Final

82. A negative output gap is associated with: A) an unusually low unemployment rate. B) a natural rate of unemployment. C) an unusually high unemployment rate. D) no changes in the unemployment rate.

C

86. If an economy's short-run Phillips curve shifts up, this is most likely due to: A) a change in the inflation rate. B) an increase in the unemployment rate. C) an increase in expected inflation. D) a contractionary fiscal policy.

C

88. When an economy has debt deflation: A) aggregate demand increases, since the real debt burden is reduced. B) aggregate demand is not affected, since real variables are not affected. C) aggregate demand decreases as borrowers' real debts increase, which leads to less spending. D) the economy moves quickly to its potential output.

C

92. A shadow bank is a: A) branch of the main office of a bank. B) bank that is operated by a shadow government. C) financial firm that is not closely watched or effectively regulated. D) a credit union or a savings and loan institution.

C

97. Which of the following is an example of maturity transformation? A) Anne sells her house for $200,000 and uses the money to open a bakery. B) Matthew sells his car and uses the money to pay college tuition. C) Justin takes $10,000 from his savings account and uses it to buy some Apple stock. D) Michael closes his checking account at Bank of America and opens a checking account at a local credit union.

C

10. In economies with persistently high inflation, an increase in the money supply: A) will translate into a proportional increase in the aggregate price level much faster than usual. B) will translate into a proportional increase in the aggregate price level only in the long run. C) will not affect either the aggregate price level or the aggregate output. D) will translate into a proportional increase in the aggregate output much faster than usual.

A

100. Since the early 1980s, shadow banks have increased because they: A) are not subject to capital requirements and reserve requirements. B) offer online bill payment to their depositors. C) pay lower interest rates on their deposits than commercial banks. D) offer lower interest rates on their commercial loans than commercial banks.

A

105. All of the following are regulations designed to prevent bank runs EXCEPT: A) asset bubbles. B) capital requirements. C) reserve requirements. D) provisions that allow banks to borrow from the Fed's discount window.

A

109. In a vicious cycle of deleveraging, financial institutions: A) sell assets at a deep discounts. B) sell assets at unreasonably high prices. C) buy assets at deep discounts. D) buy assets at unreasonably high prices.

A

111. To put an end to the vicious cycle of bank failures during the early 1930s: A) President Franklin Roosevelt declared a bank holiday, temporarily closing all banks. B) the Federal Reserve System was established. C) a system of shadow banks was developed to replace the troubled commercial banks. D) the government nationalized all commercial banks.

A

113. In the early 1990s, banking crises occurred in Finland, Sweden, and Japan because: A) of real estate bubbles in each country. B) the central banks of these countries were prohibited from conducting monetary policy. C) the value of the euro fell to historically low levels. D) there were many runs on banks.

A

115. To stabilize the banking crisis in Ireland: A) the Irish government guaranteed all bank debt. B) the European Union central bank revalued the euro. C) the European Union central bank devalued the euro. D) the Irish government declared a bank holiday for several weeks.

A

118. A credit crunch causes a recession because: A) potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending. B) banks have a surplus of funds to loan, so interest rates fall to very low levels. C) unemployment falls to very low levels, causing a problem of inflation. D) interest rates are so low that investors' incomes fall, and they decrease their spending.

A

16. According to the classical model of the price level, an increase in the money supply will create: A) inflation with no long-run increase in real GDP. B) inflation and a long-run increase in real GDP. C) no inflation and a long-run increase in real GDP. D) deflation with no long-run increase in real GDP.

A

24. When the output gap is negative, the actual unemployment rate is: A) above the natural rate. B) below the natural rate. C) equal to the natural rate. D) The actual and natural unemployment rates are not related to the output gap.

A

29. Suppose actual aggregate output is equal to the potential output; the actual unemployment rate is: A) equal to the natural rate of unemployment. B) higher than the natural rate of unemployment. C) zero. D) equal to the cyclical rate of unemployment.

