Prin. & App. to Macroeconomics
11:373: 122 

 Practice Test Questions
 

Prin. & App. to Macroeconomics
11:373: 122 

 

Chapter 1 & Appendix (What Is Economics?)

1) An incentive
A) could be a reward but could not be a penalty.
B) could be a penalty but could not be a reward.
C) could be either a reward or a penalty.
D) is the opposite of a tradeoff.

2) Scarcity requires that people must
A) cooperate.                 B) compete.
C) trade.                         D) make choices.

3) Microeconomics focuses on all of the following EXCEPT
A) the purchasing decisions that an individual consumer makes.
B) the effect of increasing the money supply on inflation.
C) the hiring decisions that a business makes.
D) the effect of an increase in the tax on cigarettes on cigarette sales.

4) Studying the determination of prices in individual markets is primarily a concern of
A) positive economics.         B) negative economics.
C) macroeconomics.             D) microeconomics.

5) When an economy produces more houses and fewer typewriters, it is answering the ________ question.
A) "what"         B) "how"         C) "where"             D) "for whom"

6) Entrepreneurs do all of the following EXCEPT
A) organize labor, land, and capital.
B) come up with new ideas about what, how, when and where to produce.
C) bear risk from business decisions.
D) own all the other resources.

7) Which of the following is NOT a factor of production?
A) the water used to cool a nuclear power plant.
B) the effort of farmers raising cattle.
C) the wages paid to workers.
D) the management skill of a small business owner.

8) When a university decides to add to the football stadium instead of adding to the baseball stadium, it faces the
A) "what" tradeoff.                                 B) "how" tradeoff.
C) "for whom" tradeoff.                         D) macroeconomic question.

9) The term used to emphasize that making choices in the face of scarcity involves a cost is
A) substitution cost.                              B) opportunity cost.
C) utility cost.                                         D) accounting cost.

10) The opportunity cost of something you decide to get is
A) all possible alternatives that you give up to get it.
B) the highest valued alternative you give up to get it.
C) the lowest valued alternative you give up to get it.
D) the amount of money you pay to get it.

11) During the summer you have made the decision to attend summer school, which precludes you from working at your usual summer job in which you normally earn $6,000 for the summer. Your tuition cost is $3,000, books and supplies cost $300, and room and board cost $1,000. The opportunity cost of attending summer school is 
A) $10,300.         B) $6,000.         C) $4,300.             D) $3,300.

12) You decide to take a vacation and the trip costs you $2,000. While you are on vacation, you do not report to work where you could have earned $750. The opportunity cost of the vacation is 
A) $2,000.         B) $750.             C) $2,750.             D) $1,250

13) When the government chooses to use resources to build a dam, these sources are no longer available to build a highway. This choice illustrates the concept of
A) a market mechanism.                                B) macroeconomics.
C) opportunity cost.                                       D) a fallacy of composition.

14) Marginal benefit is the benefit
A) that your activity provides to someone else.
B) of an activity that exceeds its cost.
C) that arises from the secondary effects of an activity.
D) that arises from an increase in an activity.

15) In economics, positive statements are about
A) the way things ought to be.
B) the way things are.
C) macroeconomics, not microeconomics.
D) microeconomics, not macroeconomics.

16) A positive statement
A) is an affirming statement that is strongly worded.
B) is a statement of what ought to be.
C) is a statement of what is.
D) cannot be tested by checking it against the facts.

17) Which of the following are true regarding "positive" statements?
I. They describe what "ought to be."
II. They describe what is believed about how the world appears.
III. They can be tested as to their truthfulness.
A) I and II.             B) II and III.             C) I and III.             D) I, II and III.

18) Which of the following is a positive statement?
A) State lotteries are good methods to use for raising revenues.
B) Increased prison sentences are the best way to reduce the crime rate.
C) An increase in gas prices leads people to carpool more.
D) Inflation is a more serious problem than is deflation.

19) Which of the following is a positive statement? 
A) Low rents will restrict the supply of housing.
B) Low rents are good because they make apartments more affordable.
C) Housing costs too much.
D) Owners of apartment buildings ought to be free to charge whatever rent they want.

20) Which of the following is a normative statement? 
A) The price of candy bars is $1.25 each.
B) Candy bars are more expensive than newspapers.
C) You should eat less candy.
D) Popcorn and candy are sold in movie theaters.

21) Three steps that economists take to discover how the economic world works are
A) speculation; observation and measurement; and, drawing conclusions.
B) observation and measurement; model building; and, testing models.
C) model building; speculation; and, revision.
D) data mining; data testing; and, drawing conclusions.

22) The Latin term "ceteris paribus" means
A) "false unless proven true."
B) "other things being equal."
C) "after this, therefore because of this."
D) "what is true of the whole is not necessarily true of the parts."

23) Most economists agree that
A) tariffs and import restrictions make most people worse off.
B) a minimum wage increases unemployment among young workers and low-skilled workers.
C) rent ceilings cut the availability of housing.
D) all of the above

24) A graph shows the level of imports falling during a recession and rising during an expansion. This result implies
A) there is a negative trend during recessions.
B) there is a positive trend during recessions.
C) there is a negative trend during expansions.
D) the level of imports is fairly steady over time.

25) If two variables are positively related
A) they move in opposite directions over time.
B) they are independent of each other.
C) they move in the same direction over time.
D) their graph will have a negative slope.

  


26) In the above figure, which curve shows a negative relationship between x and y?
A) only curve A
B) only curve B
C) only curve C
D) None of the curves show a negative relationship.

27) If you hire 1 worker, he can produce 10 pretzels a day. If you hire a 2nd worker, she can produce 8 more pretzels. If you hire a 3rd worker, she can produce 6 more pretzels a day. A graph displaying this relationship between the number of employees on the horizontal axis and total pretzel output per day on the vertical axis shows
A) a positive linear relationship.
B) an upward-sloping curve that becomes less steep as employment increases.
C) a negative linear relationship.
D) a negatively-sloped curve that becomes less steep as employment as increases.

28) As a curve approaches a maximum point, the slope will
A) be positive, then negative after the maximum point.
B) be negative, then positive after the maximum point.
C) remain constant on either side of the maximum point.
D) increase before and after the maximum point.

29) If a curve rises and then falls, it shows a
A) maximum.                                B) minimum.
C) linear relationship.                   D) constant slope relationship.

30) Along a curved line, the slope at the maximum
A) is greater than zero.
B) is zero.
C) is less than zero.
D) may be greater than, less than, or equal to zero.


Key: Chapter 1
1) C
2) D
3) B
4) D
5) A
6) D
7) C
8) A
9) B
10) B
11) A
12) C
13) C
14) D
15) B
16) C
17) B
18) D
19) A
20) C
21) B
22) B
23) D
24) A
25) C
26) D
27) B
28) A
29) A
30) B

 


 

Chapter 2 (The Economic Problem)

1) The production possibilities frontier
A) refers to the technology used in such goods as computers and military aircraft.
B) once applied to U.S. technology but now refers to Japanese technology.
C) marks the boundary between attainable combinations of goods and services and unattainable combinations.
D) is also called the supply curve.

2) The production possibilities frontier represents
A) the maximum amount of resources available at any given time.
B) combinations of goods and services that do not fully use available resources.
C) the maximum rate of growth of output possible for an economy.
D) the maximum levels of production that can be attained.

3) Any production point outside the production possibilities frontier 
A) is unattainable.
B) is associated with unused resources.
C) is attainable only if prices fall.
D) is attainable only if prices rise.

4) Scarcity is represented on the production possibilities frontier by
A) the amount of the good on the horizontal axis forgone.
B) the fact that there are only two goods in the diagram.
C) technological progress.
D) the fact there are attainable and unattainable points.

5) A point inside a production possibilities frontier
A) could indicate that some resources are unemployed.
B) is unattainable.
C) is more efficient than points on the production possibilities frontier.
D) implies that too much capital and not enough labor are being used.

   


6) Refer to the production possibilities frontier in the figure above. Which point indicates that resources are NOT fully utilized or are misallocated?
A) Point a         B) Point b             C) Point c             D) Point e

7) In the figure above, moving from point d to point a requires
A) technological change.
B) a decrease in unemployment.
C) decreasing the output of consumer goods in order to boost the output of capital goods.
D) both capital accumulation and a decrease in unemployment.

8) Refer to the production possibilities frontier in the figure above. Suppose a country is at point a. A movement to point ________ means that the country ________.
A) d; must give up 20 million capital goods
B) e; is not operating efficiently
C) d; gives up 10 million consumer goods.
D) b; is producing at an inefficient point.

