Section 6 Multiple Choice

If an economy's short-run aggregate supply curve is upward sloping, a Keynesian would argue that an increase in government spending will most likely result in a decrease in the:

Unemployment rate

When the Federal Reserve buys bonds, which of the following happens to interest rates and bond prices? a. Interest rates decrease, bond prices increase b. Interest rates stay the same, bond prices increase c. Interest rates increase, bond prices increase d. Interest rates increase, bond prices decrease e. Interest rates decrease, bond prices decrease

a. Interest rates decrease, bond prices increase

Which of the following arguments is typically associated with classical economists? a. A market economy is self-correcting and thus will not remain in a recession indefinitely. b. A market economy has stable prices and thus is usually free from inflation. c. A market economy requires a strong government to ensure that the market meets the needs of the people. d. A market economy eventually results in monopolies in both the input and output markets. e. A market economy needs only moderate assistance from the government to avoid an extended recession.

a. A market economy is self-correcting and thus will not remain in a recession indefinitely.

Which of the following arguments is typically associated with classical economists? a. A market economy is self-correcting and thus will not remain in a recession indefinitely. b. A market economy has stable prices and thus is usually free from inflation. c. A market economy requires a strong government to ensure that the market meets the needs of the people. d. A market economy needs only moderate assistance from the government to avoid an extended recession. e. A market economy eventually results in monopolies in both the input and output markets.

a. A market economy is self-correcting and thus will not remain in a recession indefinitely.

If a data point on the Short Run Phillips Curve moved from the lower right of the Phillips Curve to the upper left then: a. Aggregate Demand Increased. b. Aggregate Demand decreased. c. Aggregate Supply shifted left. d. Aggregate Supply shifted right. e. Fiscal policy was ineffective.

a. Aggregate Demand Increased.

Which of the following statements best describes the impact of a decrease in Japanese income on aggregate demand in the United States? a. Aggregate demand will decrease because demand for U.S. exports decreases. b. Aggregate demand will decrease because the value of the U.S. dollar decreases relative to the Japanese yen. c. There will be no change in aggregate demand because U.S. aggregate demand depends only on the income of U.S. consumers. d. Aggregate demand will increase because a decrease in income in Japan causes an increase in income in the U.S. e. Aggregate demand will increase because interest rates in the U.S. decrease.

a. Aggregate demand will decrease because demand for U.S. exports decreases.

Which of the following will lead to an increase in the demand for loanable funds in the United States? a. An increase in U.S. government borrowing b. An increase in the supply of loanable funds in other countries c. An increase in household savings d. A decrease in the real interest rate in the United States e. A decrease in the supply of loanable funds in the United States

a. An increase in U.S. government borrowing

Which of the following are true statements about the federal funds rate? o I. It is the same thing as the discount rate. o II. It is the interest rate that banks charge each other for short-term loans. o III. It is influenced by open market operations. a. II and III only b. I and II only c. II only d. III only e. I only

a. II and III only

1. A change in which of the following will cause the short-run aggregate supply curve to shift? -I. the price level -II. government spending -III. the cost of all inputs a. III only b. I only c. II only d. I and III e. I, II, and III

a. III only

Which of the following fiscal policy actions would have the greatest positive potential impact on a recession? a. Increase government expenditure with no additional tax revenues being raised. b. Lower the discount rate. c. Increase taxes and cut spending. d. Increase government spending but keeping the budget balanced by raising taxes. e. Cut taxes.

a. Increase government expenditure with no additional tax revenues being raised.

Which of the following is the strictest, and thereby most liquid, monetary aggregate (that is, definition of the money supply)? a. M1 b. M2 c. currency d. M16 e. the monetary base

a. M1

A surplus of money in the money market will be eliminated how? a. People buy bonds to reduce cash holdings, bidding up their price and pushing interest rates down. b. The Federal Reserve reduces the money supply. c. Banks loan out all excess reserves and interest rates decline. d. Individuals demand more currency and coins. e. The federal government will pass a bill to reduce this.

a. People buy bonds to reduce cash holdings, bidding up their price and pushing interest rates down.

Which of the following monetary policy options would the Federal Reserve be most likely to choose during a recession? a. Selling bonds b. Increasing the reserve requirement c. Spending more on highway construction d. Decreasing the discount rate e. Decreasing income taxes

a. Selling bonds

If the Demand Curve for money shifts to the right, which of the following has most likely occurred? a. The Federal Reserve raised the reserve requirement. b. The Federal Reserve sold treasury securities. c. Households or individuals reduced their holdings of money. d. The Federal Reserve raised the discount rate. e. Households or individuals sought to hold more money as a precaution.

a. The Federal Reserve raised the reserve requirement.

Which of the following statements correctly describes the relationship between bond prices and interest rates? a. The price of a bond varies inversely with market interest rates. b. When market interest rates go up, all bond prices go up. c. The price of a bond is positively related to its interest rate. d. The price of an old bond is not based on interest rates. e. The price of a bond changes only when the fixed payment changes

a. The price of a bond varies inversely with market interest rates.

If the government increases spending without a tax increase and simultaneously no monetary-policy changes are made, which of the following would most likely occur? a. The rise in income may be smaller than the multiplier would predict because the higher interest rates will crowd out private investment spending. b. Income would not rise at all because no new money is available for increased consumer spending. c. The rise in income may be greater than the multiplier would predict because the higher interest rates will stimulate investment spending. d. Income will go up by exactly the amount of the new government spending since this ants as a direct injection to the income stream. e. Income will not go up unless taxes are cut as well.

a. The rise in income may be smaller than the multiplier would predict because the higher interest rates will crowd out private investment spending.

Assume the wage in the labor market is above equilibrium. According to the Classical view, which of the following will occur? a. The wage rate will fall to a market-clearing level. b. There will only be voluntary unemployment at this above-equilibrium wage rate. c. There will be a deficiency of workers willing to work at the prevailing wage. d. There will be persistent unemployment. e. Since the wage rate is not flexible, it will remain above equilibrium.

a. The wage rate will fall to a market-clearing level.

Assuming the current price is above the equilibrium price in the market for oranges, which of the following is true? a. There is excess supply and the price should decrease to the equilibrium price. b. There is neither excess demand nor excess supply. c. There is excess demand and the price should increase to the equilibrium price. d. There is excess supply and the price should increase to the equilibrium price. e. There is excess demand and the price should decrease to the equilibrium price.

a. There is excess supply and the price should decrease to the equilibrium price.

When the central bank increases the money supply to stimulate aggregate demand, workers believe that this action will cause inflation in the future and ask for higher wages to offset the expected increase in inflation. This is an example of: a. adaptive expectations. b. the velocity of money. c. the real balance effect d. rational expectations. e. the money multiplier.

a. adaptive expectations.