A

31. If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will: A) not change. B) rise. C) fall. D) be zero.

A

32. The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as: A) Okun's law. B) Phillip's law. C) Greenspan's law. D) Keynes's law.

A

50. If the natural rate of unemployment _________, the NAIRU _________, and the long-run Phillips curve shifts to the left. A) falls; falls B) rises; rises C) falls; rises D) rises; falls

A

59. Deflation: A) hurts borrowers and helps lenders. B) helps borrowers and hurts lenders. C) unlike inflation, affects neither borrowers nor lenders. D) has effects on borrowers and lenders that depend on the amount of the loan.

A

60. The problem of debt deflation deepens during an economic slump because: A) borrowers have to reduce spending to pay back burdensome debts. B) the Fisher effect raises the nominal interest rate during a period of deflation. C) lenders have to lower spending in order to accommodate higher returns from loans. D) the zero bound on the nominal interest rate is broken.

A

77. When an economy has high inflation: A) wage and price stickiness lessen or disappear. B) the Keynesian model of the economy is most relevant. C) wages become more inflexible as workers wait for prices to stabilize. D) changes in the money supply take much longer to affect the inflation rate.

A

78. If a central bank pursues an expansionary monetary policy: A) the aggregate price level and level of real GDP will increase in the short run. B) the level of real GDP will increase, but the aggregate price level will stay the same in the long run. C) nominal prices and nominal wages will be unaffected in the long run. D) the aggregate price level will increase and the level of real GDP will decrease in the short run.

A

81. During an inflationary gap: A) the unemployment rate is less than the natural rate of unemployment. B) actual output is less than potential output. C) the unemployment rate is equal to the natural rate of unemployment. D) wages and prices must fall in order to restore the economy to its potential output.

A

83. A negative output gap implies: A) an unemployment rate above the natural rate. B) an unemployment rate below the natural rate. C) an unemployment rate equal to the natural rate. D) an unemployment rate that equals the frictional and structural amounts of unemployment.

A

89. During a liquidity trap: A) monetary policy is ineffective, since nominal interest rates cannot fall below zero. B) the money market is in disequilibrium. C) the only tool that the Federal Reserve finds effective is expansionary monetary policy. D) nominal interest rates will rise regardless of what policy the Federal Reserve pursues.

A

93. Without banks, people would: A) hold more of their wealth as cash. B) hold less of their wealth as cash. C) invest most of their wealth in real estate. D) earn higher rates of return and enjoy more liquidity.

A

94. Depository banks: A) borrow on a short-term basis from depositors and lend on a long-term basis to others. B) borrow on a long-term basis from depositors and lend on a long-term basis to others. C) borrow on a short-term basis from depositors and lend on a short-term basis to others. D) borrow on a long-term basis from depositors and lend on a short-term basis to others.

A

96. Maturity transformation is converting: A) short-term liabilities into long-term assets. B) short-term liabilities into short-term assets. C) long-term liabilities into long-term assets. D) long-term liabilities into short-term assets.

A

103. In a bank run: A) the bank has a surplus of deposits and must turn customers away . B) bank customers try to withdraw their deposits. C) the bank runs out of money to lend to customers. D) the bank runs out of profitable investments for the funds of its depositors.

B

110. During the early 1930s, approximately _______ of the banks in the United States failed. A) 75% B) 40% C) 10% D) 3%

B

116. As a consequence of the Irish banking crisis: A) the budget surplus of the Irish government is growing to record levels. B) the Irish government has to pay high interest rates on money it borrowed in international markets, and its solvency is in question. C) unemployment fell to less than 3%. D) Ireland has been forced to leave the European Union.

B

119. Debt overhang is the result of: A) maturity transformation. B) a vicious cycle of deleveraging. C) falling unemployment. D) rising inflation.

B

20. If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is: A) $5 billion. B) $15 billion. C) $60 billion. D) $1500 billion.

