedemand.
C) willbeanincreaseinbothaggregatedemandandaggregatesupply.
D) willbeadecreaseinbothaggregatedemandandaggregatesupply.
Answer: A
Diff:1
44) Whenthevalueofthedollardecreases,theneteffectontheeconomy
A) willbeanincreaseinshort-runaggregatesupplyandadecreaseinaggregatedemand.
B) willbedecreaseinshort-runaggregatesupplyandanincreaseinaggregatedemand.
C) willbeanincreaseinbothaggregatedemandandaggregatesupply.
D) willbeadecreaseinbothaggregatedemandandaggregatesupply.
Answer: B
Diff:1
45) Whateffectdoesastrongerdollarhaveonaggregatesupply?Why?
Answer: AstrongerdollarmeansthatU.S.residentscanbuyforeigngoodsmorecheaply.Since
someoftheforeigngoodswillberawmaterialsandpartiallyprocessedgoods,input
pricesfall,whichcausesaggregatesupplytoincrease.
Diff:1
46) Usingagraph,showtheeffectsofaweakerdollarontheeconomy.Explain.
Answer: TheoriginalequilibriumisE1 .Aweakerdollarcausesaggregatesupplytodecrease,
representedbyashiftfromAS1 toAS2 .Buttheweakerdollarmakesimportsmore
expensiveandexportscheaper,soaggregatedemandincreasesfromAD 1 toAD2 .The
newequilibriumisE2 ,withanincreaseinrealGrossDomesticProduct(GDP)andarise
inthepricelevel.Thisresultisduetothefactthataggregatedemandshiftedfurtherthan
aggregatesupply.RealGrossDomesticProduct(GDP)wouldhavefalleniftheshiftin
aggregatesupplyhadbeengreaterthantheshiftinaggregatedemand.
Diff:3
Chapter12
Consumption,RealGDP,andtheMultiplier
12.1SomeSimplifyingAssumptionsinaKeynesianModel
1) WhichofthefollowingisNOTasimplifyingassumptioninthesimpleKeynesianmodel?
A) Netinvestmentandgrossinvestmentareequal.
B) Allprofitsaredistributedtothebusinessowners.
C) Realdisposableincomeequalsgovernmentpurchasesofgoodsandservices.
D) Thereisnoforeigntrade.
Answer: C
Diff:1
Topic: 12.1SomeSimplifyingAssumptionsinaKeynesianModel
2) Whichofthefollowingrepresentstherelationshipbetweendisposableincome(DI),
consumption(C),andsaving(S)?
A) DI+C=S
B) DI= C+ S
C) DI= C*S
D) DI= C- S
Answer: B
Diff:1
3) Whichofthefollowingisasimplifyingassumptionassociatedwiththeshort-runKeynesian
modelofequilibriumrealGrossDomesticProduct(GDP)determination?
A) Grossprivatedomesticinvestmentexceedsnetprivatedomesticinvestment.
B) Mostbusinessprofitsaredistributedtoshareholders.
C) Businessespayindirecttaxes.
D) Thereisnodepreciation.
Answer: D
Diff:1
4) WhichofthefollowingwouldNOTbeconsideredaconsumptiongood?
A) Anewsweater
B) Toolsusedtocutmetalonanautoproductionline
C) AjarofSkippypeanutbutter
D) AbottleofScotchwhiskey
Answer: B
Diff:1
5) Thetermssavingandsavingsdifferinthat
A) savingisastock,andsavingsareaflow.
B) savingalwaysexceedssavings.
C) savingsareastock,andsavingisaflow.
D) savingscanbenegative,butsavingcannot.
Answer: C
Diff:1
6) WhenyoupurchaseGapclothingandbaseballtickets
A) youarebuyingconsumptiongoods.
B) youarebuyingcapitalgoods.
C) youareconsumingintermediategoods.
D) youarebuyingphysicalcapital.
Answer: A
Diff:2
7) Thedifferencebetweensavingandsavingsisthat
A) savingisdonebyhouseholdsandsavingsbybusinesses.
B) savingisundertakenasaprecautionagainstunemploymentandsavingsareundertaken
toincreaseinvestmentspending.
C) savingsaretheresultofpastandcurrentsaving.
D) savingisplacedinfinancialinstitutionssuchasbanks,whilesavingsarekeptathomeby
people.
Answer: C
Diff:1
8) WhichofthefollowingisNOTaflowvariable?
A) Consumption
B) Investment
C) Savings
D) Saving
Answer: C
Diff:2
9) Atalevelofrealdisposableincomeof$0,supposeconsumptionis$2,000.Giventhis
information,weknowwithcertaintythatsavingequals
A) $0.
B) $2,000.
C) -$2,000.
D) -$1,000.
Answer: C
Diff:1
Chapter12Consumption,RealGDP,andtheMultiplier437
A) Disposableincome- saving= consumption
B) Consumption+saving= disposableincome
C) Saving=disposableincome- consumption
D) Consumption=saving- disposableincome
Answer: D
Diff:1
11) Thinkingasaneconomistwould,whichistrueofinvestment?
A) Itistheportionofdisposableincomethatisnotusedforconsumptionorsaving.
B) Investmentrepresentsspendingoncapitalgoods.
C) Investmentisputtingmoneyintostocksandbonds.
D) Investmentisastockconcept.
Answer: B
Diff:1
12) Theincome-expendituremodelofrealGDPdeterminationisduetotheworkof
A) AdamSmith.
B) J.B.Say.
C) JohnMaynardKeynes.
D) RogerMiller.
Answer: C
Diff:1
13) Whichofthefollowingisconsideredinvestment?
A) Mainapurchasesanewcarforcommutingtoandfromwork.
B) Janepurchasesanewcarforcommutingtoandfromschool.
C) Johnnybuysanewcarforhiswifeasananniversarygift.
D) Jamespurchasesanewcartoreplaceanoldcarinhiscabbusiness.
Answer: D
Diff:1
14) Savingdiffersfromsavingsinthat
A) savingisaflowwhilesavingsisastock.
B) savingisastockwhilesavingsisaflow.
C) savingisbothaflowandastockwhilesavingsisastock.
D) savingisastockwhilesavingsisbothaflowandastock.
Answer: A
Diff:1
15) ConsumptionexpendituresincludeallofthefollowingEXCEPT
A) buyingapizza.
B) goingtoaconcert.
C) havingyourhousecleanedbyKleanMaids.
D) purchasingashareofstock.
Answer: D
Diff:1
16) Consumptiongoods
A) includegoodssuchasDVDsthatfirmsholdininventory.
B) areonlythegoodsboughtbyhouseholdsforimmediatesatisfaction.
C) includespendingonmachinesandbuildingssothatgoodscanbeproducedinthefuture.
D) aregoodsthatareusedtomakeothergoods.
Answer: B
Diff:1
17) Keynesthoughtthatthekeytodeterminingthebroadereconomiceffectsofinvestment
fluctuations
A) wastoexaminehowbusinessesreacttoflexiblepricesandwages.
B) wastocloselyregulatetherealinterestrate.
C) wastounderstandtherelationshipbetweenhowmuchpeopleearnandtheirwillingness
toengageinpersonalconsumptionspending.
D) wastounderstandhowchangesinthemoneysupplyinfluencesconsumptiondecisions.
Answer: C
Diff:1
18) Savingis
A) theamountonedoesnotconsumeinagivenperiodoftimewhilesavingsisthe
accumulationofpastperiodsofsaving.
B) theaccumulationofpastperiodsofsavingswhilesavingsistheamountofdisposable
incomethatisnotconsumedinagivenperiodoftime.
C) thedifferencebetweenrealGDPanddisposableincomewhilesavingsisthedifference
betweendisposableincomeandconsumptionspending.
D) thedifferencebetweendisposableincomeandspendingongoodsandserviceswhile
savingsisthedifferencebetweenrealGDPanddisposableincome.
Answer: A
Diff:2
19) Spendingonnewgoodsandservicesoutofahouseholdscurrentincomeis
A) consumption.
B) thecapitalconsumptionallowance.
C) savings.
D) investment.
Answer: A
Diff:1
20) Consumptiongoodsare
A) aformofinvestment.
B) goodspurchasedfromsavings.
C) aformofcapitalgoods.
D) goodspurchasedbyhouseholdstobeusedimmediately.
Answer: D
Diff:1
21) Thedifferencebetweenastockandaflowis
A) astockissomethingmeasuredatonepointintimewhileaflowissomethingthatis
expressedperunitoftime.
B) astockissomethingmeasuredatonepointintimewhileaflowissomethingthatisfixed.
C) astockisexpressedperunitoftimewhileaflowismeasuredatonepointintime.
D) astockreferstothesolidinventoryfirmshaveonhandwhileaflowreferstotheliquid
inventoryfirmshaveonhand.
Answer: A
Diff:1
22) Thedifferencebetweensavingsandsaving
A) isnonexistent.
B) isthatsavingsoccurswhenconsumptiondoesnotandsavingisusedtopurchase
consumptiongoods.
C) isthatsavingsisastockconceptandsavingisaflowconcept.
D) isthatsavingsismeasuredinrealtermswhilesavingismeasuredinnominalterms.
Answer: C
Diff:1
23) Whichofthefollowingisaflowvariable?
A) Savings
B) Wealth
C) Consumption
D) Population
Answer: C
Diff:1
24) AllofthefollowingareflowvariablesEXCEPT
A) consumption.
B) saving.
C) investment.
Answer: D
Diff:1
A) consumption+saving=disposableincome
B) consumption+saving=personalincome
C) consumption-investment=disposableincome
D) consumption-saving=personalincome
Answer: A
Diff:1
A) investment=disposableincome+ consumption
B) saving=personalincome-consumption
C) saving=disposableincome-consumption
D) saving=personalincome+consumption
Answer: C
Diff:1
D) capitalgoods.
27) Investmentis
A) thepurchasingofstocksandmutualfunds.
B) goodsboughtbyhouseholds.
C) spendingbybusinessesonthingswhichcanbeusedtoproducegoodsandservicesinthe
future.
D) theproductionofgoodsforimmediatesatisfaction.
Answer: C
Diff:1
28) Spendingbybusinessesonthingssuchasmachinesandbuildingswhichcanbeusedto
producegoodsandservicesinthefutureis
A) investment.
B) consumption.
C) consumptiongoods.
D) savings.
Answer: A
Diff:1
29) Expendituresbyfirmsonnewmachinesandbuildingsthatareexpectedtoyieldafuturestream
ofincomeisknownas
A) consumerdurable.
B) consumptiongoods.
C) fixedinvestment.
Answer: C
Diff:1
30) Changesinbusinessinventoriesareknownas
A) consumerdurable.
C) fixedinvestment.
B) consumptiongoods.
Answer: D
Diff:1
31) Fixedinvestmentis
A) whenafirmaddstoitsinventoriesofgoods.
B) whenafirmaccumulatesprofits.
C) dissavings.
D) anexpenditurebyfirmsonnewmachinesthatareexpectedtoproduceincomeinthe
future.
Answer: D
Diff:1
32) Investmentis
A) aflowconceptandismadeupoffixedinvestmentandinventoryinvestment.
B) aflowconceptandismadeupoffixedinvestment.
C) astockconceptandismadeupoffixedinvestmentandinventoryinvestment.
D) astockconceptandismadeupoffixedinvestment.
Answer: A
Diff:1
33) Nonconsumablegoodsthatfirmsusetomakeothergoodsare
A) consumptiongoods.
B) capitalgoods.
C) dissaving.
D) theMPC.
Answer: B
Diff:1
34) Howisinvestmentdefinedasaneconomicconcept?
A) Investmentisprimarilythemarketvalueofallsharesofstockheldbythepublic.
B) Investmentisprimarilythemarketvalueofallequipment,buildings,andinventoriesheld
bycorporations,partnerships,andproprietorships.
C) Investmentisprimarilythesumofexpendituresbybusinessesonnewcapitalgoodsthat
willyieldafuturestreamofincome.
D) Investmentisprimarilytheportionofyoursavingsheldinaninterest-earningaccount.
Answer: C
Diff:1
35) Savingsareanexampleof
A) aflowconcept.
C) adepreciationconcept.
B) astockconcept.
D) aninvestmentconcept.
Answer: B
Diff:1
36) Savingisanexampleof
A) aflowconcept.
C) adepreciationconcept.
B) astockconcept.
D) aninvestmentconcept.
Answer: A
Diff:1
37) Bydefinition,disposableincomeisequalto
A) consumptionplussaving.
C) investmentplussaving.
B) consumptionplusinvestment.
D) consumptionminussaving.
Answer: A
Diff:1
38) Investmentincludesspendingon
A) capitalgoods,buildings,andconsumerdurablegoods.
B) capitalgoods,buildings,andchangesinbusinessinventories.
C) capitalgoods,consumerdurablegoods,andchangesinbusinessinventories.
D) capitalgoods,buildings,andchangesinbusinesssavings.
Answer: B
Diff:1
39) Whichformulaiscorrect?
A) S=Yd-C
B) Yd + S= C
C) 2(Yd)- S= C
Answer: A
Diff:2
D) Yd + C= S
40) Yourrealdisposableincomeisyourrealincomeafteryouhavepaid
A) rentandfoodexpenses.
B) nettaxes.
C) medicalexpenses.
D) consumptionexpenses.
Answer: B
Diff:2
41) Distinguishbetweensavingandsavings.Howdoesinvestmentrelatetothisdistinction,ifat
all?
Answer: Savingisaflowconceptandsavingsisastockconcept.Savingistheactofnot
consumingallofonesincomeinayear.Savingsisastockofwealthatapointintime.
Investmentisalsoaflowconcept.Forinvestmenttotakeplace,theremustbesaving.
Diff:1
12.2DeterminantsofPlannedConsumptionandPlannedSaving
1) Keynesiantheoryisbasedonthehypothesisthat
A) savingandconsumptionareinfluencedprimarilybyrealcurrentdisposableincome.
B) savingisinfluencedprimarilybytheinterestrate.
C) plannedsavingsequalplannedinvestmentonlyatfullemployment.
D) fullemploymentisautomaticallyattainedinanyeconomy.
Answer: A
Diff:1
Topic: 12.2DeterminantsofPlannedConsumptionandPlannedSaving
2) Supposethatwhendisposableincomeincreasesby$1,000,consumptionspendingincreasesby
$750.Giventhisinformation,weknowthatthemarginalpropensitytoconsume(MPC)is
A) .25.
B) .75.
C) $1,000/$750=1.33.
D) 1/.25= 4.
Answer: B
Diff:1
3) Supposethatwhendisposableincomedecreasesby$2,000,consumptionspendingincreasesby
$1500.Giventhisinformation,weknowthatthemarginalpropensitytoconsume(MPC)is
A) .25.
B) .75.
C) $1,000/$750=1.33.
D) 1/.25= 4.
Answer: B
Diff:1
A) MPC-MPS=1
C) MPC*MPS=1
B) MPC+ MPS=1
D) MPC/MPS=1
Answer: B
Diff:1
5) AccordingtoKeynesiantheory,themostimportantdeterminantofsavingandconsumptionis
A) thelevelofrealdisposableincome.
B) thestockofliquidassets.
C) thestockofdurablegoodsintheconsumerspossession.
D) thelevelofconsumerindebtedness.
Answer: A
Diff:1
6) TheKeynesianmodelisbasedontheideathat
A) savingdependsonlyontheinterestrate.
B) bothconsumptionandsavingaredirectlyrelatedtodisposableincome.
C) consumptionisunrelatedtothelevelofrealGrossDomesticProduct(GDP).
D) bothconsumptionandsavingareunrelatedtothelevelofrealGrossDomesticProduct
(GDP).
Answer: B
Diff:1
7) Theconsumptionfunctionshows
A) apositiverelationshipbetweenanindividualsstockofwealthandhislevelofplanned
consumption.
B) apositiverelationshipbetweendisposableincomeandplannedconsumption.
C) anegativerelationshipbetweenplannedconsumptionandaggregatesaving.
D) anegativerelationshipbetweendisposableincomeandplannedconsumption.
Answer: B
Diff:1
8) Therelationshipbetweenhouseholdsplannedconsumptionexpendituresandhouseholdslevel
ofdisposablerealincomeiscalled
A) theconsumptionfunction.
B) thesavingsfunction.
C) theinvestmentfunction.
D) thehouseholdaggregatedemandfunction.
Answer: A
Diff:1
9) AccordingtoKeynes,plannedconsumption
A) decreasesasdisposableincomeincreases.
B) isunstableandfluctuateswidelywithchangesindisposableincome.
C) ispositivelyrelatedtorealdisposableincome.
D) isindirectlyrelatedtotheinterestrate.
Answer: C
Diff:1
10) Theconsumptionfunctionshowstherelationship
A) betweenhouseholdsdisposableincomeandtheirconsumptionspending.
B) betweeninvestmentandrateofreturn.
C) betweenconsumptionspendingandcapitalgains.
D) betweengovernmentspendingandtaxcollection.
Answer: A
Diff:1
11) Whenanindividualspendsmorethanher/hisdisposableincome,thispersonis
A) saving.
B) investing.
C) dissaving.
D) unemployed.
Answer: C
Diff:1
12) Alongalinearconsumptionfunction,
A) theaveragepropensitytoconsumefallswithanincreaseinincome.
B) themarginalpropensitytoconsumeriseswithanincreaseinincome.
C) theaveragepropensitytoconsumeriseswithincome,butthemarginalpropensityto
consumefallswithanincreaseinincome.
D) boththeaveragepropensitytoconsumeandthemarginalpropensitytoconsumerisewith
anincreaseinincome.
Answer: A
Diff:1
13) Dissavingoccurswhen
A) disposableincomeexceedsconsumption.
B) disposableincomeislessthanconsumption.
C) themarginalpropensitytosaveislessthan.5.
D) themarginalpropensitytoconsumeislessthan.5.
Answer: B
Diff:1
14) Savingequals
A) disposableincomeminustaxes.
B) disposableincomeminusconsumptionspending.
C) disposableincomeminussavings.
D) consumptionspendingminussavings.
Answer: B
Diff:1
15) AccordingtoKeynes,theprimarydeterminantofapersonssavingisNOT
A) thepersonslevelofincomebutthedesiredrealincomeoftheperson.
B) thepersonslevelofsavingsbuttheexpectedinterestrateinthenearfuture.
C) theinterestratebutthelevelofsavingsthepersonhas.
D) theinterestratebutthelevelofthepersonsrealdisposableincome.
Answer: D
Diff:2
16) AccordingtoKeynes,anindividualslevelofsavingisprimarilydeterminedby
A) theinterestrate.
B) theindividualscurrentlevelofdisposablerealincome.
C) theindividualsassessmentofthefuturedirectionofthestockmarket.
D) realGrossDomesticProduct(GDP)fortheeconomy.
Answer: B
Diff:1
17) Whichofthefollowingtheoriespredictsthatcurrentconsumptionincreaseswhenaperson
expectsanincreaseinfutureincome?
A) Thelife-cycletheoryofconsumption
B) Thepermanentincomehypothesis
C) TheKeynesiantheoryofconsumption
D) Alloftheabove
Answer: D
Diff:2
QuestionStatus: New
18) Accordingtothepermanentincomehypothesis,atemporaryincreaseinincomethatdoesnot
affectaveragelifetimeincomewould
A) causealargeincreaseinconsumption.
B) causenochangeinconsumption.
C) causeanincreaseinconsumptionandsavingbythesameamount.
D) causeadecreaseinconsumptionandsavingbythesameamount.
Answer: B
Diff:2
QuestionStatus: New
19) Accordingtothepermanetincomehypothesis,apersonsconsumptionincreasesonlywhen
A) thepersonsaveragelifetimeincomeincreases.
B) thepersonsavesmore.
C) thepersonsincomeincreasesunexpectedly.
D) thepersonscurrentincomeincreases.
Answer: A
Diff:2
QuestionStatus: New
20) Thelife-cycletheoryofconsumptionpredictsthatwhenapersonanticipatesahigherincomein
thefuture,thenthatpersonwill
A) consumemoreandsavelessinthecurrentperiod.
B) consumelessandsavemoreinthecurrentperiod.
C) consumelessandsavelessinthecurrentperiod.
D) notchangetheamountofconsumptionorsavinginthecurrentperiod.
Answer: A
Diff:1
QuestionStatus: New
21) Theconsumptionfunctionshowshowmuch
A) householdsplantoconsumeperyearateachlevelofrealdisposableincome.
B) householdsplantoconsumeperyearateachpossibleinterestrate.
C) realdisposableincomepeoplewillearnateachincometaxbracket.
D) householdsplantoconsumeperyearateachlevelofsavings.
Answer: A
Diff:1
22) AccordingtoKeynes,
A) consumptionispositivelyrelatedtotheinterestrate.
B) consumptionisdirectlyrelatedtoincomebutsavingisinverselyrelatedtoincome.
C) bothconsumptionandsavingarepositivelyrelatedtorealdisposableincome.
D) consumptionisdirectlyrelatedtoincomebutsavinghasnorelationshipwithincome.
Answer: C
Diff:2
23) Whenconsumptionspendingisgreaterthandisposableincome,weknowwithcertaintythat
wehave
A) dissaving.
B) excessthrift.
C) positivesavings.
D) negativenetinvestment.
Answer: A
Diff:1
24) Supposerealdisposableincomeincreasesby$1,000.Giventhisinformation,weknowthat
A) consumptionwillgenerallyincreasebyexactly$1,000.
B) consumptionwillgenerallyincreasebylessthan$1,000.
C) consumptionwillgenerallyincreasebymorethan$1,000.
D) savingwillgenerallyincreasebyexactly$1,000.
Answer: B
Diff:1
25) Supposewhenrealdisposableincomeis$5000,plannedrealconsumptionis$4000.Whenreal
disposableincomeincreasesto$6000,plannedrealsavingincreasesby$500.Thenewplanned
realconsumptionexpendituresis
A) $5,000.
B) $4,500.
C) $6,000.
D) $3,500.
Answer: B
Diff:2
Planned
Consumption
$6,000
10,000
14,000
18,000
22,000
26,000
Planned
Saving
-$1,000
0
1,000
2,000
-
Planned
Investment
$1,000
-
Real
GDP
$5,000
10,000
15,000
20,000
25,000
30,000
26) Accordingtotheabovetable,ifrealGrossDomesticProduct(GDP)is$30,000,plannedsaving
equals
A) $2,000.
B) $3,000.
C) $4,000.
D) $5,000.
Answer: C
Diff:2
27) Accordingtotheabovetable,themarginalpropensitytoconsumeis
A) 0.6.
B) 0.5.
C) 0.75.
Answer: D
Diff:2
D) 0.8.
28) Accordingtotheabovetable,ifrealGrossDomesticProduct(GDP)equals$30,000,whatisthe
averagepropensitytoconsume?
A) 0.67
B) 0.75
C) 0.8
D) 0.87
Answer: D
Diff:3
29) Thebreak-evenpointontheconsumptionfunctionrepresentsthepointwhere
A) consumptionequalsspending.
B) incomeequalsconsumptionplusspending.
C) consumptioniszero.
D) consumptionequalsincome.
Answer: D
Diff:1
30) Inthegraphfortheconsumptionfunction,the45-degreeline
A) containsonlyaconsumptioncomponent.
B) representsbothplannedconsumptionandplannedinvestment.
C) showsvariouscombinationswhereplannedconsumptionequalsrealdisposableincome.
D) reflectsadecreasingAPCasrealdisposableincomerises.
Answer: C
Diff:1
31) Whenafamilysincomeislowanditisspendingmoreonconsumptionthanitisreceivingin
income,
A) theAPCmustbeincreasing.
B) theAPCmustbeequaltotheratioofplannedconsumptionexpendituretototalsaving.
C) theMPCmustbezero.
D) somesegmentoftheconsumptionfunctioncurveliesabovethe45 -degreeline,indicating
dissaving.
Answer: D
Diff:1
32) Atthebreak-evenpointfortheconsumptionfunction
A) savingispositive.
B) savingisnegative.
C) savingiszero.
D) themarginalpropensitytoconsumeequalsl.
Answer: C
Diff:1
33) Ifsavingequals$200whenrealdisposableincomeequals$1,000,thebreak -evenincomeis

A) lessthan$1,000.
B) greaterthan$1,000.
C) equalto$1,000.
D) equalto$1,200.
Answer: A
Diff:1
34) Accordingtotheabovefigure,plannedconsumptionandincomeareequalatanincomelevelof
A) Y2 .
B) Y3 .
C) Y1 .
D) Y0 .
Answer: D
Diff:1
35) Accordingtotheabovefigure,atanincomelevelofY 1 ,
A) theeconomysavesanamountequaltoBD.
B) themarginalpropensitytosaveisfalling.
C) theaveragepropensitytosaveisgreaterthanone.
D) theeconomydissavesanamountequaltoBD.
Answer: D
Diff:1
36) Accordingtotheabovefigure,theaveragepropensitytosave(APS)iszeroatpoint
A) D.
B) F.
C) I.
D) J.
Answer: B
Diff:1
37) Intheabovefigure,whendisposableincomeisgreaterthan600,
A) savingisnegative.
B) theMPCisgreaterthan1.
C) savingispositive.
D) theMPSisnegative.
Answer: C
Diff:1
38) Intheabovefigure,themarginalpropensitytoconsume(MPC)equals
A) 0.8.
B) 0.9.
C) 0.75.
Answer: B
Diff:3
D) 0.85.
39) Intheabovefigure,achangeinautonomousconsumptionto100wouldcausetheconsumption
functionto
A) becomesteeper.
B) becomeflatter.
C) shiftdown.
D) shiftup.
Answer: D
Diff:1
40) Intheabovefigure,savingwillequalzerowhenrealdisposableincomeequals
A) 0.
B) 60.
C) 600.
D) 500.
Answer: C
Diff:1
41) Intheabovefigure,whenrealdisposableincomeequals600
A) thereisdissaving.
B) consumptionislessthandisposableincome.
C) realdisposableincomeexceedsconsumption.
D) consumptionequalsrealdisposableincome.
Answer: D
Diff:1
42) Intheabovefigure,whenrealdisposableincomeislessthan600,then
A) consumptionislessthandisposableincome.
B) consumptionismorethandisposableincome.
C) consumptionisthesameasdisposableincome.
D) theMPCwillfall.
Answer: B
Diff:1
43) Alongtheportionoftheconsumptionfunctionthatliesabovethe45-degreeline,savingis
A) positive.
B) negative.
C) equaltozero.
D) equaltoconsumption
Answer: B
Diff:1
44) Refertotheabovefigure.IftheMPCisunchangedandlevelofautonomousconsumption
increases,whatoccurs?
A) LineEBDwillshiftup.
B) LineABCwilldropdown.
C) LineABCshiftsup.
D) LineEBDrotatesandbecomessteeper.
Answer: C
Diff:1
45) Refertotheabovefigure.LineABCiscalled
A) the45-degreeline.
C) thesavingfunction.
B) theconsumptionfunction.
D) aggregatesupply.
Answer: B
Diff:1
46) Refertotheabovefigure.LineEBDiscalled
A) the45-degreeline.
C) thesavingfunction.
B) theconsumptionfunction.
D) aggregatedemand.
Answer: A
Diff:1
47) Accordingtotheabovefigure,autonomousconsumptionequals
A) $0.
B) $5,000.
C) $20,000.
D) -$5,000.
Answer: B
Diff:2
48) Refertotheabovefigure.Ifrealdisposableincomeislessthan$5,000,thensavingis
A) 0.
B) negative.
C) positive.
D) noneoftheabove:cannotbedeterminedwiththegiveninformation.
Answer: B
Diff:2
49) Wheretheconsumptionfunctionintersectsthe45-degreeline,
A) savingswillbenegative.
B) consumptionwillequalonlyautonomousconsumption.
C) theaveragepropensitytoconsumeis0.5.
D) savingwillbezero.
Answer: D
Diff:1
50) Ifthemarginalpropensitytoconsumeisunchangedandautonomousconsumption
expendituresincrease,then
A) savingateverylevelofdisposableincomeincreases.
B) thebreak-evendisposableincomedecreases.
C) thebreak-evendisposableincomeincreases.
D) savingisunaffected.
Answer: C
Diff:1
51) Autonomousconsumptionis
A) consumptionspendingthatisearnedratherthantransferredfromthegovernment.
B) consumptionspendingthatdoesnotdependonthelevelofincome.
C) theamountspentonconsumptionwhensavingequalszero.
D) consumptionspendingwhenthemarginalpropensitytoconsumeis1.
Answer: B
Diff:1
52) Ineconomics,thetermautonomousmeans
A) existingindependently.
C) disposableincome.
B) non-economicrelated.
D) cashpayments.
Answer: A
Diff:1
53) Whenahouseholdsdisposableincomefallstozero,whatdoweexpectwillhappen?
A) Thehouseholdsconsumptionspendingalsofallstozero.
B) Thehouseholdwillmaintainapositivelevelofsaving.
C) Thehouseholdwillmaintainitspreviouslevelofconsumption.
D) Consumptionwillfalltothelevelofautonomousconsumption.
Answer: D
Diff:1
54) Ifthelevelofconsumptionis$100billionanddisposableincomeis$125billion,thenthe
A) APC=0.6andsavingispositive.
B) APC= 0.8andsavingisnegative.
C) APC=0.8andsavingispositive.
D) APC= 0.6andsavingisnegative.
Answer: C
Diff:1
55) Ifdisposableincome=$200billionandtheAPS= 0.9,then

A) saving=$90billion.
B) saving= $45billion.
C) saving=$180billion.
D) savingcannotbedetermined.
Answer: C
Diff:1
56) Ifthemarginalpropensitytosaveis0.4anddisposableincomeincreasesfrom$1,000to$1,500,
savingwillincrease
A) $100.
B) $200.
C) $300.
D) $400.
Answer: B
Diff:1
57) Ifconsumptionis$750whenrealdisposableincomeis$1,000,theaveragepropensityto
consumeis
A) 0.80.
B) 0.75.
C) 0.50.
D) 0.25.
Answer: B
Diff:1
58) Theaveragepropensitytoconsumeisthe
A) percentageoftotaldisposableincomeconsumed.
B) rateatwhichrealdisposableincomechangesasplannedconsumptionchanges.
C) ratioofchangesinplannedconsumptiontochangesinrealdisposableincome.
D) slopeoftheconsumptionfunction.
Answer: A
Diff:1
59) Whichofthefollowingcorrectlydefinestheaveragepropensitytoconsume(APC)?
A) Changeinplannedconsumptiondividedbychangeinrealdisposableincome
B) Plannedconsumptiondividedbyrealdisposableincome
C) Realdisposableincomedividedbyplannedconsumption
D) Changeinrealdisposableincomedividedbychangeinplannedconsumption
Answer: B
Diff:1
60) Asrealdisposableincomeincreases,weexpecttheaveragepropensitytoconsume(APC)
A) toalwaysbebelowMPC.
B) toincrease.
C) todecrease.
D) toremainunchanged.
Answer: C
Diff:1
61) Iftheaveragepropensitytoconsumeis0.8,thentheaveragepropensitytosaveis
A) 0.
B) 0.2.
C) 0.8.
D) 1.
Answer: B
Diff:1
62) Theaveragepropensitytoconsume(APC)equals
A) realdisposableincomedividedbyconsumptionexpenditures.
B) consumptionexpendituresdividedbyrealdisposableincome.
C) thechangeinconsumptionexpendituresdividedbythechangeinrealdisposableincome.
D) thechangeinrealdisposableincomedividedbythechangeinconsumptionexpenditures.
Answer: B
Diff:2
63) Iftheaveragepropensitytosave(APS)is0.60,thenthismeans
A) peoplearesaving60percentoftheirdisposableincome.
B) peoplearespending60percentoftheirdisposableincome.
C) themarginaltaxrateis60.
D) thegovernmentspends60percentofitsrevenues.
Answer: A
Diff:2
64) Whentheaveragepropensitytosave(APS)is0.20,thenthismeans
A) peoplearespending20percentoftheirdisposableincome.
B) peoplearespending80percentoftheirdisposableincome.
C) peoplearesaving$0.20ofthelastdollarearned.
D) peoplearespending60percentoftheirdisposableincomeandinvestingtheremaining20
percent.
Answer: B
Diff:2
65) Ifthemarginalpropensitytosave(MPS)= 0.1,then

A) theMPC=0.9.
B) theAPS=0.1.
C) theAPC=0.9.
D) consumptionequals$1,800whenincomeequals$2,000.
Answer: A
Diff:1
66) Themarginalpropensitytoconsume(MPC)canbestbedefinedasthatfractionof
A) realdisposableincomethatisconsumed.
B) realdisposableincomethatisnotconsumed.
C) achangeinrealdisposableincomethatisspent.
D) achangeinrealdisposableincomethatissaved.
Answer: C
Diff:1
67) Thefractionofachangeinrealdisposableincomethatisspentisreferredtoasthe
A) APC.
B) MPC.
C) MPS.
D) APS.
Answer: B
Diff:1
68) Themarginalpropensitytoconsume(MPC)
A) showshowmuchrealdisposableincomechangeswhenconsumptionfalls.
B) isgreaterthan1onlyifthemarginalpropensitytosaveisgreaterthan1.
C) showshowmuchofanextradollarofrealdisposableincomeisspent.
D) showsthepercentageofrealdisposableincomeconsumedateachlevelofincome.
Answer: C
Diff:1
69) Themarginalpropensitytoconsumeexplainshowmuchofthenextdollarofdisposableincome
A) ahouseholdwillspend.
B) abusinesswillinvest.
C) thegovernmentwillspend.
D) foreignresidentswillusetopurchasedomesticexports.
Answer: A
Diff:1
RealDisposableIncome
0
$100
$300
$500
$700
$900
Consumption
$100
$180
$340
$500
$660
$820
70) Intheabovetable,themarginalpropensitytoconsume(MPC)is
A) 0.9.
B) 0.75.
C) 0.8.
D) 0.85.
Answer: C
Diff:1
71) Intheabovetable,savingispositivewhenrealdisposableincomeisgreaterthan
A) zero.
B) $100.
C) $300.
D) $500.
Answer: D
Diff:1
72) Intheabovetable,savingequalszerowhenrealdisposableincomeequals
A) $0.
B) $200.
C) $300.
D) $500.
Answer: D
Diff:2
73) Intheabovetable,themarginalpropensitytosaveis________.
A) 0.8
B) 0.6
C) 0.2
D) 0.4
Answer: C
Diff:2
74) Thearithmeticvalueof(1- MPC)equals

A) APC.
B) MPS.
C) APS.
Answer: B
Diff:1
D) NDP.
75) Theratioofthechangeinconsumptiontothechangeindisposableincomeisthe
A) marginalpropensitytoconsume.
B) marginalpropensitytosave.
C) averagepropensitytoconsume.
D) averagepropensitytosave.
Answer: A
Diff:1
76) Themarginalpropensitytoconsumeiscalculatedby
A) dividingconsumptionbyincome.
B) dividingincomebyconsumption.
C) dividingthechangeinincomebythechangeinconsumption.
D) dividingthechangeinconsumptionbythechangeinincome.
Answer: D
Diff:1
77) Iftheaveragepropensitytoconsumeis1.0,themarginalpropensitytoconsumeis0.8,andreal
disposableincomeincreasesby$100,theadditionalsavingis
A) $0.
B) $20.
C) $80.
D) $100.
Answer: B
Diff:3
78) IftheMPCis0.8,thentheMPSis
A) 0.2.
B) 1.
C) 5.
Answer: A
Diff:1
D) 8.
RealDisposable
Income
$100
150
200
300
360
500
Planned
Savings
-$10
-5
0
10
16
30
79) Accordingtotheabovetable,thevalueoftheMPCis
A) 0.9.
B) 0.1.
C) 0.5.
Answer: A
Diff:1
80) Accordingtotheabovetable,asthelevelofrealdisposableincomeincreases,
A) themarginalpropensitytosavedeclines.
B) theAPCincreases.
C) themarginalpropensitytoconsumeincreases.
D) theAPSincreases.
Answer: D
Diff:1
81) Accordingtotheabovetable,thevalueofMPSis________.
A) 0.9
B) 0.2
C) 0.1
D) increasingasrealdisposableincomerises.
Answer: C
Diff:1
82) ItisconceivablethattheAPC,APS,MPC,andMPScouldsimultaneouslybe
A) APC=1.0;APS=0.1;MPC= 0.8;MPS= 0.25.
B) APC=0.8;APS=0.2;MPC= 1.1;MPS= 0.1.
C) APC=1.3;APS=-0.3;MPC= 0.9;MPS= 0.1.
D) APC=1.0;APS=0;MPC= 1.0;MPS= 0.15.
Answer: C
Diff:3
D) 0.7.
83) WhatcanwesayaboutAPC+APSandMPC+ MPS?

A) Eachmustsumto1.
B) MPC+MPS=100%oftotalincome.
C) APC+APS=100%ofthechangeinincome.
D) MPC+MPSalwaysequals1,butthesumofAPC+ APScanvary.
Answer: A
Diff:1
84) Whichofthefollowingwouldbeexpectedtoshifttheconsumptionfunctionup?
A) Decreasesinwealth
B) Expectationsofhardertimesahead
C) Increasesinthenationspopulation
D) Changesinrealdisposableincome
Answer: C
Diff:1
85) Thenon-incomedeterminantsofconsumptionincludeallofthefollowingEXCEPT
A) stockofassetsownedbyhousehold.
B) innovation.
C) theinterestrate.
D) realwealth.
Answer: B
Diff:1
86) AllofthefollowingwillshifttheconsumptionfunctionEXCEPT
A) achangeinwealth.
B) achangeintherateofinterest.
C) achangeinincome.
D) achangeinexpectationsconcerningeconomicconditions.
Answer: C
Diff:1
87) Theconsumptionfunctionshiftsupwardwhen
A) realincomeincreases.
B) savingincreases.
C) therealwealthoftheaveragehouseholdincreases.
D) populationdecreases.
Answer: C
Diff:2
88) Theconsumptionfunctionwillshiftwith
A) anincreaseinrealdisposableincome.
C) adecreaseinrealdisposableincome.
B) achangeinsaving.
D) achangeinhouseholdwealth.
Answer: D
Diff:2
89) AccordingtoKeynes,theprimarydeterminantofapersonssavingis
A) thenominalinterestrate.
B) therealinterestrate.
C) thelevelofthepersonsconsumptionspending.
D) thelevelofthepersonsrealcurrentincome.
Answer: D
Diff:1
90) Whichofthefollowingiscorrect?
A) 1+MPS=MPC
C) 1-MPS=MPC+1
B) 1- MPC= MPS
D) 1- MPS= MPC-1
Answer: B
Diff:1
91) Theconsumptionfunctionrelates
A) ahouseholdsconsumptiontoitswealth.
B) plannedhouseholdconsumptiontorealdisposableincome.
C) plannedhouseholdconsumptionandrealinterestrates.
D) realdisposableincomesearnedbyhouseholdswiththelevelofconsumptioncredit
desiredintheeconomy.
Answer: B
Diff:1
92) Howmuchpeopleplantoconsumeatvariouslevelsofdisposableincomeisknownas
A) dissaving.
B) investment.
C) theconsumptionfunction.
Answer: C
Diff:1
93) Therelationshipbetweenplannedrealconsumptionexpendituresofhouseholdsandtheir
currentlevelofrealdisposableincomeis
A) investment.
B) dissaving.
C) saving.
D) theconsumptionfunction.
Answer: D
Diff:1
94) IntheKeynesianmodel,consumption
A) ispositivelyrelatedtoincomeandsavingisnegativelyrelatedtothestockmarket.
B) ispositivelyrelatedtoincomebutsavingisnotsystematicallyrelatedtoeitherincomeor
interestrates.
C) andsavingarepositivelyrelatedtotherealinterestrate.
D) andsavingarepositivelyrelatedtoincome.
Answer: D
Diff:2
95) Dissavingis
A) impossibleinthesimpleKeynesianmodel.
B) thesituationwhensavingexceedsconsumption.
C) thesituationwhenconsumptionspendingexceedsdisposableincome.
D) thesituationwhenpeoplesavesmallerandsmalleramounts.
Answer: C
Diff:1
96) Asituationinwhichspendingexceedsincomeis
A) theconsumptionfunction.
C) averagepropensitytosave.
B) thesavingfunction.
D) dissaving.
Answer: D
Diff:1
97) Asrealdisposableincomeincreases,consumptionexpenditures
A) increasebythesameamount.
B) increasebyasmalleramount.
C) increasebyalargeramount.
D) remainconstant.
Answer: B
Diff:2
98) Whendisposableincomeequalsconsumptionexpenditures,then
A) savingiszero.
B) savingequals10percentofincome.
C) bothsavingandsavingsarezero.
D) wecanttellwhatsavingiswithoutmoreinformation.
Answer: A
Diff:1
99) Atalevelofrealdisposableincomeof0,consumptionis$4000.Then
A) savingequals0.
B) savingequals-$4000.
C) savingsequal-$4000.
D) savingequals$4000.
Answer: B
Diff:2
100) Refertotheabovefigure.LineBCDiscalled
A) thesavingfunction.
C) the45-degreeline.
Answer: D
Diff:1
101) Refertotheabovefigure.LineACEiscalled
A) thesavingfunction.
C) the45-degreeline.
Answer: C
Diff:1
102) Refertotheabovefigure.Ifrealdisposableincomeis$30,000,savingis
A) $0.
B) $4000.
C) $5000.
D) $6000.
Answer: A
Diff:2
103) Refertotheabovefigure.Atanincomeof$10,000,savingis
A) 0.
B) $13,000.
C) $3,000.
D) -$3,000.
Answer: D
Diff:2
104) Refertotheabovefigure.Autonomousconsumptionequals
A) 0.
B) -$5000.
C) $5000.
D) $25,000.
Answer: C
Diff:2
105) Refertotheabovefigure.Themarginalpropensitytoconsumeandthemarginalpropensityto
save
A) are0.90and0.10,respectively.
B) are0.83and0.17,respectively.
C) are0.75and0.25,respectively.
D) dependonthelevelofincome.
Answer: B
Diff:2
106) Refertotheabovefigure.Thefigurerepresentstheconsumptionfunctionforaconsumer.Point
Arepresents
A) autonomousconsumption.
B) positivesaving.
C) negativeconsumption.
D) zerosaving.
Answer: A
Diff:3
Brepresents
B) positivesaving.
C) negativesaving.
D) zerosaving.
Answer: C
Diff:3
Crepresents
B) positivesaving.
C) negativesaving.
D) zerosaving.
Answer: D
Diff:3
Drepresents
B) saving.
C) dissaving.
D) zerosaving.
Answer: B
Diff:3
110) Refertotheabovefigure.Thefigurerepresentstheconsumptionfunctionforaconsumer.The
distancebetweenAandBrepresents
A) theamountofautonomousconsumption.
B) theamountofautonomoussaving.
C) theamountoftotalconsumption.
D) noneoftheabove.
Answer: D
Diff:2
111) Refertotheabovefigure.Thefigurerepresentstheconsumptionfunctionforaconsumer.The
distancebetweenCandDrepresents
B) theamountofsaving.
C) theamountofdissaving.
D) thepointwheresavingequalszero.
Answer: B
Diff:3
112) Refertotheabovefigure.Thefigurerepresentsthesavingfunctionfortheconsumer.PointA
represents
B) asituationinwhichsavingispositive.
C) asituationinwhichsavingisnegative.
D) thepointatwhichsavingequalszero.
Answer: C
Diff:3
113) Refertotheabovefigure.Thefigurerepresentsthesavingfunctionfortheconsumer.PointB
represents
Answer: D
Diff:3
114) Refertotheabovefigure.Thefigurerepresentsthesavingfunctionfortheconsumer.PointC
represents
Answer: B
Diff:3
115) Refertotheabovefigure.Autonomousconsumptionis
A) onlyatpointA.
B) totheleftofpointB.
C) onlyatpointB.
D) totherightofpointB.
Answer: A
Diff:3
116) Refertotheabovefigure.Thepointatwhichsavingequalszerois
A) onlyatpointA.
C) onlyatpointB.
Answer: C
Diff:2
117) Refertotheabovefigure.Dissavingoccurs,
A) onlyatpointA.
C) onlyatpointB.
Answer: B
Diff:3
118) Refertotheabovefigure.Savingoccursat
A) onlyatpointA.
C) onlyatpointB.
Answer: D
Diff:3
119) Alongthe45referenceline
A) consumptionexpendituresequalsaving.
B) therelationshipbetweenconsumptionandincomeisrepresented.
C) theaveragepropensitytoconsumeisrepresented.
D) plannedrealexpendituresequalrealdisposableincome.
Answer: D
Diff:1
120) Plannedexpendituresequalrealdisposableincome
A) ateverypointontheconsumptionfunction.
B) ateverypointonthesavingfunction.
C) ateverypointonthe45-degreeline.
D) whensavingequalszero.
Answer: C
Diff:2
121) Thebreak-evenpointrefersto
B) thepointatwhichplannedrealconsumptionequalsrealdisposableincome.
C) themaximumamountofdissavingapersoncanexperience.
D) apointatwhichplannedrealconsumptionisforgreaterthanrealdisposableincome.
Answer: B
Diff:1
122) Autonomousconsumption
A) isthesameasthebreak-evenpoint.
B) givestheamountapersonchangesplannedconsumptionforachangeinrealdisposable
income.
C) istheamountofconsumptionthatisindependentofthelevelofdisposableincome.
D) istheproportionoftotaldisposableincomethatisconsumed.
Answer: C
Diff:1
123) Thepartofconsumptionthatdoesnotdependuponthelevelofdisposableincomeis
B) saving.
C) savings.
D) averagepropensitytoconsume.
Answer: A
Diff:1
124) Averagepropensitytoconsume
income.
Answer: D
Diff:1
125) Theaveragepropensitytoconsumeis
A) realconsumptionexpendituresdividedbyrealdisposableincome.
B) realdisposableincomedividedbyrealconsumptionexpenditures.
C) realconsumptionexpendituresdividedbyrealsaving.
D) realsavingdividedbyrealconsumptionexpenditures.
Answer: A
Diff:1
126) Marginalpropensitytoconsume
income.
Answer: B
Diff:1
127) Theaveragepropensitytoconsumeis
A) realconsumption/realdisposableincome.
B) realsaving/realdisposableincome.
C) changeinrealconsumption/changeinrealdisposableincome.
D) changeinrealsaving/changeinrealdisposableincome.
Answer: A
Diff:2
128) Themarginalpropensitytosaveis
Answer: D
Diff:2
129) Whichofthefollowingisnegativeforthetypicalconsumeratsomelevelofrealdisposable
income?
A) Marginalpropensitytosave.
B) Marginalpropensitytoconsume.
C) Averagepropensitytosave.
D) Averagepropensitytoconsume.
Answer: C
Diff:2
130) Themarginalpropensitytoconsumeis
Answer: C
Diff:2
131) Theaveragepropensitytosaveis
Answer: B
Diff:2
132) Theequation
realconsumption
isthe
realdisposableincome
A) averagepropensitytoconsume.
C) marginalpropensitytoconsume.
B) averagepropensitytosave.
D) marginalpropensitytosave.
Answer: A
Diff:2
133) Theequation
realsaving
isthe
realdisposableincome
Answer: B
Diff:2
134) Theequation
changeinrealconsumption
isthe
changeinrealdisposableincome
Answer: C
Diff:2
135) Theequation
changeinrealsaving
isthe
changeinrealdisposableincome
Answer: D
Diff:2
Real
DisposableIncome
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
PlannedReal
Consumption
3,000
4,400
5,800
7,200
8,600
10,000
11,400
12,800
136) Refertotheabovetable.Thetablegivesthecombinationsofrealdisposableincomeandreal
consumptionforacollegestudentforayear.Whatdoesplannedrealsavingequalwhenreal
disposableincomeequals$12,000?
A) 0
B) 600
C) 3,000
D) 11,400
Answer: B
Diff:2
consumptionforacollegestudentforayear.Whatdoesplannedrealsavingequalwhenreal
disposableincomeequals$6,000?
A) -3,000
B) -1,200
C) 0
D) 7,200
Answer: B
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueofthemarginalpropensityto
consume?
A) 0
B) 0.3
C) 0.7
D) 1
Answer: C
Diff:2
consumptionforacollegestudentforayear.Thebreak-evenlevelofrealdisposableincomeis
A) 0
B) 6,000
C) 10,000
D) 14,000
Answer: C
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensityto
consumewhenrealdisposableincomeequals$4,000?
A) -0.45
B) 0.69
C) 0.7
D) 1.45
Answer: D
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensitytosave
whenrealdisposableincomeequals$4,000?
A) -0.45
B) 0.69
C) 0.7
D) 1.45
Answer: A
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensityto
consumewhenrealdisposableincomeequals$14,000?
A) 0.09
B) 0.7
C) 0.91
D) 1.1
Answer: C
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensitytosave
equalwhenrealdisposableincomeequals$14,000?
A) 0.09
B) 0.7
C) 0.91
D) 1.1
Answer: A
Diff:2
144) Anincreaseinautonomousconsumptionmeansthat
A) theconsumptionfunctionshiftsdown.
B) theconsumptionfunctionshiftsup.
C) theconsumptionfunctionbecomessteeper.
D) theconsumptionfunctionbecomeslesssteep.
Answer: B
Diff:2
145) Iftheaveragepropensitytoconsumeisinitially1.0,themarginalpropensitytoconsumeis0.75,
andrealdisposableincomeincreasesby$1000,thenewvalueofsavingis
A) 0.
B) $250.
C) $750.
D) $1000.
Answer: B
Diff:3
146) Supposeautonomousconsumptiondecreases.Thisreductioninautonomousconsumptionwill
causewhichofthefollowingtooccur?
A) Theconsumptionfunctionshiftsdown.
B) Theconsumptionfunctionshiftsup.
C) Theconsumptionfunctionbecomessteeper.
D) Theconsumptionfunctionbecomeslesssteep.
Answer: A
Diff:1
147) Thestockofassetsownedbyaperson,household,firmornationis
A) realdisposableincome.
B) wealth.
C) capitalinvestment.
D) capitalgoods.
Answer: B
Diff:1
148) TheaveragepriceofashareofstockontheNewYorkStockExchangefallsby30percent.Other
thingsbeingequal,wewouldexpect
A) anincreaseinthemarginalpropensitytoconsume.
B) adecreaseinthemarginalpropensitytoconsume.
C) ashiftupoftheconsumptionfunction.
D) ashiftdownoftheconsumptionfunction.
Answer: D
Diff:3
A) APC+APS=1
C) APC+MPS=1
B) APC+ APS< 1
D) APC+ APS+ MPC+ MPS=1
Answer: A
Diff:2
150) Anotherwayofstatingthatinvestmentisindependentofrealdisposableincomeistosaythatit
is
A) inverselyrelated.
B) directlyrelated.
C) complementary.
D) autonomous.
Answer: D
Diff:1
A) Intheclassicalmodel,thesupplyofsavingisdeterminedbytherateofinterest.
B) Intheclassicalmodel,thesupplyofsavingisdeterminedbythelevelofincome.
C) IntheKeynesianmodel,thesupplyofsavingisdeterminedbytherateofinterest.
D) IntheKeynesianmodel,thesupplyofsavingisdeterminedbythelevelofinvestment.
Answer: A
Diff:2
152) Theconsumptionfunctionshowstherelationshipbetween
A) interestratesandplannedrealconsumption.
B) employmentandplannedrealconsumption.
C) thepricelevelandplannedrealconsumption.
D) realdisposableincomeandplannedrealconsumption.
Answer: D
Diff:2
153) Therelationshipthattellsushowmuchapersonintendstospendatvariouslevelsofincomeis
A) thespendingfunction.
B) theexpenditurefunction.
C) theconsumptionfunction.
D) thebuyingfunction.
Answer: C
Diff:1
154) Thepartofconsumptionthatisindependentofdisposableincomeiscalled
A) automaticconsumption.
B) fixedconsumption.
C) personalconsumption.
D) autonomousconsumption.
Answer: D
Diff:1
155) Whichofthefollowingisfalse?
A) APC+MPS=1
C) 1-APC=APS
B) MPC+ MPS=1
D) APC+ APS=1
Answer: A
Diff:1
156) Whichofthefollowingisfalse?
A) 1-MPC=MPS
C) 1-APS=APC
B) 1+ MPC= MPS
D) APC+ APS=1
Answer: B
Diff:1
A) APC+MPS=1
C) 1+APC=APS
B) MPC+ MPS= 1
D) APC- APS= 1
Answer: B
Diff:1
A) APC+MPS=1
C) MPS+APS=1
B) APC+ APS= 1
D) APC*APS= 1
Answer: B
Diff:1
RealDisposable
IncomeperYear
$0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
PlannedReal
ConsumptionperYear
$1,000
1,800
2,600
3,400
4,200
5,000
5,800
6,600
7,400
8,200
9,000
159) Intheabovetable,thelevelofautonomousconsumptionis
A) $0.
B) $1,000.
C) $5,000.
D) $9,000.
Answer: B
Diff:2
160) Intheabovetable,dissavingoccursateverylevelofincomebelow
A) $10,000.
B) $8,000.
C) $7,000.
Answer: D
Diff:2
D) $5,000.
161) Intheabovetable,themarginalpropensitytoconsumewhendisposableincomechangesfrom
$5,000to$6,000is
A) 0.8.
B) 0.75.
C) 0.6.
D) 0.5.
Answer: A
Diff:2
162) Intheabovetable,themarginalpropensitytosavewhendisposableincomechangesfrom
$1,000to$2,000is
A) 0.1.
B) 0.2.
C) 0.8.
D) -0.2.
Answer: B
Diff:3
163) Intheabovetable,theaveragepropensitytosavewhendisposableincomeis$5,000is
A) 0.2.
B) 0.1.
C) 0.0.
D) -0.1.
Answer: C
Diff:2
164) Intheabovetable,theaveragepropensitytoconsumewhenincomeis$10,000is
A) 0.8.
B) 0.2.
C) 0.0.
D) 0.9.
Answer: D
Diff:2
165) Atthepointatwhichplannedrealconsumptionspendingisequaltorealdisposableincome
A) theconsumptionfunctionisabovethe45-degreeline.
B) theconsumptionfunctionisbelowthe45-degreeline.
C) theconsumptionfunctionintersectsthe45-degreeline.
D) theconsumptionfunctionintersectsthesavingsfunction.
Answer: C
Diff:2
166) Whichoneofthefollowingwouldshiftyourconsumptionfunctioninanupwarddirection?
A) anincreaseinyourwealth
B) adecreaseinyourwealth
C) anincreaseinyourrealdisposableincome
D) adecreaseinyourrealdisposableincome
Answer: A
Diff:2
167) AccordingtoKeynes,themostimportantdeterminantofanindividualsrealsavingis
A) interestrates.
B) theforeignexchangerate.
C) theindividualsrealdisposableincome.
D) thelevelofinvestment.
Answer: C
Diff:2
168) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensityto

consumewouldbeequalto
A) 0.9.
B) 1.1.
C) 1.8.
D) 0.8.
Answer: B
Diff:2
169) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensitytosave

equals
A) 0.9.
B) 1.1.
C) -0.1.
D) -0.8.
Answer: C
Diff:2
170) Therelationshipbetweenplannedconsumptionandrealdisposableincomeisreferredtoas
A) thewealthfunction.
B) thesavingfunction.
C) themultiplier.
Answer: D
Diff:2
171) Considertheabovefigure.Autonomousconsumption,inthisscenario,isequalto
A) $30.
B) $40.
C) $60.
D) $80.
Answer: B
Diff:2
172) Considertheabovefigure.Atanincomeof$60wewouldexpectsavingtobeequalto
A) $60.
B) $40.
C) $10.
D) $0.
Answer: D
Diff:3
173) Considertheabovefigure.AtincomelevelYd = $30,theAPCisequalto

A) 1.25.
B) 1.67.
C) 1.05.
D) 0.05.
Answer: B
Diff:3
174) Considertheabovefigure.AtincomelevelYd = $110,theAPSisequalto

A) 0.64.
B) 0.32
C) 1.10.
Answer: B
Diff:3
D) -0.36.
175) Considertheabovefigure.Theequationfortheconsumptionfunctionis
A) C=40+60Yd.
B) C= 40+ 50Yd.
C) C=40+0.33Yd.
D) C= 40+ 0.1Yd.
Answer: C
Diff:3
176) Considertheabovefigure.Theequationforthesavingfunctionis
A) S=40-0.67Yd.
B) S= 40+ 0.33Yd.
C) S=-40+0.67Yd.
D) S= -40- 0.33Yd.
Answer: C
Diff:3
177) Theconsumptionfunctionistherelationshipbetween
A) realconsumptionspendingandrealtaxes.
B) realconsumptionspendingandinvestmentspending.
C) realconsumptionspendingandrealdisposableincome.
D) realconsumptionspendingandrealsaving.
Answer: C
Diff:1
178) Ifyourrealdisposableincomegoesupby$1,000perweek,andyourrealconsumption
spendinggoesupby$800perweek,youhaveamarginalpropensitytoconsumeof
A) 0.2.
B) 0.8.
C) 1.2.
D) 1.0.
Answer: B
Diff:2
179) Ifyourrealdisposableincomegoesupby$1,000perweek,andyourrealconsumption
spendinggoesupby$800perweek,youhaveanmarginalpropensitytosaveof
A) 0.2.
B) 0.8.
C) 1.2.
D) 1.0.
Answer: A
Diff:2
180) Whichofthefollowingchangeswillshifttheconsumptionfunctionupward?
A) anincreaseinwealth
B) adecreaseinwealth
C) adecreaserealdisposableincome
D) anincreaseinrealdisposableincome.
Answer: A
Diff:2
181) AccordingtoKeynes,realsavingandrealconsumptionspendingarefunctionsof
A) economicexpectations.
B) anindividualsfutureearningpotential.
C) currenteducationalattainment.
D) currentrealdisposableincome.
Answer: D
Diff:1
182) Theconsumptionfunctionshowstherelationshipbetweenplannedrealconsumptionspending
and
B) plannedrealsaving.
C) theaveragepropensitytoconsume.
D) themarginalpropensitytoconsume.
Answer: A
Diff:1
183) Thesavingfunctionshowstherelationshipbetweenplannedrealsavingand
A) realwealth.
B) realdisposableincome.
C) theaveragepropensitytosave.
D) themarginalpropensitytosave.
Answer: B
Diff:1
184) Therelationshipbetweenrealconsumptionspendingandrealdisposableincome
A) isdirect.
B) isinverse.
C) plotsaverticalline.
D) plotsahorizontalline.
Answer: A
Diff:1
185) Ifrealdisposableincomeincreases,theaveragepropensitytoconsumewill
A) initiallyincrease,andthendecrease.
B) remainconstant.
C) increase.
D) decrease.
Answer: D
Diff:1
186) Ifrealdisposableincomeincreases,theaveragepropensitytosavewill
A) initiallyincrease,andthendecrease.
B) remainconstant.
C) increase.
D) decrease.
Answer: C
Diff:1
187) Autonomousconsumption
A) ismeasuredbytheslopeoftheconsumptionfunction.
B) isthereciprocalofconsumption.
C) isequaltotheminimumsavings.
D) ismeasuredbytheinterceptoftheconsumptionfunctionandtheY -axis.
Answer: D
Diff:1
188) Autonomousconsumptionisdefinedas
A) thelevelofrealconsumptionspendingthatisindependentofrealdisposableincome.
B) therealconsumptionspendingbytheautonomousgovernment.
C) thelevelofrealconsumptionspendingthatisequaltorealdisposableincome.
D) theconsumptionofforeign-madegoodsindependentofexchangerates.
Answer: A
Diff:1
189) Withreferencetotheconsumptionfunction,the45-degreelinerepresents
A) theplannedsavingsfunction.
B) allpointsatwhichplannedrealsavingisequaltorealdisposableincome.
C) allpointsatwhichplannedrealsavingisequaltoplannedrealconsumptionspending.
D) allpointsatwhichrealdisposableincomeisequaltorealconsumptionspending.
Answer: D
Diff:2
190) Intheconsumptionfunctionmodel,the45-degreelinerepresentswhere
A) therealdisposableincomeisequaltozero.
B) plannedrealsavingisequaltozero.
C) plannedrealconsumptionspendingisequaltozero.
D) plannedrealsavingisgreaterthanactualrealsavings.
Answer: B
Diff:2
191) Theaveragepropensitytoconsume(APC)is
A) therateatwhichrealconsumptionspendingchangesovertime.
B) thepercentageofrealdisposableincomesaved.
C) thepercentageofrealdisposableincomeconsumed.
D) thepercentageofadditionalrealdisposableincomethatwillgotowardadditional
consumptionspending.
Answer: C
Diff:1
192) Theaveragepropensitytosave(APS)is
A) therateatwhichrealsavingschangesovertime.
C) thedifferencebetweentheamountsofrealdisposableincomeconsumedandsaved.
D) thepercentageofadditionalrealdisposableincomethatwillgotowardrealsaving.
Answer: B
Diff:1
193) Themarginalpropensitytoconsume(MPC)is
A) therateatwhichrealconsumptionspendingchangesovertime.
C) thepercentageofrealdisposableincomeconsumed.
D) thepercentageofanadditionaldollarofrealdisposableincomethatwillgotoward
additionalrealconsumptionspending.
Answer: D
Diff:1
194) Themarginalpropensitytosave(MPS)is
A) therateatwhichrealsavingschangesovertime.
C) thedifferencebetweentheamountsofrealdisposableincomeconsumedandsaved.
D) thepercentageofanadditionaldollarofrealdisposableincomethatwillgotoward
additionalrealsavings.
Answer: D
Diff:1
195) Theslopeoftheconsumptionfunctionisthe
A) MPC.
B) APC.
C) APS.
D) MPS.
Answer: A
Diff:3
196) Theslopeofthesavingfunctionisthe
A) MPC.
B) APC.
C) MPS.
D) APS.
Answer: C
Diff:3
197) Dissavingoccurswhen
A) householdsdepositunusuallylargeamountsofmoneyintotheirsavingsaccount.
B) householdsreducetheirplannedmonthlysaving.
C) consumptionspendingexceedsrealdisposableincome.
D) theaveragesavingrateforthenationunexpectedlyfalls.
Answer: C
Diff:1
RealDisposableRealPlanned
Income
Consumption
$0
$20
$50
$60
$75
$80
$100
$100
$125
$120
$150
$140
198) Usetheabovetable.Theautonomousconsumptioninthistableis
A) $140.
B) $20.
C) $0.
D) $50.
Answer: B
Diff:1
199) Usetheabovetable.Dissavingoccursuptoadisposableincomelevelof
A) $0.
B) $50.
C) $100.
D) $150.
Answer: C
Diff:1
200) Usetheabovetable.Whichofthefollowingistrueifrealdisposableincomeis$150?
A) APCislessthanMPC.
B) APC= 0.8.
C) APS=0.2.
D) APSislessthanMPS.
Answer: D
Diff:2
201) Usetheabovetable.Whenrealdisposableincomeis$125,
A) APC=0.96.
B) APC= 0.80.
C) APS= 0.20.
D) MPS= 0.96.
Answer: A
Diff:2
202) Usetheabovetable.Wecaninferfromthetablethatwhenrealdisposableincomeis$175,
A) APC=0.91.
B) APC= 0.80.
C) APC= 0.20.
D) APC= 0.09.
Answer: A
Diff:2
203) Usetheabovetable.TheMPCis
A) 0.91.
B) 0.80.
C) 0.20.
D) 0.09.
Answer: B
Diff:1
204) Usetheabovetable.TheMPSis
A) 0.91.
B) 0.80.
C) 0.20.
D) 0.09.
Answer: C
Diff:1
205) Usetheabovetable.Atanincomeof$50,
A) realsavingis$20.
C) realsavingis$10.
B) realdissavingis$10.
D) realdissavingis$50.
Answer: B
Diff:2
206) Usetheabovetable.Atanincomeof$150,
A) realsavingis$20.
C) realsavingis$10.
B) realdissavingis$10.
D) realdissavingis$50.
Answer: C
Diff:2
207) Whengraphingtheconsumptionfunction,whatpurposeisservedbythe45-degreeline?
A) Itidentifiesallthepointsatwhichsavingandconsumptionspendingareequal.
B) Itidentifiesallthepointsatwhichrealdisposableincomeandplannedrealconsumption
spendingareequal.
C) Itidentifiesallthepointsatwhichrealplannedinvestmentexpenditureandreal
autonomousconsumptionspendingareequal.
D) Itidentifiesallthepointswhererealdissavingandsavingareequal.
Answer: B
Diff:2
208) Autonomousconsumptionisthelevelofconsumptionthatis
A) consistentwiththeaveragestandardofliving.
B) observedatthepovertyline.
C) independentofrealincome.
D) availabletosomeoneearningtheminimumwage.
Answer: C
Diff:2
209) Atthepointatwhichtheconsumptionfunctionintersectsthe45degreereferenceline
A) plannedrealconsumptionequalsrealdisposableincome.
B) equilibriumoutputissupplydeterminedequilibriumoutputisdeterminedbyboth.
C) plannedrealsavingequalsrealdisposableincome.
D) plannedrealconsumptionofrealdisposableincomeequalszero.
Answer: A
Diff:1
210) AccordingtotheKeynesianmodel,whatarethetwocomponentsofconsumptionspending?
Whatdetermineshowconsumptionchangeswhenrealdisposableincomechanges?Explain.
Answer: Autonomousconsumptionisthepartofconsumptionthatdoesnotdependondisposable
income.Itistheamountofconsumptionexpendituresapersonmakeswhendisposable
incomeiszero.Theotherpartofconsumptionvariesasrealdisposableincomevaries.
Themarginalpropensitytoconsumeisthechangeinconsumptionexpendituresdivided
bythechangeinrealdisposableincome.Keynesarguedthatwhenpeoplereceivean
increaseindisposableincome,theyrespondbyincreasingtheirconsumption
expenditures,butbyasmalleramount.Theyalsoincreasetheirsaving.
Diff:2
211) WhatistheprimarydeterminantofrealsavingandrealconsumptionaccordingtoKeynes?
Explain.
Answer: Keynesarguedthatrealconsumptionandrealsavingdependprimarilyonan
individualscurrentrealdisposableincome.Assomeonesrealdisposableincomerises,
Keynesexpectedthepersonsrealconsumptionspendingandrealsavingtoincrease,too.
Hearguedthatindividualsdidnotrespondtotheinterestrateinmakingdecisionsabout
realsaving.
Diff:1
212) Supposethemarginalpropensitytoconsumeis0.75.Whatdoesthismean?Whatdoweknow
aboutthemarginalpropensitytosave?Whatdoweknowabouttheaveragepropensityto
consume?
Answer: Amarginalpropensitytoconsumeof0.75meansthataconsumerwillincreasereal
consumptionspending$75forevery$100increaseinrealdisposableincome.Sincea
personeitherconsumesorsavesrealdisposableincome,themarginalpropensitytosave
mustbe0.25.Wedonotknowwhattheaveragepropensitytoconsumeis.Itdependson
thelevelofrealdisposableincome.
Diff:2
12.3DeterminantsofInvestment
1) Comparedtoconsumptionspending,investmenthistoricallyhastendedtobe
A) greater.
B) morestable.
C) stagnant.
D) morevariable.
Answer: D
Diff:1
Topic: 12.3DeterminantsofInvestment
2) Whichofthefollowingwouldincreasethelevelofplannedrealinvestment?
A) Anincreaseintheinterestrate
B) Anexpectationofhigherfutureprofits
C) Anexpectationofhigherfuturecosts
D) Anincreaseinbusinesstaxes
Answer: B
Diff:1
3) WhichofthefollowingisNOTincludedintheflowofinvestmentspendingthatispartoftotal
plannedexpendituresintheeconomy?
A) Purchasesofcorporatestock
B) Spendingoncapitalgoods
C) Inventoryinvestment
D) Fixedinvestment
Answer: A
Diff:1
4) Theplannedinvestmentfunctionshowsthat
A) realgrossinvestmentfallsasrealNNPincreases.
B) anegativerelationshipexistsbetweenthelevelofplannedinvestmentandtheinterest
rate.
C) apositiverelationshipexistsbetweenplannedconsumptionandplannedinvestment.
D) athigherlevelsofplannedsaving,plannedinvestmentincreases.
Answer: B
Diff:1
5) Anincreaseintheinterestratewillcause
A) plannedinvestmentspendingtoincrease.
B) plannedinvestmentspendingtodecrease.
C) theinvestmentfunctiontoshiftout.
D) theinvestmentfunctiontoshiftin.
Answer: B
Diff:2
6) Theinvestmentfunctionisrepresentedby
A) aninverserelationshipbetweentheinterestrateandthevalueofplannedinvestment.
B) thedirectrelationshipbetweentheinterestrateandthevalueofplannedinvestment.
C) thedirectrelationshipbetweentaxesandgovernmentspending.
D) theindirectrelationshipbetweentaxesandgovernmentspending.
Answer: A
Diff:2
7) Whathappensasinterestratesfall?
A) Thenumberofprofitableinvestmentopportunitiesdeclines.
B) Theopportunitycostofusingretainedearningstofinanceinvestmentspendingdeclines.
C) Plannedinvestmentspendingalsofalls.
D) Plannedinvestmentspendingremainsconstantsinceitdependsonprofitprojectionsnot
interestrates.
Answer: B
Diff:2
8) IntheKeynesianmodel,plannedinvestmentisinverselyrelatedto
A) theinterestrate.
B) thelevelofincome.
C) thewagerate.
D) thetaxrate.
Answer: A
Diff:1
9) Ifbusinessexecutivesbecomemoreoptimisticaboutthefuture,wewouldexpectthat
A) theinvestmentcurvewouldshiftoutwardtotheright.
B) thesavingfunctionwouldshiftup.
C) theconsumptioncurvewouldshiftup.
D) investmentspendingwoulddecrease.
Answer: A
Diff:2
10) Theinvestmentfunctionwouldshiftinwardtotheleftif
A) realdisposableincomedecreased.
B) interestratesincreased.
C) therewasanincreaseinbusinesstaxes.
D) therewasapositivechangeinproductivetechnology.
Answer: C
Diff:2
11) Anincreaseintheinterestrateresultsin
A) asmalleropportunitycostofinvestmentandsoplannedinvestmentspendingincreases.
B) asmalleropportunitycostofinvestmentandsoplannedinvestmentspendingdecreases.
C) agreateropportunitycostofinvestmentandsoplannedinvestmentspendingdecreases.
D) agreateropportunitycostofinvestmentandsoplannedinvestmentspendingincreases.
Answer: C
Diff:2
12) AllofthefollowingwillcauseanoutwardshiftoftheinvestmentfunctionEXCEPT
A) innovationthatimprovesproductionefficiencyateverylevelofoutput.
B) areductioninbusinesstaxes.
C) businesspeoplebecomingoptimisticaboutthefuture.
D) adecreaseintheinterestrate.
Answer: D
Diff:1
13) Theplannedinvestmentfunctionwillshiftdownwardif
A) realdisposableincomeincreases.
B) theinterestratefalls.
C) businessexpectationsbecomemorepessimistic.
D) theexistingstockofcapitaldecreases.
Answer: C
Diff:1
14) Technologicalprogressshouldleadto
A) anoutward(rightward)shiftintheinvestmentfunction.
B) adownwardmovementoftheinvestmentfunction.
C) anunchangedinvestmentfunction.
D) lesssaving.
Answer: A
Diff:1
15) Whichofthefollowingwouldcausealeftwardshiftintheinvestmentfunction?
A) Technologicalprogress
B) Areductionintherateofinterest
C) Optimisticexpectationsaboutbusinessconditions
D) Anincreaseinbusinesstaxes
Answer: D
Diff:1
16) Foraninvestmenttobeconsideredautonomous,itmust
A) benegativelyrelatedtotheinterestrate.
B) increaseasthelevelofincomeincreases.
C) includefixedcomponents.
D) beindependentofthelevelofrealdisposableincome.
Answer: D
Diff:1
17) InKeynesiananalysis,ifinvestmentremainsconstantwhenincomechanges,theinvestmentis
called
A) planned.
B) autonomous.
C) unplanned.
D) discretionary.
Answer: B
Diff:1
18) Oftherelationshipsbelow,whichistheleaststable?
A) Consumption
B) Saving
C) Investment
D) Netexports
Answer: C
Diff:1
19) Afirmwillinvestinaprojectif
A) theinterestrateexceedstheopportunitycostoftheproject.
B) thefirmslevelofcapitalisatthedesiredlevel.
C) thefirmslevelofcapitalishigherthanthedesiredlevel.
D) therateofreturnoftheprojectisgreaterthantheopportunitycostoftheinvestment.
Answer: D
Diff:1
20) Investmentspendingis
A) directlyrelatedtotheinterestrate.
B) inverselyrelatedtotheinterestrate.
C) directlyrelatedtorealdisposableincome.
D) inverselyrelatedtorealdisposableincome.
Answer: B
Diff:2
21) Whichofthefollowingisatruestatementrelativetoretainedearningsandinvestment?
A) Lowerinterestratesstimulateborrowingforinvestment,buthavenoeffectontheuseof
retainedearningsforinvestmentspending.
B) Lowerinterestratesstimulateborrowingforinvestment,butdiscouragetheuseof
retainedearningsforinvestment.
C) Lowerinterestratesreducetheopportunitycostofretainedearnings,stimulatingtheuse
ofthesefundsininvestment.
D) Lowerinterestrateshavenoeffectoninvestmentspendingatallbecauseinvestment
spendingisautonomous.
Answer: C
Diff:2
22) Theinvestmentfunctionwillshiftwhenthereisachangein
A) theinterestrate.
B) firmsprofitexpectations.
C) thecostofborrowing.
D) theopportunitycostofretainedearnings.
Answer: B
Diff:1
23) WhichofthefollowingwillNOTleadtoashiftintheinvestmentfunction?
A) Afirmdowngradesitsfutureprofitability.
B) Anewdiscoveryleadstoatechnologicaladvancement.
C) Thegovernmentjustloweredbusinesstaxes.
D) Thecostofborrowinghasjustdecreased.
Answer: D
Diff:1
A) Overtheyears,realconsumptionspendinghasbeenmorevolatilethanrealinvestment
spending.
B) Overtheyears,realinvestmentspendinghasbeenmorevolatilethanrealconsumption
spending.
C) DomesticrealinvestmentintheUnitedStateswashighestduringtheGreatDepression.
D) IntheKeynesianmodel,changesinthevolumeofrealinvestmentspendingarefully
explainedbychangesintherealinterestrate.
Answer: B
Diff:2
25) Changesinrealplannedinvestmentspendinghave
A) adirectrelationshiptochangesininterestrates.
B) aninverserelationshiptochangesintheinterestrate.
C) noidentifiablerelationshiptochangesintheinterestrate.
D) adirectrelationshiptochangesinthelevelofhouseholdsavings.
Answer: B
Diff:1
26) WhentheinvestmentisgraphedasafunctionofrealGDP,
A) itgraphsasaverticalstraightline.
B) itgraphsasa45-degreelinestartingattheindicatedlevelofinvestment.
C) itgraphsasanegativelyslopedlineindicatingtheinverserelationshipbetweeninterest
ratesandinvestment.
D) itgraphsasahorizontalstraightlineatthelevelofinvestment.
Answer: D
Diff:2
A) Theinvestmentfunctionispositivelyslopedtoreflectthefactthathigherinterestrates
causemorepeopletoinvesttheirfunds.
B) Theinvestmentfunctionispositivelyslopedtoreflectthefactthatlowerinterestrates
causemorefirmstoexpandtheiroperations.
C) Alongagiveninvestmentfunction,higherinterestratesresultinmoreinvestmentprojects
beingundertaken.
D) Alongagiveninvestmentfunction,higherinterestratesresultinfewerinvestmentprojects
beingundertaken.
Answer: D
Diff:3
28) Agingbaby-boomers,predisposedtohearinglossbecauseofyearsoflisteningtoloudmusic,
arenowapproachingtheagerangeinwhichhearinglossstartstobecomeapparent.Whateffect
doesthishaveoninvestmentspendingwithinthehearingaidindustry?
A) Therewillnolongerbeanopportunitycostassociatedwithinvestmentspending.
B) Therewillbenochangeinrealinvestmentspending,becausehearingaidmanufacturers
willlookonlyattheinterestrateindeterminingwhethertoexpandproduction.
C) Theinvestmentfunctionrelatingplannedrealinvestmentspendingtotheinterestratecan
beexpectedtoshiftrightward.
D) Theinvestmentfunctionrelatingplannedrealinvestmentspendingtotheinterestratecan
beexpectedtoshiftleftward.
Answer: C
Diff:3
29) Theinvestmentfunctiontellsus,atanygiveninterestrate,
A) howmanyfundspeoplewillinvestinthestockmarket.
B) howmanyfundspeoplewillearnontheirstockmarketinvestments.
C) howprofitableitwillbeforfirmstoexpand.
D) howmuchbusinesseswillspendonaddingtothecapitalstock.
Answer: D
Diff:2
30) Basedonhistoricaldata,whichofthefollowingtendedtobemostvariableovertime?
A) realconsumptionspending
B) realsaving
C) realinvestmentspending
D) theaveragepropensitytoconsume
Answer: C
Diff:2
31) Oneoftheprimarydeterminantsofplannedrealinvestmentspendingisthe
A) expectationoffutureprofits.
B) rateofrealconsumptionspending.
C) rateofrealgovernmentspending.
D) rateofrealsaving.
Answer: A
Diff:2
32) Whatwouldhappentotheplannedinvestmentfunctionifbusinesstaxeswereincreased?
A) Itwouldshifttotheright.
B) Itwouldshifttotheleft.
C) Itwouldshiftupward.
D) Therewouldbenochange.
Answer: B
Diff:2
33) Whichwouldincreaserealplannedinvestmentdemand?
A) adecreaseinnewtechnologiesavailable
B) adeclineinprofitexpectations
C) adecreaseinbusinesstaxes
D) anincreaseinnominalinterestrates
Answer: C
Diff:2
34) Adecreaseininterestrateswill
A) shifttheinvestmentfunctionrelatingplannedinvestmenttotheinterestratetotheright.
B) shifttheinvestmentfunctionrelatingplannedinvestmenttotheinterestratetotheleft.
C) beamovementalongtheinvestmentfunctionrelatingplannedinvestmenttotheinterest
rate.
D) havenoimpactontheinvestmentfunctionrelatingplannedinvestmenttotheinterestrate.
Answer: C
Diff:2
35) Allofthefollowingwouldcausetheinvestmentfunctionrelatinginvestmenttotheinterestrate
toshiftEXCEPT
A) achangeintherealinterestrate.
B) achangeinproducerexpectationsoffutureprofit.
C) achangeinplannedcapitalgoodsexpenditure.
D) achangeinproductivetechnology.
Answer: A
Diff:2
36) Ifbusinessesexpecttheeconomicactivitytoexpand,
A) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillshifttothe
left.
B) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillremain
unchanged,butwillmovedownwardalongthecurve.
C) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillsteepen.
D) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillshifttothe
right.
Answer: D
Diff:2
37) Realplannedinvestmentspendingisinverselyrelatedto
B) wealth.
C) theinterestrate.
D) producerexpectationsoffutureprofit.
Answer: C
Diff:1
38) Therelationshipbetweenplannedrealinvestmentspendingandtheinterestrateis
A) inverse.
B) direct.
C) constant.
D) highlyvolatile.
Answer: A
Diff:1
39) Ifweobservethatinterestratesrisebutrealinvestmentspendingstillincreases,whatmusthave
happenedtothefunctionrelatinginvestmenttotheinterestrate?
A) Itshiftedtotheright.
B) Itshiftedtotheleft.
C) Therewasamovementupthefunctionrelatinginvestmenttotheinterestrate.
D) Therewasamovementdownthefunctionrelatinginvestmenttotheinterestrate.
Answer: A
Diff:2
40) Theinvestmentscheduleisdownwardslopingandthesavingscheduleisupwardslopingwith
respecttotheinterestrate.Supposetheequilibriumrealinvestmentperyearatthemarketrate
ofinterestis$1trillion.Howisthisrepresentedwhenrealnationalincomeperyearisonthe
horizontalaxis?Howisthisincorporatedintotheconsumption-functiongraph?
Answer: Investmentspendingisafunctionoftheinterestrate,butitisautonomouswithrespectto
realGrossDomesticProduct(GDP).Sotheinvestmentfunctionisahorizontallineat$1
trillionwhenrealGrossDomesticProduct(GDP)peryearisonthehorizontalaxis.TheC
+Icurveisfoundbyverticallysummingtheupwardslopingconsumptioncurvewiththe
horizontalinvestmentcurve.TheC+Icurveslopesupandisalways$1trillionhigher
thantheCcurve.
Diff:3
41) WhatdeterminesinvestmentintheKeynesianframework?Howisinvestmentrelatedtoreal
Answer: Investmentisdeterminedbybusinesspeoplebasedontheirviewsofwhattheeconomic
futurelookslike.Otherthingsequal,investmentspendingisinverselyrelatedtothe
interestrate.InvestmentistreatedasautonomousandnotasafunctionofrealGross
DomesticProduct(GDP).
Diff:2
12.4DeterminingEquilibriumRealGDP
1) Iffirmsunplannedinventoriesareincreasing,theninaclosed,privateeconomy,
A) thelevelofrealnationalincomewillrise.
B) thelevelofrealnationalincomewillnotchangeintheforeseeablefuture.
C) actualconsumptionisgreaterthanplannedconsumption.
D) consumersaresavingmorethanbusinessesanticipated.
Answer: D
Diff:1
Topic: 12.4DeterminingEquilibriumRealGDP
2) Ignoringthegovernmentandforeignsectors,equilibriumrealGrossDomesticProduct(GDP)is
determinedby
A) theintersectionoftheplannedsavingandplannedinvestmentschedules.
B) theintersectionoftheplannedsavingandplannedconsumptionschedules.
C) theintersectionoftheconsumptionfunctionwiththe45-degreeline.
D) findingtherealGrossDomesticProduct(GDP)forwhichrealsavingsarezero.
Answer: A
Diff:1
3) Ignoringthegovernmentandforeignsectors,ifplannedinvestmentspendingis$500billion,
plannedsavingis$800billion,andrealGrossDomesticProduct(GDP)is$13trillion,then
unplannedinventorieswill
A) decrease$300billion.
B) increase$300billion.
C) increase$800billion.
D) notchange.
Answer: B
Diff:2
4) Ignoringthegovernmentandforeignsectors,thereisanunplanneddecreaseininventoriesof
$200billionatthecurrentlevelofrealnationalincomeof$12trillion.Fromthisinformation,we
knowthat
A) savingequals$200billion.
B) consumptionexpendituresequal$12trillionlesssavingless$200billion.
C) plannedinvestmentis$200billionmorethanplannedsaving.
D) plannedinvestmentis$200billionlessthanplannedsaving.
Answer: C
Diff:1
5) Apermanentincreaseinautonomousinvestmentcauses
A) amorethanproportionalincreaseinrealGrossDomesticProduct(GDP).
B) aproportionalincreaseinrealGrossDomesticProduct(GDP).
C) alessthanproportionalincreaseinrealGrossDomesticProduct(GDP).
D) anoffsettingchangeinsavingthatleavesrealGrossDomesticProduct(GDP)atthesame
level.
Answer: A
Diff:1
6) UsingrealGDPonthehorizontalaxisinsteadofrealdisposableincomeimpliesthatamarginal
propensitytoconsume0.75generatesforeveryadditional$100ofrealGDP
A) $75ofadditionalrealdisposableincome.
B) $25ofadditionalsaving.
C) $56.25ofadditionalconsumptionspending.
D) $25ofadditionalsavingandtaxes.
Answer: D
Diff:3
7) The45-degreereferencelineindicatesallpointsatwhich
A) plannedrealconsumptionexpendituresandplannedrealsavingareequal.
B) plannedrealsavingandplannedrealinvestmentareequal.
C) plannedrealconsumptionexpendituresandrealGDPareequal.
D) plannedrealsavingandplannedrealsavingareequal.
Answer: C
Diff:1
8) Investmentis
A) apositivefunctionofrealGDP.
C) autonomouswithrespecttorealGDP.
B) anegativefunctionofrealGDP.
D) apositivefunctionofinterestrates.
Answer: C
Diff:1
9) Theinvestmentfunctionintersectsthesavingscheduleataninterestrateof8percentandalevel
ofinvestmentof$1.2trillionayear.Iftheconsumptioncurveintersectsthe45-degreereference
lineat$3trillion,then
A) theC+Icurvewillintersectthe45-degreereferencelineat$1.2trillion.
B) theC+Icurvewillintersectthe45-degreelineat$1.8trillion.
C) theequilibriumlevelofrealGDPis$1.8trillion.
D) theequilibriumlevelofrealGDPis$4.2trillion.
Answer: D
Diff:3
10) Refertotheabovefigure.WhichvariableisautonomouswithrespecttorealGDP?
A) Realsaving
B) Realinvestmentspending
C) Realconsumptionspending
D) Thesumofrealconsumptionandrealsaving
Answer: B
Diff:2
11) Refertotheabovefigure.IfrealGDPis$4trillion,then
A) consumptionexpendituresaretoolow.
B) unplannedinventorieswilldecrease.
C) unplannedinventorieswillincrease.
D) actualinvestmentspendingequals$1trillionasplannedinvestmentspendingplus
unplannedinventoryincreasesequal$1trillion.
Answer: C
Diff:3
12) Refertotheabovefigure.AtrealGDPof$1trillion,actualinvestmentequals
A) plannedinvestmentof$1trillion.
B) plannedsavingof$1trillion.
C) actualsavingof0.
D) unanticipatedinventoryadjustmentsof$1trillion.
Answer: D
Diff:2
13) Foraclosedeconomywithnogovernment,weknowthatateverylevelofGDPactual
investmentequals
A) plannedinvestment.
B) plannedsaving.
C) thedifferencebetweenplannedsavingandactualsaving.
D) thedifferencebetweenplannedinvestmentandactualsaving.
Answer: B
Diff:3
14) Supposedactualinvestmentisgreaterthanplannedinvestmentatthecurrentlevelofoutputin
2010.Giventhisinformation,weknowthat
A) GDPwilltendtoincreaseovertime.
B) firmsstockofinventoriesmusthaveincreasedunexpectedlyin2010.
C) savingmustbelessthanplannedinvestment.
D) savingmustbeequaltoplannedinvestment.
Answer: B
Diff:2
15) IntheKeynesianmodel,wheneverplannedinvestmentisgreaterthanplannedsaving,
A) theamountofplannedinvestmentwilldecrease,andrealGDPwilldecrease.
B) theamountofplannedinvestmentwilldecrease,andrealGDPwillremainunchanged.
C) therewillbeanunplannedinventorydecrease,andGDPwilleventuallyincrease.
D) therewillbeanunplannedinventoryincrease,andGDPwilleventuallydecrease.
Answer: C
Diff:1
16) IntheKeynesianmodel,wheneverplannedinvestmentislessthanplannedsaving,
A) theamountofplannedinvestmentwilldecrease,andrealGDPwilldecrease.
B) theamountofplannedinvestmentwilldecrease,andrealGDPwillremainunchanged.
C) therewillbeanunplannedinventorydecrease,andrealGDPwilleventuallyincrease.
D) therewillbeanunplannedinventoryincrease,andrealGDPwilleventuallydecrease.
Answer: D
Diff:1
17) IntheKeynesianmodel,wheneverplannedsavingexceedsplannedinvestment,
A) therewillbeunplannedinventoryaccumulation.
B) therewillbeunplannedinventorydepletion.
C) realGDPwillnotbeinfluenced.
D) theinterestratewillremainunchanged.
Answer: A
Diff:1
18) IntheKeynesianmodel,wheneverplannedsavingislessthanplannedinvestment,
A) therewillbeunplannedinventoryaccumulation.
B) therewillbeunplannedinventorydepletion.
C) realGDPwillnotbeinfluenced.
D) theinterestratewillremainunchanged.
Answer: B
Diff:1
19) Alongthe45-degreereferenceline,
A) totalplannedrealexpenditures= realGDP.
B) totalplannedrealexpenditures= plannednominalexpenditures.
C) totalplannednominalexpenditures= consumption.
D) totalplannedinvestmentspending= plannedrealexpenditures.
Answer: A
Diff:2
20) Intheabovefigure,whatisautonomousconsumption?
A) $0.0trillion
B) $1.0trillion
C) $2.0trillion
D) $3.0trillion
Answer: B
Diff:1
21) Intheabovefigure,whatistheequilibriumlevelofrealconsumptionspending?
A) $0.0trillion
B) $1.0trillion
C) $2.0trillion
D) $3.0trillion
Answer: C
Diff:1
22) Whengraphingtheconsumptionfunction,weincludea45-degreereferenceline.Whatistrue
atthepointsatwhichtheconsumptionfunctioncrossesthisline?
A) Plannedrealsavingiszero.
B) Plannedrealconsumptionspendingiszero.
C) Realdisposableincomeiszero.
D) RealGDPiszero.
Answer: A
Diff:2
23) Supposethatthereisnogovernmentandnointernationaltrade.WhenC +Iislessthanthelevel

ofrealGDP,
A) unplannedinventoriesdecrease,andrealGDPexpands.
B) unplannedinventoriesincrease,andrealGDPcontracts.
C) unplannedinventoriesequalzero,andthereisnochangeinthelevelofrealGDP.
D) realplannedinvestmentspendingequalsrealplannedsaving.
Answer: B
Diff:2
24) Autonomousrealinvestmentspendingis
A) thelevelofinvestmentexpenditurerequiredtokeeptheeconomyexpandingatitscurrent
growthrate.
B) thelevelofinvestmentexpenditurethatisindependentofrealGDP.
C) thelevelofinvestmentexpenditurerequiredtoreplacecapitallosttodepreciation.
D) thelevelofinvestmentexpenditurethatwouldprevailifinterestrateswerezero.
Answer: B
Diff:2
25) WhenrealGDPisinequilibriumwithnogovernmentandnointernationaltrade,
A) realplannedinvestmentspendingequalsrealplannedsaving.
B) realplannedinvestmentequalsrealplannedconsumptionspending.
C) unplannedinventoriesareincreasing.
D) unplannedinventoriesaredecreasing.
Answer: A
Diff:2
26) Intheabovefigure,pointErepresentsthelevelofrealGDPatwhichplannedsavingequals
plannedinvestment.AtpointA,
A) unplannedinventoriesincrease.
B) changesininventoriescannotbedetermined.
C) unusedindustrialcapacityexistsintheeconomy.
D) unplannedinventoriesdecrease.
Answer: D
Diff:3
27) Intheabovefigure,pointErepresentsthelevelofrealGDPatwhichplannedsavingequals
plannedinvestment.AtpointC,
A) unplannedinventoriesincrease.
B) changesininventoriescannotbedetermined.
C) unusedindustrialcapacityexistsintheeconomy.
D) unplannedinventoriesdecrease.
Answer: A
Diff:3
28) Whenrealplannedsavingisgreaterthanrealplannedinvestmentspending,
A) theinterestratewillincrease.
B) theinterestratewilldecrease.
C) realGDPwillincrease.
D) realGDPwilldecrease.
Answer: D
Diff:2
29) Whatistheresultwhenrealplannedsavingexceedsrealplannedinvestmentspending?
A) Theeconomyisinequilibrium.
B) Thereisunplannedaccumulationofbusinessinventories.
C) Thereisunplanneddepletionofbusinessinventories.
D) Employmentexpands.
Answer: B
Diff:2
30) Consideraclosedeconomywithoutagovernmentandwithoutinternationaltrade.Whatwillbe
truewhenthiseconomyisinequilibrium?
A) Totalplannedrealinvestmentspendingwillexceedtotalplannedrealexpenditures.
B) Plannedrealinvestmentspendingwillexceedrealplannedsaving.
C) PlannedrealconsumptionspendingequalsrealGDP.
D) Plannedrealconsumptionspendingplusplannedrealinvestmentspendingequalsreal
GDP.
Answer: D
Diff:2
31) Realconsumptionisafunctionofrealdisposableincome,butthesimpleKeynesianmodeluses
realGDPinsteadofrealdisposableincome.Thisisappropriatesince
A) realdisposableincometendstomoveproportionatelywithrealGDP.
B) realdisposableincomeisafixedpercentageofrealGDP.
C) realGDPisafixedpercentageofrealdisposableincome.
D) wecannotmeasureeitherexactlyandthepurposeoftheexerciseistheoreticalonly.
Answer: A
Diff:3
32) Inaclosedeconomy,equilibriumrealGrossDomesticProduct(GDP)occurswhere
A) theC+I+Glinecrossesthe45-degreeline.
B) plannedexpendituresexceednationalincome.
C) savingexceedsplannedinvestment.
D) allofthese.
Answer: A
Diff:1
33) IfrealGrossDomesticProduct(GDP)isatanequilibriumlevelinaclosedeconomy,
A) C+I+G=realGDP.
B) savingwillbelessthanplannedinvestment.
C) unplannedinventoryaccumulationwillequalplannedinventoryaccumulation.
D) C+T-G=realGDP.
Answer: A
Diff:1
34) InthesimpleKeynesianmodel,whydoesactualinvestmentspendinghavetoequalsavingin
theabsenceofthegovernmentandforeignsectors?Isthistrueonlyfortheequilibrium?
Explain.
Answer: RealGrossDomesticProduct(GDP)equalsactualinvestmentspendingplus
consumptionspending,andrealGrossDomesticProduct(GDP)equalsconsumption
spendingplussaving.Therefore,actualinvestmentspendingandsavingarealways
equal.However,plannedinvestmentspendingandsavingarenotalwaysequal.When
theyarenotequal,unplannedchangesininventoriesmakeactualinvestmentspending
andsavingequal.Inequilibrium,plannedinvestmentandsavingareequal.
Diff:2
35) Theabovefigureshowsaconsumptionfunctionanda45 -degreeline.Realconsumptionisa

functionofdisposableincome.WhyisrealGDPusedhereinstead?Whatismeasuredalongthe
verticalaxis?WhatismeasuredbypointB?ExplainthesignificanceofpointA.
Answer: RealdisposableincomeislessthanrealGDP,butcanbederivedfromrealGDP.Ifwe
assumethatrealdisposableincomeisthesameproportionofrealGDPeveryyear,then
thechangeisappropriate.RealGDPisusedbecausewewanttofindtheequilibriumreal
GDP.Plannedconsumptionexpendituresaremeasuredontheverticalaxis,andpointB
measuresautonomousconsumption.AtA,plannedconsumptionspendingequalsreal
GDP.SavingequalszeroatpointA.
Diff:2
36) Supposeautonomousconsumptionis$1trillion,investmentspendingis$1.5trillion,andthe
marginalpropensitytoconsumeis0.75.ShowthegraphfortheC+Icurve.Whatisthe
equilibriumlevelofrealGDP?Explainitsmeaning.
Answer: Inthebelowfigure,theCcurvehasaverticalinterceptat$1trillion,indicating
autonomousconsumptionspending.Investmentspendingisconstantat$1.5trillion,so
theverticalinterceptfortheC+Icurveis$2.5trillion.EquilibriumrealGDPis$10trillion
wheretheC+Icurveintersectsthe45-degreeline.Atthispoint,plannedexpenditures
exactlyequalsrealGDP.Further,savingequalsinvestment($1.5trillion).Consumption
spendingis$8.5trillion.
Diff:3
37) Intheabovediagram,whathappensiftherealGDPis$3trillion?$5trillion?$7trillion?Whatis
theequilibriumlevelofrealGDP?Why?
Answer: AtrealGDPof$3trillion,plannedrealinvestmentisgreaterthanrealsaving,which
meanshouseholdsarebuyingmorethanproducershadanticipated.Thereisan
unplannedinventorydecreaseof$500billion,andbusinessesincreaseproductionand
hiring.At$5trillion,plannedrealinvestmentandplannedrealsavingareequal,sothisis
theequilibrium.At$7trillion,plannedrealsavingisgreaterthanplannedrealinvestment
sothereisanunplannedincreaseininventoriesof$500billion.Businessesreduce
productionandlayoffworkers,forcingrealGDPbacktowards$6trillion.
Diff:3
12.5KeynesianEquilibriumwithGovernmentandtheForeignSectorAdded
1) Governmentpurchases
A) aredeterminedbythepublic.
C) areinfluencedbyinterestrates.
B) aredeterminedbythepoliticalprocess.
D) aredeterminedbysuppliers.
Answer: B
Diff:2
Topic: 12.5KeynesianEquilibriumwithGovernmentandtheForeignSectorAdded
2) Refertotheabovefigure.TheequilibriumlevelofrealGrossDomesticProduct(GDP)is
A) $6trillion.
B) $7trillion.
C) $12trillion.
D) $20trillion.
Answer: C
Diff:1
3) Refertotheabovefigure.IfrealGrossDomesticProduct(GDP)is$2trillion,then
A) theleveloftotalplannedexpendituresislessthanrealGDP.
B) theleveloftotalplannedexpendituresequalsrealGDP.
C) theleveloftotalplannedexpendituresisgreaterthanrealGDP.
D) theleveloftotalplannedexpendituresequalszero.
Answer: C
Diff:2
4) Refertotheabovefigure.IfrealGrossDomesticProduct(GDP)is$6trillion,thenunplanned
businessinventorieswill
A) rise.
B) bezero.
C) fall.
D) beequaltoplannedinventories.
Answer: C
Diff:2
5) WhenrealGrossDomesticProduct(GDP)exceedstotalplannedrealexpenditures,
A) therewillbeunplanneddecreasesininventories.
B) thecircularflowwillincrease.
C) alowerlevelofequilibriumrealGrossDomesticProduct(GDP)willresult.
D) ahigherlevelofequilibriumrealGrossDomesticProduct(GDP)willprevail.
Answer: C
Diff:1
6) AhigherlevelofrealGrossDomesticProduct(GDP)willresultif
A) totalplannedrealexpendituresexceedrealGrossDomesticProduct(GDP).
B) aggregatesupplyexceedsaggregatedemand.
C) aggregatedemandexceedsaggregatesupply.
D) leakageexceedsinjections.
Answer: A
Diff:1
7) If,atsomelevelofoutput,totalplannedrealexpendituresarelessthanrealGrossDomestic
Product(GDP),
A) realGDPwillrise.
B) realGDPremainsunchanged.
C) realGDPwilleitherfallorremainunchanged,dependingontheMPC.
D) unplannedinventorieswillincreaseandrealGDPwillfall.
Answer: D
Diff:1
8) SupposetheeconomyisatanequilibriumwhenC+ I+ G+ X= $12trillion.Iftheeconomyis
currentlyatarealnationalincomelevelof$14trillion,thentotalplannedrealexpenditures
A) exceedrealGrossDomesticProduct(GDP),andrealGrossDomesticProduct(GDP)will
increase.
B) arelessthanrealGrossDomesticProduct(GDP),andrealGrossDomesticProduct(GDP)
willdecline.
C) areequaltorealGrossDomesticProduct(GDP),andtherewillbenochangeinrealGross
D) arelessthanrealGrossDomesticProduct(GDP),andrealGrossDomesticProduct(GDP)
willincrease.
Answer: B
Diff:1
9) SupposeequilibriumforaneconomyoccurswhenC+ I+ G+ X= $14trillion.IftherealGross
DomesticProduct(GDP)is$13trillion,thenunplannedinventoriesare
A) increasing,andrealGrossDomesticProduct(GDP)willexpand.
B) increasing,andrealGrossDomesticProduct(GDP)willcontract.
C) decreasing,andrealGrossDomesticProduct(GDP)willexpand.
D) decreasing,andrealGrossDomesticProduct(GDP)willcontract.
Answer: C
Diff:1
10) IfrealGrossDomesticProduct(GDP)isaboveitsequilibriumlevel,
A) firmsarenotmaximizingtheirprofits.
B) plannedinvestmentisgreaterthanplannedsaving.
C) firmsaccumulateunplannedinventories.
D) plannedconsumptionislessthanactualconsumption.
Answer: C
Diff:1
11) Intheabovefigure,atanincomelevelofY 3 andplannedexpendituresof(C+ I)1 ,

