Deficits and debts

Question 1
The U.S. debt to GDP ratio in 2008 was approximately:
Choose one answer.
a. 5 percent.
b. 25 percent.
c. 75 percent. See the figure of debt to GDP ratio in the text.
d. 105 percent.
Question 2
In the long-run framework, deficits reduce:
Choose one answer.
a. investment.
b. government consumption. Deficits reduce investment over the long run because they
reduce savings but may be desirable in the short run if the economy falls below potential output.
c. taxes.
d. subsidies.
Question 3
Marks: 1
Deficits may be desirable in the short run if they:
Choose one answer.
a. help to stabilize the economy when the economy falls below potential output.
Deficits are desirable in the short run if the economy falls below potential output because deficits
increase aggregate demand, bringing the economy closer to potential output.
b. increase savings necessary for future investment and growth.
c. increase savings necessary for future consumption and demand.
d. help to stabilize the economy when the economy is above potential output.
Question 4
Marks: 1Debt needs to be judged relative to assets because:
Choose one answer.
a. private investment is always more productive than government investment.
b. all assets provide interest payments to pay the debt.
c. assets can increase the ability of a country to repay a debt. Assets lead to greater
productivity and greater income, making it easier to repay a debt.
d. assets are always depreciating.
Question 5
All of the following fiscal policies will contribute to increasing budget deficits except:
Choose one answer.
a. tax cuts.
b. increases in defense expenditures.
c. increases in Social Security payments to the elderly and disabled. Reducing aid to
farmers will reduce government outlays and in this way reduce the budget deficit.
d. cuts in aid to farmers.
Question 6
The Social Security trust fund:
Choose one answer.
a. converts an unfunded pension system into a funded pension system.
b. converts a funded pension system into an unfunded pension system. The Social Security
trust fund buys government bonds, helping to finance the budget deficit.
c. currently helps finance the budget deficit.
 d. currently contributes to the budget surplus.
Question 7
The budget deficit or surplus is:
Choose one answer.
a. easy to calculate since there is only one valid method for computing it.
b. hard to calculate even though there is only one valid method for computing it.
Computing the budget deficit or surplus is difficult because there is no obviously correct approach.
c. hard to calculate since economists disagree on how it should be computed.
d. easy to calculate since economists agree on how it should be computed.
Question 8
A pay-as-you-go pension system is viable as long as:
Choose one answer.
a. the ratio of workers to retirees does not become too high.
b. each generation pays its own way.
c. the relative sizes of different generations do not change too much. As long as the
number of members in each generation is balanced across generations, a pay-as-you-go system is
viable. Such a system becomes infeasible when the number of retirees grows too large relative to the
number of workers.
d. benefits paid out do not exceed revenues by too much.
Question 9
Paying interest on external government debt rather than on domestic debt produces:
Choose one answer.
a. a net reduction in domestic income.
b. a redistribution of income within the country.
c. a net increase in domestic income.
d. no change in the level or distribution of domestic income. The external debt is that debt
owed to foreigners. Thus, interest paid on that debt leaves the economy, reducing domestic income.
Question 10
A passive deficit is the portion of the deficit that exists when:
Choose one answer.
a. the economy is at potential income.
b. the economy is beneath potential income. The passive deficit represents that portion
of the deficit that exists because income is below its potential.
c. inflation is not fully anticipated.
d. inflation is fully anticipated.

