Download test #1 production possibilities / growth / circular flow

TEST #1 (SUPPLY AND DEMAND PART 1)
1) What does the demand curve show?
a)
b)
c)
d)
how producers want to increase quantity as price increases
how much people actually buy
the amount of goods that people are willing and able to buy
none of these
2) At a price of $30
a)
b)
c)
d)
a surplus would exist
a shortage would exist
quantity demanded is very high
supply is going up
3) Suppose that the cost of producing cars increases dramatically. The immediate result
is that
a)
b)
c)
d)
the quantity demanded of cars increases
the supply of cars decreases
the supply of cars increases
the demand for cars decreases
4) A report from the Food and Drug Administration (FDA) says that vitamin C will cure
the common cold and protect against flu. Which of the following is most likely to
result initially?
a)
b)
c)
d)
a shift of the supply curve to the right, causing the price to fall
a shift of the demand curve to the right, causing the price to rise
a shift of the supply curve to the left, causing the price to rise
a shift of the demand curve to the left, causing the price to fall
5) If the cost of steel rises, and steel is a major input into bicycles, then the bicycle
a)
b)
c)
d)
demand curve shifts to the left
demand curve shifts to the right
supply curve shifts to the left
supply curve shifts to the right
6) Which of the following would most likely lead to a fall in the price paid for broccoli?
a)
b)
c)
d)
A new pesticide vastly increases the supply of broccoli
The FDA reports that broccoli reduces the risk of heart attacks
Bad weather destroys a large part of the broccoli crop
The price of carrots rise due to the same bad weather
7) Which of the following would cause a move along the demand curve for broccoli, but
not a shift in the demand curve for broccoli?
a)
b)
c)
d)
a change in the price of broccoli
a change in the price of carrots
a change in tastes of consumers
a change in the incomes of consumers
8) Which of the following statements best describes a supply curve?
a) it always slopes downwards
b) it slopes upwards because it shows a positive relationship between price and quantity
demanded
c) it slopes downwards because it shows a negative relationship between price and
quantity demanded
d) it slopes upwards because the higher the price a seller can get, he will be willing to
produce more of that good
9) Which newspaper headline best describes a situation where the price in the market is
below the equilibrium price?
a)
b)
c)
d)
“rent controls create shortage of apartments”
“new minimum wage law causes more teenage unemployment
“quotas on foreign clothing causes US clothing to rise in price”
“wheat price supports help struggling farmers”
10) The income of a consumer decreases and his/her demand for a particular good
increases. It can be concluded that the good is
a)
b)
c)
d)
normal
inferior
a substitute
a complement
11) If Coke and Pepsi are substitutes, then
a) a rise in the price of Coke will cause a fall in the demand for Pepsi
b) a fall in the price of Coke will have no effect on the demand for Pepsi
c) a rise in the price of Coke will cause a fall in the supply of Pepsi
d) a fall in the price of Coke will cause a fall in the demand for Pepsi
12) If bread and butter are complements then
a)
b)
c)
d)
a rise in the price of bread will decrease the demand for butter
a rise in the price of bread will increase the demand for butter
a rise in the price of bread will have no effect on the demand for butter
a fall in the price of bread will decrease the demand for butter
13) When the supply of a good increases, the equilibrium price will (hint: draw it out)
a) rise
b) fall
c) stay the same
d) fall and rise
14) When demand for a good increases, which of the following happens?
a)
b)
c)
d)
price decreases, quantity decreases
price increases, quantity decreases
price decreases, quantity increases
price increases, quantity increases
15) The price of oranges increased at the same time that the quantity of oranges sold
decreased. Which of the following caused this? (hint: draw it out)
a)
b)
c)
d)
an increase in supply
a decrease in demand
a decrease in supply
an increase in demand
16) Over time a price floor may cause
a)
b)
c)
d)
a surplus
a shortage
rationing
government intervention
17) Why does the supply curve slope upwards?
a)
b)
c)
d)
economists have traditionally drawn it this way
this is the only way it can be distinguished from the demand curve
sellers will accept lower prices as they produce more
higher prices are necessary to cover higher costs of production
18) The law of supply states that as price increases
a)
b)
c)
d)
supply increases
quantity supplied increases
supply decreases
quantity supplied decreases
19) If the supply curve moves from S to S1 on the graph below, there has been
a) an increase in quantity supplied
$
b) a decrease in quantity supplied
c) an increase in supply
d) a decrease in supply
20) Which of the following best explains why skilled workers are paid more that
unskilled ones?
a) there are more jobs for skilled workers than unskilled ones
b) skilled workers work harder than unskilled workers
c) the demand as compared with the available supply is greater for skilled workers
than for unskilled workers
d) there are more skilled workers than unskilled ones
ANSWER KEY TO TEST # 1 (SUPPLY AND DEMAND)
1) C
2) A
3) B
4) B
5) C
6) A
7) A
8) D
9) A
S1
10) B
11) D
12) A
13) B
14) D
15) C
16) A
17) D
18) B
19) C
20) C
TEST #2 PRODUCTION POSSIBILITIES / GROWTH / CIRCULAR FLOW
1) Which of the following would cause the PPC below to shift outwards?
a) using machinery for missiles rather than steel production
b) re-opening steel plants that had been closed
c) developing a more efficient steel-making process
d) re-hiring laid-off steel workers
e) using machinery for steel rather than missile production
steel
2) Which of the following is true of an economy with the PPC curve below?
a) point R is unattainable but desirable
b) point Q is attainable but undesirable
c) there is unemployment at point T because workers in the watch industry are without
jobs
d) a technological improvement in the watch industry would move the economy from
point T to point P
e) the opportunity cost of moving from point S to point T is the number of watches given
up
3) An economy that is fully employing all of its productive resources but is allocating
less to investment than to consumption will be at which of the following points on its
PPC show below?
a) A
b) B
c) C
d) D
e) E
4) Assume that land in an agricultural economy can be used either for producing grain or
for grazing cattle to produce beef. The opportunity cost of converting an acre from cattle
grazing to grain production is the
a) market value of the extra grain that is produced
b) total amount of beef produced
c) number of extra bushels of grain that are produced
d) amount by which beef production decreases
e) profits generated by the extra production of grain
5) Which of the following must be true of a country that is operating inside its PPC?
a) it has a market economy
b) it has a command economy
c) it is in the early stages of industrial development
missiles
d) it is using resources inefficiently
e) it has plentiful resources
6) an increase of which of the following is most likely to cause an improvement in the
standard of living over time?
a) level of taxation
b) number of banks
c) size of population
d) productivity of labor
e) size of the labor force
7) an increase in which of the following is most likely to increase the long-run growth
rate of an economy’s real per capita income?
a) the supply of money in circulation
b) population growth
c) the proportion of GDP consumed
d) the educational attainment of the population
e) personal income taxes
8) increases in real income per capita are made possible by
a) improved productivity
b) a high labor / capital ratio
c) large trade surpluses
d) stable interest rates
e) high protective tariffs
9) [QUESTION OMITTED]
10) which of the following policies is most likely to encourage long-run economic
growth in a country
a) an increase in defense spending
b) an increase in the per capita savings rate
c) an increase in government transfer payments
d) a decline in the number of immigrants to the country
e) an embargo on high-technology imports
11) what is the fundament issue of economics?
a) to allow everyone to own 5 yachts and 2 cars
b) to redistribute income and eliminate poverty
c) to reduce unemployment so that welfare can be reduced
d) to learn to cope with the scarcity of resources
e) to lower taxes and reduce the role of government
12) the circular flow of economic activity between consumers and producers includes
which of the following
I. households buy factor services from firms
II. households sell factor services to firms
III. households buy outputs from firms
IV. households sell outputs to firms
a) III only
b) IV only
c) I and II only
d) II and III only
e) III and IV only
13) In the circular flow diagram, which of the following is true?
a) businesses pay wages, rent, interest and profits to households in return for use of
factors of production
b) businesses purchase goods and services from households in return for money payments
c) households pay wages, rent, interest, and profits to businesses in return for use of
factors of production
d) the relationship between households and businesses exists only in a traditional
economy
e) the relationship between households and businesses exists only in a command
economy
14) an example of the opportunity cost of producing an additional unit of good A is
a) all the human capital resources used to produce A
b) the retail price paid for A
c) the wholesale price of A
d) amount of B that cannot now be produced because of A
e) the profit that could have been made from producing A
15) In which way does a straight-line PPC differ from a PPC that is concave to the
origin?
