Practice Questions

Net exports usually ________ when the U.S. economy is in a recession and ________ when the U.S. economy is expanding. a. decrease; increase b. increase; decrease c. decrease; decrease d. increase; increase

B

The nominal interest rate is the a. interest rate corrected for inflation. b. interest rate as usually reported by banks. c. real rate of return to the lender. d. real cost of borrowing to the borrower.

B

As recessions begin, production a. and unemployment both rise. b. rises and unemployment falls. c. falls and unemployment rises. d. and unemployment both fall.

C

Investment spending will increase when a. business cash flow increases. b. firms become more pessimistic about earning future profits. c. the interest rate rises. d. the corporate income tax increases.

A

Other things being equal, as a country's price level falls, the country's real exchange rate a. falls. b. rises. c. is unaffected. d. could either rise or fall.

A

According to the quantity equation if P = 4 and Y= 800, which of the following pairs could M and V be? a. 800, 4 b. 600, 3 c. 400, 2 d. 200, 1

A

An increase in the money supply a. and a decrease in the income tax both cause aggregate demand to shift right. b. and the investment tax credit both cause aggregate demand to shift left. c. causes aggregate demand to shift right, while a decrease in taxes causes aggregate demand to shift left. d. causes aggregate demand to shift left, while a decrease in taxes causes aggregate demand to shift right.

A

Assuming no crowding-out, a $100 billion increase in government expenditures shifts aggregate demand a. right by more than $100 billion. b. right by $100 billion. c. left by more than $100 billion. d. left by $100 billion.

A

Deflation will a. increase aggregate expenditure. b. increase aggregate demand. c. decrease aggregate expenditure. d. decrease aggregate demand.

A

During a(n) ________ many firms experience increased profits, which increases ________ and investment spending. a. expansion; cash flow b. recession; business confidence c. expansion; government spending d. recession; cash flow

A

Foreign-produced goods and services that are sold domestically are called a. imports. b. exports. c. net imports. d. net exports.

A

If GDP equals $2,450 billion, consumption expenditure equals $1,390 billion, government expenditure equals $325 billion, and investment equals $510 billion. What is net exports? a. $225 billion b. $510 billion c. $735 billion d. $1,390 billion

A

In the long run, changes in the money supply affect only a. prices. b. output. c. unemployment rates. d. All of the above.

A

In the short run, open-market purchases by the Fed a. increase the price level and real GDP. b. decrease the price level and real GDP. c. increase the price level and decrease real GDP. d. decrease the price level and increase real GDP.

A

Ted is working part time. Alice was laid off, and has not worked for several weeks. Who is counted as employed by the BLS? a. only Ted b. only Alice c. both Ted and Alice d. neither Ted nor Alice

A

The natural rate of unemployment includes a. both frictional and structural unemployment. b. neither frictional nor structural unemployment. c. structural, but not frictional unemployment. d. frictional, but not structural unemployment.

A

When the aggregate demand curve and the short-run aggregate supply curve intersect, a. the economy is in short-run macroeconomic equilibrium. b. structural and frictional unemployment equal zero. c. inflation must be increasing. d. the long-run aggregate supply curve must also intersect at the same point.

A

When the money market is drawn with the nominal interest rate (i) on the vertical axis, a decrease in the reserve requirement would tend to shift the money supply curve to the a. right, lowering the interest rate. b. right, raising the interest rate. c. left, raising interest rate. d. left, lowering the interest rate.

A

Which of the following examples of production of goods and services would count as part of U.S. GDP? a. Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery store in Canada. b. Ian, an American citizen, grows peaches for his family in the back yard of their Atlanta home. c. Brian, an American citizen, grows marijuana in Mexico and sells it in Europe d. None of the above examples of production would count as part of U.S. GDP.

A

Which of the following would not be associated with an adverse (or negative) supply shock? a. the long-run Phillips curve shifts left b. unemployment rises c. the price level rises d. output falls

A

An increase in the saving rate would, other things being equal, a. increase growth more for a poor country than a rich country, and raise growth permanently. b. increase growth more for a poor country than a rich country, but raise growth temporarily. c. increase growth more for a rich country than a poor country, and raise growth permanently. d. increase growth more for a rich country than a poor country, but raise growth temporarily.

B

Assume an economy experienced a higher inflation rate, as measured by the CPI, between 2004 and 2005 than it experienced between 2003 and 2004. Which of the following scenarios is consistent with this assumption? a. The CPI was 100 in 2003, 110 in 2004, and 120 in 2005. b. The CPI was 100 in 2003, 110 in 2004, and 124 in 2005. c. The CPI was 110 in 2003, 150 in 2004, and 200 in 2005. d. All of the above are correct.

