self study quiz and exercises final 17 march 20113 (2)

7/17/2019 Self Study Quiz and Exercises Final 17 March 20113 (2)

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Principles of

Macroeconomics

Self-study quiz and Exercises

March 2011

1



Chapter 1 Introduction to Macroeconomics

1) Which of the following is NOT a topic studied in Macroeconomics?A) gross domestic productB) the unemploment rate

C) the price of IBM computers!) the inflation rate

") Which of the following is a topic studied in Macroeconomics?A) gross domestic productB) the wage of auto wor#ersC) the price of IBM computers!) the amount of pi$$a produced

%) Which of the following is a topic studied in Macroeconomics?A) the functioning of indi&idual industriesB) aggregate 'eha&ior of households and industries

C) the 'eha&ior of indi&idual households!) the decision( ma#ing 'eha&ior of indi&idual 'usiness firms

) *rices that do not alwas ad+ust rapidl to maintain e,ualit 'etween ,uantit supplied and ,uantit demanded areA) administered prices-B) stic# prices-C) regulator prices-!) mar#et prices-

5) The demand for corn has increased in May without any change in supply. Eight monthslater there still has been no change in corn prices. This is an example of a

A) price oor.B) price control.) stic!y price.") macroeconomic price.

#) The demand for massage therapists declined in the spring of $%%&' but the starting wagespaid to massage therapists was still the same at the end of $%%&. This is an example of aA) stic!y price.B) exible price.) highly regulated mar!et.") price control.

&) An increase in the o(erall price le(el is !nown asA) deation.B) recession.) ination.") stagation.

) Aggregate beha(ior isA) the beha(ior of each household and *rm.B) the beha(ior of each indi(idual.) the beha(ior of all households and *rms together.") none of the abo(e.

2



+) ,nation is a-n)A) decrease in the o(erall price le(el.B) decrease in the o(erall le(el of economic acti(ity.) increase in the o(erall price le(el.") increase in the o(erall le(el of economic acti(ity.

%) "eation occurs whenA) the a(erage price le(el declines.B) economic acti(ity declines.) the economic growth rate declines.") the unemployment rate declines.

) A period of (ery rapid increase in the o(erall price le(el is !nown asA) stagnation.B) hyperination.) stagation.") depression.

$) The trend of the economy isA) the long run growth path of the economy.B) the long run ination rate.) the long run unemployment rate.") the short run production capacity of an economy.

/) The term business cycle refers to theA) short0 term ups and downs in the price le(el.B) long0 term trends in the price le(el.) short0 term ups and downs in the le(el of economic acti(ity.") long0 term trends in the le(el of economic acti(ity.

1) A period during which aggregate output rises is !nown as a-n)A) recession.B) ination.) hyperination.") expansion.

5) A period when the economy shrin!s is !nown asA) a recession.B) a contraction.) a slump.

") all of the abo(e.

#) ,n a business cycle' a pea! represents the end of22222222 and a trough represents the endof 22222 A) an expansion3 a recessionB) a depression3 an expansion) a trough3 a pea!") a recession3 an expansion

&) ,n a business cycle' a pea! represents the end ofA) an expansion.B) a depression.

) trough.") a recession

3



) ,n a business cycle' a trough represents the end ofA) an expansion.B) an ination.) a pea!

") a recession.

+) ,t has become con(entional to classify an economic downturn as a recession whenaggregateoutput declines forA) three consecuti(e 4uarters.B) two consecuti(e 4uarters.) a year.") six consecuti(e 4uarters.

$%) ,f the labor force is 5%% and employment is 15%' then the unemployment rate isA) %%.

B) +%.) %.") %.

$) A prolonged and deep recession is calledA) a business cycle.B) a depression.) a stagation.") hyperination.

$$) Between a trough and a pea!' the economy goes through a-n)A) recession.B)bust.) expansion.") hyperination.

$/) Between a pea! and a trough' the economy goes through a-n)A) expansion.B) ination.) recession.")boom.

$1) 6nemployment means thatA) at the going wage rate' there are people who want to wor! but cannot *nd wor!.B) people are not willing to wor! at the going wage rate.) there are some people who will not wor! at the going wage rate.") there is excess demand in the labor mar!et.

$5) 6nemployment implies that in the labor mar!etA) there is an excess supply of labor.B) there is an excess demand for labor.) there are too few wor!ers for the 7obs a(ailable.") 4uantity demanded of labor exceeds 4uantity supplied.

$#) The unemployment rate e4ualsA) labor force8population.

4



B) unemployed8employed.) -employed0 unemployed)8labor force.") -labor force 0 employed) 8 labor force.$&) The unemployment rate e4uals

A) labor force8population.

B) unemployed8employed.) -employed 0 unemployed) 8 labor force.") unemployed 8 labor force.

$) ,f the labor force is 5% million and 1 million are employed then the unemployment rateis9A) $.B) 1.) 5.") 5$.

$+) ,f $% million wor!ers are unemployed and % million wor!ers are employed' then the

unemployment rate isA) %.B) ..) .") %.

/%) The period in the business cycle from a trough to pea! is called a-n)A) recession.B) expansion.) slump.") depression.

/) ,f output is rising and unemployment is falling' the economy M6:T be in a-n)A) contraction.B) expansion.) depression.") hyperinationary period.

/$) The period in the business cycle from a pea! to a trough is a-n)A) recession.B)boom.) expansion.") ination.

//) 6nemployment generally22222222 during recessions and22222222 during expansions.A) falls3 rises.B) falls3 falls.) rises3 falls.") rises3 rises.

/1) ;hich of the following statements is <A=:E>A) The rate of change in economic acti(ity is used to assess whether an economy isexpanding or contracting.B) :hort0 term ups and downs in the economy are !nown as business cycles.) "uring a recession' output and employment are falling.

") Business cycles are always symmetric the length of an expansion is the same as thelength of a contraction.

5



$ True8<alse

) Macroeconomics is concerned with ination or deation' output growth andunemployment.$) Macroeconomics is concerned with the mar!et price and e4uilibrium 4uantity of each

good or ser(ice./) The employment rate is the number of people employed di(ided by number of people inthe labor force.

1) ?yperination and stagation are two di@erent names which refer to identical economicconditions.

5) Macroeconomic beha(ior is the sum of all the microeconomic decisions made byindi(idual households and *rms.#) All business cycles are symmetric the length of an expansion is the same as the length of

a recession.&) A recession is usually associated with increasing unemployment.+) An expansion is usually associated with rising price le(els.

%) A recession is associated with a negati(e rate of growth of the economy.

5.2 The Comonents of the Macroeconomy) ,f the central ban! decreases the money supply' it is conductingA) monetary policy.B) supply0 side policy.) *scal policy.") incomes policy.

$) ,f ongress increases go(ernment spending' it is usingA) monetary policy.B) supply0 side policy.) *scal policy.") incomes policy.

/) o(ernment policies regarding taxes and expenditures are calledA) *scal policy.B) income policies.) supply0 side policy.") monetary policy.

1) The go(ernment implements *scal policy when it changes

A) spending and8or interest rate.B) money supply and8or taxes.) taxes and8or spending.") taxes and8or interest rate.

5) The go(ernment wants to encourage consumer spending through cutting income taxes. This is an example ofA) an incomes policy.B) a *scal policy.) a supply0 side policy.") a monetary policy.

#) The22222222 can change the 4uantity of money in the economy.A) Treasury "epartment

6



B) <ederal eser(e) ongress") CDce of the omptroller of the urrency

&) The <ederal eser(e a@ecting the supply of money is !nown as

A) *scal policy.B) monetary policy.) growth policy.") supply side policy.

) olicies designed to a@ect the 4uantity of money areA) *scal policies.B) supply side or growth policies.) go(ernment spending policies.") monetary policies.

+) The diagram that shows the income recei(ed and payments made by each sector of the

economy is theA) aggregate demand0 aggregate supply diagram.B) circular ow diagram.) income ow diagram.") income0 production diagram.

%) ,n the circular ow diagram' the di@erent payments made by *rms to households includeA) wages and pro*ts.B) interest and taxes.) transfer payments and di(idends.") taxes and transfer payments.

) An example of a transfer payment isA) an interest payment on a eneral MotorsF bond.B) the added (alue of stoc! from the time it was bought to the time it was sold.) a :ocial :ecurity retirement bene*t.") the salary paid to a member of the armed forces.

$) A transfer payment isA) a bonus to get a wor!er to accept a transfer.B) a cash payment made by the go(ernment to people who do not supply goods' ser(ices orlabor in exchange for the payment.) a cash payment for transferring a good from one person to another.

") an in !ind payment for wor!ingG o@ the boo!s.G

/) A household that spends less than it recei(es in income during a gi(en period isA) sa(ing.B) dissa(ing.) running a de*cit.") recei(ing transfer payments.

1) The ma7or lesson of the circular ow diagram is thatA) sa(ing must always be less than in(estment.B) taxes must always be greater than go(ernment expenditures.) total income in the economy must always e4ual total spending.

") tax receipts must be e4ual to transfer payments

7



5) ,n which of the following mar!ets are funds demanded and supplied>A) the labor mar!etB) the goods and ser(ices mar!et) the money mar!et") the factor mar!et

#) ,n the goods0 and0 ser(ices mar!et' householdsA) only supply.B) only demand.)both supply and demand.") neither supply nor demand.

&) The demanders in the goods0 and0 ser(ices mar!et areA) households and business *rms.B) households' the go(ernment' and the rest of the world.) the go(ernment and business *rms.") households' the go(ernment' business *rms' and the rest of the world.

) ,n which basic mar!et would "H"s be traded>A) the goods and ser(ices mar!etB) the money mar!et) the labor mar!et") the factor mar!et

+) ,n the circular ow diagram' *rms22222222 labor and households22222222 goods andser(ices.A) demand3 supply.B) demand3 demand.) supply3 demand.") supply3 supply.

$%) ,n the circular ow diagram' households demand22222222 and supply22222222.A) labor3 labor.B) goods3 ser(ices.) goods and ser(ices3 labor.") labor3 goods and ser(ices.

$) romissory notes issued by the federal go(ernment when it borrows money are !nown asA) Treasury shares.B) Treasury stoc!s.

) Treasury bonds.") none of the abo(e

$$) A promissory note issued by a corporation when it borrows money is aA) share.B) corporate bond.) corporate di(idend.") stoc!.

$/) "i(idends areA) go(ernment pro*ts distributed among bondholders.B) corporate pro*ts distributed among shareholders.

) capital gains realiIed by stoc!holders.") promissory notes issued by corporations.

8



$1) ;hich of the following is a CET statement>

A) ompanies issue shares but donFt issue bonds.B) The go(ernment issues both bonds and shares.) Bondholders earn di(idends but shareholders donFt.

") :hareholders earn di(idends but bondholders donFt.

$5) A capital gain isA) a *nancial instrument that gi(es the holder a share in the ownership of a *rm andtherefore the right to share in the pro*ts of the *rm.B) the portion of a corporationFs pro*ts that the *rm pays out each period to itsshareholders.) an increase in the (alue of an asset o(er the price initially paid for it.") the di@erence between an indi(idualFs economic income and money income.

$#) An increase in the (alue of an asset o(er the price initially paid for it is aA) di(idend.

B) share of stoc!.) promissory note.") capital gain.

&) A di(idend isA) a promissory note issued by corporations when they borrow money.B) an increase in the (alue of an asset o(er the purchase price initially paid for it.) the di@erence between the interest rate a ban! pays on deposits itcharges for loans.") the portion of a corporationFs pro*ts that the *rm pays out each period to itsshareholders.

$) The portion of a corporationFs pro*ts that a *rm pays out each period to its shareholdersis aA) di(idend.B) promissory note.) capital gain.") corporate bond.

$ True8<alse) <iscal policy generally ta!es the form of regulations specifying the maximum amount bywhich the money supply can be changed.$) ontractionary *scal policy includes raising taxes.

/) Monetary policy includes changing the le(el of household taxes.1) A corporate bond is a promissory note issued by a *rm when it borrows money.5) ,n the circular ow diagram e(eryoneFs expenditure is someone elseFs receipt.#) A di(idend is is paid by shareholders to *rms.&) A transfer payment is the tax one pays when transferring real estate.) A capital gain is the increase in (alue of an asset abo(e its initial cost.

5.! " #rief $istory of Macroeconomics) To get the economy out of a slump' Jeynes belie(ed that the go(ernment shouldA) cut both taxes and go(ernment spending.B) increase both taxes and go(ernment spending.

) increase taxes and8or decrease go(ernment spending.") decrease taxes and8or increase go(ernment spending.

9



$) To bring the economy out of an inationary period' Jeynes argued that the go(ernmentshouldA) cut both taxes and go(ernment spending.B) increase both taxes and go(ernment spending.

) increase taxes and8or decrease go(ernment spending.") decrease taxes and8or increase go(ernment spending.

/) ;hich of the following is an assumption used by lassical economists>A) ;ages ad7ust downward but not upward.B) ;ages ad7ust upward but not downward.) ;ages are inexible.") ;ages ad7ust both upward and downward.

1) According to the lassical model' unemploymentA) could not persist because wages would rise to eliminate the excess supply of labor.B) could not persist because wages would fall to eliminate the excess supply of labor.

) could be eliminated through *scal and monetary policies.") could be eliminated only through go(ernment inter(ention.

5) According to lassical economists' if the 4uantity of labor demanded exceeds the 4uantitysupplied' there isaA) surplus of labor and wages will rise.B) shortage of labor and wages will fall.) shortage of labor and wages will rise.") surplus of labor and wages will fall.

#) According to the lassical economists' the economyA) re4uires *ne0 tuning to reach full employment.B) has stic!y prices in many industries.) is self0 correcting.") will ne(er be at full employment.

&) Macroeconomic policies became more inuenced by JeynesF theories starting with'A) the period of high unemployment and high ination in the +&%s.B) the reat "epression.) the period of high ination in the early +%s.") the CE recession.

) According to lassical models' the le(el of employment is determined primarily by

A) the le(el of aggregate demand for goods and ser(ices.B) prices and wages.) go(ernment taxation.") go(ernment spending.

