Multiple Choice Questions
1.The demand for money to cover unexpected expenditures and to meet emergencies is known as
the transactions demand for money.
the precautionary demand for money.
the asset demand for money.
the terminal demand for money.
Question2
When people want to hold money to make regular planned expenditures, this is
the transaction demand for money.
the asset demand for money.
the precautionary demand for money.
the spending demand for money.
Question3
One of the economic costs of holding currency is that
it fulfills no precautionary role.
it fulfills no transactions role.
it earns no interest income.
its real value always increases.
Question4
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.
Question5
The indirect effect of an increase in the money supply is to
raise interest rates so people will save more.
lower interest rates, which stimulates both investment and consumption spending.
put more cash in people's pockets, thereby increasing aggregate demand.
pay off a portion of the public debt.
Question6
In order to close a recessionary gap, the Fed would
decrease the money supply.
increase interest rates.
sell bonds.
increase the money supply.
Question7
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, a decrease in prices, and a 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.
Question8
When the U.S. dollar appreciates,
foreign residents demand more of U.S. goods, and U.S. residents desire to purchase more foreign goods.
foreign residents demand more of U.S. goods, and U.S. residents desire to purchase fewer foreign goods.
foreign residents demand fewer of U.S. goods, and U.S. residents desire to purchase more foreign goods.
foreign residents demand fewer of U.S. goods, and U.S. residents desire to purchase fewer foreign goods.
Question9
Other things being equal, the quantity theory of money suggests that any increase in the money supply
causes a reduction in the demand for money.
results in a decrease in the aggregate price level.
causes the aggregate level of nominal gross domestic product (GDP) to fall.
results in a proportionate increase in the price level.
Question10
The interest rate that the Fed charges banks to borrow funds from the Fed is the
discount rate.
federal funds rate.
money market rate.
nominal interest rate.
Question11
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.
Question12
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
Question13
Specialization in trade will be economically efficient if it is based upon
national security needs.
absolute advantage.
comparative advantage.
government regulations.
Question14
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 they have a comparative advantage in and then trade.
no trade among countries should occur.
Question15
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.
only countries that have absolute advantage in producing a good can participate.
the United States has a trade surplus.
Question16
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.
Question17
A new industry develops, and the government wants to protect it from foreign competition. Which one of the following arguments would appropriately describe this type of protection?
National security
Cartelization
Infant industry
Protecting American jobs
Question18
When one country dumps some of its products in another country, it
increases the aggregate level of employment in the importing country, thereby depressing that nation's market wages.
also exports new technology to the importing nation, which indirectly boosts the importing nation's real GDP.
sells its products abroad at a price lower than the price in the home market or lower than the cost of production.
also exports pollution-causing technologies, which creates environmental hazards in the receiving country.
Question19
Free trade policies may lead to
a decrease in world output.
price increases in world markets.
some labor sectors experiencing some short-term job loss.
None of the above
Question20
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.
Question21
Tariffs to limit imports to protect U.S. jobs will also
stimulate exports.
limit exports.
decrease import prices.
reduce domestic production of import-threatened products.
Question22
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.
Question23
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.
Question24
Special drawing rights (SDRs) are
a reserve asset that is created by the International Monetary Fund that countries can use to settle international payment obligations.
a liability payment from a branch bank to a nation's central bank.
a country's surpluses in their fiscal budgets.
exchanges of gold between nations.
Question25
When political instability is present in another country, the United States can expect
an increase in the capital account balance due to an increase in the current account.
an increase in the capital account balance due to the movement of assets to the U.S.
a decrease in the balance of payments due to a decrease in special drawing rights.
a decrease in the balance of payments due to a decrease in the demand for goods and services.
Question26
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.
Question27
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
Question28
Suppose that a currency's value in the foreign exchange market is determined solely by market supply and demand without any intervention by the government authority. In this case, the currency has
a fixed exchange rate.
a gold standard.
a price control in its exchange rate.
a floating exchange rate.
Question29
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.
Question30
A hedge is
a financial strategy that reduces the change of suffering losses that arises 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.