Macroeconomics Exam 2

Suppose a nation's inflation rate is 5.8% from Year 1 to Year 2. If the CPI in Year 2 is 200, what was the CPI in Year 1? A. 190 B. 189 C. 180 D. 208

B. 189

All of the following are means of payment in the United States EXCEPT... A. Federal Reserve notes B. Stock options C. Checkable deposits D. Savings deposits

B. Stock options

When the U.S. government borrows, it sells... A. Federal paper B. Treasury bonds C. Government stocks D. Each of these answers is correct

B. Treasury bonds

To be considered money, an asset must be... A. Backed by gold or other precious metals. B. Widely accepted as a means of payment. C. Currency D. Each of these answers is correct.

B. Widely accepted as a means of payment.

Suppose the Fed carries out an open market purchase and credits the account of a bank by $160,000. Further suppose that the reserve ratio (RR) is 10%. By how much is the money supply expected to change? A. $1.6 million B. $16 million C. $160,000 D. $1.76 million

A. $1.6 million

If $100 is saved at an annual interest rate of 10%, what will be the return in one year? A. $10 B. $111 C. $110 D. $11

A. $10

If the required reserve ratio is 4%, the money multiplier is... A. 25 B. 4 C. 16 D. 20

A. 25

To increase the money supply in the economy, the Fed would... A. Carry out open market purchases an/or lower the discount rate. B. Carry out open market purchases and/or raise the reserve ratio. C. Carry out open market sales and/or lower the discount rate. D. Increase the discount rate and/or lower the reserve ratio.

A. Carry out open market purchases an/or lower the discount rate.

For a given money multiplier, a decrease in the banking system's reserves will cause the money supply to... A. Decrease B. Remain constant C. Increase D. Become difficult to predict

A. Decrease

If the interest rate rises from 5% to 9%, the number of new businesses will... A. Decrease B. Remain the same C. Increase D. Sharply increase, then level off.

A. Decrease

When workers lose their jobs and become officially unemployed, the unemployment rate... A. Increases B. Remains constant C. Becomes difficult to predict D. Decreases

A. Increases

Inflation hurts individuals because: A. It affects the ability of market prices to send signals about the value of resources. B. They can perfectly see the increases in prices. C. It raises all prices in the economy. D. Higher prices reduce the quantities demanded by consumers.

A. It affects the ability of market prices to send signals about the value of resources.

Which of the following can be defined as saving according to economics? A. Sandra purchases a certificate of deposit from a bank. B. Andrea finances her new car through an auto loan. C. General Motors issues corporate bonds. D. Microsoft sells stock at an initial public offering.

A. Sandra purchases a certificate of deposit from a bank.

Which of the following chains of logic explain the functions of banks in the process of economic growth? A. Savers deposit their savings in banks. Banks direct these funds to firms that invest and engage in capital accumulation that furthers economic growth. B. Firms borrow from stock and bond markets. These funds are used for investment, which leads to the capital accumulation that furthers economic growth. C. Savers deposit their savings in banks. Banks engage in capital accumulation, which plays an important role in economic growth. D. The demand for loanable funds shows an inverse relationship between the real interest rate that banks charge and the quantity of loans demanded.

A. Savers deposit their savings in banks. Banks direct these funds to firms that invest and engage in capital accumulation that furthers economic growth.

Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator? A. The CPI measures the average prices of typical goods consumed by consumers, whereas the GDP deflator measures the average prices of all goods consumed by all agents in the economy. B. The CPI measures the average prices of inputs in the production process, whereas the GDP deflator measures the average prices of goods purchased by consumers. C. The CPI measures the average prices of retail goods, whereas the GDP deflator measures the average prices of wholesale goods. D. The CPI measures the average prices of all final goods consumed by consumers, whereas the GDP deflator measures the average prices of all inputs used in the economy.

A. The CPI measures the average prices of typical goods consumed by consumers, whereas the GDP deflator measures the average prices of all goods consumed by all agents in the economy.

Which of the three price indexes measures the average price level of the largest total number of goods? A. The GDP deflator B. Each price index accomplishes the same task. C. The consumer price index D. The producer price index

A. The GDP deflator

Which of the following best describes the effects of a major labor union that maintains a union wage above the market equilibrium wage? A. The quantity of labor supplied exceeds the quantity of labor demanded and the unemployment rate increases. B. The quantity of labor supplied exceeds the quantity of labor demanded, and the unemployment rate decreases. C. The quantity of labor demanded exceeds the quantity of labor supplied, and the unemployment rate decreases. D. The quantity of labor demanded exceeds the quantity of labor supplied, and the unemployment rate increases.

