Macro Econ Practice exam questions
An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand? a. The aide thought the tax cut would be permanent, but the actual tax cut was temporary. b. The actual MPC was larger than the MPC the aide used to compute the multiplier. c. The increase in income resulted in investment rising more than the aide had anticipated. d. The increase in income shifted money demand less than the aide had anticipated.
A
As the price level decreases, the value of money a. increases, so people want to hold less of it. b. increases, so people want to hold more of it. c. decreases, so people want to hold more of it. d. decreases, so people want to hold less of it
A
If Thailand has a trade surplus, then a. foreign countries purchase fewer Thai assets than Thailand purchases from them. This makes Thai saving greater than Thai domestic investment. b. foreign countries purchase more Thai assets than Thailand purchases from them. This makes Thai saving smaller then Thai domestic investment. c. foreign countries purchase fewer Thai assets than Thailand purchases from them. This makes Thai saving greater than Thai domestic investment. d. foreign countries purchase more Thai assets than Thailand purchases from them. This makes Thai saving greater than Thai domestic investment
A
If people believe that the central bank is going to reduce inflation a. the short-run Phillips curve shifts left and the sacrifice ratio will fall. b. the short-run Phillips curve shifts left and the sacrifice ratio will rise. c. the short-run Phillips curve shifts right and the sacrifice ratio will fall. d. the short-run Phillips curve shifts right and the sacrifice ratio will rise.
A
If the U.S. has a trade deficit and the nominal exchange rate depreciates, then other things the same a. the trade deficit falls and net capital outflows rise. b. the trade deficit falls and net capital outflows fall. c. the trade deficit rises and net capital outflow falls. d. the trade deficit rises and net capital outflow rises.
A
If the dollar appreciates because of speculation or government policy U.S. a. aggregate demand shifts left. U.S. aggregate demand also shifts left if other countries experience recessions. b. aggregate demand shifts right. U.S. aggregate demand also shifts right if other countries experience recessions. c. aggregate demand shifts right. U.S. aggregate demand shifts left if other countries experience recessions. d. aggregate demand shifts left. U.S. aggregate demand shifts right if other countries experience recessions
A
The ability to profit by purchasing wheat in the U.S. and selling it in China implies that the a. real exchange rate is less than 1. b. nominal exchange rate is greater than 1. c. real exchange rate is greater than 1. d. nominal exchange rate is less than 1.
A
The change in aggregate demand that results from fiscal expansion changing the interest rate is called the a. crowding-out effect. b. Ricardian equivalence effect. c. multiplier effect. d. accelerator effect.
A
The long-run aggregate supply curve shifts left if a. there is a natural disaster. b. the government removes some environmental regulations that limit production methods. c. the capital stock increases. d. None of the above is correct
A
When the price level falls the quantity of a. consumption goods demanded and the quantity of net exports demanded both rise. b. consumption goods demanded falls, while the quantity of net exports demand rises. c. consumption goods demanded rises, while the quantity of net exports demanded falls. d. consumption goods demanded and the quantity of net exports demanded both fall.
A
Which of the following lists is included in what economists call "money"? a. cash b. cash and stocks and bonds c. cash and stocks and bonds and real estate d. cash and stocks and bonds and real estate and all other assets
A
Which of the following shifts aggregate demand to the right? a. The Fed purchases government bonds on the open market. b. The price level falls. c. The price level rises. d. None of the above is correct
A
According to the misperceptions theory of the short-run aggregate supply curve, if a firm thought that inflation was going to be 4 percent and actual inflation was 2 percent, then the firm would believe that the relative price of what it produces had a. decreased, so it would increase production. b. decreased, so it would decrease production. c. increased, so it would decrease production. d. increased, so it would increase production.
B
An increase in the expected price level shifts short-run aggregate supply to the a. right, and an increase in the actual price level does not shift short-run aggregate supply. b. left, and an increase in the actual price level does not shift short-run aggregate supply. c. left, and an increase in the actual price level shifts short-run aggregate supply to the left. d. right, and an increase in the actual price level shifts short-run aggregate supply to the right.
B
Critics of stabilization policy argue that a. policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived. b. policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived. c. policy does not affect aggregate demand. d. policy affects aggregate demand with a lag, but the effects are short-lived.
B
If the reserve ratio is 4 percent, then $81,250 of new money can be generated by a. $2,031,250 of new reserves. b. $3,250 of new reserves. c. $20,312.50 of new reserves. d. $325 of new reserves.
B
In Ugoland, the money supply is $8 million and reserves are $1 million. Assuming that people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve requirement is a. 14 percent. b. 12.5 percent. c. 8 percent. d. None of the above is correct
B
Other things the same, an unexpected fall in the price level results in some firms having a. lower than desired prices which increases their sales. b. higher than desired prices which depresses their sales. c. lower than desired prices which depresses their sales. d. higher than desired prices which increases their sales.
