2012 Macro - Peckham

Verify Key 30-60 30 E 31 B 32 A 33 A 34 D 35 E 36 B 37 D 38 C 39 C 40 B 41 E 42 B 43 C 44 D 45 E 46 B 47 D 48 E 49 A 50 D 51 E 52 A 53 C 54 E 55 E 56 A 57 E 58 B 59 E 60 B

Verify Key 1-29 1 B 2 E 3 D 4 A 5 A 6 A 7 B 8 C 9 B 10 D 11 B 12 C 13 C 14 D 15 A 16 D 17 D 18 C 19 D 20 C 21 C 22 C 23 E 24 A 25 B 26 B 27 C 28 A 29 C

National Economic Figures (**See test (billions of dollars) Consumption $ 3,000 Gov Purchases 1,000 Gross Ig 700 Depreciation 300 Exports 300 Imports 500 Indirect Business Taxes 0 32. Based on the economic figures in the table above, what is the value of gross domestic product, in billions of dollars? (A) $4,500 (B) $4,700 (C) $4,900 (D) $5,150 (E) $5,950

(A) $4,500

6. Which of the following best illustrates an improvement in a country's standard of living? (A) An increase in real per capita gross domestic product (B) An increase in nominal per capita gross domestic product (C) Price stability (D) A balanced budget (E) An increase in the consumer price index

(A) An increase in real per capita gross domestic product

33. Which of the following best explains the increase in national income that results from equal increases in government spending and taxes? (A) Consumers do not reduce their spending by the full amount of the tax increase. (B) The government purchases some goods that consumers would have purchased on their own anyway. (C) Consumers believe all tax cuts are transitory. (D) The increase in government spending causes adecreaseininvestment. (E) Consumersareawareoftaxincreasesbutnot of increases in government spending.

(A) Consumers do not reduce their spending by the full amount of the tax increase.

28. An increase in net investment leads to faster economic growth because capital per worker and output per worker will change in which of the following ways? Capital Output per Worker, per Worker (A) Increase , Increase (B) Increase , Decr (C) No change , Incr (D) Decrease , Incr (E) Decrease , Decr

(A) Increase , Increase

24. A reduction in inflation can best be achieved by which of the following combinations of fiscal and monetary policy? Fiscal Policy , Monetary Policy (A) Increase taxes, Sell Gov Bonds (B) Decrease taxes, Buy Bonds (C) Decrease taxes, Lower Margin Req (D) Decrease gov spending, Lower Discount Rate (E) Increasegov spending, Raise Discount Rate

(A) Increase taxes, Sell Gov Bonds

49. Which of the following occurs as investment becomes more responsive to changes in the interest rate? (A) Monetary policy becomes more effective at changing real gross domestic product. (B) Fiscal policy becomes more effective at changing real gross domestic product. (C) Monetary policy becomes more effective at changing interest rates. (D) Fiscal policy becomes more effective at changing interest rates. (E) Thereisnochangeintheeffectivenessof either monetary or fiscal policy.

(A) Monetary policy becomes more effective at changing real gross domestic product.

52. One explanation for the downward slope of the aggregate demand curve is that when the price level increases, which of the following will decrease? (A) Real value of assets (B) Prices of foreign goods (C) Prices of substitute goods (D) Expectations of future prices (E) Government deficit

(A) Real value of assets

5. The value of a country's currency will tend to appreciate if (A) demand for the country's exports increases (B) the country's money supply increases (C) the country's citizens increase their travel abroad (D) domestic interest rates decrease (E) tariffs on the country' s imports decrease

(A) demand for the country's exports increases

15. According to the short-run Phillips curve, lower inflation rates are associated with (A) higher unemployment rates (B) higher government spending (C) larger budget deficits (D) greater labor-force participation rates (E) smaller labor-force participation rates

(A) higher unemployment rates

4. Unlike a market economy, a command economy uses (A) more centralized planning in economic decision making (B) consumer sovereignty to make production decisions (C) its resources more efficiently (D) price signals in economic decision making (E) the popular vote in making resource allocation decisions

