Economics and management
Macro Review Questions to use to prepare for the Comprehensive
Exam.
Answers follow at the end of the 188 questions.
Page 1
1. The theory of comparative advantage states that
a. specialization and free trade will benefit only the more efficient producers.
b. more efficient producers will have an advantage over others and will not seek to trade.
c. specialization and free trade will benefit all trading partners.
d. a producer must have an absolute advantage in order to have the comparative advantage.
e. when we make a choice we forgo something else.
2. Which of the following statements is FALSE?
a. Capital goods are similar to consumer goods because both directly satisfy wants.
b. A person who spends time and resources developing skills is investing in capital.
c. The meaning of the word investment may be different in economics than it is in everyday language.
d. Much of present capital was put in place by previous generations.
e. None of the above
3. In an economist's view, investment involves the process of
a. using resources to produce new capital.
b. using capital to produce new resources.
c. using capital to replace labor.
d. buying ownership of a company.
e. undertaking any activity that incurs an opportunity cost.
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4. Refer to Figure 2.1. Which of the following statements is TRUE?
a. The graph illustrates that in order to have more consumer goods the society must give up capital goods, and the amount of capital goods sacrificed will decrease as the desired amount of consumer goods increases.
b. The graph illustrates that in order to have more capital goods the society must give up consumer goods, and the amount of consumer goods sacrificed will decrease as the desired amount of consumer goods increases.
c. The graph illustrates that in order to have more capital goods the society must give up consumer goods, and the amount of capital goods sacrificed will decrease as the desired amount of consumer goods increases.
d. The graph illustrates that in order to have more consumer goods the society must give up capital goods, and the amount of capital goods sacrificed will increase as the desired amount of consumer goods increases.
e. None of the above statements are true.
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5. Refer to Figure 2.1. Which of the following statements is FALSE?
a. Points E and F are both points of full employment and are equal in terms of productive efficiency.
b. It is unlikely that an actual economy would choose point A or point B.
c. Point D represents a situation of either unemployment or productive inefficiency.
d. Point G would be attainable if there were full employment of resources.
e. All of the above are true.
6. Refer to Figure 2.1 If society currently produces 1,100 units of consumer goods and 800 units of capital goods, the opportunity cost of making 200 more units of consumer goods is
a. 800 units of capital goods.
b. 550 units of capital goods.
c. 250 units of capital goods.
d. 1300 units of consumer goods.
e. not possible to calculate from the information provided.
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7. The slope of a production possibility frontier is usually
a. negative and increasingly negative.
b. negative and decreasingly negative.
c. positive and increasingly positive.
d. positive and decreasingly positive.
e. constant.
8. Sarah has 3 hours that she can choose to spend either studying for a test or baby-sitting. If she spends all of her time studying, she can score an 85 on the test. If she baby-sits for 1 hour, her test grade falls 3 points. If she baby-sits for a second hour, her test grade will fall by another 5 points. If she baby-sits for a third hour, her test grade falls 7 points. The intercept on the test score axis of Sarah's ppf is
a. 100.
b. 85.
c. 82.
d. 70.
e. 0.
9. Economic growth occurs when
a. a society sacrifices an amount of one good for more of another along its production possibility frontier.
b. there is unemployment of labor but other resources are used efficiently.
c. the combinations of goods and services that can be produced decreases.
d. a large part of a country's population is poor.
e. a society acquires additional resources or when its technology advances.
SCENARIO 1: Mary and Tom both volunteer at a food pantry that serves the poor in their town. They both pack bags for distribution and make sandwiches. The table below shows what they can each do in one hour:
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Tom Mary
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Bags packed 8 6
Sandwiches made 16 18
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
10. For Tom, the opportunity cost of a bag packed is
a. 16 sandwiches.
b. 2 sandwiches.
c. the same as it is for Mary.
d. greater than it is for Mary.
e. None of the above
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SCENARIO 1: Mary and Tom both volunteer at a food pantry that serves the poor in their town. They both pack bags for distribution and make sandwiches. The table below shows what they can each do in one hour:
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Tom Mary
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Bags packed 8 6
Sandwiches made 16 18
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
11. For Mary, the opportunity cost of a sandwich is
a. 6 bags packed.
b. 18 bags packed.
c. 3 bags packed.
d. 1/3 bag packed.
e. 1/6 bag packed.
12. Classical economists believed that
a. unemployment could not persist for extended periods of time.
b. the government could lift the economy out of recession.
c. the aggregate demand for goods and services determined the level of employment.
d. recessions were not self-correcting.
e. government could intervene in the economy and affect the level of output and employment.
13. According to John Maynard Keynes,
a. an excess supply of labor would drive down wages to a new equilibrium level.
b. unemployment could not persist.
c. recessions were self-correcting.
d. there is no role for government in the economy.
e. government could intervene in the economy and affect the level of output and employment.
14. Three of the major concerns of macroeconomics are ______, ______, and ______.
a. stock market prices; output growth; the national debt
b. inflation; output growth; unemployment
c. the balance of trade; the budget surplus; inflation
d. the money supply; interest rates; stock prices
e. the budget surplus; interest rates; unemployment
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15. John Maynard Keynes called for ______ to get the economy out of a slump and stabilize the level of output at a full employment level.
a. expansionary monetary policies
b. contractionary monetary policies
c. contractionary fiscal policies
d. expansionary fiscal policies
e. contractionary supply-side policies
16. In a typical business cycle
a. economists call the period from a trough to a peak an expansion.
b. output and employment grow during a contraction.
c. output and employment fall during an expansion.
d. the peak of a new business cycle is lower than the peak of the previous cycle.
e. the trend growth line has a negative slope.
17. According to classical models, an increase in aggregate demand should result in
a. an increase in the price level.
b. an increase in the nominal wage.
c. no sustained change in the level of employment.
d. no prolonged reduction in the unemployment rate.
e. All of the above
18. According to Keynes, which of the following determines the level of employment?
a. Stock prices
b. Aggregate demand
c. Prices
d. Wages
e. Budget deficits
19. Stagflation refers to which of the following situations?
a. Rising inflation and high unemployment
b. Rising inflation and low unemployment
c. Falling inflation and high unemployment
d. Falling inflation and low unemployment
e. Deflation and high unemployment
20. Disinflation refers to a situation where
a. the inflation rate is rising.
b. the inflation rate is low and constant.
c. the inflation rate is negative.
d. the inflation rate is falling.
e. unemployment is rising.
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21. In terms of the business cycle, the period from the trough to a peak is referred to as a(n)
a. expansion.
b. contraction.
c. recession.
d. depression.
e. slump.
22. In terms of the business cycle, the period from the peak to a trough is referred to as a(n)
a. expansion.
b. boom.
c. recession.
d. recovery.
e. None of the above
23. For the United States, we have observed that
a. business cycles were relatively more extreme prior to World War II.
b. business cycles were relatively less extreme prior to World War II.
c. business cycles have been similar both prior to and after World War II.
d. fluctuations in output have been relatively greater after World War II.
e. None of the above
24. GDP is
a. data collected and published by the government describing the various components of national income and the economy.
b. the total market value of all final goods and services produced within a given period by factors of production located within a country.
c. the total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced.
d. the value of output produced by factors of production located within and outside of a country.
e. made up of three components: consumption, investment, and government consumption and investment.