According to the short-run Phillips curve, a decrease in unemployment is expected to be accompanied by: a. an increase in inflation b. a decrease in real gross domestic product c. higher labor-force participation rate d. an increase in the government deficit e. an increase in the productivity of cap

a. an increase in inflation

Suppose-a new fear of imminent bank failure pervaded the American economy due to a looming recession and negative economic data Also. suppose this caused large numbers of private citizens to withdraw funds from barks. The most likely Fed action would be to: a. buy bonds. b. sell bonds. c. de-activate the FDIC. d. limit foreign investment in the US. e. increase Reserve Requirements.

a. buy bonds

Should the Fed increase or decrease the reserve requirement in order to lower the unemployment rate? a. decrease b. increase

a. decrease

Econoland is experiencing high inflation rates. What fiscal policy would be appropriate to address the inflationary gap? a. decrease government purchases and increase taxes b. increase government purchases and increase taxes c. increase the money supply and decrease taxes d. increase government purchases and decrease taxes e. increase government transfer payments and decrease taxes

a. decrease government purchases and increase taxes

If personal income taxes increase, what will happen to inflation and unemployment in the short run? a. decreases b. stays the same c. increases

a. decreases

Which of the following policies would a Keynesian recommend during a period of high unemployment and low inflation? a. decreasing taxes to stimulate aggregate demand b. decreasing the money supply to reduce aggregate demand c. decreasing government spending to stimulate aggregate supply d. balancing the budget to stimulate aggregate supply e. imposing wage and price controls to stimulate aggregate supply

a. decreasing taxes to stimulate aggregate demand

If aggregate demand increases, what will happen to actual inflation and expected inflation in the short run? a. increase, no change b. no change, decrease c. increase, decrease d. decrease, decrease e. no change, no change

a. increase, no change

An increase in which of the following will lead to lower inflation and lower unemployment? a. productivity of the inputs b. exports c. aggregate demand d. government spending e. investment spending

a. productivity of the inputs

When people with higher incomes pay a higher tax rate and those with lower incomes pay a lower tax rate, we say that the income tax is: a. proportionate b. progressive c. regressive d. discounted e. flat

a. proportionate

When the central bank increases the money supply to stimulate aggregate demand, workers believe that this action will cause inflation in the future and ask for higher wages to offset the expected increase in inflation. This is an example of: a. rational expectations b. the money multiplier c. adaptive expectations d. the real balance effect e. the velocity of money

a. rational expectations

All of the following are financial assets except a. required reserves b. bonds c. bank deposits d. loans e. stocks

a. required reserves

The money supply curve is vertical no matter what the interest rate is because: a. the Federal Reserve controls the supply of money. b. the free market determines it. c. the demand curve for money is downward sloping. d. real interest rates determine its quantity. e. the Federal Government controls the supply of money.

a. the Federal Reserve controls the supply of money.

To the holder of a bond, a bond is an asset because: a. the bond holder is owed money in the future. b. the Federal Reserve holds bonds on its balance sheet. c. the bond holder has to repay the face value of the bond. d. the bond gives the bond holder ownership in a company. e. the bond cannot be resold.

a. the bond holder is owed money in the future.

A change in government spending will have a greater short run impact on real output when a. the marginal propensity to consume is larger. b. the velocity of money is higher. c. the marginal propensity to consume is lower. d. the velocity of money is lower. e. interest rates rise.

a. the marginal propensity to consume is larger.

Government Spending generally falls into two categories, spending on goods and services and: a. transfer payments. b. interest on the federal debt. c. tariffs. d. corporate tax rebates. e. debt reduction.

a. transfer payments.

In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increasing income tax rates and reducing government expenditures. According to the Keynesians, implementation of these policies is most likely to increase: a. unemployment. b. aggregate demand. c. aggregate supply. d. consumer prices. e. the rate of economic growth.

a. unemployment.

In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increasing income tax rates and reducing government expenditures. According to the Keynesians, implementation of these policies is most likely to increase: a. unemployment. b. consumer prices. c. aggregate demand. d. aggregate supply. e. the rate of economic growth.

a. unemployment.

Suppose you find that the measured unemployment rate is 5% in an economy. Which of the following is true? a. According to the Classical model, wages would rise in the next period to bring down the unemployment rate. b. According to the Classical model, this could be frictional unemployment. c. This finding contradicts the Classical model since there is no unemployment in equilibrium within the classical model. d. According to the Classical model, the government should decrease demand to bring down the unemployment rate. e. According to the Classical model, the government should increase demand to bring down the unemployment rate.

b. According to the Classical model, this could be frictional unemployment.

If businesses are experiencing an unplanned increase in inventories, which of the following is most likely to be true? a. The economy is growing and will continue to grow until a new equilibrium level of spending is reached. b. Aggregate demand is less than output, and the level of spending will decrease. c. Aggregate demand is greater than output, and the level of spending will increase. d. Planned investment is greater than planned saving, and the level of spending will decrease. e. Planned investment is less than planned saving, and the level of spending will increase.

b. Aggregate demand is less than output, and the level of spending will decrease.

Assume the Fed sets lowering the unemployment rate as its policy goal. What open market operation should the Fed use to achieve this goal? a. Sell Bonds b. Buy Bonds

b. Buy Bonds

If the current wage or price of labor is above the equilibrium, which of the following is true? a. The economy is at full employment. b. Classical economists would expect the wage rate to fall to a market-clearing level. c. There is only structural unemployment. d. Keynesians believe that wage rates are highly competitive and that the economy will soon have only cyclical unemployment. e. The economy is producing above its full employment level.

b. Classical economists would expect the wage rate to fall to a market-clearing level.

According to the Keynesian view, which of the following is an inappropriate short-term policy if the economy is in a recession? a. Decreasing sales taxes b. Decreasing the deficit c. Decreasing interest rates d. Increasing government spending e. Decreasing income taxes

b. Decreasing the deficit

How is economic growth affected when financial markets do not function well? a. Economic growth is slowed because too many loans are given out with the surplus of savings. b. Economic growth is slowed because less savings are redirected toward investment in new capital. c. Economic growth is not affected because the increase in savings only increases the profits of the financial institutions and not the capital stock. d. Economic growth is accelerated because less savings are redirected toward investment in new capital. e. Economic growth is accelerated because more savings are redirected toward investment in new capital.

b. Economic growth is slowed because less savings are redirected toward investment in new capital.

The economy of a country is currently in equilibrium at point A in the diagram above. If the government does nothing and wages are flexible, which of the following will most likely occur in the long run? a. Rising wages will shift the short-run aggregate supply curve to the right, producing full employment. b. Falling wages will shift the short-run aggregate supply curve to the right, producing full employment. c. Rising wages will shift the aggregate demand curve to the right, producing full employment. d. The economy will remain at point A. e. Falling wages will shift the aggregate demand curve to the right, producing full employment.

b. Falling wages will shift the short-run aggregate supply curve to the right, producing full employment.

If the economy is in a severe recession, a Keynesian would argue that which of the following is the most effective in stimulating production? a. Government spending decreases. b. Government spending increases. c. Personal income taxes are increased. d. The central bank sells bonds on the open market. e. The central bank buys bonds on the open market.

b. Government spending increases.

Would you expect consumer purchases of homes or food would change more when Fed policies change interest rates? a. Food b. Homes

b. Homes

If a one year, a $1000 bond pays 5% APR then which of the following is true? o I. The bond will pay $50 at maturity. o ll. Maturity occurs after one year. o lll. Deficit spending has occurred. a. I only b. I and II c. I and III d. II and III e. I, II and III

b. I and II

In a closed economy with no taxes in which the marginal propensity to consume (MPC) is 0.75, which of the following is true? a. If income is $100, then saving is $75. b. If income is $100, then saving is $25. c. If income is $200, then consumption is $75. d. If income is $200, then saving is $100. e. If income is $100, then consumption is $50.

b. If income is $100, then saving is $25.

If an economy is operating at an output level above full employment, what will eventually happen to inflation expectations and the short-run Phillips curve? a. Inflation expectations decrease shifting the short-run Phillips curve to the left. b. Inflation expectations will increase shifting the short-run Phillips curve to the right. c. Inflation expectations decrease shifting the short-run Phillips curve to the right. d. Inflation expectations increase and the short-run Phillips curve remains the same. e. Inflation expectations will increase shifting the short-run Phillips curve to the left.

b. Inflation expectations will increase shifting the short-run Phillips curve to the right.

