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CHAPTER 4
Analysis Of The Financial System And The Economy
1. Assume that households decide to save more; what will happen to aggregate demand?
a. It will remain unchanged since savings is not part of consumption, investment, government
spending, or net exports.
b. It will increase.
c. It will decrease.
d. None of the above.
ANSWER: c
2. The total quantity of goods and services that will be demanded at various price levels is called
a. aggregate demand.
b. aggregate supply.
c. consumption.
d. flows.
ANSWER: a
3.
is the total quantity of goods and services that will be supplied at
various prices.
a. Aggregate demand
b. Disposable income
c. National income
d. Aggregate supply
ANSWER: d
4.
are spending units (e.g., households and firms) whose spending exceeds
income.
a. Deficit Spending Units (DSUs)
b. Surplus Spending Units (SSUs)
c. Constrained Maximizers
d. Utility Maximizers
ANSWER: a
5.
are spending units (e.g., households and firms) with income that
exceeds spending on consumption or investment in newly constructed houses.
a. Deficit Spending Units (DSUs)
b. Surplus Spending Units (SSUs)
c. Constrained Maximizers
d. Utility Maximizers
ANSWER: b
6. _________________is/are non-equity financial claims on DSUs, or IOUs issued by DSUs.
a. investment
b. stocks
c. bonds
d. flows
ANSWER: c
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Chapter 4
7. The
a. product market
b. financial market
c. stock market
d. factor market
ANSWER: d
is the market for inputs such as labor, capital, and natural resources.
8. The
is the market for consumption spending by households and investment
spending by households and firms.
a. product market
b. financial market
c. stock market
d. factor market
ANSWER: a
9. The
a. product market
b. financial market
c. stock market
d. factor market
ANSWER: b
is the market where surplus funds flow from SSUs to DSUs.
10.
is/are the sum of payments made by each sector to purchase the final
goods and services produced in the economy.
a. National Expenditures
b. National Income
c. Disposable Income
d. Investment
ANSWER: a
11.
is/are the sum of earnings of each sector and includes disposable
personal income and retained earnings.
a. National Expenditures
b. National Income
c. Disposable Income
d. Investment
ANSWER: b
12.
is/are the income available to households to spend on consumption or to
save.
a. National Expenditures
b. National Income
c. Disposable Personal Income
d. Investment
ANSWER: c
Analysis of the Financial System and the Economy
43
13. One type of financial claim a private business DSU may issue is which of these?
a. A bond
b. A Treasury bill
c. A United States savings bond
d. All of the above
ANSWER: a
14. A statement of the sources and uses of funds over a given time period is called a/an
a. chart of accounts.
b. general ledger.
c. income statement.
d. balance statement.
ANSWER: c
15. Which of the following is false?
a. Given their constraints, households maximize utility and business firms maximize profits.
b. The economy is in equilibrium when the spending plans of all economic units mesh and all
markets are in equilibrium.
c. If any factor affecting the supply and demand decisions of households or firms changes, an
adjustment process will be set in motion whereby prices and quantities will change until the
spending plans of all economic units again mesh.
d. Because there are fewer of them, firms always move to a new equilibrium must faster than
households.
ANSWER: d
16. Formally, disposable personal income is made up of
a. personal income plus taxes paid.
b. personal income minus taxes paid.
c. personal income plus taxes minus consumption.
d. personal income minus taxes and consumption.
ANSWER: b
17. Consumption is which of these?
a. Spending on goods and services by households
b. Spending on taxes
c. Spending on imported goods and services by households and business firms
d. household spending on food
ANSWER: a
18. Saving is equal to which of the following?
a. Consumption minus disposable personal income
b. Consumption minus disposable personal income plus taxes paid
c. Disposable personal income minus consumption
d. Disposable personal income plus consumption
ANSWER: c
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Chapter 4
19. Which of the following is not a form of saving?
a. Purchasing a newly constructed house
b. Saving money by buying a more fuel-efficient car
c. Buying a financial instrument, such as a stock or bond
d. Making a deposit into a savings account in a financial intermediary
ANSWER: b
20. Investment spending includes which of these?
a. Dividend payments
b. Stock purchases
c. Additions to inventory
d. Bond purchases
ANSWER: c
21. In an economy without a government or foreign sector, to determine national income add
a. household disposable income to investment spending.
b. household disposable income to firms' retained earnings.
c. firms' retained earnings to consumption.
d. firms' retained earnings to investment spending.
