Macroeconomics Final Exam

Refer to Figure 17-2. Suppose the economy is at point A in the figure above. Which of the following is true? A) The expected rate of inflation is 5.5%. B) The current unemployment rate is equal to the natural rate of unemployment. C) The current unemployment rate is 3.8%. D) Actual inflation is 1%. E) The economy will move from A to B.

B) The current unemployment rate is equal to the natural rate of unemployment.

If actual inflation is less than expected inflation, actual real wages will be ________ expected real wages and unemployment will ________. A) greater than; rise B) greater than; fall C) less than; rise D) less than; fall

A) greater than; rise

Expansionary fiscal policy involves A) increasing government purchases or decreasing taxes. B) increasing taxes or decreasing government purchases. C) increasing the money supply and decreasing interest rates. D) decreasing the money supply and increasing interest rates.

A) increasing government purchases or decreasing taxes.

The Federal Reserve's two main ___ are the money supply and the interest rate A. monetary policy targets B. policy tools C. fiscal policy targets D. fiscal tools

A. monetary policy tools

The money demand curve has a A. negative slope because an increase in the interest rate decreases the quantity of money demanded. B. positive slope because an increase in the interest rate increases the quantity of money demanded. C. negative slope because an increase in the price level decreases the quantity of money demanded. D. positive slope because an increase in the price level increases the quantity of money demanded.

A. negative slope because an increase in the interest rate decreases the quantity of money demanded.

You're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the exchange rate is 0.85 euros per dollar, what's the highest price in euros you'd be willing to pay for a camera? A) 105 euros B) 106.25 euros C) 110.15 euros D) 147 euros

B) 106.25 euros

How might a budget deficit affect the balance of trade? A) A budget deficit raises interest rates, which raises exchange rates and increases the balance of trade. B) A budget deficit raises interest rates, which raises exchange rates and reduces the balance of trade. C) A budget deficit reduces interest rates, which raises exchange rates and reduces the balance of trade. D) A budget deficit reduces interest rates, which reduces exchange rates and reduces the balance of trade.

B) A budget deficit raises interest rates, which raises exchange rates and reduces the balance of trade.

Refer to Figure 17-2. Suppose the economy is at point C in the figure above. If workers adjust their expectations of inflation, which of the following will be true? A) The short-run Phillips curve will shift to the right. B) The short-run Phillips curve will shift to the left. C) The economy will move from C to A. D) Workers and firms expect inflation to be 1%. E) The natural rate of unemployment is 6%.

B) The short-run Phillips curve will shift to the left.

Fiscal policy refers to changes in A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to fund the war on terrorism. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

Automatic stabilizers refer to A) the money supply and interest rates that automatically increase or decrease along with the business cycle. B) government spending and taxes that automatically increase or decrease along with the business cycle. C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives. D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

B) government spending and taxes that automatically increase or decrease along with the business cycle.

If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"? A) if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar B) if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar C) if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar D) if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar

B) if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar

Refer to Figure 17-2. Suppose the Fed used contractionary policy to push short-run equilibrium to point C. If the short-run equilibrium remained at point C long enough, A) the short-run Phillips curve would shift up. B) the short-run Phillips curve would shift down. C) the economy would move back to point A. D) the economy would stay at point C in the long run.

B) the short-run Phillips curve would shift down.

Suppose that you deposit $2,000 in your bank and the required ratios is 10%. The maximum loan your bank can made as a direct result of your deposit is... A. $200 B. $1,800 C. $2,000 D. $20,000

B. $1,800

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil? A) $0.89 B) $2.25 C) $4.50 D) $8.00

C) $4.50

If the dollar appreciates, how will aggregate demand in the United States be affected? A) Aggregate demand will shift to the right as exports increase. B) Aggregate demand will shift to the right as imports increase. C) Aggregate demand will shift to the left as imports increase. D) Aggregate demand will shift to the left as exports increase.

C) Aggregate demand will shift to the left as imports increase.

How does an increase in the budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market? A) The demand for dollars falls, and the supply of dollars falls. B) The demand for dollars rises, and the supply of dollars rises. C) The demand for dollars rises, and the supply of dollars falls. D) The demand for dollars falls, and the supply of dollars rises.

C) The demand for dollars rises, and the supply of dollars falls.

