Macroeconomics Final Review

The interest rate would fall and the quantity of money demanded would a. increase if there were a surplus in the money market. b. increase if there were a shortage in the money market. c. decrease if there were a surplus in the money market. d. decrease if there were a shortage in the money market.

a. increase if there were a surplus in the money market.

The economic boom of the early 1940s resulted mostly from a. increased government expenditures. b. falling prices of oil and other natural resources. c. an increase in the growth rate of the money supply. d. rapid developments in transportation, electronics, and communication.

a. increased government expenditures.

Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased. b. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased. c. your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased. d. your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased.

a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.

Figure 30-3. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. Refer to Figure 30-3. If the relevant money-supply curve is the one labeled MS1, then the equilibrium price level is a. 0.5 and the equilibrium value of money is 2. b. 2 and the equilibrium value of money is 0.5. c. 0.5 and the equilibrium value of money cannot be determined from the graph. d. 2 and the equilibrium value of money cannot be determined from the graph.

b. 2 and the equilibrium value of money is 0.5.

When a country experiences capital flight, the interest rate a. falls because the demand for loanable funds shifts left. b. falls because the supply for loanable funds shifts right. c. rises because the demand for loanable funds shifts right. d. rises because the supply for loanable funds shifts left.

c. rises because the demand for loanable funds shifts right

To decrease the money supply, the Fed can a. buy government bonds or increase the discount rate. b. buy government bonds or decrease the discount rate. c. sell government bonds or increase the discount rate. d. sell government bonds or decrease the discount rate.

c. sell government bonds or increase the discount rate.

Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess a. demand for money equal to the distance between points a and b. b. demand for money equal to the distance between points b and c. c. supply of money equal to the distance between points a and b. d. supply of money equal to the distance between points b and c.

c. supply of money equal to the distance between points a and b.

According to the classical dichotomy, which of the following increases when the money supply increases? a. the real interest rate b. real GDP c. the real wage d. None of the above increases.

d. None of the above increases.

Over time continued budget deficits lead to a. a higher capital stock and higher real wages. b. a higher capital stock and lower real wages. c. a lower capital stock and higher real wages. d. a lower capital stock and lower real wages.

d. a lower capital stock and lower real wages.

During some year a country had exports of $50 billion, imports of $70 billion, and domestic investment of $100 billion. What was its saving during the year? a. $80 billion b. $100 billion c. $120 billion d. $150 billion

a. $80 billion

In which of the following situations must national saving rise? a. Both domestic investment and net capital outflow increase. b. Domestic investment increases and net capital outflow decreases. c. Domestic investment decreases and net capital outflow increases. d. Both domestic investment and net capital outflow decrease.

a. Both domestic investment and net capital outflow increase.

Which of the following actions might we logically expect to result from rising stock prices? a. Jim increases his consumption spending. b. Firms sell fewer shares of new stock. c. Firms spend less on investment. d. None of the above is correct.

a. Jim increases his consumption spending.

U.S.-based John Deere sells machinery to residents of South Africa who pay with South African currency (the rand). a. This increases U.S. net capital outflow because the U.S. acquires foreign assets. b. This decreases U.S. net capital outflow because the U.S. acquires foreign assets. c. This increases U.S. net capital outflow because the U.S. sells capital goods. d. This decreases U.S. net capital outflow because the U.S. sells capital goods.

a. This increases U.S. net capital outflow because the U.S. acquires foreign assets.

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is a. $60.60. b. $60.67. c. $61.33. d. $63.00.

b. $60.67.

The First Bank of Fairfield Assets Reserves: $2,000 Loans: 8,000 Liabilities Deposits: $10,000 The reserve ratio for this bank is a. 0 percent. b. 20 percent. c. 80 percent. d. 100 percent.

b. 20 percent.

A bank has $200,000 in deposits and $190,000 in loans. It has a reserve ratio of a. 2.5% b. 5% c. 9.5% d. 10%

b. 5% [(200,000-190,000)/190,000]x100=5

Other things the same, a decrease in the U.S. real interest rate induces a. Americans to buy more foreign assets, which increases U.S. net capital outflow. b. Americans to buy more foreign assets, which reduces U.S. net capital outflow. c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow. d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.

a. Americans to buy more foreign assets, which increases U.S. net capital outflow.

Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2, a. the equilibrium value of money decreases. b. the equilibrium price level decreases. c. the supply of money has decreased. d. the demand for goods and services will decrease.

a. the equilibrium value of money decreases.

For purposes of analyzing the money stock and its relationship to relevant economic variables, money is best thought of as a. those items that can be readily accessed and used to buy goods and services b. currency only c. currency plus all bank accounts d. currency plus all bank accounts plus bonds

a. those items that can be readily accessed and used to buy goods and services

If the central bank in some country lowered the reserve requirement, then the money multiplier for that country a. would increase. b. would not change. c. would decrease. d. could do any of the above.

a. would increase.

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are a. smaller in closed economies than in open economies. b. larger in closed economies than in open economies. c. smaller in capitalist economies than in socialist economies. d. larger in capitalist economies than in socialist economies.

b. larger in closed economies than in open economies.

Which tool of monetary policy does the Federal Reserve use most often? a. term auctions b. open-market operations c. changes in reserve requirements d. changes in the discount rate

b. open-market operations

If policymakers decrease aggregate demand, then in the long run a. prices will be lower and unemployment will be higher. b. prices will be lower and unemployment will be unchanged. c. prices and unemployment will be unchanged. d. None of the above is correct.

b. prices will be lower and unemployment will be unchanged.

If the central bank increases the money supply, in the short run, output a. rises so unemployment rises. b. rises so unemployment falls. c. falls so unemployment rises. d. falls so unemployment falls.

b. rises so unemployment falls.

The Fisher effect a. says the government can generate revenue by printing money. b. says there is a one for one adjustment of the nominal interest rate to the inflation rate. c. explains how higher money supply growth leads to higher inflation. d. explains how prices adjust to obtain equilibrium in the money market.

b. says there is a one for one adjustment of the nominal interest rate to the inflation rate.

In order to understand how the economy works in the short run, we need to a. study the classical model. b. study a model in which real and nominal variables interact. c. understand that "money is a veil." d. understand that money is neutral in the short run.

b. study a model in which real and nominal variables interact.

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in a. the price level. b. the interest rate. c. the exchange rate. d. real wealth

b. the interest rate.

Suppose over some period of time the money supply tripled, velocity was unchanged, and real GDP doubled. According to the quantity equation the price level is now a. 6 times its old value. b. 3 times its old value. c. 1.5 times its old value. d. 0.75 times its old value

c. 1.5 times its old value.

In Ireland, a pint of beer costs 3 euros. In Australia, a pint of beer costs 4 Australian dollars. If the exchange rate is .8 euros per Australian dollar, what is the real exchange rate? a. 4/2.4 pints of Irish beer per pint of Australian beer b. 3/3.2 pint of Irish beer per pint of Australian beer c. 3.2/3 pints of Irish beer per pint of Australian beer d. 2.4/4 pints of Irish beer per pint of Australian beer

c. 3.2/3 pints of Irish beer per pint of Australian beer

The term hyperinflation refers to a. the spread of inflation from one country to others. b. a decrease in the inflation rate. c. a period of very high inflation. d. inflation accompanied by a recession.

c. a period of very high inflation.

Paul Volcker's inflation reduction efforts a. failed to reduce inflation. b. failed to reduce expected inflation. c. resulted in the highest unemployment rate since the Great Depression. d. None of the above are correct.

c. resulted in the highest unemployment rate since the Great Depression.

Which of the following statements is correct? In the special case of the 100-percent reserve banking the money multiplier is a. 0 and banks create money. b. 0 and banks do not create money. c. 1 and banks create money d. 1 and banks do not create money.

d. 1 and banks do not create money.

If the nominal interest rate is 7 percent and expected inflation is 4.5 percent, then what is the expected real interest rate? a. 11.5 percent b. 7 percent c. 4.5 percent d. 2.5 percent

d. 2.5 percent

An increase in government spending on goods to build or repair infrastructure a. shifts the aggregate demand curve to the right. b. has a multiplier effect. c. shifts the aggregate supply curve to the right, but this effect is likely more important in the long run. d. All of the above are correct.

d. All of the above are correct.

Refer to Political Instability Abroad. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand? a. Net exports would rise which by itself would increase U.S. aggregate demand. b. Net exports would rise which by itself would decrease U.S. aggregate demand. c. Net exports would fall which by itself would increase U.S. aggregate demand. d. Net exports would fall which by itself would decrease U.S. aggregate demand.

d. Net exports would fall which by itself would decrease U.S. aggregate demand.

