Friday, October 18, 2013

Review for Test II



Study Guide #2

(D) = Decrease
(I) = Increase

1) U.S Price Level changes and Xn

* PL Increases, Exports Decrease, Imports Increase, Xn Decreases
* PL Decreases, Exports Increase, Imports Decrease, Xn Increases

2) AD Shifters right (GDP up) ''Demand pull inflation''

*Consumer confidence (I)
*Government spending (I)
*Reserve requirement (D)
*Consumption (I)
*Money supply (I)
*Interest rates (D)
*Investment (I)
*Buy bonds
*Fed funds (D)
*Exports (I)
*Discount rate (D)
*Imports (D)
*People think there will be inflation

3) AD shifters left (GDP down) 

*Exports (D)
*Sell bonds
*Reserve requirement (I)
*Government spending (D)
*Consumption (D)
*Investment (D)
*Interest Rate (I)
*Money supply (D)
*Imports (I)
*Discount rate (I)
*Fed funds (I)
*Consumer confidence (D)
*People think there will be deflation (prices decreasing)


4) LRAS shifters ( how much we can produce)

*Technology
*Productivity
*Resources
*Education
*Population
*Investment
*Trade with other countries

5) AS shifters right (GDP up, PL down) [ driven by production cost]

*Business Taxes (D)
*Wages(D)
*Resource cost (D)
*Subsidies (I) (Paying a business to make something)
*Anticipated  deflation

6) AS shifters left (GDP down, PL up) ''stagflation''
''cost push inflation''
*Wages (I)
*Business Taxes (I)
*Anticipated inflation
*Resource cost (I)
*Subsidies (D)

Tuesday, October 8, 2013

Macro Practice Test



AP MACRO MIDTERM #2 PART 1 FORM B

1.        Which of the following would theoretically DECREASE the money supply?
a)        An open market sale of Treasury bonds
b)       An increase in the required reserve ratio
c)        A decrease in the discount rate
d)       Both a and b
e)        Both a and c


2.        How much is the multiplier if the required reserve ratio is 20%?
a)        4
b)       5
c)        8
d)       20

3.        Which of the following would theoretically decrease the money supply?
a)        An open market sale of treasury bonds by the Fed.
b)       A decrease in the required reserve ratio.
c)        An increase in the discount rate.
d)       Both a and b.
e)        Both a and c.

4.        Suppose $200 is deposited in Key Bank. The required reserve ratio is 20%. What is the amount of total money created (potential deposit creation)?
a)        $2,000
b)       $1,800
c)        $200
d)       $800

5.        Which of the following shifts will cause lower rates of both unemployment and inflation?
a)        An increase in SRAS (AS).
b)       A decrease in SRAS (AS).
c)        An increase in aggregate demand.
d)       A decrease in aggregate demand.

6.        The components of GDP (aggregate expenditure) include:
a)        Consumption, taxes, and savings.
b)       Consumption, investment, net imports, government expenditure.
c)        Consumption, investment, government expenditures and net exports.
d)       Consumption, investment, disposable income.


7.        Which of the following would be caused by less government spending when the economic equilibrium lies on the Long Run Aggregate Supply Curve?
a)        An inflationary gap.
b)       Decreasing unemployment.
c)        A decrease in output.
d)       An inflationary gap.
e)        An increase in prices.












8.        Which of the following would be likely to increase OUTPUT?
I.                     A decrease in productivity.
II.                   An increase in consumer spending.
III.                 A decrease in interest rates.
a)        I only
b)       II only
c)        III only
d)       I and II only
e)        II and III only

9.        What would be most effective in increasing AD?
a)        The Federal Reserve Sells Bonds.
b)       The Federal Reserve Buys Bonds.
c)        The Federal Reserve Lowers the Discount Rate and Buys Bonds.
d)       The Federal Reserve Raises the Discount Rate and Buys Bonds.

10.     A tax cut for businesses and a tax increase for consumers would
a)        Shift AD right and AS left
b)       Shift AD right and AS right
c)        Shift AD left and AS right
d)       Shift AD left and AS left
e)        Wouldn’t affect AS, it would only effect AD

11.     Andreas deposits $1,000 in the Bank of Leon. The reserve requirement is 20% . How much new money will be created by the deposit?
a)        $900
b)       $4,000
c)        $5,000
d)       $9,000
e)        $10,000

12.     Aggregate demand shifts to the right when:
a)        Government taxes are increased.
b)       Government transfers are decreased.
c)        Government purchases are decreased.
d)       All of the above.

13.     Under monetary policy, which of the following occur(s) when the Fed buys Treasury bonds?
a)        Interest rates rise
b)       Investment increases
c)        Money supply decreases
d)       AD Falls
e)        Consumption Decreases

14.     Which of the following would INCREASE the money supply?
a)        An open market sale of Treasury bonds.
b)       An decrease in the required reserve ratio.
c)        A decrease in the discount rate.
d)       Both a and b.
e)        Both b and c.

