ECON 101 PRACTICE QUESTIONS

Suppose the economy is initially in the steady state. An increase in the depreciation rate (δ) will cause

A) a reduction in K/N. B) a reduction in Y/N. C) a reduction in C/N. *D) all of the above*

Which of the following represents the domestic demand for goods?

*A) C + I + G* B) C + I + G + X C) C + I + G - IM/ε D) C + I + G + X - εM/ε E) C + I + G + X + εIM

Which of the following is true when a country's trade position is balanced (i.e., NX = 0)?

*A) Demand for domestic goods is equal to the domestic demand for goods.* B) Demand for domestic goods is greater than the domestic demand for goods. C) Demand for domestic goods is less than the domestic demand for goods. D) Neither a budget surplus nor deficit exists (i.e., G - T = 0).

Which of the following occurs when the goods market is in equilibrium?

*A) Domestic output (Y) equals the demand for domestic goods.* B) Y equals the domestic demand for goods. C) Y equals the domestic demand for domestic goods. D) Net exports equals 0. E) Demand for domestic goods equals the domestic demand for goods.

In a country like Saudi Arabia, which earns substantial income from holding the stocks and bonds of other countries, we would expect

*A) GNP to be larger than GDP.* B) a current account deficit. C) a current account surplus larger than GNP. D) a current account surplus larger than GDP. E) GDP to be larger than GNP.

In the absence of technological progress, which of the following is true when the economy is operating at the steady state?

*A) The growth of output per worker is zero.* B) The growth of output per worker is equal to the saving rate. C) The growth of output per worker is equal to the rate of investment. D) The growth of output per worker is equal to the rate of depreciation.

Which of the following has occurred for the United States since 1960?

*A) The ratio of exports to GDP (X/Y) and the ratio of imports to GDP (IM/Y) have both increased.* B) X/Y has increased while IM/Y has decreased. C) X/Y has decreased and IM/Y has increased. D) X/Y has decreased and IM/Y has decreased.

By 2011, which of the following countries had the highest level of real output per capita?

*A) United States* B) France C) Japan D) United Kingdom

In an open economy, net exports will be equal to which of the following?

*A) X - IM/ε* B) T - G C) DD D) Z E) S - I

Which of the following events will cause the largest real depreciation for the domestic economy?

*A) a 6% reduction in E and a 6% increase in the foreign price level (P*)* B) a 6% increase in the domestic price level (P) and a 6% reduction in P* C) a 6% reduction in E and a 6% reduction in P* D) a 3% increase in E E) a 2% increase in E and a 2% increase in P

Which of the following will always cause an increase in net exports?

*A) a reduction in domestic output* B) an increase in the real exchange rate C) an increase in government spending D) an increase in investment

For this question, assume that there are decreasing returns to capital, decreasing returns to labor, and constant returns to scale. A reduction in the capital stock will cause which of the following?

*A) a reduction in output* B) no change in output C) an increase in output per capita D) increase the capital-labor ratio

In an open economy, which of the following will cause an increase in the size of the multiplier?

*A) a reduction in the marginal propensity to import* B) a reduction in foreign output C) an increase in the marginal propensity to save D) all of the above E) none of the above

Exports will decrease when there is

*A) an increase in the real exchange rate.* B) an increase in domestic output. C) an increase in foreign output. D) all of the above

If the exchange rate between the dollar and the pound (the pound price of the dollar) is currently 0.80, and is expected to be 0.72 in one year, then the expected rate of

*A) depreciation of the dollar is 10%.* B) depreciation of the dollar is 15%. C) appreciation of the dollar is 10%. D) appreciation of the dollar is 15%.

In the OECD countries, there is a negative relationship between output per capita in 1950 and

*A) growth since 1950.* B) output per capita in the 1990s. C) distance from the equator. D) population.

In the absence of technological progress, an increase in the saving rate will cause which of the following?

*A) increase temporarily the growth of output per worker* B) increase the steady state growth of output per worker C) decrease temporarily the growth of output per worker D) decrease the steady state growth of output per worker E) have an ambiguous effect on the growth of output per worker

When the dollar appreciates relative to the pound, the pound price of the dollar

*A) increases.* B) decreases. C) does not change. D) increases or decreases, depending on the amount of the depreciation. E) changes in the next period.