A. The quantity of labor supplied exceeds the quantity of labor demanded and the unemployment rate increases.

An increase in the supply of savings will cause the interest rate... A. To decrease B. To increase or decrease depending on the elasticity of demand for loanable funds. C. To remain unchanged D. To increase

A. To decrease

Bonds sold by the U.S. government have almost zero default risk. A. True B. False

A. True

If someone buys a bond, economists would say that person is saving, not investing. A. True B. False

A. True

If the Fed decides to increase the money supply by $200 million, it can buy government bonds in the open market for less than $200 million. A. True B. False

A. True

If the Fed increases the amount of bank reserves by $100 million, the total money supply will potentially increase by more than $100 million. A. True B. False

A. True

Monetizing the debt occurs when the government pays off its debts by printing money. A. True B. False

A. True

The most liquid asset is cash. A. True B. False

A. True

Which of the following is the most liquid asset? A. Savings deposits B. Currency C. Checkable deposits D. Money market mutual funds

B. Currency

At lower interest rates, the cost of investing ______ and the funds that are demanded for investment _______. A. Increases, increase B. Decreases; increase C. Increases; decrease D. Decreases; decrease

B. Decreases; increase

The demand to borrow function is... A. Upward sloping B. Downward sloping C. Horizontal D. Vertical

B. Downward sloping

All individuals who do not have a job are counted as unemployed. A. True B. False

B. False

In times of rising prices, lenders benefit at the expense of borrowers. A. True B. False

B. False

Negative real interest rates among countries result when they print too little money. A. True B. False

B. False

The unemployment rate in the United States has typically been higher than the unemployment rate in Europe. A. True B. False

B. False

When information about jobs becomes scarcer, frictional unemployment tends to decrease. A. True B. False

B. False

Discouraged workers are people who... A. Are willing and able to work but can't find a job. B. Have given up looking for work but would still like to work. C. Are working for fewer hours than they want to. D. Are looking for a job that pays more than they are currently earning.

B. Have given up looking for work but would still like to work.

Time preference is the desire to... A. Increase longevity in order to have a greater income. B. Have goods and services sooner rather than later. C. Save for a time when income will be reduced. D. Maximize return on investment in the shortest amount of time.

B. Have goods and services sooner rather than later.

What do we call an increase in the average level of prices in an economy? A. Stagflation B. Inflation C. Deflation D. Recession

B. Inflation

You earned $10 an hour in 2005, when the CPI was 90, and earn $12 an hour today, when the CPI is 120. As compared to 2005, in 2010 your real wage rate is _______. A. Higher B. Lower C. Stayed the same D. Not enough information

B. Lower

France, Germany, Italy, and Spain have experienced _______ unemployment compared to the United States since 1980. A. Less B. More C. The same D. None of these answers is correct. Germany experienced less unemployment, while other nations experienced more.

B. More

Why is the demand for loanable funds downward sloping? A. People save less when the interest rates are low. B. More people borrow money when interest rates are low than when they are high. C. Fewer investments projects have returns that can beat higher interest rates, so people are more willing to invest at higher interest rates. D. Each of these answers is correct.

B. More people borrow money when interest rates are low than when they are high.

The money multiplier equals... A. One divided by the difference between the reserve ratio and the required reserve ratio. B. One divided by the reserve ratio C. One divided by the discount rate. D. The amount of money supply divided by the amount of reserves.

B. One divided by the reserve ratio

Compared to other countries, inflation in the United States has been... A. About the same B. Relatively low C. Extremely unpredictable D. Relatively high

B. Relatively low

What do we call income that is NOT spent on consumption goods? A. Profit B. Saving C. Investment D. Asset retention

B. Saving

What is one of the of the causes of frictional unemployment? A. Uneducated work force B. Scarcity of information C. Willingness to take lower level jobs D. Overabundance of job vacancies

B. Scarcity of information

Firms primarily raise money by using which two methods? A. Borrowing from banks and borrowing from the government. B. Selling stocks and issuing corporate bonds. C. Selling stocks and issuing treasury bills. D. Borrowing from international countries and the government.