a) a straight-line PPC has a decreasing opportunity cost
b) a straight-line PPC has a constant opportunity cost
c) a straight-line PPC has an increasing opportunity cost
d) a straight-line PPC does not show opportunity cost
e) there is no difference between the two PPCs
16) The law of increasing opportunity cost is reflected in the shape of the
a) PPC which is concave to the origin
b) PPC which is convex to the origin
c) PPC which is horizontal
d) PPC which is a straight line
e) PPC which is upward sloping
17) Which of the following would cause the PPC to shift outwards?
a) an increase in unemployment
b) an increase in inflation
c) an increase in capital equipment
d) a decrease in natural resources
e) a decrease in the number of workers
18) what is the economic rationale for the law of increasing opportunity costs?
a) full employment and full production has not been achieved
b) economic resources are not completely adaptable
c) economic growth is being limited by the pace of technological advancement
d) an economy’s present choice of output is determined by fixed technology and fixed
resources
e) a market economy always causes opportunity costs to rise
19) an economy is efficient when it has achieved
a) full employment
b) full production
c) either full employment or full production
d) both full employment and full production
e) neither full employment nor full production is necessary for efficiency
20) which is the correct match of a resource and its payment?
a) land and wages
b) capital and rental income
c) labor and interest income
d) enterprise and profits
Questions 21 and 22 are based on the following Production Possibilities table
A
B
C
D
E
Capital
100
95
85
70
50
goods
Consumer
0
100
180
240
280
goods
F
0
300
21) The choice of alternative B compared with D would tend to promote
a) a slower rate of economic growth
b) a faster rate of economic growth
c) increased consumption in the present
d) central economic planning
22) If the economy is currently producing at D, the opportunity cost of 40 more units of
consumer goods is
a) 5 units of capital goods
b) 10 units of capital goods
c) 15 units of capital goods
d) 20 units of capital goods
23) Suppose two countries are each capable of individually producing two given
commodities. Instead, each specializes by producing the good for which it has a
comparative advantage and then trades with the other country. Which of the following is
most likely to result?
a) the two countries will become more independent on each other
b) unemployment will increase in one country and decrease in the other
c) there will be more efficient production in one country and less efficient production in
the other
d) both countries will be better off
e) both countries will be producing their commodity inefficiently
24) The table below indicates the number of LABOR HOURS required in countries X
and Y to produce one unit of food or one unit of clothing
Country
X
Y
food
20 hours
10 hours
clothing
50 hours
20 hours
Given this information, which one of the following statements is correct?
a) X has a comparative advantage in the production of both food and clothing
b) Y has a comparative advantage in the production of both food and clothing
c) X has a comparative advantage in food, Y has a comparative advantage in clothing
d) Y has a comparative advantage in food, X has a comparative advantage in clothing
e) neither country has a comparative advantage in the production of either good
25. the following data shows the quantities of soda and cheese that can be produce in the
US and France with one unit of resources
soda (bottles)
cheese (pounds)
US
20
60
France
10
40
Which of the following statements is/are true?
I.
France has an absolute advantage in soda
II. The US has a comparative advantage in soda
III The US has a absolute advantage in cheese
IV The US has a comparative advantage in cheese
a) I only
b) II only
c) II and III only
d) II and IV only
e) I, II and III
ANSWER KEY TO TEST # 2
(PPC / TRADE)
1) C (shifts PPC out, A and E involve movement along the curve, B and D suggest points
inside the curve (operating below full capacity)
2) E
3) C
4) D
5) D
6) D
7) D (affects productivity)
8) A
9) (question omitted)
10) B (since savings will be channeled into investment)
11) D
12) D
13) A
14) D
15) B
16) A
17) C (emphasis on capital)
18) B
19) D
20) D
21) B
22) D
23) D (note: some questions may say ‘ countries become more dependent’ due to trade
24) C (input problem)
25) C (output problem)
TEST # 3 GDP / UNEMPLOYMENT / INFLATION
1) If nominal GDP grows by 12% and real GDP grows by 5%, the rate of inflation must
be
a) -7%
b) 7%
c) 8%
d) 12%
e) 17%
2) which of the following is an example of structural unemployment?
a) a worker who is engaged in unproductive work
b) a construction worker who is always unemployed in winter
c) an auto worker who is replaced by a robot
d) a worker who loses his job during a recession
e) a worker who quits his job in New York to move to Oregon
3) The real value of the dollar is determined by
a) the marginal propensity to consume
b) the money multiplier
c) the value of the gold backing the dollar
d) federal regulations regarding purchasing power
e) the goods and services it can buy
4) which of the following could cause simultaneous increases in inflation and
unemployment?
a) a decrease in the velocity of money
b) an increase in the overall level of productivity
c) a decrease in government spending
d) an increase in inflationary expectations
e) a decrease in the money supply
5) the consumer price index measures which of the following?
a) inflation corrected for changes in wholesale prices
b) inflation corrected for changes in real GDP
c) changes in the weighted wholesale price index
d) changes in the weighted prices of a particular group of goods and services
e) changes in the difference between the GDP deflator and the wholesale price index
6) which of the following is true if the economy is producing at the full-employment
level of output?
a) the balance of trade is zero
b) the unemployment rate is zero
c) payments of unemployment compensation by the government is zero
d) the government’s budget is balanced
e) there is frictional unemployment
7) which of the following would benefit from unanticipated inflation?
I. savers
II. borrowers
III. lenders
a) I only
b) II only
c) III only
d) I and II only
e) I and III only
8) an increase in the labor force participation will
a) increase savings and decrease investment
b) increase investment and decrease savings
c) make it easier to reduce unemployment
d) make it more difficult to reduce unemployment
e) have no effect on unemployment
9) the sum of which of the following expenditures is equal to the value of GDP?
a) consumer purchases, investment in capital goods, exports and imports
b) consumer purchases, investment in capital goods, net exports and inventories
c) consumer purchases, investment in capital goods, government purchases, and net
exports
d) consumer purchases, government purchases, exports and national income
e) investment in capital goods, government purchases, net exports and inventories
10) if the nominal interest rate is 6% and the expected inflation rate is 4%, the real
interest rate is
a) 10%
b) 6%
c) 4%
d) 2%
e) -2%
11) the government defines a person as unemployed if he or she
a) does not hold a paying job
b) has been recently fired
c) works part-time but needs full-time work
d) is without a job but is looking for work
e) wants a job, but is not looking, feeling demoralized
12) GDP is best described as a measure of
a) economic welfare
b) the full-employment output of an economy
c) all monetary transactions in the economy
d) current consumption in the economy
e) current final output produced by an economy
13) which of the following workers is most likely to be classified as structurally
unemployed?
a) a sports star who is not playing during the off-season
b) a recent graduate looking for her first job
c) a teenager looking for a part-time job in a fast-food restaurant
d) a worker who is unemployed because his skills are obsolete
e) a woman re-entering the job market after her child begins elementary school
14) If GDP rose from $930 billion in 1969 to $975 billion in 1970 solely because of a rise
in price level, which of the following was necessarily true?
a) real GDP increased between 1969 and 1970
b) real GDP decreased between 1969 and 1970
c) nominal income increased between 1969 and 1970
d) real income increased between 1969 and 1970
e) the rise in the price level between 1960 and 1970 was greater than 10%
15) In one year, real GDP fell by 3%, inflation rose to 10%, and unemployment rose to
11%. Which of the following may have caused these changes?
a) a decrease in the money supply and a decrease in government spending
b) a decrease in inflation expectations
c) an increase in investment in inventories
d) an increase in the money supply and an increase in government spending
e) an increase in inflationary expectations
16) which of the following would cause the unemployment rate to increase?
I. a woman who quits her job to spend more time with his children
II. a man who has not looked for a job in two years but is now looking
III. a woman who quits her job and begins looking for a new job in another city
a) I only
b) II only
c) III only
d) I and II only
e) II and III only
17) which of the following would be included from GDP?