9) If a country must decrease current consumption to increase the amount of capital goods it produces today, then it
A) must be using resources inefficiently today, but will be more efficient in the future.
B) must be producing along the production possibilities frontier today and will see a shift outward of the frontier in the future if produces more capital goods.
C) must be producing outside the production possibilities frontier and will continue to do so in the future.
D) must not have private ownership of property and will have to follow planning authorities decisions today and in the future.

10) A tradeoff is
A) represented by a point inside a PPF.
B) represented by a point outside a PPF.
C) a constraint that requires giving up one thing to get another.
D) a transaction at a price either above or below the equilibrium price.

11) A tradeoff is illustrated by
A) a point inside the PPF.
B) a point outside the PPF.
C) a change in the slope of the PPF.
D) the negative slope of the PPF.

12) When we choose a particular option, we must give up alternative options. The highest-valued alternative forgone is the
A) opportunity cost of the option chosen.
B) comparative advantage of the option chosen.
C) nonmonetary cost of the option chosen.
D) absolute advantage.

13) Most students attending college pay tuition and are unable to hold a full-time job. For these students, tuition is 
A) part of the opportunity cost of going to college. So are their forgone earnings from not holding a full-time job.
B) part of the opportunity cost of going to college. Their forgone earnings from not holding a full-time job are not.
C) not part of the opportunity cost of going to college, but their forgone earnings from not holding a full-time job are.
D) not part of the opportunity cost of going to college. Neither are their forgone earnings from not holding a full-time job.

         Point         Production of Grain    Production of cars

            A                    0                             30

            B                    2                             28

            C                    4                             24

            D                    6                             18

            E                    8                             10

            F                    10                            0

14) The table above lists six points on the production possibilities frontier for grain and cars. Given this information, which of the following combinations is unattainable?
A) 6 tons of grain and 18 cars                     B) 4 tons of grain and 26 cars
C) 2 tons of grain and 27 cars                      D) 7 tons of grain and 10 cars

15) The table above lists six points on the production possibilities frontier for grain and cars. What is the opportunity cost of producing the 26th car?
A) 2 tons of grain                                         B) 4 tons of grain
C) 0.25 tons of grain                                     D) 0.5 tons of grain

16) When the production possibilities frontier is bowed outwards, the opportunity cost of producing more of one good
A) increases in terms of the amount foregone of the other good.
B) decreases in terms of the amount foregone of the other good.
C) remains constant.
D) cannot be determined.

17) Increasing opportunity cost occurs along a production possibilities frontier because
A) resources are not equally productive in all activities.
B) increasing wants need to be satisfied.
C) in order to produce more of one good decreasing amounts of another good must be sacrificed.
D) production takes time.

      

 

18) In the figure above, the marginal cost of the second computer is
A) 2 television sets.                             B) 3 television sets.
C) 5 television sets.                             D) 30 television sets.

19) Marginal cost is the opportunity cost
A) that your activity imposes on someone else.
B) that arises from producing one more unit of a good or service.
C) of a good or service that exceeds its benefit.
D) of a good or service divided by the number of units produced.

20) Marginal cost curves generally slope
A) upward because of increasing opportunity cost.
B) upward because of decreasing opportunity cost.
C) downward because of increasing opportunity cost.
D) downward because of decreasing opportunity cost.




Key: Chapter 2

1) C
2) D
3) A
4) D
5) A
6) C
7) C
8) A
9) B
10) C
11) D
12) A
13) A
14) B
15) D
16) A
17) A
18) B
19) B
20) A



 

Chapter 3 (Demand and Supply)

1) If the price of a hot dog is $2 and the price of a hamburger is $4,
A) the relative price of a hot dog is 1/2 of a hamburger.
B) the money price of a hot dog is 2 hamburgers.
C) the relative price of a hamburger is 1/2 of a hot dog.
D) the money price of a hamburger is 2 hot dogs.

2) The opportunity cost of good A in terms of good B is equal to the
A) price of good A minus the price of good B.
B) price of good B minus the price of good A.
C) ratio of the price of good A to the price of good B.
D) ratio of the price of good B to the price of good A.

3) Demands differ from wants in that
A) demands are unlimited, whereas wants are limited by income.
B) wants require a plan to acquire a good but demands require no such plan.
C) wants imply a decision about which demands to satisfy, while demands involve no specific plan to acquire the good.
D) demands reflect a decision about which wants to satisfy and a plan to buy the good, while wants are unlimited and involve no specific plan to acquire the good.

4) The law of demand states that, other things remaining the same, the higher the price of a good, the
A) smaller is the demand for the good.
B) larger is the demand for the good.
C) smaller is the quantity of the good demanded.
D) larger is the quantity of the good demanded..

5) The law of demand implies that if nothing else changes, there is
A) a positive relationship between the price of a good and the quantity demanded.
B) a negative relationship between the price of a good and the quantity demanded.
C) a linear relationship between price of a good and the quantity demanded.
D) an exponential relationship between price of a good and the quantity demanded.

6) Each point on the demand curve reflects
A) all the wants of a given household.
B) the highest price consumers are willing and able to pay for that particular unit of a good.
C) the highest price sellers will accept for all units they are producing.
D) the lowest-cost technology available to produce a good.

7) A substitute is a good
A) that can be used in place of another good.
B) that is not used in place of another good.
C) of lower quality than another good.
D) of higher quality than another good.

8) The demand for a good increases when the price of a substitute ________ and also increases when the price of a complement ________.
A) rises; rises         B) rises; falls         C) falls; rises             D) falls; falls

9) A complement is a good
A) of lower quality than another good.
B) used in conjunction with another good.
C) used instead of another good.
D) of higher quality than another good.

10) If income increases or the price of a complement falls,
A) the demand curve for a normal good shifts leftward.
B) the demand curve for a normal good shifts rightward.
C) the supply curve of a normal good shifts leftward.
D) the supply curve of a normal good shifts rightward.

11) A decrease in the price of a game of bowling shifts the
A) demand curve for bowling balls leftward.
B) demand curve for bowling balls rightward.
C) supply curve of bowling balls leftward.
D) supply curve of bowling balls rightward.

12) By definition, an inferior good is a
A) want that is not expressed by demand.
B) normal substitute good.
C) good for which demand decreases when its price rises.
D) good for which demand decreases when income increases.

13) A normal good is a good for which demand
A) decreases when income increases.
B) increases when income increases.
C) decreases when population increases.
D) increases when population increases.

14) If a good is an inferior good, then purchases of that good will decrease when
A) income increases. B) the price of a substitute rises.
C) population increases. D) the demand for it increases.

15) When we say demand increases, we mean that there is a
A) movement to the right along a demand curve.
B) movement to the left along a demand curve.
C) rightward shift of the demand curve.
D) leftward shift of the demand curve.

16) The "law of supply" is illustrated when
A) the demand curve shifts along a stationary supply curve.
B) the supply curve and demand curve both shift in the same direction.
C) the supply curve shifts along a stationary demand curve.
D) the demand curve and supply curve are both stationary.

17) The supply curve slopes upward when graphed against ________, because of ________.
A) the price of the good; increasing marginal cost
B) the price of the good; decreasing marginal cost
C) income; increasing marginal cost
D) income; decreasing marginal cost

18) A supply curve shows the relation between the quantity of a good supplied and
A) income. Usually a supply curve has negative slope.
B) income. Usually a supply curve has positive slope.
C) the price of the good. Usually a supply curve has negative slope.
D) the price of the good. Usually a supply curve has positive slope.

    


19) The figure above represents the market for candy. People become more concerned that eating candy causes them to gain weight, which they do not like. As a result, the
A) demand curve shifts from D2 to D1 and the supply curve will not shift.
B) demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2.
C) demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1.
D) demand curve will not shift, and the supply curve shifts from S1 to S2.

20) The above figure represents the market for oil. When terrorists blow up a major refinery the
A) demand curve for oil shifts from D1 to D2 and the supply curve for oil will not shift.
B) demand curve for oil shifts from D1 to D2 and the supply curve for oil shifts from S2 to S1.
C) demand curve for oil will not shift, and the supply curve for oil shifts from S2 to S1.
D) demand curve for oil will not shift, and the supply curve for oil shifts from S1 to S2.

21) A price below the equilibrium price results in
A) a surplus.                             B) a shortage.
C) excess supply.                     D) a further price fall.

22) Which of the following correctly describes how price adjustments eliminate a shortage?
A) As the price rises, the quantity demanded decreases while the quantity supplied increases.
B) As the price rises, the quantity demanded increases while the quantity supplied decreases.
C) As the price falls, the quantity demanded decreases while the quantity supplied increases.
D) As the price falls, the quantity demanded increases while the quantity supplied decreases.

23) When the demand for a good decreases, its equilibrium price ________ and equilibrium quantity ________.
A) falls; decreases                         B) falls; increases
C) rises; decreases                        D) rises; increases

24) If both demand and supply increase, what will be the effect on the equilibrium price and quantity?
A) Both the price and the quantity will increase.
B) The quantity will increase but the price could either rise, fall, or remain the same.
C) The price will fall but the quantity will increase.
D) The price will rise but the quantity could either increase, decrease, or remain the same.