A) plannedsavingexceedsplannedinvestment.
B) theeconomyisinequilibrium.
C) thequantityofaggregatedemandexceedsrealGrossDomesticProduct(GDP).
D) thereisfullemployment.
Answer: B
Diff:1
12) Intheabovefigure,atanincomelevelofY 1 andplannedexpendituresof(C+I)1 ,thelevelof

autonomousinvestmentis
A) ED.
B) EF.
C) JK.
D) GK.
Answer: B
Diff:1
13) Totalplannedexpendituresinaclosedeconomyareequalto
A) consumption+investment+ governmentexpenditures.
B) consumption+savings+ transfers+ investment.
C) saving+investment+ governmentexpenditures.
D) investment+saving+ transfers.
Answer: A
Diff:1
14) IftheMPCequals0.75,then
A) forevery$100increaseinconsumption,realGrossDomesticProduct(GDP)increasesby
$75.
B) consumptionisalwaysmorethanrealGrossDomesticProduct(GDP).
C) forevery$100increaseinrealGrossDomesticProduct(GDP),savingincreasesby$75.
D) forevery$100increaseinrealGrossDomesticProduct(GDP),savingincreasesby$25.
Answer: D
Diff:1
15) IntheKeynesianmodel,governmentspendingisconsidered
A) apositivefunctionofrealGDP.
B) anegativefunctionofrealGDP.
C) tobeanegativefunctionoftherealinterestrate.
D) tobeautonomous.
Answer: D
Diff:1
16) ThefollowingwouldcauseanupwardshiftintheC+ I+ G+ XcurveEXCEPT

A) anincreaseindisposableincome.
B) anincreaseinexportspending.
C) adecreaseinimportspending
D) anincreaseinhouseholdwealth.
Answer: A
Diff:1
17) Alump-sumtax,suchasa$1000taxthateveryfamilymustpayonetime,is
A) atypeofincometax.
B) anautonomoustax.
C) negativelyrelatedtorealGDP.
D) aregressivetax.
Answer: B
Diff:1
18) WhichofthefollowingdoesNOToccurwhentheeconomyisoperatingattheequilibriumlevel
ofGDP?
A) TotalplannedexpendituresequalrealGDP.
B) RealGDPtendstoriseovertime.
C) Plannedinvestmentequalsactualinvestment.
D) Inventoryinvestmentequalszero.
Answer: B
Diff:1
19) WhentheeconomyisoperatingattheequilibriumlevelofGDP,weknowthat
A) totalplannedrealconsumptionexpendituresequalrealGDP.
B) plannedrealinvestmentspendingequalsrealnetexportsofzero.
C) totalplannedrealexpendituresequalrealGDP.
D) realnetexportsequalinventorychanges.
Answer: C
Diff:2
20) Refertotheabovefigure.TheequilibriumlevelofrealGDPoccurs
A) atpointA.
B) totherightofpointA.
C) totheleftofpointA.
D) attheundeterminedpointonthegraphdependinguponthelevelofinvestment.
Answer: A
Diff:1
21) Refertotheabovefigure.PointB
A) equalsautonomousconsumption.
B) equalsautonomousconsumptionplusautonomousconsumptionplusplannedinvestment
plusautonomousgovernmentspendingplusautonomousnetexports.
C) hasnospecialsignificance.
D) equalsgovernmentexpenditures.
Answer: B
Diff:1
Real
Net
Taxes
Real
GDP
Real
Disposable
Income
Real
Consumption
Spending
10
2
8
11
2
9
12
2
10
13
2
11
14
2
12
15
2
13
16
2
14
Note:Amountsin$trillions
6.8
7.6
8.4
9.2
10.0
10.8
11.6
Real
Planned
Saving
Real
Planned
Investment
Real
Government
Spending
Real
Net
Exports
TotalReal
Planned
Spending
1.2
1.4
1.6
1.8
2.0
2.2
2.4
1.5
1.5
1.5
1.5
1.5
1.5
1.5
2
2
2
2
2
2
2
0.5
0.5
0.5
0.5
0.5
0.5
0.5
10.8
11.6
12.4
13.2
14.0
14.8
15.6
22) Refertotheabovetable.WhichvariablesinthetableareNOTautonomous?
A) Taxes,governmentspending,andsaving.
B) Plannedinvestment,netexports,andgovernmentspending.
C) Plannedconsumptionandplannedsaving.
D) Plannedsavingonly.
Answer: C
Diff:2
Real
Natl
Income
10
11
12
13
14
15
16
Disp. Consmp.
Tax IncomeSpending
2
8
6.8
2
9
7.6
2
10
8.4
2
11
9.2
2
12
10.0
2
13
10.8
2
14
11.6
Plnd
Plnd
Saving Invst
1.2
1.5
1.4
1.5
1.6
1.5
1.8
1.5
2.0
1.5
2.2
1.5
2.4
1.5
Govt Net
Exp. Export
2
0.5
2
0.5
2
0.5
2
0.5
2
0.5
2
0.5
2
0.5
Plnd
Exp.
10.8
11.6
12.4
13.2
14.0
14.8
15.6
23) Refertotheabovetable.WhichvariablesinthetableareNOTautonomous?
A) Taxes,governmentspending,andsaving.
B) Plannedinvestment,netexports,andgovernmentspending.
C) Plannedconsumptionandplannedsaving.
D) Plannedsavingonly.
Answer: C
Diff:2
24) Refertotheabovetable.TheequilibriumrealGDPis
A) $12trillion.
B) $13trillion.
C) $14trillion.
D) $15trillion.
Answer: C
Diff:3
25) Refertotheabovetable.IfrealGDPis$12trillion,totalplannedexpendituresandunplanned
inventorychangesarerespectively
A) $14trillionand0.
B) $13.2trillionand-$0.8trillion.
C) $12.4trillionand-$0.4trillion.
D) $12.4trillionand$0.4trillion.
Answer: C
Diff:3
26) Refertotheabovetable.WhenrealGDPequals$10trillion,
A) governmentexpenditureswillincrease.
D) unplannedinventorieswilldecrease.
Answer: D
Diff:3
27) Refertotheabovetable.WhenrealGDPequals$16trillion,
A) governmentexpenditureswillincrease.
D) unplannedinventorieswilldecrease.
Answer: C
Diff:3
28) WhenevertotalplannedexpendituresdifferfromrealGDP,
A) unplannedinventorieswillremainunchanged.
B) unplannedinventorieswillchange.
C) governmentspendingwilladjust.
D) taxrevenueswillmovetheeconomybacktoequilibrium.
Answer: B
Diff:1
29) Inequilibrium,realGDPisequalto
A) C+I+G-X.
C) C+I+G+X.
B) C+ I+ X- G.
D) C+ I+ G+ X+ S.
Answer: C
Diff:1
30) Intheabovefigure,theequilibriumlevelofrealGDPperyearis
A) $1.0trillion.
B) $2.0trillion.
C) $3.0trillion.
D) $4.0trillion.
Answer: D
Diff:1
31) Intheabovefigure,thesumofrealplannedinvestmentspending,governmentexpenditures,
andnetexportspendingisequalto
A) $0.5trillion.
B) $1.0trillion.
C) $1.5trillion.
D) $2.0trillion.
Answer: B
Diff:2
32) Intheabovefigure,theequilibriumlevelofplannedsavingplusnettaxesis
A) $1.0trillion.
B) $2.0trillion.
C) $3.0trillion.
D) $4.0trillion.
Answer: A
Diff:2
33) Whichoneofthefollowingistrueinanopeneconomywithagovernmentsector?
A) TheequilibriumlevelofrealGDPoccurswhenrealnetexportspendingequalszero.
B) TheequilibriumlevelofrealGDPoccurswhenplannedrealsavingequalsgovernment
spending.
C) TheequilibriumlevelofrealGDPoccurswhentotalplannedrealexpendituresequalreal
GDP.
D) TheequilibriumlevelofrealGDPoccurswhenplannedrealinvestmentspendingiszero.
Answer: C
Diff:2
34) Whateffectwouldtaxationhaveonrealconsumptionspendingwhengovernmentspendingis
autonomous?
A) Taxationreducesrealconsumptionspending.
B) Taxationincreasesrealconsumptionspending.
C) Taxationcausesbothrealconsumptionspendingandplannedrealsavingtoincrease.
Answer: A
Diff:2
35) Intheabovefigure,whatistheequilibriumlevelofrealGDPwithgovernmentandtheforeign
sector?
A) $2.0trillion
B) $2.5trillion
C) $3.0trillion
D) $4.0trillion
Answer: D
Diff:1
36) Intheabovefigure,attheequilibriumlevelofrealGDP,thereis
A) positivesaving.
B) negativesaving.
C) zerosaving.
D) anegativetaxrate.
Answer: A
Diff:2
37) Intheabovefigure,ifrealGDPis$1trillion,thereis
A) dissaving.
B) positivesaving.
C) negativeinvestment.
D) negativeconsumption.
Answer: A
Diff:2
38) IntheKeynesianmodelwithgovernmentandtheforeignsectoradded,whatarethe
componentsofspending?Whichofthesecomponentsareautonomousandwhicharenot?How
istheequilibriumfound?Whentheeconomyisnotatanequilibrium,whatadjustmentsare
made?
Answer: Therearefourcomponentstospendingconsumption,investment,government,andnet
exports.Thelastthreeareautonomousandconsumptionhasanautonomousparttoit.
However,consumptionisalsoafunctionofincome.Equilibriumisfoundatthepointat
whichtotalplannedrealspending(C+I+G+X)exactlyequalsrealGrossDomestic
Product(GDP).Whentheeconomyisnotatanequilibrium,adjustmentsaremadeby
unplannedinventorychanges.
Diff:2
39) ExplainhowtheaggregatedemandcurveisrelatedtotheC+ I+ G+Xcurve.

Answer: TheC+I+G+XcurvedeterminesequilibriumrealGrossDomesticProduct(GDP)fora
givenpricelevel.Ifthepricelevelrises,peoplereduceconsumptionateverylevelof
GrossDomesticProduct(GDP)becausetheirmoneybalancesarelessvaluable,
investmentspendingfallsbecauseinterestratesincrease,andnetexportsfallbecause
domesticgoodsarerelativelymoreexpensive.Hence,theC+I+G+Xcurveshiftsdown,
generatingalowerrealGrossDomesticProduct(GDP).Wehavetwopricelevelsandtwo
equilibriumlevelsofrealGrossDomesticProduct(GDP)andcanderivethedownward
slopingaggregatedemandcurve.
Diff:3
12.6TheMultiplier
1) Onedividedbythemarginalpropensitytosave(MPS)istheformulafor
A) oneminusthemultiplier.
B) theinverseofthemultiplier.
C) themultiplier.
D) autonomousconsumption.
Answer: C
Diff:1
Topic: 12.6TheMultiplier
2) Supposethatthemarginalpropensitytosave(MPS)equals0.2.Thevalueofthemultiplier
wouldbe
A) .8.
B) 1.25.
C) 2.
D) 5.
Answer: D
Diff:1
3) Supposethatthemarginalpropensitytoconsume(MPC)is.75andthereisanincreasein
investmentspendingof$100,000.Asaresult,equilibriumrealGrossDomesticProduct(GDP)
wouldincreaseby
A) $75,000.
B) $100,000.
C) $400,000.
D) $750,000.
Answer: C
Diff:1
4) Thelargeristhemarginalpropensitytoconsume(MPC),
A) thelargeristhemultiplier.
B) thesmalleristhemultiplier.
C) thesmalleristheslopeoftheconsumptionfunction.
D) thelargeristheslopeofthesavingfunction.
Answer: A
Diff:1
5) Ifthemarginalpropensitytoconsume(MPC)decreases,then
A) themarginalpropensitytosave(MPS)decreases.
B) themultiplierdecreases.
C) themultiplierincreases.
D) MPC+MPSislessthan1.
Answer: B
Diff:1
6) Ifthemarginalpropensitytoconsume(MPC)is0.9,thenthemultiplierforachangein
autonomousspendingwillbe
A) 0.1.
B) 9.
C) 10.
D) 100.
Answer: C
Diff:1
7) Ifthemarginalpropensitytosave(MPS)increases,themultiplier
A) decreases.
B) increases.
C) staysthesame.
D) caneitherincreaseordecrease,dependingonwhathappenstothemarginalpropensityto
consume(MPC).
Answer: A
Diff:1
8) Ifthemultiplieris10andincomeincreasesby$100,thensavingwillincreaseby
A) $90.
B) $9.
C) $10.
D) $100.
Answer: C
Diff:1
9) Ifthemultiplieris10,thenthemarginalpropensitytoconsume(MPC)is
A) 0.9.
B) 0.1.
C) 1.
D) 9.
Answer: A
Diff:1
10) Ifthemarginalpropensitytoconsume(MPC)is0.8,themultiplierwillbe
A) 0.8.
B) 1.
C) 4.
D) 5.
Answer: D
Diff:1
11) Ifthemarginalpropensitytosave(MPS)is0.1,themultiplierwillbe
A) 0.1.
B) 1.
C) 5.
D) 10.
Answer: D
Diff:1
12) Ifthemultiplierintheeconomyis3,themarginalpropensitytosave(MPS)mustbe
A) 0.33.
B) 0.67.
C) 1.
D) 3.
Answer: A
Diff:1
13) Ifthemultiplieris4,themarginalpropensitytoconsume(MPC)mustbe
A) 0.25.
B) 0.5.
C) 0.75.
D) 1.
Answer: C
Diff:2
14) Themultipliereffecttendsto
A) generateinstability.
B) promotestabilityofthegeneralpricelevel.
C) magnifysmallchangesinspendingintomuchlargerchangesinrealGrossDomestic
Product(GDP).
D) increasetheMPC.
Answer: C
Diff:1
15) Ifaneconomysaves20percentofanyincreaseinrealGrossDomesticProduct(GDP),thenan
increaseininvestmentof$2billioncanproduceanincreaseinrealGrossDomesticProduct
(GDP)ofasmuchas
A) $2billion.
B) $10billion.
C) $0.4billion.
D) $1.6billion.
Answer: B
Diff:1
16) IfinitialequilibriumrealGrossDomesticProduct(GDP)is$400billion,MPC=0.9,and
autonomousinvestmentincreases$40billion,equilibriumrealGrossDomesticProduct(GDP)
willbe
A) $440billion.
B) $360billion.
C) $600billion.
D) $800billion.
Answer: D
Diff:1
17) Otherthingsbeingconstant,ifthemarginalpropensitytosave(MPS)is0.1,andprivate
investmentspendingfallsby$100million,thenrealGrossDomesticProduct(GDP)
A) decreasesby$10million.
B) increasesby$90million.
C) decreasesby$1billion.
D) increasesby$1billion.
Answer: C
Diff:1
18) Ifanincreaseof$5billionininvestmentisassociatedwithanincreaseof$25billioninrealGross
DomesticProduct(GDP),themultiplieris
A) 1.
B) 3.
C) 5.
D) 7.
Answer: C
Diff:1
19) Themultiplierhelpsexplain
A) whyariseingovernmentexpenditurescausesrealGrossDomesticProduct(GDP)torise
bymorethantheamountoftheincreaseingovernmentspending.
B) whyanincreaseindisposableincomecausesrealGrossDomesticProduct(GDP)toriseby
lessthantheamountoftheincreaseindisposableincome.
C) whyadecreaseintaxescausesrealGrossDomesticProduct(GDP)tofallbymorethanthe
amountofthedecreaseintaxes.
D) whyafallininvestmentcauserealGrossDomesticProduct(GDP)torisebymorethanthe
amountofthedecreaseininvestment.
Answer: A
Diff:2
20) Ifthemarginalpropensitytoconsume(MPC)is0.75andgovernmentpurchasesincreaseby
$200billion,then
A) equilibriumrealGrossDomesticProduct(GDP)willincreaseby$800billion.
B) equilibriumrealGrossDomesticProduct(GDP)willincreaseby$200billion.
C) equilibriumrealGrossDomesticProduct(GDP)willincreaseby$50billion.
D) theeffectonequilibriumrealGrossDomesticProduct(GDP)cannotbedeterminedfrom
thegiveninformation.
Answer: A
Diff:3
21) Ifthemarginalpropensitytosave(MPS)is0.5andnetexportsfallsby$100million,then
A) realGrossDomesticProduct(GDP)willincreaseby$100million.
B) realGrossDomesticProduct(GDP)willfallby$200million.
C) realGrossDomesticProduct(GDP)willnotchange.
D) theeffectonrealGrossDomesticProduct(GDP)cannotbedeterminedfromthegiven
information.
Answer: B
Diff:3
22) Ifautonomousinvestmentincreasesby$200billionandthemarginalpropensitytoconsume
(MPC)is0.5,then
A) realGrossDomesticProduct(GDP)willriseby$400billion.
B) realGrossDomesticProduct(GDP)willriseby$200billion.
C) realGrossDomesticProduct(GDP)willriseby$100billion.
D) realGrossDomesticProduct(GDP)willdecreaseby$100billion.
Answer: A
Diff:2
23) Adecreaseinautonomousinvestmentof$100thatoccurswhenthemarginalpropensitytosave
(MPS)equals0.25willleadtoadecreaseinrealGrossDomesticProduct(GDP)of
A) $25.
B) $100.
C) $400.
D) $800.
Answer: C
Diff:1
24) Supposethemarginalpropensitytoconsume(MPC)equals0.80,anincreaseinautonomous
investmentof$100willleadtoanincreaseinrealGrossDomesticProduct(GDP)by
A) $100.
B) $400.
C) $500.
D) $800.
Answer: C
Diff:2
25) IftheMPSisone-third,a$100increaseinnetexportswill
A) reducerealGrossDomesticProduct(GDP)by$100.
B) reducerealGrossDomesticProduct(GDP)by$300.
C) increaserealGrossDomesticProduct(GDP)by$33.
D) increaserealGrossDomesticProduct(GDP)by$300.
Answer: D
Diff:1
26) Themultiplieristheratioofthe
A) changeintheequilibriumlevelofrealGDPtothechangeinautonomousexpenditures.
B) equilibriumlevelofrealGDPtothechangeininducedexpenditures.
C) changeininducedexpenditurestothechangeinautonomousexpenditures.
D) changeinautonomousexpenditurestothechangeintheequilibriumlevelofrealGDP.
Answer: A
Diff:1
27) Ifthemultiplierhasavalueof10,thenthevalueofthemarginalpropensitytosave(MPS)is
A) 1.00.
B) 0.90.
C) 10.00.
D) 0.10.
Answer: D
Diff:1
28) Themultiplieris
A) thepartofconsumptionthatisindependentofthelevelofdisposableincome.
B) theproportionoftotaldisposableincomethatisconsumed.
C) thepercentageofagivenchangeinincomethatgoestowardsconsumption.
D) thenumberwhichismultipliedbyanautonomouschangewhichgivesthechangeinthe
equilibriumlevelofrealGDP.
Answer: D
Diff:1
29) TheratioofthechangeintheequilibriumlevelofrealGDPtothechangeinautonomousreal
expendituresisthe
B) marginalpropensitytoconsume.
C) multiplier.
D) unplannedinvestment.
Answer: C
Diff:1
30) Apermanentreductioninplannedrealinvestmentspendingleadsto
A) amorethanproportionalincreaseinrealGDP.
B) amorethanproportionaldecreaseinrealGDP.
C) alessthanproportionaldecreaseinrealGDP.
D) aproportionaldecreaseinrealGDP.
Answer: B
Diff:2
31) AnincreaseinrealnetexportsleadstoanincreaseinrealGDP.Further,
A) realconsumptionspendingandrealsavingincrease.
B) realconsumptionspendingincreasesbutrealsavingdoesnotchange.
C) realconsumptionspendingincreaseswhilerealinvestmentspendingdecreases.
D) realgovernmentspendingdecreasestooffsettheincreaseinrealnetexports.
Answer: A
Diff:2
32) Themultiplierequals
A) consumption/realdisposableincome.
B) changeinconsumption/changeinrealdisposableincome.
C) 1/MPC.
D) 1/(1-MPC).
Answer: D
Diff:1
33) Ifthemarginalpropensitytoconsume(MPC)is0.8,thespendingmultiplierwillbe
A) 0.2.
B) 1.25.
C) 4.0.
D) 5.0.
Answer: D
Diff:2
34) Ifthemarginalpropensitytoconsume(MPC)is0.9,thespendingmultiplierwillbe
A) 10.
B) 1.11.
C) 0.9.
D) 0.1.
Answer: A
Diff:2
35) Ifthemarginalpropensitytoconsume(MPC)is0.75andthereisanincreaseinplanned
investmentspendingof$0.5trillion,thensavingwill
A) increaseby$0.25trillion.
B) increaseby$0.5trillion.
C) increaseby$1trillion.
D) remainunchanged.
Answer: B
Diff:3
36) Supposethemarginalpropensitytoconsume(MPC)is0.8andthereisa$2,000increasein
autonomousconsumption.Giventhisinformation,realGDPwillincreaseby
A) $1,600.
B) $2,000.
C) $2,500.
D) $10,000.
Answer: D
Diff:3
37) Supposemarginalpropensitytoconsume(MPC)is0.7andthereisa$1,000increasein
autonomousconsumption.Giventhisinformation,realGDPwillincreaseby
A) $3,333.
B) $1,429.
C) $1,000.
D) $700.
Answer: A
Diff:3
plannedinvestment.Giventhisinformation,realGDPwillincreaseby
A) $3,000.
B) $2,700.
C) $30,000.
D) $3,333.
Answer: C
Diff:3
plannedinvestment.Giventhisinformation,realGDPwillincreaseby
A) $4,000.
B) $20,000.
C) $5,000.
D) $2,000.
Answer: B
Diff:3
40) Thelargerthemarginalpropensitytoconsume,
A) thelargerthemarginalpropensitytosaveis.
B) thelargerthemultiplieris.
C) thesmallerthemultiplieris.
D) thesmallerautonomousconsumptionis.
Answer: B
Diff:1
41) Ifthemarginalpropensitytoconsume(MPC)is0.8andthereisadesiretoincreaserealGDPby
$500billion,then
A) anincreaseinautonomousrealconsumptionspendingof$500billionwillgeneratethis
change.
B) adecreaseinautonomousrealsavingof$500billionwillgeneratethischange.
C) anincreaseinplannedrealinvestmentspendingof$200billionwillgeneratethischange.
D) anincreaseinrealautonomousspendingof$100billionwillgeneratethischange.
Answer: D
Diff:3
42) Themultipliertellsustherelationshipbetween
A) theinterestrateandthelevelofinvestmentexpenditure.
B) theexchangerateandthelevelofexports.
C) theexchangerateandthelevelofimports.
D) achangeinautonomousspendingandtheresultingchangeinequilibriumrealGDP.
Answer: D
Diff:1
43) Themultipliereffectappliestoany
A) changeinautonomousinvestmentbutnotautonomousconsumption.
B) changeinautonomousconsumptionbutnotautonomousinvestment.
C) changeinbothautonomousconsumptionandautonomousinvestment.
D) changeinanysourceofspendingotherthanconsumptionandinvestment.
Answer: C
Diff:2
44) Thelargerthevalueofthemarginalpropensitytosave(MPS),
A) thelargeristhevalueofthemultiplier.
B) thelargeristhevalueofthemarginalpropensitytoconsumption(MPC).
C) thelargeristhevalueofautonomousconsumption.
D) thesmalleristhevalueofthemultiplier.
Answer: D
Diff:2
45) IftheMPC=0.8,andplannedautonomousinvestmentincreasesby$80billion,then
equilibriumrealGDPwillincreaseby
A) $64billion.
B) $80billion.
C) $320billion.
D) $400billion.
Answer: D
Diff:2
46) IftheMPCis0.75,themultiplierisequalto
A) 0.25.
B) 0.75/0.25= 3.
Answer: C
Diff:2
C) 4.
D) 5.
47) Thesizeofthemultiplierdependson
A) thelevelofautonomousinvestment.
C) thelevelofnetexports.
B) themarginalpropensitytoconsume.
D) thelevelofautonomousconsumption.
Answer: B
Diff:2
48) Ifthemarginalpropensitytoconsume(MPC)is0.75,whatisthevalueofthemultiplier?
A) 4.0
B) 3.0
C) 2.0
D) 1.0
Answer: A
Diff:1
49) Anincreaseinthemarginalpropensitytosave(MPS)
A) increasesthevalueofthemultiplier.
B) increasesautonomousconsumption.
C) increasesthemarginalpropensitytoconsume(MPC).
D) noneoftheabove.
Answer: D
Diff:1
50) Whenthemarginalpropensitytoconsume(MPC)increases,
A) themultiplierremainsunchanged.
B) themultiplierincreases.
C) themultiplierdecreases.
D) theaveragepropensitytosaveremainsunchanged.
Answer: B
Diff:1
51) Ifthemarginalpropensitytoconsume(MPC)is0.8,themultiplieris
A) 5.0.
B) 1.2.
C) 0.2.
Answer: A
Diff:2
D) 0.8.
52) Supposegovernmentspendingdecreasesby$100billionandthemarginalpropensityto
consume(MPC)is0.8.Giventhisinformation,thisdecreaseingovernmentspendingwillcause
a(n)
A) increaseinequilibriumrealGDPequalto$500billion.
B) increaseinequilibriumrealGDPequalto$800billion.
C) decreaseinequilibriumrealGDPequalto$500billion.
D) decreaseinequilibriumrealGDPequalto$800billion.
Answer: C
Diff:2
53) Supposethereisa$200billionincreaseingovernmentspending.Weknowthatthisincreasein
governmentspendingwillcausewhichofthefollowingtooccur?
A) anincreaseinequilibriumrealGDPandanincreaseinthemultiplier.
B) anincreaseinequilibriumrealGDPandareductioninthemultiplier.
C) anincreaseinequilibriumrealGDPandnochangeinthemultiplier.
D) equilibriumrealGDPwillincreasebyexactly$200billion
Answer: C
Diff:2
54) Ifthatthemarginalpropensitytosave(MPS)increasedfrom0.20to0.25,thiswouldcausethe
multipliereffectto
A) decrease.
B) increase.
C) staythesame.
Answer: A
Diff:2
55) Apermanentreductioninnetexportsleadsto
A) amorethanproportionaldecreaseinrealGrossDomesticProduct(GDP).
B) alessthanproportionaldecreaseinrealGrossDomesticProduct(GDP).
C) aproportionalincreaseinrealGrossDomesticProduct(GDP).
D) areductionintaxes,autonomousgovernmentspending,andafallinrealGrossDomestic
Product(GDP).
Answer: A
Diff:1
56) Whatisthesignificanceofthemultiplier?Whatcausesthemultipliertobelargerorsmaller?
Answer: Themultiplierisimportantbecauseitmeansthatarelativelysmallchangein
autonomousspending,suchasinvestmentspendingornetexports,canhaveamuch
largereffectontotalspendingandrealGrossDomesticProduct(GDP).Thegreaterthe
marginalpropensitytoconsume(MPC),thegreaterthemultiplierbecausemoreofa
givenincreaseinincomeisspent,raisingtheincomeofotherpeoplebymore.
Diff:2
57) Whatisthemultiplier?Howisitcalculated?Whyisthemultiplierrelatedonlytoconsumption
spending?
Answer: Themultiplieristhenumberbywhichapermanentchangeinautonomousspendingis
multipliedtogetthechangeintheequilibriumlevelofrealGDP.Itisequalto1/(1MPC).Anincreaseinincomeleadstoanincreaseinconsumptionspending.Butthe
spendingincreasestheincomeofsomeoneelse.Thisincreaseinincomecausestheir
consumptionspendingtoincrease,whichisincomeforsomeoneelse,andsoon.Since
consumptionspendingistheonlycomponentofspendingthatdependsonincome,itis
theonlycomponentusedincalculatingthemultiplier.
Diff:3
12.7HowaChangeinRealAutonomousSpendingAffectsRealGDPWhenthePrice
LevelCanChange
1) Iftheaggregatesupplycurveisupwardsloping,thenanincreaseinautonomousconsumption
leadstoa(n)
A) increaseinaggregatedemandandariseinthepricelevel.
B) decreaseinaggregatedemandandariseinthepricelevel.
C) decreaseinaggregatedemandandafallinthepricelevel.
D) nochangeinaggregatedemandandnochangeinthepricelevel.
Answer: A
Diff:1
Topic: 12.7HowaChangeinRealAutonomousSpendingAffectsRealGDPWhenthePriceLevelCanChange
2) WhentheSRAScurveslopesupward,theactualaffectofanincreaseinrealautonomous
spendingonequilibriumrealGDPissmallerthanpredictedbythemultiplierbecause
A) thepricelevelfalls.
B) thepricelevelrises
C) realGDPincreases.
D) realGDPdecreases.
Answer: B
Diff:1
3) Becauseadecreaseinrealautonomousspendingresultsina________inthepricelevel,the
ultimateeffectonrealGDPis________thatpredictedbythemultiplier.
A) fall;smaller
B) fall;larger
C) rise;smaller
D) fall,smaller
Answer: A
Diff:1
4) Whentheequilibriumpriceleveladjuststoanincreaseinautonomousinvestmentspending,the
impactofthemultipliereffectresultingfromthatspendingincrease
A) willincreaserealGDPbyanamountsmallerthanthemultipliereffectwouldindicate.
B) willincreasenominalGDPbyanamountsmallerthanthemultipliereffectwouldindicate.
C) willhavenoimpactontherealGDP.
D) isonlyfeltwhentherearechangesinconsumption.
Answer: A
Diff:3
5) Supposethataggregatedemandincreasesalongtheupwardslopingportionoftheaggregate
supplycurve.Whatistheresult?
A) NominalGDPandrealGDPdecreasebythesameamount.
B) NominalGDPandrealGDPincreasebythesameamount.
C) NominalGDPincreasesmorethanrealGDPincreases.
D) RealGDPincreasesmorethannominalGDPincreases.
Answer: C
Diff:3
12.8TheRelationshipBetweenAggregateDemandandtheC+ I+ G+ XCurve
A) TheC+I+G+Xcurvehasnorelationshiptotheaggregatedemandcurveotherthan
someofthevariablesthataffectonecurvealsoaffecttheother.
B) TheC+I+G+Xcurveisusedtoderivetheaggregatedemandcurve,butthe
C+I+G+Xcurveisdrawnforonepricelevelwhilepricelevelsvaryalongtheaggregate
demandcurve.
C) TheC+I+G+Xcurveisusedtoderivetheaggregatedemandcurve,buttheaggregate
demandcurveisdrawnforonepricelevel.
D) BoththeC+I+G+Xcurveandtheaggregatedemandcurvearedrawnforoneprice
level.
Answer: B
Diff:2
Topic: 12.8TheRelationshipBetweenAggregateDemandandtheC+ I+ G+ XCurve
2) Ahigherpricelevelcauses
A) theaggregatedemandcurvetoshifttotheleft.
B) theaggregatedemandcurvetoshifttotheright.
C) theC+I+G+Xcurvetoshiftdown.
D) theC+I+G+Xcurvetoshiftup.
Answer: C
Diff:2
3) AlowerpricelevelcausestheC+ I+ G+ Xcurvetoshiftasaresultofachangeinallthe
followingEXCEPT
A) anincreaseinrealwealth.
B) adecreaseininterestrates.
C) anincreaseinaggregatesupply.
D) anincreaseinforeignspendingondomesticgoods.
Answer: C
Diff:2
4) Ariseinthepricelevelcauses
A) anincreaseinaggregatedemand.
B) adecreaseinaggregatedemand.
C) areductionintotalplannedrealexpenditures.
D) anincreaseintotalplannedrealexpenditures.
Answer: C
Diff:1
5) Anincreaseinplannedrealinvestmentspendingcauses
A) amovementalongtheC+ I+ G+ Xcurveandashiftoftheaggregatedemandcurve.
B) ashiftoftheC+I+G+ Xcurveandamovementalongtheaggregatedemandcurve.
C) ashiftoftheC+I+G+ Xcurvebuthasnoeffectontheaggregatedemandcurve.
D) ashiftoftheC+I+G+ Xcurvethatcausestheaggregatedemandcurvetoshift.
Answer: D
Diff:2
6) Anincreaseinthepricelevelcauses
A) reducedinvestmentspending,becauseinterestratesincrease,butanincreaseinnet
exportsasU.S.residentsbuyfewerimports.Thechangeininvestmentisusuallygreater
thanthechangeinnetexports.
B) areductioninnetexportsashigherpricedU.S.goodsinduceforeignerstobuyfewer
Americanproducts,andanincreaseininvestmentspendingasthehigherpricesmake
businessesmoreprofitable.
C) reducedinvestmentspending,becauseinterestratesincreaseandadecreaseinnetexports
asthehigherpricesinduceforeignerstobuyfewerU.S.goods.
D) increasedgovernmentspending,whichcrowdsoutinvestmentspending,sothatthenet
effectonaggregatedemandisnil.
Answer: C
Diff:3
7) Ifsocietywantsaggregatedemandtoincreasewithoutchangesinthepricelevel,thenthere
mustbe
A) agapbetweenfullemploymentandthecurrentlevelofrealGDPandanincreasein
autonomousspending.
B) anincreaseinautonomousspendingcombinedwithanincreaseinthemarginal
propensitytosave.
C) anincreaseinautonomoussavingsothatautonomousinvestmentspendingcanincrease.
D) anincreaseinautonomousspendingandahorizontalshort -runaggregatesupplycurve.
Answer: D
Diff:3
8) HowdoesareductioninthepricelevelaffectthepositionoftheC + I+ G+ Xcurveandinturn
theequilibriumlevelofrealGDP?
A) TheC+I+G+Xcurveshiftsdown,therebyreducingtheequilibriumlevelofrealGDP.
B) TheC+I+G+Xcurveshiftsdown,therebyincreasingtheequilibriumlevelofrealGDP.
C) TheC+I+G+Xcurveshiftsup,therebyreducingtheequilibriumlevelofrealGDP.
D) TheC+I+G+Xcurveshiftsup,therebyincreasingtheequilibriumlevelofrealGDP.
Answer: D
Diff:2
9) HowdoesanincreaseinthepricelevelaffectthepositionoftheC+I+G+Xcurveandinturn
theequilibriumlevelofrealGDP?
A) TheC+I+G+Xcurveshiftsdown,therebyreducingtheequilibriumlevelofrealGDP.
B) TheC+I+G+Xcurveshiftsdown,therebyincreasingtheequilibriumlevelofrealGDP.
C) TheC+I+G+Xcurveshiftsup,therebyreducingtheequilibriumlevelofrealGDP.
D) TheC+I+G+Xcurveshiftsup,therebyincreasingtheequilibriumlevelofrealGDP.
Answer: A
Diff:2
12.9AppendixC:TheKeynesianModelandtheMultiplier
1) AccordingtotheKeynesianmodel,anincreaseinautonomousinvestmentleadsto
A) amorethanproportionaldecreaseinrealGrossDomesticProduct(GDP).
B) alessthanproportionaldecreaseinrealGrossDomesticProduct(GDP).
C) aproportionalincreaseinrealGrossDomesticProduct(GDP).
D) areductionintaxes,autonomousgovernmentspending,andafallinrealGrossDomestic
Product(GDP).
Answer: A
Diff:1
Topic: 12.9AppendixC:TheKeynesianModelandtheMultiplier
2) IntheKeynesianmodel,adecreaseinrealautonomousspendingresultsinamorethan
proportionaldecreaseinrealGrossDomesticProduct(GDP)because
A) consumptiondecreasesasaresultoflowerrealdisposableincome.
B) consumptionincreaseswhilerealdisposableincomedecreases.
C) realautonomousspendingdecreasesfurtherasrealdisposableincomedecreases.
D) governmentspendingalsodecreases.
Answer: A
Diff:2
3) IntheKeynesianmodel,anincreaseinrealautonomousspendingresultsinagreaterincreasein
realGrossDomesticProduct(GDP)if
A) themarginalpropensitytoconsume(MPC)islower.
B) themarginalpropensitytoconsume(MPC)ishigher.
C) theaveragepropensitytosave(APS)ishigher.
D) theaveragepropensitytosave(APS)islower.
Answer: B
Diff:2
4) Supposetheeconomyisinitiallyatequilibrium,inwhichtotalplannedrealexpendituresequals
realGDP.Whichofthefollowingwilloccurifthereisanincreaseinautonomousinvestment?
A) Inventorieswillincreaseimmediatelyandproductionofgoodsandserviceswilldecrease
untilrealGDPcatchesupwithtotalplannedrealexpenditures.
B) Inventorieswilldecreaseimmediatelyandproductionofgoodsandserviceswillincrease
untilrealGDPcatchesupwithtotalplannedrealexpenditures.
C) Bothinventoriesandproductionofgoodsandserviceswillincrease.
D) Inventorieswillnotchangeandproductionofgoodsandserviceswillnotchangeeither.
Answer: B
Diff:2
Chapter13
FiscalPolicy
13.1DiscretionaryFiscalPolicy
1) Whenthegovernmentdeliberatelyaltersitslevelofspendingand/ortaxesinordertoachieve
specificnationaleconomicgoals,itisexercising
A) monetarypolicy.
B) discretionaryfiscalpolicy.
C) aRicardianpolicy.
D) alaissez-fairepolicy.
Answer: B
Diff:1
Topic: 13.1DiscretionaryFiscalPolicy
2) Whichofthefollowingisanexampleoffiscalpolicy?
A) areductioninthefederalfundsrate.
B) areductioninthemoneysupply.
C) areductioninlump-sumtaxes.
D) anincreaseinthephysicalstockofcapital.
Answer: C
Diff:1
3) Whichofthefollowingwouldshifttheaggregatedemandcurvetotheright?
A) Anincreaseingovernmentspending
B) Anincreaseintaxes
C) Anincreaseininterestrates
D) Anincreaseininputprices
Answer: A
Diff:1
4) Whichofthefollowingfiscalpolicyactionswouldbeappropriateiftheeconomyisexperiencing
aninflationarygap?
A) Anincreaseingovernmentspending
B) Anincreaseintaxes
C) Adecreaseininterestrates
D) Anincreaseinthemoneysupply
Answer: B
Diff:1
5) Anincreaseingovernmentspendingwouldcausewhichofthefollowingtohappen?
A) Theaggregatedemandcurvewouldshifttotheright.
B) Theaggregatedemandcurvewouldshifttotheleft.
C) Theaggregatesupplycurvewouldshifttotheright.
D) Theaggregatesupplycurvewouldshifttotheleft.
Answer: A
Diff:1
6) SupposetheeconomyisexperiencingarecessionarygapatthecurrentlevelofGDP.Whichof
thefollowingfiscalpolicyactionswouldbemostappropriategiventhisrecessionarygap?
A) decreasinginterestrates
B) increasingthemoneysupply
C) decreasingtaxes
D) asimultaneousandequalreductionintaxesandreductioningovernmentspending
Answer: C
Diff:1
7) Fiscalpolicyreferstothe
A) manipulationofthemoneysupplyinordertoincreasetheamountofpapercurrencyin
circulation.
B) adjustmentofgovernmentspendingandtaxesinordertoachievecertainnational
economicgoals.
C) adjustmentofnationalincomedatatoaccountforpricelevelchanges.
D) changingthewayunemploymentdataiscalculatedsoastomakeitappearthat
unemploymentislowerthanitactuallyis.
Answer: B
Diff:1
8) Fiscalpolicyinvolveswhichofthefollowing?
A) Taxpolicy
B) Interestrates
C) Buyingandsellinggovernment-agencybonds
D) Noneoftheabove
Answer: A
Diff:1
Chapter13FiscalPolicy549
9) Whentelevisioncommentatorsrefertotaxandspendpolicy,theyarereferringto
A) fiscalpolicy.
B) monetarypolicy.
C) theFederalReservepolicy.
D) automaticstabilizers.
Answer: A
Diff:1
10) WhichofthefollowingisNOTafiscalpolicyaction?
A) increasinggovernmentexpendituresonmilitaryhardware
B) decreasinggovernmentspendingonthearts
C) raisingthequantityofmoneyincirculation
D) loweringincometaxrates
Answer: C
Diff:1
11) Fiscalpolicyisdefinedas
A) thedesignofataxsystemtotransferincomefromtherichtothepoor.
B) theuseofCongressionalpowertopursuesocialandpoliticalgoals.
C) thediscretionarychangingofgovernmentexpendituresand/ortaxestoachievenational
economicgoals.
D) theuseofthetaxingpowerofthegovernmenttoredistributewealthinasocially
acceptablemanner.
Answer: C
Diff:1
12) Whichofthefollowingisanexampleofadiscretionaryfiscalpolicyaction?
A) increasinggovernmentspendingtodealwitharecession
B) adecreaseintaxrevenuesastaxpayersincomesdecrease
C) increasingtheminimumwagerate
D) raisingregulationsinthehealthcareindustry
Answer: A
Diff:2
13) Whichofthefollowingisadiscretionaryfiscalpolicyaction?
A) anincreaseintheamountofunemploymentcompensationbecausemorepeoplebecome
unemployed
B) aprogressivetaxsystemthatleadstoanincreaseinincometaxrevenuesduringan
economicboom
C) adeliberatetaxcutwhentheeconomyexperienceshighunemployment
D) anincreaseinSupplementalSecurityIncomepaymentswhenmorepeoplebecomeeligible
forthebenefits
Answer: C
Diff:2
14) Typicalgoalsforfiscalpolicyare
A) highemploymentandpricestability.
B) highpricesforconsumersandlowpricesforbusinesses.
C) runninghighdeficitsandraisingconsumerprices.
D) increasingthemoneysupplysothegovernmentcanspendmore.
Answer: A
Diff:2
15) Fiscalpolicytosolveshort-runeconomicproblemssupportstheKeynesiannotionof
A) therebeingnogovernmentroleintheeconomy.
B) anactivegovernmentroleintheeconomy.
C) theneedforautocraticrule.
D) thelong-runnatureoftheeconomy.
Answer: B
Diff:2
16) AccordingtotraditionalKeynesianeconomics,expansionaryfiscalpolicyinitiatedbythe
federalgovernment
A) isneverappropriate.
B) isanappropriatewaytopreventrecessionsanddepressions.
C) isanappropriatewaytoslowdownanover-heatedeconomy.
D) willalwaysfailduetocrowdingouteffects.
Answer: B
Diff:1
17) Discretionaryfiscalpolicyis
A) automaticchangesingovernmentexpendituresandinterestratesthatachievecertain
nationaleconomicgoals.
B) deliberatechangesingovernmentexpendituresortaxesinordertoachievecertain
nationaleconomicgoals.
C) usedtoachievefullemploymentbychangingmonetarygrowthtargets.
D) changesinsupportforresearchandeducationinordertoachievecertainnational
economicgoals.
Answer: B
Diff:1
18) AllthefollowingactionsrepresentfiscalpolicyEXCEPT
A) areductioninthemoneysupplybytheFederalReserve.
B) anincreaseingovernmentspending.
C) areductioninindividualincometaxrates.
D) anincreaseincorporateincometaxrates.
Answer: A
Diff:1
19) Fiscalpolicyisimplementedby
A) thecentralbank.
C) theInternalRevenueService.
B) privatebusinesses.
D) thefederalgovernment.
Answer: D
Diff:1
20) Whichofthefollowingrepresentexpansionaryfiscalpolicy?
A) areductioningovernmentspending
B) anincreaseinaverageindividualincometaxrates
C) acutincorporateincometaxrates
D) anincreaseinmarginalindividualincometaxrates
Answer: C
Diff:1
21) Thediscretionarychangeofgovernmentexpendituresortaxestoachievenationaleconomic
goalsis
A) arecessionarygap.
B) Ricardian-equivalencetheorem.
C) supply-sideeconomics.
D) fiscalpolicy.
Answer: D
Diff:1
22) Discretionaryfiscalpolicyisbestdescribedas
A) adeliberateattempttocausetheeconomytomovetofullemploymentandpricestability
morequicklythanitmightotherwise.
B) adeliberateattempttoimprovethefunctioningoffreemarkets.
C) anautomaticchangeinincometransferpaymentstokeeptheeconomyatfull
employment.
D) thedesignofataxsystemthatautomaticallystabilizeseconomicactivityovertime.
Answer: A
Diff:2
23) Keynesbelievedthatthewaytopreventrecessionsanddepressionswasto
A) reducespendingwhenthereisarecessionarygap.
B) onlychangetaxratesasameansofregulatingtheeconomy.
C) maximizethecrowdingouteffect.
D) increaseaggregatedemandthroughexpansionaryfiscalpolicy.
Answer: D
Diff:2
24) Fiscalpolicyinvolvesdiscretionarychangesin
A) interestrates.
B) exchangerates.
C) incometaxrates.
D) therateofgrowthofthequantityofmoneyincirculation.
Answer: C
Diff:1
25) AccordingtotraditionalKeynesiananalysis,fiscalpolicyoperatesby
A) informingconsumersandbusinesspeopleaboutitsplansfortheeconomysotheywill
knowhowtoadjusttheirbehavior.
B) indirectlyaffectingaggregatedemandthroughitseffectoninterestrates.
C) directlyaffectingaggregatedemand.
D) directlyaffectingaggregatesupply.
Answer: C
Diff:2
26) Toclosearecessionarygapthroughfiscalpolicy,thegovernmentshould
A) decreasegovernmentspendinginordertoincreaseaggregatesupply.
B) increasegovernmentspendinginordertoincreaseaggregatedemand.
C) reducetaxesinordertostimulateinvestment,andthusincreaseaggregatesupply.
D) increasegovernmentspendingandtaxesinordertobothincreaseaggregatedemandand
aggregatesupply.
Answer: B
Diff:2
27) Anexampleoffiscalpolicyis
A) areductioningovernmentspending.
B) areductionininvestmentspendingbytheprivatesector.
C) anincreaseinautonomousspendingbyconsumers.
D) anincreaseinSocialSecurityspendingbytheelderly.
Answer: A
Diff:1
28) FiscalpolicyincludesallofthefollowingEXCEPT
A) changingtaxes.
B) changinggovernmentspending.
C) policiesthatinfluenceaggregatedemand.
D) policiesthatinfluencetherateofgrowthofthequantityofmoneyincirculation.
Answer: D
Diff:1
29) Iftheeconomyisoperatingonthelong-runaggregatesupplycurve,thenexpansionaryfiscal
policywill
A) generatehigherpricesintheshortrun,butwillinduceaggregatesupplytoincreaseinthe
longrun.
B) generateanincreaseinrealGDPandhigherpricesinboththeshortrunandthelongrun.
C) generateanincreaseinrealGDPwithouthigherpricesintheshortrun,butthenrealGDP
willreturntoitslong-runlevel,andthepricelevelwillincrease.
D) generateanincreaseinrealGDPandhigherpricesintheshortrun,butthenrealGDPwill
decreasetoitslong-runlevel,andthepricelevelwillincreasesomemore.
Answer: D
Diff:3
30) Iftheeconomyisexperiencinganinflationarygapandthegovernmentwantstoacceleratethe
adjustmenttothelong-runequilibrium,itshould
A) reduceaggregatedemandbycuttinggovernmentspendingorraisingtaxes.
B) reduceaggregatedemandbyincreasinggovernmentspendingorcuttingtaxes.
C) increaseaggregatesupplybycuttinggovernmentspendingorraisingtaxes.
D) increaseaggregatesupplybyincreasinggovernmentspendingorloweringtaxes.
Answer: A
Diff:2
31) Supposethegovernmentincreaseslump-sumtaxes.Thiscauses
A) disposableincometodecrease,whichcausesconsumptionspendingtodecreaseand
aggregatedemandtodecrease.
B) governmentspendingtodecrease,whichcausesaggregatedemandtodecrease.
C) consumptionspendingtodecreaseandspendingonimportstoincrease.Theeffecton
aggregatedemanddependsonwhetherdomesticspendingorspendingonimports
decreasedthemost.
D) disposableincometodecrease,whichcausesaggregatesupplytodecrease.
Answer: A
Diff:2
32) Otherthingsbeingequal,areductionintaxeswill
A) leadtoareductioninthelongrunaggregatesupplycurveasbusinessesenjoygreater
profits.
B) influencetheshortrunaggregatesupplycurvebutnottheaggregatedemandcurve.
C) leadtoacorrespondingreductionininterestratesincreasingthecrowdingouteffect.
D) causeanincreaseinaggregatedemandduetoincreasesinconsumption,investment,or
netexports.
Answer: D
Diff:1
33) Whichofthefollowingactionscouldbeundertakenifthegovernmentwantstoreducean
inflationarygap?
A) Increasetaxesandreducegovernmentspending.
B) Reducetaxesandincreasegovernmentspending.
C) Increasetaxesandincreasegovernmentspending.
D) Reducetaxesandreducegovernmentspending.
Answer: A
Diff:2
34) Whichofthefollowingactionscouldbeundertakenifthegovernmentwantstoclosea
recessionarygap?
A) Increasetaxesandreducegovernmentspending.
B) Reducetaxesandincreasegovernmentspending.
C) Increasetaxesandincreasegovernmentspending.
D) Reducetaxesandreducegovernmentspending.
Answer: B
Diff:2
35) Refertotheabovefigure.SupposetheeconomyisoperatingatpointA.Thereisarecessionary
gapof________,whichcanbeclosedby________.
A) $3trillion;increasinggovernmentspendingby$1trillion
B) $1trillion;expansionaryfiscalpolicythatshiftstheshort-runaggregatesupplycurve
throughpointC
C) $2trillion;expansionaryfiscalpolicythatgeneratesanother$2trillionintotalspending
D) $2trillion;anincreaseingovernmentspendingof$14trillion
Answer: C
Diff:2
36) Refertotheabovefigure.SupposetheeconomyisatpointA.Bytheproperuseoffiscalpolicy,
thegovernmentcan
A) boosttaxestoshiftLRASthroughpointA.
B) increasegovernmentspendingtogettheeconomytopointB.
C) raiseincometaxratestogettheeconomytopointC.
D) reducegovernmentspendingtogettheeconomytopointD.
Answer: B
Diff:3
37) Refertotheabovefigure.IftheeconomyiscurrentlyoperatingatpointC,thenthereis
A) astablelong-runequilibriumsituation.
D) unemployment.
Answer: C
Diff:2
38) Refertotheabovefigure.SupposetheU.S.economyiscurrentlyoperatingatpointC.Whichof
thefollowingactionswouldyourecommendtothepresidentoftheUnitedStates?
A) Reducetaxestostimulateinvestment,consumptionandnetexports.
B) Increasegovernmentspendingwhileholdingtaxesconstant.
C) Engageincontractionaryfiscalpolicybyreducinggovernmentspending.
D) Reducetheinterestratetostimulateinvestmentminimizingthecrowdingouteffect.
Answer: C
Diff:3
39) Refertotheabovefigure.SupposethattheeconomywasoriginallyatpointA,andthenit
reachedpointCbymeansofafiscalpolicyaction.Whichofthefollowingiscorrect?
A) PointCisashort-runequilibriumthatcouldhavebeenattainedthroughataxcut,butin
thelongruntheeconomywillendupatpointB.
B) PointCisbothashort-runequilibriumandalong-runequilibriumthatcouldhavebeen
attainedthroughanincreaseingovernmentspending.
C) PointCisalong-runequilibriumthatcouldhavebeenattainedthroughataxincrease,
althoughreachingthispointfirstrequiredashort-runequilibriumatpointB.
D) PointCisashort-runequilibriumthatcouldhavebeenattainedthroughareductionin
governmentspending,butinthelongruntheeconomywillendupatpointB.
Answer: A
Diff:2
40) Refertotheabovefigure.IftheeconomyiscurrentlyatpointC,thenanincreaseintaxeswill
leadto
A) anincreaseinthepriceandanincreaseinrealGDP.
B) anincreaseinthepriceandadecreaseinrealGDP.
C) adecreaseinthepriceandadecreaseinrealGDP.
D) adecreaseinthepriceandanincreaseinrealGDP.
Answer: C
Diff:3
41) Supposetherecurrentlyisaninflationarygap.Whatcouldthegovernmentdotobringprices
down?
A) Nothing.
B) Reducegovernmentspending.
C) Increasegovernmentspending.
D) Shiftthelong-runaggregatesupplycurve.
Answer: B
Diff:1
42) Anexampleofexpansionaryfiscalpolicycouldbe
A) toincreasetaxes.
C) toreducegovernmentspending.
Answer: B
Diff:1
B) toreducetaxes.
D) toreduceinterestrates.
43) Intheshortrun,expansionaryfiscalpolicyusuallywill
A) increasethepricelevelandincreaserealGDP.
B) increasethepricelevelanddecreaserealGDP.
C) decreasethepricelevelandincreaserealGDP.
D) decreasethepricelevelanddecreaserealGDP.
Answer: A
Diff:1
44) Contractionaryfiscalpolicywillmostlikely
A) involvecuttingtaxes.
B) raiserealGDP.
C) reducethepricelevel.
D) involveincreasinggovernmentspending.
Answer: C
Diff:1
45) Intheshortrun,ifthegovernmentattemptstoincreaseaggregatedemand,itshould
A) increasegovernmentspendingandreducetaxes.
B) decreasegovernmentspendingandincreasetaxes.
C) shiftthelong-runaggregatesupplycurvetotheright.
D) shifttheshort-runaggregatesupplycurvetotheright.
Answer: A
Diff:1
46) Thegovernmentmightengageinexpansionaryfiscalpolicyifitwantedto
A) reducethepricelevel.
B) reducerealGDP.
C) shifttheaggregatedemandcurvetotheleft.
D) reducethelevelofunemployment.
Answer: D
Diff:2
47) Supposetheeconomyhasahighlevelofunemployment.Thiswouldimply
A) thatthegovernmentshouldengageinexpansionaryfiscalpolicyandincreasethetaxrate.
B) thattheeconomyisoperatingtotheleftoftheLRAScurveandthatgovernmentspending
couldbeincreasedtoreduceunemployment.
C) thatfiscalpolicyhasbeenineffectiveandshouldbeabandoned.
D) thattheeconomyisoperatingontheSRAScurveandthatgovernmentspendingcouldbe
decreasedtoreduceunemployment.
Answer: B
Diff:1
48) Fiscalpolicy
A) usesthetoolsoftaxationandspendinginanefforttoaddressinflationand
unemployment.
B) usesthetoolofbusinessregulationtoincreaseeconomicefficiency.
C) usesthetoolofinterestratestostimulateprivatesavings.
D) usesthetooloftheexchangeratetodiscourageimports.
Answer: A
Diff:1
49) Thechangingofgovernmentexpendituresortaxestoachievenationaleconomicgoalsis
A) discretionaryfiscalpolicy.
B) automaticfiscalpolicy.
C) recessionaryfiscalpolicy.
D) inflationaryfiscalpolicy.
Answer: A
Diff:1
50) Discretionaryfiscalpolicyissonamedbecauseit
A) isundertakenattheorderofthenationscentralbank.
B) occursautomaticallyasthenationslevelofGDPchanges.
C) involvesspecificchangesintaxesandgovernmentspendingundertakenbyCongressand
thepresident.
D) involvessecretadvicegivenbytheCouncilofEconomicAdviserstothepresident.
Answer: C
Diff:1
51) Ifthereisadeliberatechangeintaxesandspending,itiscalled
B) aninflationarygap.
C) discretionaryfiscalpolicy.
D) discretionarymonetarypolicy.
Answer: C
Diff:1
52) Whichofthefollowingfiscalpolicyactionswoulddefinitelycausean increaseinthesizeofa

recessionarygap?
A) increasesintaxesandcutsingovernmentspending
B) cutsintaxes
C) increasesintaxesandincreasesingovernmentspending
D) cutsintaxesandincreasesingovernmentspending
Answer: A
Diff:1
53) Whichofthefollowingfiscalpolicyactionswoulddefinitelycauseareductioninthesizeofan
inflationarygap?
A) cutsintaxesandincreasesingovernmentspending
B) increasesingovernmentspending
C) increasesintaxes
D) cutsintaxes
Answer: C
Diff:1
54) Whenthegovernmentcutstaxesorincreasesgovernmentspending
A) thelong-runaggregatesupplycurveshiftstotheleft.
B) theshort-runaggregatesupplycurveshiftstotheleft.
C) theaggregatedemandcurveshiftstotheleft.
D) theaggregatedemandcurveshiftstotheright.
Answer: D
Diff:1
55) WhichofthefollowingisNOTrelatedtofiscalpolicy?
A) passageofnewsecuritieslaws
B) decreasingmarginaltaxrates
C) reducingthebudgetdeficit
D) increasinggovernmentexpenditures
Answer: A
Diff:1
56) Whichoneofthefollowingistrueabouttheeffectsoffiscalpolicy?
A) Adecreasegovernmentspendingwillincreaseaggregatesupply.
B) Ataxchangedoesnothaveanydirectorindirecteffectsonaggregatedemand.
C) Adecreaseingovernmentspendingwilldecreaseaggregatedemand.
D) Anincreaseingovernmentspendingwillreduceaggregatedemand.
Answer: C
Diff:2
57) Whichofthefollowingconditionsdescribesarecessionarygap?
A) Theshort-runequilibriumlevelofrealGDPisabovethelong-runlevelofrealGDP.
B) Theshort-runequilibriumlevelofrealGDPisbelowthelong-runlevelofrealGDP.
C) Theactualinterestrateisabovetheequilibriuminterestrate.
D) Theactualinterestrateisbelowtheequilibriuminterestrate.
Answer: B
Diff:2
58) Howmightfiscalpolicybeusedtocorrectaninflationarygap?
A) Theexchangeratewouldbeadjustedtoencourageimports.
B) Theexchangeratewouldbeadjustedtodiscourageimports.
C) Theinterestratewouldbeadjustedtoencouragesaving.
D) Taxeswouldbeincreasedtoreduceaggregatedemand.
Answer: D
Diff:2
59) Howmightfiscalpolicybeusedtocorrectarecessionarygap?
A) Theexchangeratewouldbeadjustedtoencourageimports.
B) Theexchangeratewouldbeadjustedtodiscourageimports.
C) Governmentspendingwouldbeadjustedtoincreaseaggregatedemand.
D) Businessoperationswouldberegulatedbythegovernmenttobecomemoreefficient.
Answer: C
Diff:2
60) Expansionaryfiscalpolicyisusedto
A) combatinflation.
C) encourageprivatesaving.
B) combatrecessions.
D) makebusinessesmoreefficient.
Answer: B
Diff:1
61) In2009,Congresspassedabillthatinvolvedgovernmentspendingincreasesandtaxcutswith
thepurposeofstimulatingtheU.S.economy.Thispolicyisanexampleof
A) anautomaticstabilizer.
B) contractionaryfiscalpolicy.
C) expansionaryfiscalpolicy.
D) expansionarymonetarypolicy.
Answer: C
Diff:2
62) Taxpolicyconductedforthepurposeofachievingfullemployment,pricestability,oreconomic
growthisanexampleof
A) monetarypolicy.
B) interest-ratepolicy.
C) exchange-ratepolicy.
D) discretionaryfiscalpolicy.
Answer: D
Diff:2
63) Governmentspendingconductedforthepurposeofachievingfullemployment,pricestability,
oreconomicgrowthisanexampleof
A) monetarypolicy.
B) interest-ratepolicy.
C) exchange-ratepolicy.
D) fiscalpolicy.
Answer: D
Diff:2
64) DiscretionaryFiscalpolicy
A) istheuseofgovernmentspendingandtaxpoliciestoinfluenceeconomicgrowthand
inflation.
B) istheuseofregulationtoinfluenceeconomicgrowthandinflation.
C) isthepurchaseandsaleofTreasurysecuritiestoinfluenceeconomicgrowthandinflation.
D) istheconversionofnominaldatatorealdata.
Answer: A
Diff:1
65) ThefiscalpolicyoftheUnitedStatesis
A) summarizedinthebudgetoftheU.S.federalgovernment.
B) thesumofthebudgetsofeachstateandmunicipality.
C) publishedintheFederalReserveBanksAnnualReport.
D) announcedbythePresidentinhisStateoftheUnionmessage.
Answer: A
Diff:1
66) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD2 ,whatisthecurrent

economicsituation?
A) inflationarygap
C) equilibrium
Answer: B
Diff:2
B) recessionarygap
D) overemployment
67) Refertotheabovefigure.Supposetherelevantaggregatedemandcurveis AD2 .Ifthe

governmentwantstousediscretionaryfiscalpolicytoclosetheexistinggap,itshould
A) decreasetaxes.
B) increasetaxes.
C) increasethemoneysupply.
D) decreasegovernmentspending.
Answer: A
Diff:2
68) Refertotheabovefigure.Iftherelevantaggregatedemandcurvewas AD2 ,thegovernment

coulddoallofthefollowingtoclosetheexistinggapEXCEPT
A) increasegovernmentspendingonroads.
B) reducemarginaltaxrates.
C) reducecorporatetaxes.
D) reducedefensespending.
Answer: D
Diff:2
69) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD2 ,whatisthecurrent

economicsituation?
A) inflationarygap
C) equilibrium
Answer: A
Diff:1
B) recessionarygap
D) overemployment
70) Refertotheabovefigure.Supposetherelevantaggregatedemandcurveis AD2 .Ifthe

governmentwantstousefiscalpolicytoclosetheexistinggap,itshould
A) increasetaxes.
B) decreasetaxes.
C) increasethemoneysupply.
D) increasegovernmentspending.
Answer: A
Diff:2
71) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD1 ,thentheeconomyis

experiencing
C) adeflationarygap.
D) fullemployment.
Answer: D
Diff:2
72) SupposethecurrentlevelofrealGDPisbelowthefull-employmentlevelofrealGDP.Which
ofthefollowingrepresentsafiscalpolicyactionthatcouldbeimplementedtoreducethesizeof
thisrecessionarygap?
A) Increasegovernmentspending.
B) Decreaseinterestrates.
C) Increasethemoneysupply.
D) alloftheabove
Answer: A
Diff:2
73) Whenthecurrentshort-runequilibriumistotherightofthelong-runaggregatesupply,
appropriatediscretionaryfiscalpolicyusedtoaddressthisproblemwouldbeto
A) increasetaxes.
B) decreasetaxes.
C) increasegovernmentspending.
D) decreasethediscountrate.
Answer: A
Diff:3
74) Whichofthefollowingstatementsaboutfiscalpolicyistrue?
A) RealGrossDomesticProduct(GDP)canbeincreasedaboveitslong-runequilibriumonly
intheshortrun.
B) RealGrossDomesticProduct(GDP)canneverbeincreasedaboveitslong -run
equilibrium,evenforabriefperiodoftime.
C) Governmentcanshifttheaggregatedemandcurveinwardbyincreasingspending.
D) Governmentcanshifttheaggregatedemandcurveoutwardbyreducingspending.
Answer: A
Diff:1
75) Whichoneofthefollowingisanexampleofdiscretionaryfiscalpolicyusedtocorrecta
recessionarygap?
A) ataxdecreasepassedintolawbyCongress
B) anincreaseinthemoneysupplybytheFederalReserve
C) adecreaseingovernmentexpendituresapprovedbyCongress
D) anagreementamongmajorbankstoraiseinterestrates
Answer: A
Diff:1
76) Whichoneofthefollowingisanexampleofdiscretionaryfiscalpolicyusedtocorrectan
inflationarygap?
A) ataxincreasepassedintolawbyCongress
B) decreaseinthemoneysupplybytheFederalReserve
C) anincreaseingovernmentexpendituresapprovedbyCongress
D) anagreementamongmajorbankstolowerinterestrates
Answer: A
Diff:1
77) Whatisdiscretionaryfiscalpolicyandwhatisitspurpose?
Answer: Discretionaryfiscalpolicyisthedeliberatechangingofgovernmentspendingand/or
taxes.Itspurposeistomovetheeconomytowardfullemploymentwithpricestability
morerapidlythanitwouldifleftonitsown.
Diff:1
78) Explainhowfiscalpolicycancorrectacontractionarygap.
Answer: Acontractionarygapcanbeclosedbyanincreaseinaggregatedemand.Byincreasing
governmentspendingorreducingtaxes,aggregatedemandincreases,therebyraisingthe
levelofrealGDP.
Diff:1
79) Supposethegovernmentbelievestheeconomyisoperatingbeyondthefull -employmentreal

GDP.Whatkindoffiscalpolicycoulditpursue?
Answer: Thegovernmentcouldinitiatecontractionaryfiscalpolicyandeitherreducegovernment
spendingorincreasetaxes.Theaggregatedemandcurveshiftstotheleft.Withan
upwardslopingshort-runaggregatesupplycurve,realGDPfallsandthepricelevelfalls.
Diff:3
13.2PossibleOffsetstoFiscalPolicy
1) WhatdoesresearchtellusabouttheimpactofRicardianequivalenceeffectsontheeconomy?
A) ThereisnoevidenceofanyimpactofRicardianequivalenceeffects.
B) Ricardianequivalenceeffectshaveahugeimpactonaggregatedemand.
C) Thereisaverysmallimpactonbothaggregatedemandandaggregatesupply.
D) Ricardianequivalenceeffectsmayexist,buttheirmagnitudesareunclear.
Answer: D
Diff:3
Topic: 13.2PossibleOffsetstoFiscalPolicy
2) TheRicardianequivalencetheoremstatesthat
A) anincreaseingovernmentspendinghasnoeffectonaggregatesupply.
B) increasesingovernmentspendinghavealargerimpactonrealGrossDomesticProduct
(GDP)thandecreasesintaxes.
C) anincreaseinthegovernmentbudgetdeficitcreatedbyacurrenttaxcuthasnoeffecton
aggregatedemand.
D) anincreaseinthegovernmentbudgetdeficithasnoeffectonrealGrossDomesticProduct
(GDP)becauseitonlyaffectsthepriceindex.
Answer: C
Diff:2
3) Theconceptthatincreasedgovernmentspendingwillleadtolowerinvestmentandconsumer
spendingisreferredtoasthe
A) inflationaryeffect.
B) crowding-outeffect.
C) aggregatedemandeffect.
D) Keynesianeffect.
Answer: B
Diff:2
4) TheLaffercurveshowsarelationshipbetween
A) inflationratesandunemploymentrates.
B) interestratesandinvestmentspending.
C) pricelevelandrealGrossDomesticProduct(GDP).
D) taxratesandtaxrevenues.
Answer: D
Diff:2
5) Bydefinition,adirectexpenditureoffsetwilloccurwhenever
A) thegovernmentincreasesspendinginanareathatcompeteswiththeprivatesector.
B) thegovernmentincreasesspendingforthemilitary.
C) theinterestraterises.
D) theinterestratefalls.
Answer: A
Diff:1
6) Ifthegovernmentbeganprovidingfreetextbookstocollegestudentswhowouldotherwise
haveboughttheirbooksfromtheprivatesector,thegovernmentsactionwouldresultin
A) anincreaseinrealGrossDomesticProduct(GDP).
B) adirectexpenditureoffset.
C) aRicardiandilemma.
D) areductionofthegovernmentdeficit.
Answer: B
Diff:1
7) Ifthegovernmentincreasesspendingandthereisacompletedirectexpenditureoffset,then
A) aggregatedemandandrealGrossDomesticProduct(GDP)willnotchange.
B) aggregatedemandandrealGrossDomesticProduct(GDP)willincreasebytheamountof
thespendingincrease.
C) thepricelevelwilldrop.
D) thegovernmentspendingmultiplierwillbegreaterthanzero.
Answer: A
Diff:1
8) Thegovernmentwantstoincreaseitsspendingby$1billiontostimulatetheeconomyandis
countingonthegovernmentspendingmultipliertohelp.Takingintoaccountdirectexpenditure
offseteffects,whatisitsbestspendingoption?
A) Anewcruisemissileforthemilitary
B) Expandingtheschoollunchprogram
C) Constructingmorelowincomehousing
D) Providingtextbooksforcollegestudents
Answer: A
Diff:2
9) Accordingtosupply-sideeconomics,changesinmarginaltaxrateswillhavewhichofthe
followingeffects?
A) changetheincentivetowork
B) changetheincentivetosave
C) changetheincentivetoinvest
D) alloftheabove
Answer: D
Diff:1
10) Onepartofthesupply-sideargumentisthat
A) lowermarginaltaxratesarerequiredtoinduceCongresstoreducegovernmentspending.
B) lowermarginaltaxratescanincreasetotaltaxrevenues.
C) themarginaltaxrateshouldbesetat50percent.
D) therelevantaggregatesupplycurveisclosetohorizontal.
Answer: B
Diff:2
11) Thesupportersofaproposaltoincreasemarginaltaxesonthoseearningover$200,000ayear
saythischangewouldgenerate$100billioninnewtaxrevenues.Asupply-sideeconomist
wouldarguethattheactualrevenueraisedwillbe
A) lessthan$100billionbecausesomepeoplewillrespondbyworkingless.
B) exactly$100billionbecausetherearenooffsettingfactorstoataxincrease.
C) morethan$100billion,becauselowerincomepeoplewillworkharderwhentheyperceive
thetaxsystemtobefairer.
D) morethan$100billionbecauseinterestrateswillalsobeaffected.
Answer: A
Diff:2
12) Supply-sideeconomistsarguethat
A) lowertaxratessometimesleadtoincreasedtaxrevenues.
B) highertaxratesleadtoincreasedproductivity.
C) lowertaxratesleadtoadropinrealGrossDomesticProduct(GDP).
D) lowertaxratesalwaysleadtolowertaxrevenues.
Answer: A
Diff:1
13) Accordingtosupply-sideeconomists,lowermarginaltaxrateswillnotnecessarilyleadto
lowertaxrevenuesbecause
A) thecrowdingouteffectdoesnotapplytotaxes.
B) lowertaxrateshavenoeffectontheopportunitycostoflabor.
C) theaggregatesupplycurvewillshiftinwardtotheleftifthetaxratesarelowered.
D) thelowermarginaltaxrateswillbeappliedtoagrowingtaxbaseduetoeconomicgrowth.
Answer: D
Diff:1
14) Supply-sideeconomicsfocusesontaxcutstostimulate
A) aggregatedemandbyreducingsaving.
B) aggregatesupplybyincreasingproduction.
C) governmentspending.
D) militaryresearch.
Answer: B
Diff:2
15) Whensupply-sidepolicyissuccessfulinpushingupequilibriumrealGrossDomesticProduct
(GDP),thereasonisthatthepolicygenerates
A) adecreaseinaggregatedemand.
B) anincreaseinaggregatesupply.
C) adecreaseinemployment.
D) adecreaseinsaving.
Answer: B
Diff:3
16) Ifthegovernmentincreasesspendingbutdoesnotraisetaxes,
A) aggregatedemandwillincreasewithoutanyeffectonthepricelevel.
B) borrowingbythegovernmentwilltakeplace.
C) thegovernmentwillhavetosellsomeassets,suchasoilandnationalparks.
D) thegovernmentwillhavetoeitherlowerexpendituresorraisetaxesthenextyear.
Answer: B
Diff:2
17) Thecrowding-outeffectis
A) thetendencyofcontractionaryfiscalpolicytocauseanincreaseinplannedinvestmentor
plannedconsumptionintheU.S.privatesector.
B) thetendencyofexpansionaryfiscalpolicytocauseanincreaseinplannedinvestmentbut
notinplannedconsumptionintheU.S.privatesector.
C) thetendencyofexpansionaryfiscalpolicytocauseadecreaseinplannedinvestmentor
plannedconsumptionintheU.S.privatesector.
D) thetendencyofcontractionaryfiscalpolicytocauseanincreaseinplannedinvestmentbut
adecreaseinplannedconsumptionintheU.S.privatesector.
Answer: C
Diff:2
18) AttaxrateshigherthanthetaxratethatmaximizestaxrevenuesalongaLaffercurve,
A) anincreaseintaxratesincreasestaxrevenues.
B) areductionintaxratesreducestaxrevenues.
C) areductionintaxratesincreasestaxrevenues.
D) anyvariationintaxrateshasnoeffectontaxrevenues.
Answer: C
Diff:2
19) Ifthegovernmentincreasesspendingwhileholdingtaxesconstant,weexpect
A) anincreaseininvestmentspendingbybusinessestoo,astheyanticipatefutureeconomic
growth.
B) adecreaseinrealsavingasconsumersfollowsuitandalsoincreaseborrowing.
C) plannedrealinvestmentspendingbybusinessestoincrease.
D) interestratestorise.
Answer: D
Diff:2
20) Thetendencyforexpansionaryfiscalpolicytocauseareductioninplannedrealinvestment
spendingbytheprivatesectoriscalled
A) theindirecteffect.
C) thecrowding-outeffect.
D) theLaffereffect.
Answer: C
Diff:1
21) Thecrowding-outeffectis
A) duetotheupwardslopeoftheSRASwhentheeconomyisoperatingtotherightofthe
LRAScurve.
B) duetothegovernmentbeingmorepowerfulinthemarketswhenthereisanincreasein
governmentspending.
C) asituationinwhichexpansionaryfiscalpolicyleadstoadecreaseinplannedreal
investmentorplannedrealconsumptionintheprivatesector.
D) onlyrelevantwhenaninflationarygapispresent.
Answer: C
Diff:1
22) Ifthecrowding-outeffectiscompleteandthemarginalpropensitytosaveis0.25,thenan
increaseingovernmentspendingof$100billionwillgeneratehowmuchmorerealGDP?
A) $0
B) $25billion
C) $100billion
D) $400billion
Answer: A
Diff:2
23) Adirectexpenditureoffsetoccurswhenanincreaseingovernmentspending
A) resultsinanincreaseinhouseholdsavingforretirement.
B) isfollowedbyanincreaseinconsumerspending
C) resultsinadecreaseinprivatespending.
D) isfollowedbyanincreaseintaxes.
Answer: C
Diff:2
24) Refertotheabovefigure.Thegovernmenthasjustengagedinexpansionaryfiscalpolicy
shiftingtheaggregatedemandcurvefromAD1 toAD2 .Interestrateshavestartedtorise.
Whichofthefollowingstatementsistrueintheshortrun?
A) RealGDPwillbe$14trillionsincetheeffectofgovernmentspendingisnotinfluencedby
interestrates.
B) RealGDPwillfallbackto$11trillionsincetheeffectthatincreasedgovernmentspending
hasonrealGDPisshortlived.
C) RealGDPwillgobeyond$14trillionasbusinessesandconsumersreacttotheincreasein
interestrates.
D) RealGDPwillendupsomewherebetween$11and$14trillionasbusinessesand
consumersreducetheirspendinginresponsetotheincreaseininterestrates.
Answer: D
Diff:2
25) Totheextentthatadirectexpenditureoffsetresultsfromanexpansionaryfiscalpolicy,
A) thestimulativeeffectwillbelessthananticipated.
B) thestimulativeeffectwillbemorethananticipated.
C) thefiscalpolicywillnotbediscretionary.
D) thetimelagsassociatedwiththeimplementationoffiscalpolicywillshorten.
Answer: A
Diff:1
26) SupposethatrealGDPisinitially$14trillionandthegovernmentattemptstoincreaserealGDP
to$15trillion.Themarginalpropensitytoconsumeis0.8,andevery$1.00increaseinreal
governmentspendingcrowdsout$0.50inrealplannedinvestmentexpenditures.Which
increaseingovernmentspendingbelowcouldyieldthedesiredlevelofrealGDP?
A) $100billion
B) $125billion
C) $200billion
D) $400billion
Answer: D
Diff:3
27) SupposethatrealGDPisinitially$13trillionandthegovernmentattemptstoincreaserealGDP
to$14trillion.Themarginalpropensitytoconsumeis0.75,andevery$1.00increaseinreal
governmentspendingcrowdsout$0.50inrealplannedinvestmentexpenditures.Howmuch
increaseinrealgovernmentspendingcouldleadtothedesiredlevelofrealGDP?
A) $200billion
B) $250billion
C) $500billion
D) $1trillion
Answer: C
Diff:3
28) Refertotheabovefigure.IftheeconomyisatEandthegovernmentwantstoincreaseaggregate
demandtoAD3 ,buttheincreaseinspendingonlyshiftstheaggregatedemandcurvetoAD2 ,
then
A) completecrowdingouthasoccurred.
B) somecrowdingouthasoccurred.
C) theincreasedborrowingcausedinterestratestofall.
D) theshort-runaggregatesupplycurveissteeperthanthefigureindicates.
Answer: B
Diff:2
29) Refertotheabovefigure.SupposetheeconomyisatEandthegovernmentusesan
expansionaryfiscalpolicytomovetheaggregatedemandcurveto AD2 .Intheend,the
aggregatedemandcurveisstillAD1 .Apossiblereasonforthisisthat
A) theeconomyisalreadyatfullemployment.
B) theincreasedborrowingcauseshigherinterestrates,whichencouragepeopletosavemore
andincreaseinvestmentspendingduetotheextrasaving.
C) peopleincreasesavingbecausetheyanticipatehigherfuturetaxes,resultinginareduction
incurrentconsumptionspendingthatoffsetstheincreasedgovernmentspending.
D) someoftheincreasedgovernmentspendingisnotcountedinGDP.
Answer: C
Diff:3
30) TheRicardianequivalencetheoremstatesthat
A) anincreaseingovernmentspendingbythefederalgovernmentleadstooffsetting
reductionsinstategovernmentspending.
B) anincreaseingovernmentspendingfinancedbyhighertaxeshasnoeffectonaggregate
demand.
C) spendingonnationaldefenseisadirectexpenditureoffset.
D) governmentspendingfinancedbytaxesisequivalenttogovernmentspendingfinancedby
borrowing.
Answer: D
Diff:1
31) AccordingtotheRicardianequivalencetheorem,ataxcutthatincreasesthegovernmentbudget
deficitwillhave
A) noeffectonaggregatedemandbecausepeoplerealizethattherewillbeafuturetax
liabilitysothatthereisnoincreaseinconsumptionexpenditures.
B) noeffectonaggregatedemandbecausepeopleonlylookatchangesintaxesor
governmentspendinginthepresent.
C) apositiveeffectonaggregatedemandbecausepeoplelookatchangesintaxesor
governmentspendinginthepresent.
D) aneffectonaggregatedemand.Themagnitudetheeffectwillhavedependsuponwhether
theincreaseiscausedbyareductionintaxesoranincreaseingovernmentspending.
Answer: A
Diff:3
32) AdecreaseintaxeswillhavenoeffectonrealGDPif
A) peoplelookatchangesintaxesonlyinthepresent.
B) thereisnocrowdingout.
C) theRicardianequivalencetheoremholds.
D) thetaxdecreaseisoffsetbyanincreaseingovernmentspending.
Answer: C
Diff:1
33) Thepropositionthatdecreasesintaxesthatraisethegovernmentbudgetdeficithasnoeffecton
aggregatedemandiscalledthe
A) open-economyeffect.
B) federalismeffect.
C) Ricardianequivalencetheorem.
D) interest-rateeffect.
Answer: C
Diff:1
34) AccordingtotheRicardianequivalencetheorem,budgetdeficitsresultingfromtaxcuts
A) increaseaggregatedemand.
B) decreaseaggregatedemand.
C) havenoeffectonaggregatedemand.
D) affectonlyaggregatesupply.
Answer: C
Diff:1
35) Expansionaryfiscalpolicyfallsshortofitsgoal.Someeconomistsclaimitisduetoindirect
crowdingout.Whatevidencewouldbeconsistentwiththisclaim?
A) Anincreaseinconsumerspendingoccurred.
B) Theinterestrateincreased.
C) Savingdecreased.
D) Thepriceleveldecreased.
Answer: B
Diff:2
36) Threecandidatesforpoliticalofficedisagreeoverthebenefitsofenlargingthefederalbudget
deficit.CandidateCsaysthestimulationpackageisneededtoincreaseemploymentandreal
GDP;CandidateDsaysitwillonlycausehigherprices;andCandidateFsaysitwillhaveno
effectoneitherrealGDPorthepricelevel.Howdothethreecandidatesdifferwithrespectto
theconditionoftheeconomyandtheeffectsoffiscalpolicy?
A) CandidateCthinksthesimpleKeynesianmodelisapplicable,whileDthinksthe
expansionarypolicywillfullycrowdoutprivateinvestment.Fbelievestheeconomyis
experiencingarecessionarygap.
B) CandidateCthinksthesimpleKeynesianmodelisapplicable;Dthinkstheshort -run
aggregatesupplycurveishorizontal;andFthinkstheexpansionarypolicywillgenerate
lowerinterestrates.
C) CandidateCthinkstheeconomyisbelowthefull-employmentrealGDPandthatthe
short-runaggregatesupplycurveishorizontal.CandidateDbelievestheeconomyisat
fullemployment..CandidateFbelievestheexpansionarypolicywillresultonlyindirect
fiscaloffsets.
D) CandidateCthinkstheshort-runaggregatesupplycurveisupwardsloping;Dthinks
interestrateswillrise;andFthinkstheeconomyisatfullemployment.
Answer: C
Diff:3
37) Expansionaryfiscalpolicyisalways100percenteffectivewhentheshort -runaggregatesupply

curveishorizontal.Isthisstatementtrue?
A) Yes,becausetheoreticallynothingelsecanoffsettheeffectsoffiscalpolicy.
B) Yes,whenthelong-runaggregatesupplycurveishorizontaltoo.
C) No,becausecrowdingoutcouldtakeplace.
D) No,becausetheincreasedspendingmaycausethepriceleveltoincrease.
Answer: C
Diff:2
38) Directexpenditureoffsetsare
A) thediscretionarychangingofgovernmentexpenditurestoachieveahigheremployment
level.
B) thedecreaseinplannedinvestmentthatoccursastheresultofanincreaseininterestrates.
C) thesameastheRicardianequivalencetheorem.
D) thedecreaseinspendingintheprivatesectorinareasinwhichthegovernmentis
competing.
Answer: D
Diff:1
39) Whenevergovernmentspendingisasubstituteforprivatespending
A) interestrateswillrise.
B) theRicardianequivalencetheoremholds.
C) theeffectsofexpansionaryfiscalpolicyaredampened.
D) thereisadirectmultipliereffect.
Answer: C
Diff:1
40) ThegovernmenthasdecidedtogiveeverypersonintheU.S.a$5couponthattheycanuseat
thegrocerystoretopurchasetheirchoiceofcheese.Wewouldexpectthispolicytoleadto
A) anincreaseinaggregatedemandequivalenttothefullimpactofallofthecoupons
redeemable.
B) noincreaseinaggregatedemandduetotheRicardianequivalencetheorem.
C) noincreaseinaggregatedemandbecausetherewouldbenodirectexpenditureoffset.
D) anincreaseinaggregatedemandbutnotequivalenttothefullimpactofallofthecoupons
redeemedduetosomedirectexpenditureoffset.
Answer: D
Diff:2
41) TheLaffercurve
A) initiallyslopesupwardasincreasingtaxratesleadtoincreasingtaxrevenuebut
eventuallywillslopedownwardasincreasingtaxratesleadtodecreasingtaxrevenue.
B) slopesdownwardthroughoutitsrangesinceincreasingtaxrateswillalwaysleadto
decreasesintaxrevenue.
C) slopesupwardthroughoutitsrangesinceincreasingtaxrateswillalwaysleadtoincreases
intaxrevenue.
D) ishorizontalbecausetaxrevenueisindependentoftherateofinterest.
Answer: A
Diff:1
42) Supply-sideeconomicsfocusesattentiononhowfiscalpolicymightbeusedto
A) increaseaggregatedemandtothefull-employmentlevelofrealGDP.
B) shifttheaggregatesupplycurveout.
C) alignaggregatedemandandaggregatesupply.
D) increaseconsumption.
Answer: B
Diff:1
43) TheLaffercurveindicateswhichofthefollowing?
A) Thereisanidealinterestratethatwillmaximizeinvestmentspending.
B) Thereisanidealamountofgovernmentspendingthatwillleadtofullnational
employment.
C) Thereisanidealtax-revenue-maximizingtaxrateforgovernmenttaxes.
D) Thereisanidealtariffratethatwillmaximizeexportsandminimizeimports.
Answer: C
Diff:2
44) AccordingtotheLaffercurve,increasesinthetaxratewillleadtoa(n)
A) steadydecreaseintaxrevenues.
B) steadyincreaseintaxrevenues.
C) initialdecreaseintaxrevenuesandthenanincreaseintaxrevenues.
D) initialincreaseintaxrevenuesandthenadecreaseintaxrevenues.
Answer: D
Diff:2
45) Refertotheabovefigure.WhichpanelisconsistentwiththeLaffercurve?
A) PanelA
B) PanelB
C) PanelC
D) PanelD
Answer: D
Diff:2
46) IfthegovernmentwishestopromoteahigherrateofgrowthofrealGDP,asupply-side
economistwouldarguetheappropriatepolicyis
A) engaginginexpansionaryfiscalpolicybyloweringmarginaltaxrates.
B) engaginginexpansionaryfiscalpolicyofincreasinggovernmentspending.
C) loweringmarginaltaxratesonpeopleandraisingthemoncorporations.
D) leavingtheeconomyaloneandlettingthenaturalforcesbringitintoalong-run
equilibrium.
Answer: A
Diff:2
47) Accordingtosupply-sideeconomics,lowertaxratesonwages
A) generatehigherrevenuesforthegovernmentandincreasedunemployment.
B) createincentivestoworkmore,whichincreasesrealGDP.
C) arelessproductivethanlowertaxratesonconsumers.
D) havelittleeffectontheeconomy.
Answer: B
Diff:2
48) Theideathatcreatingincentivesforindividualsandfirmstoincreaseproductivityleadingtoan
increaseinlong-runaggregatesupplyis
A) supply-sideeconomics.
B) demand-sideeconomics.
C) theRicardianequivalencetheorem.
D) consistentwithcrowdingout.
Answer: A
Diff:1
49) Supply-sideeconomics
A) promotesexpansionaryfiscalpolicybyincreasinggovernmentspending.
B) promotesreducingtaxestocreateincentivestoincreaseproductivity.
C) promotesincreasingtaxestocreateadditionalrevenueforgovernmentspending.
D) isbasedontheRicardianequivalencetheorem.
Answer: B
Diff:1
50) Agovernmentproposaltoincreasemarginaltaxratesonthewealthiest2percentofU.S.
residentsissupposedtogenerateanadditional$100billionintaxrevenues.Itislikelythat
A) theactualrevenueraisedwillexceedthe$100billion,becausetheother98percentofthe
populationwillincreasetheirworkeffortwithamorefairtaxsystem.
B) theactualrevenueraisedwillbemorethan$100billion,becausetheshort-runaggregate
supplycurveisupwardsloping.
C) theactualrevenueraisedwillbelessthan$100billion,becausesomeofthepeoplewill
respondbyworkinglessandearninglessincomethatcanbetaxed.
D) theactualrevenueraisedwillbecloseto$100billion,becausethewealthydontrespondto
workincentivesthewaypoorerworkersdo.
Answer: C
Diff:2
51) Anincreaseingovernmentspendingwithoutanaccompanyingincreaseintaxes
A) doesnotincreaseaggregatedemand.
B) wouldeffectivelyeliminateaninflationarygap.
C) causesinvestmentspendingtoincrease.
D) requiresadditionalgovernmentborrowing.
Answer: D
Diff:1
52) WhichoneofthefollowingstatementsisNOTtrue?
A) Expansionaryfiscalpolicyisemployedtooffsetrecessionarygaps.
B) Expansionaryfiscalpolicyhasaneffectoninterestrates.
C) Crowdingoutdilutestheeffectofexpansionaryfiscalpolicy.
D) Whencrowdingoutoccurs,fiscalpolicyismoreeffective.
Answer: D
Diff:3
53) Intheextremecaseofacompletecrowding-outeffect,
A) anincreaseininterestrateswillstimulateinvestmentspending.
B) anincreaseintaxrateswillstimulateworkeffort.
C) anincreaseingovernmentspendingwillnotincreaseaggregatedemand.
D) anincreaseingovernmentspendingwillstimulateinvestmentspending.
Answer: C
Diff:2
54) Becauseofcrowdingout,
A) expansionaryfiscalpolicyduringarecessionmustinvolveataxincrease.
B) expansionaryfiscalpolicyduringarecessionisreinforcedbyprivateinvestmentspending.
C) theeffectofexpansionaryfiscalpolicyispartiallyoffsetbythedeclineininvestment
spendingcausedbyhigherinterestrates.
D) expansionaryfiscalpolicyiscompletelyachievedevenwithadeclineininvestment
spending.
Answer: C
Diff:2
55) Ifanincreaseingovernmentspendingcausesanincreaseingovernmentborrowing,thiscould
induce
A) anincreaseininterestrates,whichwouldcauseprivatedomesticinvestmenttofall.
B) anincreaseininterestrates,whichwouldcauseprivatedomesticinvestmenttorise.
C) anincreaseininterestratesbutnoeffectonprivatedomesticinvestment.
D) adecreaseininterestrates,whichwouldcauseprivatedomesticinvestmenttorise.
Answer: A
Diff:2
56) Thecrowding-outeffectrefersto
A) anincreaseintheconsumptionofdomesticgoodsattheexpenseofimportedgoods.
B) anincreaseintheconsumptionofimportedgoodsattheexpenseofdomesticgoods.
C) adecreaseinconsumptionandinvestmentcausedbyanincreaseingovernment
borrowing.
D) adecreaseinconsumerspendingcausedbyadecreaseinconsumerconfidence.
Answer: C
Diff:1
57) Thepermanentincomehypothesisimpliesthattheeffectofatemporarytaxcutoneconomic
activity
A) isgreaterthantheeffectofapermanenttaxcut.
B) isthesameastheeffectofapermanenttaxcut.
C) canbegreaterthanorsmallerthantheeffectofapermanenttaxcut,dependingonhow
thetaxcutaffectsthegovernment.
D) issmallerthantheeffectofapermanenttaxcut.
Answer: D
Diff:2
QuestionStatus: New
58) Accordingtothepermanentincomehypothesis,taxpayersreacttoaone -timetaxrebate