+) According to Jeynes' the le(el of employment is determined byA) exible wages and prices.B) interest rates.) price and wages.") the le(el of aggregate demand for goods and ser(ices.

%) The concept ofG mar!et clearingG is adopted and defended by

A) Jeynesian economists.B) lassical economists.

10



) *ne0 tuning economists.") demand0 side economists.

) :uppose the economy su@ers a high rate of unemployment. According to Jeynesianeconomists' the go(ernment should increase employment by

A) decreasing money supply.B)balancing the budget.) not doing anything.") increasing go(ernment spending.

$) ;hich of the following would be an example of *ne tuning>A) <irms increase wages to attract high0 4uality wor!ers.B) <irms increase employment bene*ts to increase wor!ersF producti(ity.) The federal go(ernment enacts legislation to increase spending to try to stimulate theeconomy.") The federal go(ernment passes legislation that would re4uire that the go(ernmentFsbudget always be balanced.

/) apid increases in the price le(el during periods of recession or high unemployment are!nown asA) stagation.B) stagnation.) depression.") ination.

1) :tagation occurs when the economyFs ination rate is high andA) employment is high.B) the unemployment rate is high.) the unemployment rate is low.") the rate of change in economic acti(ities is positi(e.

$ True8<alse) Jeynes belie(ed that expansionary *scal policy could help get an economy out of anination.$) According to the lassical model' an excess supply of labor would dri(e up wages to a newe4uilibrium le(el and therefore unemployment would not persist./) According to Jeynes' aggregate supply determines the le(el of economic acti(ities in theeconomy.1) According to Jeynes' the go(ernmentFs role during periods when pri(ate demand is low is

to stimulate aggregate demand and' by so doing' lift the economy out of recession.

5) ,n the lassical model' the le(el of employment is determined by the le(el of aggregatedemand. #)G <ine tuningG is any go(ernment attempt to regulate ination or unemployment.&) lassical economists belie(ed that economic slowdowns are self0 correcting.

11



Chapter " Measuring National Output and National Income

1) The total mar#et &alue of all final goods and ser&ices produced within a gi&en period ' factors of productionlocated within a countr isA) gross domestic product-

B) gross national product-C) net national product-!) net national income-

") .ross domestic product measuresA) the total spending of e&erone in the econom-B) the &alue of all output in the econom-C) the total income of e&erone in the econom-!) all of the a'o&e

%) Which of the following is an e/ample of a final good or ser&ice?A) wheat a 'a#er purchases to ma#e 'read

B) coffee 'eans 0tar'uc#s purchases to ma#e coffeeC) lum'er purchased ' a construction compan to used in 'uilding houses!) a computer purchased ' ederal 2/press to trac# shipments

) Which of the following is a good or ser&ice counted in .!*?A) tires ord 'us to put on a car B) a used tire ou 'u for our personal car C) a new tire ou 'u for our personal car !) used tires 'ought ' a used car dealer to put on a car on his lot

3) !ou'le counting can 'e a&oided 'A) including the &alue of intermediate goods in the current ear-B) not counting the &alue of intermediate goods in .!*-C) including the &alue of intermediate goods in the .N* 'ut not in the .!*-!) including the &alue of intermediate goods in the production ear 'ut not in the selling ear of those goods-

4) .ross national product is the total mar#et &alue of A) all final and intermediate goods and ser&ice produced ' resources owned ' a countr in a gi&en ear-B) all final and intermediate goods and ser&ices produced in a countr5 regardless of whoowns the resources-C) all final goods and ser&ices produced in a countr in a gi&en ear5 regardless of who owns the resources-!) all final goods and ser&ices produced ' resources owned ' a countr5 regardless of where production ta#es place-

11) If no foreign companies produce in a countr5 'ut man of the countr s companies produce a'road5 thenʹ

A) the countr s .N* will tend to e/ceed its .!*-ʹ

B) the countr s .!* will tend to e/ceed its .N*-ʹ

C) the countr s .N* and .!* will tend to 'e e,ual-ʹ

!) the countr s .!* will tend to 'e e,ual to its domestic income-ʹ

1") Which of the following is included in 'oth the 6-0- .!* and .N*?A) The &alue of all cars produced ' ord in Me/ico-B) The &alue of all cars produced ' .eneral Motors in the 6-0-C) The &alue of all cars produced ' Toota in the 6-0-!) The &alue of cars produced ' Nissan in 7apan and the 6-0-

1%) Which of the following is NOT counted in the .N* of the 6nited 0tates?A) The wage of a 6-0- citi$en who wor#s in a foreign countr for a foreign firm-

12



B) The interest earned ' a 6-0- 'an# on loans to a 'usiness firm located in Bra$il-C) The profit earned ' a restaurant located in the 6nited 0tates 'ut owned ' a Me/ican compan-!) The &alue of ser&ices that are produced ' state and local go&ernments in the 6nited0tates-

13) *rofits earned in the 6nited 0tates ' foreign(owned companies are included inA) the 6-0- .!* 'ut not .N*-B) neither the 6-0- .!* nor .N*-C) the 6-0- .N* 'ut not .!*-!) 'oth the 6-0- .!* and .N*-

18) The .!* includesA) the &alue of all intermediate goods and ser&ices-B) the &alue of all final goods and ser&ices-C) the &alue of 'oth intermediate and final goods and ser&ices-!) the &alue of all transactions-

19) Income Me/ican citi$ens earn in the 6-0- counts inA) 6-0- .N*-B) Me/ican .N*-C) Me/ican .!*-!) 'oth 6-0- and Me/ican .!*-

2 True/False

1) .!* measures the total income of e&erone and the total spending ' e&erone in the econom-") The income of 6-0- citi$ens wor#ing a'road counts in 6-0- .!*-%) 0toc# mar#et transactions are part of .N*-) :alue added is the difference 'etween the &alue of good as the lea&e a stage of production and cost of the goods

as the entered that stage of production-

1 Multiple Choice

1) The e,uation for .!* using the e/penditure approach isA) .!* ; C < I < G < EX ( I M -B) .!* ; C < I < G < = IM ( EX )-C) .!* ; C < I < G < EX < IM -!) .!* ; C < I < G ( EX ( IM -

") The single largest e/penditure component in .!* isA) go&ernment spending-

B) in&estment-C) consumption- !) net e/ports-

13



Refer to the information provided in Table 6.1 below to answer the questions that follow.

%) >efer to Ta'le 4-1- *ersonal consumption e/penditures in 'illions of dollars areA) 15-B) 15%-C) 153-!) "5-

) >efer to Ta'le 4-1- The &alue for gross pri&ate domestic in&estment in 'illions of dollars isA) %-B) %83-C) "3-!) 3-

3) >efer to Ta'le 4-1- The &alue for net e/ports in 'illions of dollars isA) 13-B) "3-C) 43-!) 9-

4) >efer to Ta'le 4-1- The &alue of gross domestic product in 'illions of dollars isA) %5-B) %583-C) %51"3-!) %583-

8) >efer to Ta'le 4-1- The &alue of go&ernment spending in 'illions of dollars isA) 1-B) "- C) %- !) 3-

14




Table 6.2

9) >efer to Ta'le 4-"- *ersonal consumption e/penditures in 'illions of dollars areA) @-B) 151-C) 15-!) 154-

@) >efer to Ta'le 4-"- The &alue for gross pri&ate domestic in&estment in 'illions of dollars isA) 8-B) 91-C) 93-!) 9@-

1) >efer to Ta'le 4-"- The &alue for net e/ports in 'illions of dollars isA) ("-B) (13-C) 3-!) "3-

11) >efer to Ta'le 4-"- The &alue for gross domestic product in 'illions of dollars isA) "5@-B) %51-

C) %5-!) %543-

1") >efer to Ta'le 4-"- The &alue of go&ernment spending in 'illions of dollars isA) "-B) 4-C) 9-!) 15-

13) The change in 'usiness in&entories is measured as

A) final sales minus .!*-B) final sales plus .!*-

15



C) .!* minus final sales-!) the ratio of final sales to .!*-

14) In "8 final sales e,ual " 'illion5 and the change in 'usiness in&entories is 3 'illion- .!* in "8A) is "3 'illion-B) is " 'illion-C) is 13 'illion-!) is 'illion-

18) In "4 final sales e,ual %3 'illion and the change in 'usiness in&entories is (4 'illion- .!* in "4A) is "@ 'illion-B) is "@3 'illion-C) is 1 'illion-!) cannot 'e determined from this information-

19) In "9 the change in 'usiness in&entories is (8 'illion and .!* is " 'illion- inal sales in "9A) are 1% 'illion-B) are " 'illion-C) are "8 'illion-!) are % 'illion-

1@) In "85 .!* was e/actl e,ual to final sales- This implies thatA) there was accumulation of in&entories that ear-B) there was a decline in in&entories that ear-C) there was no change in in&entories that ear-

!) .!* did not grow that ear compared to the ear 'efore-

") If the change in 'usiness in&entories is $ero5 then final sales areA) $ero-B) less than .!*-C) greater than .!*-!) e,ual to .!*-

"1) If in a ear there is a positi&e in&entor in&estment5 then final sales

A) e/ceed .!*- B) are less than .!*-C) e,ual .!*- !) are $ero-

"") Net in&estment e,ualsA) .!* minus final sales- B) gross in&estment minus final sales-C) gross in&estment minus depreciation-!) depreciation plus .!*-

"%) If net in&estment is $ero5 then

16



A) gross in&estment is greater than depreciation-B) gross in&estment is less than depreciation-C) gross in&estment e,uals depreciation-!) depreciation is $ero-

") 0uppose that net in&estment in "9 was " 'illion and depreciation was 'illion- .ross in&estment in "9wasA) 14 'illion-B) " 'illion-C) " 'illion-!) "9 'illion-

"3) The total &alue of all capital goods newl produced in a gi&en period isA) the change in 'usiness in&entories-

B) depreciation-C) net in&estment-!) gross in&estment-

"4) The change in capital stoc# in a period is e,ual toA) the ratio of the amount of the capital at the 'eginning of the period to the amount of depreciation-B) the amount of the capital stoc# at the 'eginning of the period plus gross in&estment minus depreciation-C) the amount of the capital at the 'eginning of the period plus gross in&estment-!) the amount of the capital at the 'eginning of the period minus net in&estment-

"8) Net in&estment isA) gross in&estment minus depreciation-B) gross in&estment plus depreciation-C) depreciation minus gross in&estment-!) .N* minus final sales-

"9) !epreciation isA) the decrease in the o&erall price le&el-B) the additional capital stoc# in a ear-C) the amount of used up machiner in a ear-

!) the amount of decline in 'usiness in&entories-

"@) If net in&estment in "8 is %3 'illion and gross in&estment in "8 is 3 'illion5depreciation in "8 isA) -8 'illion-B) 13 'illion-C) 183 'illion-!) "3 'illion-

%) 2/ports e,ualA) imports ( net e/ports-B) net e/ports < imports-

17



C) net e/ports ( imports-!) imports < =e/ports < imports)-

%) When calculating .!*5 e/ports are and imports are -A) added addedB) added su'tractedC) su'tracted added!) su'tracted su'tracted

%3) If the &alue of net e/ports is negati&e5 thenA) e/ports e/ceed imports-B) imports e/ceed e/ports-C) e/ports e,ual imports-!) imports are $ero-

%8) What should 'e su'tracted from .!* to calculate national income?A) depreciationB) indirect ta/esC) personal income ta/es-!) net factor paments to the rest of the world

1) What tpe of ta/ affects the amount of mone ou pa for a product?A) direct ta/B) income ta/C) indirect ta/

!) all of the a'o&e

") !epreciation isA) su'tracted from national income to get .!*-B) added to national income to get .!*-C) su'tracted from .N* to get NN*-!) added to .N* to get NN*-

8) If receipts of factor income from the rest of the world e/ceed paments of factor income to the rest of theworld5 then

A) .!* is greater than .N*-B) .!* e,uals .N*-C) .N* e,uals NN*-!) .N* is greater than .!*-

18




Table 6.4

9) >efer to Ta'le 4-- The &alue for .!* in 'illions of dollars isA) @1-B) @"-C) @3-!) 153-

@) >efer to Ta'le 4-- The &alue for .N* in 'illions of dollars isA) @-B) @%-C) @9-

!) 151-

3) >efer to Ta'le 4-- The &alue for NN* in 'illions of dollars isA) 9@-B) @1-C) @-!) @8-

31) >efer to Ta'le 4-- The &alue for national income in 'illions of dollars isA) 9@-

B) @1-C) @-!) @8-

3") >efer to Ta'le 4-- The &alue for personal income in 'illions of dollars isA) 98-B) 9@-C) @3-!) @4-

3%) >efer to Ta'le 4-- The &alue for disposa'le personal income in 'illions of dollars isA) 83-

19



B) 88-C) 9"-!) @@-

3) If .N* is 4 'illion5 receipts of factor income from the rest of the world are 3 'illion5 and paments of factor income to the rest of the world are % 'illion5 then .!* isA) 3" 'illion-B) 39 'illion-C) 4" 'illion-!) 49 'illion-

33) If .N* is " 'illion5 receipts of factor income from the rest of the world are 1 'illion5 and paments of factor income to the rest of the world are % 'illion5 then .!* isA) 14 'illion- B) "1 'illion-

C) "" 'illion-!) " 'illion-

34) If .!* is 3 'illion and depreciation is 'illion5 then net national productA) is 4 'illion-B) is 3 'illion-C) is 3 'illion-!) cannot 'e determined from this information-

38) If .!* is % 'illion5 depreciation is % 'illion5 and net factor income from the rest of the world is ( 'illion5 then net national product is

A) "% 'illion-B) "8 'illion-C) "@ 'illion-!) %1 'illion-

39) If .N* is 9 'illion and depreciation is @ 'illion5 then net national product isA) 81 'illion-B) 93 'illion-C) 9@ 'illion-!) @9 'illion-

3@) If .N* is " 'illion and depreciation is " 'illion5 then net national product isA) 1 'illion-B) 19 'illion-C) "1 'illion-!) "" 'illion-

