question
1. C
answer
A binding minimum wage is likely to cause:
A. Frictional unemployment.
B. Structural unemployment.
C. Cyclical unemployment.
D. Natural unemployment.
A. Frictional unemployment.
B. Structural unemployment.
C. Cyclical unemployment.
D. Natural unemployment.
question
2. A
answer
Unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. natural unemployment.
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. natural unemployment.
question
3. C
answer
The increased transaction costs caused by inflation are known as:
A. menu costs.
B. shoe-leather costs.
C. unit-of-account costs.
D. redistributive costs.
A. menu costs.
B. shoe-leather costs.
C. unit-of-account costs.
D. redistributive costs.
question
4. C
answer
During times of very high inflation firms are forced to change prices more often than they would if the price levels were more stable, thus incurring costs that are passed along to the consumer. This is referred to as:
A. shoe-leather costs.
B. unit-of-account costs.
C. real wage costs.
D. menu costs.
A. shoe-leather costs.
B. unit-of-account costs.
C. real wage costs.
D. menu costs.
question
5. C
answer
Price indexes measure:
A. Changes in the unemployment rate.
B. Fluctuations in aggregate output.
C. Fluctuations in the aggregate price level.
D. Changes in consumption patterns.
A. Changes in the unemployment rate.
B. Fluctuations in aggregate output.
C. Fluctuations in the aggregate price level.
D. Changes in consumption patterns.
question
6. B
answer
The convergence hypothesis states that relatively poor countries:
A. Should always have lower rates of growth of real GDP per capita as compared to rich countries.
B. Should eventually have rates of growth of real GDP per capita that approach those of rich countries.
C. Will never converge to the growth rates of real GDP per capita experienced by rich countries.
D. Will eventually have much higher rates of growth of real GDP per capita as compared to rich countries.
A. Should always have lower rates of growth of real GDP per capita as compared to rich countries.
B. Should eventually have rates of growth of real GDP per capita that approach those of rich countries.
C. Will never converge to the growth rates of real GDP per capita experienced by rich countries.
D. Will eventually have much higher rates of growth of real GDP per capita as compared to rich countries.
question
7. B
answer
From the point of view of savers, the interest rate represents:
A. the cost of researching different investment opportunities.
B. the cost of monitoring investments to make sure they are secure.
C. the reward for accepting a permanently lower standard of living.
D. the reward for postponing consumption.
A. the cost of researching different investment opportunities.
B. the cost of monitoring investments to make sure they are secure.
C. the reward for accepting a permanently lower standard of living.
D. the reward for postponing consumption.
question
8. A
answer
Crowding out is:
A. the negative effects of taxation on investment decisions.
B. the positive effects of taxation on investment decisions.
C. the negative effect of government budget deficits on private investment.
D. the positive effect of government budget deficits on private investment.
A. the negative effects of taxation on investment decisions.
B. the positive effects of taxation on investment decisions.
C. the negative effect of government budget deficits on private investment.
D. the positive effect of government budget deficits on private investment.
question
9. D
answer
An example of a discretionary fiscal policy would be:
A. decreasing personal income taxes during a recession.
B. unemployment insurance payments.
C. a progressive income tax.
D. food stamp benefits.
A. decreasing personal income taxes during a recession.
B. unemployment insurance payments.
C. a progressive income tax.
D. food stamp benefits.
question
10. C
answer
A $75 billion tax cut will:
A. increase GDP by the same amount as a $75 billion increase in government purchases of goods and services.
B. increase GDP by a smaller amount than would a $75 billion increase in government purchases of goods and services.
C. not affect aggregate demand, as it will only shift aggregate supply.
D. increase the marginal propensity to consume, thereby decreasing the value of the multiplier.
A. increase GDP by the same amount as a $75 billion increase in government purchases of goods and services.
B. increase GDP by a smaller amount than would a $75 billion increase in government purchases of goods and services.
C. not affect aggregate demand, as it will only shift aggregate supply.
D. increase the marginal propensity to consume, thereby decreasing the value of the multiplier.
question
11. D
answer
Suppose that Congress votes to increase personal income taxes in order to balance the budget. As a result, automatic stabilizers will:
A. increase the contractionary impact of the decrease in aggregate demand.
B. decrease the contractionary impact of the decrease in aggregate demand.
C. decrease the expansionary impact of the increase in aggregate demand.
D. increase the expansionary impact of the increase in aggregate demand.
A. increase the contractionary impact of the decrease in aggregate demand.
B. decrease the contractionary impact of the decrease in aggregate demand.
C. decrease the expansionary impact of the increase in aggregate demand.
D. increase the expansionary impact of the increase in aggregate demand.
question
12. C
answer
The multiplier effect of changes in government purchases of goods and services is equal to:
A. MPS/(1 - MPC).
B. 1/(1 - MPS).
C. MPC/(1 - MPS).
D. 1/(1 - MPC).
A. MPS/(1 - MPC).
B. 1/(1 - MPS).
C. MPC/(1 - MPS).
D. 1/(1 - MPC).
question
13. D
answer
Due to the effect of the multiplier, the _____ in GDP that results from an increase in government spending is _____, in absolute value, than the increase in government spending.
