Question 1
The idea that supply creates its own demand is known as
the law of supply.
the law of demand.
Keynes' law.
Say's law.
Question 2
According to classical economists, a decrease in the rate of interest will
increase unemployment.
increase consumer saving.
increase business investment.
increase business failures.
Question 3
According to the Keynesian model, the short-run aggregate supply (SRAS) curve is horizontal when
real gross domestic product (GDP) is at full capacity but prices are not flexible.
there are no unemployed resources and wages do not change when prices change.
prices react to an aggregate demand shock but real gross domestic product (GDP) does not.
there are unemployed resources and prices do not fall when aggregate demand falls.
Question 4
Which of the following would increase aggregate supply?
Increased training and education
A reduction in input prices
A discovery of new raw materials
All of the above
Question 5
The gap that exists when equilibrium real gross domestic product (GDP) is greater than full employment real GDP is called a(n)
employment gap.
inflationary gap.
recessionary gap.
demand gap.
Question 6
Inflation that is caused by an increase in aggregate demand and is not matched by an increase in aggregate supply is called
demand-push inflation.
demand-pull inflation.
cost-push inflation.
cost-pull inflation.
Question 7
The significant run-up in oil prices during the late 2000s was an example of
an aggregate demand shock that increased the price level and increased the rate of growth of real gross domestic product (GDP).
an aggregate demand shock that reduced the price level and reduced the rate of growth of real gross domestic product (GDP).
an aggregate supply shock that increased the price level and reduced the rate of growth of real gross domestic product (GDP).
an aggregate supply shock that reduced the price level and increased the rate of growth of real gross domestic product (GDP).
Question 8
Thinking as an economist would, which is true of investment?
It is the portion of disposable income that is not used for consumption or saving.
Investment represents spending on capital goods.
Investment involves putting money into stocks and bonds.
Investment is a stock concept.
Question 9
Keynesian theory is based on the hypothesis that
saving and consumption are influenced primarily by real current disposable income.
saving is influenced primarily by the interest rate.
planned savings equal planned investment only at full employment.
full employment is automatically attained in any economy.
Question 10
If the marginal propensity to save (MPS) = 0.1, then
the MPC = 0.9.
the APS = 0.1.
the APC = 0.9.
consumption equals $1,800 when income equals $2,000.
Question 11
In the Keynesian model, whenever planned saving exceeds planned investment,
there will be unplanned inventory accumulation.
there will be unplanned inventory depletion.
real GDP will not be influenced.
the interest rate will remain unchanged.
Question 12
A rise in the price level causes
an increase in aggregate demand.
a decrease in aggregate demand.
a reduction in total planned real expenditures.
an increase in total planned real expenditures.
Question 13
Suppose that the marginal propensity to consume (MPC) is 0.8, and there is a $2,000 increase in autonomous consumption. Given this information, real GDP will increase by
$1,600.
$2,000.
$2,500.
$10,000.
Question 14
When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it exercises
monetary policy.
discretionary fiscal policy.
a Ricardian policy.
a laissez-faire policy.
Question 15
If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should
reduce aggregate demand by cutting government spending or raising taxes.
reduce aggregate demand by increasing government spending or cutting taxes.
increase aggregate supply by cutting government spending or raising taxes.
increase aggregate supply by increasing government spending or lowering taxes.
Question 16
Refer to the above figure. If the relevant aggregate demand curve is AD2, what is the current economic situation?
Inflationary gap
Recessionary gap
Equilibrium
Overemployment
Question 17
Which of the following are lags with which fiscal policy makers must cope?
Recognition time lags
Action time lags
Effect time lags
All of the above
Question 18
One characteristic of built-in or automatic stabilizers is
they require no new legislative action by Congress to have an effect.
they automatically produce surpluses during recessions and deficits during inflation.
they have no effect on the distribution of income.
they reduce the size of the public debt during times of recession.
Question 19
When real gross domestic product (GDP) falls, which of the following will automatically occur?
A decrease in all tax rates
A decrease in income tax revenues
A decrease in unemployment compensation expenditures
An increase in income tax revenues
Question 20
When government revenues exceed government outlays in a particular year, this is called
a budget surplus.
a budget deficit.
the national debt.
fiscal policy.
Question 21
The public debt can be thought of as
the total amount that consumers owe on their credit cards.
the total amount in taxes that consumers pay to the government.
accumulated budget deficits and surpluses.
the total amount that the government spends for goods and services.
Question 22
Expressing the U.S. federal budget deficit as a percentage of gross domestic product (GDP)
results in inflation-adjusted revenue and expenditure numbers.
helps to understand the size of the deficit relative to the size of the economy.
was useful through the 1980s, but is no longer helpful because both the deficit and real GDP have grown so large.
is only useful if the budget deficit is rising at an annual rate of more than 4%.
Question 23
The amount of funds that the Social Security system has loaned the federal government is
included in the net public debt.
added to the gross public debt to calculate the net public debt.
not included in the gross public debt.
excluded from the net public debt.
Question 24
Other things being equal, what is the effect of deficit spending on interest rates?
Interest rates decline.
Interest rates rise.
Interest rates hold constant because the demand for credit decreases.
There is no impact unless the Federal Reserve decides to alter the money supply.
Question 25
Which is the fastest-growing component of the federal government budget?
Spending on the military and the war on terrorism
Spending to improve the nation's schools
Spending to improve and expand the nation's infrastructure
Spending on entitlements
Question 26
When you set aside the money that you have today in order to purchase goods and services later on, you use money as a
medium of exchange.
standard of deferred payment.
unit of accounting.
store of value.