Which of the following is a function of money? a. a unit of account b. a store of value c. medium of exchange d. all of the above are correct

d. all of the above are correct

Refer to Figure 32-5. In the market for foreign-currency exchange, the effects of an increase in the budget surplus is illustrated as a move from g to a. e. b. f. c. h. d. i.

d. i.

According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes a. the interest rate to fall, so aggregate demand shifts right. b. the interest rate to fall, so aggregate demand shifts left. c. the interest rate to rise, so aggregate demand shifts right. d. the interest rate to rise, so aggregate demand shifts left.

d. the interest rate to rise, so aggregate demand shifts left.

If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by a. buying bonds. This buying would increase the money supply. b. buying bonds. This buying would reduce the money supply. c. selling bonds. This selling would increase the money supply. d. selling bonds. This selling would reduce the money supply.

a. buying bonds. This buying would increase the money supply.

If U.S. citizens decide to save a larger fraction of their incomes, the real interest rate a. decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases. b. decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases. c. increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases. d. increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.

a. decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.

The national debt a. exists because of past government budget deficits. b. is the difference between the government's spending and revenue in a given year. c. is the amount households owe on credit cards, mortgages and other loans. d. is the amount household and firms have borrowed minus the amount they have saved.

a. exists because of past government budget deficits.

High and unexpected inflation has a greater cost a. for those who save than for those who borrow. b. for those who hold a little money than for those who hold a lot of money. c. for those whose wages increase by as much as inflation than those who are paid a fixed nominal wage. d. for savers in low income tax brackets than for savers in high income tax brackets.

a. for those who save than for those who borrow.

An increase in the budget deficit a. reduces net capital outflow and domestic investment. b. reduces net capital outflow and raises domestic investment. c. raises net capital outflow and domestic investment d. raises net capital outflow and reduces domestic investment.

a. reduces net capital outflow and domestic investment.

If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher in the short run than before. b. left, so that at any inflation rate unemployment is higher in the short run than before. c. right, so that at any inflation rate unemployment is lower in the short run than before. d. left, so that at any inflation rate unemployment is lower in the short run than before.

a. right, so that at any inflation rate unemployment is higher in the short run than before.

Which of the following would we not expect if government policy moved the economy up along a given short-run Phillips curve? a. Louise reads in the newspaper that the central bank recently raised the money supply. b. Eric gets fewer job offers c. Jack makes larger increases in the prices at his health food store. d. Maria's nominal wage increase is larger.

b. Eric gets fewer job offers

Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing power parity hold? a. Both the euro area and Australia. b. Neither the euro area or Australia. c. The euro area but not Australia. d. Australia but not the euro area.

b. Neither the euro area or Australia.

Which of the following is correct concerning recessions? a. They come at fairly regular and predictable intervals. b. They are associated with comparatively large declines in investment spending. c. They are any period when real GDP growth is less than average. d. They tend to be associated with falling unemployment rates.

b. They are associated with comparatively large declines in investment spending.

In the open-economy macroeconomic model, equilibrium in the market for foreign-currency exchange is determined by the equality between the supply of dollars which comes from a. U.S. national saving and the demand for dollars for U.S. net exports. b. U.S. net capital outflow and the demand for dollars for U.S. net exports. c. domestic investment and the demand for U.S. net exports. d. foreign demand for U.S. goods and services and U.S. demand for foreign goods and services.

b. U.S. net capital outflow and the demand for dollars for U.S. net exports.

Other things the same, continued increases in the money supply lead to a. continued increases in the price level and real GDP. b. continued increases in the price level but not continued increases in real GDP. c. continued increases in real GDP but not continued increases in the price level. d. a one-time permanent increase in both prices and real GDP.

b. continued increases in the price level but not continued increases in real GDP.

If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as a. e(P*/P). b. e(P/P*). c. e + P*/P. d. e - P/P*.

b. e(P/P*).

Net exports of a country are the value of a. goods and services imported minus the value of goods and services exported. b. goods and services exported minus the value of goods and services imported. c. goods exported minus the value of goods imported. d. goods imported minus the value of goods exported.

b. goods and services exported minus the value of goods and services imported.

Other things the same, if the price level falls, people a. increase foreign bond purchases, so the dollar appreciates. b. increase foreign bond purchases, so the dollar depreciates. c. increase domestic bond purchases, so the dollar appreciates. d. increase domestic bond purchases, so the dollar depreciates.

b. increase foreign bond purchases, so the dollar depreciates.

A Peruvian firm purchases construction equipment made in the U.S. and pays for it with Peruvian currency. This transaction a. increases U.S. net exports, and increases Peruvian net capital outflow. b. increases U.S. net exports, and decreases Peruvian net capital outflow. c. decreases U.S. net exports, and increases Peruvian net capital outflow. d. decreases U.S. net exports, and decreases Peruvian net capital outflow.

b. increases U.S. net exports, and decreases Peruvian net capital outflow.

Which of the following will decrease U.S. net capital outflow? a. capital flight from the United States b. the government budget deficit increases c. the U.S. imposes import quotas d. None of the above is correct.

b. the government budget deficit increases

A decrease in expected inflation shifts a. the long-run Phillips curve left. b. the short-run Phillips curve left. c. neither the short-run nor long-run Phillips curve left. d. both the short-run and long-run Phillips curve left.

b. the short-run Phillips curve left.

Other things the same, the aggregate quantity of goods demanded in the U.S. increases if a. real wealth falls. b. the interest rate rises. c. the dollar depreciates. d. None of the above is correct.

c. the dollar depreciates.

Stacey, a U.S. citizen, buys a bond issued by an Italian pasta manufacturer. a. This purchase is foreign direct investment. By itself it increases U.S. net capital outflow. b. This purchase is foreign direct investment. By itself it decreases U.S. net capital outflow. c. This purchase is foreign portfolio investment. By itself it increases U.S. net capital outflow. d. This purchase is foreign portfolio investment. By itself it decreases U.S. net capital outflow.

c. This purchase is foreign portfolio investment. By itself it increases U.S. net capital outflow.

Refer to Figure 33-2. Starting from point B and assuming that aggregate demand is held constant, in the long run the economy is likely to experience a. a falling price level and a falling level of output. b. a falling price level and a rising level of output. c. a rising price level and a falling level of output. d. a rising price level and a rising level of output.

c. a rising price level and a falling level of output.

If the unemployment rate rises, which policies would both be appropriate to reduce it? a. increase taxes, increase government spending b. increase taxes, decrease government spending c. decrease taxes, increase government spending d. decrease taxes, decrease government spending

c. decrease taxes, increase government spending

The sticky-price theory of the short-run aggregate supply curve says that when the price level is higher than expected, some firms will have a. higher than desired prices which leads to an increase in the aggregate quantity of goods and services supplied. b. higher than desired prices which leads to a decrease in the aggregate quantity of goods and service supplied. c. lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied. d. lower than desired prices which leads to a decrease in the aggregate quantity of goods and services supplied

c. lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied.

Refer to Figure 35-5. If the economy starts at C and the money supply growth rate increases, in the long run the economy a. stays at C. b. moves to B. c. moves to F. d. None of the above is consistent wit an increase in the money supply growth rate.

c. moves to F.

Which of the following lists includes only changes that shift aggregate demand to the right? a. repeal of an investment tax credit, an increase in the money supply b. repeal of an investment tax credit, a decrease in the money supply c. passing of an investment tax credit, an increase in the money supply d. passing of an investment tax credit, a decrease in the money supply

c. passing of an investment tax credit, an increase in the money supply

Suppose a tax cut affected aggregate demand and aggregate supply. The shift in aggregate supply would make the a. price level and real GDP change by more than otherwise. b. price level change by more than otherwise and real GDP change by less than otherwise. c. price level change by less than otherwise and real GDP change by more than otherwise. d. price level and real GDP change by more than otherwise.

c. price level change by less than otherwise and real GDP change by more than otherwise.

If the demand for loanable funds shifts right, then a. the real interest rate and the equilibrium quantity of loanable funds both fall. b. the real interest rate falls and the equilibrium quantity of loanable funds rises. c. the real interest rate and the equilibrium quantity of loanable funds both rise. d. the real interest rate rises and the equilibrium quantify of loanable funds falls.

c. the real interest rate and the equilibrium quantity of loanable funds both rise.