A. increase; greater
B. decrease; greater
C. increase; less
D. decrease; less
A. increase; greater
B. decrease; greater
C. increase; less
D. decrease; less
question
14. B
answer
The amount of the aggregate demand shift in response to an increase in government spending depends on:
A. the slope of the short-run aggregate supply curve.
B. the slope of the long-run aggregate supply curve.
C. the size of the multiplier.
D. whether the increase in government spending is supported by both political parties.
A. the slope of the short-run aggregate supply curve.
B. the slope of the long-run aggregate supply curve.
C. the size of the multiplier.
D. whether the increase in government spending is supported by both political parties.
question
15. D
answer
Assume that real GDP is $1,800 and potential GDP is $1,500. The marginal propensity to consume is 0.80. Which of the following fiscal policy actions should policy makers take?
A. decrease government spending by $60
B. increase government spending by $60
C. decrease government spending by $300
D. increase government spending by $150
A. decrease government spending by $60
B. increase government spending by $60
C. decrease government spending by $300
D. increase government spending by $150
question
16. C
answer
Because transfer payments rise when the economy is contracting, and fall when it is expanding, they are referred to as:
A. automatic stabilizers
B. discretionary policy measures.
C. fiscal lags.
D. zero-balance accounts.
A. automatic stabilizers
B. discretionary policy measures.
C. fiscal lags.
D. zero-balance accounts.
question
17. B
answer
Which of the following discretionary policies will shift the aggregate expenditure line down and decrease GDP?
A. a decrease in taxes
B. an increase in transfer payments
C. a decrease in government spending
D. an increase in unemployment insurance benefits
A. a decrease in taxes
B. an increase in transfer payments
C. a decrease in government spending
D. an increase in unemployment insurance benefits
question
18. D
answer
If the MPC is 0.9 and government transfers increase by $100 billion, GDP will:
A. increase by less than $1,000 billion.
B. decrease by less than $1,000 billion.
C. increase by more than $1,000 billion.
D. decrease by more than $1,000 billion.
A. increase by less than $1,000 billion.
B. decrease by less than $1,000 billion.
C. increase by more than $1,000 billion.
D. decrease by more than $1,000 billion.
question
19. D
answer
The money multiplier is the ratio of:
A. the money supply to the monetary base.
B. bank deposits to currency in circulation.
C. bank reserves to bank deposits.
D. M2 to M1.
A. the money supply to the monetary base.
B. bank deposits to currency in circulation.
C. bank reserves to bank deposits.
D. M2 to M1.
question
20. C
answer
Bank reserves include:
A. checking deposits and savings deposits.
B. loans to businesses and consumers.
C. currency held in a vault plus deposits at the Federal Reserve.
D. Treasury Bills and loans to businesses.
A. checking deposits and savings deposits.
B. loans to businesses and consumers.
C. currency held in a vault plus deposits at the Federal Reserve.
D. Treasury Bills and loans to businesses.
question
21. D
answer
Assume that Bank of America has $1 million in loans, $2 million in deposits, and $300,000 in reserves. If the reserve ratio set by the Federal Reserve is 0.2, then how much of the bank's deposits must be held as reserves?
A. $400,000
B. $600,000
C. $200,000
D. $60,000.
A. $400,000
B. $600,000
C. $200,000
D. $60,000.
question
22. D
answer
The money supply expands when:
A. you cash a paycheck.
B. you deposit your paycheck into your checking account.
C. you deposit your paycheck into your savings account.
D. banks make loans against the excess reserves they hold.
A. you cash a paycheck.
B. you deposit your paycheck into your checking account.
C. you deposit your paycheck into your savings account.
D. banks make loans against the excess reserves they hold.
question
23. A
answer
Which of the following is NOT an asset of a bank?