I. the sale of a used car
II. social security payments to a retired steelworker
III. the purchases of a new home from a builder
a) I only
b) II only
c) III only
d) I and II only
e) II and III only
18) how do we find the nominal rate of interest?
a) by adding a nominal sum to the prime interest rate
b) by adding the expected rate of inflation to the real interest rate
c) by adding the increase in the CPI to the interest rate
d) by adding the inflation rate to the unemployment rate
19) which of the following will lead to a decrease in the unemployment rate?
a) discouraged workers drop out of the labor force
b) more women enter the labor force and seek jobs
c) young people leave summer jobs and return to college
d) the economy begins to experience a recession
20) change in real GDP from one year to the next do NOT reflect
a) changes in the quality of goods and services
b) changes in the size of the population of the economy
c) changes in the average length of the work week
d) any of the above changes
21) if both nominal GDP and the price level are rising, it is evident that
a) real GDP is constant
b) real GDP is rising, but not as fast as the price level
c) real GDP is falling
d) no conclusion can be drawn concerning real GDP on the basis of the information
22) A refrigerator was produced by its manufacturer in 2001, sold during 2001, and sold
by the retailer to a final consumer in 2002. The refrigerator was
a) counted as consumption in 2001
b) counted as savings in 2001
c) counted as investment in 2001
d) not included in the GDP of 2001
23) the service a babysitter performs for her parents receiving no payment is not included
in GDP because
a) this is a non-market transaction
b) this is a non-production transaction
c) this is a non-investment transaction
d) double counting would be involved
ANSWER KEY TO TEST # 3 (INFLATION /GDP / UNEMPLOYMENT)
1) B (note: the real rate is positive)
2) C
3) E (the real value is the purchasing power)
4) D
5) D (producer price index measures prices of raw materials; GDP deflator measures
prices of all goods and services; CPI measures only consumer prices)
6) E (note: A and D could be true, but not necessarily because of frictional
unemployment;
7) B (savers and lenders both hurt)
8) D (since more jobs will have to be created; more labor force participation means, for
example, women entering the labor force after the children start school; before this, the
women were not looking for work, and so were not considered part of the labor force)
9) C
10) D
11) D
12) E (note: not C, because of the four things that are excluded from GDP)
13) D (obsolete = out of date)
14) C (A, B, and D false since you don’t have enough information to tell; nominal GDP
rises by 4.83%, so inflation could not exceed this)
15) E (see # 4 above)
16) E (remember, unemployment is involuntary)
17) C (I is second hand good, II is transfer payment)
18) B (nominal interest is what the bank will charge)
19) A
20) D
21) D (you need specific numbers to tell whether real has increased or decreased)
22) C (investment in first year)
23) A
TEST # 4
AGGREGATE DEMAND / AGGREGATE SUPPLY
1) What would be the effect of a large increase in labor productivity on the real GDP and
the price level?
a)
b)
c)
d)
e)
Real GDP
decrease
decrease
no effect
increase
increase
price level
decrease
increase
increase
decrease
increase
2) According to the Keynesian model, which of the following would increase aggregate
demand?
a) an increase in autonomous investment
b) an increase in the discount rate
c) a decrease in unemployment compensation payments
d) a decrease in government expenditures accompanied by an equal reduction in taxes
e) a decrease in government expenditures on public works
3) according to the graph below, which of the following will necessarily result in a
decrease in output?
I. a rightward shift of the AD curve
II. a leftward shift of the AD curve
III. a rightward shift of the AS curve
IV. a leftward shift of the AS curve
a) II and IV only
b) II and III only
c) I and III only
d) III only
e) I only
4) an aggregate supply curve may be horizontal over some range because within that
range
a) a higher price level leads to higher interest rates, which reduce the money supply and
consumer spending
b) change in the aggregate price level do not induce substitution
c) output cannot be increased unless prices and interest rates increase
d) rigid prices prevent employment from fluctuating
e) resources are underemployed and an increase in demand will be satisfied without any
pressure on the price level
5) the long run aggregate supply curve is likely to shift to the right when there is
a) an increase in the cost of productive resources
b) an increase in productivity
c) a decrease in the labor force
d) a decrease in the money supply
e) an increase in the federal budget deficit
6) which of the following is true of supply shocks?
a) they make the aggregate supply curve vertical
b) they can be anticipated and offset with appropriate monetary policy
c) they can be anticipated and offset with appropriate fiscal policy
d) they affect only the general price level
e) they tend to change both relative prices and the general price level in the economy
7) If a large increase in total spending has no effect on real GDP, it must be true that
a) aggregate supply has increased
b) the economy is in short run equilibrium
c) the spending multiplier is equal to 1
d) the economy is experiencing high unemployment
e) the price level is rising
8) the graph below depicts and economy’s aggregate demand and aggregate supply
curves. If aggregate demand remains constant, the equilibrium price levels in the short
run and in the long run will be which of the following?
a)
b)
c)
d)
e)
Short run
OC
OC
OB
OB
OA
long run
OC
OA
OC
OA
OA
9) which of the following would most likely lead to a decrease in aggregate demand, that
is, shift the AD curve to the left?
a) an increase in business firms’ purchases of capital equipment from retained earnings
b) an increase in household consumption
c) an increase in household savings
d) a decrease in interest rates
e) a decrease in taxes
10) an increase in which of the following would cause the long run aggregate supply
curve to shift to the right?
a) the price level
b) the average wage rate
c) potential output
d) aggregate demand
e) corporate income taxes
11) if businesses are experiencing an unplanned increase in inventories, which of the
following is most likely to be true?
a) planned investment is less than planned savings, and the level of spending will
increase
b) planned investment is greater than planned savings, and the level of spending will
decreased
c) the economy is growing and will continue to grow until a new equilibrium level of
spending is reached
d) aggregate demand is less than output, and the level of spending will decrease
e) aggregate demand is greater than output, and the level of spending will increase
12) which of the following is a possible cause of stagflation (simultaneous high
unemployment and high inflation)?
a) a low growth rate of the money supply
b) a decline in labor union membership
c) the rapid growth and development of the computer industry
d) increase in the price of raw materials
e) increase in labor productivity
13) which of the following is an example of ‘investment’ as the term is used by
economists?
a) an apparel company purchases $10,000 worth of sewing machines
b) a farmer purchases $10,000 worth of government securities
c) one large auto firm purchases another auto firm
d) newlyweds purchase a previously owned home
e) a school teacher purchases 10,000 shares of stock in an auto company
14) the diagram below shows two aggregate supply curves, AS1 and AS2. Which of the
following statements most accurately characterizes the AS1 curve in relation to AS2?
a) AS1 could be either classical or Keynesian, because it reflects greater wage flexibility
but less price flexibility
b) AS1 is classical because it reflects less wage and price flexibility
c) AS1 is Keynesian because it reflects less wage and price flexibility
d) AS1 is classical because it reflects greater wage and price flexibility
e) AS1 is Keynesian because it reflects greater wage and price flexibility
15) According to the classical economists, which of the following the most sensitive to
interest rates?
a) consumption
b) investment
c) government spending
d) transfer payments
e) intermediate goods
16) what does the aggregate demand curve show?
a) it shows the amount of real national output that will be purchased at each possible
price level
b) it shows the amount of expenditures required to induce the production of each possible
level of real national output
c) it is downsloping because production costs decline as real national output increases
d) it is upsloping because a higher price level is necessary to make production profitable
as production costs rise
17) what does the interest rate effect suggest?
a) an increase in the price level will decrease the demand for money, reduce interest rates,
and increase consumption and investment spending
b) an increase in the price level will increase the demand for money, increase interest
rates, and decrease consumption and investment spending
c) an increase in the price level will increase the demand for money, reduce interest
rates, and decrease consumption and investment spending
d) a decrease in the supply of money will increase interest rates, and reduce interestsensitive consumption and investment spending
18) what does the real balances (or wealth) effect indicate?
a) a higher price level will decrease the real value of many financial assets and therefore
cause a decline in spending
b) a higher price level will increase the real value of many financial assets and therefore
cause a decline in spending
c) a lower price level will decrease the real value of many financial assets and therefore
cause a decline in spending
d) an increase in the price level will increase the demand for money, increase interest
rates and reduce consumption and investment spending
19) A decrease in taxes will not have exactly the same effect on the level of national
income as an equal increase in government expenditures. Why?
a) because individuals will consume less as GDP falls
b) because individuals do not spend all of an increase in disposable income
c) because governments must tax to cover expenditures but need not spend to cover taxes
d) because a change in government spending affects the total spending curve, but a
change in taxes does not
20) Assume that other things remain unchanged, an increase in government purchases of
goods and services has an effect on the GDP similar to which of the following?
a) an increase in taxes
b) an increase in our productive capacity
c) a decline in consumer spending
d) a decrease in private investment
e) an increase in private investment
21) which of the following will occur as a result of an improvement in technology?