25. Which of the following would be included in GDP?
a. The purchase of a used car
b. The sale of bonds
c. The broker's fee one pays when purchasing stocks
d. The sale of Firestone tires to Ford Motor company
e. None of the above
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26. If GDP is less than final sales, we know that
a. the change in business inventories is positive.
b. the change in business inventories is negative.
c. the change in business inventories is zero.
d. EX - IM is positive.
e. EX - IM is negative.
27. If depreciation is greater than gross investment, we know that
a. GDP is greater than GNP.
b. GDP is less than GNP.
c. the capital stock has decreased.
d. the capital stock has increased.
e. None of the above
28. An employed person includes anyone 16 years old or older who is
a. not working but is available for work and has made specific efforts to find work during the previous four weeks.
b. either a full-time student, or staying home to take care of children, or an individual in an institution.
c. not in the labor force.
d. without a job and without pay.
e. a paid employee who worked one hour or more, either for someone else or in his/her own business.
29. The unemployment rate is defined as the ratio of the
a. labor force to the total population 16 years old or older.
b. number of people unemployed to total population.
c. number employed to the total population 16 years old or older.
d. number of people unemployed to the total population 16 years old or older.
e. None of the above
30. The labor-force participation rate is the ratio of the
a. labor force to the total population 16 years old or older.
b. labor force to total population.
c. number employed to the total population 16 years old or older.
d. number employed to total population.
e. number of people employed to the total number of people in the labor force.
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31. Which of the following statements about discouraged worker effects is correct?
a. People who are still looking for work and have been unemployed for LONGER than four weeks are classified as having dropped out of the labor force rather than as being unemployed.
b. Because of the existence of discouraged workers, the reported unemployment rate generally understates the true level of unemployment in an economy.
c. The unemployment rate rises when those no longer looking for work are no longer counted as unemployed.
d. No Bureau of Labor Statistics survey provides any evidence on the size of the discouraged worker effect.
e. The number of discouraged workers seems to hover around 25% of the size of the labor force in normal times.
32. Some unemployment is inevitable because
a. there are always individuals entering the labor force searching for a job at any point in time.
b. some workers find the jobs that they get are too difficult.
c. some individuals will stop searching if they cannot find a job.
d. the gains to firms and workers rarely exceed the costs of searching for workers or work.
e. of the existence of discouraged workers.
33. The frictional unemployment rate ______.
a. can reach 100%
b. will never equal zero
c. is constant over time
d. increases as the number of discouraged workers increases
e. None of the above
34. The portion of unemployment that is due to longer-run adjustment problems of the economy is called ______ unemployment.
a. frictional
b. the natural rate of
c. structural
d. discouraged-worker
e. cyclical
35. Changes in the unemployment that occur as the economy expands and contracts are called ______ unemployment.
a. the natural rate of
b. frictional
c. structural
d. cyclical
e. discouraged-worker
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SCENARIO 3: The average growth rate of output in the U.S. economy since 1900 has been about 3.4% per year. Some years are better than others, but on average the rate is 3.4% per year. What determines this rate is a key question in the area of economics called "growth theory."
36. Refer to Scenario 3. A country's growth rate of output depends on
a. how much land is available for production.b. the number of machines that wear out exceeding the number of new machines produced.c. how fast the average efficiency of the capital stock is growing.d. the number of trading partners that it has.
e. the exchange rate for its currency.
37. "Growth theory" is concerned with explaining which of the following?
a. Inflationb. Unemploymentc. Outputd. Interest rates
e. All of the above
38. Based on growth theory, which of the following would cause an increase in output?
a. Increase in employmentb. Increase in the capital stockc. Increase in the number of hours workedd. Increase in human capital
e. All of the above
39. Based on growth theory, which of the following would NOT cause an increase in output?
a. Increase in employmentb. Increase in the capital stockc. Increase in the number of hours workedd. Increase in money supply
e. Increase in human capital
40. According to growth theory, which of the following helps explain why the growth rate in the United States has been positive during the 1900s?
a. The increase in capital per workerb. The increase in the money supplyc. The reduction in oil pricesd. The reduction in nominal wagese. The increase in the minimum wage
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41. The level of GDP, the overall price level, and the level of employment three chief concerns of macroeconomistsÄÄare influenced by events in three broadly defined "markets": ______, ______, and ______ markets.
a. goods-and-services; financial; labor
b. stock; bond; goods-and-services
c. computer; automobile; medical
d. foreign; domestic; government
e. local; national; international
42. In a closed economy with no government, we know that
a. consumption equals income plus savings.
b. S = Y + C.
c. Income equals savings plus taxes.
d. Y = C + S.
e. saving minus income equals consumption.
43. In The General Theory, Keynes argued that the amount of consumption undertaken by a household is ______ related to ______.
a. directly; its income
b. directly; the level of interest rates
c. indirectly; its income
d. indirectly; the level of interest rates
e. directly; the money supply
44. For the aggregate consumption function, C = a + bY, the letter a represents
a. aggregate output.
b. aggregate consumption.
c. the level of consumption when Y = 0.
d. the slope of the line.
e. ‘C/‘Y.
45. Suppose the consumption function is represented as follows: C = 200 + .75Y. If Y increases by $100, then consumption would increase by
a. $70.
b. $75.
c. $80.
d. $90.
e. $100.
46. If the marginal propensity to consume is 0.7, then the marginal propensity to save is
a. 0.5.
b. 0.4.
c. 0.3.
d. 0.2.
e. 0.1.
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47. If C = 100 + .8Y, then S =
a. -100 + .2Y
b. 80 + .2Y
c. -80 + .2Y
d. 100 + .2Y
e. Ý25Y
48. Based on the terminology used by economists,
a. investment represents the purchase of assets such as a mutual fund.
b. an investment is not something that is used to create value in the future.
c. investment refers to the creation of capital stock.
d. firms invest when they sell off their inventories.
e. investment can refer to something other than the creation of capital stock.
49. If actual inventory investment turns out to be ______ than firms planned, then ______ investment is ______ than planned investment.
a. lower; planned; less
b. higher; actual; less
c. lower; actual; greater
d. lower; planned; greater
e. higher; actual; greater
50. In a closed economy with no government, equilibrium in the goods market occurs at that point
a. where S = I.
b. where Y = C.
c. at which actual aggregate expenditure is greater than aggregate output.
d. at which actual aggregate expenditure is less than aggregate output.
e. at which planned aggregate expenditure exceeds aggregate output.
