Econ Macro principles final practice

36. The long-run aggregate supply curve shifts left if a. the capital stock increases. b. there is a natural disaster. c. the government removes some environmental regulations that limit production methods. d. None of the above is correct.

b. there is a natural disaster.

26. If the exchange rate is 1.25 New Zealand dollars per U.S dollar, the price of apples is $2 a pound in the U.S. and 1 New Zealand dollar per pound in New Zealand, what is the real exchange rate? a. 2.50 b. 2 c. 1.25 d. .75

a. 2.50

14. On a Sunday morning, Tom sold 300 cups of coffee for a total of $750. a. The $750 is a nominal variable. The 300 cups of coffee is a real variable. b. The $750 is a real variable. The 300 cups of coffee is a nominal variable. c. Both the $750 and the 300 cups of coffee are nominal variables. d. Both the $750 and the 300 cups of coffee are real variables.

a. The $750 is a nominal variable. The 300 cups of coffee is a real variable.

41. Refer to Figure 2. Suppose the economy starts at Y. If aggregate demand increases from AD2 to AD3, then the economy moves to a. V. b. W. c. X. d. Z.

a. V.

44. Which of the following affected aggregate demand during the recession of 2008-2009? a. a decline in residential construction and a decrease in lending b. a decline in residential construction but not a decrease in lending c. a decrease in lending but not a decline in residential construction d. neither a decrease in residential construction nor a decrease in lending

a. a decline in residential construction and a decrease in lending

49. The opportunity cost of holding money a. decreases when the interest rate decreases, so people desire to hold more of it. b. decreases when the interest rate decreases, so people desire to hold less of it. c. increases when the interest rate decreases, so people desire to hold more of it. d. increases when the interest rate decreases, so people desire to hold less of it.

a. decreases when the interest rate decreases, so people desire to hold more of it.

8. When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money a. demanded increases. b. demanded decreases. c. supplied increases. d. supplied decreases.

a. demanded increases.

48. When the Fed buys government bonds, the reserves of the banking system a. increase, so the money supply increases. b. increase, so the money supply decreases. c. decrease, so the money supply increases. d. decrease, so the money supply decreases.

a. increase, so the money supply increases.

46. According to the liquidity preference theory, an increase in the overall price level of 10 percent a. increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded. b. decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded. c. increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged. d. decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.

a. increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.

29. According to purchasing-power parity which of the following would happen if a country raised its money supply growth rate? a. its nominal exchange rate would fall b. its real exchange rate would fall c. its real net exports would rise d. All of the above would happen.

a. its nominal exchange rate would fall

7. When the Consumer Price Index increases from 100 to 120 a. more money is needed to buy the same amount of goods, so the value of money falls. b. more money is needed to buy the same amount of goods, so the value of money rises. c. less money is needed to buy the same amount of goods, so the value of money falls. d. less money is needed to buy the same amount of goods, so the value of money rises.

a. more money is needed to buy the same amount of goods, so the value of money falls.

56. Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates, a. the Federal Reserve could increase the money supply by buying bonds. b. the Federal Reserve could increase the money supply by selling bonds. c. the Federal Reserve could decrease the money supply by buying bonds. d. the Federal Reserve could decrease the money supply by selling bonds.

a. the Federal Reserve could increase the money supply by buying bonds.

10. When the money market is drawn with the value of money on the vertical axis, if the value of money is above the equilibrium level, a. the price level will rise. b. the value of money will rise. c. money demand will shift leftward. d. money demand will shift rightward.

a. the price level will rise.

9. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in a. the value of money. b. real interest rates. c. nominal interest rates. d. the money supply.

a. the value of money.

