question
Microeconomics deals with:
A. gross domestic product.
B. individual decision makers in the economy.
C. the working of the entire economy or large sectors of it.
D. economic growth.
A. gross domestic product.
B. individual decision makers in the economy.
C. the working of the entire economy or large sectors of it.
D. economic growth.
answer
B. Individual decision makers in the economy.
question
Macroeconomics deals with:
A. the working of the entire economy or large sectors of it.
B. how individuals make decisions.
C. bits and pieces of the economy.
D. the question of how a business unit should operate profitably
A. the working of the entire economy or large sectors of it.
B. how individuals make decisions.
C. bits and pieces of the economy.
D. the question of how a business unit should operate profitably
answer
A. The working of the entire economy or large sectors of it.
question
Scarcity in economics means:
A. We do not have sufficient resources to produce all the goods and services we want.
B. The wants of people are limited.
C. Shortages exist in nearly all markets.
D. There must be poor people in rich countries.
A. We do not have sufficient resources to produce all the goods and services we want.
B. The wants of people are limited.
C. Shortages exist in nearly all markets.
D. There must be poor people in rich countries.
answer
A. We do not have sufficient resources to produce all the goods and services we want.
question
The concept of the margin deals with:
A. making incremental choices.
B. making difficult choices.
C. all or none of something.
D. engaging in unethical activities.
A. making incremental choices.
B. making difficult choices.
C. all or none of something.
D. engaging in unethical activities.
answer
A. Making incremental choices.
question
A trade-off involves weighing the costs and the benefits.
A. False
B. True
A. False
B. True
answer
B. True
question
An economy is efficient if it is:
A. possible to produce more of all goods and services.
B. producing a combination of goods.
C. not possible to produce more of one good without producing less of another good.
D. possible to produce more of one good without producing less of another
A. possible to produce more of all goods and services.
B. producing a combination of goods.
C. not possible to produce more of one good without producing less of another good.
D. possible to produce more of one good without producing less of another
answer
C. Not possible to produce more of one good without producing less of another good.
question
Katherine has a physics exam tomorrow. However, a free lecture by one of her favorite authors is taking place this evening. Katherine decides to attend the lecture instead of studying for her exam. Which is a correct statement?
A. Katherine's opportunity cost is not relevant, since no money is involved.
B. Katherine's opportunity cost is the time spent getting to the lecture.
C. Katherine's opportunity cost is the cost of getting to the lecture event itself plus the reduction in her physics exam grade by not studying tonight.
D. Katherine's opportunity cost is the time spent listening to the lecture.
A. Katherine's opportunity cost is not relevant, since no money is involved.
B. Katherine's opportunity cost is the time spent getting to the lecture.
C. Katherine's opportunity cost is the cost of getting to the lecture event itself plus the reduction in her physics exam grade by not studying tonight.
D. Katherine's opportunity cost is the time spent listening to the lecture.
answer
C. Katherine's opportunity cost is the cost of getting to the lecture event itself plus the reduction in her physics exam grade by not studying tonight.
question
According to the article 'Love, Rationally', one should not shop around for a mate forever as
A. dating is boring.
B. there will only be a diminishing pool of mates to choose from.
C. there is no difference between the potential mates.
A. dating is boring.
B. there will only be a diminishing pool of mates to choose from.
C. there is no difference between the potential mates.
answer
B. There will only be a diminishing pool of mates to choose from.
question
The article, 'Love Rationally, states that economists Wolfers and Stevenson found in their research that as more women entered the workforce, over time,
A. the opportunity cost of women's time continued to diminish, and they got better at home duties.
B. the opportunity cost of women's time has risen, diminishing their comparative advantage in home duties.
C. men and women just gave up on home duties.
A. the opportunity cost of women's time continued to diminish, and they got better at home duties.
B. the opportunity cost of women's time has risen, diminishing their comparative advantage in home duties.
C. men and women just gave up on home duties.
answer
B. The opportunity cost of women's time has risen, diminishing their comparative advantage in home duties.
question
Which of the following factors would cause a movement along the demand curve for a particular good?
A. both a change in the price of that good and a change in the size of the population
B. a change in the price of that good
C. a change in the size of the population
D. a change in the prices of related goods
A. both a change in the price of that good and a change in the size of the population
B. a change in the price of that good
C. a change in the size of the population
D. a change in the prices of related goods
answer
B. A change in the price of that good.
question
An increase in supply of a good is caused by:
A. expectations of future price increases.
B. an increase in the number of sellers.
C. a fall in the price of the good.
D. input prices rising.
A. expectations of future price increases.
B. an increase in the number of sellers.
C. a fall in the price of the good.
D. input prices rising.
answer
B. An increase in the number of sellers.
question
Pizza is a normal good. If students' incomes at your college increase, the effect on pizza would be:
A. an increase in the demand.
B. an increase in the quantity demanded.
C. no change in the demand.
D. a decrease in the demand.
A. an increase in the demand.
B. an increase in the quantity demanded.
C. no change in the demand.
D. a decrease in the demand.
answer
A. An increase in the demand.
question
After graduation from college, you might have an increase in your income from a new job. If, as a result, you decide that you will purchase more T-bone steak and less hamburger, then for you hamburger would be considered:
A. an inferior good.
B. a complementary good.
C. a substitute good.
D. a normal good.
A. an inferior good.
B. a complementary good.
C. a substitute good.
D. a normal good.
answer
A. An inferior good.
question
When the price of lamps increases, the:
A. supply increases.
B. supply decreases.
C. quantity supplied increases.
D. quantity supplied decreases
A. supply increases.
B. supply decreases.
C. quantity supplied increases.
D. quantity supplied decreases
answer
C. Quantity supplied increases.
question
In much of the country, homeowners choose to heat their houses with either natural gas or home heating oil. Which of the following would cause a change in the demand for natural gas?