41) Net national product isA) .!* plus depreciation-B) .!* minus depreciation-C) .N* minus depreciation-!) .N* plus depreciation-

20



4%) *ersonal income is national income minusA) depreciation-B) net factor income to the rest of the world-C) the amount of national income not going to households-!) imports-

4) If national income is 4 'illion5 personal income is 'illion5 personal ta/es are 1" 'illion5 thendisposa'le income e,ualsA) 9 'illion-B) %" 'illion-C) "9 'illion-!) 9 'illion-

43) Which of the following is su'tracted from national income to get to personal income?A) retained earnings

B) personal interest incomeC) depreciation!) personal Ta/es

44) *ersonal incomeA) is alwas less than national income-B) is alwas greater than national income-C) ma 'e greater than or less than national income-!) will alwas e,ual national income-

48) If personal income is @"3 'illion and personal income ta/es are 8 'illion5 the &alue of disposa'le personalincome is

A) 9%3 'illion-B) 933 'illion-C) 9@ 'illion-!) @@3 'illion-

49) If personal sa&ing is (1 'illion and disposa'le personal income is %8 'illion5 then personal consumptionspendingA) is %4 'illion-B) is %9 'illion-C) is %@ 'illion-!) cannot 'e determined from this information-

4@) The personal sa&ing rate isA) the difference 'etween total personal spending and personal sa&ing-B) the difference 'etween personal income and disposa'le personal income-C) the ratio of personal income to personal sa&ing-!) the percentage of disposa'le personal income that is sa&ed-

8) If disposa'le personal income is 'illion and personal sa&ing is 9 'illion5 the personal sa&ing rate isA) 1-3D-B) "D-C) 3D-!) 1"D-

81) If the personal sa&ing rate is 3D and personal sa&ing is 1 'illion5 the &alue of personaldisposa'le income

21



A) is 1 'illion-B) is " 'illion-C) is 3 'illion-!) cannot 'e determined from this information-

2 True/False

1) Transfer paments are su'tracted from national income to get to personal income-") If in&estment is larger than depreciation5 the capital stoc# decreases-%) !epreciation is included in .!*5 'ut e/cluded from NN*-) inal sales plus changes in in&entories e,uals .!*-3) New houses count as consumer dura'les-4) !air Eueen opens a 'ranch in 2stonia- The sales of the restaurant enter the 6-0- .!* and the 2stonian .N*-8) Consumers can spend their entire personal income-9) The difference 'etween .N* and .!* is depreciation-@) !isposa'le personal income is personal income minus personal ta/es-

1 Multiple Choice

1) Nominal .!* measures the &alue of all goods and ser&icesA) in constant dollars-B) in current dollars-C) in fi/ed dollars-!) without inflation-

") .ross domestic product measured in terms of the prices of a fi/ed5 or 'ase5 ear isA) current .!*-B) 'ase .!*-C) real .!*-

!) nominal .!*-

%) Nominal .!* is gross domestic product measuredA) in the prices of a 'ase ear-B) in current dollars-C) at a constant output le&el 'ut at the 'ase(ear prices-!) as the difference 'etween the current ear s .!* and last ear s .!*-ʹ ʹ

) >eal .!* is gross domestic product measuredA) at a constant output le&el 'ut at current prices-B) in current dollars-C) in the prices of a 'ase ear-

!) as the difference 'etween the current ear s .!* and last ear s .!*-ʹ ʹ

3) If real .!* in "8 using "4 prices is lower than nominal .!* of "85 thenA) prices in "8 are lower than prices in "4-B) nominal .!* in "8 e,uals nominal .!* in "4-C) prices in "8 are higher than prices in "4-!) real .!* in "8 is larger than real .!* in "4-

4) If real .!* in "9 using "8 prices is higher than nominal .!* of "95 thenA) prices in "9 are lower than prices in the 'ase ear-B) nominal .!* in "9 e,uals nominal .!* in "8-C) prices in "9 are higher than prices in the 'ase ear-!) real .!* in "9 is larger than real .!* in "8-

22




Table 6.5

8) >efer to Ta'le 4-3- Assume that this econom produces onl two goods .ood X and .ood Y - The &alue for thiseconom s nominal .!* in ear 1ʹ

A) is 1-B) is 14-C) is 19-!) is "-

9) >efer to Ta'le 4-3- Assume that this econom produces onl two goods .ood X and .ood Y - The &alue for thiseconom s nominal .!* in ear % isʹ

A) "-B) """-C) "3-!) "8-

@) >efer to Ta'le 4-3- Assume that this econom produces onl two goods .ood X and .ood Y - The &alue for thiseconom s nominal .!* in ear " isʹ

A) 149- B) 18@- C) ""- !) "1-

1) >efer to Ta'le 4-3- Assume that this econom produces onl two goods .ood X and .ood Y - If ear 1 is the 'ase ear5 the &alue for this econom s real .!* in ear " isʹ

A) 149- B) 18@- C) ""- !) "1-

11) >efer to Ta'le 4-3- Assume that this econom produces onl two goods .ood X and .ood Y - If ear 1 is the 'ase ear5 the &alue for this econom s .!* deflator in ear 1 isʹ

A) 1-B) 1- C) 11- !) 111-

1") >efer to Ta'le 4-3- Assume that this econom produces onl two goods .ood X and .ood Y - If ear 1 is the 'ase ear5 the &alue for this econom s .!* deflator in ear " isʹ

A) @%-@- B) 1- C) 14-3- !) 18@-

1%) >efer to Ta'le 4-3- Assume that this econom produces onl two goods .ood X and .ood Y - If ear 1 is the 'ase ear5 the &alue for this econom s inflation rate 'etween ear 1 and ear " isʹ

A) (4-1D-B) (3-3D-C) 4-3D-

23



!) 8@D-

1) The .!* deflator is theA) difference 'etween real .!* and nominal .!* multiplied ' 1-B) difference 'etween nominal .!* and real .!* multiplied ' 1-C) ratio of nominal .!* to real .!* multiplied ' 1-!) ratio of real .!* to nominal .!* multiplied ' 1-

13) If nominal .!* is 9 trillion and real .!* is 4 trillion5 the .!* deflator isA) 9-B) 83-

C) 1%%-%%-!) 9-

14) If the .!* deflator is greater than 15 thenA) nominal .!* is greater than real .!*-

B) nominal .!* is lower than real .!*-C) nominal .!* e,uals real .!*-!) prices decreased ' more than half 'etween the current and the 'ase ears-

18) The .!* deflator in ear " is 11 and the .!* deflator in ear % is 119- The rate of inflation 'etween ears "and % isA) -33D-B) 8-"8D-C) 9D-!) 19D-

2 True/False

1) If in the same period output dou'les and the price le&el remains the same5 nominal .!* dou'les-") A .!* deflator is real .!* di&ided ' nominal .!* times 1-%) If the .!* deflator ne/t ear is less than the .!* deflator this ear5 then the price le&el has fallen-) .!* measured in 'ase ear prices is real .!*-3) If nominal .!* rises5 then so must real .!*-4) If real .!* rises5 then so must nominal .!*-8) If real .!* increased during a ear5 then output must ha&e increased-

6.4 Limitations of the GP Concept

1 Multiple Choice1) .!* is not a perfect measure of social welfare and the societ s economic well('eing 'ecauseʹ

A) it does not sa anthing a'out the distri'ution of income-B) .!* accounting rules do not ad+ust for production that causes negati&e e/ternalities-C) it does not include all economic acti&ities in the econom-!) all of the a'o&e

") Fegali$ing all forms of illegal acti&ities wouldA) reduce measured .!*-B) reduce the si$e of the underground econom and increase measured .!*-C) reduce 'oth the underground econom and measured .!*-!) increase the si$e of the underground econom and reduce measured .!*-%) *er capita gross national income =.NI) decreases when

24



A) .NI and the population increase at the same rate-B) .NI does not change and the population increases-C) .NI and the population decrease at the same rate-!) .NI increases and the population does not change-

) .ross national income isA) .N* con&erted into dollars using an a&erage e/change rate o&er se&eral ears ad+ustedfor rates of inflation-B) .!* con&erted into dollars using an a&erage e/change rate o&er se&eral ears ad+ustedfor rates of inflation-C) .N* measured using an incomes approach-!) .N* di&ided ' population-

3) The 'ase ear of an inde/ isA) the ear chosen for the weights in a fi/ed weight procedure-B) the ear currentl 'eing calculated-C) the last ear of the inde/-

!) the first ear of the inde/-

2 True/False

1) All economic acti&ities in the econom are included in the .!*-") The costs of pollution are su'tracted from the &alue of final sales 'efore calculating .!*-%) A wea#ness in the concept of .!* is that it ignores income distri'ution-) *roduction in the illegal or underground econom is not reflected in .!*-3) i/ed weight inde/es can not account for new goods-

25



Chapter % 6nemploment5 Inflation5 and Fong(>un .rowth

8-1 6nemploment1) We can safel sa that total output can increase if there is a=n)A) increase in the si$e of the la'or force and a decrease in the producti&it of wor#ers-B) decrease in the si$e of capital and an increase in the producti&it of machines-C) increase in the num'er of machines per wor#er-!) decrease in the num'er of wor#ers per machine-

") The producti&it of wor#ers is defined as theA) total output produced ' the la'or force-B) output produced ' a wor#er per hour-C) num'er of hours a wor#er spends at wor#-!) num'er of wor#ers needed to produce one da s &olume of output-ʹ

%) The capital per wor#er ratio is a measure of

A) how man tools or machines each wor#er has to wor# with-B) how producti&e wor#ers are-C) how much .!* is growing-!) how much 'orrowed mone is needed per wor#er-

) *roducti&it is the ratio of A) total output to the total num'er of wor#er hours-B) total output to the total population-C) total output to the total num'er of unemploed-!) total capital to the total num'er of wor#ers-

9) or ou to 'e considered out of the la'or force5 ou can 'e

A) a full(time student-B) a full(time retiree-C) a full(time &olunteer-!) an of the a'o&e

@) Cherl graduated from college a month ago and is now without wor#- 0he accepted a +o' that will start ne/tmonth- Toda5 Cherl isA) not in the la'or force-B) in the la'or force-C) emploed-!) a discouraged wor#er-

1) The num'er of people unemploed e,ualsA) the num'er of people emploed minus the la'or force-B) the la'or force plus the num'er of people emploed-C) the la'or force minus the num'er of people emploed-!) the num'er of people emploed di&ided ' the la'or force-

11) 7a#e retired from the police force- Ge started wor#ing an hour or two a da at a paid +o' incit s courthouse- 7a#e isʹ

A) emploed-B) in the la'or force-C) unemploed-!) not in the la'or force-

26



1") !iane lost her +o' and immediatel started loo#ing for another +o'- As a result theA) unemploment rate increases-B) la'or force increases-C) la'or force decreases-!) unemploment rate remains constant-


Table !.1

2mploed 15 people6nemploed %5 people

Not in the Fa'or orce 5 people

1%) >efer to Ta'le 8-1- The la'or force e,ualsA) 15 people-B) 185 people-C) 195 people-!) "15 people-

1) >efer to Ta'le 8-1- The unemploment rate isA) 18-4D-B) 14-8D-C) 1-%D-!) "3-D-

13) >efer to Ta'le 8-1- The la'or(force participation rate isA) 83-D-B) 44-8D-C) 88-9D-!) 9-@D-

14) >efer to Ta'le 8-1- The emploment rate isA) 93-8D-B) 9%-%D-C) 9"-D-!) 83-D-


Table !.2

Fa'or force participation rate 83D

Total population 14 ears of age and older " million

6nemploment rate 1D

18) >efer to Ta'le 8-"- The la'or forceA) e,uals 13 million-B) e,uals 1% million-C) e,uals 18 million!) cannot 'e determined from this information-

19) >efer to Ta'le 8-"- The total num'er of people unemploed isA) " million-B) 1% million-

C) 18 million-!) 13 million-

27



1@) >efer to Ta'le 8-"- The total num'er of people emploed isA) 13% million-B) 118 million-C) 1%3 million-!) 19 million-

") The unemploment rate isA) unemploedHpopulation 1-B) =emploed ( unemploed)Hla'or force 1-C) =la'or force ( emploed)Hla'or force 1-!) =emploed ( la'or force)Hemploed 1-

"1) The num'er of people classified as emploed is "45 and the num'er of people classified as unemploed is%5- The si$e of the la'or forceA) e,uals "@5-B) e,uals "%5-C) e,uals "45-

!) e,uals %"5-

"") The num'er of people classified as emploed is %35 and the num'er of people in the la'or force is35- The total num'er of people classified as unemploed isA) %35-B) 135-C) "35-!) 35-

"%) If the num'er of people classified as unemploed is "5 and the num'er of people classified as emploed is55 what is the unemploment rate?A) "-D

B) -9DC) 3-D!) @-"D

"3) If the num'er of people emploed is 135 and the la'or force is 1855 the unemploment rate isA) 4-"3D-B) 11-84D-C) "-3D-!) 4-33D-

"4) If the unemploment rate is 4-"D and the num'er of people emploed is "55 the total num'er of peopleunemploed is appro/imatel

A) 1"5 peopleB) 15@8 people-C) 1%5"" people-!) cannot 'e determined from this information

"8) If the unemploment rate is 4-"D and the num'er of people emploed is "55 the la'or force isappro/imatelA) "1"5 people-B) "15@8 peopleC) "1%5"" people-!) cannot 'e determined from this information

"9) If the la'or force is %"5 and the total population 14 ears of age or older is 55 the la'or(force participation rate is

28



A) 8"D-B) 84D-C) 9D- !) 99D-

"@) If the la'or(force participation rate is 9"D and the total population 14 ears of age or older is 1 million people5the la'or force isA) @15 people-B) 9"5 people-C) 85 people-!) 195 people-

%) If the num'er of unemploed e,uals %55 the num'er of emploed e,uals 455 and the num'er not in thela'or force is 155 the la'or(force participation rateA) is @D-B) is 48D-C) is 99-@D-

!) cannot 'e determined from this information-

%1) If the num'er of unemploed e,uals "5 and the num'er of emploed e,uals %55 the la'or(force participation rateA) is 9D-B) is "D-C) is 33-4D-!) cannot 'e determined from this information-