Question 1
Bond holders:
Choose one answer.
a. lose when actual inflation equals expected inflation.
b. gain when actual inflation is more than was expected.
c. do not lose when the expected inflation built into the nominal interest rate is correct.
d do not lose when the expected inflation built into the nominal interest rate is lower than
actual inflation. Bond holders can avoid losing purchasing power by building inflation into
nominal interest rates, but they will be accurately compensated only if inflation expectations prove
right.
Incorrect
Marks for this submission: 0/1.
Question 2
Debt is measured relative to GDP because:
Choose one answer.
a. the ability of a country to pay off its debt depends on its productive capacity. Increases in a
nation's capacity, which mean increases in GDP, increase the government's tax base and therefore its
ability to pay off the debt.
b. the ability to produce output depends on the size of the nation's debt.
c. GDP is always used as a reference point in economics.
d. as long as this ratio remains high, the government will have no trouble repaying the debt.
Question 3
When the government runs a deficit, it will:
Choose one answer.
a. buy bonds to finance the deficit.
b. sell bonds to finance the deficit. Bond sales provide the funds the government needs to
cover the budget deficit.
c. reduce the money supply to finance the deficit.
d. raise taxes immediately.
Question 5
Marks: 1
If inflation is correctly anticipated, those who buy government bonds will:
Choose one answer.
a. suffer losses regardless of inflation because interest paid on government bonds is set by
Congress. If inflation is anticipated, nominal interest rates will be raised accordingly, forcing up
the nominal deficit to the point at which the real deficit is the same as it would have been if no inflation
had been anticipated.
b. not suffer losses because inflation does not affect the purchasing power.
c. suffer losses because they will be compensated by lower interest payments.
d. not suffer losses because they will be compensated by higher interest payments.
Question 8
The real deficit depends on the:
Choose one answer.
a. level of government expenditures and receipts only.
b. rate of inflation only.
c. nominal deficit, the rate of inflation, and the government debt. The real deficit is the
nominal deficit adjusted for inflation's effect on the existing debt.
d. rate of interest only.
3
As the interest rate rises, debt service:
Choose one answer.
a. decreases.
b. does not change, but debt increases.
c. increases. Debt service refers to the interest payments on a debt. These payments are the
product of the debt and the interest rate and therefore increase with the interest rate.
d. does not change and neither does the debt.
9
If an economy operates below potential income, the actual deficit is:
Choose one answer.
a. smaller than the structural deficit.
b. larger than the structural deficit. As the economy falls below potential income, the passive
deficit increases, causing the total deficit to exceed the structural deficit.
 c. the same as the structural deficit.
d. comparable to the structural deficit.
Developing economies:
Choose one answer.
a. generally allow their
citizens to buy and sell
foreign currency freely.
b. are generally Developing countries
committed to full normally restrict
exchange rate foreign currency
convertibility. transactions, and
hence do not have
fully convertible
currencies.
c. generally oppose full
exchange rate
convertibility but are
required by the IMF to
implement it anyway.
d. generally do not
have fully convertible
currencies.
Incorrect
Marks for this submission: 0/1.
Question
2
Marks: 1
When considering activist fiscal policy in developing countries, these governments:
Choose one answer.
a. usually have greater
flexibility in
determining
expenditures than
governments in
developed countries.
b. have about the
same degree of
flexibility in
determining
expenditures as
governments in
developed countries.
c. usually have less Governments in
flexibility in developing countries
determining often have little
 expenditures than flexibility in
governments in determining
developed countries. expenditures if they
wish to remain in
power.
d. do not have to worry
about their
expenditures because
they have no taxes
with which to finance
them.
Correct
Marks for this submission: 1/1.
Question
3
Marks: 1
Inadequate health and disease impede development for all of the following reasons
except:
Choose one answer.
a. they contribute to Improvements in
overpopulation. public health
contribute to
overpopulation, unlike
higher levels of
disease and illness.
b. they reduce the
ability of a person to
work.
c. they reduce the
ability of a person to
care for others.
d. developing
countries lack the
resources and
infrastructure to deal
with these problems.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
In comparison to most developed economies, developing countries:
Choose one answer.
a. offer greater
currency convertibility.
 b. offer about the Unlike developed
same degree of countries, developing
currency convertibility. countries restrict
foreign currency
transactions. This is
because governments
in these countries use
restrictions on
currency convertibility
in an effort to force
domestic residents to
keep their savings in
the domestic economy.
c. offer more restricted
currency convertibility.
d. sometimes offer
higher levels of
currency convertibility
and sometimes offer
lower levels.
Incorrect
Marks for this submission: 0/1.
Question
5
Marks: 1
Developing countries place:
Choose one answer.
a. greater emphasis on
both development and
growth than developed
countries.
b. greater emphasis on Achieving higher levels
development and less of output and
emphasis on growth institutional change
than developed receive greater weight
countries. for developing
countries because
unlike developed
countries, they are
poor and lack the
institutions necessary
for development.
c. greater emphasis on
growth and less
emphasis on
 development than
developed countries.
d. less emphasis on
both growth and
development than
developed countries.
Incorrect
Marks for this submission: 0/1.
Question
6
Marks: 1
Development refers to an increase in:
Choose one answer.
a. productive capacity Development occurs
with no change in when the underlying
output. institutions that
determine production
evolve over time,
causing the production
process to evolve as
well.
b. output with no
change in productive
capacity.
c. output brought
about by an increase
in inputs.
d. output brought
about by a change in
the production
function.
Incorrect
Marks for this submission: 0/1.
Question
7
Marks: 1
Roughly what percentage of the world's population lives in the developing countries?
Choose one answer.
a. 25 percent.
b. 50 percent.
c. 75 percent. Roughly 5 billion of the
world's 6.6 billion
people live in
developing countries.
d. 90 percent.
Correct
Marks for this submission: 1/1.
Question
8
Marks: 1
The difference in terms of economic goals between developing countries and
developed countries is that:
Choose one answer.
a. developing
countries focus
primarily on achieving
an equitable
distribution of income
while developed
countries focus on
higher economic
growth rates.
b. developing
countries focus
primarily on achieving
economic stability
while developed
countries focus on an
acceptable growth
rate.
c. developing countries Because the level of
focus primarily on poverty is so high in
meeting basic needs most developing
while developed countries, meeting
countries focus on basic needs is the
economic stability. overriding economic
goal. In developed
countries the main
economic goal is
macroeconomic
stability.
d. there are no
differences between
the economic goals of
developing and
developed countries.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
Infant mortality rates in developing countries:
Choose one answer.
a. are substantially Infant mortality rates in
higher than in developing countries
developed countries. are roughly 10 times
as great as in
developed countries.
b. are about the same
as in developed
countries.
c. are substantially
lower than in
developed countries.
d. cannot be computed
because the data are
not available.
Correct
Marks for this submission: 1/1.
Question
10
Marks: 1
In contrast to development, growth refers to an increase in:
Choose one answer.
a. productive capacity
with no change in
output.
b. output with no
change in productive
capacity.
c. output brought Growth occurs when
about by an increase the production function
in inputs. does not change but
the quantity of inputs
increases.
d. output brought
about by a change in
the production
function.
Correct
Marks for this submission: 1/1.
Marks: 1
The problem of political instability has been greatest in which continent or country?
Choose one answer.
a. South America.
 b. Asia.
c. Africa. Africa has been
characterized by civil
wars, famines, and
other events that have
created more political
turmoil than is
observed in the other
countries and regions
of the world.
d. Russia.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
In comparison to most developed economies, developing countries:
Choose one answer.
a. offer greater
currency convertibility.
b. offer about the
same degree of
currency convertibility.
c. offer more restricted Unlike developed
currency convertibility. countries, developing
countries restrict
foreign currency
transactions. This is
because governments
in these countries use
restrictions on
currency convertibility
in an effort to force
domestic residents to
keep their savings in
the domestic economy.
d. sometimes offer
higher levels of
currency convertibility
and sometimes offer
lower levels.
Correct
Marks for this submission: 1/1.
Question
3
Marks: 1
Infant mortality rates in developing countries:
Choose one answer.
a. are substantially Infant mortality rates in
higher than in developing countries
developed countries. are roughly 10 times
as great as in
developed countries.
b. are about the same
as in developed
countries.
c. are substantially
lower than in
developed countries.
d. cannot be computed
because the data are
not available.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
Annual per capita income in the developing countries is closest to:
Choose one answer.
a. $100
b. $500 See the figures cited in
the textbook.
c. $2,000
d. $6,000
Correct
Marks for this submission: 1/1.
Question
5
Marks: 1
Developing countries place:
Choose one answer.
a. greater emphasis on Achieving higher levels
both development and of output and
growth than developed institutional change
countries. receive greater weight
for developing
countries because
unlike developed
countries, they are
poor and lack the
 institutions necessary
for development.
b. greater emphasis on
development and less
emphasis on growth
than developed
countries.
c. greater emphasis on
growth and less
emphasis on
development than
developed countries.
d. less emphasis on
both growth and
development than
developed countries.
Correct
Marks for this submission: 1/1.
Question
6
Marks: 1
Roughly what percentage of the world's population lives in the developing countries?
Choose one answer.
a. 25 percent.
b. 50 percent.
c. 75 percent. Roughly 5 billion of the
world's 6.6 billion
people live in
developing countries.
d. 90 percent.
Correct
Marks for this submission: 1/1.
Question
7
Marks: 1
The purpose of the International Monetary Fund is to:
Choose one answer.
a. provide developing
countries with short-
term loans and
technical assistance.
b. buy and sell the The role of the IMF is
currencies of to advise developing
developing countries in countries and to lend
order to stabilize their them money in order
 value. to stabilize their
exchange rates.
c. determine exchange
rates for developing
countries.
d. determine monetary
and fiscal policy in
developing countries.
Incorrect
Marks for this submission: 0/1.
Question
8
Marks: 1
Political instability is an obstacle to development in:
Choose one answer.
a. market economies.
b. socialist economies.
c. both market and Without political
socialist economies. stability, the incentives
to undertake economic
activity are limited no
matter what the nature
of the economy is.
d. neither market nor
socialist economies.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
According to most economists, the development of markets is:
Choose one answer.
a. neither a necessary
nor a sufficient
condition for
development.
b. a necessary The presence of
condition for markets is seen as
development but not a essential by most
sufficient condition. economists, but
markets must also be
integrated into the
social and cultural
fabric of a society
before development
 can occur.
c. a sufficient condition
for development but
not a necessary
condition.
d. both a necessary
and a sufficient
condition for
development.
Correct
Marks for this submission: 1/1.
Question
10
Marks: 1
Central banks in most developing countries:
Choose one answer.
a. do not recognize the
link between money
creation and inflation.
b. recognize the link
between money
creation and inflation
but don't care about
inflation.
c. recognize the link
between money
creation and inflation
and exploit this link to
reduce their budget
deficit.
d. recognize the link Because the tax bases
between money of developing
creation and inflation economies tend to be
but often have no small and because the
other means of public will purchase
financing government only small quantities of
expenditures than government debt,
increasing the money developing countries
supply. often have little choice
but increasing the
money supply if they
want to finance their
expenditures.
Correct
Marks: 1
Inadequate health and disease impede development for all of the following reasons
except:
Choose one answer.
a. they contribute to Improvements in
overpopulation. public health
contribute to
overpopulation, unlike
higher levels of
disease and illness.
b. they reduce the
ability of a person to
work.
c. they reduce the
ability of a person to
care for others.
d. developing
countries lack the
resources and
infrastructure to deal
with these problems.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
The more rapidly the government creates money to finance its budget deficits, the:
Choose one answer.
a. greater the inflation The more money the
tax and the greater the government creates to
reduction in the real finance its budget
value of any assets deficits, the higher is
specified in nominal the inflation rate, and
terms. hence the higher is the
implicit tax on any
obligations specified in
nominal terms.
b. greater the inflation
tax and the smaller the
reduction in the real
value of any assets
specified in nominal
terms.
c. smaller the inflation
tax and the greater the
reduction in the real
 value of any assets
specified in nominal
terms.
d. smaller the inflation
tax and the smaller the
reduction in the real
value of any assets
specified in nominal
terms.
Correct
Marks for this submission: 1/1.
Question
3
Marks: 1
The problem of political instability has been greatest in which continent or country?
Choose one answer.
a. South America.
b. Asia.
c. Africa. Africa has been
characterized by civil
wars, famines, and
other events that have
created more political
turmoil than is
observed in the other
countries and regions
of the world.
d. Russia.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
Development refers to an increase in:
Choose one answer.
a. productive capacity
with no change in
output.
b. output with no
change in productive
capacity.
c. output brought
about by an increase
in inputs.
d. output brought Development occurs
 about by a change in when the underlying
the production institutions that
function. determine production
evolve over time,
causing the production
process to evolve as
well.
Correct
Marks for this submission: 1/1.
Question
5
Marks: 1
Roughly what percentage of the world's population lives in the developing countries?
Choose one answer.
a. 25 percent.
b. 50 percent.
c. 75 percent. Roughly 5 billion of the
world's 6.6 billion
people live in
developing countries.
d. 90 percent.
Correct
Marks for this submission: 1/1.
Question
6
Marks: 1
In comparison to most developed economies, developing countries:
Choose one answer.
a. offer greater
currency convertibility.
b. offer about the
same degree of
currency convertibility.
c. offer more restricted Unlike developed
currency convertibility. countries, developing
countries restrict
foreign currency
transactions. This is
because governments
in these countries use
restrictions on
currency convertibility
in an effort to force
domestic residents to
keep their savings in
 the domestic economy.
d. sometimes offer
higher levels of
currency convertibility
and sometimes offer
lower levels.
Correct
Marks for this submission: 1/1.
Question
7
Marks: 1
According to most economists, the development of markets is:
Choose one answer.
a. neither a necessary
nor a sufficient
condition for
development.
b. a necessary The presence of
condition for markets is seen as
development but not a essential by most
sufficient condition. economists, but
markets must also be
integrated into the
social and cultural
fabric of a society
before development
can occur.
c. a sufficient condition
for development but
not a necessary
condition.
d. both a necessary
and a sufficient
condition for
development.
Correct
Marks for this submission: 1/1.
Question
8
Marks: 1
Developing countries place:
Choose one answer.
a. greater emphasis on Achieving higher levels
both development and of output and
growth than developed institutional change
 countries. receive greater weight
for developing
countries because
unlike developed
countries, they are
poor and lack the
institutions necessary
for development.
b. greater emphasis on
development and less
emphasis on growth
than developed
countries.
c. greater emphasis on
growth and less
emphasis on
development than
developed countries.
d. less emphasis on
both growth and
development than
developed countries.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
Infant mortality rates in developing countries:
Choose one answer.
a. are substantially Infant mortality rates in
higher than in developing countries
developed countries. are roughly 10 times
as great as in
developed countries.
b. are about the same
as in developed
countries.
c. are substantially
lower than in
developed countries.
d. cannot be computed
because the data are
not available.
Correct
Marks for this submission: 1/1.
Question
10
Marks: 1
Political instability is an obstacle to development in:
Choose one answer.
a. market economies.
b. socialist economies.
c. both market and Without political
socialist economies. stability, the incentives
to undertake economic
activity are limited no
matter what the nature
of the economy is.
d. neither market nor
socialist economies.
Correct
Marks for this submission: 1/1.
According to the institutionalist theory of inflation:
Choose one answer.
a. money supply Institutional theories
increases are a argue that the
necessary link in the institutional structure
inflationary process, leads to inflation, and
but not the root cause. that increases in the
money supply are
necessary to make
sure the demand
exists to buy the goods
at the higher prices.
b. the money supply
should increase by
only the amount of real
economic growth.
c. people are often
fooled into thinking
that an increase in
nominal demand is
actually an increase in
real demand.
d. accelerating inflation
is inevitable whenever
government attempts
to reduce
unemployment below
the natural level.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
Refer to the graph below.