15.     A tax cut is less powerful than an increase in government purchases of the same size because:
a)        A portion of the tax cut is spent on exports.
b)       A portion of the tax cut is saved.
c)        Tax cuts do not increase disposable income.
d)       The tax-cut multiplier is equal to 1.

16.     Aggregate demand shifts to the right when:
a)        Government taxes are increased.
b)       Money supply is decreased.
c)        Government purchases are decreased.
d)       Interest rates go down due to an increase in the money supply.

17.     Suppose $1,000 is deposited in M&T Bank. The required reserve ratio is 20%. How much can the bank lend?
a)        $500.
b)       $600.
c)        $7000.
d)       $8000.



Sunday, October 6, 2013

TEST BANK LINKS

http://web.cjcu.edu.tw/~lcc/Courses/sg27.pdf

http://www.oneonta.edu/faculty/beckei/E110ReviewQuestions.html#top

AD AS QUESTIONS

1. Whenever the economy is in recession, we can expect:
a. investment to decrease
b. unemployment to decrease
c. incomes to increase
d. all of the above


2.
Which of the following occurs when the price level rises?
a. Consumers feel wealthier, which encourages them to spend more.
b. People need to hold more money, so interest rates rise, making firms borrow and invest less.
c. The value of the dollar rises on foreign exchange markets.
d. The government responds to the higher prices by reducing its purchases.


3.
Which of the following would cause the aggregate demand curve to shift to the right?
a. A new law that requires the government to cover the full cost of medicines for the elderly.
b. A wave of pessimism afflicts consumers.
c. Higher real interest rates.
d. The stock market crashes.


4.
The long run aggregate supply curve is ________, because in the long-run, nominal variables, such as the price level, ________ affect real variables, such as the production of goods and services in the economy.
a. vertical, do
b. vertical, do not
c. horizontal, do
d. horizontal, do not


5.
The long run aggregate supply will shift to the right whenever:
a. the price level increases.
b. factors of production (such as labor and capital) increase.
c. expenditures (such as consumption and net exports) increase.
d. the prices of inputs used to produce goods and services (such as wages and the price of oil) decrease.


6.
Which of the following would cause the short run aggregate supply curve to shift to the left, but have no effect over the long run aggregate supply?
a. The amount of factors of production (such as labor and capital) increase.
b. The amount of factors of production (such as labor and capital) decrease.
c. Prices of inputs (such as wages or oil prices) increase.
d. Prices of inputs (such as wages or oil prices) decrease.


7.
If an economy is in a state of long run equilibrium, all of the following will occur, EXCEPT:
a. all markets will be in equilibrium, including input markets.
b. there are no forces for further adjustment.
c. the economy will be producing its natural rate of output.
d. there will be no unemployment in the economy.


8.
Suppose the economy is in long run equilibrium. If aggregate demand increases, we can expect that in the short run output will ________, and in the long run output will ________.
a. decrease, increase
b. decrease, decrease
c. increase, increase
d. increase, return to the natural rate of output


9.
Suppose the economy is in long run equilibrium. If the stock market crashes in the short run, we can expect the price level to ________, and output to ________
a. decrease, increase
b. decrease, decrease
c. increase, increase
d. increase, decrease


10.
Suppose the economy is in long-run equilibrium.  If the price of oil increases substantially, in the short run, we can expect the price level to ________, and output to ________
a. decrease, increase
b. decrease, decrease
c. increase, increase
d. increase, decrease                                                                                                                                

MACRO TEST BANK

OPPORTUNITY COSTS

1. Which of the following sayings best reflects the concept of opportunity cost?
a. "You can't teach an old dog new tricks."
b. "Time is money."
c. "I have a baker's dozen."
d. "There's no business like show business."
2. If an economy is operating at a point inside the production possibilities curve,
a. its resources are being wasted.
b. the curve will begin to shift inward.
c. the curve will begin to shift outward.
d. This is a trick question because an economy cannot produce at a point inside the curve.
3. The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is
a. an expansion in capital investment resulting from a reallocation of resources away from consumption.
b. a larger output resulting from a more efficient use of resources.

c. greater equality of income resulting from an increase in the number of workers.
d. an increase in the profitability of business enterprises resulting from an increase in capital formation.
4. The price of an airline ticket from Denver to Washington, D.C., is $600. A bus ticket is $150. Traveling by plane takes six hours, compared with 36 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than
a. $6 per hour.
b. $8 per hour.
c. $10 per hour.
d. $15 per hour.
5. Does voluntary exchange create wealth (value)?
a. No, exchange does not expand output.
b. No, if one person gains, the other party must lose an equal amount.
c. Uncertain, it does when it results in the creation of additional goods and services; otherwise it does not.
d. Yes, trade generally permits the trading partners to gain more of what they value; this is why they agree to the terms of the exchange.

