Review Practice
Who demands the factors of production in the circular flow diagram?
Firms
Assume a recession causes jobless workers to grow more discouraged and give up their search for work. What will be the resulting change in the labor force participation rate and unemployment rate?
Labor Force Participation Rate: Decrease, Unemployment Rate: Decrease
If an economy experiences an increase in net capital inflows by foreign investors, which of the following will be the resulting change in the market for loanable funds and the real interest rate?
Market for Loanable Funds: Increase in supply, Real Interest Rate: Decrease
Which of the following policy combinations would foster long run growth of an economy without increasing the price level?
Monetary Policy: Buy bonds, Fiscal Policy: Decrease government spending
If foreign investors purchase U.S. government treasury bills, those purchases will be included in their nation's
financial account
A rightward shift in the aggregate demand curve could most likely be caused by which of the following?
the purchase of government securities by the central bank
If the reserve requirement increases from 5 percent to 10 percent, and assuming the general public holds a portion of its money in cash, what will happen to the money multiplier and the money supply?
Money Multiplier: Decrease, Money Supply: Increase by less than half
In the AS/AD model, which of the following shifts would be the likely result of an increase in personal income taxes?
Aggregate demand shifts to the left
Which of the following is most likely to cause an increase in potential gross domestic product?
An increase in government expenditures on infrastructure projects
If a country is experiencing a recessionary gap, which of the following fiscal and monetary policy combinations would be most likely to move the nation closer to full employment with a minimum change in interest rates?
An increase in government spending and the purchase of bonds on the open market
Which of the following is MOST likely to promote economic growth?
An increase in investment in tools and machinery
The short run aggregate supply curve would shift to the left in response to which of the following?
An increase in the cost of resources
Assume that the velocity of money is constant in the equation of exchange. Which of the following must be true if the GDP deflator is equal to 200 while the economy is operating with a vertical aggregate supply curve?
the money supply has doubled
If the economy is operating below full employment output, assuming that wages and prices are flexible, long run equilibrium can be restored by which of the following?
Enacting no policy since lower wages will result in a return to full employment
What will happen to the equilibrium price and equilibrium quantity of a good if there is a simultaneous increase in input costs while the product is gaining popularity among consumers?
Equilibrium Price: Increase, Equilibrium Quantity: Indeterminate
According to rational expectations theory
Expected inflation often leads to actual inflation as individuals and businesses change their behavior.
If a country is experiencing a significant recessionary gap, which of the following combinations of fiscal and monetary policies would be most likely to move the nation toward long-run equilibrium?
Fiscal Policy: Increase government spending, Monetary Policy: Buy securities on the open market
Which of the following is NOT a criticism of gross domestic product (GDP) as a measure of a nation's well-being?
GDP measures only the value of final goods and services and not intermediate goods and services.
In the midst of a $300 billion recessionary gap, the federal government decides to use fiscal policy to bring the economy back to long run equilibrium. If society's marginal propensity to consume (MPC) is 0.80, which of the following could the government do to reach full employment assuming no crowding out or leakages?
Increase government expenditures $60 billion.
Nations can benefit from free trade mainly because
It allows each nation to consume beyond its production possibilities curve.
Which of the following is a reason why one nation's economic growth rate might be higher than another nation?
Larger per capita government subsidies for education and worker training programs
What must be true if a nation's economy is operating inside of its production possibilities curve?
The nation is using resources and technology inefficiently
The natural rate of unemployment is
The rate of unemployment when the economy is in long run equilibrium
If nominal wages and prices are not flexible, which of the following must be true when the economy has a severe recessionary gap?
The short run aggregate supply curve is horizontal
Which of the following is true of the short run Phillips curve, but not true for the long run Phillips curve?
There is a tradeoff between the unemployment rate and the inflation rate
Which of the following groups would benefit in the short run from an unanticipated rise in the inflation rate?
Young people repaying fixed-interest-rate student loans
Which of the following is an example of cyclical unemployment?