The relationship represented in the figure is called a:

Choose one answer.
a. labor supply curve. See the graphical
representation of a
short-run Phillips curve
in the text.
b. labor demand curve.
c. short-run Phillips
curve.
d. long-run Phillips
curve.
Incorrect
Marks for this submission: 0/1.
Question
3
Marks: 1
Outsourcing occurs when domestic firms hire foreign workers to perform tasks
previously performed by domestic workers. Domestic firms usually outsource jobs in
order to take advantage of less expensive foreign labor. According to the
insider/outsider model of inflation, the recent increases in outsourcing observed in the
U.S. should:
Choose one answer.
a. reduce inflationary According to the
pressures by insider/outsider model,
increasing labor insiders thwart
market competition. competition from
outsiders, and in this
way are able to earn
above-equilibrium
wages. These higher
wages in turn increase
inflation. Because
outsourcing reduces
the barriers that
protect insiders from
outsiders, they
 increase labor market
competition, reduce
above-equilibrium
wages, and reduce
inflationary pressures.
b. reduce inflationary
pressures by
decreasing labor
market competition.
c. increase inflationary
pressures by
increasing labor
market competition.
d. increase inflationary
pressures by
decreasing labor
market competition.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
Social Security payments have been adjusted for inflation annually since the late
1970s, yet it is sometimes argued that the true cost of living for retirees on Social
Security rises less than the cost of living adjustment used by the government. If this is
the case, retirees:
Choose one answer.
a. are hurt by inflation
even with the
government's inflation
adjustment.
b. are protected from
inflation by the
government's inflation
adjustment.
c. benefit from using If Social Security
the government's cost payments more than
of living adjustment keep pace with the
rather than a more true cost of living,
accurate cost of living retirees will be better
adjustment. off.
d. would be better off if
the government cost of
living adjustment more
accurately reflected
 the true cost of living
for retirees.
Correct
Marks for this submission: 1/1.
Question
5
Marks: 1