A. Currency held in the bank's vault
B. Households' checking deposits held at the bank
C. Bank loans to businesses and consumers
D. The bank's deposits at the Federal Reserve
A. Currency held in the bank's vault
B. Households' checking deposits held at the bank
C. Bank loans to businesses and consumers
D. The bank's deposits at the Federal Reserve
question
24. D
answer
The monetary base is:
A. Bank reserves and the sum of currency in circulation.
B. Equal to M1.
C. Equal to M2.
D. The amount of currency held in bank vaults.
A. Bank reserves and the sum of currency in circulation.
B. Equal to M1.
C. Equal to M2.
D. The amount of currency held in bank vaults.
question
25. D
answer
Suppose that excess reserves rise by $5,000 in the banking system and that the reserve ratio is 0.1. Assume that banks loan out all their excess reserves and that the public withdraws no money in cash. In this case, what is the change in checkable deposits?
A. $500
B. $5,000
C. $50,000
D. $500,000
A. $500
B. $5,000
C. $50,000
D. $500,000
question
26. D
answer
1. A country that receives a net capital inflow must:
A. export more goods than it imports.
B. export more services than goods.
C. maintain a fixed exchange rate.
D. run a matching current account deficit.
A. export more goods than it imports.
B. export more services than goods.
C. maintain a fixed exchange rate.
D. run a matching current account deficit.
question
27. A
answer
A capital inflow is most likely to occur when:
A. domestic economic growth is relatively low.
B. domestic inflation is relatively high.
C. domestic real interest rates are relatively high.
D. domestic unemployment is relatively high.
A. domestic economic growth is relatively low.
B. domestic inflation is relatively high.
C. domestic real interest rates are relatively high.
D. domestic unemployment is relatively high.
question
28. D
answer
The balance of payments on goods and services:
A. is the difference between the value of exports and the value of imports.
B. is the sum of all liabilities incurred in financial transactions with foreigners.
C. reflects the sale of financial assets to foreigners.
D. reflects the amount of foreign exchange reserves held by the central bank.
A. is the difference between the value of exports and the value of imports.
B. is the sum of all liabilities incurred in financial transactions with foreigners.
C. reflects the sale of financial assets to foreigners.
D. reflects the amount of foreign exchange reserves held by the central bank.
question
29. D
answer
Which of the following situations would affect the balance of payments on financial account?
A. King Estate, a U.S. wine producer, sells newly produced wine to France.
B. The United States purchases oil from Saudi Arabia.
C. Goldman Sachs, a U.S. financial company, buys consulting services from UBS, a Swiss financial company.
D. Kanye West, an American citizen, buys a house and 100 acres of property in Cabo San Lucas, Mexico.
A. King Estate, a U.S. wine producer, sells newly produced wine to France.
B. The United States purchases oil from Saudi Arabia.
C. Goldman Sachs, a U.S. financial company, buys consulting services from UBS, a Swiss financial company.
D. Kanye West, an American citizen, buys a house and 100 acres of property in Cabo San Lucas, Mexico.
question
30. B
answer
For any country, it will be true that:
A. total exports will equal total imports.
B. the sum of the current account and the financial account will be zero.
C. the sum of the merchandise trade balance and factor income will be zero.
D. the sum of the current account and factor income will be zero.
A. total exports will equal total imports.
B. the sum of the current account and the financial account will be zero.
C. the sum of the merchandise trade balance and factor income will be zero.
D. the sum of the current account and factor income will be zero.
question
31. A
answer
Which of the following would NOT be included in the U.S. balance of payments on current account?
A. the proceeds from sales of U.S. goods and services to foreigners
B. funds transferred to residents of foreign countries from U.S. immigrants
C. the value of U.S. assets sold to a foreign country
D. U.S. factor income earned from a foreign country
A. the proceeds from sales of U.S. goods and services to foreigners
B. funds transferred to residents of foreign countries from U.S. immigrants
C. the value of U.S. assets sold to a foreign country
D. U.S. factor income earned from a foreign country
question
32. C
answer
If the U.S. dollar changes from $1 = €1 to $0.80 = €1, then...
A. The dollar has depreciated relative to the euro.
B. The dollar has been fixed by the United States and the euro bloc.
C. The dollar has appreciated relative to the euro.
D. U.S. goods are now cheaper in the euro bloc.
A. The dollar has depreciated relative to the euro.
B. The dollar has been fixed by the United States and the euro bloc.
C. The dollar has appreciated relative to the euro.
D. U.S. goods are now cheaper in the euro bloc.
question
33. A
answer
If French consumers buy more American-made wine, then:
A. the demand for dollars will increase.
B. the supply of euros will decrease.
C. the supply of both dollars and euros will increase.
D. the demand for both dollars and euros will increase.
A. the demand for dollars will increase.
B. the supply of euros will decrease.
C. the supply of both dollars and euros will increase.
D. the demand for both dollars and euros will increase.
question
34. B
answer
The balance of payments for goods and services is (Current Account)?