Keynesian Economics is concerned with: a. Identifying indicators to evaluate the success of an economy b. Instances of market failure that provide the Government with scope to intervene with macroeconomic policies to achieve better outcomes c. Studying the interactions of the individual units of the economy and seeking insight into the motivation of individual consumers and producers. d. Understanding why long run growth is interrupted, which leads to recessions

b. Instances of market failure that provide the Government with scope to intervene with macroeconomic policies to achieve better outcomes

An increase in which of the following will lead to lower inflation and lower unemployment? a. Government Spending b. Labor Productivity c. Aggregate Demand d. Exports e. The international value of domestic currency

b. Labor Productivity

Which of the following is a key feature of Keynesian economics? a. Wages are more flexible than prices. b. Macroeconomic equilibrium can occur at less than full employment. c. The level of government expenditure depends mostly on interest rates. d. Supply creates its own demand. e. The level of saving depends mostly on the interest rate.

b. Macroeconomic equilibrium can occur at less than full employment.

An important assumption in Keynesian theory is that: a. Price rigidity will cause downturns in the economy to self-correct. b. Prices are sticky and decreases in aggregate demand will lead to an increase in unemployment. c. When aggregate demand is inadequate, prices will fall. d. When interest rates are high, many businesses borrow money. e. Changes in the money supply are the major cause of changes in real output and price level.

b. Prices are sticky and decreases in aggregate demand will lead to an increase in unemployment.

With the inflation rate higher than the Federal Reserve's target, the Fed decides it wants to use open market operations to try to bring the inflation rate down. a. Buy Bonds b. Sell Bonds

b. Sell Bonds

Which of the following statements would ''supply side'' economists disagree with? a. A tax cut is likely to increase aggregate supply by providing greater rewards for risk taking. b. Tax changes cause shifts in aggregate supply that work against shifts in aggregate demand, thus reducing the effect of the tax change on real GDP. c. A decrease in tax rates does not necessarily result in a decrease in tax revenues. d. A tax increase is likely to decrease aggregate supply by decreasing after-tax wages and thus providing disincentives to work. e. A tax cut is likely to increase aggregate supply by boosting saving, investments and thus capital accumulation.

b. Tax changes cause shifts in aggregate supply that work against shifts in aggregate demand, thus reducing the effect of the tax change on real GDP.

How would an improvement in production technology affect a country's production possibilities curve and LRAS curve? a. The PPC would be unaffected and the LRAS would shift to the right. b. The PPC would shift away from the origin and the LRAS would shift to the right. c. The PPC would shift toward the origin and the LRAS would shift to the left. d. The PPC would shift toward the origin and the LRAS would shift to the right. e. The PPC would shift away from the origin and the LRAS would shift to the left.

b. The PPC would shift away from the origin and the LRAS would shift to the right.

How do we correctly describe the relationship between bond prices and interest rates? a. The price of a bond is positively related to its interest rate. b. The price of a bond varies inversely with market interest rates. c. The price of an old bond is not based on interest rates. d. When market interest rates go up, bond prices go up. e. The price of a bond changes only when the fixed payment changes.

b. The price of a bond varies inversely with market interest rates.

Which of the following is true if the economy is producing at the full employment level of output? a. The balance of trade is in equilibrium. b. There is still frictional unemployment. c. The unemployment rate is zero. d. No person is receiving unemployment compensation from the government. e. The government's budget is balanced.

b. There is still frictional unemployment.

According to the Keynesian view, the Great Depression could be characterized as a period during which: a. Prices and wages increased rapidly. b. There was a prolonged excess supply of labor. c. Prices increased rapidly, but wages stayed low. d. Prices stayed low, but wages increased rapidly. e. There was a prolonged excess demand for labor

b. There was a prolonged excess supply of labor.

Which of the following is NOT a possible cause of simultaneous increases in inflation and unemployment? a. inflation expectations increase b. a drop in interest rates c. input prices increase d. labor productivity decreases

b. a drop in interest rates

In the short run, following a decrease in aggregate demand there will be: a. an inward shift of the Phillips curve. b. a movement downward along an existing Phillips curve. c. an outward shift in the Phillips curve. d. no change on a Phillips curve. e. a movement upward along an existing Phillips curve.

b. a movement downward along an existing Phillips curve.

In the short run, following an increase in aggregate demand there will be: a. a movement downward along an existing Phillips curve. b. a movement upward along an existing Phillips curve. c. no change on a Phillips curve. d. an inward shift of the Phillips curve. e. an outward shift in the Phillips curve.

b. a movement upward along an existing Phillips curve.

In the short run, when the Fed increases the quantity of money: a. the money supply curve shifts leftward. b. bond prices rise and the interest rate falls. c. bond prices rise and the interest rate rises. d. demand for money increases. e. bond prices fall and the interest rate rises.

b. bond prices rise and the interest rate falls.

To reduce inflation, the Federal Reserve could a. contract the money supply in order to lower interest rates, which increases investment. b. contract the money supply in order to raise interest rates, which decreases investment. c. buy bonds and decrease the discount rate to encourage borrowing. d. expand the money supply in order to lower interest rates, which increases investment. e. expand the money supply in order to raise interest rates, which increases investment.

b. contract the money supply in order to raise interest rates, which decreases investment.

When banks make loans to each other, they charge the: a. prime rate. b. federal funds rate. c. mortgage rate. d. discount rate. e. market rate.

b. federal funds rate.

Under which of the following circumstances would expansionary fiscal policy be most effective? a. high unemployment and high inflation b. high unemployment and low inflation c. low unemployment and high inflation d. low unemployment and low inflation

b. high unemployment and low inflation

If aggregate demand increases, what will happen to actual inflation and expected inflation in the short run? a. no change, decrease b. increase, no change c. no change, no change d. increase, decrease e. decrease, decrease

b. increase, no change

When interest rates increase, how is the price of existing bonds affected? a. There is not enough information to answer without knowing the actual interest rate. b. The price increases. c. The price is not related to interest rates. d. The price decreases. e. The price stays the same.

d. The price decreases.

The neutrality of money refers to the situation where a. increases in interest rates are matched by decreases in the price of bonds. b. increases in the money supply eventually result in no change in real output. c. money has not been the cause of war. d. increases in interest rates are matched by increases in the price of bonds. e. decreases in the money supply result in increases in the interest rate in the short run.

b. increases in the money supply eventually result in no change in real output.

According to the short-run Phillips Curve, there is a trade-off between a. the growth of the money supply and interest rates b. inflation and unemployment c. economic growth and interest rates d. unemployment and economic growth e. interest rates and inflation

b. inflation and unemployment

Suppose the economy had the following statistics o 3% unemployment o Real GDP growth of 4.5% o 5% inflation The most likely monetary response to this situation would be to: a. decrease the Reserve Requirement. b. sell bonds on the open market. c. buy gold. d. increase the federal funds rate. e. increase the prime rate.

b. sell bonds on the open market.

In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increasing income tax rates and reducing government expenditures. According to Keynesian theory, implementation of these policies is most likely to increase: a. the rate of economic growth b. unemployment c. aggregate supply d. aggregate demand e. consumer prices

b. unemployment

A. commercial bank holds $500,000 in demand deposit liabilities and $120,000 in reserves. If the required reserve ratio is 20 percent, which of the following is the maximum amount by which this single commercial bank and the maximum amount by which the banking system can increase loans? o Amount created by single bank Amount created by banking system a. $5,000 $25,000 b. $20,000 $80,000 c. $20,000 $100,000 d. $30,000 $150,000 e. $120,000 $500,000

c. $20,000 $100,000

Which of the following best describes monetary policy? a. The government fixes an exchange rate between its currency and another country's currency. b. A household chooses to save money in a bank account instead of spending the money on goods and services. c. A central bank changes a country's money supply in order to influence interest rates and aggregate demand. d. A legislative body's votes to increase spending to influence aggregate demand and unemployment. e. A business chooses to use its profits to purchase more capital equipment instead of paying the profits to shareholders.

c. A central bank changes a country's money supply in order to influence interest rates and aggregate demand.

