Chapter Quiz Questions
The GDP is the:
monetary value of all final goods and services produced within the borders of a nation in a particular year.
The GDP is:
monetary value of all final goods and services produced within the borders of a nation in a particular year.
Other things equal, an improvement in productivity will:
shift the aggregate supply curve to the left
The aggregate supply curve (short-run):
slopes upward and to the right.
The greater is the marginal propensity to consume, the:
smaller is the marginal propensity to save
A rightward shift of the traditional Phillips Curve would suggest that:
the rate of inflation is now higher at each rate of unemployment
The immediate primary cause of the swing from Federal budget surpluses between 1998 and 2001 to a budget deficit in 2002 was:
the recession of 2001
The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of:
the reserve ratio
To say that coins are "token money" means that:
their face value is greater than their intrinsic value
Checkable deposits are classified as money because:
they can be readily used in purchasing goods & paying debts
The real interest rate is:
the percentage increase in purchasing power that the lender receives on a loan.
Open-market operations
the purchase and sale of U.S. government bonds by the Fed
As a general rule, if pollution costs are external, firms will produce
too much of a polluting good
Per-unit production cost is:
total input cost divided by units of output.
About ________ of U.S. economic growth between 1990 and 2007 came from improved productivity (as opposed to added inputs).
two-thirds
Official unemployment statistics:
understate unemployment because discouraged workers are not counted as unemployed.
A large underground economy results in an:
understated GDP
Structural unemployment:
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
A $70 price tag on a sweater in a department store window is an example of money functioning as a:
units of account
Savings is always equal to
unplanned changes in inventory
When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of:
wage contracts
Spillover costs arise:
when firms "use" resources without being compelled to pay for their full costs
If the price index rises from 100 to 120, the purchasing power value of the dollar:
will fall by 1/6th
Built-in stability means that:
with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.
If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:
decreasing taxes by $25 billion
When the Fed lends money to a commercial bank, the bank:
increases its reserves and enhances its ability to extend credit to bank customers
If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by:
increasing taxes by $20 billion
The M2 money supply includes:
individual shares in money market mutual funds
If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity supplied, we would expect:
inflation to occur
The purchasing power of money and the price level vary:
inversely
Exports have the same effect on the current size of GDP as:
investment
The relationship between the real interest rate and investment is shown by the:
investment demand schedule
All else equal, a large decline in the real interest rate will shift the
investment schedule upward
Discretionary fiscal policy is so named because it:
involves specific changes in the T and G undertaken expressly for stabilization at the option of congress
A public good is a good that
is available for everyone to consume, regardless of who pays
The Federal Reserve System:
is basically an independent agency.
A good is considered to be a public good if it
is both nonrival-in-consumption and nonexcludable.
A fractional reserve banking system:
is susceptible to bank panics.
Refer to the above table. The value of the dollar in year 3 is:
$1.25
In January 2008, the supply of money ( M1) in the United States was about:
$1365 billion
In an economy nominal GDP is $4,000 billion. The actual unemployment rate is 8 percent and the natural rate of unemployment is 6 percent. According to Okun's law there will be:
$160 billion lost in potential output
If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be:
$200 Billion
Answer the next question(s) on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent Reference: 7-91 The amount of output being forgone by the above economy is:
$24 billion?
If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is:
$360 billion
Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:
$50 billion
Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by:
$6 Billion
Reference: 13-81 Refer to the above data. The commercial banking system has excess reserves of:
$9 Billion
Answer the next question(s) on the basis of the following information: An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10, each unit of raw materials, $4, and each unit of labor, $3. Refer to the above information. The per-unit cost of production in this economy is:
.10
Answer the next question(s) on the basis of the following data for a hypothetical economy.
.80
The value of the monetary multiplier is:
1/required reserve ratio
At an annual growth rate of 7 percent, real GDP will double in about:
10 years
American exports and imports of goods and services each are about what percentage (of GDP?)