22. Other things the same, which of the following would both make foreigners more willing to engage in U.S. portfolio investment? a. U.S. interest rates rise, the default risk of U.S. assets rise b. U.S. interest rates rise, the default risk of U.S. assets fall c. U.S. interest rates fall, the default risk of U.S. assets rise d. U.S. interest rates fall, the default risk of U.S. assets fall

b. U.S. interest rates rise, the default risk of U.S. assets fall

16. Paul, a Canadian citizen, purchases oranges grown in Florida. This purchase is an example of a. a U.S. import and a Canadian export b. a U.S. export and a Canadian import c. an export for both the U.S. and Canada d. an import for both Canada and the U.S.

b. a U.S. export and a Canadian import

37. Other things the same, if the price level rises by 2% and people were expecting it to rise by 5%, then some firms have a. higher than desired prices, which increases their sales. b. higher than desired prices, which depresses their sales. c. lower than desired prices, which increases their sales. d. lower than desired prices, which depresses their sales.

b. higher than desired prices, which depresses their sales.

31. The classical model is the appropriate model for analysis of the economy in the a. long run, because evidence indicates that money is not neutral in the long run. b. long run, because real and nominal variables are essentially determined separately in the long run. c. short run, because money is neutral in the short run. d. short run, because real and nominal variables are not highly intertwined in the short run.

b. long run, because real and nominal variables are essentially determined separately in the long run.

45. The goal of monetary policy and fiscal policy is to a. offset the shifts in aggregate demand and thereby eliminate unemployment. b. offset shifts in aggregate demand and thereby stabilize the economy. c. enhance the shifts in aggregate demand and thereby create fluctuations in output and employment. d. enhance the shifts in aggregate demand and thereby increase economic growth

b. offset shifts in aggregate demand and thereby stabilize the economy.

50. Refer to Figure 4. If the current interest rate is 2 percent, a. there is an excess supply of money. b. people will sell more bonds, which drives interest rates up. c. as the money market moves to equilibrium, people will buy more goods. d. All of the above are correct.

b. people will sell more bonds, which drives interest rates up.

35. Other things the same, if the price level rises, then domestic interest rates a. rise, so domestic residents will want to hold more foreign bonds. b. rise, so domestic residents will want to hold fewer foreign bonds. c. fall, so domestic residents will want to hold more foreign bonds. d. fall, so domestic residents will want to hold fewer foreign bonds.

b. rise, so domestic residents will want to hold fewer foreign bonds.

47. Liquidity preference theory is most relevant to the a. short run and supposes that the price level adjusts to bring money supply and money demand into balance. b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. c. long run and supposes that the price level adjusts to bring money supply and money demand into balance. d. long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

12. When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then a. the money supply and the price level increase. b. the money supply and the price level decrease. c. the money supply increases and the price level decreases. d. the money supply increases and the price level increases.

b. the money supply and the price level decrease.

40. An increase in the expected price level shifts the a. short-run and long-run aggregate supply curves left. b. the short-run but not the long-run aggregate supply curve left. c. the long-run but not the short-run aggregate supply curve left. d. neither the long-run nor the short-run aggregate supply curve left.

b. the short-run but not the long-run aggregate supply curve left.

54. The logic of the multiplier effect applies a. only to changes in government spending. b. to any change in spending on any component of GDP. c. only to changes in the money supply. d. only when the crowding-out effect is sufficiently strong.

b. to any change in spending on any component of GDP.

27. According to purchasing-power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate? a. 2 pounds per dollar b. 1 pound per dollar c. 1/2 pound per dollar d. None of the above is correct

c. 1/2 pound per dollar

53. If the MPC = 0.75, then the government purchases multiplier is about a. 1.33. b. 7. c. 4. d. 3.

c. 4.

20. Which of the following is an example of U.S. foreign direct investment? a. A Greek company opens a cheese factory in the U.S. b. A German mutual fund buys stock issued by a U.S. corporation. c. A U.S. beverage company opens a bottling plant in Russia. d. A U.S. bank buys bonds issued by an Argentinean company.

c. A U.S. beverage company opens a bottling plant in Russia.

23. A U.S. mutual fund buys stocks issued by a Columbian company. This purchase is an example of a. U.S. foreign direct investment. It increases Columbia's net capital outflow. b. U.S. foreign direct investment. It decreases Columbia's net capital outflow. c. U.S. foreign portfolio investment. It decreases Columbia's net capital outflow. d. U.S. foreign portfolio investment. It increases Columbia's net capital outflow.

c. U.S. foreign portfolio investment. It decreases Columbia's net capital outflow.

