Test 2 guide

21) Which of the following does NOT shift the short- run aggregate supply curve? A) The price level changes and the money wage rate is constant. B) The money wage rate changes and the price level is constant. C) The money wage rate and the price level change by the same percentage. D) Neither the price level nor the money wage rate changes

A) The price level changes and the money wage rate is constant.

22) Which of the following occurs while moving along a short- run aggregate supply curve? A) The price level changes and the money wage rate is constant. B) The money wage rate changes and the price level is constant. C) The money wage rate and the price level change by the same percentage. D) Neither the price level nor the money wage rate changes.

A) The price level changes and the money wage rate is constant.

41) An increase in the expected inflation rate leads to ________ the short- run Phillips curve. A) an upward shift of B) a movement upward along C) a movement downward along D) a downward shift of

A) an upward shift of

6) If disposable income increases, people will decide to ________ saving, the supply of loanable funds will ________ and the real interest rate will ________. A) decrease; decrease; rise B) decrease; increase; fall C) increase; increase; fall D) increase; decrease; rise

A) decrease; decrease; rise

28) An economy currently has an inflationary gap. An increase in the money wage rate will ________the inflationary gap and ________ the price level. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase

A) decrease; increase

2) Disposable income is A) income minus taxes plus transfer payments. B) total income divided by the price level. C) income plus transfer payments minus consumption expenditure. D) income minus saving.

A) income minus taxes plus transfer payments.

24) The short- run aggregate supply curve shifts leftward when the A) money wage rate increases. B) price level increases. C) general level of technology advances. D) availability of on- the- job training expands to all workers.

A) money wage rate increases.

5) If households believe their incomes will fall in the future, the result is a A) rightward shift in the supply of loanable funds curve. B) movement along the supply of loanable funds curve. C) leftward shift in the supply of loanable funds curve. D) movement along the demand for loanable funds curve.

A) rightward shift in the supply of loanable funds curve.

36) Stagflation occurs when the price level ________ and real GDP ________. A) rises; decreases B) rises; increases C) falls; increases D) falls; decreases

A) rises; decreases

32) According to real business cycle theory, workers' decisions to work now versus later depend on A) the real interest rate. B) the real wage rate today but not the real wage rate in the future. C) the money wage rate. D) labor productivity.

A) the real interest rate.

40) Which of the following leads to a rightward shift in the short- run Phillips curve? I. a reduction in the expected inflation rate II. an increase in the natural unemployment rate A) I only B) II only C) I and II D) neither I nor II

B) II only

16) Which of the following is TRUE? A) MPS - MPC = 1 B) MPS + MPC = 1 C) MPS + MPC = 0 D) MPS = MPC

B) MPS + MPC = 1

15) When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals A) 20.0. B) 0.2. C) 5. D) 0.5.

C) 5.

10) If aggregate planned expenditure exceeds real GDP A) planned consumption expenditure is less than actual consumption expenditure. B) planned investment is greater than planned saving. C) actual inventories decrease below their target. D) firms are not maximizing their profits.

C) actual inventories decrease below their target.

25) If the expected future inflation rate decreases, then A) aggregate demand increases. C) aggregate demand decreases. B) long- run aggregate supply decreases. D) short- run aggregate supply increases.

C) aggregate demand decreases.

8) The sum of the components of aggregate expenditure that are not influenced by real GDP is called A) autonomous consumption. B) the MPC. C) autonomous expenditures. D) induced expenditures.

C) autonomous expenditures.

3) Disposable income is divided into A) consumption and taxes. B) consumption, saving, and taxes. C) consumption and saving. D) the price level

C) consumption and saving.

14) The monetary expansion process from an open market operation continues until A) the discount rate is lower than market interest rates. B) the Federal Reserve takes actions to stop the process. C) excess bank reserves are eliminated. D) required reserves are eliminated.

C) excess bank reserves are eliminated.

12) The multiplier effect exists because a change in autonomous expenditure A) will undergo its complete effect in one round. B) prompts further exports. C) leads to changes in income, which generate further spending. D) leaves the economy in the form of imports.

C) leads to changes in income, which generate further spending.

12) The larger the public's currency drain from the banking system, the A) larger is the money multiplier. B) smaller is the monetary base. C) smaller is the money multiplier. D) larger is the monetary base.

C) smaller is the money multiplier.

15) When autonomous expenditure decreases, ________. A) there is a movement down along the AE curve B) the AE curve becomes less steep C) the AE curve shifts downward D) the AE curve shifts upward

C) the AE curve shifts downward

17) The opportunity cost of holding money is A) real GDP. B) the inverse of the price level multiplied by the nominal interest rate. C) the nominal interest rate. D) the price level.

C) the nominal interest rate.

35) As the money wage rate rises A) both the long- run aggregate supply curve and the short- run aggregate supply curve shift leftward. B) the short- run aggregate supply curve shifts rightward. C) the short- run aggregate supply curve shifts leftward. D) the long- run aggregate supply curve shifts rightward.

C) the short- run aggregate supply curve shifts leftward.

18) In the short run, when the Fed increases the quantity of money A) bond prices fall and the interest rate rises. B) the demand for money increases. C) the supply of money curve shifts leftward. D) bond prices rise and the interest rate falls.

