Macro Final (14-20)

Which of the following is a correct description of the natural rate hypothesis?

In the long run, the economy will self-correct to the natural rate of unemployment, and therefore in the long run the Phillips curve is a vertical line.

In Adam Smith's competitive market economy, the question of what goods to produce is determined by the

a. "invisible hand" of the price system.

Karl Marx was a (an)

a. 19th-century German philosopher.

If a Japanese radio priced at 2,000 yen can be purchased for $10, the exchange rate is

a. 200 yen per dollar.

Which of the following defines the "unit of account" function of money?

a. A common measurement of the relative value of different goods and services.

Which of the following is not part of the Federal Reserve System>

a. Council of Economic Advisers

Which of the following is a key criticism of the market economy as a system of allocation?

a. Goods and services are allocated unequally based on ability to pay.

Which of the following would cause a decrease in the demand for euros by those holding U.S. dollars?

a. Inflation in France, but not in the United States.

Which of the following is true when two countries specialize according to their comparative advantage?

a. It is possible to increase their total output of all goods.

How many nations in the world today operate totally according to Karl Marx's theory of communism?

a. None

What establishes the value of fiat money?

a. Our collective trust and confidence that the central government, which decrees that money cannot be refused as payment for debt.

Since the 1970s, the

a. Phillips curve has not been stable.

In a market economy, the three economic questions are answered by which of the following?

a. Prices determined by the interaction of the forces of supply and demand.

How does rational expectations differ from adaptive expectations?

a. Rational expectations uses all available information, whereas adaptive expectations is heavily weighed toward recent information.

Which of the following best defines the vicious circle of poverty?

a. The GDP per capita must rise before people can save and invest.

According to the classification in the text, which of the following is not an IAC?

a. United Arab Emirates

An increase in the equilibrium price of a nation's money could be caused by a (an)

a. decrease in the supply of money curve.

An outward shift of the production possibilities curve represents

a. economic growth.

Assume the demand for money curve is fixed and the Fed decreases the money supply. The result is a temporary

a. excess quantity of money demanded.

When making economic decisions, Adam Smith urged society to

a. follow the principle of self-interest.

When the government fixes the exchange rate above market exchange rates,

a. international trade falls.

Karl Marx predicted which of the following?

a. market system would self-destruct.

Assume the demand for money curve is fixed and the Fed increases the money supply. The result is that the price of bonds

a. rises

The United States

a. was on a fixed exchange rate system prior to late 1971, but now is on a flexible exchange rate system.

Assume a simplified banking system in which all banks are subject to a uniform required reserve ration of 30 percent and checkable deposits are the only form of money. A bank the receives a new deposit of $10,000 is able to extend new loans up to a maximum of

b. $7,000.

If a bank has total deposits of $100,000 with $10,000 set aside to meet reserve requirements of the Fed, its required reserve ratio is

b. 10 percent.

The term "capitalism" refers to which of the following?

b. An economic system characterized by private ownership of resources, and decentralized market allocation.

If the Fed decides to engage in an open market operation to increase the money supply, what will it do?

b. Buy Treasury bonds, bills, or notes on the bond market.

Which of the following is in charge of the buying and selling of government securities by the Fed?

b. Federal Open Market Committee (FOMC)

Which of the following is a problem with barter?

b. Individuals' wants must coincide in order for there to be exchange.

Which of the following is not a characteristic of money?

b. It is always backed by something of high inartistic value such as gold or silver.

______ plus ______ plus ______ equals ______.

b. Loans, required reserves, excess reserves, total deposits.

According to the adaptive expectations theory and the short-run Phillips curve, which of the following is true?

b. People persistently underestimate inflation when it is accelerating and overestimate inflation when it is slowing down.

Which of the following is not one of the functions of the Federal Reserve?

b. Printing currency.

Which of the following defines the "store of value" function of money?

b. The ability of money to hold value over time.

Which of the following government policies is an incomes policy?

b. The publication of a list of guidelines suggesting maximum wage and price increases.

Suppose the exchange rate changes so that fewer Japanese yen are required to buy a dollar. We would conclude that

b. U.S. citizens will buy fewer Japanese imports.

Which of the following is infrastructure?

b. Waste and water system provided by government.

Adam Smith, in his book The Wealth of Nations, advocated

b. an economy guided by an "invisible hand."

The economic system in which private individuals own the factors of production is

b. capitalism.

The M1 definition of the money supply consists of

b. coins and currency in circulation, and checkable deposits

A decrease in the interest rate, other things being equal, causes a (an)

b. downward movement along the demand curve for money.

A difficulty in using the Phillips curve as a policy menu is the

b. fact that the curve wouldn't remain in one position.

The Best National Bank operates with a 10 percent required reserve ratio. One day a depositor withdraws $400 from his or her checking account at the bank. As a result, the bank's excess reserves

b. fall by $360.