%%) When an indi&idual ,uits hisHher +o' and decides to sta at home for a while5 the la'or Jforce participation rateA) decreases-B) increases-

C) stas the same-!) ma increase or decrease5 depending on the length of time heHshe stas at home-

%) Mi#e has +ust graduated from college and is now loo#ing for a +o'5 'ut has not et found one- This causes theunemploment rate to and the la'or (force participation rate to -A) increase decreaseB) sta the same sta the sameC) increase increase!) increase sta the same

%3) !iscouraged wor#ers areA) considered cclicall unemploed-

B) considered structurall unemploed-C) considered frictionall unemploed-!) not considered as part of the la'or force-

%8) When 1 people who were pre&iousl loo#ing for +o's stop loo#ing for +o's5 theA) unemploment rate increases-B) si$e of the la'or force decreases-C) la'or(force participation rate does not change-!) unemploment rate does not change-

%9) Classifing discouraged wor#ers as unemploed wouldA) increase the unemploment rate-B) decrease the unemploment rate-

29



C) not change the unemploment rate-!) ha&e an indeterminate impact on the unemploment rate-

1) Which of the following statements is T>62?A) The unemploment rate does not tell us anthing a'out the duration of unemploment-B) The duration of unemploment decreases during recessions-C) The duration of unemploment increases during economic e/pansions-!) The median duration of unemploment is usuall greater than the a&erage duration-

") The la'or force participation rate is theA) total num'er of people who are participating in the la'or force-B) ratio of the num'er of emploed people to the num'er of unemploed people-C) ratio of the la'or force to the total population 14 ears old or older-!) the num'er of people in the la'or force minus the num'er of people who are unemploed-

%) !uring recessions5 the num'er of discouraged wor#ers and this theunemploment rate-

A) falls reducesB) decreases increasesC) increases reduces!) increases increases

3) When an economics professor ,uits hisHher +o' at a uni&ersit and starts loo#ing for a 'etter +o' in anotheruni&ersit5 heHshe isA) frictionall unemploed-B) structurall unemploed-C) cclicall unemploed-!) naturall unemploed-

4) Increasing the efficienc of &arious emploment agencies to find 'etter matches for thoseloo#ing for +o's willA) reduce the natural rate of unemploment-B) reduce structural unemploment-C) reduce cclical unemploment-!) not affect frictional unemploment-

8) A man is fired from his +o' 'ecause he was late for wor# too man times- While he is searching for another +o'he would 'e classified asA) not in the la'or force 'ecause his emploer had a legitimate reason for firing him-B) structurall unemploed-C) cclicall unemploed-

!) frictionall unemploed-

@) When an indi&idual is not wor#ing and is not loo#ing for a +o' 'ecause heHshe lac#s an mar#eta'le +o' s#ills5heHshe isA) structurall unemploed-B) frictionall unemploed-C) cclicall unemploed-!) none of the a'o&e

3) 0tructural unemploment is theA) portion of unemploment that is due to changes in the structure of the econom thatresult in a significant loss of +o's in certain industries-B) unemploment that occurs during recessions and depressions-

30



C) portion of unemploment that is due to the normal wor#ing of the la'or mar#et-!) unemploment that results when people 'ecome discouraged a'out their chances of finding a +o' so the stoploo#ing for wor#-

3%) An indi&idual who cannot find a +o' 'ecause his or her +o' s#ills ha&e 'ecome o'solete is an e/ample of A) frictional unemploment-B) structural unemploment-C) cclical unemploment-!) seasonal unemploment-

3) The natural rate of unemploment is generall thought of as theA) ratio of the frictional unemploment rate to the cclical unemploment rate-B) sum of structural unemploment and cclical unemploment-C) sum of frictional unemploment and cclical unemploment-!) sum of frictional unemploment and structural unemploment-

33) The sum of frictional and structural unemploment is thought of as the

A) natural rate of unemploment-B) normal rate of unemploment-C) cclical rate of unemploment-!) seasonal rate of unemploment-

38) If the la'or mar#et 'ecomes more efficient so that the unemploed are more ,uic#l matched with +o's5 thenA) the natural rate of unemploment will increase-B) the natural rate of unemploment will decrease-C) the natural rate of unemploment will not change-!) the natural rate of unemploment could either increase or decrease-

3@) The increase in unemploment that occurs during recessions and depressions is called

A) frictional unemploment-B) structural unemploment-C) cclical unemploment-!) normal unemploment-

4) Cclical unemploment is theA) portion of unemploment that is due to changes in the structure of the econom that result in a significant lossof +o's in certain industries-B) unemploment that occurs during recessions and depressions-C) portion of unemploment that is due to the normal wor#ing of the la'or mar#et-!) unemploment that results when people 'ecome discouraged a'out their chances of finding a +o' so the stoploo#ing for wor#-

2 True/False

1) When more people who are not wor#ing start loo#ing for +o's5 the la'or (force participation rate increases-") Fa'or producti&it is total output di&ided ' the total num'er of wor#er hours-%) Anone 14 ears of age or older who is not classified as emploed is classified as unemploed-) If discouraged wor#ers were counted as unemploed5 the measured unemploment rate would increase-3) If la'or mar#ets were perfectl efficient5 the unemploment rate would fall to $ero-

!.2 "nflation

1) In which of the following conditions is the inflation rate li#el to fall and the unemploment rate li#el to rise?A) hperinflationB) recession

31



C) 'oom!) stagflation

") Which of the following statements is T>62?A) The costs of recessions are distri'uted e,uall among all groups of the population-B) >ecessions tend to increase the demand for imports and therefore impro&e the nation s 'alance of paments-ʹ

C) >ecessions ma increase efficienc ' dri&ing the least efficient firms in the econom out of 'usiness-!) A recession ma lead to an increase in the inflation rate-

%) An economic 'oom tends to the demand for imports5 which a nation sʹ

'alance of paments-A) reduce worsens-B) reduce impro&es-C) increase impro&es-!) increase worsens-

4) Inflation is an increase in

A) the price of one item-B) the o&erall price le&el-C) the a&erage income le&el-!) real gross national product-

8) An increase in the o&erall price le&el isA) inflation-B) deflation-C) a price inde/-!) a recession-

9) !eflation is a decrease in

A) the price of one item-B) the o&erall price le&el-C) the a&erage income le&el-!) real gross national product-

@) An increase in the o&erall price le&el that continues o&er a significant period of time isA) high inflation-B) sustained reco&er-C) sustained inflation-!) super inflation-

1) A price inde/ is

A) a measurement showing how the a&erage price of a 'undle of goods changes o&er time-B) a measurement showing the cost of a 'undle of goods at a point in time-C) a sustained increase in the o&erall price le&el-!) a decrease in the o&erall price le&el-

32




Table !.#

11) >efer to Ta'le 8-%- 0uppose "4 is the 'ase ear- The price inde/ in "4 isA) 15-B) 1-C) 1-!) 1-

1") >efer to Ta'le 8-%- If "4 is the 'ase ear5 the price inde/ in "3 isA) @4--B) 1--C) 111-@-!) 9@-%-

1%) >efer to Ta'le 8-%- If "4 is the 'ase ear5 the price inde/ in "8 isA) @%-@-B) 14-1-C) @-"-!) 13-9-

1) >efer to Ta'le 8-% If "4 is the 'ase ear5 the price inde/ in "9 isA) 91-"-B) 119-9-C) 1"%-"-!) 94-9-

13) >efer to Ta'le 8-%- If "4 is the 'ase ear5 the inflation rate 'etween "4 and "8 isA) %-@D-B) 1-"D- C) 8-D-

!) 4-1D-

14) >efer to Ta'le 8-%- If "4 is the 'ase ear5 the inflation rate 'etween "4 and "8 is D5 and theinflation rate 'etween "8 and "9 is D-A) 8- 1%-@ B) 4-1 14-1 C) %-@ 18-1!) 1-" 1-

18) >efer to Ta'le 8-%- The lowest inflation rate is 'etween the earsA) "8 and "9-B) "4 and "8-

C) "3 and "4-!) cannot 'e determined from the gi&en information

33




Table !.4

19) >efer to Ta'le 8-- The 'undle price for the goods in period "4 isA) 1-

B) 1- C) 3-3- !) 38-3-

1@) >efer to Ta'le 8-- If "4 is the 'ase period5 the price inde/ in "4 isA) 1-B) 1-C) 1-!) 1-

") >efer to Ta'le 8-- If "4 is the 'ase ear5 the price inde/ in "8 isA) 91-@-B) 1"%-"-C) 11@-1- !) 84-9-

"1) >efer to Ta'le 8-- If "4 is the 'ase ear5 the price inde/ in "9 isA) 81-%- B) 1-"- C) 3@-9-!) 1"9-8-

"") >efer to Ta'le 8-- If "4 is the 'ase ear5 the inflation rate 'etween "4 and "8 isA) 1"-D- B) 1@-1D-C) "%-"D- !) 18-4D-

"%) >efer to Ta'le 8-- If "4 is the 'ase ear5 the inflation rate 'etween "4 and "9 isA) "9-8D-B) 18-D-C) "3-1D-!) -"D-

") >efer to Ta'le 8-- If "8 is the 'ase ear5 the inflation rate 'etween "8 and "9 isA) 1"-"D-

34



B) 8-D-C) 1%-@D-!) @-D-

"3) If period 1 is the 'ase ear5 the 'undle price of goods in period 1 is %5 and the 'undle price of goods in period " is %"5 the period " price inde/ isA) @%-9-B) 14-"-C) @%-%-!) 14-8-

"4) If "8 is the 'ase ear5 the 'undle price of goods in "8 is 35 and the 'undle price of goods in "9 is 85 the "9 price inde/ isA) 1"9-4- B) 1--C) 81--!) 4--

"8) If the price inde/ in period " is 1@ and the price inde/ in period % is 1"35 the rate of inflation 'etween period "and period % isA) 14D-B) @D-C) 1-8D-!) 9-8D-

"9) If "8 is the 'ase ear and the inflation rate 'etween "8 and "9 is 4-D5 the price inde/ in "9 isA) 14--B) 14--C) 4-

!) cannot 'e determined from this information 'ecause the inde/ in the 'ase ear is not gi&en

"@) If "8 is the 'ase ear and the inflation rate 'etween "8 and "9 is (-35 the price inde/ in "9 isA) 1-3-B) (13-C) @3-3-!) cannot 'e determined from this information 'ecause the 'ase ear is not #nown

%) If the price inde/ in "8 is 113 and the price inde/ in "9 is 1"5 the rate of inflation 'etween "8 and "9is

A) 1"-8D-B) (11-%D-C) (1%-D-!) 1%-D-

%1) The inde/ used most often to measure inflation is theA) producer price inde/-B) consumer price inde/-C) wholesale price inde/-!) .!* deflator-

%8) A price inde/ that tends to 'e a leading indicator of future inflation rates is theA) consumer price inde/-B) producer price inde/-

35



C) .!* price inde/-!) retail price inde/-

%") Most economists consider the as the 'est o&erall indicator of inflationar pressures in the econom-A) producer price inde/B) .!* deflator C) wholesale price inde/!) consumer price inde/

%%) Which of the following statements is AF02?A) An indi&idual li&ing on a fi/ed income is alwas made worse off as a result of inflation-B) Those indi&iduals recei&ing welfare 'enefits ha&e 'een harmed ' inflation 'ecause increases in welfare

paments ha&e not #ept pace with inflation-C) Inflation will ha&e no effect on an indi&idual whose income is inde/ed to the inflation rate-!) 0ome people in societ 'enefit from inflation-

%) The difference 'etween the interest rate on a loan and the inflation rate is theA) nominal interest rate- B) inflation premium-C) real interest rate-!) e/pected interest rate-

%3) Which of the following increases the real interest rate?A) a decrease in the nominal interest rate5 holding the inflation rate constantB) an increase in 'oth the nominal interest rate and the inflation rate ' the same percentage pointsC) a decrease in the inflation rate5 holding the nominal interest rate constant

!) a decrease in 'oth the nominal interest rate and the inflation rate ' the same percentage points

%4) If Mr- .arrison is paid an interest rate of D on his sa&ings5 'ut the inflation rate is 8D5 the real interest rateMr- .arrison earns isA) D-B) (%D-C) (8D-!) "9D-

%8) Kou want to ma#e a 1D real return on a loan that ou are planning to ma#e5 and the e/pected inflation rateduring the period of the loan is D- Kou should charge a nominal interest rate of

A) 4D-B) (4D-C) 1D-!) 1D-

%9) Fola wants to ma#e an 4D real return on a loan that she is planning to ma#e5 and the e/pected inflation rateduring the period of the loan is 3D- 0he should charge an interest rate of A) 4D- B) 14D-C) 11D-!) 1D-

36



%@) If the inflation rate is smaller than the nominal interest rate5 the real interest rate isA) positi&e-B) negati&e-C) $ero-!) either positi&e or $ero-

) Which of the following is a cost of anticipated inflation?A) !e'tors are made worse off-B) If people are not full informed a'out the price le&el changes5 resources will 'e misallocated-C) The degree of ris# associated with in&estments in the econom increases-!) Creditors are made worse off-

1) 0topping inflationA) can onl 'enefit the econom5 'ecause the price le&el will 'e reduced-B) ma 'e costl5 if the inflation is stopped ' inducing a recession-

C) ma 'e costl5 'ut the 'enefits of stopping inflation will alwas outweigh the costs of such actions-!) will ha&e no 'enefits or costs associated with it-

") Which of the following statements is AF02?A) Whether ou gain or lose during a period of inflation depends on whether our income rises faster or slowerthan the prices of the things ou 'u-B) Inflation that is higher than e/pected 'enefits de'tors5 and inflation that is lower than e/pected 'enefitscreditors-C) There are no costs or losses associated with anticipated inflation-!) When unanticipated inflation occurs regularl5 the degree of ris# associated with in&estments in the economincreases-

