Practice Exam #1

According to Keynes, consumption is primarily determined by a. the interest rate. b. wealth. c. current income. d. future income.

c

Keynes's theory of liquidity preference holds that: I. As interest rates rise, people desire to hold fewer of their assets in very liquid form. II. As nominal incomes rise, people desire to hold fewer liquid assets for the purpose of making transactions. a. I only b. II only c. IandII d. Neither I nor II

a

Using the liquidity-preference model, when the Federal Reserve increases the money supply a. the equilibrium interest rate decreases. b. the aggregate-demand curve shifts to the left. c. the quantity of goods and services demanded is unchanged for a given price level. d. the long-run aggregate-supply curve shifts to the right.

a

When the price level rises more than expected, a firm with a sticky price will sell its output at a price that is a. less than it desires and increase its production. b. less than it desires and decrease its production. c. more than it desires and increase its production. d. less than it desires and decrease its production.

a

Which of the following decreases in response to the interest-rate effect from an increase in the price level? a. both investment and consumption b. consumption but not investment c. investment but not consumption d. neither investment nor consumption

a

Why does the money demand curve slope downward? a. A higher nominal interest rate increases the opportunity cost of holding money. b. Higher real income causes people to demand more money. c. Higher interest rates are caused by contractionary monetary policy, which reduces M. d. Higher nominal income causes people to demand more money.

a

If the Federal Reserve lowers the reserve requirement, interest rates ____________ and the economy _______________. a. Fall; moves along its AD curve b. Fall; shifts to a new AD curve c. Rise; moves along its AD curve d. Rise; shifts to a new AD curve

b

If, at some interest rate, the quantity of money supplied exceeds the quantity of money demanded, people will want to _________ interest-bearing assets, causing the interest rate to _____________. a. Buy; increase b. Buy; decrease c. Sell; increase d. Sell; decrease

b

In 1986, OPEC countries increased their production of oil. This caused a. the price level to rise. b. aggregate supply to shift right. c. unemployment to rise. d. None of the above is correct.

b

Other things the same, an increase in the price level causes the interest rate to a. increase, the dollar to depreciate, and net exports to increase. b. increase, the dollar to appreciate, and net exports to decrease. c. decrease, the dollar to depreciate, and net exports to increase. d. decrease, the dollar to appreciate, and net exports to decrease.

b

Other things the same, if the price level falls, people a. increase foreign bond purchases, so the dollar appreciates. b. increase foreign bond purchases, so the dollar depreciates. c. increase domestic bond purchases, so the dollar appreciates. d. increase domestic bond purchases, so the dollar depreciates.

b

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as a decrease in government spending, then we would expect that in the short-run, a. Real GDP will rise and the price level might rise, fall, or stay the same. b. Real GDP will fall and the price level might rise, fall, or stay the same. c. The price level will rise, and real GDP might rise, fall or stay the same. d. The price level will fall and real GDP might rise, fall or stay the same.

b

The money (liquidity) market a. helps explain why aggregate supply is perfectly inelastic in the long run. b. helps explain the interest-rate effect on the level of aggregate expenditure. c. helps explain the effect of budget deficits on the level of investment spending. d. helps explain why Milton Friedman was so rich.

b

When the price level increases, the real value of people's money holdings a. falls, so they buy more. b. falls, so they buy less. c. rises, so they buy more. d. rises, so they buy less.

b

An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level a. rises, shifting aggregate demand right. b. rises, shifting aggregate demand left. c. falls, shifting aggregate supply right. d. falls, shifting aggregate supply left.

c

An economy initially in LR equilibrium experiences a negative supply shock (a sharp rise in oil prices, for example). As a result, its ______________ curve shifts back and to the left, and ______________ falls. a. SRAS; the price level b. AD; the price level c. SRAS; real output d. AD; real output

c

If the MPC is 2/3 then the multiplier is a. 3/2, so a $100 increase in government spending increases aggregate demand by $150. b. 3/2, so a $100 increase in government spending increases aggregate supply by $150. c. 3, so a $100 increase in government spending increases aggregate demand by $300. d. 3, so a $100 increase in government spending increases aggregate supply by $300.

c

If the stock market booms, then a. aggregate demand increases, which the Fed could offset by increasing the money supply. b. aggregate supply increases, which the Fed could offset by increasing the money supply. c. aggregate demand increases, which the Fed could offset by decreasing the money supply. d. aggregate supply increases, which the Fed could offset by decreasing the money supply.

c

Other things staying the same, an increase in the price level induces people to demand a. Less money and the interest rate rises. b. Less money and the interest rate falls. c. More money and the interest rate falls. d. More money and the interest rate rises.

d

The long-run aggregate supply curve shifts right if a. immigration from abroad increases. b. the capital stock increases. c. technology advances. d. All of the above are correct.

d

The long-run effect of an increase in government spending is to raise a. both real output and the price level. b. real output and lower the price level. c. real output and leave the price level unchanged. d. the price level and leave real output unchanged.

d

Which of the following is correct? a. An increase in the money supply causes the interest rate to decrease so that aggregate demand shifts left. b. An increase in stock prices reduces consumption spending so that aggregate demand shifts left. c. A decrease in the price level causes the exchange rate to rise so that aggregate demand shifts left. d. A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left.

d