Macroeconomics Quiz

Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action? a. $0 b. $10,000 c. $9,000 d. $1,000

a. $0

Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5 percent to 9 percent, the Fisher effect suggests that, in the long run, the nominal interest rate should become a. 11 percent. b. 4 percent. c. 16 percent. d. 12 percent. e. 9 percent.

a. 11 percent.

If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 20 percent, what is the after-tax real interest rate? a. 2 percent b. 1 percent c. 3 percent d. 5 percent e. 4 percent

a. 2 percent

If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is a. 3 percent. b. 6 percent. c. 9 percent. d. 18 percent. e. none of the above.

a. 3 percent.

Which of the following statements about inflation is not true? a. Inflation reduces people's real purchasing power because it raises the cost of the things people buy. b. If there is inflation, taxing nominal interest income reduces the return to saving and reduces the rate of economic growth. c. An increase in inflation increases nominal interest rates. d. Unanticipated inflation redistributes wealth.

a. Inflation reduces people's real purchasing power because it raises the cost of the things people buy.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? a. Prices fall; output falls. b. Prices fall; output rises. c. Prices rise; output falls. d. Prices rise; output rises.

a. Prices fall; output falls.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? a. Prices fall; output is unchanged from its initial value. b. Prices rise; output is unchanged from its initial value. c. Output and the price level are unchanged from their initial values. d. Output rises; prices are unchanged from the initial value. e. Output falls; prices are unchanged from the initial value.

a. Prices fall; output is unchanged from its initial value.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? a. Prices rise; output falls. b. Prices fall; output rises. c. Prices rise; output rises. d. Prices fall; output falls.

a. Prices rise; output falls.

The M1 money supply is composed of a. currency, demand deposits, traveler's checks, and other checkable accounts. b. currency, demand deposits, savings deposits, money market mutual funds, and small time deposits. c. currency, government bonds, gold certificates, and coins. d. currency, NOW accounts, savings accounts, and government bonds. e. none of the above

a. currency, demand deposits, traveler's checks, and other checkable accounts.

Commodity money a. has intrinsic value. b. has no intrinsic value. c. is used as reserves to back fiat money. d. is used exclusively in the United States.

a. has intrinsic value.

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the a. misperceptions theory of the short-run aggregate-supply curve. b. classical dichotomy theory of the short-run aggregate-supply curve. c. sticky-price theory of the short-run aggregate-supply curve. d. sticky-wage theory of the short-run aggregate-supply curve.

a. misperceptions theory of the short-run aggregate-supply curve.

An example of fiat money is a. paper dollars. b. gold. c. solid silver coins. d. cigarettes in a prisoner-of-war camp.

a. paper dollars.

Which of the following policy actions by the Fed is likely to increase the money supply? a. reducing reserve requirements b. selling government bonds c. increasing the discount rate d. increasing interest on reserves e. All of these will increase the money supply.

a. reducing reserve requirements

Suppose that, because of inflation, people in Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of a. shoeleather costs. b. menu costs. c. costs due to confusion and inconvenience. d. costs due to inflation-induced tax distortions. e. costs due to inflation-induced relative price variability, which misallocates resources.

a. shoeleather costs.

Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the a. sticky-wage theory of the short-run aggregate-supply curve. b. sticky-price theory of the short-run aggregate-supply curve. c. misperceptions theory of the short-run aggregate-supply curve. d. classical dichotomy theory of the short-run aggregate-supply curve.

a. sticky-wage theory of the short-run aggregate-supply curve.

To insulate the Federal Reserve from political pressure, a. the Board of Governors are appointed to fourteen-year terms. b. the Board of Governors have lifetime tenure. c. the Board of Governors are supervised by the House Banking Committee. d. the Board of Governors are elected by the public

a. the Board of Governors are appointed to fourteen-year terms.

Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent? a. $1,000 b. $5,000 c. $0 d. $4,000

b. $5,000

If the reserve ratio is 25 percent, the value of the money multiplier is a. 0.25. b. 4. c. 5. d. 25. e. none of the above.

b. 4.

Which of the following statements about a bank's balance sheet is true? a. An increase in a bank's capital increases its leverage ratio. b. Assets minus liabilities equals owner's equity or capital. c. The largest liability on the bank's balance sheet is its loans. d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital. e. None of the above is correct.

b. Assets minus liabilities equals owner's equity or capital.

Which of the following is not a function of money? a. Store of value b. Protection against inflation c. Unit of account d. Medium of exchange

b. Protection against inflation

An inflation tax is a. an explicit tax paid quarterly by businesses based on the amount of increase in the prices of their products. b. a tax on people who hold money. c. a tax on people who hold interest-bearing savings accounts. d. usually employed by governments with balanced budgets. e. none of the above.

b. a tax on people who hold money.