2 True/False

1) The C*I somewhat o&erstates changes in the cost of li&ing 'ecause it does not allow for su'stitutions thatconsumers might ma#e in response to price changes-") An inflation rate that is lower than e/pected 'enefits creditors-%) There are no costs associated with inflation if the inflation rate is perfectl anticipated-) The actual real rate of interest is the nominal rate less the actual inflation rate-

!.# Lon$%&un Gro'th

1) Output in an econom can 'e increased 'A) adding more wor#ers-B) limiting the wor# wee#-

C) using fewer machines- !) decreasing inflation-

") A prolonged and deep recession is aA) hperinflation- B) slowdown-C) contraction-!) depression-

2 True/False

1) The onl source of economic growth is growth in the num'er of wor#ers in the econom-") Wor#ers who ta#e a +o' related training course are enhancing their human capital-%) If more wor#ers ha&e more capital to wor# with5 then production will increase-) *roducti&it is output per wor#er hour-

37



Chapter Aggregate 2/penditure and 2,uili'rium Output(.1 The )e*nesian Theor* of Consumption

1) The MPC isA) the change in consumption di&ided ' the change in income-B) consumption di&ided ' income-

C) the change in consumption di&ided ' the change in sa&ing-!) the change in sa&ing di&ided ' the change in income-

") The M*0 isA) the change in sa&ing di&ided ' the change in income-B) 1 < M*CC) income di&ided ' sa&ing-!) total sa&ing di&ided ' total income-

%) 0a&ing e,uals

A) K ( C-B) K ( planned I-C) K ( actual I-!) In&entor changes-

) If the MPS is -45 MPC

A) is 1-4-B) is -%-C) is --!) cannot 'e determined ' the gi&en information-

3) If Fogan recei&ed a "53 'onus and his MPS is -"5 his consumption rises ' and his sa&ing rises ' -A) 3 1B) "53 "C) "5 3!) "53 "

4) 6ncertaint a'out the future is li#el toA) increase current spending-B) ha&e no impact on current spending-

C) decrease current spending-!) either increase or decrease current spending-

8) Gigher interest rates are li#el toA) ha&e no effect on consumer spending or sa&ing-B) decrease consumer spending and increase consumer sa&ing-C) decrease 'oth consumer spending and consumer sa&ing-!) increase consumer spending and decrease consumer sa&ing-

9) Consumption isA) positi&el related to household income and wealth and households e/pectations a'out the future5 'ut negati&elʹ

related to interest rates-

B) negati&el related to household income and wealth5 interest rates5 and households e/pectations a'out the future-ʹ

C) determined onl ' income-

38



!) positi&el related to household income and wealth5 interest rates5 and households e/pectations a'out the future-ʹ

@) In a closed econom with no go&ernment5 aggregate e/penditure isA) consumption plus in&estment- B) sa&ing plus in&estment-C) consumption plus the M*C- !) M*C < M*0-

1) If Wanda s income is reduced to $ero after she loses her +o'5 her consumption will 'e and her sa&ingʹ

will 'e -A) less than $ero less than $eroB) greater than $ero greater than $eroC) less than $ero greater than $ero!) greater than $ero less than $ero

Refer to the information provided in Fiure !.1 below to answer the questions that follow.

Fi$ure (.1

1%) >efer to igure 9-1- The MPS for this household is and the MPC is -A) - -4B) -3 -3C) -" -9!) -% -8

1) >efer to igure 9-1- The e,uation for this household s sa&ing function isʹ

A) S ; (" < -9Y -

B) S ; (% < -"3Y -C) S ; (3 < -3Y -!) S ; (15 < -9Y -

13) >efer to igure 9-1- At income le&el 1535 this household s sa&ing is than =to) $ero and thisʹ

household s consumption is $ero-ʹ

A) less than greater thanB) e,ual to e,ual toC) greater than less than!) greater than greater than

14) >efer to igure 9-1- This household s consumption function isʹ

A) C ; " < -"Y -

39



B) C ; % < -83Y -C) C ; 3 < -3Y -!) C ; 15 < -"Y -

18) >efer to igure 9-1- This household sa&es (% at an income le&el of A) - B) %C) "3-!) 1"3-

19) >efer to igure 9-1- This household consumes "5 at an income le&el of A) %5-B) "5-C) "5"83- !) 159-

1@) >efer to igure 9-1- An increase in the amount of consumption this household ma#es when this household s

income is $eroA) ma#es the consumption function steeper-B) ma#es the sa&ing function flatter-C) shifts the consumption function downward-!) shifts the sa&ing function downward-

") >efer to igure 9-1- An increase in the MPC

A) ma#es the consumption function flatter-B) ma#es the sa&ing function flatter-C) shifts the consumption function upward-!) shifts the sa&ing function downward-


"1) >efer to igure 9-"- The line segment BD represents 7err sʹ

A) consumption when income e,uals Y 1-B) sa&ing when income e,uals $ero-C) sa&ing when income is Y 1-!) consumption when income e,uals $ero-

"") >efer to igure 9-"- 7err s consumption e,uals his income at *ointʹ

A) B-B) A-

C) D-!) C -

40



"%) >efer to igure 9-"- 7err s sa&ing e,uals $ero at income le&elʹ

A) $ero-B) Y 1-C) Y "-!) Y " ( Y 1-

") >efer to igure 9-"- Along the line segment AC 5 7err sʹ

A) consumption e,uals his income-B) consumption is greater than his income-C) sa&ing is $ero-!) sa&ing is positi&e-

"3) >efer to igure 9-"- Along the segment AB5 7err sʹ

A) consumption is less than his income- B) sa&ing is positi&e-C) consumption e,uals his income- !) sa&ing is negati&e-

"4) >efer to igure 9-"- *ositi&e sa&ing occurs along the line segmentA) BC -B) DC -C) AC -!) BA-

"8) >efer to igure 9-"- An increase in 7err s income is represented 'ʹ

A) an upward shift in 7err s consumption function-ʹ

B) an increase in the slope of 7err s consumption function-ʹ

C) a mo&ement from *oint B to A-!) none of the a'o&e

"9) >efer to igure 9-"- 0uppose 7err sʹ MPC increases- At income Y 15 7err sʹ

A) consumption will 'e greater than his income-B) consumption will 'e less than his income-C) sa&ing will 'e $ero-!) all of the a'o&e

"@) The fraction of a change in income that is consumed or spent is calledA) the marginal propensit of income- B) the marginal propensit to sa&e-C) the marginal propensit to consume- !) a&erage consumption-

%) If ou sa&e 9 when ou e/perience a rise in our income5A) our MPS is -"3-

B) our MPC is -9-C) our MPC is -93-!) our MPS is --

%1) If consumption is %5 when income is %355 and consumption increases to %45 when incomeincreases to %55 the MPC isA) -43- B) -9- C) -83- !) -@3-

%") If consumption is 15 when income is 155 and consumption increases to 115 whenincome increases to 1"55 the MPS isA) -1- B) -"3- C) -3- !) -@-

41



%%) 0uppose consumption is 35 when income is 95 and the MPC e,uals -@- When income increases to155 consumption isA) 53-B) "58-C) 459- !) 85"-

%) 0uppose sa&ing is 15 when income is 15 and the MPC e,uals -9- When income increases to 1"55sa&ing isA) 1549-B) 159-C) "5"- !) %5-

%3) 0uppose consumption is 45 when income is @5 and the MPS e,uals -"3- When income increases to155 consumption is

A) 85- B) 935- C) 4853- !) @5"3-

%4) If the MPS is -""5 the MPC isA) (-""-B) -89-C) 1-""-!) -44-

%8) If the MPS is -35 the MPC is

A) (-3-B) "-"3-C) -@3-!) 1-3-

%9) If the consumption function is of the form C ; 9 < -Y 5 the MPS e,ualsA) (--B) --C) -4-!) (-4-

%@) If the sa&ing function is of the form S ; (" < -%Y 5 consumption at an income le&el of " is

A) 9- B) 1"- C) 14- !) 19-

) If Fil s consumption function is of the formʹ C ; 1 < -9Y 5 her sa&ing e,uals $ero at an income le&el of A) 19-B) 3-C) 9-!) cannot 'e determined from the gi&en information

1) If Lander s sa&ing function is of the formʹ S ; (13 < -3Y 5 his consumption e,uals his income at an incomele&el of A) 13-

42



B) ""3- C) 153- !) %-

Refer to the information provided in Table !.1 below to answer the questions that follow.

Table (.1

") >efer to Ta'le 9-1- The e,uation for the aggregate consumption function isA) C ; 9 < -@3Y -B)C ; 9 < -@Y -C) C ; 9 < -83Y -!)C ; (9 < -3Y -

%) >efer to Ta'le 9-1- 0ociet sʹ MPC isA) -@-B) -@3-C) -9- !) -3-

) >efer to Ta'le 9-1- 0ociet sʹ MPS isA) -3- B) -1-C) -"- !) -@3-

3) >efer to Ta'le 9-1- At an aggregate income le&el of 15 aggregate sa&ing would 'eA) (%- B) %- C) (8-!) 3-

4) >efer to Ta'le 9-1- Assuming societ sʹ MPC is constant at an aggregate of income of %5 aggregateconsumption would 'e -A) %"3- B) %3- C) %3-!) "3-

43




Table (.2

8) >efer to Ta'le 9-"- The e,uation for the aggregate sa&ing function isA) S ; (1 < -13Y -

B) S ; (1 < -1Y -C) S ; (13 < -"Y -!) S ; (13 < -93Y -

9) >efer to Ta'le 9-"- 0ociet sʹ MPC isA) -1-B) -"-C) -9-!) -@-

@) >efer to Ta'le 9-"- 0ociet sʹ MPS is

A) -"-B) -%-C) -1-!) -@-

3) >efer to Ta'le 9-"- Assuming societ s M*C is constant5 at an aggregate income le&el of @5ʹ

aggregate consumption would 'eA) 443-B) @1-C) 15"-!) 1583-

31) >efer to Ta'le 9-"- Assuming societ sʹ MPC is constant5 at an aggregate income of 15" aggregate sa&ingwould 'e -A) B) "C) 33!) 13

44




Fi$ure (.#

3") >efer to igure 9-%- The e,uation for the aggregate consumption function isA) C ; 1 < -3Y -B)C ; 4 < -8Y -C) C ; 9 < -4Y -!) C ; 4 < -Y -

3%) >efer to igure 9-%- The e,uation for the aggregate sa&ing function isA) S ; (4 < -%Y -B)S ; (" < -4Y -C)S ; (1 < -3Y -!)S ; (9 < -Y

3) >efer to igure 9-%- In this econom5 aggregate sa&ing will 'e $ero if income isA) 1 'illion-B) " 'illion- C) % 'illion- !) 'illion-

33) >efer to igure 9-%- or this societ5 aggregate sa&ing is positi&e if aggregate income isA) a'o&e $ero-

B) 'etween and 13 'illion-C) e,ual to " 'illion-!) a'o&e " 'illion-

34) >efer to igure 9-%- If aggregate income is 15 'illion5 then in this societ aggregate sa&ing is 'illion-A) %B) %"C) "!) 33

38) >efer to igure 9-%- Which of the following statements is AF02?

45



A) Aggregate sa&ing is negati&e for all income le&els 'elow 'illion-B) or all aggregate income le&els a'o&e " 'illion5 aggregate consumption is less than aggregate income-C) If consumption is the onl e/penditure5 this econom would 'e in e,uili'rium at an aggregate income le&el of" 'illion-!) 0a&ing is negati&e at all income le&els 'elow " 'illion-


Fi$ure (.4

39) >efer to igure 9-- The aggregate consumption functions C 1 and C "A) ha&e the same MPC &alues-B) impl a different MPS &alues-C) ha&e the same autonomous consumption &alues-!) ha&e the same 'rea#(e&en &alues-

3@) >efer to igure 9-- Which consumption function has the largest MPC ?A) C 1- B) C "-C) C %- !) cannot 'e determined from the figure

4) >efer to igure 9-- 0uppose the consumption function for C 1 ; 1 < -9Y 5 the consumptionfunction that 'est fits C " isA) C " ; " < -9Y - B) C " ; 1 < -Y -C) C " ; < -3Y - !) C " ; " < -1Y -

41) >efer to igure 9-- 0uppose the consumption function for C 1 ; " < -3Y 5 the consumption function that 'estfits C % isA) C % ; " < -9Y -

B) C % ; " < -Y -C) C % ; < -3Y -

46



!) C % ; < -Y -

4") >efer to igure 9-- If income is Y 15 aggregate consumption is the greatest when the aggregateconsumption function isA) C %-B) C "-C) C 1-!) cannot 'e determined from the figure

4%) >efer to igure 9-- If income is Y "A) the societ s sa&ing is negati&e alongʹ C 15 C "5 and C %-B) the societ s consumption is e,ual alongʹ C " and C %-C) the societ s sa&ing is positi&e alongʹ C " and C %-!) the societ s sa&ings is negati&e alongʹ C 1-

4) If the consumption function is 'elow the 3(degree line5A) consumption is less than income and sa&ing is positi&e-

B) consumption is less than income and sa&ing is negati&e-C) consumption e/ceeds income and sa&ing is positi&e-!) consumption e/ceeds income and sa&ing is negati&e-


Fi$ure (.5

43) >efer to igure 9-3- The MPS for this sa&ing function isA) 3-B) -"3-C) -3-!) -

44) >efer to igure 9-3- If aggregate income is 'illion5 aggregate sa&ing is 'illion-A) (%B) (1C) !) 3

48) >efer to igure 9-3- If aggregate income is @ 'illion5 aggregate consumptionA) is "3 'illion-B) is 9 'illion-C) is 983 'illion-

!) cannot 'e determined from this information-


47



Fi$ure (.6

49) >efer to igure 9-4- The MPS for this sa&ing function isA) --B) -"-C) -"3-!) -1-

4@) >efer to igure 9-4- If aggregate income is 95 aggregate sa&ing is -A) (1B) ("C) !) "

8) >efer to igure 9-4- If aggregate income is 155 aggregate consumption isA) 93-B) @4-C) @1-!) @"-

2 True/False

1) As interest rates fall5 spending decreases-") 6ncertaint a'out the future is li#el to increase current spending-%) The marginal propensit to consume is the change in consumption per change in income-) If the marginal propensit to consume is -95 the marginal propensit to sa&e is 9-

(.2 Planne+ "n,estment

1) The Tin Tots To Compan manufactures onl sleds- In "8 Tin Tots manufactured 15 sleds5 'ut soldonl 95 sleds- In "8 Tin Tots change in in&entor wasʹ

A) ("5 sleds-B) 15 sleds-

C) "5 sleds-!) %5 sleds-

%) Which of the following is NOT considered in&estment?A) The ac,uisition of capital goodsB) The purchase of go&ernment 'ondsC) The increase in planned in&entories!) The construction of a new factor

) Which of the following is an in&estment?A) the purchase of a new printing press ' a 'usinessB) the purchase of a corporate 'ond ' a household

48



C) the purchase of a share of stoc# ' a household!) a le&eraged 'uout of one corporation ' another

3) O&er which component of in&estment do firms ha&e the least amount of control?A) purchases of new e,uipmentB) construction of new factoriesC) changes in in&entories!) 'uilding new machines

4) Assume that in 0candia5 planned in&estment is 9 'illion 'ut actual in&estment is 4 'illion-6nplanned in&entor in&estment isA) (1 'illion-B) 1 'illion-C) (" 'illion-!) 8 'illion-

9) If unplanned 'usiness in&estment is " million and planned in&estment is " million5 thenactual in&estment isA) " million-B) million-C) (" million-!) " million-

1) If planned in&estment e/ceeds actual in&estment5A) there will 'e an accumulation of in&entories-B) there will 'e no change in in&entories-

C) there will 'e a decline in in&entories-!) none of the a'o&e

11) If In&entor in&estment is higher than firms planned5A) actual and planned in&estment are e,ual-B) actual in&estment is less than planned in&estment-C) actual in&estment is greater than planned in&estment-!) actual in&estment must 'e negati&e-


Fi$ure (.!