B
Other things the same, if the price level rises, people a. increase foreign bond purchases, so the dollar appreciates. b. increase domestic bond purchases, so the dollar appreciates. c. increase foreign bond purchases, so the dollar depreciates. d. increase domestic bond purchases, so the dollar depreciates
B
Other things the same, if the price level rises, then domestic interest rates a. fall, so domestic residents will want to hold more foreign bonds. b. rise, so domestic residents will want to hold fewer foreign bonds. c. rise, so domestic residents will want to hold more foreign bonds. d. fall, so domestic residents will want to hold fewer foreign bonds.
B
Suppose investment spending falls. To offset the change in output the Federal Reserve could a. increase the money supply. However, this increase would move the price level farther from its value before the decline in investment spending. b. increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending. c. decrease the money supply. However, this increase would move the price level farther from its value before the decline in investment spending. d. decrease the money supply. This decrease would also move the price level closer to its value before the decline in investment spending.
B
There is a temporary adverse supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would a. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right. b. raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right. c. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left. d. raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.
B
Which of the following accounts for about two-thirds of the decline in output during a recession? a. the decline in total consumption spending alone b. the decline in investment spending alone c. the combined decline in consumption and investment spending d. the decline in consumption expenditures on consumer durables alone
B
As the price level rises a. people will want to hold more money, so the interest rate falls. b. people will want to hold less money, so the interest rate rises. c. people will want to hold more money, so the interest rate rises. d. people will want to hold less money, so the interest rate falls.
C
If the price level falls, the real value of a dollar a. rises, so people will want to buy more. This response shifts aggregate demand to the right. b. falls, so people will want to buy less. This response helps explain the slope of the aggregate demand curve. c. rises, so people will want to buy more. This response helps explain the slope of the aggregate demand curve. d. falls, so people will want to buy less. This response shifts aggregate demand to the left.
C
If there is inflation, then a firm that has kept its price fixed for some time will have a a. high relative price. Relative-price variability falls as the inflation rate rises. b. high relative price. Relative-price variability rises as the inflation rate rises. c. low relative price. Relative-price variability rises as the inflation rate rises. d. low relative price. Relative-price variability falls as the inflation rate rises.
C
Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the a. money supply to rise. To reduce the impact of this the Fed could lower the discount rate. b. money supply to rise. To reduce the impact of this the Fed could raise the discount rate. c. money supply to fall. To reduce the impact of this the Fed could lower the discount rate. d. money supply to fall. To reduce the impact of this the Fed could raise the discount rate.
C
The investment component of GDP measures spending on a. residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount. b. financial assets such as stocks and bonds. During recessions it declines by a relatively small amount. c. residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount. d. financial assets such as stocks and bonds. During recessions it declines by a relatively large amount
C
The lag problem associated with monetary policy is due mostly to a. the time it takes for changes in government spending to affect the interest rate. b. the political system of checks and balances that slows down the process of determining monetary policy. c. the fact that business firms make investment plans far in advance. d. All of the above are correct.
C
When in France you notice that prices are posted in euros, this best illustrates money's function as a. a medium of exchange. b. a store of value. c. a unit of account. d. a method of barter
C
Which of the following can explain the upward slope of the short-run aggregate supply curve? a. an increase in the money supply lowers the interest rate b. as the price level falls, the exchange rate falls c. nominal wages are slow to adjust to changing economic conditions d. an increase in the interest rate increases investment spending
C
Which of the following statements concerning the history of U.S. inflation is not correct? a. There was about a 16-fold increase in the price level over the last 70 years. b. The United States has experienced periods of deflation. c. Inflation in the 1970s was below the average over the last 70 years. d. Prices rose at an average annual rate of about 4 percent over the last 70 years
C
According to Friedman and Phelps, the unemployment rate is above the natural rate when actual inflation a. low whether its greater than or less than expected. b. equals expected inflation. c. is greater than expected inflation. d. is less than expected inflation.
D
Classical economist David Hume observed that as the money supply expanded after gold discoveries a. it took time for prices to rise; in the meantime output was lower. b. prices and output both increased immediately. c. prices increased immediately while output remained unchanged. d. it took time for prices to rise; in the meantime output was higher.
D
During World War II, the economy's production increased about a. 25 percent and prices rose about 5 percent. b. 75 percent and prices rose about 15 percent. c. 50 percent and prices rose about 10 percent. d. 100 percent and prices rose about 20 percent
D
During periods of expansion, automatic stabilizers cause government expenditures a. to rise and taxes to fall. b. and taxes to fall. c. and taxes to rise. d. to fall and taxes to rise.
D
If a central bank reduced inflation by 2 percentage points and that made output fall by 1 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is a. 1/2. b. 4. c. 2. d. 1.
D
If the Federal Reserve accommodates an adverse supply shock, a. inflation expectations may fall which shifts the short-run Phillips curve shifts right. b. inflation expectations may rise which shifts the short-run Phillips curve shifts left. c. inflation expectations may fall which shifts the short-run Phillips curve shifts left d. inflation expectations may rise which shifts the short-run Phillips curve shifts right.
