Tes OSN 2008
1. The points emphasized in John Maynard Keynes's 1936 book The General Theory of Employment, Interest, and Money included
A) the role of expectations of future profits in determining investment.
B) the stability of expectations of future profits.
C) the government should take control of production and employment.
D) the division process.
2 . The topics that would have been found in a macroeconomics textbook in 1960 included
A) much discussion of monetary policy and a downplaying of fiscal policy.
B) the IS-LM model.
C) a full discussion of expectations.
D) the relationship between production and inflation.
3. Milton Friedman's critique of the dominant tradition in macroeconomics in the 1960s included
A) then-standard models greatly underestimated the government's ability to manage and control the economy.
B) then-standard models greatly overestimated the power of fiscal policy and greatly underestimated the power of monetary policy.
C) then-standard models greatly underestimated the degree of fixed prices.
D) the government's budget deficit or surplus told you most of what you needed to know about how economic policy was working.
4. Macroeconomists in the early 1960s
A) tended to think that an increase in aggregate demand would eventually cause expected inflation to increase, which would shift the Phillips curve to the right.
B) tended to think that an increase in aggregate demand would eventually cause expected inflation to increase, which would shift the Phillips curve to the left.
C) tended to think that the short-run Phillips curve was fixed and that aggregate demand could be increased without causing the Phillips curve to shift to the right.
D) tended to think that supply created its own demand.
5. The Milton Friedman - Edmund Phelps analysis of the Phillips curve
A) emphasized that it was fixed and that aggregate demand could be increased without causing the Phillips curve to shift to the right.
B) emphasized that an increase in aggregate demand would eventually cause expected inflation to increase, which would shift the Phillips curve to the left.
C) emphasized that an increase in unemployment would eventually cause expected inflation to increase, which would shift the Phillips curve to the right.
D) emphasized that an increase in aggregate demand would eventually cause expected inflation to increase, which would shift the Phillips curve to the right.
6. The key elements in understanding business cycles believed by economists working in both Keynesian and monetarist traditions include
A) there is no need to understand the determinants of nomianl aggregate demand.
B) there is no need to understand the division of changes in nominal aggregate demand into changes in production (and employment) and changes in prices (inflation or deflation).
C) real fundamentals effectively determine the values of real quantities like GDP even in the short run.
D) the need to understand the velocity of money, the determinants of investment spending, the multiplier, crowding out, the natural rate of unemployment, the rate of expected inflation, and the Phillips curve.
7. Real business cycle theorists believe that the key to understanding business cycles is
A) the need to understand the determinants of nomianl aggregate demand.
B) that the same theory that determines what happens in the long run should also be applied to explain fluctuations in the short run.
C) the need to understand the division of changes in nominal aggregate demand into changes in production (and employment) and changes in prices (inflation or deflation).
D) the need to understand the velocity of money, the determinants of investment spending, the multiplier, crowding out, the natural rate of unemployment, the rate of expected inflation, and the Phillips curve.
8 According to real business cycle theorists, the incentive to work hard now depends on, among other things,
A) the wage last year.
B) the real exchange rate.
C) the wage expected in the future.
D) the real price level.
9 According to real business cycle theorists, hours worked would increase
A) if the current wage increases relative to past wages.
B) if the future wage increases relative to the current wage.
C) if the real interest rate increases.
D) if highly valuable investment opportunities become less plentiful.
10 According to real business cycle theorists, hours worked would decrease
A) if labor becomes less productive.
B) if the current wage increases relative to the future wage.
C) if the real interest rate increases.
D) if highly valuable investment opportunities become more plentiful.
11 Problems of real business cycle theory pointed out by critics include
A) in the economy as a whole, total work hours decrease because some people become unemployed, not because most individuals work less hours.
B) in the economy as a whole, total work hours decrease because most individuals work less hours, not because some people become unemployed.
C) the unemployment rate is fairly stable over the business cycle.
D) high unemployment in a recession is a market-clearing phenomenon.
12 According to real business cycle theorists,
A) production fluctuates because of aggregate demand shocks.
B) production fluctuates because of inadequate monetary policy.
C) production fluctuates because of international shocks.
D) production fluctuates because of the changing value of output and the changing productivity of the economy.
13 According to real business cycle theories, the reasons why production increases include
A) an improvement in production technology.
B) a unique opportunity for consumption.
C) a decrease in the value of output.
D) an expansionary fiscal policy.
14 Critics of real business cycle theory have problems with the claim that the economy experiences
A) large negative shocks to aggregate demand.
B) large negative shocks to consumption spending.
C) large negative shocks to productivity.
D) contractionary fiscal policy.
15 Since at least the 1930s, the mainstream of macroeconomics
A) has attributed the sluggishness of aggregate demand - the fact that the Phillips curve has a slope - to stickiness in wages and prices.
B) has attributed the sluggishness of aggregate supply - the fact that the Phillips curve has a slope - to stickiness in wages and prices.
C) has attributed the sluggishness of aggregate supply - the fact that the Phillips curve is vertical - to the flexibility of wages and prices.
D) has attributed the sluggishness of aggregate demand - the fact that the monetary policy reaction function has a slope - to stickiness in wages and prices.
16 The reasons suggested by New Keynesian Economics for the stickiness in wages and prices include
A) prices do not adjust immediately and completely in the short run because it is costly to change them.
B) a price adjustment or a failure to adjust prices on the part of one firm does not affect other firms.
C) one firm's best choice for its price depends only on that firm's costs.
D) changing prices does allow firms to maximize profits.
17 In the standard view, fiscal deficits
A) stimulate the economy in the long run as long as the central bank takes action to raise interest rates.
B) stimulate the economy in the long run as long as the central bank does not take action to raise interest rates.
C) stimulate the economy in the long run as long as the central bank does not take action to neutralize the fiscal stimulus.
D) stimulate the economy in the short run as long as the central bank takes actions to raise interest rates.
18 The problems that economists have with Ricardian Equivalence include
A) there is no incentive for people to fully work out what an increased deficit in the present implies for their future taxes.
B) myopia - perhaps people are not near-sighted enough to fully work out what an increased deficit in the present implies for their future taxes.
C) liquidity constraints - perhaps people can't easily borrow and lend as needed.
D) the beneficiaries of government spending today are the ones who will have to pay the increased taxes in the future.
19 The reasons offered by economists to explain why consumers seem unwilling to borrow to maintain consumption spending during a recession include
A) the typical consumer is impatient and risk averse.
B) current income is not a good proxy for permanent income.
C) the typical consumer is a risk taker.
D) psychologists should take seriously what economists have to say about how humans reason.
20 The reasons why monetary policy could become less powerful in the future include
A) deposits at commercial banks will become more important in the future.
B) deposits at savings banks will become more important in the future.
C) people will decrease their usage of reserve-backed commercial bank deposits as transactions balances.
D) less and less transactions will be carried out by credit cards and debit cards.
1 Between the United States Civil War in the 1860s and the end of the twentieth century the share of the U.S. labor force engaged in agriculture
A) increased from about 50 percent to about 80 percent.
B) decreased from about 80 percent to about 50 percent.
C) decreased from about 50 percent to about 2 percent.
D) decreased from about 60 percent to about 25 percent.
2 In the United States economy 100 years ago,
A) the government social insurance state was quite well developed.
B) the tax system was very progressive.
C) every person had easy access to all occupations.