2. The term hyperinflation refers to a. the spread of inflation from one country to others. b. a decrease in the inflation rate. c. a period of very high inflation. d. inflation accompanied by a recession.

c. a period of very high inflation.

21. Carl and Carly are American residents. Carl buys stock of a corporation in Austria. Carly opens a coffee shop in Austria. Whose purchase, by itself, decreases Austria's net capital outflow? a. Carl's b. Carly's c. both Carl's and Carly's d. neither Carl's nor Carly's

c. both Carl's and Carly's

3. When the price level falls, the number of dollars needed to buy a representative basket of goods a. increases, so the value of money rises. b. increases, so the value of money falls. c. decreases, so the value of money rises. d. decreases, so the value of money falls.

c. decreases, so the value of money rises.

30. During a recession the economy experiences a. rising income and unemployment. b. rising income and falling unemployment. c. falling income and rising unemployment. d. falling income and unemployment.

c. falling income and rising unemployment.

6. Money demand refers to a. the total quantity of financial assets that people want to hold. b. how much income people want to earn per year. c. how much wealth people want to hold in liquid form. d. how much currency the Federal Reserve decides to print.

c. how much wealth people want to hold in liquid form.

19. A Texas ranch sells beef to a U.S. company that sells it to a grocery chain in Japan. These sales a. decrease U.S. exports but increase U.S. net exports. b. decrease both U.S. exports and U.S. net exports. c. increase both U.S. exports and U.S. net exports. d. increase U.S. exports but decrease U.S. net exports.

c. increase both U.S. exports and U.S. net exports.

38. The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has a. decreased, so they increase production. b. decreased, so they decrease production. c. increased, so they increase production. d. increased, so they decrease production.

c. increased, so they increase production.

33. Other things the same, a decrease in the price level makes consumers feel a. less wealthy, so the quantity of goods and services demanded falls. b. less wealthy, so the quantity of goods and services demanded rises. c. more wealthy, so the quantity of goods and services demanded rises. d. more wealthy, so the quantity of goods and services demanded falls.

c. more wealthy, so the quantity of goods and services demanded rises.

28. Suppose a Starbucks tall latte cost $4.00 in the United States and 2.50 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area. If the nominal exchange rate is .80 euros per dollar, which goods have prices that are consistent with purchasing-power parity? a. both the tall latte and the Big Mac b. the tall latte but not the Big Mac c. the Big Mac but not the tall latte d. neither the Big Mac nor the tall latte

c. the Big Mac but not the tall latte

55. The term crowding-out effect refers to a. the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. b. the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. c. the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase. d. the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.

c. the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.

52. If the multiplier is 3, then the MPC is a. 1/3. b. 3/4. c. 4/3. d. 2/3.

d. 2/3.

1. If the price level increased from 120 to 130, then what was the inflation rate? a. 1.1 percent. b. 7.7 percent. c. 10.0 percent. d. 8.3 percent.

d. 8.3 percent.

4. If P denotes the price of goods and services measured in terms of money, then a. 1/P represents the value of money measured in terms of goods and services. b. P can be regarded as the "overall price level." c. an increase in the value of money is associated with a decrease in P. d. All of the above are correct.

d. All of the above are correct.

15. An assistant manager at a restaurant gets a $100 a month raise. He figures that with his new monthly salary he cannot buy as many goods and services as he could buy last year. a. His real and nominal salary have risen. b. His real and nominal salary have fallen. c. His real salary has risen and his nominal salary has fallen. d. His real salary has fallen and his nominal salary has risen.

d. His real salary has fallen and his nominal salary has risen.

25. If a country has a trade deficit then a. S > I and Y > C + I + G. b. S > I and Y < C + I + G. c. S < I and Y > C + I + G. d. S < I and Y < C + I + G.

d. S < I and Y < C + I + G.

42. Refer to Figure 2. Suppose the economy starts at Y. If there is a fall in aggregate demand, then the economy moves to a. V in the long run. b. W in the long run. c. X in the long run. d. Z in the long run.

d. Z in the long run.

17. A country purchases more goods and services from residents of foreign countries than residents of foreign countries purchase from it. This country has a. a trade surplus and positive net exports. b. a trade surplus and negative net exports. c. a trade deficit and positive net exports. d. a trade deficit and negative net exports.

d. a trade deficit and negative net exports.

43. Refer to Figure 3. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P1 and Y1 , then it must be the case that a. short run aggregate supply has decreased. b. short run aggregate supply has increased. c. aggregate demand has increased. d. aggregate demand has decreased.

d. aggregate demand has decreased.

24. If Chileans buy more U.S. stocks and bonds and U.S. residents buy more Chilean wine, then a. both U.S. net exports and U.S. net capital outflows rise. b. U.S. net exports rise and U.S. net capital outflows fall. c. U.S. net exports fall and U.S. net capital outflows rise. d. both U.S. net exports and U.S. net capital outflows fall.

d. both U.S. net exports and U.S. net capital outflows fall.

51. People will want to hold less money if the price level a. increases or if the interest rate increases. b. decreases or if the interest rate decreases. c. increases or if the interest rate decreases. d. decreases or if the interest rate increases.

d. decreases or if the interest rate increases.

18. A country purchases $3 billion of foreign-produced goods and services and sells $2 billion dollars of domestically produced goods and services to foreign countries. It has a. exports of $3 billion and a trade surplus of $1 billion. b. exports of $3 billion and a trade deficit of $1 billion. c. exports of $2 billion and a trade surplus of $1 billion. d. exports of $2 billion and a trade deficit of $1 billion.

d. exports of $2 billion and a trade deficit of $1 billion.

34. Other things the same, an increase in the price level induces people to hold a. less money, so they lend less, and the interest rate rises. b. less money, so they lend more, and the interest rate falls. c. more money, so they lend more, and the interest rate falls. d. more money, so they lend less, and the interest rate rises.

d. more money, so they lend less, and the interest rate rises.

32. The aggregate quantity of goods and services demanded changes as the price level falls because a. real wealth falls, interest rates rise, and the dollar appreciates. b. real wealth falls, interest rates rise, and the dollar depreciates. c. real wealth rises, interest rates fall, and the dollar appreciates. d. real wealth rises, interest rates fall, and the dollar depreciates.

d. real wealth rises, interest rates fall, and the dollar depreciates.

39. If wages are sticky, then a greater than expected increase in the price level a. raises the real costs of production, so the short-run aggregate supply curve shifts left. b. raises the real costs of production, so the aggregate quantity of goods and services declines. c. reduces the real costs of production, so the short-run aggregate supply curve shifts right. d. reduces the real costs of production, so the aggregate quantity of goods and services rises.

d. reduces the real costs of production, so the aggregate quantity of goods and services rises.

13. Refer to Figure 1. If the money supply is MS2 and the value of money is 2, then there is an excess a. demand for money that is represented by the distance between points A and C. b. demand for money that is represented by the distance between points A and B. c. supply of money that is represented by the distance between points A and C. d. supply of money that is represented by the distance between points A and B.

d. supply of money that is represented by the distance between points A and B.

11. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money a. and equilibrium quantity of money to increase. b. and equilibrium quantity of money to decrease. c. to increase, while the equilibrium quantity of money decreases. d. to decrease, while the equilibrium quantity of money increases.

d. to decrease, while the equilibrium quantity of money increases.

57. During periods of expansion, automatic stabilizers cause government expenditures a. and taxes to fall. b. and taxes to rise. c. to rise and taxes to fall. d. to fall and taxes to rise.

d. to fall and taxes to rise.

5. With the value of money on the vertical axis, the money supply curve is a. upward sloping because people supply a larger quantity of money when the value of money increases. b. downward sloping because people supply a larger quantity of money when the value of money decreases. c. horizontal because we assume the central bank controls the money supply d. vertical because we assume the central bank controls the money supply.

d. vertical because we assume the central bank controls the money supply.