A) byspendingallofthetaxrebate.
B) byspendingmorethantheamountofthetaxrebate.
C) bysavinghalfofthetaxrebateandspendingtherest.
D) bysavingallofthetaxrebate.
Answer: D
Diff:1
QuestionStatus: New
59) TotheextentthattheRicardianequivalencetheoremistrue,whichoftheconditionsbelowwill
hold?
A) Increasesinthegovernmentbudgetdeficitwillnotaffectaggregatedemand.
B) Exportswillnotbeconsideredpartofaggregatedemand.
C) Investmentspendingwillnotbeconsideredpartofaggregatedemand.
D) Thelong-runaggregatesupplycurvewillnotbevertical.
Answer: A
Diff:2
60) Whichofthefollowingbestexplainswhythefederaltaxrebatesin2008and2009hadalmostno
effectsonaggregatedemand?
A) Accordingtothepermanentincomehypothesis,thoseone -timetaxrebatesdidnotaffect
consumptionbecausetheydidnotchangetaxpayerspermanentincome.
B) Accordingtothepermanentincomehypothesis,thoseone -timetaxrebatesdidnotaffect
consumptionbecausetaxpayersdidnotbelievetherebateswouldoccur.
C) AccordingtoRicardianequivalencetheorem,thosetaxrebatesdidnotaffectaggregate
demandbecausetheywereaccompaniedbymoregovernmentspending.
D) AccordingtoRicardianequivalencetheorem,thosetaxrebatesdidnotaffectaggregate
demandbecausetherewerenodirectexpenditureoffsets.
Answer: A
Diff:2
QuestionStatus: New
61) Ifthereisadollar-for-dollardirectexpenditureoffset,then
A) increasesinaggregatedemandwillalsoincreaselong-runaggregatesupply.
B) increasesingovernmentspendingwillnotincreaseaggregatedemand.
C) increasesinaggregatedemandwillincreasethepricelevel,butleaverealoutput
unchanged.
D) increasesinaggregatedemandwillincreaserealoutput,butleavethepricelevel
unchanged.
Answer: B
Diff:3
62) Thetheorythatgovernmentborrowingmayfunctionlikeanincreaseintaxes,thatis,reducing
currentconsumptionandbusinessexpenditures,isknownas
A) themarginalpropensitytoconsume.
B) theRicardianequivalencetheorem.
C) plannedtaxpolicy.
D) CongressionalTaxpolicy.
Answer: B
Diff:2
63) Thetheorythatgovernmentborrowingmayfunctionlikeanincreaseintaxes,thatis,reducing
currentconsumptionandbusinessexpenditures,wasformulatedby
A) JohnMaynardKeynes
B) JeanBaptisteSay.
C) DavidRicardo.
D) AdamSmith.
Answer: C
Diff:1
64) Theideathatataxreductionfundedbygovernmentborrowinghasnoeffectonaggregate
demandisknownas
A) theexpenditure-offsettheorem.
B) theKeynesianCross.
C) thebalancedbudgetmultiplier.
D) theRicardianequivalencetheorem.
Answer: D
Diff:2
65) Supply-sideeconomistsarguethatchangesintaxratescausechangesin
A) thefull-employmentlevelofoutput.
B) laborsupply.
C) saving.
D) alloftheabove.
Answer: D
Diff:2
66) Supply-sidetheoryassertsthathighmarginaltaxrates
A) encourageprivatesaving.
B) encouragebusinessinvestment.
C) discouragegovernmentexpenditures.
D) discourageworkeffort.
Answer: D
Diff:1
67) Supply-sidetheorysuggeststhat
A) aggregatesupplydoesnotdependonlaborproductivity.
B) increasedgovernmentspendingdoesnotincreaseaggregatedemand.
C) lowertaxratesmaynotreduceoveralltaxrevenues.
D) increasedlaborproductivitymaynotincreaserealoutput.
Answer: C
Diff:2
68) Supply-sideeconomistsarguethatdecreasingmarginaltaxrates
A) increasesproductivityandshiftstheAScurvetotheright.
B) increasesproductivityandshiftstheAScurvetotheleft.
C) increasesproductivityandshiftstheADcurvetotheleft.
D) duetotheRicardianequivalence,hasnoimpactontheeconomy.
Answer: A
Diff:2
69) Supply-sideeconomistsarguecutsintaxrates
A) alwaysreducetaxrevenues.
C) alwaysincreasebudgetdeficits.
B) mayincreasetaxrevenues.
D) havenoeffectontaxrevenues.
Answer: B
Diff:1
70) Thenotionthatadeclineintaxratesandotherincentiveswillspurindividualsandfirmsto
increaseproductivityistypicallyreferredtoas
A) demand-sideeconomics.
B) Ricardianequivalence.
C) supply-sideeconomics.
D) Keynesianeconomics.
Answer: C
Diff:1
71) TheLaffercurveshowsthatastaxratesincrease
A) initiallytaxrevenuesincrease,thendecrease.
B) taxrevenuesdecreaseastheincidenceofcheatingontaxreturnsincreases.
C) taxrevenuesincreaseasmoreindividualsandbusinesseshavetopaytaxes.
D) taxrevenuesremainunchanged.
Answer: A
Diff:1
72) AccordingtotheLaffercurve,weknowwithcertaintythatanincreaseinthetaxratewill
A) causetaxrevenuetoincrease.
B) causetaxrevenuetodecrease.
C) havenoeffectontaxrevenue.
D) causetaxrevenuetoincrease,decrease,orremainunchanged.
Answer: D
Diff:2
73) Considertheabovefigure.Thecurveshownissometimesreferredtoas
A) theLaffercurve.
B) theRicardiancurve.
C) theKeynesiancurve.
D) thePhillipscurve.
Answer: A
Diff:2
74) Considertheabovefigure.Thiscurvesuggeststhatasthegovernmentraisesthetaxrate,apoint
willeventuallybereachedatwhichtherevenuesthatarecollectedwill
A) increase.
B) decline.
C) approachinfinity.
D) becomenegative.
Answer: B
Diff:1
75) Refertotheabovefigure.SupposethattheeconomyinitiallyisoperatingalongAD 1 .Ifthe

governmentseekstoclosetherecessionarygapbyraisinggovernmentspendingwithoutany
changeintaxation,whichmovestheaggregatedemandcurvefrom AD1 toAD2 ,thentoAD3 .
Whichofthefollowingscenariosistrue?
A) Interestratesfallandinvestmentrises.
C) Bothinterestratesandinvestmentrise.
B) Bothinterestratesandinvestmentfall.
D) Interestratesriseandinvestmentfalls.
Answer: D
Diff:3
76) Refertotheabovefigure.SupposethattheeconomystartsatAD1 .Ifthegovernmentreduces

taxes,thentheeconomygoestoAD2 ,butthenfallsbacktoAD3 .Thisisanexampleof
A) partialcrowding-outeffect.
B) Ricardianequivalence.
C) laissez-faire.
D) completecrowding-outeffect.
Answer: A
Diff:3
77) Refertotheabovefigure.SupposethattheeconomystartsatAD1 .Ifthegovernmentreduces

taxes,thentheeconomygoestoAD2 ,butthenfallsbacktoAD1 .Thisisanexampleof
A) partialcrowding-outeffect.
B) thefreeriderproblem.
C) laissez-faire.
D) completecrowding-outeffect.
Answer: D
Diff:2
78) Ifthefederalgovernmentborrowsfromtheprivatesectortopayforincreasedbudgetdeficits
andinterestratesincrease,thiswillcause
A) adecreaseinplannedinvestmentandplannedconsumption.
B) anincreaseinplannedinvestmentandplannedconsumption.
C) adecreaseinplannedinvestmentandanincreaseinplannedconsumption.
D) anincreaseinplannedinvestmentandadecreaseinplannedconsumption.
Answer: A
Diff:2
79) Thecrowdingouteffectofexpansionaryfiscalpolicyreferstowhichofthefollowing?
A) areductioninprivatesectorplannedinvestment
B) areductioninthestockofinventories
C) thereductioninthesizeofthebudgetdeficit
D) thereductioninthesizeoftherecessionarygap
Answer: A
Diff:1
80) Whenprivateexpendituresdecreaseasaresultofincreasedgovernmentspending,thisis
knownas
A) thestabilizereffect.
B) thecrowdingouteffect.
C) themultipliereffect.
D) governmentdeficitspending.
Answer: B
Diff:1
81) Thecrowdingouteffectisoftenassociatedwith
A) atemporaryincreaseintaxes.
B) anincreaseintheinterestratecausedbygovernmentborrowing.
C) thereinforcingimpactofstateandlocaltaxchangesonfederaltaxchanges.
D) theimpactofataxrateincreasewhentheaggregatesupplyfunctionishorizontal.
Answer: B
Diff:1
82) Supposepolicymakerspassabudgetthatresultsinareductioningovernmentspendingandno
changeintaxes.Thisreductioningovernmentspendingwilllikely
A) increasegovernmentborrowingandincreaseinterestrates.
B) generateextrataxrevenuestocovertheextraspending.
C) reduceinterestratesandincreaseplannedinvestment.
D) reduceinterestrates,increaseinplannedinvestment,andincreaserealGDP.
Answer: C
Diff:2
83) Anincreaseingovernmentspendingthatisnotfinancedbyanincreaseintaxeswillcause
whichofthefollowing?
A) anincreaseininterestratesandanincreaseinplannedinvestment
B) anincreaseininterestratesandareductioninplannedinvestment
C) areductionininterestratesandanincreaseinplannedinvestment
D) areductionininterestratesandareductioninplannedinvestment
Answer: B
Diff:2
84) Thecrowding-outeffectreferstothetendencyofexpansionaryfiscalpolicyto
A) causedecreasesinplannedinvestmentorplannedconsumption.
B) causehouseholdstosaveless.
C) replacelow-skilledlaborwithhigher-skilledlabor.
D) causefirmstoproducebeyondcapacity.
Answer: A
Diff:1
85) Tocompensateforthepossibilityofindirectcrowdingout,agovernmentengagingin
expansionarypolicyaimedateliminatingarecessionarygapcould
A) increasespendinglessthanthesimplestKeynesianmodelwouldpredict.
B) increasespendingmorethanthesimplestKeynesianmodelwouldpredict.
C) reducetaxesratherthanincreasegovernmentspending.
D) bothreducetaxesandreducespendingtobeabletoachievefullemployment.
Answer: B
Diff:3
86) Ifotherfactorsareheldconstant,whathappenswhenthefederalgovernmentfinancesa
growingbudgetdeficitbyincreasingtheamountitborrowsfromtheprivatesector?
A) Therewillbeanincreaseintheinterestrate.
B) Therewillbeadecreaseintheinterestrate.
C) Thecrowdingouteffectwillbecancelledout.
D) Therewillbeanincreaseinnetexports.
Answer: A
Diff:1
87) AccordingtoDavidRicardo,anincreaseingovernmentspendingwithoutanytaxincreasewill
notincreaseaggregatedemandbecause
A) consumerswillconsumelessandsavemoretoprepareforincreasedtaxesinthefuture.
B) theprivatesectorismorelikelythanthepublicsectortospendanyextraincomeon
nationaldefense.
C) consumerswillincreasetheirconsumptionproportionatelymorethanKeynesian
economistsbelievetheywill.
D) consumerswillsavelessthantheyotherwisewouldhave.
Answer: A
Diff:1
88) TheRicardianequivalencetheoremsuggeststhatanincreaseinthegovernmentbudgetdeficit
createdbyataxcutwill
A) increaserealGrossDomesticProduct(GDP)inboththeshortandlongrun.
B) decreaserealGrossDomesticProduct(GDP)inboththeshortandlongrun.
C) decreaserealGrossDomesticProduct(GDP)intheshortrun,butincreaseitinthelong
run.
D) havenoeffectonaggregatedemand.
Answer: D
Diff:1
89) WhichofthefollowingisabasicassumptionoftheRicardianequivalencetheorem?
A) Consumerspaynoattentiontogovernmentbudgetdeficits.
B) Consumersthinkonlyintermsofthepresent.
C) Ifcurrenttaxcutsresultinbudgetdeficitincreases,aggregatesupplyfalls.
D) Consumersconsiderfuturetaxpaymentswhendecidinghowmuchtospendandsave
today.
Answer: D
Diff:2
90) Thepropositionthatanincreaseinthefederalbudgetdeficitcausedentirelybyacurrenttaxcut
hasnoeffectonaggregatedemandiscalledthe
A) indirecteffect.
B) interestrateeffect.
C) open-economyeffect.
D) Ricardianequivalencetheorem.
Answer: D
Diff:1
91) Whatissupply-sideeconomics?
Answer: Supply-sideeconomicsistheideathatcreatingincentivesforindividualsandfirmsto
increaseproductivitywillcausetheaggregatesupplycurvetoshiftoutward.Itfocuses
onreducingmarginaltaxratestocreateincentivestoincreasedproductivity.
Diff:1
92) Usinggraphs,explainhowindirectcrowdingoutcanoccurwhenthegovernmentincreases
spendinginanattempttostimulatetheeconomy.
Answer:
Seetheabovefigure.TheoriginalequilibriumisE1 ,wherethereisacontractionarygap.
Thegovernmentpursuesexpansionaryfiscalpolicybyincreasingspending.Itsgoalisto
reachE2 .However,theincreasedborrowingcausestheinterestratetoincrease,so
privateinvestmentspendingfalls.Theaggregatedemandcurveshiftsbackto AD3 .
Diff:3
93) Whataredirectexpenditureoffsetsandhowdotheyinfluencetheeffectsoffiscalpolicy?
Answer: Whengovernmentspendingcompeteswiththeprivatesector,directexpenditureoffsets
mayoccur.Ifthegovernmentprovideslunchesforchildreninschool,familiescanreduce
theirexpendituresonfoodtosomeextent.Theimpactsoffiscalpolicyactionsonreal
GDParereduced.Intheextremecase,thegovernmentspendingmultipliermaybezero.
Diff:2
94) Supposethegovernmentpursuesexpansionaryfiscalpolicybyloweringtaxes.Whatarethe
expecteddemand-sideeffects?Whatarethepossibleoffsetstothedemand-sideeffect?How
mightsupply-sideeffectschangetheseresults?
Answer: Aggregatedemandincreasesasconsumptionspendingincreasesaftertheincreasein
disposableincome.CrowdingoutandtheeffectoftheRicardianequivalencetheoremcan
offsetthisifthegovernmentmustborrowmoreandinterestratesincreaseandifpeople
anticipatehigherfuturetaxestheymayincreasesaving.Thesupply-sideeffectmaybeto
generatemoreproductivityaspeoplehaveagreaterincentivetoworkwiththelowertax
rates.Taxrevenuesmaynotdecrease.Ifthegovernmentdoesnothavetoborrowmore,
interestratesdontchange,andthereisnocrowdingout.
Diff:3
95) Explainhowindirectcrowdingoutcanoffsetexpansionaryfiscalpolicy.
Answer: Ifthegovernmentincreasesspending,itmustpayforthemsomeway.Ifitincreases
borrowing,interestratesincrease.Firmswillissuefewerbondsbecauseofthehigher
interestrates,soprivateinvestmentspendingisreduced.Thisreductionininvestment
spendingpartiallyoffsetstheincreasedgovernmentspending.
Diff:2
96) ExplaintheRicardianequivalencetheorem.
Answer: TheRicardianequivalencetheoremisthepropositionthatanincreaseinthegovernment
budgetdeficithasnoeffectonaggregatedemand.Whengovernmentspendingincreases
withouttaxes,peopleexpectfuturetaxestoincreaseandsoincreasetheirsavingtobe
readytopaythehigherfuturetaxes.Thereductioninconsumptionspendingoffsetsthe
highergovernmentspending,sothataggregatedemanddoesnotchange.
Diff:2
97) Explainwhyproponentsofsupply-sideeffectsoftaxratevariationswhoalsobelievethat
tax-ratechangesinfluenceaggregatedemandmightclaimthatcutsinmarginalincometaxrates
canpotentiallypushuprealGrossDomesticProduct(GDP)withoutgeneratinginflation.
Answer: Accordingtosupply-sideeconomics,areductioninmarginalincometaxratescausesthe
aggregatesupplycurvetoshiftrightward.Ifsuchtax-ratereductionsalsocausetotal
plannedexpenditurestoriseandgenerateanequal-sizedrightwardshiftofthe
aggregatedemandcurve,thenequilibriumrealGrossDomesticProduct(GDP)rises,but
theequilibriumpricelevelremainsthesame.
Diff:2
13.3DiscretionaryFiscalPolicyinPractice:CopingwithTimeLags
1) Theperiodbetweentherecognitionofaproblemandtheimplementationofapolicytosolve
theproblemis
A) therecognitionlag.
B) theactiontimelag.
C) theeffecttimelag.
D) thefinetuninglag.
Answer: B
Diff:1
Topic: 13.3DiscretionaryFiscalPolicyinPractice:CopingwithTimeLags
2) Whichofthefollowingarelagsthatfiscalpolicymakersmustcopewith?
A) Recognitiontimelags.
B) Actiontimelags.
C) Effecttimelags.
Answer: D
Diff:1
3) Theeffecttimelagoffiscalpolicyrefersto
A) thetimeneededforCongresstoenactapolicy.
B) thedelayinrecognizinganeconomicproblem.
C) thetimebetweentheonsetofapolicyandwhenthepolicyhasimpactontheeconomy.
D) thedifficultyingettingthePresidentandtheCongresstoagreeonanappropriatepolicy.
Answer: C
Diff:1
4) Thetimerequiredtocollectinformationaboutthecurrentstateoftheeconomyisknownas
A) therecognitiontimelag.
B) theactiontimelag.
D) thefiscallag.
Answer: A
Diff:1
5) Fiscalpolicymayendupbeingdestabilizingtoaneconomybecause
A) thereisneveralongenoughtimelag.
B) theeconomyisalmostalwaysatfullemployment.
C) thePresidentmayhavedifferentgoalsthanCongress.
D) varioustimelagsassociatedwithfiscalpolicycausethepolicychangestotakeeffecttoo
latetosolvetheproblemitwassupposedtosolve.
Answer: D
Diff:2
6) Therecognitiontimelagrecognizesthatittakestime
A) tocollectinformationaboutthestateoftheeconomy.
B) togetpoliticianstoagreeonthebestpolicytoenact.
C) foranychangeinpolicytotakeeffectandforpeopletorecognizethatthepoliciesare
effective.
D) forthepoliticianstoenactthepolicyoncetheneedforchangehasbeenrecognized.
Answer: A
Diff:1
7) Theamountoftimethatittakestoidentifyanationaleconomicproblemis
A) fiscalpolicy.
B) therecognitiontimelag.
D) theactiontimelag.
Answer: B
Diff:1
8) Theamountoftimethatittakesbetweenrecognizinganeconomicproblemandimplementing
policytosolveitis
A) fiscalpolicy.
Answer: D
Diff:1
9) Theamountoftimethatelapsesbetweentheimplementationofapolicyandtheresultsofthat
policyis
A) fiscalpolicy.
Answer: C
Diff:1
10) Onceeitherexpansionaryorcontractionaryfiscalpolicyhasbeenundertaken,
A) aggregatedemandwillrespondquicklyandtheproblemsintheeconomywillbe
corrected.
B) aggregatedemandwillrespondquicklyintheshortrunbuttheeconomywillnotimprove
inthelong-run.
C) atimelagexistsbetweenimplementationandtheresultsofthepolicy.
D) taxeswillneedtobeadjustedbecauseoftherecognitiontimelag.
Answer: C
Diff:1
11) TheamountoftimeittakesCongresstodebatethesizeofataxcutisknownasthe
A) actiontimelag.
B) effecttimelag.
C) recognitiontimelag.
D) Ricardian-equivalencetimelag.
Answer: A
Diff:1
12) Thevarioustimelagsinvolvedwithfiscalpolicyimplythat
A) fiscalpolicyiseffectiveonlyslowly,buttheslownessensuresthatitiseffectiveinthelong
run.
B) fiscalpolicyismosteffectiveasashort-runmeasuretofinetunetheeconomysquarterly
upsanddowns.
C) fiscalpolicymayoftenbedestabilizingiftheeffectsofthepolicykickinaftertheneedis
over.
D) whenfiscalpolicyiscarefullycoordinated,itcanquicklymovetokeeptheeconomyatthe
full-employmentlevelofrealGDP.
Answer: C
Diff:2
13) InJanuary2009,thePresidentsubmittedabilltoCongressthatwasdesignedtostimulatethe
economyandincreaseemployment.ThelegislationwaspassedinMarch2009,andthe
spendingoccurredfromJune2009toSeptember2010.Consequently,
A) theeconomyshouldhavebeenatfullemploymentbyDecember2009.
B) thefullimpactofthebillwouldbefeltbyMarch2009becausepeopleanticipatedthe
effectsoftheincreasedspending.
C) thefullimpactofthebillwouldbefeltbytheendofSeptember2010.
D) thefulleffectofthespendingwouldbefeltsometimeafterSeptember2010becausethe
fullmultipliereffectscouldnotbefeltuntilalltheincreaseinspendingtookplace.
Answer: D
Diff:3
14) InJanuary2009,thePresidentsubmittedabilltoCongressinordertostimulatetheeconomy
andincreaseemployment.ThelegislationwaspassedinMarch2009,andthespendingoccurred
fromJune2009toMarch2011.Asaresult,
A) thefulleffectofthefiscalpolicychangewouldnotbefeltuntilafterMarch2011becauseof
theeffecttimelag.
B) thefulleffectofthefiscalpolicychangewouldnotbefeltuntilafterMarch2011becauseof
therecognitiontimelag.
C) thefulleffectofthefiscalpolicychangewouldbefeltbyMarch2011becausepeople
anticipatedthespendingandchangedtheirbehavioraccordingly.
D) thefulleffectofthefiscalpolicychangewouldbefeltwhenthelastofthefundswere
spentbythegovernment.
Answer: A
Diff:3
15) Discretionaryfiscalpolicy
A) maynothavedesiredeffectsonrealGDPbecauseofthetimelags.
B) maynothavedesiredeffectsonrealGDPbecauseitleadstoincreasesinaggregate
demand.
C) maynothavedesiredeffectsonrealGDPbecauseitleadstodecreasesinaggregate
demand.
D) wouldhavealargereffectonrealGDPifthemultiplierwassmaller.
Answer: A
Diff:1
16) TotheextentthatthepoliticalprocessofmovinglegislationthroughCongressisslow,
A) theeffecttimelagwillbelong.
B) therecognitiontimelagwillbelong.
C) theactiontimelagwillbelong.
D) automaticstabilizerswillnotbeeffective.
Answer: C
Diff:1
17) Thetimerequiredtoacquireinformationaboutthestateoftheeconomyisreferredtoas
A) theactiontimelag.
D) thedatalag.
Answer: B
Diff:1
18) Thetimethatelapsesbetweentheimplementationofapolicyanditsintendedresultisreferred
toas
A) theactiontimelag.
D) thedatalag.
Answer: C
Diff:1
19) Aproblemwithusingfiscalpolicytofine-tunetheeconomyisthat
A) agreeingontheappropriatefiscalpolicyistimeconsuming.
B) fiscalpolicyimpactstheeconomytoofast.
C) fiscalpolicyimpactsonlyurbanareasofthenation.
D) fiscalpolicyimpactsonlythelargeststatesinthenation.
Answer: A
Diff:1
20) Therecognitiontimelagisthetimethatelapsesbetween
A) whenaneconomicproblemmanifestsitselfanditisofficiallyacknowledged.
B) therecognitionofaneconomicproblemandimplementingpoliciestosolveit.
C) implementingpoliciestosolveaneconomicproblemandwhentheresultsofthatpolicy
canbemeasured.
D) thebeginningofthebudgetaryprocessandthefinalbudgetresolution.
Answer: A
Diff:1
21) Theactiontimelagisthetimeperiodthatelapses
A) betweenwhenaneconomicproblemmanifestsitselfanditisofficiallyacknowledged.
B) betweentherecognitionofaneconomicproblemandimplementingpoliciestosolveit.
C) betweenimplementingpoliciestosolveaneconomicproblemandwhentheresultsofthat
policycanbemeasured.
D) betweenthebeginningofthebudgetaryprocessandthefinalbudgetresolution.
Answer: B
Diff:1
22) Theeffecttimelagisthetimeperiodthatelapses
A) betweenwhenaneconomicproblemmanifestsitselfanditisofficiallyacknowledged.
B) betweentherecognitionofaneconomicproblemandimplementingpoliciestosolveit.
C) betweenimplementingpoliciestosolveaneconomicproblemandwhentheresultsofthat
policycanbemeasured.
D) betweenthebeginningofthebudgetaryprocessandthefinalbudgetresolution.
Answer: C
Diff:1
23) Whendataontheeconomyrequiressometimetogatherandinterpret,wehavea(n)
A) aggregatetimelag.
B) actiontimelag.
D) effecttimelag.
Answer: C
Diff:2
24) WhenittakestimeforthepresidentandCongresstochangefiscalpolicytoactoneconomic
data,wehavea(n)
B) actiontimelag.
D) effecttimelag.
Answer: B
Diff:2
25) Whenthereisanintervalbetweenwhenthefiscalpolicychangesandcorrespondingchangesin
aggregatespending,wehavea(n)
B) actiontimelag.
D) effecttimelag.
Answer: D
Diff:2
26) Whenfiscalpolicyisused,timelagsarevariableandlastanywherefrom
A) onetothreeweeks.
B) onetothreemonths.
C) onetothreeyears.
D) onetothreedecades.
Answer: C
Diff:2
27) Fiscalpolicytimelagstendtobe
A) constant,alwaysthirteenmonthslong.
B) variable,betweenoneandthreeyears.
C) variable,betweenoneandthreeweeks.
D) variable,betweenoneandthreemonths.
Answer: B
Diff:2
28) ArecessionbeginsinJulybutgovernmentpolicymakersdonotreachaconsensusthata
recessionhadinfactbegununtilOctober.Thisisanexampleofa(n)
A) recognitiontimelag.
B) actiontimelag.
C) effecttimelag.
D) quicktimelag.
Answer: A
Diff:2
29) Whatarethevarioustimelagsthataffectdiscretionaryfiscalpolicy,andwhataretheireffects?
Answer: Therecognitionlagreferstothetimeittakesbeforeeconomicproblemscanbeidentified;
theactiontimelagisthetimerequiredbetweenrecognizingtheproblemandputting
policyintoeffect;andtheeffecttimelagisthetimethatelapsesbetweentheonsetof
policyandtheresultsofthatpolicy.Theresultisthattheeffectsofachangeinfiscal
policymaytakeholdonlyaftertheproblemnolongerexists,andmayhaveunintended
effects.
Diff:1
13.4AutomaticStabilizers
1) Onecharacteristicofbuilt-inorautomaticstabilizersisthat
A) theyrequirenonewlegislativeactionbyCongresstohaveaneffect.
B) theyautomaticallyproducesurplusesduringrecessionsanddeficitsduringinflation.
C) theyhavenoeffectonthedistributionofincome.
D) theyreducethesizeofthepublicdebtduringtimesofrecession.
Answer: A
Diff:1
Topic: 13.4AutomaticStabilizers
2) Unemploymentcompensationprogramsarecalledautomaticstabilizersbecausepayments
increaseduring
A) expansionaryperiods.
B) recessions.
C) bothrecessionsandexpansions.
D) wartimeonly.
Answer: B
Diff:2
3) AllofthefollowingareautomaticfiscalstabilizersEXCEPT
A) acongressionallymandateddecreaseintaxratestostimulatetheeconomy.
B) adecreaseinunemploymentcompensationpaymentsduringanexpansion.
C) adecreaseinoveralltaxrevenuesduringarecession.
D) anincreaseinunemploymentexpendituresduringarecession.
Answer: A
Diff:1
4) WhenrealGrossDomesticProduct(GDP)falls,whichofthefollowingwillautomaticallyoccur?
A) Adecreaseinalltaxrates
B) Adecreaseinincometaxrevenues
C) Adecreaseinunemploymentcompensationexpenditures
D) Anincreaseinincometaxrevenues
Answer: B
Diff:1
5) Automaticstabilizersare
A) provisionsthatcausechangesingovernmentspendingandtaxeswithoutnewactionby
CongressorthePresident.
B) policiessetbycertaincommitteesinCongress.
C) toolsusedbythePresidentsCouncilofEconomicAdvisers.
D) provisionsthatcausetheaggregatesupplycurvetobeupwardsloping.
Answer: A
Diff:1
6) Anexampleofanautomaticstabilizeris
A) unemploymentcompensation.
B) anewlyenactedsurtaxtoslowdownanoverheatedeconomy.
C) ahorizontalaggregatesupplycurve.
D) achangeinthemarginaltaxrates.
Answer: A
Diff:1
7) Anadvantageofautomaticstabilizersoverdiscretionaryfiscalpolicyisthat
A) automaticstabilizersarenotsubjecttothesametimelagsasdiscretionaryfiscalpolicy.
B) automaticstabilizerscanbeeasilyfine-tunedtomovetheeconomytofullemployment.
C) onlythePresidentisinvolvedinimplementingautomaticstabilizers,insteadofboththe
PresidentandCongress.
D) theRicardianequivalencetheoremappliesmorereadilytoautomaticstabilizersthanto
discretionaryfiscalpolicy.
Answer: A
Diff:2
8) IntheUnitedStateseconomy,theprogressiveincometaxandunemploymentcompensationare
both
A) destabilizers.
B) discretionarypresidentialeffectors.
C) automaticstabilizers.
D) timelagfactors.
Answer: C
Diff:1
9) Refertotheabovefigure.AstherealnationalincomeexpandsfromY 2 toY 3 ,
A) abudgetsurplusoccurs.
B) abudgetdeficitoccurs.
C) taxrevenuesfall.
D) governmenttransfersrise.
Answer: A
Diff:1
10) Refertotheabovefigure.Abudgetdeficitoccurswhenrealnationalincomeis
A) Y1
B) Y2
C) Y3
D) Noneoftheabove:cannotbedeterminedgiventheinformation
Answer: A
Diff:1
11) Provisionsthatcausechangesingovernmentspendingandtaxesthatdonotrequireactionof
thePresidentorCongressarecalled
B) discretionarystabilizers.
C) automaticstabilizers.
D) privatestabilizationeffects.
Answer: C
Diff:1
12) Manygovernmentprograms,suchasunemploymentcompensation,operateonadeficitduring
recessionsandasurplusduringperiodsofeconomicexpansion.Theprogramsarereferredto
as
B) automaticstabilizers.
C) Ricardianequivalence.
D) Recognitiontimelag.
Answer: B
Diff:1
13) Theexistenceofautomaticstabilizerswill
A) reducetherecognitionlagofdiscretionaryfiscalpolicy.
B) eliminaterecessions.
C) reducethesizeofrecessionaryandinflationarygaps.
D) causetheeffectsofshockstoaggregatedemandtohavealargereffectonGDP.
Answer: C
Diff:1
14) Whichofthefollowingisanexampleofanautomaticstabilizer?
A) costoflivingadjustmentstoSocialSecuritypayments
B) unemploymentbenefits
C) atemporarytaxrebate
D) alloftheabove
Answer: B
Diff:1
15) AllofthefollowingareautomaticstabilizersEXCEPT
A) discretionaryincreasesingovernmentspending.
B) incometransferpayments.
C) progressiveincometaxsystem.
D) unemploymentcompensation.
Answer: A
Diff:1
16) Supposetherearetwoeconomiesthatareidenticalineverywaywiththefollowingexception.
EconomyAhasanunemploymentcompensationsystemwhileeconomyBdoesNOThavean
unemploymentcompensationsystem.Nowsupposebotheconomiesexperiencethesamedrop
inplannedinvestment.Whichofthefollowingiscorrect?
A) RealGDPwillfallmoreineconomyAthanineconomyB.
B) RealGDPwillfallmoreineconomyBthanineconomyA.
C) RealGDPwillfallthesameinbotheconomies.
D) TheeffectontherelativesizeofthereductioninrealGDPinthetwoeconomiesis
ambiguous.
Answer: B
Diff:1
17) Whatdoautomaticstabilizersattempttostabilize?
A) long-runaggregatesupply
C) exports
B) aggregatedemand
D) imports
Answer: B
Diff:2
18) Whichofthefollowingmightbeconsideredanautomaticfiscalstabilizer?
A) governmentspendingforthewareffort
B) 401(k)retirementprogram
C) unemploymentcompensation
D) governmentbudgetingforeducation
Answer: C
Diff:2
19) Government-providedunemploymentinsuranceisanexampleof
A) adiscretionaryfiscalstabilizer.
B) anautomaticfiscalstabilizer.
C) amonetarystabilizer.
D) anautomaticmonetarystabilizer.
Answer: B
Diff:1
20) Automaticstabilizershavetheeffectof
A) increasingaggregatedemandduringarecessionarygap.
B) increasingaggregatedemandduringaninflationarygap.
C) increasinglong-runaggregatesupplyduringarecessionarygap.
D) increasinglong-runaggregatesupplyduringaninflationarygap.
Answer: A
Diff:2
21) WhichoneofthefollowingisNOTanautomaticstabilizer?
A) theincometaxsystem
B) thesystemofnationaldefenseprocurement
C) thesystemofwelfarepayments
D) unemploymentcompensationprograms
Answer: B
Diff:1
22) Automaticstabilizersareso-named because

A) theyareautomaticallyundertakenbytheFederalReserveBanktoreducebudgetdeficits.
B) theyoccurautomaticallywhenrealGDPchanges.
C) thepolicysuggestionsoftheCouncilofEconomicAdvisorsareautomaticallyfollowed.
D) thepolicysuggestionsoftheOfficeofManagementandBudgetareautomatically
followed.
Answer: B
Diff:2
23) Anexampleofanautomaticstabilizeris
A) theprogressivetaxsystem.
B) thedecisionofthePresidenttocuttaxesinarecession.
C) theCongressionaldecisiontoincreaseunemploymentbenefitsinarecession.
D) theraisingoftaxesoncigarettestodiscouragesmokingtostabilizehealth -carecosts.
Answer: A
Diff:1
24) Theadvantageofautomaticstabilizersisthatthey
A) helptobalancethebudget.
B) reducethesizeofthenetpublicdebt.
C) reducethefluctuationsinthebusinesscycle.
D) helpreducetheinflationrate.
Answer: C
Diff:1
25) AllofthefollowingareautomaticstabilizersEXCEPT
A) thefederalincometaxsystem.
B) welfarepayments.
C) discretionarytaxcuts.
D) unemploymentcompensation.
Answer: C
Diff:2
26) Automaticstabilizersarefiscalpolicymeasuresthat
A) mustbedeterminedbytheCongressineachbudget.
B) donotrequirenewlegislation.
C) aredeterminedbytheFederalReserveSystem.
D) arepartofdiscretionaryfiscalpolicy.
Answer: B
Diff:1
27) Automaticstabilizers
A) workcounter-cyclicallytomoderatethebusinesscycle.
B) oftenmakeanydownturnintheeconomyworse.
C) mustbedeterminedbytheCongressineachbudget.
D) areneveraltered.
Answer: A
Diff:2
28) Automaticstabilizersaredesignedto
A) promoteglobaltrade.
B) simplifythetaxsystem.
C) moderatechangesindisposableincome.
D) stabilizethebi-partisanbudgetprocess.
Answer: C
Diff:2
29) WhataretheautomaticstabilizerstheUnitedStateshasinplace,andhowdotheyfunction
differentlyfromdiscretionaryfiscalpolicy?
Answer: Automaticstabilizersareprovisionsofthetaxlawthatcausechangesingovernment
spendingortaxeswithouttheactionofCongressorthePresident.Theprogressive
incometaxtakesmoremoneyoutofthehandsofpeopleduringinflationarytimesand
lessduringrecessions.Unemploymentcompensationgivesspendingpowertopeople
evenwhentheyarenotworkingduetoarecession.Thekeydifferenceisthatautomatic
stabilizersworkwithoutthelagsassociatedwithdiscretionaryfiscalpolicy.
Diff:2
13.5WhatDoWeReallyKnowAboutFiscalPolicy?
1) Ifthegovernmentincreasesaggregatedemandwhentheeconomyisatbothshort -runand
long-runequilibrium,thefulllong-runeffectofthisfiscalpolicywillbeto
A) increaserealGrossDomesticProduct(GDP).
B) increasethepricelevel.
C) increaseeithertherealGrossDomesticProduct(GDP)orthepricelevel,dependingonthe
lengthofthetimelag.
D) decreasebothrealGrossDomesticProduct(GDP)andthepricelevel.
Answer: B
Diff:1
Topic: 13.5WhatDoWeReallyKnowAboutFiscalPolicy?
2) Duringnormaltimes,discretionaryfiscalpolicy
A) ismoreeffectiveininfluencingrealGDPthanattimesofarecession.
B) isprobablynotveryeffectiveininfluencingrealGDPduetotimelags.
C) ismoreeffectiveininfluencingrealGDPthanautomaticstabilizers.
D) workswellbecausetherearenolagproblemsininfluencingrealGDP.
Answer: B
Diff:1
3) Discretionaryfiscalpolicy
A) isnotveryeffectiveininfluencingrealGDPduringnormaltimesbecauseoftimelags.
B) canbeveryeffectiveininfluencingrealGDPduringabnormaltimes,suchaswhena
nationisatwar.
C) mayreassureinvestorsandconsumersthatthefederalgovernmentwillbeabletoaverta
majoreconomicdownturn.
D) alloftheabove
Answer: D
Diff:2
4) Duringwhichtimewillfiscalpolicybethemosteffective?
A) Normaltimes
B) Timesofwar
C) Inthemiddleofexpansions
D) Timesofstagflation
Answer: B
Diff:1
5) Duringnormaltimes,
A) fiscalpolicyisveryeffectivebecauseittheeffectsoffiscalpolicywillswampautomatic
stabilizersandtimelagscanbe.
B) fiscalpolicycanimmediatelycorrectproblemsintheeconomy.
C) theRicardianequivalencetheoremmakesfiscalpolicyveryeffective.
D) fiscalpolicyisnoteffectivebecauseoftherecognitiontimelag.
Answer: D
Diff:1
6) Deficitfinancing
A) iswhenthegovernmentadjuststaxestoraisemoneytopayforgovernmentprojects.
B) isthemechanismbehindtheLaffercurve.
C) ishowtheautomaticstabilizerswork.
D) iswhendiscretionaryfiscalpolicyleadstospendingmorethaniscollectedintaxes.
Answer: D
Diff:1
7) ThetraditionalKeynesianapproachtofiscalpolicyassumes
A) thepricelevelisconstant.
B) governmentexpendituresareoftensubstitutesforprivateexpenditures.
C) theRicardianequivalencetheoremiscorrect.
D) thevalidityofsupply-sideeconomics.
Answer: A
Diff:1
8) ThetraditionalKeynesianapproachtofiscalpolicyassumes
A) currenttaxesaretheonlytaxestakenintoaccountbyfirmsandconsumers.
B) thefocusofattentionshouldbethelongrun.
C) pricesareflexiblewhileinterestratesarenot.
D) exchangeratesarefixed.
Answer: A
Diff:1
9) ThetraditionalKeynesianapproachtofiscalpolicyassumesthat
A) theeffectofunemploymentcompensationistodestabilizetheeconomy.
B) anequalincomedistributionensuresastableeconomy.
C) consumersspendmorewhentheirincomesarehigher.
D) cuttingtaxesisamoreeffectivewaytostimulatetheeconomythanisincreasing
governmentspending.
Answer: C
Diff:2
10) Fiscalpolicyduringperiodsofrelativelylowunemploymentandlowinflationhave
A) littleeffectduetotimelagsandthecrowding-outeffect.
B) significanteffectduetothetimelyinterventionofthepresidentandcongress.
C) significanteffectbecausethechangesinfiscalpolicygivesinvestorsconfidenceinthe
economy.
D) littleeffectbecausetheglobalmarketmakesupfiftypercentofaggregatespending.
Answer: A
Diff:2
11) Whataretheeffectsoffiscalpolicyduringnormaltimes?Whataretheeffectsoffiscalpolicy
duringabnormaltimes?
Answer: Duringnormaltimes,discretionaryfiscalpolicymaynothaveitsintendedeffectsand,
therefore,mayactuallycausemoreharmthangood.Thevarioustimelagsandthe
possibleoffsetsmakeitfairlyineffectiveasatool.Duringamajorrecession,fiscalpolicy
ismorelikelytobeeffective,sincetheoffsetsarelesslikely.
Diff:1
13.6AppendixD:ChangesinGovernmentSpending
1) InthetraditionalKeynesianmodel,ifthegovernmentincreasesspending,then
A) realGrossDomesticProduct(GDP)willriseandthepricelevelwillremainconstant.
B) realGrossDomesticProduct(GDP)willincreaseandthepricelevelwillfall.
C) bothrealGrossDomesticProduct(GDP)andthepricelevelwillrise.
D) realGrossDomesticProduct(GDP)willremainconstantandthepricelevelwillrise.
Answer: A
Diff:1
Topic: 13.6AppendixD:ChangesinGovernmentSpending
2) InthetraditionalKeynesianmodel,anincreaseingovernmentspending
A) causestheC+I+G+Xlinetoshiftupwardbythefullamountoftheincreasein
governmentspending.
B) causestheC+I+G+Xlinetoshiftupwardbyanamountlessthantheincreasein
governmentspending.
C) causestheC+I+G+Xlinetoshiftupwardbymorethantheincreaseingovernment
spending.
D) causesnochangeintheC+I+ G+ Xline.
Answer: A
Diff:2
3) InthetraditionalKeynesianmodel,ifthegovernmentincreasesspending,then
A) consumptionwillincrease,andsorealGrossDomesticProduct(GDP)willincreaseby
morethantheincreaseingovernmentspending.
B) consumptionwilldecrease,andsorealGrossDomesticProduct(GDP)willincreasebyless
thantheincreaseingovernmentspending.
C) consumptionwillremainthesame,andsorealGrossDomesticProduct(GDP)will
increasebythesameamountoftheincreaseingovernmentspending.
D) consumptionwillincreaseordecrease,andsorealGrossDomesticProduct(GDP)will
increaseordecreasedependingonthechangeinconsumption.
Answer: A
Diff:2
4) AccordingtothetraditionalKeynesiananalysis,ifthegovernmentincreasesspendingby$10
million,then
A) consumptionwillincrease,andsototalexpenditureswillincreasebymorethan$10
million.
B) consumptionwilldecrease,andsototalexpenditureswillincreasebylessthanthe$10
million.
C) consumptionwillremainthesame,andsototalexpenditureswillincreasebyexactly$10
million.
D) consumptionwillincreaseordecrease,andsototalexpenditureswillincreaseordecrease
dependingonthechangeinconsumption.
Answer: A
Diff:2
5) InthetraditionalKeynesianmodel,ifthegovernmentincreasesgovernmentspending,
A) theC+I+G+Xlinewillshiftdownbuttheaggregatedemandcurvewillnotshift.
B) theC+I+G+Xlinewillshiftdownandtheaggregatedemandcurvewillshifttotheleft.
C) theC+I+G+Xlinewillshiftupandtheaggregatedemandcurvewillshifttotheright.
D) theC+I+G+Xlinewillshiftupbuttheaggregatedemandcurvewillnotshift.
Answer: C
Diff:2
6) InthetraditionalKeynesianmodel,anincreaseingovernmentspendingraisestotalplanned
realexpendituresbymorethantheoriginalincreaseingovernmentspendingbecause
A) consumptionspendingdependsnegativelyonrealGDP.
B) consumptionspendingdependspositivelyonrealGDP.
C) consumptionspendingisnotrelatedtorealGDP.
D) ofthecrowding-outeffectonconsumptionspending.
Answer: B
Diff:2
7) InthetraditionalKeynesianmodel,anincreaseingovernmentspendingleadstoallofthe
followingEXCEPT
A) anincreaseinaggregatedemand.
B) ahigherpricelevel.
C) anincreaseinconsumption.
D) higherrealGDP.
Answer: B
Diff:2
8) ThetraditionalKeynesianapproachconcludesthatanincreaseingovernmentspending
A) generatesagreaterincreaseininvestmentspending.
B) generatesanequalincreaseintotalspendingbecausegovernmentspendingmakesuppart
oftotalspending.
C) generatesagreaterincreaseintotalspendingbecauseconsumptionspendingincreasesas
incomesincrease.
D) hasnoeffectontotalspendingbecauseconsumersincreasesavingbyanequalamount.
Answer: C
Diff:2
13.7AppendixD:ChangesinTaxes
1) AccordingtothetraditionalKeynesianapproach,ifthegovernmentincreasestaxes,then
A) realGrossDomesticProduct(GDP)willfallandthepricelevelwillremainconstant.
B) realGrossDomesticProduct(GDP)willfallbutthepricelevelwillrise.
C) bothrealGrossDomesticProduct(GDP)andthepricelevelwillfall.
D) realGrossDomesticProduct(GDP)willremainconstantbutthepricelevelwillrise.
Answer: A
Diff:1
Topic: 13.7AppendixD:ChangesinTaxes
2) InthetraditionalKeynesianmodel,ataxcut
A) causestheC+I+G+ Xlinetoshiftupward.
B) causestheC+I+G+ Xlinetoshiftdownward.
C) causesamovementalongtheC+ I+ G+ Xline.
D) doesnotaffecttheC+ I+ G+ Xline.
Answer: A
Diff:2
3) InthetraditionalKeynesianmodel,anincreaseincurrenttaxes
A) increasesdisposableincomebutdoesnotaffectconsumption.
B) decreasesbothdisposableincomeandconsumption.
C) decreasesdisposableincomebutincreasesconsumption.
D) hasnoeffectoneitherdisposableincomeorconsumption.
Answer: B
Diff:2
4) AccordingtothetraditionalKeynesianapproach,ataxcutraisesaggregatedemandbecause
A) taxesarepartoftheC+ I+ G+ Xline.
B) disposableincomeavailabletoconsumersincreases.
C) taxpayersanticipateataxincreaseinthefuture.
D) ataxcutalwaysresultsinabalancedbudget.
Answer: B
Diff:2
5) InthetraditionalKeynesianmodel,ifthegovernmentcutstaxes,then
A) bothconsumptionandrealGrossDomesticProduct(GDP)willincrease.
B) bothconsumptionandrealGrossDomesticProduct(GDP)willdecrease.
C) consumptionwillincreasebutGrossDomesticProduct(GDP)willdecrease.
D) consumptionwilldecreasebutGrossDomesticProduct(GDP)willincrease.
Answer: A
Diff:2
6) InthetraditionalKeynesianmodel,ifthegovernmentcutscurrenttaxes,
A) theC+I+G+Xlinewillshiftdownbuttheaggregatedemandcurvewillnotshift.
B) theC+I+G+Xlinewillshiftdownandtheaggregatedemandcurvewillshifttotheleft.
C) theC+I+G+Xlinewillshiftupandtheaggregatedemandcurvewillshifttotheright.
D) theC+I+G+Xlinewillshiftupbuttheaggregatedemandcurvewillnotshift.
Answer: C
Diff:2
7) InthetraditionalKeynesianmodel,anincometaxcutraisesrealGDPbecause
A) consumptionspendingdependsnegativelyonafter-taxincome.
B) consumptionspendingdependspositivelyonafter-taxincome.
C) consumptionspendingisnotrelatedtoafter-taxincome.
D) ofthecrowding-outeffectsoftaxes.
Answer: B
Diff:2
8) InthetraditionalKeynesianmodel,anincreaseintaxesleadstoallofthefollowingEXCEPT
A) adecreaseinaggregatedemand.
B) alowerpricelevel.
C) adecreaseinconsumption.
D) lowerrealGDP.
Answer: B
Diff:2
9) AccordingtotheKeynesianapproach,anincreaseintaxes
A) willreduceconsumptionexactlybytheamountofthetaxes.
B) willreduceconsumptionbyanamountlessthanthechangeintaxes.
C) willnotimpactconsumption,asmostconsumptionisautonomous.
D) willincreaseconsumption,asthegovernmentwillspendtheextrataxrevenueandthat
increasesconsumption.
Answer: B
Diff:1
10) AccordingtotheKeynesianapproach,adecreaseintaxes
A) willincreaseconsumptionexactlybytheamountofthetaxes.
B) willincreaseconsumptionbyanamountoflessthanthechangeintaxes.
C) willnotimpactconsumption,asmostconsumptionisautonomous.
D) willdecreaseconsumption,asthegovernmentwillhavetospendless.
Answer: B
Diff:1
11) TheKeynesianperspectiveontheeffectofanincreaseintaxesisthatthispolicyaction
A) generatesreductionsinconsumptionandinsaving.
B) generatesreductionsinconsumptionandanincreaseinsavingtopayforthenewtaxes.
C) hasnoimpactonconsumption.
D) increasescurrentconsumptionandreducesfutureconsumption.
Answer: A
Diff:2
12) SupposetherearetwopolicyoptionsfacingavoteintheSenate.Inthefirst,government
spendingwillincrease$50billion,whilethesecondoptionistocuttaxesby$50billion.A
Keynesianeconomistwouldarguefor
A) thetaxoptionbecauseitalsoaffectstheincentivesworkersface.Long-runaggregate
supplywillincreasewiththetaxcut,butnotwiththespendingincrease.
B) thetaxoptionbecauseitiseasiertopass.Theeffectsontotalspendingwouldbeidentical.
C) thespendingoptionbecauseitwontaffectthedeficitthewaythetaxcutwould.
D) thespendingoptionbecauseithasabiggerimpactontotalspending.Thespending
directlyraisestotalspendingplusitworksthroughthemultiplier,whilethetaxcutonly
worksthroughthemultiplier.
Answer: D
Diff:3
13.8AppendixD:TheBalanced-BudgetMultiplier
1) InCountryZ,thegovernmentsimultaneouslyincreasesitsexpendituresby$25billionand
increasestaxesby$25billion.IftheMPSisequalto0.2,thegovernmentsaction________real
GDPby________.
A) increases;$125billion
B) increases;$25billion
C) increases;$100billion
D) hasnoeffecton;$0
Answer: B
Diff:2
Topic: 13.8AppendixD:TheBalanced-BudgetMultiplier
2) InCountryZ,thegovernmentsimultaneouslydecreasesitsexpendituresby$20billionand
decreasestaxesby$20billion.IftheMPSisequalto0.2,thegovernmentsaction________real
GDPby________.
A) decreases;$100billion
B) decreases;$20billion
C) decreases;$80billion
D) hasnoeffecton;$0
Answer: B
Diff:2
3) Thebalanced-budgetmultiplierisequalto
A) thepercentageincreaseingovernmentexpenditures.
B) thereciprocaloftheincreaseingovernmentexpenditures.
C) thepercentageincreaseintaxes.
D) 1.
Answer: D
Diff:1
4) AccordingtothetraditionalKeynesiananalysis,ifthegovernmentincreasesspendingandpays
forallofitbyraisingcurrenttaxes,then
A) aggregatedemandwilldecrease.
B) abudgetdeficitwilloccur.
C) abudgetsurpluswilloccur.
D) aggregatedemandwillincrease.
Answer: D
Diff:1
5) AccordingtothetraditionalKeynesianapproach,ifthegovernmentincreasesspendingby$5
millionandraisescurrenttaxesby$5millionatthesametime,then
A) realGDPwillincreaseby$5million.
B) realGDPwilldecreaseby$5million.
C) realGDPwilldecreasebymorethan$5million.
D) realGDPwillremainthesame.
Answer: A
Diff:1
13.9AppendixD:TheFixedPriceLevelAssumption
1) TheKeynesianapproachassumesthat
A) thereisnounemploymentintheeconomy.
B) theeconomyisself-regulating.
C) thegovernmentbudgetisalwaysindeficit.
D) thepricelevelisfixed.
Answer: D
Diff:2
Topic: 13.9AppendixD:TheFixedPriceLevelAssumption
2) Ifthepricelevelisfixed,thenanincreaseingovernmentspendingwillleadto
A) alargerincreaseinnominalGDPthaninrealGDP.
B) asmallerincreaseinnominalGDPthaninrealGDP.
C) noincreaseineithernominalGDPorrealGDP.
D) anincreaseinnominalGDPbythesameamountasanincreaseinrealGDP.
Answer: D
Diff:2
3) AccordingthetraditionalKeynesianapproach,anincreaseingovernmentspendingiseffective
inloweringunemploymentif
A) thepricelevelisfixed.
B) thepricelevelisflexible.
C) thepriceleveldoesnotexist.
D) Ricardianequivalenceoccurs,regardlessofthepricelevel.
Answer: A
Diff:2
Chapter14
DeficitSpendingandthePublicDebt
14.1PublicDeficitsandDebts:FlowsversusStocks
1) Inthecurrentyear,anationsgovernmentspendingequals$1.5trillionanditsrevenuesare$1.9
trillion.Whichofthefollowingistrue?
A) Thenationsnationaldebtequals$0.4trillion.
B) Thisnationhasacurrentyearbudgetsurplusof$0.4trillion.
C) Thisnationiscurrentlyrunningabudgetdeficitof$0.4trillion.
D) Thenationhasacurrentyeartradesurplusof$0.4trillion.
Answer: B
Diff:2
Topic: 14.1PublicDeficitsandDebts:FlowsversusStocks
2) Whengovernmentrevenuesexceedgovernmentoutlaysinaparticularyear,thisiscalled
A) abudgetsurplus.
B) abudgetdeficit.
C) thenationaldebt.
D) fiscalpolicy.
Answer: A
Diff:2
3) SupposethatthegovernmentofSummerfieldspends$2trillionin2013andreceivestax
revenuesof$1.5trillion.Whichofthefollowingistrue?
A) Summerfieldhasabudgetsurplusof$0.5trillion.
B) Summerfieldhasabudgetdeficitof$0.5trillion.
C) Summerfieldhasatradedeficitof$0.5trillion.
D) Summerfieldhasatradesurplusof$0.5trillion.
Answer: B
Diff:2
4) Whengovernmentspendingexceedsgovernmentrevenuesduringagivenperiodoftime,
A) abudgetdeficitexists.
B) abudgetsurplusexists.
C) thenationaldebtmustbedecreasing.
D) Congressisobligedtoraisetaxes.
Answer: A
Diff:1
Chapter14DeficitSpendingandthePublicDebt 621
5) Howdoesagovernmentbudgetdeficitoccur?
A) Agovernmentstaxrevenuesexceeditsspending.
B) Agovernmentsspendingexceedsitstaxrevenues.
C) Ifanationcarriesapublicdebt,itmustberunningadeficiteveryyear.
D) Anationearnsmoreonexportsthanitspendsonimports.
Answer: B
Diff:1
6) Stockschange________whereasflowsrelateto________.
A) withinagivenperiodoftime;changesbetweenpointsintime
B) onlyattheendofeachyear;amountsatagivenpointintime
C) betweenpointsintime;changeswithinagiventimeperiod
D) andthatcausesflowstochange;changesthathavenoimpactonstocks
Answer: C
Diff:2
7) WhichofthefollowingisNOTanexampleofaflowvariable?
A) plannedinvestment
B) capitalstock
C) Thefederaldeficit
D) inventoryinvestment
Answer: B
Diff:2
8) Ifthegovernmentsspendingexactlyequalsitsrevenuesduringabudgetyear,thatgovernment
is
A) runningabudgetdeficit.
B) experiencingabudgetsurplus.
C) balancingitsbudget.
D) payingoffitspublicdebt.
Answer: C
Diff:1
9) Whichofthefollowingisastockvariable?
A) publicdebt
C) moneysupply
Answer: D
Diff:2
B) wealth
D) alloftheabove
10) Howdoesthefederalgovernmentfinanceabudgetdeficit?
A) ItredeemsitsIOUs.
B) ItpurchasesU.S.Treasurybonds.
C) Itcutsspendingonentitlementprograms.
D) ItborrowsfundsbysellingTreasurybonds.
Answer: D
Diff:1
11) Otherthingsbeingequal,duringaperiodwhenthefederalgovernmentissuesmoreTreasury
securitiestoborrowfunds,
A) theflowofgovernmentexpendituresduringthatperiodmustexceedtheflowoftax
revenues.
B) theflowofgovernmentexpendituresduringthatperiodmustexceedthestockoftax
collections.
C) thestockofgovernmentdeficitspendingduringthatperiodmustexceedtheflowoftax
revenues.
D) thestockofgovernmentdeficitspendingduringthatperiodmustexceedthestockoftax
collections.
Answer: A
Diff:2
12) Ifthepublicdebtincreasedbythesameamounteachyearduringthepastthreeyears,then
A) theU.S.governmentmusthaveoperatedwiththesamebudgetsurplusesduringthepast
threeyears.
B) theU.S.governmentmusthaveexperiencedbudgetsurplusesthatincreasedbythesame
amounteachofthepastthreeyears.
C) theU.S.Treasurymusthaveissuedsecuritiestofundaflowofgovernmentspendingthat
exceededaflowoftaxrevenuesbythesameamountduringeachofthepastthreeyears.
D) duringeachofthepastthreeyears,theU.S.Treasurymusthaveboughtbackthesame
amountofsecuritiesthathadpreviouslybeenissuedtocoverdeficitsexperiencedmore
thanthreeyearsago.
Answer: C
Diff:2
13) Thetotalvalueofalloutstandingfederalgovernmentsecuritiesis
A) aflowvariable.
B) thebudgetdeficit.
C) totalpersonalwealth.
D) noneoftheabove.
Answer: D
Diff:1
14) Agovernmentbudgetdeficitis
A) anexcessofgovernmentspendingovergovernmentrevenuesduringagiventimeperiod.
B) asituationinwhichthegovernmentsspendingisexactlyequaltothetotaltaxesandother
revenuesitcollectsduringagiventimeperiod.
C) thetotalvalueofalloutstandingfederalgovernmentsecurities.
D) allfederalgovernmentdebtirrespectiveofwhoownsit.
Answer: A
Diff:1
15) Ifthegovernmentspendsmorethanitreceivesintaxesduringagiveninterval,thentheresult
is
A) abalancedbudget.
B) thegrosspublicdebt.
C) thenetpublicdebt.
D) agovernmentbudgetdeficit.
Answer: D
Diff:1
16) Whichofthefollowingstatementsaboutthebudgetdeficitistrue?
A) Itisastockvariable.
B) Itisaflowvariable.
C) Itisequaltothepublicdebt.
D) Noneoftheabove.
Answer: B
Diff:1
17) Afederaldeficitof$300billionmeansthat
A) thegovernmenthasatotaldebtof$300billion.
B) governmentspendingis$300billionayear.
C) thegovernmentisspending$300billionayearmorethanitiscollectingintaxes.
D) thegovernmentplansoncollecting$300billionintaxesthisyear.
Answer: C
Diff:2
18) Agovernmentbalancedbudgetis
Answer: B
Diff:1
19) Ifthegovernmentspendsexactlywhatitreceivesintaxesduringagiveninterval,thenthe
resultis
A) abalancedbudget.
B) thegrosspublicdebt.
C) thenetpublicdebt.
D) agovernmentbudgetdeficit.
Answer: A
Diff:1
20) Ifthegovernmentspendslessthanwhatitreceivesintaxesduringagiveninterval,thenthe
resultis
A) abalancedbudget.
B) anentitlement.
C) unrealizedpublicdebt.
D) agovernmentbudgetsurplus.
Answer: D
Diff:1
21) Agovernmentbudgetsurplusis
A) asituationinwhichthesupplyofgoodsintheeconomyisgreaterthanthedemandfor
goods.
B) asituationinwhichtheamountspentbythegovernmentisgreaterthantheamount
collectedintaxes.
C) thepublicdebt.
D) anexcessofrevenuesovergovernmentspending.
Answer: D
Diff:1
22) Thepublicdebtis
Answer: C
Diff:1
23) Whichofthefollowingstatementsaboutthepublicdebtistrue?
A) Itisastockvariable.
B) Itisequaltothebudgetdeficit.
C) Itdecreaseswhenthegovernmentrunsabudgetdeficit..
D) Alloftheabove.
Answer: A
Diff:1
24) Thepublicdebtcanbethoughtofas
A) thetotalamountconsumersoweontheircreditcards.
B) thetotalamountintaxesconsumerspaytothegovernment.
C) accumulatedbudgetdeficitsandsurpluses.
D) thetotalamountthegovernmentspendsforgoodsandservices.
Answer: C
Diff:1
25) Whichofthefollowingstatementsistrueaboutthedifferencebetweenthepublicdebtandthe
governmentbudgetdeficit?
A) Thepublicdebtalwaysincreaseswhilethegovernmentbudgetdeficitmayincreaseor
decrease.
B) Thepublicdebtforthisyearwillincreaseordecreasedependinguponwhetherthereisa
governmentbudgetdeficitoragovernmentbudgetsurplus.
C) Thepublicdebtisaflowmeasureandthegovernmentbudgetdeficitisnotaflow
measure.
D) Thereisnorelationshipbetweenthepublicdebtandthegovernmentbudgetdeficitsince
oneisastockmeasureandtheotherisaflowmeasure.
Answer: B
Diff:2
26) WhichofthefollowingwillNOTcausethepublicdebttochange?
A) Collectionbythegovernmentof$200billionmoreintaxesthanitspends
B) Governmentbudgetdeficit
C) Governmentbudgetsurplus
D) Balancedbudget
Answer: D
Diff:1
27) Publicdebtisheldas
A) corporatebondsandcommonstocksofthelargestcompanies.
B) FederalReserveNotes.
C) U.S.Notes.
D) TreasuryBills,TreasuryNotes,TreasuryBonds,andU.S.SavingsBonds.
Answer: D
Diff:2
28) Whichofthefollowingistruewhenabudgetdeficitexists?
A) Governmentexpendituresexceedtaxrevenues.
B) Taxrevenuesexceedgovernmentexpenditures.
C) Atradesurplusexists.
D) Dissavingexists.
Answer: A
Diff:1
29) Agovernmentbudgetdeficitoccursduringabudgetyearwhen
A) taxrevenues>governmentspending.
B) taxrevenues=governmentspending.
C) taxrevenues<governmentspending.
D) taxrevenues+governmentspending= personalconsumption.
Answer: C
Diff:1
30) Agovernmentbudgetsurplusoccursduringabudgetyearwhen
A) taxrevenues>governmentspending.
B) taxrevenues=governmentspending.
C) taxrevenues<governmentspending.
D) taxrevenues+governmentspending= personalincome.
Answer: A
Diff:1
31) Ifthegovernmenthasaspendingflowthatexceedstherevenuesitcollects,thegovernmentwill
runa________thatyear.
A) debt
B) deficit
C) debtandadeficit
D) surplus
Answer: B
Diff:2
32) Whilethebudgetdeficitrepresentsa________,thepublicdebtrepresentsa________.
A) flow;flow
B) flow;stock
C) stock;stock
D) stock;flow
Answer: B
Diff:2
33) Whengovernmentspendingexceedstaxrevenuesduringaspecifictimeperiod,thisisknown
asa
A) governmentbudgetdeficit.
B) governmentbudgetsurplus.
C) balancedbudget.
D) publicdebt.
Answer: A
Diff:1
34) Whengovernmentspendingislessthanthetaxrevenuesduringaspecifictimeperiod,thisis
knownasa
C) balancedbudget.
D) publicdebt.
Answer: B
Diff:1
35) Whengovernmentspendingisequaltothetaxrevenuesduringaspecifictimeperiod,thisis
knownasa
C) balancedbudget.
D) publicdebt.
Answer: C
Diff:1
36) Whengovernmentexpendituresaregreaterthantaxrevenues
A) therewillbebudgetdeficit.
B) therewillbebudgetsurplus.
C) automaticstabilizersdonotkickin.
D) thepublicdebtwillbereduced.
Answer: A
Diff:1
37) Supposethatthefederalgovernmenthadabudgetdeficitof$80billioninyear1and$90billion
inyear2,butthatitexperiencesbudgetsurplusesof$40billioninyear3and$20billioninyear
4.Alsoassumethatthegovernmentusesanybudgetsurplusestopaydownthepublicdebt.At
theendofthesefouryears,theFederalgovernmentspublicdebtwouldhave
A) decreasedby$110billion.
B) increasedby$230billion.
C) increasedby$110billion.
D) decreasedby$57.5billion.
Answer: C
Diff:2
38) Supposethatthefederalgovernmenthadabudgetdeficitof$80billioninyear1and$10billion
inyear2,butithadbudgetsurplusesof$140billioninyear3and$20billioninyear4.Also
assumethatthegovernmentusesanybudgetsurplusestopaydownthepublicdebt.Attheend
ofthesefouryears,theFederalgovernmentspublicdebtwouldhave
A) decreasedby$70billion.
B) increasedby$250billion.
C) increasedby$70billion.
D) decreasedby$62.5billion.
Answer: A
Diff:2
39) Ifthegovernmenthasnodebtinitially,butthenhasannualrevenuesof$10 billionperyearfor

4yearsandannualexpendituresof$10.5billionperyearfor4years,thenthegovernmenthas
A) abudgetsurplusof$0.5billionperyearandadebtof$2billionattheendofthe4years.
B) abudgetdeficitof$0.5billionperyearandabudgetsurplusof$2billionattheendofthe
4years.
C) abudgetdeficitof$0.5billionperyearandadebtof$2billionattheendofthe4years.
D) abudgetsurplusof$0.5billionperyearandasurplusof$2billionattheendofthe4
years.
Answer: C
Diff:2
40) Explainthedifferencesbetweenthepublicdebtandthegovernmentbudgetdeficit.
Answer: Thepublicdebtisastockmeasuredatapointintime,whilethegovernmentbudget
deficitisaflowmeasure.Thepublicdebtchangesasaresultofgovernmentbudget
deficitsorsurpluses.Thepublicdebtisthetotalvalueofalloutstandingfederal
governmentsecurities.
Diff:2
14.2GovernmentFinance:SpendingMoreThanTaxCollections
1) Since2001,theU.S.governmentbudgetdeficit
A) hasbeenapproximatelyequalto10%ofU.S.GDP.
B) asapercentageofU.S.GDPhasincreasedsteadilyeachyear.
C) asapercentageofU.S.GDPhasdecreasedsteadilyeachyear.
D) noneoftheabove.
Answer: D
Diff:1
Topic: 14.2GovernmentFinance:SpendingMoreThanTaxCollections
2) WhenwasthelastyeartheUnitedStateshadabudgetsurplus?
A) 2009
B) 1984
C) 1993
Answer: D
Diff:1
D) 2001
3) Since1940,theU.S.governmenthasexperienced
A) aboutthesamenumberofyearswithbudgetdeficitsaswithbudgetsurpluses.
B) twiceasmanyannualbudgetsurplusesasannualbudgetdeficits.
C) onlyoneyearwithabudgetsurplus.
D) manymorebudgetdeficitsthanbudgetsurpluses.
Answer: D
Diff:1
4) ExpressingtheU.S.federalbudgetdeficitasapercentageofGrossDomesticProduct(GDP)
A) resultsininflation-adjustedrevenueandexpenditurenumbers.
B) helpsusunderstandthesizeofthedeficitrelativetothesizeoftheeconomy.
C) wasusefulthroughthe1980s,butisnolongerhelpfulbecauseboththedeficitandreal
GrossDomesticProduct(GDP)havegrownsolarge.
D) isonlyusefulifthebudgetdeficitisrisingatanannualrateofmorethan4percent.
Answer: B
Diff:2
5) Whatistrueaboutgovernmentbudgetdeficitsandsurplusessince1940?
A) Balancedbudgetshavebeenmorecommonthangovernmentbudgetdeficitsor
governmentbudgetsurpluses.
B) Therehavebeenmoregovernmentbudgetsurplusesthangovernmentbudgetdeficits.
C) Therehavebeenmoregovernmentbudgetdeficitsthangovernmentbudgetsurpluses.
D) Thenumberofgovernmentbudgetdeficitsisaboutthesameasthenumberof
governmentbudgetsurpluses.
Answer: C
Diff:1
6) Betweentheyears1998and2001,theU.S.governmentexperienced
A) budgetsurpluses.
B) balancedbudgets.
C) budgetdeficits.
D) contractionarybudgetcycles.
Answer: A
Diff:2
7) AllofthefollowingarepossibleexplanationsfortheincreaseinU.S.governmentbudgetdeficits
asapercentageofGDPsincetheearly2001EXCEPT
A) increasesintaxrevenues.
B) increasesinpaymentsforentitlements.
C) increasesingovernmentspending.
D) decreasesintaxrates.
Answer: A
Diff:2
14.3EvaluatingtheRisingPublicDebt
1) Thedifferencebetweennetpublicdebtandgrosspublicdebtis
A) allgovernmentinteragencyborrowing.
B) theinterestpaidannuallyonthepublicdebt.
C) theamountowedtoindividualsandfirmsoutsidetheUnitedStates.
D) thecurrentyearsbudgetdeficitfromtheamountofpublicdebtatthestartoftheyear.
Answer: A
Diff:2
Topic: 14.3EvaluatingtheRisingPublicDebt
2) Thetotalvalueofalloutstandingfederalgovernmentsecuritiesiscalled
A) thebudgetdeficit.
B) thepublicdebt.
C) thetradedeficit.
D) crowdingout.
Answer: B
Diff:2
3) Accordingtothetext,approximatelywhatpercentageofU.S.netpublicdebtisheldbyforeign
residents?
A) 20%
B) 50%
C) 800%
D) 90%
Answer: B
Diff:2
4) Accordingtothetext,thenetpublicdebttoGrossDomesticProduct(GDP)ratioiscurrently
about
A) 10%.
B) 25%.
C) 60%.
D) 120%.
Answer: C
Diff:2
5) Netpublicdebtisthe
A) differencebetweentaxrevenuesandgovernmentexpenditureseachyear.
B) sumofaccumulatedgovernmentdeficitsandsurplusesheldbyindividualsand
businessesandforeigninstitutions.
C) sumofaccumulatedgovernmentdeficitsandsurplusesheldbyU.S.governmentagencies.
D) sumofaccumulatedgovernmentdeficitsandsurplusesheldbylargemoneycenterbanks.
Answer: B
Diff:1
6) TheamountoffundstheSocialSecuritysystemhasloanedthefederalgovernmentis
A) includedinthenetpublicdebt.
B) addedtothegrosspublicdebttocalculatethenetpublicdebt.
C) notincludedinthegrosspublicdebt.
D) excludedfromthenetpublicdebt.
Answer: D
Diff:2
7) Sincethelate1980s,theshareofthenetpublicdebtowedtoforeigninterestshas
A) remainedconstant.
B) decreased.
C) increased.
D) goneupandthendown,finallysettlingataround10percent.
Answer: C
Diff:1
8) Ifthegovernmentborrowstopurchasegoodsandservices,todaysconsumptionofgovernment
goodsandserviceswillbepaidforby
A) todaystaxpayers.
B) governmentemployees.
C) futuretaxpayers.
D) todaystaxpayersandtomorrowstaxpayersinevenshares.
Answer: C
Diff:1
9) Otherthingsbeingequal,whatistheeffectofdeficitspendingoncreditmarkets?
A) Boththedemandforcreditandthesupplyofcreditwillincrease.
B) Boththedemandforcreditandthesupplyofcreditwilldecrease.
C) Thedemandforcreditincreaseswhilethesupplyofcreditremainsconstant.
D) Thesupplyofcreditwillincreasewhilethedemandforcreditremainsthesame.
Answer: C
Diff:1
10) Otherthingsbeingequal,whatistheeffectofdeficitspendingoninterestrates?
A) Interestratesdecline.
B) Interestratesrise.
C) Interestratesholdconstantbecausethedemandforcreditdecreases.
D) ThereisnoimpactunlesstheFederalReservedecidestoalterthemoneysupply.
Answer: B
Diff:1
11) Ceterisparibus,deficitspendingresultsinhigherinterestrates,whichcan
A) accelerategrowthininvestmentspending.
B) ultimatelyhaveapositiveimpactonproductivitygainsandsocietysstandardofliving.
C) increasethewealthoffuturegenerations.
D) crowdoutprivateinvestment.
Answer: D
Diff:2
12) Grosspublicdebtis
C) thetotalvalueofbudgetdeficitsplusbudgetsurplusesoverthepastfiveyears.
Answer: D
Diff:1
13) Thedifferencebetweenthegrosspublicdebtandthenetpublicdebtis
A) thesumofallpreviouslyaccumulatedgovernmentbudgetdeficitsandsurpluses.
B) thesumofallpreviouslyissuedU.S.governmentsecuritiesthathavebeenpurchasedby
foreignresidents.
C) allprivate-sectorborrowingfromprivatesources.
D) allgovernmentinteragencyborrowing.
Answer: D
Diff:1
14) Netpublicdebtis
A) allfederalpublicdebtirrespectiveofwhoownsit.
B) grosspublicdebtminusallgovernmentinteragencyborrowing.
C) allpublicdebtminusallmoneyowedonthefederalincometax.
D) allpublicdebtplusallgovernmentinteragencyborrowing.
Answer: B
Diff:1
15) IfnoforeignresidentsownedanyoftheU.S.publicdebt,thenitwouldbetruethat
A) therewouldbenodistributionalconsequencesassociateswithhepublicdebt.
B) U.S.residentswouldessentiallyowethepublicdebttothemselves.
C) therewouldbenointerestpaymentsonthepublicdebt.
D) thepublicdebtwouldnaturallydisappearovertime.
Answer: B
Diff:1
16) Grosspublicdebtminusallgovernmentinteragencyborrowingis
B) netpublicdebt.
C) U.S.Treasurybonds.
D) anentitlement.
Answer: B
Diff:1
17) WhentheSocialSecurityAdministrationholdsU.S.TreasuryBonds
A) interagencyborrowinghasoccurredandthegovernmentowesitself.
B) thereisabalancedbudget.
C) anentitlementhasoccurred.
D) thegrosspublicdebthasincreased.
Answer: A
Diff:1
18) Thedifferencebetweenthegrosspublicdebtandthenetpublicdebtisthatthe
A) grosspublicdebtincludesentitlementswhilethenetpublicdebtdoesnot.
B) grosspublicdebtisbasedonbudgetdeficitwhilethenetpublicdebtisnotbasedon
budgetdeficits.
C) grosspublicdebtincludesgovernmentinteragencyborrowingwhilethenetpublicdebt
doesnot.
D) thegrosspublicdebtisexpressedasapercentageofGDPwhilethenetpublicdebtisnot.
Answer: C
Diff:2
19) Whichofthefollowingisthebeststatementabouthowtheamountofthenetpublicdebtthata
typicalindividualowestotheholdersofthedebthasvariedintherecentpast?
A) Theamounthasnotvariedmuchovertime.
B) Theamounthasvariedalotovertime.
C) Theamounthassteadilyincreasedovertime.
D) Theamounthassteadilydecreasedovertime.
Answer: A
Diff:1
20) Someeconomistsbelievethatfinancingdeficitspendingbyincreasingtaxeswillleadtoalower
levelofnationalconsumptionandahigherlevelofnationalsavingsthandeficitspending.The
reasonis
A) peoplebelievethattheycanconsumethegovernmentprovidedgoodsandhavefuture
generationspaythebill.
B) thatpeopledonotrealizethattaxeshaveincreasedalso.
C) peoplewillforgoprivateconsumptionnowassocietysubstitutesgovernmentgoodsfor
privategoods.
D) theinterestrateonthedebtwillincrease.
Answer: C
Diff:2
21) Assumetheeconomyisclosedandthatitisoperatingatfullemployment.Whichstatementis
truewhenthesizeofthebudgetdeficitdecreases?
A) Theinterestratewilldecrease,leadingtoanincreaseininvestmentandcapitalformation.
B) Demandandsupplyofcreditwillincrease.
C) Areductioninthegrowthofproductivity,andareductioninsocietysstandardofliving
willoccur.
D) Theincreasedamountofpublicgoodswillcrowdoutprivatelyproducedgoods.
Answer: A
Diff:2
22) Someeconomistsbelievethatdeficitspendingcanimposeaburdenonfuturegenerations.
WhichofthefollowingdoesNOTexplaintheburden?
A) Investmentwillbecrowdedoutbyanincreaseincurrentconsumption.
B) Deficitspendingthatisallocatedtopurchasesleadstolong-termincreasesinrealGDP.
C) Futuregenerationswillhaveasmallercapitalstockthatwillreducetheirwealth.
D) Futuregenerationswillhavetobetaxedatahigherrate.
Answer: B
Diff:3
23) Whichofthefollowingstatementsistrueaboutthepublicdebtandfuturegenerations?
A) Futuregenerationswillalwaysbeworseoffbecausetheywillhavetopayoffthepublic
debt.
B) Increasedconsumptiontodaywillleadtoincreasesinthecapitalstockinthefuture.
C) Futuregenerationsmaybebetteroffiftherateofreturnontheborrowedfundsishigher
thantheinterestratepaidtoforeignresidents.
D) Thepublicdebtcannotbeheldbyforeignresidentsthereforewereallyowethedebtto
ourselves.
Answer: C
Diff:3
24) Thedifferencebetweengrosspublicdebtandnetpublicdebtisthat
A) netpublicdebtincludesinteragencyborrowingwhilethegrossdomesticproductdebt
doesnot.
B) netpublicdebtisexpressedinrealtermswhilegrosspublicdebtisexpressedinnominal
terms.
C) grosspublicdebtincludesinteragencyborrowingwhilenetpublicdebtdoesnot.
D) grosspublicdebtisheldbyindividualswhilenetpublicdebtisheldbythegovernment.
Answer: C
Diff:2
25) Anincreaseinthepublicdebtwouldmostlikelyindicatethat
A) thebudgetdeficithasincreased.
B) thebudgetdeficithasdecreased.
C) thetradedeficithasdecreased.
D) nationalsavinghasincreased.
Answer: A
Diff:2
26) Theshareofnetpublicdebtowedtoforeignresidentstodayiscloseto
A) 100percent.
B) 80percent.
C) 50percent.
D) 10percent.
Answer: C
Diff:1
27) Mediareportsoftensuggestthattheincreasingpublicdebtisaburdenonfuturegenerations.
Whattheymeanisthat
A) itreducesthecurrentlevelofinvestment.
B) itmakespredictingfutureunemploymentlevelsunpredictable.
C) itcausesdeflation.
D) itreducesbothnominalandrealinterestrates.
Answer: A
Diff:2
Year
1
2
3
4
Expenditures
400
290
430
470
TaxRevenues
375
330
320
350
GDP
5,000
5,300
5,600
6,000
28) Supposethatinitiallythereisnopublicdebt.Usingtheabovetable,thepublicdebtoverthis
fouryearperiodwouldhave
A) increasedby$215.
B) decreasedby$100.
C) increasedby$1,375.
D) decreasedby$1,590.
Answer: A
Diff:2
29) Supposethatinitiallythereisnopublicdebt.Usingtheabovetable,whatisthepublicdebtasa
percentageofGDPinYear4?
A) 5.8percent
B) 7.8percent
C) 3.6percent
D) 2.0percent
Answer: C
Diff:2
30) Supposethatinitiallythereisnopublicdebt.Usingtheabovetable,whatisthepublicdebtasa
percentageofGDPinYear3?
A) 1.7percent
B) 2.0percent
C) 7.7percent
D) 5.9percent
Answer: A
Diff:2
31) Thegrosspublicdebtisthe
A) amountofU.S.papercurrencyandcoinsincirculation.
B) differencebetweencurrentgovernmentexpendituresandtaxrevenues.
C) ratioofpastdeficitstopastsurpluses.
D) totalofallaccumulateddeficitsandsurpluses.
Answer: D
Diff:1
32) Ifthenetpublicdebtexpandedlastyear,thenwhichofthefollowingmostlikelyoccurred
duringtheyear?
A) Thegovernmentsbudgetwasbalanced.
B) Thegovernmentexperiencedabudgetsurplus.
C) Thegovernmentexperiencedabudgetdeficit.
D) Thegovernmentstaxcollectionsexceededitsspending.
Answer: C
Diff:2
33) Onemechanismthroughwhichincreasingpublicdebtmayimpacttheeconomyisthatthe
resulting
A) increasedcompetitionforfundsincreasesinterestratesandcausesareductionin
investment.
B) increasedcompetitionforfundsdecreasesinterestratesandcausesanincreasein
investment.
C) decreasedcompetitionforfundsdecreasesinterestratesandcausesareductionin
investment.
D) decreasedcompetitionforfundsdecreasesinterestratesandcausesanincreasein
investment.
Answer: A
Diff:2
34) Ifthenetpublicdebtdeclinedlastyear,thenwhichofthefollowingmostlikelyoccurred
duringthatyear?
A) Thegovernmentsbudgetwasbalanced.
B) Thegovernmentexperiencedabudgetsurplus.
C) Thegovernmentexperiencedabudgetdeficit.
D) Theshareofforeignholdingsofthegovernmentsdebtincreased.
Answer: B
Diff:1
35) Toevaluaterelativechangesinthenetpublicdebt,wemust
A) lookattheabsoluteamountowedbythegovernment.
B) compareittothenationsrealGDP.
C) lookattheannualpercentagechangeinthepublicdebt.
D) compareittothedebtsofalldevelopedcountries.
Answer: B
Diff:2
36) Grosspublicdebtistheamountoffundsthat
A) U.S.residentsowetoforeignresidents.
B) statesowetothefederalgovernment.
C) thefederalgovernmentowestotaxpayers.
D) thefederalgovernmentowestoallholdersofU.S.securities.
Answer: D
Diff:1
37) Whichofthefollowingstatementsisfalse?
A) Thefederalbudgetdeficitin2004wasabout4percentoftheGDP.
B) Abudgetdeficitof$25billioninagivenyearincreasesthepublicdebtby$25billion.
C) Thepublicdebtof$25billionistheaccumulateddebtofallU.S.individuals,firms,and
institutions.
D) Duringthepastfiveyears,theU.S.publicdebthasbeenincreasing.
Answer: C
Diff:1
38) Netpublicdebtisequalto
A) thegrosspublicdebtminuscurrentyeartaxrevenuecollection.
B) thegrosspublicdebtminustaxespaidbyforeigncorporationsontheirprofitsmadeinthe
UnitedStates.
C) thegrosspublicdebtplusallgovernmentalinteragencyborrowing.
D) thegrosspublicdebtminusallgovernmentalinteragencyborrowing.
Answer: D
Diff:2
39) Borrowingtofinancetheincreasesingovernmentexpenditures
A) reducescurrentprivateinvestmentexpenditures.
B) increasesinterestrates.
C) reducesgrowthinthenationsprivatecapitalstock.
D) alloftheabove
Answer: D
Diff:1
40) Thetwowaysinwhichdeficitspendingcanimposeaburdenonfuturegenerationsare
A) byrequiringfuturegenerationstofacehighertaxesandtoworkwithaloweraccumulated
stockofcapitalgoods.
B) byrequiringfuturegenerationstofacelowergovernmentspendingandtoutilizeasmaller
stockofhumancapital.
C) bysubstitutingprivategoodsforpublicgoodsandtherebyshiftingresourcestoforeign
residents.
D) bysubstitutingprivategoodsforpublicgoodsandtherebybenefitingonlylarge
businesses.
Answer: A
Diff:2
41) Ifthenetpublicdebtremainsunchangedduringagivenperiod,butthegrosspublicdebt
increases,thenwhichofthefollowingstatementsmustbecorrect?
A) Governmentinteragencyborrowingmusthaveincreasedduringtheperiod.
B) Governmentinteragencyborrowingmusthavedecreasedduringtheperiod.
C) ForeignownershipofU.S.Treasurysecuritiesmusthaverisenduringtheperiod.
D) ForeignownershipofU.S.Treasurysecuritiesmusthavefallenduringtheperiod.
Answer: A
Diff:2
42) Whichofthefollowingisthebestmeasureofthetotalamountthatthefederalgovernmentowes
toprivateownersofU.S.Treasurysecurities?
A) Governmentinteragencyborrowing
B) Thegovernmentbudgetdeficit
C) Thegrosspublicdebt
D) Thenetpublicdebt
Answer: D
Diff:2
43) Whichofthefollowingcorrectlydescribesawayinwhichdeficitspendingcanimposeaburden
onfuturegenerations?
I. FailuretoallocatedeficitspendingtousesthatboostfuturerealGrossDomesticProduct
(GDP)willrequiretaxingfuturegenerationsatahigherratetorepaytheresultinghigherpublic
debt.
II. GovernmentdeficitsthatleadtohigheremploymentandrealGrossDomesticProduct
(GDP)inthefuturewillgenerateincreasedincometaxesforfuturegovernments,whichwill
respondbyspendingthehighertaxrevenues,creatinghigherfuturegovernmentbudget
deficits.
III. Otherthingsbeingequal,deficitspendingfuelsincreasedconsumptionofgoodsand
servicesbythecurrentgenerationthatcrowdsoutcapitalinvestment,therebyleavingfuture
generationswithasmallerstockofcapitalthanotherwisewouldhaveexisted.
A) Ionly
B) IIonly
C) IandIIIonly
D) IIandIIIonly
Answer: C
Diff:3
44) Whichofthefollowingistrueoftheportionofthenetpublicdebtheldbyforeignresidents?
A) ItwilldefinitelybeabenefittocurrentandfuturegenerationsofU.Sresidents,because
foreignresidentshaveshownawillingnesstolendtotheU.S.governmentinexchangefor
ratesofreturnsignificantlylowerthantheycanreceiveelsewhereintheworld.
B) ItwilldefinitelybeaburdenoncurrentandfuturegenerationsofU.S.residentswhowill
havetopayinterestonthisportionofthedebt,therebytransferringaportionoffuture
U.S.incomesabroad.
C) ItwillbeaburdenonfuturegenerationsofU.S.residentsonlyiffundsthattheU.S.
governmentobtainsfromborrowingareexpendedonprojectswithratesofreturnlower
thantheratesofinterestthatthegovernmentpaysforeignresidents.
D) ItwillbeabenefittofuturegenerationsofU.S.residentsonlyiffundsthattheU.S.
governmentobtainsfromborrowingareexpendedonprojectswithratesofreturnlower
thantheratesofinterestthatthegovernmentpaysforeignresidents
Answer: C
Diff:2
45) Netpublicdebtis
A) theexcessofannualgovernmentspendingoverannualtaxrevenues.
B) theexcessofannualtaxrevenuesoverannualgovernmentspending.
C) theportionofgovernmentdebtheldbyprivateindividualsandfirms.
D) thesumowedbythepublictokeeptheSocialSecuritysystemafloat.
Answer: C
Diff:2
46) Tocomparethenetpublicdebtofvariouscountries,thedebthastobecomparedto
A) thecountrystradedeficit.
B) thecountryscurrentbudgetdeficitorsurplus.
C) thecountrysrealGDP.
D) thecountrysnationaldefenseexpenditure.
Answer: C
Diff:2
47) Explainhowdeficitspendingcouldbeaburdentofuturegenerations.
Answer: Deficitspendingcanleadtotwonegativeeffects.First,futuregenerationswillhave
highertaxestopayoffthedebt.Second,currentconsumptioncrowdsoutinvestment,
andreducesthegrowthofcapitalgoodsleavingfuturegenerationswithareduced
capitalstock.
Diff:2
48) Explainhowdeficitspendingcanbenefitfuturegenerations.
Answer: Iftherateofreturnonborrowedfundsishigherthantheinteresttobepaidtoforeign
residents,futuregenerationscanbemadebetteroff.
Diff:2
14.4FederalBudgetDeficitsinanOpenEconomy
1) InwhichdecadedidtheUnitedStatesbeginexperiencinglargetradedeficits?
A) 1960s
B) 1970s
C) 1980s
D) 1990s
Answer: C
Diff:1
Topic: 14.4FederalBudgetDeficitsinanOpenEconomy
2) Arefederalbudgetdeficitsrelatedtotradedeficits?
A) Yes.IfU.S.consumersbuytoomanyimportedgoodstheydonthavemoneytosaveanda
budgetdeficitresults.
B) No.ThebudgetdeficitisentirelyadomesticmatterwhilethetradedeficitonlyaffectsU.S.
citizenswhotravelabroad.
C) Yes.Asdeficitspendinggoesup,itislikelygovernmentborrowingwill,too.Thenforeign
residentswholendfundstotheU.S.governmenthavelesstospendonourgoods,soU.S.
exportswillfall.
D) Yes,butonlyifthequalityofU.S.goodsandservicesisdeteriorating.
Answer: C
Diff:2
3) Whichofthefollowingstatementshasusuallyheldtrueabouttherelationshipbetweenthe
tradedeficitsandgovernmentbudgetdeficits?
A) Thereisnorelationshipbetweentradedeficitsandbudgetdeficits.
B) Thereisapositiverelationshipbetweentradedeficitsandbudgetdeficits.
C) Thereisanegativerelationshipbetweentradedeficitsandbudgetdeficits.
D) Arelationshipexistsonlywhenthereisabalancedbudget.
Answer: B
Diff:1
4) Historicdataindicatethatthereisusuallya________relationshipbetweentradedeficitsand
federalgovernmentbudgetdeficits.
A) positive
B) zero
C) negative
D) fluctuating
Answer: A
Diff:1
5) Atradesurplusoccurswhen
A) thevalueofimportsisgreaterthanthevalueofexports.
B) governmentspendingislessthantotaltaxrevenue.
C) consumptionisgreaterthandisposableincome.
D) noneoftheabove.
Answer: D
Diff:1
6) Whichofthefollowingistrueabouthowtradedeficitsandgovernmentbudgetdeficitsare
related?
A) Thetradedeficitleadstoareductionininvestmentthatleadstoagovernmentbudget
deficit.
B) Thetradedeficitleadstoadeclineinimportsrelativetoexportsthatleadstoa
governmentbudgetdeficit.
C) Thegovernmentbudgetdeficitleadstohigherinterestratesthatwillleadtoatrade
deficit.
D) Thegovernmentbudgetdeficitleadstolowerinterestratesthatwillleadtoalowertrade
deficit.
Answer: C
Diff:2
7) WhenforeignresidentsbuyU.S.Treasurysecuritiestofinancethebudgetdeficit,
A) wecanalsoanticipateanincreaseinthetradedeficit.
B) wecanalsoanticipateadecreaseinthetradedeficit.
C) thetradedeficitwillnotbeaffected.
D) thepublicdebtwillbereduced.
Answer: A
Diff:2
8) Historicalevidenceseemstoindicatethat
A) budgetandtradedeficitsgenerallymoveinthesamedirection.
B) budgetandtradedeficitsgenerallymoveintheoppositedirection.
C) thereisnoconsistentrelationshipbetweentradeandbudgetdeficits.
D) tradeandbudgetdeficitsdecreasewhenthepresidentisaRepublican,andincreasewhen
thepresidentisaDemocrat.
Answer: A
Diff:2
9) WhichofthefollowingistrueoftherelationshipbetweenU.S.tradedeficitsandfederal
governmentbudgetdeficits?
A) Increasesinthebudgetdeficittendtobeassociatedwithincreasesinthetradedeficit.
B) Increasesinthebudgetdeficittendtobeassociatedwithreductionsinthetradedeficit.
C) Increasesinthebudgetdeficitarealwaysassociatedwithincreasesinthetradedeficit.
D) Increasesinthebudgetdeficitarealwaysassociatedwithreductionsinthetradedeficit.
Answer: A
Diff:2
10) WhichofthefollowingistrueoftheU.S.tradebalanceandthefederalgovernmentbudget?
A) Inmostyearssincethe1970s,bothhavebeeninsurplus.
B) Inmostyearssincethe1970s,bothhavebeenindeficit.
C) Bothexhibitedgreatervariabilitybeforethe1970sthantheyhavesince.
D) Thefederalgovernmentbudgetdeficitwasmorevariablebeforethe1970s,butthetrade
deficithasbeenmorevariablesince.
Answer: B
Diff:2
11) Arefederalbudgetdeficitsrelatedtotradedeficits?
A) Yes.IfU.S.consumersbuytoomanyimportedgoods,theydonothavefundstosave,and
abudgetdeficitresults.
B) No.Thebudgetdeficitisentirelyadomesticmatter,whilethetradedeficitonlyaffects
U.S.citizenswhotravelabroad.
C) Yes.Higherdeficitspendinggoesupresultsinmoregovernmentborrowing,andforeign
residentswholendfundstotheU.S.governmenthavefewerresourcestospendU.S.
exportgoods.
D) Yes,butonlyifthequalityofU.S.goodsandservicesisdeteriorating.
Answer: C
Diff:2
14.5GrowingU.S.GovernmentDeficits:ImplicationsforU.S.EconomicPerformance
1) Whatistheshort-runeffectofincreaseddeficitspendingonaneconomyexperiencinga
recessionarygap?
A) Aggregatedemandincreases,andthegapcloses.
B) Aggregatesupplyincreases,closingthegap.
C) Aggregatedemanddecreases,andthegapwidens.
D) Aggregatedemandwillincrease,creatinganinflationarygap.
Answer: A
Diff:2
Topic: 14.5GrowingU.S.GovernmentDeficits:ImplicationsforU.S.EconomicPerformance
2) Inthelongrun,whateffectdoesagovernmentsdeficitspendinghaveonequilibriumreal
A) ThegovernmentsdeficitspendingwillincreaseequilibriumrealGrossDomesticProduct
(GDP).
B) DeficitspendingwilldecreasethenationsequilibriumrealGrossDomesticProduct
(GDP).
C) HighergovernmentdeficitswillnotraiseequilibriumGrossDomesticProduct(GDP)
abovethefull-employmentlevel.
D) EquilibriumrealGrossDomesticProduct(GDP)willincreasebeyondthefull-employment
levelandtherewillalsobeaninflationaryeffect.
Answer: C
Diff:2
3) Oneofthelong-runeffectsofhighergovernmentbudgetdeficitsis
A) aredistributionofrealGrossDomesticProduct(GDP)awayfromgovernment -provided
goodsandtowardmoreprivatelyprovidedgoods.
B) anincreaseinthegovernmentsshareofthenationseconomicactivity.
C) growthintheeconomysprivatesectoratthesametimethegovernmentsectorshrinks.
D) afallintheequilibriumpricelevel.
Answer: B
Diff:2
4) WhyisitunlikelythattaxincreaseswillbethewaytoeliminatecurrentU.S.federalbudget
deficits?
A) Increasingeveryworkerstaxesbythesameamountcouldeliminatethedeficit,butitis
likelythisactionwouldbeviewedastooburdensomeforworkerswithmodestincomes.
B) Therevenuesgeneratedbyincreasingtaxesontherichwouldonlypayforasmallportion
ofthefederalbudgetdeficitinanyrecentyear.
C) SinceWorldWarII,onaveragewhentaxeswereincreasedbyadollar,federalgovernment
spendingincreasedbythatmuchandmore.
D) Alloftheabove.
Answer: D
Diff:2
5) Thelargestexpenditurecomponentofthefederalbudgetisspendingon
A) themilitary.
B) entitlementprograms.
C) environmentalprotectionprograms.
D) foreignaid.
Answer: B
Diff:1
6) GuaranteedbenefitsundergovernmentprogramssuchasSocialSecurityorMedicarearecalled
A) discretionaryspending.
B) controllableexpenditures.
C) entitlements.
D) automaticstabilizers.
Answer: C
Diff:1
7) Today,U.S.governmentspendingonentitlementsrepresents________ofthetotalfederal
budget.
A) about10percent
B) lessthan25percent
C) nearly60percent
D) nearly90percent
Answer: C
Diff:1
8) Whichisthefastestgrowingcomponentofthefederalgovernmentbudget?
A) Spendingonthemilitaryandthewaronterrorism
B) Spendingtoimprovethenationsschools
C) Spendingtoimproveandexpandthenationsinfrastructure
D) Spendingonentitlements
Answer: D
Diff:1
9) Inthelongrun,whateffectdoesagovernmentsdeficitspendinghaveonequilibriumreal
A) GovernmentdeficitspendingwillincreaseequilibriumrealGrossDomesticProduct
(GDP).
B) DeficitspendingwilldecreasethenationsequilibriumrealGrossDomesticProduct
(GDP).
C) HighergovernmentdeficitswillnotraiseequilibriumGrossDomesticProduct(GDP)
abovethefull-employmentlevel.
D) HighergovernmentdeficitswillraiseequilibriumGrossDomesticProduct(GDP)above
thefull-employmentlevelandalsohaveaninflationaryeffect.
Answer: C
Diff:2
10) Inthelongrun,ahighergovernmentdeficitdoesnotaffectequilibriumrealGrossDomestic
Product(GDP),sothatcontinuousincreasesinthegovernmentdeficitwill
A) leadtogreatertaxrevenues.
B) reducethepricelevel.
C) reducespendingonprivatelyprovidedgoodsandservices.
D) increasetheunemploymentrate.
Answer: C
Diff:2
11) Inthelongrun,ahighergovernmentbudgetdeficitcauses
A) adecreaseinbothprivatespendingandequilibriumrealGDP.
B) anincreaseinbothprivatespendingandequilibriumrealGDP.
C) adecreaseinprivatespendingwhileequilibriumrealGDPremainsunchanged.
D) nochangeinprivatespendingbutadecreaseinequilibriumrealGDP.
Answer: C
Diff:2
12) ThelargestcomponentofU.S.federalspendingthatcontributestotheU.S.governmentbudget
deficitis
A) entitlements.
B) militaryspending.
C) interestexpenses.
D) salariesofgovernmentemployees.
Answer: A
Diff:1
13) Whenanalyzingtheeffectsofthegovernmentbudgetdeficit,
A) nodistinctionmustbemadebetweenaneconomywherefullemploymentexistsandone
wheresubstantialunemploymentexists.
B) itisimportanttoexaminetheeffectsofthereportedcapitalbudgetandthereported
operatingbudgetseparately.
C) thereshouldbeacomparisonoftheeffectofthedeficittotheeffectsofhighertaxes
neededtoeliminateit.
D) thebaselinebudgetshouldbeusedsinceitisthemostaccurate.
Answer: C
Diff:1
14) Intheshortrun,afiscalpolicyactionthatresultsinareductioninthesizeofthebudgetdeficit
willcause
A) anincreaseinrealGDPwithstablepricesiftheeconomywasbelowfullemployment.
B) areductioninrealGDPwithfallingpricesiftheeconomywasbeloworatfull
employment.
C) aninflationarygapiftheeconomywasinitiallyoperatingatfullemployment.
D) aninflationarygapiftheeconomywasinitiallyoperatingbelowfullemployment.
Answer: B
Diff:1
15) Supposetheeconomyisinitiallyexperiencingashort-runrecessionarygap.Anincreaseinthe
sizeofthebudgetdeficitwill
A) increasethesizeoftherecessionarygap.
B) reducethesizeoftherecessionarygap.
C) leadtoanincreaseinpriceswithnoincreaseinrealGDP.
D) leadtoadecreaseinpriceswithanincreaseinrealGDP.
Answer: B
Diff:1
16) Supposetheeconomyisinitiallyoperatingatfullemployment.Areductioninthesizeofthe
budgetdeficitwillcausewhichofthefollowingintheshortrun?
B) anincreasethepricelevelandareductioninrealGDP.
C) anincreaseinthepricelevelwithnochangeinrealGDP.
D) anincreaseinrealGDPandanincreaseinthepricelevel.
Answer: A
Diff:1
17) Supposetheeconomyisinitiallyoperatingatfullemployment.Afiscalpolicyactionthat
resultsinanincreaseinthesizeofthebudgetdeficitwillcausewhichofthefollowinginthe
longrun?
A) anincreaseinrealGDP.
B) havenoeffectonboththelevelandcompositionofrealGDP.
C) areductioninthepricelevel.
D) changethecompositionofrealGDP.
Answer: D
Diff:1
18) Inthelongrun,highergovernmentbudgetdeficitswill
A) leadtoaredistributionofrealGDPfromprivatelyproducedgoodsandservicesto
governmentproducedgoodsandservices.
B) leadtoaredistributionofrealGDPfromgovernmentproducedgoodsandservicesto
privatelyproducedgoodsandservices.
C) causethepriceleveltogodownongovernmentgoodsbutnotonprivategoods.
D) leadtoareductionintheamountofgoodsandservicesproducedbythegovernmentand
privatesector.
Answer: A
Diff:1
19) Whatisthedifferencebetweentheshortrunandthelongrunwhenthereisfullemployment
andthegovernmentengagesindeficitspending?
A) RealGDPwillincreaseinboththeshortrunandthelongrun.
B) RealGDPwillincreaseinthelongrunbutnottheshortrun.
C) RealGDPwillincreaseintheshortrunbutnotthelongrun.
D) RealGDPwillnotincreaseineitherthelongrunortheshortrun.
Answer: C
Diff:1
20) WhichofthefollowinghasNOTbeenproposedasapossibleeconomicsolutiontoreducingthe
governmentdeficit?
A) Reducingexpenditures
B) Increasingtaxesfortherich
C) Increasingthenumberofentitlements
D) Increasingtaxesforeveryone
Answer: C
Diff:1
21) Asapossibleapproachtoeliminatingthegovernmentbudgetdeficit,increasingtaxesfor
everyonewould
A) meanonlyasmallincreaseintaxes.
B) leadtoaninflationarygap.
C) transfermoregoodsandservicestothegovernmentsector.
D) leadtoalargeincreaseintaxesforeveryworker.
Answer: D
Diff:1
22) Asapossibleapproachtoeliminatingthegovernmentbudgetdeficit,increasingtaxesonthe
richonlywould
A) leadtoasignificantincreaseintaxrevenues.
B) notleadtoasignificantincreaseintaxrevenues.
C) leadtoagreaternumberofentitlements.
D) leadtoanincreaseinrealGDP.
Answer: B
Diff:1
23) Anentitlementis
A) governmentspendingonthingslikemilitarysalaries.
B) guaranteedbenefitsundersomegovernmentprograms.
C) anotherwordforagovernmentbudgetsurplus.
D) thepaymentstotheprivatesectorinexchangeforgoodsandservices.
Answer: B
Diff:1
24) Legislatedfederalgovernmentpaymentsthatanyonewhoqualifiescanreceivearecalled
A) controllableexpenditures.
B) afiscalstabilizer.
C) balancedexpenditures.
D) entitlements.
Answer: D
Diff:1
25) WhichofthefollowingisNOTanentitlement?
A) Medicaid
C) Federalgovernmentsalaries
B) SocialSecurity
D) Medicare
Answer: C
Diff:1
26) Amongeconomists,itisgenerallybelievedthat
A) thefederalbudgetdeficitwillbeeliminatedwithin10years.
B) thepublicdebtwillbepaidoffwithin10years.
C) entitlementspendingwillcontinuetodecline.
D) thefederalgovernmentwillfinditdifficulttocutentitlementprograms.
Answer: A
Diff:1
27) GovernmentspendingthatchangesautomaticallywithoutactionbyCongressis
A) anoncontrollableexpenditure.
B) nationaldefense.
C) paymentstocontractorsforroutingservicesperformed.
D) discretionarypayments.
Answer: A
Diff:1
28) Thefastest-growingpartofthefederalbudgetis
A) nationaldefense.
C) entitlements.
B) paymentsforservicesrendered.
D) governmentsalaries.
Answer: C
Diff:1
29) Supposetheeconomyisinitiallyexperiencingarecessionary gap.Areductioninthesizeofthe

