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.

2 points   

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

2 points   

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

2 points   

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.

2 points   

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

2 points   

Question 6

Aggregate demand includes

Answer

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

Question 11

When the price level falls

Answer

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.

2 points   

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.

2 points   

Question 13

As the price level rises,

Answer

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

Question 26

The effects of a higher than expected price level are shown by

Answer

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.

2 points   

Question 27

A decrease in the expected price level shifts

Answer

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.

2 points   

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

2 points   

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.

2 points   

Question 30

Keynes believed that economies experiencing high unemployment should adopt policies to

2  points   

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.

2 points   

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.

2 points   

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.

2 points   

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.”

2 points   

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.

2 points   

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.

2 points   

Question 37

When the Fed sells government bonds, the reserves of the banking system

decrease; increases

increase; decreases

increase; increases

decrease; decreases

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

Question 41

If the MPC = 3/5, then the government purchases multiplier is

5/3

5/2

5

1.5

2 points   

Question 42

If the multiplier is 5, then the MPC is

Answer

0.05

0.5

0.6

0.8

2 points   

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.

2 points   

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.

2 points   

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.

2 points   

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

2 points   

Question 47

In the short run, policy that changes aggregate demand changes

Answer

2 points

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.

2 points   

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.

2 points   

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.

2 points