In order for Ethiopia to increase its future economic growth, it must choose a point that is

b. further along on its production possibilities curve toward the capital goods axis.

With trade, the production possibilities for two nations lie

b. inside their consumption possibilities.

There is significant positive relationship between ______ and ______.

b. investment in capital; high levels of per capital GDP

Most macroeconomic policy changes, say the rational expectations theorists, are

b. predictable.

The figure that results when good imports are subtracted from goods exports is

b. the balance of trade.

According to rational expectations theory, systematic and predictable expansionary monetary and fiscal policies used to reduce unemployment are ______ and ______.

b. useless, in fact are harmful because the only result is inflation

According to the adaptive expectations theory, expansionary monetary and fiscal policies to reduce unemployment are ______ in the long run. After a short-run reduction in unemployment, the economy will ______ at a ______ inflation rate.

b. useless; self-correct to the natural rate of unemployment, lower

The doctrine of laissez-faire

b. was advocated by Adam Smith in his book The Wealth of Nations.

Which of the following is correctly the money multiplier?

c. 1/(required reserve ratio).

If an increase of $100 in excess reserves in a simplified banking system can lead to a total expansion in bank deposits of $400, the required reserve ration must be

c. 25 percent.

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?

c. 3.5.

Which of the following is an example of foreign private investment?

c. A multinational corporation builds shoe-manufacturing facility in a less-developed country.

Which of the following is not part of M1?

c. Credit cards.

The infant industry argument for protectionism is based on which of the following views?

c. Firms in a newly developing domestic industry will have difficulty growing if they face strong competition from established foreign firms.

Which of the following represents a problem with using per capita GDP to compare standard of living between less-developed and industrially advanced countries?

c. GDP per capita will overstate the prevailing standard of living for the average person in countries with extreme levels of income inequality.

Which of the following is not a basic characteristic of capitalism?

c. Income is distributed on the basis of need.

Which of the following makes short-term conditional low-interest loans to developing countries?

c. International Monetary Fund (IMF).

______ generally results in increases in per-capita GDP.

c. Investment in human capital

Based on the equation of exchange, the money supply in the economy is calculated as

c. MV=PQ.

Which of the following correctly gives us the equation of exchange?

c. MV=PQ.

Assume the economy is experiencing a recessionary gap. Classical economists would support which of the following policies.

c. Noninterventionist

Which of the following problems do LDCs face?

c. Rapid population growth and low human capital.

Which of the following is not included when computing M1?

c. Savings accounts.

If a society were to use a widely accepted, easily measurable, but highly perishable food product as its money, which of the following functions of money would be most impaired?

c. Store of value

Which of the following is the velocity of money?

c. The average number of times per year that a given dollar of the money supply is spent.

Which of the following international accounts records the purchase and sale of financial assets and real estate between the United States and other nations?

c. The capital account.

Which of the following international accounts records payments for exports and imports of goods, military transactions, foreign travel, investment income, and foreign gifts?

c. The current account.

Free-trade theory suggests that when trade takes place

c. both nations are better off.

The economic system in which all of the basic decisions are made through a centralized authority, such as a government agency, is termed a

c. command economy

In a simplified banking system in which all banks are subject to a 25 percent required reserve ratio, a $1,000 open sale by the Fed would cause the money supply to

c. decrease by $4,000.

The major protection against sudden mass attempts to withdraw cash form banks is the

c. deposit insurance provided by the FDIC.

The cost to a member bank of borrowing from the Federal Reserve is measured by the

c. discount rate.

Rational expectations theorists advise the federal government to

c. do the opposite of what the public expects.

LDCs are characterized by

c. high infant mortality.

Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that the

c. investment demand curve is nearly vertical.

The easier it is to convert an asset directly into goods and services without loss, the

c. more liquid it is.

A tariff increases the

c. prices of imports to domestic buyers.

Adam Smith wrote that the

c. pursuit of private self-interest promotes the public interest in a market economy.

According to the natural rate hypothesis,

c. the Phillips curve is vertical in the long run at full employment.

The conclusion of adaptive expectations theory is the expansionary monetary and fiscal policies intended to reduce the unemployment rate are

c. unnecessary and cause inflation in the long run.

Voluntary wage-price restraints are known as

c. wage-price guidelines.

According to Karl Marx, under capitalism,

c. workers would be exploited and revolt against owners of capital.