D) most households found it very difficult to borrow.
3 The automatic stabilizers which have been developed in the last 100 years to help dampen the business cycle
A) deposit insurance.
B) regressive income tax.
C) inflation insurance.
D) guaranteed minimum income.
4 In the late nineteenth century, the bulk of the improvements in labor productivity
A) came from improvements in the efficiency of labor.
B) came from labor deepening: the building up of the infrastructure and the factories of the country.
C) came from labor working longer hours.
D) came from capital deepening: the building up of the infrastructure and the factories of the country.
5 In the twentieth century, the bulk of the improvements in labor productivity
A) came from capital deepening: the building up of the infrastructure and the factories of the country.
B) came from labor deepening: the building up of the infrastructure and the factories of the country.
C) came from improvements in the efficiency of labor.
D) came from labor working longer hours.
6 Changes that will transform the macroeconomy in the future include
A) continued increase in financial flexibility that allows consumers to borrow more easily.
B) less need for productivity increases in agriculture and manufacturing.
C) international investments will become more difficult to make.
D) the importance of international trade will decrease.
7 If liquidity constraints - the inability to borrow - continue to decrease for households,
A) the marginal propensity to consume will increase.
B) the marginal propensity to consume will decrease.
C) the marginal propensity to consume will not be affected.
D) the marginal propensity to save will decrease.
8 The marginal propensity to expend will decrease
A) if international trade continues to increase.
B) if liquidity constraints - the inability to borrow - continue to decrease for households.
C) if international investments become easier to make.
D) if the marginal propensity to export decreases.
9 The multiplier is likely to get smaller
A) if international trade starts to decrease.
B) if the exchange rate sensitivity of exports increases.
C) if liquidity constraints - the inability to borrow - continue to decrease for households.
D) if the interest sensitivity of investment increases.
10 U.S. merchandise imports
A) have doubled as a share of total goods production since 1960.
B) have doubled as a share of total goods production since 1900.
C) have quadrupled as a share of total goods production since 1960.
D) have tripled as a share of total goods production since 1900.
11 Unanticipated large-scale inventory accumulation or drawdowns
A) have been a minor source of fluctuations in employment and output over the past century.
B) have been a principal source of fluctuations in employment and output over the past century.
C) have been a principal cause of inflation over the past century.
D) have been a principal cause of interest rate movements over the past century.
12 Prior to World War I
A) the U.S. economy experienced recessions that were much shorter in length than post-World War II recessions.
B) experienced expansions that were much longer in length than post-World War II expansions.
C) fiscal and monetary policy worked together to be effective stabilization policies in the United States.
D) neither fiscal nor monetary policy were feasible as stabilization policy in the United States.
13 In the post-World War II era
A) the business cycle has been driven by economic policies that allowed unemployment to rise, followed by expansionary fiscal and monetary policies to reverse the rise in unemployment.
B) the business cycle has been about 25 to 30 percent smaller than prior to World War I.
C) inflation has been less of a problem than prior to World War I.
D) borrowing by households has decreased from what it was prior to World War I.
14 The facts about the Great Depression include
A) from full employment in 1929, real GDP fell until it was about 10 percent below potential output by 1933.
B) consumption spending collapsed: by 1932 real consumption spending was less than one-ninth of what it had been three years before.
C) unemployment had reached a quarter of the labor force by 1933.
D) investment spending held fairly steady throughout the 1930s.
15 The possible shocks that triggered the Great Depression include
A) the stock market crash of 1931.
B) an increase in imports caused by a sharp increase in the marginal propensity to import.v
C) a downward shift in the price of gold.
D) a downward shift in the baseline level of investment spending caused by a decrease in investment in residential housing.
16 Falling price levels reduce real GDP
A) because real exchange rates increase, reducing exports and increasing imports, and because wealth is redistributed from creditors to debtors.
B) because real income decreases and consumption spending decreases, and because income is redistributed from debtors to creditors.
C) because real interest rates decrease, reducing investment spending, and because wealth is redistributed from creditors to debtors.
D) because real interest rates increase, reducing investment spending, and because wealth is redistributed from debtors to creditors.
17 Europe in the 1990s
A) has experienced remarkably low unemployment rates.
B) has experienced growth rates that have been much higher than in the United States.
C) has experienced unemployment rates that have been much higher than in the United States.
D) has experienced inflation rates that have been much lower than in the United States.
18 In western Europe since the 1970s
A) the Phillips Curve seems to have shifted to the left.
B) the Phillips Curve seems to have been remarkably stable.
C) the Monetary Policy Reaction Curve seems to have shifted to the left.
D) the Phillips Curve seems to have shifted to the right.
19 The potential for a stock market and a real estate price collapse to become a real problem
A) is worsened when lots of enterprises and individuals have been careful not to borrow heavily using the inflated values as collateral.
B) is worsened when lots of enterprises and individuals have borrowed heavily using the inflated values as collateral.
C) is lessened when lots of enterprises and individuals have borrowed heavily using the inflated values as collateral.
D) is not really affected when lots of enterprises and individuals have borrowed heavily using the inflated values as collateral.
20 In Japan in the 1990s
A) the IS curve shifted to the right because of an increase in the marginal propensity to consume.
B) the LM curve shifted to the left partially due to investment spending being depressed.
C) the IS curve shifted to the left partially due to investment spending being depressed.
D) the LM curve became more vertical because monetary policy was tight.
1 Nominal GDP is calculated by
A) adding up all of the goods and services produced in the economy, valued in current year market prices.
B) adding up all of the goods and services produced in the economy, valued in base year market prices.
C) adding up all of the final goods and services produced in the economy, valued in current year market prices.
D) adding up all of the final goods and services produced in the economy, valued in base year market prices.
2 The unemployment rate
A) is the principal measure of material well-being and economic productivity.
B) is the proportional rate of change of the price level.
C) is the principal determinant of the level of investment, and a principal determinant of future economic growth.
D) is the principal measure of how far production is falling short of potential output.
3 The real long-term interest rate
A) is the principal determinant of the level of investment, and a principal determinant of future economic growth.
B) is the principal measure of material well-being and economic productivity.
C) is the principal measure of how far production is falling short of potential output.
D) is the proportional rate of change of the price level.
4 Subtracting the rate of inflation from nominal interest rates
A) gives you the real exchange rate.
B) gives you the real interest rate.
C) gives you the real unemployment rate.
D) gives you real GDP.
5 An individual in the Mexico wishing to invest in Europe would need to _____________ in the foreign exchange market.
A) sell pesos and buy euros
B) buy pesos and sell euros
C) buy dollars and sell pesos
D) sell euros and sell dollars
6 The price of stocks will decrease if
A) investors become optimistic and expect that long-term earnings will decrease.
B) investors become pessimistic and expect that long-term earnings will decrease.
C) the risk premium associated with holding stocks decreases.
D) the real interest rate decreases.
7 If the risk premium associated with holding stocks increases at the same time that the real rate of interest increases,
A) we would initially expect the price of stocks to increase.
B) we would initially expect the price of stocks to decrease.
C) we would initially expect the price of bonds to decrease.
D) we would be unable to determine the impact on the price of stocks unless we knew the relative magnitudes of the changes.
8 If investors become more pessimistic and expect that long-term earnings will decrease at the same time that the real rate of interest decreases,
A) we would initially expect the price of stocks to increase.