Refer to the graph above. Which of the graphs correctly depicts the short-run Phillips
curve?
Choose one answer.
a. A.
b. B. The short-run Phillips
curve shows an
inverse relationship
between
unemployment and
inflation.
c. C.
d. D.
Correct
Marks for this submission: 1/1.
Question
6
Marks: 1
If productivity growth is 5 percent and nominal wages increase at a rate of 6 percent,
then inflation will most likely be:
Choose one answer.
a. -11 percent.
b. -1 percent.
c. 1 percent. The inflation rate is
roughly equal to the
difference between the
rate of change in
nominal wages and
productivity growth.
d. 11 percent.
Correct
Marks for this submission: 1/1.
Question
7
Marks: 1
According to the institutional theory of inflation, real-world firms often meet workers'
demands for higher wages because:
Choose one answer.
a. the majority of Institutional theories of
American workers inflation emphasize the
belong to a labor fact that people are the
union. ultimate owners of
firms and that the labor
market is not
competitive. Thus,
firms are pushed into
raising wages to keep
employee morale high.
b. the labor market is
highly competitive.
c. the government
requires them to do so.
d. it helps maintain
morale and prevents
turnover of key
workers.
Incorrect
Marks for this submission: 0/1.
Question
8
Marks: 1
Suppose workers bargain for a new contract that gives them a 5 percent pay increase
over the next year. If they expected no inflation but inflation is in fact 2 percent,
inflation makes:
Choose one answer.
a. both workers and
firms worse off.
b. workers worse off Workers expected a
and firms better off. real pay increase of 5
percent and ended up
with a real increase of
only 3 percent. The
workers' loss is the
firms' gain.
c. workers better off
and firms worse off.
d. both workers and
firms better off.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
According to the institutionalist theory of inflation, once nominal wage and price levels
have risen, the two options available to government are to:
Choose one answer.
a. increase the money
supply and accept
inflation or leave the
money supply fixed
and cause
unemployment.
b. increase the money
supply and accept
unemployment or
leave the money
supply fixed and cause
inflation.
c. decrease the money According to the
supply and accept institutionalist theory of
inflation or increase inflation, if government
the money supply and does not increase the
cause unemployment. money supply, there
will not be enough
demand to buy up the
supply of goods and
unemployment will
result.
d. increase the money
supply and accept
both unemployment
and inflation or
decrease the money
supply and eliminate
both.
Incorrect
Marks for this submission: 0/1.
Question
10
Marks: 1
Velocity can be calculated as the ratio of:
Choose one answer.
a. nominal GDP to real Dividing nominal GDP
GNP. by the money supply
yields the average
number of times each
dollar is spent during a
 year, which is the
definition of velocity.
b. nominal GDP to the
money supply.
c. real GDP to the
price level.
d. the money supply to the price level.
Suppose inflation is expected to be 2 percent but it is actually 4 percent. The people
who gain from the difference between actual and expected inflation are most likely to
be the:
Choose one answer.
a. owners of firms and
lenders.
b. owners of firms and Since expected
borrowers. inflation is likely to be
incorporated into
interest rates and into
the worker's contracts,
and since inflation is
more than expected,
companies and
borrowers in this case
are the winners.
c. workers and
lenders.
d. workers and
borrowers.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
Outsourcing occurs when domestic firms hire foreign workers to perform tasks
previously performed by domestic workers. Domestic firms usually outsource jobs in
order to take advantage of less expensive foreign labor. According to the
insider/outsider model of inflation, the recent increases in outsourcing observed in the
U.S. should:
Choose one answer.
a. reduce inflationary According to the
pressures by insider/outsider model,
increasing labor insiders thwart
market competition. competition from
outsiders, and in this
way are able to earn
above-equilibrium
 wages. These higher
wages in turn increase
inflation. Because
outsourcing reduces
the barriers that
protect insiders from
outsiders, they
increase labor market
competition, reduce
above-equilibrium
wages, and reduce
inflationary pressures.
b. reduce inflationary
pressures by
decreasing labor
market competition.
c. increase inflationary
pressures by
increasing labor
market competition.
d. increase inflationary
pressures by
decreasing labor
market competition.
Correct
Marks for this submission: 1/1.
Question
3
Marks: 1
The short-run aggregate supply curve will shift up if:
Choose one answer.
a. productivity
increases.
b. wages decrease.
c. productivity is
increasing faster than
wages.
d. wages are When this is true,
increasing faster than inflation occurs,
productivity. causing the SAS curve
to shift up.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
The quantity theory of money:
Choose one answer.
a. does not explain
inflation in the real
world at all.
b. explains low Changes in the money
inflation rates well but supply do explain the
does not explain high high levels of inflation
inflation rates well. observed in many
developing and
transitional economies
but do not explain the
much lower rates of
inflation observed in
most developed
countries. See Figure
16-2 in the text.
c. explains high
inflation rates well but
does not explain low
inflation rates well.
d. provides a
comprehensive
explanation of inflation.
Incorrect
Marks for this submission: 0/1.
Question
5
Marks: 1

Refer to the graph above. Which of the graphs correctly depicts the short-run Phillips
curve?
Choose one answer.
a. A.
b. B. The short-run Phillips
curve shows an
inverse relationship
between
unemployment and
inflation.
c. C.
d. D.
Correct
Marks for this submission: 1/1.
Question
6
Marks: 1
The insider/outsider model is based upon:
Choose one answer.
a. the natural rate
hypothesis.
b. outsider's ability to The insider/outsider
have access to jobs. model depends upon a
division between
insiders and outsiders
that is maintained by
sociological and
institutional forces.
c. a highly competitive
labor market.
d. the presence of
strong sociological and
institutional barriers.
Incorrect
Marks for this submission: 0/1.
Question
7
Marks: 1
The velocity of money is:
Choose one answer.
a. the average number
of months a dollar is
held before being
spent.
b. the average number
of times each dollar is
spent each year.
c. constant. Velocity measures the
average number of
times a dollar is spent
during a year.
d. inversely related to
output.
Incorrect
Marks for this submission: 0/1.
Question
8
Marks: 1
According to the quantity theory of money, velocity:
Choose one answer.
a. varies substantially
with changes in the
rate of interest and the
expected rate of
inflation.
b. varies with changes
in the growth rate of
the money supply.
c. is fairly constant,
responding only to
changes in the
expected rate of
inflation.
d. is virtually constant, Quantity theorists
responding only to believe that velocity
changes in the depends only on the
underlying institutional nature of the
structure. institutional structure
that supports
transactions, which
changes very slowly
over time, keeping
velocity approximately
constant.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
Refer to the graph below.

The relationship represented in the figure is called a:

