Macroeconomics Practice Questions

Suppose a U.S weapons manufacturer increases the price of the cruise missile it sells to the U.S. Navy. It follows that, ceteris paribus, the increase in the price will increase: a. both CPI and GDP deflator b. neither CPI nor GDP deflator c. GDP deflator but not CPI d. CPI but not GDP deflator

GDP deflator but not CPI

In what sense do positive externalities cause the so-called "invisible hand" of the marketplace to "fail"?

In the absence of government intervention, markets with positive externalities often fail to produce the maximum total benefit to society as measured by total surplus.

What is the efficient market hypothesis?

Ps = Pf + Ɛ

Suppose a ten-year bond with a $10,000 face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 6.5%. Which of the following would give you the present value - i.e. the price - of the bond?

Refer to test #2, question 13

Suppose that in the state of Chocaville there are final goods produced in the economy - milk and diapers. Suppose the economy produces 20 units of milk and 5 units of diapers in 2000 (base year), and 25 units of milk and 10 units of diapers in 2010. Further suppose the price of milk was $2.00 per unit in 2000, and $3.00 per unit in 2010; whereas the price of a diaper was $1.00 in 2000 and $2.00 in 2010. What was the real GDP for Chocaville in 2010? a. $60.00 b. $70.00 c. $95.00 d. $140.00

a. $60.00

Suppose the money supply is $4 trillion, nominal GDP is $16 trillion, and real GDP is $12 trillion. It follows that the price level is _____ and the velocity is _____. a. 1.33 ; 4 b. 3 ; 4 c. 1.33 ; 3 d. 4 ; 3

a. 1.33 ; 4

Suppose your economist tells you the free market demand for X is given by P = 30 - 3X and the free market supply of X is given by P = 10 + 2X. Ceteris paribus, the consumer surplus in this market is _____ and the producer surplus is _____. a. 24 ; 16 b. 48 ; 32 c. 32 ; 48 d. 4 ; 18

a. 24 ; 16

Suppose some of the country's largest commercial banks decide to increase their holdings of excess reserves relative to deposits. Ceteris paribus, this action will put _____ pressure on the money supply, and to reduce the impact of this action the Fed could _____. a. downward ; conduct open market purchases b. downward ; conduct open market sales c. upward ; conduct open market purchases d. upward ; conduct open market sales

a. downward ; conduct open market purchases

Which of the following statements regarding the Federal Reserve System is incorrect? a. in the U.S. economy, the Fed is the primary organization for the conduct of fiscal, as well as monetary policy. b. the current chair is Jerome Powell c. there are 12 regional Federal Reserve Banks in the United States d. the Federal Reserve Board of Governors (7) is appointed by the president for a 14-year non-renewable term.

a. in the U.S. economy, the Fed is the primary organization for the conduct of fiscal, as well as monetary policy.

Ceteris paribus, when the Fed conducts an open market operation: a. it purchases Treasury securities, which puts upward pressure on the money supply. b. it sells Treasury securities, which puts upward pressure on the money supply. c. it purchases commercial loans from commercial banks, which increases the money supply. d. it purchases commercial loans from commercial banks, which decreases the money supply.

a. it purchases Treasury securities, which puts upward pressure on the money supply.

Because consumer can sometimes substitute cheaper goods for those that have risen in price... a. the CPI overstates inflation b. the CPI understates inflation c. the GDP deflator overstates inflation d. the GDP deflator understates inflation

a. the CPI overstates inflation

Which of the following is the best example of a good or service that would be considered rival and excludable? a. the clothes on your back b. the U.S. secret service c. the N.C. State highway patrol d. the Federal Bureau of Investigation

a. the clothes on your back

According to the quantity theory of money, if the velocity of money is constant and if the money supply increases, while at the same time real GDP decreases, then it follows that in the long run: a. the price level will increase - the economy will experience inflation b. the price level will decrease - the economy will experience deflation c. nominal GDP must be decreasing d. none of the above is mathematically possible