B. Selling stocks and issuing corporate bonds.

Which of the following individuals can be counted as part of the labor force? A. Someone who retired four months ago B. Someone who is collecting unemployment benefits C. Someone who is on active military duty in Afghanistan D. Someone who just celebrated a fifteenth birthday

B. Someone who is collecting unemployment benefits

A country has 24 million people in the labor force and 21.5 million of them are employed. What is the unemployment rate in this country? A. 2.5 percent B. 89.6 percent C. 10.4 percent D. 21.5 percent

C. 10.4 percent

Which of the following individuals can be counted as unemployed? A. A woman who works only part time B. A temp working, who is currently responding to job advertisements from the newspaper C. A man who was laid off from an auto manufacturing plant in Detroit D. Each of these answers is correct

C. A man who was laid off from an auto manufacturing plant in Detroit

The reserve ratio is the ratio of bank reserves to... A. Currency demand B. Bank loans C. Bank deposits D. The monetary base

C. Bank deposits

Since 1950, the female labor force participation rate in the United States... A. Has fallen B. Has remained relatively constant C. Has risen D. Has first fallen and then risen

C. Has risen

During recessions the unemployment rate... A. Fluctuates randomly B. Decreases C. Increases D. Remains relatively constant

C. Increases

The Federal Reserve acquires its exclusive powers through its ability to... A. Tax individuals and firms B. Stop economic recessions C. Issue money D. All of the answers are correct

C. Issue money

Trading in the market for loanable funds determines the equilibrium A. Amount of borrowing. B. Interest rate C. It determines all three of these D. Level of savings

C. It determines all three of these

Holding reserves is costly for banks because... A. The Fed charges banks interest on required reserves. B. It leads to the risk of bank robberies. C. It leads to fewer profits. D. It forces banks to pay for ATMs.

C. It leads to fewer profits.

The percentage of adults in the labor force is the... A. Unemployment rate B. Employment rate C. Labor force participation rate D. Work force participation rate

C. Labor force participation rate

The main difference between M1 and M2 is that... A. M1 includes some less liquid assets in addition to the assets in M2. B. M2 includes more liquid assets in addition to the assets in M1. C. M2 includes some less liquid assets in addition to the assets in M1. D. M1 includes more liquid assets in addition to the assets in M2.

C. M2 includes some less liquid assets in addition to the assets in M1.

In the United States, the amount of cash per capita is about $3,000. This figure... A. Shows how much currency each American holds in their checking accounts. B. Accurately represents the size of the underground economy in the United States. C. Misrepresents actual currency holdings in the United States because a lot of dollars are held outside the country. D. Shows how much the world depends on the United States monetary system.

C. Misrepresents actual currency holdings in the United States because a lot of dollars are held outside the country.

Negative real rates of interest tend to: A. Increase economic growth B. Exist only in poor countries C. Reduce economic growth D. Have no impact on economic growth

C. Reduce economic growth

Firms primarily raise money by using which two methods? A. Selling stocks and issuing treasury bills. B. Borrowing from international countries and the government. C. Selling stocks and issuing corporate bonds. D. Borrowing from banks and borrowing from the government.

C. Selling stocks and issuing corporate bonds.

When the Fed wants to increase interest rates it... A. Adjusts the fractional reserve ratio. B. Buys bonds in the open market. C. Sells bonds in the open market. D. Instructs banks across the nation that they must raise their rates.

C. Sells bonds in the open market.

Which of the following assets would classify as being most liquid? A. Small-cut diamonds B. An oil painting by Claude Monet C. Small-time deposits D. Money market mutual funds

C. Small-time deposits

The supply of savings function shows the relationship between saving and... A. Consumption B. Age C. The interest rate D. Income

C. The interest rate

The actual real rate of return for lenders is equal to... A. The nominal rate of return divided by the inflation rate times 100. B. The nominal rate of return times the inflation rate. C. The nominal rate of return minus the inflation rate. D. The nominal rate of return plus the inflation rate.

C. The nominal rate of return minus the inflation rate.

The members of the Board of Governors of the Federal Reserve have 14-year non-renewable terms. Thus... A. The New York Federal Reserve District Bank President can only serve 14 years on the FOMC. B. Every president of a federal reserve district bank will serve at least 14 years on the BOG. C. They are somewhat insulated from the political process. D. The chairmen of the board of governors also has a 14-year term.