Suppose the domestic interest rate is 3% and that the foreign interest rate is 6%. And finally, assume that the domestic currency is expected to appreciate by 4% during the coming year. Given this information, we know that

*A) individuals will only hold domestic bonds.* B) individuals will only hold foreign bonds. C) individuals will be indifferent about holding domestic or foreign bonds. D) the interest parity condition holds.

When the economy is in the steady state, we know with certainty that

*A) investment per worker is equal to depreciation per worker.* B) consumption per worker is maximized. C) output per worker is maximized. D) the growth rate is maximized.

In a large country, the effect of a given change in government spending

*A) on output is large and the effect on the trade balance is small.* B) on output is large and the effect on the trade balance is large. C) on output is small and the effect on the trade balance is small. D) on output is small and the effect on the trade balance is large.

Which of the following must occur to sustain economic growth in the long run?

*A) technological progress* B) capital accumulation C) a higher saving rate D) all of the above

In a flexible exchange rate regime, an increase in the foreign interest rate (i*) will cause

*A) the IP curve to shift to the left/up.* B) the IP curve to shift to the right/down. C) a movement along the IP curve. D) neither a shift nor movement along the IP curve.

A reduction in the marginal propensity to import will cause

*A) the multiplier to increase and a given change in government spending (G) to have a larger effect on domestic output.* B) the multiplier to increase and a given change in government spending (G) to have a smaller effect on domestic output. C) the multiplier to decrease and a given change in government spending (G) to have a larger effect on domestic output. D) the multiplier to decrease and a given change in government spending (G) to have a smaller effect on domestic output.

Assume that the uncovered interest parity condition holds. Also assume that the U.S. interest rate is less than the U.K. interest rate. Given this information, we know that investors expect

*A) the pound to depreciate.* B) the pound to appreciate. C) the dollar-pound exchange rate to remain fixed. D) the U.S. interest rate to fall.

Assume that the interest rate in a foreign country is 7% and that the foreign currency is expected to depreciate by 3% during the year. For each dollar that a U.S. resident invests in foreign bonds, he/she can expect to get back an approximate total of

A) $.93. B) $.96. C) $1.04. *D) $1.07.* E) $1.10

If the price level in Japan is 1.0, the price level in the U.S. is 2.0, and it costs 100 Yen to buy one dollar, then the real exchange rate between the U.S. and Japan is

A) 2. B) 10. C) 50. D) 100. *E) 200.*

Which of the following represents the demand for domestic goods?

A) C + I + G B) C + I + G + X C) C + I + G - εIM D) C + I + G + X + εIM *E) C + I + G + X - IM/ε*

For this question assume that technological progress does not occur. The rate of saving in Canada has generally been greater than the saving rate in the U.S. Given this information, we know that in the long run

A) Canada's growth rate will be greater than the U.S. growth rate. B) investment per worker in Canada will be no different than U.S. investment per worker. *C) capital per worker in Canada will be higher than U.S. capital per worker.* D) all of the above

Which of the following will occur in a small country with a high marginal propensity to import?

A) Changes in government spending will cause large changes in output. *B) Changes in government spending will cause large changes in the trade balance.* C) A depreciation will cause only small changes in the trade balance. D) There is no combination of policies that can eliminate the trade deficit. E) all of the above

Which of the following is true when a country is experiencing a trade surplus (NX > 0)?

A) Demand for domestic goods is equal to the domestic demand for goods. *B) Demand for domestic goods is greater than the domestic demand for goods.* C) Demand for domestic goods is less than the domestic demand for goods. D) A budget surplus exists.

Which of the following expressions represents the real exchange rate (ε)?

A) E/P. B) EP*/P. C) EP*. *D) EP/P*.* E) none of the above

Which of the following expressions represents the dollar price of foreign currency?

A) EP*/P B) EP/P* *C) 1/E* D) E

Which of the following statements is always true?

A) Investment equals depreciation. B) Investment equals the capital stock minus depreciation. C) The capital stock is equal to investment minus depreciation. *D) Any change in the capital stock is equal to investment minus depreciation.* E) The increase in investment is equal to the capital stock minus depreciation.