(A) more centralized planning in economic decision making

56. In the narrowest definition of money, M1, savings accounts are excluded because they are (A) not a medium of exchange (B) not insured by federal deposit insurance (C) available from financial institutions other than banks (D) a store of purchasing power (E) interest-payingaccounts

(A) not a medium of exchange

58. Assume that Jane's marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by (A) $4,000 (B) $8,000 (C) $9,000 (D) $10,000 (E) $14,000

(B) $8,000

46. Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and borrowers deposit all loans made by banks. Suppose you have saved $100 in cash at home and decide to deposit it in your checking account. As a result of your deposit, the money supply can increase by a maximum of (A) $800 (B) $900 (C) $1000 (D) $1100 (E) $1,200

(B) $900

40. A commercial bank's ability to create money depends on which of the following? (A) The existence of a central bank (B) A fractional reserve banking system (C) Gold or silver reserves backing up the currency (D) A large national debt (E) The existence of both checking accounts and savings accounts

(B) A fractional reserve banking system

31. If Country Alpha has been experiencing a higher inflation rate than Country Beta over the past decade, which of the following is true? (A) Alpha' s currency will have appreciated relative to Beta's currency. (B) Alpha's currency will have depreciated relative to Beta's currency. (C) Alpha will have had lower nominal interest rates than Beta. (D) Alpha will have had slower growth in the money supply than Beta. (E) Alpha'seconomywillhavegrownatafaster rate than Beta's.

(B) Alpha's currency will have depreciated relative to Beta's currency.

26. The table below shows the production alternatives of Country A and Country B for producing com- puters and cars with equal amounts of resources that are fully and efficiently employed. Country Computers Cars A 24 0 0 12 B 45 0 0 15 Which of the following is true according to the data in the table? (A) Country A has an absolute and comparative advantage in the production of computers. (B) Country B has an absolute and comparative advantage in the production of computers. (C) Country B should import computers and export cars. (D) Since Country B has an absolute advantage in the production of both goods, it will not trade with Country A. (E) Neithercountrycanbenefitfromtrade.

(B) Country B has an absolute and comparative advantage in the production of computers.

1. A country's government runs a budget deficit when which of the following occurs in a given year? (A) The amount of new loans to developing nations exceeds the amount of loans paid off by developing nations. (B) Government spending exceeds tax revenues. (C) The debt owed to foreigners exceeds the debt owed to the country's citizens. (D) The amount borrowed exceeds the interest payment on the national debt. (E) Interest payments on the national debt exceed spending on goods and services.

(B) Government spending exceeds tax revenues.

11. Which of the following combinations of changes in government spending and taxes is necessarily expansionary? Government Spending, Taxes (A) Increase, Increase (B) Increase, Decrease (C) Decrease, Not Change (D) Decrease, Increase (E) Decrease, Decrease

(B) Increase, Decrease

60. If economic agents perfectly anticipate policy changes and if all prices, including wages, are completely flexible, which of the following will be true in the long run? (A) The price level will be constant. (B) There will be no trade-off between inflation and unemployment. (C) The unemployment rate will be less than the natural rate of unemployment. (D) The unemployment rate will be greater than the natural rate of unemployment. (E) Changesinthemoneysupplywillnotleadto changes in the price level.

(B) There will be no trade-off between inflation and unemployment.

25. Which of the following is likely to occur following the depreciation of the United States dollar? (A) United States imports will increase. (B) United States exports will increase. (C) Demand for the United States dollar will decrease. (D) United States demand for foreign currencies will increase. (E) UnitedStatesgoodswillbecomemore expensive in foreign markets.

(B) United States exports will increase.

7. Hyperinflation is typically caused by (A) high tax rates that discourage work effort (B) continuous expansion of the money supply to finance government budget deficits (C) trade surpluses that are caused by strong protectionist policies (D) bad harvests that lead to widespread shortages (E) a large decline in corporate profits that leads to a decrease in production

(B) continuous expansion of the money supply to finance government budget deficits

36. A country can have an increased surplus in its balance of trade as a result of (A) an increase in domestic inflation (B) declining imports and rising exports (C) higher tariffs imposed by its trading partners (D) an increase in capital inflow (E) anappreciatingcurrency