a) the aggregate demand curve will shift to the right
b) the aggregate demand curve will shift to the left
c) the aggregate supply curve will shift to the right
d) the aggregate supply curve will shift to the left
e) the production possibilities curve will shift inwards
ANSWER KEY TO TEST # 4
AD / AS
1) D (rise in productivity shifts AS to the right (use intermediate AS)
2) A (B, C, D, E decrease demand)
3) A
4) E
5) B (A and C decrease AS, D decreases AD, E increases AD, since a budget deficit
implies an expansionary fiscal policy)
6) E (note, by definition, shocks are unanticipated, so B and C are wrong, D is wrong
since oil prices are a specific item)
7) E (draw classical AS, shift AD to the right; regarding E, a multiplier of 1 means that
increasing G will increase GDP by 1 times the amount spent)
8) D (short run, AD = SRAS, long run AD = LRAS)
9) C (all the others increase AD)
10) C (A is move along AD curve, B is decrease in SRAS, D shifts AD curve, E is
decrease in SRAS)
11) D
12) D (A small increase in AD, B helps business, so SRAS increases, C and E also
increase SRAS)
13) A (B, C, D, E no new goods produced)
14) C
15) B
16) A
17) B
18) A
19) B
20) E (A, C, and D reduce AD; B involves an increase in AS
21) C
TEST # 5 FISCAL POLICY
1) According to Keynesian theory, decreasing taxes and increasing government spending
will most likely change consumption expenditures and unemployment in which of the
following ways?
a)
b)
c)
d)
e)
Consumption
no change
increase
increase
decrease
decrease
unemployment
decrease
increase
decrease
no change
increase
2) In an economy at full employment, a presidential candidate proposes cutting the
government debt in half in four years by increasing tax rates and reducing government
expenditures. According to Keynesian theory, implementation of these policies is most
likely to increase
a) the rate of economic growth
b) aggregate supply
c) aggregate demand
d) consumer prices
e) unemployment
3) Which of the following means of reducing military spending would have the greatest
POSITIVE impact on gross domestic product for the United States
a) canceling contracts with domestic producers for new airplanes
b) closing overseas military bases and laying off military personnel
c) closing overseas military bases and relocating those operations to the United States
d) cutting retirement benefits to military personnel
e) combining two domestic military bases into one overseas base
4) Which of the following will result in the greatest increase in aggregate demand?
a) a $100 increase in government expenditures, coupled with a $100 decrease in taxes
b) a $100 increase in government expenditures, coupled with a $100 increase in taxes
c) a $100 increase in government expenditures
d) a $100 decrease in taxes
e) a $100 increase in taxes
5) Which of the following will most likely result from a decrease in government
spending?
a) a decrease in aggregate demand
b) a decrease in aggregate supply
c) an increase in employment
d) an increase in price level
e) an increase in output
6) the crowding-out effect of expansionary fiscal policy is the result of government
borrowing in the money market which
a) increases interest rates and increases investment
b) increases interest rates and decreases investment
c) decreases interest rates and increases investment
d) decreases interest rates and decreases investment
7) Faced with a large budget deficit, the government decides to decrease expenditures and
increase tax revenues by the same amount. This action will affect output and interest
rates in which of the following ways
a)
b)
c)
d)
e)
output
decrease
decrease
no change
increase
increase
interest rates
decrease
increase
decrease
decrease
increase
8) total spending in the economy is most likely to increase by the largest amount if
which of the following occur to government spending and taxes
a)
b)
c)
d)
e)
government spending
decrease
decrease
increase
increase
no change
taxes
increase
no change
increase
decrease
increase
9) according to the Keynesian model, an expansionary fiscal policy would tend to cause
which of the following changes in output and interest rates?
a)
b)
c)
d)
e)
Output
no change
decrease
decrease
increase
increase
interest rates
decrease
decrease
increase
decrease
increase
10) If the US pursued a contractionary fiscal policy, which of the following are likely
effects?
a) US interest rates would rise, and the value of the dollar (exchange rate) would rise
b) US interest rates would rise, and the value of the dollar (exchange rate) would fall
c) US interest rates would fall, and the value of the dollar (exchange rate) would fall
d) US interest rates would fall, and the value of the dollar (exchange rate) would rise
11) Assume the following conditions describe the current US economy: there is rapidly
rising inflation (13.3% annual rate), the unemployment rate is stable at 3.1%, and there is
a high level of real GDP. What part of the aggregate supply curve is most applicable to
this economy?
a) Keynesian range
b) Intermediate range
c) Classical range
d) Horizontal range
e) both A and D
12) Which of the following fiscal policy actions would be most effective in combating a
recession?
a) tax cut of $25 billion and a cut in government purchases of $25 billion
b) tax cut of $25 billion and an increase in government purchases of $25 billion
c) tax increase of $25 billion and a cut in government purchases of $25 billion
d) tax increase of $25 billion and an increase in government purchases of $25
e) there is not enough information to answer this question
13) Assume the economy is described as follows: the federal budget is balanced; there is
annual inflation of less than one per cent; real GDP has fallen for the last three
consecutive quarters; and business investment is declining. Which of the following fiscal
actions would be most appropriate?
a) urge citizens to save more and spend less
b) continue to balance the federal budget
c) decrease federal spending on highway construction
d) increase government expenditures and transfer payments
e) increase taxes on all levels of income
14) Which of the following represent(s) problems with discretionary fiscal policy in the
United States?
I. special interests in Congress
II. time lags in recognition, decision, and implementation of solutions to fiscal problems
III. imprecise knowledge of current economic conditions
a) I only
b) II only
c) III only
d) I and II only
e) I, II, and III only
15) Which of the following represent(s) automatic stabilizers in the economy?
I. graduated (progressive) income tax
II. unemployment insurance compensation payments
III. a law passed by Congress increasing tax rates
a) I only
b) II only
c) III only
d) I and II only
e) I and III only
16) assume the economy is in a severe recession. Which set of fiscal policies would be
consistent and designed to cure the recession?
a)
b)
c)
d)
e)
Taxes
lower
raise
raise
lower
lower
government spending
lower
lower
raise
raise
lower
17) In order to be called a ‘built-in stabilizer’, taxes must automatically do which one of
the following?
a)
b)
c)
d)
e)
Recession
no change
decrease
increase
decrease
increase
inflationary period
no change
decrease
decrease
increase
increase
18) if unplanned investment in inventory is occurring, the Keynesian model forecasts
a) an increase in national output and income
b) a decrease in national output and income
c) an increase in the consumer price index
d) a decline in the unemployment rate
e) an increase in planned spending
19) a rise in US interest rates will cause
a) the dollar to fall, exports to rise, and imports to fall
b) the dollar to rise, exports to rise, and imports to fall
c) the dollar to fall, exports to rise, and imports to fall
d) the dollar to rise, exports to fall, and imports to rise
20) If crowding out only partially offsets the effects of a tax cut, which of the following
changes in interest rates and GDP are most likely to occur?
a)
b)
c)
d)
e)
Interest rates
increase
increase
increase
remain unchanged
decrease
ANSWER KEY TO TEST # 5
GDP
increase
remain unchanged
decrease
increase
decrease
FISCAL POLICY
1) C
2) E (contractionary fiscal policy)
3) C (A,D, and E have a negative effect on domestic output; B does not have an
immediate effect on domestic output
4) A
5) A (GDP equation)
6) B
7) A (the fall in AD will cause a fall in demand for loanable funds (Md)
8) D
9) E
10) C (note the role of the foreign lenders)
11) C
12) B
13) D (note that B is not expansionary, while A, C and E are contractionary)
14) E (note that I and II are political limitations)
15) D (III is a discretionary)
16) D
17) D (note that in a recession, a fall in tax revenues will keep money in the hands of
consumers, so it will help spending; during inflation, the rise in tax revenues will take
money out of the hands of consumers, thus slowing spending)
18) B (businesses will cut back on production and fire people)
19) D (note the role of the foreign lenders)
20) A (note: the question assumes that the expansionary fiscal policy still works, despite
a small crowding out effect)
TEST # 6 MONETARY POLICY
1) Commercial banks can create money by
a) transferring depositors’ accounts at the Federal Reserve for conversion to cash
b) buying Treasury bills from the Federal Reserve
c) sending vault cash to the Federal Reserve
d) maintaining the excess reserves of customers
e) lending excess reserves to customers
2) If the reserve requirement is 20%, the existence of $100 worth of excess reserves in
the banking system can lead to a maximum expansion of the money supply equal to
a) $750
b) $500
c) $300
d) $100
e) $20
3) If the Federal Reserve lowers the reserve requirement, which of the following would
most likely occur?
a) the budget deficit will increase
b) businesses will purchase more factories and equipment
c) unemployment and inflation will both increase
d) the rate of saving will increase
e) imports will rise, decreasing the trade deficit
4) If the public’s desire to hold money as currency increases, what will be the impact on
the banking system?
