Chapter 1

An increase in stock prices ______ the size of people's wealth and may _______ their willingness to spend. A. increase; increase B. increase; decrease C. decreases; increase D. decreases; decreases

A

Budget deficits can be a concern bc they might: A. ultimately lead to higher inflation B. lead to lower interest rates C. lead to a slower rate of money growth D. lead to higher bond prices

A

Everything else held constant, Americans who love French wine benefit most from A) a decrease in the dollar price of euros. B) an increase in the dollar price of euros. C) a constant dollar price for euros. D) a ban on imports from Europe

A

Everything else held constant, a decrease in the value of the dollar relative to all foreign currencies means that the price of foreign goods purchased by Americans A) increases B) decreases. C) remains unchanged. D) either increases, decreases, or remains unchanged.

A

Everything else held constant, an increase in interest rates on student loans: A. increases the cost of a college education B. reduces the cost of a college education C. has no effect on educational costs D. increases costs for students with no loans

A

Evidence from the United States and other foreign countries indicates that A) there is a strong positive association between inflation and growth rate of money over long periods of time. B) there is little support for the assertion that "inflation is always and everywhere a monetary phenomenon." C) countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant. D) money growth is clearly unrelated to inflation

A

Financial institutions search for ________ has resulted in many financial innovations. A. higher profits B. regulations C. respect D. higher risk

A

Financial intermediaries: A. provide a channel for linking those who want to save with those who want to invest B. produce nothing of value and are therefore a drain on society's resources C. can hurt the performance of the economy D. hold very little of the average American's wealth

A

From 1980 to 1985 the dollar appreciated relative to the British pound. Holding everything else constant, one would expect that when compared to 1980:A) fewer Britons traveled to the United States in 1985. B) Britons imported more wine from California in 1985. C) Americans exported more wheat to England in 1985. D) more Britons traveled to the United States in 1985.

A

From 1980 to early 1985 the dollar ________ in value, thereby benefiting American _________. A. appreciated; consumers B. appreciated; businesses C. depreciated; consumers D. depreciated; businesses

A

GDP measured with constant prices is referred to as: A. real GDP B. nominal GDP C. the GPD deflator D. industrial production

A

High interest rates might ______ purchasing a house or car but at the same time high interest rates might ______ saving. A. discourage: encourage B. discourage; discourage C. encourage; encourage D. encourage; discourage

A

If real GDP grows from $10 trillion in 2002 to $10.5 trillion in 2003, the growth rate for real GDP is A) 5%. B) 10%. C) 50%. D) 0.5%.

A

If ten years ago the prices of the items bought last month by the average consumer would have been much higher, then one can likely conclude that A) the aggregate price level has declined during this ten-year period. B) the average inflation rate for this ten-year period has been positive. C) the average rate of money growth for this ten-year period has been positive. D) the aggregate price level has risen during this ten-year period.

A

The measure of the aggregate price level that is frequently the focus of Federal Reserve officials is the A) consumer price index. B) producer price index. C) GDP deflator. D) PCE deflator.

D

Well-functioning financial markets promote: A. inflation B. deflation C. unemployment D. growth

D

When stock prices fall: A. an individual's wealth is not affected or is their willingness to spend B. a business firm will be more likely to sell stock to finance investment spending C. an individual's wealth may decrease but their willingness to spend is not affected D. an individual's wealth may decrease and their willingness to spend may decrease

D

Which is NOT a financial institution: A. a life insurance company B. a pension fund C. a credit union D. a business college

D

Why is it important to understand the bond market?

The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined.

A budget ________ occurs when government expenditures exceed tax revenues for a particular time period. A. deficit B. surplus C. surge D. surfeit

A

An increase in interest rates might ________ saving bc more can be earned in interest income. A. encourage B. discourage C. disallow D. invalidate

A

If the aggregate price level at time t is denoted by Pt, the inflation rate from time t - 1 to t is defined as A) πt = (Pt - Pt - 1)/ Pt - 1. B) πt = (Pt + 1 - Pt - 1) /Pt - 1. C) πt = (Pt + 1 - Pt) /Pt. D) πt = (Pt - Pt - 1) /Pt.