25) Let Qd stand for the quantity demanded, Qs stand for the quantity supplied, and P stand for price. If Qd = 20 - 2P and Qs = 5 + 3P, then the equilibrium quantity is
A) 3.         B) 5.             C) 14.             D) 20.
 

Key: Chapter 3

1) A
2) C
3) D
4) C
5) B
6) B
7) A
8) B
9) B
10) B
11) B
12) D
13) B
14) A
15) C
16) A
17) A
18) D
19) A
20) C
21) B
22) A
23) A
24) B
25) C
 

 

Chapter 4  (Measuring GDP and Economic Growth)

1)Gross domestic product

A)includes all the goods and none of the services produced in an economy in a given time period.

B)is generally less than federal expenditure in any time period.

C)measures the value of the aggregate production of goods and services in a country during a given time period.

D)measures the value of labor payments generated in an economy in a given time period.

 

2)The word "final" in the definition of GDP refers to

A)the time period when production took place.

B)not counting intermediate goods or services.

C)counting the intermediate goods and services used to produce GDP.

D)valuing production at market prices.

 

3)Intermediate goods are excluded from GDP because

A)the premise of the question is incorrect because intermediate goods are directly included in calculating GDP.

B)they represent goods that have never been purchased so they cannot be counted.

C)their inclusion would involve double counting.

D)their inclusion would understate GDP

 

4)If we compare the four sources of spending in the economy we see that

A)business investment is the largest.

B)government expenditure is the largest.

C)household consumption is the smallest.

D)household consumption is the largest.

 

5)In the circular flow of economic activity

A)aggregate expenditure measures the dollar value of purchases of final goods and services.

B)aggregate expenditure is measured as it moves through the financial markets.

C)aggregate income measures the dollar value of labor resources only.

D)aggregate expenditure measures the dollar value of purchases of factors.

 

6)Which of the following relationships is correct?

A)Net Investment = Gross Investment + Depreciation

B)Capital Consumption  = Net Investment - Depreciation

C)Depreciation = Gross Investment - Capital Consumption

D)Gross Investment = Net Investment + Depreciation

 

7)GDP using the expenditure approach equals the sum of personal consumption expenditures plus

A)gross private investment.

B)gross private investment plus government expenditure on goods and services plus net exports of goods and services.

C)gross private investment plus government expenditure on goods and services.

D)gross private investment plus government expenditure on goods and services minus imports of goods and services.

 

8)To measure GDP using the expenditure approach you must collect data on

A)inflation.      B) saving.        C) exports.       D) wages.

 

9)An example of "investment" in the national income accounts is the purchase of

A)a new van by a potter, who packs it with his wares and travels to art shows.

B)a U.S. government bond.

C)a 100-year-old house that was just put on the protected historic sites list in the year in question.

D)100 shares of Canadian stock on the New York Stock Exchange.

 

10)Transfer payments

A)refer to payments made by the government that are not made to purchase a good or service.

B)are included in the government expenditure category in gross domestic product.

C)refer to all payments made to households by governments.

D)are made by households to firms in exchange for goods and services.

 

11)Which of the following is included in government expenditures when measuring GDP?

A)pension payment made to past presidents

B)the current president's salary

C)Social Security payments

D)unemployment compensation payments

 

12)An U.S. firm buys a new industrial sewing machine from a company located in France. Which of the following is true?

I.          U.S. net exports decrease.

II.         U.S. investment increases.

A)only I B) only II

C)both I and II D) neither I nor II

                       

 

Item                                                                 Billions of dollars

Personal consumption expenditure                            100

Gross private domestic investment                            10

Government expenditure on goods and services         50

Exports of goods and services                                  30

Imports of goods and services                                  30

Net taxes                                                                50

 

13)The above table shows data from the GDP accounts of Hypothetica. Hypothetica's GDP is ________ billion.

A)$190            B) $270           C) $160           D) $210

 

14)If imports are $100 million less than exports, government expenditures are $500 million, consumer expenditures are $1 billion, and gross investment spending is $500 million, then GDP is

A)$2.1 billion.                         B) $2 billion.

C)$1 billion.                D) $1.9 billion.

 

15)If consumption expenditures are $500 million, net investment is $100 million, depreciation equals $5 million, imports are $50 million, exports are $55 million, government expenditure on goods and services is $220 million, and government transfer payments are $20 million, then GDP is

A)$800 million.                       B) $830 million.

C)$790 million.                       D) $850 million.

 

16)Proprietors' income is a component of which approach to measuring GDP?

A)cost approach                      B) incomes approach

C)output approach                   D) expenditure approach

 

17)Real Gross Domestic Product is  

A)the productivity of labor.

B)the most that can be produced when the economy's resources are fully employed.

C)the amount of people unemployed divided by the total labor force.

D)the value of total production linked back to the prices of a single year.

 

18)When all of the economy's resources are fully employed, the value of production is called

A)actual GDP.                                     B) potential GDP.

C)nominal GDP.                      D) real GDP.

 

19)Potential GDP

A)is cyclical.

B)measures the actual production from year to year.

C)measures the output that could be produced if all resources were fully employed.

D)Both answers A and C are correct

 

20)The relationship between real GDP and potential GDP is that

A)real GDP never equals potential GDP.

B)real GDP fluctuates about potential GDP.

C)real GDP is always below potential GDP.

D)real GDP always equals potential GDP.

 

21)Business cycles are

A)irregular, with some having two recessions and no expansion.

B)unpredictable, and don't always have two phases and two turning points.

C)unpredictable, but always have two phases and two turning points.

D)predictable, with a recession following a trough.

 

22)By common definition, a recession occurs when

A)the government budget deficit exceeds the national debt.

B)the inflation rate exceeds 3.5 percent.

C)the international deficit worsens for at least two successive quarters.

D)real GDP decreases for at least two successive quarters.

 

 

 

23)In the above figure, a recession begins at point ________ and an expansion begins at point ________.

A)b; a              B) d; c              C) b; c              D) a; b

 

24)In the above figure, a trough is at point ________ and a peak is at point ________.

A)b; c              B) b; a              C) d; c              D) a; b

 

25)In calculating GDP, household production is

A)included as part of consumption.

B)included under employee compensation.

C)not included because there is no market transaction.

D)ignored because it is not a large amount.

 

 

Key: Chapter 4

 

 

1) C

2) B

3) C

4) D

5) A

6) D

7) B

8) C

9) A

10) A

11) B

12) C

13) C

14) A

15) B

16) B

17) D

18) B

19) C

20) B

21) C

22) D

23) D

24) B

25) C

 

 

Chapter 5 (Monitoring Jobs and Inflation)

1) The working-age population can be divided into two groups,

A) people in the labor force and people who are not in the labor force.

B) people looking for work and those in the armed forces.

C) people in the labor force and people looking for work.

D) people in the labor force and people with a job.

 

2) Which of the following is NOT included in the working-age population?

A) people waiting to be called back to a job after being laid off

B) discouraged workers

C) people in prison

D) retirees under the age of 55

 

3) Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the ________ equals ________.  

A) unemployment rate; 25/75 × 100

B) unemployment rate; 25/100 × 100

C) labor force; 75

D) labor force; 25/100 × 100

 

4) The labor force is defined as the

A) number of people in blue-collar jobs.

B) number of people over 16 years of age.

C) sum of employed and unemployed people.

D) number of people who are working.

 

5) Assume that the total labor force is 100 individuals with 10 unemployed. The unemployment rate is ________. Now assume that 10 people drop out of the labor force and that 10 remain unemployed. The new unemployment rate is ________.

A) 10 percent, 11 percent                    B) 10 percent, 9 percent

C) 11 percent, 10 percent                    D) 9 percent, 10 percent

 

6) The employment-to-population ratio is defined as 100 times

A) total employment divided by the labor force.

B) total employment divided by the working-age population.

C) the labor force divided by the working-age population.

D) total employment divided by labor hours.

 

7) A discouraged worker

A) is not counted as unemployed, but is considered in the labor force.

B) is not counted as unemployed and is not in the labor force.

C) is counted as unemployed and in the labor force.

D) is counted as unemployed, but not in the labor force.

 

8) When an individual who has not been working but has been looking for work decides to terminate the search process, the official unemployment rate

A) will remain unchanged.

B) will fall.

C) will rise.

D) may fall or rise depending on whether or not the individual resumes his education.

 

9) Job leavers are people who

A) are laid off permanently or temporarily.

B) enter the labor force for the first time.

C) quit a job to look for something better.

D) reenter the labor force after many years.

 

10) Frictional unemployment is

A) unemployment associated with declining industries.