If the dollar appreciates against the Mexican peso, A) Mexican imports to the U.S. become more expensive. B) U.S. exports to Mexico become less expensive. C) U.S. exports to Mexico become more expensive. D) The value of Mexican imports to the United States does not change.

C) U.S. exports to Mexico become more expensive.

Refer to Figure 16-4. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president? A) an increase in transfer payments B) an increase in interest rates C) an increase in the marginal income tax rate D) an open market purchase of Treasury bills

C) an increase in the marginal income tax rate

Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to A) lower the discount rate of interest. B) execute an open market sale of government securities. C) increase government transfer payments. D) increase marginal income tax rates.

C) increase government transfer payments.

Monetary policy has a ________ effect on aggregate demand in a(n) ________ economy, and fiscal policy has a ________ effect on aggregate demand in a(n) ________ economy. A) weaker; open; weaker; open B) weaker; closed; weaker; closed C) stronger; open; weaker; open D) stronger; closed; weaker; open

C) stronger; open; weaker; open

If the nominal exchange rate between the American dollar and the Canadian dollar is 0.89 Canadian dollars per American dollar, how many American dollars are required to buy a product that costs 2.5 Canadian dollars? A) $1.32 B) $2.23 C) $2.75 D) $2.81

D) $2.81

If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP. A) $7.25 trillion B) $1 trillion C) $500 billion D) $250 billion

D) $250 billion

Refer to Figure 17-2. Suppose the economy is at point A in the figure above. Which of the following is true? A) The short-run Phillips curve will shift to the right. B) The short-run Phillips curve will shift to the left. C) The long-run Phillips curve will shift to the left. D) Actual inflation and expected inflation are the same. E) The long-run Phillips curve will shift to the right.

D) Actual inflation and expected inflation are the same.

Fiscal policy is determined by A) the Federal Reserve. B) the president and the Federal Reserve. C) Congress and the Federal Reserve. D) Congress and the president.

D) Congress and the president.

Which of the following would be classified as fiscal policy? A) The federal government passes tax cuts to encourage firms to reduce air pollution. B) The Federal Reserve cuts interest rates to stimulate the economy. C) A state government cuts taxes to help the economy of the state. D) The federal government cuts taxes to stimulate the economy. E) States increase taxes to fund education.

D) The federal government cuts taxes to stimulate the economy.

Decreasing government spending ________ the price level and ________ equilibrium real GDP. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases

D) decreases; decreases

Which of the following is an objective of fiscal policy? A) energy independence from Middle East oil B) health care coverage for all Americans C) discovering a cure for AIDs D) high rates of economic growth E) homeland security

D) high rates of economic growth

Which of the following is one of the most important benefits of money in an economy A. Money allows for the exchange of goods and services B. Money allows for the accumulation of wealth C. Money makes exchange easier, leading to more specialization and higher productivity D. Money encourages people to produce all. of their own goods and therefore increase economic stability

c. money makes exchange easier, lending to more specialization and higher productivity

The M2 measure of the money supply equals A. savings account balances plus small-denomination time deposits plus traveler's check B. saving account balances plus small-denomination time deposits plus non-institutional money market funds shares C. M1 plus savings account balances plus small-denomination time deposits D. M1 plus savings account balances plus small-denomination time deposits plus non-institutional money market funds shares

D. M1 plus savings account balances plus small-denomination time deposits plus non-institutional money market funds shares

Which of the following would cause the money demand curve to shift to the left? A. an open market purchase of Treasury securities by the Federal Reserve B. an increase in the interest rate C).an increase in the price level D. a decrease in real GDP

D. a decrease in real GDP

Refer to Figure 15-10. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve? A. an increase in income taxes B. a decrease in the required reserve ratio C. an open market purchase of Treasury bills D. an open market sale of Treasury bills

D. an open market sale of Treasury bills

In economics, money is defined as A. the total value of one's assets in current prices B. the total value of one's assets minus the total value of one's debt, in current prices C. the total amount of salary, interest, and rental income earned during a year D. any assets people generally accept in exchange for goods and services

D. any assets people generally accept in exchange for goods and services

To decrease the money supply, the Federal Reserve could A. lower the discount B. raise income taxes C. lower the required reserve ratio D. conduct an open market sale of Treasury securities E. raise transfer payments

D. conduct an open market sale of Treasury securities

The quantity theory of money predicts that, in the long run, inflation results from the A. velocity of money growing faster rate than real GDP B. velocity of money growing at a lower rate than real GDP C. money supply growing at a lower rate than real GDP D. money supply growing at a faster rate than real GDP

D. money supply growing at a faster rate than real GDP

How does an increase in a country's exchange rate affect its balance of trade? A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade. B) An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade. C) An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade. D) An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade.