B) we would initially expect the price of bonds to decrease.
C) we would be unable to determine the impact on the price of stocks unless we knew the relative magnitudes of the changes.
D) we would initially expect the price of stocks to decrease.
9 The information summed up by the real value of the stock market includes
A) the desire of businesses to purchase capital goods.
B) the current level of earnings, or profits.
C) the level of savings in the economy.
D) attitudes toward consumption spending.
10 If the nominal interest rate is 9% and rate of inflation is 6%, the real interest rate is approximately
A) 15%.
B) 3%.
C) 1.5%.
D) -3%.
11 If the inflation rate, as measured by the CPI, over the past year was 5%, a basket of goods and services that cost _____ a year ago would be equivalent to _______ at the current price level.
A) $200,000, $210,000
B) $150,000, $155,000
C) $50,000, $55,000
D) $200,000, $201,000
12 If the CPI changes from 110 in one year to 118 the next, the rate of inflation over that time period is
A) 8%.
B) 218%.
C) 7.27%.
D) 107.27%.
13 The labor force is composed of those who are
A) employed plus those that are not working.
B) unemployed plus those who are looking for work.
C) employed plus those who would like to work but have given up looking for work.
D) employed plus those who are looking for work.
14 Suppose that real GDP is $10 trillion and the unemployment rate is 5.5%. If, over the next year, potential output grows by 2 percent and the unemployment rate decreases by 1 percentage point to 4.5%, real GDP will increase to
A) $10.25 trillion.
B) $10.45 trillion.
C) $10.3 trillion.
D) $10.40 trillion.
15 The reasons that Okun's Law coefficient is greater than one include
A) technological change occurs.
B) the unemployment rate counts discouraged workers.
C) average hours of work per week increase as the economy comes out of a recession.
D) when business returns to normal, firms initially ask existing employees to work less hours.
16 Since 1948, the labor force participation rate
A) has been increasing for males and decreasing for females.
B) has been increasing for both males and females.
C) has been decreasing for both males and females.
D) has been decreasing for males and increasing for females.
17 If nominal GDP was $9.8 trillion and the GDP deflator was 140, real GDP would be
A) $70 billion ($.07 trillion).
B) $7 trillion.
C) $8.4 trillion.
D) $13.72 trillion.
18 Residential structures are a component of
A) consumption expenditures.
B) government expenditures.
C) net exports.
D) investment expenditures.
19 Which of the following would be considered a component of government purchases?
A) A pension check sent to a retired federal employee.
B) A Social Security check sent to an individual.
C) The purchase of a military aircraft.
D) A check sent to a disabled veteran.
20 Stock prices are likely to increase if
A) investors expect long-run earnings to decrease.
B) investors are more willing to tolerate risk than before.
C) investors become more risk averse.
D) interest rates increase.
1 Which of the following is not a concern of macroeconomics?
A) economy-wide employment
B) changes in the aggregate price level
C) economy-wide levels of production
D) wages in particular occupations
2 Which of the following is not one of the six key variables in macroeconomics?
A) the unemployment rate
B) the price of corn
C) the inflation rate
D) the interest rate
3 Which of the following is not one of the six key variables in macroeconomics?
A) the level of employment in the restaurant industry
B) the exchange rate
C) the inflation rate
D) the level of the stock market
4 Real GDP is a measure of the economy's
A) employment level
B) money supply
C) stock market level
D) output level
5 When the domestic currency's value in terms of other currencies is high,
A) we say the domestic currency is depreciated.
B) we say the domestic currency has excess value.
C) we say the domestic currency is overvalued.
D) we say that foreign currencies are overvalued.
6 If a domestic currency has depreciated
A) foreign-made goods are cheap relative to domestic-made goods.
B) domestic-made goods are cheap relative to foreign-made goods.
C) government spending is likely to decrease.
D) the money supply is likely to increase.
7 Periods in which production increases and unemployment decreases are called
A) macroeconomic expansions.
B) business cycles.
C) recessions, or possibly, depressions.
D) inflation.
8 Microeconomists
A) focus on the economy as a whole.
B) spend much time analyzing how total income changes, and how changes in income cause changes in other modes of economic behavior.
C) consider the possibility that decision makers might change the quantities they produce before they change the prices they charge.
D) assume that economic adjustment occurs first through prices that change to balance supply and demand.
9 Macroeconomists
A) hold total income constant.
B) spend a great deal of time and energy investigating how people form their expectations and change them over time.
C) don't worry much about how decision makers form their expectations.
D) assume that economic adjustment occurs first through prices that change to balance supply and demand.
10 In the latter half of the 1990s, unemployment in the United States was
A) greater than its trend level.
B) equal to its trend level.
C) less than its trend level.
D) not relevant to its trend level.
11 Which of the following is not likely to be considered part of economic activity?
A) Purchasing a new automobile.
B) Working in a restaurant.
C) Trimming the bushes in your yard.
D) Buy a new book.
12 Which of the following is not likely to be considered part of economic activity?
A) Getting your automobile washed at as car wash.
B) Washing your clothes in a laundromat.
C) Fixing you own car.
D) Leasing a new automobile.
13 An example of an investment good is
A) a stock certificate for General Motors.
B) machine tools.
C) certificates of deposit.
D) mutual funds.
14 When interest rates increase,
A) consumption expenditures tend to increase.
B) investment expenditures tend to increase.
C) investment expenditures tend to decrease.
D) government expenditures tend to decrease.
15 The yield curve shows the difference between
A) short-term and long-term stock dividends.
B) short-term and long-term stock prices.
C) short-term and long-term inflation rates.
D) short-term and long-term interest rates.
16 The 1970s was a decade of generally
A) low output growth, increasing unemployment, and decreasing inflation.
B) high output growth, increasing unemployment, and decreasing inflation.
C) low output growth, increasing unemployment, and increasing inflation.
D) high output growth, decreasing unemployment, and decreasing inflation.
17 The 1990s was a decade of generally
A) low output growth, increasing unemployment, and increasing inflation.
B) high output growth, decreasing unemployment, and decreasing inflation.
C) high output growth, increasing unemployment, and decreasing inflation.
D) high output growth, increasing unemployment, and decreasing inflation.
18 Which of the following macroeconomic scenarios would likely decrease your chances of receiving a reasonable job offer as you near graduation from your college of university?
A) low output growth and high unemployment.
B) low inflation and low unemployment.
C) high output growth and low unemployment.
D) low output growth and high inflation.
19 During most of the 1970s, real GDP per worker in the United States was
A) greater than its trend level.
B) equal to its trend level.
C) less than its trend level.
D) not relevant to its trend level.
20 Which of the following is not likely to be considered part of economic activity?
A) Washing your automobile.
B) Hiring someone to mow your lawn.
C) Making hamburgers in a restaurant.
D) Renting an apartment
1 The relationship between the government's debt and the government's deficit (or surplus) is
A) the change in the deficit for a year is equal to the debt (or surplus) for that year.
B) the change in the debt for a year is equal to the deficit (or surplus) for that year.
C) the change in the surplus for a year is equal to the debt (or deficit) for that year.
D) the debt and deficit are the same.
2 One of the reasons why economists are interested in the debt and the deficit is
A) the deficit is a convenient measure of monetary policy's role in stabilization policy.
B) the deficit affects the position of the IS curve.
C) the deficit affects the position of the LM curve.