B) unemployment associated with business cycle recessions.

C) long-term unemployment.

D) unemployment associated with the changing of jobs in a changing economy.

 

11) When a student finishes college and begins looking for work,  

A) frictional unemployment increases.

B) cyclical unemployment increases.

C) frictional and cyclical unemployment increase.

D) structural unemployment increases.

 

12) Nicholas does not possess marketable job skills; therefore, he is  

A) structurally unemployed.                            B) seasonally unemployed.

C) cyclically unemployed.                               D) frictionally unemployed.

 

13) Cyclical unemployment ________.

A) decreases during an expansion

B) grows at the same rate as potential GDP

C) decreases during a recession

D) is zero at a business-cycle trough

 

14)Full employment occurs

A) only if the unemployment rate is equal to the natural unemployment rate.

B) only if the unemployment rate is zero.

C) only if unemployment is equal to structural unemployment plus cyclical unemployment.

D) None of the above answers are correct.

 

15)Cyclical unemployment exists when

A) frictional and structural unemployment is zero.

B) real GDP is less than potential GDP.

C) real GDP exceeds potential GDP.

D) real national income exceeds potential income.

 

16) Inflation is a problem when  

A) it is unpredictable.

B) it causes resources to be diverted from productive uses.

C) it causes the value of money to vary unpredictably.

D) All of the above answers are correct.

 

17) If the CPI basket costs $35 in the base period but costs $42, what is the CPI in the next period?

A) 20 percent                           B) 83.3

C) $42                                                 D) 120

 

18) Suppose the Consumer Price Index for the year 2007 is 143.6. What does that number mean?

A) On average, goods cost $243.60 each in 2007.

B) On average, goods cost $143.60 each in 2007.

C) Prices rose 143.6 percent over the reference base period, on average.

D) Prices rose 43.6 percent over the reference base period, on average.

 

19) If the CPI was 122.3 at the end of last year and 124.5 at the end of this year, the inflation rate over these two years was

A) 22.5 percent.                                   B) 2.5 percent.

C) 18.0 percent.                                   D) 1.8 percent.

 

20) Suppose that the price level was 100 in 2005, 110 in 2006, 120 in 2007, and 130 in 2008. Over these three years,

A) prices were stable.

B) inflation did not occur.

C) the inflation rate accelerated.

D) the inflation rate was positive.

 

21) Which of the following means that the CPI overstates the actual inflation rate?

A) outlet substitution bias

B) quality change bias

C) new goods bias

D) All of the above cause the CPI to overstate inflation

 

22) If a new and better good replaced an older and less expensive good, then the price level measured by the CPI ________.

A) might be either higher or lower than the actual price

B) is lower than the actual price level

C) is higher than the actual price level

D) is the same as the actual price level because it measures the prices of the actual goods.

 

23) If last year's price level was 100 and this year's price level is 114, over the year the inflation rate has been

A) 100 percent.                        B) 114 percent.

C) 12 percent                           D) 14 percent.

 

24) The commodity substitution bias is that

A) consumers substitute high-quality goods for low-quality goods.

B) consumers decrease the quantity they buy of goods whose relative prices rise and increase the quantity of goods whose relative price falls.

C )national saving and foreign borrowing are interchangeable.

D) government spending is a good substitute for investment expenditures.

 

 

Key: Chapter 5

 

1) A

2) C

3) C

4) C

5) A

6) B

7) B

8) B

9) C

10) D

11) A

12) A

13) A

14) A

15) B

16) D

17) D

18) D

19) D

20) D

21) D

22) C

23) D

24) B

 

 

 

 

 

Chapter 6 (Economic Growth)

1)Economic growth is measured by

A) changes in the employment rate.

B) changes in nominal GDP.

C) changes in real GDP.

D) All of the above are used to measure economic growth.

 

In 2005, Armenia had a real GDP of approximately $4.21 billion and a population of 2.98 million.  In 2006, real GDP was $4.59 billion and population was 2.97 million.

2)In 2008, Armenia had a real GDP of $4.21 billion and a population of 2.98 million.  In 2009, real GDP was $4.59 billion and population was 2.97 million. What was Armenia’s economic growth rate from 2008 to 2009?

A) 9.0 percent             B) 0.38 percent

C) 8.3 percent             D) 3.8 percent

 

3) During 2009, the country of Economia had a real GDP  of $115 billion and the population was 0.9 billion.  In 2008, real GDP was 105 billion and the population was 0.85 billion.  In 2009, real GDP per person was

A) $135           B) $128           C) $124           D) $117

 

4) Which of the following is used to calculate the standard of living?

A) the one-third rule

B) real GDP/aggregate hours

C) real GDP/population

D) ((real GDP in the current year — real GDP in previous year)/real GDP in previous year) x 100

 

5)If real GDP per person is growing at 4 percent per year, approximately how many years will it take to double?

A) 17.5            B) 4     C) 8     D) 25

 

6) Over the past 100 years real GDP per person in the United States, on average, has

A) increased by about 10 percent per year.

B) increased by about 5 percent per year.

C) increased by about 2 percent per year.

D) decreased by about 5 percent per year.

 

7) Which of the following statements are correct?

I.          The average economic growth rate in real GDP per person in the United States over the last century was 5 percent per year.

II.         The United States has the highest economic growth rate of any nation.

A) I only                                  B) II only

C) both I and II                        D) neither I nor II

 

8) Moving along the production function shows the relationship between ________, holding all else constant.

A) labor input, capital input and real GDP

B) capital input and real GDP

C) technology and real GDP

D) labor input and real GDP

 

9) An aggregate production function shows the relationship between  

A) real GDP and unemployment.

B) leisure and unemployment.

C) real GDP and the quantity of labor employed.

D) real GDP and leisure.

 

10)The aggregate production function shows that an economy increases its real GDP in the short run by

A) using more labor.

B) developing new technologies.

C) exploring for new deposits of natural resources.

D) increasing its physical capital stock.

 

11) The aggregate production function relating real GDP to labor hours

A) has a constant slope.

B) has a positive slope and becomes less steep as employment increases.

C) has a positive slope and becomes steeper as employment increases.

D) has a negative slope.

 

 

 

12)The country of Kemper is on its aggregate production function at point W in the above figure. The government of Kemper passes a law that makes 4 years of college mandatory for all citizens. After all citizens have their education, the economy will 

A) move to point such as X.                B) remain at point W.

C) move to point such as Z.                D) move to point such as Y.

 

13) The real wage rate measures the  

A) dollar value of what a worker could earn in another job.

B) average weekly earnings in dollars of a worker.

C) quantity of goods and services that an hour of work will buy.

D) dollar value of an hour of work.

 

14) If the money wage rate is $10 per hour and the price level is 100, the real wage rate is

A) $11.00.       B) $10.10.       C) $10.00.       D) $11.10.

 

15) Which of the following statements are TRUE regarding the demand for labor?

I.          The quantity of labor demanded depends on the real wage rate.

II.         If the money wage rate increases and the price level remains the same, the quantity of labor demanded decreases.  

A) I only                                  B) II only

C) both I and II                        D) neither I nor II

 

16) People base their labor supply on the ________ because they care about ________.

A) real wage; the equality of money wages and the price level

B) money wage; the amount of labor firms demand

C) real wage; what their earnings will buy

D) money wage; a surplus of labor

 

17) In the labor market, an increase in labor productivity ________ the real wage rate and ________ the level of  employment.

A) lowers; increases                 B) raises; decreases

C) raises; increases                 D) lowers; decreases

 

 

18) In the above figure, at the real wage rate of $50

A) there is shortage of 20 billion hours per year.

B) there is a surplus of 60 billion hours per year.

C) there is a surplus of 100 billion hours per year.

D) there is a shortage of 100 billion hours per year.

 

19) In the above figure, what is the full-employment real wage rate and quantity of hours per year?

A) $35 and 100 billion hours per year

B) $50 and 40 billion hours per year

C) $50 and 100 billion hours per year

D) $40 and 60 billion hours per year

 

20) An increase in productivity relates to

A) working harder over time.

B) producing the same output with more labor hours.

C) producing the same output with fewer labor hours.

D) working longer over time.

 

21) Classical growth economists believed that the real wage rate ________ the subsistence real wage rate.

A) would always be above

B) could sometimes be above

C) would always equal

D) None of the above answers is correct.

 

22) Classical growth theory assumes that  

A) there are increasing returns to capital.

B) there are no diminishing returns to capital.

C) population increases when wage rates are above subsistence levels.

D) when interest rates increase, savings and investment both increase.

 

23) According to the classical growth theory of Thomas Malthus,

A) technological advances lead to permanent increases in real GDP per person.

B) increases in real GDP per person are only temporary.

C) the population growth rate is fixed.

D) labor productivity increases continuously.