budgetdeficitwillcausewhichofthefollowingintheshortrun?
A) areductioninthesizeoftherecessionarygapandincreaseinrealGDP.
B) anincreaseinthesizeoftherecessionarygapanddecreaseinrealGDP.
C) anincreaseininflationandincreaseinaggregatesupply.
Answer: B
Diff:2
30) Iftheeconomyisexperiencinganinflationarygapintheshortrun,anincreaseinthebudget
surplus
A) willreducethesizeoftheinflationarygap.
B) willincreasethesizeoftheinflationarygap.
C) willcauseanincreaseininflationandincreaseaggregatesupply.
D) willincreaseaggregatedemandandwillincreasethepricelevel.
Answer: A
Diff:2
31) Supposetheeconomyisinitiallyoperatingatfullemployment.Areductioninthesizeofthe
budgetdeficitwillcausewhichofthefollowinginthelongrun?
B) areductioninrealGDP.
D) noneoftheabove.
Answer: D
Diff:2
32) Noncontrollableexpendituresarecallednoncontrollablebecause
A) theyincreaseatthesamerateasthepublicdebt.
B) theychangewithoutcongressionalaction.
C) onlythepresidentcanapprovetheseentitlementpayments.
D) thepoliticalprocessdeterminesthesizeofthepayments.
Answer: B
Diff:1
33) Politicianshavesuggestedthatthebudgetdeficitcouldbereducedby
A) increasingtaxesandreducingexpenditures.
B) loweringtheinterestrates.
C) imposinghighertariffsonimportedgoods.
D) forbiddinginterestpaymentsongovernmentbondsoutsourcing.
Answer: A
Diff:1
34) Whichgovernmentprogramwouldbeconsideredanentitlementprogram?
A) nationaldefense
B) subsidiesformasstransportation
C) lawenforcementinmajorU.S.cities
D) SocialSecurity
Answer: D
Diff:2
35) Thefastestgrowingcomponentoftheannualfederalbudgetssince2000is
A) theeducationbudget.
B) entitlementpayments.
C) fundingforhealthresearch.
D) fundingforNASA.
Answer: B
Diff:1
36) Thelong-runeffectofincreasinggovernmentbudgetdeficits
A) isaredistributionofrealGDPfromprivatelyprovidedgoodstogovernmentprovided
goods.
B) isnoimpactonequilibriumrealGDP.
C) istoincreaseofpricelevel.
D) alloftheabove
Answer: D
Diff:2
A) Sincethemid-1940s,expendituresonnationaldefensehaveincreasedconsiderablyasa
percentageoftotalfederalgovernmentspending.
B) Sincethemid-1940s,expendituresonincomesecurityandhealthprogramshaveincreased
considerablyasapercentageoftotalfederalgovernmentspending.
C) Takentogether,expendituresonnationaldefenseandonincomesecurityandhealth
programsnowaccountforlessthanhalfofallfederalgovernmentspending.
D) Expendituresonnationaldefensenowaccountformorethantwiceasmuchfederal
governmentspendingasexpendituresonincomesecurityandhealthprograms.
Answer: B
Diff:2
38) Byapproximatelyhowmuchwouldthefederalgovernmenthavetoraiseeachworkersannual
taxestoeliminatethecurrentfederalbudgetdeficit?
A) Between$50and$100peryear
B) Between$500and$1,000peryear
C) Between$1,500and$2,500peryear
D) Between$5,000and$7,000peryear
Answer: D
Diff:1
39) Whatarethemacroeconomicconsequencesofabudgetdeficitwhentheeconomyisoperating
atfullemployment?Besuretodiscusstheeffectsintheshort-runandinthelong-run.
Answer: Intheshortrun,abudgetdeficitwillcreateaninflationarygap.RealGDPandpriceswill
increase.Inthelongrun,abudgetdeficitwillbeinflationaryandhavenoeffectonthe
fullemploymentlevelofrealGDP.ThedeficitwillleadtoaredistributionofrealGDP
withalargersharegoingtogovernmentprovidedgoodsandservices.
Diff:2
Chapter15
Money,Banking,andCentralBanking
15.1TheFunctionsofMoney
1) Inabartersystem,wewouldexpecttosee
A) manydifferentunitsofmoney.
B) moneyandgoodsexchangedforeachother.
C) wide-spreadfinancialinstitutions.
D) goodstradeddirectlyforothergoodsandservices.
Answer: D
Diff:1
Topic: 15.1TheFunctionsofMoney
2) Moneyfunctionsasa(n)
A) storeofvalue.
C) mediumofexchange.
B) unitofaccount.
D) alloftheabove.
Answer: D
Diff:1
3) Abarterarrangementessentiallymeans
A) acashlesstransaction.
C) buyingwithanI.O.U.
B) acreditdeal.
D) swappinggoodsforcash.
Answer: A
Diff:1
4) Forbartertooccurtheremustbe
A) hyperinflation.
B) adoublecoincidenceofwantsforeachgoodtobeexchanged.
C) onepersonwhopayscash.
D) twopeoplewillingtopaywithcredit.
Answer: B
Diff:2
5) Abarterarrangementsimplymeans
A) adirectexchangeofgoodswithouttheuseofmoney.
B) apromisetopayinthefuture.
C) thatgoldmustbeofferedfromoneparty.
D) thegovernmenthaspaidforthegoods.
Answer: A
Diff:1
6) Thedirectexchangeofgoodsandservicesforothergoodsandservicesisknownas
A) barter.
B) purchasingpower.
C) intermediation.
D) wholesaletrade.
Answer: A
Diff:1
7) Withoutanacceptedmediumofexchange,people
A) havetospecializeinoneareaofproduction.
B) havetorelyongoldorsilverinordertoexchangegoodsandservices.
C) havetoresorttobarterinordertoexchangegoodsandservices.
D) canefficientlyobtaingoodsandservices.
Answer: C
Diff:2
8) Asaresultofmoneyinaneconomy,
A) peoplearegreedierthaninabartereconomy.
B) stealingexistsandpeoplehavetofindwaystopreventtheft.
C) transactioncostsarehigherthanwouldbethecaseinabartereconomy.
D) realGrossDomesticProduct(GDP)andeconomicgrowtharegreaterthantheywouldbe
inabartereconomy.
Answer: D
Diff:2
9) Whichofthefollowingrepresentsafunctionofmoney?
A) mediumofexchange
B) unitofaccounting
C) standardofdeferredpayment
D) alloftheabove
Answer: D
Diff:1
Chapter15Money,Banking,andCentralBanking 659
10) Moneyisdefinedas
A) apersonsnetworth.
B) anythingpeoplegenerallyacceptinexchangeforgoodsandservices.
C) abyproductofabartereconomy.
D) anyfinancialinstrumentthatisbackedbygold.
Answer: B
Diff:1
11) WhichofthefollowingstatementsdoesNOTdescribeafunctionofmoney?
A) Astoreofvalue
B) Ahedgeagainstinflation
C) Astandardofdeferredpayment
D) Aunitofaccounting
Answer: B
Diff:1
12) Whenyoubuyatacoforbreakfast,youareusingmoneyasa
A) storeofvalue.
B) standardofdeferredpayment.
D) unitofaccounting.
Answer: C
Diff:1
13) Whenmoneyisacceptedaspaymentinamarkettransaction,itisfunctioningasa
A) storeofvalue.
B) unitofaccounting.
D) unitofinvestment.
Answer: C
Diff:1
14) Moneyasamediumofexchange
I. Facilitatestheexchangeofgoods
II. Reducestheincentivetobarter
A) Ionly
B) IIonly
Answer: C
Diff:1
C) BothIandII
D) NeitherInorII
15) Theuseofmoneyasamediumofexchange
I. lowerstransactioncosts.
II. permitsmorespecialization.
A) Ionly
B) IIonly
C) NeitherInorII
D) BothIandII
Answer: D
Diff:2
16) Apricetagof$400foratabletdeviceisanexampleofmoneyas
A) amediumofexchange.
B) aunitofaccounting.
C) astoreofvalue.
D) atimedeposit.
Answer: B
Diff:1
17) Whenmoneyprovidesayardstickthatallowsindividualstocomparetherelativevaluesof
goodsandservices,itisfunctioningasa
A) mediumofexchange.
C) storeofvalue.
D) standardofdeferredpayment.
Answer: B
Diff:2
18) Whenmoneyservesasastandardforcomparingvaluesofdifferentthings,itisfunctioningasa
A) storeofvalue.
B) hedgeagainstinflation.
C) standardofdeferredpayment.
D) unitofaccounting.
Answer: D
Diff:1
19) Tofunctionasmoney,somethingmustholditspurchasingpowerovertime.Thatis,itmustbe
a
A) storeofvalue.
C) unitofaccounting.
D) mediumofexchange.
Answer: A
Diff:1
20) Ifyousave$2,500foradownpaymentonanewcar,youareusingmoneyas
A) astoreofvalue.
B) aunitofaccount.
C) amediumofexchange.
D) astandardofdeferredpayment.
Answer: A
Diff:1
21) Tobeacceptedasmoney,anitemmustperformallofthefollowingfunctionsEXCEPT
A) serveasastoreofvalue.
B) beeasilyreproduced.
C) beamediumofexchange.
D) serveasastandardofdeferredpayment.
Answer: B
Diff:1
22) Ineconomics,moneyis
A) anothertermforincome.
B) afinancialinstrumentbackedbysomepreciousmetalsuchasgoldorsilver.
C) anythingthatpeoplegenerallyacceptinexchangeforgoodsandservices.
D) whateverthegovernmentdefinesittobe.
Answer: C
Diff:1
23) Whenyousetasidethemoneyyouhavetodayinordertopurchasegoodsandserviceslateron,
youareusingmoneyasa
D) storeofvalue.
Answer: D
Diff:1
24) Themostimportantfunctionofmoneyiswhenmoneyisusedasa
D) storeofvalue.
Answer: A
Diff:1
25) Forsomethingtoserveasmoney,itmustbe
A) backedbytheauthorityofthegovernment.
B) generallyacceptedbybuyersandsellers.
C) light,durable,andcommon.
D) convertibletogold.
Answer: B
Diff:2
26) WhichofthefollowingisNOToneofthefunctionsofmoney?
A) Mediumofexchange
B) Sourceofwealth
C) Unitofaccounting
D) Storeofvalue
Answer: B
Diff:1
27) Thefunctionofmoneyasastoreofvaluediminishesif
A) pricesofgoodsandservicesincrease.
B) interestratesincrease.
C) peoplebegintobarter.
D) moneyisnolongerbackedbygold.
Answer: A
Diff:1
28) WhichofthefollowingstatementsisNOTtrueaboutmoney?
A) Anythingthatservesasamediumofexchange,asaunitofaccounting,asastoreofvalue,
andasastandardofdeferredpaymentcanbecalledmoney.
B) Moneyisanymediumthatisuniversallyacceptedbysellersandcreditors.
C) Moneyisastandardofdeferredpayment.
D) Moneycanonlybecoinsandpaper.
Answer: D
Diff:2
29) Amediumofexchangeis
A) anyassetthatsellerswillacceptaspayment.
B) ameasurebywhichpricesareexpressed.
C) anassetthatisusedtosettlefuturedebts.
D) thethingtradedwhenbartertakesplace.
Answer: A
Diff:1
30) Anyassetthatsellerswillacceptaspaymentisa(n)
C) storeofvalue.
Answer: A
Diff:1
31) Withoutanacceptedmediumofexchange
A) therewouldbenotrade.
B) peoplewouldhavetorelyongoldorsilverinordertoexchangegoodsandservices.
C) goodsandserviceswouldbeexchangedbybarter.
D) pricesareverydifficulttodetermine.
Answer: C
Diff:2
32) Oneofthebenefitsofmoneyasamediumofexchangeisthat
A) itallowsforprivatetransactionssuchastradingvegetablesformedicalservices.
B) itallowsindividualstocomparetherelativevalueofgoods.
C) overtimeitwillbecomemorevaluablesothatindividualscanpurchasemoregoodsand
services.
D) itallowsforspecializationthatleadstoeconomicefficiencies.
Answer: D
Diff:1
33) Thedirectexchangeofgoodsandservicesforothergoodsandservicesisknownas
A) primitivetrade.
B) nonmarkettrade.
C) barter.
D) purchasingpowerparity.
Answer: C
Diff:1
34) Thedirectexchangeofgoodsandservicesforothergoodsandserviceswithouttheuseof
moneyis
A) astandardofdeferredpayment.
B) barter.
C) astoreofvalue.
D) financialintermediaries.
Answer: B
Diff:1
35) Whichfunctionofmoneyallowspeopletospecializeinareasinwhichtheyhaveacomparative
advantage?
A) Mediumofexchange
B) Unitofaccounting
C) Storeofvalue
D) Standardofdeferredpayment
Answer: A
Diff:2
36) Comparedtoabartereconomy,aneconomythatusesmoneywill
A) begreedier.
B) bepoorer.
C) havemorecorruption.
D) havemoreoutput.
Answer: D
Diff:2
37) WhichofthefollowingisNOTabenefitofmoneywhenusedasamediumofexchange?
A) Allowingindividualstospecialize
B) Allowingindividualstopayoffdebts
C) Allowingforsomeeconomicefficiencies
D) Providingeconomicgrowth
Answer: B
Diff:1
38) Asaunitofaccount,moneyisused
A) todefinepricesofallothergoods.
C) toholdpurchasingpowerovertime.
B) topayofffuturedebts.
D) toexchangeforgoodsandservices.
Answer: A
Diff:1
39) Thefunctionofmoneythatallowsindividualsamethodtocomparetherelativevalueofgoods
andservicesis
C) storeofvalue.
D) liquidity.
Answer: B
Diff:1
40) Ameasurebywhichpricesareexpressedisa(n)
C) storeofvalue.
Answer: B
Diff:1
41) Thefunctionofmoneythatprovidesforacommonlyrecognizedmeasureofvaluefortheprice
systemisa(n)
C) storeofvalue.
Answer: B
Diff:1
42) Camelshavebeenusedasmoney.Whichfunctionofmoneywouldthistypeofmoneyperform
leastwell?
A) Mediumofexchange
B) Unitofaccounting
C) Storeofvalue
Answer: B
Diff:2
43) Whichtermbelowfitsclosesttomoneyfunctioningasaunitofaccounting?
A) Exchange
B) Specialization
C) Yardstick
D) Liquid
Answer: C
Diff:2
44) Whichfunctionofmoneyallowsforcomparisonshopping?
A) Mediumofexchange
B) Unitofaccounting
C) Storeofvalue
Answer: B
Diff:1
45) Moneyservesasastandardofvalue,whichisanotherwayofsayingthatmoneyfunctionsas
A) amediumofexchange.
B) aunitofaccounting.
C) astoreofvalue.
Answer: B
Diff:2
46) Cigarettesservedasmoneyinsomeprisonerofwar(POW)campsduringWorldWarII.Given
this,wewouldexpecttoobserve
A) nooneeversmokingacigarette.
B) peopleusuallyresortingtobarterratherthanusingcigarettesasmoney.
C) pricesofothergoodsexpressedintermsofcigarettes.
D) onlygovernment-issuedcigarettesbeingacceptedasmoney.
Answer: C
Diff:3
47) Ifsomethingservesasastoreofvalue,weexpectittobe
A) divisible.
B) durable.
C) ofintrinsicvalue.
D) light.
Answer: B
Diff:2
48) Theabilityofanassettoholditsvalueovertimeisa(n)
C) storeofvalue.
Answer: C
Diff:1
49) Ifsomethingistoserveasmoneyitmustbeastoreofvalue.Thismeansthatitmust
A) bedivisible.
B) bethestandardbywhichallgoodsarecomparedinsettingprices.
C) holditspurchasingpowerovertime.
D) beliquid.
Answer: C
Diff:1
50) Moneythatwehavetodaycanbesetasidetopurchasethingsinthefuture.Thisfunctionof
moneyisknownas
C) storeofvalue.
Answer: C
Diff:1
51) Moneyprovidesawaytotransferwealthintothefuture.Thisfunctionofmoneyisknownas
C) storeofvalue.
Answer: C
Diff:1
52) Iflendersrefusetostatethedebtintermsofdollars,thendollarsarenota
C) storeofvalue.
Answer: D
Diff:1
53) Thepropertyofmoneythatallowsforthesettlingofdebtsthatmatureinthefutureis
A) liquidity.
B) acceptability.
C) storeofvalue.
Answer: D
Diff:1
54) Apropertyofanassetthatmakesitdesirableforuseasameansofsettlingdebtsmaturingin
thefutureisa(n)
C) storeofvalue.
Answer: D
Diff:1
55) Whatcharacteristicdefinessomethingasmoney?
A) assetsdeclaredbythegovernmenttobeofvalue
B) amediumofexchangeuniversallyacceptedinaneconomy
C) notesyoucandepositinasavingsaccount
D) anassetthatearnsinterest
Answer: B
Diff:1
56) Therequirementforadoublecoincidenceofwantsoccurswhen
A) thereisinflation.
B) thereisdeflation.
C) asystemofbarterisused.
D) themediumofexchangeisliquid.
Answer: C
Diff:1
57) Totheextentthatmoneyservesasastoreofvalue,itallowsyouto
A) transferwealthintothefuture.
B) comparisonshop.
C) beaneffectivenegotiator.
D) findgoodbargains.
Answer: A
Diff:2
58) Totheextentthatmoneyservesasamediumofexchange
A) itbenefitsbothbuyersandsellers.
B) itreducestransactioncosts.
C) iteliminatestheneedforbarter.
Answer: D
Diff:2
59) Theadvantageofholdingmoneyasanassetisthat
A) moneyearnsinterest.
B) moneyisliquid.
C) moneyissafefromthievery.
D) thevalueofmoneyappreciatesovertime.
Answer: B
Diff:2
60) Theexistenceofmoneyinaneconomypromotesefficiencyby
A) creatinganequaldistributionofincome.
B) creatingincentivestobeself-sufficient.
C) facilitatingtrade,therebyallowingforgreaterspecialization.
D) allowingfortheformationofcorporationsaslegalentities.
Answer: C
Diff:2
61) WhichofthefollowingisNOTafunctionofmoney?
A) mediumofexchange
B) formofcredit
C) storeofvalue
D) standardofdeferredpayment
Answer: B
Diff:1
62) WhencomparingthepriceofaplasmaTVwiththepriceofanLEDTV,Amandadiscoveredthe
LEDwasmoreexpensive.Thisisanexampleofusingmoneyas
A) astoreofvalue.
B) amediumofexchange.
C) aunitofaccounting.
D) astandardofdeferredpayment.
Answer: C
Diff:1
63) IfJoebuysaMochaatStarbucks,hismoneyisactingasa
A) unitofaccounting.
C) storeofvalue.
Answer: D
Diff:2
64) WhenKateandSamusedollarstocomparethemarketvaluesoftheirautomobiles,moneyis
actingasa
C) storeofvalue.
Answer: A
Diff:2
65) WhenAnnieputshermoneyinhersockdrawerforpurchaseslateron,moneyisactingasa
C) storeofvalue.
Answer: C
Diff:2
66) Amonetarysystemispreferableoverthebartersystembecauseoftheproblemsassociatedwith
A) cashleakages.
B) thedoublecoincidenceofwants.
C) thelawofdiminishingmarginalutility.
D) thelawofincreasingrelativecosts.
Answer: B
Diff:1
67) Amonetarysystemispreferableoverthebartersystembecauseit
A) reducestransactioncosts.
B) iseasiertotrackbythegovernment.
C) limitscashleakages.
D) isdeterminedbytheCongress.
Answer: A
Diff:1
68) Thedirectexchangeofonegoodorserviceforanotheriscalled
A) atokenexchange.
B) astandardofdeferredpayment.
C) theexchangeofpurchasingpower.
D) barter.
Answer: D
Diff:1
69) Forbartertooccurtherehastobe
A) acommoditytoserveasamediumofexchange.
B) aformalmarketwherepricesarequoted.
C) adoublecoincidenceofwants.
D) asinglecoincidenceofwants.
Answer: C
Diff:1
70) A$20pricetagonasweaterinadepartmentstoreisanexampleofmoneyservingasa
C) storeofvalue.
D) standardofdeferredvalue.
Answer: B
Diff:1
71) Givingthestoreclerka$20billforasweaterpricedat$20isanexampleofmoneyservingasa
C) storeofvalue.
Answer: A
Diff:1
72) Ifafriendofyourskeepscashhiddenunderthemattress,heisusingmoneyasa
C) storeofvalue.
Answer: C
Diff:1
73) Yougotoworktoday,butwillgetyourpaycheckattheendofthemonth.Thisisanexampleof
moneyservingasa
C) storeofvalue.
Answer: D
Diff:1
74) WhichofthefollowingisNOTafunctionofmoney?
A) mediumofstoredvalue
B) standardofdeferredpayment
C) unitofaccounting
D) storeofvalue
Answer: A
Diff:1
75) ThepricetagonapairofNikeshoesillustrateshowmoneyperformsthefunctionofa
C) storeofvalue.
Answer: B
Diff:1
76) Perishablegoodssuchasmilkorfruitareneverusedasmoney,becausetheycannotfunctionas
a
C) storeofvalue.
Answer: C
Diff:1
77) SupposeyouareofferedanewiPodinexchangeforthirtyhoursofyourworkinyourfriends
garden.Thisisanexampleof
A) moneyasamediumofexchange.
B) moneyasastoreofvalue.
C) barter.
D) moneyasastandardofdeferredpayment.
Answer: C
Diff:2
78) Supposeyoupay$490.00foranewiPad.Thisisanexampleof
A) moneyasamediumofexchange.
B) moneyasastoreofvalue.
C) barter.
D) moneyasastandardofdeferredpayment.
Answer: A
Diff:2
79) Whatismoney?
Answer: Moneyisanymediumthatisuniversallyacceptedinaneconomybysellersofgoodsand
servicesaspaymentsforthegoodsandservicesandbycreditorsaspaymentfordebts.
Diff:1
80) Whyismoneyasamediumofexchangeimportantinaneconomy?
Answer: Moneypermitsmorespecializationandreducesthetransactioncostsassociatedwith
means-of-paymentuncertainty.Underbarter,onemightbeuncertainastowhatthe
otherpartymightbewillingtoaccept.Withmoney,thisuncertaintyisgreatlyreduced.
Diff:2
81) Whatarethefunctionsofmoney?
Answer: Moneyservesasamediumofexchange,whichmeansitisacceptedaspayment.Itserves
asaunitofaccountinwhichpricesareexpressed.Italsoservesasastoreofvalueandas
astandardofdeferredpayment.
Diff:1
15.2PropertiesofMoney
1) Giventhelistofassetsbelow,whichisthemostliquid?
A) $500worthofGeneralMotorscommonstock
B) $500worthofGeneralMotorsbonds
C) A$500travelerscheck
D) Aone-ouncegoldcoin
Answer: C
Diff:1
Topic: 15.2PropertiesofMoney
2) Thedegreetowhichanassetcanbeacquiredordisposedofwithoutmuchlossofnominal
valueortransactioncostsisknownas
A) fiatmoney.
B) liquidity.
C) fiducia.
D) credit.
Answer: B
Diff:1
3) Anindividualwhodesiresthemostliquidassetpossiblewillhold
A) currency.
B) asavingsaccount.
C) checkabledepositsatabank.
D) U.S.governmentbonds.
Answer: A
Diff:1
4) Theabilitytoquicklyconvertanassetintocashis
A) disintermediation.
C) financialintermediation.
B) thestandardofdeferredpayment.
D) liquidity.
Answer: D
Diff:1
5) Whenanassetisdescribedasbeinghighlyliquid,whichoneofthefollowingcharacteristics
doesitpossess?
A) Itearnsahighrateofinterest,soitspurchasingpowerismaintainedwhenpricesrise.
B) Itiseasilyandreadilyconvertedintomoneywithoutanylossinpurchasingpower.
C) Thefacevalueoftheassetissomewhatlessthanitsvaluewhenconvertedintocurrency.
D) Theassetholdsitsvalueovertime.
Answer: B
Diff:1
6) Liquidityrefersto
A) theeasewithwhichanassetcanbeacquiredordisposedofwithoutincurringhigh
transactioncosts.
B) theexpectedreturnfromanasset.
C) theamountofindebtednessheldagainstanasset.
D) thenetworthoftheindividualinquestion.
Answer: A
Diff:1
7) Whichofthefollowingisthemostliquidasset?
A) smalldenominationtimedeposits
C) short-termtreasurybonds
Answer: B
Diff:1
B) currency
D) sharesofstock
8) Ahighlyliquidasset
A) hashightransactioncostsassociatedwithitssale.
B) mustbeheldforasubstantialperiodoftime.
C) generallyhasaverylimitedmarketforitsresale.
D) canbedisposedofeasilywithoutlossofvalue.
Answer: D
Diff:1
9) Thecostofholdingmoneyisbestdescribedas
A) thecostofprintingmoney.
B) thecostwhichpricedecreasesimposeonmoneyholders.
C) theyieldwhichispaidtomoneyholdersbytheU.S.government.
D) theyieldthatcouldhavebeenearnedhadtheassetbeenheldinanotherform.
Answer: D
Diff:1
10) Acorporatebondisnotasliquidascashbecausethebond
A) cannotbeconvertedtospendabledollarseitheruntilitmaturesorissoldtoanother
investor.
B) canbeexchangedonlyforthegoodsorservicesproducedbythecompanythatissuedthe
bond.
C) mustbeexchangedforastockcertificatebeforeitcanbeconvertedtospendablefunds.
D) representsanexchangeforgoldonly.
Answer: A
Diff:2
11) Ifanassetcanbeobtainedordisposedofwithoutmuchriskoflosingitsnominalvalue,itis
saidtobe
A) fiduciary.
B) liquid.
C) wealth.
D) valuable.
Answer: B
Diff:1
12) Theopportunitycostofholdingmoneyismeasuredby
A) adollar.
B) thepriceofgovernmentbonds.
C) theinterestyieldthatcouldhavebeenearnedbyholdingsomeotherasset.
D) theliquidityofinterest-bearingassets.
Answer: C
Diff:1
13) Themostliquidassetis
A) gold.
C) money.
B) silver.
D) blue-chipstocks.
Answer: C
Diff:1
14) Thereasonwearewillingtoacceptmoneywithnointrinsicvalueisthat
A) papercurrencymaybeexchangedforfull-bodiedmoney.
B) themoneysupplyisbackedbyanequalamountofgoldandsilver.
C) wehaveafiduciarymonetarysysteminwhichcurrencyhasbothacceptabilityand
predictabilityofvalue.
D) thevalueofthemoneyvariesdirectlywithchangesinthepricelevel.
Answer: C
Diff:2
15) Inafiduciarymonetarysystem,thevalueofthemoneyissuedbyagovernmentisbasedon
A) thegoldheldinthatgovernmentsvaults.
B) publicconfidenceinthatcurrencysacceptabilityandpredictabilityofvalue.
C) theabilitytoconvertittosomeassetofvalue,likesilver.
D) itsbeingmadeoutofsomematerialwithamarketvalueequaltoabillsfacevalue.
Answer: B
Diff:2
16) Checkableanddebitableaccountsincommercialbanksandotherfinancialinstitutionsare
classifiedasmoneybecause
A) theyarenotliabilitiesofthebanks.
B) theysometimesearnaninterestincomeforthedepositor.
C) theyaregenerallyacceptableinthepaymentofdebt.
D) banksholdcurrencyintheirvaultsequaltothevalueofdemanddeposits.
Answer: C
Diff:1
17) Afiduciarymonetarystandardexistswhenthevalueofacurrency
A) isdeterminedbylaw.
B) isconvertibletoafixedquantityofgold.
C) dependsuponthepublicsconfidencethatthecurrencycanbeexchangedforgoodsand
services.
D) increaseswithinflation.
Answer: C
Diff:1
18) WhichofthefollowingisacorrectreasonforstatingthattheUnitedStateshasafiduciary
monetarysystem?
I. Ourmoneyisconvertibletoafixedamountofsilverorgold.
II. Ourmoneyhasapredictablevalue.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: B
Diff:1
19) Asysteminwhichthevalueofcurrencyissuedbythegovernmentisbasedentirelyonpublic
faiththatthecurrencywillbeacceptableintradeis
A) afiduciarysystem.
B) aprivatepropertysystem.
C) aGreshamsystem.
D) asocialisticsystem.
Answer: A
Diff:1
20) Acheckableanddebitableaccount
A) isaveryilliquidasset.
B) isoneonwhichtheholdercanwritechecks.
C) mustbetradedonthestockexchange.
D) cannotserveasastoreofvalue.
Answer: B
Diff:1
21) Whichofthefollowingisacheckableanddebitableaccount?
A) Abrokerageaccountwithyourstockbroker
B) Asavingsaccount
C) Acheckingaccount
D) Alloftheabovearecheckableanddebitableaccounts.
Answer: C
Diff:1
22) Afiduciarymonetarysystemis
A) fullybackedbygold.
B) dependentonbarterforexchangesofgoodsandservices.
C) onewhichcannothaveanyinflation.
D) dependentonthepublicsfaithtoacceptthecurrency.
Answer: D
Diff:1
23) Transactionsdepositsinclude
A) creditcards.
C) linesofcredit.
Answer: D
Diff:1
B) certificatesofdeposit.
D) checkableanddebitableaccounts.
24) Moneyinafiduciarymonetarysystemisbackedby
A) gold.
B) thepublicsconfidencethattheassetswillcontinuetoserveasmoney.
C) theintrinsicvalueofthematerialsusedtomaketheassetsthatserveasmoney.
D) assetsownedbythegovernmentthatareintrinsicallyvaluable.
Answer: B
Diff:2
25) Thepurchasingpowerorvalueofmoney
A) isdeterminedbylaw.
C) dependsonthevalueofgold.
B) variesinverselywiththepricelevel.
D) variesinverselywiththeinterestrate.
Answer: B
Diff:2
26) Thepurchasingpowerofthedollar
A) variesdirectlywiththepriceofgold.
B) variesdirectlywiththepurchasingpowerofothermajorcurrenciessuchastheeuroand
theJapaneseyen.
C) variesdirectlywiththepricelevel.
D) variesinverselywiththepricelevel.
Answer: D
Diff:3
27) Whenthepricelevelgoesup,thepurchasingpowerofthedollar
A) alsoincreases.
B) falls.
C) remainsconstant.
D) variesdirectlywiththevalueoftheeuro.
Answer: B
Diff:2
28) Moneyisstillusefulduringtimesofinflationbecause
A) itstillretainsthecharacteristicofpredictabilityofvalue.
B) moremoneycanbemadesopeoplecanstillpurchasethegoodsandservicestheywant.
C) itisnotaliquidasset.
D) itsopportunitycostfallsasinflationrises.
Answer: A
Diff:2
29) Anassetisliquidifit
A) isofintrinsicvalue.
B) canbeexchangedforothergoodsandservices.
C) isastoreofvalue.
D) canbeobtainedordisposedofwithoutlosingmuchofitsnominalvalue.
Answer: D
Diff:2
30) Whichofthefollowingisthemostliquid?
A) certificateofdeposit
C) checkableanddebitableaccount
B) cash
D) stocksandbonds
Answer: B
Diff:2
31) Theliquidityofmoneyrefersto
A) theamountofgolditisbackedby.
B) thestandardofdeferredpaymentsandhowquicklythosepaymentscanbemade.
C) howquicklyitcanbedisposedofwithouthightransactioncosts.
D) asymmetricinformation.
Answer: C
Diff:1
32) Theopportunitycostofholdingmoney
A) ismeasuredbythealternativeinterestyieldobtainablebyholdingsomeotherasset.
B) isbasedonthefiduciarymonetarysystem.
C) referstotheamountofpapercurrencyheldbytheFed.
D) referstotheFedsroleasthelenderoflastresort.
Answer: A
Diff:1
33) Thecostofholdingmoneyis
A) transactionsaccounts.
C) theliquidityapproach.
B) theopportunitycost.
D) capitalcontrols.
Answer: B
Diff:1
34) Theopportunitycostofholdingadollaris
A) adollar.
B) thepriceofagovernmentbond.
C) lessthanadollar.
D) theinterestyieldthatcouldhavebeenearnedbyholdingsomeotherasset.
Answer: D
Diff:1
35) Anincreaseintheinterestratewouldinducepeopleto
A) sellsharesofstockandbuybonds,butwouldhavenoeffectontheirdesiretoholdmoney.
B) getridofalltheirmoneyandbuystockswithit.
C) selltheirleastliquidassetsandholdmoremoneyincaseinterestratesgoupagain.
D) holdasmallerfractionoftheirwealthintheformofmoney.
Answer: D
Diff:3
36) Thedegreetowhichanassetcanbeacquiredordisposedofwithoutmuchdangerofany
interveninglossinnominalvalueisknownas
A) transactiondeposits.
B) atimedeposit.
C) liquidity.
D) M2.
Answer: C
Diff:1
37) Anassetthatcanbeeasilydisposedofwithouthightransactionscostsandwithrelative
certaintyastoitsvalueis
A) solid.
B) liquid.
C) M1.
D) M2.
Answer: B
Diff:1
38) Inafiduciarymonetarysystem,moneyisbackedby
A) thepublicsconfidencethattheassetswillcontinuetobeacceptedasmoney.
B) theintrinsicvalueofthematerialsusedtomaketheassets.
C) theassetsoftheinstitutionsthatissuethevariousassetsusedasmoney.
D) gold.
Answer: A
Diff:2
39) Asysteminwhichmoneyisissuedbythegovernmentanditsvalueisbaseduniquelyonthe
publicsfaiththatthecurrencyrepresentscommandovergoodsandservicesisthe
A) transactionsapproach.
B) liquidityapproach.
C) fiduciarymonetarysystem.
D) transactiondeposits.
Answer: C
Diff:1
40) TheU.S.fiduciarymonetarysystem
A) istheoneagencyresponsibleforprovidingcoinsandpapercurrency.
B) isonewheremoneyisnotconvertibletoafixedquantityofgold.
C) putscapitalcontrolsinplace.
D) controlstheprivatebankingsystem.
Answer: B
Diff:1
41) Theessentialdifferencebetweenpapermoneyandcoinsasformsofmoneyisthat
A) themetalliccontentofcoinsmakesthemmoreacceptableasmoney.
B) papermoneyissuedbytheFederalReserveBoardisbackedbygoldwhilecoinsarenot.
C) papermoneyservesasaunitofaccountwhilecoinsdonot.
D) paperispaperandnotmetal.Themetalismoredurable.
Answer: D
Diff:3
42) Evenwhenaparticularmonetaryassetisnotperformingoneofthefunctionsofmoneywell,
peoplestillusetheassetbecause
A) itisstilleasierthanrelyingonbarter.
B) theyhavenochoice.
C) onceanassetisdefinedasmoneyitisalwaysmoney.
D) peopleexpectmoneywillcomebackatalaterdate.
Answer: A
Diff:2
43) Afiduciarymonetarysystemultimatelyrestson
A) thevalueofthemetalbackingupthesystem.
B) thepublicsconfidenceinthesystem.
C) thevalueoftheassetsbackingupthesystem.
D) thedifficultyofcounterfeitingthecurrency.
Answer: B
Diff:2
44) Thevalueofadollarvaries
A) inverselywiththepriceofgold.
B) inverselywiththepricelevel.
C) directlywiththepricelevel.
D) directlywiththepurchasingpowerofothermajorcurrencies.
Answer: B
Diff:2
45) Evenwhenpeopleknowthepurchasingpowerofthecurrencyisdeclining,theycontinuetouse
thecurrencybecause
A) theyhavenootherchoice.
B) itsvalueisholdingbetterthananyotherasset.
C) itsvalueisstillpredictable.
D) itstillhassomeintrinsicvalue.
Answer: C
Diff:3
46) Whichofthefollowingwouldbeconsideredtheleast liquidasset?

A) currency
B) checkabledeposits
C) travelerschecks
D) sharesofstock
Answer: D
Diff:1
47) WhichofthefollowingassetsisthemostliquidintheUnitedStates?
A) U.S.TreasuryBonds
B) U.S.currency
C) corporatebonds
D) anantiquecar
Answer: B
Diff:1
48) Whichofthefollowingisthemostliquid?
A) realestate
C) U.S.treasurybonds.
B) currency.
D) sharesofstock.
Answer: B
Diff:1
49) Anassetisliquidif
A) itearnsinterest.
B) itisbackedbyagovernmentguarantee.
C) itcanbeexchangedforotheritemsofvaluewithouthightransactioncosts.
Answer: C
Diff:2
50) Oftheitemsinthefollowinglists,whichgofrommostliquidtoleastliquid?
A) acheckingaccount,ahouse,asix-monthcertificateofdeposit,sharesofstock
B) asix-monthcertificateofdeposit,sharesofstock,ahouse,acheckingaccount
C) acheckingaccount,acertificateofdeposit,sharesofstock,ahouse
D) ahouse,asix-monthcertificateofdeposit,sharesofstock,acheckingaccount
Answer: C
Diff:3
51) Inafiduciarymonetarysystem,
A) coinsgettheirvaluefromthepreciousmetalsofwhichtheyaremade.
B) moneygetsitsvaluefromtheconfidencethatthepublichasinitsacceptability.
C) papercurrencydoesnothavevalue,butbalancesincheckingaccountsdo.
D) checkingaccountbalancesdonothavevalue,butpapercurrencydoes.
Answer: B
Diff:2
52) ThetermfiduciarycomesfromtheLatinfiducia,whichmeans
A) value.
B) gold.
C) money.
D) trustorconfidence.
Answer: D
Diff:1
53) Afiduciarymonetarysystemmeans
A) thatthevalueofeachcurrencyisdeterminedbytheamountofgoldheldbyeachnation.
B) thatthecurrencyisbackedbyimplicitfaithingovernment.
C) thatmoneyislegaltender.
D) thatmoneyhascommodityvalue.
Answer: B
Diff:1
54) AfiduciarymonetarysystemhastohaveallofthefollowingEXCEPT
A) trust.
B) theFederalReserveSystem.
C) acceptability.
D) predictabilityofvalue.
Answer: B
Diff:1
A) Notallformsofcurrencyareacceptedequallywellbythepublicasamediumof
exchange.
B) Checkableanddebitableaccountbalancesarenotmoney,butcurrencyis.
C) Checkableanddebitableaccountsareconsideredmoneybylawinonly15states.
D) Thevalueofthedollarrisesalongwiththeincreasesintheconsumerpriceindex.
Answer: A
Diff:2
56) Totheextentthatthevalueofmoneyislesspredictable,itbecomes
A) moreacceptableasastandardofdeferredpayment.
B) moreacceptableasaunitofaccount.
C) moreacceptableasastoreofvalue.
D) lessacceptableasamediumofexchange.
Answer: D
Diff:3
57) Whichofthefollowingwouldbeconsideredatransactiondeposit?
A) passbooksavingsaccount
B) checkingaccount
C) creditcardaccount
D) 401(k)retirementaccount
Answer: B
Diff:2
58) WhattypeofintrinsicvalueorbackingdoesU.S.currencyhavetoday?
A) gold
B) governmentbonds
C) none
D) silver
Answer: C
Diff:2
59) ThemoneysupplyintheUnitedStatesisbackedby
A) faith.
B) gold.
C) silver.
Answer: A
Diff:1
60) UnitedStatescoinsandcurrencyarebackedby
A) silver.
B) gold.
C) reservesofforeigncurrencies.
D) confidencethattheywillretaintheirvalue.
Answer: D
Diff:1
D) platinum.
61) Stockmarketpricequotationsareanexampleofmoneyservingasa
A) storeofvalue.
B) mediumofexchange.
D) economicvalue.
Answer: C
Diff:1
62) Afiduciarymonetarysystemisdependenton
A) acceptabilityandpredictabilityofvalue.
C) Congressionalmonetarysupport.
B) preciousmetalsbackingfiatmoney.
D) anegativeinflationrate.
Answer: A
Diff:2
63) Whatisliquidity?Whyismoneythemostliquidofallassets?Whatisthecostofthisliquidity?
Answer: Liquidityisthedegreetowhichanassetcanbeacquiredordisposedofwithoutmuch
dangerofanylossinnominalvalueandwithsmalltransactioncosts.Moneyisthemost
widelyandreadilyacceptedassetthatcanbeexchangedforothergoodsandservices,so
itisthemostliquidasset.Thecostofthisliquidityistheinterestyieldgivenupthatwas
availablebyholdinganotherasset.
Diff:2
64) Whatisafiduciarymonetarysystem?
Answer: Afiduciarymonetarysystemisasysteminwhichcurrencyisissuedbythegovernment
anditsvalueisbasedonthepublicsconfidencethatthecurrencyrepresentscommand
overgoodsandservices.Thecurrencyusedinthesystemhasnointrinsicvalue.
Diff:1
65) Savingsaccounts,certificatesofdeposit,andbondspayinterestandstockspaydividends.Why
doesanyoneholdontocurrencyorotherformsofmoneyandlosethisextraincome?
Answer: Moneyismoreliquidthantheseotherassetsandthisliquidityisoftenvaluable.Ifone
wantstopurchasesomething,stockscannotbeused.Thestockmustbesoldand
paymenttothebrokermustbepaid.Thetransactioncostswillbegreaterthanthecostsof
holdingthemoneybalances.
Diff:2
66) Whymightpeopleinacountryrefusetoacceptthefiduciarymoneyinthecountry?
Answer: Ifpeoplebelievedthegovernmentwasabouttofailorbelievedthecurrencywas
becomingworthlessbecauseofinflation,theymaydecidetouseotherthingsasmoney.
Thesemightincludegoldorcurrenciesfromothercountriesthatareseenasmorestable.
Diff:3
15.3DefiningMoney
1) Thetwobasicwaystodefinemoneyare
A) thetransactionsapproachandthefiduciaryapproach.
B) thetransactionsapproachandtheM1approach.
C) thetransactionsapproachandtheliquidityapproach.
D) theliquidityapproachandthestoreofvalueapproach.
Answer: C
Diff:2
Topic: 15.3DefiningMoney
2) Whichofthefollowinginstitutionshasresponsibilityfordistributingcurrencyandcoinstothe
U.S.bankingsystem?
A) TheOfficeoftheComptrolleroftheCurrency
B) TheFederalReserveSystem
C) TheU.SBureauofEngravingandPrinting
D) TheU.S.Mint
Answer: B
Diff:2
3) Whichofthefollowinginstitutionshasresponsibilityforproducingthecoinsthatare
distributedintheUnitedStates?
A) TheOfficeoftheComptrolleroftheCurrency
B) TheFederalReserveSystem
C) TheU.SBureauofEngravingandPrinting
D) TheU.S.Mint
Answer: D
Diff:2
4) Whichapproachtomeasuringmoneyfocusesonthevalueofcurrency,transactiondeposits,
andtravelerschecks?
A) Thetransactionsapproach
B) Theliquidityapproach
C) Nearmoneys
D) M2
Answer: A
Diff:1
5) Thetransactionsapproachtomeasuringmoneystressestheroleofmoneyasa
C) storeofvalue.
Answer: A
Diff:2
6) WhichofthefollowingisNOTincludedusingthetransactionsapproachtomeasuringthe
moneysupply(M1)?
A) Currency
B) Certificatesofdeposit
C) Transactiondeposits
D) Travelerschecks
Answer: B
Diff:1
7) ThedesignateM1measureofmoneyconsistsof
A) themostliquidtypesofmoneyintheU.S.system.
B) smalltimedepositsonly.
C) creditcardsandATMcards.
D) goldandgoldcoins.
Answer: A
Diff:1
8) Checkabledepositaccountbalancesare
A) countedinthecalculationofthemoneysupply.
B) partofM2butnotpartofM1.
C) consideredcredit,butnotmoney.
D) onlyasmallcomponentofthemoneysupply.
Answer: A
Diff:1
9) WhichofthefollowingisNOTpartofM1?
A) Creditcards
C) Currency
B) Checkingaccounts
D) Travelerschecks
Answer: A
Diff:1
10) WhichoneofthefollowingisNOTapartoftheM1definitionofmoney?
A) Papercurrency(i.e.,FederalReservenotes)
B) Coins
C) Savingsaccounts
D) Checkableanddebitableaccounts
Answer: C
Diff:1
11) WhenweexaminetheU.S.moneysupply,thesmallestcomponentofM1is
A) currencyandcoins.
B) transactiondeposits.
C) certificatesofdeposit.
D) travelerschecks.
Answer: D
Diff:1
12) Thetransactionsapproachtomeasuringmoneyincludes
A) governmentbonds.
B) thevalueofsharesofstockincommercialbanks.
C) travelerschecks.
D) allofthese.
Answer: C
Diff:1
13) Thetransactionsapproachtomeasuringmoney(M1)includesallofthefollowingEXCEPT
A) travelerschecks.
B) certificatesofdeposit.
C) checkingaccounts.
D) currency.
Answer: B
Diff:1
14) AllofthefollowingareincludedinM1EXCEPT
A) coinandcurrency.
C) travelerschecks.
B) moneymarketmutualfundshares.
D) checkingaccountbalances.
Answer: B
Diff:1
15) WhichofthefollowingisNOTpartofM1?
A) Moneymarketdepositaccounts
C) Checkingdeposits
B) Coinandcurrency
D) Travelerschecks
Answer: A
Diff:1
16) Thriftinstitutions
A) receivemostoftheirfundsfromthepublicssavingsdeposits.
B) includecommercialbanksandinvestmentfirms.
C) includecreditunionsbutnotsavingsandloanassociations.
D) donotoffertransactiondeposits.
Answer: A
Diff:1
17) Atimedepositwithafixedmaturitydateofferedbybanksiscalleda
A) checkingaccount.
B) savingsdeposit.
C) small-denominationcertificateofdeposit.
D) corporatebond.
Answer: C
Diff:1
18) WhichofthefollowingisNOTpartofM1butisincludedinM2?
A) Currency
B) Small-denominationcertificatesofdeposits
C) Travelerschecks
D) Cash
Answer: B
Diff:1
19) Assetsthatcanbeeasilyconvertedintomoneywithoutsignificantlossofvalueare
A) transactionsbalances.
B) nearmonies.
C) currencies.
D) liabilities.
Answer: B
Diff:1
20) Small-denominationtimedepositsare
A) consideredpartofnearmoney.
B) includedinthedefinitionofbothM1andM2.
C) includedinthedefinitionofM1,butnotinM2.
D) thesameastransactiondeposits.
Answer: A
Diff:1
21) WhichofthefollowingisincludedinM2?
I. moneymarketmutualfunds
II. small-denominationcertificatesofdeposit
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:1
22) Whichofthefollowingcouldleastreasonablybeincludedintheliquidityapproachtodefining
themoneysupply?
A) Savingsdeposits
B) Moneymarketmutualfundaccounts
C) Corporatebonds
D) Travelerschecks
Answer: C
Diff:1
23) WhichofthefollowingistrueofM2?
A) ItislargerthanM1.
B) Itexcludessavingsdeposits.
C) Itdoesnotincludehighlyliquidcomponentsofthemoneysupply.
D) ItislessthanM1.
Answer: A
Diff:1
24) Theliquidityapproachtomeasuringmoneystressestheroleofmoneyasa
C) temporarystoreofvalue.
Answer: C
Diff:2
25) Since1982,banksandthriftinstitutionshaveofferedatypeofsavingsaccountthatyieldsa
marketrateofinterestwithaminimumbalanceandalimitontransactions.Theseaccounts,
whichhavenominimummaturity,areknownas
A) certificatesofdeposit.
B) moneymarketmutualfunds.
C) mutualfunds.
D) repurchaseagreements.
Answer: B
Diff:1
26) Whatdifferentiatesasavingsdepositfromasmall-denominationcertificateofdeposit(CD)?
A) ACDhasafixedmaturitydate;asavingsdepositcanbewithdrawnatanytime.
B) Asavingsdepositcannotbewithdrawnbeforeitsmaturitydatewithoutincurringa
penalty;fundsinaCDareavailableatanytimewithnointerestpenalty.
C) Onlyasavingsdepositisatimedeposit.
D) Alldepositoryinstitutionsacceptsavingsdeposits,whereasonlyathriftinstitutioncan
issueaCD.
Answer: A
Diff:2
27) Alltransactiondepositsareincludedin
A) M1only.
C) bothM1andM2.
B) M2only.
D) savingsbalancesonly.
Answer: C
Diff:1
28) WhichofthefollowingisNOTincludedintheMZMdefinitionofmoney?
A) currency.
B) moneymarketfunds.
C) travelerschecks.
D) small-denominationtimedeposits.
Answer: D
Diff:2
Amount
Component
(Billionsofdollars)
Currency
$600
Coins
35
TransactionDeposits
570
SavingDeposits
450
TravelersChecks
8
SmallDenominationTimeDeposits
2,144
MoneyMarketMutualFundShares
1,430
OvernightEurodollars
16
AvailableCreditonCreditCards
1,000
29) Accordingtotheabovetable,thevalueofM1is
A) $1,888billion.
B) $1,629billion.
C) $1,213billion.
D) $1,205billion.
C) $6,237billion.
D) $6,253billion.
Answer: C
Diff:2
30) Accordingtotheabovetable,thevalueofM2is
A) $3,807billion.
B) $5,237billion.
Answer: B
Diff:2
31) Themoneysupplyis
A) therateatwhichtheFederalReserveBoardprintscurrency.
B) limitedtocurrencyandcoins.
C) theamountofmoneyincirculation.
D) therateatwhichtheFederalReserveBoardcreatesmoney.
Answer: C
Diff:1
32) ThelargestcomponentofM1is
A) currencyandcoins.
C) transactiondeposits.
Answer: A
Diff:1
B) travelerschecks.
D) timedeposit.
33) Thebestmeasureofmoneyis
A) coinsandcurrency.
B) theonebasedonthetransactionsapproach.
C) theonebasedontheliquidityapproach.
D) somethingeconomistshaveneveragreedon.
Answer: D
Diff:1
34) Thetransactionsapproachtomeasuringmoneyreliesontheroleofmoneyprimarilyasa
B) unitofaccount.
Answer: A
Diff:2
35) Amethodofmeasuringthemoneysupplybylookingatmoneyasamediumofexchangeisthe
A) fiduciarymonetarysystem.
B) capitalcontrol.
C) transactionsapproach.
D) liquidityapproach.
Answer: C
Diff:1
36) Amethodofmeasuringthemoneysupplybylookingatmoneyasatemporarystoreofvalueis
the
A) fiduciarymonetarysystem.
B) capitalcontrol.
C) transactionsapproach.
D) liquidityapproach.
Answer: D
Diff:1
37) Theliquidityapproachtomeasuringmoneystressestheroleofmoneyasa
B) unitofaccount.
Answer: C
Diff:2
38) Thekeyofficialdefinitionofthemoneysupplyis
A) onlycoinsandpapercurrencyincirculation.
B) onlytransactionsdepositsatbanks.
C) MZM.
D) M2.
Answer: D
Diff:1
39) Themoneysupplythatconsistsofcurrency,transactiondeposits,andtravelerschecksis
A) M1.
B) M2.
C) thefiduciarymonetarysystem.
D) theliquidityapproach.
Answer: A
Diff:1
40) Transactiondeposits
A) aredepositsinathriftinstitutionoracommercialbankonwhichacheckmaybewritten.
B) areonlydepositsthatyoucancheckonthroughtheInternet.
C) includesavingsaccounts.
D) areaccountsthatpayinteresttothedepositor.
Answer: A
Diff:1
41) Travelerscheckare
A) partofM1only.
C) partofM1andM2.
B) partofM2only.
D) notpartofM1orM2.
Answer: C
Diff:1
42) Ifthetransactionsapproachtomeasuringmoneyisused,thenthemoneysupplyconsistsof
A) currencyonly.
B) transactiondepositsonly.
C) currencyandtransactiondepositsonly.
D) currency,checkableanddebitabledeposits,andtravelerschecks.
Answer: D
Diff:1
43) WhichofthefollowingisNOTincludedinthemoneysupplywhenthetransactionsapproachis
used?
A) Moneymarketdepositaccounts.
B) Travelerschecks.
C) Transactiondeposits.
D) Currency.
Answer: A
Diff:1
44) WhichofthefollowingisNOTincludedinM1?
A) Currency.
C) Savingdeposits.
B) Transactiondeposits.
D) Travelerschecks.
Answer: C
Diff:1
45) Currencyconsistsof
A) onlycoinsmintedbytheU.S.Treasury.
B) onlyFederalReservenotes.
C) coinsmintedbytheU.S.TreasuryandFederalReservenotes.
D) coins,FederalReserveNotesandtravelerschecks.
Answer: C
Diff:1
Amount
Component
(BillionsofDollars)
Currency
$250
Coins
50
TransactionDeposits
600
SavingsDeposits
450
TravelersChecks
10
1,200
MoneyMktMutualFundShares
500
OverNightEurodollars
20
OverNightRepurchase
AgreementsatCommercialBanks
65
AvailableCreditonCreditCards
900
LargeTimeDeposits
2,500
46) Refertotheabovetable.ThevalueofM1is
A) $860billion.
B) $910billion.
C) $1,360billion.
D) $2,560billion.
Answer: B
Diff:2
47) Theliquidityapproachtomeasuringthemoneysupplyuses
A) M1only.
B) nearmoneysonly.
C) M1plussomehighlyliquidassets.
D) M2plussomehighlyliquidassets.
Answer: C
Diff:1
48) Aninterest-earningaccountthatcanbewithdrawnatanytimewithoutpaymentofapenaltyis
a
A) savingsdeposit.
B) moneymarketdepositaccount.
C) timedeposit.
D) certificateofdeposit.
Answer: A
Diff:1
49) Anaccountissuedbybanksyieldingamarketrateofinterestwithaminimumbalance
requirementandalimitontransactionsisa
A) savingsdeposit.
C) timedeposit.
Answer: B
Diff:1
50) Adepositinafinancialinstitutionthatrequiresnoticeofintenttowithdrawisa
A) savingsdeposit.
C) timedeposit.
Answer: C
Diff:1
51) Whichofthefollowingisatimedepositwithafixedmaturitydateofferedbybanksandother
financialinstitutions?
A) Savingsdeposit
B) Moneymarketdepositaccount
C) Timedeposit
D) Small-denominationcertificateofdeposit
Answer: D
Diff:1
52) Small-denominationtimedepositsarelessthan
A) $1million.
B) $100,000.
C) $10,000.
D) $1,000.
Answer: B
Diff:1
53) U.S.papercurrencyisissuedbythe
A) UnitedStatesMint.
C) U.S.Treasury.
Answer: B
Diff:1
B) FederalReserveSystem.
D) largestcommercialbanks.
OutstandingU.S.TreasuryBills
CurrencyinCirculation
MoneyMarketDepositsAccounts
TransactionDeposits
StockMarketShares
MoneyMarketMutualFundsBalances
SavingsDeposits
TravelersChecks
$900
$500
$300
$700
$1,000
$1,500
$500
$400
$200
54) Basedontheinformationintheabovetable,thevalueofM1is
A) $2,100.
B) $1,700.
C) $3,000.
D) $3,100.
Answer: B
Diff:2
55) Usingtheinformationintheabovetable,thevalueofM2is
A) $3,500.
B) $3,600.
C) $4,500.
Answer: B
Diff:2
56) TheM1definitionofthemoneysupplyincludesallofthefollowingEXCEPT
A) currency.
B) transactiondeposits.
C) savingsaccounts.
D) travelerschecks.
Answer: C
Diff:1
57) IndefiningmoneyasM1,economistsexcludetimedepositsbecause
A) theyhavenointrinsicvalue.
B) theydonotdirectlyserveasamediumofexchange.
C) theyarenotrecognizedaslegaltender.
D) theyearnaninterestfortheirholders.
Answer: B
Diff:1
D) $5,500.
58) Ifpeoplewithdraw$10millionfromthenationsmoneymarketmutualfundsandredepositthe
fundsinvariouscheckableanddebitableaccounts,then
A) M1andM2willremainunchanged.
B) M1willincrease,M2willremainunchanged.
C) M1willincrease,M2willdecrease.
D) M1andM2willincrease.
Answer: B
Diff:2
59) Indefiningmoneyaccordingtothetransactionsapproach,youwouldwanttoinclude
A) thoseassetsthatareusedasastoreofvalue.
B) thoseassetsthatareusedasamediumofexchange.
C) thoseassetsthatareusedasaunitofaccount.
D) thoseassetsthatareusedasastandardofdeferredpayment.
Answer: B
Diff:2
A) TransactiondepositsarecountedinM2butarenotincludedinM1.
B) MostoftheU.S.currencyinexistencecirculatesoutsideU.S.borders.
C) Travelerschecksarenotconsideredtobemoneybecausetheyarenotvalidunlesssigned.
D) BalancesinmoneymarketdepositaccountsarecountedinM1butarenotincludedinM2.
Answer: B
Diff:3
61) TheM1measureofmoneyissuggestedbythe________approachtomeasuringmoney.
A) investment
B) liquidity
C) transactions
D) security
Answer: C
Diff:1
62) TheM2measureofmoneyissuggestedbythe________approachtomeasuringmoney.
A) investment
B) liquidity
C) transactions
D) security
Answer: B
Diff:1
63) WhichoneofthefollowingisincludedinM2butNOTinM1?
A) coinsandcurrency
B) transactiondeposits
C) asavingsdepositwithoutasetmaturity
D) large-denominationtimedeposits
Answer: C
Diff:2
64) WhichofthefollowingisNOTincludedintheM1moneysupply?
A) currency
B) passbooksavingsaccounts
C) checkableanddebitableaccounts
D) travelerschecks
Answer: B
Diff:1
65) WhichofthefollowingisincludedinM2butNOTinM1?
A) small-denominationtimedeposits
C) currency
D) travelerschecks
Answer: A
Diff:1
66) TheM2moneysupplyisequaltotheM1moneysupplyplus
A) smalltimedeposits,savingsdeposits,andretailmoneymarketmutualfundshares.
B) allcreditcardbalancesandretailmoneymarketmutualfundshares.
C) largetimedepositsandretailmoneymarketmutualfundshares.
D) everyaccountheldbycommercialbanks.
Answer: A
Diff:2
67) Small-denominationcertificatesofdepositsare
A) includedinM1butnotM2.
C) includedonlyinM1.
Answer: D
Diff:1
B) includedinM1andM2.
D) includedinM2butnotM1.
68) Thenarrowestdefinitionofthemoneysupplyis
A) M1.
C) thedifferencebetweenM2andM1.
B) M2.
D) thesumofM1andM2.
Answer: A
Diff:2
69) Moneymarketmutualfundsarefundspooledby
A) agroupofpeopletobuysharesofstocks.
B) agroupofpeopletobuystockmarketfunds.
C) agroupofpeopletobuyshortmaturitycreditinstruments.
D) agroupofpeopletobuyU.S.Treasurybonds.
Answer: C
Diff:2
70) Forasmall-denominationcertificateofdeposittobeincludedinM2itmustbeadenomination
oflessthan
A) $1,000,000.
B) $100,000.
C) $10,000.
D) $1,000.
Answer: B
Diff:1
71) WhichofthefollowingassetsarecountedinM1?
A) transactiondeposits
C) bonds
Answer: A
Diff:1
72) WhichofthefollowingassetsarecountedinM2?
A) gold
B) balancesinretailmutualfundsaccounts
C) valueofoutstandingbonds
D) linesofcreditofferedbycommercialbanks
Answer: B
Diff:1
B) mutualfundsaccounts
D) lineofcredit
73) Supposeyour$50,000certificateofdepositmaturesandyoutransferthefundstoyourchecking
account.Thiscauses
A) M1todecreaseby$50,000andM2toincreaseby$50,000.
B) M1toincreaseby$50,000andM2toremainthesame.
C) bothM1andM2toincreaseby$50,000.
D) nochangetoeitherM1orM2.
Answer: B
Diff:2
74) WhichofthefollowingisNOTincludedinM1?
A) transactiondeposits
C) smalltimedeposits
B) currency
D) travelerschecks
Answer: C
Diff:1
75) ThelargestcomponentofM1is
C) travelerschecks.
B) currencyandcoins.
D) savingsaccounts.
Answer: B
Diff:2
76) Checkingaccountsareincludedin
A) certificatesofdeposit.
C) linesofcredit.
Answer: D
Diff:1
77) Acheckingaccountbalanceinacommercialbankis
A) partofthecurrencysupply.
B) atimedeposit.
C) notliquidenoughtobeconsideredmoney.
D) anassetreadilyusableformosttransactions.
Answer: D
Diff:1
B) currency.
D) M1.
78) Atransactiondepositis
A) afiduciarymonetarysystem.
C) opportunitycost.
B) acheckableanddebitableaccount.
D) theliquidityapproach.
Answer: B
Diff:1
79) FederalReservenotesare
A) papercurrency.
C) checksissuedbytheU.S.government.
B) savingsbonds.
D) travelerschecks.
Answer: A
Diff:1
80) FortheUnitedStates,whatismoneybasedonthetransactionsapproachtomeasuringmoney?
Answer: Thetransactionsapproachlooksatwhatisusedasamediumofexchange.Forthe
UnitedStates,thisincludescurrency,transactiondeposits,andtravelerschecks.
Diff:1
81) Howdoestheliquidityapproachtomeasuringthemoneysupplydifferfromthetransaction
approach?
Answer: Theliquidityapproachfocusesonassetsthatcanbeconvertedintomoneyquicklyand
withoutlossofnominalvaluewhilethetransactionapproachonlylooksatassetsthatare
usedasamediumofexchange.Peoplecanearnsomeinterestwiththeseassetsandstill
convertthemtomoneyeasilyandcheaply.
Diff:2
15.4FinancialIntermediationandBanks
1) Thefinancialinstitutionsinourbankingsystemareallinthebusinessoftransferringfunds
fromsaverstoinvestors.Thisprocessisknownas
A) lobbying.
B) parachuting.
C) moneylaundering.
D) financialintermediation.
Answer: D
Diff:1
Topic: 15.4FinancialIntermediationandBanks
2) Supposeyouplaceyoursavingsinatimedepositatthebank,andthatbanklendssomeofthose
fundstoabusinessthatdesiresaloan.Thisisanexampleof
A) directfinance.
B) indirectfinance.
C) asymmetricinformation.
D) adverseselection.
Answer: B
Diff:1
3) Anitemtowhichabusinessholdslegalclaimiscalleda(n)
A) asset.
B) liability.
C) loan.
D) timedeposit.
Answer: A
Diff:1
4) Acheckableanddebitableaccountis
A) aliabilitytoacommercialbank.
B) anassettoacommercialbank.
C) aliabilitytothehouseholdorfirmthathastheaccount.
D) anassetfortheFederalReserveSystem.
Answer: A
Diff:2
5) Financialinstitutionsparticipateinwhichofthefollowingactivities?
A) financialintermediation
B) indirectfinance
C) theissuanceofloans
D) alloftheabove
Answer: D
Diff:1
6) Financialintermediationisbestdefinedastheprocessbywhich
A) inflationiscontrolled.
B) corporationsissuenewstock.
C) liabilitiesareliquidated.
D) financialinstitutionsacceptsavingsfromsaversandmakeloanstoinvestors.
Answer: D
Diff:1
7) Financialintermediariesareinstitutionsthat
A) producemoneyforthefederalgovernment.
B) regulatetheactivitiesofstockandbondmarkets.
C) actasmiddlemenintheprocessofdirectingfundsfromsaverstoinvestors.
D) overseetheactivitiesofgovernmentinstitutionssuchastheFederalReserve.
Answer: C
Diff:1
8) Financialintermediariesareimportantbecause
A) theybringlendersandborrowerstogetherinawaythatlowerstransactioncosts.
B) theyprovidelargefundstothestockmarket.
C) theyemploylargenumbersofpeople.
D) theyincreasecostsforbanks.
Answer: A
Diff:2
9) Supposethatanewcustomeropensacheckingaccountandasavingaccount,placing$50,000in
each.Later,thebankmakesaloanof$100,000toabusinessfirm.Forthisbank,
A) assetsincreasedby$50,000becausethesavingaccountisanasset,whileliabilities
increasedby$50,000becausethecheckingaccountisaliability.
B) assetsincreasedby$100,000becausethecheckingandsavingaccountsareassets,and
liabilitiesincreasedby$100,000becausetheloanisaliability.
C) assetsincreasedby$100,000becausetheloanisanasset,andliabilitiesincreasedby
$100,000becausethecheckingandsavingaccountsareliabilities.
D) assetsremainedunchangedbutliabilitiesincreasedby$100,000becauseoftheloan.
Answer: C
Diff:2
10) WhichofthefollowingisNOTanexampleofafinancialintermediary?
A) Acreditunion
B) Apensionfund
C) TheInternalRevenueService
D) Aninsurancecompany
Answer: C
Diff:2
11) Thetermdepositoryinstitutionrefersto
A) commercialbanksonly.
B) creditunionsonly.
C) savingsandloanassociationsonly.
D) commercialbanks,creditunions,andsavingsandloanassociations.
Answer: D
Diff:1
12) Abusinessownerappliesforabankloantolaunchafairlylow -riskproject.Afterreceivingthe