A. an increase in consumer tastes for natural gas as an energy source
B. a change in income
C. all of the above
D. a change in the price of home heating oil
A. an increase in consumer tastes for natural gas as an energy source
B. a change in income
C. all of the above
D. a change in the price of home heating oil
answer
C. All of the above
question
Raclette is a popular wintertime dish in Switzerland. It is essentially melted Raclette cheese over boiled new potatoes. If the price of Raclette cheese decreased, we would expect to see:
A. an increase in demand for Raclette cheese and for new potatoes.
B. no effect on the demand for either of the Raclette ingredients, since this is a traditional dish and its consumption does not depend on the prices of the ingredients.
C. an increase in demand for new potatoes.
D. an increase in demand for Raclette cheese.
A. an increase in demand for Raclette cheese and for new potatoes.
B. no effect on the demand for either of the Raclette ingredients, since this is a traditional dish and its consumption does not depend on the prices of the ingredients.
C. an increase in demand for new potatoes.
D. an increase in demand for Raclette cheese.
answer
C. An increase in demand for new potatoes.
question
In the market for tacos, each of the following shifts the supply curve to the left except:
A. a decrease in the price of tacos.
B. an increase in the wages of taco shop workers.
C. an increase in the price of beef.
D. fewer taco shops.
A. a decrease in the price of tacos.
B. an increase in the wages of taco shop workers.
C. an increase in the price of beef.
D. fewer taco shops.
answer
A. A decrease in the price of tacos.
question
Over the past few years, the technology associated with producing flat-panel televisions has improved. This has led to ________ in ________ flat-panel televisions.
A. an increase; the supply of
B. a decrease; the supply of
C. an increase; the demand for
D. a decrease; the quantity supplied of
A. an increase; the supply of
B. a decrease; the supply of
C. an increase; the demand for
D. a decrease; the quantity supplied of
answer
A. An increase/ the supply of
question
The market equilibrium is found at the:
A. price where quantity demanded equals quantity supplied.
B. price where quantity demanded exceeds quantity supplied.
C. price where quantity supplied exceeds quantity demanded.
D. highest price the market will bear.
A. price where quantity demanded equals quantity supplied.
B. price where quantity demanded exceeds quantity supplied.
C. price where quantity supplied exceeds quantity demanded.
D. highest price the market will bear.
answer
A. Price where quantity demanded equals quantity supplied.
question
If the quantity supplied in a market exceeds the quantity demanded in a market, we would expect prices to:
A. rise in order to clear the market.
B. stay the same.
C. rise.
D. fall
A. rise in order to clear the market.
B. stay the same.
C. rise.
D. fall
answer
D. Fall
question
Which of the following is considered investment spending in macroeconomics?
A. GM builds a new plant to manufacture automobiles.
B. Ryan Jones buys some GM stock.
C. Ryan Jones buys some GM bonds.
D. Ryan Jones buys some GM stock and bonds.
A. GM builds a new plant to manufacture automobiles.
B. Ryan Jones buys some GM stock.
C. Ryan Jones buys some GM bonds.
D. Ryan Jones buys some GM stock and bonds.
answer
A. GM builds a new plant to manufacture automobiles
question
Private savings is equal to:
A. income after taxes minus consumption.
B. taxes minus government spending on goods and services.
C. the total amount of savings accounts plus stocks plus bonds owned by households.
D. income plus investment.
A. income after taxes minus consumption.
B. taxes minus government spending on goods and services.
C. the total amount of savings accounts plus stocks plus bonds owned by households.
D. income plus investment.
answer
A. Income after taxes minus consumption.
question
The budget balance is equal to:
A. taxes plus government spending.
B. taxes minus government spending.
C. consumption plus investment.
D. imports minus exports.
A. taxes plus government spending.
B. taxes minus government spending.
C. consumption plus investment.
D. imports minus exports.
answer
B. Taxes minus government spending.
question
The demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of loanable funds.
A. downward; investors; increasing
B. downward; savers; increasing
C. upward; investors; decreasing
D. upward; savers; decreasing
A. downward; investors; increasing
B. downward; savers; increasing
C. upward; investors; decreasing
D. upward; savers; decreasing
answer
A. Downward/ investors/ increasing
question
The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.
A. upward; savers; increasing
B. upward; investors; decreasing
C. upward; savers; decreasing
D. downward; investors; increasing
A. upward; savers; increasing
B. upward; investors; decreasing
C. upward; savers; decreasing
D. downward; investors; increasing
answer
C. Upward/ savers/ decreasing
question
A firm does NOT want to borrow money for a project when:
A. the interest rate is higher than the rate of return on the project.
B. the interest rate is lower than the rate of return on the project.
C. the interest rate is positive.
D. the rate of return on the project is positive.
A. the interest rate is higher than the rate of return on the project.
B. the interest rate is lower than the rate of return on the project.
C. the interest rate is positive.
D. the rate of return on the project is positive.
answer
A. The interest rate is higher than the rate of return on the project.
question
If the government increases its borrowing during a recession
A. interest rates will rise as a result of increased demand for loanable funds
B. interest rates will decrease because of a drop in demand for loanable funds
C. interests rates are unlikely to change because the increase in government demand for loanable funds is negated by the decrease in firms borrowing for investment spending
D. increase the interest rate due to a drop in supply of loanable funds
A. interest rates will rise as a result of increased demand for loanable funds
B. interest rates will decrease because of a drop in demand for loanable funds
C. interests rates are unlikely to change because the increase in government demand for loanable funds is negated by the decrease in firms borrowing for investment spending
D. increase the interest rate due to a drop in supply of loanable funds
answer
C. Interest rates are unlikely to change because the increase in government demand for loanable funds is negated by the decrease in firms borrowing for investment spending.
question
Which of the following would NOT be considered to be one of the four main types of financial assets?