11-16%
If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:
12%
If nominal GDP in some year is $280 and real GDP is $160, then the GDP price index for that year is:
175
The Federal Reserve System was created in:
1913
Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. Answer the following question(s) on the basis of this information. Refer to the above information. The level of productivity is:
2
If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
22%
In the depth of the Great Depression, the unemployment rate in the United States was about:
25%
If the MPS is only half as large as the MPC, the multiplier is:
3
If the Consumer Price Index was 166.6 in one year and 172.2 in the next year, then the rate of inflation from one year to the next was:
3.4%
In an economy, 35 million workers are employed out of a labor force of 50 million and a total population of 70 million. The unemployment rate is:
30%
About ____ percent of the U.S. public debt is held by people and institutions abroad.
33%
Refer to the above table. Between years 1 and 2, real GDP per capita grew by __________ percent in Alta:
4 or 5...
The Great Depression of the 1930s resulted in a decline in real GDP of about:
40%
If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000, then the monetary multiplier is:
5
The average U.S. tariff rate on imported goods is about:
5%
Refer to the above data. If the money supply is $160, the equilibrium interest rate will be:
6%?
The Board of Governors of the Federal Reserve has ____ members.
7 members
What percentage of the average firm's costs are accounted for by wages and salaries?
75%
Limited liability applies to:
All corporations
The United States' most important trading partner in terms of dollar volume is:
Canada
The countries comprising of NAFTA are:
Canada, Mexico, and the US
If government increases lump-sum taxes by $20 billion and the economy's MPC is .6, then the:
Consumption schedule will shift down by $12 billion
In the expansion phase of a business cycle:
Employment and output increase
The paper money used in the United States is:
Federal Reserve Notes
Real GDP refers to:
GDP data that have been adjusted for changes in the price level.
Money market deposit accounts are included in:
M2 only
Government can push the unemployment rate below the natural rate only by:
Producing a higher rate of inflation than people expect
The primary purpose of the legal reserve requirement is to:
Provide a means by which the monetary authorities can influence the lending ability of commercial banks.
The emigration of software designers from India to the United States best illustrates:
Resource Flow
The exclusion principle:
The ability to exclude those who do not pay for a product from receiving its benefits
Which one of the following is true about the U.S. Federal Reserve System?
There are 12 regional federal reserve banks
As monetarists view the equation of exchange:
V is quite stable.
Which one of the following would not shift the aggregate demand curve?
a change in the price level
If the dollar appreciates relative to foreign currencies, we would expect:
a country's net exports to fall
Cyclical unemployment results from:
a deficiency of spending on goods and services.
The real-balances effect indicates that:
a higher price level will decrease the real value of many financial assets and therefore reduce spending.
Net exports are negative when:
a nation's imports exceed its exports.
Cost-push inflation may be caused by:
a negative supply shock
What will be the effect of an excess of planned investments over saving in a private closed economy with unemployed resources?
a rise in the real GDP
Demand-pull inflation:
a sustained rise in the price level caused by a rightward shift of the aggregate demand curve
If you are estimating your total expenses for school next semester, you are using money primarily as
a unit of account
Which of the following fiscal policy actions is most likely to increase aggregate supply?
answer is not: a reduction in interest rates that encourages consumers to purchase more durable goods
Which of the following is correct?
a. Government expenditures and taxes both increase GDP
The prime interest rate:
affects investment spending while the Federal funds rate affects overnight borrowing of bank reserves.
An increase in net exports will shift the:
aggregate expenditures curve upward and the aggregate demand curve rightward.
An inflationary expenditure gap is the amount by which:
aggregate expenditures exceed the full-employment level of GDP
Other things equal, if the U.S. dollar were to depreciate, the:
aggregate supply curve would shift to the left
The 45-degree line on a graph relating consumption and income shows:
all the points at which consumption and income are equal
An appropriate fiscal policy for a severe recession is:
an decrease in tax rates
Stagflation refers to:
an increase in inflation accompanied by decreases in real output and employment
Which of the following would not shift the aggregate supply curve?
an increase in the price level
The interest-rate effect suggests that:
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
Which one of the following would increase per unit production cost and therefore shift the aggregate supply curve to the left?
an increase in the price of imported resources
To be officially unemployed a person must:
be in the labor force
The immediate-short-run aggregate supply curve represents circumstances where:
both input and output prices are fixed
In a private closed economy, when aggregate expenditures exceed GDP:
business inventories will fall
Banks create money when they:
buy government bonds from households
Other things equal, appreciation of the dollar:
decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.
An adverse aggregate supply shock:
can cause stagflation
Real GDP per capita
can grow either more slowly or more rapidly than real GDP.