When prices rise at an extraordinarily high rate, it is called a. deflation. b. hyperinflation. c. inflation. d. disinflation. e. hypoinflation.

b. hyperinflation.

If the money supply grows 5 percent, and real output grows 2 percent, prices should rise by a. 5 percent. b. less than 5 percent. c. more than 5 percent. d. none of the above.

b. less than 5 percent.

According to the interest-rate effect, aggregate demand slopes downward (negatively) because a. lower prices increase the value of money holdings and consumer spending increases. b. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases. c. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls. d. lower prices decrease the value of money holdings and consumer spending decreases.

b. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases.

The Fed's tools of monetary control are a. fiat, commodity, and deposit money. b. open-market operations, lending to banks, reserve requirements, and paying interest on reserves. c. the money supply, government purchases, and taxation. d. coin, currency, demand deposits, and commodity money. e. government expenditures, taxation, reserve requirements, and interest rates.

b. open-market operations, lending to banks, reserve requirements, and paying interest on reserves.

Stagflation occurs when the economy experiences a. falling prices and falling output. b. rising prices and falling output. c. falling prices and rising output. d. rising prices and rising output.

b. rising prices and falling output.

Velocity is a. the annual rate of turnover of business inventories. b. the annual rate of turnover of the money supply. c. highly unstable. d. the annual rate of turnover of output. e. impossible to measure.

b. the annual rate of turnover of the money supply.

The discount rate is a. the interest rate the Fed pays on reserves. b. the interest rate the Fed charges on loans to banks. c. the interest rate the public pays when borrowing from banks. d. the interest rate paid by banks at the Term Auction Facility. e. the interest rate banks pay on the public's deposits.

b. the interest rate the Fed charges on loans to banks.

In the long run, the demand for money is most dependent upon a. the availability of banking outlets. b. the level of prices. c. the interest rate. d. the availability of credit cards.

b. the level of prices.

Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank, a. the money supply increases by more than $1,000. b. the money supply is unaffected. c. the money supply increases by less than $1,000. d. the money supply decreases by more than $1,000. e. the money supply decreases by less than $1,000.

b. the money supply is unaffected.

An example of a real variable is a. the nominal interest rate. b. the ratio of the value of wages to the price of soda. c. the price of corn. d. the dollar wage. e. none of the above

b. the ratio of the value of wages to the price of soda.

If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements, a. the money supply should remain unchanged. b. we cannot be certain what will happen to the money supply. c. the money supply should fall. d. the money supply should rise.

b. we cannot be certain what will happen to the money supply.

If actual inflation turns out to be greater than people had expected, then a. no redistribution occurred. b. wealth was redistributed to borrowers from lenders. c. wealth was redistributed to lenders from borrowers. d. the real interest rate is unaffected.

b. wealth was redistributed to borrowers from lenders.

The natural level of output is the amount of real GDP produced a. when the economy is at the natural level of aggregate demand. b. when the economy is at the natural rate of unemployment. c. when the economy is at the natural level of investment. d. when there is no unemployment.

b. when the economy is at the natural rate of unemployment.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? a. Output rises; prices are unchanged from the initial value. b. Output falls; prices are unchanged from the initial value. c. Output and the price level are unchanged from their initial values. d. Prices rise; output is unchanged from its initial value. e. Prices fall; output is unchanged from its initial value.

c. Output and the price level are unchanged from their initial values.

Which of the following statements is true? a. The Federal Reserve was created in 1871 in response to the Civil War. b. The primary tool of monetary policy is the reserve requirement. c. When the Fed sells government bonds, the money supply decreases. d. The FOMC meets once per year to discuss monetary policy.

c. When the Fed sells government bonds, the money supply decreases.

If money is neutral, a. a change in the money supply reduces velocity proportionately; therefore, there is no effect on either prices or real output. b. an increase in the money supply does nothing. c. a change in the money supply only affects nominal variables such as prices and dollar wages. d. a change in the money supply only affects real variables such as real output. e. the money supply cannot be changed because it is tied to a commodity such as gold.

c. a change in the money supply only affects nominal variables such as prices and dollar wages.

Which of the following events shifts the short-run aggregate-supply curve to the right? a. an increase in government spending on military equipment b. an increase in price expectations c. a drop in oil prices d. a decrease in the money supply e. none of the above

c. a drop in oil prices

Countries that employ an inflation tax do so because a. an inflation tax is the most equitable of all taxes. b. the government doesn't understand the causes and consequences of inflation. c. government expenditures are high and the government has inadequate tax collections and difficulty borrowing. d. the government has a balanced budget. e. an inflation tax is the most progressive (paid by the rich) of all taxes.

c. government expenditures are high and the government has inadequate tax collections and difficulty borrowing.

