Practice Test 3: Chapters 10, 12, 13 & 14

The wealth effect is shown graphically as a A shift of the consumption schedule B. movement along an existing consumption schedule C. shift of the investment schedule D. movement along an existing investment schedule

A shift of the consumption schedule

Refer to the given table, which illustrates the multiplier process. The total change in income resulting from the initial change in investment will be A. $100 B. $20 C. $80 D. $200

A. $100

If you write a check on a bank to purchase a used Toyota, you are using money primarily as A. A medium of exchange B. A store of value C. A unit of account D. An economic investment

A. A medium of exchange

Which of the following would most likely shift the aggregate demand curve to the right? A. An increase in stock prices that increases consumer wealth B. Increased fear that a recession will cause workers to lose their jobs C. An increase in personal income tax rates D. A reduction in household borrowing because of tighter lending practices

A. An increase in stock prices that increases consumer wealth

As disposable income increases, A. Consumption and saving both increase B. Consumption and saving both decrease C. Consumption decreases and saving increases D. Consumption increases and saving decreases

A. Consumption and saving both increase

Refer to the diagram. Consumption equals disposable income when A. Disposable income is B B. Disposable income is D C. CD equals A D. B equals CD

A. Disposable income is B

The immediate determinants of investment spending are the A. Expected rate of return on capital goods and the real interest rate B. Level of saving and the real interest rate C. Marginal propensity to consume and the real interest rate D. Interest rate and the expected price level

A. Expected rate of return on capital goods and the real interest rate

The crowding-out effect of expansionary fiscal policy suggests that A. Government spending increases at the expense of private investment B. Imports replace domestic production C. Private investment increases at the expense of government spending D. Saving increases at the expense of investment

A. Government spending increases at the expense of private investment

If the consumption schedule is linear, then the A. Saving schedule will also be linear B. MPS will decline as income rises C. MPC will decline as income rises D. APC will be constant at all levels of income

A. Saving schedule will also be linear

The real-balances, interest-rate, and foreign purchases effects all help explain A. Why the aggregate demand curve is downward sloping B. Why the aggregate supply curve is upward sloping C. Shifts in the aggregate demand curve D. Shifts in the aggregate supply curve

A. Why the aggregate demand curve is downward sloping

Which one of the following would not shift the aggregate demand curve? A. a change in the price level B. depreciation of the international value of the dollar C. a decline in the interest rate at each possible price level D. an increase in personal income tax rates

A. a change in the price level

The immediate-short-run aggregate supply curve represents circumstances where A. both input and output prices are fixed B. both input and output prices are flexible C. input prices are fixed, but output prices are flexible D. input prices are flexible, but output prices are fixed

A. both input and output prices are fixed

If the MPC is 0.70 and investment increases by $3 billion, the equilibrium GDP will A. increase by $10 billion B. increase by $2.10 billion C. decrease by $4.29 billion D. increase by $4.29 billion

A. increase by $10 billion

Discretionary fiscal policy will stabilize the economy most when A. deficits are incurred during recessions and surpluses during inflations B. the budget is balanced each year. C. deficits are incurred during inflations and surpluses during recessions. D. budget surpluses are continuously incurred

A. deficits are incurred during recessions and surpluses during inflations

Refer to the diagram. Consumption equals disposable income when A. disposable income is B B. disposable income is D C. CD equals A D. B equals CD

A. disposable income is B

If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift A. leftward by $40 billion at each price level B. rightward by $20 billion at each price level C. rightward by $40 billion at each price level D. leftward by $20 billion at each price level

A. leftward by $40 billion at each price level

The Board of Governors of the Federal Reserve has ... members. A. 5 B. 7 C. 9 D. 14

B. 7

Refer to the data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect A. Demand-pull inflation B. An expansionary fiscal policy C. A recession D. A contractionary fiscal policy.