51. When output is ______ planned spending, there is ______ inventory investment.
a. equal to; unplanned
b. less than; unplanned
c. greater than; unplanned
d. less than; planned
e. equal to; planned
52. Assume that the consumption function is C = 100 + .8Y, income (Y) is $1,000 billion, and planned investment I is $50 billion, then the unplanned inventory change will be $______ billion.
a. -100
b. -50
c. 0
d. 50
e. 100
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53. If firms react to unplanned inventory reductions by ______ output, an economy with planned spending ______ than output will adjust to equilibrium, with Y ______ than before.
a. decreasing; less; higher
b. decreasing; greater; lower
c. increasing; greater; higher
d. increasing; less; lower
e. not changing; less; lower
54. The size of the multiplier depends on the
a. marginal propensity to consume.
b. level of equilibrium output.
c. level of autonomous investment.
d. point of intersection of the 45ø line and planned aggregate expenditure.
e. point at which consumption intersects the vertical axis.
55. The multiplier is
a. ‘C/‘Y.
b. ‘S/‘Y.
c. 1/(1 - MPC).
d. ‘Y/‘S.
e. (1 + MPS).
SCENARIO 3: Assume C = 150 + .9Y and I = 50.
56. Refer to Scenario 3. The multiplier is
a. 99.
b. 8.
c. 6.
d. 4.
e. None of the above
SCENARIO 3: Assume C = 150 + .9Y and I = 50.
57. Refer to Scenario 3. The equilibrium level of Y is
a. 3,000.
b. 2,000.
c. 1,000.
d. 750.
e. 500.
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SCENARIO 3: Assume C = 150 + .9Y and I = 50.
58. Refer to Scenario 3. If I increases by 25 from 50 to 75, then the increase in the equilibrium Y will be
a. 500.
b. 375.
c. 250.
d. 200.
e. 125.
SCENARIO 3: Assume C = 150 + .9Y and I = 50.
59. Refer to Scenario 3. After I reaches 75, the new equilibrium Y will be
a. 4,000.
b. 3,000.
c. 2,500.
d. 2,250.
e. 2,000.
SCENARIO 3: Assume C = 150 + .9Y and I = 50.
60. Refer to Scenario 3. If all one knew was that the multiplier was 5, then the MPC would be
a. Ý2.
b. Ý4.
c. Ý5.
d. Ý6.
e. Ý8.
61. An increase in the marginal propensity to consume (MPC) will tend to cause
a. the AE line to become flatter and a given change in investment to have a smaller effect on output.
b. the AE line to become flatter and a given change in investment to have a greater effect on output.
c. the AE line to become steeper and a given change in investment to have a smaller effect on output.
d. the AE line to become steeper and a given change in investment to have a greater effect on output.
e. None of the above
62. Suppose planned investment falls by 100 and equilibrium output falls by 250. Given this information, we know that
a. the MPS = .25.
b. the MPS = .4.
c. the MPS = .1.
d. the MPS = .5.
e. None of the above
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63. Suppose equilibrium output needs to rise by 1000. Also assume that the marginal propensity to consume (MPC) equals .75. Given this information, how much does planned investment have to increase to cause equilibrium output to rise by 1000?
a. 100
b. 150
c. 200
d. 250
e. 400
64. Which of the following statements is correct?
a. Changes in government spending do not have an immediate and direct impact on the economy's total spending.
b. An increase in G leads to a less than dollar-for-dollar increase in planned aggregate expenditures.
c. When taxes are cut, there is a direct impact on the economy's total spending.
d. An increase in taxes would cause an increase in household disposable income.
e. A tax cut initially affects households before affecting aggregate expenditure.
65. An equal increase in government spending and taxes will cause
a. an increase in output.
b. no change in output.
c. an uncertain effect on output.
d. an increase in any budget deficit.
e. a reduction in any budget surplus.
66. The balanced-budget multiplier is
a. 1/MPS.
b. -(MPC/MPS).
c. 1/(1 - MPC).
d. -‘T ð (MPC/MPS).
e. None of the above
67. For an economy that trades goods and services (i.e., the open-economy model), equilibrium is represented by which of the following?
a. Y = C + I + G
b. Y = C + I + G + (EX - IM)
c. S + T = I + G
d. S = I
e. G - T = EX - IM
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SCENARIO 1: Assume an economy is represented by the following:
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
C = 100 + .5Yd G = 500
I (planned) = 150 T = 500
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
68. Refer to Scenario 1. What is planned aggregate expenditure if Y = 900?
a. 800
b. 850
c. 900
d. 950
e. 1000
SCENARIO 1: Assume an economy is represented by the following:
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
C = 100 + .5Yd G = 500
I (planned) = 150 T = 500
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
69. Refer to Scenario 1. What is the unplanned inventory change if Y = 900?
a. -100
b. -50
c. 0
d. 100
e. 50
70. Suppose the economy is in equilibrium and that G < T. Given this information, we know that
a. S = I.
b. S > I.
c. S < I.
d. S + T > I + G.
e. S + T < I + G.
71. Suppose the MPC = .9 and that policymakers want to increase equilibrium output by 1000. Given this information, policymakers would have to increase government spending by
a. 50.
b. 100.
c. 200.
d. 250.
e. 500.
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72. The existence of automatic stabilizers causes
a. the size of any budget deficit to increase as the economy enters a recession.
b. the size of any budget deficit to decrease as the economy enters a recession.
c. the effects of a given change in autonomous expenditures on output to be larger than they would be if there were no automatic stabilizers.
d. no change in the size of the budget deficit as the economy enters a recession.
e. None of the above
73. We know that money is an asset that can be used to transport purchasing power from one time period to another. This description of money illustrates its role as a
a. unit of account.
b. liquid asset.
c. store of value.
d. medium of exchange.
e. means of payment.
74. The money multiplier represents the multiple that deposits can ______ for every dollar ______ in ______.
a. increase; decrease; reserves
b. increase; increase; deposits
c. increase; increase; reserves
d. decrease; decrease; deposits
e. decrease; increase; deposits
75. If the Fed wants to increase the supply of money, it
a. reduces the amount of reserves in the banking system.
b. buys bonds.
c. makes it more difficult for banks to create additional deposits.
d. raises the required reserve ratio for banks.
e. discourages banks from making more loans.
76. If the Fed reduces the required reserve ratio,
a. the supply of money will decrease.
b. excess reserves will become negative.
c. banks must reduce their deposits by "calling in" some of their loans.
d. banks will be able to create more deposits with the existing volume of reserves.
e. the money multiplier will decrease.
77. If the Fed wants to slow the growth of the money supply, it
a. lowers reserve requirement ratios.
b. lowers the discount rate.
c. encourages banks to borrow from it.
d. restricts the growth of bank reserves.
e. encourages the growth of deposits.
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78. The most frequently used tool of the Fed for controlling the supply of money is
a. changing the discount rate.
b. open-market operations.
c. changing bank reserve requirement ratios.
d. Fed transactions with the U.S. Treasury Department.
e. Fed loans to commercial banks.
79. A Fed open-market purchase of securities results in a(n)
a. decrease in the supply of money by an amount equal to the money multiplier times the change in reserves.
b. increase in the supply of money by an amount equal to the money multiplier times the decrease in reserves.
c. decrease in the supply of money by an amount equal to the money multiplier times the increase in reserves.
d. increase in reserves and an increase in the supply of money.
e. decrease in reserves and a decrease in the supply of money.