D
If there are sticky wages, and the price level is greater than what was expected, then a. the quantity of aggregate goods and services supplied falls, which is shown by a shift of the short-run aggregate supply curve to the left. b. the quantity of aggregate goods and services supplied rises, as shown by a shift of the short-run aggregate supply curve to the right. c. the quantity of aggregate goods and services supplied falls, as shown by a movement to the left along the short-run aggregate supply curve. d. the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve
D
Monetary policy affects the economy with a long lag, in part because a. proposals to change monetary policy must go through both the House and Senate before being sent to the president. b. changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance. c. monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly. d. changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.
D
Most economists believe that classical macroeconomic theory is a good description of the economy a. in the short run and in the long run. b. in neither the short nor long run. c. in the short run, but not in the long run. d. in the long run, but not in the short run.
D
Other things the same, a country could move from having a trade deficit to having a trade surplus if either a. saving fell or domestic investment rose. b. saving rose or domestic investment rose. c. saving fell or domestic investment fell. d. saving rose or domestic investment fell.
D
Suppose the economy is in long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run, a. the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be unaffected. b. the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall. c. real GDP will rise and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise and the price level might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall
D
Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could a. buy bonds to increase the money supply. b. buy bonds to decrease the money supply. c. sell bonds to increase the money supply. d. sell bonds to decrease the money supply.
D
The Fisher effect a. explains how prices adjust to obtain equilibrium in the money market. b. says the government can generate revenue by printing money. c. explains how higher money supply growth leads to higher inflation. d. says there is a one for one adjustment of the nominal interest rate to the inflation rate
D
The curve that shows the quantity of goods and services that firms produce and sell a. as it relates to the overall price level is called the aggregate-demand curve. b. as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-demand curve. c. as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-supply curve. d. as it relates to the overall price level is called the aggregate-supply curve.
D
The idea that inflation by itself reduces people's purchasing power is called a. menu costs. b. the inflation tax. c. shoeleather costs. d. the inflation fallacy.
D
The inflation tax a. is an alternative to income taxes and government borrowing. b. taxes most those who hold the most money. c. is the revenue created when the government prints money. d. All of the above are correct.
D
When taxes increase, consumption a. increases, so aggregate demand shifts right. b. decreases, so aggregate supply shifts left. c. increases, so aggregate supply shifts right. d. decreases, so aggregate demand shifts left.
D
8. Automatic stabilizers a. are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. b. are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. c. increase the problems that lags cause in using fiscal policy as a stabilization tool. d. All of the above are correct.
a. are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
Which of the following would shift the long-run Phillips curve to the right? a. an increase in the inflation rate b. increases in unemployment compensation c. expansionary fiscal policy d. None of the above is correct
b. increases in unemployment compensation
An increase in government spending a. decreases the interest rate and so investment spending decreases. b. increases the interest rate and so investment spending decreases. c. increases the interest rate and so investment spending increases. d. decreases the interest rate and so increases investment spending increases.
b. increases the interest rate and so investment spending decreases.
If inflation expectations decline, then the short-run Phillips curve shifts a. left, so that at any inflation rate unemployment is higher in the short run than before. b. left, so that at any inflation rate unemployment is lower in the short run than before. c. right, so that at any inflation rate unemployment is lower in the short run than before. d. right, so that at any inflation rate unemployment is higher in the short run than before.
b. left, so that at any inflation rate unemployment is lower in the short run than before.
Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $5,200 when income is $8,000. • Consumption spending is $5,536 when income is $8,400 In response to which of the following events could aggregate demand increase by $1,500? a. A stock-market boom stimulates consumer spending by $225, and there is an operative crowding-out effect. b. An economic boom overseas increases the demand for U.S. net exports by $225, and there is no crowding-out effect. c. A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect. d. An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out effect
c. A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect.
Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $5,200 when income is $8,000. • Consumption spending is $5,536 when income is $8,400 Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500? a. An economic boom overseas increases the demand for U.S. net exports by $240, and there is no crowding-out effect. b. A stock-market boom increases households' wealth by $275, and there is an operative crowding-out effect. c. A stock-market boom increases households' wealth by $300, and there is an operative crowding-out effect. d. Aggregate demand could increase by $1,500 in response to any of these events
d. Aggregate demand could increase by $1,500 in response to any of these events
A favorable supply shock will cause inflation to a. fall and shift the short-run Phillips curve right. b. rise and shift the short-run Phillips curve left. c. rise and shift the short-run Phillips curve right. d. fall and shift the short-run Phillips curve left.
d. fall and shift the short-run Phillips curve left.
The logic of the multiplier effect applies a. only when the crowding-out effect is sufficiently strong. b. only to changes in the money supply. c. only to changes in government spending. d. to any change in spending on any component of GDP
d. to any change in spending on any component of GDP