If the saving rate is 1 (i.e., s = 1), we know that

A) K/N will be at its highest level. B) Y/N will be at its highest level. C) C/N = 0. *D) all of the above*

For this question, assume that the production function exhibits the same characteristics as those presented in the textbook. Based on these characteristics (i.e., assumptions), successive and equal increases in capital per worker will cause which of the following to occur?

A) Output per worker will decline. B) Output per worker will not change. *C) Output per worker will increase by a decreasing amount.* D) Output per worker will increase by a larger amount.

Which of the following is a main conclusion about growth for OECD countries and the four rich countries examined in the chapter?

A) There has been a large increase in the standard of living since 1950. B) The growth rates have decreased since the mid-1970s. C) There has been a convergence of output per capita since 1950. *D) all of the above*

Which of the following countries had the highest rate of growth of output per capita between 1950 and 2011?

A) United States B) France *C) Japan* D) United Kingdom

Which of the following conditions must be satisfied for the demand for domestic goods to be equal to the domestic demand for goods?

A) X = εIM B) X = 0 C) G - T = 0 D) S = I *E) X = IM/ε*

Which of the following, all else fixed, will cause the real exchange rate to increase?

A) a nominal depreciation *B) a reduction in the foreign price level* C) a reduction in the domestic price level D) all of the above

For this question, assume that a country experiences a permanent increase in its saving rate. Which of the following will occur as a result of this increase in the saving rate?

A) a permanently faster growth rate of output B) a permanently higher level of output per capita C) a permanently higher level of capital per worker D) all of the above *E) both B and C.*

For this question, assume that a country experiences a permanent reduction in its saving rate. Which of the following will occur as a result of this reduction in the saving rate?

A) a permanently slower growth rate of output B) no permanent effect on the level of output per capita *C) a permanently lower level of output per worker* D) all of the above

Suppose policy makers want to increase NX and keep Y constant. Which of the following policies would most likely achieve this?

A) a reduction in government spending B) a real depreciation *C) a reduction in government spending and a reduction in the real exchange rate* D) a reduction in the real exchange rate and a tax cut

A reduction in the real exchange rate will cause

A) a reduction in net exports. *B) a reduction in the quantity of imports.* C) a reduction in output. D) an increase in government spending.

Suppose there is a reduction in foreign output (Y*). This reduction in Y* will cause which of the following in the domestic country?

A) a reduction in output B) a reduction in consumption C) a reduction in net exports *D) all of the above* E) none of the above

Decreasing returns to capital (K) implies that a 4% increase in K will cause

A) a reduction in output per worker (Y/N). B) a reduction in K/N. C) Y to increase by exactly 4%. *D) Y to increase by less than 4%.* E) no change in Y/N.

Which of the following will cause a reduction in output per worker (Y/N)?

A) a reduction in the capital stock (K) B) a reduction in the saving rate C) a reduction in K/N *D) all of the above*

The quantity of imports will increase when there is

A) a reduction in the real exchange rate. *B) an increase in domestic output.* C) an increase in foreign output. D) all of the above

Contractionary monetary policy in a flexible exchange rate regime will cause

A) a shift of the IP curve. B) a depreciation of the domestic currency. *C) an increase in E.* D) no change in E

An increase in domestic demand will have which of the following effects in an open economy?

A) a smaller effect on output than in a closed economy and a positive effect on the trade balance *B) a smaller effect on output than in a closed economy and a negative effect on the trade balance* C) a larger effect on output than in a closed economy and a positive effect on the trade balance D) a larger effect on output than in a closed economy and a negative effect on the trade balance

For this question, assume that the saving rate increases. We know that this increase in the saving rate will cause which of the following?

A) a temporary increase in the level of output per capita B) no permanent change in the level of output per capita *C) a temporary increase in the rate of growth of output per capita* D) a permanently higher rate of growth of output per capita

Suppose the rest of the world experiences an expansion that causes an increase in foreign income (Y*). From the domestic economy's perspective, this increase in foreign income will cause which of the following as the domestic economy adjusts to the rise in Y*?