B

Assume the United States is the "domestic" country and China is the "foreign" country. Which of the following might increase the real exchange rate between the United States and China? a. an appreciation of the yuan b. an increase in the price level in the United States c. a depreciation of the dollar d. an increase in the price level of China

B

Assuming no change in the nominal exchange rate, how will a decrease in the price level in the United States relative to France affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.) a. The real exchange rate will be unaffected. b. The real exchange rate will fall. c. The real exchange rate will rise. d. The impact on the real exchange rate cannot be predicted.

B

Fluctuating exchange rates can alter a multinational firm's profits and losses. German company Bayer produces products in Germany and sells them in the United States. If the dollar depreciates against the euro, then Bayer's sales in the United States should ________ because it will take ________ U.S. dollars to purchase the German-made products. a. rise; more b. fall; more c. fall; fewer d. rise; fewer

B

If a country's saving rate declined, then other things the same, in the long run it would have a. lower productivity, but not lower real GDP per person. b. lower productivity and lower real GDP per person. c. lower real GDP per person, but not lower productivity d. neither lower productivity nor lower real GDP per person.

B

If purchasing-power parity holds, a dollar will buy a. more goods in foreign countries than in the United States. b. as many goods in foreign countries as it does in the United States. c. fewer goods in foreign countries than it does in the United States. d. None of the above is implied by purchasing-power parity.

B

If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve? a. This will shift the aggregate demand curve to the left. b. This will shift the aggregate demand curve to the right. c. This will move the economy down along a stationary aggregate demand curve. d. This will move the economy up along a stationary aggregate demand curve.

B

If the stock market booms a. household spending increases. To offset the effects of this on the price level and real GDP, the Fed would increase the money supply. b. household spending increases. To offset the effects of this on the price level and real GDP, the Fed would decrease the money supply. c. household spending decreases. To offset the effects of this on the price level and real GDP, the Fed would increase the money supply. d. household spending decreases. To offset the effects of this on the price level and real GDP, the Fed would decrease the money supply.

B

Which of the following best describes the "wealth effect"? a. When the price level falls, the purchasing power of household wealth falls. b. When the price level falls, the purchasing power of household wealth rises. c. When the price level falls, the nominal value of household wealth falls. d. When the price level falls, the nominal value of household wealth rises.

B

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise? a. the multiplier effect b. the crowding-out effect c. the accelerator effect d. None of the above is correct.

B

Which of the following will raise consumer expenditures? a. an increase in interest rates b. an increase in expected future income c. an increase in the price level d. a general decline in housing prices

B

Workers expect inflation to rise from 3% to 5% next year. As a result, this should a. move the economy up along a stationary short-run aggregate supply curve. b. shift the short-run aggregate supply curve to the left. c. move the economy down along a stationary short-run aggregate supply curve. d. shift the short-run aggregate supply curve to the right.

B

Which of the following causes of unemployment is not associated with a wage rate above the equilibrium level? a. Unions b. efficiency wages c. job search d. minimum-wage laws

C

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil? a. $0.89 b. $2.25 c. $4.50 d. $8.00

C

A steep short-run aggregate supply (SRAS) curve a. means the majority of prices in the economy are not flexible. b. implies that expansionary fiscal policy will have a larger effect on GDP than if SRAS were flatter. c. implies that an expansionary open market operation by the Fed will have a bigger impact on the price level than if SRAS were flatter. d. means that a contractionary open market operation will have no impact on economy in the short run.

C

According to new growth theory, a. physical capital is nonexcludable. b. knowledge capital is rival and excludable. c. knowledge capital is subject to increasing returns. d. knowledge capital is excludable.

C

Assume that the MPC is 0.75. The government spending multiplier is a. .75. b. 4/3. c. 4. d. 7.5

C

Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 195 for 2005. Ruth's 1931 salary was equivalent to a 2005 salary of about a. $536,000. b. $828,000. c. $1,026,000. d. $1,216,000.

C

During the past century the average growth rate of U.S. real GDP per person was about 2%. This implies that it doubled about every a. 100 years on average. b. 70 years. c. 35 years. d. 25 years.

C

Higher personal income taxes a. increase aggregate demand. b. increase disposable income. c. decrease aggregate demand. d. both B and C 

C

If firms are more pessimistic and believe that future profits will fall and remain weak for the next few years, then a. investment spending will rise and then fall. b. investment spending will rise. c. investment spending will fall. d. investment spending will remain unaffected.