ANSWER: b
22. In an economy without a government or foreign sector, to determine total expenditure on output
add:
a. investment and consumption spending.
b. firms' retained earning and investment spending.
c. household disposable income and firms' retained earnings.
d. household disposable income and investment spending.
ANSWER: a
23. A deficit in the business sector is exactly offset by a surplus in the household sector due to the
fact that
a. the amount of stocks sold equals stocks bought.
b. the amount of investment spending equals retained earnings.
c. the total amount of business expenses equals household income.
d. the amount of bonds sold equals the amount of bonds bought.
ANSWER: d
24. Holding cash balances
a. is a form of saving.
b. is always a bad thing to do since cash does not earn a return.
c. is a form of investment.
d. is always a good thing to do since it involves no risk.
ANSWER a
Analysis of the Financial System and the Economy
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25. Which of the following is false?
a. A fundamental constraint limiting the level of utility or profits attainable is that all spending
must be financed with money.
b. Typical sources of financing for households and firms are existing money holdings, current
income, the liquidation of other financial assets, and borrowing.
c. Changes in the cost or availability of funds has little impact on household spending but
significant impact on business firms’ spending.
d. Business firms and households respond to changes in the cost or availability of fund by
changing their supplying or demanding plans in various markets.
ANSWER: c
26. According to the circular flow diagram, households and business firms generally meet in how
many separate but related market arenas?
a. 0
b. 1
c. 2
d. 3
ANSWER: d
27. In which type of market would firms and businesses find electricity to run their plants?
a. The product market
b. The service market
c. The factor market
d. The financial market
ANSWER: c
28. In which type of market would a student find cymbals?
a. The product market
b. The factor market
c. The financial market
d. The production market
ANSWER: a
29. In which type of market would an entrepreneur find startup funds?
a. The product market
b. The stock market
c. The financial market
d. The output market
ANSWER: c
30. National income includes which of these?
a. Employee wages
b. Proprietors' income
c. Rental income of persons
d. All of the above
ANSWER: d
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Chapter 4
31. National income is the sum of expenditures in each sector on
a. intermediate output of goods and services.
b. final output of goods and services.
c. double counting of goods and services.
d. None of the above.
ANSWER: b
32. Payments for factor services are which of these?
a. Loanable funds
b. Production funds
c. Household income
d. Business profits
ANSWER: c
33. The demand for labor curve would shift to the left if
a. the Fed decreased interest rates, causing a leftward shift of the AD curve.
b. the Fed increased interest rates, causing a rightward shift of the AD curve.
c. the Fed increased interest rates, causing a leftward shift of the AD curve.
d. the Fed decreased interest rates, causing a rightward shift of the AD curve.
ANSWER: c
34. In the circular flow diagram, in which order do surplus funds of households flow?
a. Household, firms, financial markets
b. Firms, financial markets, households
c. Households, financial markets, firms
d. Households, firms, financial markets
ANSWER: c
35. In the circular flow diagram, firms act as all of the following except as a
a. supplier of goods and services.
b. demander of investment goods.
c. demander of funds.
d. supplier of factor services.
ANSWER: d
36. In the simple circular flow diagram, firms act as all of the following except as a
a. demander of goods and services.
b. demander of labor and capital.
c. demander of funds.
d. supplier of goods and services.
ANSWER: a
Analysis of the Financial System and the Economy
Product
A
E
Households
I
B
H
Financial
Markets
F
D
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Firms
J
G
Factor
C
Figure 4-1
Use Figure 4-1 to answer questions 37-43.
37. In the simplified circular flow diagram displayed in Figure 4-1, which of the following flows are
money flows?
a. ABCD
b. EFGH
c. Neither ABCD nor EFGH
d. Both ABCD and EFGH
ANSWER: a
38. In the simplified circular flow diagram displayed in Figure 4-1, which of the above flows are
product or factor flows?
a. ABCD
b. EFGH
c. Neither a nor b
d. Both a and b
ANSWER: b
39. In the simplified circular flow diagram displayed in Figure 4-1, which of the following pairs of
flows would be most directly and immediately influenced by changes in the wage rate?
a. A and B
b. C and D
c. B and C
d. A and D
ANSWER: b
40. In the simplified circular flow diagram displayed in Figure 4-1, the price for wheat would be
determined in
a. the factor market.
b. the financial market.
c. the product market.
d. None of the above
ANSWER: c
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Chapter 4
41. In the simplified circular flow diagram displayed in Figure 4-1, Flow B shows
a. a flow of factor inputs to firms.
b. a flow of goods to firms.
c. a flow of income to firms.
d. a flow of goods to the product market.