D) the debt and deficit are not very closely connected with national savings and investment.
3 A rising government debt
A) tends to increase capital formation and lower the economy's long-run steady-state growth path.
B) tends to decrease capital formation and lower the economy's long-run steady-state growth path.
C) tends to increase the steady-state GDP per worker.
D) means that taxes in the future will be lower because of lower interest charges.
4 A decreasing government debt
A) tends to decrease capital formation.
B) tends to decrease the economy's long-run steady-state growth path.
C) means that taxes in the future will be higher to pay higher interest charges.
D) tends to increase the steady-state GDP per worker.
5 An increase in government purchases
A) shifts the LM curve to the right.
B) makes the IS curve more vertical.
C) makes the LM curve more horizontal.
D) shifts the IS curve to the right.
6 An increase in government tax collections
A) shifts the IS curve to the left and may change its slope.
B) shifts the LM curve to the right and may change its slope.
C) shifts the IS curve to the right and may change its slope.
D) shifts the LM curve to the left and may change its slope.
7 If the Federal Reserve tightens monetary policy so that real interest rates increase and real GDP decreases,
A) tax revenues will decrease, increasing the government's cash deficit, but not changing the full-employment budget balance.
B) tax revenues will decrease, decreasing the government's cash deficit, and increasing the full-employment deficit.
C) tax revenues will increase, decreasing the government's cash deficit, and decreasing the full-employment deficit.
D) tax revenues will increase, decreasing the government's cash deficit, but not changing the full-employment budget balance.
8 When real GDP decreases and unemployment increases
A) tax revenue increases, swinging the cash budget toward surplus.
B) social welfare spending decreases, swinging the cash budget toward deficit.
C) social welfare spending increases, swinging the cash budget toward surplus.
D) tax revenue decreases, swinging the cash budget toward deficit.
9 Further adjustments that need to be made to the reported cash budget level include
A) an adjustment for inflation in the stock market.
B) an adjustment for public investment.
C) an adjustment for public consumption.
D) an adjustment for assets and generational accounting.
10 Economists suggest that governments should adopt capital budgeting because
A) the cost of consumption goods should be amortized over a period of time rather than completely charged to the budget when incurred.
B) the federal government is located in Washington, D.C.
C) the cost of capital goods should be amortized over a period of time rather than completely charged to the budget when incurred.
D) the true debt is understated unless capital budgeting is used.
11 Fiscal policy is sustainable if
A) the debt-to-money supply ratio is heading for a steady state.
B) the deficit-to-money supply ratio is heading for a steady state.
C) the deficit-to-government spending ratio is heading toward a steady state.
D) the debt-to GDP ratio is heading for a steady state.
12 In an economy with a constant cash-balance deficit of 2 percent of GDP, a long-run inflation rate of 3% per year, a labor force growth rate of 2% per year, and a growth rate of output per worker of 1% per year,
A) the steady-state debt-to-GDP ratio would be 1/2.
B) the steady-state debt-to-GDP ratio would be 1/3.
C) the steady-state deficit-to-GDP ratio would be 1/2.
D) the steady-state deficit-to-GDP ratio would be 1/3.
13 If the labor force growth rate increases,
A) the steady-state deficit-to-GDP ratio will decrease.
B) the steady-state debt-to-GDP ratio will decrease.
C) the steady-state debt-to-GDP ratio will increase.
D) the steady-state deficit-to-GDP ratio will increase.
14 The higher the debt-to-GDP ratio,
A) the less risky an investment do financiers judge the debt of the country and the less willing they will be to buy and hold that debt.
B) the less risky an investment do financiers judge the debt of the country and the more willing they will be to buy and hold that debt.
C) the more risky an investment do financiers judge the debt of the country and the less willing they will be to buy and hold that debt.
D) the more risky an investment do financiers judge the debt of the country and the more willing they will be to buy and hold that debt.
15 The lower the debt-to-GDP ratio,
A) the more risky an investment do financiers judge the debt of the country, reducing the interest rate that governments will have to pay to convince people to buy and hold the debt.
B) the less risky an investment do financiers judge the debt of the country, increasing the interest rate that governments will have to pay to convince people to buy and hold the debt.
C) the less risky an investment do financiers judge the debt of the country, reducing the interest rate that governments will have to pay to convince people to buy and hold the debt.
D) the more risky an investment do financiers judge the debt of the country, increasing the interest rate that governments will have to pay to convince people to buy and hold the debt.
16 A deficit is sustainable only if
A) the associated steady-state debt-to-GDP ratio is low enough that investors judge the debt safe enough to buy and hold.
B) the associated steady-state debt-to-GDP ratio is high enough to attract risk adverse investors.
C) the associated steady-state debt-to-GDP ratio is high enough that investors judge the debt safe enough to buy and hold.
D) it is equal to zero.
17 The only two time periods in which the upward movement in the debt-to-GDP ratio was not associated with a war were
A) the 1970s during the Carter presidency and the 1990s during the Clinton presidency.
B) the 1940s during the Truman presidency and the 1950s during the Eisenhower presidency.
C) the Great Depression during the 1930ss and the 1940s during the Truman presidency.
D) the Great Depression during the 1930s and the 1980s during the Reagan and Bush presidencies.
18 In the short-run, a government budget deficit produced by a tax cut
A) increases consumption spending and shifts the LM curve to the right.
B) increases consumption spending and shifts the Phillips curve to the right.
C) decreases consumption spending and shifts the IS curve to the left.
D) increases consumption spending and shifts the IS curve to the right.
19 An increase in the government's budget deficit
A) will lead to a decrease in imports, a depreciated dollar, an increase in exports, and a decrease in the international trade deficit.
B) will lead to an increase in imports, a depreciated dollar, an increase in exports, and an uncertain effect on the international trade deficit.
C) will lead to an increase in imports, an appreciated dollar, a decrease in exports, and an increase in the international trade deficit.
D) will lead to a decrease in imports, an appreciated dollar, a decrease in exports, and an uncertain effect on the international trade deficit.
20 Lower full-employment deficits
A) shift the IS curve to the right, raise real interest rates, and reduce consumption spending.
B) shift the IS curve to the right, raise real interest rates, and reduce investment spending.
C) shift the IS curve to the left, lower interest rates, and increase consumption spending.
D) shift the IS curve to the left, lower interest rates, and increase investment spending.
1 Changes in fiscal policy
A) shift the LM curve out and back.
B) shift the Phillips curve out and back.
C) shift the potential output curve out and back.
D) shift the IS curve out and back.
2 Changes in monetary policy
A) shift the Phillips curve out and back.
B) shift the LM curve out and back.
C) shift the IS curve out and back.
D) shift the potential output curve out and back.
3 Fiscal and monetary policy, along with the economic environment,
A) set the level of aggregate supply and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
B) set the level of aggregate supply and move the economy along the aggregate demand curve, raising and lowering inflation and unemployment.
C) set the level of aggregate demand and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
D) set the level of aggregate demand and move the economy along the aggregate demand curve, raising and lowering inflation and unemployment.
4 Changes in expectations of inflation, changes in the natural rate of unemployment, and supply shocks
A) change the position of the short-run Phillips curve, raising and lowering inflation and unemployment.
B) change the level of aggregate demand and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
C) change the level of aggregate supply and move the economy along the Phillips curve, raising and lowering inflation and unemployment.