loan,shecancelsthelow-riskprojectandinsteadusestheborrowedfundsforahigh -risk
venture.Thisisanexampleof
A) financialintermediation.
B) thetransactionsapproach.
C) moralhazard.
D) capitalcontrols.
Answer: C
Diff:2
13) Ifknowledgepossessedbyonepartyinafinancialtransactionisnotknowntotheotherparty,
________exists.
A) disintermediation
B) asymmetricinformation
C) fraud
D) nofinancialintermediation
Answer: B
Diff:1
14) Whobenefitsfromtheprocessoffinancialintermediation?
A) Saversonly.
B) Borrowersonly.
C) Bothsaversandborrowers.
D) Thereisnobenefit,becausemoneydoesnotcreatewealth.
Answer: C
Diff:1
15) Asymmetricinformationisasituationinwhich
A) informationpossessedbyonepartyinatransactionisnotknownbyanotherparty.
B) informationpossessedbyonepartyinatransactionisalsoknownbyanotherparty.
C) thegovernmenthasinformationthatitchoosestopassalongtoprivatefirms.
D) privatefirmshaveinformationthattheychoosetopassalongtothegovernment.
Answer: A
Diff:1
16) Theprocessinwhichfinancialinstitutionsacceptsavingsfrombusinesses,households,and
governmentsandlendthefundstootherbusinesses,households,andgovernmentsiscalled
A) centralbankingsystem.
B) financialintermediation.
C) moralhazard.
Answer: B
Diff:1
17) Acentralbankis
A) thelargestbankinthecountry.
C) abankersbank.
B) thelargestbankinthecountryscapital.
D) aninternationalbank.
Answer: C
Diff:1
18) Financialintermediariesareinstitutionsthat
A) createmoney.
B) providecheckingaccounts.
C) setinterestrates.
D) transferfundsintheformofloansfromsaverstoinvestors.
Answer: D
Diff:1
19) AllofthefollowingareexamplesoffinancialintermediariesEXCEPT
A) creditunions.
B) insurancecompanies.
C) retirementfunds.
D) stockexchanges.
Answer: D
Diff:2
20) Possessionofinformationbyonepartyinafinancialtransactionbutnotbytheotherpartyis
A) asymmetricinformation.
B) symmetricinformation.
C) informationalhazard.
Answer: A
Diff:1
21) Twopeopleareinvolvedinaborrower/lendersituation,andonepersonhassuperior
knowledgeofitsowncurrentandfutureprospectsovertheotherperson.Thisisknownas
A) preventableinformation.
D) deceptiveknowledge.
Answer: C
Diff:2
22) Thelikelihoodthatindividualswhoseektoborrowmoneymayusethefundsforunworthy,
high-riskprojectsis
B) adverseselection.
C) moralhazard.
Answer: B
Diff:1
23) Thepossibilitythataborrowermightengageinriskierbehaviorafteraloanhasbeenobtained
is
C) moralhazard.
Answer: C
Diff:1
24) RussiaborrowedfundsfromtheInternationalMonetaryFundin1989inexchangeforagreeing
toundertakecertainchanges.However,afterreceivingthefunds,Russiaspentthefundson
otherthings,makingtheloanrepaymentmoreunlikelytooccur.Thissituationisreferredtoas
A) adverseselection.
B) moralhazard.
D) deceptiveknowledge.
Answer: B
Diff:2
25) Theprocessbywhichfinancialinstitutionsacceptsavingsfrombusinesses,householdsand
governmentsandlendthesavingstootherbusinesses,householdsandgovernmentsis
C) moralhazard.
Answer: D
Diff:1
26) Whenyoudepositfundsinabankandthenthebanklendsthesefundstoaborrower,thebank
isengagedin
A) fiduciaryinvestment.
B) fraudulentbehavior.
C) universalbanking.
Answer: D
Diff:2
27) WhichofthefollowingisNOTanassetofcommercialbanks?
A) consumerloans
B) businessloans
C) savingsdeposits
D) homemortgages
Answer: C
Diff:2
28) Peoplewithsavingsoftendeposittheirfundsinacommercialbank,ratherthaninvestingthem
directlywithbusinessenterprises,inorderto
A) avoidtheproblemsassociatedwithfinancialintermediation.
B) avoidtheproblemsassociatedwithasymmetricinformation.
C) earnthehighestpossiblereturnfortakingontheriskiestinvestments.
Answer: B
Diff:2
29) Fromanaccountingpointofview,acheckingaccountshouldbeconsideredpartofabanks
A) assets.
B) liabilities.
C) profits.
D) reserves.
Answer: B
Diff:2
30) WhichofthefollowingisNOTadescriptionofindirectfinance?
A) Youtakeoutastudentloanfromyourbank.
B) AninsurancecompanylendsfundstoIBM.
C) Youborrow$500fromyourbestfriend.
D) Youbuysharesinamutualfund.
Answer: C
Diff:1
31) Whichofthefollowingisafinancialintermediary?
A) theRedCross
B) theInternalRevenueService
C) ashareofcorporatestock
D) aninsurancecompany
Answer: D
Diff:1
32) WhichofthefollowingisNOTafinancialintermediary?
A) commercialbanks
B) asavingsandloanassociation
C) theFederalReserveBankofNewYork
D) theInternalRevenueService
Answer: D
Diff:1
33) Letussupposethatyouapplyforaloanwithabank.Youtellthebankthatyouaregoingto
remodelyourkitchen,butafteryougettheloanyougotoLasVegastogamblewiththemoney.
Yourbehaviorisanexampleof
B) directcreditallocation.
C) moralhazard.
D) indirectcreditallocation.
Answer: C
Diff:3
34) Thefunctionthatbanksperformbyobtainingfundsfromhouseholds,businesses,and
governmentsandlendingthesefundstootherhouseholds,businesses,andgovernmentsis
knownas
A) financialintermediation.
B) lendingintermediation.
C) fiscalintermediation.
D) liquidityintermediation.
Answer: A
Diff:1
35) WhichofthefollowingisNOTareasonthatpeopletendtodeposittheirfundswithbanks
ratherthanlendtheirfundsdirectlytootherindividuals?
A) adverseselectionproblems
B) asymmetricinformationproblems
C) moralhazardproblems
D) liquidityproblems
Answer: D
Diff:3
36) Adverseselectionreferstothe
A) possibilitythattheborrowermayengageinriskierbehavioraftertheloanisobtained.
B) likelihoodthatapotentialborrowermayusethefundsthathereceivesforunworthy,high
riskprojects.
C) possessionofinformationbyonepartyinafinancialtransactionnotknownbytheother
party.
D) useofstatisticaldiscriminationinmakingloans.
Answer: B
Diff:2
37) Thepossibilitythataborrowermightengageinriskierbehaviorafteraloanismadeiscalled
B) liabilityaversion.
C) moralhazard.
D) theriskofdefault.
Answer: C
Diff:1
38) Whichofthefollowingdescribesamoralhazardproblem?
A) aprocessbywhichindividualshavesubstantialresourcesdevotedtotheexchangeprocess
andneedtomakeaprofitortheywillbeadverselyaffected
B) apost-contractualproblemthatmayresultbecauseparticipantstotheexchangeprocess
haveinformationthatallowsthemtoactinanopportunisticmanner
C) aprocessbywhichindividualbuyersorsellerswithbetterinformationaremorelikelyto
participateinvoluntaryexchange
D) acontractualproblemthatresultsbecausemonopoliesexistinalleconomies
Answer: B
Diff:3
39) Supposeyouandafriendareshoppingataswapmeetandyouborrow$500fromyourfriend
topayforaguitarthatyouseethere.Thisisanexampleof
A) directfinancing.
B) indirectfinancing.
C) moralhazard.
D) transactioncosts.
Answer: A
Diff:2
40) Supposeyouborrow$500fromyourbanktopayforaguitar.Thisisanexampleof
A) directfinancing.
B) indirectfinancing.
C) moralhazard.
D) transactioncosts.
Answer: B
Diff:2
41) Financialinstitutionsthatreceivemostoftheirfundsfromthesavingsofthepublicare
A) thefiduciarymonetarysystem.
B) theworldindexfund.
C) universalbanking.
D) thriftinstitutions.
Answer: D
Diff:1
42) Whenyouuseadebitcardtopurchaseapairofjeans,youare
A) creatinga30-dayloanfromyourbanktotheseller.
B) creatinga30-dayloanfromthesellertoyourbank.
C) givingyourbankaninstructiontotransferfundsdirectlyfromyourbankaccounttothe
storesbankaccount.
D) creatinganovernightrepurchaseagreementbetweenyourbankandthestore.
Answer: C
Diff:1
43) Whenyoumakeapurchaseataretailstorebygivingyourbankaninstructiontotransferfunds
directlyfromyourbankaccounttothestoresbankaccount,youhavemostlikelymadethe
purchaseusing
A) cash.
B) aloan.
C) adebitcard.
D) credit.
Answer: C
Diff:1
44) Explaintheroleoffinancialintermediation.
Answer: Financialintermediationistheprocessbywhichfinancialinstitutionsacceptsavingsfrom
householdsandlendthesavingstohouseholds,businesses,andthegovernment.Itisa
middlemanrolethatbringssaversandborrowerstogether.
Diff:2
15.5TheFederalReserveSystem:TheU.S.CentralBank
1) ThecentralbankfortheUnitedStatesis
A) ChaseManhattanBank.
C) theFederalReserveSystem.
B) theCongressionalBank.
D) FirstNationalBankofNewYork.
Answer: C
Diff:1
Topic: 15.5TheFederalReserveSystem:TheU.S.CentralBank
2) ThecurrentchairoftheBoardofGovernorsoftheFederalReserveis
A) AlanGreenspan.
B) JohnSnow.
C) BenBernanke.
D) HenryPaulson.
Answer: C
Diff:1
3) WhichofthefollowingistrueoftheFederalReserveSystem?
I. Itwasestablishedintheearly1980s.
II. ItservesasthecentralbankoftheUnitedStates.
A) Ionly
B) IIonly
C) BothIandII
Answer: B
Diff:1
4) TheFederalOpenMarketCommittee(FOMC)
A) determinesthetaxpolicyofthegovernment.
B) influencesthefuturegrowthofthemoneysupply.
C) overseesalltransactionsonthestockmarket.
D) lendstotheleastcredit-worthycustomers.
Answer: B
Diff:1
D) NeitherInorII
5) ThepartoftheFederalReserveSystemthatdeterminesmonetarypolicyactionsisthe
A) DistrictBankBoard.
B) FederalDepositInsuranceCorporation(FDIC).
C) FederalOpenMarketCommittee.
D) ComptrollersOffice.
Answer: C
Diff:1
6) TheBoardofGovernorsoftheFederalReserveSystemis
A) electedbythegeneralpublic.
B) composedofsevenmemberswhoareappointedbythePresidentandapprovedbythe
Senate.
C) composedofrepresentativesfromthecountrys12largestcommercialbanks.
D) composedof12membersoftheSenateandtheU.S.HouseofRepresentatives.
Answer: B
Diff:1
7) Monetarypolicyactionsaredeterminedbythe
A) FederalOpenMarketCommittee.
C) PresidentoftheUnitedStates.
B) NewYorkFederalReserveBank.
D) U.S.Congress.
Answer: A
Diff:2
8) WhoappointstheFederalReserveSystemsBoardofGovernors?
A) TheSecretaryoftheTreasury
B) ThePresidentoftheUnitedStates
C) TheSpeakeroftheHouseofRepresentatives
D) TheAmericanBankingAssociation
Answer: B
Diff:1
9) WhichofthefollowingisNOTapartoftheFederalReserveSystem?
A) TheTwelveDistrictFederalReservebanks
B) TheFederalOpenMarketCommittee
C) TheFederalDepositInsuranceCorporation
D) TheBoardofGovernors
Answer: C
Diff:1
10) TheBoardofGovernorsoftheFederalReserveSystemis
A) appointedbytheCongress.
B) electedbythepublic.
C) appointedbythePresidentwithapprovaloftheU.S.Senate.
D) electedbymembersoftheAmericanBankingAssociation.
Answer: C
Diff:1
11) WhichofthefollowingisNOTafunctionoftheFederalReserveSystem?
A) TheFedholdsreservesofdepositoryinstitutions.
B) TheFedsuppliestheeconomywithfiduciarycurrency.
C) TheFeddeterminesgovernmentspendingandtaxationpolicies.
D) TheFedactsasfiscalagentfortheUnitedStatesDepartmentoftheTreasury.
Answer: C
Diff:2
12) WhichofthefollowingisNOTafunctionoftheFed?
A) Regulatingthemoneysupplyintheeconomy
B) OfferingcheckingaccountstotheU.S.public
C) Actingasgovernmentsfiscalagent
D) Providingasystemofcheckcollectionandclearingfordepositoryinstitutions
Answer: B
Diff:1
13) WhichofthefollowingisNOTafunctionoftheFed?
A) Holdingreservesfordepositoryinstitutions
B) Supervisingmemberbanks
C) Regulatingthemoneysupply
D) Lendingfundstocredit-worthyprivatefirms
Answer: D
Diff:1
A) Providingforcheckcollectionandclearing
B) Holdingdepositsofmemberbanks
C) Supervisingmemberbanks
D) Makingloanstocollegestudents
Answer: D
Diff:1
15) Regardingthenationsmoneysupply,theFederalReserve
A) hasnoabilitytoinfluenceitsmagnitudeoritsrateofgrowth.
B) preciselysetstheamountofmoneyincirculationinconsultationwiththeCongress.
C) caninfluenceitsfuturegrowth.
D) givestheU.S.Treasurytheauthoritytoprintasmuchasitwishes.
Answer: C
Diff:1
I. TheFedcanperiodicallyandwithoutwarningexaminemembercommercialbanksto
ensurethattheyareconformingtocurrentbankingstandards.
II. TheFedhelpsthegovernmentcollectcertaintaxrevenuesandaidsinthepurchaseand
saleofgovernmentsecurities.
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:1
17) TheFedissaidtobethelenderoflastresortinthat
A) itstandsreadytolendtoanydepositoryinstitutionthatithasdecidedshouldnotfail.
B) itmakesloanstoindividualswhomcommercialbanksdonotbelievearecredit -worthy.
C) itchargesahigherinterestratetoborrowersthandoesanyotherbank.
D) itfunctionsasthegovernmentsbankonlywhencommercialbanksfailtodoso.
Answer: A
Diff:1
18) AllofthefollowingarefunctionsoftheFederalReserveSystemEXCEPT
A) supplyingtheeconomywithfiduciarycurrency.
B) providingasystemofcheckcollectionandclearing.
C) actingasthegovernmentsfiscalagent.
D) lendingfundstoriskycustomersdeniedcreditbycommercialbanks.
Answer: D
Diff:1
19) ItiswidelybelievedthattheFederalReservesmostimportantfunctionis
A) toprovideloanstothefederalgovernment.
B) toregulatethemoneysupply.
C) tosetthelegal,controlledconsumerinterestrates.
D) tolendtoriskycustomers.
Answer: B
Diff:1
A) Regulatingthemoneysupply
B) Makingloanstohouseholdsandbusinesses
C) Actingasthefiscalagentofthefederalgovernment
D) Supervisingmemberbanks
Answer: B
Diff:2
21) TheFederalReserveSystemactsasthegovernmentsfiscalagentby
A) auditingtaxpayers.
B) providingcheckingaccountservicesforthegovernment.
C) preparingthebudgetthePresidentpresentstoCongresseveryyear.
D) determininghowtofinanceadeficit.
Answer: B
Diff:1
22) WhichofthefollowingisNOTacorrectstatementabouttheFederalReservebanks?
A) TheysupervisememberbankswithintheFederalReserveSystem.
B) Theyprovideasystemofcheckcollectionandclearing.
C) Theyprovidetheeconomywithgoldbackedcurrency.
D) TheyactasbankerandfiscalagentfortheU.S.government.
Answer: C
Diff:1
23) Abankersbankisanothernamefor
A) afinancialintermediary.
B) agovernmentbank.
C) acentralbank.
D) theFederalDepositoryInsuranceAgency.
Answer: C
Diff:1
24) WhichofthefollowingisthecentralbankfortheUnitedStates?
A) theFederalDepositInsuranceCorporation(FDIC)
B) theUnitedStatesTreasury
C) theComptrolleroftheCurrency
D) noneoftheabove
Answer: D
Diff:1
25) TheU.S.centralbankperformsallthefollowingrolesforthenationEXCEPT
A) performingbankingfunctionsfortheirnationsgovernments.
B) lendingfundsdirectlytothepublic.
C) providingfinancialservicesforprivatebanks.
D) conductingtheirnationsmonetarypolicies.
Answer: B
Diff:1
26) TheFederalReserveSystemwasestablishedinwhichyear?
A) 1865.
B) 1913.
C) 1929.
D) 1941.
Answer: B
Diff:1
27) TheBoardofGovernorsoftheFederalReserveSystemhashowmanygovernors?
A) 1.
B) 5.
C) 7.
D) 12.
Answer: C
Diff:1
28) AllofthefollowingarefunctionsoftheFederalReserveSystemEXCEPT
A) toprovideloanstodevelopingcountries.
B) tosupplytheeconomywithfiduciarycurrency.
C) toholddepositoryinstitutionsreserves.
D) toactasthegovernmentsfiscalagent.
Answer: A
Diff:1
29) Byservingasthelenderoflastresort,
A) theFedprovidescheckclearingservices.
B) theFedsupervisesdepositoryinstitutions.
C) theFedcanpreventbankfailures.
D) theFedaidsinthesaleofgovernmentsecurities.
Answer: C
Diff:1
30) TheFederalReserveSystemisdividedintohowmanydistricts?
A) 1
B) 5
C) 7
D) 12
Answer: D
Diff:1
31) Controlofthemoneysupplyishandledby
A) Congress.
B) theFederalReserveSystem.
C) allcommercialbanks.
D) Congressandallmembercommercialbanks.
Answer: B
Diff:2
32) Depositoryinstitutionsmust
A) useandpayfortheservicesoftheFederalReserveSystem.
B) settheirinterestratesaccordingtoschedulesestablishedbytheFederalReserveSystem.
C) keepacertainpercentageoftheirdepositsasreserves.
D) turnoverapercentageoftheirprofitstotheFederalReserveSystemaspaymentfor
servicesprovidedbytheFed.
Answer: C
Diff:2
33) TheFed
A) isresponsibleformintingcoins.
B) distributesFederalReservenotes,whicharepapercurrency.
C) isresponsibleforconductingU.S.fiscalpolicy.
D) has15FederalReservebanksandgoverningboardsinNewYorkandChicago.
Answer: B
Diff:1
34) WhichofthefollowingisresponsibleforthedistributionofpapercurrencyintheUnitedStates?
A) theU.S.Treasury
B) theOfficeoftheComptrollerofthecurrency
C) theFederalReserve
D) alloftheabove
Answer: C
Diff:1
35) Checkcollectionandclearinghappen
A) atthebankwherethecheckwaswritten.
B) onlyatprivateclearingcenters.
C) attheFedandatprivateclearingcenters.
D) onlyattheFed.
Answer: C
Diff:1
36) WhichofthefollowingisNOTtrueaboutthedutiestheFedperformsforthefederal
government?
A) TheFederalReserveisthebankerandfiscalagentofthefederalgovernment.
B) TheU.S.TreasurycontrolstheFed.
C) TheFederalReserveaidsinthepurchaseandsaleofcertaingovernmentsecurities.
D) TheU.S.TreasuryhasacheckingaccountattheFed.
Answer: B
Diff:2
37) Asalenderoflastresort,theFed
A) isobligatedtobailoutanydepositoryinstitutioninthecountrythatisinfinancial
difficulty.
B) protectsthedepositsof$100,000orlessinallcommercialbanksinthecountry.
C) providesloanstobanksexperiencingtemporaryliquidityproblems.
D) bailsoutanycorporationthegovernmenthasdecidedshouldnotfail.
Answer: C
Diff:2
38) ThemostimportantfunctionoftheFedisto
A) provideasystemforcollectingandclearingchecks.
B) collecttaxes.
C) supportthefederalgovernmentsdeficitspendingbybuyinggovernmentsecurities.
D) regulatethemoneysupply.
Answer: D
Diff:2
39) AllofthefollowingarefunctionsoftheFedEXCEPT
A) providingpapercurrency.
B) enforcinginternationaltradeagreements.
C) servingasamechanismforclearingchecks.
D) thebankerandfiscalagentforthegovernment.
Answer: B
Diff:1
40) WhichofthefollowingdepositoryinstitutionsisNOTregulatedbyagovernmentagency?
A) Savingsandloanassociations
B) Creditunions
C) CommercialbanksthatarenotpartoftheFederalReserveSystem
D) Noneoftheabove:Alldepositoryinstitutionsareregulatedbysomegovernmentagency
Answer: D
Diff:2
41) Whichofthefollowingissolelyresponsiblefordeterminingchangesinthemoneysupplyinthe
UnitedStates?
A) theU.S.Treasury
B) theComptrolleroftheCurrency
C) theFederalOpenMarketCommittee
D) thechairmanoftheFederalReserve
Answer: C
Diff:2
42) WhichoneofthefollowingisafunctionoftheFederalReserveSystem?
A) providingtheeconomywithcurrency
B) providingasystemforcheckclearing
C) servingasalenderoflastresort
D) alloftheabove
Answer: D
Diff:3
43) WhymighttheFederalReserveinterveneinforeigncurrencymarkets?
A) toensurethesafetyofoverseasinvestmentsforbanks
B) toensurethesafetyofoverseasinvestmentsforprivateinvestors
C) toensurethesafetyofoverseasinvestmentsforpensionfunds
D) tomaintainadesiredexchangerateforthedollar
Answer: D
Diff:2
44) TheFederalReserveBankwasfirstestablishedintheU.S.byanActofCongresspassedin
A) 1789.
B) 1861.
C) 1913.
D) 1947.
Answer: C
Diff:1
45) TheBoardofGovernorsoftheFederalReserveSystemhas
A) 7membersserving14yearterms.
B) 7membersserving4yearterms.
C) 12membersserving14yearterms.
D) 12membersserving4yearterms.
Answer: A
Diff:2
46) TheFederalReserveSystemhas
A) 7districtbanks.
C) 24districtbanks.
B) 12districtbanks.
D) 50districtbanks.
Answer: B
Diff:1
47) HowmanyFederalReservedistrictbanksarethereintheUnitedStates?
A) 1
B) 5
C) 7
D) noneoftheabove.
Answer: D
Diff:1
48) Thefiscalagentforthefederalgovernmentis
A) theUnitedStatesTreasury.
C) theComptrollerofCurrency.
B) theUnitedStatesTreasurer.
D) theFederalReserveSystem.
Answer: D
Diff:1
49) AmajorfunctionoftheFederalReserveSystemis
A) theimplementationoffiscalpolicyforthefederalgovernment.
B) thecontrolofthemoneysupply.
C) thecontrolofgovernmentspending.
D) thecontroloftaxingpolicy.
Answer: B
Diff:2
A) supplyfiduciarycurrencytotheeconomy
B) provideasystemforcheckcollectionandclearing
C) implementfiscalpolicy
D) regulatethemoneysupply
Answer: C
Diff:2
51) WhoappointsthechairoftheFederalReserveSystem?
A) theSenateandCongress
B) memberbanksoftheFederalReserveSystem
C) thePresidentoftheUnitedStates
D) theFederalOpenMarketCommittee(FOMC)
Answer: C
Diff:2
52) ThepartoftheFederalReserveSystem(theFed)thatsetsreserverequirementsis
A) theFederalOpenMarketCommittee.
B) theFederalAdvisoryCommittee.
C) theFederalReservedistrictbanks.
D) theBoardofGovernors.
Answer: D
Diff:2
53) ThepartoftheFederalReserveSystem(theFed)that holdsthereservebalancesofdepository

institutionsis
Answer: C
Diff:2
54) ThepartoftheFederalReserveSystem(theFed)thatdirectsthebuyingandsellingofU.S.
governmentsecuritiesis
Answer: A
Diff:2
55) ThepartoftheFederalReserveSystem(theFed)thatsupervisesandregulatesmemberbanksis
Answer: D
Diff:2
56) AllofthefollowingarefunctionsoftheFederalReserveSystem(theFed)EXCEPT
A) supplyingcurrency.
B) checkclearing.
C) regulationofthemoneysupply.
D) lenderoflastresortforconsumers.
Answer: D
Diff:2
57) FederalReservenotesare
A) aliabilityoftheFederalReserveSystem.
B) anassettotheFederalReserveSystem.
C) bothanassetandaliabilitytotheFederalReserveSystem.
D) aliabilitytotheUnitedStatesTreasury.
Answer: A
Diff:2
58) Thepotentialforafinancialbreakdownatlargeinstitutionstospreadthroughoutthefinancial
systemiscalled
A) asystemicrisk.
B) atoo-large-to-failproblem.
C) anaverseselectionproblem.
D) amoralhazard.
Answer: A
Diff:1
59) Afterthefinancialcrisisofthelate2000s,PresidentObamaandCongressconsideredaddingto
theFederalReservesfunctionsbymakingitthenationsprimaryregulatorof
A) systemicrisk.
B) defaultrisk.
C) creditrisk.
D) investmentrisk.
Answer: A
Diff:1
60) Whatisthetypicalroleofacentralbank?
A) Itservesasabankforthenationaltreasury.
B) Itregulatesdepositoryinstitutions.
C) Itservesasalenderoflastresort.
D) Alloftheabove.
Answer: D
Diff:1
61) Thepotentialforafinancialbreakdownatonefinancialinstitutiontospreadthroughoutthe
financialsystemisknownasa
A) lendingrisk.
B) moralhazard.
C) liquidityrisk.
D) systemicrisk.
Answer: D
Diff:1
62) In2010,PresidentObamasignedintolawthatmadetheFederalReserveasthenations
A) largestprivatebank.
B) federalincometaxcollector.
C) fiscalpolicymakingunit.
D) regulatorofsystemicfinancialrisk.
Answer: D
Diff:1
63) ThemembersoftheFederalOpenMarketCommitteeare
A) theTreasurysecretary,theheadoftheFederalDepositInsuranceCorporation,andthe
ComptrolleroftheCurrency.
B) thesevenmembersoftheFedsBoardofGovernorsandfiveoftheFederalReservebank
presidents.
C) thePresident,theSpeakeroftheHouseofRepresentatives,andtheSenateMajority
Leader.
D) thefivetopofficialsattheFederalReserveBankofNewYorksTradingDesk.
Answer: B
Diff:2
64) TheFedisthebankersbank.WhatfunctionsoftheFedareinvolvedinthisrole?Whatarethe
otherimportantfunctionsoftheFed?
Answer: TheFedholdsreservesofbanks,lendstobankswhentheirreservesarelow,and
providesasystemforcheckcollectingandclearing.Otherimportantfunctionsinclude
providingfiduciarycurrency,actingasthegovernmentsfiscalagent,supervising
memberbanks,andregulatingthemoneysupply.
Diff:2
65) IntheUnitedStates,whodeterminesmonetarypolicy?Whatisthemajortoolusedtodetermine
monetarypolicy?
Answer: TheFederalReserveBanksFederalOpenMarketCommitteedeterminesmonetary
policy.ThecommitteeismadeupoftheBoardofGovernorsand5reservebank
presidents.TheirmaintoolisbuyingandsellingexistingU.S.governmentsecuritiesin
openmarkets.
Diff:2
15.6FractionalReserveBanking,theFederalReserve,andtheMoneySupply
1) Goldsmithswereabletopracticeanearlyformoffractionalreservebankingbecausetheyknew
that
A) peoplewererelativelyunsophisticatedintheirfinancialtransactions.
B) goldwasthemajorformofmoney.
C) notalldepositorswouldclaimtheirgoldatthesametime.
D) golddidnotserveasaunitofaccount.
Answer: C
Diff:1
Topic: 15.6FractionalReserveBanking,theFederalReserve,andtheMoneySupply
2) Asysteminwhichdepositoryinstitutionsholdreservesthatarelessthantheamountoftotal
depositsiscalled
A) fiatmoneybanking.
B) fractionalreservebanking.
C) centralbankingsystem.
D) requiredreservebanking.
Answer: B
Diff:1
3) Fractionalreservebankingreferstoabankingsysteminwhich
A) bankdepositsarelessthanbankreserves.
B) bankreservesareonlyafractionoftotaldeposits.
C) bankreservesareonlyafractionofrequiredreserves.
D) bankloansarelessthanbankreserves.
Answer: B
Diff:1
4) Ifbanksengageinfractionalreservebanking,itmeansthat
A) theyneverrunshortofcurrency.
B) theyholdlessthan100percentoftheirdepositsasreserves.
C) afractionoftheirlegalreservesareheldastop-gradegovernmentsecurities.
D) theydonotholdanyexcessreserves.
Answer: B
Diff:1
5) Fractionalreservebankingcanbethoughtofasabank
A) withholdingaportionofitstotaldepositsthatarenotloanedout.
B) holdingdepositsequaltoitsnetworth.
C) payingafractionofitsprofittodepositors.
D) loaningoutallofitsreserves.
Answer: A
Diff:2
6) IntheUnitedStates,wheredodepositoryinstitutionsholdtheirreserves?
A) Intheirownvaultsintheformofpreciousmetalssuchasgoldandsilver
B) InaccountswiththeU.S.DepartmentoftheTreasury
C) EitherasvaultcashoronreservewithFederalReservedistrictbanks
D) AllreservesmustbeheldataFederalReservedistrictbank
Answer: C
Diff:2
7) Afractionalreservebankingsystemisasystemwhereby
A) bankskeepatleast100percentoftheirdepositsonhandasreserves.
B) bankskeeponlyafractionoftheirdepositsonhandasreserves.
C) acentralbanktellsallbankswhatfractionofthepopulationtheycanserve.
D) banksspecializesothatonetypeofbankhandlesonekindofdepositandanothertypeof
bankhandlesanothertypeofdeposit.
Answer: B
Diff:1
8) Withfractionalreservebanking,
A) bankscannotgenerateprofits.
B) monetarypolicywillbeineffective.
C) banksretainonlyaportionoftheirdepositsintheirvaultsoratFederalReservebanks.
D) bankscanactassecuritiesbrokers.
Answer: C
Diff:1
9) Abankwith$200millionintransactiondepositskeeps$20millionincashinthebankvault,$10
millionindepositsattheFed,and$5millioningovernmentsecuritiesinthebankvault.Itstotal
reservesequal
A) $10million.
B) $20million.
C) $30million.
D) $35million.
Answer: C
Diff:2
10) Banksdonotneedtokeepalloftheirdepositsonhandasreservesbecause
A) onlyafractionofdepositsarewithdrawnatanyonetime.
B) FDICprotectsbanksfromexcessivewithdrawaldemands.
C) thereistoomuchriskofbankrobberies.
D) theycanalwaysgeneratenewreservesthroughthemoneycreationprocess.
Answer: A
Diff:2
11) Totalreservesare
A) depositsheldbyFederalReservedistrictbanksfordepositoryinstitutions,plusdepository
institutionsvaultcash.
B) reservesthatadepositoryinstitutionmustholdintheformofvaultcash.
C) reservesthatdepositoryinstitutionsareallowedtoclaimasreserves.
D) anyitemthatlegallyfunctionsasmoney.
Answer: C
Diff:2
12) DepositsheldbyFederalReservedistrictbanksfordepositoryinstitutions,plusdepository
institutionsvaultcashareknownas
A) reserves.
B) asweepaccount.
C) adverseselection.
D) thediscountrate.
Answer: A
Diff:1
13) Totalreservesofprivatebanksare
A) allcustomerdeposits.
B) depositsheldattheFedandvaultcash.
C) theminimumamountbanksneedtoholdagainsttimedeposits.
D) federalreservenotes.
Answer: B
Diff:1
14) Totalreservesare
A) requiredreservesplusvaultcash.
C) requiredreserves.
B) requiredreservesplusexcessreserves.
D) excessreserves.
Answer: B
Diff:1
15) Thereserveratiois10%andabankhas$600,000in transaction deposits.Theamountofreserves

equals
A) $6,000.
B) $60,000.
C) $600,000.
D) undeterminablewithoutinformationoncashreserves.
Answer: B
Diff:1
16) Abankwith$100millionindepositshas$15millionofcashinthebank,$10millionindeposits
withtheFed,and$15millioningovernmentsecuritiesinitsvault.Itstotalreservesequal
A) $10million.
B) $15million.
C) $25million.
D) $40million.
Answer: C
Diff:2
17) Underafractionalreservebankingsystem,
A) bankskeepafractionoftheirdepositsonhandasreserves.
B) bankskeepafractionoftheirreservesonhandasdeposits.
C) bankskeepalloftheirdepositsonhandasreserves.
D) bankskeepalloftheirreservesonhandasdeposits.
Answer: A
Diff:1
depositsis
A) theFederalReserveSystem.
B) thefederalfundsmarket.
C) sweepaccounts.
D) fractionalreservebanking.
Answer: D
Diff:1
19) Janehasjustdeposited$2,000inhercheckingaccount.Sheknowsthatthebankwillkeeppart
ofthesefundsonhandandloanouttherest.Thisisanexampleof
B) asweepaccount.
C) fractionalreservebanking.
D) excessreserves.
Answer: C
Diff:2
20) Inafractionalreservebankingsystem,
A) banksarerequiredtokeepalldepositsonhandsothattheycanpaytheirdepositorswhen
theydesiretowithdrawfunds.
B) banksarerequiredtokeepafractionofdepositsinbonds.
C) banksarerequiredtokeepafractionofalldepositsonhandandsendtheresttotheFed.
D) banksdonotkeepsufficientreservesonhandtocover100percentoftheirdepositors
accounts.
Answer: D
Diff:1
21) Fractionalreservebankingbegan
A) intheearlytwentiethcentury.
C) intheMiddleAges.
B) intheearlynineteenthcentury.
D) inancientGreece.
Answer: D
Diff:2
depositsis
A) afractionalreservebankingsystem.
B) apercentagereservebankingsystem.
C) aratioreservebankingsystem.
D) alegalreservebankingsystem.
Answer: A
Diff:2
23) Theconceptofholdingreserves,suchasgold,thatarelessthanthevalueofthetotaldeposits
A) isknownasfractionalreservebanking.
B) hasbeenillegalsincethepassageoftheFinancialServicesModernizationActof1999.
C) isknownasnon-creditbanking.
Answer: A
Diff:2
24) Fractionalreservebankingisasysteminwhich
A) depositoryinstitutionspayafractionofadvertisedinterestrates.
B) afractionofbankingservicesmustbeprovidedbydepositoryinstitutions.
C) depositoryinstitutionsholdafractionoftotaldepositsinreserve.
D) themoneysupplyisasetfractionoftheU.S.goldreserves.
Answer: C
Diff:2
25) Fractionalreservebankingreferstoasysteminwhichthedepositoryinstitution
A) holdsreservesequaltoitsdeposits.
B) holdsreservesgreaterthanitsdeposits.
C) holdsreserveslessthanitsdeposits.
D) holdszeroreserves.
Answer: C
Diff:2
26) Astatementofassetsandliabilitiesofanybusinessentityiscalled
A) anincomestatement.
B) acashflowstatement.
C) abalancesheet.
D) astatementofnetworth.
Answer: C
Diff:3
27) WhichofthefollowingwouldNOTbeanassetonabanksbalancesheet?
A) Loansoutstanding
B) Bankbuilding
C) Cashinthevault
D) Transactionsdeposits
Answer: D
Diff:3
28) Whichofthefollowingactionshasno effectonthetotalmoneysupply?

A) TheFederalOpenMarketCommitteebuysgovernmentsecurities.
B) TheFederalOpenMarketCommitteesellsgovernmentsecurities.
C) Thereisatransferofdepositsfromonebanktoanotherbank.
D) Thereischangeinthemoneymultiplier.
Answer: C
Diff:1
29) Givenarequiredreserveratioof20percent,acommercialbankthathasreceivedanewdeposit
of$100canmakeadditionalloansof
A) $0.
B) $20.
C) $80.
D) $400.
Answer: C
Diff:1
30) Followinganewdepositof$500,theloansofacommercialbankincreaseby$400.Inthis
situation,thereserveratioismostlikely
A) 0percent.
B) 20percent.
C) 80percent.
D) 180percent.
Answer: B
Diff:1
31) Thereserveratiois10percent.Ifthebankreceivesacustomerdepositof$100,000,thenan
immediateeffectis
A) areductioninthebankstotalassetsofexactly$10,000.
B) areductioninthebankstotalliabilitiesofexactly$10,000.
C) nochangeinthebankstotalassetsortotalliabilities.
D) anincreaseinthebanksreservesofexactly$10,000.
Answer: D
Diff:2
32) Otherthingsbeingequal,ifthereserveratioisraisedfrom10percentto20percent,
A) minimumpotentialvalueofthemoneymultiplierrisesfrom0.10to0.20.
B) minimumpotentialvalueofthemoneymultiplierfallsfrom100to50.
C) maximumpotentialvalueofthemoneymultiplierrisesfrom10to20.
D) maximumpotentialvalueofthemoneymultiplierfallsfrom10to5.
Answer: D
Diff:3
33) Toreachthemaximummoneymultiplier,itisassumedthat
A) commercialbankskeeptheamountofreserves.equaltototalbankdeposits.
B) allloansgetredepositedinacheckableaccount.
C) thereisinsufficientloandemand.
D) loansaredivertedintocirculatingcurrency.
Answer: B
Diff:1
34) Whichofthefollowingwilllimittheexpansionofthemoneysupplyfollowinganewdeposit?
A) Failureofbankstovoluntarilyholdexcessreserves
B) Astrongdemandfornewloans
C) Are-depositingofallloanproceeds
D) Astrongdemandforholdingcurrencyoutsideofcommercialbanks
Answer: D
Diff:1
35) Astatementofassetsandliabilitiesofanybusinessentityis
A) asweepaccount.
B) abalancesheet.
C) networth.
D) legalreserves.
Answer: B
Diff:1
36) Thedifferencebetweenassetsandliabilitiesis
A) asweepaccount.
C) networth.
B) abalancesheet.
D) legalreserves.
Answer: C
Diff:1
37) Abankcurrentlyhas$50millionindeposits,$6millionincashinthevault,$4millionon
depositwiththeFed,and$5millioningovernmentsecurities.Thereserveratiois20percent.A
newdepositismadeof$1million.Whatisthemaximumsizeloanthebankcanmakeoncethe
checkclears?
A) 0
B) $800,000
C) $1million
D) $5.8million
Answer: B
Diff:3
38) Thereserveratiois20percent.Acheckfor$1millionisdepositedinBankA,writtenonan
accountfromBankB.AfterthecheckclearswhatarethenewexcessreservesatBankA,andby
howmuchdoesthemoneysupplychangeifallbanksmakeloanssothattheyhavezeroexcess
reserves?
A) $200,000;$800,000
B) $800,000;$1million
C) $800,000;$800,000
D) $800,000;0
Answer: D
Diff:2
39) Ifallofabanksdepositorsshowedupononedayrequestingcashwithdrawalsofalltheir
depositedfunds,
A) thebankwouldpaythemall,althoughreluctantly.
B) thebankwouldlikelyfailtohavesufficientreservestohonortheirrequests.
C) thebankcouldlawfullyrefusetheirdemands.
D) thebankwouldimmediatelycallalloutstandingloans.
Answer: B
Diff:2
40) Amongtheliabilitiesofabankareits
C) excessreserves.
B) totalreserves.
D) loans.
Answer: A
Diff:2
41) Thebalancesheetofabankshowsits
A) profitsandlosses.
C) earningsandexpenses.
B) assetsandliabilities.
D) revenuesandcosts.
Answer: B
Diff:2
42) Ifabankreceivesanewtransactiondepositof$10,000andthereserveratiois15percent,then
thebankcouldexpanditsloansbyasmuchas
A) $1,500.
B) $8,500.
C) $15,000.
D) $66,700.
Answer: B
Diff:2
43) Ifacheckwrittenononebankisdepositedinanotherbank
A) themoneysupplyincreases.
B) themoneysupplyremainsunchanged.
C) themoneysupplydecreases.
D) newreservesarecreatedforthebankingsystem.
Answer: B
Diff:2
44) Whichofthefollowingisaliabilitytoabank?
A) totalreserves
C) governmentsecurities
D) loans
Answer: B
Diff:2
45) IfacheckwaswrittenonBankAfor$100andBankBpresentedthechecktoBankAfor
payment,whatwillhappentotherequiredreservesforeachrespectivebankafterpaymentis
made?
A) BankAsrequiredreservesincrease;BankBsdecrease.
B) BankBsrequiredreservesincrease;BankAsdecrease.
C) Bothbankswillseeanincreaseintheirrequiredreserves.
D) Bothbankswillseeadecreaseintheirrequiredreserves.
Answer: B
Diff:2
46) WhichofthefollowingisNOTanassetofabank?
A) cash
C) totalreserves
B) loans
D) transactiondeposits
Answer: D
Diff:2
Assets
Reserves
Securities
Loans
TotalAssets
$200,000
$200,000
$1,600,000
$2,000,000
Liabilities
TransactionDeposits$2,000,000
TotalLiabilities
$2,000,000
47) Basedontheabovetable,thereserveratioforthebankingsystemis
A) 20percent.
B) 10percent.
C) 15percent.
D) 1percent.
Answer: B
Diff:1
48) Basedontheabovetable,anopenmarketoperationinwhichtheFedpurchased$100,000of
governmentsecuritieswould
A) createareservedeficiencyforthebankingsystem.
B) leadtoamaximumpotentialexpansionofthemoneysupplyof$100,000.
C) leadtoamaximumpotentialexpansionofthemoneysupplyof$1million.
D) causedemanddepositstofallby$100,000.
Answer: C
Diff:1
49) Thepotentialmoneymultiplierforthebankingsystemintheabovetableis
A) 5.
B) 9.
C) 1.
Answer: D
Diff:1
50) WhentheFederalReservesellsagovernmentsecuritytoacommercialbank,
A) thecashreservesofthecommercialbankdecrease.
B) thenetworthofthecommercialbankincreases.
C) theloansofthecommercialbankwillincrease.
D) thebalancesheetofthecommercialbankisthrownoffbalance.
Answer: A
Diff:1
D) 10.
51) Ifa$1millionopenmarketpurchasebytheFedgeneratesanewdepositatabankthat
immediatelycausesthebanksreservesheldattheFedtoincreaseby$1million,thenthe
T-accounteffectsarethatthebanksassetsandliabilities________by$1millionandthatthe
Fedsassetsandliabilities________by$1million.
A) decline;decline
B) increase;decline
C) decline;increase
D) increase;increase
Answer: D
Diff:2
52) TheFedsellsaU.S.governmentsecurityandabankdealerwritesacheckfortheamount.When
thecheckclears,
A) reservesremainunchangedbecausethedecreaseofreservesatthedealersbankisoffset
byanincreaseinthereservesattheFed.
B) reserveshavefallenbytheamountofthecheckbecausetheFedclearsthecheckby
reducingthebanksdepositsattheFed.
C) reservesincreasebytheamountofthecheckbecausetheFedclearsthecheckby
increasingtheamountofthebanksdepositswiththeFed.
D) reserveshavefallenbytheamountofthereservestimesthereserveratio,andthemoney
supplyfallsbythedifferencebetweentheamountofthecheckandthefallinthereserves.
Answer: B
Diff:3
53) Thereserveratiois10percentandallloanproceedsaredepositedintransactionsaccounts.A
bonddealerhas$100millionindeposits,$8millioninvaultcash,and$7millionindepositsat
theFed.TheFedsells$1millioninsecuritiestothebonddealer.Asaresult,ofthistransaction
alone,
A) themoneysupplyfallsby$1millionandtotalreservesfallby$1million.
B) themoneysupplyfallsby$1millionandtotalreservesriseby$1million.
C) themoneysupplyrisesby$1million,totalreservesfallby$900,000.
D) themoneysupplyrisesby$1million,butreservesdonotchange.
Answer: A
Diff:2
54) Supposethattheactualmoneymultiplierequalsthemaximumpotentialmoneymultiplier.If
thereserveratiois10percent,inorderforthebankingsystemtoincreasedepositsby$2.5
million,theFedmust
A) permitthesystemtohaveprolongedreservedeficiencies.
B) sell$2.5millionofgovernmentsecuritiestothegeneralpublic.
C) sell$250,000ofgovernmentsecuritiestothegeneralpublic.
D) buy$250,000ofgovernmentsecuritiesfromthepublic.
Answer: D
Diff:1
55) TheFederalOpenMarketCommitteehasresponsibilityfor
A) appointingmemberstotheBoardofGovernorsoftheFederalReservesystem.
B) printingmoney.
C) issuingorderstobuyorsellgovernmentsecuritiesfortheFed.
D) advisingtheTreasuryDepartmentonmonetarypolicy.
Answer: C
Diff:1
56) WhentheFedwantstoundertakeopenmarketoperations,it
A) canrequireallcommercialbankstobuyfromorselltoit.
B) canrequireallmemberbankstobuyfromorselltoit.
C) buysorsellssecuritiesthroughthetradingdeskattheNewYorkFederalReserveBank.
D) buysfromorsellstotheU.S.Treasury.
Answer: C
Diff:1
57) Openmarketoperationsare
A) thebuyingofexistingcorporatesecuritiesinsecondarymarketsbyprivatecitizens,banks
andtheFed.
B) thebuyingandsellingofexistingU.S.governmentsecuritiesinopenprivatemarketsby
theFed.
C) theactionsoftheFedthatareusedtofinancedeficitfinancingbythegovernment.
D) thesellingofnewgovernmentsecuritiesinordertoincreasethemoneysupply.
Answer: B
Diff:1
58) Thelevelofreservesinthebankingsystemisdeterminedby
A) theAmericanBankingAssociation.
B) theFederalOpenMarketCommittee.
C) bonddealers.
D) theTreasuryDepartment.
Answer: B
Diff:1
59) WhentheFedbuysaU.S.bondintheopenmarket
A) itsactionhasnoeffectonthetotalreservesorthemoneysupplybecausethecheckit
writesincreasesreservesatonebankbuttheyfallatanother.
B) totalreservesincreasebytheamountofthepurchasebutthemoneysupplystaysthe
same.
C) itsactionexpandstotalreservesandthemoneysupply.
D) itsactioncontractstotalreservesandthemoneysupply.
Answer: C
Diff:2
60) OpenmarketoperationsareconductedbytheFed
A) intheprivatesecondaryU.S.securitiesmarket.
B) intheNewYorkStockExchange.
C) throughtheBureauofEngraving.
D) throughtheWashingtonlocationoftheFederalReservesBankofGovernors.
Answer: A
Diff:2
61) TheinitialimpactoftheFedsopenmarketsaleofgovernmentsecuritiesbytheFederalReserve
is
A) anincreaseinthemoneysupplybysomemultipleofthedollarvolumeofthesale.
B) anincreaseincommercialbankdepositsattheFed.
C) afallinthemoneysupplybysomemultipleofthedollarvolumeofthesale.
D) areductionofthecommercialbankingsystemsreservedepositsattheFed.
Answer: D
Diff:1
62) AsaleofsecuritiesbytheFedcauses
A) acontractionofthemoneysupplyequaltotheamountofthesecuritiessold.
B) anexpansionofthemoneysupplyequaltotheamountofthesecuritiessold.
C) amultipleexpansionofthemoneysupplygreaterthantheamountofthesecuritiessold.
D) amultiplecontractionofthemoneysupplygreaterthantheamountofthesecuritiessold.
Answer: D
Diff:2
63) IftheactualmoneymultiplierequalsthepotentialmoneymultiplierandiftheFederalReserve
wishestoincreasethemoneysupplyby$500whenthereserveratiois10percent,itshould
A) sell$50ofgovernmentbonds.
B) buy$50ofgovernmentbonds.
C) sell$5000ofgovernmentbonds.
D) buy$5000ofgovernmentbonds.
Answer: B
Diff:2
64) IftheactualmoneymultiplierequalsthepotentialmoneymultiplierandiftheFedwishesto
reducethemoneysupplyby$1millionwhenthereserveratiois20percent,thentheFedshould
A) sell$200,000ofgovernmentsecurities.
B) buy$200,000ofgovernmentsecurities.
C) sell$500,000ofgovernmentsecurities.
D) buy$500,000ofgovernmentsecurities.
Answer: A
Diff:2
65) WhentheFedbuysU.S.governmentsecurities,themoneysupply
A) increasesbecausethereisanincreaseintransaction depositsatthebankofthebonddealer
butthereisnodecreaseintransactiondepositsatanyotherbank.
B) decreasesbecausethereisanincreaseinthereservesofthebonddealersbank.
C) remainsunchangedbecausetheincreaseintransaction depositsatthebonddealersbank
isoffsetbyareductionintransactiondepositsattheFed.
D) remainsunchangedbecausetheincreaseintransaction depositsatthebonddealersbank
isoffsetbyafallintransactiondepositsatanotherbank.
Answer: A
Diff:2
A) thebuyingandsellingofexistingU.S.governmentsecuritiesinopenprivatemarketsby
theFedinordertochangethemoneysupply.
B) thebuyingandsellingofexistingU.S.governmentsecuritiesinopenprivatemarketsby
citizens.
C) thesellingofnewgovernmentsecuritiesbybanksinordertoincreasethemoneysupply.
D) thesellingofnewgovernmentsecuritiesinopenprivatemarketsbybanksinorderto
financethedeficit.
Answer: A
Diff:1
67) Assumingareserveratioof10percent,ifabanksells$100,000insecuritieshowmuchcanthe
bankloanout?
A) $90,000
B) $100,000
C) $110,000
D) $10,000
Answer: B
Diff:1
68) Assumingareserveratioof10percent,ifabankreceives$100,000indepositshowmuchcanthe
bankloanout?
A) $90,000
B) $100,000
C) $110,000
D) $10,000
Answer: A
Diff:1
69) TheFederalReservewillengageinopenmarketoperationswhen
A) itwantstopunishprivatebanksbecausetheyarenotkeepingtherequiredlevelof
reserves.
B) itwantstochangethemoneysupply.
C) itwantstochangethereserveratio.
D) itwantstoincreasethetotalamountofreservessincegovernmentsecuritiesare
consideredareserve.
Answer: B
Diff:1
70) Thelevelofreservesinthemonetarysystemisdeterminedby
B) theTreasuryDepartment.
C) Congress.
D) thePresidentoftheUnitedStates.
Answer: A
Diff:1
71) WhentheFedsellsaU.S.bondintheopenmarket
A) totalreserveswillincrease.
B) totalreserveswilldecrease.
C) totalreservesdonotchangebutthemoneysupplyincreases.
D) totalreservesdonotchangebutthemoneysupplydecreases.
Answer: B
Diff:2
72) WhentheFedbuysaU.S.bondintheopenmarket
A) totalreserveswillincrease.
B) totalreserveswilldecrease.
C) totalreservesdonotchangebutthemoneysupplyincreases.
D) totalreservesdonotchangebutthemoneysupplydecreases.
Answer: A
Diff:2
73) TheFedsells$1millioninbondstoabonddealer.Thebonddealersbankexperiences
A) adecreaseinassetsof$1millionasitsreservesdecreaseandanincreaseinliabilitiesof$1
millionasitsdepositsrise.
B) adecreaseinassetsof$1millionasitsreservesdecreaseandadecreaseinliabilitiesof$1
millionasitsdepositsfall.
C) anincreaseinassetsof$1millionasitsdepositsfellby$1million,andadecreasein
liabilitiesasitsreservesfellby$1million.
D) nochangeinassetsorliabilities.
Answer: B
Diff:2
74) IfabanksdepositsattheFedincreaseby$10million,then
A) boththebanksassetsandtheFedsassetsincreaseby$10million.
B) boththebanksliabilitiesandtheFedsliabilitiesincreaseby$10million.
C) thebanksassetsincreaseby$10millionandtheFedsliabilitiesincreaseby$10million.
D) thebanksassetsincreaseby$10million,butthereisnochangeattheFedsinceitdoesnot
reallyhaveassetsorliabilities.
Answer: C
Diff:2
75) TheFedbuyssecuritiesandgivesabonddealeracheckfortheamount.Afterthecheckhas
cleared,
A) reservesremainunchangedbecausetheincreaseofreservesatthedealersbankareoffset
byanincreaseinreservesattheFed.
B) reserveshavefallenbytheamountofthecheckbecausetheFedclearsthecheckby
reducingthebanksdepositsattheFed.
C) reserveshaverisenbytheamountofthecheckbecausetheFedclearsthecheckby
increasingtheamountofthebanksdepositswiththeFed.
D) reserveshavefallenbytheamountofthereservestimesthereserveratioandthemoney
supplyincreasesbythedifferencebetweentheamountofthecheckandtheincreaseinthe
reserves.
Answer: C
Diff:3
76) WhentheFedsellsgovernmentsecurities,
A) reservesincrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
saleofthegovernmentsecurities.
B) reservesdecrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
C) reservesincrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
D) reservesdecrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
Answer: D
Diff:1
77) WhentheFedbuysgovernmentsecurities,
A) reservesincrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
purchaseofthegovernmentsecurities.
B) reservesdecrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
C) reservesincrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
D) reservesdecrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
Answer: C
Diff:1
78) MarydecidestobuyabondfromJoefor$100.Themoneysupplywill
A) neitherincreasenordecrease.
B) increaseby$100.
C) increasebymorethan$100.
D) decreaseby$100.
Answer: A
Diff:2
79) Thereserveratiois20percent.IftheFedbuys$1millionofU.S.governmentsecuritiesandthe
checkisdepositedinBankA,butBankAincreasesitsvaultcashbytheentireamount,thenthe
moneysupply
A) doesnotincrease.
B) increasesby$800,000.
C) increasesby$1million.
D) increasesbymorethan$1million.
Answer: C
Diff:2
80) ApurchaseofU.S.governmentsecuritiesbytheFedcauses
A) anexpansionofthemoneysupplyequaltotheamountofthesecuritiespurchased.
B) acontractionofthemoneysupplyequaltotheamountofthesecuritiespurchased.
C) anexpansionofthemoneysupplyofmorethantheamountofthesecuritiespurchased.
D) acontractionofthemoneysupplyofmorethantheamountofthesecuritiespurchased.
Answer: C
Diff:2
81) AsaleofU.S.governmentsecuritiesbytheFedcausesa(n)
A) expansionofthemoneysupplyequaltotheamountofthesecuritiessold.
B) contractionofthemoneysupplyequaltotheamountofthesecuritiessold.
C) expansionofthemoneysupplyofmorethantheamountofthesecuritiessold.
D) contractionofthemoneysupplyofmorethantheamountofthesecuritiessold.
Answer: D
Diff:2
82) Thereserveratiois20percent.IftheFedbuys$1millionofU.S.governmentsecuritiesfroma
bonddealerbytransmittingthefundstothedealersdepositaccountatBankABC,then
A) BankABCcanmakenoadditionalloans.
B) BankABCcanmakeadditionalloansupto$800,000.
C) BankABCcanmakeadditionalloansupto$1million.
D) BankABCcannotmakeanyadditionalloans,butthesystemasawholecanmake
additionalloansupto$1million.
Answer: B
Diff:2
83) Thereserveratiois20percent.AftertheFedbuys$1millioninU.S.governmentsecuritiesfrom
abonddealerbytransmittingthefundstothedealersdepositaccountatBankA,BankAlends
aconstructioncompanyanamountequaltoitsexcessreserves.Theconstructioncompany
spendstheentireamountonlumberfromalumberyard,whichdepositstheconstruction
companyscheckinitsdepositaccountwithBankA.ThemaximumloanBankAcannowmake
is
A) $0.
B) $640,000.
C) $800,000.
D) $1million.
Answer: B
Diff:3
84) Thereserveratiois20percent.TheFedbuys$1millioningovernmentsecuritiesfromabond
dealerbytransmittingthefundstothedealersdepositaccountatBankA.BankAloansthe
maximumamountpossibletoaconstructioncompany,whichbuysmaterialsfromalumber
yard.ThelumberyarddepositstheconstructioncompanyscheckinBankB.Whatisthe
maximumloanBankAcannowmakeandthemaximumloanBankBcannowmake?
A) BankA:0;BankB:$640,000
B) BankA:0;BankB:$800,000
C) BankA:$800,000;BankB:$640,000
D) BankA:$800,000;BankB:0
Answer: A
Diff:3
85) Thereserveratiois20percent.TheFedbuys$1millioningovernmentsecuritiesfromabond
dealerbytransmittingthefundstothedealersdepositaccountatBankA.BankAmakesthe
maximumloanpossibletoaconstructioncompany,whichbuysmaterialswiththeloan.The
checkisdepositedinBankB,whichloansoutallitcantoacardealership.Tothispoint,the
moneysupplyhasincreasedby
A) $1million.
B) $1.8million.
C) $2.44million.
D) $3million.
Answer: C
Diff:3
86) Supposethatthereserveratiois20percent.Abankscustomerdepositsintoheraccount
$100,000infundsfromacheckwrittenonanaccountatanotherbank.Themaximumpotential
increaseinthemoneysupplyresultingfromthistransactionisequalto
A) $0.
B) $20,000.
C) $200,000.
D) $500,000.
Answer: A
Diff:2
87) WhentheFedbuysa$10,000bondfromabonddealer,
A) reservesofthebankingsystemincreaseby$10,000,butthemoneysupplywillonlybeable
toincreasebysomethinglessthanthisamount.
B) reservesofthebankingsystemincreaseby$10,000,butthemoneysupplycanincreaseby
morethan$10,000.
C) reservesofthebankingsystemremainunchanged,butthemoneysupplyincreasesby
$10,000.
D) reservesofthebankingsystemremainunchanged,butthemoneysupplydecreasesby
$10,000.
Answer: B
Diff:2
88) IfabonddealersellsagovernmentbondtotheFedfor$100,000,andthereserveratiois10
percent,thenthebankthatreceivesa$100,000depositfromthedealercanexpanditsloansby
________,andthemoneysupplycanincreasebyasmuchas________.
A) $80,000;$800,000
B) $10,000;$100,000
C) $90,000;$1,000,000
D) $90,000;$900,000
Answer: C
Diff:2
89) Forthemoneyexpansionprocesstoproducethemaximumpotentialmultipliereffect,
A) allloansofagivenbankhavetobedepositedinthatbank.
B) therequiredreserveratiohastobe100percent.
C) theFedhastosellgovernmentbondstobackuptheloans.
D) allloansfrombankshavetoberedepositedthroughoutthebankingsystem.
Answer: D
Diff:2
A) theproceduresforapprovingloansatcommercialbanks.
B) theproceduresofapplyingforloansatcommercialbanks.
C) theFederalReservespurchaseandsaleofexistingU.S.governmentsecurities.
D) stepsabankmustcompletebeforeitcaninvestinstocksontheopenmarket.
Answer: C
Diff:2
91) WhentheFedbuysU.S.governmentsecuritiesontheopenmarket,
A) thereservesofthebankingsystemexpand.
B) thereservesofthebankingsystemcontract.
C) themoneysupplycontracts.
D) thetotalreservesofthebankingsystemwillfallbelowrequiredreserves.
Answer: A
Diff:2
92) Whichoneofthefollowingwouldincreasereservesforthebankingsystem?
A) TheFedsellsgovernmentsecuritiesontheopenmarket.
B) TheFedbuysgovernmentsecuritiesontheopenmarket.
C) Youpurchaseanewly-issuedU.S.Treasurybond.
D) YoupurchaseaU.S.Treasurybondfromabonddealer.
Answer: B
Diff:2
93) Openmarketoperationsinvolve
A) thebuyingandsellingofexistingcorporatebonds.
B) thebuyingandsellingofexistingcorporatestocks.
C) thebuyingandsellingofexistingfederalgovernmentbonds.
D) thebuyingandsellingofFederalReservebonds.
Answer: C
Diff:2
94) IftheFedpurchases$100,000ingovernmentbondsfromabank,thenthe
A) liabilitiesofthebankriseby$100,000.
B) reservesofthebankfallby$100,000.
C) assetsofthebankriseby$100,000.
D) reservesofthebankriseby$100,000.
Answer: D
Diff:2
95) IftheFOMCdecidestoengageinthesellingofgovernmentbonds,whatistheeffectonthe
moneysupply?
A) adecrease
B) anincrease
C) nochange
D) aninitialincreasefollowedbyanadditionalrisewhenthebondsmature
Answer: A
Diff:2
96) TheFedsbuyingandsellingofexistinggovernmentsecuritiesiscalled
A) marketinterventions.
B) openmarketoperations.
C) changesinthereserverequirementratio.
D) changesinthedifferencebetweenthediscountrateandthefederalfundsrate.
Answer: B
Diff:2
97) WhenabanksellsabondtotheFed,
A) itsliabilitiesdecrease.
C) itsreservesinitiallydecrease.
B) itsliabilitiesincrease.
D) itsreservesinitiallyincrease.
Answer: D
Diff:2
98) WhenabankbuysabondfromtheFed,
A) itsliabilitiesdecrease.
C) itsreservesinitiallydecrease.
B) itsliabilitiesincrease.
D) itsreservesinitiallyincrease.
Answer: C
Diff:2
99) IftheFOMCdecidesthattheFedshouldbuybondsit
A) instructstheNewYorkFederalReserveBankstradingdesktobuythem.
B) askstheCongressforpermissiontobuythem.
C) requiresthePresidentssignatureonthebuyorder.
D) requiresthepermissionoftheFinancialOversightCommittee.
Answer: A
Diff:2
100) Ifthemoneymultiplieris2.4andtheFedbuys$8millioninsecuritiesontheopenmarket,
transactiondepositscouldpotentially
A) increaseby$19.2million.
B) increaseby$8million.
C) decreaseby$19.2million.
D) decreaseby$16.5million.
Answer: A
Diff:1
101) Supposethatthereserveratiois5%.Whatisthevalueofthepotentialmoneymultiplier?
A) 2
B) 5
C) 10
D) 20
Answer: D
Diff:1
102) TheFedbuys$1millioninbondsfromabonddealer.Thebonddealersbankexperiences
A) anincreaseinassetsof$1millionasitsreservesincreaseandadecreaseinliabilitiesasits
transactionsdepositsfall.
B) nochangeinassetsorliabilities.Assetsbothincreasedanddecreasedbytheamountofthe
check.
C) adecreaseinassetsof$1millionasthecheckingaccountofthebonddealerincreased,and
adecreaseinliabilitiesasthebanksdepositswiththeFedincreasedby$1million.
D) anincreaseinassetsof$1millionasitsreservesincreaseandanincreaseinliabilitiesof$1
millionasthedepositsinthebonddealerstransactionsaccountincreasesby$1million.
Answer: D
Diff:2
103) Otherthingsbeingequal,whentheFedbuysU.S.governmentsecurities,
A) theU.S.Treasurymustimmediatelyissuenewsecuritiestoreplacethesecuritiesthatthe
Fedhasremovedfromthemarket.
B) theFedstotalassetsandtotalliabilitiesimmediatelyexpandbyexactlytheamountofthe
Fedspurchase.
C) thequantityofdepositsintheU.S.bankingsystemexpandsbylessthantheamountofthe
Fedspurchase.
D) thequantityofpapercurrencyandcoinsincirculationexpandsbymorethantheamount
oftheFedspurchase.
Answer: B
Diff:2
104) ApurchaseofU.S.governmentsecuritiesbytheFedcauses
A) amultiplecontractionofthemoneysupplybecausedepositsfallbymorethantheamount
ofthesecuritiespurchased.
B) acontractionofthemoneysupplyequaltotheamountofthesecuritiesbecauseallother
transactionsoccurwithinthebankingsystem.
C) amultipleexpansionofthemoneysupplybecausethereserveratioislessthanone.
D) anexpansionofthemoneysupplyequaltotheamountofthesecuritiesbecauseallother
transactionsoccurwithinthebankingsystem.
Answer: C
Diff:2
105) Thereserveratiois10percent.Depositorsregularlykeep10percentoftheirdepositsascash.If
theFedbuys$1millionofU.S.governmentsecurities,excessreserves
A) increaseby$800,000.
B) increaseby$810,000.
C) increaseby$900,000.
D) increaseby$1million.
Answer: B
Diff:3
106) Toexpandthemoneysupply,theFedshould
A) buyU.S.governmentsecurities.
C) raisetherequiredreserveration.
B) sellU.S.governmentsecurities.
D) cuttaxes.
Answer: A
Diff:1
107) Tocontractthemoneysupply,theFedshould
A) reducethedifferentialbetweenthediscountrateandthefederalfundsrate.
B) increasegovernmentspendingandcuttaxes.
C) lowertherequiredreserveratio.
D) sellU.S.governmentsecurities.
Answer: D
Diff:2
108) Thereserveratioequals20percent.TheFedbuys$1millioninU.S.governmentsecurities.The
mostthemoneysupplycanincreaseis
A) $1million.
B) $4million.
C) $5million.
D) $10million.
Answer: C
Diff:2
109) Toincreasethemoneysupply,
A) theFederalReserveshouldsellgovernmentsecurities.
B) thecommercialbanksshouldreducetheirloans.
C) theFederalReserveshouldbuygovernmentsecurities.
D) theFederalReserveshouldreduceitsloanstobanks.
Answer: C
Diff:1
110) Adecreaseinthereserveratiowill
A) causethemoneysupplytodecrease.
C) notaffectthemoneysupply.
B) causethemoneysupplytoincrease.
D) decreasethemoneymultiplier.
Answer: B
Diff:1
111) Thereasonthatthecommercialbankingsystemcangenerateamultipleexpansionor
contractionofthemoneysupplyisthat
A) banksarerequiredtoholdonlyafractionoftheirdepositliabilitiesasreserves.
B) mostbanksmaintainarelativelylargestockofreserves.
C) banksholdreservesequaltotheirnetworth.
D) banksgenerallyarerequiredtoholdsurplusfundsondepositwithotherbanks.
Answer: A
Diff:1
112) Ifthereserveratioisraised,themoneymultiplier
A) islowered.
B) isincreased.
C) staysthesame.
D) isdoubled.
Answer: A
Diff:2
113) Themaximumpotentialmoneymultiplierisequalto
A) thereserveratio.
B) theinverseoftherequiredreserveratio.
C) oneminusthereserveratio
D) thenumberofdollarsonreserve.
Answer: B
Diff:1
114) Ifthereserveratiois25percent,themaximumpotentialmoneymultiplieris
A) 1.
B) 4.
C) 8.
D) 25.
Answer: B
Diff:1
115) Withareserveratioof10percent,themaximumpotentialmoneymultiplieris
A) 1.
B) 5.
C) 10.
D) 100.
Answer: C
Diff:1
116) Forthepastseveraldecades,theU.S.M1multiplierhasbeenbetween________.
A) 1.0and2.0.
B) 2.5and3.0.
C) 3.0and6.0.
D) 6.5and10.0.
Answer: B
Diff:1
117) Thelargeristhereserveratio,
A) thegreateristheincreaseinthemoneysupplyforanincreaseinbankdeposits.
B) themorelikelyitistherewillbecurrencydrains.
C) thesmalleristhemaximumpotentialmoneymultiplier.
D) themoredifficultitisfortheFederalReservetocontrolthemoneysupply.
Answer: C
Diff:1
118) Byaffectingtheamountofreservesinthebankingsystem,theFedcan
A) affectthesizeofthemoneysupply.
B) changethemarginaltaxrates.
C) increasegovernmentpurchases.
D) reducegovernmentpurchases.
Answer: A
Diff:2
119) Initially,thereserveratiois10percent.Nowbanksdecidetheywantanadditional10percentof
depositsasreserves.Therearenocurrencydrains.IftheFedbuys$1millionofU.S.government
securities,themoneysupplywill
A) notchangebecauseoftheexcessreservesbankskeeponhand.
B) increaseby$1million.
C) increaseby$5million.
D) increaseby$10million.
Answer: C
Diff:2
120) Followinganewdepositof$50atabank,drawnonfundspreviouslyheldondepositatanother
bank,whenthereserveratiois10percent,themaximumpotentialincreaseinthemoneysupply
willbe
A) $0.
B) $50.
C) $400.
D) $500.
Answer: A
Diff:1
121) Ifthereserveratiois10percentandreservesinthecommercialbankingsystemincreaseby
$10,000,themaximumpossibleexpansionofdemanddepositsis
A) $10,000.
B) $90,000.
C) $100,000.
D) $1,000,000.
Answer: C
Diff:1
122) WhentheFederalReservesellsagovernmentsecuritytoabonddealer,whichtransmits
paymentfromatransactionsdepositaccountatabank,
A) thecashoftheFederalReservewilldecrease.
B) thenetworthofthecommercialbankwilldecrease.
C) theloansofthecommercialbankwillincrease.
D) themoneysupplywilldecrease.
Answer: D
Diff:1
123) IftheFederalReservesells$100ofsecuritiesthroughacommercialbankwhenthereserve
requirementis10percent,themaximumpotentialchangeinthemoneysupplyis
A) a$100increase.
B) a$1,000increase.
C) a$100decrease.
D) a$1,000decrease.
Answer: D
Diff:1
124) IftheFederalReservebuys$500ofgovernmentsecuritieswhentherequiredreserveratiois20
percent,themaximumpotentialchangeinthemoneysupplyisa(n)
A) increaseby$100.
B) increaseby$2,500.
C) decreaseby$100.
D) decreaseby$2,500.
Answer: B
Diff:1
125) Whichofthefollowingwouldreducethemoneymultiplier?
A) Reducingthereserveratio
B) BondpurchasesbytheFed
C) Cashdrainsfrombanks
D) Bankreductionsindesiredreserveholdings
Answer: C
Diff:1
126) Whichofthefollowingwouldreducethemoneymultiplier?
A) ThepurchaseofbondsbytheFed
B) Loweringthereserveratio
C) Increasesinthereserveratio
D) Aflowofcurrencyintothebankingsystem
Answer: C
Diff:1
127) Accordingtothetext,theactualM1multiplierintheU.S.todayis
A) between0and1.
B) between1.5and2.0.
C) negative.
D) over10.
Answer: B
Diff:1
128) Accordingtothetext,theactualM2multiplierintheUnitedStatestodayis
A) about5.
B) between1.0and2.0.
C) negative.
D) over10.
Answer: B
Diff:1
129) Theformula
1
isthe
requiredreserveratio
A) federalfundsrate.
C) potentialmoneymultiplier.
B) discountrate.
D) actualchangeinthemoneysupply.
Answer: C
Diff:1
130) Theactualmoneymultipliermultipliedbythechangeintotalreservesisthe
A) federalfundsrate.
B) discountrate.
C) potentialmoneymultiplier.
D) actualchangeinthemoneysupply.
Answer: D
Diff:1
131) Thepotentialmoneymultipliergivesus
A) thegrowthinrealnationalincomewhenthemoneysupplyincreases.
B) thegrowthinthemoneysupplywhenincomeincreases.
C) themaximumpotentialchangeinthemoneysupplyduetoachangeinreserves.
D) themaximumpotentialchangeinthemoneysupplyduetoachangeinincome.
Answer: C
Diff:1
132) Whenpeopledecidetoincreasetheamountofcurrencytheyarecurrentlyholding
A) thepotentialmoneymultiplierwillincrease.
B) thepotentialmoneymultiplierwilldecrease.
C) theactualmoneymultiplierwillincrease.
D) theactualmoneymultiplierwilldecrease.
Answer: D
Diff:1
133) Whenbanksreducethereserveratio,thepotentialmoneymultiplier
A) increases.
B) decreases.
C) remainsunchanged.
D) sometimesincreases,andsometimesdecreasesdependingontherateofinflation.
Answer: A
Diff:2
134) IfproceedsfromloansareNOTdepositedbackinthebankingsystem,then
A) themagnitudeofthemultiplierprocessisreduced.
B) thereisnoeffectonthemagnitudeofthemultiplierprocess.
C) themagnitudeofthemultiplierprocessisincreased.
D) theFedintervenesbysellingmoreFederalgovernmentbonds.
Answer: A
Diff:2
135) Thevalueofthemoneymultiplierdependson
A) thereserveratio.
B) theratiooftotalassetstototalliabilitiesforthebankingsystemasawhole.
C) theinterestrateofferedonbondscurrentlybeingsoldbytheFed.
D) theinterestrateofferedonbondscurrentlybeingpurchasedbytheFed.
Answer: A
Diff:2
136) Ifthereserveratiodecreasesfrom20percentto10percent,thenthepotentialmoneymultiplier
A) increasesfrom5to10.
B) decreasesfrom10to5.
C) doesnotchange.
D) decreasesfrom20to10.
Answer: A
Diff:2
137) Anincreaseinthereserveratio
A) hasanexpansionaryeffectonthemoneysupply.
B) hasacontractionaryeffectonthemoneysupply.
C) increasesthemoneymultiplier.
D) willcausebankstomakemoreloans.
Answer: B
Diff:2
138) SupposethattheFedpurchases$1,000,000worthofbondsandthatthereserveratiois25
percent.Then,themaximumpotentialexpansionofdepositsis
A) $4,000,000.
B) $10,000,000.
C) $400,000.
D) $25,000,000.
Answer: A
Diff:2
139) Whatisafractionalreservebankingsystem?Howlonghasthefractionalreservebanking
systembeeninexistence?
Answer: Afractionalreservebankingsystemisasysteminwhichdepositoryinstitutionshold
reservesthatarelessthantheamountoftotaldeposits.Theyhavebeeninexistenceat
least2,500years.
Diff:1
140) Whatarereserves?DiscussthevarioustypesofreservesusedintheU.S.bankingsystem.
Answer: Reservesareassetsheldbyadepositoryinstitutionthatareusedtomeetwithdrawal
demands.IntheU.S.FederalReserveSystem,reservesincludedepositsheldbyFederal
Reservedistrictbanksfordepositoryinstitutionsplusthevaultcashinthedepository
institution.Totalreservesareanythingthatthelawallowsbankstoclaimasreserves.
Requiredreservesarethevalueofreservesthedepositoryinstitutionmustholdand
excessreservesarethereservestheinstitutionholdsinexcessoftherequiredreserves.
Diff:1
141) Asfarasreservesanddepositsareconcerned,describetheassetsandliabilitiesofabank.
Answer: Themajorliabilitiesofabankarethedepositstheyhold. Transaction depositsaredrawn
downeverytimeadepositorwritesacheck.Theassetsarethereservesthebankhasand
anyloanstheyhavemade.
Diff:1
142) ExplainwhathappenstothemoneysupplywhentheFedsellsbondsontheopenmarket.What
happenstotheassetsandliabilitiesoftheFed?
Answer: ThemoneysupplyfallswhentheFedsellsbondsontheopenmarket,becausethe
purchaserpaysforthebondsbytransmittingfundsfromatransactionsdeposit.The
reservesofthebankfallbytheamountofthefundstransfer.TheassetsoftheFedfall,
becausethebondssoldhadbeenassetsandtheliabilitiesoftheFed.Theliabilitiesofthe
Feddecrease,becausethepurchasersbanksreservesdeclinedbytheamountofthe
transfer.
Diff:3
143) SupposetheFedpurchases$1millioninbondsintheopenmarket.Explainhowthemoney
supplycanincreasebymorethan$1million.
Answer: Transactiondepositsandreservesincreaseby$1millionasaresultofthepurchase.Since
thereserveratioislessthanone,thebanknowcanloansomeofthereservestosomeone.
Ifitdoes,thenthetransactiondepositsoftheborrowerincreasebytheamountofthe
loan,sothemoneysupplyhasincreasedfurther.
Diff:2
144) WhydoesthemoneysupplyincreasewhentheFedbuysabondbutdoesnotchangewhena
businessbuysabond?
Answer: ThereservesinthebankingsystemincreasewhentheFedbuysbondsbutremain
unchangedwhenabusinessbuysbonds.Whenabusinessbuysbonds,acheckiswritten
ononebankanddepositedinanother.Thereservesofonebankincreasebutfallinthe
other,sothereisnonetchange.WhentheFedbuysbonds,reservesincreaseinabankbut
dontdecreaseanywhereelsesincetheFedcanaddtothereservesofamemberbank.
Diff:3
145) ExplainhowtheFedincreasesthemoneysupplywhenitbuysbondsintheopenmarket.
Answer: TheFedbuysbondsintheopenmarketandpaysforthebondsbytransmittingfundsto
thebonddealersdepositaccountinabank,atwhichpointitbecomespartofthemoney
supply.TheFedhasjustcreatedmoney,becauseithasaddedtothereserveaccountof
thebonddealersbank,andthemoneysupplyincreasesbytheamountofthepurchase.
Diff:2
146) Howaretheassetsandliabilitieschangedforabonddealer,thebonddealersbank,andtheFed
whentheFedbuys$100,000inbonds?
Answer: Thebonddealertradesabondforatransactionsdepositof$100,000.Thatis,theformof
theassetschangebutnotthetotalvalue.Assetsandliabilitiesofthebankincreaseby
$100,000sincetransactiondepositsincreasewhentheFeddepositsthefunds,andthe
banksreservesincreasebythesameamount.TheassetsoftheFedincreaseby$100,000
whenitbuysthebondanditsliabilitiesincreaseby$100,000becausereservesofthebank
ondepositwiththeFedincrease.Themoneysupplyincreasesasthebondisconverted
intomoney.
Diff:3
147) Supposeapersondepositsapaycheckinabank.Thetransactiondepositsaremoney,sohasthe
moneysupplyincreased?Explain.
Answer: No.Thecheckwasdrawnontheemployersaccount.Transactiondepositsfellinthat
bankbythesameamounttransactiondepositsincreasedinthisbank,sothetotalmoney
supplyhasnotchanged.
Diff:2
15.7FederalDepositInsurance
1) TheFederalDepositInsuranceCorporationinsures
A) banksagainstlawsuits.
B) thefederalfundsmarket.
C) thedepositsheldinmemberbanks.
D) thedepositsheldintheFed.
Answer: C
Diff:1
Topic: 15.7FederalDepositInsurance
2) TheFDICwascreatedbecause
A) banksfailedtocreatemoneythewaytheFedwantedthemto.
B) peopleworriedaboutbankfailuresafterWorldWarI,eventhoughveryfewbanks
actuallyfailed.
C) thereweresomanybankfailuresinthe1930s.
D) theFedkepttherequiredreserveratiotoolow.
Answer: C
Diff:1
3) WhichofthefollowinghasbeenaproblemfacedbytheFDICinitsprovisionoffederaldeposit
insurance?
A) Moralhazardarisingfromthetendencyforthehighest-riskbankstobethosemost
interestedinobtainingdepositinsuranceinthefirstplace
B) Adverseselectionarisingfromthetendencyforbankstotakeonmoreriskafterthey
receivedepositinsurance
C) Moralhazardarisingfromthetendencyforbankstotakeonmoreriskaftertheyreceive
depositinsurance
D) Arelativelylownumberofbankfailureseachyear,whichhasreducedtheneedfor
depositinsurance
Answer: C
Diff:2
4) WhichofthefollowingstatementsabouttheFDICiscorrect?
I. ThedepositinsurancepremiumschargedbytheFDICtoamemberbankfullyreflectthe
riskinessofthatbanksassets
II. ThemannerinwhichtheFDICissetuphelpsprotectdepositoryinstitutionsfromthe
rigorsoftruemarketcompetition
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: B
Diff:1
5) Bankrunsareapossibilitybecause
A) theFDICisinefficient.
B) bankersareoftenpoorbusinesspeople.
C) indifficulttimespeoplewantcurrencyinsteadofdemanddeposits.
D) banksdonotkeepenoughreservestocoveralltheirdepositoryliabilities.
Answer: D
Diff:2
6) ThemannerinwhichFDICdepositinsuranceissetupintheUnitedStatesencouragesbanksto
A) betooconservativeintheirlendingpractices.
B) maintainexcessreservesthataretoogreat.
C) makeriskierloansthantheyotherwisewould.
D) rejectsomeloansthatprobablywouldbeprofitable.
Answer: C
Diff:2
7) IftheFDICeliminateditsinsuranceprogramfordeposits,then
A) thebankingsystemwouldprobablyfail.
B) individualdepositorswouldhavemoreincentivetoascertainthesoundnessandsolvency
ofthebank.
C) bankswouldprobablyholdfewerreserves.
D) moralhazardwouldbeincreased.
Answer: B
Diff:1
8) Asymmetricinformationbeforeatransactiontakesplacegeneratestheproblemof
A) flawedbankregulation.
B) intermediation.
C) adverseselection.
D) bankruns.
Answer: C
Diff:1
9) Depositinsuranceshieldsdepositorsfromtheadverseeffectsofriskydecisionsandthereby
A) encouragesriskierbehavioronthepartofmanagersofdepositoryinstitutions.
B) encouragesdepositorstomonitorthemanagersofdepositoryinstitutionsmoreclosely.
C) encouragesmoralhazardonthepartofdepositors.
D) generatesamoreefficientbankingsystem.
Answer: A
Diff:2
10) Thefactthatindividualswhosecreditworthinessislessthanitappearstobearethosewhoare
mostwillingtoborrowfundsatanygiveninterestrateisanexampleof
C) moralbonuses.
D) diverseorigins.
Answer: A
Diff:1
11) Whichofthefollowingstatementsis/arecorrect?
I. Depositoryinstitutionmanagersundertakeriskieractionsthantheyotherwisewould
becauseoftheexistenceofdepositinsurance
II. Becauseoftheexistenceofdepositinsurance,depositorsinsavingsandloansandother
bankshavelittleincentivetoinvestigatethefinancialstabilityoftheseinstitutions
A) Ionly
B) IIonly
C) BothIandII
D) NeitherInorII
Answer: C
Diff:1
12) Lendersgenerallywantborrowerstoagreetoinvestprudently,yetoncealoanismade
borrowersmayusethefundsinahighlyriskyfashion.Thisleadstotheproblemof
A) criticalmass.
B) depositinsurance.
C) investorselection.
D) moralhazard.
Answer: D
Diff:1
13) TheFederalDepositInsuranceCorporation
A) insuresthedepositsheldbytheFed.
B) insuresthedepositsheldinbanks.
C) insuresbanksagainstlawsuitsbydepositors.
D) insurestheopenmarketoperationsoftheFed.
Answer: B
Diff:1
14) Asof2010,theFDICinsureddepositaccountsuptowhichofthefollowingamounts?
A) $10,000.
B) $25,000.
C) $100,000.
D) $250,000.
Answer: D
Diff:1
15) TheFDIChelpsprevent
A) riskybehavioronthepartofbankers.
C) bankruns.
B) inflation.
D) riskybehavioronthepartofdepositors.
Answer: C
Diff:2
16) TheFDICfeesystemencouragesdepositoryinstitutionsto
A) makeriskierloansthantheywouldotherwise.
B) rejectloansthatprobablywouldhavebeenprofitable.
C) seekonlyamodestrateofreturn.
D) operatetheirinstitutionsintooconservativeafashion.
Answer: A
Diff:2
17) Asymmetricinformationbeforeatransactiontakesplacegeneratestheproblemof
A) bankruns.
B) irrationalbehavior.
C) moralhazard.
Answer: D
Diff:1
18) Ifdepositoryinsuranceexists,bankmanagersmaymakeriskierloansthantheywouldhave
otherwise,whichisanexampleof
A) regulatorylag.
B) irrationalbehavior.
C) moralhazard.
Answer: C
Diff:2
19) WhichofthefollowingisNOTapotentialproblemduetofederaldepositoryinsurance?
A) Bankshaveanincentivetomakeriskierloansthantheywouldotherwise.
B) Depositorshavelittleincentivetomonitorthebehaviorofthemanagersofthedepository
institutions.
C) Depositorsdemandgreaterinterestratesontheirdepositstocompensatethemforthe
riskierbehaviorofthemanagersofthedepositoryinstitutions.
D) Lendershavelessincentivetoinvestigatethecredit-worthinessofborrowers.
Answer: C
Diff:3
20) BankexaminationsbytheFDIChelpreducethe________problem,bypreventing bank