6. "Now that Blake paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects
a. the importance of secondary effects.
b. the fallacy of composition.
c. the law of comparative advantage.
d. behavior inconsistent with economizing.
7. Which of the following will most likely occur under a system of clearly defined and enforced private property rights?
a. Resource owners will fail to conserve vital resources, even if they expect their scarcity to increase.
b. Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned.
c. Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources.
d. Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.
8. Three basic decisions must be made by all economies. What are they?
a. how much will be produced; when it will be produced; how much it will cost
b. what the price of each good will be; who will produce each good; who will consume each good
c. what will be produced; how goods will be produced; for whom goods will be produced
d. how the opportunity cost principle will be applied; if and how the law of comparative advantage will be utilized; whether the production possibilities constraint will apply

9. If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who
a. have the highest opportunity cost.
b. have a comparative advantage in the productive activity.
c. can complete the productive activity most rapidly.
d. least enjoy performing the productive activity.
10. "The economic wealth of this country is primarily the result of the profit made by some individuals at the expense of others." The person who made this statement
a. has failed to comprehend that mutual gains result from specialization and exchange.
b. has failed to comprehend the fallacy of composition.
c. has failed to understand the significance of the production possibilities constraint.
d. has utilized the economic way of thinking; the statement is essentially correct.

SUPPLY AND DEMAND

1. Which of the following would most likely increase the demand for peanut butter?
a. a decrease in the price of bread, a good that is often used with peanut butter
b. a discovery that the average daily consumption of peanut butter decreases one's life span by 15 years
c. crop failures that raise the price of peanuts
d. a decrease in the price of all substitute protein products
2. Economic profit is best defined as
a. a company's net income as indicated by its accounting statement. b. the difference between the price of a product and the monetary cost of the raw materials used to produce it.
c. the difference between the revenue from the sale of a product and the opportunity cost of the resources used to produce it.
d. income paid by a business to its owners.
3. The long run is a time period of sufficient length to enable
a. producers to alter their use of fixed capital (the size of their plant and equipment).
b. producers to alter their output by utilizing labor and raw materials more intensively.
c. decision makers to adjust fully to a change in market conditions.
d. Both a and c are correct.
4. The number of persons wanting tickets to Super Bowl games is invariably greater than the number of tickets (and seats) available. This is evidence that the price of the tickets is
a. higher than the competitive equilibrium price.
b. equal to the competitive equilibrium price since the number of tickets bought equals the number sold.
c. lower than the competitive equilibrium price.
d. higher than the competitive equilibrium price when the demand is inelastic but lower when the demand is elastic.
5. "A reduction in gasoline prices caused the demand to increase. The lower prices led to an increase in demand for large cars, causing their prices to rise." These statements
a. are essentially correct.
b. contain one error; the lower gasoline prices would cause a reduction in demand for large cars, not an increase.
c. contain one error; the lower gasoline prices would increase the quantity of gasoline demanded by consumers, not the demand.
d. contain two errors; the lower gasoline prices would cause the quantity of gasoline demanded (rather than demand for large cars) to increase, and the lower gasoline price would reduce (rather than increase) the demand for large cars.
6. A cold spell in Florida extensively reduced the orange crop, and, as a result, California oranges commanded a higher price. Which of the following statements best explains the situation?
a. The supply of Florida oranges fell, causing the supply of California oranges to increase as well as their price.
b. The supply of Florida oranges fell, causing the supply of California oranges to decrease and their price to increase.
c. The supply of Florida oranges fell, causing their price to increase and the demand for California oranges to increase.
d. The demand for Florida oranges was reduced by the freeze, causing an increase in the price of California oranges and a greater demand for them.
7. When a price floor is above the equilibrium price,
a. quantity demanded will exceed quantity supplied.
b. quantity supplied will exceed quantity demanded.
c. the market will be in equilibrium.
d. This is a trick question because price floors generally exist below the equilibrium price.
8. If the market price of a good is less than the opportunity cost of producing it,
a. the market price of the product will fall in the long run.
b. producers will increase supply in the long run.
c. resources will flow away from production of the good, causing supply to decline with the passage of time.
d. the situation will remain unchanged as long as supply and demand remain in balance.
9. The price of chicken increases as the result of higher beef prices. This indicates that
a. chicken and beef are substitutes.
b. chicken and beef are complements.
c. the market demand for beef is inelastic.
d. the market demand for chicken is elastic.
10. The invisible hand principle indicates that competitive markets can help promote the efficient use of resources
a. only if buyers and sellers really care, personally, about economic efficiency.
b. even when each market participant cares only about getting a "bigger slice of the pie" rather than about the overall efficiency of resource use.
c. even if business firms fail to produce goods efficiently.
d. if, and only if, businesses recognize their social obligation to keep costs low and use resources wisely.