A. $51,000
B. $48,000
C. $3,000
D. -$29,000
A. $51,000
B. $48,000
C. $3,000
D. -$29,000
question
35. D
answer
The money supply measured by M1 is?
A. $325 billion
B. $450 billion
C. $1,425 billion
D. $1,875 billion
A. $325 billion
B. $450 billion
C. $1,425 billion
D. $1,875 billion
question
36. B
answer
President Johnson's use of a temporary 10% surcharge (increase) on income taxes is a classic example of?
A. Expansionary fiscal policy
B. Contractionary fiscal policy
C. Expansionary monetary policy
D. Contractionary monetary policy
A. Expansionary fiscal policy
B. Contractionary fiscal policy
C. Expansionary monetary policy
D. Contractionary monetary policy
question
B. Structural Unemployment
answer
The country's balance of payments on Current Account is?
A. $355 billion
B. -$395 billion
C. $375 billion
D. -$355 billion
A. $355 billion
B. -$395 billion
C. $375 billion
D. -$355 billion
question
B. Structural unemployment.
answer
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question
B. Shoe-leather costs.
answer
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question
D. Menu costs.
answer
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question
B. Fluctuations in aggregate output.
answer
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question
B. Should eventually have rates of growth of real GDP per capita that approach those of rich countries.
answer
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question
D. The reward for postponing consumption.
answer
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question
C. The negative effect of government budget deficits on private investment.
answer
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question
A. Decreasing personal income taxes during a recession.
answer
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question
B. Increase GDP by a smaller amount than would a $75 billion increase in government purchases of goods and services.
answer
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question
B. Decrease the contractionary impact of the decrease in aggregate demand.
answer
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question
D. 1/(1 - MPC).
answer
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question
A. Increase; greater
answer
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question
C. The size of the multiplier.
answer
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question
A. Decrease government spending by $60
Correct: The MPC = 0.80, so the multiplier is 1/(1 - 0.80) = 5. Because real GDP needs to decrease by $300, government spending must decrease by $60.
Correct: The MPC = 0.80, so the multiplier is 1/(1 - 0.80) = 5. Because real GDP needs to decrease by $300, government spending must decrease by $60.
answer
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question
A. Automatic stabilizers
answer
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question
C. A decrease in government spending
Correct: Decreasing government spending shifts the aggregate expenditure line down and decreases GDP.
Correct: Decreasing government spending shifts the aggregate expenditure line down and decreases GDP.
answer
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question
A. Increase by less than $1,000 billion.
Correct: Increasing government transfers will increase GDP, but the increase is less than what would occur with an increase in government spending. The increase in GDP due to a $100billion increase in government transfers will be $900 billion, while the increase in GDP due to a $100 billion increase in government spending will be $1,000 billion.
Correct: Increasing government transfers will increase GDP, but the increase is less than what would occur with an increase in government spending. The increase in GDP due to a $100billion increase in government transfers will be $900 billion, while the increase in GDP due to a $100 billion increase in government spending will be $1,000 billion.
answer
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question
A. The money supply to the monetary base.
Correct: The money multiplier is a number that attempts to measure how much the total money supply would increase in response to a given injection of new bank reserves or new currency in circulation.
Correct: The money multiplier is a number that attempts to measure how much the total money supply would increase in response to a given injection of new bank reserves or new currency in circulation.
answer
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C. Currency held in a vault plus deposits at the Federal Reserve.
Correct: This is the correct definition of bank reserves.
Correct: This is the correct definition of bank reserves.
answer
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question
A. $400,000
Correct: The reserve requirement tells us what fraction of deposits must be held as reserves. In this example, multiply the reserve requirement by the deposit amount = 0.2 × $2 million = $400,000.
Correct: The reserve requirement tells us what fraction of deposits must be held as reserves. In this example, multiply the reserve requirement by the deposit amount = 0.2 × $2 million = $400,000.
answer
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question
D. Banks make loans against the excess reserves they hold.
Correct: This is an example of how a change in the monetary base will affect the money supply. Bank reserves, a component of the monetary base, can be used to finance an even greater expansion in the money supply.
