Econ Mooshi

The highest interest rates in the world are found in countries

that have followed an expansionary monetary policy that resulted in high rates of inflation.

The exchange rate is

the price of one nation's currency in terms of the currency of another nation

Over the past century, the growth rate of real GDP in the United States has averaged approximately

3%

During 2009 and 2010, the federal government financed approximately __40____ percent of its spending through borrowing. (Fill in the blank)

40

The demand curve for money

shows the amount of money balances that individuals and businesses wish to hold at various interest rates.

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Decrease Consumption Spending

Which of the following would be most likely to maintain that spending increases and larger budget deficits would help promote recovery from the recession of 2008-2009?

Keynesian Economics

Are funds available on a credit card included in a definition of the money supply?

No, because these funds are not a store of value

Which of the following is true about budget deficits?

a. A budget deficit will reduce the national debt. b. A budget deficit will increase the national debt. c. A balanced budget will increase the national debt. d. A budget surplus will increase the national debt. ANSWER = B

"Every major contraction in the U.S. economy has either been created or greatly exacerbated by monetary instability. Every major inflation has been caused by monetary expansion." Which of the following economists made this statement?

a. Adam Smith b. John Maynard Keynes c. Milton Friedman d. Paul Samuelson Answer: C

Which of the following individuals would be considered unemployed by the official government definition?

a. Alexander, a mathematician, who returned to graduate school after failing to find a job the last four months. b. Abigail, a medical student, who is still in college and is not working. c. Elizabeth, who is employed part-time but desires a full-time job. d. Darius, an auto worker vacationing in Florida during a layoff at a General Motors plant. Answer: D

Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?

a. An increase in prices temporarily improves profit margins because important components of costs are fixed in the short run. b. An increase in prices leads to higher interest rates, which temporarily improves profit margins. c. An increase in prices leads to an expansion in the money supply, which stimulates additional output. d. An increase in prices increases real wage rates and thereby expands the size of the economy's resource base. Anser: A

Which of the following best explains the political attractiveness of debt financing relative to taxation?

a. Debt financing pushes the visible cost of government into the future. b. Debt financing exposes the current costs of government programs; taxes do not. c. Debt financing reduces the attractiveness of special-interest spending. d. Taxes allow politicians to supply voters with immediate benefits without having to impose a visible cost. Answer : A

In 2012, more than 60% of privately held national debt was held by

a. foreign investors. b. Federal Reserve banks. c. large corporations. d. government trust funds. Answer: A

Keynesians and non-Keynesians would largely agree on which one of the following statements?

a. Expansionary fiscal policy will tend to substantially increase current real output. b. Proper timing of discretionary fiscal policy is difficult to achieve. c. The use of discretionary fiscal policy is an important stabilization tool. d. Market forces will automatically direct the economy toward full employment. Answer B

According to the monetarists, which of the following is true?

a. Instability in the money supply is the primary cause of economic instability. b. A reduction in the money supply will cause consumers to increase spending. c. A reduction in the money supply will cause a proportional reduction in wages and prices, leaving output unchanged. d. A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP. A

If a country's currency depreciates, which of the following will most likely happen

a. Net exports will fall and aggregate demand will increase. b. Net exports will rise and aggregate demand will increase. c. Net exports will fall and aggregate demand will decrease. d. Net exports will rise and aggregate demand will decrease. Answer: B

Which of the following are leakages from the circular flow of income?

a. Savings, taxes, and imports b. Investment, government purchases, and exports c. Investment, taxes and bonds d. Imports, wages and taxes Anser: A

What is the difference between the federal budget deficit and the national debt?

a. The budget deficit is the amount by which expenditures exceed revenues in a particular year, while the national debt is the cumulative effect of all past budget deficits and surpluses. b. The budget deficit is the cumulative effect of all prior national debts. c. The national debt includes all outstanding bonds, while the budget deficit excludes bonds held by government agencies. d. This is a trick question because there is no difference between the budget deficit and the national debt. ANS: A

Suppose an economy is operating at its maximum sustainable output rate. Neither recession nor economic boom are present. Which of the following would be true?

a. The economy would be considered at full employment. b. Actual GDP would exceed potential GDP. c. Actual unemployment will be less than the natural rate of unemployment. d. One hundred percent of the labor force is employed. Answer: A