a. the price level will increase - the economy will experience inflation

When economists says money is neutral, they most likely mean that in the long run, the Fed can only influence _____. a. the price level, but not real interest rates or output b. real interest rates, but not the price level c. commercial bank excess reserves but not the price level d. real interest rates, but not the money supply

a. the price level, but not real interest rates or output

In general, if the Fed is buying short-term government securities on the open market, then one should expect, ceteris paribus, that this activity would put _____ pressure on the money supply. a. upward b. downards c. zero d. no answer

a. upward

In general, if the Fed is conducting quantitative easing, then one would expect, ceteris paribus that this activity would put _____ pressure on the money supply. a. upward b. downward c. zero d. no answer

a. upward

Suppose a thirty-year bond with a $10,000 face value pays a 0.0% annual coupon at the end of the year, has 1 year left to maturity, and has a discount rate of 0.0%. Ceteris paribus, it follows that the current market price of the bond should be: a. more than $10,000 b. $10,000 c. less than $10,000 d. the market price of the bond cannot be determined from the information given

b. $10,000

If the real interest rate is 1% and the nominal interest rate is 3%, what is the inflation rate? a. -2% b. 2% c. -4% d. 4%

b. 2%

Ceteris paribus, if the government imposes a tax on a good, then the price paid by buyers will _____ while the net price received by sellers will _____. a. Increase ; increase b. Increase ; decrease c. Decrease ; increase d. Decrease ; decrease

b. Increase ; decrease

Which of the following statements is correct about the relationship between the nominal interest rate and real interest rate? a. Real interest rate = nominal interest rate x inflation rate b. Real interest rate = nominal interest rate - inflation rate c. Real interest rate = nominal interest rate + inflation rate d. Real interest rate = nominal interest rate / inflation rate

b. Real interest rate = nominal interest rate - inflation rate

Which of the following best describes the economic concept of deadweight loss? a. The decrease in total surplus resulting from the removal of an excise tax. b. The decrease in total surplus resulting from the distortion of the market from a tax. c. The increase in total surplus resulting from the removal of an excise tax. d. The increase in total surplus resulting from the distortion of the market from a tax.

b. The decrease in total surplus resulting from the distortion of the market from a tax.

In the United States for fiscal 2016, total government expenditure was roughly 38% of GDP; yet, using the expenditure method for calculating GDP, government expenditure on goods and services were only 18% of GDP. Which of the following most likely explains the difference? a. Transfer payments are included in the second figure, but not the first b. Transfer payments are included in the first figure, but not the second c. Discretionary spending on goods and services is included in the second figure, but not the first d. Discretionary spending on goods and services is included in the first figure, but not the second

b. Transfer payments are included in the first figure, but not the second

Ceteris paribus, which of the following Fed actions would most likely bring about an increase to the money supply? a. an increase in the interest rate that the Fed pays on commercial bank reserves held at the Fed. b. an open market purchase of securities by the Fed from commercial banks c. no action d. an increase in the required reserve ratio

b. an open market purchase of securities by the Fed from commercial banks

Suppose the required reserve ratio decreased from 40% to 20%, and suppose that banks kept no excess reserves. Ceteris paribus, it follows that the money (or deposit) multiplier would: a. increase from 40 to 20 b. increase from 2.5 to 5 c. decrease from 40 to 20 d. decrease from 1/5 to 1/2.5

b. increase from 2.5 to 5

Suppose monetary neutrality holds in the long run; further suppose the velocity of money and real GDP are constant. It follows that a 7% increase in the money supply will eventually - in the long run - _____. a. decrease the price level by more than 7% b. increase the price level by 7% c. increase the price level by more than 7% d. increase real GDP by 7%

b. increase the price level by 7%

Suppose earlier this morning, your broker recommended you sell German federal government bonds from your personal investment portfolio. Ceteris paribus, it follows that she thinks the market is currently _______ German bonds, and she expects German bond prices to _______ in the future. a. over pricing ; increase b. over pricing ; decrease c. under pricing ; increase d. under pricing ; decrease