A

The most comprehensive measure of aggregate output is: A) gross domestic product. B) net national product. C) the stock value of the industrial 500. D) national income

A

The price of one country's currency in terms of another country's currency is called the: A. exchange rate B. interest rate C. Dow Jones Industrial average D. prime rate

A

To calculate the growth rate of a variable, you will A) calculate the percentage change from one time period to the next. B) calculate the difference between the two variables. C) add the ending value to the beginning value. D) divide the increase by the number of time periods.

A

When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation. A. bond; stock B. stock; bond C. stock; debt security D. bond; debt security

A

_________ theory relates the quantity of money and monetary policy to changes in aggregate economic activity and inflation: A. Monetary B. Fiscal C. Financial D. Systemic

A

What is stock and how do they affect the economy?

A stock represents a share of ownership of a corporation, or a claim on a firm's earnings/assets. Stocks are part of wealth, and changes in their value affect people's willingness to spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment.

From 1980-1985, the dollar strengthened in value against other currencies. Who was helped and who was hurt by this strong dollar?

American consumers benefitted because imports were cheaper and consumers could purchase more. American businesses and workers in those businesses were hurt as domestic and foreign sales of American products fell.

A financial crisis is: A. not possible in the modern financial environment B. a major disruption in the financial markets C. a feature of developing economies only D. typically followed by an economic boom

B

A key factor in producing high economic growth is: A. eliminating foreign trade B. well-functioning financial markets C. high interest rates D. stock market volatility

B

A rising stock market index due to higher share prices: A. increases people's wealth but is unlikely to increase their willingness to spend B. increases people's wealth and as a result may increase their willingness to spend C. decreases the amount of funds that business firms can raise by selling newly-issued stock. D. decreases people's wealth, but is unlikely to increase their willingness to spend

B

American farmers who sell beef to Europe benefit most from: A) a decrease in the dollar price of euros. B) an increase in the dollar price of euros. C) a constant dollar price for euros. D) a European ban on imports of American beef.

B

The management of money and interest rates is called _______ policy and is conducted by a nation's _______ bank. A. monetary; superior B. fiscal; superior C. fiscal; central D. monetary; central

D

Banks and other financial institutions engage in financial intermediation, which: A. can hurt the performance of the economy B. can benefit economic performance C. has no effect on economic performance D. involves borrowing from investors and lending to savers

B

Banks are important to the study of money and the economy bc they: A. channel funds from investors to savers B. have been a source of rapid financial innovation C. are the only important financial institution in the U.S. economy D. create inflation

B

Between 1950 and 1980 in the U.S., the interest rates trended upward. During this same time period, A. the rate of money growth declined B. the rate of money growth increased C. the government budget deficit trended downward D. the aggregate price level decline quite dramatically

B

Changes in stock prices: A. do not affect people's wealth and their willingness to spend B. affect firms' decisions to sell stock to finance investment spending C. occur in regular patterns D. are unimportant to decision makers

B

Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are _________ on average. A. more; lower B. less; lower C. more; higher D. less; higher

B

Countries that experience very high rates of inflation may also have: A. balanced budgets B. rapidly growing money supplies C. falling money supplies D. constant money supplies

B

During a recession, output declines resulting in: A. lower unemployment in the economy B. higher unemployment in the economy C. no impact on the unemployment in the economy D. higher wages for the workers

B

Everything constant, a stronger dollar will mean that: A. vacationing in England becomes more expensive B. vacationing in England becomes less expensive C. French cheese becomes more expensive D. Japanese cars become more expensive

B

Financial institutions that accept deposits and make loans are called: A. exchange B. banks C. over the counter markets D. finance companies

B

If an economy has aggregate output of $20 trillion, then aggregate income is A) $10 trillion. B) $20 trillion. C) $30 trillion. D) $40 trillion

B

If the price of a euro (the European currency) increases from $1.00 to $1.10, then, everything else held constant, A) a European vacation becomes less expensive. B) a European vacation becomes more expensive. C) the cost of a European vacation is not affected. D) foreign travel becomes impossible

B

If your nominal income in 1998 is $50,000, and prices increase by 50% between 1998 and 2011, then to have the same real income, your nominal income in 2011 must be A) $50,000. B) $75,000. C) $100,000. D) $150,000.