What is the relationship between real interest rates and investment? a. As real interest rates rise, investment spending rises and then falls marginally. b. There is no long term relationship between real interest rates and Investment. c. As real interest rates fall, investment spending rises. d. As real interest rates fall, investment spending falls. e. A slight increase in real interest rates tends to discourage investments, but higher interest rates entice funds into investments.

c. As real interest rates fall, investment spending rises.

The definition of disposable income: a. The spare income households have to spend on leisurely activities. b. The income households have left over after paying their daily living expenses. c. The income households have left over after they pay taxes. d. The income households receive from providing their services to the firm sector.

c. The income households have left over after they pay taxes.

The opportunity cost of holding money is equal to: a. the quantity of money demanded. b. the money supply. c. the price level. d. the interest rate. e. the supply of loanable funds.

d. the interest rate.

Which of the following occur when a short-run Phillips curve shifts to the right? a. At each unemployment rate, the inflation rate is lower and at each inflation rate, the unemployment rate is lower. b. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate is lower. c. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate remains the same. d. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate is higher. e. At each unemployment rate, the inflation rate is lower and at each inflation rate, the unemployment rate is higher.

c. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate remains the same.

For a given market supply curve for paper, which of the following is true? a. When demand shifts out or increases, there is a movement down the supply curve towards a greater quantity and lower price. b. An increase in the number of firms producing paper will be reflected in a move up the market supply curve. c. At higher paper prices, a greater quantity is supplied. d. At lower paper prices, a greater quantity is supplied. e. An increase in demand should lead to a decrease (or inward shift) in the market supply curve.

c. At higher paper prices, a greater quantity is supplied.

The M1 definition of money includes which of the following? a. Money market accounts and currency in circulation b. Savings accounts and small time deposits c. Currency in circulation and demand deposits d. Demand deposits and savings accounts e. Small time deposits and demand deposits

c. Currency in circulation and demand deposits

The economy automatically moves towards equilibrium when: a. Firms systematically respond to changes in inventory levels b. Consumers notice there is more or less products to buy and adjust their habits accordingly c. Firms systematically respond to changes in unexpected inventory levels d. The government tries to make up the difference through taxation or spending

c. Firms systematically respond to changes in unexpected inventory levels

The graph above shows the macroeconomic conditions of Wattsonia. Many economists estimate that the natural rate of unemployment is 6 percent. If this is true, and the current rate of unemployment is 5.1 percent, in what range of real gross domestic product is the economy currently producing? a. Less than Y1 b. At Y2 c. Greater than Y2 d. Greater than Y1 and less than Y2 e. At Y1

c. Greater than Y2

What will happen to the supply of loanable funds and the equilibrium interest rate if the Federal Reserve buys government securities? o Supply Interest rate a. Increase Increase b. Decrease Decrease c. Increase Decrease d. Decrease Remain unchanged

c. Increase Decrease

If an economy is operating at an output level above full employment, what will eventually happen to inflation expectations and the short-run Phillips curve? a. Inflationary expectations will increase shifting the short-run Phillips curve to the left. b. Inflationary expectations decrease shifting the short-run Phillips curve to the left. c. Inflationary expectations will increase shifting the short-run Phillips curve to the right. d. Inflationary expectations decrease shifting the short-run Phillips curve to the right. e. Inflationary expectations increase and the short-run Phillips curve remains the same.

c. Inflationary expectations will increase shifting the short-run Phillips curve to the right.

Which of the following does the Fed have the least amount of control over? a. Short-Term Interest Rates b. Banking Reserves c. Long-Term Interest Rates d. Federal Funds Rate e. T-Bill Rates

c. Long-Term Interest Rates

Which of the following is not a monetary policy tool that central banks use to influence the economy? a. Increasing the discount rate b. Selling bonds in the open market c. Lowering income taxes d. Buying bonds in the open market e. Increasing the reserve requirement

c. Lowering income taxes

Which of the following is a key feature of Keynesian economics? a. The level of saving depends mostly on the interest rate. b. The level of government expenditure depends mostly on interest rates. c. Macroeconomic equilibrium can occur at less than full employment. d. Supply creates its own demand. e. Wages are more flexible than prices.

c. Macroeconomic equilibrium can occur at less than full employment.

Which of the following is most likely the result of the Fed implementing a contractionary monetary policy? a. The unemployment rate would fall. b. The demand for investment would fall. c. Nominal interest rates would rise. d. Real GDP would rise. e. The price level would rise.

c. Nominal interest rates would rise.

Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation? a. Inflation had been under predicted. b. The real interest rate had been negative. c. People who borrowed funds at the nominal interest rate during this time period would lose. d. The real interest rate had exceeded the nominal interest rate. e. The economy would expand because of the increased investment and spending.

c. People who borrowed funds at the nominal interest rate during this time period would lose.

Which statement is not correctly associated with "price rigidity"? a. Changes to equilibrium quantities are greater than if prices changed frequently b. Changes in market conditions, which cause shifts of the demand curve, do not change the equilibrium price c. Since prices are expected to remain "sticky" in the short term, the equilibrium quantity of a good cannot change d. The supply curve is horizontal

c. Since prices are expected to remain "sticky" in the short term, the equilibrium quantity of a good cannot change

Which of the following would lead to a decrease in the money supply? a. The federal government spends less money. b. The FED lowers reserve requirements. c. The FED sells government securities in the secondary market. d. Taxes are reduced. e. The FED lowers the discount rate.

c. The FED sells government securities in the secondary market.

According to Say's Law: a. The act of producing goods will not generate income sufficient to purchase all of the goods produced. b. The act of demanding goods will generate sufficient incentives for firms to match the demand with supply. c. The act of producing goods will generate income sufficient to purchase all of the goods produced. d. The government needs to play an important role to ensure that enough income is generated for the purchase of all of the goods produced. e. The act of demanding goods will not generate sufficient incentives for firms to match the demand with supply.

c. The act of producing goods will generate income sufficient to purchase all of the goods produced.

According to the Keynesian view, unemployment caused by inadequate demand could persist because: a. Workers do not have the skills that firms need. b. Workers receiving unemployment benefits have no incentive to look for employment. c. Wages are rigid. d. Government has set an interest rate that is too low. e. Technological developments have induced firms to replace workers with machines and robots.

c. Wages are rigid.

Which of the following changes would cause an economy's aggregate demand curve to shift to the right? a. an increase in autonomous consumption spending b. a decrease in the money supply c. a decrease in the overall price level in the economy d. an increase in interest rates e. an increase in spending on imports

c. a decrease in the overall price level in the economy

An inflationary gap could be reduced by: a. a decrease in the discount rate. b. a decrease in the reserve requirement. c. an increase in the income tax rate. d. an increase in government spending. e. an increase in the supply of money.

c. an increase in the income tax rate.

An inflationary gap could be reduced by: a. a decrease in the discount rate. b. a decrease in the reserve requirement. c. an increase in the income tax rate. d. an increase in the supply of money. e. an increase in government spending.

c. an increase in the income tax rate.

Suppose-a new fear of imminent bank failure pervaded the American economy due to a looming recession and negative economic data Also. suppose this caused large numbers of private citizens to to withdraw funds from barks. The most likely Fed action would be to: a. sell bonds. b. increase Reserve Requirements. c. buy bonds. d. limit foreign investment in the US. e. de-activate the FDIC.

c. buy bonds.