A) an increase in domestic income B) an increase in imports C) an increase in net exports *D) all of the above*

In an open economy, a reduction in government spending will cause

A) an increase in domestic output. B) an increase in imports. *C) an increase in net exports.* D) all of the above

A real appreciation will tend to cause

A) an increase in exports. B) a reduction in imports. C) an increase in net exports. *D) a reduction in demand for domestic goods.*

Suppose policy makers want to increase Y and keep NX constant. Which of the following policies would most likely achieve this?

A) an increase in government spending B) a real depreciation *C) an increase in government spending and a reduction in the real exchange rate* D) a reduction in the real exchange rate E) encourage the country's trading partners to implement policies that will cause an increase in foreign income (Y*)

An increase in the real exchange rate will cause

A) an increase in net exports. *B) an increase in the quantity of imports.* C) an increase in output. D) a decrease in government spending.

In an open economy under flexible exchange rates, expansionary monetary policy that results in an increase in the money supply will always cause

A) an increase in output. B) an increase in exports. C) a reduction in the exchange rate, E. *D) all of the above* E) only A and C

Assume the interest parity condition holds and that initially i = i*. A reduction in the domestic interest rate will cause

A) an increase in the demand for the domestic currency. B) an increase in E. *C) a decrease in the demand for domestic currency.* D) all of the above

Year-to-year movements in real exchange rates between industrialized countries like the U.S. and Canada are caused mostly by

A) changes in relative rates of inflation. B) changes in relative growth rates of output. C) changes in quotas or tariffs. D) changes in capital controls. *E) changes in nominal exchange rates.*

Which of the following represents the change in the capital stock?

A) consumption minus depreciation B) output minus depreciation C) investment minus saving *D) investment minus depreciation*

When switching from the "current exchange rate" method to the "purchasing power parity" method, India's standard of living in dollars

A) decreases. B) remains essentially the same. C) rises, but still remains far below that of the U.S. *D) rises almost to the level of the U.S.* E) leapfrogs over that of the U.S.

Assume that the interest parity condition holds. Also assume that the U.S. interest rate is 8% while the U.K. interest rate is 6%. Given this information, financial markets expect the pound to

A) depreciate by 14%. B) depreciate by 2%. *C) appreciate by 2%.* D) appreciate by 6%. E) appreciate by 14%.

An increase in the real exchange rate indicates that

A) domestic goods are now relatively cheaper. B) domestic goods are now relatively more expensive. C) foreign goods are now relatively cheaper. *D) both B and C*

Assume that the nominal exchange rate increases by 2%. If prices (both domestic and foreign do not change), we know that

A) domestic goods are now relatively cheaper. B) domestic goods are now relatively more expensive. C) foreign goods are now relatively cheaper. *D) both B and C*

In the U.S., over the past forty years,

A) exports as a percentage of GDP have increased, while imports has a percentage of GDP have decreased. B) exports as a percentage of GDP have decreased, while imports has a percentage of GDP have increased. C) both exports and imports as a percentage of GDP have decreased. *D) both exports and imports as a percentage of GDP have increased.* E) both exports and imports as a percentage of GDP have remained constant.

Suppose there is a real depreciation of the dollar. Which of the following may have occurred?

A) foreign currency has become more expensive in dollars. B) foreign goods have become more expensive to Americans. C) the foreign price level has increased relative to the U.S. price level. *D) all of the above*

Assume that the nominal exchange rate decreases by 4%. If prices (both domestic and foreign do not change), we know that

A) foreign goods are now relatively cheaper. *B) foreign goods are now relatively more expensive.* C) domestic goods are now relatively more expensive. D) both A and C

An increase in which of the following variables will cause a reduction in the demand for domestic goods?

A) foreign income *B) the real exchange rate* C) consumer confidence D) domestic income E) all of the above

Suppose you have one U.S. dollar with which you wish to purchase U.K. (one-year) bonds in period t. Which of the following expressions represents the amount of U.S. dollars you will receive in one year (i.e., period t + 1) from purchasing U.K. bonds in period t?