A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade.

How does expansionary monetary policy affect net exports? A) Expansionary monetary policy increases exports and reduces imports. B) Expansionary monetary policy reduces exports and increases imports. C) Expansionary monetary policy increases exports and increases imports. D) Expansionary monetary policy reduces exports and reduces imports.

A) Expansionary monetary policy increases exports and reduces imports.

Refer to Figure 17-2. Suppose the economy is at point A. The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur? A) Inflation will accelerate in the long run. B) Inflationary expectations will decline. C) Unemployment will rise above the natural rate. D) Unemployment will accelerate in the long run.

A) Inflation will accelerate in the long run.

Refer to Figure 17-2. Suppose the economy is at point B in the figure above. Which of the following is true? A) The expected rate of inflation is 3%. B) The natural rate of unemployment is 3.8%. C) The current unemployment rate is 5%. D) The economy is producing at potential GDP. E) Expected inflation and actual inflation are the same.

A) The expected rate of inflation is 3%.

Assuming no change in the nominal exchange rate, how will a higher rate of inflation in the United States relative to France affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.) A) The real exchange rate will rise. B) The real exchange rate will fall. C) The real exchange rate will be unaffected. D) The impact on the real exchange rate cannot be predicted.

A) The real exchange rate will rise.

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $300 billion decrease in GDP B) a $300 billion increase in GDP C) a $30 billion increase in GDP D) a $133.33 billion decrease in GDP E) a $133.33 billion increase in GDP

A) a $300 billion decrease in GDP

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy.

A) automatic stabilizers.

The balance of payments includes which three accounts? A) the current account, the financial account, and the capital account B) the capital flows account, the financial account, and the trade account C) the net investment account, the net exports account, and the net transfers account D) the balance of trade account, the net foreign investment account, and statistical discrepancy

A) the current account, the financial account, and the capital account

Refer to Figure 17-2. Suppose the Fed used expansionary policy to push short-run equilibrium to point B. If the short-run equilibrium remained at point B long enough, A) the short-run Phillips curve would shift up. B) the short-run Phillips curve would shift down. C) the economy would move back to point A. D) the economy would stay at point B in the long run.

A) the short-run Phillips curve would shift up.

The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms. A) unexpected B) expected C) perfectly predicted D) ignored

A) unexpected

An increase in the interest rate causes A. a movement up along the money demand curve. B. a movement down along the money demand curve. C. the money demand curve to shift to the left. D. the money demand curve to shift to the right.

A. a movement up along the money demand curve.

Commodity money A. has value independent of its use as money B. has little to no value independent of its use as money C. is backed by a valuable commodity such as gold D. can be used to purchase commodities, but not services

A. has value independent of its use of money

A decrease in the discount rate __ bank reserve and __ the money supply if banks respond appropriately to the change in the rate A. increases; increases B. increases; decreases C. decreases; increases D. decrease; decreases

A. increases; increases

A decrease in the reserve requirement __ bank reserves and __ the money supply A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

A. increases; increases

Refer to Figure 15-6. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to A. lower interest rates. B. raise interest rates. C. lower income taxes. D. raise income taxes.

A. lower interest rates.

Monetary policy refers to the actions the A. President and Congress take to manage the money supply and interest rates to pursue their economic objectives B. Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives C. Presiden and Congress take to manage government spending and taxes to pursue their economic objectives D. Federal Reserve takes to manage government spending and taxes to pursue its economic objectives

B. Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives

The most liquid measure of money supply is... A. M0 B. M1 C. M2 D. M3

B. M1

Open market operations refer to the purchase or sale of __ to control the money supply A. corporate bonds and sucks by the Federal Reserve B. U.S. Treasury securities by the Federal Reverse C. corporate bonds and stocks by the U.S. Treasury D. U.S. Treasury securities by the U.S. Treasury

B. U.S. Treasury securities by the Federal Reserve

Contractionary monetary policy on the part of the Fed results in A. an increase in the money supply, an increase in interest rates, and an increase in GDP. B. a decrease in the money supply, an increase in interest rates, and a decrease in GDP. C. an increase in the money supply, a decrease in interest rates, and an increase in GDP. D. a decrease in the money supply, a decrease in interest rates, and a decrease in GDP.