SCENARIO 2: Assume the commercial banking system has $500 of deposits, $50 of reserves, and $450 of loans. Assume also that the Fed has $100 in currency in the hands of the public as liabilities. The initial reserve requirement ratio is 10%.
80. Refer to Scenario 2. If the Fed lowers the reserve requirement ratio from 10% to 5% and banks lend to the maximum extent permitted, banks' deposits will
a. increase by $900.
b. increase by $500.
c. increase by $300.
d. not change.
e. decrease by $500.
81. When we speak of the demand for ______, we are concerned with how much of your financial assets you want to hold in the form of ______, which does not earn interest, versus how much you want to hold in interest-bearing securities, such as ______.
a. bonds; money; bonds
b. money; currency; checking accounts
c. money; money; bonds
d. bonds; bonds; money
e. money; bonds; money
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82. Refer to Figure 11.1. A reduction in aggregate output (Y) will
a. d d
shift the money demand curve from M1 to M2.
b. d d
shift the money demand curve from M2 to M1.
c. d
move an individual from Point B to Point A on her M1 money
demand curve.
d. d
move an individual from Point A to Point B on her M1 money
demand curve.
e. not affect an individual's money demand curve.
83. Refer to Figure 11.2. If the Fed wants to reduce the economy's market interest rate, it needs to ______.
a. sell bonds
b. buy bonds
c. increase Md
d. not change Ms
e. not change Md
Page 20
84. Refer to Figure 11.3. If the Fed increases the supply of money from
s s
M0 to M1,
a. there will be an excess demand for money at an interest rate of 8%.
b. there will be an excess supply of money at an interest rate of 8%.
c. the interest rate will tend to rise.
d. households and firms will take no action to buy or sell bonds.
e. households and firms will expect interest rates to increase and want to buy bonds now.
85. Which of the following events, all else fixed, will NOT cause an increase (i.e., rightward shift) in money demand?
a. A reduction in the interest rate
b. An increase in income
c. An increase in the aggregate price level
d. An increase in the brokerage fees associated with the purchase and sale of bonds
e. None of the above
86. At the current level of output (i.e., income) and at the current interest rate, suppose there is an excess supply of money. Given this information, we know that
a. an excess supply of bonds exists at the current price of bonds.
b. bond prices will rise as individuals adjust their portfolios of assets to this situation.
c. an increase in the interest rate will help eliminate the excess supply of money.
d. an increase in the money supply will help eliminate the excess supply of money.
e. None of the above
Page 21
87. Suppose there is a reduction in the price level. This reduction in the price level will cause
a. an increase in the interest rate.
b. a reduction in the interest rate.
c. a reduction in the equilibrium quantity of money.
d. an increase in the equilibrium quantity of money.
e. no effect on the interest rate.
88. One of the links between the goods and money market exists because ______
a. consumption depends on income.
b. investment depends on the interest rate.
c. the interest rate depends on the price of bonds.
d. government expenditures depend on the money supply.
e. the money supply depends on investment.
89. Which of the following statements is CORRECT?
a. Investment refers to the purchase of new goodsÄÄnew clothes and washing machines.
b. A firm decides to invest in a project even if the expected benefits do not cover the costs.
c. Interest cost is usually a small cost of an investment project.
d. An increase in the interest rate will cause an increase in the level of planned investment.
e. An increase in business confidence will usually cause an increase in the level of planned investment.
90. Planned investment spending
a. is directly related to the money supply.
b. is inversely related to the money supply.
c. is independent of either the interest rate or money supply.
d. increases as the interest rate increases.
e. decreases as the interest rate increases.
91. A(n) ______ in the interest rate ______ planned aggregate expenditure and ______ equilibrium income.
a. decrease; lowers; reduces
b. decrease; increases; increases
c. increases; increases; increases
d. decrease; decreases; increases
e. increase; lowers; increases
92. Which choice is TRUE?
a. Higher r causes lower I, higher AE, and higher Y.
b. Lower r causes lower I, higher AE, and higher Y.
c. Higher r causes higher I, lower AE, and lower Y.
d. Higher r causes lower I, lower AE, and lower Y.
e. Lower r causes lower I, lower AE, and lower Y.
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93. Which of the following statements is CORRECT?
a. The money supply depends on the level of income in the economy.
b. An increase in income causes a reduction in money demand.
c. A lower volume of transactions implies a greater demand for money.
d. An increase in income shifts the demand for money curve to the right.
e. Equilibrium in the money market occurs when the actual quantity of money in circulation is greater than what the economy wants to hold in money balances.
94. Which of the following is correct?
a. Higher Y causes greater money demand and a lower r
b. Lower Y causes lower money demand and higher r
c. Lower Y causes lower money demand and lower r
d. Higher Y causes lower money demand and lower r
e. Lower Y causes higher money demand and lower r
95. The crowding-out effect refers to the tendency of ______ in government spending to cause ______ in private investment spending.
a. increases; increases
b. increases; reductions
c. decreases; reductions
d. decreases; no change
e. increases; no change
96. The effects of an expansionary fiscal policy are that ______ less than if ______ did NOT ______.
a. r decreases; Md; increase
b. r increases; Md; decrease
c. Y decreases; r; decrease
d. I increases; Md; decrease
e. None of the above
97. An increase in the money supply will cause
a. a reduction in the interest rate.
b. an increase in investment.
c. an increase in income.
d. an increase in transactions and an increase in money demand.
e. All of the above
98. A reduction in the money supply will cause
a. a reduction in the interest rate.
b. an increase in investment.
c. an increase in income.
d. a reduction in transactions and a reduction in money demand.
e. All of the above
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99. An increase in government spending will cause
a. a reduction in the interest rate.
b. an increase in investment.
c. an increase in the size of the multiplier.
d. an increase in transactions and an increase in money demand.
e. None of the above
100. Suppose investment is independent of the interest rate (i.e., the planned investment curve is vertical). For this economy, an increase in the money supply will cause
a. no change in the interest rate.
b. an increase in the interest rate.
c. an increase in money demand as income increases.
d. no change in output.
e. an increase in output and no change in investment.
101. As investment becomes more responsive to (i.e., sensitive to) changes in the interest rate, we know that
a. a given increase in taxes will cause a smaller change in Y.
b. a given increase in taxes will cause the same change in Y.
c. a given increase in taxes will cause a larger change in Y.
d. fiscal policy will no longer affect output.
e. None of the above
102. A reduction in the money supply will cause
a. the LM curve to shift up.
b. the LM curve to shift down.
c. the IS curve to shift right.
d. the IS curve to shift left.
e. no shift in either the IS curve or LM curve.
103. A reduction in taxes will cause
a. the LM curve to shift up.
b. the LM curve to shift down.
c. the IS curve to shift right.
d. the IS curve to shift left.
e. no shift in either the IS curve or LM curve.