C

If the CPI in the US is 175, the CPI in Sweden is 210, and the real exchange rate is 5, what is the nominal exchange rate, expressed as the number of Swedish krona per US dollar? a. 1/6 b. 5 c. 6 d. Cannot be determined from the information given

C

If the Fed conducts open-market purchases which of these three increases in the short run: interest rate, prices, and investment spending? a. interest rates, prices, and investment spending b. interest rates and prices, not investment spending c. prices and investment spending, not interest rates d. interest rates, not prices nor investment spending

C

If the economy is in long-run equilibrium and then the Fed sells bonds, a. the price level will increase and real GDP will decrease. b. the real exchange rate will increase in the short run. c. the price level will decrease and real GDP will be unchanged in the long run. d. the price level will decrease and unemployment will decrease in the long run.

C

If the marginal propensity to consume (MPC) goes up, then a. a given increase in government spending will have less impact on equilibrium GDP. b. a given increase in taxes will have less impact on equilibrium GDP. c. a given increase in government spending will have more impact on equilibrium GDP. d. a given increase in the money supply will result in a smaller increase in total deposits.

C

In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Italian adult non-institutionalized population was 45.020 million, the labor force was 24.065 million, and the number of people employed was 22.105 million. According to these numbers, the Italian labor-force participation rate and unemployment rate were about a. 45.1%, 8.1% b. 45.1%, 4.4% c. 53.5%, 8.1% d. 53.5%, 4.4%

C

In the CPI, goods and services are weighted according to a. how long a market has existed for each good or service. b. the extent to which each good or service is regarded by the government as a necessity. c. how much consumers buy of each good or service. d. the number of firms that produce and sell each good or service.

C

In the short run, an increase in the money supply causes interest rates to a. increase, and aggregate demand to shift right. b. increase, and aggregate demand to shift left. c. decrease, and aggregate demand to shift right. d. decrease, and aggregate demand to shift left.

C

On the long-run aggregate supply curve, a. a decrease in the price level increases the aggregate quantity of GDP supplied. b. a decrease in the price level decreases the aggregate quantity of GDP supplied. c. a decrease in the price level has no effect on the aggregate quantity of GDP supplied. d. a decrease in the price level decreases the level of potential GDP.

C

Other things being equal, aggregate expenditure increases if a. real wealth falls. b. the interest rate rises. c. the dollar depreciates. d. None of the above is correct.

C

Political Instability Abroad Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. Refer to Political Instability Abroad. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand? a. Net exports would rise and so U.S. aggregate demand would fall. b. Net exports would rise and so U.S. aggregate demand would rise. c. Net exports would fall and so U.S. aggregate demand would fall. d. Net exports would fall and so U.S. aggregate demand would rise.

C

Purchasing-power parity theory does not hold at all times because a. many goods are not easily transported. b. the same goods produced in different countries may be imperfect substitutes for each other. c. Both a and b are correct. d. prices are different across countries.

C

Stagflation occurs when a. inflation falls and GDP falls. b. inflation falls and GDP rises. c. inflation rises and GDP falls. d. inflation rises and GDP rises.

C

The Big Mac Index tests the accuracy of the purchasing power parity theory. In July 2009, The Economist reported that the average price of a Big Mac in the U.S. was $3.57. In Mexico, the average price of a Big Mac at that time was 33 pesos. What is the "implied exchange rate" between the peso and the dollar? a. 0.108 pesos per dollar b. 8.25 pesos per dollar c. 9.24 pesos per dollar d. 11.78 pesos per dollar

C

The Federal Funds rate is the interest rate a. the Federal Reserve charges for loans it makes to the federal government. b. the Federal Reserve charges banks for short-term loans. c. banks charge each other for short-term loans of reserves. d. on newly issued one-year Treasury bonds.

C

The banking system currently has $50 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10%. If the Fed raises the reserve requirement to 12.5% and at the same time sells $10 billion dollars of bonds, then by how much does the money supply change? a. It falls by $20 billion. b. It falls by $110 billion. c. It falls by $180 billion. d. None of the above is correct.

C

The long-run adjustment to a negative supply shock results in a. workers demanding higher wages. b. the price level rising. c. the short-run aggregate supply curve shifting down. d. unemployment rising.

C

Which of the following shifts aggregate demand to the right? a. an increase in government expenditures or a decrease in the price level b. a decrease in government expenditures or an increase in the price level c. an increase in government expenditures, but not a change in the price level d. a decrease in the price level, but not an increase in government expenditures

C

Which of the following would cause the short-run aggregate supply curve to shift to the right? a. a decrease in inflation expectations b. an increase in interest rates c. a technological advance d. an increase in the price level

C

All other things being equal, if the Fed buys bonds a. aggregate expenditure will decrease. b. aggregate demand will decrease. c. aggregate expenditure will increase d. aggregate demand will increase

D

An increase in interest rates due to an increase in the price level will cause ________ in _________, whereas an increase in interest rates due to monetary policy will cause _________. a. an increase; aggregate expenditure; a decrease in aggregate demand b. a decrease; aggregate expenditure; an increase in aggregate demand c. a decrease; aggregate demand; a decrease in aggregate expenditure d. a decrease; aggregate expenditure; a decrease in aggregate demand

D

As the price level rises a. Interest rates fall. b. consumption, investment and net exports will rise. c. the money supply curve will shift to the left. d. Interest rates rise.

