Question 1:
Historical evidence for the U.S. economy indicates that
Answer
recessions have occurred roughly once every six years since the 1960s.
the unemployment rate usually decreases during a recession and increases shortly after the recession ends.
real GDP usually remains roughly constant during a recession and decreases shortly after the recession ends.
changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle.
Question 2:
Which of the following is most commonly used to monitor short-run changes in economic activity?
Answer
the inflation rate
real GDP
aggregate demand
aggregate supply
Question 3:
During recessions investment
Answer
falls by a larger percentage than GDP.
falls by about the same percentage as GDP.
falls by a smaller percentage than GDP.
falls but the percentage change is sometimes much larger and sometimes much smaller
Question 4:
The classical model is appropriate for analysis of the economy in the
Answer
long run, since evidence indicates that money is not neutral in the long run.
long run, since real and nominal variables are essentially determined separately in the long run.
short run, provided money is not neutral.
short run, provided real and nominal variables are highly intertwined.
Question 5
Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes
Answer
both the short run and the long run.
the short run, but not the long run.
the long run, but not the short run.
neither the long run nor the short run
Question 6
Aggregate demand includes
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the quantity of goods and services both the government and customers abroad want to buy.
the quantity of goods and services neither the government nor customers abroad want to buy.
the quantity of goods and service the government wants to buy, but not the quantity of goods and services customers abroad want to buy.
the quantity of goods and services customers abroad want to buy, but not the quantity of goods and services the government wants to buy.
Question 7
The model of aggregate demand and aggregate supply
Answer
is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution of resources between markets to explain aggregate relationships.
is different from the model of supply and demand for a particular market, in that we have to separate real and nominal variables in the aggregate model.
is a straightforward extension of the model of supply and demand for a particular market, in which substitution of resources between markets is highlighted.
is a straightforward extension of the model of supply and demand for a particular market, in which the interaction between real and nominal variables is highlighted.
Question 8
When the price level falls the quantity of
Answer
consumption goods demanded rises, while the quantity of net exports demanded falls
consumption goods demanded and the quantity of net exports demanded both rise.
consumption goods demanded and the quantity of net exports demanded both fall.
consumption goods demanded falls, while the quantity of net exports demand rises.
Question 9
When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?
Answer
the real value of wealth
the interest rate
the value of currency in the market for foreign exchange
All of the above are correct.
Question 10
Other things the same, a decrease in the price level makes the dollars people hold worth
Answer
more, so they can buy more.
more, so they can buy less.
less, so they can buy more.
less, so they can buy less.
Question 11
When the price level falls
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households want to lend more, so the interest rate rises making the quantity of goods and services demanded rise.
households want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise.
households want to lend more, so the interest rate rises, making the quantity of goods and services demanded fall.
None of the above are correct.
Question 12
Other things the same, if the U.S. price level falls, then
Answer
the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate rises.
the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate falls.
the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate rises.
the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate falls.
Question 13
As the price level rises,
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the exchange rate falls, so net exports fall.
the exchange rate falls, so net exports rise.
the exchange rate rises, so net exports fall.
the exchange rate rises, so net exports rise.
Question 14
Other things the same, as the price level rises, the real value of a dollar
Answer
rises, and interest rates rise.
rises, and interest rates fall.
falls, and interest rates rise.
falls, and interest rates fall.
Question 15
Other things the same, as the price level falls, a country's exchange rate
Answer
and interest rates rise.
and interest rates fall.
falls and interest rates rise.
rises and interest rates fall.
Question 16
Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to desire
Answer
decreased consumption, shown as a movement to the left along a given aggregate-demand curve.
increase consumption, shown as a movement to the right along a given aggregate-demand curve.
decreased consumption, shifting the aggregate-demand curve to the left.
increased consumption, shifting the aggregate-demand curve to the right.
Question 17
Which of the following both shift aggregate demand left?
Answer
a decrease in taxes and at a given price level consumers feel more wealthy
a decrease in taxes and at a given price level consumers feel less wealthy
an increase in taxes and at a given price level consumers feel more wealthy
an increase in taxes and at a given price level consumers feel less wealthy
Question 18
If speculators bid up the value of the U.S. dollar in the market for foreign exchange, then
Answer
U.S. goods become more expensive relative to foreign goods so aggregate demand shifts right.
U.S. goods become less expensive relative to foreign goods so aggregate demand shifts right.
U.S. goods become more expensive relative to foreign goods so aggregate demand shifts left.
U.S. goods become less expensive relative to foreign goods so aggregate demand shifts left.
Question 19
The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change
Answer
in the price level and output.
in the price level, but not output.
in output, but not the price level.
in neither the price level nor output.
Question 20
The long-run aggregate supply curve shifts right if
Answer
immigration from abroad increases.
the capital stock increases.
technology advances.
All of the above are correct.
Question 21
According to the aggregate demand and aggregate supply model, in the long run an increase in the money supply leads to
Answer
increases in both the price level and real GDP.
an increase in real GDP but does not change the price level.
an increase in the price level but does not change real GDP.
no change in either the price level or real GDP.
Question 22
In the long run, technological progress
Answer
and increases in the money supply both make the price level rise.
and increases in the money supply both make the price level fall.
makes the price level rise, while increases in the money supply make prices fall.
makes the price level fall, while increases in the money supply make prices rise.
Question 23
If the price level rises above what was expected and nominal wages are fixed, then
Answer
production becomes less profitable so firms will hire fewer workers.
production becomes less profitable so firms will hire more workers.
production becomes more profitable so firms will hire fewer workers.
production become more profitable so firms will hire more workers.