104. Suppose there is a simultaneous increase in the money supply and increase in government spending. Given this information, we know with certainty that
a. r will increase and Y will increase.
b. r will increase and Y will decrease.
c. Y will increase.
d. r will decrease.
e. investment will decrease.
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105. Suppose there is a simultaneous increase in the money supply and reduction in government spending. Given this information, we know with certainty that
a. r will increase and Y will increase.
b. r will increase and Y will decrease.
c. Y will increase.
d. r will decrease.
e. investment will decrease.
106. Suppose there is a simultaneous reduction in the money supply and reduction in taxes. Given this information, we know with certainty that
a. r will increase and Y will increase.
b. r will increase and Y will decrease.
c. Y will decrease.
d. r will decrease.
e. investment will decrease.
107. The aggregate demand curve shows a(n) ______ relationship between the ______.
a. positive; interest rate and planned investment
b. negative; interest rate and planned investment
c. negative; interest rate and money demand
d. positive; price level and aggregate output
e. inverse; price level and aggregate output
108. Refer to Figure 13.1. A reduction in the money supply at a given price level causes
a. aggregate output to move from Point B to Point A, but does not cause a shift of the aggregate demand curve.
b. aggregate output to move from Point A to Point B, but does not cause a shift of the aggregate demand curve.
c. the aggregate demand curve to shift from AD1 to AD0.
d. the aggregate demand curve to shift from AD1 to AD2.
e. neither a shift of the aggregate demand curve nor a change in aggregate output.
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109. At high levels of output, the short run aggregate supply curve is
a. vertical.
b. nearly vertical with a positive slope.
c. fairly flat with a positive slope.
d. negatively sloped.
e. nearly vertical with a negative slope.
110. When an economy produces at its ______ level of output, the aggregate supply curve becomes ______.
a. maximum; vertical
b. maximum; horizontal
c. minimum; vertical
d. minimum; flatly positively sloped
e. minimum; negatively sloped
111. Refer to Figure 13.3. A(n) ______ in the price of crude oil shifts to ______.
a. increase; AS2; AS1
b. increase; AS1; AS0
c. increase; AS1; AS2
d. decrease; AS2; AS1
e. decrease; no AS curve; a new location but would move aggregate output from A to B if the economy is on AS1
112. ______ represents the level of aggregate output that an economy can sustain in the long run without inflation.
a. Inflationary Gap
b. Potential GDP
c. Nominal GDP
d. Real GDP
e. NAIRU
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113. If the aggregate supply curve is vertical in the long run, ______ has(have) an effect on aggregate output in the long run.
a. monetary and fiscal policy
b. monetary policy does but fiscal policy does not
c. monetary policy does not but fiscal policy does
d. neither monetary nor fiscal policy
e. sometimes but not always the two policies do
114. According to Keynesian-type models, reduction in taxes will cause
a. a rightward shift in the AD curve.
b. a leftward shift in the AD curve.
c. a rightward shift in the AS curve.
d. a leftward shift in the AS curve.
e. only a movement along the AD and AS curves.
115. A reduction in the price level will cause
a. a rightward shift in the AD curve.
b. a leftward shift in the AD curve.
c. a rightward shift in the AS curve.
d. a leftward shift in the AS curve.
e. only a movement along the AD and AS curves.
116. In the short run, an increase in the money supply will cause a(n)
a. increase in P and an increase in Y.
b. increase in P and a reduction in Y.
c. reduction in P and an increase in Y.
d. reduction in P and a reduction in Y.
e. increase in P and no change in Y.
117. In the short run, a reduction in the money supply will cause a(n)
a. increase in P and an increase in Y.
b. increase in P and a reduction in Y.
c. reduction in P and an increase in Y.
d. reduction in P and a reduction in Y.
e. increase in P and no change in Y.
118. In the short run, a reduction in the supply of labor will cause a(n)
a. increase in P and an increase in Y.
b. increase in P and a reduction in Y.
c. reduction in P and an increase in Y.
d. reduction in P and a reduction in Y.
e. increase in P and no change in Y.
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119. Classical economists assumed
a. unemployment does exist.
b. there is never full employment.
c. the wage rate adjusts to maintain labor market equilibrium.
d. the wage rate does not adjust to equate the quantity of labor demanded with quantity of labor supplied.
e. that changes in the money supply would affect output in the long run.
120. Those who believe ______ are likely to believe ______.
a. wages are sticky; there is no AS curve
b. wages are sticky; the AS curve is horizontal
c. the wage rate adjusts quickly to clear the labor market; the AS curve is positively sloped
d. the wage rate adjusts quickly to clear the labor market; the AS curve is vertical
e. the wage rate does not adjust quickly to clear the labor market; the AS curve is vertical
121. When firms have imperfect information, they
a. know exactly what wage they need to set to clear the labor market.
b. have enough information at their disposal to know what the market-clearing wage is.
c. set wages too high and there will be a shortage of workers.
d. may set wages wrongÄÄwages that do not clear the labor market.
e. face a relatively fixed equilibrium wage level.
122. The Phillips curve is a graph showing the relationship between the ______ and the ______.
a. price level; unemployment rate
b. price level; rate of inflation
c. rate of inflation; money growth
d. aggregate output; price level
e. None of the above
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SCENARIO 2: Refer to Figure 14.4. The three Phillips curves in the graph show the relationship between the inflation rate and the unemployment rate.
123. Refer to Scenario 2. Suppose the price of imports decreases considerably, the
a. economy will experience stagflation.b. AD curve will shift to the right and the AS curve will stay put.c. AS curve will shift to the right and the AD curve will stay put.d. AS curve will shift to the left and the AD curve will stay put.
e. AD curve will shift to the left and the AS curve will stay put.
SCENARIO 3: Your noneconomist friend sees the term NAIRU in a business magazine and asks you what it means.
124. Refer to Scenario 3. You say it means that the change in the inflation rate will be ______ when the current unemployment rate is ______ the NAIRU level.
a. positive; belowb. positive; abovec. negative; belowd. zero; above
e. negative; at
125. If all wages were automatically and fully adjusted to changes in the aggregate price level, we would expect that the
a. AD curve would be vertical.b. AD curve would be horizontal.c. AS curve would be vertical.d. AS curve would be horizontal.
e. AS curve would be upward sloping.
126. ______ and ______ rise when the economy ______.
a. The taxable income of households; profits of firms; does not changeb. The taxable income of households; profits of firms; expandsc. The taxable income of households; profits of firms; contractsd. Personal income; corporate profits taxes; expandse. Government expenditures; budget deficits; contracts
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127. When the Fed "leans against the wind," it uses ______ to ______ gradually to try to prevent the economy from expanding too quickly.
a. the discount rate; raise the money supply
b. the discount rate; lower the money supply
c. open-market operations; raise interest rates
d. open-market operations; lower interest rates
e. the reserve requirement ratio; lower interest rates
128. "The fool in the shower" analogy is that government policy can make matters ______ if ______ varies more widely than it would have if no policy had been implemented.
a. better; tax revenue
b. better; the money supply
c. worse; personal saving
d. better; income
e. worse; income
129. The ______ lag is the amount of time policymakers need to become aware of the existence of a change in economic activity.
a. recognition
b. implementation
c. response
d. automatic stabilizer
e. time
130. The ______ lag is the amount of time it takes for policymakers to put into place a desired policy.
a. recognition
b. implementation
c. response
d. automatic stabilizer
e. time
131. According to the life-cycle theory of consumption, people
a. consume less than they earn in their early working years.
b. consume less than they earn in their retirement years.
c. consume more than they earn between their early working years and retirement.
d. tend to save the most during their working years.
e. do not save for retirement between their early working years and retirement.