A) i B) 1 + i* C) (1 + i*)Eet+1/Et *D) (1 + i*)Et/Eet+1* E) none of the above

When steady state capital per worker is above the golden-rule level, we know with certainty that an increase in the saving rate will

A) increase consumption in both the short run and the long run. *B) decrease consumption in both the short run and the long run.* C) decrease consumption in the short run, and increase it in the long run. D) increase consumption in the short run, and decrease it in the long run.

For this question, assume the interest parity conditions holds. Also assume that the domestic interest rate is 9% and that the foreign interest rate is 5%. Given this information, we would expect that

A) individuals will only hold foreign bonds. B) individuals will only hold domestic bonds. C) the domestic currency is expected to appreciate by 4%. *D) the domestic currency is expected to depreciate by 4%.*

In the absence of technological progress, which of the following remains constant in the steady state equilibrium?

A) investment per worker B) output per worker C) saving per worker *D) all of the above*

As the economy moves down and to the right along the IS curve, which of the following will occur when exchange rates are flexible?

A) investment spending increases B) consumption increases C) the domestic currency depreciates *D) all of the above*

Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year interest rate of 5% per year. Ignoring risk and transaction costs, a U.S. investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is

A) less than 5%. B) greater than 5%. C) greater than 2%. *D) less than 2%.* E) less than 1%.

Assume that the price levels in two countries are constant. In this situation, we know that

A) neither the real nor the nominal exchange rate can change. B) the real exchange rate can change, while the nominal exchange rate is constant. C) the nominal exchange rate can change, while the real exchange rate is constant. *D) the real and nominal exchange rate must move together, changing by the same percentage.* E) the nominal exchange rate will fluctuate more widely than the real exchange rate.

For this question, assume that there are decreasing returns to capital, decreasing returns to labor, and constant returns to scale. Now suppose that both capital and labor decrease by 5%. Given this information, we know that output (Y) will

A) not change. B) decrease by less than 5%. *C) decrease by 5%.* D) decrease by more than 5% but less than 10%. E) none of the above

Assume that constant returns to scale exists and that N and K both decrease by 3%. Given this information, we know that

A) output (Y) will decrease 6%. *B) Y will decrease by 3%.* C) Y will decrease by less than 3%. D) the capital-labor ratio (K/N) will decrease.

Assume that constant returns to scale exists and that N and K both increase by 2%. Given this information, we know that

A) output (Y) will increase by 4%. *B) Y will increase by 2%.* C) Y will increase by less than 2%. D) Y will increase by less than 4% and more than 2%.

A reduction in the saving rate will not affect which of the following variables in the long run?

A) output per worker *B) the growth rate of output per worker* C) the amount of capital in the economy D) capital per worker

An increase in the saving rate will affect which of the following variables in the long run?

A) output per worker B) capital per worker C) the level of investment *D) all of the above*

Policy coordination is difficult because each country

A) prefers to be the one to increase demand. B) prefers to be the one to appreciate its currency. *C) prefers that other countries increase their demand.* D) prefers to be the one to increase taxes. E) prefers that other countries increase taxes.

Which of the following will occur as a result of a tax cut?

A) private saving decreases B) investment decreases C) the trade balance improves *D) the trade balance worsens* E) the budget deficit decreases

Which of the following will occur as a result of a tax increase?

A) private saving increases B) investment increases *C) the trade balance improves* D) the trade balance worsens E) the budget deficit increases

When the U.S. has a current account surplus, we know that it is also

A) running a balanced trade account. *B) lending to the rest of the world.* C) borrowing from the rest of the world. D) suffering from negative investment income.

Suppose the following situation exists for an economy: Kt+1/N < Kt/N. Given this information, we know that

A) saving per worker equals depreciation per worker in period t. *B) saving per worker is less than depreciation per worker in period t.* C) saving per worker is greater than depreciation per worker in period t. D) the saving rate fell in period t.

Suppose two countries are identical in every way with the following exception. Economy A has a higher rate of depreciation (δ) than economy B. Given this information, we know with certainty that

A) steady state consumption in A is higher than in B. *B) steady state consumption in A is lower than in B.* C) steady state consumption in A and in B are equal. D) steady state growth of output per worker is higher in A than in B.

When an economy is operating at the steady state, we know that

A) steady state saving equals consumption. B) steady state saving is less than total consumption. *C) steady state saving is equal to depreciation per worker.* D) steady state saving exceeds depreciation each year by a constant amount.