Question 24
Other things the same, when the price level rises more than expected, some firms will have
Answer
higher than desired prices which increases their sales.
higher than desired prices which depresses their sales.
lower than desired prices which increases their sales.
lower than desired prices which depresses their sales.
Question 25
According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what they produce had
Answer
increased, so they would increase production.
increased, so they would decrease production.
decreased, so they would increase production.
decreased, so they would decrease production.
Question 26
The effects of a higher than expected price level are shown by
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shifting the short-run aggregate supply curve right.
shifting the short-run aggregate supply curve left.
moving to the right along a given aggregate supply curve.
moving to the left along a given aggregate supply curve.
Question 27
A decrease in the expected price level shifts
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only the long-run aggregate supply curve right.
only the short-run aggregate supply curve right.
both the short-run and the long-run aggregate supply curve right.
Neither the short-run nor the long-run aggregate supply curve right.
Question 28
Which of the following shifts short-run, but not long-run aggregate supply right?
Answer
a decrease in the actual price level
a decrease in the expected price level
a decrease in the capital stock
an increase in the money supply
Question 29
In 1986, OPEC countries increased their production of oil. This caused
Answer
the price level to rise.
aggregate supply to shift right.
unemployment to rise.
None of the above is correct.
Question 30
Keynes believed that economies experiencing high unemployment should adopt policies to
reduce the money supply.
reduce government expenditures.
increase aggregate demand.
increase aggregate supply.
Question 31
The interest-rate effect
Answer
depends on the idea that increases in interest rates decrease the quantity of goods and services demanded.
depends on the idea that increases in interest rates decrease the quantity of goods and services supplied.
is responsible for the downward slope of the money-demand curve.
is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
Question 32
The wealth effect stems from the idea that a higher price level
Answer
increases the real value of households' money holdings.
decreases the real value of households' money holdings.
increases the real value of the domestic currency in foreign-exchange markets.
decreases the real value of the domestic currency in foreign-exchange markets.
Question 33
According to John Maynard Keynes,
Answer
the demand for money in a country is determined entirely by that nation's central bank.
the supply of money in a country is determined by the overall wealth of the citizens of that country.
the interest rate adjusts to balance the supply of, and demand for, money.
the interest rate adjusts to balance the supply of, and demand for, goods and services.
Question 34
While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:
Answer
"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent."
"Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount."
"Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent."
"Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent."
Question 35
People choose to hold a smaller quantity of money if
Answer
the interest rate rises, which causes the opportunity cost of holding money to rise.
the interest rate falls, which causes the opportunity cost of holding money to rise.
the interest rate rises, which causes the opportunity cost of holding money to fall.
the interest rate falls, which causes the opportunity cost of holding money to fall.
Question 36
If expected inflation is constant, then when the nominal interest rate increases, the real interest rate
Answer
increases by more than the change in the nominal interest rate.
increases by the change in the nominal interest rate.
decreases by the change in the nominal interest rate.
decreases by more than the change in the nominal interest rate.
Question 37
When the Fed sells government bonds, the reserves of the banking system
decrease; increases
increase; decreases
increase; increases
decrease; decreases
Question 38
The opportunity cost of holding money
Answer
decreases when the interest rate increases, so people desire to hold more of it.
decreases when the interest rate increases, so people desire to hold less of it.
increases when the interest rate increases, so people desire to hold more of it.
increases when the interest rate increases, so people desire to hold less of it.
Question 39
If there is excess money supply, people will
Answer
deposit more into interest-bearing accounts, and the interest rate will fall.
deposit more into interest-bearing accounts, and the interest rate will rise.
withdraw money from interest-bearing accounts, and the interest rate will fall.
withdraw money from interest-bearing accounts, and the interest rate will rise.
Question 40
According to liquidity preference theory, if the price level increases, then the equilibrium interest rate
Answer
rises and the aggregate quantity of goods demanded rises.
rises and the aggregate quantity of goods demanded falls.
falls and the aggregate quantity of goods demanded rises.
falls and the aggregate quantity of goods demanded falls.
Question 41
If the MPC = 3/5, then the government purchases multiplier is
5/3
5/2
5
1.5
Question 42
If the multiplier is 5, then the MPC is
Answer
0.05
0.5
0.6
0.8
Question 43
In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is
Answer
$151.25.
$166.75.
$170.20.
$175.00.
Question 44
If the MPC is 0.80 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by
Answer
$80 billion.
$125 billion.
$500 billion.
$800 billion.
Question 45
Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand
Answer
shifts rightward by $62.5 billion.
shifts rightward by $50.0 billion.
shifts rightward by $32.5 billion.
None of the above is correct.
Question 46
The economist A.W. Phillips published a famous article in 1958 in which he showed a
negative correlation between the rate of unemployment and the rate of inflation.
positive correlation between the rate of unemployment and the rate of inflation.
negative correlation between the rate of unemployment and the rate of interest.
positive correlation between the rate of unemployment and the rate of interest
Question 47
In the short run, policy that changes aggregate demand changes
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both unemployment and the price level.
neither unemployment nor the price level.
only unemployment.
only the price level.
Question 48
If policymakers decrease aggregate demand, then in the short run the price level
Answer
falls and unemployment rises.
and unemployment fall.
and unemployment rise.
rises and unemployment falls.
Question 49
If the central bank increases the money supply, then in the short run prices
Answer
rise and unemployment falls.
fall and unemployment rises.
and unemployment rise.
and unemployment fall.
Question 50
According to the short-run Phillips curve, if the central bank increases the money supply, then
Answer
inflation and unemployment will both fall.
inflation and unemployment will both rise.
inflation will fall and unemployment will rise.
inflation will rise and unemployment will fall.