A. robots on an assembly line
B. bonds
C. bank deposits
D. loans
A. robots on an assembly line
B. bonds
C. bank deposits
D. loans
answer
A. Robots on an assembly line.
question
A random walk occurs when an asset price:
A. moves in a predicable direction but with random error.
B. makes unpredictable movements.
C. moves in a predictable way with no error.
D. moves slowly but predictably.
A. moves in a predicable direction but with random error.
B. makes unpredictable movements.
C. moves in a predictable way with no error.
D. moves slowly but predictably.
answer
B. Makes unpredictable movements.
question
Which of the following is a serious challenge to the efficient markets hypothesis?
A. Stock prices fluctuate more than can be explained by news about fundamentals.
B. Individual investors behave in systematically irrational ways.
C. Stock prices follow a random walk.
D. Both that stock prices fluctuate more than can be explained by news about fundamentals and that individual investors behave in systematically irrational ways.
A. Stock prices fluctuate more than can be explained by news about fundamentals.
B. Individual investors behave in systematically irrational ways.
C. Stock prices follow a random walk.
D. Both that stock prices fluctuate more than can be explained by news about fundamentals and that individual investors behave in systematically irrational ways.
answer
D. Both that stock prices fluctuate more than can be explained by news about fundamentals and that individual investors behave in systematically irrational ways.
question
The marginal propensity to consume is:
A. increasing if the marginal propensity to save is increasing.
B. the proportion of total disposable income that the average family consumes.
C. the change in consumer spending divided by the change in aggregate disposable income.
D. the change in consumer spending minus the change in aggregate disposable income
A. increasing if the marginal propensity to save is increasing.
B. the proportion of total disposable income that the average family consumes.
C. the change in consumer spending divided by the change in aggregate disposable income.
D. the change in consumer spending minus the change in aggregate disposable income
answer
C. The change in consumer spending divided by the change in aggregate disposable income.
question
The MPS plus the MPC must equal:
A. zero.
B. one.
C. income.
D. saving.
A. zero.
B. one.
C. income.
D. saving.
answer
B. One.
question
The marginal propensity to save is:
A. savings divided by aggregate income.
B. the fraction of an additional dollar of disposable income that is saved.
C. 1 + MPC.
D. savings divided by aggregate income or 1 + MPC.
A. savings divided by aggregate income.
B. the fraction of an additional dollar of disposable income that is saved.
C. 1 + MPC.
D. savings divided by aggregate income or 1 + MPC.
answer
B. The fraction of an additional dollar of disposable income that is saved.
question
The multiplier is:
A. 1 / (1 - MPC).
B. MPS / MPC.
C. 1 / (MPC).
D. 1(1 + MPC).
A. 1 / (1 - MPC).
B. MPS / MPC.
C. 1 / (MPC).
D. 1(1 + MPC).
answer
A. 1/ (1-MPC).
question
If the MPS = 0.1, then the value of the multiplier equals:
A. 1.
B. 5.
C. 9.
D. 10.
A. 1.
B. 5.
C. 9.
D. 10.
answer
D. 10
question
You and a coworker have been trying to develop a linear equation that describes the local household consumption function. Your co-worker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + 0.75(YD). Your job is to explain this result to your supervisor. According to this consumption function, what is the marginal propensity to consume?
A. 100
B. 0.75
C. 4
D. 0.25
A. 100
B. 0.75
C. 4
D. 0.25
answer
B. 0.75
question
According to the life-cycle hypothesis, wealth affects consumer spending because:
A. wealthier people have higher incomes.
B. wealthier people have better connections to buy in-demand goods.
C. people try to smooth their consumption over the course of their lives.
D. people try to consume as early in their lives as they can.
A. wealthier people have higher incomes.
B. wealthier people have better connections to buy in-demand goods.
C. people try to smooth their consumption over the course of their lives.
D. people try to consume as early in their lives as they can.
answer
C. People try to smooth their consumption over the course of their lives.
question
Planned investment spending depends on all of the following EXCEPT:
A. the rate of interest.
B. the expected future level of real GDP.
C. the current productive capacity in the economy.
D. the current level of real GDP.
A. the rate of interest.
B. the expected future level of real GDP.
C. the current productive capacity in the economy.
D. the current level of real GDP.
answer
D. The current level of real GDP.
question
Which one of the following accurately describes actual investment spending?
A. Actual investment = planned investment + unplanned investment.
B. Actual investment = planned investment - unplanned investment.
C. Actual investment = planned investment + unplanned investment + inventory investment.
D. Actual investment = planned investment × unplanned investment - inventory investment.
A. Actual investment = planned investment + unplanned investment.
B. Actual investment = planned investment - unplanned investment.
C. Actual investment = planned investment + unplanned investment + inventory investment.
D. Actual investment = planned investment × unplanned investment - inventory investment.
answer
A. Actual investment = planned investment + unplanned investment.
question
In an economy without government purchases, government transfers, or taxes, aggregate autonomous consumer spending is $250 billion, planned investment spending is $100 billion, and the marginal propensity to consume is 0.6. What is the expression for planned aggregate spending?