Which of the following is an important insight of Keynesian analysis?

a. When an economy is in a recession, lower interest rates and lower wage rates will quickly direct the economy back to full employment. b. When widespread unemployment is present, increases in aggregate demand will exert a larger impact on real output than when the economy is operating at or near full employment. c. When an economy is in a recession, it makes sense to increase taxes and reduce government expenditures. d. A balanced budget is the key to maintenance of full employment. Answer: B

Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?

a. a decrease in inflation b. a decrease in unemployment c. an increase in the general level of prices d. an increase in the natural rate of unemployment Answer: C

According to traditional view (Crowding-out), large budget deficits during normal times will lead to:

a. bank failures in the future. b. a smaller capital stock in the future. c. lower interest rates in the future. d. a bankrupt government in the future. Answer : B

Crowding out refers to the situation in which

a. borrowing by the federal government raises interest rates and causes firms to invest less. b. foreigners sell their bonds and purchase U.S. goods and services. c. borrowing by the federal government causes state and local governments to lower their taxes. d. increased federal taxes to balance the budget causes interest rates to increase and consumer credit to decrease Answer: A

The new classical view of fiscal policy holds that

a. budget deficits will stimulate consumption. b. budget deficits will decrease the saving rate. c. individuals fail to recognize that debt-financing implies higher future taxes. d. individuals fully anticipate the added tax liability implied by the debt financing and will increase their saving so they can meet this obligation. ANS: D

If the Fed wanted to use all four of its major monetary control tools to decrease the money supply, it would

a. buy bonds, reduce the discount rate, reduce reserve requirements, and reduce the interest rate paid on excess reserves. b. sell bonds, reduce the discount rate, reduce reserve requirements, and reduce the interest rate paid on excess reserves. c. sell bonds, increase the discount rate, increase reserve requirements, and increase the interest rate paid on excess reserves. d. buy bonds, increase the discount rate, increase reserve requirements, and increase the interest rate paid on excess reserves. Answer C

Other things constant, an increase in the real interest rate will

a. cause consumers to reduce their purchases of durable items like appliances and automobiles. b. induce businesses to increase their level of investment. c. make borrowing money more attractive. d. increase the natural rate of unemployment. Answer: A

Which of the following compose the M2 money supply?

a. currency only b. currency, demand deposits, other checkable deposits, and traveler's checks c. M1 plus large denomination time deposits and Eurodollar deposits d. M1 plus savings deposits, small-denomination time deposits, and money market mutual funds (retail) ANSWER: D

The type of unemployment caused by changes in the business cycle is

a. cyclical unemployment. b. natural unemployment. c. frictional unemployment. d. structural unemployment. A: Cyclical unemployment

. Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the

a. demand for government-provided public goods. b. level of aggregate demand required to achieve full employment of resources. c. size and quality of the labor force. d. need to expand or contract the supply of money. Answer: B

The crowding-out effect suggests that

a. expansionary fiscal policy causes inflation. b. restrictive fiscal policy is an effective weapon against inflation. c. a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit. d. a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment. Answer: C

Prior to the Great Depression, most economists believed that a recessionary downturn would be reversed by

a. higher wages that would stimulate aggregate demand and reduce unemployment. b. lower wages that would increase the quantity of labor demanded and reduce unemployment. c. an expansionary monetary policy on the part of the Federal Reserve System. d. an increase in government spending that would stimulate aggregate demand and employment. Answer:B

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

a. increase the reserve requirements. b. buy U.S. securities on the open market. c. raise the discount rate. d. sell U.S. securities on the open market. ANSWER: B

Which of the following would be most likely to cause an increase in current aggregate demand in the United States?

a. increased fear that the U.S. economy was going into a recession b. an increase in the real interest rate c. sharp increase in the value of stocks owned by Americans d. a recession in Canada, Mexico, and Western Europe Answer: C

The M1 money supply

a. is composed of assets that reflect the medium of exchange function of money. b. is larger than the M2 money supply. c. includes credit card balances since they are used to purchase things. d. is composed of only currency. A

A depreciation in the U.S. dollar on the foreign exchange market will

a. make U.S. exports more expensive to foreigners. b. make imports less expensive for U.S. consumers. c. make U.S. exports cheaper for foreign consumers. d. encourage U.S. consumers to travel abroad. Answer: C