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132. A key difference between the Keynesian consumption theory and the life-cycle theory is that the life-cycle theory suggests people generally base consumption and saving decisions on ______ income.
a. wealth as well as
b. interest rates as well as
c. not just current but also past
d. not just current but also expectations of future
e. only expectations of future
133. Given the existence of substitution and income effects, which of the following do we know with certainty is true?
a. An increase in the wage rate will have ambiguous effects on labor supply.
b. An increase in the wage rate raises the labor supply.
c. A decrease in the wage rate lowers the labor supply.
d. An increase in the wage rate lowers the labor supply.
e. A decrease in the wage rate raises the labor supply.
134. An ______ in wealth or nonlabor income leads to ______ in labor supply.
a. unexpected decrease; no change
b. expected increase; an increase
c. expected decrease; no change
d. unexpected decrease; an increase
e. unexpected decrease; a decrease
135. If the income effect dominates the substitution effect, then a(n) ______ in income tax rates that ______ after-tax wages will ______ labor supply.
a. increase; lower; lower
b. decrease; lower; lower
c. increase; raise; lower
d. decrease; raise; lower
e. decrease; lower; raise
136. Suppose the substitution effect is larger than the income effect associated with changes in wages. An increase in the wage will cause
a. no change in the supply of labor.
b. an increase in the supply of labor.
c. a reduction in the supply of labor.
d. a movement along the supply curve of labor.
e. None of the above
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137. Economists offered many explanations for the U.S. productivity decline of the late 1970s and early 1980s. Some economists
a. pointed to the high rate of saving in the United States compared to other parts of the world.
b. pointed to the high rate of investment in human capital and educational expenditures of the United States.
c. blamed decreased environmental and government regulation of U.S. businesses.
d. argued that the country spent too much on research and development.
e. None of the above
138. To increase the United States growth rate, some suggest policies to
a. allocate less funds to education.
b. decrease the saving rate.
c. increase government regulation.
d. increase human capital.
e. decrease research and development.
139. Advocates of growth believe
a. that, in applying new technologies and better production methods, we free resources to produce new and better products.
b. it generally has neutral effects on the quality of life.
c. it encourages the creation of artificial needs.
d. it does deplete a finite quantity of resources but that is not a problem.
e. it does improve the income distribution in an economy.
140. Which of the following is an antigrowth argument?
a. Growth makes possible improved conditions for the less fortunate.
b. Growth benefits the rich more than the poor.
c. Growth produces jobs.
d. Growth improves the quality of things that yield satisfaction directly.
e. Growth improves the quality of life by giving us more freedom.
141. A reduction in physical capital will cause the production possibilities frontier (ppf) to
a. become steeper.
b. become flatter.
c. remain constant.
d. shift up and to the right.
e. shift to the left.
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142. Monetarism
a. believes in an activist federal government.
b. believes that the government has a role to play in fighting inflation and unemployment.
c. stresses the difficulty in managing the economy because of, for example, the existence of policy lags.
d. believes that monetary and fiscal policy should be used to manage the macroeconomy.
e. does not support the notion of the quantity theory of money.
143. The income velocity of money is the ratio of
a. the stock of money (M) to nominal GDP.
b. nominal GDP to the overall price level (P).
c. P to M.
d. nominal GDP to M.
e. real GDP to real money balances (M/P).
144. The quantity theory of money allows monetarists to obtain a number of economic predictions by assuming a constant
a. velocity of money.
b. real output (Y).
c. nominal GDP.
d. overall price level.
e. stock of money.
145. If the quantity theory of money holds and the money supply triples, then
a. nominal GDP remains unchanged.
b. nominal GDP also triples.
c. the overall price level triples.
d. real output (Y) triples.
e. the overall price level remains unchanged.
146. Concerning the debate over the usefulness of monetarist theory,
a. there is no time lag between a change in the money supply and its effects on nominal GDP.
b. whatever the empirical results, monetarist theory is the more useful approach to understanding how the macroeconomy works.
c. it is primarily theoretical.
d. we cannot resolve it by looking at facts about the real world and seeing whether they are in accord with the predictions of theory.
e. the appropriate question is, "Is there a measure of the money supply and a choice of the time lag between a change in the money supply and its effects on nominal GDP such that V is in effect constant?"
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147. Most monetarists
a. oppose the idea that the money supply should grow at a rate equal to the average growth of real output (income).
b. argue that the United States could not have avoided the inflation it encountered over the years.
c. advocate expanding the money supply during bad times and slowing its growth during good times.
d. advocate an activist monetary stabilization policy.
e. blame the federal government for most economic instability.
148. Most Keynesians
a. agree after the experience of the 1970s that government cannot finely calibrate monetary and fiscal policies.
b. do not advocate stabilization policies because they fear bigger economic disasters.
c. agree with monetarists on the appropriate role of fiscal policy.
d. do not advocate coordinated monetary and fiscal policy tools to fight inflation and unemployment.
e. support the notion that monetary and fiscal policy can "fine-tune" the economy.
149. New classical macroeconomics developed from two different sources: ______ and ______.
a. supply-side economics; libertarianism
b. theoretical; empirical critiques of existing, or traditional, macroeconomics
c. socialism; communism
d. capitalism; supply-side economics
e. Post-Keynesian; monetarist theories of the macroeconomy
150. When expectations are rational,
a. there is neither equilibrium nor disequilibrium.
b. half the time equilibrium exists and the other half of time disequilibrium exists.
c. equilibrium exists only temporarily as a result of random, unpredictable shocks.
d. disequilibrium exists most of the time as a result of predictable shocks.
e. temporary periods of disequilibrium exist as a result of random, unpredictable shocks.
151. The assumption that expectations are rational implies
a. that output can deviate from full employment as a result of unexpected shocks.
b. a need for government stabilization policies.
c. that unemployment is a problem that governments need to worry about.
d. unemployment exists because of predictable shocks that the government can counteract.
e. All of the above
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152. Robert E. Lucas assumes that
a. people and firms are generalists in production and specialists in consumption.
b. people and firms are specialists in production but generalists in consumption.
c. buying and selling are symmetric activities.
d. people know more about the prices of the things they buy than they do about the prices of the things they sell.
e. most companies tend to concentrate on producing a large range of products, but they typically buy a smaller range of inputs.