A. AEPlanned = $100 + 0.6 × YD.
B. AEPlanned = $250 + 0.4 × YD.
C. AEPlanned = $350 + 0.6 × YD.
D. AEPlanned = $150 + 0.4 × YD
A. AEPlanned = $100 + 0.6 × YD.
B. AEPlanned = $250 + 0.4 × YD.
C. AEPlanned = $350 + 0.6 × YD.
D. AEPlanned = $150 + 0.4 × YD
answer
C. AEPlanned = $350 + 0.6 × YD.
question
Stagflation is a combination of:
A. increasing unemployment and increasing inflation.
B. decreasing unemployment and decreasing inflation.
C. increasing unemployment and decreasing inflation.
D. decreasing unemployment and increasing inflation.
A. increasing unemployment and increasing inflation.
B. decreasing unemployment and decreasing inflation.
C. increasing unemployment and decreasing inflation.
D. decreasing unemployment and increasing inflation.
answer
A. Increasing unemployment and increasing inflation.
question
The relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world is called:
A. market demand.
B. surplus demand.
C. aggregate demand.
D. simple demand.
A. market demand.
B. surplus demand.
C. aggregate demand.
D. simple demand.
answer
C. Aggregate demand.
question
According to the wealth effect, when prices decrease, the purchasing power of assets:
A. decreases and consumer spending decreases.
B. increases and consumer spending decreases.
C. decreases and consumer spending increases.
D. increases and consumer spending increases.
A. decreases and consumer spending decreases.
B. increases and consumer spending decreases.
C. decreases and consumer spending increases.
D. increases and consumer spending increases.
answer
D. Increases and consumer spending increases.
question
According to the interest rate effect, an increase in the price level causes people to:
A. increase their money holdings, which increases interest rates and decreases investment spending.
B. decrease their money holdings, which increases interest rates and decreases investment spending.
C. to increase their money holdings, which decreases interest rates and decreases investment spending.
D. to decrease their money holdings, which decreases interest rates and increases investment spending.
A. increase their money holdings, which increases interest rates and decreases investment spending.
B. decrease their money holdings, which increases interest rates and decreases investment spending.
C. to increase their money holdings, which decreases interest rates and decreases investment spending.
D. to decrease their money holdings, which decreases interest rates and increases investment spending.
answer
A. Increase their money holdings, which increases interest rates and decreases investment spending.
question
Which of the following factors cannot shift the aggregate demand curve?
A. changes in expectations
B. changes in wealth
C. changes in stock market indices
D. changes in the price level
A. changes in expectations
B. changes in wealth
C. changes in stock market indices
D. changes in the price level
answer
D. Changes in the price level
question
Which of the following represent the three consequences of the decline in aggregate demand during the Great Depression?
A. falling prices, declining output, and a surge in unemployment
B. falling prices, increasing output, and a surge in unemployment
C. rising prices, increasing output, and a surge in unemployment
D. rising prices, declining output, and a surge in unemployment
A. falling prices, declining output, and a surge in unemployment
B. falling prices, increasing output, and a surge in unemployment
C. rising prices, increasing output, and a surge in unemployment
D. rising prices, declining output, and a surge in unemployment
answer
A. Falling prices, declining output, and a surge in unemployment
question
If the stock of physical capital becomes larger, all other things unchanged, the aggregate demand curve will:
A. shift to the right.
B. shift to the left.
C. remain constant.
D. become positively sloped.
A. shift to the right.
B. shift to the left.
C. remain constant.
D. become positively sloped.
answer
B. Shift to the left.
question
An increase in government spending, all other things unchanged, will cause the aggregate demand curve to:
A. become positively sloped.
B. remain constant.
C. shift to the right.
D. shift to the left.
A. become positively sloped.
B. remain constant.
C. shift to the right.
D. shift to the left.
answer
C. Shift to the right.
question
The aggregate supply curve shows the relationship between:
A. the price of oil and the quantity of aggregate output supplied.
B. the aggregate price level and the quantity of aggregate output supplied.
C. the price of money and the quantity of aggregate output supplied.
D. the level of employment and the quantity of aggregate output supplied
A. the price of oil and the quantity of aggregate output supplied.
B. the aggregate price level and the quantity of aggregate output supplied.
C. the price of money and the quantity of aggregate output supplied.
D. the level of employment and the quantity of aggregate output supplied
answer
B. The aggregate price level and the quantity of aggregate output supplied.
question
According to the short-run aggregate supply curve, when the _________ rises, the quantity of _________ rises.
A. profit per unit; aggregate output demanded
B. aggregate price level; aggregate output supplied
C. aggregate price level; aggregate output demanded
D. interest rate; aggregate output supplied
A. profit per unit; aggregate output demanded
B. aggregate price level; aggregate output supplied
C. aggregate price level; aggregate output demanded
D. interest rate; aggregate output supplied
answer
B. aggregate price level; aggregate output supplied
question
The short-run aggregate supply curve is positively sloped because:
A. business people suffer from money illusion.
B. wages are sticky or don't readily adjust to changes in economic conditions in the short run.
C. workers care about nominal wages, not real wages.
D. of diminishing returns to labor.
A. business people suffer from money illusion.
B. wages are sticky or don't readily adjust to changes in economic conditions in the short run.
C. workers care about nominal wages, not real wages.
D. of diminishing returns to labor.
answer
B. Wages are sticky or don't readily adjust to changes in economic conditions in the short run.
question
The short-run aggregate supply curve will increase if:
A. commodity prices fall
B. the nominal wage rate falls
C. productivity increases
D. commodity prices fall, the nominal wage rate falls, or if productivity increases
A. commodity prices fall
B. the nominal wage rate falls
C. productivity increases
D. commodity prices fall, the nominal wage rate falls, or if productivity increases
answer
D. Commodity prices fall, the nominal wage rate falls, or if productivity increases
question
The point where the long-run aggregate supply curve intercepts the horizontal axis:
A. is the point of macroeconomic equilibrium.
B. is the economy's potential output.
C. is the level of real GDP the economy would produce if all prices were flexible and wages were fixed.
D. is impossible to actually attain.
A. is the point of macroeconomic equilibrium.
B. is the economy's potential output.
C. is the level of real GDP the economy would produce if all prices were flexible and wages were fixed.
D. is impossible to actually attain.
answer
B. Is the economy's potential output.
question
All of the following will increase the economy's potential output EXCEPT:
A. an increase in physical capital.
B. a decrease in the aggregate price level.
C. an increase in human capital.
D. technological innovation.
A. an increase in physical capital.
B. a decrease in the aggregate price level.
C. an increase in human capital.
D. technological innovation.
answer
B. A decrease in the aggregate price level.
question
Suppose that the aggregate output level is lower than potential output. Which of the following is NOT true?