ADDITIONAL QUESTIONS

1. "A reduction in gasoline prices caused the demand to increase. The lower prices led to an increase in demand for large cars, causing their price to rise." This statement
a. is essentially correct.
b. contains one error the lower gasoline prices would cause a reduction in demand for large cars, not an increase.
c. contains one error the lower gasoline prices would increase the quantity demanded by consumers, not the demand.
d. contains two errors the lower gasoline prices would cause the quantity demanded (rather than demand) to increase, and the lower gasoline price would reduce (rather than increase) the demand for large cars.

2. "If gasoline sales were taxed, the price of gasoline would rise. Consequently, the quantity demanded of gasoline would decline. As a result of the higher gasoline prices, the demand for fuel-efficient automobiles would increase." This statement is
a. essentially correct.
b. incorrect; the high gasoline prices would cause the demand for gasoline, not the quantity demanded, to fall.
c. incorrect; the statement confuses a change in demand with a shift in supply.
d. incorrect; demand and quantity demanded are confused for both gasoline and fuel-efficient cars.
3. "As the price of gasoline rose, consumers decreased their quantity demanded. In addition, the demand for compact cars increased, causing their price to rise." This statement
a. is essentially correct.
b. contains one error the quantity demanded, not the demand for compact cars, increased.
c. contains two errors demand and quantity demanded are confused twice.
d. contains one error demand, not quantity demanded, for gasoline decreased.
4. "If gasoline sales were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would decline. As a result of the higher gasoline prices, the demand for fuel-efficient automobiles would increase." This statement is
a. essentially correct.
b. incorrect; the high gasoline prices would cause the quantity demanded of gasoline, not the demand, to fall.
c. incorrect; the statement confuses a change in demand with a shift in supply.
d. incorrect; demand is confused with quantity demanded for both gasoline and fuel-efficient cars.
5. If the supply of apples decreases, which of the following will generally occur in a market setting?
a. Demand for apples will decrease.
b. The quantity demanded will increase.
c. The costs of apple producers will decrease.
d. The price of apples will increase.
6. If the supply of a good decreases, which of the following will generally occur in a market setting?
a. The price of the good will decrease.
b. Demand will decrease.
c. The quantity demanded will increase.
d. The quantity demanded will decrease.
7. "Lower fuel oil prices in 1986 led to a reduction in demand and lower prices of solar heating units. At the lower price, producers of solar heating units reduced the quantity supplied." This statement is
a. false; lower fuel oil prices would increase the demand for and price of solar heating units.
b. false; producers of solar units would expand production rather than reduce output if the price of the units fell.
c. false; if the demand for solar units fell, the supply of the units would decrease but not the quantity supplied.
d. essentially correct.
8. If the demand for a good increases, which of the following will generally occur in a market setting?
a. The price of the good will decrease.
b. The supply of the good will increase.
c. The quantity supplied will increase.
d. Producer profits will fall.
9. If the demand for a good decreases, which of the following will generally occur in a market setting?
a. The price of the good will increase.
b. The supply of the good will decrease.
c. The quantity supplied will decrease.
d. Producer profits will rise.
10. In a market economy, an increase in demand will generally cause the equilibrium
a. price to fall.
b. quantity supplied to increase.
c. quantity demanded to fall.
d. number of firms in the market to decline.
11. A decrease in demand will
a. reduce supply.
b. increase the quantity traded in the market.
c. cause higher prices, although quantity traded in the market will decline.
d. lead to a reduction in the quantity supplied.
 
FLOORS AND CEILINGS

1. If the United Auto Workers union can obtain a substantial wage increase for auto workers, the price of automobiles will rise. The rise can be attributed to
a. a shift to the right in the supply curve for automobiles.
b. a shift to the left in the supply curve for automobiles.
c. a shift to the right in the demand curve for automobiles.
d. a shift to the left in the demand curve for automobiles.
2. When a price floor is above the equilibrium price,
a. quantity demanded will exceed quantity supplied.
b. quantity supplied will exceed quantity demanded.
c. the market will be in equilibrium.
d. This is a trick question because price floors generally exist below the equilibrium price.
3. Rent control applies to about two-thirds of the private rental housing in New York City. Economic theory suggests that the below-equilibrium prices established by rent controls would
a. redistribute income from tenants to landlords.
b. promote a rapid increase in the future supply of housing.
c. result in poor service and quality deterioration of many rental units.
d. lead to a reduction in housing discrimination against minorities.
4. Which of the following is the most likely result of an increase in the minimum wage?
a. an increase in the employment of unskilled workers
b. a decrease in the unemployment rate of unskilled workers
c. an increase in the demand for unskilled workers
d. a decrease in the employment of unskilled workers