B. An expansionary fiscal policy

Refer to the given market-for-money diagrams. The asset demand for money is shown by A. D1 B. D2 C. D3 D. S

B. D2

When income or GDP decreases, the transaction demand for money ... and it is... by interest rates A. Decreases; affected B. Decreases; unaffected C. Increases; affected D. Increases; unaffected

B. Decreases; unaffected

Suppose the government changes the economy's cyclically adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n) A. Contractionary fiscal policy B. Expansionary fiscal policy C. Low-interest-rate policy D. Neutral fiscal policy

B. Expansionary fiscal policy

In the diagram, a shift from AS1 to AS3 might be caused by a(n) A. Increase in productivity B. Increase in the prices of imported resources C. Decrease in the prices of domestic resources D. Decrease in business taxes

B. Increase in the prices of imported resources

Near monies are included in A. Both M1 and M2 B. M2 only C. M1 only D. Neither M1 nor M2

B. M2 only

One can determine the amount of any level of total income that is consumed by A. Multiplying total income by the slope of the consumption schedule B. Multiplying total income by the APC C. Subtracting the MPS from total income D. Multiplying total income by the MPC

B. Multiplying total income by the APC

If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by A. Reducing government expenditures by $125 billion B. Reducing government expenditures by $20 billion C. Increasing taxes by $50 billion D. Increasing taxes by $250 billion

B. Reducing government expenditures by $20 billion

Contractionary fiscal policy would tend to make a budget deficit become A. Bigger B. Smaller C. A trade deficit D. A trade surplus

B. Smaller

Which of the following statements is correct? A. The cyclically adjusted budget and the actual budget differ because the latter does not take government transfer payments into account. B. The cyclically adjusted budget is less likely to show a deficit than is the actual budget C. The cyclically adjusted budget and the actual budget will show the same size of deficit or surplus in any given fiscal year D. The cyclically adjusted budget is more likely to show a deficit than is the actual budget

B. The cyclically adjusted budget is less likely to show a deficit than is the actual budget

The cyclically adjusted budget estimates the Federal budget deficit or surplus if A. The rate of inflation were zero B. The economy were at full employment C. The MPC were zero D. The government had a balanced budget

B. The economy were at full employment

The difference between M1 and M2 is that A. The former includes time deposits B. The latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances C. The latter includes negotiable government bonds D. The latter includes cash held by commercial banks and the U.S. Treasury

B. The latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances

Refer to the given graph. A shift of the consumption schedule from C1 to C2 might be caused by a(n) A. Recession B. Wealth effect of an increase in stock market prices C. Increase in income tax rates D. Increase in saving.

B. Wealth effect of an increase in stock market prices

Countercyclical discretionary fiscal policy calls for A. surpluses during recessions and deficits during periods of demand-pull inflation B. deficits during recessions and surpluses during periods of demand-pull inflation C. surpluses during both recessions and periods of demand-pull inflation D. deficits during both recessions and periods of demand-pull inflation

B. deficits during recessions and surpluses during periods of demand-pull inflation

Other things equal, a decrease in the real interest rate will A. expand investment and shift the AD curve to the left B. expand investment and shift the AD curve to the right C. reduce investment and shift the AD curve to the left D. reduce investment and shift the AD curve to the right

B. expand investment and shift the AD curve to the right

A tax reduction of a specific amount will be more expansionary the A. smaller is the economy's MPC B. larger is the economy's MPC C. smaller is the economy's multiplier D. less is the economy's built-in stability

B. larger is the economy's MPC

The most important determinant of consumption and saving is the A. level of bank credit B. level of income C. interest rate D. price level

B. level of income

The fear of unwanted price wars may explain why many firms are reluctant to A. reduce wages when a decline in aggregate demand occurs B. reduce prices when a decline in aggregate demand occurs C. expand production capacity when an increase in aggregate demand occurs D. provide wage increases when labor productivity rises

B. reduce prices when a decline in aggregate demand occurs

Refer to the given graph. A shift of the consumption schedule from C1 to C2 might be caused by a(n) A. recession B. wealth effect of an increase in stock market prices C. increase in income tax rates D. increase in saving

B. wealth effect of an increase in stock market prices

Refer to the given table, which illustrates the multiplier process. The multiplier in this economy is A. 2 B. 4 C. 5 D. 10

C. 5

Refer to the data for a fictional economy. The changes in the budget conditions between 1998 and 1999 best reflect A. Demand-pull inflation B. An expansionary fiscal policy C. A recession D. A contractionary fiscal policy

C. A recession

The 45-degree line on a graph relating consumption and income shows A. All the points where the MPC is constant B. All the points at which saving and income are equal C. All the points at which consumption and income are equal D. The amount households will plan to save at each possible level of income

C. All the points at which consumption and income are equal

Refer to the data for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect A. Demand-pull inflation B. Cost-push inflation C. An expansion of real GDP and an automatic increase in tax revenues D. A contractionary fiscal policy

C. An expansion of real GDP and an automatic increase in tax revenues

Menu costs A. Increase during recession B. Decrease during recession C. Are the costs to firms of changing prices and communicating them to consumers D. Are sunk costs and therefore should be disregarded