managersfromallocatingfundsalreadyobtainedfromdepositorstonon -creditworthyloans.
A) moralhazard
B) principledhazard
C) adverseselection
D) contraryselection
Answer: A
Diff:2
21) Inadditiontoinsuringaccounts,theFDICtodayhastheadditionalpowerof
A) settingreserverequirements.
B) establishingFOMCgoals.
C) establishingthediscountrate.
D) establishinghighercapitalrequirementsforbanks.
Answer: D
Diff:2
22) TheFederalDepositInsuranceCorporation
A) increasesthestabilityofthebankingsystembyreducingthelikelihoodofbankruns.
B) discouragesbanksfromengaginginexcessiverisktaking.
C) onlyinsuresdepositsinmoney-centerbanks.
D) wasestablishedafterthePanicof1907.
Answer: A
Diff:2
23) BecausedepositsareinsuredbytheFDIC,mostofusdonotlookatthelendingbehaviorofour
banks.Thiscreatesa(n)________problem.
A) moralhazard
B) principledhazard
C) adverseselection
D) contraryselection
Answer: A
Diff:2
24) BankXhadareputationforaskingfewquestionswhenitprovidedloans.Fiveyearslater,the
majorityoftheloanswerenotrepaid.Thisisbecausethebankhadfailedtoaddressthe
A) adverseselectionproblem.
B) moralhazardproblem.
C) contraryselectionproblem.
D) free-riderproblem.
Answer: A
Diff:2
25) Whichofthefollowingrepresentsapreventativemeasureagainstbankruns?
A) ThePresidentoftheUnitedStatescanorderbankstopaydepositors.
B) TheFederalReservecanlowerreserverequirementstoensurethatbankshavesufficient
funds.
C) TheFDICprovidesdepositinsurance.
Answer: C
Diff:2
26) Whatwouldcauseabankrun?
A) Depositorsfeelthatthebankdoesnothavesufficientassetstocovertheirdeposits.
B) Depositorsfeelthattheyareearningtoolowofareturnontheirdeposits.
C) Borrowersfeelthattheyarebeingchargedtoohighofaninterestrateontheirloans.
D) Bankmanagerschoosetoholdmoreexcessreserves.
Answer: A
Diff:2
27) Whateffecthasthepresenceoffederaldepositinsurancehadonthebankingindustry?
A) Banksnowholdmoreexcessreserves.
B) Bankshavemadeitmoredifficultforcustomerstoqualifyforloans.
C) Bankshavemaderiskierloans.
D) Depositorshavebecomemorevigilantinmonitoringthedecisionsmadebymanagersof
theirbanks.
Answer: C
Diff:2
28) ThegovernmentagencythatinsuresdepositsheldinbanksintheUnitedStatesis
B) theFederalBankInsuranceCorporation.
C) theFederalAssetInsuranceCorporation.
D) theFederalDepositInsuranceCorporation.
Answer: D
Diff:2
29) DuetotheexistenceoftheFDIC,banks
A) maymakeriskierloansknowingthattheirdepositorsareinsured.
B) havenotchangedtheirbehaviorevenwiththeexistenceofinsurance.
C) becomemorecautiousinmakingloans.
D) arenolongerconcernedaboutnetworth.
Answer: A
Diff:2
30) InwhichyearwastheFederalDepositInsuranceCorporation(FDIC)established?
A) 1913
B) 1929
C) 1933
D) 1951
Answer: C
Diff:2
31) TheprimarypurposeoftheFDICistoreducethepotentialfor
A) governmentregulations.
B) reservecheating.
C) bankruns.
D) excessiveinterestrates.
Answer: C
Diff:2
32) Beginninginlate2010,theFDICsoughttoincreasethepublicsconfidenceindepository
institutionsby
A) loweringinsurancepremiumsforbankdeposits.
B) eliminatinginsurancepremiumsforbankdeposits.
C) assessinginsurancepremiumsonbankstotalliabilities.
D) changingthescopeofinsurancetobanksassets.
Answer: C
Diff:2
QuestionStatus: New
33) Explaintheforcesthatcausedthesavingsandloandebacleinthelatterhalfofthe1980s.
Answer: Depositinsurancecreatedamoralhazardprobleminwhichsavingsinstitutionshadan
incentivetomakeriskierloansthantheywouldhavemadeintheabsenceofdeposit
insurance.Inaddition,becausetheirdepositswerefederallyinsured,depositorsof
savingsinstitutionshadlessincentivetomonitortherisksincurredbythemanagers.Asa
result,theinstitutionsextendedlargeamountsofhigh -riskloans,manyofwhich
generatedlossesthatresultedinfailuresbynumerousinstitutions.
Diff:2
Chapter16
DomesticandInternationalDimensionsofMonetaryPolicy
16.1TheDemandforMoney
1) Whatarethetwofeaturesofmoneythatdistinguishitfromallothergoodsintheeconomy?
A) Moneyisgovernmentissuedanditisredeemableforgoldorsilver.
B) Moneyisacceptedasamediumofexchangeanditisthecommonunitofaccountusedto
expressprices.
C) Moneyispartofeverybartertransactionanditisdivisible.
D) Moneyisacommonunitofaccountanditisalsocanbetradedforothercurrenciesata
guaranteedexchangerate.
Answer: B
Diff:1
Topic: 16.1TheDemandforMoney
2) Whichofthefollowingisafactorinfluencingthedemandformoney?
A) Transactionsdemand
B) Precautionarydemand
C) Assetdemand
D) Alloftheabovearecorrect
Answer: D
Diff:1
3) Holdingmoneytomeetunplannedexpendituresandemergenciesisknownas
A) transactionsdemand.
B) precautionarydemand.
C) assetdemand.
D) aggregatedemand.
Answer: B
Diff:1
4) Moneyisa________andatransactionisa________.
A) stock;stock
B) flow;flow
C) flow;stock
Answer: D
Diff:2
D) stock;flow
Chapter16DomesticandInternationalDimensionsofMonetaryPolicy 773
5) Accordingtothetext,themainreasonforpeopletoholdmoneyis
A) toenjoylookingatthepicturesofpastleaders.
B) totellotherpeoplehowrichtheyare.
C) becausetheyareirrational.
D) touseitfordifferentreasons.
Answer: D
Diff:1
6) Whatisthemostcommonreasonpeopledemandmoney?
A) Eachbillandcoinisareflectionofimportantpeopleandeventsinanationshistory.
B) Peopledesiretousemoneyasamediumofexchangewhentheybuygoodsandservices.
C) Sinceveryfewofusengageinaflowoftransactions,moneyisourfinancialsafetynet.
D) Theydemandmoneytoensurethatthenationsgovernmentwillnotspendtoomuch.
Answer: B
Diff:1
7) Whenhouseholdsholdmoneyforunplannedexpendituresandemergencies,itiscalled
A) thespeculativedemandformoney.
B) thetransactionsdemandformoney.
C) theirrationaldemandformoney.
D) theprecautionarydemandformoney.
Answer: D
Diff:1
8) Apersonputsa$100billintheglovecompartmentofhiscarincaseofanemergency.Thisisan
exampleof
A) theprecautionarydemandformoney.
B) thetransactiondemandformoney.
C) theemergencyinvestmentdemandformoney.
D) theassetdemandformoney.
Answer: A
Diff:2
9) Thedemandformoneytocoverunexpectedexpendituresandtomeetemergenciesisknownas
A) thetransactionsdemandformoney.
B) theprecautionarydemandformoney.
C) theassetdemandformoney.
D) theterminaldemandformoney.
Answer: B
Diff:1
10) Precautionarydemandformoneywillfallwhen
A) theinterestraterises.
C) themoneysupplyincreases.
B) theinterestratefalls.
D) governmentspendingfalls.
Answer: A
Diff:2
11) Theprecautionarydemandforholdingmoneyarisesbecause
A) peoplewantbeabletomakeunexpectedpurchasesortomeetemergencies.
B) creditcardschargelowinterestrates,whichmakesmoneymoreattractivethancredit.
C) peoplewouldratherholdmoneyintheformoftimedepositsthanintheformofhard
currency.
D) expectedtransactionsarecompletedmoreeasilywithdebitcardsthanwithcreditcards.
Answer: A
Diff:1
12) Thetransactionsdemandformoneyexistsbecausehouseholds
A) areinsensitivetointerestratechanges.
B) mustsaveforunexpectedemergencies.
C) donotlikethefactthatmoneyisaliquidasset.
D) donotreceivetheirincomesatthesametimetheywishtomakepurchases.
Answer: D
Diff:1
13) Whenpeoplewanttoholdmoneytomakeregularplannedexpenditures,thisis
A) thetransactiondemandformoney.
B) theassetdemandformoney.
C) theprecautionarydemandformoney.
D) thespendingdemandformoney.
Answer: A
Diff:1
14) AsnominalGrossDomesticProduct(GDP)rises,peoplewillwishto
A) holdlessmoneyfortransactions.
B) holdmoremoneyfortransactions.
C) spendless.
D) investonlyinstocks.
Answer: B
Diff:2
15) Thetransactionsdemandformoney
A) variesnegativelywithnominalGrossDomesticProduct(GDP).
B) variesinverselywithnominalGrossDomesticProduct(GDP).
C) variesdirectlywithnominalGrossDomesticProduct(GDP).
D) isunrelatedtonominalGrossDomesticProduct(GDP).
Answer: C
Diff:1
16) Wheninterestratesrise,thetransactionsdemandformoneyusually
A) decreases.
B) increases.
C) decreasesinitiallyandthenincreasestotheoriginalposition.
D) doesnotchange.
Answer: A
Diff:1
17) AsnominalGrossDomesticProduct(GDP)rises,thetransactionsdemandformoney
A) increases,andthemoneydemandcurveshiftstotheleft.
B) decreases,andthemoneydemandcurveshiftstotheleft.
C) increases,andthemoneydemandcurveshiftstotheright.
D) remainsconstant,andthemoneydemandcurveremainsthesame.
Answer: C
Diff:1
A) variesinverselywiththeprecautionarydemandformoney.
B) variesdirectlywiththerateofinterest.
C) isafunctionofnominalGrossDomesticProduct(GDP).
D) isdeterminedbytheFederalReserveSystem.
Answer: C
Diff:1
19) Thetransactionsdemandformoneywillincreasewhen
A) therateofinterestincreases.
B) thepricelevelfalls.
C) nominalGrossDomesticProduct(GDP)increases.
D) nominalGrossDomesticProduct(GDP)decreases.
Answer: C
Diff:1
A) variesdirectlywithnominalGrossDomesticProduct(GDP).
B) variesinverselywithnominalGrossDomesticProduct(GDP).
C) variesnegativelywithrealnominalGrossDomesticProduct(GDP).
D) hasnorelationshipwithnominalGrossDomesticProduct(GDP).
Answer: A
Diff:2
21) Thetransactionsdemandformoneyrefersto
A) thedesireforwealth.
B) thedemandtoholdmoneyforuseinplannedpurchases.
C) thedesireforincome.
D) thedemandtoholdmoneyasalong-termstoreofvalue.
Answer: B
Diff:2
22) Theassetdemandformoneyisrelatedtowhichfunctionofmoney?
A) Mediumofexchange
B) Unitofaccounting
C) Storeofvalue
Answer: C
Diff:1
23) Whenhouseholdschoosetoholdmoneyasastoreofvalue,ratherthanholdingassetssuchas
certificatesofdeposit,stocks,andbonds,________demandformoneyresults.
A) liquidity
B) transactions
C) precautionary
D) asset
Answer: D
Diff:1
24) Supposethetypicalhouseholdholds$1,000whentheinterestrateis5percent.Whenthe
interestraterisesto6percent,thetypicalhouseholdwouldmostlikelyhold
A) moremoneybecausetheopportunitycostofholdingmoneyislower.
B) lessmoneybecausetheopportunitycostofholdingmoneyislower.
C) moremoneybecausetheopportunitycostofholdingmoneyishigher.
D) lessmoneybecausetheopportunitycostofholdingmoneyishigher.
Answer: D
Diff:1
25) Whatisaprimarydeterminantoftheassetdemandformoney?
I. theinterestrate
II. theopportunitycostofholdingmoney
III. thesupplyofmoney
A) Ionly
B) IIIonly
C) bothIandII
D) bothIIandIII
Answer: C
Diff:1
26) Oneoftheeconomiccostsofholdingcurrencyisthat
A) itfulfillsnoprecautionaryrole.
B) itfulfillsnotransactionsrole.
C) itearnsnointerestincome.
D) itsrealvaluealwaysincreases.
Answer: C
Diff:1
27) Themoneydemandfunctionimpliesthatmoneydemandis
A) positivelyrelatedtointerestrates.
B) negativelyrelatedtobondprices.
C) negativelyrelatedtointerestrates.
D) negativelyrelatedtotransactionsintheeconomy.
Answer: C
Diff:1
28) Boththeprecautionaryandassetdemandformoneyareinfluencedby
A) theU.S.Treasury.
B) theinterestrate.
C) goldprices.
D) noneoftheabove.
Answer: B
Diff:2
29) Usingtheinterestrateasameasureoftheopportunitycostofholdingmoney,thedemandfor
moneycurve
A) slopesupwardwithrespecttotherateofinterest.
B) isnotaffectedbythepricelevel.
C) slopesdownwardwithrespecttotherateofinterest.
D) isvertical.
Answer: C
Diff:1
30) Whentherateofinterestintheeconomyincreases,
A) themarketpriceofexistingbondswillfall.
B) thetransactiondemandformoneywillincrease.
C) realGrossDomesticProduct(GDP)willincrease.
D) theassetdemandformoneywillincrease.
Answer: A
Diff:1
31) Whentherateofinterestintheeconomyfalls,therewillbe
A) anincreaseinthemarketpriceofexistingbonds.
B) adecreaseinthetransactiondemandformoney.
C) lessinvestmentbybusinesses.
D) anincreaseinnominalGrossDomesticProduct(GDP).
Answer: A
Diff:1
32) Theopportunitycostofholdingmoneyrefersto
A) theservicefeesassociatedwithcheckingaccounts.
B) theservicefeesassociatedwithcheckingaccountsplusthecostsundertakentoprevent
theft.
C) theinterestthatcouldhavebeenearnedifthemoneybalanceshadbeentransferredtoan
interest-bearingasset.
D) thepleasurethatwouldhavebeenreceivedifthemoneybalanceshadbeenusedtobuya
goodorservice.
Answer: C
Diff:2
33) Thedemandformoneycurveisdrawnwith
A) theinterestrateontheverticalaxisandthecurveslopingdown.
B) theinterestrateontheverticalaxisandthecurveslopingup.
C) nominalGrossDomesticProduct(GDP)ontheverticalaxisandthecurveslopingup.
D) nominalGrossDomesticProduct(GDP)onthehorizontalaxisandthecurvesloping
down.
Answer: A
Diff:2
34) Moneysuseinnon-bartertransactionsrelatestoitsroleasa
A) storeofvalue.
Answer: B
Diff:1
35) Assetdemandformoneyisholdingmoney
A) tomeetunplannedexpendituresandemergencies.
B) asamediumofexchangetomakepayments.
C) asastoreofvalueinsteadofotherassets.
D) tospeculateonthestockmarketandbonds.
Answer: C
Diff:1
36) Somethingthataffectstheamountofmoneyinexistencewill
A) havenoparticulareffect.
B) notaffecttheeconomyasawholebutmayaffectcertainkeymarketssuchasthemarket
forloans.
C) haveaneffectonlyifthechangeinmoneyislarge.
D) affectallmarkets.
Answer: D
Diff:1
A) Todemandmoneyistodemandwealth.
B) Todemandmoneyistodemandahigherincome.
C) Tousemoney,onemustholdmoney.
D) Togetmoremoney,onemustearninterestonmoney.
Answer: C
Diff:1
38) Thedemandformoneyreferstothedesireto
A) holdagoodthatyieldsutilitywhenitisconsumed.
B) ahighincome.
C) spendmoneybecausemoneyisusedinalltransactions.
D) holdmoneybecausemoneyisusedinallnon-bartertransactions.
Answer: D
Diff:1
39) Themainreasonpeopleholdmoneyisthat
A) moneyprovidesastandardofvalue.
B) moneyisusedtobuygoodsandservices.
C) moneyisintrinsicallyvaluable.
D) moneyispower.
Answer: B
Diff:1
40) WhichofthefollowingisNOTareasonwhypeoplearemotivatedtoholdmoney?
A) Assetdemand.
B) Precautionarydemand.
C) Liabilitydemand.
D) Transactionsdemand.
Answer: C
Diff:1
41) PeopledemandmoneyforallofthefollowingreasonsEXCEPT
A) itisamediumofexchangetomakepayments.
B) itgeneratesarateofreturn.
C) itcanmeetunplannedexpenditures.
D) itisastoreofvalue.
Answer: B
Diff:1
42) Thetransactionsdemandformoneyisthedemandtoholdmoneyto
A) makeregular,expectedpurchases.
B) meetunplannedexpenditures.
C) storeoneswealth.
D) purchasebondswheninterestratesincrease.
Answer: A
Diff:1
43) Whenapersonholdsmoney,theygiveup
A) thepleasureassociatedwithspendingmoney.
B) thepleasureassociatedwithsavingmoney.
C) theinterestthatcouldhavebeenearnedifthemoneyhadbeenchangedintoan
interest-bearingasset.
D) nothing,sincethepersoncanalwaysusethemoneytobuygoodsorservicesor
interest-bearingassets.
Answer: C
Diff:2
44) Thetransactiondemandformoneyvaries
A) directlywiththeinterestrate.
B) directlywithnominalGDP.
C) inverselywithnominalGDPandrealGDP.
D) inverselywithnominalGDPonly.
Answer: B
Diff:2
45) AsrealGDPincreases,peoplehold
A) lessmoneybecausetheywillwanttoincreasetheamountofsavings.
B) lessmoneybecausetheywillwanttocollectinterest.
C) aboutthesameamountofmoneysincethathasbeenenoughinthepast.
D) moremoneysincetheywillincreasetheirpurchases.
Answer: D
Diff:1
46) Amajordifferencebetweenthetransactionsdemandformoneyandtheprecautionarydemand
isthatthe
A) transactionsdemandmeansthatpeopleareforegoinginterestbuttheyarenotforegoing
interestintheprecautionarydemand.
B) transactionsdemandleadstothepurchaseofassetswhiletheprecautionarydemanddoes
not.
C) transactionsdemandinvolvesexpectedexpenditureswhiletheprecautionarydemand
involvesunexpectedexpenditures.
D) transactionsdemandisforemergencieswhiletheprecautionarydemandisforeveryday
expenditures.
Answer: C
Diff:1
47) Holdingmoneyasamediumofexchangetomakepaymentsis
B) thecapitaldemandformoney.
Answer: A
Diff:1
48) Albertopurchasestencupsofcoffeeaweek.Theamountofmoneythatheholdstopurchase
tencupsofcoffeeisthe
A) precautionarydemandformoney.
B) transactionsdemandformoney.
C) assetdemandformoney.
D) moneybalancedemandformoney.
Answer: B
Diff:2
49) Holdingmoneytomeetunplannedexpendituresis
Answer: C
Diff:1
50) Whentheinterestrateincreases,peoplewilladjusttheirprecautionarydemandformoney
A) upward.
B) downward.
C) notatall.
D) downwardorupwarddependingupontheactualsupplyofmoney.
Answer: B
Diff:1
51) Theprecautionarydemandformoneyiswhenpeopleholdmoney
A) fortheinterestityields.
B) asastoreofvalue.
C) asamediumofexchange.
D) tomeetunplannedexpenditures.
Answer: D
Diff:1
52) Therelationshipbetweentheinterestrateandtheprecautionarydemandformoneyis
A) positive.
B) inverse.
C) positivesometimesandinverseothertimes.
D) nonexistent.
Answer: B
Diff:1
53) Apersonispreparingforalongautomobiletripandcashesinacertificateofdepositforcashin
caseofemergenciesalongtheway.Thisisanexampleofthe
A) transactionsdemandformoney.
B) precautionarydemandformoney.
C) wealthdemandformoney.
D) assetdemandformoney.
Answer: B
Diff:2
54) Holdingmoneyasastoreofvalueinsteadofotherassetsis
Answer: D
Diff:1
55) Theassetdemandformoneyisrelatedtothefunctionofmoneycalled
B) unitofaccount.
C) storeofvalue.
Answer: C
Diff:2
56) Peopleholdmoneyasanassetratherthanotherassetsbecause
A) itishighlyliquid.
B) itholdsitsvalue.
C) itgrowsinvalue.
D) thereisnocosttoholdingmoneyasanasset.
Answer: A
Diff:2
57) Javierhasbeenthinkingaboutpurchasingabondbutisafraidthatthebondwilllosevalue.He
hasdecidedtoholdmoneyinstead.Thisisknownasthe
C) assetdemandformoney.
D) moneybalancedemandformoney.
Answer: C
Diff:2
58) Peopleholdmoneybecauseitisliquidandlacksriskunderthe
A) moneybalancedemandformoney.
B) assetdemandformoney.
C) precautionarydemandformoney.
D) transactionsdemandformoney.
Answer: B
Diff:1
59) Therelationshipbetweentheinterestrateandtheassetdemandformoneyis
A) positive.
B) inverse.
C) positivesometimesandinverseothertimes.
D) nonexistent.
Answer: B
Diff:1
60) Johngetspaidmonthlyandpaysforeverythingwithcash.Whenhecasheshischeckhekeeps
$200forfood,$100forutilities,$900forrent,$50fortransportation,$100forentertainmentand
$300forunexpectedexpenditures.Whichofthefollowingstatementsistrue?
A) Thetransactionsdemandformoneyis$1,350,theprecautionarydemandis$300andthe
assetdemandis$0.
B) Thetransactionsdemandformoneyis$450,theprecautionarydemandis$300andthe
assetdemandis$900.
C) Thetransactionsdemandformoneyis$350,theprecautionarydemandis$1,150andthe
assetdemandis$150.
D) Thetransactionsdemandformoneyis$350,theprecautionarydemandis$950andthe
assetdemandis$0.
Answer: A
Diff:1
61) Georgemakes$250aweekworkingasastudentaid.Whenhecasheshischeckhetakes$100to
thecashiersofficetopaypartofhistuition.$25goestopayingoffhisbooks,$75goesfor
entertainmentand$50hekeepsforunexpectedexpenditures.Whichofthefollowingstatements
istrue?
A) Thetransactionsdemandformoneyis$125,theprecautionarydemandis$75andthe
assetdemandis$50.
B) Thetransactionsdemandformoneyis$0,theprecautionarydemandis$250andtheasset
demandis$0.
C) Thetransactionsdemandformoneyis$250,theprecautionarydemandis$0andtheasset
demandis$0.
D) Thetransactionsdemandformoneyis$200,theprecautionarydemandis$50andthe
assetdemandis$0.
Answer: D
Diff:1
62) Samiamakes$8,000amonth.Samiaspends$2,500onrentandrelatedhouseholdexpenses,
$500onfood,$200onclothes,$500onentertainmentand$600ontransportation.Shealways
keeps$200forthingslikethecarbreakingdown.$3,500isinvestedinthestockmarket.Which
ofthefollowingstatementsistrue?
A) Thetransactionsdemandformoneyis$4,300,theprecautionarydemandis$200andthe
assetdemandis$3,500.
B) Thetransactionsdemandformoneyis$4,300,theprecautionarydemandis$3,500andthe
assetdemandis$200.
C) Thetransactionsdemandformoneyis$4,300,theprecautionarydemandis$200andthe
assetdemandis$0.
D) Thetransactionsdemandformoneyis$3,500,theprecautionarydemandis$200andthe
assetdemandis$4,300.
Answer: C
Diff:1
63) Supposeafamilyisholding$1000initscheckingaccountfornormaltransactions,$500incash
foremergencies,and$1500asastoreofvaluewhentheinterestrateis4percent.Iftheinterest
raterisesto10percent,whichofthefollowingpatternsofholdingmoneywouldbemostlikely
andwhy?
A) Transactionsdemand$1000;Precautionarydemand$350;Assetdemand$500,because
theopportunitycostofholdingmoneyhasincreased.Thereductionmoneybalancesheld
asanassetisgreatestbecauseinterest-bearingassetsaremuchmoreattractivewhen
interestratesarehigher.
B) Transactionsdemand$500;Precautionarydemand$500;Assetdemand$1400,because
theopportunitycostofholdingmoneybalanceshasrisen.Thereductioninmoney
balancesheldfortransactionpurposesfallsthemostbecausepeoplestartusingcredit
cardsmorewhentheopportunitycostofholdingmoneyincreases.
C) Transactionsdemand$1000;Precautionarydemand$500;Assetdemand$500,because
onlytheassetdemandisresponsivetochangesintheinterestrate.
D) Transactionsdemand$800;Precautionarydemand$600;Assetdemand$1500,because
peoplecaneconomizeontheirmoneybalancesformakingtransactions,butthepossibility
ofanemergencyincreaseswiththeinterestrate.Peoplewillalsoexpectratestogohigher,
sotheywillholdmoneyasanassetuntiltheratesincreasefurther.
Answer: A
Diff:3
64) Thedemandformoneycurveisdrawn
A) holdingseveralthingsconstant,includingGDPandinterestrates.
B) holdingseveralthingsconstant,includingthepricelevelandinterestrates.
C) withinterestratesonthehorizontalaxis,andthecurveslopingupsincethepriceof
holdingmoneyvariesdirectlywiththeinterestrate.
D) withinterestratesontheverticalaxisandthecurveslopingdownsincelowerinterest
ratesmeanthepriceofholdingmoneyhasfallen.
Answer: D
Diff:2
65) Whenconsideringthedemandformoneycurve,theinterestrate
A) willhaveapositiverelationshipwiththequantityofmoneydemanded.
B) variesnegativelywiththetransactionsdemandformoney.
C) isthepriceofholdingmoney.
D) isindependentoftheopportunitycostofmoney.
Answer: C
Diff:1
66) Theopportunitycostofholdingmoneyis
A) theinterestincomeforegone.
C) contractionarymonetarypolicy.
B) thetransactionsdemandformoney.
D) themonetaryrule.
Answer: A
Diff:1
67) Therelationshipbetweenthequantityofmoneybalancesdemandedandtheinterestrateis
A) determinedbyopenmarketoperations.
B) negative.
C) contractionarymonetarypolicy.
D) thereserverequirements.
Answer: B
Diff:1
68) Thedemandformoneycurve
A) showstherelationshipbetweenmoneydemandedandopenmarketoperations.
B) showstherelationshipbetweenthequantityofmoneybalancesdemandedandtheinterest
rate.
C) ispositivelyrelatedtotheinterestrate.
D) variesinverselywiththesupplyofmoney.
Answer: B
Diff:1
69) Thereasonthatpeoplemaynotwanttoholdmoneyis
A) theprecautionarydemandformoneyandtheriskofbeingrobbed.
B) theopportunitycost.
C) thetransactionsdemandmakesitunnecessary.
D) duetothedirectrelationshipbetweenmoneydemandandtheinterestrate.
Answer: B
Diff:1
70) Thedemandformoneyforwhichthepurposeismakingunexpectedpurchasesormeeting
emergenciesisconsideredtobepartof
A) precautionarydemand.
B) transactionsdemand.
C) assetdemand.
D) savingsdemand.
Answer: A
Diff:1
71) Ineconomics,thedemandformoneyasbasicallyademandfor
A) bonds.
B) status.
C) liquidity.
D) investment.
Answer: C
Diff:1
72) Holdingmoneyasamediumofexchangetopurchasegoodsandservicesandmakepayments
isknownasthe
A) spendingdemandformoney.
D) assetdemandformoney.
Answer: B
Diff:1
73) Thedemandformoneycurvedepicts
A) aninverserelationshipbetweenthequantityofmoneydemandedandthequantityof
bondsdemanded.
B) adirectrelationshipbetweenthequantityofmoneydemandedandthequantityofbonds
demanded.
C) aninverserelationshipbetweenthequantityofmoneydemandedandtheinterestrate.
D) adirectrelationshipbetweenthequantityofmoneydemandedandtheinterestrate.
Answer: C
Diff:1
74) Whichofthefollowingwilltendtooccurwhentheinterestrateincreases?
A) Thedemandformoneycurveshiftsleftward.
B) Thedemandformoneycurveshiftsrightward.
C) Thereisarightwardmovementalongthedemandformoneycurve.
D) Thereisaleftwardmovementalongthedemandformoneycurve.
Answer: D
Diff:1
75) Whichofthefollowingwillcauseareductionintheamountofmoneyindividualswishtohold?
A) anincreaseintheinterestrate
B) anincreaseinincome
C) anincreaseinthepricelevel
D) alloftheabove
Answer: A
Diff:1
76) Theamountofmoneypeoplewishtoholdshowsaninverserelationshipto
A) theirplannednear-termpurchases.
B) themoneysupply.
C) theincometaxrate.
D) theinterestrate.
Answer: D
Diff:2
77) Theamountofmoneythatpeoplewishtoholdtouseintransactionsvariesdirectlywith
A) theirplannednear-termpurchases.
B) themoneysupply.
C) theincometaxrate.
D) theinterestrate.
Answer: A
Diff:2
78) Thedownwardslopeofthedemandformoneycurvereflectsthefactthat
A) peopleholdmoreoftheirwealthintheformofmoneyasthepricelevelrises.
B) peopleholdmoreoftheirwealthintheformofmoneyasthepricelevelfalls.
C) peopleholdmoreoftheirwealthintheformofmoneyastheinterestraterises.
D) peopleholdmoreoftheirwealthintheformofmoneyastheinterestratefalls.
Answer: D
Diff:2
79) WhichofthefollowingisNOTatypeofdemandforholdingmoney?
A) transactionsdemand
B) precautionarydemand
C) assetdemand
D) qualitativedemand
Answer: D
Diff:1
80) Whichofthefollowingrepresentstheopportunitycostofholdingmoney?
A) liquidity
B) theinterestrate
C) therateofinflation
D) noneoftheabove
Answer: B
Diff:2
81) Thetransactionsdemandformoneyisrelatedtomoneyfunctioningasa
C) storeofvalue.
D) mediumofdeferredpayment.
Answer: B
Diff:1
82) Thedemandformoneyisbasedon
A) thetransactionsdemand,assetdemand,andprecautionarydemand.
B) thedemandforcash,demandforsecurities,andthedemandforrealestate.
C) thedemandforconsumption,demandforinvestment,anddemandbygovernment.
D) ademandforliquidityandwealth.
Answer: A
Diff:1
83) Apersonkeeps$500inhishomeinordertobepreparedforsomeunforeseenfutureevent.This
reflectshis
A) speculativedemandformoney.
D) liquiditydemandformoney.
Answer: C
Diff:1
84) Assetdemandformoneyisrelatedtomoneyfunctioningasa
C) storeofvalue.
D) mediumofdeferredpayment.
Answer: C
Diff:1
85) Theinterestrateistheopportunitycost
A) ofinvestinginstocks.
C) ofusingcreditcards.
B) ofinvestinginTreasurysecurities.
D) ofholdingmoney.
Answer: D
Diff:1
86) Iftheinterestrateincreases,the
A) quantityofmoneydemandedwillremainunchanged.
B) moneydemandcurvewillshifttotheright.
C) moneydemandcurvewillshifttotheleft.
D) quantityofmoneydemandedwillfall.
Answer: D
Diff:2
87) Warrenalwayscarriesaonehundreddollarbillincaseofemergencies.Thisisanexampleof
the
C) transactionsdemandformoney.
D) wealthdemandformoney.
Answer: A
Diff:1
88) Travisalwayscarries$100inhiswallettopayforgroceries.Thisisanexampleofthe
Answer: C
Diff:1
89) Berthaholdssomeofhersavingsascurrencyandcoinsplacedinhersewingbasket.Thisisan
exampleof
Answer: B
Diff:1
90) Thedemandformoneyisdownwardsloping,becauseathigherinterestrates,
A) theopportunitycostofholdingcashislower.
B) theopportunitycostofholdingmoneyishigher.
C) theopportunitycostofholdingmoneyisdecreasing.
D) theopportunitycostofholdingmoneyisconstant.
Answer: B
Diff:2
91) Iftheinterestrateincreases,thereisa(n)
A) increaseinthedemandformoney.
B) decreaseinthedemandformoney.
C) increaseinthequantityofmoneydemanded.
D) decreaseinthequantityofmoneydemanded.
Answer: D
Diff:2
92) SupposeTimhas$1,000incashonhandtobuycollectablebaseballcardsataswapmeet.Tim
oftensellsthesecardsataprofit.Thisisanexampleofthe
A) assetdemandformoney.
B) transactiondemandformoney
Answer: A
Diff:1
93) Theassetdemandformoneyis
A) greaterathighinterestratesasinvestorscanearnmoreontheirinvestments.
B) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyislow.
C) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
D) loweratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
Answer: B
Diff:2
94) Asinterestratesrise,thequantityofmoneydemanded
A) falls.
B) rises.
C) staysthesame.
D) doesnotreacttointerestratechanges.
Answer: A
Diff:2
95) Whatismeantbythedemandformoney?
Answer: Moneyisusedtobuygoodsandservices.So,ifwewanttopurchasesomething,wemust
havesomemoney.Thedemandformoneyisamountofdesiredmoneyholdings,given
factorssuchasincomeandtheinterestrate.
Diff:1
96) Thedemandformoneyisinfinitesinceeveryonewantsmoremoney.Doyouagreeor
disagreewiththisstatement?Why?
Answer: Disagree.Thedemandformoneydoesnotrefertothedesiretohavemorewealthor
income.Itisademandtoholdmoneybalancessothatonecanpurchasegoodsand
services.Therefore,thedemandformoneyisnotinfinite,butisdownwardslopingwith
respecttothecostofholdingmoneybalances theinterestrate.
Diff:3
97) Whatarethreereasonspeoplewanttoholdmoneybalances?
Answer: Therearethreereasonspeopleholdmoneybalances.Thetransactionsdemandformoney
isthedemandtoholdmoneytomakeregular,expectedexpenditures.Theprecautionary
demandisthemoneyheldtomeetunplannedexpendituresandemergencies.Theasset
demandformoneyistoholdmoneyasanassetthatisastoreofvalue.
Diff:2
98) Whatdoesthedemandcurveformoneylooklike?Why?
Answer: Ifthequantityofmoneyisonthehorizontalaxisandtheinterestrateontheverticalaxis,
thedemandcurveformoneyisadownwardslopingcurveorline.Peopleholdmoney
becauseofmoneysroleasamediumofexchangeandastoreofvalue.Thelowerthe
interestratethelowerthecosttoholdmoneybalancessincetheforgoneinterestislower.
Peoplewillholdmorebalanceswhenthepriceofdoingsoisless,sothedemandcurve
formoneyslopesdown.
Diff:2
16.2HowtheFedInfluencesInterestRates
1) WhichofthefollowingactionsbytheFedwouldleadtoanincreaseinthemoneysupply?
A) Anincreaseintherequiredreserveratio
B) Anincreaseinthedifferentialbetweenthediscountrateandthefederalfundsrate
C) Anincreaseintaxrates
D) Thepurchaseofgovernmentsecurities
Answer: D
Diff:2
Topic: 16.2HowtheFedInfluencesInterestRates
2) Anincreaseinbondpriceswillmostlikelyresultin
A) anincreaseininterestrates.
B) adecreaseinthequantitydemandedofmoney.
C) anincreaseinthequantitydemandedofmoney.
D) anincreaseintheopportunitycostofholdingmoney.
Answer: C
Diff:2
3) Ifabondsellsfor$2,000andpays$200peryearininterest,theinterestrateonthebondis
A) 20percent.
B) 10percent.
C) 5percent.
D) 100percent.
Answer: B
Diff:1
4) Ifyouinitiallypay$1,000forabondwithanannualinterestrateof5percent,butthenthe
marketinterestraterisesto6percent,
A) themarketpriceofthebondisstill$1,000.
B) thebondsannualinterestpaymentremainsequalto$50.
C) themarketpriceofthebondhasincreased.
D) themarketpriceofthebondhasdecreased.
Answer: D
Diff:1
5) Thepriceofbondsandtheinterestrateare
A) inverselyrelated.
C) unrelated.
B) positivelyrelated.
D) related,butwearenotsurehow.
Answer: A
Diff:1
6) Anexcessquantityofmoneydemandedwillleadtoarisein
A) theinterestrate.
B) investment.
C) income.
D) bondprices.
Answer: A
Diff:1
7) Whichofthefollowingwillleadtoadecreaseinthepriceofexistingbonds?
A) Adecreaseintherateofinterest
B) Aninwardshiftinmoneydemand
C) Adecreaseinplannedinvestmentspending
D) Areductioninthemoneysupply
Answer: D
Diff:1
8) Anincreaseinthemoneysupplytypicallyleadsto
A) areductionintherateofinterest.
C) areductioninthevelocityofmoney.
Answer: A
Diff:1
B) adecreaseinthepricelevel.
D) aninwardshiftinmoneydemand.
9) IftheFedpurchasesU.S.governmentsecuritiesintheopenmarket,allofthefollowingwould
occurEXCEPT
A) anexpansionofthemoneysupply.
B) anincreaseininvestment.
C) afallinbondprices.
D) anincreaseinrealGrossDomesticProduct(GDP).
Answer: C
Diff:1
10) IftheFedsellsbondsthroughitsopenmarketoperations,thenthereis
A) anincreaseinthedemandforbondsandariseinthepriceofexistingbonds.
B) anincreaseinthesupplyofbondsandafallinthepriceofexistingbonds.
C) adecreaseininterestratesbecauseoftheincreaseinthesupplyofbonds.
D) adecreaseininterestratesbecauseofthedecreaseinthedemandforbonds.
Answer: B
Diff:2
11) IftheFeddecidestobuybonds,theresultwillbe
A) lowerbondpricesandlowerinterestrates.
B) lowerbondpricesandhigherinterestrates.
C) higherbondpricesandlowerinterestrates.
D) higherbondpricesandhigherinterestrates.
Answer: C
Diff:2
12) Themarketpricesofexistingbondsare
A) notrelatedtotheinterestrate.
C) inverselyrelatedtotheinterestrate.
Answer: C
Diff:1
B) directlyrelatedtotheinterestrate.
D) statedintermsoftheinterestrate.
13) Interestratestypicallyrisewhen
A) bondpricesincrease.
B) bondpricesdecrease.
C) thecouponpayoutonexistingbondsincrease.
D) thematuritydateonexistingbondsextendsfartherintothefuture.
Answer: B
Diff:2
14) WhichofthefollowingisNOTareasontheFedchangestherateofgrowthofthemoney
supply?
A) Toinfluenceaggregatedemand
B) Toshiftthedemandformoneycurve
C) Toinfluencetheamountofconsumption
D) Toinfluencetheamountofinvestment
Answer: B
Diff:1
15) Themarketpriceofexistingbondsis________totherateofinterestprevailingintheeconomy.
A) inverselyrelated
B) directlyrelated
C) totallyunrelated
D) synonymous
Answer: A
Diff:1
16) OpenmarketoperationsbytheFedcause
A) changesinthedifferencebetweenthediscountrate.andthefederalfundsrate.
B) aggregatesupplytochange.
C) thepricesofbondstochange.
D) changesintherequiredreserveratio.
Answer: C
Diff:1
17) WhentheFedconductsopenmarketoperations,it
A) purchasesorsellsgovernmentbondsissuedbytheU.S.Treasury.
B) isengaginginfiscalpolicy.
C) alsoraisestaxesatthesametime.
D) shiftsthedemandformoneycurve.
Answer: A
Diff:1
18) AsaleofbondsbytheFedgenerates
A) anincreaseinthedemandformoneybalances.
B) adecreaseinthedemandformoneybalances.
C) anincreaseinthedemandforbondsandariseinbondprices.
D) anincreaseinthesupplyofbondsandafallinbondprices.
Answer: D
Diff:2
19) ThepurchaseofgovernmentbondsbytheFedleadstoa(n)
A) increaseinthesupplyofbondsandadecreaseinbondprices.
B) decreaseinthesupplyofbondsandanincreaseinbondprices.
C) increaseinthedemandofbondsandadecreaseinthepriceofbonds.
D) decreaseinthedemandofbondsandanincreaseinthepriceofbonds.
Answer: B
Diff:1
20) Anincreaseintheinterestratewill
A) decreasethepriceofbonds.
B) increasethepriceofbonds.
C) increaseordecreasethepriceofbondsdependinguponwhetherthemoneysupplyhas
increasedordecreased.
D) leavethepriceofbondsunchanged.
Answer: A
Diff:1
21) Refertotheabovefigure.WhichpanelisconsistentwiththeFedsellingbonds?
A) PanelA
B) PanelB
C) PanelC
D) PanelD
Answer: A
Diff:2
22) Refertotheabovefigure.WhichpanelisconsistentwiththeFedbuyingbonds?
A) PanelA
B) PanelB
C) PanelC
D) PanelD
Answer: B
Diff:2
23) Refertotheabovefigure.WhichpanelscouldrepresentthesituationiftheFedhadengagedin
openmarketoperations?
A) PanelsAandB
B) PanelsAandC
C) PanelsBandC
D) PanelsCandD
Answer: A
Diff:2
24) Abondthatpaysayearlyinterestrateof$100isforsale.Theinterestratewas10percentand
nowis5percent.Thepriceofthebondwas
A) $1000andnowis$500.
B) $1000andnowis$2000.
C) $500andnowis$2000.
D) $2000andnowis$1000.
Answer: B
Diff:2
25) Abondissellingfor$1000anditpays$150ininterestayear.Iftheinterestratechangesto20
percent,then
A) theinterestpaymentrisesto$200.
B) theinterestpaymentfallsto$75.
C) thepriceofthebondfallsto$750.
D) thepriceofthebondrisesto$1500.
Answer: C
Diff:3
26) Whichofthefollowingisatruestatementabouttherelationshipbetweenthepriceofbondsand
theinterestrate?
A) Thepricesofbondsaredirectlyrelatedtotheinterestrate.
B) Thepricesofbondsincreasewhentheinterestratesrise.
C) Thepricesofbondsareunrelatedtotheinterestrate.
D) Thepricesofbondsareinverselyrelatedtotheinterestrate.
Answer: D
Diff:2
27) TheFedengagesinopenmarketoperationsandsellsgovernmentsecurities.Theresultis
A) lowerinterestrates.
B) higherinterestrates.
C) interestratesremainunchangedsincethereisnoreasontothinkbondpriceschanged.
D) uncertainsincemoreinformationisneeded.
Answer: B
Diff:2
28) Whichofthefollowingisassociatedwithacontractionarymonetarypolicy?
A) Loweringthedifferentialbetweenthediscountrateandthefederalfundsrate
B) Sellingbonds
C) Loweringtherequiredreserveratio
D) Raisingbondprices
Answer: B
Diff:1
29) TheFedwouldbepursuingacontractionarymonetarypolicyifitwas
A) loweringthedifferentialbetweenthediscountrateandthefederalfundsrate.
B) loweringthereserverequirement.
C) sellingdollarsinforeignexchangemarkets.
D) sellingbondsintheopenmarket.
Answer: D
Diff:2
30) HowdoestheFedincreasethelevelofreservesinthebankingsystem?
A) byloweringinterestrates
B) byraisinginterestrates
C) bysellingbonds
D) bybuyingbonds
Answer: D
Diff:2
31) WhentheFedpurchasesfederalgovernmentbondsintheopenmarket,
A) thereisnochangeinthemoneysupply.
B) themoneysupplyexpands.
C) themoneysupplycontracts.
D) thedemandformoneyexpands.
Answer: B
Diff:2
32) Wheninterestratesinthebondmarketgoup,
A) thereisnoimpactonthepriceofexistingbonds.
B) thepriceofexistingbondsgoesup.
C) thepriceofstocksgoesup.
D) thepriceofexistingbondsgoesdown.
Answer: D
Diff:2
33) Thepricesofallfixed-incomeassets(bonds)
A) varydirectlywiththeinterestrate.
C) varyinverselywiththeinterestrate.
B) areindependentoftheinterestrate.
D) aredeterminedbytheU.S.Treasury.
Answer: C
Diff:2
34) Theassetdemandformoneyis
A) greaterathighinterestratesasinvestorscanearnmoreontheirinvestments.
B) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyislow.
C) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
D) loweratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
Answer: B
Diff:2
35) Intheabovefigure,ifwebeginatS1 andtheFedsellsbonds,

A) thepriceofbondsfalls,andtheinterestraterises.
B) thepriceofbondsfalls,andsodoestheinterestrate.
C) thepriceofbondsrises,andsodoestheinterestrate.
D) thepriceofbondsrises,andtheinterestratefalls.
Answer: A
Diff:3
36) Intheabovefigure,ifwebeginatS2 andtheFedbuysbonds,

A) thepriceofbondsfalls,andtheinterestraterises.
B) thepriceofbondsfalls,andsodoestheinterestrate.
C) thepriceofbondsrises,andsodoestheinterestrate.
D) thepriceofbondsrises,andtheinterestratefalls.
Answer: D
Diff:3
37) SupposetheFedconductsanopenmarketsaleofbonds.Thismonetarypolicyactionwilltend
tocause
A) thepriceofbondstoincreaseandtheinterestratetoincrease.
B) thepriceofbondstoincreaseandtheinterestratetodecrease.
C) thepriceofbondstodecreaseandtheinterestratetoincrease.
D) thepriceofbondstodecreaseandtheinterestratetodecrease.
Answer: C
Diff:1
38) IftheFedsellsU.S.governmentsecurities,the
A) moneysupplyincreases,andthemoneysupplycurveshiftstotheright.
B) moneysupplyincreases,andthemoneysupplycurveshiftstotheleft.
C) moneysupplydecreases,andthemoneysupplycurveshiftstotheright.
D) moneysupplydecreases,andthemoneysupplycurveshiftstotheleft.
Answer: D
Diff:2
39) SupposetheFedconductsanopenmarketpurchaseofbonds.Thismonetarypolicyactionwill
tendtocause
A) thepriceofbondstoincrease,andtheinterestratetoincrease.
B) thepriceofbondstoincrease,andtheinterestratetodecrease.
C) thepriceofbondstodecrease,andtheinterestratetoincrease.
D) thepriceofbondstodecrease,andtheinterestratetodecrease.
Answer: B
Diff:1
40) TheFederalOpenMarketCommitteeengagesincontractionarymonetarypolicyby
A) loweringinterestrates.
B) creatingexcessreserves.
C) sellingbonds.
D) buyingbonds.
Answer: C
Diff:1
41) WhathappenstothepriceofbondswhentheFedissellingbonds?Whathappenstotheinterest
rate?Whathappenstothemoneysupply?
Answer: IftheFedsellsbonds,thesupplyofbondsinthemarketincreases,causingthepriceof
bondstofall.Sincethepriceofbondsisinverselyrelatedtotheinterestrate,theinterest
rateincreases.TheFedsellsbondstoreducethemoneysupply.
Diff:2
42) Describeandexplaintherelationshipbetweenthepriceofbondsandtheinterestrate.
Answer: Thereisaninverserelationshipbetweenthepriceofabondandtheinterestrate.Ifa
bondpaysinterestof$100ayearandthepriceofthebondis$1000,theinterestrateis10
percent.Iftheinterestratefallsto5percent,thenthepriceofabondpaying$100ayear
interestwouldriseto$2000.Theinterestrateistheamountofinterestpaidperyear
dividedbythepriceofthebond,sotheinterestrateandthepriceofthebondare
inverselyrelated.
Diff:3
16.3EffectsofanIncreaseintheMoneySupply
1) Otherthingsbeingequal,anincreaseinthesupplyofmoney
A) reducestheamountofmoneybalances.
B) increasesthepricelevel.
C) reducesaggregatedemand.
D) generatessignificantchangesinrelativeprices.
Answer: B
Diff:2
Topic: 16.3EffectsofanIncreaseintheMoneySupply
2) Thedirecteffectofanincreaseinthemoneysupplyisto
A) raiseinterestratesaspeopleincreasetheirsaving.
B) increaseinterestratesaspeopleanticipatehigherinflationinthefuture.
C) increaseaggregatedemandaspeopletrytospendtheirexcessmoneybalances.
D) decreaseaggregatedemandaspeopleanticipatefutureeconomicproblems.
Answer: C
Diff:2
3) Theshort-runeffectofanincreaseinthesupplyofmoneyis
A) anincreaseinbothrealGrossDomesticProduct(GDP)andthepricelevel.
B) anincreaseinthepricelevelbutnotinrealGrossDomesticProduct(GDP).
C) anincreaseinrealGrossDomesticProduct(GDP)butnotinthepricelevel.
D) anincreaseinthepricelevel,adecreaseinrealGrossDomesticProduct(GDP),butan
increaseinnominalnationalincome.
Answer: A
Diff:2
4) Theindirecteffectofanincreaseinthemoneysupplyisto
A) raiseinterestratessopeoplewillsavemore.
B) lowerinterestrates,whichstimulatesbothinvestmentandconsumptionspending.
C) putmorecashinpeoplespockets,therebyincreasingaggregatedemand.
D) payoffaportionofthepublicdebt.
Answer: B
Diff:2
5) Lookattheabovefigure.SupposetheeconomywasinitiallyinequilibriumatpointA.What
pointwouldrepresenttheshort-runequilibriumiftheFedmakesanopenmarketpurchaseof
bonds?
A) A
B) B
C) C
D) D
Answer: B
Diff:1
6) Inthelongrun,theeffectofareductioninthemoneysupplyisto
A) decreasethepricelevelonly.
B) decreaserealGrossDomesticProduct(GDP)only.
C) decreaseboththepricelevelandrealGrossDomesticProduct(GDP).
D) decreasethepricelevelandincreaserealGrossDomesticProduct(GDP).
Answer: A
Diff:2
7) Toclosearecessionarygap,theFedwould
A) decreasethemoneysupply.
C) sellbonds.
Answer: D
Diff:2
B) increaseinterestrates.
D) increasethemoneysupply.
8) Expansionarymonetarypolicyduringperiodsofunderutilizedresourcescancause
A) realGrossDomesticProduct(GDP)toincreasewithoutanincreaseinthepricelevel.
B) realGrossDomesticProduct(GDP)toincreasewithadecreaseinthepricelevel.
C) realGrossDomesticProduct(GDP)toincreasewithanincreaseinthepricelevel.
D) nominalGrossDomesticProduct(GDP)toincreasebutcannotaffectrealGrossDomestic
Product(GDP).
Answer: C
Diff:2
9) Iftheeconomyisunderutilizingitseconomicresources,theFedshould
A) discourageinvestmentspending.
B) expandthemoneysupplytoincreaseaggregatedemand.
C) decreaseaggregatesupply.
D) contractthemoneysupplytodecreaseaggregatedemand.
Answer: B
Diff:3
10) Intheabovefigure,assumetheeconomystartsoutinequilibriumatpointd.IftheFedincreases
themoneysupplysothatthenewaggregatedemandcurveisAD 3 ,thenthenewshort-run
equilibriumwillbeatpoint
A) a.
B) b.
C) c.
D) i.
Answer: C
Diff:1
11) Intheabovefigure,assumetheeconomystartsoutinequilibriumatpointd.IftheFedincreases
themoneysupplysothatthenewaggregatedemandcurveisAD 3 ,thenthelong-run
equilibriumwillbeatpoint
A) a.
B) b.
C) c.
D) i.
Answer: A
Diff:1
12) Intheabovefigure,assumetheaggregatedemandoftheeconomyisAD 2 andtheFedactions

moveaggregatedemandtoAD 1 .Inthissituation,theFedhaspracticed
A) contractionarymonetarypolicy.
C) irresponsiblefiscalpolicy.
Answer: A
Diff:1
B) expansionarymonetarypolicy.
D) Keynesianfiscalpolicy.
13) Intheabovefigure,assumetheeconomyisinequilibriumatpointd.ThentheFeddecreasesthe
moneysupplysothatthenewaggregatedemandcurveisAD 1 .Inthelongrun,thenewprice
levelwillbe
A) 100.
B) 120.
C) 130.
D) 110.
Answer: A
Diff:1
14) Intheabovefigure,iftheeconomyisinequilibriumatE 1 ,then

A) theeconomyisproducingbelowitspotentiallong-runequilibriumatfullemployment.
B) theeconomyisproducingaboveitspotentiallong-runequilibriumatfullemployment.
C) thereisaninflationarygapintheeconomy.
D) theeconomyisinaperiodofhighinflation.
Answer: A
Diff:1
15) Intheabovefigure,iftheeconomyisatequilibriumatE 1 ,theFedwouldmostlikely

A) adoptacontractionarymonetarypolicy.
B) adoptanexpansionarymonetarypolicy.
C) attempttolowertheaggregatedemandintheeconomy.
D) attempttolowerthepricelevelbelow120.
Answer: B
Diff:1
16) Inthelongrun,adecreaseinthemoneysupplywill
A) decreaserealGrossDomesticProduct(GDP).
B) increaserealGrossDomesticProduct(GDP).
C) increasethepricelevel.
D) decreasethepricelevel.
Answer: D
Diff:1
17) Oneresultofacontractionarymonetarypolicywouldbe
A) adeclineinthepricelevel.
B) anincreaseinthemoneysupply.
C) anincreaseinbusinessinvestment.
D) lowerinterestrates.
Answer: A
Diff:2
18) Thedirecteffectofanincreaseinthemoneysupplyisto
A) increaseaggregatedemandaspeoplespendtheirexcessmoneybalances.
B) increaseaggregatedemandasinterestratesfallandinvestmentspendingincreases.
C) increaseaggregatesupplyasproducersanticipatehigherfutureprofits.
D) decreasetherateofinflation.
Answer: A
Diff:1
19) Theindirecteffectofanincreaseinthemoneysupplyisto
A) increaseaggregatedemandaspeopletrytospendtheirexcessmoneybalances.
B) increaseaggregatedemandasinterestratesfallandinvestmentspendingincreases.
C) increaseaggregatesupplyasfirmsanticipatefutureprofits.
D) decreasethepricelevel.
Answer: B
Diff:1
20) WhichofthefollowingwillNOToccurintheshortrunwhenthemoneysupplydecreases?
A) Peoplewillbuyfewergoodsandservices.
B) Theinterestratewillincrease.
C) Aggregatesupplydecreases.
D) Thepriceleveldecreases.
Answer: C
Diff:2
21) Anincreaseinthemoneysupplywill
A) increaseaggregatesupply.
C) increaseaggregatedemand.
B) decreaseaggregatesupply.
D) decreaseaggregatedemand.
Answer: C
Diff:1
22) Theshort-runeffectofanincreaseinthemoneysupplyisto
A) increaserealGDPonly.
B) increasethepricelevelonly.
C) increasebothrealGDPandthepricelevel.
D) increasenominalGDPbutdecreasethepricelevel.
Answer: C
Diff:2
23) Refertotheabovefigure.SupposepointAistheoriginalequilibrium.Ifthereisanincreasein
themoneysupply,thenewshort-runequilibriumisgivenbypoint
A) A.
B) B.
C) C.
D) D.
Answer: B
Diff:2
24) Refertotheabovefigure.SupposepointAistheoriginalequilibrium.Ifthereisanincreasein
themoneysupply,thenewlong-runequilibriumisgivenbypoint
A) A.
B) B.
C) C.
D) D.
Answer: C
Diff:2
25) Thelong-runeffectofanincreaseinthemoneysupplywhenstartingfromfullemploymentisto
A) increaserealGDPonly.
B) increasethepricelevelonly.
C) increasebothrealGDPandthepricelevel.
D) increaserealGDPasthepricelevelincreasestoo.
Answer: B
Diff:2
26) Anexpansionarymonetarypolicyisonethat
A) stimulatesaggregatesupply.
B) reducesaggregatesupplyandaggregatedemand.
C) stimulatesaggregatedemand.
D) reducesaggregatedemandwhilestimulatingaggregatesupply.
Answer: C
Diff:1
27) Supposetheeconomycurrentlyhassomeunderutilizedresources.TheFedengagesin
expansionarymonetarypolicy.Theimpactofexpansionarymonetarypolicywillbeto
A) increaseaggregatedemand,increasepricesandincreaserealGDP.
B) increaseaggregatedemand,increasepricesanddecreaserealGDP.
C) increaseshort-runaggregatesupply,decreaseinpricesanddecreaseinrealGDP.
D) increaseshort-runaggregatesupply,decreasepricesandincreaserealGDP.
Answer: A
Diff:1
28) Supposetheeconomycurrentlyhasaninflationarygap.TheFedengagesincontractionary
monetarypolicy.Theimpactofcontractionarymonetarypolicywillbeto
A) increaseshort-runaggregatesupply,decreaseinpricesanddecreaseinrealGDP.
B) increaseshort-runaggregatesupply,decreasepricesandincreaserealGDP.
C) decreaseaggregatedemand,decreaseprices,andincreaserealGDP.
D) decreaseaggregatedemand,decreaseprices,anddecreaserealGDP.
Answer: D
Diff:1
29) WhentheFederalReserveconductsopenmarketpurchasestoincreasebankreserveswithout
tryingtoaltertheinterestratethatisalreadyclosetozero,thepolicyactioniscalled
A) qualitativeeasing.
B) quantitativeeasing.
C) qualitativetightening.
D) quantitativetightening.
Answer: B
Diff:2
QuestionStatus: New
30) Iftheeconomyisoperatingbelowitsfullemploymentlevel,theFedcan
A) increaseaggregatedemandbyincreasingtherateofgrowthofthemoneysupply.
B) increaseaggregatedemandbystimulatingthedemandformoney.
C) increaseaggregatedemandbysellingbondsandraisinginterestrates.
D) increaseaggregatesupplybyraisingthepricelevel.
Answer: A
Diff:2
31) Supposetheeconomyhasarecessionarygap.Byusinganexpansionarymonetarypolicy,the
Fedcan
A) raiserealGDPwithoutincreasingthepricelevel.
B) raiserealGDPandthepricelevel.
C) raiserealGDPanddecreasethepricelevel.
D) raisethepricelevelalone,butcannotincreaserealGDP.
Answer: B
Diff:2
32) Supposetheeconomyisoperatingbelowitsfullemploymentlevel.TheFed
A) ispowerlesstoaffecteitheraggregatedemandoraggregatesupply.Fiscalpolicyis
needed.
B) canmovetheeconomytowardthefullemploymentlevelbyexpandingthemoneysupply
toincreaseaggregatesupply.
C) canmovetheeconomytowardthefullemploymentlevelbyexpandingthemoneysupply
toincreaseaggregatedemandandtoholdpricesconstant.
D) canmovetheeconomytowardthefullemploymentlevelbyexpandingthemoneysupply
toincreaseaggregatedemandthroughbothitsdirectanditsindirecteffects.
Answer: D
Diff:3
33) Quantitativeeasingreferstoapolicyactioninwhichacentralbank
A) sellsgovernmentsecuritiestodirectlydecreasebankreserves.
B) buysgovernmentsecuritiestodirectlyincreasebankreserves.
C) increasesinterestratesdirectlywithoutalteringbankreserves.
D) decreasesinterestratesdirectlywithoutalteringbankreserves.
Answer: B
Diff:1
QuestionStatus: New
34) TheFederalReserveconductedthepolicyofquantitativeeasingprimarilywhen
A) theinterestratewasclosetozero.
B) theinterestratewasrelativelyhigh.
C) theinterestratewastooerratictobecontrolled.
D) theinterestratewasverysensitivetothechangeinthemoneysupply.
Answer: A
Diff:2
QuestionStatus: New
35) Duringaperiodofcontractionarymonetarypolicy,
A) thepricelevelisincreased,whichleadstoanincreaseinthemoneysupply.
B) thepricelevelisdecreased,whichleadstoadecreaseinthemoneysupply.
C) therateofgrowthofthemoneysupplyisincreased,leadingtoanincreaseintheprice
level.
D) therateofgrowthofthemoneysupplyisreduced,leadingtoadecreaseinthepricelevel.
Answer: D
Diff:1
36) Duringaperiodofexpansionarymonetarypolicy,
A) thepricelevelisincreased,whichleadstoanincreaseinthemoneysupply.
B) thepricelevelisdecreased,whichleadstoadecreaseinthemoneysupply.
C) therateofgrowthofthemoneysupplyisincreased,leadingtoanincreaseintheprice
level.
D) therateofgrowthofthemoneysupplyisreduced,leadingtoadecreaseinthepricelevel.
Answer: C
Diff:1
37) Asaresultofanincreaseinthemoneysupply,somebanksmayendupwithexcessreserves.
Whatisthelikelyresult?
A) Bankswillmakemoreloans,therebycontributingtoanincreaseinaggregatedemand.
B) Bankswillmakemoreloans,therebycontributingtoadecreaseinaggregatedemand.
C) Bankswillraiseinterestrates.
D) Bankswillspendtheexcessreservesbypayingtheiremployeesmore.
Answer: A
Diff:2
38) Howistheeffectofexpansionarymonetarypolicydepictedinanaggregatesupply -aggregate

demandgraph?
A) Theaggregatesupplycurveshiftsleftward.
B) Theaggregatesupplycurveshiftsrightward.
C) Theaggregatedemandcurveshiftsrightward.
D) Theequilibriumlevelofincomeincreases,butneithercurveshifts.
Answer: C
Diff:2
39) Intherealworld,contractionarymonetarypolicywouldbeusedto
A) combatarecession.
B) reducetherateofinflation.
C) increasenominalGDP.
D) increaselong-runaggregatesupply.
Answer: B
Diff:3
40) HowwouldexpansionarymonetarypolicyaffecttheADcurve?
A) Itwouldshifttotheright.
B) Itwouldshifttotheleft.
C) Itwouldbecomemorestatic.
D) Itwouldfall.
Answer: A
Diff:2
41) Theappropriatemonetarypolicyintheeventofarecessionarygapwouldbeto
A) increasethedifferencebetweenthediscountrateandthefederalfundsrate.
B) engageinanopenmarketpurchaseofU.S.governmentsecurities.
C) increasethedifferencebetweenthefederalfundsrateandtherequiredreserveratio.
D) raisetherequiredreserveratio.
Answer: B
Diff:2
42) Thedirecteffectofanincreaseinthemoneysupplyis
A) peoplewillspendtheextramoney,causingtheaggregatedemandcurvetoshifttothe
rightandpricestorise,andcausingtheeconomytogointorecession.
B) peoplewillsavethemoney,causinganincreaseinbankdeposits,causinginterestratesto
fall,andloanstoexpand.
C) peoplewillsavemoremoney,causingadecreaseineconomicactivityandafallinprices.
D) peoplewillspendtheextramoney,causingtheaggregatedemandcurvetoshifttothe
right,creatinganincreaseineconomicactivity.
Answer: D
Diff:2
43) Anindirecteffectofmonetarypolicyisthatasthemoneysupply
A) increases,interestratesfall,andborrowingandspendingincrease.
B) increases,interestratesrise,andborrowingandspendingdecrease.
C) decreases,interestratesfall,andborrowingandspendingincrease.
D) decreases,interestratesrise,andborrowingandspendingincrease.
Answer: A
Diff:2
44) SupposetheFedincreasesthemoneysupply.Asaresultofthis,peoplegooutandspendmore
moneyonconsumergoods,increasingaggregatespending.Thisisknownasa(n)
A) directeffectofmonetarypolicy.
B) indirecteffectofmonetarypolicy.
C) directeffectoffiscalpolicy.
D) indirecteffectoffiscalpolicy.
Answer: A
Diff:2
45) SupposetheFedincreasesthemoneysupply.Asaresultofthis,peopledepositexcessfunds
intotheirbankaccounts,causingbankstohaveexcessreserves.Asaresult,thebankslowerthe
interestratesthattheychargeonloans,andinvestmentrises,causinganincreaseinaggregate
spending.Thisisknownasa(n)
A) directeffectofmonetarypolicy.
B) indirecteffectofmonetarypolicy.
C) directeffectoffiscalpolicy.
D) indirecteffectoffiscalpolicy.
Answer: B
Diff:2
46) Whatarethedirectandindirecteffectsofanincreaseinthemoneysupply?
Answer: Thedirecteffectofmoremoneyintheeconomyistoinducepeopletobuymoregoods
andservices,causingconsumptionexpenditurestoincreaseandaggregatedemandto
increase.Theindirecteffectistoincreasereservesaspeopleputsomeoftheextrafunds
intotransactionsaccounts.Bankswanttomakemoreloans,causinginterestratestofall.
Consumerexpendituresandbusinessinvestmentspendingincreaseindirectlyastherise
inreservesraisesthemoneysupplyandpushesdowntheinterestrate.Eitherway,the
aggregatedemandcurvewouldshiftout.
Diff:1
47) Usingagraphabove,showtheshort -runandlong-runeffectsofanexpansionarymonetary

policy.
Answer: Intheabovefigure,E1 istheoriginalequilibrium.Theincreaseinthemoneysupply
causestheaggregatedemandtoincreaseduetothedirectandindirecteffects.RealGDP
increasesintheshortrunto$15trillionandthepricelevelincreasesto120.Onceinput
ownersrevisetheirexpectationsaboutprices,theshort-runaggregatesupplycurveshifts
toSRAS2 ,realGDPreturnsto$14trillion,andthepricelevelincreasesto140.The
long-runeffectoftheexpansionarymonetarypolicyistoincreasethepricelevel.
Diff:3
16.4OpenEconomyTransmissionofMonetaryPolicy
1) Anexpansionarymonetarypolicyresultsinlowerinterestrates,whichinturn
A) increasesforeigndemandforU.S.financialinstruments,raisingtheinternationalpriceof
thedollarandreducingnetexports.
B) increasestheforeigndemandforU.S.financialinstruments,loweringtheinternational
priceofthedollaranddecreasingnetexports.
C) reducestheinternationalpriceofthedollarandincreasesnetexports.
D) reducestheforeigndemandforU.S.financialinstrumentsandreducenetexports.
Answer: C
Diff:2
Topic: 16.4OpenEconomyTransmissionofMonetaryPolicy
2) AnappreciationoftheU.S.dollarismostlikelyaresultthat
A) theFedhaspursuedanexpansionarymonetarypolicy.
B) U.S.interestrateshaveincreased.
C) U.S.bondpriceshaveincreased.
D) moredollarsarerequiredtoobtainforeigncurrencies.
Answer: B
Diff:3
3) Astheworldeconomybecomesmoreintegratedthroughglobalization,
A) theFedwillfinditeasiertoconductmonetarypolicy.
B) theFedwillhaveamoredifficulttimereachingitsmoneysupplygrowthratetargets.
C) theFedwillrelylessonopenmarketoperationsandmoreonchangingtherequired
reserveratiowhenconductingmonetarypolicy.
D) U.S.interestrateswilldetermineworldinterestrates.
Answer: B
Diff:2
4) Acontractionarymonetarypolicycauses
A) higherinterestrates,whichincreasestheinternationalpriceofthedollaranddecreasesnet
exports.
B) higherinterestrates,whichdecreasestheforeigndemandforU.S.financialinstruments,
raisingtheinternationalpriceofthedollarandincreasingnetexports.
C) lowerinterestrates,whichdecreasestheforeigndemandforU.S.financialinstruments,
raisingtheinternationalpriceofthedollarandincreasingnetexports.
D) higherinterestrates,whichincreasestheforeigndemandforU.S.financialinstruments,
whichcausesinterestratestodecrease.Thereisnoeffectonnetexports.
Answer: A
Diff:3
5) IthasbeenobservedthatachangeinmonetarypolicyintheUnitedStates
A) impactsnetexports.
B) haslittleornoeffectonforeignmarkets.
C) leadstocorrespondingchangesinothercountries.
D) hasonlyshortruninfluences.
Answer: A
Diff:1
6) AnappreciationoftheU.S.dollaroccurswhen
A) theinternationalpriceofthedollarfalls.
B) theinternationalpriceofthedollarrises.
C) theU.S.demandforforeigncurrenciesincreases.
D) thesupplyofdollarsininternationalmarketsincreases.
Answer: B
Diff:1
7) WhentheU.S.dollarappreciates,
A) foreignresidentsdemandmoreofU.S.goods,andU.S.residentsdesiretopurchasemore
foreigngoods.
B) foreignresidentsdemandmoreofU.S.goods,andU.S.residentsdesiretopurchasefewer
foreigngoods.
C) foreignresidentsdemandfewerofU.S.goods,andU.S.residentsdesiretopurchasemore
foreigngoods.
D) foreignresidentsdemandfewerofU.S.goods,andU.S.residentsdesiretopurchasefewer
foreigngoods.
Answer: C
Diff:1
8) AnappreciationoftheU.S.dollar
A) makesourexportsmoreexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,increasingnetexports.
B) makesourexportslessexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,increasingnetexports.
C) makesourexportslessexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,decreasingnetexports.
D) makesourexportsmoreexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,decreasingnetexports.
Answer: D
Diff:3
9) AdepreciationoftheU.S.dollar
A) makesU.S.exportsmoreexpensiveintermsofforeigncurrencyandimportsless
expensiveintermsofthedollar,increasingnetexports.
B) makesU.S.exportslessexpensiveintermsofforeigncurrencyandimportsmore
expensiveintermsofthedollar,increasingnetexports.
C) makesU.S.exportslessexpensiveintermsofforeigncurrencyandimportsmore
expensiveintermsofthedollar,decreasingnetexports.
D) makesU.S.exportsmoreexpensiveintermsofforeigncurrencyandimportsless
expensiveintermsofthedollar,decreasingnetexports.
Answer: B
Diff:1
10) Asaresultofcontractionarymonetarypolicy,
A) interestratesfall,thedollardepreciates,anddomesticgoodsbecomecheaper,thereby
reducingnetexports.
B) interestratesrise,thedollarappreciates,anddomesticgoodsbecomemoreexpensive,
therebyreducingnetexports.
C) interestratesrise,thedollarappreciates,anddomesticgoodsbecomecheaper,thereby
reducingnetexports.
D) interestratesrise,thedollarappreciates,anddomesticgoodsbecomecheaper,thereby
increasingnetexports.
Answer: B
Diff:1
11) Thenet-exporteffectofcontractionarymonetarypolicyis
A) thedepreciationofthevalueofthedollarandaresultingincreaseofU.S.netexports.
B) thedepreciationofthevalueofthedollarandaresultingdecreaseofU.S.netexports.
C) theappreciationofthevalueofthedollarandaresultingincreaseofU.S.netexports.
D) theappreciationofthevalueofthedollarandaresultingdecreaseofU.S.netexports.
Answer: D
Diff:2
12) WhateffectdoesacontractionarymonetarypolicyintheU.S.haveontheforeigntradesector?
A) Thelowervalueofthedollarwilldecreaseexportsandincreaseimports.
B) Thelowervalueofthedollarwilldecreaseimportsandincreaseexports.
C) Thehighervalueofthedollarwilldecreaseexportsandincreaseimports.
D) Thehighervalueofthedollarwilldecreaseimportsandincreaseexports.
Answer: C
Diff:3
13) WhateffectdoesanexpansionarymonetarypolicyintheU.S.haveontheforeigntradesector?
A) Thelowervalueofthedollarwilldecreaseexportsandincreaseimports.
B) Thelowervalueofthedollarwilldecreaseimportsandincreaseexports.
C) Thehighervalueofthedollarwilldecreaseexportsandincreaseimports.
D) Thehighervalueofthedollarwilldecreaseimportsandincreaseexports.
Answer: B
Diff:3
14) WhichofthefollowingwouldNOTbearesultofacontractionarymonetarypolicy?
A) Interestrateswouldrise.
B) ForeigngoodswouldbecomemoreexpensivetoU.S.residents.
C) Netexportswoulddecline.
D) Importswouldrise.
Answer: B
Diff:3
15) Thenet-exporteffectofexpansionarymonetarypolicyisa(n)
A) depreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
B) depreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
C) appreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
D) appreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
Answer: A
Diff:2
16) Thenet-exporteffectofcontractionarymonetarypolicyisa(n)
A) depreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
B) depreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
C) appreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
D) appreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
Answer: D
Diff:2
17) Asglobalfinancialmarketsbecomemoreintertwined,theFedhas
A) lesscontrolovermonetarypolicy.
B) morecontrolovermonetarypolicy.
C) morecontroloverfiscalpolicy.
D) lesscontroloverfiscalpolicy.
Answer: A
Diff:2
18) WhyisitmoredifficultfortheFedtocontrolthemoneysupplytodaythanitwasfiftyyears
ago?
Answer: Theinternationalfinancialmarketsaremoreglobaltoday.IftheFeddecidestoreduce
themoneysupply,peoplecanobtaindollarsininternationalmarkets,offsettingthe
actionsoftheFed.Peoplecanborrowinothercurrenciesiftheywantmoreliquidity.The
globalizationofinternationalmoneymarketsmakesitmoredifficultfortheFedto
controltherateofgrowthofthemoneysupplyintheUnitedStates.
Diff:2
19) Whateffectsdoesanexpansionarymonetarypolicyhaveonthetradebalance?Why?
Answer: Anexpansionarymonetarypolicymaycauseinterestratestofall,whichwouldleadto
outflowsoffinancialcapitalandadepreciationofthedollar.Thiswouldcausenet
exportstoincrease,sothenetexporteffectisinthesamedirectionasthemonetarypolicy
effect.
Diff:2
16.5MonetaryPolicyandInflation
1) Accordingtotheequationofexchange,ifM= $400,P= 8,andY= $200,then
A) netdomesticproductis$800.
B) Vis4.
C) thepricelevelmustfall.
D) Vcannotbedetermined.
Answer: B
Diff:2
Topic: 16.5MonetaryPolicyandInflation
2) Whichofthefollowingbestrepresentstheequationofexchange?
A) M*P=V*Y
B) M*V= P*Y
C) M*Y= P*V
D) M*Y*V=P
Answer: B
Diff:2
3) Thehypothesisthatchangesinthemoneysupplyleadtoanequiproportionalchangeinthe
priceleveliscalled
A) thequantitytheoryofmoney.
B) theclassicaltheoryofmoney.
C) theKeynesiantheoryofmoney.
D) thefractionaltheoryofmoney.
Answer: A
Diff:2
4) Accordingtothequantitytheoryofmoney,thepriceleveldecreasesinequalproportionto
A) anincreaseintheincomevelocityofmoney.
B) adecreaseinthenominalinterestrate.
C) anincreaseintherealinterestrate.
D) adecreaseinthemoneysupply.
Answer: D
Diff:1
5) Otherthingsbeingequal,thequantitytheoryofmoneysuggeststhatanyincreaseinthemoney
supply
A) causesareductioninthedemandformoney.
B) resultsinadecreaseintheaggregatepricelevel.
C) causestheaggregatelevelofnominalGrossDomesticProduct(GDP)tofall.
D) resultsinaproportionateincreaseinthepricelevel.
Answer: D
Diff:1
6) Accordingtothequantitytheoryofmoney,increasesinthemoneysupplyleadto
A) decreasesinnominalGrossDomesticProduct(GDP).
B) increasesinthepricelevel.
C) decreasesinthepricelevel.
D) increasesintaxes.
Answer: B
Diff:1
7) Accordingtothequantitytheoryofmoney,
A) achangeinthemoneysupplycanleadonlytoaproportionatechangeinthepricelevel.
B) thevelocityofmoneyistheleaststablefactorinmonetaryanalysis.
C) therateofinflationisnotrelatedtochangesinthemoneysupply.
D) pricelevelchangescanbestbeexplainedbyKeynesiananalysis.
Answer: A
Diff:1
8) Theformulaoftheequationofexchangeis
A) MS=Y.
B) MS=VPY.
C) MSV= PY.
D) MS/P=Y.
Answer: C
Diff:2
9) Accordingtoboththeequationofexchangeandthequantitytheoryofmoney,
A) anincreaseinthemoneysupplywillincreaserealGrossDomesticProduct(GDP).
B) anincreaseinthemoneysupplywilldecreaserealGrossDomesticProduct(GDP).
C) adecreaseinthemoneysupplywilldecreasethevelocityofmoney.
D) adecreaseinthemoneysupplywilldecreasethepricelevel.
Answer: D
Diff:1
10) Thevelocityofmoney
A) is,accordingtotheequationofexchange,equaltoP/M.
B) indicatesthenumberoftimesperyearadollarisspentonfinalgoodsandservices.
C) is,accordingtotheequationofexchange,equaltoM/Y.
D) indicatesthespeedwithwhichtheU.S.Treasurycanmintnewcoins.
Answer: B
Diff:1
11) Accordingtotheequationofexchange,ifV= 5,P= 3,andY= $50,thenthemoneysupply

equals
A) $10.
B) $30.
C) $150.
D) $300.
Answer: B
Diff:2
12) Accordingtothequantitytheoryofmoney,anexcessquantityofmoneysuppliedwillleadto
A) areductioninspendingandhigherinterestrates.
B) areducedlevelofrealGrossDomesticProduct(GDP).
C) ahigherlevelofemployment.
D) ahigherpricelevel.
Answer: D
Diff:1
13) Adecreaseinthesupplyofmoneywill,accordingtothequantitytheoryofmoney,leadto
A) ahigherpricelevel.
B) ahighernominalGrossDomesticProduct(GDP).
C) alowerrealGrossDomesticProduct(GDP).
D) alowerpricelevel.
Answer: D
Diff:1
14) Theincomevelocityofmoneyis
A) thetimeittakestoproducemoney.
B) thetimelagfromwhentheFeddecidestoincreasethemoneysupplyuntiltheeffecttakes
place.
C) thenumberoftimesperyearadollarisspentonfinalgoodsandservices.
D) thetimeittakesformonetarypolicytohaveaneffectonworldfinancialmarkets.
Answer: C
Diff:1
15) Accordingtotheequationofexchange,ifrealGrossDomesticProduct(GDP),inbaseyear
dollars,is$25billion,themoneysupplyis$1billion,andthepriceindexequals2,thenthe
incomevelocityofmoneyis
A) 5.
B) 10.
C) 25.
D) 50.
Answer: D
Diff:2
16) Theequationofexchangeis
A) anassumptionthatisnotalwaystrue.
B) trueintheshortrunbutnotalwaysinthelongrun.
C) anaccountingidentityandthereforeisalwaystrue.
D) atheorydevelopedattheFederalReserve.
Answer: C
Diff:1
17) Anassumptionusedinthequantitytheoryofmoneyisthat
A) thepricelevelisconstant.
B) velocityisconstant.
C) nominalGrossDomesticProduct(GDP)isconstant.
D) themoneysupplyisconstant.
Answer: B
Diff:1
18) Accordingtothequantitytheoryofmoney,
A) realGrossDomesticProduct(GDP)isdirectlyrelatedtochangesinthemoneysupplyin
thelongrun.
B) velocityvariesindirectlywiththerateofgrowthofthemoneysupply.
C) aproportionateincreaseinthemoneysupplyleadstoalessthanproportionateincreasein
realGrossDomesticProduct(GDP),atleastinthelongrun.
D) agivenproportionateincreaseinthemoneysupplyleadstoanequalproportionate
increaseinthepricelevel.
Answer: D
Diff:1
19) Anincreaseinthemoneysupply,otherthingsbeingconstant,
A) causesinterestratestorise.
B) generatesanincreaseinthedemandformoney.
C) causesthepriceleveltoincrease.
D) causesthepurchasingpowerofmoneytoincrease.
Answer: C
Diff:1
20) Theincomevelocityofmoneyistheabsolutenumberoftimes,onaverage,that
A) peoplepurchasegoodsandservicesduringayear.
B) eachmonetaryunitisspentonfinalgoodsandservices.
C) eachunitofrealGDPisproducedbybusinessfirms.
D) eachone-unitincreaseinthepriceleveloccurs.
Answer: B
Diff:1
21) Empiricalevidenceacrossnumerouscountriesindicatesthatchangesinthe________are
associatedwithnearlyequiproportionalchangesin________.
A) moneysupply,realGDPperyear
B) moneysupply,pricelevel
C) pricelevel,moneysupply
D) realGDPperyear,incomevelocityofmoney
Answer: B
Diff:1
22) Thenumberoftimesperyear,onaverage,thatadollarisspentonfinalgoodsandservicesis
knownas
A) themoneysupply.
B) theequationofexchange.
C) thepriceofmoney.
D) theincomevelocityofmoney.
Answer: D
Diff:1
23) Accordingtotheequationofexchange,nominalGDPequals
A) theamountofactualmoneybalancestimestheincomevelocityofmoney.
B) theamountofactualmoneybalancesdividedbytheincomevelocityofmoney.
C) thepriceleveldividedbytheincomevelocityofmoney.
D) thepriceleveltimestheincomevelocityofmoney.
Answer: A
Diff:2
24) Theequationofexchangeisaformulaindicatingthatthenumberofmonetaryunitstimes
A) thenumberoftimeseachmonetaryunitisspentonfinalgoodsandservicesisidenticalto
thepriceleveltimesrealGDP.
B) thepricelevelisidenticaltothenumberoftimeseachmonetaryunitisspentonfinal
goodsandservicestimesrealGDP.
C) realGDPisidenticaltothepriceleveltimesthenumberoftimeseachmonetaryunitis
spentonfinalgoodsandservices.
D) nominalGDPisidenticaltothepriceleveltimesthenumberoftimeseachmonetaryunit
isspentonfinalgoodsandservices.
Answer: A
Diff:1
25) Theidentitystatingthatthetotalamountspentonfinaloutputequalstheamountreceivedfor
finaloutputisknownasthe
A) fundamentallawofeconomics.
B) circularflowidentity.
C) equationofexchange.
D) identityequation.
Answer: C
Diff:1
26) Inwords,theequationofexchangesaysthat
A) thetotalamountspentonfinaloutputequalstheamountreceivedforfinaloutput.
B) theamountofmoneyincirculationequalsthevelocityofthepricelevel.
C) changesinthemoneysupplywillhavenoimpactontheamountspentonfinaloutput.
D) whenvelocityequals1,nominalGDPequalsthepricelevel.
Answer: A
Diff:1
27) Ifthetotalmoneysupplyis$3trillion,realGDPis$8trillionandthepricelevelis1.5,thenthe
equationofexchangetellsusthatvelocityequals
A) 0.25
B) 3
C) 4
D) 16
Answer: C
Diff:1
28) Ifvelocityisequalto4,thismeansthat
A) therateofgrowthofthemoneysupplyis4.
B) eachdollarofthemoneysupplyisspentontheaverage4timesperyear.
C) forevery4dollarsofthemoneysupply,nominalGDPwillincreaseby4.
D) anincreaseinthemoneysupplywillleadtoanincreaseinaggregatesupplyof4.
Answer: B
Diff:1
29) IfnominalGDPis$5trillionandvelocityis20,then
A) actualmoneybalancesheldbythenonbankingpublicare$250billion.
B) actualmoneybalancesheldbythenonbankingpublicare$100trillion.
C) realGDPequals$100trillion.
D) realGDPequals$400trillion.
Answer: A
Diff:3
30) Theequationofexchangeisan________whilethequantitytheoryofmoneyisatheorythat
________.
A) accountingidentity;assumesthemoneysupplyisconstant
B) accountingidentity;assumesvelocityisheldconstant
C) accountingtheory;assumesthepricelevelisconstant
D) accountingtheory;economistsusetoexplainchangesinrealGDP
Answer: B
Diff:2
31) Thequantitytheoryofmoneyisbasedontheformulathat
A) V=PYMs.
B) Y= PV/Ms.
C) Ms = PV/Y.
D) P= MsV/Y.
Answer: D
Diff:2
32) Thequantitytheoryofmoneyandpricesassumes
A) velocityisconstant.
B) realoutputisconstant.
C) thepricelevelisconstant.
D) thepricelevelisincreasingataconstantrate.
Answer: A
Diff:1
33) Thequantitytheoryofmoneyandprices
A) isderivedfromtheequationofexchangeassumingthatpricesremainconstant.
B) showshowachangeinthepricelevelleadstoachangeinthemoneysupply.
C) showshowthedemandformoneyisinverselyrelatedtothepricelevel.
D) isthehypothesisthatchangesinthemoneysupplyleadstoproportionalchangesinthe
pricelevel.
Answer: D
Diff:1
34) Accordingtothequantitytheoryofmoneyandprices,a10percentincreaseinthemoney
supplyultimatelyleadsto
A) a10percentincreaseinrealGDP.
B) a10percentincreaseinrealnationaloutput.
C) a10percentincreaseinthepricelevel.
D) a10percentincreaseinvelocity.
Answer: C
Diff:2
35) Anincreaseinthepricelevelmeansthat
A) long-runaggregatesupplyhasincreased.
B) monetarypolicyhasbeencontractionary.
C) thevalueofthedollarhasincreased.
D) thepurchasingpowerofmoneyhasfallen.
Answer: D
Diff:1
36) Whichofthefollowingisavariableintheequationofexchange?
A) thepricelevel.
B) themoneysupply.
C) thevelocityofmoney.
D) realGDP.
E) alloftheabove.
Answer: E
Diff:2
37) Theequationofexchangecanbewrittenas
A) MsP=VY.
C) MsY=VP.
Answer: B
Diff:1
B) MsV= PY.
38) TheVintheequationofexchangeMsV= PYrefersto