D) change the level of aggregate demand and move the economy along the aggregate demand curve, raising and lowering inflation and unemployment.
5 If the Federal Reserve wanted to pursue an expansionary monetary policy, it could
A) lower the discount rate.
B) sell U.S. government bonds.
C) increase the reserve requirement.
D) raise credit card interest rates.
6 A policy option for a country that finds itself in a liquidity trap situation is
A) expansionary fiscal policy via increased government purchases.
B) expansionary monetary policy designed to decrease interest rates and increase investment spending.
C) contractionary fiscal policy via increased taxes.
D) contractionary monetary policy designed to decrease inflation expectations.
7 The past forty years have seen the level of Federal Government spending
A) as a share of GDP increase significantly, with the share of mandatory spending decreasing and discretionary spending increasing.
B) as a share of GDP remain roughly constant, with the share of mandatory spending increasing and discretionary spending decreasing.
C) as a share of GDP remain roughly constant, with the share of mandatory spending decreasing and discretionary spending increasing.
D) as a share of GDP has decreased, with the share of mandatory spending increasing and discretionary spending decreasing.
8 Unemployment and inflation were low and stable in the United States
A) between 1940 and 1950.
B) between the mid-1950s and the late 1960s.
C) between 1967 and 1975.
D) between 1976 and 1983.
9 The natural rate of unemployment and expected inflation increased in the United States
A) between 1967 and 1975.
B) between the mid-1950s and the late 1960s.
C) between the mid-1980s and the mid-1990s.
D) during the 1930s.
10 The stagflation of the early 1970s was the result of
A) expansionary aggregate demand policies and a decrease in expected inflation
B) contractionary aggregate demand policies and a decrease in expected inflation.
C) expansionary aggregate demand policies.
D) expansionary aggregate demand policies and an increase in expected inflation.
11 The velocity of money since 1980 has been
A) unstable and predictable around a steady upward trend.
B) stable and predictable with a constant downward trend.
C) unstable and unpredictable without any discernable trend.
D) stable and predictable with a constant upward trend.
12 Each of the following is a component of the Conference Board's Index of Leading Indicators except
A) stock prices, 500 common stocks.
B) average weekly initial claims for unemployment insurance.
C) manufacturers' new orders, consumer goods and materials.
D) average weekly initial claims for disability insurance.
13 As an example of the problem of using only the money supply as a leading indicator, during 1992 if M1 were used as the measure of the money supply rather than M3
A) monetary policy would have been deemed contractionary, deepening the 1990-92 recession.
B) monetary policy would have been deemed expansionary, resulting in short-term real interest rates of less than zero.
C) monetary policy would have been deemed expansionary, resulting in short-term nominal interest rates of less than zero.
D) monetary policy would have been deemed neutral.
14 If the reserve requirement is 4% and the Federal Reserve increases the reserves in the banking system by $20 billion, the potential increase in the money supply is
A) $5000 billion.
B) $500 billion.
C) $50 billion.
D) $5 billion.
15 If the reserve requirement is 8%, the money multiplier is
A) 12.5.
B) 125.
C) 1.25.
D) .125.
16 If the reserve requirement is 8%, households' and businesses' desired holding ratio of currency-to-deposits is .1, and the ratio of excess reserves to total deposits that banks desire to hold is .04, the money multiplier is
A) 6.1.
B) 1.2.
C) 50.
D) 5.
17 A decrease in the reserve requirement will
A) decrease the value of the money multiplier.
B) increase the value of the money multiplier.
C) increase the value of the autonomous spending multiplier.
D) decrease the value of the autonomous spending multiplier.
18 If households' and businesses' decide to hold more currency relative to deposits,
A) the value of the autonomous spending multiplier will decrease.
B) the value of the money multiplier will increase.
C) the value of the money multiplier will not change.
D) the value of the money multiplier will decrease.
19 If the principal instability in the economy is due to shifts in the IS curve,
A) targeting interest rates will stabilize the magnitude of shocks to the economy.
B) targeting the exchange rate will stabilize the magnitude of the shocks to the economy.
C) targeting interest rates will do little or nothing to stabilize the magnitude of shocks to the economy.
D) the Federal Reserve should take monetary policy action to shift the IS curve in the opposite direction of the shock.
20 If the principal instability in the economy is due to instability in the velocity of money,
A) targeting interest rates will stabilize the magnitude of shocks to the economy.
B) targeting interest rates will do little or nothing to stabilize the magnitude of shocks to the economy.
C) it would be better to have a monetary policy reaction function that reacts to leading indicators and outcomes.
D) the Federal Reserve should take monetary policy action to shift the IS curve in the opposite direction of the shock.
1 Changes in _____________ is the driving force behind the business cycle.
A) consumption spending
B) investment spending
C) the money supply
D) government purchases
2 In the sticky-price model, the interest rate is set
A) directly by businesses or indirectly by the combination of the stock of money and the liquidity preference of households and the central bank.
B) directly by households or indirectly by the combination of the stock of money and the liquidity preference of businesses and the central bank.
C) directly by Congress or indirectly by the combination of the stock of money and the liquidity preference of households and businesses.
D) directly by the central bank or indirectly by the combination of the stock of money and the liquidity preference of households and businesses.
3 A source of fluctuations in investment spending is
A) changes in government expectations of future output growth.
B) changes in households' expectations about future output growth.
C) changes in households' expectations about future risk.
D) changes in investors' expectations about future profits.
4 The increase in the interest rate that the market charges on _________ loans over __________ loans is called the ____________.
A) long-term; short-term; term premium
B) short-term; long-term; term premium
C) long-term; short term; yield premium
D) short-term; long-term; yield premium
5 The riskier that lenders believe a loan to be,
A) the higher will be the term premium they will charge.
B) the lower will be the risk premium they will charge.
C) the higher will be the risk premium they will charge.
D) the more willing they will be to make the loan at the risk-free interest rate.
6 The slope of the investment function
A) tells us by how much investment spending is discouraged by a one-unit increase in the short-term, risky, nominal interest rate.
B) tells us what the level of investment spending would be if the long-term, risky, real interest rate were 0.
C) tells us what the level of investment spending would be if the short-term, risky, nominal interest rate were 0.
D) tells us by how much investment spending is discouraged by a one-unit increase in the long-term, risky, real interest rate.
7 An increase in the domestic real interest rate
A) will reduce the real exchange rate and reduce the level of exports.
B) will increase the real exchange rate and increase the level of exports.
C) will reduce the real exchange rate and increase the level of exports.
D) will increase the real exchange rate and reduce the level of exports.
8 The IS curve tells us
A) what equilibrium level of real GDP corresponds to each value of the nominal interest rate.
B) what equilibrium level of real GDP corresponds to each value of the real interest rate.
C) what equilibrium level of real GDP corresponds to each value of the price level.
D) what equilibrium level of real GDP corresponds to each value of the money supply.
9 The factors that influence the slope of the IS curve include
A) the baseline level of consumption spending and the level of foreign real GDP.
B) the marginal propensity to consume and the interest rate-sensitivity of investment spending.
C) the level of real GDP and the baseline level of investment spending.
D) foreign real interest rates and the level of government purchases.
10 If the marginal propensity to expend is equal to .8, the interest rate sensitivity of investment is equal to $100 billion, the interest rate sensitivity of the exchange rate is 10, and the exchange rate sensitivity of exports is $7 billion, a one percentage point change in the real interest rate will change the level of aggregate demand by
A) $170 billion.