GDP

1. Which of the following would increase GDP?
a. Ford Motor Company begins to produce and sell cars in Japan.
b. Mercedes-Benz begins to produce and sell cars in Alabama.
c. An American investor buys 100 shares of Ford stock.
d. An American investor purchases 100 shares of Mercedes-Benz stock.
2. When the expenditure approach is used to measure GDP, the major components of GDP are
a. consumption, investment, indirect business taxes, and depreciation.
b. employee compensation, rents, interest, self-employment income, and corporate profits.
c. employee compensation, corporate profits, depreciation, and indirect business taxes.
d. consumption, investment, government consumption and gross investment, and net exports.
3. Assume that between 1990 and 1998 nominal GDP increased from $5 trillion to $8.3 trillion and that the price index rose from 100 to 140. Which of the following expresses GDP for 1990 in terms of 1998 prices?
a. $5.93 trillion
b. $7 trillion
c. $8.3 trillion
d. $11.63 trillion
4. Which of the following would not be counted as part of this year's GDP?
a. the paint you buy to paint your house
b. the government bond you receive as a birthday present
c. the purchase of an IBM computer (produced during the year) by the U.S. government
d. the purchase of wheat (produced during the year by a Kansas farmer) by the Russian government
5. The GDP deflator is designed to
a. adjust nominal GDP for changes in the unemployment rate.
b. adjust nominal GDP so as to include the problem of externalities.
c. adjust nominal GDP for changes in the price level.
d. calculate changes in the price of food and other consumer goods.
6. Which of the following best describes the difference between gross domestic product (GDP) and gross national product (GNP)?
a. GDP measures output produced within domestic borders, while GNP measures output produced by domestic citizens.

b. GDP measures output produced by domestic citizens within domestic borders, while GNP measures all output produced within domestic borders.
c. GDP measures output produced by domestic citizens, while GNP measures output produced within domestic borders.
d. GDP measures all output produced within domestic borders, while GNP measures output produced by domestic citizens within domestic borders.
7. Suppose that, in dollar terms, GDP increased by approximately 8 percent during a given year, but real GDP increased 5 percent. Which of the following best explains these events?
a. The money supply decreased by approximately 8 percent.
b. Prices fell by approximately 3 percent.
c. Prices increased by approximately 3 percent.
d. The real capacity of the economy decreased more rapidly than money output.
8. If waitresses and taxi drivers do not report all of their income to the government, GDP will be understated. This is because the unreported income
a. involves the introduction of new goods.
b. is part of the underground economy.
c. is an example of nonmarket production.
d. represents an increase in leisure time.
9. The primary value of GDP is
a. its ability to reflect the output rate of a nation.
b. as a measure of well-being, income inequality, and unemployment in an economy.
c. to provide observers with a reasonably good index of social progress.
d. limited to capitalist economies and highly developed countries.
10. National income is
a. after-tax household income available for either consumption expenditures or saving during a period.
b. gross national product minus depreciation.
c. the total income payments to the owners of human (labor) and physical capital during a period.
d. gross national product minus government expenditures.

UNEMPLOYMENT AND INFLATION

1. During this century, the growth rate of real GDP in the United States has averaged approximately
a. 1 percent.
b. 3 percent.
c. 6 percent.
d. 10 percent.
2. Economists use the term "business cycle" to refer to
a. the growth of small businesses into major corporations.
b. changes in products that occur from improved technology.
c. fluctuations in economic activity, measured by GDP or unemployment.
d. periods of increases and decreases in the rate of inflation.
3. The labor force participation rate of women in the United States has been
a. increasing for several decades.
b. decreasing for the past several decades after increasing dramatically in the early 1900s.
c. approximately constant during the last three decades.
d. decreasing since the early 1900s.
4. Suppose there was a country with a population of 1000, of which 200 were unemployed and 500 were employed. Which of the following is true?
a. The numbers have been calculated incorrectly as there are 300 people who are neither employed nor unemployed.
b. The labor force participation rate is 50 percent.
c. The unemployment rate is 20 percent.
d. There are 700 individuals in this country's labor force.
5. The type of unemployment caused by changes in the business cycle is
a. structural unemployment.
b. natural unemployment.
c. frictional unemployment.
d. cyclical unemployment.
6. An individual should continue to spend time searching for a job as long as
a. all salary offers are below what the person expected.
b. the marginal gain from additional search exceeds the marginal cost.
c. job openings are available in the individual's field.
d. information is available that the individual has not yet collected.
7. Suppose an economy is operating at its maximum sustainable output rate. It is not in a recession, but neither is it experiencing a boom. Which of the following would be true?
a. The economy would be considered at full employment.
b. Actual GDP would equal potential GDP.
c. Actual unemployment would equal the natural rate of unemployment.
d. All of the above are true.
8. Which of the following persons would be considered unemployed by the official government definition?
a. George, a mathematician who returned to graduate school after failing to find a job the last four months
b. Gwen, a medical student, who is still in college and is not working
c. Morgan, who is employed part-time but desires a full-time job
d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant due to an annual change-over in models
9. During a recession, which of the following will be true?
a. The actual rate of unemployment will be lower than the natural rate.
b. Actual GDP will be lower than potential GDP.
c. Actual employment will exceed what is considered full employment.
d. Actual inflation will be higher than was anticipated.
10. Which of the following is not a harmful effect of inflation?
a. Unanticipated inflation increases the risk associated with long-term contracts.
b. Inflation distorts the information delivered by market prices.
c. Individuals will waste productive resources protecting themselves from the effects of inflation.
d. Inflation increases the purchasing power of the dollar.