a) banks would be less able to expand credit
b) banks would be more able to expand credit
c) banks would be less able to decrease aggregate supply
d) banks would be more able to decrease aggregate supply
e) banks would be more able to reduce unemployment
5) The demand for money increases when the national income increases because
a) the public becomes more optimistic about the future
b) the money supply increases
c) the budget deficit increases
d) interest rates increase
e) spending on goods and services increases
6) suppose the required reserve ratio is 20% and a single bank with no excess reserves
receives a $100 deposit from a new customer. The bank now has excess reserves equal to
a) $500
b) $400
c) $100
d) $80
e) $20
7) Which of the following is most likely to increase if the public decides to increase its
holdings of currency
a) the reserve requirement
b) employment
c) disposable personal income
d) the price level
e) the interest rate
8) A commercial bank holds $500,000 in deposit liabilities, reserves of $120,000 and a
required reserve ratio of 20%. The maximum amount by which this single commercial
bank and the amount by which the banking system can increase loans are, respectively:
a) $20,000 and $100,000
b) $120,000 and $500,000
c) $5,000 and $25,000
d) $20,000 and $80,000
e) $30,000 and $150,000
9) Under which of the following circumstances would increasing the money supply be
effective in increasing real GDP?
a)
b)
c)
d)
e)
Interest rates
low
low
low
high
high
employment business optimism
less than full
low
full
low
full
high
less than full
high
full
high
10) All of the following are components of the money supply in the United States
EXCEPT
a) demand deposits
b) coins
c) checkable deposits
d) gold bullion
e) paper money
11) According to both monetarists and Keynesians, which of the following happens when
the Federal Reserve reduces the discount rate?
a) both the demand for money and the supply of money increase and market interest rates
increase
b) the supply of money increases and market interest rates increase
c) the supply of money increases and market interest rates decrease
d) the demand for money increases and market interest rates increase
e) the demand for money increases and market interest rates decrease
12) Which of the following combinations of monetary policy actions would cause the
greatest decrease in aggregate demand
a)
b)
c)
d)
e)
discount rate open market operations
increase
sell bonds
decrease
buy bonds
decrease
sell bonds
increase
sell bonds
decrease
buy bonds
reserve requirement
decrease
decrease
decrease
increase
increase
13) An increase in the money supply will have the greatest effect on real GDP if
a) the required reserve ratio is high
b) the quantity of money demanded is not very sensitive to interest rates
c) investment spending in not sensitive to changes in interest rates
d) unemployment is very low
d) the marginal propensity to consume is low
14) If the Federal Reserve undertakes a policy to reduce interest rates, international
capital flows will be affected in which of the following ways
a) short run capital inflows to the US will not change
b) short run capital inflows to the US will decrease
c) short run capital outflows from the US will decrease
d) long run capital inflows to the US will increase
e) long run capital outflows from the US will decrease
15) The principal reason for requiring commercial banks to maintain reserve balances
with the Federal Reserve is that these balances
a) enable the government to borrow cheaply from the Federal Reserve’s discount window
b) assist the Treasury in refinancing government debt
c) ensure that banks do not make excessive profits
d) give the Federal Reserve more control over the money-creating of banks
e) provide the maximum amount of reserves a bank would ever need
16) If the Federal Reserve lowers the reserve requirement, which of the following is most
likely to happen to interest rates and GDP?
a)
b)
c)
d)
e)
Interest rates
no change
decrease
decrease
increase
increase
GDP
no change
increase
decrease
increase
decrease
17) The purchase of securities on the open market by the Federal Reserve will
a) decrease the reserve requirement
b) decrease the number of Federal Reserve notes in circulation
c) increase the discount rate
d) increase interest rates
e) increase the money supply
18) If the banking system’s reserves are $100 billion, demand deposits are $500 billion,
and the system is fully loaned up, then the reserve requirement must be
a) 10%
b) 12.5%
c) 16.6%
d) 20%
e) 25%
19) Assume that the reserve requirement is 25%. If banks have excess reserves of
$10,000, which of the following is the maximum amount of additional money that can be
created by the banking system through the lending process?
a) $2,500
b) $10,000
c) $40,000
d) $50,000
e) $250,000
20) According to the Keynesian model, an increase in the money supply affects output
more if
a) investment is sensitive to interest rates
b) money demand is sensitive to interest rates
c) the unemployment rate is low
d) consumption is sensitive to the Phillips curve
e) government spending is sensitive to public opinion
21) To counteract a recession, the Federal Reserve should
a) buy securities on the open market and raise the reserve requirement
b) buy securities on the open market and lower the reserve requirement
c) buy securities on the open market and raise the discount rate
d) sell securities on the open market and raise the discount rate
e) raise the reserve requirement and lower the discount rate
22) What will happen if the Fed buys bonds and lowers the reserve requirement during a
period of full employment
a) real GDP will increase
b) real GDP will decrease
c) the price level will increase
d) the price level will decrease
e) both (a) and (d) will occur
ANSWER KEY TO TEST # 6
MONETARY POLICY
1. E
2. B 1/.2 = 5 x excess reserves
3. B due to lower interest rates (A refers to fiscal policy, C refers to stagflation, D
and E are stupid)
4. A (c, d, and e are stupid!!)
5. E
6. D (20 in required reserves, 80 in excess = able to be loaned out)
7. E (banks would need to raise interest rates to attract depositors)
8. A (500,000 deposited, 100,000 required reserves, 20,000 excess reserves 1/.2 = 5
remember to multiply the money multiplier by excess reserves)
9. D (if interest rates are already low, lowering them further may not help much)
10. D
11. C (Fed controls only money SUPPLY, NOT money demand
12. D (all three are contractionary)
13. B (draw out MIF (monetarist: investment flat = sensitive, Md steep = insensitive)
(A will restrict banks ability to make loans; C means that GDP won’t rise by
much if investment spending does not rise by much; D means that GDP is close
to full capacity; E means that consumers would spend a big part of their extra
income)
14. B
15. D
16. B (lower RR = higher Ms = lower interest = higher investment, AD and GDP
17. E
18. D
19. C
20. A (draw out KIS (Keynesian investment steep (= insensitive), Md flat (=sensitive)
C means that the economy is at full capacity; D and E are irrelevant
21. B (both expansionary)
22. C (draw vertical = Classical AS curve, due to full employment, shift AD to the
right due to expansionary monetary policy
TEST # 7 COMBINATIONS OF FISCAL AND MONETARY POLICY
1) Which of the following policy combinations is most likely to cure a severe recession?
a)
b)
c)
d)
e)
Open market operations
Fed buys
Fed buys
Fed buys
Fed sells
Fed sells
Taxes
increase
decrease
decrease
decrease
increase
Government spending
decrease
increase
decrease
decrease
increase
2) If the Federal Reserve wishes to use monetary policy to reinforce Congress’ fiscal
policy changes, it should
a) decrease interest rates when government spending is decreased
b) increase interest rates when government spending is increased
c) decrease the money supply when government spending is increased
d) increase the increase the money supply when government spending is decreased
e) increase the money supply when government spending is increased
3) Which of the following monetary and fiscal policy combinations would most likely
result in a decrease in aggregate demand?
a)
b)
c)
d)
e)
Discount rate
raise
raise
raise
lower
lower
open market operations
Fed sells bonds
Fed buys bonds
Fed sells bonds
Fed buys bonds
Fed buys bonds
government spending
decrease
increase
increase
decrease
increase
4) an inflationary gap could be reduced by
a) a decrease in the reserve requirement
b) a decrease in the discount rate
c) an increase in the income tax rate
d) an increase in the supply of money
e) an increase in government spending
5) during a mild recession, if policy makers want to reduce unemployment by increasing
investment, which of the following policies would be most appropriate?
a) purchase of government securities by the Federal Reserve
b) an increase in the reserve requirement
c) an increase in transfer payments
d) an increase in government expenditure only
e) equal increases in government expenditure and taxes
6) Which of the following measures might be used to reduce a federal budget deficit?
I. raising taxes
II. reducing federal spending
III. lowering interest rates
a) I only
b) II only
c) III only
d) I and III only
e) I, II and III
7) Which of the following policies would most likely be recommended in an economy
with an annual inflation rate of 3% and an unemployment rate of 11%
a) a decrease in the tax rate on corporate profits and a decrease in the discount rate
b) a decrease in government spending and the open market sale of government securities
c) an increase in income tax rates and a decrease in the reserve requirement
d) an increase in defense spending and an increase in the discount rate
e) an increase in transfer payments and an increase in the reserve requirement
8) According to the Classical model, an increase in the money supply causes an increase
in which of the following
I.
II.