Choose one answer.
a. labor supply curve.
b. labor demand curve.
c. short-run Phillips See the graphical
curve. representation of a
short-run Phillips curve
in the text.
d. long-run Phillips
curve.
Correct
Marks for this submission: 1/1.
Question
10
Marks: 1
The quantity theory of money:
Choose one answer.
a. is no longer
relevant.
b. is relevant in some Changes in the money
cases but not others. supply do explain the
high levels of inflation
observed in many
developing and
transitional economies
but no longer explain
the much lower rates
of inflation observed in
most developed
countries.
c. has become
increasingly irrelevant.
d. is more relevant
today then ever
before.
Correct
Marks for this submission: 1/1.
Outsourcing occurs when domestic firms hire foreign workers to perform tasks
previously performed by domestic workers. Domestic firms usually outsource jobs in
order to take advantage of less expensive foreign labor. According to the
insider/outsider model of inflation, the recent increases in outsourcing observed in the
U.S. should:
Choose one answer.
a. reduce inflationary According to the
pressures by insider/outsider model,
increasing labor insiders thwart
market competition. competition from
outsiders, and in this
way are able to earn
above-equilibrium
wages. These higher
wages in turn increase
inflation. Because
outsourcing reduces
the barriers that
 protect insiders from
outsiders, they
increase labor market
competition, reduce
above-equilibrium
wages, and reduce
inflationary pressures.
b. reduce inflationary
pressures by
decreasing labor
market competition.
c. increase inflationary
pressures by
increasing labor
market competition.
d. increase inflationary
pressures by
decreasing labor
market competition.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
Inflation occurs when the price level:
Choose one answer.
a. rises and then falls.
b. changes.
c. increases one year Inflation is a
only. continuous increase in
the price level, not a
one-time increase.
d. increases
continuously.
Incorrect
Marks for this submission: 0/1.
Question
3
Marks: 1
The velocity of money is:
Choose one answer.
a. the average number
of months a dollar is
held before being
spent.
 b. the average number Velocity measures the
of times each dollar is average number of
spent each year. times a dollar is spent
during a year.
c. constant.
d. inversely related to
output.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
If inflation is 5 percent, then it is most likely that:
Choose one answer.
a. nominal wages are
growing at 5 percent.
b. productivity growth
is 5 percent.
c. productivity is The inflation rate is
growing faster than roughly equal to the
nominal wages. difference between the
rate of change in
nominal wages and
productivity growth. If
inflation is positive,
nominal wages must
be growing faster than
productivity.
d. nominal wages are
growing faster than
productivity.
Incorrect
Marks for this submission: 0/1.
Question
5
Marks: 1
The quantity theory of money:
Choose one answer.
a. does not explain
inflation in the real
world at all.
b. explains low
inflation rates well but
does not explain high
inflation rates well.
 c. explains high Changes in the money
inflation rates well but supply do explain the
does not explain low high levels of inflation
inflation rates well. observed in many
developing and
transitional economies
but do not explain the
much lower rates of
inflation observed in
most developed
countries. See Figure
16-2 in the text.
d. provides a
comprehensive
explanation of inflation.
Correct
Marks for this submission: 1/1.
Question
6
Marks: 1
According to the institutional theory of inflation, real-world firms often meet workers'
demands for higher wages because:
Choose one answer.
a. the majority of
American workers
belong to a labor
union.
b. the labor market is
highly competitive.
c. the government
requires them to do so.
d. it helps maintain Institutional theories of
morale and prevents inflation emphasize the
turnover of key fact that people are the
workers. ultimate owners of
firms and that the labor
market is not
competitive. Thus,
firms are pushed into
raising wages to keep
employee morale high.
Correct
Marks for this submission: 1/1.
Question
7
Marks: 1
According to the institutionalist theory of inflation, once nominal wage and price levels
have risen, the two options available to government are to:
Choose one answer.
a. increase the money According to the
supply and accept institutionalist theory of
inflation or leave the inflation, if government
money supply fixed does not increase the
and cause money supply, there
unemployment. will not be enough
demand to buy up the
supply of goods and
unemployment will
result.
b. increase the money
supply and accept
unemployment or
leave the money
supply fixed and cause
inflation.
c. decrease the money
supply and accept
inflation or increase
the money supply and
cause unemployment.
d. increase the money
supply and accept
both unemployment
and inflation or
decrease the money
supply and eliminate
both.
Correct
Marks for this submission: 1/1.
Question
8
Marks: 1
According to the quantity theory of money, velocity:
Choose one answer.
a. varies substantially
with changes in the
rate of interest and the
expected rate of
inflation.
b. varies with changes
 in the growth rate of
the money supply.
c. is fairly constant,
responding only to
changes in the
expected rate of
inflation.
d. is virtually constant, Quantity theorists
responding only to believe that velocity
changes in the depends only on the
underlying institutional nature of the
structure. institutional structure
that supports
transactions, which
changes very slowly
over time, keeping
velocity approximately
constant.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
Suppose workers bargain for a new contract that gives them a 5 percent pay increase
over the next year. If they expected no inflation but inflation is in fact 2 percent,
inflation makes:
Choose one answer.
a. both workers and
firms worse off.
b. workers worse off Workers expected a
and firms better off. real pay increase of 5
percent and ended up
with a real increase of
only 3 percent. The
workers' loss is the
firms' gain.
c. workers better off
and firms worse off.
d. both workers and
firms better off.
Correct
Marks for this submission: 1/1.
Question
10
Marks: 1
Social Security payments have been adjusted for inflation annually since the late
1970s, yet it is sometimes argued that the true cost of living for retirees on Social
Security rises less than the cost of living adjustment used by the government. If this is
the case, retirees:
Choose one answer.
a. are hurt by inflation
even with the
government's inflation
adjustment.
b. are protected from
inflation by the
government's inflation
adjustment.
c. benefit from using If Social Security
the government's cost payments more than
of living adjustment keep pace with the
rather than a more true cost of living,
accurate cost of living retirees will be better
adjustment. off.
d. would be better off if
the government cost of
living adjustment more
accurately reflected
the true cost of living
for retirees.
Correct
Marks for this submission: 1/1.
Velocity can be calculated as the ratio of:
Choose one answer.
a. nominal GDP to real
GNP.
b. nominal GDP to the Dividing nominal GDP
money supply. by the money supply
yields the average
number of times each
dollar is spent during a
year, which is the
definition of velocity.
c. real GDP to the
price level.
d. the money supply to
the price level.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
It is a rule of thumb that inflation equals the:
Choose one answer.
a. difference between
the change in nominal
wages and productivity
growth.
b. difference between
productivity growth
and the change in
nominal wages.
c. negative of Nominal wage growth
productivity growth. leads to higher costs
and increases inflation.
Productivity increases
reduce costs and
lower inflation. The
difference between the
two is approximately
equal to the inflation
rate.
d. change in nominal
wages.
Incorrect
Marks for this submission: 0/1.
Question
3
Marks: 1
Social Security payments have been adjusted for inflation annually since the late
1970s, yet it is sometimes argued that the true cost of living for retirees on Social
Security rises less than the cost of living adjustment used by the government. If this is
the case, retirees:
Choose one answer.
a. are hurt by inflation
even with the
government's inflation
adjustment.
b. are protected from
inflation by the
government's inflation
adjustment.
c. benefit from using If Social Security
the government's cost payments more than
of living adjustment keep pace with the
 rather than a more true cost of living,
accurate cost of living retirees will be better
adjustment. off.
d. would be better off if
the government cost of
living adjustment more
accurately reflected
the true cost of living
for retirees.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1

Refer to the graph above. Which of the graphs correctly depicts the short-run Phillips
curve?
Choose one answer.
a. A.
b. B. The short-run Phillips
curve shows an
inverse relationship
between
unemployment and
inflation.
c. C.
d. D.
Correct
Marks for this submission: 1/1.
Question
5
Marks: 1
Annual inflation in Zimbabwe was 32 percent in 1998, 383 percent in 2003, and
increased to more than 100,000 percent in 2009. What would a classical economist
who sees great merit in the quantity theory of money look for in trying to explain this
rise in inflation?
Choose one answer.
a. A poor distribution of The quantity theory
income. says that when you
see inflation, look for
excessive monetary
growth.
b. A very low rate of
unemployment.
 c. A rapid increase in
the quantity of money
in circulation.
d. Very low interest
rates.
Incorrect
Marks for this submission: 0/1.
Question
6
Marks: 1
Inflation occurs when the price level:
Choose one answer.
a. rises and then falls.
b. changes.
c. increases one year
only.
d. increases Inflation is a
continuously. continuous increase in
the price level, not a
one-time increase.
Correct
Marks for this submission: 1/1.
Question
7
Marks: 1
According to the insider/outsider model, those workers first to be fired during a
recession tend to be:
Choose one answer.
a. insiders.
b. outsiders. In the insider/outsider
model, outsiders are
the first to be fired.
c. union members.
d. owners.
Correct
Marks for this submission: 1/1.
Question
8
Marks: 1
According to the institutionalist theory of inflation:
Choose one answer.
a. money supply Institutional theories
increases are a argue that the
necessary link in the institutional structure
inflationary process, leads to inflation, and
 but not the root cause. that increases in the
money supply are
necessary to make
sure the demand
exists to buy the goods
at the higher prices.
b. the money supply
should increase by
only the amount of real
economic growth.
c. people are often
fooled into thinking
that an increase in
nominal demand is
actually an increase in
real demand.
d. accelerating inflation
is inevitable whenever
government attempts
to reduce
unemployment below
the natural level.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
Inflation hurts:
Choose one answer.
a. everyone.
b. those whose
incomes don't change.
c. those whose People on fixed
incomes can change. incomes are hurt by
inflation because their
incomes do not rise to
keep pace with
inflation.
d. no one.
Incorrect
Marks for this submission: 0/1.
Question
10
Marks: 1
The insider/outsider model is based upon:
Choose one answer.
a. the natural rate
hypothesis.
b. outsider's ability to The insider/outsider
have access to jobs. model depends upon a
division between
insiders and outsiders
that is maintained by
sociological and
institutional forces.
c. a highly competitive
labor market.
d. the presence of
strong sociological and
institutional barriers.
Incorrect
Marks for this submission: 0/1.
Suppose workers bargain for a new contract that gives them a 5 percent pay increase
over the next year. If they expected no inflation but inflation is in fact 2 percent,
inflation makes:
Choose one answer.
a. both workers and
firms worse off.
b. workers worse off Workers expected a
and firms better off. real pay increase of 5
percent and ended up
with a real increase of
only 3 percent. The
workers' loss is the
firms' gain.
c. workers better off
and firms worse off.
d. both workers and
firms better off.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
According to the quantity theory of money, velocity:
Choose one answer.
a. varies substantially
with changes in the
rate of interest and the
expected rate of
 inflation.
b. varies with changes
in the growth rate of
the money supply.
c. is fairly constant,
responding only to
changes in the
expected rate of
inflation.
d. is virtually constant, Quantity theorists
responding only to believe that velocity
changes in the depends only on the
underlying institutional nature of the
structure. institutional structure
that supports
transactions, which
changes very slowly
over time, keeping
velocity approximately
constant.
Correct
Marks for this submission: 1/1.
Question
3
Marks: 1
According to the institutionalist theory of inflation, once nominal wage and price levels
have risen, the two options available to government are to:
Choose one answer.
a. increase the money According to the
supply and accept institutionalist theory of
inflation or leave the inflation, if government
money supply fixed does not increase the
and cause money supply, there
unemployment. will not be enough
demand to buy up the
supply of goods and
unemployment will
result.
b. increase the money
supply and accept
unemployment or
leave the money
supply fixed and cause
inflation.
c. decrease the money
 supply and accept
inflation or increase
the money supply and
cause unemployment.
d. increase the money
supply and accept
both unemployment
and inflation or
decrease the money
supply and eliminate
both.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
Annual inflation in Zimbabwe was 32 percent in 1998, 383 percent in 2003, and
increased to more than 100,000 percent in 2009. What would a classical economist
who sees great merit in the quantity theory of money look for in trying to explain this
rise in inflation?
Choose one answer.
a. A poor distribution of
income.
b. A very low rate of
unemployment.
c. A rapid increase in The quantity theory
the quantity of money says that when you
in circulation. see inflation, look for
excessive monetary
growth.
d. Very low interest
rates.
Correct
Marks for this submission: 1/1.
Question
5
Marks: 1
The insider/outsider model is based upon:
Choose one answer.
a. the natural rate
hypothesis.
b. outsider's ability to
have access to jobs.
c. a highly competitive
labor market.
 d. the presence of The insider/outsider
strong sociological and model depends upon a
institutional barriers. division between
insiders and outsiders
that is maintained by
sociological and
institutional forces.
Correct
Marks for this submission: 1/1.
Question
6
Marks: 1
The velocity of money is:
Choose one answer.
a. the average number
of months a dollar is
held before being
spent.
b. the average number Velocity measures the
of times each dollar is average number of
spent each year. times a dollar is spent
during a year.
c. constant.
d. inversely related to
output.
Correct
Marks for this submission: 1/1.
Question
7
Marks: 1
Unexpected inflation hurts:
Choose one answer.
a. lenders. If inflation is
unexpected, lenders
will earn a lower return
on the funds than they
expected.
b. borrowers.
c. both lenders and
borrowers.
d. neither lenders nor
borrowers.
Correct
Marks for this submission: 1/1.
Question
8
Marks: 1
It is a rule of thumb that inflation equals the:
Choose one answer.
a. difference between Nominal wage growth
the change in nominal leads to higher costs
wages and productivity and increases inflation.
growth. Productivity increases
reduce costs and
lower inflation. The
difference between the
two is approximately
equal to the inflation
rate.
b. difference between
productivity growth
and the change in
nominal wages.
c. negative of
productivity growth.
d. change in nominal
wages.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
According to the institutional theory of inflation, real-world firms often meet workers'
demands for higher wages because:
Choose one answer.
a. the majority of
American workers
belong to a labor
union.
b. the labor market is
highly competitive.
c. the government
requires them to do so.
d. it helps maintain Institutional theories of
morale and prevents inflation emphasize the
turnover of key fact that people are the
workers. ultimate owners of
firms and that the labor
market is not
competitive. Thus,
 firms are pushed into
raising wages to keep
employee morale high.
Correct
Marks for this submission: 1/1.
Question
10
Marks: 1
Rational expectations, strictly speaking, are expectations based on:
Choose one answer.
a. the predictions of Although some
economic models. economists believe
many expectations are
rational, the technical
definition of rational
expectations is
expectations based on
economic results.
b. what has happened
in the past.
c. models of human
behavior.
d. the continuation of
past trends.
Correct
Marks for this submission: 1/1.
Government regulations that deal with financial crises tend to become less effective over time.
True