A. Workers are abundant.
B. Jobs are scarce.
C. Nominal wages will fall over time.
D. The short-run aggregate supply curve will gradually shift to the left.
A. Workers are abundant.
B. Jobs are scarce.
C. Nominal wages will fall over time.
D. The short-run aggregate supply curve will gradually shift to the left.
answer
D. The short-run aggregate supply curve will gradually shift to the left.
question
Inflationary and recessionary gaps are closed by self-correcting adjustments that shift:
A. the SRAS curve.
B. the AD curve.
C. he LRAS curve.
D. both the SRAS curve and the LRAS curve.
A. the SRAS curve.
B. the AD curve.
C. he LRAS curve.
D. both the SRAS curve and the LRAS curve.
answer
A. The SRAS curve.
question
An economy is currently operating at an output level below its potential real GDP. If the government wishes use fiscal policy (government spending and taxes) to bring the economy back to its potential real GDP, it will:
A. increase the money supply.
B. increase government spending.
C. increase taxation.
D. decrease the money supply.
A. increase the money supply.
B. increase government spending.
C. increase taxation.
D. decrease the money supply.
answer
B. Increase government spending.
question
When you or your parents pay the tuition at college, money is being used as:
A. a unit of account.
B. a store of value.
C. a medium of exchange
D. a unit of account, a store of value, and a medium of exchange.
A. a unit of account.
B. a store of value.
C. a medium of exchange
D. a unit of account, a store of value, and a medium of exchange.
answer
C. A medium of exchange
question
A reserve ratio is the:
A. proportion of cash and security reserves the bank holds.
B. fraction of deposits that the bank is required to hold.
C. loan-to-deposit ratio in the bank's balance sheet.
D. money belonging to the bank's largest depositors.
A. proportion of cash and security reserves the bank holds.
B. fraction of deposits that the bank is required to hold.
C. loan-to-deposit ratio in the bank's balance sheet.
D. money belonging to the bank's largest depositors.
answer
B. Fraction of deposits that the bank is required to hold.
question
A bank run can break a bank because:
A. borrowers default on their loans, and the bank's assets become worthless.
B. banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.
C. depositors' panic spreads to borrowers, who want to take additional loans from the bank.
D. the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury bonds.
A. borrowers default on their loans, and the bank's assets become worthless.
B. banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.
C. depositors' panic spreads to borrowers, who want to take additional loans from the bank.
D. the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury bonds.
answer
B. Banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss.
question
Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves.
Reference: Ref 14-7
(Scenario: Money Supply Changes II) As a result of the withdrawal, loans ______ by ________.
A. increase; $8,000
B. decrease; $8,000
C. decrease; $6,400
D. decrease; $1,600
Reference: Ref 14-7
(Scenario: Money Supply Changes II) As a result of the withdrawal, loans ______ by ________.
A. increase; $8,000
B. decrease; $8,000
C. decrease; $6,400
D. decrease; $1,600
answer
C. decrease; $6,400
question
To _______ the money supply, the Federal Reserve could ________.
A. decrease; lower the reserve requirements
B. increase; lower the discount rate
C. increase; conduct open-market sales
D. decrease; lower the federal funds rate
A. decrease; lower the reserve requirements
B. increase; lower the discount rate
C. increase; conduct open-market sales
D. decrease; lower the federal funds rate
answer
B. increase; lower the discount rate
question
The banking crisis of 1907 that preceded the Great Depression and the recent one in 2008 were both caused by:
A. short-run business cycle fluctuations.
B. lack of investment spending and high unemployment.
C. risky speculation in real estate and in the stock market.
D. low labor productivity in the United States combined with a huge trade deficit.
A. short-run business cycle fluctuations.
B. lack of investment spending and high unemployment.
C. risky speculation in real estate and in the stock market.
D. low labor productivity in the United States combined with a huge trade deficit.
answer
C. Risky speculation in real estate and in the stock market.
question
The Federal Reserve:
A. was created by Franklin Delano Roosevelt to disburse funds for the Works Progress Administration.
B. was created in 1913 in response to the Panic of 1907.
C. conducts fiscal policy for state governments.
D. was established by Ronald Reagan during the recession of 1982.
A. was created by Franklin Delano Roosevelt to disburse funds for the Works Progress Administration.
B. was created in 1913 in response to the Panic of 1907.
C. conducts fiscal policy for state governments.
D. was established by Ronald Reagan during the recession of 1982.
answer
B. Was created in 1913 in response to the Panic of 1907.
question
According to the Glass-Steagall Act of 1933:
A. investment banks could accept deposits, which were covered by deposit insurance.
B. commercial banks could create and trade financial assets, such as stocks and bonds.
C. investment banks could create and trade financial assets, such as stocks and bonds, but commercial banks could not trade stocks and bonds.
D. there was no difference between commercial banks and investment banks.
A. investment banks could accept deposits, which were covered by deposit insurance.
B. commercial banks could create and trade financial assets, such as stocks and bonds.
C. investment banks could create and trade financial assets, such as stocks and bonds, but commercial banks could not trade stocks and bonds.