B

34. According to recent estimates of Okun's law, if the unemployment rate fell by a full percentage point, it would most probably be attributable to a: A) 3% increase in real GDP. B) 2% increase in real GDP. C) 1% increase in real GDP. D) 3% decrease in real GDP.

B

35. Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract? A) a reduction in the number of discouraged workers B) an increase in the number of discouraged workers C) an increase in the level of employment D) a decrease in the level of employment

B

36. Okun's law suggests that: A) a 1% increase in a positive output gap increases the unemployment rate by 0.5%. B) a 1% increase in a positive output gap decreases the unemployment rate by 0.5%. C) a 0.5% increase in a positive output gap increases the unemployment rate by 1%. D) a 0.5% increase in a positive output gap decreases the unemployment rate by 1%.

B

38. A supply shock caused by an increase in the price of gasoline causes: A) a decrease in output and prices. B) a decrease in output and an increase in prices. C) an increase in output and prices. D) an increase in output and a decrease in prices.

B

39. The short-run Phillips curve shows: A) a direct relationship between unemployment and inflation. B) an inverse relationship between unemployment and inflation. C) consequences of the misperceptions theory. D) the optimal level of employment.

B

4. In the short run in periods of low inflation, an increase in aggregate demand from a position of full employment leads to: A) higher prices and higher unemployment. B) higher prices and higher output. C) lower prices and higher output. D) lower prices and higher unemployment.

B

41. Along a Phillips curve: A) consumption depends on prices. B) the inflation rate varies inversely with the unemployment rate. C) the inflation rate varies directly with the unemployment rate. D) prices and tax rates are directly related.

B

45. An increase in the expected rate of inflation: A) shifts the short-run Phillips curve down. B) shifts the short-run Phillips curve up. C) moves the economy along the short-run Phillips curve to higher rates of inflation. D) moves the economy along the short-run Phillips curve to higher rates on unemployment.

B

47. During the 1950s and 1960s, the short-run Phillips curve for the U.S. economy showed a(n): A) positive relationship between unemployment and inflation. B) inverse relationship between unemployment and inflation. C) positive relationship between interest rates and inflation. D) inverse relationship between interest rates and inflation.

B

49. An increase in expected inflation will affect the short-run Phillips curve: A) by shifting it downward; the actual rate of inflation at any given unemployment rate will fall by the same amount. B) by shifting it upward, as a result the actual rate of inflation at any given unemployment rate will also be higher when the expected inflation rate is higher. C) by moving along the same curve, where it equals the actual rate of inflation. D) only if the economy is at the nonaccelerating inflation rate of unemployment.

B

51. When workers and firms become aware of a rise in the general price level: A) they will not do anything, because they know they are powerless to counter any economic changes. B) they will incorporate higher prices into their expectations of future prices. C) firms with sticky prices will ultimately adjust their prices downward. D) they will agree to renegotiate wage contracts downward.

B

61. During periods of deflation _____ will be hurt and _____ will be helped. A) firms; borrowers B) borrowers; lenders C) consumers; firms D) home buyers; home sellers

B

62. When economists state that there is a zero bound on nominal interest rates, they mean that: A) the real interest rate cannot go below zero. B) the nominal interest rate cannot go below zero. C) the real interest rate can very well be negative. D) the nominal interest rate can always go below zero.

B

70. The Fed tries to keep the core inflation rate around: A) zero. B) 2%. C) 4%. D) 5%

B

79. Government's right to print money to finance deficits is referred to as: A) open-market sales. B) seigniorage. C) fiat money implementation. D) crowding out.

B

84. As a result of a downturn in the economy, a firm cuts back on workers' hours but does not fire workers. Following Okun's law, this is one reason: A) the relationship between the output gap and the unemployment rate is positive. B) the relationship between the output gap and the unemployment is negative and less than a one-to-one relationship. C) a negative output gap is associated with an unusually low unemployment rate. D) a positive output gap is associated with an unusually high unemployment rate.