(B) declining imports and rising exports

9. The official unemployment rate understates the unemployment level in the economy because the official unemployment rate (A) ignores the duration of unemployment (B) ignores underemployed and discouraged workers (C) includes jobs created by the underground economy (D) excludes all unemployed teenagers (E) excludesfrictionallyunemployedworkers

(B) ignores underemployed and discouraged workers

42. A barter economy is different from a money economy in that a barter economy (A) encourages specialization and division of labor (B) involves higher costs for each transaction (C) eliminates the need for a double coincidence of wants (D) has only a few assets that serve as a medium of exchange (E) promotesmarketexchanges

(B) involves higher costs for each transaction

20. Which of the following will most likely lead to a decrease in inflationary expectations? (A) A decrease in the marginal propensity to save (B) A decrease in imports (C) A decrease in the money supply (D) An increase in the government budget deficit (E) Anincreaseinthepricesofrawmaterials

(C) A decrease in the money supply

22. Which of the following are the most likely short-run effects of an increase in government expenditures? Unemployment Rate,Inflat,RGDP (A) Increase, Inc, Inc (B) Increase, Inc, Decr (C) Decrease, Inc, Inc (D) Decrease, Decr, Inc (E) No change, Decr, Inc

(C) Decrease, Inc, Inc

13. For an economy consisting of households and businesses only, which of the following is consistent with the circular flow of income and production? (A) Households are producers of goods and services and consumers of resources. (B) Households are users of resources, and businesses are sources of saving. (C) Households are suppliers of resources and consumers of goods and services. (D) Businesses are users of taxes, and households are sources of taxes. (E) Businessesaresuppliersofresourcesand consumers of goods and services.

(C) Households are suppliers of resources and consumers of goods and services.

43. In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations? Bond Prices, Interest Rates (A) No change, Increase (B) Increase, Increase (C) Increase, Decrease (D) Decrease, Increase (E) Decrease, Decrease

(C) Increase, Decrease

18. Which of the following changes in the supply of and the demand for a good will definitely result in a decrease in both the equilibrium price and quantity of the good? Supply, Demand (A) Increase, Increase (B) Increase, No change (C) No change, Decrease (D) Decrease, Increase (E) Decrease, Decrease

(C) No change, Decrease

27. Which of the following individuals is considered officially unemployed? (A) Chris, who has not worked for more than three years and has given up looking for work (B) Kim, who is going to school full-time and is waiting until graduation before looking for a job (C) Pat, who recently left a job to look for a different job in another town (D) Leslie, who retired after turning 65 only five months ago (E) Lee, who is working 20 hours per week and is seeking full-time employment

(C) Pat, who recently left a job to look for a different job in another town

39. An increase in which of the following would be most likely to increase long-run growth? (A) Pension payments (B) Unemployment compensations (C) Subsidies to businesses for purchases of capital goods (D) Tariffs on imported capital goods (E) Tariffsonimportedoil

(C) Subsidies to businesses for purchases of capital goods

38. An increase in the government budget deficit is most likely to result in an increase in which of the following? (A) The marginal propensity to consume (B) Exports (C) The real interest rate (D) The money supply (E) Thesimplemultiplier

(C) The real interest rate

53. Which of the following is true about changes in tax rates, changes in the level of government expenditures, and changes in the money supply? (A) They are automatic stabilizers. (B) They are tools of discretionary fiscal policy. (C) They have different lag times between implementation of a policy and its effects on aggregate demand. (D) They are favored equally by both classical and Keynesian economists to fine-tune the economy. (E) All are controlled by the Federal Reserve system.

(C) They have different lag times between implementation of a policy and its effects on aggregate demand.