C. Are the costs to firms of changing prices and communicating them to consumers

In a fractional reserve banking system, A. Bank panics cannot occur B. The monetary system must be backed by gold C. Banks can create money through the lending process D. The Federal Reserve has no control over the amount of money in circulation

C. Banks can create money through the lending process

A rightward shift of the investment demand curve might be caused by A. An increase in the price level B. A decline in the real interest rate C. Businesses planning to increase their stock of inventories D. An increase in business taxes

C. Businesses planning to increase their stock of inventories

Fractional reserve banking refers to a system where banks A. Grant loans to their borrowing customers B. Deposit a fraction of their reserves at the central bank C. Hold only a fraction of their deposits in their reserves D. Accept a portion of their deposits in checkable accounts

C. Hold only a fraction of their deposits in their reserves

Contractionary fiscal policy A. Involves a contraction of the nation's money supply B. Necessarily reduces the size of government C. Is aimed at reducing aggregate demand and thus achieving price stability D. Is expressly designed to expand real GDP

C. Is aimed at reducing aggregate demand and thus achieving price stability

Suppose an economy's consumption schedule shifts from C1 to C2, as shown in the diagram. We can say that its A. MPC has increased, but its APC at each income level is unchanged B. APC at each income level is increased, but its MPC is unchanged C. MPC and APC at each income level have both increased D. MPC and APC at each income level have both decreased

C. MPC and APC at each income level have both increased

Suppose an economy's consumption schedule shifts from C1 to C2, as shown in the diagram. We can see that its A. MPC has increased, but its APC at each income level is unchanged B. APC at each income level has increased, but its MPC is unchanged C. MPC and APC at each income level have both increased D. MPC and APC at each income level have both decreased

C. MPC and APC at each income level have both increased

A major advantage of the built-in or automatic stabilizers is that they A. Simultaneously stabilize the economy and reduce the absolute size of the public debt B. Automatically produce surpluses during recessions and deficits during inflations C. Require no legislative action by Congress to be made effective D. Guarantee that the federal budget will be balanced over the course of the business cycle

C. Require no legislative action by Congress to be made effective

A depreciation of the US dollar will A. Create a downward movement along the AD curve because of an increase in exports B. Create an upward movement along the AD curve because of a decrease in exports C. Shift the AD curve to the right because of an increase in exports D. Shift the AD curve to the left because of a decrease in exports

C. Shift the AD curve to the right because of an increase in exports

Which of the following statements best describes the 12 Federal Reserve Banks? A. They are privately owned and privately controlled central banks whose basicgoal is to provide an ample and orderly market for U.S. Treasury securities B. They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry C. They are privately owned and publicly controlled central banks whose basic g

C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward A. an equality of tax receipts and government expenditures B. an excess of tax receipts over government expenditures C. an excess of government expenditures over tax receipts D. a reduction of subsidies and transfer payments and an increase in tax rates

C. an excess of government expenditures over tax receipts

The multiplier effect means that A. consumption is typically several times as large as saving B. a change in consumption can cause a larger increase in investment C. an increase in investment can cause GDP to change by a larger amount D. a decline in the MPC can cause GDP to rise by several times that amount

C. an increase in investment can cause GDP to change by a larger amount

The interest-rate effect suggests that A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption B. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending D. an increase in the price level will decrease the demand for money, reduce interest ra

C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by A. increasing government spending by $25 billion B. increasing government spending by $80 billion C. decreasing taxes by $25 billion D. decreasing taxes by $20 billion

C. decreasing taxes by $25 billion

The cyclically adjusted budget deficit in an economy is zero. If this economy goes into an expansion, then the actual government budget will be A. balanced B. in deficit C. in surplus D. It cannot be determined without further numerical information

C. in surplus

The size of the multiplier is equal to the A. slope of the consumption schedule B. reciprocal of the slope of the consumption schedule C. slope of the saving schedule D. reciprocal of the slope of the saving schedule

C. slope of the saving schedule

Refer to the given diagram. The marginal propensity to consume is equal to A. AE/0E B. CF/CD C. CB/AB D. CD/CF

CB/AB

Prices and wages tend to be A. Flexible both upward and downward B. Inflexible both upward and downward C. Flexible downward but inflexible upward D. Flexible upward but inflexible downward

D. Flexible upward but inflexible downward

Refer to the given table, which illustrates the multiplier process. The total change in consumption resulting from the initial change in investment will be A. $100 B. $96 C. $180 D. $80