If total deposits at Last Bank and Trust are $100 million, total loans are $70 million, and excess reserves are $20 million, then which of the following is the required reserve ratio?

d. 10 percent

Which of the following represents key strengths of the market economy as a system of allocation?

d. All of the answers (goods and services are allocated based on willingness and ability to pay, rather than based on need; producers have strong incentives to innovate because successful innovators are rewarded with higher profit; since price is freely set based on supply and demand, shortages and surpluses are minimized)

M1 refers to

d. All of the answers above are correct (the most narrowly defined money supply; currency held by the public plus checking account balances; the smallest dollar amount of the money supply definitions)

Which of the following is true when making GDPs per capita comparisons between nations?

d. All of the answers above are correct. (the GDP per capita is subject to greater measurement errors for LDCs compared to IACs; the GDP per capita does not measure income distribution; the GDP per capita is subject to fluctuations from changes in exchange rates)

Which of the following distinguishes industrially advanced countries from less-developed countries?

d. All of the answers above are correct. (GDP per capita; educational attainment of the workforce; extent to which capital is technologically advanced)

Economic growth and development in LDCs are low because many of them lack

d. All of the answers above are correct. (a capital investment; technological progress; a favorable political environment)

Which of the following statements is true?

d. All of the answers above are correct. (an LDC is a country with a low GDP per capita, low levels of capital, and uneducated workers; the vicious circle of poverty exists because GDP must rise before people can save and invest; LDCs are characterized by rapid population growth and low levels of investment in human capital)

Keynes gave which of the following as a motive for people holding money?

d. All of the answers above are correct. (transactions demand; speculative demand; precautionary demand)

Which of the following is not an issue in the Keynesian-monetarist debate?

d. All of the issues above are part of the debate. (the importance of monetary vs. fiscal policy; the importance of a change in the money supply; the importance of a crowding-out effect)

Which of the following correctly describes fractional reserve banking?

d. Banks can loan out all but a fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults.

Adam Smith stated that the role of government in society should be to

d. Both answers a. and b. are correct. (provide defense; enforce contracts)

Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?

d. Both answers a. and c. are correct (the money supply shifts inward, and the equilibrium interest rate rises in the money market; investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy)

Which of the following is not a store of value?

d. Credit card

Assume the economy is operating at a real GDP below full-employment real GDP. Keynesian economists would prescribe which of the following policies

d. Expansionary

Which of these institutions has the responsibility for controlling the money supply?

d. Federal Reserve System

Assume the economy is in short-run equilibrium at a real GDP above its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

d. Fiscal policy and monetary policy should be contractionary.

Which of the following would cause the U.S. dollar to depreciate against the Japanese yen?

d. Higher incomes in the U.S.

According to the definition given in the text, which of the following is not and LDC?

d. Ireland.

Which of the following is part of the M2 definition of the money supply, but not part of M1?

d. Money market mutual fund shares.

Which of the following defines the "medium of exchange" function of money?

d. Money that is widely accepted in exchange for goods and services.

Which definition of the money supply includes credit cards, or "plastic money"?

d. Neither answers a. nor b. are correct (M1; M2)

Assume the economy is in short-run equilibrium at a real GDP. According to the classical self-correction theory, which of the following policies should be followed?

d. None of the answers above are correct. (the Federal Reserve should increase the money supply; the federal government should increase spending; the federal government should cut taxes)

Which of the following makes long-term low-interest loans to less-developed countries (LDCs)?

d. The World Bank.

The V in the equation of exchange represents the

d. average number of times per year a dollar is spent on final on final goods and services.

In Marx's ideal communist society, the state

d. does not exist

According to the theory of comparative advantage, a country should produce and

d. export goods in which it has a comparative advantage.

Most of the world's economies are mixed economies because

d. government intervention in an overall market system exists because markets fail when there is market power, a great deal of inequality, pollution externalities, or public goods.

In a simplified banking system in which all banks are subject to a 20 percent required reserve ratio, a $1,000 open market by the Fed would cause the money supply to

d. increase by $5,000.

Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that people

d. increase the demand for bonds, thus driving down the interest rate.

The Monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on the

d. indirect impact of changes in the money supply on aggregate demand.

The Phillips curve depicts the relationship between the

d. inflation rate and the unemployment rate.

Assuming the economy is in a recession, classical economists predict that

d. lower wages will shift the short-run aggregate supply curve rightward.

Using the aggregate supply and demand model, assume the economy is in equilibrium on the intermediate portion of the aggregate supply curve. A decrease in the money supply will decrease the price level and

d. raise the interest rate and lower real GDP.

An LDC is defined as a country

d. that is described by all of the above. (without large stocks of advanced capital; without well-educated labor; with a low GDP per capita)

Command economies typically suffer from

d. underemployment, but not employment.

Adaptive expectations theory

e. All of the answers above are correct. (argues that the best indicator of the future is recent information; underestimates inflation when it is accelerating; overestimates inflation when it is slowing down)

If the Fed reduces the discount rate, which of the following are most likely to result?

e. Both answers a. and c. above are correct (the money supply curve shifts rightward, and the equilibrium interest rate falls in the money market; investment spending rises, causing the aggregate demand curve to shift rightward, increasing equilibrium real GDP and this accelerating the economy)

If the dollar appreciates (becomes stronger), this causes

e. all of the above to occur. (the relative price of U.S. goods to increase for foreigners; the relative price of foreign goods to decrease for Americans; U.S. exports to fall and U.S. imports to rise; a balance of trade deficit for the U.S.)