b. over pricing ; decrease

In the loanable funds market, ceteris paribus, it typically follows that when the Federal government runs a budget deficit, there will be _____ pressure on interest rates and _____ on private investment. This is referred to as _____. a. upward ; upward ; crowding out b. upward ; downward ; crowding out c. downward ; downward ; financial intermediation d. downward ; upward ; financial intermediation

b. upward ; downward ; crowding out

Suppose nominal GDP in Chocaville in 2019 was $21.4. Some of the components on the expenditure side of the equation were as follows: consumption = $14.4; investment = $3.7; government purchase of goods and services = $3.7; and exports = $1.9, all in trillions of (nominal) Chocaville dollars. From this information, it follows that the nominal value of imports in 2019 was: a. $0.0 trillion b. $0.4 trillion c. $2.3 trillion d. $4.2 trillion

c. $2.3 trillion

In 2016 the U.S. federal minimum wage was $7.25 an hour, and the CPI was 237.5. In 1938 the minimum wage was $0.25 and CPI was 14.1. Ceteris paribus, it follows that the value of the minimum wage in 1938 as measured in 2016 dollars was: a. $0.29 b. $0.43 c. $4.21 d. $12.22

c. $4.21

In 1973, Xavier Mazza signed a contract with the Boston Celtics for $125,000 a year, and CPI was 32.4. Roman Mazza, a pitcher, signed a contract with the Red Sox for $35,000,000 a year, and the CPI in 2005 was 237.5. How much was Roman's salary in 1973 dollars? a. $17,052 b. $916,280 c. $4.8 million d. $259.8 million

c. $4.8 million

Suppose that in the state of Chocaville there are final goods produced in the economy - milk and diapers. Suppose the economy produces 20 units of milk and 5 units of diapers in 2000 (base year), and 25 units of milk and 10 units of diapers in 2010. Further suppose the price of milk was $2.00 per unit in 2000, and $3.00 per unit in 2010; whereas the price of a diaper was $1.00 in 2000 and $2.00 in 2010. What was the nominal GDP for Chocaville in 2010? a. $60.00 b. $70.00 c. $95.00 d. $140.00

c. $95.00

Suppose that in the state of Chocaville there are final goods produced in the economy - milk and diapers. Suppose the economy produces 20 units of milk and 5 units of diapers in 2000 (base year), and 25 units of milk and 10 units of diapers in 2010. Further suppose the price of milk was $2.00 per unit in 2000, and $3.00 per unit in 2010; whereas the price of a diaper was $1.00 in 2000 and $2.00 in 2010. The GDP deflator for Chocaville, for 2010, is _____ ; and it follows that Chocaville experiences _____. a. 63.2 ; deflation b. 147.4 ; infaltion c. 158.3 ; inflation d. 211,1 ; inflation

c. 158.3 ; inflation

Suppose that after graduating in 2023 you accepted a job that paid $85,000 annually, and suppose you remained there for ten years - through the end of 2033. Further suppose that during those years your salary increased at an average annual compounded rate of 2.15%; while during that same period the CPI went from 215 to 270. It follows that the annual compounded rate of inflation between 2023 and 2033 was ____, and it follows that your real income was ____. a. 1.52% ; increased b. 2.56% ; increased c. 2.30% ; decreased d. 2.56% ; decreased

c. 2.30% ; decreased

Suppose country ABC has a total population of 100 and a working age population of 50 people. Of the working age population there are 10 who are not employed and not actively seeking work. There are 30 people who was employed. There are also 10 people who are not employed but are actively seeking work. What is the official unemployment rate in ABC? a. 50% b. 40% c. 25% d. 20%

c. 25%

Suppose the CPI accurately measures inflation, and at the end of 2000 the CPI in Chocaville was 113.7. If the CPI at the end of 2001 was 111.2, then ceteris paribus, it follows that Chocaville experienced an _____ rate of _____ in 2001. a. Deflation ; 2.22% b. Inflation ; 2.25% c. Deflation ; 2.20% d. Inflation ; 2.50%