8. All of the following changes will shift the investment demand curve to the right EXCEPT (A) a decrease in the corporate income tax rate (B) an increase in the productivity of new capital goods (C) an increase in the real interest rate (D) an increase in corporate profits (E) an increase in real gross domestic product

(C) an increase in the real interest rate

12. The hold in the form of cash will (A) be unaffected by any change in interest rates or the price level (B) increase if interest rates increase (C) decrease if interest rates increase (D) increase if the price level decreases (E) decreaseifthepricelevelremainsconstant

(C) decrease if interest rates increase

21. With an upward-sloping short-run aggregate supply curve, an increase in government expenditure will most likely (A) reduce the price level (B) reduce the level of nominal gross domestic product (C) increase real gross domestic product (D) shift the short-run aggregate supply curve to the right (E) shiftboththeaggregatedemandcurveand the long-run aggregate supply curve to the left

(C) increase real gross domestic product

29. If a country's economy is operating below the full-employment level of output at a very low inflation rate, the central bank of the country is most likely to (A) pursue an expansionary monetary policy because it is required to do so by law whenever output is below the full- employment level (B) pursue an expansionary fiscal policy because it is required to do so by law whenever output is below the full-employment level (C) lower the discount rate and buy bonds on the open market to generate an increase in output (D) lower the required reserve ratio and sell bonds on the open market to generate an increase in output (E) raisethediscountrateandlowertherequired reserve ratio to generate an increase in output

(C) lower the discount rate and buy bonds on the open market to generate an increase in output

44. Suppose that in an economy with lump-sum taxes and no international trade, autonomous investment spending increases by $2 million. If the marginal propensity to consume is 0.75, equilibrium gross domestic product will change by a maximum of (A) $0.5 million (B) $1.5 million (C) $2.0 million (D) $8.0 million (E) $15 million

(D) $8.0 million

16. Which of the following will lead to a decrease in a nation's money supply? (A) A decrease in income tax rates (B) A decrease in the discount rate (C) An open market purchase of government securities by the central bank (D) An increase in reserve requirements (E) Anincreaseingovernmentexpenditures on goods and services

(D) An increase in reserve requirements

**** (Study Physical Problem) 19. Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent? (A) Bank A has no excess reserves. (B) Bank B has no excess reserves. (C) Bank B can increase its loans by $500. (D) Bank B can increase its loans by $40. (E) BankChasexcessreserves.

(D) Bank B can increase its loans by $40.

14. With an increase in the real interest rate, consumption and real gross domestic product will most likely change in which of the following ways? Consumption, Real GDP (A) Increase, Increase (B) Increase, Decrease (C) Decrease, Increase (D) Decrease, Decrease (E) No change, Increase

(D) Decrease, Decrease

50. If two nations specialize according to the law of comparative advantage and then trade with each other, which of the following would be true? (A) A smaller number of goods would be available in each trading nation. (B) Total world production of goods would decrease. (C) Everyone within each nation would be better off. (D) Each nation would increase its consumption possibilities. (E) Onenationwouldgainattheexpenseofthe other nation.

(D) Each nation would increase its consumption possibilities.

17. An increase in which of the following would cause the aggregate demand curve to shift to the left? (A) Consumer optimism (B) Population (C) Cost of resources (D) Income taxes (E) Netexports

(D) Income taxes

34. Which of the following statements is true of unanticipated inflation? (A) It decreases the economic well-being of all members of society proportionately. (B) It decreases the economic well-being of all members of society equally. (C) It increases the economic well-being of net creditors. (D) It increases the economic well-being of net debtors. (E) Itincreasestheeconomicwell-beingof workerswithlong-termlaborcontracts.

(D) It increases the economic well-being of net debtors.

10. If a reduction in aggregate supply is followed by an increase in aggregate demand, which of the following will definitely occur? (A) Output will increase. (B) Output will decrease. (C) Output will not change. (D) The price level will increase. (E) Thepricelevelwilldecrease.

(D) The price level will increase.

47. Which of the following would be the initial impact on an economy if wages were to increase more than worker productivity? (A) There would be no initial impact, since neither the aggregate supply curve nor the aggregate demand curve would shift. (B) Employment would increase, causing a rightward shift in the aggregate demand curve. (C) The price level would increase, resulting in excess aggregate supply. (D) The short-run aggregate supply curve would shift to the left, increasing the price level. (E) Theaggregatedemandcurvewouldshiftto the left, increasing the price level.

(D) The short-run aggregate supply curve would shift to the left, increasing the price level.