An increase in the marginal propensity to import will cause

A) the ZZ line to become flatter and a given change in government spending (G) to have a larger effect on domestic output. *B) the ZZ line to become flatter and a given change in government spending (G) to have a smaller effect on domestic output.* C) the ZZ line to become steeper and a given change in government spending (G) to have a larger effect on domestic output. D) the ZZ line to become steeper and a given change in government spending (G) to have a smaller effect on domestic output.

Suppose there are two countries that are identical with the following exception. The saving rate in country A is greater than the saving rate in country B. Given this information, we know that in the long run

A) the capital-labor ratio (K/N) will be greater in B than in A. B) the capital-labor ratio (K/N) will be greater in A than in B. C) the capital-labor ratio (K/N) will be the same in the two countries. *D) economic growth will be higher in A than in B.*

Suppose individuals wish to obtain the most accurate comparison of living standards between the US and Saudi Arabia. To do so, one would convert Saudi Arabian output into dollars using

A) the current nominal exchange rate. B) the current real exchange rate. C) the prior year's real exchange rate. D) an average of the last five years' exchange rates. *E) purchasing power parity methods.*

Suppose that the rest of the world experiences an economic boom causing an increase in foreign output (Y*). This increase in Y* will not cause which of the following to occur?

A) the domestic country's output to increase B) the domestic country's consumption to increase *C) the domestic country's output to increase and its trade balance to worsen as imports increase* D) all of the above E) none of the above

For this question, assume that there is a simultaneous tax increase and monetary expansion. In a flexible exchange rate regime, we know with certainty that

A) the exchange rate and output would both increase. B) the exchange rate would increase and output would decrease. *C) the exchange rate would decrease.* D) the exchange rate would decrease and output would increase.

The interest parity condition indicates that the domestic interest rate must be equal to

A) the foreign interest rate. B) the expected rate of depreciation of the domestic currency. C) the expected rate of appreciation of the domestic currency. *D) the foreign interest rate minus the expected rate of appreciation of the domestic currency.*

Of the following, the most often used measure of changing living standards is

A) the growth rate of nominal GDP. B) the growth rate of real GDP. C) the growth rate of nominal GDP per capita. *D) the growth rate of real GDP per capita.* E) unemployment per capita

Suppose there are two countries that are identical with the following exception. The saving rate in country A is greater than the saving rate in country B. Given this information, we know that in the long run

A) the growth rate of output per capita will be greater in B than in A. *B) the growth rate of output per capita will be greater in A than in B.* C) the capital-labor ratios (K/N) will be the same in both countries. D) the growth rate of output per capita will be the same in both countries.

We will generally observe that the more open an economy

A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position. B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position. *C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.* D) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.

The differences in the ratios of exports to GDP across countries are believed to be caused primarily by

A) the number of units of foreign currency you can obtain with one unit of domestic currency. B) the number of units of domestic goods you can obtain with one unit of foreign goods. C) the price of domestic currency in terms of foreign currency. D) none of the above *E) both A and C*

The nominal exchange rate (E) as defined in the text represents

A) the number of units of foreign currency you can obtain with one unit of domestic currency. B) the number of units of domestic goods you can obtain with one unit of foreign goods. C) the price of domestic currency in terms of foreign currency. D) none of the above *E) both A and C*

Which of the following best defines the real exchange rate?

A) the price of foreign bonds in terms of domestic bonds B) the price of foreign currency in terms of domestic currency *C) the price of domestic goods in terms of foreign goods* D) the price of domestic currency in terms of foreign currency

A nominal appreciation of the Japanese yen (against all currencies) indicates that

A) the yen price of the U.S. dollar has increased. B) the yen price of the U.K. pound has increased. *C) the number of units of foreign currency that one can obtain with one yen has increased.* D) all of the above

From the perspective of the United States, an increase in the nominal exchange rate will cause which of the following?

From the perspective of the United States, an increase in the nominal exchange rate will cause which of the following? A) the dollar becomes less expensive to foreigners B) foreign goods are more expensive to Americans C) foreign currency is more expensive to Americans *D) American goods are more expensive to foreigners*