In 2007 when different kinds of mortgages defaulted at the same time we experienced a:
c. systemic risk.

In the 2008 financial crisis, the Fed was:

b. more aggressive with monetary policy than it was in the Depression.

Fiscal policy during the Great Depression:

d. was quite limited, because the government mainly focused on balancing the budget.

Derivatives are financial instruments:

c. whose value depends on the value of another financial instrument.

Suppose my financial adviser tells me to combine different financial assets, whose prices are not
expected to move together, in an effort to reduce risk. This process is known as:
c. diversification.

Suppose the people in my town hear a rumor that their local bank is in trouble and all rush to withdraw
money from the bank. This is referred to as:
d. a bank run.

The financial sector is of special concern to economists because:

b. it is like oil to a car.

The New Deal in the 1930s included:

c. almost no fiscal stimulus.
Refer to the graph above. How does the effective bubble demand curve differ from the standard
demand curve?
c. The bubble demand curve will be flatter and may be upward sloping.

If a firm or an industry is considered too big to fail, it is

c. wise to regulate it because of the moral hazard problem.

When the government does whatever it can to prevent an immediate collapse of financial markets, this
would fall under which of the stages?
b. Triage.

The government has bailed out homeowners who are in danger of foreclosure. However, future
homeowners may deduce that the government will again bail them out in the case of future economic
turmoil. The government inadvertently has created what is known as:
c. moral hazard.

Which of the following actions is best viewed as an element of the financial treatment stage of the
response to the crisis of 2008?
d. The tax cuts passed by the Congress early in the Obama administration.

Why are financial-sector crises scarier than collapses in other sectors of the economy?
d. If the financial sector fails, it can bring the whole economy down with it.

Why weren't economists worried as housing prices fell in 2007?

b. They felt that this was just a temporary phenomenon and that the housing market would soon pick
up.

In the 2008-2009 recession, the Congress was:

d. more aggressive with fiscal policy than it was in the Depression.

If housing prices are rising by 20% per year and you can borrow money at 5% per year, and you are
sure housing prices will continue to rise in the future, you would be wise to:
b. Buy as many houses as you can.

Which of the following actions is best viewed as an element of the financial treatment stage of the
response to the crisis of 2008?
d. The tax cuts passed by the Congress early in the Obama administration.

Derivatives are financial instruments:

c. whose value depends on the value of another financial instrument.

Why weren't people worried as mortgage security market conditions deteriorated in 2007?
c. People thought that they were covered for the risks of a downturn in the housing/financial markets.

Which of the following best describes how the economy recovered from the Great Depression?
d. Fiscal policy became extremely expansionary as the US geared up for WWII.
Expansionary monetary policy is always expected to increase:
c. nominal income.

Monetary policy is one of the two main macroeconomic tools governments use to control the aggregate
economy, the other being:
a. fiscal policy.

If nominal income increases by 4 percent and the price level increases by 3 percent, real income must:
b. increase by 1 percent.

Refer to the graph above. Monetary policy that shifts the AD curve from AD 0 to AD1 and moves the
economy from A to B:
b. increases both real and nominal output in the short run.

An effect of an expansionary monetary policy is to:

d. lower interest rates.
Refer to the graph above. Suppose the economy is initially at O but then the Fed adopts an
expansionary monetary policy. The immediate effect of this policy will be to move the economy to:
a. A.

In the AS/AD model, an expansionary monetary policy has the greatest effect on the price level when
it:
c. increases nominal income but not real income.

If the SAS curve is upward sloping but not vertical, monetary policy that affects nominal income but
not real income must result in the shift of:
a. both the AD and SAS curves.

If prices are inflexible, monetary policy:

b. affects output but not inflation.

Monetary policy directly affects:

c. the availability of credit.

If nominal income increases by 3 percent and real income increases by 4 percent, the price level must:
c. decrease by 1 percent.

Assuming an economy is initially at potential output, an expansionary monetary policy will:

a. not affect output in the long run.
Who determines U.S. monetary policy?
d. The Federal Reserve.

Which of the following is not directly affected by monetary policy?

d. The budget deficit.

Refer to the graph above. Monetary policy that shifts the AD curve from AD 0 to AD2 is
b. contractionary.
Monetary policy affects:
c. both inflation and output.

A monetary policy that reduces both real and nominal income:

b. must be contractionary.