Part of the lag in monetary policy effects is due to a. the long political process of monetary policy decisions. b. precise economic forecasts. c. the time required for firms and households to alter their spending plans. d. changes in the unemployment rate.

c. the time required for firms and households to alter their spending plans.

If the quantity of loanable funds supplied is greater than the quantity demanded, then a. there is a shortage of loanable funds and the interest rate will fall. b. there is a shortage of loanable funds and the interest rate will rise. c. there is a surplus of loanable funds and the interest rate will fall. d. there is a surplus of loanable funds and the interest rate will rise.

c. there is a surplus of loanable funds and the interest rate will fall.

If saving is greater than domestic investment, then a. there is a trade deficit and Y > C + I + G. b. there is a trade deficit and Y < C + I + G. c. there is a trade surplus and Y > C + I + G. d. there is a trade surplus and Y < C + I + G.

c. there is a trade surplus and Y > C + I + G.

In 2009 Barack Obama responded to recession a. only by cutting taxes. b. by cutting taxes and reducing government expenditures. c. only by raising government expenditures. d. by cutting taxes and by raising government expenditures.

d. by cutting taxes and by raising government expenditures.

Refer to Figure 32-6. If the economy were initially in equilibrium at r2 and E3 and the government removed import quotas, the exchange rate would a. appreciate to E4. b. appreciate to E2. c. depreciate to E1. d. depreciate to E2.

d. depreciate to E2.

80. Economists a. agree that the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high. b. agree that the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high. c. disagree about whether the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be smaller if inflation expectations remain high. d. disagree about whether the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.

d. disagree about whether the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from reducing inflation will be larger if inflation expectations remain high.

Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation a. increases the real interest rate and the after-tax real rate of interest. b. increases the real interest rate and the after-tax real rate of interest. c. does not change the real interest rate but raises the after tax real rate of interest. d. does not change the real interest rate but reduces the after-tax real rate of interest.

d. does not change the real interest rate but reduces the after-tax real rate of interest.

The principal lag for monetary policy a. and fiscal policy is the time it takes to implement policy. b. and fiscal policy is the time it takes for policy to change spending. c. is the time it takes to implement policy. The principal lag for fiscal policy is the time it takes for policy to change spending. d. is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it takes to implement it.

d. is the time it takes for policy to change spending. The principal lag for fiscal policy is the time it takes to implement it.

The reserve requirement is 4%, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 of bonds what happens to the money supply? a. it increases by $250,000 b. it increases by $200,000 c. it decreases by $200,000 d. it decreases by $250,000

d. it decreases by $250,000

If the long-run Phillips curve shifts to the left, then for any given rate of money growth and inflation the economy has a. higher unemployment and lower output. b. higher unemployment and higher output. c. lower unemployment and lower output. d. lower unemployment and higher output

d. lower unemployment and higher output

If the inflation rate is zero, then a. both the nominal interest rate and the real interest rate can fall below zero. b. the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero. c. the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero. d. neither the nominal interest rate nor the real interest rate can fall below zero.

d. neither the nominal interest rate nor the real interest rate can fall below zero.

A 1977 amendment to the Federal Reserve Act of 1913 says the Fed should "promote" which of the following goals? a. only price stability b. only maximum employment c. only price stability and maximum employment d. price stability, maximum employment, and moderate long-term interest rates

d. price stability, maximum employment, and moderate long-term interest rates

The aggregate quantity of goods and services demanded changes as the price level falls because a. real wealth falls, interest rates rise, and the dollar appreciates. b. real wealth falls, interest rates rise, and the dollar depreciates. c. real wealth rises, interest rates fall, and the dollar appreciates. d. real wealth rises, interest rates fall, and the dollar depreciates.

d. real wealth rises, interest rates fall, and the dollar depreciates.

A favorable supply shock a. raises unemployment and the inflation rate. b. raises unemployment and reduces the inflation rate. c. reduces unemployment and raises the inflation rate. d. reduces unemployment and the inflation rate.

d. reduces unemployment and the inflation rate.

Refer to Figure 34-2. What is measured along the horizontal axis of the left-hand graph? a. nominal output b. real output c. the opportunity cost of holding money d. the quantity of money

d. the quantity of money

If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate, then a. the long-run Phillips curve would shift right. b. the long-run Phillips curve would shift left. c. the short-run Phillips curve would shift up. d. the short-run Phillips curve would shift down.

d. the short-run Phillips curve would shift down.