B

85. Suppose an economy's aggregate price level increases and its aggregate level of real GDP decreases. This could arise from: A) a positive demand shock. B) a negative supply shock. C) a positive supply shock. D) a negative demand shock.

B

87. Disinflation: A) involves eliminating inflation in an economy. B) policy often results in plunging the economy into a major recession. C) occurs as a result of a policy makers' attempts to correct a major recession. D) results in a fall in the unemployment rate.

B

9. In the long run, any given percentage increase in the money supply: A) decreases real GDP. B) leads to an equal percentage increase in the overall price level. C) increases real GDP. D) leads to an equal percentage decrease in the unemployment rate.

B

91. A financial intermediary that provides liquid assets in the form of deposits to savers and uses its funds to finance illiquid investment spending needs of borrowers is a(n): A) insurance company. B) bank. C) pension fund. D) hedge fund.

B

99. Shadow banks differ from commercial banks because shadow banks: A) accept deposits only from businesses and state and local governments, not from individuals. B) are not subject to as many regulations as commercial banks. C) are not allowed to pay interest on deposits. D) can operate branches in more than one state.

B

8. During periods of low inflation, the short-run aggregate supply curve is: A) vertical. B) horizontal. C) upward sloping. D) downward sloping

C

101. When shadow banks engage in maturity transformation, they raise funds by ___________ and invest in _________. A) issuing stock; stock of other companies B) selling bonds; Treasury bills C) borrowing in short-term credit markets; longer-term speculative investments D) borrowing in long-term credit markets; short-term speculative investments

C

104. Which of the following are regulations intended to prevent bank runs? A) the Sherman Anti-Trust law B) regulation Q, which prohibits banks from paying interest on demand deposits C) deposit insurance D) maturity transformation

C

106. A shadow bank engages in maturity transformation by: A) accepting short-term deposits from businesses and making short-term loans to commercial banks. B) accepting long-term deposits from businesses and making long-term loans to commercial banks. C) borrowing money short term and lending or investing long term. D) borrowing money long term and lending or investing short term

C

112. Following the banking crises of the early 1930s: A) real GDP and the price level increased at a rapid pace. B) real GDP increased and the price level decreased. C) real GDP and the price level both decreased. D) real GDP decreased and the price level increased.

C

76. In the long run, an increase in the money supply: A) will increase real GDP and the price level. B) causes people to hold onto large sums of money. C) results in no change in real GDP. D) encourages people to save more money.

C

117. What did the panic of 1893 in the United States and the Swedish banking crisis of 1991 have in common? A) Each was followed by a period of record high growth rates of real GDP. B) Both were ended by aggressive monetary policies of the central bank. C) Each was followed by a deep recession and slow recovery. D) Both were caused by a real estate bubble.

C

17. The inflation tax is: A) the higher tax paid by individuals whose incomes are indexed to inflation. B) the taxes paid during periods of inflation. C) the reduction in the value of money that is held by the public caused by inflation. D) the higher prices consumers pay due to inflation.

C

18. Fiat money is: A) money backed by gold. B) money that only the government will accept to pay taxes. C) paper money with no intrinsic value. D) used only in the United States as a medium of exchange.

C

19. If the money supply is $3 billion and inflation is 6%, the inflation tax is: A) $3.18 billion. B) $50 billion. C) $180 million. D) $1.8 billion.

C

2. In the classical model, it is thought that the long-run: A) and short-run aggregate supply curves are both upward sloping. B) aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping. C) and short-run aggregate supply curves are both vertical. D) aggregate supply curve is upward sloping and the short-run aggregate supply curve is vertical.

C

21. If a high inflation rate leads people to ______ their money holdings, this may lead to a further increase in the money supply and ______ inflation. A) reduce; lower B) increase; lower C) reduce; higher D) increase; higher

C

23. Zimbabwe's economic instability was caused primarily by: A) its joining the Coalition of the Willing in the Iraq war. B) its attempts to join the European Union. C) the government's seizure of the country's farms, which disrupted production. D) its high tariffs on imported goods.