B

Nominal GDP is output measured in ________ prices while real GDP is output measured in ________ prices. A) current; current B) current; fixed C) fixed; fixed D) fixed; current

B

Poorly performing financial markets can be the cause of: A. wealth B. poverty C. financial stability D. financial expansion

B

Sustained downward movements in the business cycle are referred to as: A. inflation B. recessions C. economic recoveries D. expansions

B

The stock market is important because it is: A. where interest rates are determined B. the most widely followed financial market in the U.S. C. where foreign exchange rates are determined D. the market where most borrowers get their funds

B

There is a _______ association between inflation and the growth rate of money _________. A. positive; demand B. positive; supply C. negative; demand D. negative; supply

B

When in 1985 a British pound cost approximately $1.30, a Shetland sweater that cost 100 British pounds would have cost $130. With a weaker dollar, the same Shetland sweater would have cost:A) less than $130. B) more than $130. C) $130, since the exchange rate does not affect the prices that American consumers pay for foreign goods. D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in price due to the stronger dollar

B

When prices are measured in terms of fixed (base-year) prices they are called ________ prices. A) nominal B) real C) inflated D) aggregate

B

Which is a true statement?A) Money or the money supply is defined as Federal Reserve notes. B) The average price of goods and services in an economy is called the aggregate price level. C) The inflation rate is measured as the rate of change in the federal government budget deficit. D) The aggregate price level is measured as the rate of change in the inflation rate.

B

_________ policy involves decisions about government spending and taxation. A. Monetary B. Fiscal C. Financial D. Systemic

B

A sharp increase in the growth of the money supply is likely followed by: A. recession B. a depression C. an increase in the inflation rate D. no change in the economy

C

A stronger dollar benefits ________ and hurts _________. A. American businesses; American consumers B. American businesses; foreign businesses C. American consumers; American businesses D. foreign businesses; American consumers

C

American companies can borrow funds: A. only in the U.S. financial markets B. only in foreign financial markets C. in both U.S. and foreign financial markets D. only from the U.S. government

C

Banks, savings and loan associations, mutual savings banks, and credit unions: A. are no longer important players in financial intermediation B. since deregulation now provide services only to small depositors C. have been adept at innovating in response to changes in the regulatory environment D. produce nothing of value and are therefore a drain on society's resources

C

Budget deficits are important bc deficits: A. cause bank failures B. always cause interest rates to fall C. can result in higher rates of monetary growth D. always cause prices to fall

C

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as: A. barter B. redistribution C. financial intermediation D. taxation

C

Fear of a major recession causes stock prices to fall, which in turn causes consumer spending to: A. increase B. remain unchanged C. decrease D. cannot be determined

C

Financial markets promote economic efficiency by: A. channeling funds from investors to savers B. creating inflation C. channeling funds from savers to investors D. reducing investment

C

Financial markets promote greater economic efficiency by channeling funds from ______ to _______. A. investors; savers B. borrowers; savers C. savers; borrowers D. Savers; lenders

C

From 1950-2011 the price level in the U.S. increased more than: A. twofold B. threefold C. sixfold D. ninefold

C

High interest rates might cause a corporation to _______ building a new plant that would provide more jobs. A. complete B. consider C. postpone D. contemplate

C

If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996 prices is $6 trillion, the GDP deflator price index is A) 7. B) 100. C) 150. D) 200.

C

Low stock market prices might ________ consumers willingness to spend and might ________ businesses willingness to undertake investment projects. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

C

Prior to almost all recessions since 1990, there's been a drop in: A. inflation B. the money stock C. the growth rate of the money stock D. interest rates

C

The Dow reached a peak of over 11,000 before the collapse of the _______ bubble in 2000. A. housing B. manufacturing C. high-tech D. banking

C

The bond markets are important bc they are: A. easily the most widely followed financial markets in the U.S. B. the markets where foreign exchange rates are determined C. the markets where interest rates are determined D. the markets where all borrowers get their funds

C

The decline in stock prices from 2000 through 2002: A. increased individuals' willingness to spend B. had no effect on individual spending C. reduced individuals' willingness to spend D. increased individual wealth

C

The delivery of financial services electronically is called: A. e-business B. e-commerce C. e-finance D. e-possible

C

The gross domestic product is the A) the value of all wealth in an economy. B) the value of all goods and services sold to other nations in a year. C) the market value of all final goods and services produced in an economy in a year. D) the market value of all intermediate goods and services produced in an economy in a year