 

24) Population increases are the limiting factor in the growth process in

A) neoclassical growth theory.             B) classical growth theory.

C) real growth theory.                         D) the new growth theory.

 

 

Key: Chapter 6 

 

1) C

2) A

3) B

4) C

5) A

6) C

7) D

8) D

9) C

10) A

11) B

12) C

13) C

14) C

15) C

16) C

17) C

18) B

19) D

20) C

21) B

22) C

23) B

24) B




 

 Chapter 7 (Finance, Saving, and Investment)

1) The term capital, as used in macroeconomics, refers to
A) the amount of money a firm can raise in the stock market.
B) physical capital.
C) the amount of money that someone can invest in a new venture.
D) All of the above answers are correct.

2) The total amount of plants, inventories, equipment and buildings is called
A) net investment.                   B) gross investment.
C) depreciation.                       D) capital stock.

3) Gross investment
A) does not include additions to inventories.
B) includes only replacement investment.
C) is the purchase of new capital.
D) Both answers A and B are correct.  

4) Net investment equals
A) gross investment minus depreciation.
B) the total quantity of plant, equipment and buildings.
C) gross investment/depreciation.
D) capital stock minus depreciation.

5) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's capital stock at the end of year equals
A) 1 machine.             B) 6 machines.    
C) 3 machines.            D) 2 machines.

6) The funds used to buy and operate physical capital are
A) depreciation.         B) financial capital.
C) wealth.                 D) saving.

7) If a bank’s net worth is negative, then the bank definitely is
A) solvent.                   B) insolvent.
C) illiquid.                    D) liquid.

8) U.S. investment is financed from
A) private borrowing, government budget deficits, and lending to the rest of the world.
B) private saving, government budget deficits, and borrowing from the rest of the world.
C) private saving, government budget surpluses, and borrowing from the rest of the world.
D) private saving and borrowing from the rest of the world only.

9) National saving is defined as
A) the saving by the federal government.
B) the total amount of household saving.    
C) saving by households and businesses plus government saving.    
D) None of the above answers are correct.

10) If national saving (S) is $100,000, net taxes (T) equal $100,000 and government expenditure (G) is $25,000, how much are households and businesses saving?
A) -$25,000.                B) $25,000.
C) $225,000.               D) none of the above  

11) Approximately, the real interest rate ________ the  inflation rate ________ the nominal interest rate.
A) equals; plus                         B) equals; minus
C) plus; equals                         D) minus; equals

12) The nominal interest rate minus the real interest rate approximately equals the
A) rate of increase in the amount of investment.
B) the rate the bank receives to cover lending costs.
C) the rate of increase in the income.
D) inflation rate.

13) If the real interest rate is 3 percent and the inflation rate is 2 percent, the nominal interest rate is approximately
A) 1 percent.                B) 5 percent.
C) 1.5 percent.             D) -1 percent.  

14) A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from
A) technological improvements.
B) decreases in the expected profit.    
C) an increase in the real interest rate.    
D) tax cuts.

 

 

15) In the above figure, the economy is at point a on the initial demand for loanable funds curve DLF0. What happens if the real interest rate rises? A) The demand for loanable funds curve shifts leftward to a curve such as DLF1.
B) The demand for loanable funds curve shifts rightward to a curve such as DLF2.    
C) There is a movement to a point such as b on the demand for loanable funds curve DLF0.
D) none of the above  

16) Which of the following are included in the supply of loanable funds?

            i.          private saving
            ii.         government budget surplus
            iii.        international borrowing
A) ii and iii.                    B) i and iii.
C) i, ii and iii.                 D) i and ii.

17) ________ increases households' saving.
A) A stock market boom that increases the purchasing power of households' wealth
B) A decrease in the real interest rate
C) Higher expected future income
D) A tax cut that increases disposable income  

18) A decrease in disposable income ________.
A) has no effect on the supply of loanable funds curve
B) shifts the supply of loanable funds curve rightward
C) results in movement up the supply of loanable funds curve
D) shifts the supply of loanable funds curve leftward  

19) When a government has a budget surplus, the surplus
A) must be subtracted from private saving.
B) crowds-out private saving.
C) increases the world real interest rate.
D) helps finance investment.  

20) The term "crowding out" relates to
A) increases in the real interest rate due to government budget deficit.
B ) an effect of a government budget deficit.
C) decreases in private investment because of a government budget deficit.    
D) All of the above answers are correct.
 

Key: Chapter 7

1) B
2) D
3) C
4) A    
5) B
6) B
7) B    
8) C
9) C
10) B    
11) C
12) D
13) B
14) B
15) C
16) C    
17) D
18) B
19) D
20) D


 


 



Chapter 8 (Money, Price Level, and Inflation)

1) Which of the following is a primary function of money?
 A) to serve as a unit of account
 B) to serve as an encouragement to work
 C) to reduce the burden of excessive imports
 D) to raise funds for the government
 
 2) When you buy a hamburger for lunch, you are using money as a
 A) store of value.
 B) standard of deferred payment.
 C) medium of exchange.
 D) unit of accounting.
 
 3) A $25,000 price tag on a new car is an example of money as
 A) medium of exchange.
 B) a unit of account.
 C) a store of value.
 D) a time deposit.
 
 4) Checking deposits at banks are
 A) money.
 B) not money because they are an intangible.
 C) money only because they are insured by the FDIC.
 D) not money until they are converted into currency.
 
 5) Which of the following is NOT included in the M1 definition of money?
 A) currency held outside banks
 B) time deposits
 C) traveler's checks
 D) checking deposits at savings and loans
 
 6) The definition of M2 includes
 A) M1.
 B) savings deposits.
 C) time deposits.
 D) all of the above
 
 7) An individual wanting the most liquid asset possible will hold
 A) currency.
 B) a savings account.
 C) checkable deposits at a bank.
 D) U.S government bonds.
 
 8) Money ________.
 A) is always composed of coins and paper
 B) loses its value as it becomes older
 C) requires a double coincidence of wants
 D) is any commodity that is generally acceptable as a means of payment
 
 9) Which of the following institutions is NOT a depository institution?
 A) the U.S. Treasury
 B) a commercial bank
 C) a money market mutual fund
 D) a thrift institution, such as a savings and loan association
 
 10) A bank's reserves include
 A) the cash in its vault plus the value of its depositors' accounts.
 B) the cash in its vault plus its deposits held at a Federal Reserve bank.
 C) the cash in its vault plus any gold held for the bank at Fort Knox.
 D) its common stock holdings, the cash in its vault, and any deposits at a Federal Reserve bank.
 
 11) Liquidity is
 A) the property of an asset being instantly convertible into a means of payment with little loss in value.
 B) the degree of movement in an asset's interest rate.
 C) the same thing as a checking deposit.
 D) the net flow of gold into the U.S. Treasury.
 
 12) Control of the nation's quantity of money is handled by
 A) Congress.
 B) the Federal Reserve System.
 C) the President of the United States.
 D) Congress, the Federal Reserve System, and all member commercial banks.
 
 
 13) Monetary policy is conducted
 A) only by the Federal Reserve.
 B) by the Federal Reserve and the President of the United States.
 C) by the Federal Reserve, the President of the United States, and Congress.
 D) by the Federal Reserve with veto power residing with the President of the United States.
 
 14) The Federal Open Market Committee
 A) consists of the Fed chairman and the 12 regional bank presidents.
 B) is the main policy-making organ of the Federal Reserve.
 C) is headed by the president of the New York Federal Reserve Bank.
 D) meets every week to review the state of the economy.
 
 15) Which of the following is NOT a monetary policy tool?
 A) discount rate
 B) open market operations
 C) required reserve ratio
 D) federal funds rate
 
 16) The discount rate is the interest rate that
 A) the Federal Reserve charges when it loans reserves to depository institutions.
 B) is the lowest rate that banks will charge when lending to their best customers.
 C) the Federal Reserve charges when it loans to the U.S. Government.
 D) banks charge when they lend to each other.
 
 17) The monetary base does NOT include
 A) Federal Reserve notes.
 B) bank deposits at the Fed.
 C) checking accounts at commercial banks.
 D) cash in vaults at commercial banks.
 
 18) The reserve ratio is a bank's reserves as a fraction of its
 A) total assets.
 B) total loans.
 C) currency.
 D) total deposits.
 
 19) You deposit $4,000 in currency in your checking account. The bank holds 20 percent of all deposits as desired reserves. As a direct result of your deposit, your bank will create
 A) $200 of new money.
 B) $800 of new money.
 C) $1,600 of new money.
 D) $3,200 of new money.
 
 
 20) The money multiplier is
 A) the amount by which a change in the quantity of money is multiplied to determine the change in the monetary base.
 B) the amount by which a change in the monetary base is multiplied to determine the change in the quantity of money.
 C) equal to bank reserves divided by the change in the monetary base.
 D) equal to bank reserves divided by the change the quantity of money.
 