C. They are somewhat insulated from the political process.

At an 8% interest rate, the quantity of savings is $250 billion. What would the quantity of savings be if the interest rate falls to 5%? A. $500 billion B. $250 billion C. $300 billion D. $190 billion

D. $190 billion

What is the unemployment rate for a nation with 6 million employed and 2 million unemployed? A. 10% B. 15% C. 20% D. 25%

D. 25%

A country has a population of 160 million. Thirty million of its people are under the age of 16, and ten percent of the population is either in the military or institutionalized. Seventy million people have jobs and five million are looking for work. What is the labor force participation rate in your country? A. 52 percent B. 70 percent C. 62 percent D. 66 percent

D. 66 percent

For a given nominal interest rate, an increase in the inflation rate will cause real interest rates to... A. Become unpredictable B. Remain relatively constant C. Increase D. Decrease

D. Decrease

Which of the following assets would you classify as being most liquid? A. Gold bullion B. A home C. Small-time deposits D. Demand deposits

D. Demand deposits

The Federal Reserve is the... A. Federal government's bank B. U.S. central bank C. Banker's bank in the United States D. Each of these answers is correct

D. Each of these answers is correct

Which of the following programs could help overcome structural unemployment? A. Worker retraining B. Limitations to unemployment benefits C. Job search assistance programs D. Each of these answers is correct

D. Each of these answers is correct

Mario is saving if he does which of the following? A. Makes a deposit in a savings account at the bank. B. Buys a share of stock in a computer company. C. Buys a corporate bond. D. Each of these answers is correct.

D. Each of these answers is correct.

Which of the following did NOT contribute to the financial crisis of 2007-2008? A. Highly leveraged investment banks B. Highly leveraged homeowners C. Fear on the part of short-term lenders D. Each of these contributed to the crisis

D. Each of these contributed to the crisis

Why do firms and individuals borrow? A. They want to smooth consumption. B. Debt is often necessary for large purchases. C. They believe their return will be greater than the interest rate. D. Each of these explanations provides a reason for borrowing.

D. Each of these explanations provides a reason for borrowing.

The labor force is made up of... A. Unemployed workers, employed workers, and students over 16. B. All adult non-institutionalized civilians. C. Institutionalized people, the military, and employed workers. D. Employed and unemployed workers.

D. Employed and unemployed workers.

What is a service that banks specialize in providing? A. Providing the highest return available in the market. B. Seeking to pass all of the returns on investment to the savers. C. Making sure all funds are distributed in the most equitable fashion. D. Evaluating the quality of investment opportunities.

D. Evaluating the quality of investment opportunities.

What is the overnight lending rate from one bank to another? A. Money market rate B. Federal Reserve rate C. Money multiplier rate D. Federal Funds rate

D. Federal Funds rate

Compared to the United States, unemployment rates in Western Europe tend to be... A. Higher because of fewer labor regulations. B. Lower because of more labor regulations. C. Lower because of fewer labor regulations. D. Higher because of more labor regulations.

D. Higher because of more labor regulations

When the price of a good in Russia increases from 20 rubles to 20 million rubles in a single year, the nation is experiencing... A. High disinflation B. Deflation C. Falling GDP per capita D. Hyperinflation

D. Hyperinflation

Inflation generally causes the taxes paid by individuals and business firms to... A. Remain relatively constant B. Become less of a burden C. Decrease D. Increase

D. Increase

When the Federal Reserve makes an open market purchase, the reserves of the banking system will... A. Become difficult to predict B. Decrease C. Remain constant D. Increase

D. Increase

When workers lose their jobs and become officially unemployed, the unemployment rate... A. Decrease B. Remains constant C. Becomes difficult to predict D. Increases

D. Increases

A major problem with inflation is that after it starts... A. It always stops quickly because the economy always corrects itself naturally. B. It can never be stopped with any government policy. C. It is easy to stop as long as it is fully expected. D. It is difficult to stop without experiencing high unemployment.

D. It is difficult to stop without experiencing high unemployment.

How might changes in marginal tax rates on married couples affect labor force participation rates? A. Higher marginal tax rates on married couples encourage lower labor force participation rates by the secondary income earner. B. Lower marginal tax rates on married couples encourage lower labor force participation rates by the secondary income earner. C. Higher marginal tax rates on married couple encourage higher labor force participation rates by the secondary income earner. D. Lower marginal tax rates on married couples encourage higher labor force participation rates by the secondary income earner.