III
the price level
nominal GDP
nominal wages
a) I only
b) II only
c) III only
d) II and III only
e) I, II and III only
9) Which of the following combinations of monetary and fiscal policies is coordinated to
increase output?
Monetary policy
a) decrease reserve requirement
b) increase discount rate
c) sell securities
d) sell securities
e) purchase securities
fiscal policy
increase taxes
increase government expenditures
increase taxes
decrease government expenditures
decrease taxes
10) which of the following would result in the largest increase in aggregate demand?
a) a $30 billion increase in military expenditures and a $30 billion open market purchase
of government securities
b) a $30 billion increase in military expenditures and a $30 billion open market sale of
government securities
c) a $30 billion tax cut and a $30 billion open market sale of government securities
d) a $30 billion tax cut and a $30 billion open market purchase of government securities
e) a $30 billion increase in social security payments and a $30 billion open market sale of
government securities
11) Expansionary fiscal policy will be most effective when
a) the Federal Reserve simultaneously increases the reserve requirement
b) wages and prices are very flexible
c) transfer payments are decreased, while taxes remain unchanged
d) the economy is at or above full employment output
e) the aggregate supply curve is horizontal
12) which of the following monetary and fiscal policy combinations would cause the
greatest decrease in aggregate demand
a)
b)
c)
d)
e)
discount rate
increase
decrease
increase
decrease
decrease
government spending
decrease
increase
decrease
decrease
increase
open market operations
Fed buys bonds
Fed sells bonds
Fed sells bonds
Fed buys bonds
Fed buys bonds
13) Which of the following monetary and fiscal policy combinations would cause the
greatest increase in aggregate demand?
a)
b)
c)
d)
e)
Reserve requirement
decrease
increase
increase
increase
decrease
tax rate
decrease
increase
increase
decrease
decrease
government spending
decrease
increase
decrease
increase
increase
14) Assume that the economy has low unemployment and a high inflation rate. Which
set of monetary and fiscal policies would be consistent and designed to lower the rate of
inflation?
a)
b)
c)
d)
e)
Taxes
increase
increase
increase
increase
decrease
government spending
decrease
increase
increase
decrease
increase
open market operations
Fed sells bonds
Fed buys bonds
Fed sells bonds
Fed buys bonds
Fed buys bonds
15) To counter the crowding-out effect on interest rates caused by deficit spending by the
government, the Fed has to
a) increase tax rates
b) increase the reserve requirement
c) increase the discount rate
d) buy bonds through the open market
e) decrease tax rates
16) an expansionary fiscal policy will increase the interest rate unless which of the
following occurs
a) The Fed sells government bonds
b) the exchange rate is fixed
c) wage and price controls are imposed
d) the money supply is increased
e) taxes are cut instead of government expenditures being increased
17) If the government acts to stimulate GDP by raising government spending without a
tax increase, and if at the same time there is no change in monetary policy
a) income will not go up at all unless taxes are cut
b) income will go up by exactly the amount predicted by the multiplier analysis since
fiscal policy and monetary policy are separate policies and have no relationship to each
other
c) the rise in income might be smaller than the multiplier would predict because demand
for money will go up and interest rates will rise
d) the rise in income might be smaller than the multiplier would predict because higher
interest rates will stimulate investment
e) income would not go up at all because the money isn’t available for increased
spending
18) If Congress and the Federal Reserve both wished to encourage growth of productive
capacity in an economy already close to full employment, it would be most appropriate to
a) increase capital gains taxes and decrease the money supply
b) reduce interest rates by open market operations and raise taxes on consumption
c) reduce taxes on consumption, increase income tax rates, and increase government
transfer payments
d) use a tight money policy to decrease government spending
e) raise interest rates by buying securities on the open market
19) Why will expansionary monetary policy promote long-run growth?
a) it increases investment
b) it increases consumption
c) it decreases net exports
d) it leaves government expenditures unchanged
20) If, in time, we use fiscal policy to expand the economy when there is unemployment
and monetary policy to contract the economy when there is inflation, the effect will be
which of the following?
a) more rapid long-run growth
b) high unemployment
c) high inflation
d) high interest rates
ANSWER KEY TO TEST # 7 COMBINATIONS OF FISCAL AND MONETARY
POLICY
1.
2.
3.
4.
5.
B (all three expansionary)
E (both expansionary)
A (all contractionary)
C (contractionary)
A (note that C and D are expansionary, but won’t stimulate investment, likewise
E which is also expansionary, because of the balanced budget multiplier
6. E (note that I and II are obvious; expansionary monetary policy will result in AD
and GDP going up, bringing in tax revenues
7. A (both expansionary)
8. E (note: no REAL growth is taking place
9. E both must be expansionary
10. A (note: increase G is more effective than cutting T, and OMO is the most
powerful of the Fed’s tools)
11. E (A will slow the expansion, if B is true, the inflation will lessen the impact, C is
contractionary, D implies a Classical AS curve, so increasing AD is useless
12. C most contractionary combination
13. E most expansionary combination
14. A most contractionary
15. D (A and E are wrong since taxes are controlled by GOVT; B and C are
contractionary monetary policy, driving interest rates up
16. D (same as # 15)
17. C (due to crowding out effect; B ignores crowding out)
18. B (need to discourage consumption and encourage savings, which will go into
investment if the goal is to increase LRAS; therefore, A will hurt investment; D is
rubbish, since it confuses fiscal and monetary policy; C is bizarre, since it mixes
expansionary and contractionary fiscal policy
19. A
20. D
TEST # 8 DIFFERENT VIEWS OF THE ECONOMY
1) Suppose that form 1985 to 1986, unemployment fell from 7.2 to 7.0 per cent and
inflation fell from 3.8 to 1.1 per cent. An explanation of these changes might be that the
a) short run Phillips curve shifted to the right
b) aggregate supply curve shifted to the right
c) aggregate supply curve shifted to the left
d) aggregate demand curve shifted to the right
e) aggregate demand curve shifted to the left
2) Which of the following relationships is illustrated by a short run Phillips curve?
a) a decrease in the rate of economic growth is accompanied by a decrease in the rate of
unemployment
b) an increase in the rate of inflation is accompanied by an increase in the rate of
unemployment
c) an increase in the rate of inflation is accompanied by a decrease in the rate of
economic growth
d) a decrease in the rate of inflation is accompanied by an increase in the rate of
unemployment
e) a decrease in the rate of inflation is accompanied by an increase in the rate of
economic growth
3) Which of the following is a basic tenet of classical economic analysis?
a) the prices of products tend to be inflexible
b) inflation is not a serious economic problem
c) the economy may be in equilibrium at less than full employment
d) the economy is self-correcting to full employment
e) saving is usually greater than investment
4) which of the following is a key feature of Keynesian economics?
a) wages are more flexible than prices
b) macroeconomic equilibrium can occur at less than full employment
c) supply creates its own demand
d) the level of government expenditure depends mostly on interest rates
e) the level of saving depends mostly on interest rates
5) According to Keynesian theory, the most important determinant of saving and
consumption is the
a) flexibility of wages and prices
b) level of employment
c) level of income
d) price level
e) interest rate
6) “The cost of reducing unemployment is accepting a higher rate of inflation”.
The statement above would most likely be made by a person who believes in
a) the liquidity trap
b) the paradox of value
c) theory of rational expectations
d) Phillips curve
e) the quantity theory of money
7) Which of the following will be true if inflation can be accurately forecast and both
prices and wages are fully flexible?
a) real interest rates will be greater than nominal interest rates
b) the equilibrium unemployment rate will be zero
c) the Phillips curve will be vertical
d) the supply of labor will be insensitive to the real wage rate
e) long periods of high unemployment will be possible
8) According to the Keynesian model, equilibrium output of an economy may be less
than the full-employment level of output because at full employment
a) banks may not be willing to lend enough money to support the output
b) interest rates might not be high enough to provide the incentive to finance the
production
c) workers may not be willing to work the hours necessary to produce the output
d) there might not be enough demand by firms and consumers to buy that output
e) sufficient income may not be generated to keep the workers above the subsistence
level
9) Supply-side economists argue that
a) the government should regulate the supply of imports
b) increased government spending should be used to stimulate the economy
c) the aggregate supply of goods can only be increased if the price level falls
d) lower tax rates provide positive work incentives and thus shift the aggregate supply
curve to the right
e) a cut in high tax rates results in an increased deficit and thus increases aggregate
supply
10) According to monetarists, inflation is most often the result of
a) upward shifts in the consumption function
b) an excessive growth in the money supply
c) decreased production of capital goods
d) increased production of capital goods
e) high federal tax rates
11) In the Keynesian conception of the AD / AD model
a) the only effective fiscal policy is to increase aggregate supply
b) changes in AD and changes in the price level are inversely related
c) a decrease in AD can reduce inflation substantially without causing much
unemployment
d) an increase in AD can expand real output and employment only by causing a great deal
of inflation
e) an increase in AD can expand real output and employment without causing much
inflation
12) What does the theory of rational expectations imply?