C

The measure of the aggregate price level that is most frequently reported in the media is the A) GDP deflator. B) producer price index. C) consumer price index. D) household price index

C

The organization responsible for the conduct of monetary policy in the U.S. is the: A. Controller of the Currency B. U.S. Treasury C. Federal Reserve System D. Bureau of Monetary Affairs

C

The price paid for the rental of borrowed funds is commonly referred to as the: A. inflation rate B. exchange rate C. interest rate D. aggregate price level

C

To convert a nominal GDP to a real GDP, you would use A) the PCE deflator. B) the CPI measure. C) the GDP deflator. D) the PPI measure.

C

When tax revs are better than government expenditures, the government has a budget. A. crisis B. deficit C. surplus D. revision

C

When the total value of final goods and services is calculated using current prices, the resulting measure is referred to as A) real GDP. B) the GDP deflator. C) nominal GDP. D) the index of leading indicators

C

Which is most likely to result from a stronger dollar?A) U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them. B) U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy more of them. C) U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them. D) Americans will purchase fewer foreign goods.

C

Which of the following items are not counted in U.S. GDP? A) your purchase of a new Ford Mustang B) your purchase of new tires for your old car C) GM's purchase of tires for new cars D) a foreign consumer's purchase of a new Ford Mustang

C

_______ markets transfer funds from people who have an excess of available funds to people who have a shortage. A. Commodity B. Fund-available C. Financial D. Derivative exchange

C

Stock prices are: A. relatively stable trending upward at a steady pace B. relatively stable trending downward at a moderate rate C. extremely volatile D. unstable trending downward at a moderate rate

C. (Volatile as in tend to fluctuate sharply)

A share of common stock is a claim on a corporation's: A. debt B. liabilities C. expenses D. earnings and assets

D

Complete Milton Friedman's famous statement, "Inflation is always and everywhere a _______ phenomenon." A. recessionary B. discretionary C. repressionary D. monetary

D

Everything else held constant, a decline in interest rates will cause spending on housing to: A. fall B. remain unchanged C. either rise, fall, or remain the same D. rise

D

Everything else held constant, a weaker dollar will likely hurt: A. textile exports in South Carolina B. wheat farmers in Montana that sell domestically C. automobile manufacturers in Michigan that use domestically produced inputs D. furniture importers in China

D

Evidence from business cycle fluctuations in the U.S. indicates that: A) a negative relationship between money growth and general economic activity exists. B) recessions are usually preceded by declines in bond prices. C) recessions are usually preceded by dollar depreciation. D) recessions are usually preceded by a decline in the growth rate of money.

D

If real GDP in 2002 is $10 trillion, and in 2003 real GDP is $9.5 trillion, then real GDP growth from 2002 to 2003 is A) 0.5%. B) 5%. C) 0%. D) -5%.

D

If your nominal income in 2002 was $50,000, and prices doubled between 2002 and 2011, to have the same real income, your nominal income in 2011 must be A) $50,000. B) $75,000. C) $90,000. D) $100,000.

D

It is true that inflation is a: A. continuous increase in the money supply B. continuous fall in prices C. decline in interest rates D. continually rising price level

D

Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called: A. commodity markets B. fund-available markets C. derivative exchange markets D. financial markets

D

On ________, October 19, 1987, the market experience its worst one-day drop in its entire history with the DIJA failing by 22%: A. "Terrible Tuesday" B. "Woeful Wednesday" C. "Freaky Friday" D. "Black Monday"

D

The financial intermediaries that the average person interacts with most frequently are: A. exchanges B. over-the-counter markets C. finance companies D. banks

D

The interest rate on Baa (medium quality) corporate bonds is _______, on average, than other interest rates, and the spread between it and other rates became _______ in the 1970s. A. lower; smaller B. lower; larger C. higher; smaller D. higher; larger

D

The market where one currency is converted into another currency is called the: A. stock B. bond C. derivatives D. foreign exchange

D

What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the money growth rate and a business cycle recession?

During a recession, output declines and unemployment increases. Prior to almost every recession in the U.S. the money growth rate has declined, however, not every decline is followed by a recession.

What crucial role do financial intermediaries perform in an economy?

Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy.