Exam 1 Review Questions

The inflation rate measures how fast A. prices are rising. B. the money supply is growing. C. the economy is growing. D. personal income is growing.

A. prices are rising.

Which equation describes the marginal product of a factor (MPi)? A. (P × MPi) − W B. W/P C. F(j, i +1) − (F(j, i) D. Y = F( j, i)

C. F(j, i +1) − (F(j, i)

A bank's total assets relative to the bank owners' equity is the: A. required reserve ratio. B. monetary base. C. leverage ratio. D. capital requirement.

C. leverage ratio.

Which is NOT a role money plays in the economy? A. Store of value B. Factor of production C. Unit of account D. Medium of exchange

B. Factor of production

The national income identity is expressed as: A. Output = Income. B. S = I. C. NX = Exports −Imports. D. Y = C + I + G + NX.

D. Y = C + I + G + NX.

Which is TRUE concerning the relationship between money growth and inflation? A. Monthly data show the impact of growth in the money supply on inflation better than decades-long data. B. Inflation and money growth are inversely related. C. There is a strong correlation between growth in the money supply and inflation. D. Inflation is a function of growth in real output rather than growth in the money supply.

C. There is a strong correlation between growth in the money supply and inflation.

Which statement is TRUE about economists' models? A. Microeconomic models are based on a macroeconomic foundation. B. Microeconomic and macroeconomic models have little in common. C. Unlike microeconomics, with its plethora of models, macroeconomics relies on very few models. D. Macroeconomists employ a variety of models, each focused on a specific problem or set of problems.

D. Macroeconomists employ a variety of models, each focused on a specific problem or set of problems.

FX Forward Premium is Calculated as: A. The forward rate minus the spot rate B. The spot rate minus the forward rate C. (The forward rate minus the spot rate) divided by the forward rate D. (The forward rate minus the spot rate) divided by the spot rate

D. (The forward rate minus the spot rate) divided by the spot rate

Which statement is TRUE? A. The system of fractional-reserve banking creates money but not wealth. B. The system of fractional-reserve banking creates both money and wealth. C. The Fed determines commercial banks' excess reserves. D. With fractional-reserve banking, each round of loan and deposit creates a growing addition to the money supply.

A. The system of fractional-reserve banking creates money but not wealth.

The market basket used to measure price changes is: A. fixed in the CPI but changing in the GDP deflator. B. fixed in the GDP deflator but changing in the CPI. C. fixed in both the GDP deflator and the CPI. D. changing in both the GDP deflator and the CPI.

A. fixed in the CPI but changing in the GDP deflator.

If the foreign interest rate is 4% and the domestic interest rate is 5%, then the forward premium is approximately: A. 1% B. -1% C. 9% D. 5/4%

B. -1%

If 5 Swiss francs trade for $1, the U.S. price level equals $1 for a good, and the Swiss price level equals 2 francs for the same good, then the real exchange rate between Swiss goods and U.S. goods is _____ Swiss good(s) per U.S. good. A. 0.4. B. 2.5. C. 5. D. 10

B. 2.5.

Ruritania has a labor force of 50 million people. Currently 48.2 million are employed. What is the Ruritanian unemployment rate? A. 96.4 percent B. 3.6 percent C. 3.7 percent D. 1.8 percent

B. 3.6 percent

Which is NOT a cost of expected inflation? A. Shoeleather costs B. Arbitrary redistributions of wealth C. Menu costs D. Misallocation of resources

B. Arbitrary redistributions of wealth

Suppose that each factor of production increases by 10 percent and output subsequently increases by 10 percent. Which phrase describes this situation? A. Cobb-Douglas production function B. Constant returns to scale C. Unit elasticity D. Constant opportunity costs

B. Constant returns to scale

What do we call this equation: S − I = NX ? A. Net capital outflow B. Net exports C. National income accounts identity D. Crowding out from trade

C. National income accounts identity

Why does the trade balance with China receive so much attention? A. It is the most dependable way to determine which country has comparative advantages in which goods. B. Congress can use it to determine how many net jobs have been lost. C. We can use it as one datapoint needed to establish absolute advantage. D. Commentators do not recognize that bilateral trade balances do not matter.

D. Commentators do not recognize that bilateral trade balances do not matter.

Which is a possible negative result of increased government spending? A. Hyperinflation B. Tax increases C. Lower GDP D. Crowding out of investment

D. Crowding out of investment

What enables money creation in addition to that directly created by the central bank? A. The Federal Reserve B. Open-market operations C. Off-shore banking D. Fractional-reserve banking

D. Fractional-reserve banking

Which equation is used to derive the quantity theory of money? A. Y = F (K , L) B. r = i − π C. M/P = L(r + Eπ, Y) D. MV = PY

D. MV = PY

Why are models useful when studying economics? A. Models explain the behavior of exogenous variables. B. Models enable economists to transform endogenous variables into exogenous variables and exogenous variables into endogenous variables. C. Models are used to keep economic theories inaccessible to non-economists. D. Models can help us dispense with irrelevant details and focus on underlying connections.