153. ______ in combination with the ______ assumption implies that anticipated policy changes do not affect real output.
a. The Laffer curve; Lucas supply function
b. Supply-side economics; rational expectations
c. The Lucas supply function; rational expectations
d. Real business cycle theory; adaptive expectations
e. Monetarism; adaptive expectations
154. Real business cycle theory
a. argues that AD curve shifts are responsible for fluctuations in output.
b. emphasizes only changes in tax rates.
c. ignores the effects of shocks to the production technology.
d. is no longer on the forefront of research in macroeconomics.
e. argues that fluctuations in output are caused by shifts in aggregate supply.
155. Supply-side economics argues that
a. high rates of taxation and heavy regulation can have a negative effect on economic activity.
b. we need to explain business cycle fluctuations assuming complete price and wage flexibility.
c. output depends on the difference between actual and expected price levels.
d. an increase in the tax rate will always raise tax revenue.
e. we must increase government regulation to encourage firms to invest more.
156. The Laffer curve illustrates that
a. there is no tax rate beyond which the supply response is large enough to lead to a decrease in tax revenue for further increases in the tax rate.
b. changes in the tax rate will affect the level of revenue the government collects.
c. with high tax rates, an increase in the tax rate will always cause an increase in tax revenues.
d. when tax rates are high, a tax rate cut reduces economic activity and causes an increase in tax revenue.
e. a 100% tax rate maximizes tax revenue.
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157. Research done during the 1980s suggests tax ______ seem to ______ the supply of labor.
a. increases; increase
b. increases; not change
c. increases; decrease
d. cuts; decrease
e. changes; not change
SCENARIO 1: You are an avid advocate of a school sometimes referred to as the new classical macroeconomics and a friend of yours, who knows nothing about it, asks you some questions about your school.
158. New classical macroeconomics developed on a theoretical level from
a. growing dissatisfaction with the way traditional models treat expectations.
b. a desire to stress aggregate demand and the links between the money market and the goods market.
c. a belief that the government had a role to play in fighting inflation and unemployment.
d. a desire to stress that "money matters."
e. a desire to advocate that the money supply should grow at a rate equal to the average growth of real output.
SCENARIO 1: You are an avid advocate of a school sometimes referred to as the new classical macroeconomics and a friend of yours, who knows nothing about it, asks you some questions about your school.
159. The Lucas supply function
a. is an important part of many new classical macroeconomic theories.
b. says real output (Y) depends on the sum of the actual and expected price level.
c. states the expected price level minus the actual price level is the price surprise.
d. states that real output can change from its fixed level even if there is no price surprise.
e. states that unexpected changes in the price level can fool workers and firms into thinking relative prices have not changed.
SCENARIO 1: You are an avid advocate of a school sometimes referred to as the new classical macroeconomics and a friend of yours, who knows nothing about it, asks you some questions about your school.
160. The attempt to explain business cycle fluctuations under the assumptions of complete price and wage flexibility and rational expectations is called ______.
a. monetarism
b. the rational expectations hypothesis
c. the Lucas supply function
d. supply-side economics
e. the real business cycle theory
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161. Which of the following represents the Lucas supply function?
a. Y = C + I + G + (EX - IM)
b. Y = f(P - Pe)
c. Y = f(Pe - P)
d. Y = f(Pe/P)
e. None of the above
162. According to the Lucas supply function, if P < Pe, we know that
a. output is constant.
b. output is increasing.
c. output is decreasing.
d. the money supply must have decreased.
e. None of the above
163. According to supply-side economics, we know with certainty that a reduction in the tax rate will cause
a. an increase in tax revenue.
b. a reduction in tax revenue.
c. no change in tax revenue.
d. tax revenue to be maximized.
e. an increase in the incentive to work.
164. According to the new classical model with rational expectations, an expected 5% increase in the money supply will cause
a. an increase in output and an increase in the price level.
b. an increase in output with no change in the price level.
c. an increase in the price level and no change in output.
d. no change in output and no change in the price level.
e. None of the above
165. According to the new classical model with rational expectations, an unexpected 5% reduction in the money supply will cause
a. a reduction in output and a reduction in the price level.
b. a reduction in output with no change in the price level.
c. a reduction in the price level and no change in output.
d. no change in output and no change in the price level.
e. None of the above
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166. David Ricardo's theory of comparative advantage argued
a. one country may enjoy an advantage in the production of a product over another country if it uses fewer resources to produce that product than the other country does.
b. one country may enjoy an advantage in the production of a product over another country if it uses more resources to produce that product than the other country does.
c. that trade prevents countries from specializing in producing the products they produce best.
d. specialization and free trade will benefit all trading partners, even those that may be absolutely less-efficient producers.
e. specialization and free trade will benefit all trading partners, except for those that may be absolutely less-efficient producers.
167. Refer to Figure 19.1. Iceland has ______ advantage in the production of blue jeans whereas Greenland has ______ advantage in the production of sweatshirts.
a. neither a comparative nor an absolute; a comparative and an absolute
b. a comparative and an absolute; neither a comparative nor an absolute
c. neither a comparative nor an absolute; neither a comparative nor an absolute
d. a comparative but not absolute; a comparative but not absolute
e. None of the above
168. Suppose the dollar exchanges for 125 Japanese yen and the price of a camera in Japan is 25,000 yen. The dollar price of the camera is approximately $______.
a. 150
b. 175
c. 200
d. 225
e. 250
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SCENARIO 2: Suppose the United States and Great Britain produce two goodsÄÄcomputers and raincoats. The following table gives the current prices of both goods as domestic buyers see them.
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
United States Great Britain
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Computers $5 è4 pounds
Raincoats $2 è2 pounds
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Assume the exchange rate is $1.75 = è1 pound.
169. Refer to Scenario 2. A dollar buys ______% of a computer in the United States; but if converted into a British pound, it will buy about ______% of a computer in Great Britain.
a. 20; 14
b. 25; 20
c. 30; 25
d. 40; 30
e. 50; 35
SCENARIO 2: Suppose the United States and Great Britain produce two goodsÄÄcomputers and raincoats. The following table gives the current prices of both goods as domestic buyers see them.
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
United States Great Britain
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Computers $5 è4 pounds
Raincoats $2 è2 pounds
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
Assume the exchange rate is $1.75 = è1 pound.
170. Refer to Scenario 2. Assume the exchange rate changes to $1 = è1 pound. At this exchange rate,
a. Americans find that British-produced computers and raincoats are less expensive than computers and raincoats produced in the United States.
b. the British find that U.S.-produced computers and raincoats are less expensive than computers and raincoats produced in Great Britain.
c. U.S. buyers will buy British computers but both British and American buyers will be indifferent between U.S. and British raincoats.
d. U.S. buyers will buy British raincoats but both British and American buyers will be indifferent between U.S. and British computers.
e. the British will buy U.S. raincoats but both British and American buyers will be indifferent between U.S. and British computers.
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171. We divide the balance of payments into two major accounts:
a. the income account and the balance sheet account.
b. the flow and stock accounts.
c. the current and capital accounts.
d. the trade deficit and budget deficit accounts.
e. the goods market and service sector accounts.
