Download Section 6 Practice Test Figure 31-1: Money Market I 1. Use the

Section 6 Practice Test
Figure 31-1: Money Market I
1. Use the “Money Market I” Figure 31-1. If the money market is initially in equilibrium at point E and the central
bank _____ bonds, then the interest rate will:
A. sells; move toward point H.
B. sells; move toward point L.
C. buys; remain at point E.
D. sells; remain at point E.
E. buys; move toward point H.
Figure 32-2: Classical Model of the Price Level
2. Use the “Classical Model of the Price Level” Figure 32-2. If the central bank increases the money supply such
that aggregate demand shifts from AD1 to AD2, then, according to this classical model, the price level would:
A. not change.
B. increase from P1 to P2.
C. increase from P2 to P3.
D. decrease from P1 to P2.
E. increase from P1 to P3.
3.In the long run, the only effect of monetary policy is on:
A. the long-run aggregate supply.
B. the interest rate.
C. the aggregate output level.
D. the aggregate price level.
E. the rate of employment.
Figure 31-2: Changes in the Money Supply
4. Use the “Changes in the Money Supply” Figure 31-2. Fed policy to increase the supply of money and hence to
lower the interest rate from 6% to 4%, is accomplished by action that _______ the _______ government bonds.
A. lowers; price of
B. increases; interest rate on
C. decreases; issuing of
D. increases; supply of
E. increases; demand for
5. Budget deficits:
A. always decrease with inflation and increase with deflation.
B. always increase when unemployment increases and fall when unemployment falls.
C. always decrease when unemployment increases and increase when unemployment falls.
D. always increase when aggregate price level increases and fall when aggregate price level
falls.
E. always increase when unemployment increases and increase when real GDP increases.
6. The negative relationship between the inflation rate and the unemployment rate is known as the:
A. short-run Phillips curve.
B. short-run aggregate supply curve.
C. long-run Phillips curve.
D. aggregate demand curve.
E. long-run aggregate supply curve.
Figure 34-1: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of 0%; SRPC2 is the Phillips curve with an expected
inflation rate of 2%.
7. Use the “Expected Inflation and the Short-Run Phillips Curve” Figure 34-1. Suppose that this economy
currently has an unemployment rate of 6%, inflation of 0%, and no expectation of future inflation. If the central
bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%,
then inflation would:
A. decrease to –2%.
B. not change.
C. increase to 2%.
D. increase to 4%.
E. increase to 8%.
8. When the government borrows funds in financial markets to pay for budget deficits:
A. planned aggregate spending decreases rather than increases.
B. the multiplier effect of government purchases increases.
C. private investment spending may be crowded out.
D. the interest rate and savings decrease.
E. the interest rate rises and consumption spending increases.
9. Monetary policy attempts to affect the overall level of spending in the economy through:
A. changes in the inflation rate.
B. changes in the quantity of money or the interest rate.
C. changes in tax policy or government spending.
D. discretionary regulation of profits and wages.
E. changes to imports and exports.
10. The budget balance is calculated as:
A. T – G – TR
B. T + G – TR
C. T – G + TR
D. T + G + TR
E. TR – T – G
Figure 32-3: AD–AS
11. Use the “AD–AS” Figure 32-3. Refer to the AD–AS diagram. Suppose the economy is initially at E1, and then
moves to E2 where AD2 intersects SRAS1. Now, suppose that the SRAS1 shifts to SRAS2, because:
A. real wages rise in the long run.
B. nominal wages rise in the long run.
C. the real money supply rises in the long run.
D. aggregate real output rises in the long run.
E. nominal wages fall in the long run.
12. If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax
that year is:
A. $5 billion.
B. $15 billion.
C. $60 billion.
D. $1500 billion.
E. $1.5 billion.
13. Contractionary monetary policy causes _______ in the price level in the short run and _______ in the price level in
the long run.
A. no change; a decrease
B. a decrease; a decrease
C. a decrease; no change
D. no change; no change
E. a decrease; an increase
14. Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a lower
rate of future inflation. What do we expect to happen to the SRAS curve and short-run Phillips curve?
A. The SRAS curve will shift to the left, and the short-run Phillips curve will shift downward.
B. The SRAS curve will shift to the right, and the short-run Phillips curve will shift
downward.
C. The SRAS curve will shift to the left, and the short-run Phillips curve will shift upward.
D. The SRAS curve will shift to the right, and the short-run Phillips curve will shift upward.
E. The LRAS curve will shift to the right, and the short-run Phillips curve will shift upward.
15. Suppose that U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the
government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of
the fiscal year, the debt is:
A. $10.5 trillion.
B. $6.5 trillion.
C. $9 trillion.
D. $7.5 trillion.
E. $8.5 trillion.
16. During an inflationary gap:
A. the unemployment rate is less than the natural rate of unemployment.
B. actual output is less than potential output.
C. the unemployment rate is equal to the natural rate of unemployment.
D. wages and prices will need to fall in order to restore the economy to its potential output.
E. the unemployment rate is equal to zero.
17. In 1958, which of the following economists came up with a theory regarding the tradeoff relationship between
unemployment and inflation?
A. A.W.H. Phillips
B. John Maynard Keynes
C. Joseph Schumpeter
D. Milton Friedman
E. Karl Marx
18. According to the classical model of the price level, an increase in the money supply will create:
A. inflation with no long-run increase in real GDP.
B. inflation and a long-run increase in real GDP.
C. no inflation and a long-run increase in real GDP.
D. deflation with no long-run increase in real GDP.
E. disinflation with no long-run increase in real GDP.
Figure 31-4: Economic Adjustments
19.Use the “Economic Adjustments” Figure 31-4. Assume that the economy is at point c. An increase in the money
supply would cause:
A. a shift of the SRAS1 curve to SRAS2.
B. a shift of the SRAS2 curve to SRAS1.
C. a shift of the AD1 curve to AD2.
D. a shift of the AD2 curve to AD1.
E. a shift of the AD1 curve to AD2 and a shift of the SRAS2 curve to SRAS1.
20. When a central bank prints money to pay government debts, causing rising prices that erode the purchasing power
of money held by the public, it is called:
A. a payroll tax.
B. an excise tax.
C. a currency tax.
D. a budget tax.
E. an inflation tax.