            Assets                            Liabilities 
Reserves           $400            Deposits          $1,200
Loans                $800
Total                $1,200           Total                $1,200

21) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio on deposits is 10 percent, FBN Bank has desired reserves of
 A) $700 million.
 B) $120 million.
 C) $100 million.
 D) $0.
 
 22) In the balance sheet above, the entries are in millions of dollars for the FBN Bank. If the desired reserve ratio equals 10 percent, FBN Bank has excess reserves of
 A) $280 million.
 B) $200 million.
 C) $100 million.
 D) $0.
 
 23) The nominal demand for money is
 A) inversely related to GDP.
 B) measured in constant dollars.
 C) inversely related to the price level.
 D) proportional to the price level.
 
     
 
 24) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of a fall in the interest rate?
 A) The demand for money curve would shift rightward to MD2.
 B) The demand for money curve would shift leftward to MD0.
 C) There would be a movement upward along the demand for money curve MD1.
 D) There would be a movement downward along the demand for money curve MD1.
 
 25) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of a rise in the interest rate?
 A) The demand for money curve would shift rightward to MD2.
 B) The demand for money curve would shift leftward to MD0.
 C) There would be a movement upward along the demand for money curve MD1.
 D) There would be a movement downward along the demand for money curve MD1.


    
 
 26) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion
 A) less money than the quantity supplied and the interest rate will rise.
 B) less money than the quantity supplied and the interest rate will fall.
 C) more money than the quantity supplied and the interest rate will fall.
 D) more money than the quantity supplied and the interest rate will rise.
 
 27) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion
 A) less money than the quantity supplied and bond prices will rise.
 B) less money than the quantity supplied and bond prices will fall.
 C) more money than the quantity supplied and bond prices will fall.
 D) more money than the quantity supplied and bond prices will rise.
 
 28) If real GDP is $10 trillion, the price level is 120, and the quantity of money is $4 trillion, what is the velocity of circulation?
 A) 3
 B) 2.5
 C) 30
 D) 25
 
 29) Which of the following equations represents the equation of exchange?
 A) PM = VY
 B) MY = PV
 C) MV = PY
 D) M = VP/Y
 
 30) If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP?
 A) $12 trillion
 B) $6 trillion
 C) $3 trillion
 D) $333 billion
 
 31) An increase in the quantity of money leads to a proportional increase in the price level according to the
 A) equation of exchange.
 B) short-run velocity model.
 C) quantity theory of money.
 D) short-run theory of inflation.
 
 32) Suppose the money growth rate is 3 percent, velocity is constant, and real GDP is growing at 2 percent. What is the inflation rate?
 A) 1 percent
 B) 5 percent
 C) 3 percent
 D) 6 percent
 

Key: Chapter 8
1) A
2) C
3) B
4) A
5) B
6) D
7) A
8) D
9) A
10) B
11) A
12) B
13) A
14) B
15) D
16) A
17) C
18) D
19) D
20) B
21) B
22) A
23) D
24) D
25) C
26) B
27) A
28) A
29) C
30) A
31) C
32) A

 

 

Chapter 10 (Aggregate Supply and Aggregate demand)

1) The quantity of real GDP supplied ________ the amount of ________.
A) increases as; labor input decreases
B) decreases as; capital input increases
C) decreases as; capital and labor input decreases
D) is unaffected by; technology

2) In the macroeconomic long run,
A) real GDP = potential GDP.
B) the economy is at full employment.
C) regardless of the price level, the economy is producing at potential GDP.
D) All of the above are correct.

3) The long-run aggregate supply (LAS) curve
A) has a positive slope. B) has a negative slope.
C) is vertical. D) is horizontal.

4) In the short-run
A) the aggregate supply curve is upward sloping.
B) real GDP is always equal to potential GDP.
C) the money wage rate can change.
D) the price level does not change.

5) A change in the full-employment quantity of labor ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve.
A) shifts; shifts B) shifts; does not shift
C) does not shift; shifts D) does not shift; does not shift

6) Technological progress will
A) shift the LAS curve rightward but will not shift the SAS curve.
B) not shift either the LAS or the SAS curve.
C) shift both the LAS and SAS curves rightward.
D) shift the SAS curve rightward but will not shift the LAS curve.

7) The aggregate demand curve
A) has a negative slope. B) has a positive slope.
C) is vertical. D) is horizontal.

8) Your real wealth is measured as the
A) amount of assets you have in dollar terms.
B) amount of money you have.
C) amount of goods and services your wealth will buy.
D) amount of goods you have divided by the price level.

9) According to the wealth effect, an increase in the price level ________ real wealth and ________ consumption expenditure.
A) increases; increases B) increases; decreases
C) decreases; increases D) decreases; decreases

10) A decrease in government purchases of goods and service
A) increases aggregate demand.
B) increases the aggregate quantity demanded.
C) decreases the aggregate quantity demanded.
D) decreases aggregate demand.

11) An increase in the quantity of money
A) increases aggregate demand.
B) increases the aggregate quantity demanded.
C) decreases the aggregate quantity demanded.
D) decreases aggregate demand.

12) An inflationary gap means that short-run macroeconomic equilibrium GDP
A) is less than full-employment GDP.
B) equals full-employment GDP.
C) is more than full-employment GDP.
D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP.

13) Which of the following can be said about economic growth? I. Economic growth is increases in long-run aggregate supply. II. Economic growth is the persistent increase in potential GDP.
A) I only B) II only
C) I and II D) neither I or II

14) A recessionary gap means that short-run macroeconomic equilibrium GDP
A) is less than full-employment GDP.
B) equals full-employment GDP.
C) is more than full-employment GDP.
D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP.

15) Suppose the economy was initially in a long-run equilibrium. Then the world economy expands so that foreign incomes rise. U.S. aggregate demand ________ and eventually the money wage rate ________.
A) increases; rises                                 B) increases; falls
C) decreases; rises                                D) decreases; falls

16) The forces that generate economic growth are those that
A) shift the long-run aggregate supply curve leftward.
B) shift the long-run aggregate supply curve rightward.
C) shift the aggregate demand curve leftward.
D) None of the above answers are correct.

17) If the economy experiences inflation, aggregate
A) demand increases faster than aggregate supply.
B) demand increases more slowly than aggregate supply.
C) supply increases faster than aggregate demand.
D) demand and supply increase at about the same rate.

18) Disposable income ________ when ________.
A) increases; taxes decrease
B) decreases; transfer payments increase
C) increases; government purchases decrease
D) decreases; aggregate income increases

19) At long-run macroeconomic equilibrium, ________.
A) an inflationary gap exists
B) real GDP equals potential GDP
C) a recessionary gap exists
D) real GDP is less than potential GDP but is as close as it is possible to be

20) When the price level increases, ________.
A) real GDP remains constant
B) the quantity of real GDP demanded decreases
C) aggregate demand increases
D) aggregate demand decreases


Key: Chapter 10

1) C
2) D
3) C
4) A
5) A
6) C
7) A
8) C
9) D
10) D
11) A
12) C
13) C
14) A
15) A
16) B
17) A
18) A
19) B
20) B

 


 

Chapter 11 (Expenditure Multipliers: The Keynesian Model)

1) If firms set prices and then keep them fixed for a period of time, their fixed prices imply that
A) the aggregate price level is fixed and that aggregate demand determines the quantity of goods and services sold.
B) prices are set by aggregate demand and supply.
C) the aggregate price level adjusts continuously.
D) the aggregate price level is fixed and that aggregate supply determines the quantity of goods and services sold.

2) The consumption function relates consumption expenditure to
A) the interest rate.                                 B) disposable income.
C) saving.                                               D) the price level.


3) In the above figure, consumption and disposable income are equal at
A) any point along the consumption function.
B) a saving level of $100 billion and disposable income level of $400 billion.
C) a disposable income level of $0.
D) a disposable income level of $200 billion.

4) In the above figure, at a disposable income level of $200 billion, saving equals
A) disposable income.                                 B) zero.
C) $40 billion.                                             D) consumption expenditures.

5) The marginal propensity to consume
A) is negative if dissaving is present.
B) is between 0 and 1.
C) equals 1.
D) exceeds 1.

6) If consumption expenditures for a household increase from $1000 to $1800 when disposable income rises from $1000 to $2000, the marginal propensity to consume is
A) 0.8.                 B) 0.5.                     C) 0.3.                     D) 0.2.

7) If the marginal propensity to consume is 0.8, every $10 increase in disposable income increases
A) consumption expenditure by $0.80.
B) consumption expenditure by $18.00.
C) saving by $0.20.
D) consumption expenditure by $8.00.

8) If wealth increases, the consumption function
A) shifts upward.                                     B) shifts downward.
C) is unaffected.                                      D) has a steeper slope.