According to the traditional (crowding-out) view, which of the following is most likely to result if a substantial portion of government expenditures is financed by borrowing rather than taxation?

a. no change in interest rates and an increase in saving b. higher interest rates and an outflow of foreign capital c. higher interest rates and a reduction in private domestic investment d. lower interest rates and an inflow of foreign investment Answer: C

Frictional unemployment is the result of

a. not enough jobs for everyone to be employed. b. unemployed workers' skills not matching those needed for the available jobs. c. a decline in the demand for labor, such as during a recession. d. imperfect information and temporary periods of unemployment while workers are changing jobs. Answer: D

Public Choice Analysis Explains that

a. politicians have strong incentives to favor deficit finance over tax finance. b. policy makers believe the budget should be balanced except in times of war. c. the legislator who is a spending "watch dog" can save her constituents a substantial amount of tax money. d. given the way Congress operates, the apparent popularity of deficit financing is surprising. Ans : A

When a nation has a high debt/GDP ratio, that nation generally will

a. require high taxes just to pay interest on the debt. b. be able to borrow funds at relatively low real interest rates. c. find that its bonds are attractive to international investors seeking low-risk investments. d. want to increase spending in order to gain the confidence of international investors. Answer: A

The demand curve for money

a. shows the amount of money balances that individuals and businesses wish to hold at various levels of private investment. b. reflects the open market operations policy of the Federal Reserve. c. shows the amount of money that households and businesses wish to hold at various rates of interest. d. indicates the amount that consumers wish to borrow at a given interest rate. Answer C

In order for barter trades to occur, there must be a

a. singularity of interests. b. bargaining intermediary. c. double coincidence of wants. d. sufficient supply of cash. Ans: C

From a public choice viewpoint, the persistent budget deficits of recent decades are

a. surprising, because politicians have a strong incentive to balance the government's budget. b. an expected result, because the political incentive structure makes it attractive for politicians to levy taxes rather than spend on current programs. c. surprising, because politicians have a strong incentive to run budget surpluses and thereby indicate that their actions have generated a profit. d. an expected result, because the political incentive structure makes it attractive for politicians to spend on current programs rather than levy taxes. Answer = D

As the real interest rate in the domestic loanable funds market increases,

a. the cost of purchasing goods and services during the current period will decrease. b. the net inflow of capital from abroad will increase. c. the inflationary premium will rise and the money rate of interest will decline. d. a trade surplus will occur. Answer: B

Fiscal policy is

a. the deliberate control of the money supply to achieve macroeconomic goals. b. the use of the government's regulatory powers to improve economic efficiency. c. the operation of business enterprises by the government. d. the use of government taxation and expenditures to achieve macroeconomic goals. Answer : D

The national debt is

a. the difference between a nation's exports and imports of goods and services. b. the sum of the personal debt of all citizens in the United States. c. the cumulative effect of all past budget deficits and surpluses of the federal government. d. equal to the current size of the budget deficit. Answer: C

As the Fed maintained interest rates at near zero during 2008-2012,

a. the economy recovered and the unemployment rate fell to normal levels. b. households and businesses held larger money balances and the velocity of money fell substantially. c. stock prices declined during 2010-2012, causing the economy to remain weak. d. the earnings senior citizens derived from saving deposits and other forms of savings rose substantially, leading to higher incomes and a strong increase in aggregate demand. Answer B

Economists use the term "business cycle" to refer to

a. the growth of small businesses into major corporations. b. changes in products that occur from improved technology. c. fluctuations in the level of real output and employment. d. periods of increases and decreases in the rate of inflation. Ans: C

The velocity of money is

a. the rate at which the price index for consumer goods rises. b. the multiple by which an increase in government expenditures will cause output to rise. c. set by the Board of Governors of the Federal Reserve System. d. the average number of times one dollar is used to buy final goods and services during a year. Answer: D

The macroeconomy is said to be in long-run equilibrium only if

a. the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium. b. prices were incorrectly estimated by decision makers. c. the output of the economy exceeds the full-employment level of output. d. the economy is operating along its short-run aggregate supply curve. Answer: A

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

a. the sharp reduction in the supply of money during 1929-1933 and another monetary contraction in 1938. b. the high interest rates of the 1930s. c. the double-digit inflation of the 1930s. d. insufficient aggregate demand and the failure of market forces to direct the economy back to full employment. Answer: D