c. Deflation ; 2.20%

The real GDP of country ABC is $75. The population of ABC is 3. The real GDP of country XYZ is $100. The population of XYZ is 5. Ceteris paribus, it follows that the ____ in ABC is ____ than it is in XYZ. a. Standard of living ; is less b. Inflation rate ; is less c. Standard of living ; is greater d. Inflation rate ; is greater

c. Standard of living ; is greater

The nation state of Chocaville produces one final good: dog food. With other conditions remaining the same, which of the scenarios below will unambiguously lead to an increase in nominal GDP in Chocaville? a. The price of dog food increases, and the quantity of dog food decreases b. The price of dog food decreases, and the quantity of dog food decreases c. The price of dog food increases, and the quantity of dog food increases d. The price of dog food decreases, and the quantity of dog food increases

c. The price of dog food increases, and the quantity of dog food increases

Suppose a ten-year bond with a $10,000 face value pays a 5.0% annual coupon (at the end of the year), has 2 years left to maturity, and has a discount rate of 6.5%. Further suppose you purchase this bond, but then, after you purchase it, you discover that the credit (default) risk on the bond has increased. Ceteris paribus, it follows that the present value (i.e. the market price) would _____, and the yield would _____. a. increase ; decrease b. increase ; increase c. decrease ; increase d. decrease ; decrease

c. decrease ; increase

Suppose the required reserve ratio increased from 40% to 100%, and the banks kept no excess reserves. Ceteris paribus, it follows that the money (or deposit) multiplier would: a. increase from 2.5 to 3 b. increase from 2.5 to 5 c. decrease from 2.5 to 1 d. decrease from 1/5 to 1/2.5

c. decrease from 2.5 to 1

If the Fed is increasing the required reserve ratio, then one would expect, ceteris paribus, that this activity would: (1) put ________ pressure on the money supply; and (2) in the short run put ________ pressure on nominal interest rates. a. upward ; upward b. downward ; downward c. downward ; upward d. upward ; downward

c. downward ; upward

Which of the following is the best example of a good or service that would be considered non rival and non excludable? a. your breakfast b. a congested interstate highway c. the United States Navy d. Grandma's dentures

c. the United States Navy

Ceteris paribus, if the Fed increases the money supply, it follows that in the short run there will be _____ pressure on the price level and _____ pressure on nominal interest rates. a. upward ; upward b. downward ; upward c. upward ; downward d. downward ; downward

c. upward ; downward

Suppose the market for tea is characterized by a downward sloping demand curve and an upward sloping supply curve, and suppose there is an excise tax on tea. Ceteris paribus, which of the following is most likely to lead to an increase in total surplus in the tea market? a. when the government increases the excise tax on tea b. when the government imposes a sales tax on tea c. when the government removes the excise tax on tea d. both A and B are correct

c. when the government removes the excise tax on tea

If the reserve ratio is 1/4 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by: a. $90 b. $150 c. $160 d. $480

d. $480

Suppose your economist tells you the free market demand for X is given by P = 30 - 3X and the free market supply of X is given by P = 10 + 2X. Ceteris paribus, the equilibrium quantity exchanged in this market is _____ and the equilibrium price is _____. (P is price, X is quantity) a. 20 ; 50 b. 8 ; 6 c. 8 ; 26 d. 4 ; 18

d. 4 ; 18

The money supply grew at an average annual compounded rate of 7%, velocity was constant, the nominal interest rate averaged 4%, and real output grew at an average annual rate of 3%. According to the Quantity Theory of Money, inflation averaged _____ per annum, and the real interest rate was _____. a. 7% ; 0% b. 3% ; 3% c. 7% ; 4% d. 4% ; 0%

d. 4% ; 0%

You deposit $1,000 into a savings account, and a year later you have $1,050. Meanwhile, the CPI rises from 100 to 102. In this case, the nominal interest rate is ____ percent, and the real interest rate is ____ percent. a. 1 ; 5 b. 3 ; 5 c. 5 ; 1 d. 5 ; 3