B) -$850 billion.
C) $850 billion.
D) -$170 billion.
11 A decrease in the baseline level of consumption spending will
A) shift the IS curve to the left.
B) shift the IS curve to the right.
C) make the IS curve more vertical.
D) make the IS curve less vertical.
12 A decrease in the marginal propensity to consume will
A) shift the IS curve to the left.
B) shift the IS curve to the right.
C) make the IS curve more vertical.
D) make the IS curve less vertical.
13 If the economy is operating below (to the left of) the IS curve, then real GDP is _______ than planned expenditure,
A) greater; inventories are decreasing faster than expected, and businesses will reduce production.
B) greater; inventories are increasing faster than expected, and businesses will reduce production.
C) less; inventories are increasing faster than expected, and businesses will increase production.
D) less; inventories are decreasing faster than expected, and businesses will increase production.
14 If the MPE is equal to .8, the baseline level of spending is $3 trillion, a one percentage point decrease in the real interest rate increases investment spending by $100 billion and exports by $20 billion, and the real interest rate is equal to 5%, then the equilibrium level of real GDP is
A) $15 trillion.
B) $18 trillion.
C) $3 trillion.
D) $12 trillion.
15 If the MPE is equal to .8, a one percentage point decrease in the real interest rate increases investment spending by $100 billion and exports by $20 billion, the real interest rate is equal to 5%, and the baseline level of investment spending increases by $100 billion, the change in the equilibrium level of real GDP would be
A) -$.125 trillion
B) $.125 trillion.
C) $.5 trillion.
D) -$.5 trillion.
16 If the Federal Reserve raises interest rates,
A) the IS curve will shift to the left and the level of aggregate demand will decrease.
B) the level of aggregate demand will move upward along the IS curve and thus decrease.
C) the level of aggregate demand will move downward along the IS curve and thus increase.
D) the IS curve will shift to the right and the level of aggregate demand will increase.
17 Suppose that the Federal Reserve has decided that there is a deflationary gap of $1 trillion in the economy. Suppose further that the estimated slope of the IS curve is -$500 billion. By how many percentage points would the Fed need to decrease the real interest rate in order close the deflationary gap?
A) 5
B) 2
C) .5
D) 20
18 The major determinant of the term premium is
A) expectations of the expected profitability of investment projects.
B) expectations of future consumption spending.
C) expectations of future monetary policy.
D) expectations of future government purchases.
19 In the early 1980s (1982 to 1985) the US economy
A) experienced a shifting of the IS curve to the right because of increased business optimism, tax increases, and decreased government purchases.
B) experienced a shifting of the IS curve to the right because of tax reductions, and increased government purchases.
C) experienced a movement down and to the right along the IS curve.
D) experienced a shifting of the IS curve to the right due to a decrease in interest rates.
20 From 1992 until the end of the decade, the US economy
A) experienced a shifting of the IS curve to the left due to an increase in interest rates.
B) experienced a movement down and to the right along the IS curve.
C) experienced a shifting of the IS curve inward because of increased business optimism and tight fiscal policy.
D) experienced a shifting of the IS curve to the left due to a decrease in the baseline level of investment spending.
1 In the United States during the 1970s, the price level
A) rose at a level of 60 percent per month.
B) rose at a level of between five and ten percent per year.
C) rose at a level of 60 percent per year.
D) rose at a level of 60 percent per week.
2 The classical dichotomy means
A) that real variables (such as the price level)can be analyzed and calculated without thinking of nominal variables such as real GDP, real investment spending, or the real exchange rate.
B) that real variables (such as real GDP, real investment spending, or the real exchange rate) cannot be analyzed and calculated without thinking of nominal variables such as the price level.
C) that real variables (such as real GDP, real investment spending, or the real exchange rate) can be analyzed and calculated without thinking of nominal variables such as the price level.
D) that real variables (such as real GDP, real investment spending, or the price level) can be analyzed and calculated with out thinking of nominal variables such as wage rate.
3 Each of the following is part of the economy's stock of money except
A) coin and currency that are transferred by handing the cash over to the seller.
B) checking account balances that are transferred by writing a check.
C) credit cards held by the public sector.
D) other assets that can be turned into cash or demand deposits nearly instantaneously, risklessly, and costlessly.
4 Anything that alters the real value of the domestic money in terms of its purchasing power over goods and services
A) will also alter the real terms of those existing contracts that use money as the medium of exchange.
B) will invalidate existing contracts that use money as the unit of account.
C) will cause people to hoard money.
D) will also alter the real terms of those existing contracts that use money as the unit of account.
5 The cost of holding money in one's portfolio
A) is that holding money makes you wealthier than holding other assets.
B) is how much it costs to store money.
C) is the rate of return foregone by not holding interest-bearing assets.
D) is that it makes buying things easier.
6 The amount of wealth households and businesses wish to hold in the form of money depends on
A) the opportunity cost of holding money - the lost interest and profits- and the benefits of holding money - the ease of transactions gained
B) the opportunity cost of holding money - the ease of making transactions gained - and the benefits of holding money - the interest and profits gained.
C) the opportunity cost of holding money - the cost of transactions not made - and the benefits of holding money - the status gained by doing so.
D) the savings rate of households and businesses.
7 The amount of money households and businesses wish to hold will _________ if total spending decreases and will _________ if transactions technology decreases.
A) increase; increase
B) decrease; increase
C) decrease; decrease
D) increase; decrease
8 The American quantity equation is
A) M = (1/V) x (P x Y).
B) M / V = P x Y
C) M / P = V x Y
D) M x V = P x Y
9 In the American form of the quantity theory, V represents
A) the velocity of money: the amount of money households and businesses wish to hold.
B) the velocity of money: how many times a year the average unit of money shows up in someone's income and is then used to buy a final good or service that counts in GDP.
C) the velocity of money: amount of money households and businesses actually hold.
D) the velocity of money: amount of wealth households and businesses wish to hold.
10 In the flexible-price model of the macroeconomy with a given velocity of money and real GDP, the price level is equal to
A) (V x Y) / M.
B) (Y / V) x M.
C) (V / Y) x M.
D) (M / V) + Y.
11 If the real GDP is equal to $10 trillion, the stock of money is equal to $3 trillion, and the velocity of money is equal to 5, the price level would be equal to
A) 16.7.
B) 1.5.
C) 6.
D) 10.6.
12 If the money supply increases by 8%, velocity decreases by 2%, and real GDP grows by 3%, then the price level
A) will increase by 9%.
B) will increase by 13%.
C) will increase by 3%.
D) will increase 7%.
13 Using the quantity theory of money, the bulk of changes in the rate of inflation is due to
A) changes in the growth rate the velocity of money.
B) changes in the growth rate of real GDP.
C) changes in the growth rate of real wages.
D) changes in the growth rate of the money supply.
14 One problem with the quantity theory of money is that, in the real world,
A) real GDP fluctuates greatly.
B) inflation is not always proportional to money growth.
C) real wages fluctuate greatly.
D) the velocity of money never changes.
15 The opportunity cost of holding money is
A) the real rate of interest.
B) the negative of the expected inflation rate.
C) the difference between the expected inflation rate and the real interest rate.
D) the sum of the expected inflation rate and the real interest rate.