An expansionary monetary policy that affects the price level but not real output must result in the shift
of:
a. both the AD and SAS curves.
Some economists believe that the financial sector does not channel all saving back into the spending
stream. Financial assets that do not re-enter the spending stream are called:
a. money.

When the interest rate rises, people are:

a. less likely to borrow, that is, sell a financial asset.

The risk that all loans will default at the same time is called:
a. systemic risk.

Which of the following is not one of the functions of money?

c. standard of economic well-being.

Every financial asset has a corresponding:

a. financial liability.

When money is used to set the value of goods such as cars, DVDs, and TVs, money is serving as a:
b. unit of account.

In a market economy, every real transaction has a corresponding:

a. financial transaction.

What is produced and exchanged in the real sector?

b. Goods and services.

When the interest rate rises, people are:

d. more likely to save, that is, purchase a financial asset.

Real assets are created by:

b. real economic activity, such as the construction of a house.

Which of the following statements best summarizes the relationship between debit cards and credit
cards?
c. Debit cards can be considered money but credit cards cannot.

The Federal Reserve Bank is the U.S. central bank:

a. whose liabilities serve as cash in the United States.

For every real transaction, there is a financial transaction that mirrors it.
True

Flows that do not enter the spending stream enter the financial sector in the form of:
a. saving.

In order to function as a medium of exchange, money must:

d. be generally accepted in exchange for goods and services.
The financial sector channels saving back into the spending stream.
True

One of the three functions of money is to serve as:

a. a financial asset.

If the financial sector causes more to flow into spending than is saved, most likely:
c. the economy will experience inflation.

The process of packaging a variety of loans together and slicing them up into new financial instruments
is called:
d. securitization.

Which of the following statements about the financial and real sectors is true?
d. For every real transaction there is a financial transaction.

Checking account balances are:

d. included in M1 and serve as a medium of exchange.

Credit cards:
a. reduce the value of holding money.

What is exchanged in the financial sector?

c. All financial assets.

Checking account deposits are classified as money because:

d. they can be readily used in the making of purchases and the payment of debts.

Why do banks package loans into securities?

c. To spread the risk of default and increase liquidity.

The interest rate is the price paid for the use of a:

d. financial asset.

A financial asset is liquid:

b. if it can be readily exchanged for another asset or good.

The U.S. dollar bills you sometimes have in your wallet are:
a. liabilities of the Federal Reserve.

The U.S. central bank is a financial institution that:

b. has the sole right to issue currency.

Credit cards:
a. reduce the value of holding money.
Savings deposits are not included in:
a. M1.

When you withdraw $1,000 from your bank account:

d. the bank's financial liabilities and assets fall by $1,000, and you have exchanged one financial asset
for another.

Which of the following are examples of financial assets that pay a long-term interest rate?
b. Mortgages and government bonds.

When you have $1,000 in a savings account at a bank:

b. the bank holds a financial liability of $1,000 and you hold a financial asset of $1,000.

Credit cards create:

a. financial liabilities for those who use them.
When money is held as an asset, it is serving as a:
d. store of wealth.
If potential output is unknown:
d. we cannot determine precisely how the short-run aggregate supply curve will shift.

If productivity increases by 5% but wages increase by 2%, then it is most likely that the price level
will:
b. fall by 3 percent.

The shapes of the curves in the AS/AD model are based:

d. on the relationship between the price level and total output.

Keynesian economists believe:

b. government can implement policy proposals that can positively impact the economy.

Laissez-faire economists believe:

c. most government policies would probably make things worse.

As prices fall, people become richer and buy more. This occurs as a result of:
d. the money wealth effect

The short-run aggregate supply is most likely to shift down (to the right) when actual output:
b. is less than potential output.

Keynes believed:
c. market forces pushing the economy to potential income were weak.

"Classical economist" is often used interchangeably with which term?

a. Laissez-faire economist.

Before the Great Depression the popular view of government was:

a. laissez-faire, and after the Depression, the popular view of government was activist.

The Classical economists argued that:

b. if unemployment occurs, it will cure itself because wages and prices will fall.

According to Keynes, the economy could become stuck at a low income level if:
a. declines in aggregate demand and aggregate supply reinforce one another.

Keynesian economists focus their analysis on:

b. the short run.
Refer to the graph above. In 1930, the United States passed the Smoot-Hawley Tariff Act, which raised
tariffs on imported goods at an average of 60 percent. Other countries retaliated with similar tariffs and
world output declined. The effect of the decline in foreign output on the U.S. AD curve can be shown
by a movement from:
c. A to D

A fall in the price level will:

a. increase the value of money in people's pockets.

An increase in production costs is most likely to shift the:

a. short-run aggregate supply curve up (to the left).

According to Keynes, the economy could become stuck at a low income level if:
a. declines in aggregate demand and aggregate supply reinforce one another.

When Classical economists of the 1930s looked at the Great Depression, they:
a. lacked a good explanation of why it was happening.

Aggregate demand management policies are designed most directly to:

c. control the aggregate level of spending in the economy.

The laissez-faire policy prescription to eliminate unemployment was to:

a. eliminate labor unions and government policies that hold real wages too high.
Which of the graphs correctly labels the axes of the AS/AD model?
d. D

Before the Great Depression the popular view of government was:

a. laissez-faire, and after the Depression, the popular view of government was activist.
A concern about long-term economic growth was important in economics:
a. from the time of Adam Smith and his Wealth of Nations.

New growth theory emphasizes the contribution of technology to growth more than Classical growth
theory.
True

Classical growth theory:

b. incorrectly predicted that per capita income levels would converge across countries.

An innovator, who creates new products and new ways to get business done, is referred to as:
c. an entrepreneur.

We can show economic growth in terms of the production possibility curve by:
c. shifting the production possibility curve outward.

Modern macroeconomics developed as an attempt to explain:

d. short-run business cycles.

The economist who stressed the importance of the entrepreneur in economic growth was:
d. Joseph Schumpeter.

Macroeconomics emerged as a separate field largely in response to:

d. John M. Keynes's explanation of depression.

Classical growth theory argued that economic growth was limited because of diminishing marginal
productivity.
True

Diminishing marginal productivity implies that a proportional increase in all inputs will produce a less
than proportional increase in output.
False

The convergence hypothesis says that countries with similar levels of per capita GDP develop similar
institutions.
False

Decreasing returns to scale exist when doubling all inputs less than doubles output.
True

The study of economic growth focuses on the factors that cause an:
b. economy's production possibility curve to shift out.

The production function in the figure below depicts:

b. only decreasing returns to scale.

The U.S. economy experienced the Great Depression in the:

c. 1930s.
GDP is the:
a. market value of an economy's production of final goods and services in a one year period.

Government expenditures for social security and unemployment insurance are, for GDP accounting
purposes, considered:
b. transfers, and are not included in government spending as part of GDP.

Aggregate accounting emerged from the work of two economists for which they received the Nobel
Prize. The two economists are:
a. Simon Kuznets and Richard Stone.

The total market value of all final goods and services produced in a country in a year is:
d. GDP.

Which of the following statements about aggregate accounting is false?

d. It provides the only way to measure social welfare.

GNP is the:
b. aggregate final output of the citizens and businesses of an economy in a one year period.

GDP is $7 trillion. If consumption is $3.5 trillion, investment is $1.4 trillion, and government purchases
are $2.1 trillion, then:
a. exports are equal to imports.

Per capita gross domestic product (GDP) in the United States is roughly:
b. $45,000

In 2008, U.S. GNP exceeded U.S. GDP by approximately $133 billion. This implies that:
a. U.S. factor income earned abroad exceeded foreign factor income by $133 billion.

Net foreign factor income is:

c. the difference between the income earned abroad by domestic factors and the income earned
domestically by foreign factors.

If you decide not to spend $1,000 you earned at your summer job but instead intend to buy shares in a
mutual fund, in terms of aggregate economic accounting you would be:
b. saving.

The largest expenditure component of GDP is:

a. consumption.