D. there was no difference between commercial banks and investment banks.
answer
C. investment banks could create and trade financial assets, such as stocks and bonds, but commercial banks could not trade stocks and bonds.
question
A vicious cycle of deleveraging occurs when:
A. asset sales to cover losses produce negative balance sheet effects and force creditors to call in loans, forcing more sales of assets at decreasing prices.
B. bank regulators take over a bank.
C. deposit insurance is paid out.
D. top executives at failing companies are forced to return bonuses.
A. asset sales to cover losses produce negative balance sheet effects and force creditors to call in loans, forcing more sales of assets at decreasing prices.
B. bank regulators take over a bank.
C. deposit insurance is paid out.
D. top executives at failing companies are forced to return bonuses.
answer
A. asset sales to cover losses produce negative balance sheet effects and force creditors to call in loans, forcing more sales of assets at decreasing prices.
question
Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. Which of the following would be the end result of such an action?
A. The money supply would stay the same.
B. The money supply would decrease by $100 million.
C. The money supply would increase by $100 million.
D. The money supply would increase by more than $100 million.
A. The money supply would stay the same.
B. The money supply would decrease by $100 million.
C. The money supply would increase by $100 million.
D. The money supply would increase by more than $100 million.
answer
D. The money supply would increase by more than $100 million.
question
To fight a recession, the Federal Reserve should conduct _____ monetary policy to ______ interest rates, which will shift the aggregate demand curve to the _____.
A. expansionary; lower; left
B. contractionary; raise; left
C. contractionary; lower; right
D. expansionary; lower; right
A. expansionary; lower; left
B. contractionary; raise; left
C. contractionary; lower; right
D. expansionary; lower; right
answer
D. expansionary; lower; right
question
Which of the following describes the difference between the Taylor rule and inflation targeting?
A. The Federal Reserve uses inflation targeting, and the Bank of England uses the Taylor rule.
B. The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation.
C. Inflation targeting responds to past inflation, and the Taylor rule is based on a forecast of inflation.
D. Inflation targeting is a strategy used in conducting fiscal policy, while the Taylor rule is used in monetary policy.
A. The Federal Reserve uses inflation targeting, and the Bank of England uses the Taylor rule.
B. The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation.
C. Inflation targeting responds to past inflation, and the Taylor rule is based on a forecast of inflation.
D. Inflation targeting is a strategy used in conducting fiscal policy, while the Taylor rule is used in monetary policy.
answer
B. The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation.
question
The US economy experienced financial crises every 15 to 20 years since independence except for one 50 year period in which there was no financial crisis. This 50 year period, between 1933 and 1980, was brought on by:
A. The Invisible Hand of the Market
B. Banks being extremely cautious
C. The Glass Steagall Act and other such bank regulations
D. There was no such time period in the economic history of the US
A. The Invisible Hand of the Market
B. Banks being extremely cautious
C. The Glass Steagall Act and other such bank regulations
D. There was no such time period in the economic history of the US
answer
C. The Glass Steagall Act and other such bank regulations
question
Credit cards are counted in:
A. M1 but not in M2.
B. Neither, M1 nor M2
C. M2 but not in M1.
D. M1, M2, and the gold stock.
A. M1 but not in M2.
B. Neither, M1 nor M2
C. M2 but not in M1.
D. M1, M2, and the gold stock.
answer
B. Neither, M1 nor M2
question
Economists believe the following about returning the US money supply to one based on commodities (such as the gold standard):
A. It would be a positive for the economy as the money has a guarantee of value
B. Economists are ambivalent about the value of commodity backed money like the gold standard
C. Economists oppose commodity backed money like the gold standard, because it inhibits the ability of the Federal Reserve to fight recessions by expanding the money supply
A. It would be a positive for the economy as the money has a guarantee of value
B. Economists are ambivalent about the value of commodity backed money like the gold standard
C. Economists oppose commodity backed money like the gold standard, because it inhibits the ability of the Federal Reserve to fight recessions by expanding the money supply
answer
C. Economists oppose commodity backed money like the gold standard, because it inhibits the ability of the Federal Reserve to fight recessions by expanding the money supply
question
According to the article "How eliminating paper money could end recessions", the author presents which of the following actions to fight a deep recession in a cashless economy:
A. Require people to buy things
B. Charge negative interest rates, to ensure that people don't save their money and instead spend to stimulate the economy
C. Enact a massive discretionary spending plan from the government
A. Require people to buy things
B. Charge negative interest rates, to ensure that people don't save their money and instead spend to stimulate the economy
C. Enact a massive discretionary spending plan from the government
answer
B. Charge negative interest rates, to ensure that people don't save their money and instead spend to stimulate the economy
question
Monetary neutrality implies that in the long run:
A. monetary policy does not affect the level of economic activity.
B. aggregate supply is independent of monetary policy.
C. changing the money supply does not have any effect on the aggregate price level.
D. aggregate demand is independent from monetary policy.
A. monetary policy does not affect the level of economic activity.
B. aggregate supply is independent of monetary policy.
C. changing the money supply does not have any effect on the aggregate price level.
D. aggregate demand is independent from monetary policy.
answer
A. monetary policy does not affect the level of economic activity.
question
When the Fed uses quantitative easing, it is:
A. buying three-month Treasury bills.
B. selling three-month Treasury bills.
C. buying longer-term government debt.
D. selling longer-term government debt.
A. buying three-month Treasury bills.
B. selling three-month Treasury bills.
C. buying longer-term government debt.
D. selling longer-term government debt.
answer
C. buying longer-term government debt.
question
The difference between a country's exports and imports of goods alone—not including services—is the:
A. merchandise trade balance.
B. balance of payments on good and services.
C. balance of payments on current account.
D. current account.
A. merchandise trade balance.
B. balance of payments on good and services.
C. balance of payments on current account.
D. current account.
answer
A. merchandise trade balance.
question
When a Japanese investor buys stock in General Motors, which of the following balance of payments accounts is affected?