49



1") >efer to igure 9-8- In A$ora5 planned in&estment does not &ar with income- A$ora s planned in&estmentʹ

function is represented 'A) *anel A-B) *anel B-C) *anel C-!) *anel !-

1%) >efer to igure 9-8- In arle5 planned in&estment &aries in&ersel with income- arle sʹ

planned in&estment function is represented 'A) *anel A-B) *anel B-C) *anel C-!) *anel !-

1) Without the go&ernment or the foreign sector in the income(e/penditure model5 planned aggregate e/pendituree,ualsA) consumption plus actual in&estment-

B) consumption plus in&entor ad+ustment-C) consumption minus planned in&estment-!) consumption plus planned in&estment-

2 True/False

1) If actual in&estment is greater than planned in&estment5 unplanned in&entories decline-") irms react to an unplanned in&entor in&estment ' increasing output-%) irms react to negati&e in&entor in&estment ' increasing output-) If planned sa&ing e/ceeds planned in&estment5 in+ections are greater than lea#ages-3) If planned in&estment increases5 e,uili'rium will 'e restored onl when sa&ing has increased

' e/actl the amount of the initial increase in planned in&estment5 assuming there is nogo&ernment or foreign sector-

50



(.# The etermination of -uilibrium utput 0"ncome

1 Multiple Choice

1) In macroeconomics5 e,uili'rium is defined as that point at whichA) sa&ing e,uals consumption-B) planned aggregate e/penditure e,uals aggregate output-C) planned aggregate e/penditure e,uals consumption-!) aggregate output e,uals consumption minus in&estment-

") The econom can 'e in e,uili'rium if5 and onl if5A) planned in&estment is $ero-B) actual in&estment is $ero-C) planned in&estment is greater than actual in&estment-!) planned in&estment e,uals actual in&estment-

%) If aggregate output is greater than planned spending5 then

A) unplanned in&entor in&estment is $ero-B) unplanned in&entor in&estment is negati&e-C) unplanned in&entor in&estment is positi&e-!) actual in&estment e,uals planned in&estment-

) If unplanned in&entor in&estment is positi&e5 thenA) planned in&estment must 'e $ero-B) planned aggregate spending must 'e greater than aggregate output-C) planned aggregate spending must 'e less than aggregate output-!) planned aggregate spending must e,ual aggregate output-

3) If aggregate output e,uals planned aggregate e/penditure5 then

A) unplanned in&entor in&estment is $ero-B) unplanned in&entor ad+ustment is negati&e-C) unplanned in&entor ad+ustment is positi&e-!) actual in&estment is greater than planned in&estment-


Table (.#

4) >efer to Ta'le 9-%- At an aggregate output le&el of 'illion5 planned e/penditure e,ualsA) 33 'illion-B) 3 'illion-C) 3 'illion-

!) 93 'illion-

51



8) >efer to Ta'le 9-%- At an aggregate output le&el of 9 'illion5 aggregate sa&ingA) e,uals (3 'illion-B) e,uals -C) e,uals 3 'illion-!) cannot 'e determined from this information-

9) >efer to Ta'le 9-%- At an aggregate output le&el of " 'illion5 the unplanned in&entor change isA) (13 'illion-B) (" 'illion-C) (3 'illion-!) 1 'illion-

@) >efer to Ta'le 9-%- At an aggregate output le&el of 4 'illion5 the unplanned in&entor change isA) (1 'illion- B) (3 'illion-C) - !) 3 'illion-

1) >efer to Ta'le 9-%- If aggregate output e,uals 5 there will 'e a 1 'illion unplanneddecrease in in&entories-A) " 'illion B) 'illionC) 4 'illion!) 9 'illion

11) >efer to Ta'le 9-%- The e,uili'rium le&el of aggregate output e,ualsA) 'illion-B) 4 'illion-

C) 9 'illion- !) 15 'illion-

1") >efer to Ta'le 9-%- Which of the following statements is AF02?A) At output le&els greater than 9 'illion5 there is a positi&e unplanned in&entor change-B) If aggregate output e,uals 1 'illion5 then aggregate sa&ing e,uals 1-C) The MPC for this econom is -83-!) At an output le&el of 'illion5 there is a 13 'illion unplanned in&entor decrease-

1%) >efer to Ta'le 9-%- *lanned sa&ing e,uals planned in&estment at an aggregate output le&elA) of 1 'illion-

B) of 4 'illion-C) of 9 'illion-!) that cannot 'e determined from this information-

1) >efer to Ta'le 9-%- *lanned in&estment e,uals actual in&estment atA) all income le&els-B) all income le&els a'o&e 4 'illion-C) all income le&els 'elow 4 'illion-!) 1 'illion-


Table (.4

52



13) >efer to Ta'le 9-- At an aggregate output le&el of %5 million5 planned e/penditure e,ualsA) %5-B) %54-

C) "59-!) 5-

14) >efer to Ta'le 9-- The MPC in this econom isA) -3-B) -4-C) -8-!) -9-

18) >efer to Ta'le 9-- At an aggregate output le&el of 5 million5 the unplanned in&entor change isA) 15" million-B) -

C) million- !) ( million-

19) >efer to Ta'le 9-- At an aggregate output le&el of 85 million5 the unplanned in&entorchange isA) -B) million-C) ( million-!) (15" million-

1@) >efer to Ta'le 9-- If aggregate output e,uals 5 there will 'e a " million unplanneddecrease in in&entories-

A) %5 millionB) 5 million C) 35 million !) 45 million

") >efer to Ta'le 9-- The e,uili'rium le&el of aggregate output e,ualsA) %5 million- B) 5 million- C) 35 million- !) 45 million-

"1) >efer to Ta'le 9-- Which of the following statements is AF02?A) At an output le&el 55 there is a million unplanned in&entor decrease-

53



B) If aggregate output e,uals 5 million5 then aggregate sa&ing e,uals 1 million-C) The MPC for this econom is -9-!) At an output le&el of %5 million5 there is a 4 million unplanned in&entordecrease-

"") >efer to Ta'le 9-- *lanned sa&ing e,uals planned in&estment at an aggregate output le&el of A) 5 million-B) 35 million- C) 45 million- !) 85 million-

"%) >efer to Ta'le 9-- *lanned in&estment e,uals actual in&estment atA) all income le&els-B) all income le&els a'o&e 45 million-C) all income le&els 'elow 45 million!) an income le&el of 45 million-

"3) If C ; 3 < -@Y and I ; 5 then the e,uili'rium le&el of income isA) @-B) 159- C) 15-!) @5-

"4) If S ; (" < -"Y and I ; 15 then the e,uili'rium le&el of income isA) %5- B) 153- C) 5- !) 15"-

"8) If C ; 153 < -83Y and I ; 35 then planned sa&ing e,uals planned in&estment at aggregateoutput le&el of A) 95-B) "5- C) "5444-48- !) 15-

Refer to the information provided in Fiure !.! below to answer the questions that follow.

"9) >efer to igure 9-9- What is the e,uation for the aggregate e/penditure function = AE )?

54



A) AE ; " < -3Y.

B) AE ; 13 < -"3Y.

C) AE ; " < -9Y.

!) AE ; %3 < -4Y.

"@) >efer to igure 9-9- 2,uili'rium output e,ualsA) 1- B) "-C) 13-!) %-

%) >efer to igure 9-9- At aggregate output le&el % million5 there is aA) 83 million unplanned increase in in&entories-B) 83 million unplanned decrease in in&entories-C) 1 million decrease in in&entories-!) 1 million increase in in&entories-

%") >efer to igure 9-9- Gow will e,uili'rium aggregate e/penditure and e,uili'rium aggregateoutput change as aresult of a decrease in in&estment ' " million?A) AE line shifts down5 increasing e,uili'rium output and e,uili'rium e/penditure-B) AE line shifts up5 increasing e,uili'rium output and e,uili'rium e/penditure-C) AE line shifts down5 decreasing e,uili'rium output and e,uili'rium e/penditure-!) AE line shifts down5 increasing e,uili'rium output and decreasing e,uili'riume/penditure-

%%) >efer to igure 9-9- Fea#ages are greater than in+ections at an aggregate output le&el of A) % million-

B) 1 million-C) " million- !) cannot 'e determined from the figure

Refer to the information provided in Fiure !." below to answer the questions that follow.

Fi$ure (.

55



%) >efer to igure 9-@- What is the e,uation for the aggregate e/penditure function = AE )?A) AE ; 4 < -1Y -B) AE ; " < -9Y -C) AE ; 33 < -9Y -!) AE ; 1 < -@Y -

%3) >efer to igure 9-@- At an aggregate output le&el of 3 million5 there is aA) 1 million unplanned increase in in&entories-B) 183 million unplanned decrease in in&entories-C) change in unplanned in&entories-!) 1 million unplanned decrease in in&entories-

%4) >efer to igure 9-@- At aggregate output le&els a'o&e 15 million5 there areA) unplanned increases in in&entories and output increases-B) unplanned decreases in in&entories and output increases-

C) unplanned decreases in in&entories and output decreases-!) unplanned increases in in&entories and output decreases-

%8) >efer to igure 9-@- At aggregate output le&els 'elow 15 million5 there areA) unplanned decreases in in&entories and output increases-B) unplanned increases in in&entories and output increases-C) unplanned increases in in&entories and output decreases-!) unplanned decreases in in&entories and output decreases-

%9) >efer to igure 9-@- At aggregate output le&els a'o&e 15 million5A) lea#ages e,ual in+ections-B) lea#ages are more than in+ections-

C) lea#ages are $ero5 'ut in+ections are positi&e-!) lea#ages are less than in+ections-

%@) >efer to igure 9-@- At aggregate output le&els 'elow 15 million5A) lea#ages e,ual in+ections-B) lea#ages are greater than in+ections-C) lea#ages are less than in+ections-!) lea#ages are positi&e5 'ut in+ections are negati&e-

) 6sing the sa&ingHin&estment approach to e,uili'rium5 the e,uili'rium condition can 'e written asA) C < I ; C < S -

B) C ; S < I -C) C ( S ; I - !) C < S ; I -

1) irms react to unplanned in&entor reductions 'A) reducing output-B) increasing output-C) reducing planned in&estment- !) increasing consumption-

") irms react to unplanned increases in in&entories 'A) reducing output-B) increasing output-C) increasing planned in&estment-

56



!) increasing consumption-

%) Aggregate output will increase if there is a=n)A) increase in sa&ing-B) unplanned rise in in&entories-C) unplanned fall in in&entories-!) decrease in consumption-

) A decrease in planned in&estment causesA) output to increase-B) output to decrease5 'ut ' a smaller amount than the decrease in in&estment-C) output to decrease5 'ut ' a larger amount than the decrease in in&estment-!) output to decrease ' an amount e,ual to the decrease in in&estment-

2 True/False

1) When aggregate e/penditure is greater than aggregate output5 there will 'e an unplanned

'uild up of in&entories-") When there is an unplanned draw down of in&entories5 firms will increase production-%) Actual in&estment e,uals planned in&estment plus unplanned changes in in&entories-) When the econom is in e,uili'rium5 sa&ings e,uals planned in&estment-3) If aggregate e/penditure decreases5 then e,uili'rium output increases-4) Assuming there is no go&ernment or foreign sector5 the econom will 'e in e,uili'rium if5 andonl if5 planned in&estment e,uals actual in&estment-

(.4 The Multiplier

1) The ratio of the change in the e,uili'rium le&el of output to a change in some autonomous &aria'le is theA) elasticit coefficient-

B) multiplier-C) automatic sta'ili$er-!) marginal propensit of the autonomous &aria'le-

Refer to the information provided in Fiure !.1# below to answer the questions that follow.