Correct: This is an example of how a change in the monetary base will affect the money supply. Bank reserves, a component of the monetary base, can be used to finance an even greater expansion in the money supply.
answer
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question
B. Households' checking deposits held at the bank
Correct: Checking accounts at the bank, whether held by businesses or consumers, are not bank assets but bank liabilities.
Correct: Checking accounts at the bank, whether held by businesses or consumers, are not bank assets but bank liabilities.
answer
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A. Bank reserves and the sum of currency in circulation.
Correct: This is the definition of the monetary base. There is no immediate change in the monetary base when cash is moved into and out of checking accounts.
Correct: This is the definition of the monetary base. There is no immediate change in the monetary base when cash is moved into and out of checking accounts.
answer
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C. $50,000
Correct: The change equals $5,000 × (1/0.1) = $5,000 × 10 = $50,000.
Correct: The change equals $5,000 × (1/0.1) = $5,000 × 10 = $50,000.
answer
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question
D. Run a matching current account deficit.
Correct: The current account deficit means that the domestic currency will be flowing abroad to purchase imports. This currency then returns as a capital inflow. Recall that the balance of payments on current account plus the balance of payments on financial account must sum to zero.
Correct: The current account deficit means that the domestic currency will be flowing abroad to purchase imports. This currency then returns as a capital inflow. Recall that the balance of payments on current account plus the balance of payments on financial account must sum to zero.
answer
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question
C. domestic real interest rates are relatively high.
Correct: Capital will flow to those places where it finds a higher return.
Correct: Capital will flow to those places where it finds a higher return.
answer
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question
A. is the difference between the value of exports and the value of imports.
Correct: This account item, the difference between the value of exports and the value of imports, will be negative when the country runs a trade deficit. Consider that the balance of payments on goods and services is part of the current account, rather than the financial account.
Correct: This account item, the difference between the value of exports and the value of imports, will be negative when the country runs a trade deficit. Consider that the balance of payments on goods and services is part of the current account, rather than the financial account.
answer
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D. Kanye West, an American citizen, buys a house and 100 acres of property in Cabo San Lucas, Mexico.
Correct: This involves the purchase of an asset, so this transaction would affect the balance of payments on financial account.
Correct: This involves the purchase of an asset, so this transaction would affect the balance of payments on financial account.
answer
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question
B. the sum of the current account and the financial account will be zero.
Correct: In practice, this number will be slightly different from zero because of difficulties in collecting comprehensive data.
Correct: In practice, this number will be slightly different from zero because of difficulties in collecting comprehensive data.
answer
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question
C. the value of U.S. assets sold to a foreign country
Correct: This is a transaction that is included in the financial account.
Correct: This is a transaction that is included in the financial account.
answer
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question
C. The dollar has appreciated relative to the euro.
answer
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question
A. the demand for dollars will increase.
answer
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question
A. $51,000
answer
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question
B. $450 billion
answer
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question
B. Contractionary fiscal policy
answer
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question
D. -$355 billion
answer
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question
C.
ΔY = Multiplier x ΔG
ΔY = $ 100 bill
Multiplier = 1/(1-MPC) = 1/0.4 = 2.5
ΔG = ΔY/Multiplier = $100 bill / 2.5 = $40 bill
ΔY = Multiplier x ΔG
ΔY = $ 100 bill
Multiplier = 1/(1-MPC) = 1/0.4 = 2.5
ΔG = ΔY/Multiplier = $100 bill / 2.5 = $40 bill
answer
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question
C.
answer
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question
B.
answer
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question
A.
answer
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question
D.
answer
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question
C.
MPS = 1 - MPC
Multiplier = 1/(1-MPC) or 1/MPS
ΔY = Multiplier x ΔG
ΔY = 1/0.25 x 100 mill = 4 x 100 mill = 400 mill
MPS = 1 - MPC
Multiplier = 1/(1-MPC) or 1/MPS
ΔY = Multiplier x ΔG
ΔY = 1/0.25 x 100 mill = 4 x 100 mill = 400 mill
answer
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question
D.
Money multiplier of original $8,000 is 8,000/0.20 = 40,000. So, subtract 8,000 out the 40,000 resulting in 32,000.
Money multiplier of original $8,000 is 8,000/0.20 = 40,000. So, subtract 8,000 out the 40,000 resulting in 32,000.
answer
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question
C.
Money multiplier = 1/rr = 1/0.1 = 10
ΔMS = Multiplier x Δdeposits
ΔMS = 10 x $25,000 = $250,000
Money multiplier = 1/rr = 1/0.1 = 10
ΔMS = Multiplier x Δdeposits
ΔMS = 10 x $25,000 = $250,000
answer
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