macroeconomics chapters 8&10 review problems

9) Your real wealth is measured as the A) amount of assets you have in dollar terms. B) amount of money you have. C) amount of goods and services your wealth will buy. D) amount of goods you have divided by the price level.

) amount of goods and services your wealth will buy.

8) In the above figure, the economy is at point A and the money wage rate falls by 10 percent. If the price level is constant, firms will be willing to supply output equal to A) less than $13.0 trillion B) $13.0 trillion C) more than $13.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct.

C) more than $13.0 trillion

7) A decrease in the money wage rate increases ________ and an increase in the full employment quantity of labor increases ________. A) the SAS and the LAS; only the SAS B) the SAS and the LAS; only the LAS C) only the SAS; the SAS and the LAS D) only the LAS; the SAS and the LA

C) only the SAS; the SAS and the LAS

14) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________. A) point e; a decrease in the nominal interest rate B) point c; an increase in the nominal interest rate C) point d; an increase in real GDP D) point b; an increase in real GDP

C) point d; an increase in real GDP

6) The initial impact of the Fed's open market sale of government securities to banks is A) an increase in the quantity of money by some multiple of the dollar volume of the sale. B) an increase in bank deposits at the Fed. C) a decrease in the quantity of money by some multiple of the dollar volume of the sale. D) a decrease of the banking system's reserve deposits at the Fed.

D) a decrease of the banking system's reserve deposits at the Fed.

12) Suppose consumers decrease their consumption expenditure because they worry about what their income will be in the future. There is A) a rightward shift of the aggregate demand curve. B) an upward movement along the aggregate demand curve. C) a downward movement along the aggregate demand curve. D) a leftward shift of the aggregate demand curve.

D) a leftward shift of the aggregate demand curve.

18) The quantity theory of money predicts that in the ________, a 10 percent increase in the quantity of money leads to a 10 percent increase in ________. A) long run; real GDP B) short run; velocity C) long run; velocity D) long run; price level

D) long run; price leve

13) When the nominal interest rate rises, the quantity of money demanded decreases becauseA) people will buy fewer goods and hold less money. B) the price level also rises and people decrease their demand for money. C) people move funds from interest-bearing assets into money. D) people shift funds from money holdings to interest-bearing assets.

D) people shift funds from money holdings to interest-bearing assets.

20) In the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of money. How is the surplus eliminated? A) People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down. B) Banks will lend out the surplus, lowering interest rates. C) The Federal Reserve will destroy currency, reducing the quantity of money. D) The high interest rate increases the demand for money, eliminating the surplus.

A) People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down.

9) Which of the following best describes the chain of events in the money creation process? A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves. B) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money. C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases. D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money.

A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.

8) An increase in currency held outside the banks is ________. A) a currency drain B) income C) a currency surplus D) wealth

A) a currency drain

20) The above figure illustrates A) a recessionary gap. B) a full-employment equilibrium. C) an inflationary gap. D) an equilibrium at the economy's physical limits.

A) a recessionary gap.

16) In the short run, when the Fed increases the quantity of money A) bond prices rise and the interest rate falls. B) bond prices fall and the interest rate rises. C) the demand for money increases. D) the supply of money curve shifts leftward.

A) bond prices rise and the interest rate falls.

5) In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation, Homeland Security Secretary Janet Napolitano said," according to CNN, 06/16/2012. If many of these immigrates had previously been afraid to work, now as a result of being able to work legally, A) both the short-run and long-run aggregate supply curves shift rightward. B) only the long-run aggregate supply curve shifts rightward. C) only the short-run aggregate supply curve shifts rightward. D) neither the short-run nor the long-run supply curve shift.

A) both the short-run and long-run aggregate supply curves shift rightward.

11) When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________. A) increase; stay the same B) increase; increase C) increase; decrease D) decrease; increase

A) increase; stay the same

19) In the short run, an increase in government expenditure on goods and services ________ real GDP and ________ the price level. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls

A) increases; rises

1) The most direct way in which money replaces barter is through its use as a A) medium of exchange. B) recording device. C) store of value. D) unit of account.

A) medium of exchange.

12) The opportunity cost of holding money is the A) nominal interest rate on assets other than money. B) price of goods and services. C) level of wage and rental income. D) ease with which an asset can be converted into a means of payment.

A) nominal interest rate on assets other than money.

2) When the labor market is at full employment, A) real GDP equals potential GDP. B) the price level is stable. C) the price level equals the potential price level. D) the SAS curve is horizontal.

A) real GDP equals potential GDP.

7) The commercial banks on Sunny Island have checking deposits of $4 million, reserves of $600,000, and loans of $2.4 million. The desired reserve ratio is 10 percent. The banks have ________ of desired reserves and ________ of excess reserves. A) $600,000; $0 B) $400,000; $200,000 C) $400,000; $600,000 D) $600,000; $200,000

B) $400,000; $200,000

11) There are several reasons why the aggregate demand curve is downward sloping. Which of the following correctly describes one of these explanations? A) A rise in the price level raises the purchasing power wealth and increases desired consumption. B) A rise in the price level raises interest rates and increases investment spending. C) A fall in the price level, holding foreign prices and the exchange rate constant, increases net exports. D) A rise in the price level lowers the interest rate and increases investment spending.

B) A rise in the price level raises interest rates and increases investment spending.