D. Models can help us dispense with irrelevant details and focus on underlying connections.

What does real GDP measure? A. The market value of all goods sold in a given time period B. The total income of everyone in the economy in a given time period C. The value of all goods sold in a given time period adjusted for price changes D. The total income of everyone in the economy in a given time period adjusted for price changes

D. The total income of everyone in the economy in a given time period adjusted for price changes

The use of borrowed funds to make investments is called: A. hedging. B. the balance sheet. C. fractional-reserve banking. D. leveraging.

D. leveraging.

The prices of capital goods are: A. not included in the GDP deflator but are included in the CPI. B. included in neither the GDP deflator nor the CPI. C. included in both the GDP deflator and the CPI. D. not included in the CPI but are included in the GDP deflator.

D. not included in the CPI but are included in the GDP deflator.

The Fed sees that commercial banks hold adequate reserves by: A. posting a bank examiner in each commercial bank's accounting office. B. setting an appropriate required reserve ratio. C. conducting appropriate open-market operations. D. paying the banks interest on their reserves.

D. paying the banks interest on their reserves.

Technological advances typically have a _____ impact on investment. A. negative B. negligible C. volatile D. positive

D. positive

The GDP deflator enables economists to make adjustments for changes in: A. quality. B. output. C. population. D. prices.

D. prices.

The Fed's strategy of buying long-term, riskier assets in response to the Great Recession is known as: A. open-market operations. B. leveraging. C. the money multiplier. D. quantitative easing.

D. quantitative easing.

The neoclassical theory of distribution suggests that factor demand is based on: A. monopsony power. B. the rule, "from each according to his abilities, to each according to his needs." C. the capital-labor ratio. D. the marginal productivity of that factor.

D. the marginal productivity of that factor.

Which is an example of the Cobb-Douglas production function? A. F( K, L ) = A K α L1 −α B. F( K, L ) = A K α + L1 −α C. F( K, L ) = A K α L1 + α D. F( K, L ) = A (K α )/(L1 −α)

A. F( K, L ) = A K α L1 −α

Which best describes changes in U.S. GDP over time? A. Real GDP rises over time, but its growth is not steady. B. Real GDP is constant; only nominal GDP changes. C. Real GDP grows at a consistent rate over time. D. Real GDP falls in about as many years as it rises.

A. Real GDP rises over time, but its growth is not steady.

Which variable adjusts to bring the market for goods and services into equilibrium? A. The real interest rate B. The real profit rate C. The marginal propensity to consume D. The nominal interest rate

A. The real interest rate

If the currency-deposit ratio is 0.7 and the reserve-deposit ratio is 0.2, what is the money multiplier? A. 0.53 B. 0.90 C. 1.89 D. 3.50

C. 1.89

What do we call the difference between what a country produces and what it demands for consumption, investment, and government purchases? A. Net income B. Imports C. Gross national product D. Net exports

D. Net exports

Which is most likely TRUE about how prices behave? A. Prices are sticky in the long run and flexible in the short run. B. Prices are flexible regardless of the time frame. C. Price are typically sticky regardless of the time frame. D. Prices are sticky in the short run and flexible in the long run.

D. Prices are sticky in the short run and flexible in the long run.

An example of fiat money is: A. beaver pelts. B. gold coins. C. cigarettes. D. paper bills.

D. paper bills.

The opportunity cost of holding money is: A. the real interest rate. B. the inflation rate. C. the cost of living. D. the nominal interest rate.

D. the nominal interest rate.

If F(K, L ) = A K α L1 −αis an economy's production function, what is labor's share of output? A. α B. 1 − α C. α/(1 − α) D. (1 − α)/α

B. 1 − α

How do competitive, profit-maximizing firms determine the optimal level of a factor? A. The firm demands each factor of production until that factor's marginal product equals its real factor price. B. The firm demands each factor of production until that factor's marginal product equals zero. C. The firm demands each factor of production until that factor's marginal product equals all other factors' marginal products. D. The firm demands each factor of production until that factor's marginal product equals its nominal factor price.

A. The firm demands each factor of production until that factor's marginal product equals its real factor price.

Which statement is NOT TRUE? A. The net capital outflow equals the opposite of the trade balance. B. The net capital outflow is the excess of domestic saving over domestic investment. C. The trade balance is the amount received for a country's net exports of goods and services. D. Imports decrease a country's GDP, whereas exports increase it.

A. The net capital outflow equals the opposite of the trade balance.

How do economists define 'investment?' A. The purchase of newly created goods and services to add to the capital stock B. The purchase of shares in a publicly-traded corporation C. The purchase of interest-bearing assets such as bonds D. The purchase of existing productive assets in the capital stock

A. The purchase of newly created goods and services to add to the capital stock

How do economists define 'seigniorage?' A. The revenue raised by creating money B. The power to levy taxes C. The ultimate control over an economy's resources D. The supremacy of federal laws over state laws

A. The revenue raised by creating money

Which statement is TRUE? A. Trade deficits do not always signify a serious problem. B. A trade surplus is always better than a trade deficit. C. A trade surplus results in higher levels of domestic investment. D. The trade balance is the most reliable variable indicating the health of an economy.