D. $80

The Federal Reserve System was created in A. 1926 B. 1946 C. 1895 D. 1913

D. 1913

In the diagram, the economy's immediate-short-run AS curve is line ...; its short-run AS curve is ...; and its long-run AS curve is line ... A. 1; 2; 4 B. 1; 2; 3 C. 2; 3; 4 D. 3; 2; 1

D. 3; 2; 1

Based on the given table, the equilibrium interest rate is A. 2% B. 4% C. 6% D. 8%

D. 8%

Suppose that the federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision? A. The value of the "wheat dollar" would be unstable depending on crop yields from year to year B. Farmers would replace corn and soy crops with wheat. C. Wheat would function as money so long as people accept it in exchange for goods and services D. All of these are possible outcomes

D. All of these are possible outcomes

Currency in circulation is part of A. M1 only B. M2 only C. Neither M1 nor M2 D. Both M1 and M2

D. Both M1 and M2

The multiplier is useful in determining the A. Full-employment unemployment rate. B. Level of business inventories C. Change in the rate of inflation from a change in the interest rate D. Change in GDP resulting from a change in spending

D. Change in GDP resulting from a change in spending

Refer to the data for a fictional economy. The changes in the budget conditions between 2001 and 2002 best reflect a(n) A. Recession B. Expansionary fiscal policy C. Tax increase D. Contractionary fiscal policy

D. Contractionary fiscal policy

In Year 1, the actual budget deficit was $200 billion and the cyclically adjusteddeficit was $150 billion. In Year 2, both the actual budget deficit and the cyclicallyadjusted deficit were $175 billion. It can be concluded that fiscal policy from Year1 to Year 2 became more A. Proportional B. Progressive C. Contractionary D. Expansionary

D. Expansionary

Which group aids the Board of Governors of the Federal Reserve System in conducting monetary policy? A. U.S. Treasury B. U.S. Congress C. Federal Advisory Council D. Federal Open Market Committee

D. Federal Open Market Committee

Payment of interest on the U.S. public debt A. Increases the current domestic standard of living in the United States B. Has no effect on the distribution of income C. Is thought to decrease income inequality D. Is thought to increase income inequality

D. Is thought to increase income inequality

Suppose the government cuts taxes to keep the economy's cyclically adjusted budget in balance when the economy is expanding. The government is engaging in a(n) A. Contractionary fiscal policy B. Expansionary fiscal policy C. Low-interest-rate policy D. Neutral fiscal policy

D. Neutral fiscal policy

Currency held in the vault of First National Bank is A. Counted as part of M1 B. Counted as part of M2 but not M1 C. Only counted as part of M1 if it was deposited into a checking account D. Not counted as part of the money supply

D. Not counted as part of the money supply

Which of the following best describes the built-in stabilizers as they function in the United States? A. The size of the multiplier varies inversely with the level of GDP B. Personal and corporate income tax collections fall & transferssubsidies rise as GDP rises C. Personal and corporate income tax collections, transfers, subsidies all vary inversely with level GDP D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises

D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises

Given the consumption schedule, it is possible to graph the relevant saving schedule by A. Subtracting the MPC from 1 at each level of income B. Subtracting investment from consumption at each level of GDP C. Plotting the horizontal differences between the consumption schedule and the 45-degree line D. Plotting the vertical differences between the consumption schedule and the 45-degree line

D. Plotting the vertical differences between the consumption schedule and the 45-degree line

The consumption schedule shows A. That the MPC increases in proportion to GDP. B. That households consume more when interest rates are low. C. That consumption depends primarily on the level of business investment. D. The amounts households intend to consume at various possible levels of aggregate income

D. The amounts households intend to consume at various possible levels of aggregate income

The real-balances effect indicates that A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption B. a lower price level will decrease the real value of many financial assets and therefore reduce spending. C. a higher price level will increase the real value of many financial assets and therefore increase spending. D. a higher price level will decrease the real value of many financial assets and therefore reduce spending

D. a higher price level will decrease the real value of many financial assets and therefore reduce spending

Prices and wages tend to be A. flexible both upward and downward B. inflexible both upward and downward C. flexible downward but inflexible upward D. flexible upward but inflexible downward

D. flexible upward but inflexible downward

Other things equal, a decrease in the real interest rate will A. shift the investment demand curve to the right B. shift the investment demand curve to the left C. move the economy upward along its existing investment demand curve D. move the economy downward along its existing investment demand curve

D. move the economy downward along its existing investment demand curve