a) government policies work only if the money supply increases by ten percent
b) attempts to reduce unemployment through government policy will be thwarted by
people’s reactions
c) attempts to decrease unemployment below the natural rate lead to depressions
d) an increase in the money supply will have no effect on prices
e) unemployment and the rate of inflation are directly related
13) Which of the following combinations correctly describes the shape of the aggregate
supply curve as seen by Keynesians, monetarists and rational expectations theorists
(RET)?
a)
b)
c)
d)
e)
Keynesians
flat
steep
flat
flat
steep
Monetarists
flat
steep
steep
steep
flat
RET
flat
steep
flat
steep
flat
14) The statement that ‘the cost of reducing the rate of inflation is that people must lose
their jobs’ indicates that the speaker believes in a relationship that is usually depicted by
which of the following?
a) the multiplier
b) the quantity theory of money
c) the production function
d) the liquidity trap
e) the Phillips curve
15) The so-called Phillips curve is usually plotted with the unemployment rate on the
horizontal axis and the percentage increase in prices on the vertical axis. According to
those who believe in rational expectations and the natural rate of unemployment
hypotheses, the long-run Phillips curve would appear as which of the following?
a) a U-shaped line
b) a line that slopes down from left to right
c) a line that slopes up left to right
d) a horizontal line
e) a vertical line
16) What is the monetary rule as defined by monetarists?
a) monetary policy does not have an impact upon the economy until six to nine months
after the money supply is changed
b) an expansionary fiscal policy should always be accompanied by an easy money policy
c) the annual rate of increase in the money supply should be equal to the long run
increase in the price level
d) the annual rate of increase in the money supply should be equal to the potential annual
growth rate of real GDP
e) A contractionary fiscal policy must always be accompanied by an expansionary
monetary policy
17) What does the theory of rational expectations imply?
a) attempts to decrease unemployment through government policy will be thwarted by
people’s reactions
b) attempts to decrease unemployment below the natural rate lead to recessions
c) an increase in the money supply will decrease prices
d) unemployment and the rate of inflation are inversely related
18) For purposes of maintaining a stable monetary policy, ‘neo-Keynesian’ economists
and ‘monetarists’ would do which of the following?
a) the same thing—keep interest rates constant
b) the same thing—keep the supply of money growing at about the growth rate of GDP
c) different things—keep money growth constant or interest rates constant, respectively
d) different things—keep interest rates constant or money growth constant, respectively
19) Which of the following is the Keynesian position?
a) monetary policy is more important than fiscal policy
b) monetary policy and fiscal policy are equally important
c) fiscal policy is more important than monetary policy
d) monetary policy is more important than fiscal policy during recession, but the opposite
holds true during inflation
20) What does the theory of rational expectations hold?
a) by reacting in its self-interest to the expected effects of stabilization policies, the public
will tend to negate the impact of those policies
b) the public’s expectations as to the effects of economic policies will tend to reinforce
the effectiveness of those policies
c) the public’s expectations can influence the outcome of fiscal policy but not of
monetary policy
d) the public’s expectations can influence the outcome of monetary policy but not of
fiscal policy
ANSWER KEY TO TEST # 8
DIFFERENT VIEWS OF THE ECONOMY
1. B (If A were true, both inflation and unemployment would be higher, not lower)
2. D
3. D
4. B
5. C
6. D
7. C
8. D
9. D
10. B
11. E
12. B
13. D
14. E
15. E
16. D
17. A
18. D
19. C
20. A
TEST # 9
INTERNATIONAL TRADE
1. To protect high-cost domestic producers, a country imposes a tariff on an
imported good Y. Which of the following is most likely to occur in the short
run?
I. a decrease in domestic production of Y
II. an increase in domestic production of Y
III. an increase in foreign output of Y
a) I only
b) II only
c) III only
d) I and III only
e) II and III only
2. Suppose two countries are each capable of individually producing two given
commodities. Instead, each specializes by producing the good for which it has a
comparative advantage and then trades with the other country. Which of the following is
most likely to result?
a) the two countries will become more independent on each other
b) unemployment will increase in one country and decrease in the other
c) there will be more efficient production in one country and less efficient production in
the other
d) both countries will be better off
e) both countries will be producing their commodity inefficiently
3. If other things are held constant, an increase in US imports will
a) tend to cause the dollar to appreciate because the world supply of dollars will rise
b) tend to cause the dollar to appreciate because the world demand for dollars will rise
c) have no effect on the exchange rate of the dollar because exports will also increase
d) tend to cause the dollar to depreciate because the world supply of dollars will rise
e) tend to cause the dollar to depreciate because the world demand for dollars will rise
4. If higher US interest rates cause foreign demand for the dollar to rise, which of the
following will occur to the international value of the dollar and US exports?
a)
b)
c)
d)
e)
International value of dollar
increase
increase
increase
decrease
decrease
exports
increase
decrease
no change
increase
decrease
5. The table below indicates the number of LABOR HOURS required in countries X and
Y to produce one unit of food or one unit of clothing
Country
food
clothing
X
20 hours
50 hours
Y
10 hours
20 hours
Given this information, which one of the following statements is correct?
a) X has a comparative advantage in the production of both food and clothing
b) Y has a comparative advantage in the production of both food and clothing
c) X has a comparative advantage in food, Y has a comparative advantage in clothing
d) Y has a comparative advantage in food, X has a comparative advantage in clothing
e) neither country has a comparative advantage in the production of either good
6. If the dollar cost of the British pound decreases, US imports from and exports to the
United Kingdom will change in which of the following ways?
a)
b)
c)
d)
e)
Imports
decrease
decrease
increase
increase
increase
exports
increase
decrease
no change
increase
decrease
7. Which of the following would occur if the international value of the US dollar
decreased?
a) Americans would pay less for foreign goods
b) The US trade deficit would increase
c) US demand for foreign currencies would increase
d) more gold would flow into the US
e) US exports would rise
8. If exchange rates are allowed to fluctuate freely, and the US demand for Danish
Krones increases, which of the following will most likely occur?
a) the dollar price of Danish goods will fall
b) the dollar price of the Krone will fall
c) the US balance of payments deficit will increase
d) Danes will find that US goods are getting more expensive
e) Americans will have to pay more for goods made in Denmark
9. Which of the following would most likely be the immediate result if the US increased
tariffs on most foreign goods?
a) the value of the US dollar would decrease against foreign currencies
b) large numbers of US workers would be laid off
c) prices of domestic goods would increase
d) more foreign goods would be purchased by Americans
e) the US standard of living would be higher
10. When does the law of comparative advantage indicate that mutually beneficial
international trade can take place?
a) when a country can produce a good in less time than another country can
b) when a country can produce more of some product than other nations can
c) when relative costs of production differ between nations
d) when transportation costs are almost zero
d) when tariffs are eliminated
11. According to the principle of comparative advantage, worldwide output and
consumption levels will be highest when goods are produced in nations where which of
the following is true?
a) the exchange rate is rising
b) the exchange rate is falling
c) the balance of trade is in surplus
d) absolute advantages are highest
E) opportunity costs are lowest
12. Which of the following is not a commonly heard argument for protection?
a) if a nation does not protect its industries, jobs will go to people in other countries
b) when other nations’ economies grow, the nations typically import fewer goods and
services
c) specialization along the lines of comparative advantage can lead to a lower standard of
living
d) infant industries need short run, but not long run, protection from foreign competition
e) a strong national defense requires that some military products be produced
domestically
13. what does a balance of trade surplus imply?
a) investment by foreigners exceeds domestic investment in other countries
b) imports of services exceed exports of services
c) exports of services exceed imports of services
d) merchandise imports exceed merchandise exports
e) merchandise exports exceed merchandise imports
14. Which of the following transactions represents a deficit on the current account
section of the US balance of payments?
a) foreigners purchase of US securities
b) US tourists in Great Britain purchase pounds sterling
c) US firms and individuals receive dividends on US investments in Latin America
d) a US subsidiary exports raw materials to its Canadian parent company
e) the Italian Capital Investment Corporation makes a loan to a US firm
15. What can an increase in US interest rates be expected to do?
a) increase the international value of the dollar
b) cause a net outflow of foreign capital from the US
c) decrease the international value of the dollar
d) encourage investment spending by US firms
e) adversely affect US importers
16. What happens if a nation does not have an absolute advantage in producing
anything?
a) the international value of its currency will not rise
b) it will export raw materials and import finished products
c) it will try to get along without trade
d) it will have a comparative advantage in the activity in which it has a lower opportunity
cost
e) it has no comparative power either
17. how would an expansionary monetary policy affect foreign investment in the US and
the international value of the dollar?
a)
b)
c)
d)
e)
Foreign investment
no change
increase
increase
decrease
decrease
value of dollar
depreciate
depreciate
appreciate
depreciate
appreciate
18. the following data shows the quantities of soda and cheese that can be produce in the
US and France with one unit of resources
soda (bottles)
cheese (pounds)
US
20
60
France
10
40
Which of the following statements is/are true?