ANSWER: c
42. In the simplified circular flow diagram displayed in Figure 4-1, Flow E shows
a. a flow of income to households.
b. a flow of factors of production to the factor market.
c. a flow of savings from firms to households.
d. a flow of goods and services to households.
ANSWER: d
43. In the simplified circular flow diagram displayed in Figure 4-1, financial flows
a. are represented by I and J.
b. are assumed to run only from SSUs to DSUs.
c. allow firms to increase production and therefore increase the flow of income, inputs, and
goods throughout the entire system.
d. All of the above.
ANSWER: d
44. The variables determined in supply and demand analysis of the product market include
a. equilibrium price and equilibrium quantity.
b. price of the good and marketability.
c. future sales of the good and income received.
d. equilibrium wage and quantity of workers hired
ANSWER: a
45. Inflation-adjusted output is measured by
a. real GDP.
b. nominal GDP.
c. national income.
d. None of the above.
ANSWER: a
46. The product market graph portrays the overall price level
a. on the horizontal axis.
b. on the vertical axis.
c. sloping upward.
d. sloping downward.
ANSWER: b
47. The product market graph portrays the quantity of the real GDP measured
a. on the horizontal axis.
b. on the vertical axis.
c. sloping upward.
d. vertically.
ANSWER: a
48. The aggregate demand curve shows which of these?
Analysis of the Financial System and the Economy
a. Real wages and labor demand
b. The quantity of real GDP supplied at various inflation rates
c. The quantity of real GDP demanded at various price levels
d. None of the above
ANSWER: c
49. The aggregate supply curve shows which of these?
a. The quantity of real GDP supplied at various prices
b. The quantity of funds lent and borrowed
c. A relative price level
d. The quantity of labor supplied at various wages
ANSWER: a
50. Given an upward sloping aggregate supply curve, when aggregate demand increases, ceteris
paribus, one can expect
a. the equilibrium price level and real output to increase.
b. the equilibrium price level to fall and real output to increase.
c. aggregate supply to also shift.
d. the quantity of aggregate supply to fall.
ANSWER: a
51. Assume that aggregate demand curve shifts rightward as a result of increased consumption and
investment spending by firms and consumers. What is likely to happen next?
a. Prices fall as consumers decrease demand in the product market.
b. Interest rates fall as consumers decrease demand for loanable funds.
c. Wage rates rise because of increased demand for labor.
d. Interest rates rise as a result of a decrease in the supply of loanable funds.
ANSWER: c
52. Ceteris paribus, the relationship between the price level and quantity demanded of real GDP is
a. inverse.
b. direct.
c. constant.
d. None of the above
ANSWER: a
53. Ceteris paribus, the relationship between the price level and quantity supplied of real GDP is
a. inverse.
b. direct.
c. constant.
d. None of the above
ANSWER: b
54. Ceteris paribus, if the price level falls, firms would anticipate profits to
a. decline.
b. remain the same.
c. rise.
d. remain the same in the short run, then rise.
ANSWER: a
55. Ceteris paribus, if the price level rises, firms would anticipate profits to
a. decline.
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Chapter 4
b. remain the same.
c. rise.
d. remain the same in the long run, then decline.
ANSWER: c
56. Ceteris paribus, if the price level falls, aggregate demand would
a. decline.
b. remain the same.
c. rise.
d. remain the same in the short run, then decline.
ANSWER: b
57. Ceteris paribus, if the price level rises, aggregate demand would
a. decline.
b. remain the same.
c. rise.
d. rise in the short run then decline.
ANSWER: b
58. Ceteris paribus, if the price level falls, the quantity demanded of real GDP would
a. decline.
b. remain the same.
c. rise.
d. rise in the short run then decline.
ANSWER: c
59. If spending plans decrease
a. there is a rightward shift in the aggregate demand curve.
b. there is a leftward shift in the aggregate demand curve.
c. there is an upward movement along the aggregate demand curve.
d. there is a downward movement along the aggregate demand curve.
ANSWER: b
60. If spending plans increase,
a. there is a rightward shift in the aggregate demand curve.
b. there is a leftward shift in the aggregate demand curve.
c. there is an upward movement along the aggregate demand curve.
d. there is a downward movement along the aggregate demand curve.