C

3. Which of the following is the BEST explanation for an upward-sloping short-run aggregate supply curve? A) Prices are perfectly flexible. B) Wages are perfectly flexible. C) Wages and prices of some goods are sticky in the short run. D) Wages and prices of some goods are flexible in the short run but sticky in the long run.

C

30. If an economy has just had a serious recession but real GDP is expanding once again, we can conclude the unemployment rate will: A) automatically fall. B) automatically rise. C) actually rise, if people who were previously discouraged enter the work force but do not find jobs right away. D) actually fall, if people who were previously discouraged enter the work force but do not find jobs right away.

C

33. The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of: A) 4%. B) 5%. C) 6.5%. D) 9%.

C

37. If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%: A) disinflation is likely to occur. B) there will be no effect on prices. C) inflation will increase. D) the short-run Phillips curve will shift down

C

40. A supply shock: A) moves our economy along the short-run aggregate supply curve. B) moves us along the short-run Phillips curve. C) shifts the short-run Phillips curve. D) shifts the short-run aggregate supply curve but not the short-run Phillips curve.

C

46. Expectations of a higher inflation rate shift the short-run aggregate supply curve to the _________, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _________. A) left; down B) right; up C) left; up D) right; down

C

52. In the long run, when the actual inflation rate gets embedded into people's expectation: A) the trade-off between inflation and unemployment becomes even stronger. B) it is possible to achieve lower unemployment in the long run by accepting higher inflation. C) there is no longer a trade-off between inflation and unemployment. D) actual inflation at any unemployment rate is always higher than expected inflation.

C

53. The NAIRU is: A) the inflation rate at which the unemployment rate does not change over time. B) a trade-off between unemployment and inflation. C) the unemployment rate at which inflation does not change over time. D) a rate at which it is possible to achieve lower unemployment by accepting higher inflation.

C

54. Which of the following accurately describes disinflation? A) It must be accompanied by a decline in the price level. B) The inflation rate rises at a higher rate. C) It is the process of bringing down the inflation that has become embedded in expectations. D) It is a gradual reduction in the price level over time.

C

56. Analysis of the Phillips curve reveals that a __________ in unemployment, like that of the early 1980s, is needed to break the cycle of inflationary expectations. A) permanent increase B) permanent decrease C) temporary increase D) temporary decrease

C

58. The U.S. government reports a core inflation rate that excludes _____ and _____ prices to remove the volatility of those two sectors from inflation estimates. A) housing; automobile B) steel; housing C) energy; food D) gasoline; housing

C

65. A liquidity trap is a situation in which: A) using expansionary monetary policy is not effective because the real interest rate is negative. B) aggregate demand falls because consumers do not have enough liquidity to consume. C) using expansionary monetary policy is not effective because the nominal interest rate is almost zero. D) lenders are trapped by large loans with declining rates of return.

C

69. The measure used by the Fed that excludes food and energy prices is the: A) consumer price index. B) wholesale price index. C) core inflation rate. D) federal funds rate.

C

75. Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be: A) a decrease in the natural rate of unemployment and an increase in inflation. B) a decrease in the natural rate of unemployment and no change in inflation. C) no change in the natural rate of unemployment and an increase in inflation. D) no change in the natural rate of unemployment and no change in inflation.

C

102. Shadow banks offer their customers a higher rate of return than commercial banks because: A) shadow banks can pay interest on deposits, but commercial banks cannot pay interest on deposits. B) shadow banks are allowed to invest in stocks of foreign corporations, while commercial banks can invest only in stocks of American corporations. C) shadow banks must hold more reserves and capital than commercial banks, D) shadow banks are not subject to reserve and capital requirements, but commercial banks must hold reserves and meet capital requirements.