The reserve ratio refers to the ratio of a bank's:
capital stock to its total assets
Externalities
cause the price system to misallocate resources
The MPC can be defined as that fraction of a:
change in income that is spent
The mainstream view of macro instability is that:
changes in investment shift the aggregate demand curve and thus cause changes in real GDP
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $100,000 in:
commercial banks & thrifts
Which of the following would reduce the money supply?
commercial banks sell government bonds to the public
If the economy's real GDP doubles in 18 years, we can:
conclude that its average annual rate of growth is about 4%
The largest component of total expenditures in the United States is:
consumption
If the MPC is .8 and disposable income is $200, then
consumption and saving cannot be determined from the information given
If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase:
consumption by $80 billion
The APC is calculated as:
consumption/ income
Mexican imports of U.S. goods:
create a supply of pesos
Commercial banks create money when they:
create checkable deposits in exchange for IOUs
The type of unemployment associated with recessions is called:
cyclical unemployment
An increase in the reserve ratio:
decreases the size of the monetary multiplier.
Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, the official unemployment rate would:
decline
Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to:
decrease by $50 billion
If APC = .6 and MPC = .7, the immediate impact of an increase in personal taxes of $20 will be to:
decrease consumption by $14
Real income can be determined by:
deflating nominal income for inflation
Reference: 14-25 Refer to the above diagram of the market for money. Given Dm and Sm, an interest rate of i 3 is not sustainable because the:
demand for bonds in the bond market will rise and the interest rate will fall
"Too much money chasing too few goods" best describes:
demand-pull inflation
Other things equal, serious recession in the economies of U.S. trading partners will:
depress real output and employment in the U.S. economy
Excess reserves refer to the:
difference between actual reserves and required reserves
The size of the multiplier associated with an initial increase in spending will be:
diminished if inflation occurs
Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:
directly increase by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million
Real GDP per capita is found by:
dividing real GDP by population
The aggregate demand curve is:
downsloping because of the interest-rate, real-balances, and foreign purchases effects.
The investment demand slopes downward and to the right because lower real interest rates:
enable more investment projects to be undertaken profitably
Banks create money when they:
exchange checkable deposits for the IOU's of businesses and individuals
Protective tariffs are:
excise taxes or duties placed on imported products
In calculating the unemployment rate, "discouraged" workers who are not actively seeking employment are:
excluded
Transfer payments are
excluded when calculating GDP because they do not reflect current production.
The determinants of aggregate demand:
explain shifts in the aggregate demand curve.
Net exports are:
exports less imports
Banks destroy money when they:
fail to reissue loans that are paid off.
The interest rate that banks charge one another on overnight loans is called the:
federal funds rate
Prices and wages tend to be:
flexible upward, but inflexible downward.
Global competition:
forces domestic producers to become more efficient...
Search and wait unemployment is another way to describe:
frictional unemployment
Which of the following activities is excluded from GDP, causing GDP to understate nation's well-being?
goods and services produced in the underground economy
The term "final goods and services" refers to:
goods and services purchased by ultimate users, as opposed to resale or further processing
Export subsidies are:
government payments to domestic producers to enable them to charge lower prices and sell more goods in world markets.
GDP differs from NDP in that:
gross investment is used in calculating GDP and net investment is used in calculating NDP
Commercial banks and thrift institutions:
have become increasingly similar in recent years.
If the Fed were to increase the legal reserve ratio, we would expect:
higher interest rates, contracted gdp, and appreciation of the dollar
GDP excludes:
household production, underground production, leisure time, environment quality
The crowding-out effect of expansionary fiscal policy suggests that:
increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment
If the multiplier in an economy is 5, a $20 billion increase in net exports will:
increase GDP by $100 Billion
If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:
increase by $10 billion
If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to:
increase in domestic output and employment
Other things equal, an increase in an economy's exports will:
increase its domestic aggregate expenditures and therefore increase its equilibrium GDP
Depreciation of the dollar will:
increase the prices of U.S. imports, but decrease the prices to foreigners of U.S. exports.
The economy's long-run aggregate supply curve:
is vertical
Money is destroyed when:
loans are repaid
Suppose that total output (real GDP) is $10,000 and worker hours are 20,000. We can conclude that:
labor productivity must be $0.50.