If personal income taxes increase, what happens to aggregate demand? a. stays the same b. increase c. decrease

c. decrease

If the economy was in a severe recession, the most expansionary fiscal policy would be to: a. increase social security taxes and increase government spending by equal amounts. b. decrease both personal income taxes and government spending by equal amounts. c. decrease personal income taxes and increase government spending by equal amounts. d. increase the money supply and increase government spending by the same proportion. e. decrease both the reserve requirement and government spending by the same proportion.

c. decrease personal income taxes and increase government spending by equal amounts.

A positive shift in the supply of a good would cause prices to ______ and the quantity to ______. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

c. decrease; increase

Which of the following is not included in M2? a. savings accounts b. cash and coins c. gold d. checkable deposits e. certificates of deposit

c. gold

Econoland is in short-run equilibrium with output below full employment. Which of the following would be an appropriate fiscal policy to increase output and decrease unemployment? a. increase transfer payments and decrease interest rates b. decrease interest rates and expand the money supply c. increase government purchases and decrease taxes d. increase interest rates and sell bonds e. decrease taxes and decrease government purchases

c. increase government purchases and decrease taxes

If a worker's nominal wage rate increases from $10 to $12 per hour and at the same time the general price level increases by 10%, the worker's real wage has: a. increased by approximately 20%. b. decreased by approximately 20%. c. increased by approximately 10%. d. not changed. e. decreased by approximately 10%.

c. increased by approximately 10%.

As the price level decreases, the value of money: a. increases, so people want to hold more of it. b. decreases, so people want to hold less of it. c. increases, so people want to hold less of it. d. decreases, so people want to hold more of it. e. stays constant, so people want to hold less of it.

c. increases, so people want to hold less of it

The vertical and horizontal axes for the Phillips curve graph are labeled respectively as: a. inflation rate, employment rate. b. just expected inflation rate, unemployment rate. c. inflation rate, unemployment rate. d. just expected inflation rate, employment rate. e. inflation rate, RGDP.

c. inflation rate, unemployment rate.

According to Keynesian theory, the most important determinant of saving and consumption is the: a. flexibility of wages and prices. b. price level. c. level of income. d. interest rate. e. level of employment.

c. level of income.

Assuming that the Federal Reserve sells bonds what happens to the price of bonds? a. price stays the same b. price falls c. price goes up

c. price goes up

The intersection of the short-run aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium level of: a. real investment and the interest rate. b. real disposable income and unemployment. c. real gross domestic product and the price level. d. government expenditures and taxes. e. imports and exports.

c. real gross domestic product and the price level.

The Net Export Effect may: a. reduce monetary policy. b. reduce the effectiveness of trade barriers. c. reduce the effectiveness of fiscal policy. d. reduce automatic stabilizer impact. e. increase government deficit spending.

c. reduce the effectiveness of fiscal policy.

If AD decreases (thus decreasing inflation in the short run) what happens to unemployment, and how would this be illustrated on a short-run Phillips curve graph? a. unemployment decreases, moving up along an existing short-run Phillips curve b. unemployment increases, shifting the short-run Phillips curve to the left c. unemployment increases, moving down along an existing short-run Phillips curve d. unemployment increases, moving up along an existing short-run Phillips curve e. unemployment increases, shifting the short-run Phillips curve to the right

c. unemployment increases, moving down along an existing short-run Phillips curve

If an economy's short-run aggregate supply curve is upward sloping, a Keynesian would argue that an increase in government spending will most likely result in a decrease in the: a. real level of output. b. price level. c. unemployment rate. d. interest rate. e. government's budget deficit.

c. unemployment rate.

Suppose the Reserve Ratio is 10% and a bank with no excess reserves had $100,000 deposited into a checking account. What would the potential increase in the money supply be? a. $100,000 which is the amount of the deposit. b. $10,000 because the increase in money supply is equal to the reserve requirement. c. $0 because if the bank has no excess reserves at time of deposit the bank must keep it all. d. $900,000 because excess reserves impact will be 10 to 1 impact. e. $1,000,000 because once the money is lent out it will have a 10 to 1 impact.

d. $900,000 because excess reserves impact will be 10 to 1 impact (actually $90,000)

If the legal reserve requirement is 25 percent, the value of the simple deposit expansion multiplier is a. 5.0 b. 2.0 c. 1.0 d. 4.0 e. 10.0

d. 4.0

If the SRPC date pint moved from the lower right of the Phillips Curve to the upper left of the curve then: a. Aggregate Supply shifted left. b. Aggregate Supply shifted right. c. Aggregate Demand decreased. d. Aggregate Demand Increased. e. Fiscal policy was ineffective.

d. Aggregate Demand Increased

In considering whether aggregate supply (AS) is upward sloping or vertical, which of the following statements about Keynesians and Classical economists is most accurate? a. An upward sloping AS is Keynesian because it reflects greater wage and price flexibility. b. An upward sloping AS is Classical because it reflects greater wage and price flexibility. c. An upward sloping AS is Classical because it reflects less wage and price flexibility. d. An upward sloping AS is Keynesian because it reflects less wage and price flexibility. e. An upward sloping AS could be either Classical or Keynesian because it reflects greater wage flexibility but less price flexibility.

d. An upward sloping AS is Keynesian because it reflects less wage and price flexibility.

Which of the following occur when a short-run Phillips curve shifts to the right? a. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate remains the same. b. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate is lower. c. At each unemployment rate, the inflation rate is lower and at each inflation rate, the unemployment rate is higher. d. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate is higher. e. At each unemployment rate, the inflation rate is lower and at each inflation rate, the unemployment rate is lower.

d. At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate is higher.

Which of the following does the Federal Reserve use most often to combat a recession? a. Increasing the federal funds rate b. Selling securities c. Increasing the discount rate d. Buying securities e. Reducing the reserve requirement

d. Buying securities

Which of the following will move the government budget toward surplus? a. Contractionary monetary policy b. A recession c. Supply-side growth policies d. Contractionary fiscal policy e. Expansionary fiscal policy

d. Contractionary fiscal policy

There is relatively more crowding out as the result of expansionary fiscal policy when a. government spending improves profit expectations among businesses aggregate supply is vertical b. the investment demand curve is elastic c. expansionary monetary policy accompanies the fiscal policy d. the investment demand curve is inelastic

d. the investment demand curve is inelastic

In the Classical view of the world, which of the following statements is correct? a. Say's Law is rejected, as it is demand that creates supply. b. To reduce cyclical unemployment, the government needs to undertake public works programs. c. Cyclical unemployment exists because the wage is too low; the wage needs to be increased. d. Cyclical unemployment will eventually be reduced and eliminated with competitive, market-clearing wages. e. Deficient aggregate demand is a persistent problem, both in the short run and in the long run.

d. Cyclical unemployment will eventually be reduced and eliminated with competitive, market-clearing wages.

Suppose the economy of a country is currently in a recessionary gap. A classical economist would argue that which of the following will occur? a. Rising wages will shift the aggregate demand curve to the right, producing full employment. b. The economy will remain in its current equilibrium level of output because of sticky wages. c. Rising wages will shift the short-run aggregate supply curve to the right, producing full employment. d. Falling wages will shift the short-run aggregate supply curve to the right, producing full employment. e. Falling wages will shift the aggregate demand curve to the right, producing full employment.

d. Falling wages will shift the short-run aggregate supply curve to the right, producing full employment.

Suppose the economy of a country is currently in a recessionary gap. A classical economist would argue that which of the following will occur? a. Rising wages will shift the aggregate demand curve to the right, producing full employment. b. The economy will remain in its current equilibrium level of output because of the paradox of thrift. c. Rising wages will shift the short-run aggregate supply curve to the right, producing full employment. d. Falling wages will shift the short-run aggregate supply curve to the right, producing full employment. e. Falling wages will shift the aggregate demand curve to the right, producing full employment.

d. Falling wages will shift the short-run aggregate supply curve to the right, producing full employment.