D. Lower marginal tax rates on married couples encourage higher labor force participation rates by the secondary income earner.

When changes in nominal prices are confused with changes in real prices, people experience... A. Cyclical price confusion B. Consumer bias C. Inflationary delusion D. Money illusion

D. Money illusion

All else being equal, a working-age person who has more patience tends to have... A. Fewer savings B. More collateral C. Less investment D. More savings

D. More savings

Which of the following individuals can be counted as unemployed? A. Daren, a ten-year-old child B. Moesha, a full-time college student C. Nazma, a stay-at-home mom D. None of the answers are correct.

D. None of the answers are correct.

In a country, where both the labor force participation rate and the unemployment rate are very low, which of the following answers explains why this may be the case? A. A large percentage of the population consists of children. B. A large percentage of the population is aging and thus has retired. C. A large percentage of the population is unemployed. D. None of these answers is correct.

D. None of these answers is correct.

The supply of savings is positively sloped because... A. Firms borrow more when interest rates are low. B. When people have more incomes they save more. C. Of time preference. D. People are enticed to forgo consumption when interest rates are higher.

D. People are enticed to forgo consumption when interest rates are higher.

Which of the following is NOT a function of the Federal Reserve? A. Regulating the U.S. money supply. B. Serving as the lender of last resort. C. Regulating the U.S. financial system. D. Providing loans to small businesses.

D. Providing loans to small businesses.

When workers lose their jobs and become officially unemployed, the number of people in the labor force... A. Increases B. Becomes difficult to predict C. Decreases D. Remains constant

D. Remains constant

If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then the real price of milk is... A. Less than $4.80 B. Unknown without further information C. More than $4.80 D. Same as $4.80

D. Same as $4.80

The supply of loanable funds comes from ______ and the demand for loanable funds comes from ________. A. Saving; consumption B. Investment; saving C. Investment; consumption D. Saving; investment

D. Saving; investment

Oil shocks, the shift from manufacturing to service jobs, and the use of new technologies are reasons for _______ unemployment. A. Permanent B. Cyclical C. Frictional D. Structural

D. Structural

If consumers expect to have shorter life expectancy and desire to save less, than the... A. The supply of loanable funds will increase, and the equilibrium interest rate will decrease. B. Demand for loanable funds will decrease, and the equilibrium interest rate will decrease. C. Demand for loanable funds will increase, and the equilibrium interest rate will increase. D. Supply of loanable funds will decrease, and the equilibrium rate will increase.

D. Supply of loanable funds will decrease, and the equilibrium rate will increase.

An open market operation occurs when... A. The Fed enforces regulations on the banking industry. B. Banks loan funds to each other. C. Banks increase the reserve ratio. D. The Fed buys or sells government bonds.

D. The Fed buys or sells government bonds.

When the Federal Reserve conducts monetary policy, the Federal Reserve usually focuses on... A. M2 B. The discount rate C. M1 D. The Federal Funds rate

D. The Federal Funds rate

Investment is... A. The purchase of shares of stock on the New York Stock Exchange. B. The purchase of gold and silver during inflationary times. C. The purchase of new consumption goods. D. The purchase of new capital goods.

D. The purchase of new capital goods.

The presence of discourage workers cause the measured unemployment rate to be... A. Correctly stated B. Either overstated, understated, or correctly stated. C. Overstated D. Understated

D. Understated

Discouraged workers and underemployed workers are examples of... A. Poor national employment planning. B. Populations that cause higher unemployment taxes. C. Users of unemployment insurance... D. Workers not included in the unemployment rate.

D. Workers not included in the unemployment rate.

Which of the following raises structural unemployment? I. Higher union membership II. More unemployment benefits III. Higher minimum wages

I, II, and III

Banks can borrow money from what sources? I. Other banks II. The Fed's discount window III. ATMs

I. and II. only

The Federal Reserve's major tools to control the money supply are... I. Open market operations. II. Discount rate lending and the term auction facility. III. Required reserve ratio and payment of interest on reserves. IV. Federal funds lending.

I., II., and III. only

Financial intermediation can break down as a result of... I. Low and stable inflation II. Government controls on interest rates III. Bank failures

II and III only

The Federal Reserve... I. Clears all checks II. Makes monetary policy III. Supervises the banking sector

II. and III. only