Fi$ure (.13

") >efer to igure 9-1- The e,uation for the aggregate e/penditure function AE is

57



A) AE ; 3 < -4Y -B) AE ; 9 < -4Y -C) AE ; 3 < -83Y -!) AE ; 3 < -Y -

%) >efer to igure 9-1- The &alue of the multiplier isA) "-B) "-3-C) %- !) -

) >efer to igure 9-1- A 1 million increase in in&estment changes e,uili'rium output toA) " million- B) @ million-C) ""3 million- !) 183 million-

3) >efer to igure 9-1- A " million decrease in autonomous consumptionA) changes e,uili'rium e/penditure to 1" million-B) changes e,uili'rium output to 19 million-C) will change the MPC -!) will change the MPS -

4) >efer to igure 9-1- If MPC increases to -95 e,uili'rium aggregate outputA) increases to "3 million-B) remains at " million-C) increases to million-!) cannot 'e determined from the gi&en information-

8) Assuming no go&ernment or foreign sector5 if the MPC is -@5 the multiplier isA) -1-B) 3-C) @- !) 1-

9) Assuming no go&ernment or foreign sector5 the formula for the multiplier isA) 1H MPC -B) 1H MPS -C) 1H=1 < MPC )- !) 1 ( MPC -

@) Assuming there is no go&ernment or foreign sector5 the formula for the multiplier isA) 1H=1 ( MPC )-B) 1H MPC -C) 1H=1 < MPC )-!) 1 ( MPC -

1) Assuming there is no go&ernment or foreign sector5 if the multiplier is 15 the MPC isA) -@- B) -9-C) -3-!) -1-

11) Assume there is no go&ernment or foreign sector- If the MPS is -35 the multiplier is

58



A) -@3- B) "- C) 1- !) 3-

1") Assume there is no go&ernment or foreign sector- If the multiplier is 15 a 1 'illion increasein planned in&estment will cause aggregate output to increase 'A) 1 'illion- B) 3 'illion-C) 1 'illion- !) 1 'illion-

1%) Assume there is no go&ernment or foreign sector- If the MPS is -"5 a 'illion decrease in plannedin&estment will cause aggregate output to decrease 'A) " 'illion- B) 3 'illion- C) 9 'illion-

!) " 'illion-

1) Assume there is no go&ernment or foreign sector- If the multiplier is 5 a " 'illion increase in in&estment willcause aggregate output to increase 'A) 3 'illion-B) " 'illion- C) 'illion- !) 9 'illion-


Fi$ure (.11

13) >efer to igure 9-11- What is the e,uation for aggregate e/penditure AE 1?A) AE 1 ; 15 < -3Y -B) AE 1 ; 4 < -Y -C) AE 1 ; 15 < -4Y - !) AE 1 ; < -Y -

14) >efer to igure 9-11- 0uppose AE 15 AE " and AE % are parallel- What is the &alue of *oint B?A) 83 millionB) 9 millionC) @ million

59



!) cannot 'e determined from the gi&en information

18) >efer to igure 9-11- 0uppose AE 15 AE " and AE % are parallel- What is the &alue of *oint A?A) 3 millionB) 3 millionC) 31 million!) cannot 'e determined from the gi&en information

19) >efer to igure 9-11- 0uppose the econom s aggregate e/penditure line isʹ AE 1- A 1 million increase in planned in&estment causes aggregate e,uili'rium output to increase toA) 1514-8 million-B) 151 million-C) 151"3-3 million- !) 15"13-4 million-

1@) As the MPS decreases5 the multiplier willA) increase-

B) decrease-C) remain constant-!) either increase or decrease depending on the si$e of the change in in&estment-

"1) If autonomous consumption increases5 the si$e of the multiplier wouldA) increase-B) decrease-C) remain constant-!) either increase or decrease depending on the si$e of the change in autonomous consumption-

"") In practice5 the actual si$e of the multiplier is a'outA) 1-

B) 1--C) "- !) -

"%) According to the parado/ of thrift5 as indi&iduals increase their sa&ing5ʺ ʺ

A) income in the econom increases 'ecause there is more mone a&aila'le for firms to in&est-B) income in the econom increases 'ecause interest rates will fall and the econom will e/pand-C) income in the econom will remain constant 'ecause the change in consumption e,uals the change in sa&ing-!) income in the econom will fall 'ecause the decreased consumption that results from increased sa&ing causesthe econom to contract-

") According to the parado/ of thrift5 increased efforts to sa&e will cause a=n)ʺ ʺ

A) increase in income and an increase in o&erall sa&ing-B) increase in income 'ut no o&erall change in sa&ing-C) decrease in income and an o&erall decrease in sa&ing-!) decrease in income 'ut an increase in sa&ing-

2 True/False

1) The larger the MPC 5 the smaller the multiplier-") The smaller the M*05 the larger the multiplier-%) If the M*C is -835 then the multiplier is -) If the M*0 is -15 then the multiplier is 1-3) An increase in the M*C5 reduces the multiplier-4) The parado/ of thrift is that all people deciding to sa&e more could lead to them sa&ing less-

60



Chapter 5 The Go,ernment an+ Fiscal Polic*.1 Go,ernment in the -conom*

1) iscal polic refers toA) the techni,ues used ' a 'usiness firm to reduce its ta/ lia'ilit-B) the 'eha&ior of the nation s central 'an#5 the ederal >eser&e5 regarding the nation s mone suppl-ʹ ʹ

C) the spending and ta/ing policies used ' the go&ernment to influence the econom-!) the go&ernment s a'ilit to regulate a firm s 'eha&ior in the financial mar#ets-ʹ ʹ

") Which of the following is NOT a categor of fiscal polic?A) go&ernment policies regarding the purchase of goods and ser&icesB) go&ernment policies regarding ta/ationC) go&ernment policies regarding mone suppl in the econom!) go&ernment policies regarding transfer paments and welfare 'enefits

%) What determines ta/ re&enues?A) the income ta/ rate

B) the rate of interestC) the mone suppl in the econom !) the rate of inflation

) Which of the following is INCO>>2CT regarding ta/ re&enues?A) the increase during recessionsB) the change with changes in the ta/ rateC) the are a re&enue source in the go&ernment s 'udgetʹ

!) the increase the rate of interest

3) !uring recessions5 go&ernment spending usuallA) decreases 'ecause unemploment paments decrease-B) increases 'ecause unemploment paments increase-C) decrease 'ecause unemploment paments increase-!) increases 'ecause unemploment paments decrease-

4) !isposa'le incomeA) increases when net ta/es increase-B) increases when income increases-C) decreases when sa&ing increases-!) increases when sa&ing decreases-

8) Bill s income is 15 and his net ta/es are %3- Gis disposa'le income isʹ

A) 15%3- B) 43- C) (%3-!) 83-

9) When the go&ernment sector is included in the income(e/penditure model5 the e,uation for aggregate income isA) Y ; C < S ( T - B)Y ; C < I -C) Y ; C < I < G- !)Y ; C < S < I -

@) The difference 'etween what a go&ernment spends and what it collects in ta/es in a ear isA) net re&enue-

61



B) net ta/es-C) the go&ernment 'udget deficit or surplus-!) the go&ernment de't-

1) In "85 the cit of Canfield collected 35 in ta/es and spent 35- In "85 the cit of Canfield hadaA) 'udget surplus of 35-B) 'udget surplus of 35-C) 'udget deficit of 35-!) 'udget surplus of 35-

11) In "85 the cit of Mi#etown collected "35 in ta/es and spent %35- In "85 the cit of Mi#etownhad aA) 'udget surplus of 15- B) 'udget surplus of 38D-C) 'udget deficit of 15-

!) 'udget deficit of "5-

1") After go&ernment is added to the income(e/penditure model5 the formula for the aggregateconsumption function isA) C ; a ( b=Y ( T )-B) C ; a ( b=T ( Y )-C) C ; a < b=Y < T )-!) C ; a < b=Y ( T )-

1%) The aggregate consumption function is C ; 1 < -4Yd - If income is 15 and net ta/es are

%5 consumption e,ualsA) 9- B) 3"- C) 39-!) 8-

1) The aggregate consumption function is C ; 9 < -9Yd - If income is "5 and net ta/es are35 consumption e,ualsA) "5-B) 153-C) "513- !) "53-

13) The aggregate consumption function is C ; 1 < -9Yd - If income is 4 and net ta/es are $ero5consumption e,ualsA) $ero-B) 4- C) 39-!) %4-

14) The aggregate consumption function is C ; 15 < -@Yd - If income is %54 and net ta/es are 45consumption e,ualsA) %5-B) %58-

62



C) "5-!) 5-

18) If output is less than planned aggregate e/penditure5 there will 'eA) an unplanned increase in in&entories- B) an unplanned decrease in in&entories-C) no change in in&entories-!) a planned increase in in&entories-

Refer to the information provided in Table ".1 below to answer the questions that follow.

Table .1

19) >efer to Ta'le @-1- At an output le&el of 15" 'illion5 the le&el of aggregate e/penditure isA) 15 'illion-B) 15" 'illion- C) 15% 'illion-

!) 15 'illion-

1@) >efer to Ta'le @-1- At an output le&el of 15" 'illion5 there is an unplanned in&entor change of A) positi&e 1 'illion-B) $ero-C) negati&e 1 'illion- !) positi&e 1 'illion-

") >efer to Ta'le @-1- At an output le&el of "5 'illion5 the le&el of aggregate e/penditure isA) 153 'illion-

B) 159 'illion- C) 15@ 'illion- !) "5 'illion-

"1) >efer to Ta'le @-1- At an output le&el of "5 'illion5 there is an unplanned in&entor change of A) positi&e 1 'illion-B) positi&e 1 'illion-C) negati&e 1 'illion- !) $ero-

"") >efer to Ta'le @-1- The e,uili'rium le&el of output is 'illion-A) 9

B) 15" C) 154

63



!) "5

"%) >efer to Ta'le @-1- At an output le&el of 9 'illion5 disposa'le income e,uals 'illion-A) 9 B) 8 C) 4 !) 3

") >efer to Ta'le @-1- At an output le&el of "5 'illion5 the &alue of sa&ingA) cannot 'e determined from the gi&en information-B) is % 'illion-C) is " 'illion-!) is 1 'illion-

"3) >efer to Ta'le @-1- At the e,uili'rium le&el of income5 lea#ages e,ual 'illion-A) B) 1 C) " !) %

"4) >efer to Ta'le @-1 At an output le&el of 15" 'illion5 there is a tendenc for outputA) to fall-B) to increase-C) to remain constant-!) to either increase or decrease-


Table .2

"8) >efer to Ta'le @-"- At an output le&el of 153 'illion5 the le&el of aggregate e/penditure is 'illion-A) 15%B) 15 C) 153!) 154

"9) >efer to Ta'le @-"- At an output le&el of 153 'illion5 there is an unplanned in&entorA) decrease of " 'illion-B) change of -C) increase of 1 'illion- !) increase of 13 'illion-"@) >efer to Ta'le @-"- At an output le&el of "535 the le&el of aggregate e/penditure is

64



'illion-A) 153 B) "5C) "5%!) "5"

%) >efer to Ta'le @-"- At an output le&el of "535 there is an unplanned in&entorA) increase of % 'illion-B) decrease of " 'illion-C) change of - !) increase of " 'illion-

%1) >efer to Ta'le @-"- The e,uili'rium le&el of output is 'illion-A) 1B) 153 C) "5 !) "53

%") >efer to Ta'le @-"- At an output le&el of 1535 disposa'le incomeA) is 15-B) is 15"-C) is 15-!) cannot 'e determined from this information-

%%) >efer to Ta'le @-"- At an output le&el of "535 the le&el for sa&ingA) is %-B) is -C) is 3-!) cannot 'e determined from this information-

%) >efer to Ta'le @-" At the e,uili'rium le&el of income5 lea#ages e,ual 'illion-A) B) %C) 3 !) "

%3) >efer to Ta'le @-"- At an output le&el of "535 there is a tendenc for outputA) to increase- B) to remain constant-C) to either increase or decrease-

!) to fall-

The $talian e%onom& %an be %hara%teri'ed b& (quation ".1.

2E6ATION @-1C ; % < -9Yd

G ; T ; " I ; "%4) >efer to 2,uation @-1- The e,uili'rium le&el of output for the Italian econom isA) "593- B) %58- C) %513- !) %59-

65



%8) >efer to 2,uation @-1- At the e,uili'rium le&el of output in Ital5 consumption e,ualsA) %51-B) %5"3- C) %5- !) %54"3-

%9) >efer to 2,uation @-1- At the e,uili'rium le&el of output in Ital5 sa&ing e,ualsA) 3-B) - C) 33-!) 3-

%@) >efer to 2,uation @-1- At the e,uili'rium le&el of output in Ital5 lea#ages e,ualA) 43-

B) 4- C) 83-!) 8-

) Assuming there is no foreign trade in the econom5 the econom is in e,uili'rium whenA) S < T ; C < I -B) I < G ; S < T -C) IT ; S < G- !) G < T ; S < I -

3) Assuming there is no foreign trade in the econom5 e,uili'rium is achie&ed when go&ernment purchases e,ualA) sa&ing minus net ta/es minus consumption-

B) sa&ing plus net ta/es minus in&estment-C) net ta/es plus in&estment minus sa&ing-!) net ta/es minus in&estment minus sa&ing-

Refer to the information provided in Fiure ".1 below to answer the questions that follow.