AD AS (DIFFICULT)

1. Which of the following is a correct statement?
a. Fiscal policy is the use of tax and spending policies by the Congress and the president.
b. Fiscal policy involves the control of the money supply by the Federal Reserve Bank.
c. Monetary policy involves the control of the money supply by the Congress and the president.
d. Monetary policy is the use of tax and spending policies by the Federal Reserve Bank.
2. The four basic markets that characterize the economy (as in the circular flow diagram) are the
a. goods market, services market, stock market, and bond market.
b. resource market, labor market, goods market, and loanable funds market.
c. goods and services market, resource market, foreign exchange market, and loanable funds market.
d. savings market, stock market, bond market, and investment market.
3. (I)  The three reasons why the aggregate demand curve slopes downward are the international substitution effect, the real balance effect, and the interest rate effect.
(II) The aggregate demand curve shows the relationship between the aggregate quantity of goods and services demanded and the general price level in an economy.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.
4. As the general price level in an economy rises, the aggregate quantity demanded of goods and services falls because
a. the prices of domestic goods have risen relative to foreign goods, causing exports to fall and imports to rise.
b. higher interest rates caused by an increase in the demand for money balances causes a reduction in current investment and consumption.
c. the value of money will fall, reducing the real wealth and thus the consumption of persons holding money balances.
d. all of the above are correct.
5. (I)  The short-run aggregate supply curve is upward sloping because the prices firms pay for major resources is set by long-term contracts, thus unexpected increases in product prices lead to higher profits inducing firms to expand output.
(II) The long-run aggregate supply curve is vertical because an economy's productive ability is determined in the long run by its resources, not by the price level. Additionally, in the long run, decision makers will adjust long-term contracts to take price changes into account.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.
6. (I)  If long-run equilibrium is present in the goods and services market, the actual price level will equal the price level anticipated when buyers and sellers agreed to long-term contracts.
(II) When an economy is in long-run equilibrium, the output level will be less than the full employment or potential level.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. I is false; II is true.
7. The resource market is important from a macroeconomic perspective because
a. it coordinates the allocation of productive resources and determines the costs of production.
b. it determines the interest rates faced by borrowers and lenders.
c. inflation rates are set in the resource market by the government.
d. resource prices determine the position of the long-run aggregate supply curve.
8. The actions of borrowers and lenders are coordinated in
a. the loanable funds market by the real interest rate.
b. the goods and services market by the general price level.
c. the resource market by wage rates.
d. the loanable funds market by the inflation rate.
9. If the money or nominal interest rate is 3 percent and the inflation premium is 8 percent, the real interest rate is
a. -5 percent.
b. 3 percent.
c. 5 percent.
d. 11 percent.


AD AS

1. (I)  A tornado strikes Michigan, destroying most of the automobile manufacturing plants, and reducing the supply of automobiles.
(II) For the fourth year in a row, the inflation rate is 3 percent.
a. I is most likely an unanticipated change; II is most likely an anticipated change.
b. I is most likely an anticipated change; II is most likely an unanticipated change.
c. Both I and II are most likely unanticipated changes.
d. Both I and II are most likely anticipated changes.
2. Which of the following will most likely accompany an unanticipated increase in aggregate demand?
a. an increase in prices
b. an increase in unemployment
c. a decrease in real GDP
d. a decrease in the demand for resources
3. In the aggregate demand/aggregate supply model, when the output of an economy is less than its long-run potential, the economy will experience
a. falling real wages and resource prices that will stimulate employment and real output.
b. rising interest rates that will stimulate aggregate demand and restore full employment.
c. a budget surplus that will stimulate demand and, thereby, help restore full employment.
d. rising resource prices that will restore equilibrium at a higher price level.
4. Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?
a. a decrease in inflation
b. a decrease in unemployment
c. an increase in prices
d. an increase in the natural rate of unemployment
5. Which of the following will most likely increase aggregate supply in the long run?
a. unfavorable weather conditions in agricultural areas
b. an increase in the expected inflation rate
c. higher real interest rates
d. a high rate of capital investment, which expands the future supply of productive resources
6. Within the AD/AS model, an unanticipated increase in short-run aggregate supply will cause real output to
a. increase and prices to decrease.
b. decrease and prices to increase.
c. increase and prices to increase.
d. decrease and prices to decrease.
7. An increase in the long-run aggregate supply curve indicates that
a. potential real GDP has increased.
b. unemployment has increased.
c. employment has increased.
d. the natural rate of unemployment has increased.
8. Which of the following will most likely accompany an unanticipated decrease in aggregate demand?
a. an increase in the general price level or inflation
b. a decrease in resource prices
c. an increase in real GDP
d. a decrease in unemployment

9. Which of the following statements is most consistent with the view that the economy has a self-corrective mechanism?
a. When the economy is in a recession, it will remain there until the government steps in to bring the economy out of the recession.
b. When the economy is in a recession, falling resource prices will eventually increase short-run aggregate supply, bringing the economy back to full employment.
c. During economic booms, interest rates will fall, causing the economy to fall into a recession.
d. In a market economy, resource prices, such as wages, can only increase; they can never decrease.