If the Fed sought to drastically reduce the money supply one would expect: a. interest rates to fall. b. congress to pass new Minimum Wage laws. c. decreased foreign investment. d. GDP to fall unless velocity increased. e. the rich to pay higher taxes due to increased nominal wages within our progressive income tax system.

d. GDP to fall unless velocity increased

If the economy is in a severe recession, a Keynesian would argue that which of the following is the most effective in stimulating production? a. Government spending decreases. b. Personal income taxes are increased. c. The central bank decreases the money supply. d. Government spending increases. e. The central bank increases the money supply.

d. Government spending increases.

According to the Classical model, an increase in the money supply causes an increase in which of the following? o I. the price level o II. nominal gross domestic product o III. nominal wages a. II and III only b. I only c. II only d. I, II, and III e. III only

d. I, II, and III

Which of the following are formal and legitimate criticisms of Fiscal Policy? o I. Re-election lag o II. Administrative Lag o III. Recognition lag o IV. Operational lag a. I only b. I and II c. II and III d. II, III and IV e. III and IV

d. II, III, and IV

Which of the following statements is false? a. There is some frictional or structural unemployment at any point in the business cycle b. Unemployment in the economy can be disaggregated into frictional, structural and cyclical components c. The natural rate of unemployment can be attributed to structural and frictional unemployment d. If the actual rate of unemployment is greater than the natural rate of unemployment, then structural unemployment is greater than the long run average

d. If the actual rate of unemployment is greater than the natural rate of unemployment, then structural unemployment is greater than the long run average

Which of the following fiscal actions will have the best impact on correcting an economy in mild recession? a. Increased Taxes. b. Increased minimum wage. c. Decrease Government purchases to offer a middle class tax break with the savings. d. Increase Government purchases of goods and services e. Reduce business subsidies.

d. Increase Government purchases of goods and services

If aggregate demand increases (thus decreasing unemployment) what happens to inflation in the short run, and how would this be illustrated on a short-run Phillips curve graph? a. inflation decreases, moving up along an existing short-run Phillips curve b. inflation increases, shifting a short-run Phillips curve to the right c. inflation increases, shifting the short-run Phillips curve to the left d. Inflation increases, moving up along an existing short-run Phillips curve e. inflation decreases, moving down along an existing short-run Phillips curve

d. Inflation increases, moving up along an existing short-run Phillips curve

Suppose the Federal Reserve buys $400,000 worth of securities from the securities dealers on the open market. If the reserve requirement is 20% and the hanks hold no excess reserves, what will happen to the total money supply? a. It will be unchanged. b. It will contract by $800,000. c. It will expand by $800,000. d. It will expand by $2,000,000. e. It will contract by $2,000,000.

d. It will expand by $2,000,000.

In 2008 the Fed took the extraordinary step of buying distressed stock from troubled banks. This activity is most effectively termed: a. Liquidity trap. b. Open Market Operations. c. Distress Call. d. Quantitative Easing. e. Inspiration Point.

d. Quantitative Easing

Which of the following is equal to one? a. The tax multiplier b. The money (or banking) multiplier c. The spending (or expenditure) multiplier d. The balanced budget multiplier e. The elasticity of the long-run aggregate supply curve

d. The balanced budget multiplier

According to the long-run Phillips Curve, which of the following is true? a. Increased automation will lead to lower levels of structural unemployment in the long run. b. Changes in the composition of the overall demand for labor tend to be deflationary in the long run. c. Unemployment increases with an increase in inflation. d. The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand. e. Unemployment decreases with an increase in inflation.

d. The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.

Suppose that in a certain year the demand for oranges increases and the supply of oranges increases as well. Which of the following is true for the market for oranges in that year? a. The quantity of oranges sold will rise unambiguously and the price of oranges will rise unambiguously as well . b. The quantity of oranges sold will rise unambiguously but the price of oranges will fall unambiguously. c. You need more information to determine whether the quantity of oranges sold will rise as well as more information to determine whether the price of oranges will rise. d. The quantity of oranges sold will rise unambiguously, but you need more information to determine whether the price will rise. e. The demand for oranges and the supply of oranges cannot both increase in the same year because the ceteris paribus condition holds in all economic markets.

d. The quantity of oranges sold will rise unambiguously, but you need more information to determine whether the price will rise.

Assuming a binding price floor, which of the following will be true? a. A quantity greater than the equilibrium quantity will be demanded. b. The quantity demanded will equal the quantity supplied. c. The price at the price floor must be less than the equilibrium price. d. There will be an excess supply of the good. e. There will be a shortage of the good.

d. There will be an excess supply of the good.

Which of the following will most likely result from a decrease in government spending? a. an increase in output b. an increase in the price level c. an increase in employment d. a decrease in aggregate demand e. a decrease in aggregate supply

d. a decrease in aggregate demand

An unanticipated decrease in aggregate demand when the economy is in equilibrium will result in: a. a decrease in real gross domestic product. b. a decrease in voluntary unemployment. c. a decrease in aggregate supply. d. a decrease in the natural rate of unemployment. e. a decrease in unplanned inventories.

d. a decrease in the natural rate of unemployment.

Which of the following policies would a Keynesian economist most likely recommend in an economy with an annual inflation rate of 2 percent and an unemployment rate of 11 percent? a. an increase in income taxes rates and an increase in the money supply b. an increase in transfer payments and a decrease in the money supply c. an increase in defense spending and a decrease in the money supply d. a decrease in the tax rate on corporate profits and an increase in the money supply e. a decrease in government spending and an increase in the money supply

d. a decrease in the tax rate on corporate profits and an increase in the money supply

An increase in short-run aggregate supply caused by declining key input prices would be consistent with which of the following? a. a movement up along an existing short-run Phillips curve b. a shift of the short-run Phillips curve to the right c. a flattening of an existing short-run Phillips curve d. a shift of the short-run Phillips curve to the left e. a movement down along an existing short-run Phillips curve

d. a shift of the short-run Phillips curve to the left

In an inflationary gap, which of the following responses would be neither favorable to Keynesians nor Classical economists? a. an increase in personal income taxes b. an increase in interest rates c. an increase in nominal wages d. an increase in the money supply e. a decrease in net exports

d. an increase in the money supply

In the short run, when the Fed decreases the quantity of money: a. demand for money increases. b. bond prices rise and the interest rate falls. c. the money supply curve shifts rightward. d. bond prices fall and the interest rate rises. e. bond prices rise and the interest rate rises

d. bond prices fall and the interest rate rises.

Fiscal policy refers to a. increases in taxes to fight recessions. b. decreases in taxes to fight inflations. c. federal deficits. d. changes in government spending and taxes to fight recessions or inflations. e. federal surpluses.

d. changes in government spending and taxes to fight recessions or inflations.

An economic recession would imply that the actual rate of unemployment is _____ than the natural rate of unemployment, and actual output is _____ than potential output. a. greater; greater b. less; less c. greater; same d. greater; less

d. greater; less

In a competitive market, an outward shift in demand will: a. increase quantity and lower price. b. decrease quantity and decrease price. c. decrease quantity and have an indeterminate impact on price. d. increase quantity and increase price. e. have an indeterminate impact on quantity and increase price.

d. increase quantity and increase price.