In the long run, inflation is caused by a. banks that have market power and refuse to lend money. b. governments that raise taxes so high that it increases the cost of doing business and, hence, raises prices. c. governments that print too much money. d. increases in the price of inputs, such as labor and oil. e. none of the above.

c. governments that print too much money.

According to the wealth effect, aggregate demand slopes downward (negatively) because a. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases. b. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls. c. lower prices increase the value of money holdings and consumer spending increases. d. lower prices decrease the value of money holdings and consumer spending decreases.

c. lower prices increase the value of money holdings and consumer spending increases.

Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of a. the Friedman rule. b. arbitrary redistributions of wealth. c. menu costs. d. shoeleather costs. e. costs due to inflation-induced tax distortions.

c. menu costs.

The quantity equation states that a. money × price level = velocity × real output. b. money × real output = velocity × price level. c. money × velocity = price level × real output. d. none of the above is true.

c. money × velocity = price level × real output.

Which of the following is not a reason why the aggregate-demand curve slopes downward? a. the wealth effect b. the interest-rate effect c. the classical dichotomy/monetary neutrality effects d. the exchange-rate effect e. All of the above are reasons why the aggregate-demand curve slopes downward.

c. the classical dichotomy/monetary neutrality effects

A decrease in the reserve requirement causes a. reserves to rise. b. reserves to fall. c. the money multiplier to rise. d. the money multiplier to fall. e. none of the above.

c. the money multiplier to rise.

Which of the following statements about economic fluctuations is true? a. A recession is when output rises above the natural level of output. b. A depression is a mild recession. c. Economic fluctuations have been termed the "business cycle" because the movements in output are regular and predictable. d. A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together. e. None of the above is true.

d. A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together.

Which of the following would not cause a shift in the long-run aggregate-supply curve? a. an increase in the available labor b. an increase in the available capital c. an increase in the available technology d. an increase in price expectations e. All of the above shift the long-run aggregate-supply curve.

d. an increase in price expectations

Which of the following policy combinations would consistently work to increase the money supply? a. sell government bonds, decrease reserve requirements, decrease the discount rate b. sell government bonds, increase reserve requirements, increase the discount rate c. buy government bonds, increase reserve requirements, decrease the discount rate d. buy government bonds, decrease reserve requirements, decrease the discount rate e. none of the above

d. buy government bonds, decrease reserve requirements, decrease the discount rate

Required reserves of banks are a fixed percentage of their a. assets. b. loans. c. government bonds. d. deposits.

d. deposits.

Which of the following statements is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve a. is positively sloped because price expectations and wages tend to be fixed in the long run. b. shifts left when the natural rate of unemployment falls. c. shifts right when the government raises the minimum wage. d. is vertical because an equal change in all prices and wages leaves output unaffected.

d. is vertical because an equal change in all prices and wages leaves output unaffected.

According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause a. prices to fall and output to remain unchanged. b. prices to rise and output to rise. c. prices to fall and output to fall. d. prices to rise and output to remain unchanged.

d. prices to rise and output to remain unchanged.

Policymakers are said to "accommodate" an adverse supply shock if they a. respond to the adverse supply shock by decreasing aggregate demand, which lowers prices. b. respond to the adverse supply shock by decreasing short-run aggregate supply. c. fail to respond to the adverse supply shock and allow the economy to adjust on its own. d. respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

d. respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

If banks increase their holdings of excess reserves a. the money multiplier increases and the money supply decreases. b. the money multiplier decreases and the money supply increases. c. the money multiplier and the money supply increase. d. the money multiplier and the money supply decrease.

d. the money multiplier and the money supply decrease.

If the price level doubles, a. the quantity demanded of money falls by half. b. the money supply has been cut by half. c. nominal income is unaffected. d. the value of money has been cut by half. e. none of the above is true.

d. the value of money has been cut by half.

The Board of Governors of the Federal Reserve System consists of a. twelve members appointed by Congress. b. seven members elected by the Federal Reserve Banks. c. seven members appointed by Congress and seven appointed by the president. d. up to seven members appointed by the president. e. five members appointed by the president and seven rotating presidents of the Federal Reserve Banks

d. up to seven members appointed by the president.

The quantity theory of money concludes that an increase in the money supply causes a. a proportional increase in velocity. b. a proportional increase in real output. c. a proportional decrease in velocity. d. a proportional decrease in prices. e. a proportional increase in prices

e. a proportional increase in prices

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to a. shift long-run aggregate supply to the left. b. shift aggregate demand to the left. c. shift short-run aggregate supply to the right. d. shift short-run aggregate supply to the left. e. shift aggregate demand to the right.

e. shift aggregate demand to the right.

Which of the following costs of inflation does not occur when inflation is constant and predictable? a. arbitrary redistributions of wealth b. menu costs c. shoeleather costs d. costs due to confusion and inconvenience e. costs due to inflation-induced tax distortions

not D