D) bond prices rise and the interest rate falls.

9) One reason the aggregate expenditure curve slopes upward is because ________ increases when real GDP increases. A) government expenditure on goods and services B) exports C) investment D) consumption expenditure

D) consumption expenditure

34) Demand- pull inflation persists because of A) continuing increases in aggregate supply. B) an increase in the money wage rate D) an increase in exports 34) B) continuing increases in government expenditures. C) continuing increases in real wage rates. D) continuing increases in the quantity of money.

D) continuing increases in the quantity of money.

11) Federal Reserve policy tools include all of the following EXCEPT A) the discount rate. B) required reserve ratios. C) open market operations. D) desired reserve ratios.

D) desired reserve ratios.

13) Which of the following best describes the chain of events in the money creation process? A) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money. B) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves. C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases. D) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money.

B) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.

39) In the short run, an unexpected increase in the inflation rate leads to A) a decrease in aggregate demand. B) a lower unemployment rate. C) workers thinking the money wage rate has fallen. D) a higher unemployment rate.

B) a lower unemployment rate.

14) Which of the following makes the multiplier larger? A) an increase in the tax rate B) an increase in the marginal propensity to consume C) an increase in the marginal propensity to save D) an increase in the marginal propensity to import

B) an increase in the marginal propensity to consume

33) Which of the following is NOT a potential start of a demand- pull inflation? A) an increase in the quantity of money B) an increase in the money wage rate C) an increase in government expenditure D) an increase in exports

B) an increase in the money wage rate

9) Which of the following is NOT included in the M1 measure of money? A) checking deposits at commercial banks B) currency held in bank vaults C) checking deposits at credit unions D) currency held outside banks

B) currency held in bank vaults

1) In the very short term, planned investment ________ when GDP changes and planned consumption expenditure ________ when GDP changes. A) changes; does not change B) does not change; change C) does not change; does not change D) changes; change

B) does not change; change

11) If aggregate planned expenditure is less than real GDP then A) firms' inventories will decrease and real GDP will decrease as production falls. B) firms' inventories will increase and real GDP will decrease as production falls. C) firms increase their planned expenditure until aggregate planned expenditure increases to equal real GDP. D) consumers increase their planned expenditure until aggregate planned expenditure increases to equal real GDP.

B) firms' inventories will increase and real GDP will decrease as production falls.

10) The sum of currency and reserves of depository institutions is the ________. A) vault cash B) monetary base C) assets of the Fed D) reserves of the Fed

B) monetary base

2) A firm's decision to invest in a project is based on the A) nominal interest rate and expected total revenue. B) real interest rate and the expected profit. C) real interest rate and expected total revenue. D) nominal interest rate and the expected profit.

B) real interest rate and the expected profit.

1) When the inflation rate is positive, the A) real interest rate is greater than the nominal interest rate. B) real interest rate is less than the nominal interest rate. C) nominal interest rate is zero. D) real interest rate equals the nominal interest rate.

B) real interest rate is less than the nominal interest rate.

37) If people CORRECTLY anticipate an increase in aggregate demand, a result is A) there are no predictable results associated with an anticipated increase in aggregate demand. B) workers demanding higher money wages to keep the real wage unchanged. C) a lower rate of inflation in the current time period. D) an increase in the real value of outstanding government debt.

B) workers demanding higher money wages to keep the real wage unchanged.

7) The MPC is equal to A) △S / △C. B) △C / △YD. C) △S / △YD. D) △C / △S.

B) △C / △YD.

8) The Ricardo- Barro effect says that A) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates. B) government budget deficits resulting from an increase in government expenditure have no effect on investment but government deficits resulting from a decrease in taxes crowd out investment. C) government budget deficits crowd out private investment and thereby lower the real interest rate. D) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government.

D) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government.

31) In the real business cycle framework, a technology shock that increases investment demand and the demand for loanable funds leads to a ________ quantity of saving and a ________ real interest rate. A) lower; higher B) higher; lower C) lower; lower D) higher; higher

D) higher; higher

16) When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________. A) decrease; increase B) increase; increase C) increase; decrease D) increase; stay the same

D) increase; stay the same

4) A movement along the consumption function is the result of changes in A) the real interest rate. B) expected future income. C) increases; decreases D) increases; increases

D) increases; increases

19) In the long run, when the Fed increases the quantity of money the A) nominal interest rate falls. B) price level falls. C) real interest rate rises. D) no real variable changes.

D) no real variable changes.

20) When the labor market is at full employment A) the price level is stable. B) the price level equals the potential price level. C) the short run aggregate supply curve is horizontal. D) real GDP equals potential GDP.

D) real GDP equals potential GDP

30) The real business cycle theory asserts that changes in ________ lead to changes in ________. A) the quantity of money; real GDP B) animal spirits; real GDP C) consumption expenditure; real GDP D) technology; productivity

D) technology; productivity

38) Moving along a short- run Phillips curve A) the inflation rate is constant. C) unemployment is constant. B) the price level is constant. D) the expected inflation rate is constant.

D) the expected inflation rate is constant.