A) avariable.
C) thevelocityofinflation.
B) incomevelocityofmoney.
D) avectorthatlinksPtoY.
Answer: B
Diff:1
39) IfVisconstantandYisfixed,anychangeinM
A) leadstoasmallerchangeinP.
C) leadstoaproportionatechangeinP.
B) leadstoalargerchangeinP.
D) doesnotleadtochangeinP.
Answer: C
Diff:2
40) Bysayingthattheequationofexchangeisanaccountingidentity,wemeanthat
A) itisusefulforaccountants,butnotforeconomists.
B) itidentifiesthekeynationalincomeaccounts.
C) itisalwaystrue.
D) itexplainstheeffectofquestionableaccountingpracticesonmacroeconomicperformance.
Answer: C
Diff:1
41) Thequantitytheoryofmoneyandpricesassertsthat
A) increasesinthemoneysupplyleadtoinflation.
B) increasesinthemoneysupplyleadtoanincreaseinthevelocityofmoney.
C) increasesinthemoneysupplyleadtoadecreaseinthevelocityofmoney.
D) increasesinthemoneysupplywillincreaserealGDP.
Answer: A
Diff:2
42) Thequantitytheoryofmoneyandpricesrestsontheassumptionthat
A) thevelocityofmoneyisconstant.
B) theminimumwageisconstant.
C) thenominalinterestrateisconstant.
D) theforeignexchangerateisconstant.
Answer: A
Diff:2
43) Thenumberoftimesperyearthatadollarisspentonfinalgoodsandservicesdefines
A) themoneysupply.
B) theincomevelocityofmoney.
C) thepriceindex.
D) GDP.
Answer: B
Diff:2
44) Whichofthefollowingbestdescribestheincomevelocityofmoney?
A) V=PMs
B) V=Y
C) V= PY/Ms
D) V=Ms/PY
Answer: C
Diff:2
45) Accordingtothesimplequantitytheoryofmoney,whichofthefollowingvariablesare
consideredeitherconstantorrelativelystable?
A) VandY
B) YandMs
C) PandMs
D) PandY
Answer: A
Diff:2
46) Thehypothesisthatchangesinthemoneysupplyleadtoproportionalchangesinthepricelevel
iscalled
A) theequationofexchange.
B) theKeynesianmultiplier.
C) thetheoryofempiricalrelativity.
D) thequantitytheoryofmoneyandprices.
Answer: D
Diff:2
47) Theequationofexchangespecifiesthat
A) MsV=PY.
B) velocityandmoneysupplyaredirectlyrelated.
C) MsP=VY.
D) Ms=PVY.
Answer: A
Diff:1
48) Inaneconomythatisatfullemployment,anincreaseinmoneysupplywillresultininflation,
unless
A) velocityincreases.
B) velocitydecreases.
C) realGDPfalls.
D) taxreductionisproportionaltoincreasesinthemoneysupply.
Answer: B
Diff:2
49) Intheequationofexchange,ifthemoneysupplyis$6trillion,thepricelevelis1.5,andthereal
GDPis$12trillion,thevelocityis
A) 3.0.
B) 9.3.
C) 6.0.
D) 2.0.
Answer: A
Diff:2
50) Ifweassumethatvelocityisconstant,andifthemoneysupplyincreasesby6percent,wewould
expect,ceterisparibus,thatthepricelevelwould
A) increaseby3percent.
B) increaseby6percent.
C) decreaseby3percent.
D) decreaseby6percent.
Answer: B
Diff:2
51) IfbothnominalandrealGDPareincreasingwhenthemoneysupplyisconstant,thanwecan
concludethat
A) velocityhasincreased.
B) velocityhasdecreased.
C) interestratehasfallen.
D) interestratehasincreased.
Answer: A
Diff:3
52) IfanationsnominalGDPis$40billion,itsmoneysupplyis$8billion,anditspricelevelis1.25,
thenthevelocityofmoneyis
A) 0.2.
B) 2.0.
C) 5.0.
D) 6.25.
Answer: D
Diff:2
53) Whatistheequationofexchange?Howcantheequationofexchangebeconvertedintothe
quantitytheoryofmoney?
Answer: TheequationofexchangeisMSV= PY,whereMS isthemoneysupply,Visthevelocity
ofmoney,andPYisthenominalGDP.Itisanaccountingidentity,soisnotatheory.The
equationofexchangebecomesthequantitytheoryofmoneyandpricesbyassumingthat
velocityisconstantandthatrealGDP(Y)isstable.ThenwehaveP=(MS)V/Yorthata
changeinthemoneysupplywillleadonlytoaproportionatechangeinthepricelevel.
Diff:3
16.6MonetaryPolicyinAction:TheTransmissionMechanism
1) Intheinterest-rate-basedtransmissionmechanism,adecreaseinthemoneysupplywill
A) increasethepricelevel.
B) reducetherateofinterestandthelevelofinvestment.
C) reduceinvestment,shifttheaggregatedemandfunctioninward,andlowerrealGross
D) shifttheaggregatesupplyfunctioninwardandincreaserealGrossDomesticProduct
(GDP).
Answer: C
Diff:1
Topic: 16.6MonetaryPolicyinAction:TheTransmissionMechanism
2) Themonetarytransmissionmechanismthatassumesthatmoneysupplygrowthstimulatesthe
economyprimarilybyencouraginginvestmentis
A) theinterest-rate-basedtransmissionmechanism.
B) theclassicaltransmissionmechanism.
C) thepost-Keynesiantransmissionmechanism.
D) pre-Keynesiantransmissionmechanism.
Answer: A
Diff:1
3) Thelinkagesoftheinterest-rate-basedtransmissionmechanismofmonetarypolicyare
summarizedasfollows:
A) changeinthemoneysupply changeinspeculativebalanceschangeintransactions
balanceschangeinplannedinvestmentchangeinaggregatedemand.
B) changeinthemoneysupply changeinplannedinvestmentchangeingovernment
spendingchangeinaggregatedemand.
C) changeinthemoneysupply changeininterestrates changeinplannedinvestment
changeinaggregatedemand.
D) changeinthemoneysupply changeininterestrates changeintransactionsbalances
changeingovernmentspendingchangeinaggregatedemand.
Answer: C
Diff:1
4) Assume(otherthingsconstant)thattheFedincreasesthemoneysupply.Themechanism
throughwhichaggregatedemandincreasesis,accordingtointerest -rate-basedtransmission
mechanism,summarizedasfollows:
A) themoneysupplyincreases thereisadropinmoneybalancesheldinterestrates
increaseplannedinvestmentspendingdecreasesaggregatedemandincreases.
B) increaseinmoneysupply increaseinmoneybalanceshelddecreaseininterestrates
decreaseinplannedinvestmentspendingincreaseinaggregatedemand.
C) increaseinmoneysupply decreaseinmoneybalanceshelddecreaseininterestrates
increaseinplannedinvestmentspendingincreaseinaggregatedemand.
D) increaseinmoneysupply decreaseininterestrates increaseinplannedinvestment
spendingincreaseinaggregatedemand.
Answer: D
Diff:1
5) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,
A) anincreaseinmoneysupplywillincreaseinterestrates.
B) anincreaseinmoneysupplywilldecreaseinterestrates.
C) adecreaseinmoneysupplywilldecreaseinterestrates.
D) adecreaseinmoneysupplywillnotchangeinterestrates.
Answer: B
Diff:1
6) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,
A) anincreaseintherequiredreserveratiowilllowerinterestrates.
B) adecreaseintherequiredreserveratiowilllowerinterestrates.
C) adecreaseintherequiredreserveratiowillnotaffectinterestrates.
D) anincreaseintherequiredreserveratiowillnotaffectinterestrates.
Answer: B
Diff:1
7) Theinterest-rate-basedtransmissionmechanismassumesthattheFedcanstimulateinvestment
by
A) sellingbonds.
B) buyingbonds.
C) raisingthediscountraterelativetothefederalfundsrate.
D) raisingtherequiredreserveratio.
Answer: B
Diff:1
8) Intheabovefigure,supposetheeconomyisinshort-runequilibriumatpointD.Whichofthe
followingisthebestpolicyoptionfortheFed?
A) Increasetherequiredreserveratio
B) Increasegovernmentspending
C) Increasetaxes
D) Openmarketpurchaseofgovernmentsecurities
Answer: D
Diff:1
9) Intheabovefigure,supposetheeconomyisatashort-runequilibriumatpointBandthe
interestrateisr2 .WhichofthefollowingpolicyoptionsfortheFedwillhelpsolvethe
short-runsituation?
A) Loweringthedifferentialbetweenthediscountrateandthefederalfundsrate
B) Openmarketpurchaseofgovernmentsecurities
C) Loweringtherequiredreserveratio
D) Openmarketsaleofgovernmentsecurities
Answer: D
Diff:1
10) Intheabovefigure,iftheeconomyisinitiallyatanequilibriumoutputatpointAandthe
interestrateisr1 ,thenanopenmarketpurchaseofbondsbytheFedwill
A) causeinterestratestoincreaseandoutputtodecline.
B) causeinterestratestodeclinetor2 ,investmenttoincreasetoI 2 ,andtheADcurvetoshift
upwardtotheright.
C) causeinterestratestodeclinetor2 ,investmenttodecline,andaggregatedemandtoshift
inwardtotheleft.
D) nothaveanyimpactonshort-orlong-runequilibriumrealGrossDomesticProduct
(GDP).
Answer: B
Diff:1
11) Accordingtoproponentsoftheinterest-rate-basedmonetarypolicytransmissionmechanism,
anyincreaseinthemoneysupply
A) iseffectiveinincreasingGrossDomesticProduct(GDP)onlyifitcausesanoutwardshift
oftheaggregatesupplycurve.
B) willincreaseGrossDomesticProduct(GDP)onlyifinterestratesfallandinvestmentis
sensitivetodecreasinginterestrates.
C) causesvelocitytoincrease,andsointheshortrunnominalGrossDomesticProduct(GDP)
mustincrease.
D) willmovetheeconomyfromtheliquiditytrapduringtimesofrecessionifinterestrates
fallenoughtostimulateprivateinvestment.
Answer: B
Diff:1
12) Proponentsoftheinterest-rate-basedmonetarypolicytransmissionmechanismarguethat
whentheFederalReservebuysbonds,therewillbe
A) anincreaseininvestmentspending.
B) adecreaseinthemoneysupply.
C) adecreaseinnominalGrossDomesticProduct(GDP),butnotinrealincome.
D) adecreaseinthepriceofoutstandingbonds.
Answer: A
Diff:1
13) Theinterest-rate-basedmonetarypolicytransmissionmechanismarguesthatanincreaseinthe
moneysupply
A) hasnoeffectonaggregatedemandbutreduceslong-runaggregatesupply.
B) hasnoeffectonaggregatedemandbutincreasesshort-runaggregatesupply.
C) causesinterestratestofall,whichcausesanincreaseinplannedinvestment,andan
increaseinaggregatedemand.
D) causestheinflationratetodecline,whichcausesanincreaseinhouseholdconsumption
spendingandanincreaseinaggregatedemand.
Answer: C
Diff:2
14) Theinterest-rate-basedmonetarypolicytransmissionmechanismemphasizesthe
A) indirecteffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
expendituresgeneratedbyachangeintheinterestrate.
B) directeffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
productiongeneratedbyachangeinthepricelevel.
C) directeffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
expendituresgeneratedbyachangeintheinterestrate.
D) indirecteffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
productiongeneratedbyachangeinthepricelevel.
Answer: A
Diff:1
A) Bothmonetaryandinterestratetargetscannotbepursuedsimultaneously.
B) Areductionintherequiredreserveratioincreasesthemoneysupplyandpushesdownthe
equilibriuminterestrate.
C) Anopenmarketpurchasereducesthemoneysupplyandpushesdowntheequilibrium
interestrate.
D) anopenmarketsaledecreasesthemoneysupplyandpushesuptheequilibriuminterest
rate.
Answer: C
Diff:1
16) Akeycausallinkintheinterest-rate-basedtransmissionmechanismformonetarypolicyis
from
A) investmenttotheinterestrate.
B) themoneysupplytoexcessreserves.
C) amonetarypolicyactiontoexcessreserves.
D) realGDPtoinvestment.
Answer: C
Diff:1
17) Ifthesourceofeconomicinstabilityisgenerallyvariationsinspending,thentheFedshould
A) setmoneysupplytargets.
B) printmoremoney.
C) buygold.
D) raisetaxes.
Answer: A
Diff:3
18) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,anincreasein
themoneysupplygenerates
A) lowerinterestrates,whichcausesanincreaseinplannedrealinvestmentspendingandan
B) increasedspendingonconsumergoodsandservicesdirectly,whichcausesanincreasein
aggregatedemand.
C) anincreaseinnominalGDPandachangeinthepricelevel,butnochangeinrealGDP.
D) anincreaseinaggregatesupplysincethesupplyofmoneyispartofaggregatesupply.
Answer: A
Diff:2
19) WhichofthefollowingisNOTareasontheFedalterstherateofgrowthofthemoneysupply?
A) Toinfluenceaggregatedemand
B) Toshiftthedemandformoneycurve
C) Toinfluencetheamountofconsumption
D) Toinfluencetheamountofinvestment
Answer: B
Diff:1
20) Theinterest-rate-basedapproachtothemonetarypolicytransmissionmechanismsaysthata
changeinthemoneysupplyinfluencesaggregatedemandby
A) achangeininterestrates,whichchangesinvestment.
B) achangeininterestrates,whichchangesthemoneysupply.
C) changingconsumerconsumptionbehaviorastheyadjusttoachangeinthenumberof
dollarsavailable.
D) leadingtoshiftsoftheshort-runaggregatesupplycurve.
Answer: A
Diff:1
themoneysupplywill
A) leadtoadecreaseininvestmentspendingandanincreaseinrealGDPthatisequaltothe
decreaseininvestmentspending.
B) leadtoadecreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
thanthedecreaseininvestmentspending.
C) leadtoanincreaseininvestmentspendingandadecreaseinrealGDPthatisequaltothe
increaseininvestmentspending.
D) leadtoanincreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
thantheincreaseininvestmentspending.
Answer: D
Diff:1
22) Accordingtotheinterest-rate-basedtransmissionmechanism,adecreaseinthemoneysupply
will
B) leadtoadecreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
D) leadtoanincreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
Answer: B
Diff:1
23) Anincreaseinthemoneysupplywillaffectaggregatedemand
A) onlyiftheincreaseinthemoneysupplycausesinterestratestorise.
B) onlyiftheincreaseinthemoneysupplycausespeopletobuylessgoodsandservices.
C) onlyiftheincreaseinthemoneysupplycausespeopletoincreasetheirsaving.
D) iftheincreaseinthemoneysupplycausesinterestratestofalland/orcausespeopletobuy
moregoodsandservices.
Answer: D
Diff:2
24) Accordingtotheinterest-rate-basedperspectiveonthemonetarypolicytransmission
mechanism,
A) keychannelsofmonetarypolicyindirectlyultimatelyrelatemoneysupplychangestototal
plannedspendingthroughindirecteffectsonplannedinvestment.
B) changesinthemoneysupplyhavelittleinfluenceonmacroeconomicvariables.
C) monetarypolicyleadstoincreasesinthepricelevelbutwillhavenoeffectontherateof
output.
D) inflationisalwayscausedbyexcessivemonetarygrowthandchangesinthemoney
supplyoffsetaggregatedemandonlydirectly.
Answer: A
Diff:1
25) Theinterest-rate-basedapproachtomonetarypolicysaysthatachangeinthemoneysupply
influencesaggregatedemandby
A) achangeininterestrateswhichchangesinvestment.
B) followingthemonetaryrule.
C) changingconsumerconsumptionbehaviorastheyadjusttoachangeinthenumberof
dollarsavailable.
D) leadingtoshiftsoftheshort-runaggregatesupplycurve.
Answer: A
Diff:1
themoneysupplywill
B) leadtoadecreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
D) leadtoanincreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
Answer: D
Diff:1
27) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,adecreasein
themoneysupplywill
B) leadtoadecreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
D) leadtoanincreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
Answer: B
Diff:1
28) IftheFedhasannouncedthatitplansonloweringtheinterestrateitwill
A) engageinexpansionaryopenmarketoperations,therebydecreasingthemoneysupply.
B) engageinexpansionaryopenmarketoperations,therebyincreasingthemoneysupply.
C) engageincontractionaryopenmarketoperations,therebydecreasingthemoneysupply.
D) engageincontractionaryopenmarketoperations,therebyincreasingthemoneysupply.
Answer: B
Diff:1
29) IftheFedhasannouncedthatitplansonincreasingtheinterestrateitwill
A) engageinexpansionaryopenmarketoperations,therebydecreasingthemoneysupply.
B) engageinexpansionaryopenmarketoperations,therebyincreasingthemoneysupply.
C) engageincontractionaryopenmarketoperations,therebydecreasingthemoneysupply.
D) engageincontractionaryopenmarketoperations,therebyincreasingthemoneysupply.
Answer: C
Diff:1
30) Accordingtotheinterest-rate-basedtransmissionmechanismformonetarypolicy,anincrease
inthemoneysupplywillcausethe
A) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoa
decreaseinaggregatedemand.
B) interestratetorise,causingplannedrealinvestmentspendingtoriseandleadingtoa
C) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoan
D) interestratetofall,causingplannedrealinvestmentspendingtofallandleadingtoan
Answer: C
Diff:2
31) Accordingtotheinterest-rate-basedtransmissionmechanismformonetarypolicy,adecrease
inthemoneysupplywillcausethe
A) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoa
B) interestratetorise,causingplannedrealinvestmentspendingtoriseandleadingtoa
C) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoan
D) interestratetorise,causingplannedrealinvestmentspendingtofallandleadingtoa
Answer: D
Diff:2
32) Theinterest-rate-basedtransmissionmechanismformonetarypolicyintheKeynesiansystem
indicatesthat
A) increasesinthemoneysupplyleadtodecreasesintheinterestrate,whichdecreases
investment,whichdecreasesthelevelofrealGDP.
B) decreasesinthemoneysupplyleadtoincreasesintheinterestrate,whichincreases
investment,whichincreasesthelevelofrealGDP.
C) increasesinthemoneysupplycausepeopletospendmore,leadingtoincreasesinreal
GDP.
D) increasesinthemoneysupplyleadtodecreasesintheinterestrate,whichincreases
investment,whichincreasesthelevelofrealGDP.
Answer: D
Diff:2
33) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,whichofthe
followingmonetarypolicieswouldresultinanincreaseinthelevelofplannedrealinvestment
spending?
A) contractionary
B) expansionary
C) reactionary
D) Monetarypolicyhasnoeffectoninvestment.
Answer: B
Diff:1
34) Theinterest-rate-basedmonetarypolicytransmissionmechanismsuggeststhatthechangesin
themoneysupplyaffectaggregatespending
A) indirectlythroughinterestratesandplannedinvestmentspending.
B) directlythroughinterestratesandplannedconsumptionspending.
C) indirectlythroughtaxratesandplannedconsumptionspending.
D) directlythroughinterestratesandplannedgovernmentspending.
Answer: A
Diff:2
35) Supposetheeconomyisinitiallyinlong-runandshort-runequilibrium.IftheFeddecidesto
pursueacontractionarymonetarypolicy,wewillsee
A) bondpricesfall,interestratesfall,aggregatedemandremainsunchangedasconsumption
spendingdecreases,butinvestmentspendingincreases.GDPremainsconstantinboththe
shortrunandthelongrun,butthepricelevelfallsinboth.
B) bondpricesfall,interestratesrise,aggregatedemandfallsasinvestmentandconsumption
spendingdecrease,andrealGDPandthepriceleveldecreasingintheshort-run,butonly
thepriceleveldecreasinginthelongrun.
C) bondpricesfall,interestratesrise,aggregatedemandfallsasinvestmentspending
decreasesandconsumptionspendingremainsunchanged,andrealGDPandtheprice
leveldecreaseintheshortrun,butonlythepricelevelfallsintheshortrun.
D) interestratesrisebutnochangeinbondprices.Aggregatedemandfallsasconsumption
spendingandinvestmentspendingdecrease,andthepricelevelandrealGDPfallinboth
theshortrunandthelongrun.
Answer: B
Diff:3
36) Supposethereisanincreaseinthemoneysupply,butthatpeoplesdemandformoneybalances
increasesbyagreateramountatthesametime.Theneteffectwouldbe
A) alowerpricelevelinthelongrun.
B) nochangeinaggregatedemandoraggregatesupply.
C) anincreaseinaggregatedemandduetotheincreaseinthemoneysupply,butadecrease
inaggregatesupplyduetotheincreaseinthedemandformoney.
D) lowerinterestrates,greaterrealGDP,andahigherpricelevelasaggregatedemand
increasesbecauseoftheindirecteffectoftheincreaseinthemoneysupply.
Answer: A
Diff:3
37) BrieflydescribetheeffectsofanopenmarketsalebytheFederalReserve,accordingtothe
interest-rate-basedapproachtothemonetarypolicytransmissionmechanism.
Answer: IftheFeddecreasesthemoneysupplythroughanopenmarketsale,thenthemoney
supplywilldecrease.Peoplewillthenfindthemselveswithtoolittlecash,andsothey
willsellbonds.Asaresult,thepricesofbondswilldecrease,therebyraisingtheinterest
rate.Ahigherinterestratewilldecreaseplannedinvestmentandthusaggregatedemand.
AdecreaseinaggregatedemandwillreduceequilibriumrealGDPviathemultiplier
effect.
Diff:2
QuestionStatus: New
38) TheinterestratethattheFedchargesbankstoborrowfundsfromtheFedisthe
A) discountrate.
B) federalfundsrate.
C) moneymarketrate.
D) nominalinterestrate.
Answer: A
Diff:1
39) Oneofthetoolsofmonetarypolicyistochangethediscountrate.Since2003
A) theFedhasnotchangedthediscountrate.
B) theFedhaspeggedthediscountratetothereserverequirement.
C) theFedhaskeptthediscountrateafixedamountabovethefederalfundsrate.
D) theFedhaskeptthefederalfundsrateonepercentagepointabovethediscountrate.
Answer: C
Diff:1
40) Thetoolsofmonetarypolicyare
A) openmarketoperations,differentialbetweenthediscountrateandthefederalfundsrate,
andtaxrates.
B) openmarketoperations,governmentspending,andtherequiredreserveratio.
C) openmarketoperations,differentialbetweenthediscountrateandthefederalfundsrate,
andtherequiredreserveratio.
D) governmentspending,taxrates,andtherequiredreserveratio.
Answer: C
Diff:2
41) Tochangetherateofgrowthofthemoneysupply,theFedcandoallbutwhichoneofthe
following?
A) Engageinopenmarketoperations
B) Changethediscountrate
C) Shiftthedemandformoneycurvebychangingtheinterestrate
D) Changetherequiredreserveratio.
Answer: C
Diff:1
42) Typically,increasingthedifferencebetweenthediscountandfederalfundsratescauses
A) anincreaseinmarketinterestrates.
B) nochangeininterestrates.
C) aboomintheeconomy.
D) highcorporateprofits.
Answer: A
Diff:3
43) Changesinwhichofthefollowingwillcausechangesintheequilibriumfederalfundsrate?
A) thedemandforexcessreservesbybanks
B) thedemandforrequiredreservesbybanks
C) thesupplyofreservescreatedthroughpastopenmarketoperations
D) alloftheabove
Answer: D
Diff:2
44) AopenmarketpurchaseofgovernmentsecuritiesbytheFedwillcausewhichofthefollowing?
A) areductioninthefederalfundsrate
B) anincreaseintheamountofexcessreservesthatbankswillwishtohold
C) anincreaseintheequilibriumquantityofreserves
D) alloftheabove
Answer: D
Diff:2
45) Inthemarketforbankreserves,thesupplyofreservesis
A) anupwardslopingcurve.
B) adownwardslopingcurve.
C) ahorizontalcurve.
D) noneoftheabove.
Answer: D
Diff:2
46) IftheFedraisestheinterestratepaidonexcessreserveswhileholdingthefederalfundsrate
unchanged,thenbankswill
A) lendmorereservesinthefederalfundsmarketandkeepmoreexcessreserves.
B) lendfewerreservesinthefederalfundsmarketandkeepmoreexcessreserves.
C) notkeepexcessreservesorlendreservesinthefederalfundsmarket.
D) notreacttoit.
Answer: B
Diff:2
47) Otherthingsbeingequal,iftheFedraisestheinterestratepaidonexcessreserves,
A) thesupplyofreservesinthefederalfundsmarketwillincrease.
B) thesupplyofreservesinthefederalfundsmarketwilldecrease.
C) boththedemandforreservesandthesupplyofreservesinthefederalfundsmarketwill
increase.
D) boththedemandforreservesandthesupplyofreservesinthefederalfundsmarketwill
decrease.
Answer: B
Diff:2
48) SinceOctober2008,CongresshasgrantedtheFedanauthorityto
A) chargebanksinterestonbothrequiredreservesandexcessreserves.
B) paybanksinterestonbothrequiredreservesandexcessreserves.
C) chargebanksinterestonrequiredreservesbutpaytheminterestonexcessreserves.
D) chargebanksinterestonexcessreservesbutpaytheminterestonrequiredreserves.
Answer: B
Diff:2
49) Inthemarketforbankreserves,areductionintherequiredreserveratiowillcause
A) areductioninthefederalfundsrate.
B) anincreaseintheequilibriumquantityofreserves.
C) areductioninthedemandforreserves.
D) alloftheabove.
Answer: D
Diff:2
50) Theopportunitycostofholdingexcessreservesisequalto
A) thediscountrate.
B) thefederalfundsrate.
C) thefederalfundsrateminusthediscountrate.
D) noneoftheabove.
Answer: D
Diff:2
51) AnopenmarketsaleofgovernmentsecuritiesbytheFedwillcausewhichofthefollowing?
A) anincreaseinthefederalfundsrate
B) anincreaseintheequilibriumquantityofreserves
C) alloftheabove
D) noneoftheabove
Answer: A
Diff:2
52) AnopenmarketsaleofgovernmentsecuritiesbytheFedwillcausewhichofthefollowing?
A) anexcessquantityofreservessuppliedandanincreaseinthefederalfundsrate
B) anexcessquantityofreservessuppliedandareductioninthefederalfundsrate
C) anexcessquantityofreservesdemandedandanincreaseinthefederalfundsrate
D) anexcessquantityofreservesdemandedandareductioninthefederalfundsrate
Answer: C
Diff:2
53) AnopenmarketpurchaseofgovernmentsecuritiesbytheFedwillcausewhichofthe
following?
A) anexcessquantityofreservessuppliedandanincreaseinthefederalfundsrate
B) anexcessquantityofreservessuppliedandareductioninthefederalfundsrate
C) anexcessquantityofreservesdemandedandanincreaseinthefederalfundsrate
D) anexcessquantityofreservesdemandedandareductioninthefederalfundsrate
Answer: B
Diff:2
54) Therateatwhichbankscanborrowexcessreservesfromotherbanksisequalto
A) thediscountrate.
B) therequiredreserveratio.
C) theinterestratepaidonreservesheldwiththeFed.
D) noneoftheabove.
Answer: D
Diff:2
55) Inthemarketforbankreserves,thesupplyofreservesis
A) anupwardslopingcurve.
B) adownwardslopingcurve.
C) averticalcurve.
D) noneoftheabove.
Answer: C
Diff:2
56) WhathappenswhentheFedaimstochangeinterestrates?
A) ItasksCongresstolegislatenewinterestrates.
B) Itbuysorsellsgovernmentbondsontheopenmarkettoachievethedesiredrate.
C) Itbuysorsellsdollarsontheforeignexchangemarkettoachievethedesiredrate.
D) Itannouncesanewdiscountinterestrate.
Answer: B
Diff:2
57) Thefederalfundsrateis
A) theinterestratepaidonreservesheldwiththeFed.
B) theinterestrateatwhichbankscanborrowexcessreservesfromotherbanks.
C) theinterestrateonbondsissuedbythefederalgovernment.
D) noneoftheabove.
Answer: B
Diff:2
58) Theincentiveofholdingexcessreservesisequalto
A) thediscountrate.
C) theinterestrateearnedonexcessreserves.
D) noneoftheabove.
Answer: C
Diff:2
59) Therateatwhichbankscanborrowexcessreservesfromotherbanksisequalto
A) thediscountrate.
C) theinterestratepaidonreservesheldwiththeFed.
D) thetreasurybillrate.
Answer: B
Diff:2
60) TheinterestratethattheFedchargesbankstoborrowfundsfromtheFedisthe
A) discountrate.
B) federalfundsrate.
C) moneymarketrate.
D) nominalinterestrate.
Answer: A
Diff:1
61) WhichofthefollowingisNOTpartoftheFOMCdirective?
A) ItlaysouttheFOMCsgeneraleconomicobjectives.
B) Itestablishesshort-termfederalfundsrateobjectives.
C) Itspecifiestargetrangesformoneysupplygrowth.
D) ItspecifieswhothechairoftheFedis.
Answer: D
Diff:2
62) WhatisthemaximumnumberofvotingmembersoftheFOMC?
A) 4
B) 7
C) 11
Answer: D
Diff:2
63) TheTradingDesksopenmarketoperations
A) areconfinedwithinaone-hourintervaleachweekdaymorning.
B) areconfinedwithinasix-hourintervaleachweekdaymorning.
C) occurthroughouteachday.
D) occuronceaweek.
Answer: A
Diff:2
D) 12
64) TheofficialFederalReservestrategyforimplementingitsmonetarypolicyobjectivesisspelled
outinthe
A) FederalReserveBoard(FRB)Decree.
B) FederalReserveBankCooperative(FRBC)Proposal.
C) FederalAdvisoryCommittee(FAC)Statement.
D) FederalOpenMarketCommittee(FOMC)Directive.
Answer: D
Diff:2
65) TheofficeoftheFederalReserveBankofNewYorkchargedwithimplementingFederal
Reserveopenmarketpolicyactionsisknownasthe
A) OpenMarketCoordinationOffice.
B) OpenMarketCooperationOffice.
C) ResponseDesk.
D) TradingDesk.
Answer: D
Diff:1
66) WhichofthefollowinginstitutionswithintheFederalReserveSystemdetermineshowmany
governmentsecuritiestheFedshouldbuyorsellonagivenday?
A) theBoardofGovernors.
B) FederalAdvisoryCommittee.
C) theFederalReserveBankofChicagosBoardofTrade.
D) theFederalReserveBankofNewYorksTradingDesk.
Answer: D
Diff:2
67) WhichofthefollowingpolicytoolsisdirectlycontrolledbytheTradingDeskattheFederal
ReserveBankofNewYork?
A) thespreadbetweenthediscountrateandthefederalfundsrate
B) thespreadbetweenthefederalfundsrateandtheinterestrateonbanksrequiredreserves
C) therequiredreserveratio
D) openmarketsalesandpurchases
Answer: D
Diff:2
68) UndertheFedscurrentinterest-rate-targetingapproachtomonetarypolicy,ifthedemandfor
federalfundsbydepositoryinstitutionsincreasestoday,then,otherthingsbeingequal,
A) themarketfederalfundsratedecreases,andtheFedsTradingDeskrespondsbyselling
bonds.
B) themarketfederalfundsrateincreases,andtheFedsTradingDeskrespondsbybuying
bonds.
C) themarketfederalfundsratedecreases,andtheFedsTradingDeskrespondsbybuying
bonds.
D) themarketfederalfundsrateincreases,andtheFedsTradingDeskrespondsbyselling
bonds.
Answer: B
Diff:3
69) ItistheresponsibilityoftheTradingDeskattheFederalReserveBankofNewYorkto
implementpoliciesintheformof
A) changesinthespreadbetweenthefederalfundsrateandthediscountratethatare
consistentwithrulesestablishedbythetwelveFederalReservebankpresidents.
B) variationsinreserverequirementsthatareconsistentwiththeannouncementsbythe
ChairoftheFedsBoardofGovernors.
C) changesinforeignexchangeratesthatareconsistentwithpoliciesestablishedbythe
SecretaryoftheTreasury.
D) buyingorsellinggovernmentsecuritiesthatareconsistentwiththeFOMCDirective.
Answer: D
Diff:2
70) OperationsoftheTradingDeskoftheFederalReserveBankofNewYorkaretypically
conducted
A) nomoreoftenthanoncepermonth.
B) onceayear.
C) nomoreoftenthanonceperweek.
D) withinaone-hourperiodduringeachday.
Answer: D
Diff:2
71) Inadditiontoopenmarketoperationsandtherequiredreserveratio,anothertoolofmonetary
policyavailabletotheFedis
A) fiscalpolicy.
B) taxratesandtheprogressivityoftheincome-taxsystem.
C) governmentspendingandvarioustransfer-paymentprograms.
D) thedifferencebetweenthediscountrateandthefederalfundsrate.
Answer: D
Diff:1
72) IftheFedthoughttheeconomywasexperiencingarecessionarygap,anditwantedtocorrect
thisgap,itwould
A) sellbonds.
B) lowerthedifferentialbetweenthediscountrateandthefederalfundsrate.
C) raisethereserverequirement.
D) increaseaggregatesupply.
Answer: B
Diff:2
73) Supposetheeconomyisinlong-runandshort-runequilibrium.TheFedchangesitspolicyby
raisingthedifferencebetweenthediscountrateandthefederalfundsrate.Inthelongrunwe
wouldexpecttoobserve
A) alowerpricelevel.
B) ahigherpricelevel.
C) alowerrealnationalincome.
D) ahigherrealnationalincome.
Answer: A
Diff:2
74) WhichofthefollowingisNOTabasisfortheTaylor-ruleguidelineforhowtheFederalReserve
shouldsetitstargetvalueforthefederalfundsrate?
A) anestimatedlong-runrealinterestrate
B) thecurrentdeviationoftheactualinflationratefromtheFedsinflationobjective
C) thepresentdeviationoftheactualunemploymentratefromtheFedsunemployment
objective
D) thegapbetweenactualrealGDPandameasureofpotentialrealGDP
Answer: C
Diff:1
75) SupposethattheFedhasdecidedtoutilizetheTaylorruletoimplementmonetarypolicy.Ifthe
actualfederalfundsratetargetispresentlybelowthelevelspecifiedbytheTaylorruleandhas
beenlowerthenthislevelforseveralweeks,thenthiswouldbeasignalthat
A) monetarypolicyisveryexpansionary.
B) monetarypolicyisverycontractionary.
C) theFedshouldhalteffortstotargetthemoneysupply.
D) theFedshouldswitchtotargetingthemoneysupplyinsteadofthefederalfundsrate.
Answer: A
Diff:2
76) Supposetheactualequilibriumfederalfundsrateisabovetherateimpliedbyaparticular
inflationgoal.Inthissituation,theTaylorruleimpliesthat
A) fiscalpolicyiscontractionary.
B) fiscalpolicyisexpansionary.
C) monetarypolicyisexpansionary.
D) monetarypolicyiscontractionary.
Answer: D
Diff:2
77) AccordingtotheTaylorrule,theFedwillsetthefederalfundsratetargetbasedonwhichofthe
following?
C) theproportionategapbetweenactualrealGDPandameasureofpotentialrealGDP
D) alloftheabove
Answer: D
Diff:2
78) WhichFederalReserveBanknowregularlytrackstargetlevelsforthefederalfundsrate
predictedbyabasicTaylor-ruleequation?
A) Boston
B) Chicago
C) NewYork
D) St.Louis
Answer: D
Diff:2
79) Supposetheactualequilibriumfederalfundsrateisbelowtherateimpliedbyaparticular
inflationgoal.Inthissituation,theTaylorruleimpliesthat
A) fiscalpolicyiscontractionary.
B) fiscalpolicyisexpansionary.
D) monetarypolicyiscontractionary.
Answer: C
Diff:2
80) Between2003and2008,theactualfederalfundsrate
A) tendedtobelowerthantheratespredictedbytheTaylorrule.
B) tendedtohigherthantheratespredictedbytheTaylorrule.
C) followedcloselytheratespredictedbytheTaylorrule.
D) movedindirectionsoppositetotheratespredictedbytheTaylorrule.
Answer: A
Diff:2
81) Supposetheactualfederalfundsrateisbelowtherateimpliedbyaparticularinflationgoal.In
thissituation,theTaylorruleimpliesthat
A) monetarypolicyisexpansionary.
B) monetarypolicyiscontractionary.
C) monetarypolicyisneitherexpansionaryorcontractionary.
D) fiscalpolicyiscontractionary.
Answer: A
Diff:2
82) Supposetheactualfederalfundsrateisabovetherateimpliedbyaparticularinflationgoal.In
thissituation,theTaylorruleimpliesthat
A) monetarypolicyisexpansionary.
C) monetarypolicyisneitherexpansionaryorcontractionary.
D) fiscalpolicyisexpansionary.
Answer: B
Diff:2
83) Supposetheactualfederalfundsrateisequaltotherateimpliedbyaparticularinflationgoal.
Inthissituation,theTaylorruleimpliesthat
A) monetarypolicywilltendtoproducethatinflationrate.
D) fiscalpolicywillresultinabalancedbudget.
Answer: A
Diff:1
84) TheTaylorruleimpliesthattheFedshouldsetthefederalfundstargetbasedonwhichofthe
following?
C) theproportionategapbetweenactualrealGDPandameasureofpotentialrealGDP
D) alloftheabove
Answer: D
Diff:2
16.7CreditPolicyatTodaysFed
1) TheFederalReservescreditpolicyrefersto
A) adirectcreditonbankdepositorssavingandcheckingaccounts.
B) regulationsontermsoncreditcardsthatbanksissue.
C) theFedsdirectlendingtohomeownersandstudents.
D) theFedsdirectlendingtofinancialandnonfinancialfirms.
Answer: D
Diff:2
Topic: 16.7CreditPolicyatTodaysFed
QuestionStatus: New
2) Since2008,theFedhasconductedapolicythatinvolvesdirectlendingtoprivatefirms.Those
actionsoftheFedarecalled
A) openmarketoperations.
B) federalfundsratetargeting.
C) quantitativeeasing.
D) creditpolicies.
Answer: D
Diff:1
QuestionStatus: New
3) TheFederalReservefinancesitscreditpolicywith
A) reservedepositsthatprivatebanksholdwiththeFed.
B) borrowingfromthefederalgovernment.
C) theinsurancepremiumscollectedbytheFDIC.
D) fundingfromtheU.S.TreasuryDepartment.
Answer: A
Diff:2
QuestionStatus: New
4) IftheFedscreditpoliciesinducesbankstoholdsubstantialexcessreservesattheFed,then
A) financialmarketswillbecomemoreilliquid.
B) themoneymultiplierwillfall.
C) themoneysupplywillrise.
D) thescopeofasymmetric-informationproblemforbankswillimprove.
Answer: B
Diff:3
QuestionStatus: New
5) WhichofthefollowingistrueoftheFedscreditpolicy?
A) TheFedhasimplementedacreditpolicysince1914.
B) Todayabout40percentoftheFedsassetholdingsarerelatedtoitsconductofcredit
policy.
C) TheFedscreditpolicyisextendedonlytoU.S.financialinstitutions.
D) TheFedsobjectiveforitscreditpolicyistoreducethefederalfundsrate.
Answer: B
Diff:3
QuestionStatus: New
6) WhichofthefollowinghasbeenthemostlikelyeffectoftheFedscreditpolicy?
A) Banksandotherfinancialinstitutionshavetakenmoretimetorecoverfromthe2008 -2009
financialmeltdown.
B) Thefederalfundsrateandthediscountratehavedroppedtonegativelevels.
C) Themoneymultiplierandthelinkbetweenthemoneysupplyandtheeconomyhave
becomeunstable.
D) Thescopeofasymmetricinformationproblemsinthebankingindustryhasreduced.
Answer: C
Diff:3
QuestionStatus: New
16.8AppendixE:IncreasingtheMoneySupply
1) AccordingtoKeynes,theimpactofanincrease inthemoneysupplyis
A) alowerinterestrateandalargergrowthinrealGDP.
B) alowerinterestrateandasmallergrowthinrealGDP.
C) ahigherinterestrateandalargergrowthinrealGDP.
D) ahigherinterestrateandasmallergrowthinrealGDP.
Answer: A
Diff:2
Topic: 16.8AppendixE:IncreasingMoneySupply
2) AccordingtoKeynes,theeffectonplannedrealinvestmentspendingresultingfromthe
interest-rateimpactofanincreaseinthemoneysupply
A) impactstheeconomythroughthemultiplier.
B) impactstheeconomybyincreasingthevalueoftheU.S.dollar.
C) impactstheeconomybyreducingthedeficit.
D) doesnotimpacttheeconomy.
Answer: A
Diff:1
Topic: 16.8AppendixE:IncreasingMoneySupply
16.9AppendixE:DecreasingtheMoneySupply
1) AccordingtoKeynes,theimpactofadecrease inthemoneysupplyisa
A) lowerinterestrateandlargergrowthinrealGDP.
B) lowerinterestrateandsmallergrowthinrealGDP.
C) higherinterestrateandlargergrowthinrealGDP.
D) higherinterestrateandsmallergrowthinrealGDP.
Answer: D
Diff:2
Topic: 16.9AppendixE:DecreasingMoneySupply
2) AccordingtoKeynes,contractionarymonetarypolicy
A) impactstheeconomybyanamountsmallerthanthechangeininvestment.
B) impactstheeconomybyanamountlargerthanthechangeininvestment.
C) willhavenoimpactontheequilibriumnominalGDP.
D) willhavenoimpactontheequilibriumrealGDP.
Answer: B
Diff:2
3) AccordingtoKeynes,theeffectonplannedrealinvestmentspendingresultingfromthe
interest-rateimpactofadecreaseinthemoneysupply
A) impactstheeconomythroughthemultiplier.
B) impactstheeconomybyreducingthevalueoftheU.S.dollar.
C) impactstheeconomybyincreasingthedeficit.
D) doesnotimpacttheeconomy.
Answer: A
Diff:2
16.10AppendixE:ArgumentsAgainstMonetaryPolicy
1) AccordingtotraditionalKeynesians,monetarypolicyisineffectiveinaffectingtheeconomy
duringarecessionbecause
A) anincreaseinthemoneysupplywillhavelittleimpactoninterestrates.
B) anincreaseinthemoneysupplywillonlyleadtohigherinterestrates.
C) anincreaseinthemoneysupplywillonlyleadtolowerinvestmentspending.
D) anincreaseinthemoneysupplywillraisetheamountofgovernmentdebt.
Answer: A
Diff:2
Topic: 16.10AppendixE:ArgumentsAgainstMonetaryPolicy
2) AccordingtotraditionalKeynesians,whenthecentralbankincreasesthemoneysupplyduring
arecession
A) peoplewillspendallofthemoneyongoodsandservices.
B) peoplewillborrowmorefrombanks.
C) peoplewillkeepmostofitintheirbankaccounts.
D) peoplewillrefusetousethemoney.
Answer: C
Diff:2
3) AccordingtotraditionalKeynesians,monetarypolicyasatooltofightarecession
A) hasanuncertaineffectontheeconomy,dependingonthedirectionoffiscalpolicy.
B) isveryeffectivebecauseinterestrateswillfallimmediately.
C) isineffectivebecauseinterestrateswillnotfall.
D) cannotbedeterminedbecausetraditionalKeynesiansdonotconsidermonetarypolicyat
all.
Answer: C
Diff:2
Chapter17
StabilizationinanIntegratedWorldEconomy
17.1ActiveversusPassivePolicymaking
1) Activepolicymakingrefersto
A) actionstakenbypolicymakersinresponsetoorinanticipationofsomechangeinthe
overalleconomy.
B) policymakingthatiscarriedoutinresponsetoarule.
C) relyingonpoliciesthatactasautomaticstabilizers.
D) nondiscretionarypolicymaking.
Answer: A
Diff:1
Topic: 17.1ActiveversusPassivePolicymaking
2) ActivepolicymakingwouldincludeallofthefollowingEXCEPT
A) interestratechangesbytheFed.
B) taxincreases.
C) unemploymentinsurancebenefits.
D) increasedgovernmentspendingbytheCongress.
Answer: C
Diff:2
3) Whichofthefollowingwouldbeanexampleofpassivepolicymaking?
A) Establishingasystemofautomatictaxstabilizers
B) MarginalratetaxcutsintendedtoincreaserealGrossDomesticProduct(GDP)
C) GovernmentspendingdecreasesintendedtodecreaserealGrossDomesticProduct(GDP)
D) Noneoftheabove
Answer: A
Diff:2
4) Monetaryandfiscalpolicymakingthatiscarriedoutinresponsetoapre -setruleanddoesnot
respondtochangesineconomicactivityisknownas
A) activepolicymaking.
B) discretionarypolicymaking.
C) nondiscretionarypolicymaking.
D) Keynesianpolicymaking.
Answer: C
Diff:1
Chapter17StabilizationinanIntegratedWorldEconomy 865
5) Withdiscretionarypolicymaking,fiscalandmonetarypoliciesareusually
A) undertakeninresponsetooranticipationofsomechangeintheoveralleconomy.
B) setaccordingtopre-establishedstandardsthatdonottakeintoaccountanychangesinthe
economy.
C) immunetoanypoliticalovertones.
D) immunetoanylagtimesthatmightcountertheireffectiveness.
Answer: A
Diff:1
6) Ifapolicymakerisconvincedthattimelagsfrequentlynegatetheimpactofshort-run
stabilizationefforts,itislikelyshewouldfavor________policymaking.
A) nondiscretionary
B) discretionary
C) active
D) aggressive
Answer: A
Diff:2
7) Whenpolicymakerstakeactionsinresponsetoorinanticipationofsomechangeintheoverall
economy,thereis
B) passivepolicymaking.
C) rationalizationpolicymaking.
D) rationalexpectationspolicymaking.
Answer: A
Diff:1
8) Proponentsofpassivepolicymakingbelievethat
A) theexistenceoftimelagsmakesactivepolicyineffectiveorevenprocyclical.
B) timelagsdonotexistsotheeconomywilladjusttoorapidlywithactivepolicy.
C) governmentshouldnotfollowanyparticularpolicy.
D) fiscalpolicyisalwaysbetterthanmonetarypolicyinstabilizingtheeconomy.
Answer: A
Diff:2
9) Whichofthefollowingscenarioscanbeclassifiedaspassivepolicymaking?
A) TheFederalReservecutsthefederalfundsrateinordertoincreaseeconomicactivity.
B) Thefederalgovernmentincreasesspendinginordertocreatejobs.
C) TheFederalReserveadjuststhemoneysupplyasappropriatetoattainatargetrateof
inflation.
D) Congressincreasesexpendituresinanefforttostimulateeconomicactivity.
Answer: C
Diff:1
10) Actionsonthepartofmonetaryandfiscalpolicymakersthatareundertakeninresponseto
somechangeintheoveralleconomyareknownas
A) nondiscretionarypolicymaking.
C) creativepolicymaking.
D) activepolicymaking.
Answer: D
Diff:1
11) Whenpolicymakersbasetheiractionsonarulethereis
C) rationalizationpolicymaking.
D) rationalexpectationspolicymaking.
Answer: B
Diff:1
12) Anexampleofnondiscretionarypolicymakingis
A) aruleunderwhichtheFedtargetstheinflationrate.
B) expansionaryfiscalpolicy.
C) changesintheinterestrateinitiatedbytheFed.
D) aCongressionaltax-ratecutaimedatboostingrealGDP.
Answer: A
Diff:1
13) Ifapolicyiscarriedoutbyarule,thenwehaveanexampleof
D) naturalpolicymaking.
Answer: C
Diff:1
14) Supposeaconstitutionalamendmentispassedthatmandatesabalancedfederalbudgetevery
yearandthePresidentandCongressconsistentlycarrythismandateout.Thiswouldbean
exampleof
B) decisivepolicymaking.
D) cooperativepolicymaking.
Answer: C
Diff:2
15) TheFederalReserveisanticipatingacontractionaryperiodintheeconomy.TheFeddecidesto
engageinopenmarketoperationstostimulatetheeconomy.Thisactionis
C) themonetaryrule.
D) Phillipspolicymaking.
Answer: A
Diff:3
16) Whichofthefollowingstatementshasbeenproposedasabenefitofpassivepolicymaking?
A) Passivepolicymakingallowsformakingimmediatechangesinresponsetoananticipated
changeineconomicperformance.
B) Passivepolicymakingutilizestherationalexpectationshypothesis.
C) Whenusingpassivepolicymakingthereisnotradeoffbetweenpricestabilityand
unemployment.
D) Passivepolicymakingdoesnotwaitforthetimelagbetweenrecognitionofaproblemand
policyactionbeforeengagingineconomicpoliciestostabilizetheeconomy.
Answer: D
Diff:1
17) Whichoneofthefollowingisanexampleofpassivepolicymaking?
A) introducingexpansionarymonetarypolicytocombatarecession
B) introducingexpansionarymonetarypolicytocombatinflation
C) introducingexpansionaryfiscalpolicytocombatarecession
D) followingapredeterminedmonetarypolicyrule
Answer: D
Diff:1
18) Whatbestdefinesactivepolicymaking?
A) takingactiontooffsetachangeineconomicperformance
B) takingactiontoincreaselong-termeconomicgrowth
C) takingactiontomakemarketsmorecompetitivesoastoimproveefficiency
D) takingactiontomakemarketslesscompetitivesoastoimproveequity
Answer: A
Diff:2
19) Policymakingthatiscarriedoutinresponsetoaruleis
C) restrictivepolicymaking.
D) determinedpolicymaking.
Answer: B
Diff:1
20) Theideaofpolicymakingtakingplaceinresponsetoapredeterminedsetofrulesisreferredto
as
C) passivepolicymaking.
D) Keynesianism.
Answer: C
Diff:1
21) Theideaofpolicymakingbeingundertakenasaresponsetoachangeintheeconomyis
referredtoas
B) non-discretionarypolicymaking.
D) Keynesianism.
Answer: A
Diff:2
22) Iftherateofgrowthinthemoneysupplyispredeterminedonthebasisofamonetaryrule,this
isknownas
A) directpolicymaking.
B) activepolicymaking.
D) fiscalpolicymaking.
Answer: C
Diff:1
23) IftheFedengagesinopenmarketsalesindirectresponsetoanincreaseintherateofinflation,
thisisknownas
A) directpolicymaking.
B) activepolicymaking.
D) fiscalpolicymaking.
Answer: B
Diff:1
24) Explainthedifferencebetweenactiveandpassivepolicymaking.
Answer: Activepolicymaking,ordiscretionarypolicymaking,isasituationwhenfiscaland
monetarypolicymakersactinresponsetoorinanticipationofsomechangeintheoverall
economy.Theyactsoastomovetheeconomymorequicklytowardfullemploymentand
greaterpricestability.Passive,ornondiscretionary,policymakingispolicymakingthat
followssomeruleratherthanonethattriestorespondoranticipatesomechangein
economicactivity.
Diff:1
17.2TheNaturalRateofUnemployment
1) Structuralunemploymentislikelytobeaffectedby
A) recessionsandexpansions.
B) thereservationwagecurvesofpeople.
C) minimumwagelawsandotherrigiditiesintheeconomy.
D) theamountofthemoneysupply.
Answer: C
Diff:2
Topic: 17.2TheNaturalRateofUnemployment
2) Whichofthefollowingistherateofunemploymentthatoccursafteralladjustmentsinthelabor
markethaveoccurred?
A) thefrictionalrateofunemployment.
C) thecyclicalrateofunemployment.
D) thestructuralrateofunemployment.
Answer: B
Diff:2
3) Whattypesofunemploymentwillstillexistwhentheeconomyisatthenaturalrateof
unemployment?
A) frictionalandcyclicalunemploymentonly
B) frictionalandstructuralunemploymentonly
C) structuralandcyclicalunemploymentonly
D) frictional,structural,andcyclicalunemployment
Answer: B
Diff:2
4) ThePhillipscurveshowstherelationshipbetween
A) thepricelevelandrealGrossDomesticProduct(GDP).
B) thetaxrateandtaxrevenues.
C) theunemploymentrateandinflationrate.
D) theinterestrateandexchangerate.
Answer: C
Diff:2
5) StructuralunemploymentmayresultfromallofthefollowingfactorsEXCEPT
A) unionwagecontracts.
B) government-imposedlicensingarrangementsthatrestrictentryintocertainprofessions.
C) improvedelementaryandsecondaryeducation.
D) welfareandunemploymentbenefits.
Answer: C
Diff:1
6) Yourfriendrecentlygraduatedfromcollegeandisactivelylookingforemployment.The
economyhascompletelyrecoveredfromthelastrecessionandyourfriendistakinghertime,
lookingfortheperfectjob.Inthemeantime,theunemploymentsheisexperiencingis
categorizedas
A) cyclical.
B) structural.
C) seasonal.
D) frictional.
Answer: D
Diff:2
7) Thenaturalrateofunemploymentis
A) zero.
B) theunemploymentratewhenthereisnostructuralunemployment.
C) theunemploymentratewhenthereisnostructuralorcyclicalunemployment.
D) theunemploymentratethatexistsinlong-runequilibrium,afteradjustmentstoall
changeshaveoccurred.
Answer: D
Diff:1
8) Thenaturalrateofunemploymentisdefinedastherateofunemploymentthat
A) prevailsinlong-runmacroeconomicequilibrium,whenallworkersandemployershave
fullyadjustedtoanychangesintheeconomy.
B) prevailsintheshort-runmacroeconomicequilibrium,beforeworkersandemployershave
hadachancetoadjusttoaneconomicshock.
C) existsduetowelfareandunemploymentbenefitsthatreducepotentialworkersincentives
tofindwork.
D) existsonlyduringperiodsofrecessionordepressionintheeconomy.
Answer: A
Diff:1
9) Thenaturalrateofunemploymentincludes
A) frictionalandcyclicalunemployment.
B) onlycyclicalunemployment.
C) onlyunemploymentduetolayoffsandcorporatedownsizing.
D) frictionalunemploymentandstructuralunemployment.
Answer: D
Diff:1
10) Accordingtothetext,theprobabilityofanunemployedpersonfindingajobdoubleswhen
A) hisunemploymentbenefitsexpire.
B) hisunemploymentbenefitsareextended.
C) theeconomyentersarecessionaryphase.
D) heisthreatenedwitharrest.
Answer: A
Diff:2
11) Accordingtothetext,minimum-wagelawscauseincreasesin
A) employmentpossibilities.
C) poverty.
D) productivity.
Answer: B
Diff:2
12) Frictionalandstructuralunemploymentbothexistwhen
A) theeconomyisinanexpansionaryphase.
B) theeconomyisinlong-runequilibrium.
C) theeconomyisatthepeakofthebusinesscycle.
D) theeconomyisinshort-runequilibrium.
Answer: B
Diff:1
13) Anincreaseinunemploymentinsuranceandothertransferpaymentsmay
A) increasethenaturalrateofunemployment.
B) increasethenumberofdiscouragedworkers.
C) reducetherateofinflationateverylevelofunemployment.
D) leadtolessunanticipatedinflation.
Answer: A
Diff:1
14) From1950untilthelate1980s,thenaturalrateofunemploymentintheUnitedStates
A) fellsharplyasgovernmentretrainingprogramshelpedputtheunemployedbacktowork.
B) cycledupanddownintandemwiththeactualrateofunemployment.
C) rosesharply,alwaysexceedingtheactualrateofunemployment.
D) trendedupward.
Answer: D
Diff:2
15) Fromthelate1980sto2000,thenaturalrateofunemployment
A) climbedsharply.
B) heldconstant.
C) fluctuatedupanddown,followingthepathoftheactualrateofunemployment.
D) graduallydeclined.
Answer: D
Diff:2
16) Duringarecession,theoverallunemploymentrate
A) fallsrapidly.
B) exceedsthenaturalrateofunemployment.
C) fallsbelowthenaturalrateofunemployment.
D) equalstheinflationrate.
Answer: B
Diff:2
17) Cyclicalunemploymentis
A) thedifferencebetweentheunemploymentratewhentheeconomyisinarecessionandthe
unemploymentratewhentheeconomyisatthepeakofanexpansion.
B) thedifferencebetweentheactualunemploymentrateandthenaturalrateof
unemployment.
C) theunemploymentduetounionactivitiesandgovernment-imposedrestrictionstoentry
intospecificoccupations.
D) theunemploymentduetotheunemploymentbenefitsandwelfareprogramsofthe
government.
Answer: B
Diff:2
18) Ifcyclicalunemploymentisnegative,then
A) theactualunemploymentrateisbelowthenaturalrateofunemployment.
B) thenaturalrateofunemploymentisgettingsmaller.
C) therehavebeensomeerrorsinclassifyingthetypeofunemploymentexperiencedbysome
people.
D) structuralunemploymentmustbeincreasing.
Answer: A
Diff:2
19) Whichofthefollowingunemploymentratescanbenegative?
A) thecyclicalunemploymentrate
B) thenaturalunemploymentrate
C) theseasonalunemploymentrate
D) theofficialunemploymentratereportedbytheBureauofLaborStatistics
Answer: A
Diff:2
20) Whichtypeofunemploymentisassociatedwiththeslumpinaggregatedemandthat
accompaniesarecession?
A) Expansionaryunemployment
B) Cyclicalunemployment
C) Frictionalunemployment
D) Structuralunemployment
Answer: B
Diff:1
21) Anunexpectedincreaseinaggregatedemandtypicallycauses
A) frictionalunemploymenttoincreasebutstructuralunemploymenttodecrease.
B) thepriceleveltoincreasebuthasnoeffectontheunemploymentrate.
C) thepriceleveltoincreaseandtheunemploymentratetofall.
D) thepriceleveltoincreaseandtheunemploymentratetoincrease.
Answer: C
Diff:2
22) Intheabovefigure,startwiththeeconomyinequilibriumatpointA.Thenanunanticipated
reductioninaggregatedemandtriggersashiftfromAD 1 toAD2 .Intheshortrun,thiswould
cause
A) thepriceleveltofallfromP 1 toP2 ,realGrossDomesticProduct(GDP)tofallfromY 1 to
Y2 ,andtherateofunemploymenttoincrease.
B) thepriceleveltomovefromP1 toP2 ,butrealGrossDomesticProduct(GDP)wouldstay
atY1 .
C) thepriceleveltofallbysomeamountlessthanP 1 butgreaterthanP2 ,andtherateof
unemploymentwoulddecrease.
D) nochangeineitherthepricelevelorrealGrossDomesticProduct(GDP),butadecreasein
unemployment.
Answer: A
Diff:1
23) SupposetheeconomyisinitiallyoperatingatpointAintheabovefigure.Whichofthe
followingstatementsistrue?
A) Anunexpectedreductioninaggregatedemandwillcausetheeconomytomovefrom
pointAtopointBinthelongrun.
B) Anunexpectedreductioninaggregatedemandwillcausetheeconomytomovefrom
pointAtopointBintheshortrun.
C) Anunexpectedreductioninaggregatedemandwillcausetheeconomytomovefrom
pointAtopointCintheshortrun.
D) noneoftheabove
Answer: B
Diff:1
24) Oneresultofanunanticipatedreductioninaggregatedemandwouldbethat
A) fewerfirmswouldbehiring.
B) morefirmswouldbehiring.
C) therewouldbenochangeinhiring.
D) thepricelevelwouldrise.
Answer: A
Diff:2
25) Onaverage,thegreatertheunexpecteddeclineinaggregatedemand,
A) theweakeristheresultingdeflation.
B) thegreateristheresultingdeflation.
C) thegreateristheresultinginflation.
D) thegreateristheriseinthepricelevel.
Answer: B
Diff:2
26) Intheabovefigure,ifAistheinitialequilibriumpointandthereisanunanticipatedrisein
aggregatedemandfromAD 1 toAD2 ,then
A) thenewshort-runequilibriumwillbeatpointB.
B) thenewlong-runequilibriumwillbeatpointB.
C) thenewshort-runequilibriumwillbeatpointD.
D) realGrossDomesticProduct(GDP)peryearwillfallbelowY 1 .
Answer: A
Diff:1
27) Intheabovefigure,ifinitialequilibriumisatpointAandifthereisanunanticipatedincreasein
aggregatedemandfromAD 1 toAD2 ,then
A) intheshortrunrealoutputwillremainatY1 .
B) intheshortrunrealoutputwillincreaseaboveY 1 ,butinthelongrunitwillreturntoY 1 .
C) inthelongrunrealoutputwillincreaseaboveY 1 .
D) realoutputwillincreaseaboveY1 inboththeshortrunandinthelongrun.
Answer: B
Diff:1
28) Intheabovefigure,ifinitialequilibriumisatpointAandthereisafullyanticipatedincreasein
aggregatedemandfromAD 1 toAD2 duetoananticipatedincreaseinthemoneysupply,then
A) theeconomywillmovedirectlyfrompointAtopointCwithoutpassingthroughpointB.
B) theeconomywillmovedirectlyfrompointAtopointB,andwillremainatpointBinthe
longrun.
C) thepricelevelwillshifttoP 2 intheshortrun.
D) thepricelevelwillshifttoP 2 inthelongrun.
Answer: A
Diff:1
29) ThePhillipsCurvewillshiftwhen
A) theexpectedinflationratechanges.
B) thepricelevelfalls.
C) theoverallemploymentrateremainsunchanged.
D) noneoftheabove.
Answer: A
Diff:2
30) BasedontheworkofeconomistA.W.Phillips,economistsconcludedthat
A) thereisnotrade-offbetweeninflationandunemployment.
B) highinflationratesareassociatedwithlowunemploymentrates.
C) unemploymentcanbeeffectivelycombatedbyraisingwages.
D) higherratesofinflationareassociatedwithhigherratesofunemployment.
Answer: B
Diff:1
31) ThePhillipscurveshows
A) apositiverelationshipinthelongrunbetweentherateofinflationandtherateof
unemployment.
B) anegativerelationshipbetweentheinflationrateandtheunemploymentrate,atleastin
theshortrun.
C) apositiverelationshipbetweencontractionarymonetarypolicyandhigherpricelevels.
D) apositiverelationshipbetweenpricestabilityandconstant,small -incrementchangesin
thefiscalpolicyonthepartoftheFed.
Answer: B
Diff:1
32) WhathappenstothePhillipscurvewhentheexpectedrateofinflationrises?
A) Thecurveshiftstotheright
B) Thecurveshiftstotheleft
C) Thecurvebecomeshorizontal
D) ThePhillipscurveisunaffected
Answer: A
Diff:1
33) Theshort-runPhillipscurvesuggestswhatpolicymakingimplications?
A) Activepolicymakingdoesnotyieldanypredictableresults.
B) Passivepolicymakingismoreeffectivethanactivepolicymaking.
C) Usingdiscretionarypolicies,itmaybepossibletoachievejusttherightunemployment
andinflationmix.
D) Maintainingboththeinflationandunemploymentratesatlowlevelsispossibleifpolicy
makerswillrelysolelyonnondiscretionarypolicymaking.
Answer: C
Diff:1
34) CriticsofthePhillipscurvearguethatinthelongrun,
A) thereisatrade-offbetweenunemploymentandinflation.
B) foranygivenunemploymentlevelthereisacorrespondinginflationratetowhichthe
economywillautomaticallyrevert.
C) employeesarenotabletoanticipatefutureratesofinflation,andthereforeunemployment
canalwaysbereducedbyinflatingtheeconomy.
D) thereisnotrade-offbetweeninflationandunemploymentbecauseworkersexpectations
adjusttoanysystematicattemptstoreduceunemploymentbelowthenaturalrate.
Answer: D
Diff:1
35) ThePhillipscurveshows
A) therelationshipbetweentherateofinterestandplannedinvestment.
B) therelationshipbetweenthemoneysupplyandthepricelevel.
C) thatanincreaseingovernmentspendingwilldecreaserealnationalincome.
D) thatanincreaseininflationmaybeassociatedwithadecreaseintherateof
unemployment.
Answer: D
Diff:1
36) ThePhillipscurvetrade-offrelationshipimpliesthat
A) thegovernmentcanfine-tunetheeconomyandgenerateboththenaturalrateof
unemploymentandzeroinflation.
B) thegovernmentcanfine-tunetheeconomyandpickthemostpreferredcombinationof
unemploymentandinflation.
C) lowunemploymentcanbeobtainedonlybygeneratingrapidlyincreasinginflation.
D) thereisnorelationshipbetweeninflationandunemployment,atleastinthelongrun.
Answer: B
Diff:2
37) Supposethattheinflationratehasbeen3percentperyearforseveralyears,andthe
unemploymentratehasbeenstableat5percent.Unanticipatedchangesingovernmentpolicy
causetheinflationratetoincreaseto6percent.Intheshortrun,wewouldexpectthe
unemploymentrateto
A) remainconstant.
B) increaseto10percent.
C) increase,buttheexactamountcannotbeknownforsure.
D) decrease.
Answer: D
Diff:2
38) Intheshortrun,unanticipatedinflationtypicallyleadsto
A) higherratesofunemployment.
B) decreasesinaggregatedemand.
C) lowerratesofunemployment.
D) workersthinkingtherealwagehasbeenreduced.
Answer: C
Diff:1
39) WhentheactualunemploymentrateisgreaterthantheNAIRU,theinflationrate
A) tendstoincrease.
B) tendstodecrease.
C) remainsunchanged.
D) fallstozero.
Answer: B
Diff:2
40) Assumethatthegovernmentdecidestousefiscalormonetarypolicytostimulatetheeconomy
andthatthisactioncomesasasurprisetomostindividualsandbusinesses.Intheshortrun,the
resultwillbe
A) adecreaseintheaveragedurationofunemploymentandadecreaseintheunemployment
rate.
B) anincreaseintheaveragedurationofunemploymentandanincreaseinthe
unemploymentrate.
C) adecreaseinaggregateddemandandariseinthepricelevel.
D) anincreaseinaggregatedemandandafallinthepricelevel.
Answer: A
Diff:1
41) Animportantsourceofstructuralunemploymentis
A) seasonalvariationsinaggregatedemand.
B) unemploymentinsurancebenefits.
C) peoplelookingfortherightjobdecidetochangejobs.
D) recessions.
Answer: B
Diff:2
42) WhichofthefollowingisNOTapossiblecauseofstructuralunemployment?
A) individualstakethetimetosearchforthebestjobopportunities
B) amismatchofworkertrainingandskillswithrequirementsofemployers
C) government-imposedminimumwagelaws
D) unionactivitythatsetswagesabovetheequilibriumlevel
Answer: A
Diff:2
43) Thenaturalrateofunemploymentis
A) theunemploymentratewhencyclicalunemploymentistheonlytypeofunemployment.
B) theunemploymentratewhenthereisnofrictionalunemployment.
C) therateofunemploymentassociatedwithlong-runequilibrium.
D) zero.
Answer: C
Diff:1
44) Atrade-offbetweenunemploymentandinflationisreflectedinthe
A) naturalrateofunemployment.
B) PhillipsCurve.
C) economicstability.
D) nonacceleratinginflationrateofunemployment(NAIRU).
Answer: B
Diff:1
45) Thenaturalrateofunemploymentconsistsof
A) noworkerslookingforemployment.
C) onlystructuralunemployment.
B) onlyseasonalunemployment.
D) structuralandfrictionalunemployment.
Answer: D
Diff:1
46) Whentheeconomyisinlong-runequilibrium,therewillbe
A) nounemployment.
B) frictionalandstructuralunemployment.
C) cyclicalunemploymentonly.
D) cyclicalandseasonalunemployment.
Answer: B
Diff:1
47) Empiricalevidencesuggeststhat,whenunemploymentbenefitsrunout,theprobabilitythatan
unemployedpersonwillfindajob
A) remainsconstant.
B) goesdownby20percent.
C) aboutdoubles.
D) abouttriples.
Answer: C
Diff:2
48) Deviationsoftheactualunemploymentratefromthenaturalrateofunemploymentarecalled
D) underemployment.
Answer: B
Diff:1
49) WhentheeconomyisoperatingatalevelofrealGDPthatisgreaterthanitspotentiallevel,we
knowthat
A) theactualunemploymentrateisgreaterthanthenaturalrateofunemployment.
B) thestructuralrateofunemploymentisnegative.
C) thefrictionalunemploymentiszero.
D) thecyclicalrateofunemploymentisnegative.
Answer: D
Diff:2
50) Duringarecession,the
A) naturalrateofunemploymenthasfallen.
B) cyclicalrateofunemploymentispositive.
C) cyclicalrateofunemploymentiszero.
D) cyclicalrateofunemploymentisnegative.
Answer: B
Diff:2
51) Deviationsoftheactualunemploymentrateawayfromthenaturalrateare
C) structuralunemployment.
D) themonetaryrule.
Answer: A
Diff:1
52) Supposethenaturalrateofunemploymentis5percent.Iftheactualunemploymentrateis7
percent,thenthecyclicalunemploymentrate
A) is2percent.
B) is-2percent.
C) is12percent.
D) cannotbedeterminedgiventheinformation.
Answer: A
Diff:2
53) Supposethenaturalrateofunemploymentis5percent.Iftheactualunemploymentrateis4
percent,thenthecyclicalunemploymentrateis
A) 9percent.
B) 1percent.
C) -1percent.
D) 0percentascyclicalunemploymentcannotbelessthanzero.
Answer: C
Diff:2
54) Weobservethedurationofunemploymentfallingandwageratesrising.Itislikelythat
A) thegovernmenthasinitiatedexpansionaryfiscalpolicybutthepolicieshaventtaken
effectyet.
B) summerhasarrived.
C) aggregatedemandhasincreased.
D) aggregatesupplyhasincreased.
Answer: C
Diff:2
55) Supposethegovernmentabolishedtheminimumwagelawandthelawthatrequiresunion
wageratestobepaidonallgovernmentcontractjobs.Wewouldexpecttosee
A) adeclineinthenaturalrateofunemployment.
B) anincreaseinclaimsforunemploymentbenefits.
C) thedurationofunemploymenttoincrease.
D) arecession.
Answer: A
Diff:3
56) Supposetherewasanunexpectedincreaseinaggregatedemand.Wewouldexpecttoobserve
A) frictionalunemploymenttoincrease.
B) thedurationofunemploymentandtheamountofunemploymenttodecrease.
C) higherwages,withthedurationofunemploymentandtheamountofunemployment
unchanged.
D) adecreaseinaggregatedemand.
Answer: B
Diff:3
57) Anunexpectedincreaseinaggregatedemandcauses
A) theunemploymentratetofall,withnochangeinthepricelevel.
B) thepriceleveltorise,butthedurationofunemploymentwillremainconstant,sothe
unemploymentrateremainsconstant.
C) simultaneouslythepriceleveltoriseandtheunemploymentratetofall.
D) simultaneouslythepriceleveltofallandtheunemploymentratetofall.
Answer: C
Diff:2
58) Refertotheabovefigure.Unexpectedexpansionarymonetarypolicyhascausedtheaggregate
demandcurvetoshifttoAD2 .Intheshortrun,
A) realGDPwillbeY1 ,andthepricelevelwillbeP1 .
B) realGDPwillbeY2 ,andthepricelevelwillbeP2 .
C) realGDPwillbeY1 ,andthepricelevelwillbeaboveP2 .
D) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbebetweenP1 andP2 .
Answer: B
Diff:3
demandcurvetoshifttoAD2 .Inthelongrun,
C) realGDPwillbeY1 ,andthepricelevelwillbeaboveP2 .
D) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbebetweenP1 andP2 .
Answer: C
Diff:3
A) theunemploymentratewillbethesamerateasbeforetheexpansionarymonetarypolicy.
B) theunemploymentratewillbelargerthantheratebeforetheexpansionarymonetary
policy.
C) theunemploymentratewillbesmallerthantheratebeforetheexpansionarymonetary
policy.
D) theunemploymentratecanincreaseordecreasedependinguponhowmuchtheLRAS
willshift.
Answer: C
Diff:3
policy.
policy.
willshift.
Answer: A
Diff:3
62) Refertotheabovefigure.Unexpectedcontractionarymonetarypolicyhascausedtheaggregate
C) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbeaboveP1 .
D) realGDPwillbebetweenY1 ,andthepricelevelwillbebelowP2 .
Answer: B
Diff:3
C) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbeaboveP1 .
D) realGDPwillbebetweenY1 ,andthepricelevelwillbebelowP2 .
Answer: D
Diff:3
demandcurvetoshifttoAD 2 .Intheshortrun,
policy.
policy.
willshift.
Answer: B
Diff:3
policy.
policy.
willshift.
Answer: A
Diff:3
66) Theinflationratehasbeenconstantforseveralyearsat4percent,andtheunemploymentrate
hasbeenstableat6percentoverthesametimeperiod.Changesingovernmentpolicythatcause
theinflationratetoriseto6percentwill
A) havenoeffectontheunemploymentrate.
B) causetheunemploymentratetofallintheshortrun.
C) causetheunemploymentratetoriseto9percentintheshortrun.
D) causetheunemploymentratetoriseintheshortrun,butwecannottellbyhowmuch.
Answer: B
Diff:2
67) Thetrade-offbetweenunemploymentandinflationisknownas
A) theKeynesianmechanism.
B) thePhillipscurve.
C) anexpansionarygap.
D) passivepolicymaking.
Answer: B
Diff:1
68) ThePhillipscurveisthoughttoreflecttherelationshipbetween
A) unemploymentandrealGDP.
B) unemploymentandinflation.
C) inflationandrealGDP.
D) thepricelevelandinflation.
Answer: B
Diff:1
69) Atonetime,manyeconomistsbelievedthat
A) thegovernmentcoulddeterminewhatthePhillipscurveshouldbe.
B) thegovernmentcoulddeterminetheslopeofthePhillipscurve.
C) thegovernmentcouldmakethePhillipscurvevertical.
D) thegovernmentcoulddecideatwhichpointonthePhillipscurvetheeconomyshouldbe.
Answer: D
Diff:2
70) Refertotheabovefigure.LineABCDisa(n)
A) aggregatedemandcurve.
C) discretionary-policycurve.
B) Phillipscurve.
D) naturalrateofunemploymentcurve.
Answer: B
Diff:1
71) Refertotheabovefigure.GovernmentpolicythatmovedtheeconomyfromAtoBwouldbe
accomplishedby
A) anexpansionaryfiscalpolicycombinedwithacontractionarymonetarypolicy.
B) acontractionaryfiscalpolicycombinedwithanexpansionarymonetarypolicy.
C) acontractionarypolicythatwouldreducetherateofinflationandwouldcauseworkersto
remainunemployedlongerthantheywerebefore.
D) raisingtheminimumwage.
Answer: C
Diff:2
72) Refertotheabovefigure.SupposetheeconomyisatC.Ifthegovernmenttriedtoreducethe
unemploymentrateto3percent,thenewlong-runoutcomewillbeatpoint
A) A.
B) C.
C) D.
D) H.
Answer: D
Diff:3
73) Refertotheabovefigure.Supposethenaturalrateofunemploymentis5percent.Ifthe
governmenttriedtoreduceunemploymentto4percentandkeepitthere,itmust
A) raiseunemploymentbenefits.
B) acceptapermanentinflationrateof1percent.
C) generatehigherandhigherinflationratesorelsepeoplewilladjusttheirbehaviorandthe
unemploymentratewillreturnto5percent.
D) usecontractionaryfiscalandexpansionarymonetarypolicy.
Answer: C
Diff:3
74) PolicymakersattemptstousethePhillipscurvetoreducetheunemploymentratebelowthe
naturalrate
A) willbesuccessfulsincethePhillipscurveshowstherelationshipbetweentheinflationrate
andtheunemploymentrate.
B) willbesuccessfulifmonetarypolicyisused.
C) willbeunsuccessfulifmonetarypolicyisusedsincemonetarypolicyleadstohigher
prices.
D) willbeunsuccessfulsinceworkersexpectationsadjusttoattemptstoreduce
unemploymentbelowthenaturalrate.
Answer: D
Diff:1
75) Refertotheabovefigure.TheeconomyinitiallyisatpointA.TheFedunexpectedlyincreases
themoneysupply.Whichofthefollowingstatementsaretrue?
A) Intheshortrun,theeconomywillmovefrompointAtopointC.Inthelongrun,the
economywillmovetopointB.
B) Intheshortrun,theeconomywillmovefrompointAtopointC.Inthelongrun,the
economywillmovebacktopointA.
C) Intheshortrun,theeconomywillmovefrompointAtopointB.Inthelongrun,the
economywillstayatpointB.
D) Intheshortrun,theeconomywillmovefrompointAtopointB.Inthelongrun,the
economywillmovebacktopointA.
Answer: D
Diff:2
76) Ifeveryoneintheeconomycorrectlyanticipatestheinflationrate,theunemploymentrate
A) willbethenaturalrateofunemployment.
B) willbethecyclicalrateofunemployment.
C) willbeinverselyrelatedtotheexpectedinflationrate.
D) willbepositivelyrelatedtotheexpectedinflationrate.
Answer: A
Diff:2
77) Unemploymentthatdeviatesfromthenaturalrateofunemploymentisreferredtoas
Answer: B
Diff:2
78) SupposetheFedpermanentlyincreasesthemoneysupplybyagivenamount.Whichofthe
followingis(are)mostlikelytooccurinthelongrunasaresultofthismonetarypolicyaction?
A) anincreaseinemployment
B) areductionintherealinterestrate
C) adecreaseinunemployment
D) alloftheabove
E) noneoftheabove
Answer: E
Diff:2
79) Whentheeconomyisatitsnaturalrateofunemployment,
A) itisstillexperiencingfrictionalandcyclicalunemployment.
B) itisstillexperiencingstructuralandcyclicalunemployment.
C) itisstillexperiencingfrictional,seasonal,andstructuralunemployment.
D) itisstillexperiencingfrictional,structural,andcyclicalunemployment.
Answer: C
Diff:2
80) AllofthefollowingwouldincreasethenaturalrateofunemploymentEXCEPT
A) unionactivityrestrictsthemobilityoflabor.
B) governmentlicensingofteachersrestrictsemployment.
C) amismatchofskillsandjobs.
D) adownturnintheeconomy.
Answer: D
Diff:2
81) Intheabovefigure,whatdoesthelineUrepresent?
A) thePhillipscurve
B) thenaturalrateofUnemployment
C) potentialunemployment
D) fullinflationrateofunemployment
Answer: B
Diff:2
82) Usetheabovefigure.Assumingthatpolicyactionsareunanticipated,iftheeconomyisatpoint
AandthepolicymakerswanttogettopointB,theycould
A) increasethemoneysupply.
B) decreasetaxation.
C) decreasethemoneysupply.
D) increasegovernmentspending.
Answer: C
Diff:2
83) AccordingtoA.W.Phillips,aninverserelationshiphasexistedbetween
A) unemploymentandinterestrates.
B) therateofgrowthofthemoneysupplyandtheunemploymentrate.
C) theinflationrateandunemploymentrate.
D) theinflationrateandthemoneysupply.
Answer: C
Diff:2
84) Whichofthefollowingcurvesshowstherelationshipbetweentheunemploymentrateandthe
rateofchangeinthepricelevel?
A) thenewKeynesianaggregatesupplycurve
B) therealbusinesscyclecurve
C) theaggregatedemandcurve
D) noneoftheabove
Answer: D
Diff:1
85) AccordingtothePhillipscurve,
A) thereisadirectrelationshipbetweenprice-levelchangesandthelevelofunemployment
rate.
B) theunemploymentrateisnotaffectedbychangesinthepricelevel.
C) price-levelchangesarenotaffectedbychangesintheunemploymentrate.
D) thereisaninverserelationshipbetweenprice-levelchangesandtheunemploymentrate.
Answer: D
Diff:1
86) ThePhillipscurveshowstherelationshipbetween
A) therateofgrowthinrealGDPandtheunemploymentrate.
B) theinflationrateandtheunemploymentrate.
C) aggregatedemandandtheunemploymentrate.
D) aggregatesupplyandtheunemploymentrate.
Answer: B
Diff:1
87) ThedownwardslopeofthePhillipscurvesuggeststhat
A) anincreaseinthepricelevelwilldepressnominalwages.
B) anincreaseinthepricelevelwillincreasethemoneysupply.
C) adecreaseinthemoneysupplywillstimulateaggregatedemand.
D) policymakersfaceatrade-offbetweeninflationandunemployment.
Answer: D
Diff:2
88) Usetheabovefigure.Thisgraphisknownas
A) theLaffercurve.
C) theNAIRUrelationship.
Answer: B
Diff:1
B) theshort-runPhillipscurve.
D) theKeynesiancurve.
89) Usetheabovefigure.Graph________correctlydepictstheshort -runPhillipsCurve.

A) A
B) B
C) C
D) D
Answer: D
Diff:1
90) Usetheabovefigure.Thelong-runPhillipscurveisbestdepictedbygraph
A) A.
B) B.
C) C.
D) D.
Answer: C
Diff:2
91) Whichoneofthefollowingwouldlikelyreducethelevelofstructuralunemployment?
A) increasingtheminimumwagetoencouragemorepeopletowork
B) increasingthelevelofunionbargainingpower
C) limitingunemploymentinsurancebenefits
D) strengtheningrestrictionsonwhocanbelicensedtoentercertainprofessions
Answer: C
Diff:2
92) Accordingtoeconomistswhosupportpassivepolicymaking,
A) thereisnodifferencebetweentheeffectofananticipatedchangeinaggregatedemandand
theeffectofanunanticipatedchangeinaggregatedemandofanidenticalamount.
B) workersalwaysconsiderachangeinnominalwagestobeachangeinrealwages.
C) expansionarypoliciescanreduceunemploymentwithoutincreasingthepricelevel.
D) policiesthatattempttoexploitthePhillipscurvetrade-offwilleventuallybecome
ineffectiveforreducingunemployment.
Answer: D
Diff:3
93) Thehistoricalrecordsuggeststhat
A) thePhillipscurveishorizontal.
B) oncepolicymakersattemptedtoexploitashort-runPhillipscurvetrade-off,it
disappeared.
C) shiftsinlong-runaggregatesupplydonotaffectrealoutput.
D) inflationratesarelowestwhenunemploymentratesarealsolow.
Answer: B
Diff:2
94) Cyclicalunemploymentispositivewhen
A) theinflationrateispositive.
B) theeconomyisatthepeakofabusinessexpansion.
C) thenaturalrateofunemploymentexceedstheactualrate.
D) theactualunemploymentrateexceedsthenaturalrate.
Answer: D
Diff:2
95) Expansionaryfiscalpolicycanbeusedtoreduceunemploymentby
A) increasinglong-runaggregatesupplysoastoraiserealGDP.
B) increasingaggregatedemandsoastoraiserealGDP.
C) reducingnominalwagessoastoencouragefirmstohiremoreworkers.
D) eliminatinginefficienciesfromlabormarkets.
Answer: B
Diff:3
96) Anunexpectedincreaseinaggregatedemand
A) causesthepriceleveltofallandtheunemploymentratetorise.
B) causesthepriceleveltofallandtheunemploymentratetofall.
C) causesthepriceleveltoriseandtheunemploymentratetorise.
D) causesthepriceleveltoriseandtheunemploymentratetofall.
Answer: D
Diff:2
97) Anunexpecteddecreaseinaggregatedemand
A) causesthepriceleveltofallandtheunemploymentratetorise.
B) causesthepriceleveltofallandtheunemploymentratetofall.
C) causesthepriceleveltoriseandtheunemploymentratetorise.
D) causesthepriceleveltoriseandtheunemploymentratetofall.
Answer: A
Diff:2
98) Anunexpecteddecreaseinaggregatedemand
A) willdecreaselong-runaggregatesupply.
B) willdecreasetheaveragedurationofunemployment.
C) willdecreasethepricelevel.
D) willdecreaserealGDP,butwillnotaffecttherateanddurationofunemployment.
Answer: C
Diff:2
99) Refertotheabovefigure.SupposetheeconomyisatpointBandthecentralbankadopts
expansionarymonetarypolicy.Intheshortrun,thiswillresultin
A) theeconomymovingtowardspointA.
B) theeconomystayingatpointB.
C) theeconomymovingtowardspointC.
D) anoutcomethatcannotbepredicted,asnotenoughinformationisgiven.
Answer: A
Diff:2
100) Refertotheabovefigure.SupposetheeconomyisatpointBandthecentralbankadopts
contractionarymonetarypolicy.Intheshortrun,thiswillresultin
A) theeconomymovingtowardspointA.
B) theeconomystayingatpointB.
C) theeconomymovingtowardspointC.
D) anoutcomethatcannotbepredicted,becausenotenoughinformationisgiven.
Answer: C
Diff:2
101) Theshort-runPhillipscurveandthelong-runPhillipscurvearedifferentbecause
A) theexpectedrateofinflationisalwayszerointhelongrun,whileitisapositivenumberin
theshortrun.
B) theexpectedrateofinflationisalwayszerointheshortrun,whileitisapositivenumber
inthelongrun.
C) theactualandexpectedrateofinflationareequalintheshortrun.
D) theactualandexpectedrateofinflationareequalinthelongrun.
Answer: D
Diff:2
900 Miller Economics Today, 17 th Edition
102) What kinds of unemployment are associated with the natural rate of unemployment?
Answer: The natural rate of unemployment is associated with unemployment that would exist
even in long-run equilibrium. Frictional unemployment and structural unemployment
both exist even when the economy is in long-run equilibrium, so is part of the natural
rate of unemployment.
Diff: 1
Topic: 17.2 The Natural Rate of Unemployment
AACSB: Analytic skills
Question Status: Previous Edition
103) What is the Phillips curve? What does the Phillips curve suggest about optimal policy?
Answer: The Phillips curve shows a trade-off between unemployment and inflation. With the
unemployment rate on the horizontal axis and inflation on the vertical, the Phillips curve
is pictured as a downward sloping curve. If the curve is a suitable representation of the
economy, in the short run policy makers can choose the combination of inflation and
unemployment that they want.
Diff: 2
Chapter 17 Stabilization in an Integrated World Economy 901
104) Suppose the economy has been experiencing zero inflation and 5 percent unemployment for
several years. The government decides to lower the unemployment by generating some
inflation. Using a graph, show what the short -run effects would be and what would happen in
the long run. What would the government have to do to keep the unemployment rate at 3
percent?
Answer:
See above figure. The natural rate of unemployment is 5 percent. The government inflates
by pursuing expansionary monetary policy and the economy moves to B, with an
unemployment rate of 3 percent and inflation rate of 5 percent. In the long run, the
Phillips curve shifts to the right and the unemployment rate goes back to 5 percent. For
the government to maintain 3 percent unemployment, it would have to keep increasing
the inflation rate (point D).
Diff: 3
105) What is meant by the natural rate of unemployment?

Answer: The natural rate of unemployment the rate of unemployment estimated to prevail in
long-run macroeconomic equilibrium, when all workers and employers have fully
adjusted to any changes in the economy.
Diff: 1
106) The natural rate of unemployment has increased in the United States and Europe over the last
twenty years. What are things that could account for this?
Answer: The natural rate of unemployment is affected by various rigidities. These rigidities
include unions, government-imposed licenses, and other restrictions in labor markets,
minimum wage laws, and welfare, and unemployment insurance. If these rigidities have
become more important, then the labor markets are likely to suffer from greater structural
unemployment and the natural rate of unemployment would be greater.
Diff: 3
17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles
1) When a person bases her future expectations for the economy on all available current data and
her own judgment about future policy effects, this is known as
A) the policy irrelevance proposition.
B) rational expectations.
C) irrational expectations.
D) the new classical theory.
Answer: B
Diff: 2
Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles
2) The hypothesis stating that people combine the effects of past policy changes on important
economic variables with their own judgment about the future effects of future and current
policy changes is known as
A) policy irrelevance hypothesis.
B) rational expectations hypothesis.
C) life cycle hypothesis.
D) real business cycle hypothesis.
Answer: B
Diff: 2
3) According to the rational expectations hypothesis, monetary policy can have real effects on such
variables as real Gross Domestic Product (GDP) in the short run
A) only when the policy is anticipated.
B) only when the policy is unsystematic and unanticipated.
C) regardless of whether the policy is anticipated or unanticipated.
D) when the Federal Reserves open market committee operates as expected in either buying
or selling bonds.
Answer: B
Diff: 1
4) The rational expectations hypothesis is a theory that states that

A) individuals can predict the future perfectly, at least with respect to macroeconomic
variables like the interest rate and inflation.
B) people make their economic plans by using all available past and present information and
their understanding about how the economy operates.
C) people make their economic plans in an irrational, intuitive manner.
D) people make their economic plans by relying on the policy statements made by the
President and by leaders in Congress.
Answer: B
Diff: 1
5) According to the rational expectations hypothesis, an individuals assessment of future

economic performance
A) does not consider past performance.
B) does not consider the impact of inflation.
C) only considers past performance.
D) considers both past performance and current monetary and fiscal policy.
Answer: D
Diff: 1
6) One economic hypothesis states that people form expectations by combining the effects of past
policy changes on important economic variables with their own judgment about the future
effects of current and future policy changes, and then react accordingly. This is known as the
A) relevance hypothesis.
B) contrary opinion hypothesis.
C) rational expectations hypothesis.
D) structural hypothesis.
Answer: C
Diff: 1
7) The hypothesis that people combine the effects of past policy changes on important economic
variables with their own judgment about the future effects of current and future policy changes
is the basis of the
A) adaptive hypothesis.
B) short-run Phillips curve hypothesis.
D) demand-pull inflation hypothesis.
Answer: C
Diff: 1
8) Rational expectations theory suggests that short-run stabilization policy

A) is best achieved with monetary policy.
B) is best achieved with fiscal policy.
C) is equally easy to achieve with monetary or fiscal policy.
D) should not be attempted.
Answer: D
Diff: 1
9) If you accept the rational expectations hypothesis as accurate, what would you tell monetary
policy makers who ask you how to more effectively manage the economy?
A) Consumers do not understand the workings of monetary policy, so discretionary and
nondiscretionary policies are equally effective.
B) Individuals do understand how monetary policy works, so consistency and predictability
are the keys to effective policy making.
C) Individuals base their economic expectations solely on current information, so repeating
policy decisions that have worked in the past is the most effective path to take.
D) Only unanticipated policies will be effective once individuals understand how monetary
policy works.
Answer: D
Diff: 2
10) Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by
economic agents in the economy. According to the rational expectation hypothesis, the result is
A) an increased price level in the short run, but no effect on price level in the long run.
B) decreased real Gross Domestic Product (GDP) in the short run, but increased real Gross
Domestic Product (GDP) in the long run.
C) increased real Gross Domestic Product (GDP) and increased employment in the long run.
D) an increased price level, but no change in real Gross Domestic Product (GDP) in the long
run.
Answer: D
Diff: 2
11) In the above figure, suppose the economy is initially at a short-run equilibrium at point D and
there is an unanticipated increase in the money supply. Which point represents the new
short-run equilibrium?
A) A
B) B
C) C
D) D
Answer: C
Diff: 1
12) In the above figure, suppose the economy is in equilibrium at point A. The Fed engages in an
expansionary monetary policy that is fully anticipated by the public. Other things being equal,
what point represents the new equilibrium according to the rational expectations theory?
A) A
B) B
C) C
D) D
Answer: C
Diff: 2
13) In the above figure, suppose the economy is currently in equilibrium at point C. Applying
rational expectations theory, what happens if the Fed announces that it is decreasing the money
supply and follows through on its statement?
A) The price level will increase.
B) Real Gross Domestic Product (GDP) per year will increase.
C) Real Gross Domestic Product (GDP) per year will decrease.
D) The price level will decrease.
Answer: D
Diff: 2
14) Proponents of the policy irrelevance proposition believe that, under the assumption of rational
expectations, the unemployment rate will
A) go up whenever the Fed announces an anticipated monetary policy change.
B) go down whenever the Fed announces an anticipated fiscal policy change.
C) equal the natural rate of unemployment in the long run, regardless of any monetary policy
actions.
D) always be higher in the long run than the natural rate of employment.
Answer: C
Diff: 1
15) The idea that anticipated monetary policy cannot affect real variables such as real Gross
Domestic Product (GDP) or employment is known as
A) the Keynesian hypothesis.
B) the policy irrelevance proposition.
C) the job search model.
D) the monetary velocity theory.
Answer: B
Diff: 1
16) According to the policy irrelevance proposition, monetary policy can affect real variables
A) in both the short run and the long run.
B) in the long run only.
C) in the short run only, and then only if the policy was unanticipated.
D) in the short run only, and then only if the policy was fully anticipated.
Answer: C
Diff: 2
17) One key implication of rational expectations is that

A) anticipated monetary policy has no effect on the rate of unemployment or the level of real
GDP.
B) anticipated monetary policy can affect the rate of unemployment but not the level of real
GDP.
C) unanticipated monetary policy has no effect on the economy but anticipated monetary
policy does have an effect on the economy.
D) both unanticipated monetary policy and anticipated monetary policy have an effect on the
economy.
Answer: B
Diff: 2
Question Status: New
18) When workers and employers correctly anticipate the rate of inflation,
A) there will be no unemployment.
B) there will be only involuntary unemployment.
C) unemployment will be at the natural rate.
D) workers will underestimate the real wage.
Answer: C
Diff: 1
19) In the aggregate supply-aggregate demand model, if every person in the economy correctly
anticipates the inflation rate, the unemployment rate will
A) be less than the natural rate of unemployment.
B) be more than the natural rate of unemployment.
C) equal the natural rate of unemployment.
D) equal zero.
Answer: C
Diff: 2
20) Assuming that the rational expectations hypothesis is NOT in effect, in the short run an
expansionary monetary policy should
A) shift the aggregate supply function.
B) increase real Gross Domestic Product (GDP) and the price level.
C) increase the rate of unemployment.
D) generate stagflation.
Answer: B
Diff: 1
21) In the short run, an unanticipated cut in the rate of inflation would
A) increase the unemployment rate.
B) decrease the unemployment rate.
C) unambiguously improve the misery index.
D) lower the natural rate of unemployment.
Answer: A
Diff: 1
22) If all the assumptions underpinning the policy irrelevance proposition are in place, fully
anticipated monetary policy will
A) affect the unemployment rate but have no impact on the level of real Gross Domestic
Product (GDP).
B) have an impact on real Gross Domestic Product (GDP) but cannot alter the level of
unemployment.
C) effectively alter both the rate of unemployment and the level of real Gross Domestic
Product (GDP).
D) not change either the level of real Gross Domestic Product (GDP) or the unemployment
rate.
Answer: D
Diff: 2
23) According to the policy irrelevance proposition,

A) monetary policy can effectively reduce the rate of unemployment in the short run.
B) workers are not rational in the long run.
C) the Phillips curve slopes upward, not downward as traditionally assumed.
D) expansionary monetary policy will only lead to a higher rate of inflation in the long run.
Answer: D
Diff: 1
24) According to the policy irrelevance proposition, the impact of an anticipated expansionary
monetary policy will be to
A) increase the price level in the long run.
B) increase the real Gross Domestic Product (GDP) in the long run.
C) decrease the natural rate of unemployment.
D) decrease the price level and the unemployment rate.
Answer: A
Diff: 1
25) According to the policy irrelevance proposition, real Gross Domestic Product (GDP) is
determined by
A) the economys aggregate demand curve.
B) the economys long-run aggregate supply curve.
C) the rate of inflation only.
D) a combination of fiscal policy and monetary policy.
Answer: B
Diff: 2
26) One key assumption lying behind the policy irrelevance proposition is that
A) wages are sticky downward.
B) prices are sticky upward.
C) the rational expectations hypothesis is correct.
D) markets are not purely competitive.
Answer: C
Diff: 1
27) The rational expectations hypothesis indicates that a monetary policy designed to alter real
Gross Domestic Product (GDP) will fail unless
A) changes in the money supply are unexpected.
B) the governments budget is not in deficit.
C) labor unions have long-term contracts.
D) changes in the money supply are completely anticipated.
Answer: A
Diff: 1
28) A key implication of the policy irrelevance proposition is that

A) only fully anticipated policy actions can influence real Gross Domestic Product (GDP).
B) only unanticipated policy actions can influence real Gross Domestic Product (GDP).
C) the rational expectations hypothesis is incorrect.
D) none of the above.
Answer: B
Diff: 2
29) Under the rational expectations hypothesis, if wages adjust rapidly to new information about
intended policy actions, monetary policy can have an effect
A) in both the short and the long run.
B) in the long run, but not the short run.
C) only in the short run and only if the policy is unanticipated.
D) only in the long run and only if the policy is fully anticipated.
Answer: C
Diff: 1
30) Under the rational expectations hypothesis, if wages adjust rapidly to new information about
intended policy actions, the only time that changes in government policies have real effects is
when
A) the changes are unanticipated.
B) the changes involve fiscal policy.
C) the changes involve monetary policy.
D) the changes affect aggregate demand.
Answer: A
Diff: 1
31) Suppose there is an oil supply shock to the U.S. economy due to an embargo by major oil
producing nations. According to the real business cycle theory, the supply shock will, other
things being equal,
A) push real Gross Domestic Product (GDP) upward in the short run but downward in the
long run.
B) push the economy into an expansionary phase of the business cycle.
C) cause real Gross Domestic Product (GDP) to decline both in the short run and in the long
run.
D) cause economy-wide deflation.
Answer: C
Diff: 1
32) The short run aggregate supply (SRAS) curve shifts left when oil supply shocks occur because
A) fewer goods are produced at any given price level due to higher oil prices.
B) oil-based production has increased at any given price level.
C) average total cost will fall at any given output level.
D) the price level will fall at any given output level.
Answer: A
Diff: 2
33) A reduction in world oil supplies is likely to cause

A) an increase in aggregate demand and a decrease in the equilibrium price level.
B) a decrease in equilibrium price level and an increase in real Gross Domestic Product
(GDP).
C) an increase in equilibrium price level and an increase in real Gross Domestic Product
(GDP).
D) a reduction in aggregate supply, a rise in the equilibrium price level, and a fall in real
Gross Domestic Product (GDP).
Answer: D
Diff: 1
34) According to the real business cycle theory, an increase in an input price, such as oil, will
A) increase both real Gross Domestic Product (GDP) and the price level.
B) increase real Gross Domestic Product (GDP) but not change the price level.
C) decrease real Gross Domestic Product (GDP) but increase the price level.
D) decrease both real Gross Domestic Product (GDP) and the price level.
Answer: C
Diff: 1
35) Real business cycle theory explains variations in prices, employment, and real Gross Domestic
Product (GDP) by focusing on
A) changes in real variables such as supply shocks, technological changes, and shifts in the
composition of the labor force.
B) anticipated monetary policies enacted by the Fed.
C) the effects of the Phillips curve.
D) anticipated changes in fiscal policy enacted by the government.
Answer: A
Diff: 1
36) The rational expectations hypothesis states that

A) the government combines the effects of past policy changes on important economic
variables with accepted views about the effects of current and future policy changes.
B) people combine the effect of past policy changes on important economic variables with
unpredictable views on what policy makers will do to determine what the economy will
do in the future.
C) people combine the effects of past policy changes on important economic variables with
their own judgments about the future effects of current and future policy changes.
D) people understand how the economy operates and use their knowledge in making
expectations about the future, but are uninformed about how fiscal and monetary policies
are made and carried out.
Answer: C
Diff: 2
37) Which of the following statements is consistent with the rational expectations hypothesis?
A) When it comes to making personal economic decisions, people rarely behave in a rational
manner.
B) People combine the effects of past policy changes on important economic variables with
their own judgment about the future effects of current and future policy changes.
C) When it comes to making personal economic decisions, people always behave in a rational
manner.
D) Every person in the economy is always correct in her predictions about current and future
policy changes.
Answer: B
Diff: 2
38) According to the rational expectations hypothesis, individuals form their expectations about
future values of economic variables by all of the following EXCEPT
A) past information.
B) current information.
C) their understanding of how the economy operates.
D) formal models of macroeconomics.
Answer: D
Diff: 1
39) People combining the effects of past policy changes on important economic variables with their
own judgment about the future effects of current and future policy changes is consistent with
A) frictional unemployment.
B) the rational expectations hypothesis.
C) active policy making.
D) passive policy making.
Answer: B
Diff: 1
40) According to the rational expectations hypothesis, the attempt by the government to reduce
unemployment below its natural rate through expansionary policies will
A) succeed in the short run and can succeed in the long run as long as the government makes
it clear what its goals are.
B) succeed because the government knows how people will react to their policies and will
adjust their policies accordingly.
C) fail because people will figure out what the government is doing and alter their
expectations and their behavior in ways that counteract the government policy.
D) fail because the economy can never achieve an unemployment rate below the natural level.
Answer: C
Diff: 3
41) Refer to the above figure. Suppose the economy is in equilibrium at point A. If the Fed tries to
stimulate the economy by undertaking an expansionary monetary policy action and this is not
expected by the people in the economy, we would expect to see
A) aggregate demand increases, real GDP increases, and the price level increases. In the long
run, aggregate supply would increase and the new long-run equilibrium would be point
B.
B) aggregate demand increases, real GDP increases, and the price level increases in the short
run. In the long run, people realize the real situation, causing the short -run aggregate
supply curve to shift up. Real GDP returns to $14 trillion, and the price level increases to
150.
C) aggregate demand increases but people would anticipate this, causing the short -run
aggregate supply curve to shift up at the same time, with the new equilibrium of $14
trillion of real GDP and a price level of 100.
D) aggregate supply shifts up as people anticipate the effects of the expansionary monetary
system. In the short run, real GDP falls to $13 trillion and the price level rises to 120. In the
long run, real GDP returns to $14 trillion, and the price level increases further, to 150.
Answer: B
Diff: 3
42) Refer to the above figure. Suppose the economy is in equilibrium at point A. If rational
expectations exist, an increase in aggregate demand caused by an anticipated increase in the
money supply will cause the economy to
A) stay at point A.
B) move to point B.
C) move to point C.
D) move to point D.
Answer: C
Diff: 2
43) Refer to the above figure. Suppose the economy is in long -run equilibrium at point A, and the
government initiates an expansionary monetary policy to increase aggregate demand. Which of
the following is a true statement concerning the differences between what happens when the
governmental action is unanticipated and when it is anticipated?
A) The new long-run equilibrium when the increase in aggregate demand is unanticipated is
point B while the new long-run equilibrium when the increase in aggregate demand is
anticipated is point C.
B) The new long-run equilibrium when the increase in aggregate demand is unanticipated is
point B while the new long-run equilibrium when the increase in aggregate demand is
anticipated is point A.
C) The new long-run equilibrium will be point C in either case. When the increase in
aggregate demand is unanticipated, the economy moves to B in the short run, but when
the increase in aggregate demand is anticipated, short -run aggregate supply shifts when
the aggregate demand curve shifts, and the economy moves immediately to point C.
D) The new long-run equilibrium is point C in either case. When the increase in aggregate
demand is unanticipated, the new short-run equilibrium is point B, but when the increase
in aggregate demand is anticipated the new short-run equilibrium is point D.
Answer: C
Diff: 3
44) Suppose that the economy is in long-run equilibrium and the government decided to engage in
unexpected expansionary policy by increasing the money supply. If we assume rational
expectations, which of the following statements is correct about the effect of expansionary policy
in the long run?
A) The unemployment rate will increase, real GDP will increase and the price level will
increase.
B) The unemployment rate will decrease, real GDP will decrease and the price level will
decrease.
C) The unemployment rate will remain unchanged, real GDP will remain unchanged and the
price level will increase.
D) The unemployment rate will remain unchanged, real GDP will remain unchanged and the
price level will decrease.
Answer: C
Diff: 3
unexpected contractionary policy by decreasing the money supply. If we assume rational
expectations, which of the following statements is correct about the effect of contractionary
policy in the long run?
increase.
decrease.
Answer: D
Diff: 3
expected expansionary policy by increasing the money supply. If we assume rational
expectations, which of the following statements is correct about the effect of expansionary
policy in the long run?
increase.
decrease.
Answer: C
Diff: 3
47) Under the assumption of rational expectations, government fiscal and monetary policy changes
are effective in the short run
A) all of the time.
B) only when the short-run aggregate supply curve is the same as the long-run aggregate
supply curve.
C) only when the policy changes leave the position of the aggregate demand curve
unaffected.
D) only when the policy changes are unanticipated.
Answer: D
Diff: 2
48) The Fed initiates a contractionary monetary policy that is correctly anticipated by economic
agents in the economy. The result is
A) decreased prices, but no change in real GDP.
B) decreased prices and decreased real GDP in the short run, but only decreased prices in the
long run.
C) decreased real GDP in the short run and decreased prices in the long run.
D) decreased real GDP and prices in both the short run and the long run.
Answer: A
Diff: 2
49) Which statement is true when rational expectations exist and there is a change in monetary
policy which is expected?
A) The change in monetary policy leads to a change in aggregate demand that leads to a
temporary short-run equilibrium that is different from the long-run equilibrium.
B) The change in monetary policy leads to a simultaneous shift of the short -run aggregate
supply curve.
C) The change in monetary policy lead to a simultaneous shift in the long-run aggregate
supply curve.
D) The change in monetary policy does not change equilibrium in either the short -run or
long-run.
Answer: B
Diff: 2
50) Which statement is true when rational expectations exist and there is a change in monetary
policy which is unexpected?
A) The change in monetary policy leads to a change in aggregate demand that leads to a
temporary short-run equilibrium that is different from the long-run equilibrium.
B) The change in monetary policy leads to a simultaneous shift of the short -run aggregate
supply curve.
C) The change in monetary policy lead to a simultaneous shift in the long-run aggregate
supply curve.
D) The change in monetary policy does not change equilibrium in either the short -run or
long-run.
Answer: A
Diff: 2
51) Under the assumption of rational expectations, expectations people have formed are an
important determinant of
A) the short-run aggregate supply curve.
B) the long-run aggregate supply curve.
C) the short-run aggregate demand curve.
D) the long-run aggregate demand curve.
Answer: A
Diff: 2
52) The idea that anticipated monetary policy changes cannot affect real GDP or employment is
known as
A) the systematic policy hypothesis.
B) the policy irrelevance theorem.
C) the policy relevance theorem.
D) the Keynesian hypothesis.
Answer: B
Diff: 1
53) Fully anticipated monetary policy actions cannot alter either the rate of unemployment or the
level of real GDP. This statement is
A) the policy irrelevance proposition.
B) the nonaccelerating inflation rate of unemployment theory.
C) the Phillips curve.
D) discretionary policy making.
Answer: A
Diff: 1
54) Which of the following is NOT an inference of the rational expectations hypothesis?
A) Government policy actions have no real effects in the short run unless the actions are
unanticipated.
B) Government policy actions have no real effects in the long run.
C) Government policy actions that are anticipated have no real effects in the short run.
D) Government policy actions that are unanticipated have no monetary effects in the short
run.
Answer: D
Diff: 2
55) If people do not always make the same mistakes when forecasting the future, then
A) rational expectations are irrational.
B) the Fed can control monetary policy and determine real variables such as real GDP.
C) the policy irrelevance theorem holds.
D) fiscal policy is more effective than monetary policy at fine-tuning the economy.
Answer: C
Diff: 2
56) Under the assumption of rational expectations, real GDP is determined by

A) the economys aggregate demand curve.
B) the Fed.
C) a combination of monetary and fiscal policy.
D) the nations long-run aggregate supply curve.
Answer: D
Diff: 1
57) Real business cycle theory explains changes in employment and output by focusing on
A) real supply-side factors.
B) changes in monetary policy.
C) changes in fiscal policy.
D) the interaction of fiscal and monetary policies.
Answer: A
Diff: 1
58) According to the real business cycle theory, which of the following would be a real disturbance
to the economy?
A) Change in the required reserve ratio
B) Reduction in the money supply
C) Increase in the rate at which married women participate in the labor force
D) Increase in the price level
Answer: C
Diff: 2
59) Suppose the economy is in equilibrium when there is a change in environmental policy that
bans all pesticides and herbicides on farmland. We would expect to observe
A) a decrease in aggregate supply and an increase in aggregate demand.
B) a decrease in both real output and the natural rate of unemployment.
C) a decrease in real output and an increase in the natural rate of unemployment.
D) a decrease in real output and an increase in the price level.
Answer: D
Diff: 3
60) According to the real business cycle theory, which of the following is a true statement about the
effects of an oil shock in the 1970s?
A) The shock affected real variables only and did not affect nominal variables.
B) The shock shifted the short-run aggregate supply curve but not the long-run aggregate
supply curve.
C) The natural rate of unemployment remained unchanged, but employment levels did
decline.
D) Relative prices changed but there was no impact on the price level in general.
Answer: C
Diff: 2
61) According to the real-business-cycle perspective,

A) the economy cannot be stabilized by policy activism.
B) the Phillips curve is very important.
C) active policy making is important.
D) passive policy making is important.
Answer: A
Diff: 1
62) The rational expectations hypothesis suggests that

A) unanticipated fiscal policy actions are more powerful than monetary policy actions.
B) anticipated monetary policy actions are more powerful than fiscal policy actions.
C) fiscal policy actions only work when accompanied by changes in the money supply.
D) anticipated fiscal and monetary policy actions are not likely to achieve their stated aims.
Answer: D
Diff: 2
63) The rational expectations hypothesis states that

A) individuals always behave rationally.
B) prices do not adjust in a downward direction.
C) past and present economic information is incorporated into decision making.
D) consumers do not understand the effects of monetary and fiscal policy.
Answer: C
Diff: 2
64) The policy irrelevance proposition implies that

A) unanticipated monetary policy actions are equally effective in stimulating both aggregate
demand and aggregate supply.
B) anticipated monetary policy actions are effective in stimulating aggregate supply, but they
are not effective in stimulating aggregate demand.
C) anticipated monetary policy actions are effective in increasing real GDP, but they do not
reduce unemployment.
D) anticipated monetary policy actions are ineffective in generating changes in real GDP.
Answer: D
Diff: 2
65) A hypothesis that assumes that people combine the effects of past policy changes on economic
events and their own judgment about future effects of current and future policy changes is
known as
A) adaptive expectations.
B) modern expectations.
C) rational expectations.
D) active expectations.
Answer: C
Diff: 1
66) Which of the following holds that economic decision making on all levels is unbiased and is
based on all available information?
A) Keynesian cycle theory
B) rational expectations based theory
C) adaptive expectations based theory
D) none of the above
Answer: B
Diff: 1
67) Adding the assumption of pure competition and complete flexibility of all prices and wages to
the rational expectations hypothesis yields a theory that provides support for
A) passive policy making.
B) active policy making.
C) discretionary policy making.
D) unemployment reducing policy making.
Answer: A
Diff: 2
68) The proposition that policy actions have no real effects in the short run if the policy actions are
anticipated is known as
A) the unemployment stabilization proposition.
B) the policy irrelevance proposition.
C) the inflation stabilization proposition.
D) the Keynesian proposition.
Answer: B
Diff: 2
69) Those who accept both the rational expectations hypothesis and the assumption of flexibility of
wages and price would likely argue that
A) saving and investment do not contribute to economic growth.
B) active policy making does not contribute to economic stability.
C) if policy makers are willing to accept a high inflation rate, they can reduce unemployment
to a point below the natural rate.
D) policy makers can eliminate fluctuations in the level of business activity with careful
planning of a widely publicized monetary policy.
Answer: B
Diff: 3
70) According to a theory that relies on the rational expectations hypothesis and the assumption
that wages and prices are flexible, why do anticipated expansionary monetary actions NOT
boost real GDP?
A) Anticipated expansionary monetary policy actions do not increase aggregate demand.
B) The short-run aggregate supply curve shifts upward simultaneously with the rightward
shift of aggregate demand.
C) The short-run aggregate supply curve shifts downward simultaneously with the upward
shift of aggregate demand.
D) The higher interest rates associated with anticipated expansionary monetary policy actions
will dampen investment spending.
Answer: B
Diff: 3
71) One implication of coupling the rational expectations hypothesis with the assumption of flexible
wages and prices is that
A) expansionary monetary policy will be effective in combating recessions.
B) contractionary monetary policy will be effective in combating inflation.
C) only predictable policy actions by the Fed will have an effect on the real economy.
D) only unpredictable policy actions by the Fed will have an effect on the real economy.
Answer: D
Diff: 2
72) The rational expectations hypothesis suggests that if wages and prices are flexible,
A) unanticipated monetary policy actions can shift the long-run aggregate supply curve but
cannot shift the aggregate demand curve.
B) anticipated monetary policy actions can affect nominal variables, but not real variables.
C) unanticipated monetary policy actions can affect real variables, but not nominal variables.
D) growth in the money supply can alter real variables only if the growth is anticipated.
Answer: B
Diff: 2
73) The hypothesis suggesting that people combine the effects of past policy changes on economic
variables with their own judgment about the future effects of current and future economic
policy is referred to as the
A) active expectations hypothesis.
B) passive expectations hypothesis
D) adaptive expectations hypothesis.
Answer: C
Diff: 2
74) The idea that policy actions have no real effects in the short run if they are anticipated and no
real effects in the long run is called the
A) Keynesian proposition.
B) policy irrelevance proposition.
C) adaptive proposition.
D) activism proposition.
Answer: B
Diff: 2
75) The rational expectations hypothesis is based on the assumption that

A) individuals combine effects of past policy actions with their own judgment about future
policy effects and changes when forming their expectations.
B) individuals adapt in response to past policy actions and changes without looking ahead
when forming their expectations.
C) firms pay above equilibrium wages to their employees.
D) most firms operate in a less than competitive environment.
Answer: A
Diff: 1
76) The policy irrelevance proposition suggests that the policy effects on the economy primarily occur
as a result of
A) fiscal policy measures.
B) policy mistakes or misjudgment of policies.
C) nondiscretionary fiscal policy, not discretionary fiscal policy.
D) fluctuations in the value of the U.S. dollar.
Answer: B
Diff: 2
77) Refer to the above figure. The rational expectations hypothesis implies that an anticipated
increase in aggregate demand from AD1 to AD2 will
A) move the economy from c to b.
B) move the economy from a to b.
C) move the economy from a to c.
D) will shift the aggregate supply (AS) curve to the right.
Answer: B
Diff: 2
78) Refer to the above figure. The rational expectations hypothesis implies that an anticipated
decrease in aggregate demand from AD2 to AD1 will
A) move the economy from b to c.
B) move the economy from b to a.
C) move the economy from c to a.
D) shift the aggregate supply (AS) curve to the left.
Answer: B
Diff: 2
79) According to the theory based on rational expectations and flexible wages and prices,
A) fiscal policy has less effect on real GDP than monetary policy in the long run.
B) monetary policy has less effect on real GDP than fiscal policy in the long run.
C) neither fiscal nor monetary policy influence real GDP in the long run.
D) only the combination of discretionary fiscal policy and conservative monetary policy can
affect real GDP in the long run.
Answer: C
Diff: 2
80) The rational expectations hypothesis is based on all the following assumptions EXCEPT
A) use of judgment about effects of future policy actions.
B) use of knowledge of effects of past policy actions.
C) understanding of how the economy operates.
D) understanding that prices are sticky.
Answer: D
Diff: 1
81) In the above figure, if we start at AD1 and SRAS1 , and the money supply increases
unexpectedly, what would be the short-run equilibrium even with rational expectations?
A) E1
B) E2
C) E3
D) P1
Answer: B
Diff: 2
unexpectedly, what would be the long-run equilibrium?
A) E1
B) E2
C) E3
D) P1
Answer: C
Diff: 3
unexpectedly, what causes the economy to get to the long-run equilibrium?
A) Peoples expectations will revise after a short-run gain in output, wages will fall, and
SRAS will shift leftward.
B) Peoples expectations will revise after a short-run gain in output, wages will rise, and
SRAS will shift rightward.
C) Peoples expectations will revise after a short-run loss in output, wages will fall, and SRAS
will shift leftward.
D) Peoples expectations will revise after a short-run gain in output, wages will rise, and
SRAS will shift leftward.
Answer: D
Diff: 3
84) The policy irrelevance proposition states that

A) only relatively large expected changes in monetary policy impact the economy.
B) anticipated changes in monetary policy are ineffective in changing real GDP.
C) only statements from the White House have impact on the economy.
D) in the short run unanticipated changes in monetary policy are ineffective in changing real
GDP.
Answer: B
Diff: 2
85) Real business cycle theory emphasizes the effect of ________ on economic performance.
A) government spending
B) the money supply
C) aggregate supply shocks
D) tax rates
Answer: C
Diff: 1
86) When stagflation occurs,

A) the economy experiences higher inflation rates and lower unemployment rates at the same
time.
B) the economy experiences lower inflation rates and higher unemployment rates at the same
time.
C) the economy experiences lower inflation rates and lower unemployment rates at the same
time.
D) the economy experiences higher inflation rates and higher unemployment rates at the
same time.
Answer: D
Diff: 2
87) The real business cycle theory

A) indicates that supply side shocks cause most business cycles.
B) indicates that demand side shocks cause most business cycles.
C) indicates that rapid changes in the money supply cause most business cycles.
D) indicates that faulty fiscal policy creates most business cycles.
Answer: A
Diff: 2
88) The real business cycle theory is based on all of the assumptions below EXCEPT
A) small menu costs.
B) flexible wages.
C) pure competition.
D) flexible prices.
Answer: A
Diff: 1
89) Which of the following holds that business cycles are primarily due to changes in technology
and does not invoke any monetary or demand -side forces?
A) the real business cycle theory
B) the efficiency wage theory
C) rational expectations hypothesis
D) Keynesian economics
Answer: A
Diff: 1
90) Real business cycles could be a result of

A) discretionary fiscal policy.
B) abrupt changes in monetary policy.
C) increases in the budget deficit and national debt.
D) shocks to the aggregate supply side of the economy.
Answer: D
Diff: 2
91) Which of the following would NOT cause a real business cycle?
A) a change in technology
B) a change in the composition of the labor force
C) a change in the money supply
D) a sustained change in the price of oil
Answer: C
Diff: 2
92) During the 1970s, the shocks to the United States economy resulted in
A) an increase in the unemployment rate, but a decrease in the inflation rate.
B) a decrease in the unemployment rate, but an increase in the inflation rate.
C) an increase in both the unemployment rate and the inflation rate.
D) a decrease in both the unemployment rate and the inflation rate.
Answer: C
Diff: 2
93) The real business cycle theory

A) is an extension of the Keynesian view of business cycles.
B) is an extension of the adaptive expectations theory of business cycles.
C) suggests that instability is caused by shifts in the long-run aggregate supply curve.
D) suggests that instability is caused by shifts in the aggregate demand curve caused by
changing consumer confidence in the economy.
Answer: C
Diff: 2
94) Stagflation means a

A) high rate of inflation coupled with a high rate of unemployment.
B) high rate of inflation coupled with a very low rate of unemployment.
C) low rate of inflation coupled with a very high rate of unemployment.
D) low rate of inflation coupled with a rate of unemployment below the natural rate.
Answer: A
Diff: 1
95) In the above figure, starting at E1 , if there is a supply shock that is permanent, the
A) aggregate supply would shift to SRAS1 and LRAS1 would shift to LRAS0 .
B) aggregate supply would shift to SRAS1 and LRAS0 would shift to LRAS1 .
C) aggregate supply would shift to SRAS2 and LRAS0 would shift to LRAS1 .
D) aggregate supply would shift to SRAS1 and then return to SRAS0 .
Answer: C
Diff: 3
96) In the above figure, starting at E1 , if there is a supply shock that is temporary, the
Answer: D
Diff: 3
97) In the above figure, starting at E3 , if there is an increase in technology that causes a permanent
increase in production capabilities
Answer: A
Diff: 3
98) In the above figure, starting at E3 , if there is an increase in technology that causes a temporary
increase in production capabilities
Answer: D
Diff: 3
99) When a supply shock is permanent

A) only the long-run aggregate supply curve shifts leftward.
B) only the short-run aggregate supply curve shifts leftward.
C) both the long-run and short-run aggregate supply curves shift leftward.
D) there are no shifts in either the long-run or short-run aggregate supply curve.
Answer: C
Diff: 2
100) Using a graph, show and explain the difference between an anticipated and an unanticipated
increase in aggregate demand.
Answer:
In the above figure, an unanticipated increase in aggregate demand is shown by moving

from A to B, along the short-run aggregate supply curve. An anticipated increase in
aggregate demand implies that only the price level increases, and the economy moves
from A to C as the short-run supply curve shifts to SRAS2 .
Diff: 3
101) Describe and explain the real business cycle theory.