Question 27
The degree to which an asset can be acquired or disposed of without much loss of nominal value or transaction costs is known as
fiat money.
liquidity.
fiducia.
credit.
Question 28
The opportunity cost of holding money is measured by
a dollar.
the price of government bonds.
the interest yield that could have been earned by holding some other asset.
the liquidity of interest-bearing assets.
Question 29
A system in which the value of currency that is issued by the government is based entirely on public faith that the currency will be acceptable in trade is
a fiduciary system.
a private property system.
a Gresham system.
a socialistic system.
Question 30
The money supply is
the rate at which the Federal Reserve Board prints currency.
limited to currency and coins.
the amount of money in circulation.
the rate at which the Federal Reserve Board creates money.
Question 31
Which of the following is not a function of the Federal Reserve System?
The Fed holds reserves of depository institutions.
The Fed supplies the economy with fiduciary currency.
The Fed determines government spending and taxation policies.
The Fed acts as fiscal agent for the United States Department of the Treasury.
Question 32
Fractional reserve banking is a system in which
depository institutions pay a fraction of advertised interest rates.
a fraction of banking services must be provided by depository institutions.
depository institutions hold a fraction of total deposits in reserve.
the money supply is a set fraction of the U.S. gold reserves.
Question 33
In order to reach the maximum money multiplier, it is assumed that
commercial banks keep the amount of reserves equal to total bank deposits.
all loans get redeposited in a checkable account.
there is insufficient loan demand.
loans are diverted into circulating currency.
Question 34
Which of the following is a factor that influences the demand for money?
Transactions demand
Precautionary demand
Asset demand
All of the above
Question 35
Which of the following is a true statement about the relationship between the price of bonds and the interest rate?
The prices of bonds are directly related to the interest rate.
The prices of bonds increase when the interest rates rise.
The prices of bonds are unrelated to the interest rate.
The prices of bonds are inversely related to the interest rate.
Question 36
In order to close a recessionary gap, the Fed would
decrease the money supply.
increase interest rates.
sell bonds.
increase the money supply.
Question 37
Suppose that the economy currently has an inflationary gap. The Fed engages in contractionary monetary policy. The impact of contractionary monetary policy will be to
increase short-run aggregate supply, decrease in prices, and decrease in real GDP.
increase short-run aggregate supply, decrease prices, and increase real GDP.
decrease aggregate demand, decrease prices, and increase real GDP.
decrease aggregate demand, decrease prices, and decrease real GDP.
Question 38
The tools of monetary policy are
open market operations, the differential between the discount rate and the federal funds rate, and tax rates.
open market operations, government spending, and the required reserve ratio.
open market operations, the differential between the discount rate and the federal funds rate, and the required reserve ratio.
government spending, tax rates, and the required reserve ratio.
Question 39
The federal funds rate is
the interest rate that is paid on reserves that are held with the Fed.
the interest rate at which banks can borrow excess reserves from other banks.
the interest rate on bonds that are issued by the federal government.
None of the above
Question 40
In order to obtain an efficient allocation of resources worldwide
countries that have a lot of resources should ship resources to countries that do not have a lot of resources.
countries that have a lot of resources should not trade since poorer countries cannot compete.
each country should produce the good with which have a comparative advantage, and then trade.
no trade among countries should occur.
Question 41
An effect of international trade is
the increase in the average price of goods, as the cost of transportation has to be included.
the transmission of ideas around the world.
that only countries that have absolute advantage in producing a good can participate.
that the United States has a trade surplus.
Question 42
One reason that U.S. exports of commercial services have increased steadily over the past 25 years is that
European and Asian nations have shown little interest in developing their own commercial services sectors.
the United States has made significant investments in new information technologies.
the U.S. government owns and operates most of the economy's service sector.
the U.S. economy operates like one big corporation.
Question 43
Selling a good abroad below the price charged in the home market, or at a price below the cost of production, is called
dumping.
import substitution.
a quota.
a tariff.
Question 44
A quota is
a tariff that is imposed on goods that are dumped in the country.
a law that prevents ecologically damaging goods from being imported into a country.
a market-imposed balancing factor that keeps prices of imports and exports in equilibrium.
a government-imposed restriction on the quantity of a specific good that can be imported.
Question 45
A significant advantage to being a member of a trade bloc is
higher tariff collections from member countries.
reduced or eliminated tariffs among member countries.
reduced tariff rates only for the largest member countries.
None of the above; there is no economic advantage to a trade bloc.
Question 46
The balance of payments is
the value of goods and services that are bought and sold in the world market.
a summary record of a country's economic transactions with foreign residents and governments.
a summary record of a country's purchases and sales of goods and services in the world market.
the value of merchandise goods that are bought and sold in the world market.
Question 47
The foreign exchange rate describes the
balance of trade.
balance of payments.
law of comparative advantage.
price of foreign currency in terms of domestic currency
Question 48
Changes in which of the following will cause a change in exchange rates?
Real interest rates
Consumer preferences
Perceptions of economic and political stability
All of the above
Question 49
Foreign exchange risk is
a financial strategy that reduces the change of suffering losses that arise from foreign exchange risk.
an exchange rate arrangement in which a country pegs the value of its currency to the exchange value.
the possibility that changes in the value of a nation's currency will result in variations in the market value of assets.
active management of a floating exchange rate on the part of a country's government.
Question 50
Under the Bretton Woods Agreement, the goal of the IMF was to
finance international transactions in gold.
lend to countries that are experiencing balance of payment deficits.
help less developed countries advertise their goods in the developed countries.
provide oversight to the functioning of central banks in the member countries.