Supply-side economist Arthur Laffer has argued that:
large reductions in personal and corporate income taxes will increase aggregate supply much more than aggregate demand
If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:
leftward by $40 billion at each price level
Graphically, cost-push inflation is shown as a:
leftward shift of the AS curve.
Growth is advantageous to a nation because it:
lessens the burden of scarcity
Which of the following was not a contributing cause of the decline in investment and thus the recessionary expenditure gap occurring during the U.S. recession of 2001?
low interest rates
A basic criticism of supply-side economics is that:
lower taxes will increase aggregate demand much more than they will increase aggregate supply.
Import quotas are:
maximum limits on the quantity or total value of specific products imported to a nation
Structural unemployment:
may involve a locational mismatch between unemployed workers and job openings
If a bank has liabilities that exceed its net worth it:
may or may not be a profitable firm.
The foreign purchases effect:
moves the economy along a fixed aggregate demand curve
Which of the following is the best example of a public good?
national defense
The full-employment rate of unemployment is also called the:
natural rate of unemployment
In terms of aggregate supply, the difference between the long run and the short run is that in the long run:
nominal wages and other input prices are fully responsive to price level changes
GDP data are criticized as being inaccurate measures of economic welfare because:
of all of the above considerations
Which of the following is a tool of monetary policy?
open market operations
The largest category for federal spending is for:
pensions and income securities
Recessions have contributed to the public debt by:
reducing national income and therefore tax revenues.
Which of the following is one of the most fundamental function of government?
protection of individuals and their property
A recession is a period in which:
real domestic output falls
Labor productivity is measured by:
real output per worker hour.
The desire to hold money for transactions purposes arises because:
receipts of income and expenditures are not perfectly synchronized
An expansionary fiscal policy is shown as a:
rightward shift in the economy's aggregate demand curve.
Graphically, demand-pull inflation is shown as a:
rightward shift of the AD curve along an upsloping AS curve.
Refer to the information above. If the price level unexpectedly increases from 100 to 125, the level of real output in the short run will: rise from $500 to $560. fall from $500 to $440. fall from $560 to $500. rise from $440 to $500.
rise from $500 to $560
At the point where the consumption schedule intersects the 45-degree line:
saving is zero
The consumption and saving schedules reveal that:
saving varies directly with the level of disposable income
The APC can be defined as the fraction of a:
specific level of total income that is consumed
If you place a part of your summer earnings in a savings account, you are using money primarily as a:
store of value
What two conditions must hold for a competitive market to produce efficient outcomes?
supply curve must reflect all costs of production, and demand curve must reflect consumers (willingness to buy it?)
The equilibrium rate of interest in the market for money is determined by the intersection of the:
supply of money curve and the total demand for money curve
Dissaving means:
that households are spending more than their current incomes.
Economists define "saving" as:
that part of after-tax income which is not consumed
If intermediate goods and services were included in GDP:
the GDP would be overstated
When a commercial bank borrows from a Federal Reserve Bank:
the commercial banks lending ability is increased
Supply-side marke failures occur when:
the demand and supply curves reflect the full cost of producing a good or service
If the exchange rate changes from $1 = 2 euros to $1 = 3 euros:
the dollar has appreciated in value
If the equilibrium exchange rate changes so that it takes more dollars to...
the dollar has depreciated in value
Which of the following will not tend to shift the consumption schedule upward?
the expectation of a future decline in the CPI
Which of the following will not tend to shift the consumption schedule upward?
the expectation of a future decline in the consumer price index
If the quantity of money demanded exceeds the quantity supplied:
the interest rate will rise
Other things equal, if there is an increase in nominal GDP:
the interest rate will rise
The difference between M1 and M2 is that:
the latter includes small-denominated time deposits, non checkable savings accounts, money market deposit accounts, and money market mutual fund balances.
The purchase of government securities from the public by the Fed will cause:
the money supply to increase
Nominal GDP is:
the sum of all monetary transactions involving final goods and services that occur in the economy in a year.
The phase of the business cycle in which real GDP is at a minimum is called:
the trough
If government uses fiscal policy to restrain cost-push inflation, we can expect:
the unemployment rate will rise
When the actual rate of inflation is less than the expected rate:
the unemployment rate will temporarily rise