Which of the following is an example of fiscal policy? a. decreasing the discount rate to lower unemployment and inflation b. decreasing the federal funds rate to stimulate investment c. decreasing the reserve ratio to increase bank reserves d. increasing government expenditures to build highways e. increasing the money supply to increase income

d. increasing government expenditures to build highways

In the Keynesian model, expansionary monetary policy will lead to: a. higher real interest rates and lower prices. b. higher real interest rates and higher real income. c. higher nominal interest rates and more investment. d. lower real interest rates and more investment. e. lower real interest rates and lower prices.

d. lower real interest rates and more investment.

What are the three primary goals for every economy? a. low taxes, high employment, and government budget surpluses b. output increases, income stability, high savings rates c. balanced international trade, independence and autonomy d. price stability, full employment, economic growth e. self-sufficiency, stability, low consumption rates

d. price stability, full employment, economic growth

The classical economists argued that involuntary unemployment would be eliminated by: a. increasing government spending to increase aggregate demand. b. increasing the money supply to stimulate investment spending. c. maintaining the growth of the money supply at a constant rate. d. self-correcting market forces stemming from flexible prices and wages. e. decreasing corporate income taxes to encourage investment.

d. self-correcting market forces stemming from flexible prices and wages.

Assume the economy is operating at full employment. If the economy enters a sudden economic expansion, the quantity of money available in the economy will: a. first decrease, then stabilize at a lower level. b. increase. c. first increase, then stabilize at a higher level. d. stay the same. e. decrease.

d. stay the same.

If prices are expected to rise more slowly in the future, a. the actual rate of inflation will increase b. the government will carry out contractionary fiscal policy to prevent this occurrence c. the actual inflation rate will remain steady unless supply shocks set in d. these expectations will become reality e. the Phillips curve will shift to the right

d. these expectations will become reality

If aggregate demand decreases (thus decreasing inflation in the short run) what happens to unemployment, and how would this be illustrated on a short-run Phillips curve graph? a. unemployment increases, shifting the short-run Phillips curve to the right b. unemployment increases, shifting the short-run Phillips curve to the left c. unemployment decreases, moving up along an existing short-run Phillips curve d. unemployment increases, moving down along an existing short-run Phillips curve e. unemployment increases, moving up along an existing short-run Phillips curve

d. unemployment increases, moving down along an existing short-run Phillips curve

Given a marginal propensity to save (MPS of 0.25, a government tax increase of $500 million would be expected to provide a a. $2 billion contractionary effect. b. $2 billion stimulus effect. c. $3.75 billion contractionary effect. d. $1.5 billion stimulus effect. e. $1.5 billion contractionary effect.

e. $1.5 billion contractionary effect

In considering whether aggregate supply (AS) is upward sloping or vertical, which of the following statements about Keynesians and Classical economists is most accurate? a. An upward sloping AS is Keynesian because it reflects greater wage and price flexibility. b. An upward sloping AS is Classical because it reflects greater wage and price flexibility. c. An upward sloping AS could be either Classical or Keynesian because it reflects greater wage flexibility but less price flexibility. d. An upward sloping AS is Classical because it reflects less wage and price flexibility. e. An upward sloping AS is Keynesian because it reflects less wage and price flexibility.

e. An upward sloping AS is Keynesian because it reflects less wage and price flexibility.

Which of the following is most likely when the Federal Reserve increases the reserve requirement? a. The money supply increases. b. Short-run aggregate supply shifts right. c. The unemployment rate decreases. d. The Fed Funds Rate is reduced. e. Bank lending is reduced.

e. Bank lending is reduced.

If market interest rates fall, what will likely occur? a. Bond prices will fall. b. Stock prices will fall. c. Business investment will fall. d. Individuals will hold less money. e. Bond prices will rise.

e. Bond prices will rise.

When real interest rates fall in the short run: a. The demand for capital investment shifts to the left. b. The price level will fall. c. Nominal interest rates rise. d. Banks will lend less money to consumers. e. Businesses are more likely to borrow money.

e. Businesses are more likely to borrow money.

Which of the following actions by the Federal Reserve will result in an increase in backs' excess reserves? a. Increasing the discount rate b. Selling bonds on the open market c. Increasing the reserve requirement d. Increasing the federal funds rate e. Buying bonds on the open market

e. Buying bonds on the open market

Which of the following is NOT a cause of rigidity in the Keynesian view? a. Long-term wage contracts negotiated by unions. b. Legal minimum wages set above the equilibrium wage. c. Large firms maintaining prices above equilibrium to avoid destabilizing competition. d. Employers choosing to pay above equilibrium "efficiency" wages to attract good workers and motivate them to work efficiently. e. Day laborers and their employers negotiating wages each period.

e. Day laborers and their employers negotiating wages each period.

An increase in personal income taxes will most likely result in which of the following changes in real GDP and the price level in the short run? o Real GDP Price level a. Increase Increase b. Increase No change c. Increase No change d. Decrease Increase e. Decrease Decrease

e. Decrease Decrease

Which of the following would be an example of fiat money? a. Arrowheads used as a medium of exchange b. Gold coins c. Chickens used for bartering d. Cigarettes used as money in prisons e. Dollar bills

e. Dollar bills

Expansionary fiscal policy and expansionary monetary policy both cause GDP to increase in the short run. How does each policy affect economic growth in the long run? a. Both policies cause interest rates to fall so they result in economic growth. b. Neither policy causes interest rates to fall so they do not result in economic growth c. Expansionary fiscal policy causes interest rates to fall and cause economic growth, but expansionary monetary policy causes interest rate to rise so economic growth is slowed. d. Both policies cause interest rates to rise so they result in economic growth. e. Expansionary fiscal policy results in higher interest rates and does not generally promote economic growth; in contrast expansionary monetary policy which lowers interest rates is likely to promote economic growth.

e. Expansionary fiscal policy results in higher interest rates and does not generally promote economic growth; in contrast expansionary monetary policy which lowers interest rates is likely to promote economic growth.

In a mild recession, which of the following is the mostly likely monetary policy solution? a. Tax cut. b. Increased Government spending. c. Lowered Reserve Requirement. d. Lowered Discount Rate at the Federal Reserve. e. Federal Reserve Purchase of secondary Securities.

e. Federal Reserve Purchase of secondary Securities.

According to the Classical model, an increase in the money supply causes an increase in which of the following? -I. the price level -II. nominal gross domestic product -III. nominal wages a. I only b. II only c. III only d. II and III only e. I, II, and III

e. I, II, and III

Expansionary monetary policy results in which of the following in the short run? o I. The money supply increases o II. The nominal interest rate decreases o III. The real interest rate decreases o IV Bond prices decrease a. I, II, and IV only b. I and II only c. IV only d. III and IV only e. I, II, and III only

e. I, II, and III only

Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment? a. The government increases taxes without increasing spending. b. Inflationary expectations decline. c. The government increases spending without increasing taxes d. Women and teen-agers stay out of the labor force. e. Negative supply shocks cause factor prices to increase.

e. Negative supply shocks cause factor prices to increase

If no policy actions are taken in response to a recession, which of the following will likely happen? a. Nominal wages will increase causing the short-run Phillips curve to shift to the left. b. Inflationary expectations will decrease causing the short-run Phillips curve to shift to the right. c. Inflationary expectations will increase causing the short-run Phillips curve to shift to the left. d. Nominal wages will decrease causing the short-run Phillips curve to shift to the right. e. Nominal wages will decrease causing a short-run Phillips curve to shift to the left.

e. Nominal wages will decrease causing a short-run Phillips curve to shift to the left.

The Phillips curve a. shows how the equilibrium price level is related to fiscal policy. b. is upward sloping from left to right. c. shows how output and prices are related. d. shows how government spending and tax collections are related. e. indicates that inflation will be high when unemployment is low.

e. indicates that inflation will be high when unemployment is low.