The value of intermediate goods is:

d. excluded from both GDP and GNP.

What is the economy's gross domestic product?

a. $10.5 trillion

A change in business inventories is:

b. counted in GDP as investment.

Which of the following statements about aggregate accounting is false?

d. It provides the only way to measure social welfare.

Aggregate accounting emerged from the work of two economists for which they received the Nobel
Prize. The two economists are:
a. Simon Kuznets and Richard Stone.
The region of the world that has achieved the lowest secular trend per capita growth rate since 1820 is:
c. Africa.

Real gross domestic product is best defined as:

c. the market value of all final goods and services produced in an economy, stated in the prices of a
given year.

Per capita real output is best defined as the market value of all final goods and services produced in an
economy in:
d. the prices of a given year divided by the population.

The secular trend growth rate is the:

c. average rate of growth in real output over many years.

U.S. economic growth in output since about 1890 has averaged:

c. 2.5 to 3.5 percent.

If a country's real GDP and population are, respectively, $500 billion and 200 million, then its per
capita real output is:
c. $2,500.

Policies that affect aggregate expenditures are primarily relevant to the:

a. short-run business cycle framework.

Per capita real output would be certain to increase if:

c. real GDP increases and population decreases.

Suppose a country's real GDP is $440 billion and its population is 100 million. Now suppose that both
its price level and its population increase by 10 percent. As a result of these changes, its new level of
per capita real GDP will be:
c. $4,000.

Use the following table to calculate the unemployment rate. Select the correct answer from the options
below.

b. 4 percent.

If per capita real output is growing faster than real GDP, it must be the case that:
d. total population is decreasing.

Between 1990 and 2001, both Finland and France had average annual population growth rates of 0.4
percent. The growth rate of real GDP in the two countries in the same time period, however, was 3
percent in Finland and 1.8 percent in France. From this we can conclude that France's per capita GDP:
d. grew less rapidly than Finland's per capita GDP.

Per capita real output is a:

a. better measure of personal material consumption than real GDP.

Per capita real output is best defined as the market value of all final goods and services produced in an
economy in:
d. the prices of a given year divided by the population.

Policies that affect work, capital accumulation, and technological change are primarily relevant to:
b. the long-run growth framework.

Policies that affect aggregate expenditures are primarily relevant to the:

a.short-run business cycle framework.

The secular trend growth rate is the:

c.average rate of growth in real output over many years.

The region of the world that has achieved the lowest secular trend per capita growth rate since 1820 is:
c. Africa.

Per capita real output would be certain to increase if:

c. real GDP increases and population decreases.

Marks: 1
Use the following table to calculate the unemployment rate. Select the correct answer from the options
below.
b. 4 percent.

U.S. economic growth in output since about 1890 has averaged:

c. 2.5 to 3.5 percent.

If a country's real GDP and population are, respectively, $500 billion and 200 million, then its per
capita real output is:
c. $2,500.

If per capita real output is growing faster than real GDP, it must be the case that:
d. total population is decreasing.

Between 1990 and 2001, both Finland and France had average annual population growth rates of 0.4
percent. The growth rate of real GDP in the two countries in the same time period, however, was 3
percent in Finland and 1.8 percent in France. From this we can conclude that France's per capita GDP:
d. grew less rapidly than Finland's per capita GDP.

Per capita real output is a:

c. better measure of personal material consumption than real GDP.
Marks: 1
Debt is measured relative to GDP because:
Choose one answer.
a. the ability of a Increases in a nation's
country to pay off its capacity, which mean
debt depends on its increases in GDP,
productive capacity. increase the
government's tax base
and therefore its ability
to pay off the debt.
b. the ability to
produce output
depends on the size of
the nation's debt.
c. GDP is always used
as a reference point in
economics.
d. as long as this ratio
remains high, the
government will have
no trouble repaying the
debt.
Correct
Marks for this submission: 1/1.
Question
2
Marks: 1
If inflation is correctly anticipated, those who buy government bonds will:
Choose one answer.
a. suffer losses
regardless of inflation
because interest paid
on government bonds
is set by Congress.
b. not suffer losses
because inflation does
not affect the
purchasing power.
c. suffer losses
because they will be
compensated by lower
interest payments.
d. not suffer losses If inflation is
because they will be anticipated, nominal
compensated by interest rates will be
higher interest raised accordingly,
payments. forcing up the nominal
deficit to the point at
which the real deficit is
the same as it would
have been if no
inflation had been
anticipated.
Correct
Marks for this submission: 1/1.
Question
3
Marks: 1
Deficits may be desirable in the short run if they:
Choose one answer.
a. help to stabilize the Deficits are desirable
economy when the in the short run if the
economy falls below economy falls below
potential output. potential output
because deficits
increase aggregate
demand, bringing the
 economy closer to
potential output.
b. increase savings
necessary for future
investment and
growth.
c. increase savings
necessary for future
consumption and
demand.
d. help to stabilize the
economy when the
economy is above
potential output.
Correct
Marks for this submission: 1/1.
Question
4
Marks: 1
All of the following fiscal policies will contribute to increasing budget deficits except:
Choose one answer.
a. tax cuts.
b. increases in
defense expenditures.
c. increases in Social
Security payments to
the elderly and
disabled.
d. cuts in aid to Reducing aid to
farmers. farmers will reduce
government outlays
and in this way reduce
the budget deficit.
Correct
Marks for this submission: 1/1.
Question
5
Marks: 1
Bond holders:
Choose one answer.
a. lose when actual
inflation equals
expected inflation.
b. gain when actual
inflation is more than
 was expected.
c. do not lose when Bond holders can
the expected inflation avoid losing
built into the nominal purchasing power by
interest rate is correct. building inflation into
nominal interest rates,
but they will be
accurately
compensated only if
inflation expectations
prove right.
d. do not lose when
the expected inflation
built into the nominal
interest rate is lower
than actual inflation.
Correct
Marks for this submission: 1/1.
Question
6
Marks: 1
Deficits and surpluses are best viewed as:
Choose one answer.
a. comprehensive
measures of
government's budget.
b. a summary measure Deficits and surpluses
of a nation's fiscal give the difference
policy. between a
government's tax
receipts and its outlays
and hence are a
summary measure of
the government's
budget.
c. a summary measure
of the financial health
of the economy.
d. a summary measure
of a nation's monetary
policy.
Correct
Marks for this submission: 1/1.
Question
7
Marks: 1
The U.S. debt to GDP ratio in 2008 was approximately:
Choose one answer.
a. 5 percent.
b. 25 percent.
c. 75 percent. See the figure of debt
to GDP ratio in the
text.
d. 105 percent.
Correct
Marks for this submission: 1/1.
Question
8
Marks: 1
The budget deficit or surplus is:
Choose one answer.
a. easy to calculate
since there is only one
valid method for
computing it.
b. hard to calculate
even though there is
only one valid method
for computing it.
c. hard to calculate Computing the budget
since economists deficit or surplus is
disagree on how it difficult because there
should be computed. is no obviously correct
approach.
d. easy to calculate
since economists
agree on how it should
be computed.
Correct
Marks for this submission: 1/1.
Question
9
Marks: 1
A passive deficit is the portion of the deficit that exists when:
Choose one answer.
a. the economy is at
potential income.
b. the economy is The passive deficit
beneath potential represents that portion
income. of the deficit that exists
 because income is
below its potential.
c. inflation is not fully
anticipated.
d. inflation is fully
anticipated.
Correct
Marks for this submission: 1/1.
Question
10
Marks: 1
Debt needs to be judged relative to assets because:
Choose one answer.
a. private investment is
always more
productive than
government
investment.
b. all assets provide
interest payments to
pay the debt.
c. assets can increase Assets lead to greater
the ability of a country productivity and
to repay a debt. greater income,
making it easier to
repay a debt.
d. assets are always
depreciating.
Correct
Marks for this submission: 1/1.