9) Read the two statements below and indicate if they are true or false. I. Autonomous expenditures change when GDP changes. II. Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government purchases, and net exports. 9) _______
A) I and II are both true.                                 B) I and II are both false.
C) I is true and II is false                                 D) I is false and II is true.

10) Autonomous expenditure is not influenced by
A) the price level.                                     B) the interest rate.
C) real GDP.                                           D) any other variable.

11) A decrease in autonomous consumption will
A) shift the aggregate expenditure function downward.
B) decrease the marginal propensity to save.
C) shift the consumption function upward.
D) change the slope of the consumption function.

12) When the economy is in equilibrium,
A) planned investment equals actual investment.
B) planned savings will equal zero.
C) there can be no unemployment.
D) changes in autonomous spending will have no impact on national income.
 

Real GDP         C        I        G        NX
  2500             1430    540     400       90
  2400             1360    540     400       100
  2300             1290    54       400       110


13) In the above table, C is consumption expenditure, I is investment, G is government purchases, and NX is net exports. All entries are in dollars. The equilibrium level of real GDP is
A) $2,500.                 B) $2,400.              C) $2,300.                 D) $2,200.


14) In the above table, C is consumption expenditure, I is investment, G is government purchases, and NX is net exports. All entries are in dollars. The slope of the aggregate expenditure function is
A) -0.10.                    B) 0.10.                 C) 0.60.                     D) 0.70.


15) In the above figure, equilibrium expenditure is
A) less than $10 trillion.
B) $10 trillion.
C) more than $10 trillion.
D) some amount that cannot be determined without more information.

16) In the above figure, if the level of real GDP is $11 trillion,
A) inventories are above the levels planned by firms.
B) inventories are below the levels planned by firms.
C) inventories equal the levels planned by firms.
D) planned expenditures are zero.

17) The multiplier effect exists because a change in autonomous expenditure
A) leaves the economy in the form of imports.
B) leads to identical changes in income, which generate further spending.
C) prompts further exports.
D) will undergo its complete effect in one round.

18) The larger the MPC, the
A) larger the value of the multiplier.
B) smaller the value of the multiplier.
C) less likely that the multiplier will be affected.
D) more likely that the multiplier will be inconsequential.

19) If investment increases by $300 and, in response, equilibrium aggregate expenditure increases by $600, the multiplier is
A) 0.2.                 B) 0.5.                 C) 2.                         D) 5.

20) Suppose that the MPC = 0.75 and there are no taxes or imports. Then a $100 decrease in autonomous spending causes equilibrium expenditure to
A) decrease by $400.                             B) increase by $400.
C) decrease by $750.                             D) increase by $750.


21) In the above figure, autonomous expenditure along AE1 equals
A) $2 trillion.
B) $4 trillion.
C) $8 trillion.
D) an amount not given in the above answers.

22) In the above figure, equilibrium expenditure along AE1 is
A) $2 trillion.
B) $4 trillion.
C) $8 trillion.
D) an amount not given in the above answers.

23) In the above figure, the multiplier is
A) 1.5.             B) 2.0.                 C) 2.5.                     D) 3.0.

 

Consumption expenditure:                 C = 8 + 0.7Y   
Investment:                                        I = 5
Government purchases:                     G = 7
Exports:                                             X = 10
Imports:                                            M = 0.2Y

24) The equations above describe the economy of La La Land. What is the equation for the aggregate expenditure curve?
A) AE = 13 + 0.5Y                             B) AE = 30 - 0.5Y
C) AE = 30 + 0.5Y                             D) AE = 30 + 0.9Y
 

25) The marginal propensity to import is the ________ that is spent on imports.
A) fraction of an increase in real GDP
B) total amount of real GDP
C) total amount of potential GDP
D) fraction of an increase in potential GDP

 

Key: Chapter 11

1) A
2) B
3) D
4) B
5) B
6) A
7) D
8) A
9) D
10) C
11) A
12) A
13) B
14) D
15) B
16) A
17) B
18) A
19) C
20) A
21) A
22) B
23) B
24) C
25) A

 

 

 

Chapter 12    (U.S. Inflation, Unemployment, and Business Cycles)

1) If the economy experiences inflation,
A) aggregate demand increases faster than potential GDP.
B) aggregate demand increases more slowly than potential GDP.
C) short-run aggregate supply increases faster than aggregate demand.
D) aggregate demand and short-run aggregate supply increase at about the same rate.

2) Inflation can be described as
A) a stock variable.
B) a flow variable.
C) an ongoing process of price level increases.
D) an excess demand for money.

3) When aggregate demand persistently grows at a rate that exceeds the growth rate of potential GDP, the economy will experience ________.
A) a slowdown in the economic growth rate
B) rising wage rates
C) persistent full-employment
D) persistent inflation

4) Demand-pull inflation starts with
A) a decrease in aggregate demand.
B) an increase in aggregate demand.
C) a decrease in aggregate supply.
D) an increase in aggregate supply.

5) An increase in ________ could start a demand-pull inflation?
A) the quantity of money.
B) government expenditures.
C) exports.
D) All of the above answers are correct.

6) Increases in the quantity of money can start a ________ inflation and an increase in government expenditure can start a ________ inflation.
A) demand-pull; demand-pull
B) demand-pull; cost-push
C) cost-push; cost-push
D) cost-push; demand-pull

7) Initially, demand-pull inflation will
A) increase the price level but not real GDP.
B) increase both the price level and real GDP.
C) increase the price level, but decrease real GDP.
D) shift the aggregate supply curve rightward.
 


8) Which of the above figures best shows the start of a demand-pull inflation?
A) Figure A
B) Figure B
C) Figure C
D) Figure D

9) A demand-pull inflation can be described as ________ shifts in the AD curve and ________ shifts in the SAS curve.
A) rightward; rightward
B) rightward; leftward
C) leftward; rightward
D) leftward; leftward

10) As the money wage rate rises,
A) the long-run aggregate supply curve shifts rightward.
B) the short-run aggregate supply curve shifts rightward.
C) both the long-run aggregate supply curve and the short-run aggregate supply curve shift leftward.
D) the short-run aggregate supply curve shifts leftward.

11) The main sources of cost-push inflation are increases in
A) money wage rates and the cost of raw materials.
B) real wage rates and the cost of raw materials.
C) money wage rates and aggregate demand.
D) aggregate demand and real wage rates.

12) Cost-push inflation can start with
A) a decrease in investment.
B) an increase in oil prices.
C) an increase in government expenditures.
D) a decrease in the quantity of money.

13) A one-time increase in oil prices without any following change in aggregate demand produces
A) stagflation.
B) demand-pull inflation.
C) an increase in the money wage rate that exceeds the percentage increase in the price level.
D) a one-time fall in the price level.

14) Stagflation occurs when the price level ________ and real GDP ________.
A) falls; increases
B) falls; decreases
C) rises; decreases
D) rises; increases

15) For a cost-push inflation to occur, oil price increases must be accompanied by
A) decreased investment spending.
B) lower personal tax rates.
C) increases in the quantity of money.
D) increases in government expenditures.

16) In a demand-pull inflation, the AD curve shifts ________ and the SAS curve shifts ________.
A) rightward; rightward
B) rightward; leftward
C) leftward; rightward
D) leftward; leftward

17) The Phillips curve shows the relationship between the
A) nominal interest rate and the real interest rate.
B) expected rate of inflation and the nominal interest rate.
C) real interest rate and the unemployment rate.
D) unemployment rate and the inflation rate.

18) A Phillips curve shows the relationship between the
A) price level and real GDP.
B) unemployment rate and real GDP.
C) inflation rate and the unemployment rate.
D) inflation rate and real GDP.

19) The short-run Phillips curve
A) slopes downward.
B) slopes upward.
C) is horizontal.
D) is vertical.



20) An increase in the expected inflation rate shifts the
A) short-run Phillips curve downward.
B) short-run Phillips curve upward.
C) long-run Phillips curve upward.
D) long-run Phillips curve downward.

21) The long-run Phillips curve
A) slopes downward.
B) slopes upward.
C) is horizontal.
D) is vertical.

22) The short-run Phillips curve intersects the long-run Phillips curve at the
A) natural interest rate.
B) nominal interest rate.
C) natural inflation rate.
D) expected inflation rate.

 




 

23) In the above figure, suppose that the economy currently is at point A. If the inflation rate falls and this fall is unanticipated by the public, the economy moves to a point such as point
A) B.
B) C.
C) D.
D) E.

24) In the above figure, suppose that the economy currently is at point A. If the inflation rate rises and this rise is NOT anticipated by the public, the economy moves to a point such as point
A) B.
B) C.
C) D.
D) E.