Answer: The real business cycle theory is a modification of the new classical theory that states that
money is neutral in its impact on the economy and only real supply-side factors matter in
influencing employment and real output. Real Gross Domestic Product (GDP) is
determined by real variables such as the supply of inputs and technology and monetary
policy only affects the price level.
Diff: 1
102) Explain the rational expectations hypothesis.

Answer: The rational expectations hypothesis assumes that people base their forecasts about the
future values of economic variables on all available past and current information, and
that these expectations incorporate their understanding about how the economy operates,
including the operation of monetary and fiscal policy. If there is pure competition in all
markets and all prices, including wages, are flexible, then the government cannot affect
real GDP except by fooling people and fooling people cannot work for long.
Diff: 1
103) Describe and explain the policy irrelevance proposition.

Answer: The policy irrelevance proposition is the conclusion that policy actions have no real
effects in the short run if the policy actions were anticipated and none in the long run
even if the policy actions were unanticipated. The conclusion comes from rational
expectations hypothesis. Prices and wages are assumed to be flexible and people form
their expectations on a rational basis.
Diff: 2
17.4 Modern Approaches to Justifying Active Policymaking

1) According to economists who promote sticky-price theories,
A) only fiscal policy is an effective stabilization policy.
B) only monetary policy is an effective stabilization policy.
C) both fiscal and monetary policy can be effective stabilization policies.
D) neither fiscal nor monetary policy is an effective stabilization policy.
Answer: C
Diff: 1
Topic: 17.4 Modern Approaches to Justifying Active Policymaking
2) Costs that deter firms from changing prices in response to demand changes are known as
A) sticky costs.
B) menu costs.
C) policy costs.
D) production costs.
Answer: B
Diff: 1
3) During the 1960s, many Keynesian economists felt that by studying the Phillips curve,
A) policy makers could dispense with the Federal Reserves open-market operations.
B) policy makers could fine-tune the economy by selecting policies that would produce the
exact mix of unemployment and inflation that suited current government objectives.
C) the President and Congress did not need to attempt to balance the budget.
D) policy makers could eliminate even frictional unemployment in the economy.
Answer: B
Diff: 1
4) Which of the following can help explain why prices might be sticky?
A) The rational expectations hypothesis
B) The policy irrelevance proposition
C) Real business cycles
D) Small menu costs
Answer: D
Diff: 1
5) The menu cost theory states that

A) prices are not fully flexible because it is costly for firms to change prices every time there is
a demand change.
B) economic agents quickly learn the likely responses of the Fed to changes in
unemployment.
C) wages depend on the productivity of workers.
D) the economy is characterized by perfect competition.
Answer: A
Diff: 2
6) Some economists suggest that because of the costs of negotiating contracts, printing price lists,
etc., it is costly for firms to change prices in response to demand changes. This hypothesis is
known as the
A) sticky wage theory.
B) menu cost theory.
C) Phillips theory.
D) Freidman theory.
Answer: B
Diff: 1
7) The menu cost theory suggests that

A) there will be no unemployment.
B) wages and prices move freely and quickly.
C) firms find frequent price changes to be costly.
D) the economy is characterized only by perfect competition.
Answer: C
Diff: 1
8) In new Keynesian theory, the pattern of inflation exhibited by an economy with growing
aggregate demand known as inflation dynamics is
A) initially sluggish upward adjustment of the price level and inflation in response to higher
aggregate demand followed by higher inflation in the future.
B) initially speedy upward adjustment of the price level and inflation in response to higher
aggregate demand followed by lower inflation in the future.
C) initially sluggish downward adjustment of the price level and inflation in response to
higher aggregate demand followed by lower inflation in the future.
D) initially speedy upward adjustment of the price level and inflation in response to higher
aggregate demand followed by higher inflation in the future.
Answer: A
Diff: 1
9) The term for a pattern of initially sluggish adjustment of the equilibrium price level to a change
in aggregate demand followed by a greater adjustment in the future is
A) real-business-cycle inflation dynamics.
B) New Keynesian inflation dynamics.
C) passive price dynamics.
D) active price dynamics.
Answer: B
Diff: 1
10) According to the new Keynesian sticky-price theory, a rise in aggregate demand results in
________ price level in the near term and in ________ price level in the longer term.
A) a higher; an unchanged
B) an unchanged; a higher
C) a lower; an unchanged
D) a lower; a higher
Answer: B
Diff: 2
11) The most important new Keynesian assumption that distinguishes this theory differs from the
real-business-cycle theory is the new Keynesian assumption
A) of a horizontal aggregate demand curve.
B) of price flexibility.
C) about the importance of interest rates in determining investment spending.
D) of a horizontal short-run aggregate curve.
Answer: D
Diff: 1
12) Which of the following is NOT associated with the new Keynesian economics?
A) Inflation dynamics
B) Small-menu cost theory
C) Market-clearing models to explain business cycles
D) Sticky-price theories of real GDP determination
Answer: C
Diff: 1
13) The costs associated with changing prices are called

A) price costs.
B) change costs.
C) menu costs.
D) inflation-dynamics costs.
Answer: C
Diff: 1
14) Which of the following statements concerning price rigidity is true?

A) Since the economy experiences continued inflation prices are not rigid.
B) Prices will be rigid when there is unanticipated monetary policy but not when there is
anticipated monetary policy.
C) Data has clearly demonstrated that the long run aggregate supply curve is horizontal.
D) When there are demand changes, firms will not change their price because of the costs
associated with renegotiating contracts and informing customers of price changes.
Answer: D
Diff: 1
15) A theory suggesting that price stickiness leads to sluggish short-run adjustment of the price
level to variations in aggregate demand is known as
A) new Keynesian flexible-price business cycles.
B) new Keynesian inflation dynamics.
C) real-business-cycle fixed-price business cycles.
D) real-business-cycle inflation dynamics.
Answer: B
Diff: 1
16) The theory of new Keynesian inflation dynamics suggests that a fall in aggregate demand
would
A) immediately reduce the price level, followed by a more sluggish decline in real GDP.
B) immediately raise the price level, followed by a more sluggish decline in real GDP.
C) immediately reduce real GDP, followed by a more sluggish decline in the price level.
D) immediately raise real GDP, followed by a more sluggish increase in the price level.
Answer: C
Diff: 2
17) According to the new Keynesian theory, the widespread importance of small menu costs results
in variations in aggregate demand causing both
A) greater short-run adjustments in real GDP and delayed adjustment in the price level.
B) greater short-run adjustments in the real GDP and immediate adjustment in the price
level.
C) smaller short-run adjustments in real GDP and delayed adjustment in the price level.
D) smaller short-run adjustments in real GDP and immediate adjustment in the price level.
Answer: A
Diff: 2
18) New Keynesian inflation dynamics can account for sluggish responses of
A) real GDP to variations in aggregate supply.
B) real GDP to variations in aggregate demand.
C) inflation to variations in aggregate supply.
D) inflation to variations in aggregate demand.
Answer: D
Diff: 1
19) If the price of bubble gum changed in the market from 1 cent to 1.5 cents and Joes Market didnt
change the price it charges for the bubble gum, this behavior is likely due to
A) discretionary policy.
B) economic laziness.
C) large menu costs.
D) small menu costs.
Answer: D
Diff: 3
20) Costs that tend to deter firms from changing their prices in response to changes in the market
equilibrium price are referred to as
A) large menu costs.
B) small menu costs.
C) real menu costs.
D) burden costs.
Answer: B
Diff: 2
21) Which of the following factors strengthens the case for policy activism?
A) sticky prices
B) flexible wages
C) flexible prices
D) lack of real-business-cycles
Answer: A
Diff: 3
22) Menu costs are a possible reason for

A) aggregate supply shocks.
B) low levels of consumer confidence in response to aggregate supply shocks.
C) sticky product prices.
D) swings in the labor force participation rate.
Answer: C
Diff: 1
23) Costs of renewing contracts or printing new price lists are known as
A) small business costs.
B) small menu costs.
C) small operating costs.
D) small production costs.
Answer: B
Diff: 2
24) Small menu costs are a common reason offered for the existence of
A) sticky wages.
B) sticky resource prices.
C) sticky prices.
D) sticky product adjustments.
Answer: C
Diff: 2
25) Economists who favor policy activism argue that the United States economy is NOT always in
equilibrium because
A) the national debt is too large.
B) the Federal Reserves monetary policy is too restrictive.
C) the markets are over regulated.
D) wage and price rigidities exist.
Answer: D
Diff: 1
26) Menu costs are

A) the constantly changing resource prices that make planning for firms difficult.
B) the advertised prices for final products that firms guarantee for a certain period of time.
C) the cost of compliance with government regulations.
D) the costs that deter firms from changing prices in reaction to demand changes.
Answer: D
Diff: 1
27) If a significant portion of firms in the economy does not immediately adjust product prices, then
the short-run aggregate supply curve
A) slopes upward.
B) slopes downward.
C) is horizontal.
D) is vertical.
Answer: C
Diff: 1
28) The new Keynesian sticky-price theory indicates that an increase in aggregate demand
generates
A) a speedy rise in real GDP but a sluggish increase in the price level.
B) a speedy rise in the price level but a sluggish increase in real GDP.
C) sluggish increases in both real GDP and the price level.
D) rapid increases in both real GDP and the price level.
Answer: A
Diff: 1
29) If a significant portion of firms in the economy does not adjust product prices, a predicted result
according to new Keynesian theory is
A) real business cycles.
B) real inflation cycles.
C) inflation dynamics.
D) output dynamics.
Answer: C
Diff: 1
30) New Keynesian inflation dynamics predicts that an increase in aggregate demand will generate,
in chronological order,
A) a leftward movement along a horizontal short-run aggregate supply curve, a short-run
decline in real GDP, a downward shift in the short-run aggregate supply curve, and a
decrease in the price level.
B) a rightward movement along a horizontal short -run aggregate supply curve, a short-run
increase in real GDP, an upward shift in the short-run aggregate supply curve, and an
increase in the price level.
C) an leftward shift in a vertical short-run aggregate supply curve, a short-run decline in real
GDP, an upward movement along the short-run aggregate supply curve, and an increase
in the price level.
D) a rightward shift in a vertical short-run aggregate supply curve, a short-run increase in
real GDP, an upward movement along the short-run aggregate supply curve, and an
increase in the price level.
Answer: B
Diff: 2
31) According to the hypothesis of New Keynesian inflation dynamics, an increase in aggregate
demand brings about
A) initial sluggish adjustment of the price level followed by higher inflation later on.
B) initial rapid adjustment of the price level followed by lower inflation later on.
C) initial sluggish adjustment of real GDP followed by more rapid real GDP growth later on.
D) sluggish growth in real GDP both initially and later on.
Answer: A
Diff: 1
32) According to some New Keynesian theories, one possible rationale for active policy making is
A) flexible prices.
B) sluggish adjustment of the price level in response to changes in aggregate demand
C) people are not rational and so do not react to incentives.
D) growing competition in U.S. product markets.
Answer: B
Diff: 1
33) New Keynesian theory implies that which of the following reduces firms incentive to adjust
their prices?
A) a downward sloping aggregate demand curve
B) the required reserve ratio
C) menu costs
Answer: C
Diff: 2
34) Describe new Keynesian economics and the arguments used to support the ideas.
Answer: New Keynesian economics are models based on the idea that demand -side factors are
most important and that the economy has rigidities that make fiscal and monetary policy
useful. They reject flexible wages and prices and argue these are sticky, especially
downward. They argue that it is costly to change prices and renegotiate contracts
constantly, so prices are less flexible.
Diff: 2
17.5 Is There a New Keynesian Phillips Curve?

1) New Keynesians hypothesize that
A) the relationship between inflation and unemployment is exploitable in the long run.
B) the relationship between inflation and unemployment is exploitable in the short run.
C) there is no relationship between inflation and unemployment.
D) fluctuations in output are largely caused by supply shocks.
Answer: B
Diff: 1
Topic: 17.5 Is There a New Keynesian Phillips Curve?
2) What did Milton Friedman and E.S. Phelps argue with respect to the Phillips Curve?
A) The Phillips Curve could accurately guide activist policy makers over the long run.
B) The inverse relationship between unemployment and inflation only holds in the long run.
In the short run, unemployment and inflation are positively related.
C) Economic participants would soon understand activist policymakers strategy and revise
their expectations, making discretionary efforts to fine-tune the economy ineffective.
D) The inflation rate will consistently be 2 percentage points below the unemployment rate.
Answer: C
Diff: 2
3) The stagflation experienced in the U.S. during the late 1960s and the 1970s showed us that
A) the Phillips curve accurately represents the trade-off between unemployment and
inflation.
B) both inflation and economic expansion could exist simultaneously.
C) the relationship between unemployment and inflation was not as clear-cut as presented
on the Phillips curve.
D) it is possible to alleviate economic stagflation through the government discretionary fiscal
policy.
Answer: C
Diff: 1
4) Economists Milton Friedman and E.S. Phelps suggested that the apparent trade -off suggested
by the Phillips curve could not be exploited by policy makers, because
A) economic participants routinely incorporate changes in the inflation rate into their
expectations.
B) economic participants are not rational, and therefore act unpredictably to any policy
change.
C) unemployment levels and the inflation rate have a clear, positive relationship.
D) unemployment levels and the inflation rate have a negative (inverse) relationship.
Answer: A
Diff: 1
5) According to New Keynesians, which of the following is one of the two key factors that
determines the inflation rate?
A) anticipated future inflation
B) fiscal policy
C) oil prices
D) stock prices
Answer: A
Diff: 1
6) According to New Keynesians, which of the following is one of the two key factors that
determines the inflation rate?
A) fiscal policy
B) firms average inflation adjusted per-unit costs of production
C) oil prices
D) stock prices
Answer: B
Diff: 1
7) The longer is the interval between firms price adjustments,

A) the longer the interval that the horizontal new Keynesian aggregate supply curve will
remain in position.
B) the shorter the interval the horizontal new Keynesian aggregate supply curve will remain
in position.
C) the new Keynesian aggregate supply curve will become steeper.
D) the smaller the output effect of a given change in the money supply.
Answer: A
Diff: 2
8) New Keynesians conclude that

A) appropriate activist policies can dampen cyclical fluctuations.
B) appropriate activist policies will increase the length of cyclical fluctuations.
C) appropriate activist policies will have an known effect on the length of cyclical
fluctuations.
Answer: A
Diff: 2
9) According to New Keynesians, an increase in which of the following will tend to cause the
inflation rate to increase?
C) an unexpected increase in aggregate demand
D) all of the above
Answer: D
Diff: 1
10) The shorter is the interval between firms price adjustments,

A) the greater is the scope for activist policies to stabilize the economy.
B) the smaller is the scope for activist policies to stabilize the economy.
C) a given unexpected increase in aggregate demand will cause a larger increase in output.
D) a given unexpected increase in aggregate demand will cause a smaller increase in the price
level in the short run.
Answer: B
Diff: 1
11) Initial studies of new Keynesian inflation dynamics indicated that the average price -adjustment
intervals in the United States was as long as
A) 6 months.
B) 12 months.
C) 2 years.
D) 4 years.
Answer: C
Diff: 1
12) More recent studies of new Keynesian inflation dynamics indicated that the average
price-adjustment intervals in the United States are
A) are one year or less.
B) two years or less.
C) four years or less.
D) more than four years.
Answer: A
Diff: 1
13) According to Friedman and Phelps, which of the following statements is a correct
characterization of unemployment and inflation in the United States since the 1950s?
A) A trade-off between inflation and unemployment as pictured in the Phillips curve existed
over the entire time period.
B) A trade-off between inflation and unemployment as pictured in the Phillips curve existed
in the 1970s and 1980s, but not over the entire period.
C) The relationship between inflation and unemployment is very different from the Phillips
curve. A positive relationship is evident rather than an inverse relationship.
D) There is no clear relationship between unemployment and inflation.
Answer: D
Diff: 2
14) A plot of points representing the rate of inflation and the unemployment for the United States
since 1953 reveals that
A) there is an inverse relationship between the two variables.
B) there does not appear to be any trade-off between the two variables.
C) there is a positive relationship between the two variables.
Answer: B
Diff: 1
15) According to New Keynesian economists,

A) activist policy has little effect on real GDP.
B) activist policy can be used to minimize variations in real GDP.
C) fluctuations in output are primarily caused by supply shocks.
D) the amount of time it takes firms to adjust prices is less than six months.
Answer: B
Diff: 1
16) According to New Keynesians, a reduction in which of the following will tend to cause the
inflation rate to decrease?
C) an unexpected reduction in aggregate demand
D) all of the above
Answer: D
Diff: 2
17) New Keynesian economists generally argue that

A) there is an exploitable tradeoff between unemployment and inflation.
B) changes in aggregate demand will have relatively greater effects on real GDP when firms
change prices less frequently.
C) activist policy can be used to reduce the fluctuations in real GDP.
D) all of the above
Answer: D
Diff: 1
18) If the average interval between firms price adjustments is relatively long,
A) an increase in aggregate demand will cause a relatively short-lived increase in real GDP.
B) an increase in aggregate demand will cause a relatively long-lived increase in real GDP.
C) a reduction in aggregate demand will cause a relatively short-lived reduction in real GDP.
Answer: B
Diff: 2
19) If the average interval between firms price adjustments is relatively short,
A) an increase in aggregate demand will cause a relatively short-lived increase in real GDP.
B) an increase in aggregate demand will cause a relatively long-lived increase in real GDP.
C) a reduction in aggregate demand will cause a relatively long -lived reduction in real GDP.
D) both B and C
Answer: A
Diff: 2
20) According to Friedman and Phelps, which of the following statements is a correct
characterization of unemployment and inflation in the United States since the 1950s?
A) A trade-off between inflation and unemployment as pictured in the Phillips curve existed
over the entire time period.
B) A trade-off between inflation and unemployment as pictured in the Phillips curve existed
in the 1970s and 1980s, but not over the entire period.
C) The relationship between inflation and unemployment is very different from the Phillips
curve. A positive relationship is evident rather than an inverse relationship.
D) There is no clear relationship between unemployment and inflation.
Answer: D
Diff: 2
21) What kind of relationship appears to actually exist, if one examines the actual data regarding
the inflation rate and the unemployment rate for all years since 1953?
A) a direct relationship
B) a one-to-one relationship
C) an inverse relationship
D) no relationship in the long run
Answer: D
Diff: 2
22) Examination of data since 1953 indicates that during this period stretching more than half a
century, the Phillips curve
A) fails to exist.
B) is smoothly upward sloping.
C) is smoothly downward sloping.
D) slopes smoothly upward at first but then slopes smoothly downward.
Answer: A
Diff: 2
23) The U.S. economic data for the last 50 years indicates that
A) there is an inverse relationship between unemployment rate and inflation rate.
B) there is a direct relationship between unemployment rate and inflation rate.
C) during recessions the unemployment rate was always twice as high as the inflation rate.
D) there has been no long-run relationship between unemployment and inflation rates.
Answer: D
Diff: 2
24) Available evidence about price adjustments across U.S. industries indicates that
A) prices are very flexible in all industries.
B) prices are very sticky in all industries.
C) prices are equally flexible in all industries.
D) there is considerable variation in price flexibility across industries.
Answer: D
Diff: 1
25) What is the modern view of the Phillips curve?

Answer: The modern view is that there is no trade-off between inflation and unemployment
except in the short run. People can be surprised and unemployment can go down if the
government pursues expansionary monetary or fiscal policy. However, once people learn
the true state of affairs, they will adjust their behavior and the natural rate of
unemployment will prevail. The price level will be higher though.
Diff: 3
17.6 Summing Up: Economic Factors Favoring Active versus Passive Policymaking
1) If a group of economists believes the following points are true, which is likely to be their policy
making stance?
Aggregate demand shocks have no long run effect on real Gross Domestic Product (GDP) or
unemployment.
Pure competition is widespread throughout the economy.
Real wages are flexible.
The Phillips Curve trade-off does not exist in the long run.
A) They will support active policy making.
B) They will support passive policy making.
C) They will support discretionary policy making.
D) They will argue that any attempt at economic policy making is futile.
Answer: B
Diff: 3
Topic: 17.6 Summing Up: Economic Factors Favoring Active versus Passive Policymaking
2) An economist who would most likely use active policy making would support which of the
following conclusions?
A) Pure competition is not typical in most markets.
B) Price flexibility is common in most markets.
C) Demand shocks have little or no short-run effects on real Gross Domestic Product (GDP)
and unemployment.
D) Supply shocks explain most business cycles.
Answer: A
Diff: 3
3) Most economists agree with which of the following?

A) Active policymaking is likely to exert sizable long-run effects on real GDP.
B) Active policymaking is unlikely to exert sizable long-run effects on real GDP.
C) Passive policymaking is likely to exert sizable long-run effects on real GDP.
Answer: B
Diff: 2
4) The stickiness of wages and prices will cause

A) changes in aggregate demand to have no short-run effects on real GDP.
B) changes in aggregate demand to have long-run effects on real GDP.
C) changes in aggregate demand to have both short-run and long-run effects on real GDP.
D) changes in aggregate demand to have short-run effects on real GDP.
Answer: D
Diff: 2
5) There is greater support for passive policymaking when

A) pure competition is widespread.
B) price flexibility is common.
C) wage flexibility is common.
D) all of the above
Answer: D
Diff: 2
6) When it comes to active policy making most economists agree that

A) active policy making should be used over passive policy making.
B) it is unlikely that active policy making will have any long term effects on the economy.
C) it is likely that active policy making will have long term effects on the economy.
D) it will lead to long term shocks in the system.
Answer: B
Diff: 1
7) Those who favor passive policy making do so because they conclude that
A) price and wage flexibility is a common and speedy occurrence.
B) price and wage flexibility is an uncommon occurrence.
C) pure competition is not typical in most markets.
D) there is a stable trade-off between inflation and unemployment in the short run.
Answer: A
Diff: 2
8) Those who favor active policy making argue that all of the following exist EXCEPT
A) perfectly flexible wages and prices.
B) inflation and unemployment are stable in the short run and predictable in the long run.
C) pure competition is not typical.
D) aggregate demand shocks can influence real GDP and unemployment.
Answer: A
Diff: 2
9) Those who favor passive policy making argue that all of the following exist EXCEPT
A) perfectly flexible wages and prices.
B) the trade off between inflation and unemployment is not stable in the short run and is
non-existent in the long run.
C) pure competition is typical.
D) aggregate demand shocks can influence real GDP and unemployment.
Answer: D
Diff: 2
10) The conclusion that the economy has price flexibility, wage flexibility, and perfectly competitive
markets justifies
A) active policy making.
B) rational policy making.
C) passive policy making.
Answer: C
Diff: 2
11) Economists who believe in activist policy making argue that

A) decreases in aggregate demand impact the economy only in the short run.
B) decreases in aggregate demand definitely impact the economy in the short run.
C) only planned changes in the money supply impact the economy.
D) only increases in the minimum wage levels improve economic well-being.
Answer: B
Diff: 2
12) There is greater support for active policymaking when

A) pure competition is widespread.
B) price flexibility is common.
C) wage flexibility is common.
Answer: D
Diff: 2
13) Compare and contrast the arguments favoring active versus passive policy making.
Answer: The models that stress wage and price flexibility and rationality on the part of economic
agents tend to favor passive policy making. If people can anticipate policy actions and if
wages and prices are flexible, the economy will tend toward long -run equilibrium.
Discretionary policies conducted by governmental policy makers will not be effective
means of influencing real Gross Domestic Product (GDP). In contrast, economists who
conclude that small menu costs are important elements of real-world economies conclude
that active policy making can influence real GDP and move the economy toward full
employment.
Diff: 3
14) How do rational expectations models differ from traditional classical economics? How does the
new Keynesian model differ from the traditional Keynesian view?
Answer: A rational expectations model sees no real effect of monetary policy while the classical
economics had changes in the money supply affecting aggregate demand. The classical
view was that stabilization policy was unnecessary and the newer view is that it is too
difficult to conduct. The traditional Keynesian view focused entirely on aggregate
demand and emphasized fiscal policy while the new Keynesian view supports the role of
monetary policy as well.
Diff: 2
Chapter 18
Policies and Prospects for Global Economic Growth
18.1 Labor Resources and Economic Growth
1) According to the text, population growth in many poor countries does not generally result in
increased labor resources because
A) many people do not join the labor force.
B) many people join the labor force.
C) many people work two jobs.
D) most jobs are for middle-age workers.
Answer: A
Diff: 2
Topic: 18.1 Labor Resources and Economic Growth
2) Suppose that the real Gross Domestic Product (GDP) growth rate for a country was 4 percent
and the population growth rate was 7 percent. What would the per capital real Gross Domestic
Product (GDP) growth rate be for this country?
A) -3 percent
B) -4 percent
C) 3 percent
D) 4 percent
Answer: A
Diff: 2
3) If population growth occurs while jobs are difficult to obtain or labor force participation does
not increase,
A) there may be little or no increase in a nations labor resources.
B) a nations labor resources will still continue to increase in both quality and quantity.
C) economic growth will be robust because any population gain is a plus.
D) per capita GDP is likely to increase sharply.
Answer: A
Diff: 1
4) If the level of aggregate real Gross Domestic Product (GDP) remains constant, a reduction in the
population
A) directly increases per capita real GDP.
B) directly reduces per capita real GDP.
C) indirectly reduces per capita real GDP.
D) has no effect on real per capita real GDP.
Answer: A
Diff: 2
5) If real per capita Gross Domestic Product (GDP) grows at a constant annual rate of 4 percent
and the annual population growth rate increases from 1 percent to 2 percent, the annual rate of
growth of per capita real GDP will
A) increase.
B) decrease.
C) remain unchanged.
D) increase or decrease depending.
Answer: B
Diff: 2
6) Suppose a nations rate of growth of per capita real Gross Domestic Product (GDP) is 3 percent
and its rate of growth in real GDP is 4 percent. Given this information, the nations population
growth rate is approximately equal to
A) 1 percent
B) 2 percent
C) 3 percent
D) 7 percent
Answer: A
Diff: 2
7) Suppose a nations real Gross Domestic Product (GDP) grows at a constant rate of 5 percent per
year while its population grows 2 percent annually. Given this information, this nations annual
rate of per capita real GDP growth is approximately equal to
A) 1 percent
B) 2 percent
C) 3 percent
D) 5 percent
Answer: C
Diff: 2
8) Over the past decade, a nations real Gross Domestic Product (GDP) grew at a constant rate of 10
percent per year while its population grew 8 percent annually. Forecasters predict that during
the coming decade, real GDP will continue to grow 10 percent annually, but the population
growth rate is expected to drop to 6 percent annually. If the forecasters are correct, which of the
following will be true?
A) The annual rate of growth of per capita real GDP will decline from 4 percent to 2 percent.
B) The annual rate of growth of per capita real GDP will decline from 2 percent to 1 percent.
C) The annual rate of growth of per capita real GDP will increase from 2 percent to 4 percent.
D) The annual rate of growth of per capita real GDP will increase from 2 percent to 6 percent.
Answer: C
Diff: 2
Chapter 18 Policies and Prospects for Global Economic Growth 955
9) The term economic freedom means

A) the right to own private property.
C) the right to own financial assets.
B) the right to trade goods and services.

D) all the above.
Answer: D
Diff: 1
10) According to the text, the 17 countries with high degrees of economic freedom
A) account for 81 percent of total world output.
B) account for less than 25 percent of total world output.
C) have the weakest economies.
D) have low productivity.
Answer: A
Diff: 2
11) With respect to economic freedom, which is true?

A) Three out of four people live in nations with governments that grant residents high
degrees of economic freedom.
B) Where governments do not grant residents a high degree of economic freedom, economic
growth rates tend to be above the annual average for the worlds nations.
C) About three dozen nations with governments unwilling to grant much in the way of
economic freedom are home to two-thirds of the worlds population. Even so, these
countries produce over 50 percent of the worlds output.
D) As economic freedom increases, so does a nations prospects for economic growth.
Answer: D
Diff: 2
12) In the determination of economic growth, political freedom

A) is more important than economic freedom.
B) appears to be less important than economic freedom.
C) contributes little to job growth.
D) is equally as important as economic freedom.
Answer: B
Diff: 1
13) Political freedom can sometimes moderately reduce economic growth because
A) special interest groups may gain at the expense of the overall economy.
B) campaign contributions rob the economy of investment.
C) most jobs are in unions that are politically connected.
Answer: A
Diff: 2
14) In nondemocratic countries that have experienced consistent economic growth and
improvements in their standards of living,
A) there is no tendency to become more democratic over time because the current political
situation is economically successful.
B) political freedom is apt to decrease over time as governments become more controlling.
C) the rise of special-interest groups usually promotes competition and growth.
D) there is a tendency to become democratic over time.
Answer: D
Diff: 2
15) Country X has experienced GDP growth of 6 percent and a population growth of 4 percent.
What is this countrys growth of per capita real GDP?
A) 2 percent
B) 10 percent
C) 6 percent
D) -2 percent
Answer: A
Diff: 1
16) Assume that a country has had a relatively steady growth of aggregate real GDP. A higher
population growth tends to
A) reduce the growth of per capita real GDP.
B) increase the growth of per capita real GDP.
C) increase the level of economic freedom.
D) increase the level of dead capital.
Answer: A
Diff: 1
17) The rate of growth in real GDP minus the rate of growth of the population is the
A) rate of growth of nominal GDP.
B) unemployment rate.
C) population growth rate.
D) rate of growth of per capita real GDP.
Answer: D
Diff: 1
18) What is the annual rate of growth of per capita real GDP if real GDP grows at a constant rate of
5 percent per year and the annual rate of population growth is 3 percent?
A) 1.7 percent
B) 2 percent
C) 5 percent
D) 8 percent
Answer: B
Diff: 2
19) What is the annual rate of growth of per capita real GDP if real GDP grows at a constant rate of
4 percent per year and the annual rate of population growth is 3 percent?
A) 1 percent
B) 3 percent
C) 4 percent
D) 87 percent
Answer: A
Diff: 2
20) What will happen to the annual rate of growth of per capita real GDP if real GDP grows at a
constant rate of 4.5 percent and the annual rate of population growth goes from 3 percent to 3.5
percent?
A) The annual rate of growth of per capita real GDP will increase from 7.5 percent to 8
percent.
B) The annual rate of growth of per capita real GDP will increase from -1.5 percent to -1
percent.
C) The annual rate of growth of per capita real GDP will remain unchanged.
D) The annual rate of growth of per capita real GDP will decrease from 1.5 percent to 1
percent.
Answer: D
Diff: 2
21) Assume that in the economy real GDP grows at a constant rate. There has just been a decrease in
the rate of growth of the population. This implies that the
A) rate of growth of per capita real GDP will decrease.
B) rate of growth of per capita real GDP will increase.
C) rate of growth of capital accumulation will decrease.
D) rate of growth of capital accumulation will increase.
Answer: B
Diff: 1
22) What will happen to the annual rate of growth of per capita real GDP if the annual rate of
population growth increases and the annual rate of growth of real GDP goes down?
A) It will increase since an increase in population means an increase in labor that translates
into an increase in real GDP.
B) It will increase since the annual rate of growth of real GDP does not influence the growth
rate of per capita real GDP.
C) It will decrease since an increase in the growth rate of population and a decrease in the
growth rate of real GDP both work to decrease the growth of per capita real GDP.
D) The effect will depend upon whether the rate of population growth is greater than or less
than the rate of growth of real GDP.
Answer: C
Diff: 2
23) A higher population growth rate can potentially lead to a higher rate of growth in per capita
real GDP if
A) it leads to an increase in the amount of dead capital.
B) it leads to greater democracy in a nation.
C) young workers replace older workers.
D) there is a greater labor force participation rate.
Answer: D
Diff: 1
24) Which of the following equations is correct?

A) Rate of growth of per capita real GDP = rate of growth in real GDP - rate of growth of
population
B) Rate of growth of per capita real GDP = rate of growth in real GDP + rate of growth of
population
C) Rate of growth in real GDP = rate of growth of per capita real GDP - rate of growth of
population
D) Rate of growth in real GDP = rate of growth of per capita real GDP + rate of growth of
population
Answer: A
Diff: 1
25) The rights to own private property and to exchange goods with minimal government
interference is
A) capital freedom.
B) population freedom.
C) economic freedom.
D) political freedom.
Answer: C
Diff: 1
26) Economic freedom is

A) the right to vote in an election for a political leader.
B) the right to own private property and to exchange goods with minimal government
interference.
C) the amount of control that the government has in a market.
D) present as long as private individuals own businesses.
Answer: B
Diff: 1
27) Economic freedom is

A) important in leading to positive economic growth.
B) not an important factor in leading to positive economic growth.
C) a confusing concept since the more economic freedom residents in a country have the
lower the level of economic growth.
D) a concept in theory since no country has pure economic freedom and therefore cannot be
analyzed with respect to economic growth.
Answer: A
Diff: 1
28) It has been noted that a country that grants a considerable amount of economic freedom will
experience
A) positive rates of per capita income growth.
B) negative rates of per capita income growth.
C) low levels of political freedom.
D) dead capital.
Answer: A
Diff: 1
29) The right to openly support and democratically select national leaders is
A) capital freedom.
B) population freedom.
D) political freedom.
Answer: D
Diff: 1
30) Which statement is true about a comparison of economic freedom with political freedom?
A) Economic freedom cannot exist without political freedom.
B) Economic freedom leads to positive economic growth while political freedom leads to
negative economic growth.
C) Political freedom is more important than economic freedom when considering positive
economic growth.
D) Economic freedom is more important than political freedom when considering positive
economic growth.
Answer: D
Diff: 1
31) Which of the following statements is true about the relationship between high birthrates and
real GDP growth?
A) High birthrates in countries with little economic freedom will lead to higher labor force
participation rates that in turn lead to higher growth of real GDP.
B) High birthrates reduce per capita incomes, and a lack of economic freedom inhibits real
GDP growth.
C) There is no relationship between birthrates and real GDP growth.
D) The influence that birthrates have on real GDP growth is the same in countries whether or
not economic freedom exits.
Answer: B
Diff: 1
32) Population growth is more likely to contribute to economic growth when

A) economic freedom is present.
B) capital accumulation is limited.
C) technological progress is limited.
D) the labor force participation rate does not increase.
Answer: A
Diff: 2
33) A major contributor to a countrys real rate of economic growth is its real GDP growth relative
to its
A) inflation.
B) unemployment rate.
C) money growth.
Answer: D
Diff: 1
34) Economic freedom by its nature suggests

A) minimal government interference.
C) a lack of laws and regulations.
B) zero government.
D) economic anarchy.
Answer: A
Diff: 1
35) Political freedom seems to be ________ important to growth than economic freedom.
A) less
B) more
C) equally
D) critically
Answer: A
Diff: 2
36) Which of the following best represents economic growth?

A) an increase in nominal GDP
B) an increase in real GDP
C) an increase in the per capita nominal GDP
D) an increase in the per capita real GDP
Answer: D
Diff: 1
37) Economic growth is measured by

A) the annual percentage change in nominal GDP.
B) the annual percentage change in the unemployment rate.
C) the annual percentage change in per capita nominal GDP.
D) the annual percentage change in per capita real GDP.
Answer: D
Diff: 1
38) If the average annual growth rate in real GDP for a nation during the last decade was 4 percent
per year and the average annual population growth rate was 3 percent per year during the same
period, then the average annual growth rate of per capita GDP was
A) 1.00 percent.
B) -1.00 percent.
C) 0.75 percent.
D) 1.33 percent.
Answer: A
Diff: 1
39) The percentage change in per capita real GDP measures economic growth because it takes into
account all of the following variables EXCEPT
A) the percentage change in population.
B) the percentage change in the inflation rates.
C) the percentage change in nominal GDP.
D) the percentage change in the quality of life.
Answer: D
Diff: 2
40) Which of the following is a barrier to economic growth in many developing nations?
A) the shortage of labor
B) the lack of natural resources
C) the lack of economic freedom
D) the low level of restrictions in the labor market
Answer: C
Diff: 2
41) A reduction in the rate of population growth

A) always causes an increase in economic growth.
B) never causes an increase in economic growth.
C) may or may not cause an increase in economic growth.
D) will cause a reduction in economic growth if accompanied by an increase in the rate of
growth of real GDP.
Answer: C
Diff: 1
42) The right to private property and ability to exchange goods and services freely is known as
A) political freedom.
B) economic freedom.
C) constitutional freedom.
D) external freedom.
Answer: B
Diff: 1
43) The per capita real GDP is the

A) rate of growth in real GDP plus the population growth rate.
B) real GDP divided by the population.
C) rate of growth in real GDP times the population growth rate.
D) rate of growth in real GDP minus the population growth rate.
Answer: B
Diff: 1
44) Which of the following is the term used to describe the expansion of a countrys per capita real
GDP?
A) economic growth
B) technological change
C) change in the labor force
D) change in factor incomes
Answer: A
Diff: 1
45) The general set of rights to own private property and exchange goods, services, and financial
assets with minimal government interference is defined as
A) capitalism.
B) market socialism.
D) economic privilege.
Answer: C
Diff: 1
46) The right to openly support and to elect leaders in a democratic way is known as
A) political freedom.
B) economic freedom.
C) constitutional freedom.
D) external freedom.
Answer: A
Diff: 1
47) Laws that make it difficult to start a new business lead to a

A) high rate of economic growth.
B) low rate of economic growth.
C) more political freedom.
D) laissez-faire.
Answer: B
Diff: 1
48) If a country has a 4 percent annual growth in real GDP and a one percent growth in population,
its per capita growth of real GDP is
A) five percent.
B) four percent.
C) three percent.
D) 1/4 = 0.25 percent.
Answer: C
Diff: 2
49) In general, a country that adheres to the rule of law has

A) a higher level of real GDP per capita.
B) a lower level of real GDP per capita.
C) no relationship to the level of real GDP per capita.
D) an inverse relationship to the level of real GDP per capita.
Answer: A
Diff: 2
50) An increase in population growth in a country

A) always causes an increase in labor resources.
B) may not necessarily cause an increase in per capita real GDP.
C) may not cause an increase in labor resources in rich countries because employers will cut
down on the number of hours required of workers.
D) will always cause an increase in per capita real GDP.
Answer: B
Diff: 1
51) Explain the role of economic freedom in economic development.

Answer: Economic freedom is a measurement of the extent to which one can pursue economic
activity without interference from government. Economic freedom is based upon
personal choice, voluntary exchange, and the security of property rights. Economic
freedom stimulates economic growth when the markets are competitive. Greater
economic freedom encourages investment, which in turn, creates jobs and economic
growth.
Diff: 2
18.2 Capital Goods and Economic Growth

1) Dead capital is
A) machinery that fails to operate properly.
B) machinery that requires constant maintenance.
C) any capital resource that lacks clear title of ownership.
D) a capital resource that depreciates rapidly.
Answer: C
Diff: 1
Topic: 18.2 Capital Goods and Economic Growth
2) The significance of dead capital is that

A) it is difficult to allocate to its most efficient use.
B) its fixed cost is too high.
C) it is being removed from its most efficient use.
D) it replaces too many workers.
Answer: A
Diff: 2
3) Developing countries are damaged by dead capital because

A) it replaces too many workers, creating unemployment.
B) resulting inefficiencies greatly reduce the rate of return on investment.
C) it must be sold as scrap.
Answer: B
Diff: 2
4) Which of the following has contributed to developing countries poor economic performance?
A) Low population growth
B) Corruption
C) High capital investment
D) Foreign direct investment
Answer: B
Diff: 2
5) According to your text, is there any relationship between bureaucratic inefficiency and
economic growth?
A) Yesthe two are positively related.
B) Yes, but only in the most economically developed nations.
C) Yesthe two are inversely related.
D) No. Some nations economies thrive in spite of their inefficient governments while others
collapse under the weight of stifling bureaucracies.
Answer: C
Diff: 2
6) Which of the following represents dead capital?

A) capital that has worn out over time
C) capital that lacks clear title of ownership
B) capital that has become obsolete

Answer: C
Diff: 1
7) Dead capital refers to

A) a capital resource that lacks clear title ownership.
B) a capital resource whose owner is deceased.
C) a capital resource jointly owned by more than one person.
D) a capital resource that has no more useful life.
Answer: A
Diff: 1
8) There is a(n) ________ relationship between a nations rate of growth in real GDP per capita and
bureaucratic inefficiency.
A) direct
B) inverse
C) proportional
D) undefined
Answer: B
Diff: 1
9) Any capital resource that lacks clear title ownership is

A) the result of foreign direct investment.
B) dead capital.
C) capital destruction.
D) free capital.
Answer: B
Diff: 1
10) The role that dead capital plays in a countrys economic growth is that
A) growth increases because the dead capital is replaced with more technologically efficient
capital.
B) growth increases since the firms using the dead capital are using it for free.
C) growth neither increases nor is impaired by dead capital.
D) growth is impaired since the capital cannot be allocated to its most efficient use.
Answer: D
Diff: 1
11) The relationship of dead capital to inefficient production is

A) without clear ownership it is not possible to sell or transfer a resource so that it can be used
efficiently.
B) that outdated equipment will lead to inefficient production.
C) nonexistent since the capital is already dead.
D) that when the dead capital is replaced by more technologically advanced capital, economic
growth occurs.
Answer: A
Diff: 1
12) The following are impediments to economic growth EXCEPT

A) dead capital.
B) increased education.
C) lack of economic freedom.
D) bureaucratic inefficiency.
Answer: B
Diff: 1
13) When a country has a large amount of dead capital,

A) there is too much political freedom.
B) there is a large amount of economic growth.
C) large amounts of capital will be inefficiently employed.
D) a countrys exports increase.
Answer: C
Diff: 1
14) One of the most significant barriers to economic growth in the worlds poorest nations is
A) environmental issues.
B) political freedom.
C) dead capital.
D) U.S. government interference.
Answer: C
Diff: 1
15) The inefficiencies associated with dead capital can

A) lead to increased consumption.
B) reduce the rate of return on investment.
C) increase the amount of investment as businesses look for more technologically advanced
capital.
D) lead to more economic freedom as firms try to get rid of the inefficient capital.
Answer: B
Diff: 1
16) When government inefficiencies exist,

A) a country tends to grow at a slower rate.
B) a country tends to grow at a faster rate.
C) economic growth is not influenced.
D) dead capital is usually not a problem.
Answer: A
Diff: 1
17) When government inefficiencies exist and government officials can be bribed, then
A) dead capital will not exist.
B) the country will have positive economic growth.
C) a bribe will increase the cost of investing in capital.
D) property rights will be more secure since an official has been bribed to grant ownership to
the business.
Answer: C
Diff: 1
18) Which of the following is NOT true about dead capital?

A) Dead capital can lead to a situation where resources are not efficiently employed.
B) Dead capital can inhibit economic growth.
C) Companies will be less likely to want to invest when a country has a lot of dead capital.
D) Dead capital will lead to higher investment returns.
Answer: D
Diff: 1
19) Dead capital is

A) unlikely to have any productive use.
B) unlikely to be applied to its most efficient use.
C) useful only if employed in a labor-intensive production process.
D) useful only if employed in a capital-intensive production process.
Answer: B
Diff: 2
20) Which one of the following statements is true?

A) Dead capital is most frequently found in countries with well-defined property rights.
B) Dead capital is most frequently found in the most prosperous countries.
C) It is easy for dead capital resources to be allocated to their best possible use.
D) It is difficult for dead capital resources to be insured or traded.
Answer: D
Diff: 1
21) Dead capital is most likely to exist when

A) there are restrictions on imports.
B) there are restrictions on exports.
C) property rights are well-defined.
D) residents of a country face barriers to establishing legal ownership of resources.
Answer: D
Diff: 2
22) Extensive government restrictions on the use of capital are likely to

A) create dead capital.
B) enhance economic growth.
C) enhance economic freedom.
D) result in capital resources being devoted to their most efficient uses.
Answer: A
Diff: 1
23) Economic growth is enhanced when

A) special interest groups acquire the political power to restrict competition.
B) capital resources are devoted to their most efficient use.
C) there are barriers to establishing legal ownership of capital resources.
D) scarce resources are made available for all citizens free of charge.
Answer: B
Diff: 2
24) The problem of dead capital can be eliminated by

A) changing the structure of import tariffs.
B) increasing the labor force participation rate.
C) making it easier for people to establish legal ownership of productive capital.
D) restricting population growth.
Answer: C
Diff: 1
25) Countries with the highest degrees of governmental bureaucratic inefficiency index
A) typically are nations with the highest real GDP per capita.
B) typically are nations with the lowest real GDP per capita.
C) normally have the lowest measured levels of dead capital.
D) normally have the highest measured levels of economic freedom.
Answer: B
Diff: 1
26) Dead capital is

A) a capital resource that lacks a clear title of ownership.
B) a capital resource that is obsolete.
C) a capital resource that is used to produce non-competitive products.
D) a capital resource associated with the defense industry.
Answer: A
Diff: 1
27) When there is a building that is used for production, but no one has clear property rights to it,
A) resources are guided to their best use by the invisible hand.
B) this is known as dead capital and causes efficient production.
C) this is known as dead capital and causes no production.
D) this is known as dead capital and causes inefficient production.
Answer: D
Diff: 2
28) All of the following are major factors limiting economic growth in developing countries
EXCEPT
A) dead capital.
B) deregulation.
C) inefficient government regulation.
D) corruption.
Answer: B
Diff: 2
29) Countries with a high level of bureaucratic inefficiency tend to have low rates of real GDP
growth because
A) of complications that keep capital goods from flowing to their most efficient use.
B) of poor accounting practices when determining real GDP.
C) of poor management skill development in companies.
D) they facilitate capital goods development.
Answer: A
Diff: 2
30) The tolerance of bribe-taking by government officials

A) reduces economic uncertainty because all investors are aware of the practice.
B) reduces economic efficiency because rules governing property rights are not regularly
enforced.
C) reduces government expenditures because public employees can be paid less.
D) reduces the need for government to impose taxes on poor people.
Answer: B
Diff: 1
31) As productive capital goods are established in developing nations,

A) developed nations will become less prosperous.
B) they will be less likely to engage in international trade.
C) these countries will experience higher rates of economic growth.
D) portfolio investment will be replaced by loans from international aid agencies.
Answer: C
Diff: 2
32) All of the following are examples of institutions that promote real economic growth EXCEPT
A) an efficient judicial system used to enforce contracts.
B) patent laws that protect innovation.
C) complex rules associated with business licensing used to promote careful business growth.
D) strong law enforcement used to protect business interests.
Answer: C
Diff: 3
33) Explain the meaning of the term dead capital, and discuss why its existence retards economic
growth.
Answer: Dead capital means a capital resource without a clearly defined owner. Although dead
capital is often used in production the lack of clearly defined title of ownership typically
leads to inefficient use of the resource. The inefficient use of dead capital reduces the rate
of return on investments and thus the incentive to increase investment in capital goods
are reduced. Lower levels of capital investment diminish the rate of economic growth.
Diff: 2
34) Define what dead capital is and why economists are concerned with its existence.
Answer: Dead capital is when capital resources lack a clear title of ownership. Dead capital is a
concern because it can lead to a reduction in investment and economic growth in
developing nations. Dead capital will lead to a reduction in investment if the investors
can not count on having clear ownership of their capital. Dead capital will lead to a
reduction in economic growth because resources cannot be put to their most efficient use.
Diff: 1
35) How have government inefficiencies contributed to the creation of dead capital in the worlds
developing nations?
Answer: Governments in developing nations place obstacles in the way of entrepreneurs
interested in owning capital goods and directing them to profitable opportunities. Poorly
administered government regulations reduce investment in new capital goods. Because of
the poor administration investors are unwilling to risk having their investment turn into
dead capital.
Diff: 1
18.3 Private International Financial Flows as a Source of Global Growth

1) Foreign direct investment is defined as
A) the acquisition of more than 10 percent of the shares of ownership in a company in another
nation.
B) funds allocated into a foreign stock market that represent an ownership share of firms less
than 5 percent.
C) purchasing both capital equipment and government bonds abroad.
D) purchasing government bonds.
Answer: A
Diff: 2
Topic: 18.3 Private International Financial Flows as a Source of Global Growth
2) The acquisition of more than 10 percent of the shares of ownership in a company in another
nation is called
A) portfolio investment.
B) gross private international investment.
C) foreign direct investment.
D) majority investment.
Answer: C
Diff: 2
3) An example of foreign direct investment is the

A) domestic acquisition of less than 10 percent of a foreign company.
B) foreign purchase of more than 10 percent of stock in a domestic company.
C) purchase of livestock from abroad.
D) sale of insurance in a foreign nation.
Answer: B
Diff: 2
4) Most international investment finance today comes from

A) portfolio and foreign direct investment.
B) the sale of antiques.
C) government financing.
D) tax collections.
Answer: A
Diff: 2
5) Portfolio investment means buying

A) less than 10 percent ownership in a foreign company.
B) more than 50 percent ownership in a foreign company.
C) a life insurance policy when traveling abroad.
D) livestock.
Answer: A
Diff: 1
6) The three sources of private direct investment in developing nations are

A) bank loans, government loans, and Eurobond issues.
B) bank loans, portfolio investments, and foreign direct investments.
C) portfolio loans, IMF loans, and government loans.
D) foreign direct investment, government loans, and Eurobond issues.
Answer: B
Diff: 1
7) Which of the following is NOT one of the three primary sources of private investment funds
flowing into developing nations?
A) Bank loans
B) Foreign direct investment
C) World Bank and IMF loans
D) Portfolio investment
Answer: C
Diff: 1
8) The primary motivation for private foreign investment in developing nations is

A) to improve the standard of living for workers.
B) to do research in countries with fewer social regulations.
C) to eradicate poverty.
D) the potential for high rates of return.
Answer: D
Diff: 1
9) The World Bank has extended a loan to Country X to build a new toll road and counts on the
repayment of the loan from the collected tolls. After the funds have been transferred to the
country, the government decides to spend the money to build a new presidential palace. This is
an example of
A) hostile selection.
B) adverse selection.
C) moral hazard.
D) government risk.
Answer: C
Diff: 2
10) An international financial crisis is most often caused by

A) a nations central bank lowering domestic interest rates.
B) a government refusing to pay its dues to the United Nations.
C) foreign investments and loans being withdrawn from a nation.
D) a drop in the value of the U.S. dollar.
Answer: C
Diff: 1
11) Which of the following is NOT a method for promoting global economic growth?
A) Reliance on private markets to direct capital goods toward their best use.
B) Count on the worlds governments to develop policies that promote economic growth in
developing nations.
C) Encourage population growth so that developing nations labor supply increases.
D) Market based approach.
Answer: C
Diff: 1
12) All of the following are sources of funding for capital goods in developing countries EXCEPT
A) loans from banks.
B) foreign direct investment.
C) taxation.
D) portfolio investment.
Answer: C
Diff: 1
13) Portfolio investment is defined as

A) the purchase of less than 40 percent of the shares of ownership in a company in another
country.
B) the acquisition of more than 40 percent of the shares of ownership in a company in another
country.
C) the diversification of purchasing shares in many companies in one country so that risk is
kept to a minimum.
Answer: D
Diff: 1
14) Foreign direct investment is

A) the purchase of less than 10 percent of the shares of ownership in a company in another
country.
B) the acquisition of more than 10 percent of the shares of ownership in a company in another
country.
C) the diversification of purchasing shares in many companies in one country so that risk is
kept to a minimum.
D) the diversification of purchasing shares in many companies in different countries so that
risk is kept to a minimum.
Answer: B
Diff: 1
15) The acquisition of more than 10 percent of the shares of ownership in a company in another
country is known as
A) net exports.
B) net national investment.
C) portfolio investment
Answer: D
Diff: 1
16) The purchase of less than 10 percent of the shares of ownership in a company in another country
is known as
A) a hostile takeover.
B) an ineffective method for encouraging economic growth.
Answer: D
Diff: 1
17) Why are international investors who have invested in developing nations favoring foreign
direct investment and portfolio investment over loans?
A) The process of making loans is usually more difficult for investors to do than foreign direct
and portfolio investment.
B) The interest rate charged on the loans is usually lower than what can be earned in the U.S.
C) It is illegal for banks to make loans to foreign firms.
D) Investors have an aversion to owning dead capital and want to make sure that the
resources they own do not become dead capital.
Answer: D
Diff: 1
18) When investment occurs in developing nations

A) investors hope to gain significant returns on their investment and residents gain higher
rates of economic growth.
B) higher rates of economic growth are usually not achieved.
C) significant levels of pollution usually occur.
D) government politicians usually benefit from the illegal payments made to secure the
investment.
Answer: A
Diff: 1
19) Adverse selection is a barrier to financing global growth because

A) firms sometimes have trouble determining whether they need funds or not.
B) if investors have trouble identifying high-risk firms they may be unwilling to lend funds
to creditworthy firms.
C) there is the possibility that the funds are used for riskier behavior than the lender agreed
to.
D) of the differences between financing using loans, portfolio investment and foreign direct
investment.
Answer: B
Diff: 1
20) Moral hazard is a barrier to financing global growth because

A) firms sometimes have trouble determining whether they need funds or not.
B) if investors have trouble identifying high-risk firms they may be unwilling to give money
to creditworthy firms.
C) there is the possibility that the funds are used for riskier behavior than the lender agreed
to.
D) of the differences between financing using loans, portfolio investment and foreign direct
investment.
Answer: C
Diff: 1
21) An international financial crisis is

A) when at least one developing country defaults on its loans.
B) when a major bank defaults.
C) when a world leader is deposed from office.
D) the rapid withdrawal of foreign investments and loans from a nation.
Answer: D
Diff: 1
22) A rapid withdrawal of foreign investments and loans from a nation is

A) dead capital.
B) an international financial crisis.
C) foreign direct capital.
Answer: B
Diff: 1
23) When an international financial crisis occurs

A) financial lenders protect their investments by pouring money into the ailing country.
B) investors sell off bonds and restrict loans as a mechanism to help the country recover.
C) financial flows can slow to a trickle, influencing economic growth.
D) there are no serious financial effects that last more than a few months.
Answer: C
Diff: 1
24) International investors are more likely to invest in countries

A) where it is relatively easier to establish property rights to capital goods.
B) where there is a significant amount of dead capital.
C) which have a high amount of government inefficiency.
D) where there are barriers to the ownership of capital goods.
Answer: A
Diff: 1
25) Foreign direct investment refers to

A) the acquisition of more than 10 percent of the shares of ownership in a company in another
nation.
B) the acquisition of less than 10 percent of the shares of ownership in a company in another
nation.
C) the granting of a loan to a company located in a foreign country.
D) a direct monetary grant to a foreign company or government.
Answer: A
Diff: 1
26) Foreign direct investment implies that the investor obtains more than a ________ share in a
foreign companys ownership.
A) 30 percent
B) 40 percent
C) 50 percent
Answer: D
Diff: 1
27) The purchase of less than 10 percent of the shares of ownership in a foreign company is referred
to as a
B) foreign direct investment.
C) foreign indirect investment.
D) negligible investment.
Answer: A
Diff: 1
28) Portfolio investment means the

A) purchase of less than 20 percent of the shares of ownership in a company in another
country.
B) purchase of less than 50 percent of the shares of ownership in a company in another
country.
C) purchase of less than 80 percent of the shares of ownership in a company in another
country.
D) purchase of less than 10 percent of the shares of ownership in a company in another
country.
Answer: D
Diff: 2
29) The acquisition of more than 10 percent of the outstanding shares in a company in another
country is
A) foreign direct investment.
B) foreign direct acquisition.
C) portfolio investment.
D) portfolio acquisition.
Answer: A
Diff: 1
30) For foreign direct investment to occur, the purchase has to be more than
A) 2 percent but less than 5 percent of shares in a business located abroad.
B) 5 percent but less than 10 percent of shares in a business located abroad.
C) 8 percent but less than 10 percent of shares in a business located abroad.
D) 10 percent of shares in a business located abroad.
Answer: D
Diff: 2
31) If you invest in a foreign company by buying 8 percent of its shares of stock, you have engaged
in
B) moral hazard.
D) adverse selection.
Answer: A
Diff: 2
32) If you invest in a foreign company by buying 28 percent of its shares of stock, you have engaged
in
B) moral hazard.
Answer: C
Diff: 2
33) Portfolio investment and foreign direct investment are methods through which
A) ownership in assets are acquired in countries other than ones home country.
B) U.S. residents invest funds in companies that export goods.
C) U.S. residents invest funds in companies that import goods.
D) short-term investments are converted to long-term ones.
Answer: A
Diff: 1
34) The possibility for recipients of funds in foreign countries to engage in riskier behavior after
receiving financing is called
A) inequitable financing.
B) moral hazard.
C) adverse selection.
D) asymmetric information.
Answer: B
Diff: 2
35) The adverse selection problem in international investment means

A) that those seeking funds for the riskiest projects are those most actively seeking the funds.
B) that the recipients of the funds may use the funds for other than the approved projects.
C) that government officials may demand higher than the usual amount of bribes.
D) those in the highest levels of government are the most dishonest.
Answer: A
Diff: 2
36) An example of the moral hazard problem in international investment would be that
A) those seeking funds for the riskiest projects are amongst those most actively seeking the
funds.
B) the recipients of the funds may use the funds for riskier projects than the approved project.
C) government officials may demand higher than the usual amount of bribes.
D) those seeking the funds are dishonest.
Answer: B
Diff: 2
37) The purchase of more than ten percent of the shares of a foreign company is known as a(n)
A) foreign direct investment.
B) International Monetary Fund (IMF) investment.
D) World Bank investment.
Answer: A
Diff: 1
38) Investors are often willing to take the risks associated with investing in capital goods in
developing nations because developing nations
A) always insure the investments.
B) insure a small return on investment.
C) get the International Monetary Fund (IMF) to back investments through a series of loan
guarantees.
D) have a large portion of the worlds unutilized or underutilized resources and hence profit
potential.
Answer: D
Diff: 2
39) When lenders are unable to get good information about the worthiness of a project the lender
has the problem of
A) adverse selection.
B) adverse hazard.
C) moral hazard.
D) moral selection.
Answer: A
Diff: 1
40) The potential for recipients of a loan to engage in riskier behavior after receiving the financing is
called
A) adverse selection.
B) moral hazard.
C) moral selection.
D) adverse hazard.
Answer: B
Diff: 1
41) If high level of corruption in a country deters foreign investment in worthy projects, this is
known as
B) moral hazard.
Answer: D
Diff: 2
42) When a foreign company engages in riskier behavior after it has received international
investment funds, it is known as
B) moral hazard.
Answer: B
Diff: 2
43) If there is a major problem in a country that leads to the rapid withdrawal of foreign investment,
this is known as
A) moral hazard.
B) adverse selection crisis.
C) portfolio investment crisis.
D) international financial crisis.
Answer: D
Diff: 2
44) Recently the largest form of international investment funds for developing countries has been
A) bank loans.
B) portfolio investments.
C) foreign direct investments.
D) World Bank loans.
Answer: B
Diff: 2
45) Two types of asymmetric information that create problems for international investment are
A) adverse hazard and moral selection.
B) adverse hazard and moral hazard.
C) adverse selection and moral hazard.
D) adverse selection and moral selection.
Answer: C
Diff: 1
46) The rapid withdrawal of foreign investment funds from a nation creates
A) an international financial crisis.
B) an international funding crisis.
C) an international fiscal crisis.
D) an international fiduciary crisis.
Answer: A
Diff: 2
47) Adverse selection and moral hazard problems arise when there is
A) complete information
B) asymmetric information.
C) too much information.
D) symmetric information.
Answer: B
Diff: 2
48) To the extent that there are concerns about moral hazard and adverse selection in a country,
A) economic growth will be hindered.
B) there will be more portfolio investment.
C) there will be more foreign direct investment.
D) it will be easier to arrange financing for new development projects.
Answer: A
Diff: 2
49) An international financial crisis can be precipitated when

A) the rate of money supply growth is not the same in all nations.
B) many international investors look at the behavior of a few large investors to determine
when funds should be withdrawn from a particular country.
C) newly-acquired political freedom in a country leads some interest groups to form a
coalition limiting competition.
D) there is an increase in portfolio investment.
Answer: B
Diff: 1
50) A country experiencing an international financial crisis will likely

A) see an increase in portfolio investment.
B) see an increase in foreign direct investment.
C) encounter difficulty in sustaining its economic growth rate.
D) be able to maintain growth and prosperity in its domestic economy, but its export sector
will suffer.
Answer: C
Diff: 2
51) All of the following are barriers to international investment EXCEPT

A) symmetric information.
B) adverse selection.
C) incomplete information.
D) moral hazard.
Answer: A
Diff: 2
52) The following are obstacles to international investment EXCEPT

A) population growth.
B) asymmetric information.
C) adverse selection.
D) moral hazard.
Answer: A
Diff: 1
53) Discuss the rationales for foreign financing of investment in developing actions and explain
how developing countries benefit from international capital investment.
Answer: The primary motivation for foreign investment in developing nations is the potential for
high rates of return on large amounts of untapped resources. Developing countries
benefit from international capital investment because they do not have the internal funds
to be able to support projects that will lead to economic growth.
Diff: 1
54) What are the sources of private investments in foreign nations?

Answer: The three sources of private investment funds are bank loans, portfolio investments and
foreign direct investment. Portfolio investment is a purchase of less than 10 percent of the
shares in a corporation in another country. Foreign direct investment is a purchase of
more than 10 percent of ownership share in a foreign corporation.
Diff: 1
18.4 International Institutions and Policies for Global Growth

1) Which of the following is true about the World Bank?
A) It is a multinational agency that specializes in development loans.
B) It is a U.S. agency that specializes in development loans.
C) It is a U.N. sponsored agency that specializes in development loans.
D) It is made up of all central banks in the world.
Answer: A
Diff: 2
Topic: 18.4 International Institutions and Policies for Global Growth
2) The multinational agency that specializes in making loans to developing nations in an effort to
promote long-term development and growth is the
A) International Monetary Fund.
B) World Trade Organization.
C) United Nations Development Program.
D) World Bank.
Answer: D
Diff: 2
3) Approximately what percentage of the World Banks loans go to developing nations in the East
Asia/Pacific and South Asia regions combined?
A) 10%
B) 40%
C) 70%
D) 100%
Answer: B
Diff: 2
4) The World Bank makes loans primarily to

A) nations without free markets, such as North Korea.
B) developing nations.
C) the United States.
D) highly developed nations.
Answer: B
Diff: 2
5) The multinational organization that aims to promote world economic growth by fostering
financial stability is the
A) International Monetary Fund.
B) World Trade Organization.
C) United Nations.
D) World Bank.
Answer: A
Diff: 2
6) A nations account with the IMF is called its

A) deposit surplus.
C) quota subscription.
B) current account.
D) capital account.
Answer: C
Diff: 2
7) The World Bank was formed in

A) 1930.
B) 1960.
C) 1945.
D) 1918.
Answer: C
Diff: 1
8) The World Bank is

A) made up of the central banks of the leading industrial nations of the world.
B) made up of five separate institutions.
C) the Bank of the United Nations.
D) the European Union.
Answer: B
Diff: 1
9) The International Monetary Fund (IMF) is an international organization designed to

A) promote world economic growth by means of greater financial stability.
B) promote world economic growth via loans to developed nations.
C) circulate a single currency worldwide.
D) act as the worlds central bank.
Answer: A
Diff: 2
10) The international unit of accounting used by the International Monetary Fund (IMF) is called
A) the Eurodollar.
B) the IMF dollar.
C) the quota subscription.
D) special drawing rights.
Answer: D
Diff: 1
11) The largest quota subscriber of the International Monetary Fund (IMF) is
A) Japan.
B) Germany.
C) the United States.
D) China.
Answer: C
Diff: 1
12) The International Monetary Fund (IMF) was created to achieve each of the following goals
EXCEPT
A) to supervise exchange-rate practices of member countries.
B) to help finance economic development in poor countries.
C) to encourage convertibility of member countries currencies.
D) to lend funds to countries having difficulties meeting their international payment
obligations.
Answer: B
Diff: 1
13) Which of the following statements about the International Monetary Fund (IMF) is TRUE?
A) The IMF was created to finance long-term economic development projects in poor
countries.
B) The IMF was created to reduce tariff barriers between nations.
C) The IMF functions as a central bank that conducts monetary policy for the world economy.
D) The IMF obtains funds from quota subscriptions charged to member countries.
Answer: D
Diff: 1
14) Each nations International Monetary Fund (IMF) quota subscription is based on
A) its national income.
B) its share in world trade.
C) its public debt.
D) its trade surplus.
Answer: A
Diff: 1
15) Which of the following is NOT a criticism that has been leveled at the World Bank?
A) Too many loans go to nations capable of privately financing their projects.
B) Since 1990, the World Bank has loaned mostly to African countries, to the detriment of
nations in other parts of the world.
C) Some countries receiving World Bank loans are net lenders of funds to other nations and
so should not be receiving World Bank funds.
D) Despite receiving loans from the World Bank, economic growth in many client nations has
been disappointing.
Answer: B
Diff: 2
16) The World Bank specializes in making loans to promote

A) short-term assistance when a nation experiences a financial crisis.
B) so-called stand-by arrangements and credits.
C) financial stability.
D) long-term development and growth.
Answer: D
Diff: 2
17) The World Bank

A) is a central bank like the Federal Reserve System.
B) is the bank that causes international financial crisis when the reserves are too high.
C) is a multinational agency that specializes in making loans to promote long-term
development and growth in developing countries.
D) is a multinational organization that aims to promote world economic growth through
more financial stability.
Answer: C
Diff: 1
18) Which of the following world regions has received the largest percentage of lending from the
World Bank since 1990?
A) Latin America/Caribbean
B) South Asia
C) Africa
D) Middle east
Answer: C
Diff: 1
19) The International Monetary Fund

A) is a central bank like the Federal Reserve System.
B) is the bank that causes international financial crisis when the reserves are too high.
C) is a multinational agency that specializes in making loans to promote long-term
development and growth in developing countries.
D) is a multinational organization that aims to promote world economic growth through
more financial stability.
Answer: D
Diff: 1
20) The largest International Monetary Fund quota subscription, denominated in Special Drawing
Rights, is held by
A) the United States.
B) Japan.
C) China.
D) Russia.
Answer: A
Diff: 1
21) A multinational agency that specializes solely in making loans to promote long-term
development and growth in developing countries is the
A) Federal Reserve System.
B) World Bank.
C) International Monetary Fund.
D) International World Fund.
Answer: B
Diff: 1
22) A multinational organization that aims to promote world economic growth through more
financial stability is the
A) Federal Reserve System.
B) World Bank.
C) International Monetary Fund.
D) International World Fund.
Answer: C
Diff: 1
23) The World Bank will primarily make

A) short-term loans for investment projects that are relatively safe.
B) short-term loans for investment projects which might not receive private financial
support.
C) long-term loans for investment projects that are relatively risky.
D) long-term in nature for investment projects which might not receive private financial
support.
Answer: D
Diff: 1
24) The international organization with the sole goal of promoting global antipoverty efforts is the
A) World Bank.
B) International Monetary Fund.
C) Board of Governors of the Federal Reserve System.
D) GAE.
Answer: A
Diff: 1
25) Which of the following are NOT part of the World Bank?
A) International Development Association
B) Federal Reserve Bank of New York
C) International Center for Settlement of Investment Disputes
D) Multinational Investment Guarantee Agency
Answer: B
Diff: 1
26) The primary source of funds for the World Bank is

A) quota subscriptions.
C) the worlds wealthiest countries.
B) private financial markets.

D) the New York Stock Exchange.
Answer: C
Diff: 1
27) A quota subscription is

A) the maximum amount of funds that can be drawn at the World Bank without a formal
proposal.
B) the maximum amount that a private investor can invest in foreign firms.
C) a nations account at the International Monetary Fund.
D) when an investor sets limits on the proportion of their portfolio that will contain foreign
investments.
Answer: C
Diff: 1
28) A nations account with the International Monetary Fund denominated in special drawing rights
is
A) the quota subscription.
B) the account at the World Bank.
D) the account at the Fed.
Answer: A
Diff: 1
29) The funds that nations have on account at the International Monetary Fund is measured in
A) U.S. dollars.
B) the currency of the nation that has deposited the funds.
C) a quota subscription.
D) an international unit of accounting called special drawing rights.
Answer: D
Diff: 1
30) To be a member of the Internal Monetary Fund a nation must deposit funds based on
A) its national income.
B) the amount of funds it wants to deposit.
C) the need to loan money to developing nations.
D) rules set up by the World Bank.
Answer: A
Diff: 1
31) Which of the following statements is true?

A) All nations that belong to the International Monetary Fund have equal voting power.
B) The voting power of a nation in the International Monetary Fund is determined by its
quota subscription.
C) The voting power of a nation in the International Monetary Fund is called special drawing
rights.
D) The voting procedure in the International Fund is determined by the World Bank.
Answer: B
Diff: 1
32) The amount of funds that a nation can withdraw from the International Monetary Fund
depends upon
A) its quota subscription.
B) whether it is a developing nation or a developed nation.
C) whether it is seeking a long-term or short-term loan.
D) the rules set up by the World Bank.
Answer: A
Diff: 1
33) The primary function of the International Monetary Fund is

A) to provide loans only to private firms in developing countries.
B) to make direct, irrevocable transfers of funds from wealthy nations to poor nations.
C) to lend solely on the basis of a nations relative poverty.
D) to make loans aimed at promoting global stability and hence growth.
Answer: D
Diff: 1
34) All the following would be a possible loan that the International Monetary Fund might make
EXCEPT
A) a loan to a private firm.
B) long-term loans to a nations government which support growth promoting projects.
C) short-term loans to a nations government.
D) long-term loans to countries which are having problems in repaying existing debts.
Answer: A
Diff: 1
35) Which of the following statements is true about the success of the World Bank?
A) The World Bank has been very successful in promoting economic growth because loans
have been primarily made to countries that have trouble attracting private funds.
B) The World Bank has not been successful because many loans have been made to countries
that can attract private funds.
C) The World Bank has been successful because it has focused on its primary function of
making loans to governments.
D) The World Bank has not been successful because it has focused on making loans to
governments where there has been a loss of confidence in a nations financial system.
Answer: B
Diff: 1
36) If the World Bank makes loans to nations that can attract private funds,
A) the increase in growth in that nation will spill over to other nations that are developing.
B) these loans will interfere in the private market for capital goods and can lead to inefficient
investment.
C) the World Banks loans will crowd out the private funds made to developing nations to
encourage economic growth.
D) the presence of the World Banks loans will lead to even more private funds being
attracted to that country.
Answer: B
Diff: 1
37) It is believed that in order to promote growth, a top priority of the World Bank and the
International Monetary Fund is to
A) promote the increase of dead capital.
B) make more loans.
C) focus on basic market foundations of guaranteeing property and contract rights.
D) join forces and merge into one unit.
Answer: C
Diff: 1
38) Because of the problems of adverse selection and moral hazard, it has been suggested that the
World Bank and International Monetary Fund
A) make loans to the riskiest nations so that private investors will not be tempted to take a
risk.
B) loan only to countries that have free elections.
C) not make loans to risky nations because there is a high demand for funds from safer
nations.
D) impose tougher preconditions on borrowers.
Answer: D
Diff: 1
39) The World Bank

A) determines the price level in each of its member nations.
B) determines the labor force participation rate in each of its member nations.
C) mediates contracts regarding minimum prices for various globally-traded commodities.
D) extends long-term loans for capital investment projects to developing nations.
Answer: D
Diff: 2
40) Where does the World Bank get its funds?

A) from selling internal reports to the public
B) from tariffs collected on goods traded internationally
C) from governments of the wealthiest nations and from private financial markets
D) from seizing dead capital in developing nations and selling it at auction
Answer: C
Diff: 1
41) The World Bank is

A) composed of five separate institutions.
B) the central bank of the U.S. government.
C) the official name of the International Monetary Fund.
D) the central bank of the United Nations.
Answer: A
Diff: 1
42) Special drawing rights are

A) the reserves held by members of the European Union to back their accounts with the
European Central Bank.
B) credit accounts held by individual stockholders with portfolio investments in other
countries.
C) international units of account held by the International Monetary Fund for member
countries.
D) the estimated level of oil reserves remaining in OPEC countries.
Answer: C
Diff: 2
43) How did the original focus of the IMF differ from that of the World Bank?
A) The IMF provided short-term loans and the World Bank provided long -term loans.
B) The IMF assisted wealthy nations and the World Bank assisted developing nations.
C) The IMF gave grants to developing countries and the World Bank made loans.
D) The IMF dealt in North and South America only, and the World Bank dealt with the rest of
the world.
Answer: A
Diff: 2
44) The official mission of the World Bank is to

A) fight global inflation.
B) advise member nations on the appropriate levels of taxation.
C) establish exchange rates between the currencies of member nations.
D) provide funding for needed development projects that would have difficulty attracting
private investment.
Answer: D
Diff: 1
45) Those who advocate a role for the World Bank in establishing systems of well -defined property
and contract rights in developing nations would argue that
A) such changes would eliminate the need for long-term capital funding.
B) such changes would eliminate the need for short-term loans.
C) such changes would make these economies more productive.
D) asymmetric information is currently not a problem in these countries.
Answer: C
Diff: 2
46) The World Bank was formed in

A) 1919.
B) 1945.
C) 1960.
D) 1980.
Answer: B
Diff: 2
47) The World Bank specializes in making loans to

A) industrialized nations.
C) developing nations.
B) communist nations.
D) African nations.
Answer: C
Diff: 2
48) Most of the loanable funds available to the World Bank to lend to developing nations come from
A) the sale of oil.
B) developing nations.
C) the worlds wealthiest nations.
D) the sale of international bonds that are issued by the World Bank.
Answer: C
Diff: 2
49) One of the major criticisms of the World Bank is that it lends funds
A) to impoverished nations.
B) to countries which could easily borrow funds from other sources.
C) to industrialized nations.
D) to terrorist groups not affiliated with any country.
Answer: B
Diff: 2
50) The World Bank primarily engages in

A) short-term lending aimed at helping developing nations repay debt accumulated in past
years.
B) short-term lending aimed at helping developing nations repay loans from the
International Monetary Fund.
C) long-term lending aimed at helping developing nations governments and central banks
keep exchange rates from varying.
D) long-term lending aimed at helping developing nations governments and businesses
make investments that will contribute to economic growth.
Answer: D
Diff: 1
51) The goal of the World Bank is to

A) supervise exchange rate stability.
B) supervise the activities of the central banks of member nations.
C) sell the government securities of member nations on the open market.
D) help finance economic development.
Answer: D
Diff: 1
52) The ________ specializes in making long-term loans for capital investment projects that do not
have private financial support.
A) International Monetary Fund
B) European Central Bank
C) World Bank
D) Federal Reserve Bank
Answer: C
Diff: 1
53) A multinational agency that specializes in making loans to a larger number of developing
nations to promote long-term development and growth is
A) the International Bank.
B) the World Bank.
C) the International Monetary Fund.
D) the World Monetary Fund.
Answer: B
Diff: 1
54) If the government of a developing country is having difficulty selling bonds to build an
irrigation system, it could go to the
A) World Bank.
B) Federal Reserve Bank.
C) United Nations International Bank.
D) International Monetary Organization.
Answer: A
Diff: 2
55) An international organization formed with the aim of promoting world economic growth
through financial stability is called
A) the World Bank.
B) the International Development Association.
C) the International Finance Corporation.
D) the International Monetary Fund (IMF).
Answer: D
Diff: 2
56) Which of the following countries has the largest quota subscription at the IMF?
A) Japan
B) Russia
C) United States
D) India
Answer: C
Diff: 2
57) The International Monetary Fund was created to achieve each of the following goals EXCEPT
A) lend funds to countries with international payment problems.
B) lend funds to large government infrastructure projects.
C) monitor and offer advice on the exchange rate policies of member nations.
D) encourage free convertibility of the currencies of member nations.
Answer: B
Diff: 1
58) When a nations currency suddenly loses value, the ________ may step in to buy the afflicted
currency.
A) World Bank
B) International Monetary Fund
C) Federal Reserve Bank
D) United Nations
Answer: B
Diff: 2
59) A nations account with the International Monetary Fund is measured in an international unit
known as
A) international reserves.
B) special drawing rights.
C) monetary rights.
D) monetary deposits.
Answer: B
Diff: 2
60) A nations account with the International Monetary Fund is known as

A) a quota subscription.
B) monetary deposits.
C) monetary rights.
D) international reserves.
Answer: A
Diff: 1
61) A multinational organization that aims to promote world economic growth through more
financial stability is
A) the World Monetary Fund.
B) the International Bank.
C) the International Monetary Fund.
D) the International Monetary Bank.
Answer: C
Diff: 1
62) The international unit of accounting used by the IMF is the

A) euro.
B) special financial right.
C) special drawing right.
D) dollar.
Answer: C
Diff: 1
63) Both the International Monetary Fund and the World Bank were established
A) at the end of World War I.
B) at the end of World War II.
C) in the 1960s.
D) in the 1970s.
Answer: B
Diff: 1
64) Voting power in the IMF is determined by

A) the population size of member states.
B) the quota subscription size.
C) the length of membership.
D) the size of the member nations trade surplus.
Answer: B
Diff: 1
65) Both the World Bank and the IMF typically

A) make loans for less than 5 years only.
B) impose stringent preconditions that the borrowers must meet.
C) charge lower than average loan rates to ensure repayment.
D) charge higher than average loan rates.
Answer: B
Diff: 2
66) The currency of the IMF is the

A) International Currency Unit.
C) IMF Dollar.
B) Special Drawing Right.

D) U.S. dollar.
Answer: B
Diff: 2
67) Each countrys IMF quota subscription is determined by

A) the relative size of its national income.
B) the size of its population.
C) the size of world trade.
D) how much a country wants to contribute.
Answer: A
Diff: 2
68) After the financial crisis in the 1990s many economists criticized the IMF and the World Bank.
Some suggestions for reform are to
A) create a board of directors made up of finance ministers for the IMF.
B) eliminate both the institutions.
C) increase private-sector lending by governments providing tax breaks to lenders.
D) all of the above
Answer: D
Diff: 1
69) When a nation joins the IMF, it deposits funds into an account. These funds have a value based
on a weighted average of
A) the euro, the British pound sterling, the Japanese yen, and the U.S. dollar.
B) the euro, the British pound sterling, the Chinese yuan, and the U.S. dollar.
C) the Russian ruble, the British pound sterling, the Japanese yen, and the U.S. dollar.
D) the Russian ruble, the British pound sterling, the Chinese yuan, and the U.S. dollar.
Answer: A
Diff: 3
70) Which organization functions as a lender of last resort for national governments?
A) The World Bank
B) The U.S. Treasury
C) The Federal Reserve Bank
D) The International Monetary Fund
Answer: D
Diff: 2
71) Which of the following is NOT a function of the International Monetary Fund?
A) serve as lender of last resort for national governments
B) administer an international foreign exchange system
C) establish the SDR system nations utilize to settle international payment obligations
D) establish and administer each nations fiscal and monetary policies
Answer: D
Diff: 2
72) What is the mission of the World Bank?

Answer: The World Bank, which was established after World War II, is charged with the mission
of providing long-term loans for specific capital investment projects. In the past thirty
years the bank is increasingly involved in financing projects that aim to reduce poverty.
Diff: 1
73) What is the mission of the International Monetary Fund (IMF)?

Answer: The IMF was established after World War II to help maintain international financial
stability. When nations join the IMF, they all must deposit funds called quota
subscriptions, measured in an accounting unit called special drawing rights. Quotas are
based on each nations national income. The IMF can lend these funds in an effort to solve
financial problems arising from fluctuations in trade, investor loss of confidence in a
nations financial system, or spillover effects from financial problems originating
elsewhere.
Diff: 1
74) Name the two international institutions that have been formed to attain higher rates of global
economic growth and briefly discuss what each of the agencies does.
Answer: There are two agencies, the World Bank and the International Monetary Fund. The World
Bank specializes in making long-term loans for capital investment projects in developing
countries that otherwise might not receive private financial support. The International
Monetary Fund promotes global economic growth by fostering financial stability in
developing countries.
Diff: 2
75) Discuss why the World Bank has been criticized for making loans to nations that can attract
private funds.
Answer: Loans given to nations that can attract private funds interfere with the private market for
capital goods. This can encourage inefficient investment in projects that should not be
undertaken.
Diff: 2
76) What are some of the criticisms that have been levied on the World Bank and the International
Monetary Fund concerning adverse selection and moral hazard?
Answer: The World Bank and International Monetary Fund usually place very loose conditions on
loans and this increases adverse selection problems. Some economists argue that the
private lenders and investors assume that the World Bank and International Monetary
Fund will back up nations and will therefore lower their standards and make loans to less
creditworthy nations. This contributes to international financial crises.
Diff: 2

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Contents

68) Usingtheabovetable,thefollowingistheoutputofatwo -producteconomy.Thepriceindexin

12) Whichofthefollowingisincluded indeterminingGrossDomesticProduct?

35) IfC=consumption,G=governmentexpenditures,andI= grossprivateinvestment

15) Ifdisposablepersonalincome(DPI)= $800andpersonalincometaxes= $80,thenwhatis

11) AssumethataGMcarsellsfor$20,000intheUnitedStatesandthattheexchangerateis$1 = 1.3

30) Agoodestimateoftheworldspopulationthatlivesonlessthananinflation -adjusted$1.5per

42) ItcanbearguedthatThomasMalthus AnEssayonthePrincipleofPopulationstatementthat

15) Ifanationsproductionpossibilitiescurveshiftsoutward,weshouldexpectitslong -run

20) Asthecapitalstockgrowsandtechnologyimproves,wewouldexpectthelong -runaggregate

59) Whatismeasuredontheverticalaxiswhenwedrawagraphoflong -runaggregatesupply?

62) Whatismeasuredonthehorizontalaxiswhenwedrawagraphofthelong -runaggregate

34) Anindividualholds$10,000inanon -interest-earningcheckingaccount,andtheoverallprice

27) Whentheaggregatedemandcurveshifts________thanthelong -runaggregatesupplyshifts

136) Classicaleconomistssuggestthatunemploymentisashort -livedphenomenonbecause

15) AccordingtoKeynes,onceasystemattainsaneconomy -wideequilibrium,

27) InthesimpleKeynesianportionoftheupwardslopingshort -runaggregatesupplycurve,

58) Refertotheabovefigure.WhichofthegraphsisconsistentwiththeKeynesianshort -run

10) Intheshortrun,realGDPcanincreasebeyondalevelconsistentwiththelong -rungrowthpath

11) ThereasonthatitispossiblefortheeconomyintheabovefiguretobeatE 2 ratherthanatE 1 is

12) Intheabovefigure,theeconomywouldmostlikelymovefromAD 1 toAD2 becauseof

17) Refertotheabovefigure.Whichpointorpointsrepresent(s)ashort -runequilibrium?

38) Intheshortrun,ifaggregatedemandshiftstotheleftwhilethepositionoftheshort -run

40) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whataretheshort-run

41) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whattypeofgapexistsand

42) Intheabovefigure,whatcouldcausetheshiftofaggregatedemandfromAD1 toAD2 ?

47) Considertheabovefigure.IftheaggregatedemandfellfromAD 1toAD2 ,ournationwouldbe

48) Considertheabovefigure.IftheaggregatedemandcurverosefromAD 1toAD3 ,ournation

49) Considertheabovefigure.IftheaggregatedemandwentfromAD 2toAD3 ,ournationwould

20) Refertotheabovefigure.SupposeweareatE andthedollarweakens.Whichaggregatesupply

36) Theexchangeratelastmonthwas$1= 3.2Swissfrancs.Thismonthitis$1=3.12Swissfrancs.

37) Theexchangeratelastmonthwas$1= 1.15euros.Thismonthitis$1=1.35euros.Wecansay

41) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,whichofthe

42) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,thentheeconomy

33) Ifsavingequals$200whenrealdisposableincomeequals$1,000,thebreak -evenincomeis

55) Ifdisposableincome=$200billionandtheAPS= 0.9,then

65) Ifthemarginalpropensitytosave(MPS)= 0.1,then

74) Thearithmeticvalueof(1- MPC)equals

83) WhatcanwesayaboutAPC+APSandMPC+ MPS?

168) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensityto

169) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensitytosave

173) Considertheabovefigure.AtincomelevelYd = $30,theAPCisequalto

174) Considertheabovefigure.AtincomelevelYd = $110,theAPSisequalto

23) Supposethatthereisnogovernmentandnointernationaltrade.WhenC +Iislessthanthelevel

35) Theabovefigureshowsaconsumptionfunctionanda45 -degreeline.Realconsumptionisa

11) Intheabovefigure,atanincomelevelofY 3 andplannedexpendituresof(C+ I)1 ,

12) Intheabovefigure,atanincomelevelofY 1 andplannedexpendituresof(C+I)1 ,thelevelof

16) ThefollowingwouldcauseanupwardshiftintheC+ I+ G+ XcurveEXCEPT

39) ExplainhowtheaggregatedemandcurveisrelatedtotheC+ I+ G+Xcurve.

52) Whichofthefollowingfiscalpolicyactionswoulddefinitelycausean increaseinthesizeofa

66) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD2 ,whatisthecurrent

67) Refertotheabovefigure.Supposetherelevantaggregatedemandcurveis AD2 .Ifthe

68) Refertotheabovefigure.Iftherelevantaggregatedemandcurvewas AD2 ,thegovernment

69) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD2 ,whatisthecurrent

70) Refertotheabovefigure.Supposetherelevantaggregatedemandcurveis AD2 .Ifthe

71) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD1 ,thentheeconomyis

79) Supposethegovernmentbelievestheeconomyisoperatingbeyondthefull -employmentreal

37) Expansionaryfiscalpolicyisalways100percenteffectivewhentheshort -runaggregatesupply

58) Accordingtothepermanentincomehypothesis,taxpayersreacttoaone -timetaxrebate

75) Refertotheabovefigure.SupposethattheeconomyinitiallyisoperatingalongAD 1 .Ifthe

76) Refertotheabovefigure.SupposethattheeconomystartsatAD1 .Ifthegovernmentreduces

77) Refertotheabovefigure.SupposethattheeconomystartsatAD1 .Ifthegovernmentreduces

22) Automaticstabilizersareso-named because