B. a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

The required reserved of a bank equal its __ the required reserve ratio A. deposits divided by B. deposits multiplied by C. loans divided by D. loans multiplied by

B. deposits multiplied by

Banks can make additional loans when required reserves are A. greater than total reserves B. less than total reserves C. less than total deposits D. less than total loans

B. less than total reserves

Fiat money has... A. little to no intrinsic value but is backed by the quantity of gold held by the central bank B. little to no intrinsic value and it authorized by the central bank or government body C. value, because it can be redeemed for gold by the central bank D. a great intrinsic value that is independent of its use as money

B. little to no intrinsic value and it authorized by the central bank of government body

The quantity equation states that the A. money supply divided by the velocity of money equals the price level divided by real output B. money supply times the velocity of money equals the price level times real output C. money supply times the price level equals real output divided by the velocity of money D. money supply times the price level equals real output times the velocity of money

B. money supply times the velocity of money equals the price level times real output

Which of the following functions of money would be violated if inflation were high? A. unit of account B. store of value C. certificate of gold D. medium exchange

B. store of value

An increase in the price level causes A. the money demand curve to shift to the left. B. the money demand curve to shift to the right. C. a movement up along the money demand curve. D. a movement down along the money demand curve.

B. the money demand curve to shift to the right.

When the Fed uses contractionary policy, A. the price level rises higher than it would if the Fed did not pursue policy. B. the price level rises less than it would if the Fed did not pursue policy. C. it does not change the price level. D. it causes inflation.

B. the price level rises less than it would if the Fed did not pursue policy.

Expansionary monetary policy refers to the ________ to increase real GDP. A. government's increasing spending and lowering taxes B. government's decreasing spending and raising taxes C. Federal Reserve's increasing the money supply and decreasing interest rates D. Federal Reserve's decreasing the money supply and increasing interest rates

C. Federal Reserve's increasing the money supply and decreasing interest rates

Refer to Figure 15-2. In the figure above, the movement from point A to point B in the money market would be caused by A. an increase in the price level. B. a decrease in real GDP. C. an open market sale of Treasury securities by the Federal Reserve. D. a decrease in the required reserve ratio by the Federal Reserve.

C. an open market sale of Treasury securities by the Federal Reserve.

The M1 measure of the money supply equals... A. paper money plus coins in circulation B. currency plus checking account balances C. currency plus checking account balances plus traveler's checks D. currency plus checking account balances plus traveler's checks plus savings account balances

C. currency plus checking account balances plus traveler's check

An increase in interest rates A. decreases investment spending on machinery, equipment, and factories, but increases consumption spending on durable goods and net exports. B. decreases investment spending on machinery, equipment, and factories, and consumption spending on durable goods, but increases net exports. C. decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports. D. increases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.

C. decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports.

The three main monetary policy tools used by the Federal Reserve to manage the money supply are A. interest rates, tax rates, and government spending B. tax rate, government purchases, and government transfer payments C. open market operations, discount policy, and reserve requirements D. open market operations, the exchange rate of the dollar against foreign currencies, and government purchases

C. open market operations, discount policy, and reserve requirements

The Federal Reserve System's four monetary policy goals are A. low government budget deficits, low current account deficits, high employment , and a high foreign exchange value of the dollar B. a low rate of bank failures, high reserve ratios, price stability, and economic growth C. price stability, high employment, economic growth, and stability of financial markets and institutions D. price stability low government budget deficits, low current account deficits, and a low rate of bank failures

C. price stability, high employment, economic growth, and stability of financial markets and institutions

The Federal Reserve was established in 1913 to... A. prevent inflation by decreasing the money supply B. stimulate the economy by increasing bank reserves C. stop bank panics by acting as a lender of last resort D. prevent bad loans by requiring banks to hold reserves

C. stop bank panics by acting as a lender of last resort

The Federal Reserve can directly affect its monetary policy ___, which then affect its monetary policy ___. A. goals; target B. goals; tools C. targets; goals D. targets; tools

C. targets; goals

The quantity theory of money was derived from the quantity equation by asserting that A. real output was fixed B. the money supply was fixed C. the velocity of money was fixed D. the velocity of money was zero

C. the velocity of money was fixed