172. United States exports ______ foreign exchange for the United States and are a ______ item on the ______ account.
a. use up; credit; current
b. use up; debit; capital
c. earn; debit; current
d. earn; credit; current
e. earn; credit; capital
173. Which of the following is NOT included in the current account?
a. Exports of goods
b. Exports of services
c. Investment income
d. Transfer payments
e. Statistical discrepancy
174. If the statistical discrepancy in the U.S. balance of payments is positive, then
a. net exports of goods are larger than net exports of services.
b. the change in U.S. private and government assets abroad is larger than the change in foreign private and government assets in the United States.
c. the imbalance on current account is larger than the imbalance on capital account.
d. the imbalance on capital account is larger than the imbalance on current account.
e. the balance on current account equals the balance on capital account.
175. When the prices of a country's imports decrease,
a. the price of domestic goods may decrease in response
b. the price of domestic goods may increase in response.
c. the price of domestic goods will not change.
d. there will be no price feedback effect.
e. the country's aggregate supply curve will shift to the right.
176. Speculators who anticipate ______ in the value of the dollar relative to the pound will ______.
a. no change; demand dollars
b. an increase; demand dollars
c. a decline; supply pounds
d. an increase; demand pounds
e. an increase; supply dollars
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177. The quantity supplied of pounds is likely to ______ when the price of pounds (dollars per pound) ______.
a. fall; rises
b. fall; falls
c. rise; falls
d. not change; falls
e. rise; does not change
178. According to the J-curve, following a currency appreciation, a country's balance of
a. trade will not change.
b. payments will improve.
c. trade may get worse before it gets better.
d. trade may get better before it gets worse.
e. trade will get worse.
179. Consider monetary policy with flexible exchange rates. Assume the economy is below full employment and the Fed decides to expand the money supply through open market purchases of U.S. government securities.
a. This results in an increase in the interest rate.
b. A lower interest rate means a higher foreign demand for U.S. securities.
c. The quantity of dollars demanded increases.
d. A cheaper dollar stimulates the domestic economy.
e. A cheaper dollar means fewer U.S. exports and more imports.
SCENARIO 2: As an expert on foreign exchange, you have been asked some questions about the foreign exchange market.
180. Consider a 10% decrease in the value of the dollar against the Japanese yen. Dollars buy ______ yen and yen buy ______ dollars.
a. more; fewer
b. fewer; more
c. the same amount of; the same amount of
d. more; more
e. fewer; fewer
SCENARIO 2: As an expert on foreign exchange, you have been asked some questions about the foreign exchange market.
181. The demand for, and supply of, dollars on foreign exchange markets determines ______; the demand for money balances and the total domestic money supply determine ______.
a. the terms of trade; the interest rate
b. the interest rate; exchange rates
c. exchange rates; the interest rate
d. exchange rates; the terms of trade
e. the balance of payments; the interest rate
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SCENARIO 2: As an expert on foreign exchange, you have been asked some questions about the foreign exchange market.
182. An increase in British demand for U.S. goods and services is likely to
a. decrease the quantity of pounds supplied and not change the quantity of pounds demanded.b. not change the quantity of pounds supplied but increase the quantity of pounds demanded.c. not change the quantity of pounds supplied.d. increase the quantity of pounds demanded.
e. increase the quantity of pounds supplied.
183. Refer to Figure 20.1. The exchange rate is currently $3 per pound. A decrease in the price level in the United States relative to the price level in England will
a. decrease the exchange rate to $2.00 per pound.b. increase the exchange rate between $3.00 and $4.00 per pound.c. decrease the exchange rate below $2.00 per pound.d. increase the exchange rate above $4.00 per pound.
e. not affect the exchange rate.
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184. Refer to Figure 20.1. If supply remains unchanged at S0 and the dollar depreciates while the pound appreciates, then
a. neither the demand for pounds nor the exchange rate changed.
b. the demand for pounds decreased from D1 to D0.
c. the demand for pounds increased from D0 to D1.
d. the exchange rate changed from $2.50 to $3.00 per pound.
e. the exchange rate changed from $3 per pound to $2 per pound.
185. Refer to Figure 20.1. Suppose the exchange market is in equilibrium. If U.S. interest rates fall relative to British interest rates, the pound will ______ and the dollar will ______.
a. depreciate; depreciate
b. appreciate; appreciate
c. appreciate; depreciate
d. depreciate; appreciate
e. maintain its exchange rate with the dollar; maintain its exchange rate with the pound
186. Which of the following is NOT included in the current account?
a. Exports of services
b. Change in U.S. government assets abroad
c. Net investment income
d. Net transfer payments
e. Imports of goods
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187. Which of the following is NOT included in the current account?
a. Exports of services
b. Change in foreign private assets in the United States
c. Net investment income
d. Net transfer payments
e. Imports of goods
188. The Law of One Price indicates that the
a. interest rate on domestic and foreign bonds must be the same.
b. exchange rate will equal 1.
c. exchange rate will exceed 1.
d. exchange rate will adjust so that the price of similar goods in different countries is the same.
e. balance of payments will be zero.
Page 1
1. c
2. a
3. a
4. d
5. d
6. c
7. a
8. b
9. e
10. b
11. d
12. a
13. e
14. b
15. d
16. a
17. e
18. b
19. a
20. d
21. a
22. c
23. a
24. b
25. c
26. b
27. c
28. e
29. e
30. a
31. b
32. a
33. b
34. c
35. d
36. c
37. c
38. e
39. d
40. a
41. a
42. d
43. a
44. c
45. b
46. c
47. a
48. c
49. e
50. a
51. c
52. d
53. c
54. a
55. c
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56. e
57. b
58. c
59. d
60. e
61. d
62. b
63. d
64. e
65. a
66. e
67. b
68. d
69. b
70. c
71. b
72. a
73. c
74. c
75. b
76. d
77. d
78. b
79. d
80. b
81. c
82. b
83. b
84. b
85. a
86. b
87. b
88. b
89. e
90. e
91. b
92. d
93. d
94. c
95. b
96. d
97. e
98. d
99. d
100. d
101. a
102. a
103. c
104. c
105. d
106. e
107. e
108. c
109. b
110. a
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111. b
112. b
113. d
114. a
115. e
116. a
117. d
118. b
119. c
120. d
121. d
122. e
123. c
124. a
125. c
126. b
127. c
128. e
129. a
130. b
131. d
132. d
133. a
134. d
135. d
136. d
137. e
138. d
139. a
140. b
141. e
142. c
143. d
144. a
145. b
146. e
147. e
148. a
149. b
150. e
151. a
152. b
153. c
154. e
155. a
156. b
157. c
158. a
159. a
160. e
161. b
162. c
163. e
164. c
165. a
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166. d
167. e
168. c
169. a
170. c
171. c
172. d
173. e
174. c
175. a
176. b
177. b
178. d
179. d
180. b
181. c
182. e
183. a
184. c
185. c
186. b
187. b
188. d