ANSWER: a
61. The aggregate supply curve is
a. upward sloping.
b. downward sloping.
c. vertical.
d. horizontal.
ANSWER: a
62. The aggregate demand curve is
a. upward sloping.
b. downward sloping.
Analysis of the Financial System and the Economy
c. vertical.
d. horizontal.
ANSWER: b
63. As prices go up, firms are willing to
a. decrease quantity supplied for fear of inflation.
b. keep quantity supplied constant for greater market share.
c. increase quantity supplied, anticipating larger profits.
d. decrease quantity supplied at decreasing amounts.
ANSWER: c
64. If the price level increases, ceteris paribus,
a. the supply curve shifts rightward.
b. the supply curve shifts leftward.
c. quantity supplied decreases.
d. quantity supplied increases.
ANSWER: d
65. If there is a technological breakthrough in a particular industry,
a. the supply curve shifts rightward.
b. the supply curve shifts leftward.
c. quantity supplied decreases.
d. quantity supplied increases.
ANSWER: a
66. A damaging frost on oranges will
a. shift the supply curve of oranges to the right.
b. shift the supply curve of oranges to the left.
c. decrease the demand for oranges.
d. increase the amount of oranges supplied.
ANSWER: b
67. On the graph of the demand and supply of labor, the wage rate is shown
a. sloping upward.
b. sloping downward.
c. on the horizontal axis.
d. on the vertical axis.
ANSWER: d
68. On the graph of the demand and supply of labor, the number of labor hours is shown on
a. a curve sloping upward.
b. a curve sloping downward.
c. the horizontal axis.
d. the vertical axis.
ANSWER: c
69. The demand curve for labor is
a. upward sloping.
b. downward sloping.
c. on the horizontal axis.
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Chapter 4
d. on the vertical axis.
ANSWER: b
70. Ceteris paribus, an increase in the wage rate will cause firms to
a. increase the demand for labor.
b. decrease the demand for labor.
c. increase the quantity demanded of labor.
d. decrease the quantity demanded of labor.
ANSWER: d
71. The supply curve for labor is
a. upward sloping.
b. downward sloping.
c. on the vertical axis.
d. on the horizontal axis.
ANSWER: a
72. Ceteris paribus, a decrease in the wage rate will cause households to
a. increase the supply of labor.
b. decrease the supply of labor.
c. increase the quantity supplied of labor.
d. decrease the quantity supplied of labor.
ANSWER: d
73. Ceteris paribus, an increase in the wage rate will cause households to
a. increase the supply of labor.
b. decrease the supply of labor.
c. increase the quantity supplied of labor.
d. decrease the quantity supplied of labor.
ANSWER: c
74. Ceteris paribus, an increase in the wage rate will
a. cause a downward movement along the supply curve of labor.
b. cause an upward movement along one labor supply curve.
c. shift the supply curve of labor to the left.
d. shift the supply curve of labor to the right.
ANSWER: b
75. Ceteris paribus, if the minimum wage rises from $5.15 to $6.15, firms most likely will
a. increase their demand for labor.
b. decrease their demand for labor.
c. increase their quantity demanded for labor.
d. decrease their quantity demanded for labor.
ANSWER: d
76. An increase in the demand for labor will
a. shift the labor demand curve to the right.
b. shift the labor demand curve to the left.
c. cause a downward slide on the labor demand curve.
d. cause an upward slide on the labor demand curve.
Analysis of the Financial System and the Economy
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ANSWER: a
77. A decrease in the demand for labor will
a. cause a downward movement along the labor demand curve.
b. cause an upward movement along the labor demand curve.
c. shift the labor demand curve to the left.
d. shift the labor demand curve to the right.
ANSWER: c
78. An increase in the supply of labor will
a. shift the labor supply curve to the right.
b. shift the labor supply curve to the left.
c. cause a downward movement along the labor supply curve.
d. cause an upward movement along the labor supply curve.
ANSWER: a
79. A decrease in the supply of labor will
a. cause a downward slide on the labor supply curve.
b. cause an upward slide on the labor supply curve.
c. shift the labor supply curve to the right.
d. shift the labor supply curve to the left.
ANSWER: d
80. The compensation for lending and the fee for borrowing is the
a. price level.
b. wage rate.
c. interest rate.
d. earnings rate.