16 If the nominal interest rate increases, the demand for money will ________ and the velocity of money will ________.
A) increase; decrease
B) decrease; increase
C) increase; increase
D) decrease; decrease
17 If the expected inflation rate increases, the demand for money will ________ and the velocity of money will ________.
A) decrease; increase
B) increase; decrease
C) increase; increase
D) decrease; decrease
18 In the flexible price macroeconomy, an increase in the rate of growth of the money supply
A) leads to an immediate jump in real GDP, to an increase in the inflation rate, to a decrease in the quantity of money demanded, and to an increase in the velocity of money.
B) leads to an immediate jump in real GDP, to a decrease in the inflation rate, and to a decrease in the quantity of money demanded, and to a decrease in the velocity of money.
C) leads to an immediate jump in the price level, to an increase in the inflation rate, to an increase in the quantity of money demanded, and to a decrease in the velocity of money.
D) leads to an immediate jump in the price level, to an increase in the inflation rate, to a decrease in the quantity of money demanded, and to an increase in the velocity of money.
19 The costs of moderate inflation that is greater than expected include
A) redistribution of wealth from creditors to debtors and the creation of uncertainty and unpredictability.
B) redistribution of income from wage workers to salaried workers and the creation of uncertainty and unpredictability.
C) redistribution of income from the service sector to the manufacturing sector and the creation of a windfall gain for creditors.
D) redistribution of wealth from creditors to debtors and a tendency to increase nominal interest rates and thus reduce investment spending.
20 A government that finances its spending by printing money
A) is actually financing its spending by borrowing from the public.
B) is actually financing its spending by levying a tax on holdings of cash.
C) is actually financing its spending by borrowing from other branches of government.
D) is actually financing its spending by borrowing from people in other countries.
1 The two principal channels through which policies and initial conditions work to accelerate or retard growth are
A) their impact on the available level of technology and labor force of the economy.
B) their impact on the available level of capital goods and capital intensity of the economy.
C) their impact on the available level of capital goods and labor force in the economy.
D) their impact on the available level of technology and capital intensity of the economy.
2 The two principal determinants of capital intensity are
A) the consumption and labor efforts being made in the economy.
B) the investment effort being made in the economy and the investment requirements of the economy.
C) the investment and saving efforts being made in the economy.
D) the investment and saving requirements of the economy.
3 In a steady-state balanced-growth equilibrium,
A) the capital intensity of the economy is increasing.
B) the capital-output ratio is decreasing.
C) the economy's capital stock and its level of real GDP are growing at the same proportional rate.
D) the capital-output ratio is increasing.
4 The labor force, the capital stock, and the level of technology
A) are components of the production function.
B) are components of aggregate demand.
C) are components of the money supply.
D) are components of national income.
5 The correct form of the Cobb-Douglas production function is
A) (Y/L) = (K/L)a x (E)1-a
B) (Y/K) = (K/L)a x (E)1-a
C) (L/Y) = (K/L)a x (E)1-a
D) (K/L) = (Y/L)a x (E)1-a
6 A level of the parameter a of the Cobb-Douglas production near zero means
A) that the extra amount of output made possible by each additional unit of capital declines very slowly as the capital stock increases.
B) that the extra amount of output made possible by each additional unit of capital declines very quickly as the capital stock increases.
C) that the extra amount of output made possible by each additional unit of labor declines very quickly as the capital stock increases.
D) that the extra amount of output made possible by each additional unit of savings declines very quickly as the capital stock increases.
7 If there is a doubling of the stock of capital per worker, then output per worker will also double when
A) the parameter a of the Cobb-Douglas production function is close to one.
B) the parameter a of the Cobb-Douglas production function equals zero.
C) the parameter a of the Cobb-Douglas production function equals one.
D) the parameter a of the Cobb-Douglas production function is close to zero.
8 An increase in the parameter E of the Cobb-Douglas production function means
A) less output per worker can be produced for each possible value of the capital stock per worker.
B) the value of capital per worker increases.
C) that the economy becomes less productive.
D) more output per worker can be produced for each possible value of the capital stock per worker.
9 If, in the Cobb-Douglas production, the value of E is $20000, a is .6 and capital per worker is $250,000, then output per worker would be approximately
A) $54928.
B) $91028.
C) $112000.
D) $158000
10 The growth rate of the capital stock will increase if the proportion of the output level saved and invested _________ and the rate of depreciation of the capital stock __________.
A) increases; increases
B) decreases; increases
C) increases; decreases
D) decreases; decreases
11 One of the factors influencing the economy's output growth rate is
A) the rate of employment growth
B) the rate of growth in the efficiency of capital
C) the rate of growth in the efficiency of labor
D) the tax rate
12 If the current level of output in the economy is $12 trillion a year, the current year's capital stock in the economy is $30 trillion, the savings rate is 20 percent and the rate of depreciation of capital stock is 3 percent, next year's capital stock will be _______ and the growth rate of the capital stock will be ______.
A) $31.5 trillion; 105%
B) $31.5 trillion; 5%
C) $17.64 trillion; 76.4%
D) $31.5 trillion; 1.05%
13 The growth rate of capital-per-worker will increase if the labor force growth rate _________ and will decrease if the rate of depreciation _________.
A) increases; decreases
B) increases; increases
C) decreases; increases
1 The flexible-price assumption means that
A) prices and wages don't change very quickly in response to excess demand or supply.
B) prices are flexible enough for markets to clear but wages are not.
C) prices and wages will adjust in response to excess demand or supply.
D) output will adjust in response to excess demand or supply.
2 Two sets of factors determine the levels of potential (and actual) output and of real wages in the flexible-price model of the macroeconomy:
A) the balance of exports and imports and the production function.
B) the balance of supply and demand in the stock market and the production function.
C) the balance of savings and investment and the production function.
D) the balance of supply and demand in the labor market and the production function.
3. The Classical assumptions of the macroeconomy include
A) wages and prices can be sticky or fixed.
B) expectations are consistent with full employment.
C) the labor market can be out of equilibrium causing involuntary employment.
D) shocks to aggregate demand will change the composition and the level of GDP.
4 The Keynesian assumptions of the macroeconomy include
A) wages and prices are fully flexible.
B) expectations are consistent with full employment.
C) the labor market can be out of equilibrium, causing involuntary unemployment.
D) shocks to aggregate demand will change the composition but not the level of GDP.
5 If the typical firm stops hiring labor when the extra revenue from the output produced by the last worker hired just equals his or her wage,
A) it will achieve the highest possible level of revenue.
B) it will achieve the highest possible level of profit.
C) it will not be earning any profits.
D) it will achieve the lowest possible level of profit.
6 The typical firm's demand for labor for the Cobb-Douglas production function with K=1 is
A) ((1-a)Ea-1/(W/P))1/a
B) ((1-a)E1-a/(W/P))a
C) ((1-a)E1-a/(W/P))1/a
D) ((1-a)Ea/(W/P))1/a
7 In the Classical Model, if the quantity of labor demanded at current wages and prices is less than the quantity of labor supplied
A) unemployment will result.
B) the real wage will decrease, increasing the quantity of labor demanded until it is equal to the quantity of labor supplied.
C) the real wage will decrease, decreasing the quantity of labor demanded until it is equal to the quantity of labor supplied.
D) the real wage will increase, decreasing the quantity of labor demanded until it is equal to the quantity of labor supplied.
