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MULTIPLE CHOICE. Choose the one alternative that best
completes the statement or answers the question.
3) Liquidity is the
A) ease with which an asset can be
converted into money.
B) same as the velocity of money.
C) speed with which the price of an asset
changes as its intrinsic value changes.
D) inverse of the velocity of money.
Answer: A
4) The velocity of circulation is
A) constant.
B) the rate of change of the GDP deflator.
C) the changes in the purchasing power of
money over a given time period.
D) the average number of times a dollar of
money is used in a year to buy goods and
services in GDP.
Answer: D
1) In the figure above, if the interest rate is 6
percent,
A) there is a $0.1 trillion excess quantity of
money and the interest rate will rise.
B) the money market is in equilibrium and
the interest rate will remain constant.
C) there is a $0.1 trillion excess demand for
money and the interest rate will rise.
D) there is a $0.1 trillion excess quantity of
money and the interest rate will fall.
Answer: B
2) The money multiplier determines how much
A) the monetary base will be expanded
given a change in the quantity of money.
B) the quantity of money will be expanded
given a change in the monetary base.
C) real GDP will be expanded given an
increase in autonomous investment.
D) money demand will expand given a
change in the quantity of money.
Answer: B
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7) Banks make additional loans when desired
reserves
A) exceed actual reserves, a situation of
positive excess reserves.
B) exceed actual reserves, a situation of
negative excess reserves.
C) are less than actual reserves, a situation
of positive excess reserves.
D) are less than actual reserves, a situation
of negative excess reserves.
Answer: C
8) Suppose that the money multiplier is 3. If the
monetary base increases by $1 million, the
quantity of money will
A) decrease by $3 million.
B) decrease by $300,000.
C) increase by $300,000.
D) increase by $3 million.
Answer: D
5) In the above figure, suppose the economy is
initially on the demand for money curve MD1 .
9) The functions of money are
A) medium of exchange, unit of account,
and means of payment.
B) medium of exchange and the ability to
buy goods and services.
C) medium of exchange, unit of account,
and store of value.
D) pricing, contracts, and means of
payment.
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 downward
along the demand for money curve MD1 .
D) There would be a movement upward
along the demand for money curve MD1 .
Answer: C
Answer: C
6) According to the quantity theory of money,
money growth and inflation are
A) negatively correlated.
B) positively correlated.
C) independent, that is, not correlated.
D) positively if the inflation rate is positive
and negatively correlated if the inflation
rate is negative.
Answer: B
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10) In the above figure, the short-run aggregate
supply curve is SAS and the aggregate
demand curve is AD. An inflationary gap
exists
A) if the long-run aggregate supply curve is
LAS3.
12) The above figure illustrates
A) a recessionary gap.
B) an equilibrium at the economy's physical
limits.
C) an inflationary gap.
D) a full-employment equilibrium.
B) if the long-run aggregate supply curve is
LAS1.
Answer: D
C) if the long-run aggregate supply curve is
LAS2.
D) All of the above answers are correct.
Answer: B
11) Which of the following changes while moving
along the aggregate demand curve?
A) the price level
B) the amount of money in the economy
C) future profits from investment projects
D) future incomes of households
Answer: A
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Price
level
Aggregate
demand
(trillions of
2000 dollars)
140
130
120
110
100
9.0
9.5
10.0
10.5
11.0
Short-run
aggregate
supply
(trillions of
2000 dollars)
11.5
11.0
10.5
10.0
9.5
16) ________ economists believe that the economy
is self-regulating and always at full
employment.
A) Monetarist
B) All
C) Keynesian
D) Classical
Long-run
aggregate
supply
(trillions of
2000 dollars)
10.0
10.0
10.0
10.0
10.0
Answer: D
17) If the economy is at the natural unemployment
rate,
A) real GDP > potential GDP.
B) real GDP = potential GDP.
C) real GDP < potential GDP.
D) All of the above can occur when the
economy is at the natural unemployment
rate.
13) From the data in the above table, when the
economy is at its short-run equilibrium, if
aggregate demand does not change, then as
time passes the
A) short-run aggregate supply curve shifts
leftward.
B) long-run aggregate supply curve shifts
rightward.
C) short-run aggregate supply curve shifts
rightward.
D) long-run aggregate supply curve shifts
leftward.
Answer: B
18) You observe that unplanned inventories are
increasing. You predict that there will be
________.
A) a trough
B) an expansion
C) a business cycle
D) a recession
Answer: A
Answer: D
14) The short-run aggregate supply curve is
upward sloping because
A) money wage rates do not immediately
change when the price level changes.
B) most business firms operate with
long-term contracts for output but not
labor.
C) lower taxes motivate people to work
more.
D) a lower price level creates a wealth effect.
19) An economy has no imports and no taxes. The
marginal propensity to save is 0.1. A ________
increase in autonomous expenditure increases
equilibrium expenditure by $60 billion and the
multiplier is ________.
A) $6 billion; 10
B) $12 billion; 5
C) $60 billion; 5
D) $60 billion; 10
Answer: A
20) An increase in disposable income shifts
A) both the consumption and savings
functions downward.
B) both the consumption and savings
functions upward.
C) neither the consumption function or the
savings function because it leads to a
movement along both the consumption
and savings function.
D) the consumption function upward and
leads to a movement along the savings
function.
Answer: A
15) One reason that the aggregate demand curve
has a negative slope is because
A) firms produce more when the price rises.
B) people earn more money when output
rises.
C) The premise of the question is wrong
because the aggregate demand curve has
a positive slope.
D) people buy fewer goods and save more
when the price level rises because their
real wealth decreases.
Answer: C
Answer: D
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21) In the Keynesian model of aggregate
expenditure, real GDP is determined by the
A) level of aggregate demand.
B) level of aggregate supply.
C) price level.
D) level of taxes.
Answer: A
22) Given an MPC of 0.80, if there are no income
taxes or imports and prices are constant, then
when investment increases by $50 million,
when prices are fixed equilibrium GDP would
A) increase by $50 million.
B) increase by $400 million.
C) increase by $250 million.
D) To answer the question more information
on income is needed.
Answer: C
24) In the above figure, autonomous expenditure
along AE1 equals
A) $4 trillion.
B) $2 trillion.
C) $8 trillion.
D) an amount not given in the above
answers.
Answer: B
25) When the economy is at full employment and
investment increases, in the long run the price
level will ________ and, if potential GDP does
not change, in the long run real GDP will
________.
A) increase; not change
B) decrease; not change
C) increase; increase
D) decrease; decrease
Answer: A
23) In the above figure, consumption and
disposable income are equal at
A) any point along the consumption
function.
B) a disposable income level of $200 billion.
C) a disposable income level of $0.
D) a saving level of $100 billion and
disposable income level of $400 billion.
Answer: B
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