ANSWER: c
81. On the graph of the demand and supply of loanable funds, where is the interest rate measured?
a. On the vertical axis
b. On the horizontal axis
c. Sloping upward
d. Sloping downward
ANSWER: a
82. The relationship between the quantity demanded of loanable funds and the interest rate is which
of these?
a. Direct
b. Vertical
c. Inverse
d. None of the above
ANSWER: c
83. The relationship between the quantity supplied of loanable funds and the interest rate is which of
these?
a. Direct
b. Horizontal
c. Inverse
d. All of the above
ANSWER: a
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Chapter 4
84. As the interest rate increases,
a. the quantity demanded of loanable funds increases.
b. the quantity demanded of loanable funds decreases.
c. the demand for loanable funds increases.
d. the demand for loanable funds decreases.
ANSWER: b
85. As the interest rate decreases,
a. the quantity demanded of loanable funds increases.
b. the quantity demanded of loanable funds decreases.
c. the demand for loanable funds increases.
d. the demand for loanable funds decreases.
ANSWER: a
86. Ceteris paribus, if the Fed decreases the supply of reserves,
a. the money supply decreases, leading to an increase in the supply of loanable funds.
b. the money supply increases, leading to a decrease in the supply of loanable funds.
c. the money supply decreases, leading to a decrease in the supply of loanable funds.
d. the money supply increases, leading to a increase in the supply of loanable funds.
ANSWER: c
87. When faced with a choice, consumers will elect to hold items that provide the most
a. utility.
b. money.
c. loanable funds.
d. None of the above
ANSWER: a
88. Business firm decisions are based upon which of the following?
a. Needs
b. Maximizing profits
c. Maximizing Utility
d. Labor supply
ANSWER: b
89. An economic unit may access means of payment by
a. using existing funds.
b. selling labor or products to get funds.
c. selling holdings of financial assets to get funds.
d. All of the above
ANSWER: d
90. Which of the following is a flow?
a. Wealth
b. Money
c. Income
d. All of the above
ANSWER: c
91. Which of the following is a stock?
Analysis of the Financial System and the Economy
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a. Wealth
b. Savings
c. Money supply
d. All of the above
ANSWER: d
92. The interest rate is determined by
a. the supply of and demand for money.
b. the supply of and demand for loanable funds.
c. the supply of and demand for credit.
d. All of the above
ANSWER: d
93. Which of the following is false?
a. Aggregate supply is upward sloping.
b. Aggregate demand is downward sloping.
c. Fiscal policy is directed by Congress.
d. Aggregate demand increases as the price level increases.
ANSWER: d
94. Which of the following statements is false?
a. In the circular flow, real flows go in one direction and financial flows go in the opposite
direction.
b. The quantity of real output demanded and price are inversely related.
c. Labor demand and wages are directly related.
d. Firms and households meet in product, factor, and financial markets.
ANSWER: c
95. Which of the following statements is not true?
a. Firms maximize profit and consumers maximize satisfaction.
b. A price index measures the change in the overall level of prices.
c. In the simple circular flow model, national expenditure is less than national income if saving
is positive.
d. Funds flow from SSUs to DSUs through financial markets or indirectly through financial
intermediaries.
ANSWER: c
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Chapter 4
96. Suppose the Fed uses monetary policy to decrease the supply of funds available to lend. The
interest rate will likely
a. remain unchanged.
b. increase.
c. decrease.
d. either remain unchanged or decrease.
ANSWER: b
97. In the aggregate demand and aggregate supply model,
a. price is measured on the horizontal axis while real GDP is measured on the vertical axis.
b. aggregate demand is on the horizontal axis while aggregate supply is on the vertical axis.
c. nominal GDP is measured on the vertical axis and a price index is on the horizontal axis.
d. real GDP is measured on the horizontal axis while a price index is on the vertical axis.
ANSWER: d
98. Which of the following does not shift the supply of loanable funds curve?
a. An increase in the supply of loanable funds by SSUs
b. An increase in bank reserves by the Fed
c. A decrease in the demand for loanable funds by government
d. An increase in lending by depository institutions
ANSWER: c
99. The payment of wages and salaries to workers, interest to bondholders, plus other expenses
subtracted from sales equals which of these?
a. Owners' equity
b. Savings
c. Profits
d. Liabilities
ANSWER: c
100. Assume that as a result of Fed actions, interest rates rise. What is most likely to happen?
a. Consumers and firms are likely to cut back on consumption and investment as the cost of
borrowing rises.
b. Consumers and firms are likely to increase consumption and investment since they can earn a
higher return on their savings.
c. The supply of loanable funds will increase.
d. The demand for loanable funds will increase.
ANSWER: a