A. Trade deficits do not always signify a serious problem.

The neoclassical theory of distribution combined with the Cobb-Douglas production function suggest a linkage between: A. productivity growth and real wages. B. productivity growth and nominal output growth. C. capital and labor productivity. D. population growth and real output growth.

A. productivity growth and real wages.

Which best describes the path of U.S. inflation over time? A. Inflation has been steadily growing in recent decades. B. Inflation in recent decades has been less volatile. C. In recent decades, deflation has occurred about as often as inflation. D. The Fed has been able to eliminate inflation.

B. Inflation in recent decades has been less volatile.

Identify to whom credit is given for this equation: 𝑖 =𝑟+𝜋. A. Milton Friedman B. Irving Fisher C. John Maynard Keynes D. Anna J. Schwartz

B. Irving Fisher

Which is NOT an explanation for the lack of capital flows into poorer countries? A. Poorer countries have less human capital. B. Poorer countries exhibit rising marginal productivity of capital. C. Poorer countries have less access to advanced technologies. D. Poorer countries do not have well-established property rights.

B. Poorer countries exhibit rising marginal productivity of capital.

How do economists define the 'real interest rate?' A. The one-year rate on Treasury bills B. The difference between the nominal interest rate and the rate of inflation C. The rate borrowers pay according to the contracts between them and lenders D. The nominal interest on a contract minus the risk premium

B. The difference between the nominal interest rate and the rate of inflation

Which is NOT a variable determining the supply of money? A. The monetary base B. The marginal propensity to save C. The reserve-deposit ratio D. The currency-deposit ratio

B. The marginal propensity to save

What must be TRUE if domestic saving is $100 and domestic investment is $110? A. The net capital outflow is $10. B. The net capital inflow is $10. C. There is a trade surplus of $10. D. GDP must be less than $210.

B. The net capital inflow is $10.

According to the model of a small open economy in the chapter, which is NOT a result of protectionist trade policies? A. The real exchange rate appreciates. B. The trade balance becomes more positive. C. Exports fall. D. Overall, society is worse off.

B. The trade balance becomes more positive.

How do economists define 'gross national product?' A. Total expenditure on an economy's output of final goods and services B. Total expenditure on an economy's output of final goods and services plus net foreign earning C. GDP minus depreciation D. Disposable personal income plus income taxes and nontax payments

B. Total expenditure on an economy's output of final goods and services plus net foreign earning

When comparing economic performance in different years, economists: A. adjust for changes in output. B. adjust for changes in prices. C. adjust for changes in both output and prices. D. do not have to make any adjustments.

B. adjust for changes in prices.

Inflation and nominal interest rates are: A. independent of one another. B. highly positively correlated. C. highly negatively correlated. D. very weakly correlated.

B. highly positively correlated.

The income velocity of money tells us: A. how fast banks process deposits and withdrawals. B. the number of times a dollar bill enters someone's income in a given time period. C. The lag between banks requesting access to reserves and the Fed responding to those requests. D. The size of real GDP when paired with the money supply.

B. the number of times a dollar bill enters someone's income in a given time period.

What is the most important measure of overall economic performance? A. Net national income B. Net exports C. Gross domestic product D. The unemployment rate

C. Gross domestic product

In a supply-and-demand model, which variables are exogenous and which are endogenous? A. Price and income are exogenous, the cost of materials and quantity are endogenous. B. Price and quantity are exogenous, income and the cost of materials are endogenous. C. Price and quantity are endogenous, income and the cost of materials are exogenous. D. Price and income are endogenous, the cost of materials and quantity are exogenous.

C. Price and quantity are endogenous, income and the cost of materials are exogenous

What do economists call the theoretical separation of real variables and nominal variables? A. The quantity theory of money B. The neoclassical revolution C. The classical dichotomy D. Price indexing

C. The classical dichotomy

What does the annual percentage change in the GDP deflator tell us? A. The unemployment rate B. The change in real GDP C. The inflation rate D. The change in nominal GDP

C. The inflation rate

Which is usually implicit in macroeconomic models? A. The interest rate B. The unemployment rate C. The optimizing behavior of households and firms D. The economy's growth rate

C. The optimizing behavior of households and firms

Which best describes the path of U.S. unemployment over time? A. Unemployment rose in the Great Recession and has remained persistent since then. B. Unemployment never falls below 4 to 5 percent. C. There is no discernible long-term trend in unemployment. D. Unemployment only occurs during recessions.

C. There is no discernible long-term trend in unemployment.

Say e is the nominal exchange rate between Merkan dollars and Furnland krone, P is the price level in Merka, and P* is the price level in Furnland. What is the real exchange rate, 𝜖?

c