37. Policies intended to reduce demand-pull inflation are most likely to increase which of the following in the short run? (A) Gross domestic product (B) The labor force participation rate (C) The price level (D) Unemployment (E) Wage levels

(D) Unemployment

3. The transaction demand for money is very closely associated with money's use as a (A) store of value (B) standard unit of account (C) measure of value (D) medium of exchange (E) standardofdeferredpayment

(D) medium of exchange

57. For which of the following sets of unemployment and inflation rates will a central bank be most reluctant to increase the rate of growth in the money supply? Unemployment Rate, Inflation Rate (A) 10% 2% (B) 10% 5% (C) 10% 10% (D) 5% 5% (E) 5% 10%

(E) 5% 10%

2. A high marginal propensity to consume implies which of the following? (A) A small change in consumption when income changes (B) A high savings rate (C) A high marginal tax rate (D) An equilibrium level of income near full employment (E) A low marginal propensity to save

(E) A low marginal propensity to save

30. Assume that an economy is currently in long-run equilibrium and the short-run aggregate supply curve is upward sloping. An adverse supply shock, such as a drought, will most likely cause which of the following to the economy in the short run? (A) A decrease in the price level and a decrease in the nominal wage (B) A decrease in the price level and an increase in the nominal wage (C) An increase in the price level and an increase in the nominal wage (D) An increase in the price level and an increase in the real wage (E) An increase in the price level and a decrease in the real wage

(E) An increase in the price level and a decrease in the real wage

23. In the short run, an expansionary monetary policy would most likely result in which of the following changes in the price level and real gross domestic product (GDP) ? Price Level, Real GDP (A) Decrease, Incr (B) No change, Decr (C) Increase, No Change (D) Increase, Decr (E) Increase, Inc

(E) Increase, Inc

35. A simultaneous increase in inflation and unem- ployment could be explained by an increase in which of the following? (A) Consumer spending (B) The money supply (C) Labor productivity (D) Investment spending (E) Inflationaryexpectations

(E) Inflationaryexpectations

59. Advocates of a monetary rule recommend increasing the money supply at a rate that is equal to the rate of increase in which of the following? (A) Price level (B) Unemployment rate (C) Level of exports (D) Level of imports (E) Long-run real gross domestic product

(E) Long-run real gross domestic product

***PPC X,Y, and W are on or outside curve, Z is inside 45. The diagram above shows the production possi- bilities curve for an economy that produces only consumption and capital goods. All of the following statements about this economy are true EXCEPT: (A) Producing at point Z results in the underutilization of resources. (B) The combination represented by point Y is unattainable, given the scarcity of resources. (C) Resources are fully utilized at points W and X. (D) Producing at point X will result in greater economic growth than will producing at point W. (E) Point X represents the most efficient combination of the two goods that can be produced by this economy.

(E) Point X represents the most efficient combination of the two goods that can be produced by this economy.

54. An increase in which of the following would LEAST likely increase labor productivity? (A) Physical capital (B) Human capital (C) Technological improvements (D) Educational achievement (E) The labor force

(E) The labor force

41. The consumer price index (CPI) is designed to measure changes in the (A) spending patterns of urban consumers only (B) spending patterns of all consumers (C) wholesale price of manufactured goods (D) prices of all goods and services produced in aneconomy (E) cost of a select market basket of goods and services

(E) cost of a select market basket of goods and services

55. Tariffs are different from assigned import quotas in that tariffs will (A) restrict imports (B) increase the price of imported goods (C) benefit domestic consumers of imported goods (D) hurt domestic producers of goods facing import competition (E) generate additional revenue for the domestic government

(E) generate additional revenue for the domestic government

48. Under a flexible exchange-rate system, the Indian rupee will appreciate against the Japanese yen when (A) India's inflation rate exceeds Japan's (B) India has a trade deficit with Japan (C) Japan's economy enters a recession, but India's does not (D) Japan's money supply decreases while India's money supply increases (E) real interestrates in India increase relative to those in Japan

(E) real interestrates in India increase relative to those in Japan

51. The shifting of a country's production possibil- ities curve to the right will most likely cause (A) net exports to decline (B) inflation to increase (C) the aggregate demand curve to shift to the left (D) the long-run aggregate supply curve to shift to the left (E) the long-run aggregate supply curve to shift to the right

(E) the long-run aggregate supply curve to shift to the right