10. A decline in the real interest rate in the loanable funds market will cause the
a. aggregate demand curve to shift to the right.
b. aggregate demand curve to shift to the left.
c. long-run aggregate supply curve to shift to the left.
d. natural rate of unemployment to fall.


AD AS

1. In a single year, a $5 billion tax reduction was accompanied by a $9 billion increase in consumer spending. From a Keynesian view, the most probable explanation for the increase in consumer spending by more than the amount of the tax cut is that
a. lower taxes caused government spending to fall, which led to the increase in consumer spending.
b. increased consumption spending by those with higher disposable incomes led to higher incomes and still more consumption spending by others.
c. the tax cut caused interest rates to fall, thus increasing consumer spending.
d. the lower taxes prompted the Federal Reserve to sell U.S. securities, causing both the money supply and consumer spending to increase.

2. Although the economy was in the Great Depression, the Hoover administration followed a fiscal policy of balancing the budget. A Keynesian would have found this policy
a. inappropriate because it probably would have depressed economic activity and led to further increases in unemployment.

b. appropriate because it probably would have led to a significant increase in the money supply and thereby increased employment.
c. inappropriate because it probably would have impaired the ability of monetary policy to end the Depression.
d. appropriate because it probably would have stimulated economic activity and helped end the Depression.
3. Suppose U.S. policy makers decide that to stimulate GDP growth, investment must be increased. What is needed, they conclude, is a reallocation of resources away from producing consumer goods and toward producing capital goods. Which of the following policy alternatives would most likely accomplish this objective?
a. a reduction in personal income taxes
b. a reduction in state sales taxes
c. a tax credit allowance for business investment in capital equipment
d. restrictive monetary policy
4. According to the Keynesian view, which of the following would most likely decrease aggregate demand?
a. a decrease in tax rates
b. a decrease in government expenditures
c. an increase in transfer payments
d. an increase in the budget deficit
5. Which of the following is an example of an automatic stabilizer?
a. Congress legislates lower tax rates to increase consumption and investment.
b. Tax rates are increased during a recession to maintain a balanced budget.
c. A regressive income tax system reduces tax revenues (as a share of income) as income expands.
d. Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation is enacted.
6. Keynesian analysis implies that a planned budget deficit is
a. always necessary to ensure full employment.
b. proper during slack economic conditions but highly inappropriate if the economy is already operating at capacity.
c. of little consequence unless there is a corresponding change in the money supply.
d. an effective method of dealing with inflation.
7. The crowding-out effect suggests that
a. expansionary fiscal policy causes inflation.
b. restrictive fiscal policy is an effective weapon against inflation.
c. reduction in private spending resulting from the higher interest rates caused by a budget deficit will largely offset the expansionary impact of a pure fiscal action.
d. a budget surplus will cause the private demand for loanable funds, the interest rate, and aggregate demand to fall.

8. Other things constant, an increase in marginal tax rates will:
a. decrease the supply of labor and reduce its productive efficiency.
b. decrease the supply of capital and reduce its productive efficiency.
c. encourage individuals to substitute less desired, tax-deductible goods for more desired, non-deductible goods.
d. cause all of the above.

9. The new classical model implies that substitution of debt for tax financing
a. increases aggregate demand and exerts a multiplier effect leading to an expansion in real output.
b. is highly effective against inflation.
c. reduces consumption because it increases both the current and future tax liability of households.
d. leaves wealth and therefore aggregate demand unchanged since the debt implies higher future taxes.

10. A balanced budget is present when
a. the economy is at full employment.
b. the actual level of aggregate spending equals the planned level of spending.
c. public sector spending equals private sector spending.
d. government revenues equal expenditures.