A. current account
B. financial account
C. reserve account
D. foreign exchange account
A. current account
B. financial account
C. reserve account
D. foreign exchange account
answer
B. financial account
question
If a country has a current account deficit, it must have a:
A. financial account surplus.
B. balance of payment surplus.
C. financial account deficit.
D. balance of payments deficit.
A. financial account surplus.
B. balance of payment surplus.
C. financial account deficit.
D. balance of payments deficit.
answer
A. financial account surplus.
question
The real exchange rate between the U.S. dollar and the Indian rupee is the:
A. exchange rate between the dollar and the rupee.
B. exchange rate between the dollar and the rupee divided by the price level in India.
C. amount of Indian rupees per dollar multiplied by the relative price levels in the United States and India.
D. official exchange rate between the dollar and the rupee quoted by the banks in the United States and India
A. exchange rate between the dollar and the rupee.
B. exchange rate between the dollar and the rupee divided by the price level in India.
C. amount of Indian rupees per dollar multiplied by the relative price levels in the United States and India.
D. official exchange rate between the dollar and the rupee quoted by the banks in the United States and India
answer
C. amount of Indian rupees per dollar multiplied by the relative price levels in the United States and India.
question
The current account and therefore trade responds to changes in:
A. the nominal exchange rate.
B. the real exchange rate.
C. the interest rate
D. both the nominal and real exchange rates
A. the nominal exchange rate.
B. the real exchange rate.
C. the interest rate
D. both the nominal and real exchange rates
answer
B. the real exchange rate.
question
If a government wants to increase the value of its currency in foreign exchange markets, it can:
A. use contractionary monetary policy.
B. use expansionary monetary policy.
C. decrease interest rates.
D. sell its currency.
A. use contractionary monetary policy.
B. use expansionary monetary policy.
C. decrease interest rates.
D. sell its currency.
answer
A. use contractionary monetary policy.
question
All of the following are major drawbacks of adopting a fixed exchange rate EXCEPT that:
A. exchange controls must be imposed at the cost of more administrative red tape and corruption.
B. resources must be diverted to the accumulation of large foreign exchange reserves.
C. monetary policy cannot be used to stabilize output and the inflation rate.
D. commerce among countries is more uncertain and riskier.
A. exchange controls must be imposed at the cost of more administrative red tape and corruption.
B. resources must be diverted to the accumulation of large foreign exchange reserves.
C. monetary policy cannot be used to stabilize output and the inflation rate.
D. commerce among countries is more uncertain and riskier.
answer
D. commerce among countries is more uncertain and riskier.
question
If a country with floating exchange rates uses an expansionary monetary policy:
A. the domestic interest rate falls, investment spending decreases,the effect on the exchange rate and net imports is ambiguous, and GDP falls
B. the domestic interest rate increases, investment spending decreases, the exchange rate increases, imports increase while exports fall, and GDP falls.
C. the domestic interest rate falls, investment spending increases, the exchange rate decreases, exports increase while imports fall, and GDP increases.
D. the domestic interest rate falls, investment spending increases, the exchange rate increases, imports increase while exports fall, and the effect on GDP is ambiguous.
A. the domestic interest rate falls, investment spending decreases,the effect on the exchange rate and net imports is ambiguous, and GDP falls
B. the domestic interest rate increases, investment spending decreases, the exchange rate increases, imports increase while exports fall, and GDP falls.
C. the domestic interest rate falls, investment spending increases, the exchange rate decreases, exports increase while imports fall, and GDP increases.
D. the domestic interest rate falls, investment spending increases, the exchange rate increases, imports increase while exports fall, and the effect on GDP is ambiguous.
answer
C. the domestic interest rate falls, investment spending increases, the exchange rate decreases, exports increase while imports fall, and GDP increases.
question
Purchasing power parity refers to:
A. the amount of foreign assets the United States is buying.
B. the amount of U.S. assets a foreign country is buying.
C. the number of units of foreign currency a dollar will buy.
D. the nominal exchange rate for which a market basket would cost the same in each country.
A. the amount of foreign assets the United States is buying.
B. the amount of U.S. assets a foreign country is buying.
C. the number of units of foreign currency a dollar will buy.
D. the nominal exchange rate for which a market basket would cost the same in each country.
answer
D. the nominal exchange rate for which a market basket would cost the same in each country.
question
The main ideas of Keynesian economics are:
A. the importance of the long run over the short run, and an emphasis on a vertical SRAS curve.
B. the importance of the long run over the short run, and an equal emphasis on the AD curve and the SRAS curve.
C. the importance of the short run over the long run, and an emphasis on the AD curve and a rising SRAS curve.
D. the importance of the free market with no government intervention, and an emphasis on monetary policy in the long run.