When the economy is in macro equilibrium,

a. the sum of savings plus investment must equal the sum of imports plus exports. b. the sum of savings plus imports plus taxes must equal the sum of investment plus government purchases plus exports. c. the sum of savings plus government purchases must equal exports minus imports. d. the government's budget must be in balance. Answer B

Monetary policy can be most accurately described as

a. the use of government taxation and expenditures to achieve macroeconomic goals. b. the use of the government's regulatory powers to improve economic efficiency. c. the government provision of goods to improve economic efficiency. d. the deliberate control of the money supply to achieve macroeconomic goals. Answer: D

When the loanable funds and foreign exchange markets are in equilibrium,

a. there are no leakages from the circular flow of income. b. macro equilibrium cannot occur. c. the leakages from the circular flow will equal the injections into it. d. injections into the circular flow will exceed leakages from it. Answer: C

If the labor force grows at a faster rate than the number employed, the

a. unemployment rate will fall. b. unemployment rate will rise. c. labor force participation rate will fall. d. employment rate will rise Anser: B

Other things being constant, countries with higher rates of saving

a. will have smaller GDPs than countries with lower rates of saving. b. will have higher rates of investment, but slower growth. c. will have higher rates of investment and growth. d. will be operating at less than full employment and potential output. Answer C

The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $82 billion, real GDP

a. will increase by less than $82 billion if the economy was initially operating well below capacity. b. will increase by more than $82 billion if the economy was initially operating well below capacity. c. will increase by more than $82 billion if the economy was initially operating at full-employment capacity. d. will decline if the marginal propensity to consume is less than 1. Answer: B

New classical economists stress that an increase in government expenditures financed by borrowing rather than taxes will

affect the timing of taxes but not their magnitude

If Europe and Japan experience rapid growth in their incomes, other things constant, this will cause

an increase in the exports of the United States

If heavy federal borrowing pushes up real interest rates in the United States, which of the following will most likely result?

an inflow of capital and an appreciation in the foreign exchange value of the dollar

An increase in the consumer sentiment index indicates that consumers are

becoming more optimistic about their future income and employment prospects.

A currency appreciation will be most likely to

c. reduce net exports and therefore decrease aggregate demand.

Which of the following attributes of the recession of 2008-2009 is most supportive of the Keynesian view that the crowding-out effect will be minimal during a severe recession?

c. short-term interest rates falling to near zero, despite growing budget deficits during 2008-2009

When the Federal Reserve sells government bonds to the public, it directly

d. reduces the M1 money supply and decreases the reserves of the commercial banking system.

When the interest rate decreases, the opportunity cost of holding money

decreases, so the quantity of money demanded increases.

The primary benefit of a monetary system of exchange compared to a barter system is the increased

efficiency in arranging transactions.

Public choice analysis indicates that it will be politically more attractive to

enact expansionary fiscal policy during a recession than to enact restrictive fiscal policy during an economic expansion.

The political incentive structure tends to

encourage budget deficits during both recessions and expansions

Which of the following reduced aggregate demand and thereby contributed to the crisis of 2008?

falling housing and stock prices

The expansionary effects of an increase in government expenditures will tend to be offset, at least partially, if

government borrowing drives interest rates upward.

The supply-side effects of a reduction in taxes are the result of

increased attractiveness of productive activity relative to leisure and tax avoidance

The labor force participation rate of women in the United States has been

increasing

The value (purchasing power) of each unit of money

is inversely related to the general level of prices.

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run an unanticipated increase in the money supply will

lower real interest rates, raise prices, and increase real GDP.

Supply-side economics stresses that

marginal tax rates exert important incentive effects that influence real output.

If the government cuts the tax rate, workers get to keep

more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.

If the general level of prices is lower than business decision makers anticipated when they entered into long-term contracts for raw materials and other resources, which of the following is most likely to occur?

output less than the economy's long-run potential

The Great Depression provided support for Keynes' view that

prolonged periods of unemployment would be present when demand is deficient.

The crowding-out effect implies that restrictive fiscal policy will

reduce real interest rates

Ordinary commercial banks can expand the supply of money by

using a portion of their deposits to extend additional loans.

Money is

whatever is generally accepted in exchange for goods and services.