d. 5 ; 3

Suppose country ABC has a total population of 100 and a working age population of 50 people. Of the working age population there are 10 who are not employed and not actively seeking work. There are 30 people who was employed. There are also 10 people who are not employed but are actively seeking work. What is the labor force rate in ABC? a. 20% b. 50% c. 60% d. 80%

d. 80%

Suppose the market for pizza is characterized by a downward sloping demand curve and an upward sloping supply curve. An excise tax to be collected by pizza sellers is imposed on this market. Ceteris paribus, it follows that the consumer surplus will _____, and the producer surplus will _____. a. Increase ; increase b. Increase ; decrease c. Decrease ; increase d. Decrease ; decrease

d. Decrease ; decrease

The nation state of Chocaville produces one final good: dog food. With other conditions remaining the same, which of the scenarios below will unambiguously lead to an increase in real GDP in Chocaville? a. The price of dog food decreases b. The price of dog food increases c. The quantity of dog food decreases d. The quantity of dog food increases

d. The quantity of dog food increases

In the National Income and Product Accounts, which of the following is a component of the income approach to calculating GDP? a. Consumption b. Investment c. Government expenditures d. Wages and salaries

d. Wages and salaries

Which of the following statements about real and nominal interest rates is correct? a. If the nominal interest rate is 5% and the inflation rate is 2%, then the real interest rate is -3% b. If the nominal interest rate is 4% and the inflation rate is 3%, then the real interest rate is 7% c. When the inflation rate is zero, ceteris paribus, the nominal interest rate will be less than the real interest rate. d. When the inflation rate is positive, ceteris paribus, the nominal interest rate will be greater than the real interest rate.

d. When the inflation rate is positive, ceteris paribus, the nominal interest rate will be greater than the real interest rate.

Ceteris paribus, to _____ the money supply and _____ nominal interest rates, the Fed could _____. a. increase ; decrease ; sell government securities to commercial banks b. increase ; decrease ; increase the discount rate c. decrease ; decrease ; decrease the required reserve ratio d. decrease ; increase ; increase the required reserve ratio

d. decrease ; increase ; increase the required reserve ratio

The primary economic function of the financial system is to provide financial intermediation, which means: a. keep the inflation rate at zero, ceteris paribus b. keep the inflation rate at the Treasury's target rate, ceteris paribus c. matching one's personal consumption expenditures with another person's capital expenditures d. matching one person's borrowing with another person's saving

d. matching one person's borrowing with another person's saving

If nominal GDP is $400, real GDP is $200, and the money supply is $100, then: a. price level is 1/2 and velocity is 2 b. price level is 1/2 and velocity is 4 c. price level is 2 and velocity is 2 d. price level is 2 and velocity is 4

d. price level is 2 and velocity is 4

Suppose you overheard a conversation in which an economist referred to the free rider problem. It is most likely the case that they were referring to a situation in which an individual: a. had a tax imposed on the market in which they sold goods or services b. experienced a deadweight loss, which is another expression for free-riding c. experienced a loss in producer surplus d. received a publicly provided good/service without paying taxes for it

d. received a publicly provided good/service without paying taxes for it

Ceteris paribus, goods with positive externalities tend to be _____ by the free market private sector. Thus, in modern developed economies these goods are often _____ by the government. a. over supplied ; taxed b. under supplied ; taxed c. over supplied ; supplied or subsidized d. under supplied ; supplied or subsidized

d. under supplied ; supplied or subsidized

As an instrument of monetary policy, the Fed decreases the interest rate it pays on commercial bank reserves held at the Fed. Ceteris paribus, it follows that the commercial banks will want to hold fewer reserves at the Fed; thus there would be _____ pressure on the money supply and _____ pressure on nominal interest rates. a. upoward ; upward b. downward ; downward c. downward ; upward d. upward ; downward

d. upward ; downward