Suppose we find that the price of coffee has risen, but the quantity of coffee sold has fallen. Which of the following could have caused this to occur? a. Good weather in Brazil has raised the yield from coffee crops. b. The government has recently set a price ceiling for coffee considerably higher than the equilibrium price. c. A new widely publicized study has debunked the link between coffee and acne. d. A new widely publicized study has linked coffee to acne. e. The government has recently set a price floor for coffee considerably higher than the equilibrium price.

e. The government has recently set a price floor for coffee considerably higher than the equilibrium price.

An expansionary fiscal policy will result in an increase in the interest rate unless which of the following occurs? a. Wage and price controls are imposed. b. Taxes are cut instead of government expenditures being increased. c. The exchange rate is fixed. d. The Federal Reserve sells government bonds. e. The money supply is increased.

e. The money supply is increased.

If the demand for money increases in the money market, what will happen to the nominal interest rate, the quantity of money and the price of bonds? a. The nominal interest rate decreases, the quantity of money increases and the price of bonds decreases b. The nominal interest rate decreases, the quantity of money decreases and the price of bonds decreases c. The nominal interest rate increases, the quantity of money increases and the price of bonds increases d. The nominal interest rate increases, the quantity of money increases and the price of bonds decreases e. The nominal interest rate increases, the quantity of money remains the same and the price of bonds decreases

e. The nominal interest rate increases, the quantity of money remains the same and the price of bonds decreases

When the Fed sells bonds in the open market, which curve in the bond market shifts and in which direction? a. The demand curve shifts right. b. The supply curve shifts left. c. The demand curve shifts left. d. Neither curve shifts, only bond buying by the Fed shifts a curve in the bond market. e. The supply curve shifts right.

e. The supply curve shifts right.

In which of the following scenarios is the Fed most likely to buy bonds? a. The current rate of inflation is above the Federal Reserve's target rate. b. Business optimism is low. c. Aggregate demand intersects aggregate supply at the long-run aggregate supply curve. d. The real interest rate is lower than the nominal interest rate. e. The unemployment rate is higher than the natural rate.

e. The unemployment rate is higher than the natural rate.

In which of the following scenarios is the Federal Reserve most likely to sell bonds? a. Aggregate demand intersects aggregate supply at the long-run aggregate supply curve. b. The current rate of inflation is below the Federal Reserve's target rate. c. Business optimism is low. d. The real interest rate is lower than the nominal interest rate. e. The unemployment rate is lower than the natural rate.

e. The unemployment rate is lower than the natural rate.

Which of the following hypothetical situations would lend support to the applicability of the Keynesian view over that of the Classical view? a. Unemployment stays at a stable and low rate for a long period of time without any government intervention. b. Unemployment decreases briefly, but rises back to a low and stable rate without any government intervention. c. Unemployment rises when the government increases its spending. d. Unemployment rises briefly, but then settles back to a low and stable rate without any government intervention. e. Unemployment rises and stays high for a long period of time without any government intervention.

e. Unemployment rises and stays high for a long period of time without any government intervention.

Which of the following statements is correct in regard to the federal budget deficit and the federal debt? a. When the debt is negative, the deficit decreases. b. When the debt is positive, the deficit decreases. c. When the deficit is negative, the debt increases. d. The deficit is the accumulation of past debts. e. When the deficit is negative, the debt decreases.

e. When the deficit is negative, the debt decreases.

Which of the following would most likely cause the United States economy to fall into a recession? a. an increase in welfare payments b. an increase in exports c. a decrease in savings by consumers d. a decrease in the required reserve ratio e. a decrease in consumer spending

e. a decrease in consumer spending

Which of the following policies would a Keynesian economist most likely recommend in an economy with an annual inflation rate of 2 percent and an unemployment rate of 11 percent? a. an increase in transfer payments and an increase in the reserve requirement b. an increase in defense spending and an increase in the discount rate c. an increase in income taxes rates and a decrease in the reserve requirement d. a decrease in government spending and the open market sale of government bonds e. a decrease in the tax rate on corporate profits and a decrease in the discount rate

e. a decrease in the tax rate on corporate profits and a decrease in the discount rate

An increase in short-run aggregate supply caused by declining key input prices would be consistent with which of the following? a.a movement up along an existing short-run Phillips curve b. a flattening of an existing short-run Phillips curve c. a movement down along an existing short-run Phillips curve d. a shift of the short-run Phillips curve to the right e. a shift of the short-run Phillips curve to the left

e. a shift of the short-run Phillips curve to the left

In an inflationary gap, which of the following responses would be neither favorable to Keynesians nor Classical economists? a. an increase in interest rates b. an increase in nominal wages c. a decrease in net exports d. an increase in personal income taxes e. an increase in the money supply

e. an increase in the money supply

Which of the following measures would NOT result in economic growth? a. limiting fish yields to maintain sustainable fisheries that can reproduce to provide greater future yields b. government financing of scientific research in agricultural production c. limiting the amount of capital per worker d. subsidizing loans for vocational training e. government financing of primary education

e. government financing of primary education

The purchase of securities on the open market by the central bank will: a. decrease the reserve requirement. b. decrease the number of central bank notes in circulation. c. increase the interest rate. d. increase the discount rate. e. increase the supply of money.

e. increase the supply of money.

In the short run, combining an expansionary fiscal policy with a tight money policy is most likely to cause a. real GDP to increase. b. real GDP to decrease. c. the federal budget deficit to decrease. d. interest rates to fall. e. interest rates to rise.

e. interest rates to rise.

Nominal interest rates are determined in the money market, and real interest rates in the: a. federal funds market. b. produce market. c. product market. d. foreign exchange market. e. loanable funds market.

e. loanable funds market.

In the Keynesian model, expansionary monetary policy will lead to: a. higher nominal interest rates and more investment. b. higher real interest rates and higher real income. c. higher real interest rates and lower prices. d. lower real interest rates and lower prices. e. lower real interest rates and more investment.

e. lower real interest rates and more investment.

When money is used as a standard of valued a person is a. earning more money than before. b. writing a check for groceries. c. making a financial transaction. d. purchasing a necessity. e. making price comparisons among products.

e. making price comparisons among products.

In macroeconomic policy debates, the Keynesian view and the Classical view differ about whether the government should: a. alleviate poverty. b. reduce the deadweight loss caused by monopolies. c. enforce property rights. d. subsidize public goods. e. manage aggregate demand.

e. manage aggregate demand.

The money market will be in equilibrium when: a. inflation is equal to zero. b. more money is demanded than the money available. c. government spending is equal to government income. d. M2 is less than M1. e. quantity of money demanded is equal to quantity of money supplied

e. quantity of money demanded is equal to quantity of money supplied

When the quantity of money demanded is greater than the quantity of money supplied, people will most likely ________ bonds while the interest rate will ________. a. hold; rise b. buy; rise c. sell; fall d. buy; fall e. sell; rise

e. sell; rise

The discount rate is: a. the interest rate that banks charge their best commercial customers. b. the interest rate paid on government bonds. c. the interest rate at which banks borrow from each other. d. the difference between the real and nominal interest rate. e. the interest rate at which banks borrow directly from the Federal Reserve.

e. the interest rate at which banks borrow directly from the Federal Reserve.

The interaction between institutions through which money is supplied to individuals, firms, and other institutions is referred to by economists as: a. the federal financial framework. b. the foreign exchange market. c. the loan depot. d. the stock market. e. the money market.

e. the money market.

Which change(s) would occur that a Classical economist would say are most effective for bringing the economy back to its long run equilibrium? a. increase taxes b. increase government spending c. increase interest rates d. increase exchange rates e. increase money supply f. decrease taxes g. decrease government spending h. nominal wages falling

h. nominal wages falling