A. the importance of the long run over the short run, and an emphasis on a vertical SRAS curve.
B. the importance of the long run over the short run, and an equal emphasis on the AD curve and the SRAS curve.
C. the importance of the short run over the long run, and an emphasis on the AD curve and a rising SRAS curve.
D. the importance of the free market with no government intervention, and an emphasis on monetary policy in the long run.
answer
C. the importance of the short run over the long run, and an emphasis on the AD curve and a rising SRAS curve.
question
Keynes believed that to end the Great Depression:
A. only a government takeover of industry could save the economy.
B. the capitalist system needed only a narrow technical fix of expansionary fiscal policy
C. a decrease in government spending would balance the budget.
D. a decrease in the money supply would fight inflation.
A. only a government takeover of industry could save the economy.
B. the capitalist system needed only a narrow technical fix of expansionary fiscal policy
C. a decrease in government spending would balance the budget.
D. a decrease in the money supply would fight inflation.
answer
B. the capitalist system needed only a narrow technical fix of expansionary fiscal policy
question
The main reason that the Great Depression ended was:
A. effective monetary policy by the Fed under the leadership of Paul Volcker.
B. the defeat of Adolf Hitler in Germany in the 1930s.
C. Winston Churchill's foreign policy.
D. deficit spending in the United States to finance World War II.
A. effective monetary policy by the Fed under the leadership of Paul Volcker.
B. the defeat of Adolf Hitler in Germany in the 1930s.
C. Winston Churchill's foreign policy.
D. deficit spending in the United States to finance World War II.
answer
D. deficit spending in the United States to finance World War II.
question
In retrospect, Milton Friedman and Anna Schwartz showed that an expansionary monetary policy would have mitigated the Great Depression. However, monetary policy was not used during the Great Depression because of the following reasons:
A. The policy makers were classical macroeconomists who believed in a vertical SRAS and as such, increases in AD would cause inflation
B. They were inhibited by the gold standard
C. They were not creative in seeking solutions to end the Great Depression
D. A and B
A. The policy makers were classical macroeconomists who believed in a vertical SRAS and as such, increases in AD would cause inflation
B. They were inhibited by the gold standard
C. They were not creative in seeking solutions to end the Great Depression
D. A and B
answer
D. A and B
question
The _____ hypothesis has been almost universally accepted amongst modern economists. This hypothesis states that macroeconomic policy should be used to stabilize the economy rather than attempt to permanently decrease the unemployment rate.
A. natural rate
B. political business cycle
C. rational expectations
D. real business cycle
A. natural rate
B. political business cycle
C. rational expectations
D. real business cycle
answer
A. natural rate
question
The Fed moved away from Milton Friedman's monetary growth rule or monetarism because:
A. the economy was unstable.
B. the money supply was unstable.
C. the velocity of money was unstable.
D. interest rates were unstable.
A. the economy was unstable.
B. the money supply was unstable.
C. the velocity of money was unstable.
D. interest rates were unstable.
answer
C. the velocity of money was unstable.
question
Supply side theorists claimed all of the following justifications for their theory, except:
A. Reduced tax rates improve incentives to work and will thereby increase the SRAS
B. Reduced tax rates will improve savings and lead to increased investment spending and increased AD
C. The increases in SRAS and AD will increase Real GDP without affecting the price level
D. The reduction in tax rates will cause massive deficits, however.
E. The government will be able to collect more revenues (Laffer Curve)
A. Reduced tax rates improve incentives to work and will thereby increase the SRAS
B. Reduced tax rates will improve savings and lead to increased investment spending and increased AD
C. The increases in SRAS and AD will increase Real GDP without affecting the price level
D. The reduction in tax rates will cause massive deficits, however.
E. The government will be able to collect more revenues (Laffer Curve)
answer
D. The reduction in tax rates will cause massive deficits, however.
question
The supply side theory was discredited because of all of the following reasons, except
A. Reducing tax rates produced mixed effects as some people chose not to work more but to increase leisure with the increased disposable income. This produced only a negligible increase in SRAS
B. Reducing tax rates did not improve incentives to save and savings and investment spending declined
C. The small or negligible increase in SRAS combined with a larger increase in AD (from consumer spending) caused price levels to increase reducing real income
D. The tax cuts caused massive deficits as opposed to increases in revenues
E. The tax cuts left the budget in a neutral position causing neither deficits or surpluses
A. Reducing tax rates produced mixed effects as some people chose not to work more but to increase leisure with the increased disposable income. This produced only a negligible increase in SRAS
B. Reducing tax rates did not improve incentives to save and savings and investment spending declined
C. The small or negligible increase in SRAS combined with a larger increase in AD (from consumer spending) caused price levels to increase reducing real income
D. The tax cuts caused massive deficits as opposed to increases in revenues
E. The tax cuts left the budget in a neutral position causing neither deficits or surpluses
answer
E. The tax cuts left the budget in a neutral position causing neither deficits or surpluses
question
Which of the following was a justification for breaking with the normal presumption against using discretionary fiscal policy during the Great Recession?
A. Monetary policy would not be effective because interest rates were so high.
B. Crowding-out was not likely to be a problem in a very depressed economy with interest rates near zero.
C. The economy was so depressed that a political business cycle was not likely to be a problem.
D. Ricardian equivalence was likely to occur if monetary policy was used alone.
A. Monetary policy would not be effective because interest rates were so high.
B. Crowding-out was not likely to be a problem in a very depressed economy with interest rates near zero.
C. The economy was so depressed that a political business cycle was not likely to be a problem.
D. Ricardian equivalence was likely to occur if monetary policy was used alone.
answer
B. Crowding-out was not likely to be a problem in a very depressed economy with interest rates near zero.
question
Which of the following was an argument in favor of using discretionary fiscal policy in fighting the Great Recession?
A. Monetary policy alone could not be effective, since interest rates were near zero.
B. If taxes were increased, the budget could be balanced.
C. If government spending decreased, the budget surplus would increase.
D. The lags associated with monetary policy would be destabilizing.
A. Monetary policy alone could not be effective, since interest rates were near zero.
B. If taxes were increased, the budget could be balanced.
C. If government spending decreased, the budget surplus would increase.
D. The lags associated with monetary policy would be destabilizing.
answer
A. Monetary policy alone could not be effective, since interest rates were near zero.
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