MONETARY POLICY

1. If the required reserve ratio is 10 percent, a bank with a new deposit of $1,000
a. must keep $100 on reserve and can make up to $900 in new loans.
b. must keep $200 on reserve and can make up to $800 in new loans.
c. must keep $900 on reserve and can make up to $100 in new loans.
d. must keep $1,000 on reserve and can make no additional loans.
2. Which one of the following is incorrect regarding money?
a. Money is a medium of exchange.
b. Money is a store of value.
c. Money serves as a unit of account.
d. The value of money is dependent on the quantity of gold held by the Federal Reserve.
3. Which of the following are changes altering the nature of money and the usefulness of the money supply figures?
a. the widespread holding of U.S. currency outside the country by foreigners
b. the increasing availability of stock and bond mutual funds
c. the use of debit cards and electronic money
d. all of the above
4. Which of the following is primarily responsible for controlling the money supply in the United States?
a. the U.S. Congress
b. the Council of Economic Advisors
c. the U.S. Treasury
d. the Board of Governors of the Federal Reserve System
5. If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would
a. buy bonds, reduce the discount rate, and reduce reserve requirements.
b. sell bonds, reduce the discount rate, and reduce reserve requirements.
c. sell bonds, reduce the discount rate, and increase reserve requirements.
d. sell bonds, increase the discount rate, and increase reserve requirements.
6. If a decrease in the money supply were desired to slow inflation, the Federal Reserve might
a. increase the reserve requirements.
b. sell U.S. securities on the open market.
c. raise the discount rate.
d. buy U.S. securities directly from the Treasury.
7. The Federal Reserve's most frequently used monetary tool is
a. the discount rate.
b. the reserve requirements.
c. moral persuasion.
d. open market operations.
8. Suppose the Fed purchases $100 million of U.S. securities from the public. The reserve requirement is 20 percent and all banks have zero excess reserves. The total impact of this action on the money supply will be a
a. $100 million decrease in the money supply.
b. $100 million increase in the money supply.
c. $200 million increase in the money supply.
d. $500 million increase in the money supply.
9. A reserve requirement of 20 percent implies a potential money deposit multiplier of
a. 4.
b. 5.
c. 20.
d. 25.
10. A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and increases its excess reserves by $300. What is the legal reserve requirement?
a. 10 percent
b. 20 percent
c. 60 percent
d. 70 percent
 
MONETARY POLICY

1. Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy changes on prices,
a. unemployment will rise.
b. unemployment will fall.
c. there will be no effect on unemployment.
d. unemployment will fall if the change in monetary policy dominates, but unemployment will rise if the change in fiscal policy dominates.
2. Which one of the following accurately states the view of activists who favor discretionary stabilization policy?
a. The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy.
b. Since we have only limited ability to forecast the economy, the best policy is to do nothing.
c. In recent years, our ability to forecast the economy has improved to the extent that discretionary macroeconomic policy is capable of fine-tuning if policy makers would follow the advice of leading economists.
d. The index of leading indicators is unreliable at revealing when an economy is about to enter a recession.
3. Which of the following is an argument against a monetary rule (money supply growth at a constant rate such as 4 percent)?
a. Since the lag between when a monetary policy is instituted and when it takes effect is unpredictable, changes in monetary policy are difficult to time.
b. The inability to forecast the economy makes it difficult to time monetary policy.
c. A monetary rule would prevent the monetary authorities from taking action to offset abrupt changes in the money velocity.
d. Since the index of leading indicators has sometimes provided conflicting information on the economy, it would be difficult to institute a monetary rule.
4. The activists' view that the best policy is one of discretionary intervention into the macroeconomy is most consistent with which of the following views?
a. The self-correcting properties of a market economy would work well if they were not disrupted by errors in macropolicy.
b. A market economy is unstable because politicians force incorrect policies on the people.
c. A market economy is inherently stable.
d. The self-correcting properties of a market economy work very slowly.
5. Compared to discretionary monetary policy, which of the following strengthen(s) the case for a monetary rule, such as the expansion of the money supply at a constant rate (perhaps 4 percent)?
a. Since the lag between when a monetary policy is instituted and when it exerts its major effect is unpredictable, changes in monetary policy are difficult to time.
b. The inability to forecast the economy makes it difficult to time discretionary monetary policy.
c. A monetary rule would reduce the likelihood that monetary planners could stimulate an economic boom just prior to a major election.
d. All of the above are correct.
6. (I)  Since forecasting is an imprecise science, policy makers should not respond to minor economic ups and downs, which may be misleading indicators. Precise fine-tuning is beyond our knowledge and capabilities.
(II) Demand stimulus can reduce the rate of unemployment below the natural level for a long time.
a. Most economists would agree with I; most economists would agree with II.
b. Most economists would disagree with I; most economists would agree with II.
c. Most economists would agree with I; most economists would disagree with II.
d. Most economists would disagree with I; most economists would disagree with II.
7. Which of the following is a good example of an activist stabilization policy designed to head off a recession?
a. Congress cuts government expenditures to reduce the budget deficit.
b. The Fed reduces money supply growth to increase the value of the dollar in the foreign exchange market.
c. Congress reduces tax rates as the result of the index of leading indicators declining for four months in a row.
d. All of the above are correct.
8. If restrictive macroeconomic policy will reduce inflation emanating from excess demand, ideally the policy should be undertaken
a. when inflation is at its highest.
b. when inflation begins to increase.
c. before inflation begins to increase.
d. about six months after inflation peaks.
9. The index of leading indicators is a(n)
a. alphabetical listing of the most popular indicators in the economy for a given month.
b. composite index of indicators that provides information on the future direction of the economy.
c. measure of the level of aggregate output.
d. composite index designed to measure inflation.
10. Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy?
a. higher prices and no change in real output
b. higher prices and real output
c. no change in prices and lower real output
d. no change in prices or real output