8 If a _________ in a full employment economy, the real wage will ________.
A) increases; increase
B) decreases; decrease
C) increases; decrease
D) none of the above
9 The four components of national income are
A) consumption spending, savings, government purchases, net exports.
B) consumption spending, investment spending, government purchases, net exports.
C) consumption spending, investment spending, tax revenue, net exports.
D) consumption spending, investment spending, government purchases, gross exports.
10 In the model developed in the text, consumption spending (C) is broken down into
A) a baseline level of consumption (C0) plus a fraction (Cy) of total income
B) a fraction (Cy) of disposable income.
C) a baseline level of consumption (C0) plus a fraction (Cy x (1-t)) of disposable income.
D) a baseline level of consumption (C0) plus a fraction (Cy) of disposable income.
11 The marginal propensity to consume (MPC, Cy)
A) is the amount by which consumption spending changes in response to a $1 change in total income.
B) is the amount households would spend on consumption goods if they had no income at all.
C) is the amount by which consumption spending would change in response to a $1 change in household wealth.
D) is the amount by which consumption spending changes in response to a $1 change in disposable income.
12 If C0 is $1 trillion, Cy is .75, the tax rate is .10, and the level of national income is $10 trillion, consumption spending would equal
A) $7.75 trillion.
B) $6.75 trillion.
C) $8.75 trillion.
D) $5.75 trillion.
13 Investment spending tends to vary _______ with business managers' confidence and _______ with real interest rates.
A) directly; inversely
B) directly; directly
C) inversely; inversely
D) inversely; directly
14 A lower interest rate leads to higher investment spending because
A) higher interest rates lower the appropriately discounted return and make more investment projects profitable.
B) lower interest rates lower the appropriately discounted return and make more investment projects profitable.
C) higher interest rates increase the appropriately discounted return and make fewer investment projects profitable.
D) lower interest rates increase the appropriately discounted return and make more investment projects profitable.
15 If I0 is equal to $5 trillion, Ir is equal to $20000 billion, and r is 5%, investment spending would equal
A) $1 trillion.
B) $4 trillion.
1 Facts about the economy of the United States over the decade of the 1990s include
A) real GDP growth at an average rate of 3.8 percent per year.
B) a stable, but very high, inflation rate.
C) net exports have been consistently positive.
D) a stable, but rather high, unemployment rate.
2 The reasons that the flexible-price model does not give a complete picture of the macroeconomy include
A) real GDP growth is always smooth.
B) real GDP growth is always positive.
C) the unemployment rate is not always equal to the natural rate.
D) inflation is sometimes negative.
3 In the recession or depression phase of the business cycle,
A) production and employment increase while the inflation rate decreases.
B) production, employment, and the inflation rate decrease.
C) production, employment, and the inflation rate increase.
D) production, unemployment, and the inflation rate increase.
4 In the expansion or boom phase of the business cycle,
A) real GDP grows slower than trend.
B) the investment spending share of real GDP generally increases.
C) unemployment increases.
D) inflation decreases.
5 In the sticky-price model, the consequences of a decrease in the marginal propensity to consume include
A) an increase in exports.
B) an increase in government purchases.
C) an increase in investment spending.
D) a decrease in real GDP.
6 One of the possible reasons why prices are sticky is
A) managers and workers find that changing prices or renegotiating wages is costly.
B) managers and workers lack the ability to differentiate between changes in total economy-wide spending with changes in demand for their specific products.
C) the level of prices is as much a physical as an economic variable.
D) managers and workers suffer from "real illusion."
7 If prices are sticky, lower aggregate demand will
A) increase production which will increase incomes, which will increase consumption spending, which will further increase aggregate demand.
B) decrease production which will decrease incomes, which will decrease consumption spending, which will further decrease aggregate demand.
C) decrease production which will decrease incomes, which will decrease investment spending, which will further decrease aggregate demand.
D) decrease production which will increase incomes, which will increase consumption spending, which will further increase aggregate demand.
8 In the multiplier process, a decrease in spending
A) causes an increase in production and incomes, which leads to a further increase in spending.
B) causes a decrease in prices and wages, which causes a further decrease in spending.
C) causes a decrease in production and incomes, which leads to a further decrease in spending.
D) causes a decrease in production and incomes, which leads to an increase in spending.
9 The level of investment spending is determined by
A) the nominal interest rate and assessments of profitability made by business investment committees.
B) the nominal exchange rate and assessments of profitability made by business investment committees.
C) the real interest rate and assessments of profitability made by business investment committees.
D) the real exchange rate and assessments of profitability made by business investment committees.
10 The parameters of the investment spending equation are
A) I0: the baseline level of investment spending, and Iy: the marginal propensity to invest.
B) I0: the interest sensitivity of investment, and Ir: the baseline level of investment spending.
C) I0: the interest sensitivity of investment, and Ir: the marginal propensity to invest.
D) I0: the baseline level of investment spending, and Ir: the interest sensitivity of investment.
11 If the marginal propensity to consume increases or the tax rate decreases
A) the slope of the planned expenditure line will decrease.
B) the intercept of the planned expenditure line will increase.
C) the slope of the planned expenditure line will increase.
D) the intercept of the planned expenditure line will decrease.
12 If foreign real income increases,
A) the slope of the planned expenditure line will increase.
B) the intercept of the planned expenditure line will increase.
C) the slope of the planned expenditure line will decrease.
D) the intercept of the planned expenditure line will decrease.
13 If the marginal propensity to expend is equal to .6, and the level of autonomous spending increases by $1500 billion, the equilibrium level of national income will
A) increase by $1500 billion.
B) decrease by $1500 billion.
C) increase by $3750 billion.
D) increase by $2500 billion.
14 If the level of autonomous spending is $6000 billion, the marginal propensity to expend is .4, and the level of national income is $9000, planned expenditures would be equal to
A) $9600 billion and inventory accumulation would equal $600 billion.
B) $11400 billion and inventory accumulation would equal $2400 billion.
C) $11400 billion and inventory accumulation would equal -$2400 billion.
D) $9600 billion and inventory accumulation would equal -$600 billion.
15 If Cy = .8, t = .2, IMy = .1, and autonomous spending increases by $1500 billion, the equilibrium level of national income
A) will increase by $3261 billion.
B) will decrease by $3261 billion.
C) will decrease by $2027 billion.
D) will increase by $2027 billion.
16 If Cy = .75, t = .2, IMy = .1, the value of the multiplier would be
A) .4.
B) .6.
C) 2.
D) 2.5.
17 If the marginal propensity to import decreases and the tax rate decreases, the marginal propensity to expend will _______ and the value of the multiplier _______.
A) increase; decreases.
B) increase; increases.
C) decrease; increases.
D) decrease; decreases.
18 If the marginal propensity to import increases, the marginal propensity to expend will _______ and the value of the multiplier _______.
A) increase; increases.
B) increase; decreases.
C) decrease; decreases.
D) decrease; increases.
19 If the MPE is equal to .6 and the gap between planned expenditures and potential output is $1500 billion, the necessary change in autonomous spending to bring planned expenditures to potential output would be
A) $1500 billion.
B) -$1500 billion.
C) $900 billion.
D) $600 billion.
20 The automatic working of the government's income tax system (and, to a lesser extent, its social welfare programs) function
A) as an automatic destabilizer.
B) as an automatic change in the money supply.
C) as an automatic stabilizer.
D) as an automatic change in private savings.
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