25) The short-run Phillips curve shows the ________ relationship between ________.
A) negative; unemployment and real GDP
B) positive; unemployment and real GDP
C) negative; inflation and unemployment
D) positive; real GDP and inflation
Answer: C


26) A decrease in the expected inflation rate leads to ________ in the long-run Phillips curve and ________ in the short-run Phillips curve.
A) an upward shift; no shift
B) a leftward shift; an upward shift
C) no shift; no shift
D) no shift; a downward shift

27) The long-run Phillips curve is ________.
A) horizontal at the expected inflation rate
B) vertical at the natural unemployment rate
C) horizontal at the actual inflation rate
D) vertical at the actual inflation rate

28) According to ________ the business cycle is the result of shifts in the economy's AD curve.
A) the Keynesian cycle theory only
B) only the Keynesian and monetarist cycle theories
C) the Keynesian, monetarist, and real business cycle theories
D) the Keynesian, monetarist, and new classical cycle theories

29) Keynes used the term "animal spirits" to refer to the
A) animalistic behavior of investors.
B) irrational behavior of financial markets.
C) volatility of business confidence.
D) all of the above

30) In monetarist business cycle theory, increases in money growth temporarily ________ real GDP and ________ the price level.
A) increase; rise
B) increase; lower
C) decrease; rise
D) decrease; lower


Key: Chapter 12
1) A
2) C
3) D
4) B
5) D
6) A
7) B
8) A
9) B
10) D
11) A
12) B
13) A
14) C
15) C
16) B
17) D
18) C
19) A
20) B
21) D
22) D
23) D
24) A
25) C
26) D
27) B
28) D
29) C
30) A

 

Chapter 13    (Fiscal Policy)

1) The purpose of fiscal policy is to
A) achieve full employment.
B) promote economic growth.
C) maintain price level stability.
D) All of the above answers are correct.

2) Which of the following is NOT a government expenditure item?
A) transfer payments
B) purchases of goods and services
C) debt interest on the government's debt
D) purchases of foreign bonds

Component                                    Dollar (billions of $)
Personal income taxes                        500
Social security taxes                           400
Corporate income taxes                      150
Indirect taxes                                     75
Transfer payments                             1,200
Purchases of goods and services         225
Debt interest                                      75
 

3) Consider the above table with data for a country's government budget. The country has government revenues of ________ billion.
A) $900                 B) $1125                 C) $725                     D) $1700

4) If the government runs a surplus, the total amount of government debt is
A) increasing.             B) decreasing.             C) constant.             D) zero.

5) If tax revenue equal $1.5 billion and government expenditures equal $1.6 billion, then
A) the government budget has a deficit of $0.1 billion.
B) the government budget has a surplus of $0.1 billion.
C) the government debt is equal to $0.1 billion.
D) the government debt declines by $0.1 billion.
 

                           Government        Government
                            tax revenue        expenditure
      Year              (billions of $)     
(billions of $)
        1                        240                     240
        2                        250                     245
        3                        260                     255
        4                        300                     320
        5                        325                     340


6) What is the amount of the surplus or deficit incurred in year 1 by the government shown in the above table?
A) $0                                              B) $25 billion deficit
C) $25 billion surplus                  D) $240 billion surplus

7) What is the amount of the surplus or deficit incurred in year 2 by the government shown in the above table?
A) $0                                                B) $5 billion surplus
C) $5 billion deficit                         D) $250 billion surplus

8) What is the amount of the surplus or deficit incurred in year 5 by the government shown in the above table?
A) $15 billion deficit                     B) $35 billion surplus
C) $5 billion surplus                      D) $325 billion surplus

9) The government begins year 1 with $25 billion of debt. Based on the information in the above table, what is the amount of debt following year 2?
A) $245 billion             B) $5 billion             C) $250 billion                 D) $20 billion

10) Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income
A) weakens the incentive to work.
B) decreases potential GDP.
C) will increase potential GDP because people work more to pay the higher taxes.
D) Both answers A and B are correct.

11) Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is
A) .5 percent.             B) 3.5 percent.                 C) 4.0 percent.                 D) 2.0 percent.

12) The term "crowding out" relates to
A) an effect of government dissaving.
B) increases in the real interest rate due to government budget deficit.
C) decreases in private investment because of government dissaving.
D) All of the above answers are correct.

13) The Ricardo-Barro effect holds that
A) equal increases in taxes and government purchases have no effect on equilibrium real GDP.
B) government budget deficits have no effect on the real interest rate.
C) a government budget deficit crowds out private investment.
D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect.

14) A discretionary fiscal policy is a fiscal policy that
A) involves a change in government defense spending.
B) is triggered by the state of the economy.
C) requires action by the Congress.
D) involves a change in corporate tax rates.

15) An expansionary fiscal policy is
A) a cut in taxes.
B) an increase in taxes.
C) a decrease in government purchases.
D) None of the above is an expansionary fiscal policy.

16) If the government wants to engage in fiscal policy to increase real GDP, it could
A) increase government purchases in order to increase aggregate supply.
B) decrease government purchases in order to increase aggregate supply.
C) increase government purchases in order to increase aggregate demand.
D) decrease government purchases in order to decrease aggregate demand.

17) The government increases its purchases. The steeper the SAS curve, the ________ will be the increase in the price level and the ________ will be the increase in real GDP.
A) larger; larger                                 B) larger; smaller
C) smaller; larger                               D) smaller; smaller
 


18) In the above figure, if the economy is initially at point B and government purchases decrease, the economy will
A) move to point C.                                 B) move to point A.
C) move to point D.                                 D) stay at point B.

19) In the above figure, if the economy is initially at point D and taxes are cut, if potential GDP does not change then the economy will move to point
A) move to point C.                                 B) move to point A.
C) move to point B.                                 D) stay at point D.

20) An example of an automatic fiscal policy stabilizer is when
A) tax revenues decrease as real GDP decreases.
B) Congress passes a law that raises tax rates.
C) Congress decides to cut government spending.
D) the president drafts a bill to reduce defense spending.





Key: Chapter 13

1) D
2) D
3) B
4) B
5) A
6) A
7) B
8) A
9) D
10) D
11) D
12) D
13) B
14) C
15) A
16) C
17) B
18) B
19) A
20) A

 

 

Chapter 14    (Monetary Policy)

1) Monetary policy affects macroeconomic performance by
A) changing aggregate supply.                         B) creating budget surpluses.
C) changing aggregate demand.                       D) creating budget deficits.

2) A policy that requires the quantity of money to grow at a constant rate is a
A) feedback rule.                                     B) fixed rule.
C) Keynesian rule.                                    D) Phillips rule.

3) If the Fed follows a feedback-rule monetary policy and aggregate demand decreases, the Fed
A) increases the growth rate of the quantity of money.
B) does not change the quantity of money.
C) decreases the growth rate of the quantity of money.
D) None of the above answers is correct.

4) If potential real GDP decreases, a fixed rule results in actual real GDP ________ and the price level ________.
A) increasing; rising                                             B) increasing; falling
C) decreasing; rising                                            D) decreasing; falling

5) If the Fed faces changes in cost-push pressure that shift the SAS curve, the Fed's monetary policy shifts the
A) AD curve.                                                     B) SAS curve.
C) LAS curve.                                                   D) SAS and LAS curves.
 

 
6) In the above figure, suppose that the economy is at point A with a fully anticipated inflation rate of 6 percent. If the Fed increases the quantity of money so that aggregate demand increases and if this change is unanticipated by the public, the result will be
A) the economy stays at point A.                             B) the economy moves to point B.
C) the economy moves to point C.                           D) the economy moves to point D.

7) In the above figure, suppose that the economy is at point A with a fully anticipated inflation rate of 6 percent. If the Fed wants to reduce the inflation rate but lacks credibility, the result will be
A) the economy stays at point A.                             B) the economy moves to point B.
C) the economy moves to point C.                           D) the economy moves to point D.

8) Price level stability
A) has no relationship to growth in potential GDP.
B) is thought by most economists to be reached with a measured inflation rate of between 0 and 3 percent a year.
C) is the most important tool of the Federal Reserve.
D) was attained by the Fed for the period between 1973 and 1984.

9) Suppose that initially real GDP equals potential GDP at $11 trillion and that the initial price level is 120. Then an increase in aggregate demand occurs. The fixed rule being followed is: Do nothing. As a result, real GDP ________ $11 trillion and the price level ________ 120.
A) equals; equals                                    B) is greater than; is less than
C) is greater than; equals                         D) is greater than; is greater than

10) Monetary policy is the adjustment of the ________ to achieve macroeconomic objectives.
A) money market mutual funds
B) quantity of money in circulation and interest rates by the Federal Reserve
C) Treasury bill rate
D) stock market





Key: Chapter 14

1) C
2) B
3) A
4) C
5) A
6) B
7) C
8) B
9) D
10) B