D

107. A banking crisis occurs: A) whenever there is an asset bubble. B) if shadow banks begin to accept deposits. C) when banks engage in maturity transformation by accepting short-term deposits and converting them into long-term loans or investments. D) when a large part of the depository banking sector or the shadow banking sector fails or threatens to fail.

D

108. A vicious downward spiral among banks in which each institution's failure increases the likelihood that another will fail is a(n): A) asset bubble. B) maturity transformation. C) multiplier effect. D) financial contagion.

D

114. The "wholesale" funding that Irish banks used to fund real estate loans came primarily from: A) the European Union central bank. B) long-term, low-interest loans from the Irish government. C) bank deposits of individuals. D) short-term loans from other banks and private investors.

D

22. From 2000 to 2008 Zimbabwe's prices: A) decreased by 50%. B) increased by 50%. C) increased by 100%. D) increased by 80 trillion percent

D

28. The relationship between the output gap and the unemployment rate can be summarized thus: A) When the output gap is negative, the unemployment rate is below the natural rate. B) When the output gap is zero, the unemployment rate is also zero. C) When there is an inflationary gap, the unemployment rate is above the natural rate. D) When the output gap is positive, the unemployment rate is below the natural rate.

D

42. Suppose that the unemployment rate rises at the same time that the inflation rate declines. This situation would be consistent with a movement along the: A) vertical Phillips curve. B) horizontal Phillips curve. C) positively sloped Phillips curve. D) negatively sloped Phillips curve.

D

48. Stagflation is a combination of: A) restrictive trade policies and inflation. B) budget deficits and trade deficits. C) unemployment and higher taxes. D) unemployment and inflation.

D

55. To bring disinflation to an economy, policy makers must: A) slow down labor productivity growth. B) increase the money supply in order to release the economy from the liquidity trap. C) keep unemployment below its natural rate for an extended period. D) lower expectations about inflation.

D

63. If the economy is in a liquidity trap: A) both monetary and fiscal policies are effective. B) neither monetary nor fiscal policy is effective. C) monetary policy is effective, but fiscal policy is not. D) fiscal policy is effective, but monetary policy is not

D

64. Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is ________, it can be argued that ________ is (are) worse off. A) above 3%; the bank issuing the certificate B) exactly 6%; both the bank and Tony C) below 3%; Tony D) below 3%; the bank issuing the certificate

D

66. A liquidity trap results from the: A) inflation tax. B) expansionary fiscal policy. C) Fisher effect. D) zero bound of the nominal interest rate.

D

67. The liquidity trap is associated with all of the following EXCEPT: A) a large reduction in the demand for loanable funds. B) the nominal interest rate falls to zero. C) monetary policy becomes ineffective. D) fiscal policy becomes ineffective.

D

68. When Fed officials worried about the possibility of "Japanification" in the United States, it meant that they were worried that the U.S. economy would: A) grow faster than the economy of Japan after World War II. B) accumulate large trade surpluses, like Japan. C) fall into a period of hyperinflation. D) fall into a deflationary trap

D

80. When inflation is high: A) people will increase their level of real-money holdings. B) people will save more. C) lenders gain at the expense of borrowers. D) people will decrease their level of real-money holdings.

D

90. Investment banks differ from commercial banks because: A) commercial banks are allowed to advertise, but investment banks are prohibited from advertising. B) commercial banks can have offices only in one state, but investment banks can have offices in many countries. C) commercial banks do not sell foreign currencies, but investment banks do. D) commercial banks accept deposits from customers, but investment banks do not.

D

95. Most of a bank's short-term liabilities are: A) loans from the Federal Reserve. B) loans from the U.S. Treasury. C) loans to its customers. D) deposits of customers' savings.

D

98. Which of the following is an example of maturity transformation? A) Jordan borrows $15,000 to buy a car. B) Aaron buys new running shoes and pays for them with his American Express credit card. C) Angela gives Russell $100 in cash for a graduation gift. D) Tyler lends $1,000 to his roommate Nick for a year.

D