D

Consumer spending ________ and investment spending ________. a. is very erratic; is also erratic, but less erratic than consumer spending b. follows a smooth trend; is the most stable component of aggregate expenditure c. is very volatile and subject to fluctuations; follows a smooth trend d. follows a smooth trend; is more volatile and subject to fluctuations

D

If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what is real GDP? a. $312.5 billion b. $207.5 billion c. $31.25 billion d. None of the above is correct.

D

If expected inflation rises, the long-run Phillips curve will a. shift to the left. b. shift to the right. c. become negatively sloped. d. not be affected.

D

If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will a. rise substantially and investment and consumer spending will rise substantially. b. fall substantially and investment and consumer spending will change very little. c. fall substantially and investment and consumer spending will fall substantially. d. change very little and investment and consumer spending will change very little.

D

If money growth does not affect real GDP, and velocity is stable, an increase in the money supply creates a proportional increase in a. real GDP only. b. nominal GDP only. c. the price level only. d. Both the price level and nominal GDP.

D

If the economy begins in long-run equilibrium, a decrease in investment causes the price level to ________ in the short run and ________ in the long run. a. increase; decrease b. decrease; increase c. increase; increase further d. decrease; decrease further

D

If the economy is currently in short-run equilibrium at a level of GDP that is above potential GDP, which of the following would move the economy back to potential GDP? a. A decrease in the value of the dollar relative to other currencies b. A decrease in interest rates c. An increase in business confidence d. A decrease in wealth

D

If the exchange rate changes from $1.45 = 1 euro to $1.37 = 1 euro, then a. both the euro and dollar have depreciated. b. both the euro and dollar have appreciated. c. the euro has appreciated and the dollar has depreciated. d. the euro has depreciated and the dollar has appreciated.

D

If the per-worker production function shifts down, a. an economy can increase its real GDP per hour worked without changing the level of capital per hour worked. b. positive technological change has occurred in the economy. c. the per-worker production function becomes steeper. d. it now takes more capital per hour worked to get the same amount of real GDP per hour worked.

D

Other things being equal, an increase in the price level makes the dollars people hold worth a. more, so they spend more. b. more, so they spend less. c. less, so they spend more. d. less, so they spend less.

D

Suppose the reserve requirement is 10%, and a bank has $4,000 in checking deposits and has loaned out all it can given the reserve requirement. a. It has $40 in reserves and $3,960 in loans. b. It has $400 in reserves and $3,600 in loans. c. It has $444 in reserves and $3,556 in loans. d. None of the above is correct.

D

The economy's inflation rate is the a. price level in the current period. b. change in the price level from the previous period. c. change in the gross domestic product from the previous period. d. percentage change in the price level from the previous period.

D

The largest source of funds for corporate investment is a. bank loans. b. bonds. c. shares of stock. d. retained earnings.

D

The level of real GDP per person a. differs widely across countries, but the growth rate of real GDP per person is similar across countries. b. is very similar across countries, but the growth rate of real GDP per person differs widely across countries. c. and the growth rate of real GDP per person are similar across countries. d. and the growth rate of real GDP per person vary widely across countries.

D

U.S. net exports fall when a. the inflation rate is lower in the United States relative to other countries. b. the price level in the United States falls relative to the price level in other countries. c. the value of the U.S. dollar decreases relative to other currencies. d. the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.

D

When an economy faces diminishing returns, a. the per-worker production function shifts to the left. b. the per-worker production function shifts to the right. c. the slope of the per-worker production function becomes steeper as capital per hour worked increases. d. the slope of the per-worker production function becomes flatter as capital per hour worked increases.

D

Which of the following is correct concerning the long-run Phillips curve? a. Its position is determined primarily by monetary factors. b. If it shifts right, long-run aggregate supply shifts right. c. It cannot be changed by any government policy. d. Its position depends on the natural rate of unemployment.

D

Which of the following is not part of the reason that the AD curve slopes down? a. As the price level increases, the real value of wealth declines. b. As the price level decreases, the real exchange rate decreases. c. As the price level increases, the real interest rate increases. d. As the price level decreases, the money supply curve shifts to the right.

D