5) An open market operation occurs when the ________ buys or sells securities ________. A) Federal Reserve System; from or to the federal government B) Federal Reserve System; in the open market C) a commercial bank; from or to the federal government D) a commercial bank; from or to the public

B) Federal Reserve System; in the open market

10) The AD curve slopes A) downward due to the wealth and price effects. B) downward due to the wealth and substitution effects. C) upward due to the price and substitution effects. D) upward due to the wealth and substitution effects.

B) downward due to the wealth and substitution effects.

4) Members of the Federal Reserve System's Board of Governors A) are elected for life. B) hold 14-year staggered terms. C) are a special subcommittee of the Senate. D) are elected at large by district banks.

B) hold 14-year staggered terms.

3) Controlling the quantity of money and interest rates to influence aggregate economic activity is called A) foreign policy. B) monetary policy. C) fiscal policy. D) bank antitrust policy.

B) monetary policy.

3) The short-run aggregate supply curve is upward sloping because in the short run the A) money wage rate changes but the price level does not. B) price level changes but the money wage rate does not. C) both the money wage rate and the price level change. D) neither the money wage rate nor the price level can change.

B) price level changes but the money wage rate does not.

16) At long-run macroeconomic equilibrium, ________. A) an inflationary gap exists B) real GDP equals potential GDP C) a recessionary gap exists D) real GDP is less than potential GDP but is as close as it is possible to b

B) real GDP equals potential GDP

18) In a short-run macroeconomic equilibrium, real GDP exceeds potential GDP. If aggregate demand does not change, then the A) short-run aggregate supply curve will shift rightward as the money wage rate falls. B) short-run aggregate supply curve will shift leftward as the money wage rate rises. C) long-run aggregate supply curve will shift leftward as the money wage rate rises. D) long-run aggregate supply curve will shift leftward as the money wage rate falls.

B) short-run aggregate supply curve will shift leftward as the money wage rate rises.

4) In the figure above, the economy is at point A when the price level rises to 120. Money wage rates and other resource prices remain constant. Firms are willing to supply output equal to A) $12.5 trillion. B) $13.0 trillion. C) $13.5 trillion. D) None of the above answers is correct.

C) $13.5 trillion.

17) Suppose the economy is at point B. If firms expect profits will be higher in the future, to what point might the economy's move in the short run? A) It stays at point B. B) It shifts to a point such as A. C) It shifts to a point such as C. D) None of the above answers are correct because it is the SAS curve that shifts, not the AD curve.

C) It shifts to a point such as C.

6) Which of the following directly shifts the short-run aggregate supply curve? A) a change in aggregate demand B) a change in the price level C) a change in resource prices D) all of the above

C) a change in resource prices

14) In the above figure, the economy is initially at point B. If the Fed decreases the quantity of money, there is A) a movement to point C. B) a movement to point A. C) a shift to AD2. D) a shift to AD1.

C) a shift to AD2.

15) In the figure above, an increase in the monetary base would create a change such as aA) movement from point a to point b along the supply of money curve MS0. B) movement from point b to point a along the supply of money curve MS0. C) shift from the supply of money curve MS0 to the supply of money curve MS1. D) shift from the supply of money curve MS1 to the supply of money curve MS0.

C) shift from the supply of money curve MS0 to the supply of money curve MS1.

13) If taxes are increased, the AD curve A) is not affected because a change in taxes is a nominal change not real change. B) shifts rightward and aggregate demand decreases. C) shifts leftward and aggregate demand decreases. D) does not shift but there is a movement down along the curve

C) shifts leftward and aggregate demand decreases.

17) The velocity of circulation is A) equal to the price level multiplied by real GDP. B) equal to the quantity of money multiplied by nominal GDP. C) the average number of times a dollar bill is used in a year to buy the goods and services in GDP. D) average quantity of money that exists during a year.

C) the average number of times a dollar bill is used in a year to buy the goods and services in GDP.

10) The money multiplier determines how much A) real GDP will be expanded given an increase in autonomous investment. B) the monetary base will be expanded given a change in the quantity of money. C) the quantity of money will be expanded given a change in the monetary base. D) money demand will expand given a change in the quantity of money.

C) the quantity of money will be expanded given a change in the monetary base.

15) In the short run, the intersection of the aggregate demand and the short-run aggregate supply curves, A) determines the equilibrium price level. B) is a point where there is neither a surplus nor a shortage of goods. C) determines the equilibrium level of real GDP. D) All of the above answers are correct.

D) All of the above answers are correct.

1) We distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. In the long run A) technology is fixed but not in the short run. B) the price level is constant but in the short run it fluctuates. C) the aggregate supply curve is horizontal while in the short run it is upward sloping. D) real GDP equals potential GDP.

D) real GDP equals potential GDP.

2) During periods of inflation, which function of money is most severely affected? A) medium of exchange B) unit of account C) means of payment D) store of value

D) store of value

19) The above figure has the demand for money curve. Suppose the Fed initially sets the quantity of money equal to $0.6 trillion. Draw the supply of money curve in the figure. What is the equilibrium interest rate? Now suppose the Fed increases the quantity of money to $0.9 trillion. Draw the new supply curve. What is the new equilibrium interest rate?

Draw the first MS curve as a vertical line going through $.6 trillion. This intersects the MD curve at 6%. For the second part of the question, draw a similar vertical line through $.9 trillion. This intersects the MD curve at 4%.