Zelda lost a job with the recent downturn in the economy.
The spending multiplier is the result of
consumer expenditures rising as incomes rise.
If the federal government taxes all income at a flat rate of 20% and the marginal propensity to consume (MPC) is 0.75. If Daniel's gross income increases by $1,000, how much will his consumption expenditures increase?
$600
Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 3 percent, the real interest rate is
7%
Which of the following would cause an inward shift of the production possibilities curve?
A decrease in the size of the labor force
If the relative price level in Canada is higher than in Mexico, what is the likely result in the foreign exchange market?
A depreciation of the Canadian dollar
A country's currency might appreciate in value because of which of the following?
A higher real interest rate relative to the rest of the world
Which of the following best describes the concept of inflation?
A steady rise in the general level of prices
Which of the following is the best example of structural unemployment?
A worker is replaced by machines that are cheaper and more productive.
What will be the resulting change in Japan's aggregate supply and aggregate demand if the value of the Japanese yen increases in the foreign exchange market?
Aggregate Demand: Decrease, Aggregate Supply: No change
A contractionary monetary policy will have what effect on aggregate demand, price level and real output?
Aggregate Demand: Decrease, Price Level: Decrease, Real Output: Decrease
Which of the following best defines investment as a component of GDP?
Buying new plants, machinery, tools and inventory
What is likely to happen to the value of the Mexican Peso and capital flow in Mexico if there is an increase in real interest rates in Mexico relative to real interest rates in the rest of the world?
Capital Flow: Inflow, Value of Peso: Appreciate
Country X can produce either 2 tons of corn or 4 scooters with 20 units of labor. Country Y can produce either 5 tons of corn or 25 scooters with 20 units of labor. Based on this information, which of the following is true.
Country X has a comparative advantage in the production of corn, while Country Y has a comparative advantage in the production of scooters.
Given a required reserve ratio of 10% and banks loan out all of their excess reserves, if the Federal Reserve chooses to engage in contractionary monetary policy by selling $1,000 of Treasury Bills to commercial banks, what will be the resulting change in the money supply?
Decrease by $10,000
A decrease in government deficit spending will have which of the following effects in the short term?
Decrease nominal interest rates
Assume the government decreases its deficit spending. What is the likely result in the money market?
Demand for Money: Decrease, Nominal Interest Rates: Decrease
If the U.S. Federal Reserve engages in expansionary monetary policy by purchasing government securities through the open market, what will be the likely result on the nominal interest rate, aggregate demand and the unemployment rate?
Nominal Interest Rate: Decrease, Aggregate Demand: Increase, Unemployment Rate: Decrease
A decrease in which of the following might cause a decrease in real per capita income?
Output per unit of input
Which of the following is most likely to improve an economy's productivity?
Positive net capital stock investment
Assume that there is no unanticipated inflation and that wages and prices are flexible. What will happen to short run real gross domestic product (RGDP) and the price level in the long run if the Federal Reserve purchases government securities in the open market?
RGDP: Decrease, Price Level: Decrease
If the aggregate supply curve is upward sloping and there is an increase in exports to foreign countries, what will be the resulting change in real gross domestic product (RGDP) and price level in the short run?
RGDP: Increase, Price Level: Increase
In an economy is at full employment with a vertical aggregate supply curve and aggregate demand is continuing to increase, which of the following monetary policy actions would be an appropriate response?
Selling government securities in the open market
Which of the following groups would most likely be hurt by the depreciation of the Canadian dollar in the international market?
Swiss ski manufacturers that market their products in Canada
Stagflation is the result of which of the following shifts in the AD/AS model?
The aggregate supply curve shifting to the left
Which of the following assets would be characterized as having the most liquidity?
paper currency
An increase in the expected rate of inflation is most likely to cause which of the following changes in the Phillips curve?
a shift of the entire short run Phillips curve to the right
The opportunity cost of holding money in the form of cash increases when
interest rates increase
The central problem in economics is
scarcity; the use of limited resources.