I.
France has an absolute advantage in soda
II. The US has a comparative advantage in soda
III The US has a absolute advantage in cheese
IV The US has a comparative advantage in cheese
a) I only
b) II only
c) II and III only
d) II and IV only
e) I, II and III
19. If a contractionary monetary policy raises interest rates in the US, what will happen to
the value of the US dollar, the value of the Japanese yen, and the US balance of trade?
a)
b)
c)
d)
e)
Dollar
no change
appreciate
appreciate
appreciate
appreciate
Yen
appreciate
depreciate
appreciate
appreciate
depreciate
Balance of Trade
toward deficit
toward surplus
toward surplus
toward deficit
toward deficit
20. what will be the effect of depreciating a nation’s currency on the net exports and
aggregate demand?
a)
b)
c)
d)
e)
Net exports
no change
increase
increase
decrease
decrease
aggregate demand
decrease
decrease
increase
decrease
increase
ANSWER KEY TO
TEST # 9 INTERNATIONAL TRADE
1. B
2. D (note: some questions may say ‘become more Dependent’ due to trade)
3. D (in order to import, we sell dollars when buying foreign currency
4. B
5. C (input problem)
6. E
7. E
8. E
9. C
10. C
11. E
12. B (note: the opposite of this statement is true)
13. E (note the difference between the balance of trade and the balance of payments
14. B (note as in 13; a,c, and e are inflows of capital on the balance of payments; d
goes on the balance of trade, where it would lead to a surplus rather than a
deficit)
15. A (foreign lenders attracted to US)
16. D
17. D (interest rates down, foreign lenders leave US)
18. C output problem
19. E
20. C ( remember the GDP equation)
TEST # 10
THE KEYNESIAN AGGREGATE EXPENDITURE MODEL
1) An increase in which of the following will increase the value of the spending
multiplier?
a) the required reserve ratio
b) the supply of money
c) the marginal propensity to consume
d) personal income tax rates
e) equilibrium output
2) the graph below indicates equilibrium E for a closed economy without government
spending. If the addition of government spending results in equilibrium F, which of the
following is true?
a) government spending is $4000, and the multiplier is 4
b) government spending is $100 and the multiplier is 4
c) government spending is $100 and consumption increases by $400
d) government spending and GDP increase by $400 each
e) consumption and GDP increase by $400 each
3) Current equilibrium output equals $5,000,000. Potential GDP equals $5,200,000.
MPC equals .75. Under these conditions, a Keynesian economist is most likely to
recommend
a) cutting taxes by $50,000
b) cutting taxes by $200,000
c) increasing government spending by $50,000
d) increasing government spending by $200,000
e) increasing government spending by $66,666
questions 4 and 5 refer to the consumption function below
4) If the MPC increases, the equilibrium levels of income and consumption will change
in which of the following ways?
a)
b)
c)
d)
e)
Equilibrium income
no change
decrease
increase
increase
no change
equilibrium consumption
no change
decrease
increase
no change
increase
5) If private investment of $100 is added to the economy, the equilibrium levels of
income and consumption will change in which of the following ways?
a)
b)
c)
d)
e)
Equilibrium income
increase
no change
increase
no change
increase
equilibrium consumption
increase
no change
no change
increase
decrease
6) According to Keynes, the most important determinant of consumption and saving is
the
a) flexibility of wages and prices
b) level of employment
c) price level
d) level of income
e) interest rates
7) Which of the following would increase the value of the multiplier?
a) an increase in government spending
b) an increase in exports
c) a decrease in government unemployment benefits
d) a decrease in the MPC
e) a decrease in the MPS
8) If an increase in investment of $10 causes GDP to rise by $50, then the MPS is
a) .1
b) .2
c) .5
d) .8
e) .9
9) If the MPC is .9, what is the maximum amount GDP could change by if government
spending rises by $1 billion?
a) rise by up to $9 billion
b) fall by up to $9 billion
c) rise by up to $0.9 billion
d) rise by up to $10 billion
e) rise by up to $1 billion
10) The figure below represents an economy with no government and no foreign sector.
Which of the following statements about this economy is true?
a) at Y, planned investment is less than saving
b) at Y, planned investment is equal to saving
c) at Y, planned investment is greater than saving
d) at full employment, total spending is equal to total income
e) at full employment, planned investment is equal to saving
11) If Maria’s income rises from $600 to $650, and her spending rises from $480 to $520,
it may be concluded that her
a) MPC = .2
b) MPC = .4
c) MPC = .8
d) MPS = .25
e) MPS = .8
12) If MPC = .75 and government spending rises by $5, the aggregate expenditure curve
will
a) shift up by $5 billion and GDP will increase by $6.5 billion
b) shift up by $5, and GDP will increase by $20 billion
c) not shift, and GDP will increase by $5 billion
d) not shift and GDP will decrease by $5 billion
e) rotate downward and GDP will remain unchanged
use the information in the following graph to answer questions 13, 14 and 15
13) which of the following statements about GDP are correct?
I. equilibrium GDP is $800 billion
II. planned investment is $50 billion
III. equilibrium aggregate expenditure is $600 billion
a) I only
b) II only
c) III only
d) I and II only
e) II and II only
14) in the graph, if full employment GDP is $800 billion, what increase in investment
would be required to move GDP to this full employment level?
a) $200 billion
b) $100 billion
c) $50 billion
d) $25 billion
e) zero, since GDP is at the full employment level
15) In the graph, what is the value of the MPC, MPS, and the multiplier?
a)
b)
c)
d)
e)
MPC
.5
.6
.75
.8
.9
MPS
.5
.4
.25
.2
.1
Multiplier
2.0
2.5
4.0
5.0
1.1
16) The forty five degree line on a consumption function shows
a) the amounts households plan to consume at each level of possible income
b) the amounts households plan to save at each level of possible income
c) all the points at which consumption and income are equal
d) all the points at which savings and income are equal
e) all the points where the MPC is constant
17) to what does the MPC refer?
a) the extra saving that is made from an extra dollar of income
b) the extra consumption that is made from an extra dollar of income
c) the extra investment that is made from an extra dollar of income
d) total consumption divided by total income
18) which best defines the multiplier?
a) national income divided by aggregate demand
b) the change in national income divided by the initial change in spending that brought it
about
c) the change in national income resulting from a change in spending, multiplied by the
equilibrium level of national income
d) a change in aggregate demand multiplied by the equilibrium level of national income
19) with an MPS of .4, the MPC will be
a) .4
b) .4 x .6
c) .6
d) the reciprocal of MPS
answer questions 20-23 on the basis of the following diagram
20) the MPC is equal to
a) CB / BF
b) CD / CF
c) CB / AB
d) CF / CD
e) AE / OE
21) at income level OF, the volume of savings is
a) CB
b) CD
c) CF – BF
d) AB
e) BD
22) consumption will be equal to income at
a) point B
b) point C
c) at income of OF
d) at income of OE
23) the economy is dissaving at
a) income OF
b) income OE
c) income OH
d) at all income levels greater that OE
e) in the amount CD
ANSWER KEY
1) C ( A and B are monetary policy, a rise in taxes will cause a fall in spending, a rise in
MPC will cause a rise in spending)
2) A (change in G is 100, change in GDP is 400)
3) C (multiplier is 4, target is 200,000)
4) C
5) A (note that the rise I will cause a rise in C
6) D (consumption function / savings function)
7) E (note the formula, A, B and C are not part of the formula)
8) B (multiplier is 5)
9) D
10) B (planned investment = savings only in equilibrium; actual investment is always
equal to savings)
11) C
12) B (increase in G causes AE to rise by $5 billion, multiplier is 4)
13) E (I is 50, so multiplier is 4)
14) C (need to increase GDP by 200)
15) C
16) C
17) B
18) B
19 C
20) C
21) B
22) D
23) C (note O = origin)