Fi$ure .1

4) >efer to igure @-1- The e,uili'rium le&el of aggregate e/penditure is 'illion-A) %5

66



B) "5 C) 5!) 153

8) >efer to igure @-1- The MPC in this econom isA) --B) -4-C) -3-!) cannot 'e determined from the gi&en information

9) >efer to igure @-1- At e,uili'rium5 in+ectionsA) can 'e greater than 15 'illion- B) e,ual 153 'illion-C) e,ual lea#ages- !) e,ual "5 'illion-

@) >efer to igure @-1- At e,uili'rium5 the part of consumption that is dependent on income e,uals 'illion-A) 153B) 15C) "5!) cannot 'e determined from the gi&en information

3) >efer to igure @-1- 0uppose that the consumption function is C ; < -3Yd and ta/es are " 'illion5 ate,uili'rium the &alue of in+ections areA) 8 'illion-B) 3 'illion-

C) 43 'illion-!) %3 'illion-

31) >efer to igure @-1- 0uppose that the consumption function is C ; < -3Yd and ta/es are " 'illion5 ate,uili'rium the &alue of autonomous consumption isA) 'illion- B) % 'illion- C) 1 'illion- !) " 'illion-

3") >efer to igure @-1- 0uppose that the consumption function is C ; < -3Yd and ta/es are" 'illion5 at e,uili'rium5 what is the &alue of consumption?A) 15%3 B) "5C) 15%!) 1513

3%) If planned in+ections e/ceed lea#ages5 output willA) decrease-B) increase-C) remain constant-!) either increase or decrease-

67



3) or the econom to 'e in e,uili'rium5A) go&ernment purchases must e,ual ta/ re&enue and sa&ing must e,ual in&estment-B) go&ernment purchases must e,ual the sum of ta/ re&enue5 sa&ing and in&estment-C) go&ernment purchases plus in&estment must e,ual sa&ing plus ta/ re&enue-!) in&estment plus ta/ re&enue must e,ual go&ernment purchases plus sa&ing-

2 True/False

1) The econom is in e,uili'rium when aggregate output e,uals consumption spending-") or the econom to 'e in e,uili'rium5 the following condition must 'e satisfied G < I ; S < T -%) When in&estment is greater than planned in&estment5 output grows-) !isposa'le income is income less net ta/es-

.2 Fiscal Polic* at or Multiplier -ffects

1) If the go&ernment wants to reduce unemploment5 go&ernment purchases should 'e andHor ta/es

should 'e -A) increased increased B) decreased decreasedC) decreased increased !) increased decreased

") The *resident of :ulcan hires ou as an economic consultant- Ge is concerned that the output le&el in :ulcan istoo high and that this will cause prices to rise- Ge feels that it is necessar toreduce output ' 1 'illion- Ge tells ou that the MPC in :ulcan is -4- Which of the following would 'e the 'estad&ice to gi&e to the :ulcan president?A) reduce go&ernment purchases ' 'illion

B) increase ta/es ' 1 'illionC) reduce go&ernment purchases ' 1 'illion!) increase ta/es ' "-3 'illion


Table .#

) >efer to Ta'le @-%- Assuming constant MPC 5 at income of 15 million5 consumption is

million5 and at income of 15% million5 consumption is million-A) 4 94

68



B) 4 @ C) 49 @"!) 8" @4

3) >efer to Ta'le @-%- Assuming constant MPC 5 at income of 15" million5 sa&ing is million5 at income of 154 million5 sa&ing is million-A) 13 "% B) 14 "C) 18 "3 !) 19 "4

4) >efer to Ta'le @-%- The MPC in this econom is and the MPS is -A) -3 -3 B) -8 -3 C) -@ -1!) -9 -"

8) >efer to Ta'le @-%- The e,uili'rium le&el of aggregate output is million-A) 15"B) 15%C) 15!) 153

9) >efer to Ta'le @-%- Which of the following &aria'les is NOT considered autonomous?A) 0a&ingB) *lanned in&estmentC) *lanned go&ernment spending!) none of the a'o&e

@) >efer to Ta'le @-%- 0uppose the econom is in e,uili'rium and the go&ernment increasesspending ' 3 million5 the new e,uili'rium output is millionA) 1543B) 153 C) 1583!) 15%3

1) >efer to Ta'le @-%- 0uppose the econom is in e,uili'rium and the go&ernment raises ta/esfrom " million to "" million5 e,uili'rium output will ' million-A) decrease "B) increase "C) decrease 9

!) increase 9


Table .4

69



11) >efer to Ta'le @-- The e,uili'rium le&el of income isA) %5 'illion-B) %59 'illion- C) "5 'illion- !) %54 'illion-

1") >efer to Ta'le @-- The MPS

A) is -9-B) is -1-C) is -"!) cannot 'e determined from the a&aila'le information-

1%) >efer to Ta'le @-- The &alue of the go&ernment spending multiplier A) is 1-B) is -@-C) is 3-!) cannot 'e determined from the a&aila'le information-

1) >efer to Ta'le @-- The econom is at the e,uili'rium le&el of output- If go&ernment spendingincreases to a le&el of 'illion5 the new e,uili'rium le&el of output is

A) 35 'illion-B) "51 'illion-C) 45 'illion-!) 454 'illion-

13) >efer to Ta'le @-- The econom is at the e,uili'rium le&el of output- If go&ernment spendingdecreases ' 1 'illion5 the new e,uili'rium le&el of output isA) %51 'illion-B) "5 'illion-C) 153 'illion- !) 1533 'illion-

14) >efer to Ta'le @-- If ta/es are reduced from 1 'illion to 3 'illion5 the new e,uili'riumle&el of output is

70



A) 53 'illion-B) 154 'illion-C) %593 'illion-!) "51 'illion-

18) >efer to Ta'le @-- If ta/es are reduced from 1 'illion to 3 'illion and go&ernmentspending is reduced from " 'illion to 13 'illion5 the new e,uili'rium le&el of incomeA) is %5%3 'illion-B) is %533 'illion-C) is 154 'illion-!) cannot 'e determined from this information-

19) The go&ernment purchases multiplier isA) the difference 'etween the old e,uili'rium le&el of output and the new e,uili'rium le&el

of output-B) the ratio of the change in go&ernment purchases to the change in the e,uili'rium le&el of output-C) the ratio of the change in the e,uili'rium le&el of output to a change in go&ernment

purchases-!) the difference 'etween the new and old le&els of go&ernment purchases-

1@) If the MPC is -835 the go&ernment spending multiplier isA) "-3-B) -C) %-!) 1-83-

") If the MPC is -35 the ta/ multiplier isA) ("-3- B) ("-C) (1-!) (1-444-

"1) If the go&ernment spending multiplier is " and go&ernment purchases increase ' " 'illion5 output willincrease 'A) 1 'illion- B) 'illion-

C) 154 'illion- !) 3 'illion-

"") If the go&ernment spending multiplier is 3 and go&ernment spending decreases ' " 'illion5 output will ' 'illion-A) increase " B) decrease 15C) decrease !) decrease "

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The e%onom& of )ananaland %an be %hara%teri'ed b& (quation ".3.

2E6ATION @-%C ; "5 < -83Yd

T ; "G ; I ; 3"%) >efer to 2,uation @-%- The e,uili'rium le&el of income in Bananaland isA) 59- B) 115-C) 15-!) 354-

") >efer to 2,uation @-%- If go&ernment spending in Bananaland increases ' 35 e,uili'riumoutput increases 'A) 1- B) "-

C) - !) 9-


Fi$ure .#

"3) >efer to igure @-%- At e,uili'rium5 autonomous planned e/penditures e,ual 'illion-A) " B) 1 C) 3 !) %

"4) >efer to igure @-%- The e/penditure multiplier isA) -

72



B) 3-C) "-3- !) "-

"8) >efer to igure @-%- If autonomous planned e/penditure increases ' " 'illion5 e,uili'rium aggregate output to 'illion-A) decreases %4B) increases 33 C) increases 4 !) increases 4


Fi$ure .4

"9) >efer to igure @-- Along aggregate e/penditure AE 15 the MPC isA) -4- B) -8-C) -9-!) -@-

"@) >efer to igure @-- What is the &alue of *oint A?A) %53 'illion-B) 45 'illion-C) 85 'illion-!) cannot 'e determined from the gi&en information

%) >efer to igure @-- What is the &alue of *oint B?A) 85 'illionB) %53 'illionC) 45 'illion!) cannot 'e determined from the gi&en information

%1) >efer to igure @-- What is the &alue of the e/penditure multiplier?

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A) 9 B) 1C) 3!) "

%") >efer to igure @-- Along AE 15 in+ections e,ual lea#ages when aggregate output e,uals 'illion-A) 153B) %5C) "53!) "5

%%) >efer to igure @-- If aggregate e/penditures are represented ' AE " and go&ernmentspending increases ' " 'illion5 e,uili'rium aggregate output increases ' 'illion-A) 1B) "

C) !) 9

%) .o&ernment spending increases ' 'illion and the e,uili'rium le&el of output increases '" 'illion- The go&ernment spending multiplier A) is 3-B) is -C) is 4-!) cannot 'e determined from this information5 'ecause the MPC is not gi&en-

%3) Assume an econom is in e,uili'rium at an output le&el of 153 'illion- If go&ernment spending increases '" 'illion5 then at the output le&el of 153 'illion5 there isA) an unplanned rise in in&entories-B) an unplanned fall in in&entories-C) an unplanned in&entor change of $ero-!) either an unplanned increase or decrease in in&entories depending on the &alue of the MPC -

%4) Assume an econom is in e,uili'rium at an output le&el of 4 'illion- If go&ernment purchases decrease '83 'illion5 then at the output le&el of 4 'illion5 there isA) an unplanned increase in in&entories-B) an unplanned in&entor change of $ero-

C) either an unplanned increase or decrease in in&entories depending on the &alue of the MPC -!) an unplanned decrease in in&entories-

%8) A decrease in lump(sum ta/es willA) ma#e the consumption function flatter-B) ma#e the consumption function steeper-C) shift the consumption function downward-!) shift the consumption function upward-

%9) The ta/ multiplier isA) the ratio of the change in ta/es to the change in the e,uili'rium le&el of output-B) the MPC multiplied ' the MPS -C) the difference in ta/es multiplied ' the change in the e,uili'rium le&el of output-

74



!) the ratio of the change in the e,uili'rium le&el of output to the change in ta/es-

%@) If the MPC is -85 the ta/ multiplier isA) ("-""- B) (1-""- C) ("-%%-!) (%-%%-

) If the MPS is -5 the ta/ multiplier isA) ("-3-B) (1-48- C) (1-3- !) ("-%%-

1) If the MPS is -35 the ta/ multiplier isA) (3-B) ("-C) (1-!) (-3-

") Ta/es are reduced ' 8 'illion and income increases ' "9 'illion- The &alue of the ta/multiplier isA) (-B) ("-C) (1-

!) (3-

%) Ta/es are reduced ' 13 'illion and income increases ' 83 'illion- The &alue of the ta/multiplier isA) (-B) @- C) (1-!) (3-

) If the ta/ multiplier is (@ and ta/es are reduced ' 1 'illion5 output

A) falls ' 1 'illion-B) falls ' @ 'illion-C) increases ' @ 'illion-!) increases ' 1 'illion-

3) If the ta/ multiplier is (1" and ta/es are increased ' 4 'illion5 outputA) falls ' " 'illion-B) falls ' 8" 'illion-C) increases ' " 'illion-!) increases ' 8" 'illion-

75




Fi$ure .5

4) >efer to igure @-3- Which of the following e,uations 'est represents the aggregatee/penditure function?A) AE ; 154 < -Y - B) AE ; < -83Y -C) AE ; 15" < -9Y - !) AE ; 15 < -3Y -

8) >efer to igure @-3- At aggregate output of "5 'illion5 unplanned in&entories e,ual 'illion-A) "B) 9 C) (9 !) (

9) >efer to igure @-3- The go&ernment spending multiplier e,uals and the ta/multiplier e,uals -

A) "-3 (1-3 B) (% C) 3 ( !) @ (9

@) >efer to igure @-3- If the econom is in e,uili'rium and the go&ernment increases spending ' 1 'illion5e,uili'rium aggregate e/penditures increase to 'illion-A) 158 B) 159 C) "5!) "5

76



3) >efer to igure @-3- If the econom is in e,uili'rium and the go&ernment decreases spending ' " 'illion5 e,uili'rium aggregate output decreases to 'illion-A) 15B) 15"C) 15!) 9

31) >efer to igure @-3- If the econom is in e,uili'rium and the go&ernment increases ta/es ' 3 'illion5e,uili'rium aggregate output to 'illion-A) increases "5B) decreases 1533C) decreases 153 !) decreases 15

3") >efer to igure @-3- If the econom is in e,uili'rium and the go&ernment increases spending ' 1 'illion and increases ta/es ' 1 'illion5 e,uili'rium aggregate output

A) does not change-B) increases ' 1 'illion-C) increases ' less than 1 'illion-!) increases ' more than 1 'illion-

3%) If the go&ernment spending multiplier is 15 then the ta/ multiplier A) is (3-B) is (-C) is (@-!) cannot 'e determined 'ecause the MPS is not gi&en-

3) If the ta/ multiplier is (9-"5 then the go&ernment purchases multiplier A) is 9-"-B) is @-"-C) is 1-39-!) cannot 'e determined 'ecause the MPS is not gi&en-

33) If go&ernment spending is increased ' %5 ta/es are reduced ' %5 and the MPS is -35 e,uili'rium outputwill change 'A) %-B) -C) @-!) an amount that cannot 'e determined from this information-

34) If go&ernment purchases are increased ' 15 ta/es are reduced ' 15 and the MPC is -95e,uili'rium output will change 'A) (-B) 159-C) @-!) an amount that cannot 'e determined from this information-

38) If go&ernment spending is increased ' 33 and ta/es are increased ' 335 the e,uili'riumle&el of income willA) decrease ' 33

77



- B) not change-C) increase ' 33- !) increase ' 151-

39) If go&ernment purchases are decreased ' 9 and ta/es are decreased ' 95 the e,uili'rium le&el ofincome willA) decrease ' 9- B) increase ' 9-C) not change- !) decrease ' 14-

3@) Assume that the MPC is -83- If go&ernment spending increases ' 5 e,uili'rium output and ifta/es increase ' 5 e,uili'rium output -A) increases ' 154 decreases ' 154 B) increases ' 154 decreases ' 15"

C) increases ' 15" decreases ' 154!) increases ' decreases '

48) As the si$e of the MPC increases5 the &alue of the 'alanced('udget multiplier A) increases- B) decreases-C) remains constant-!) could either increase or decrease-

49) 0uppose that in the 'eginning of "8 the federal de't was @ trillion- !uring "85 the go&ernment 'alancedits 'udget- At the end of "85 the federal de'tA) increased-

B) staed the same-C) decreased- !) was eliminated-

2 True/False

1) If autonomous spending increases5 the aggregate e/penditure function 'ecomes steeper-") If the go&ernment increases ta/es ' 'illion and increases spending ' 'illion5 e,uili'rium outputincreases ' 'illion-%) A ta/ cut of 1" 'illion will ha&e less effect on the econom than an increase in go&ernment purchases of 1"

'illion-

.# The Fe+eral 7u+$et

1) The total amount owed ' the federal go&ernment to the pu'lic is theA) federal 'udget deficit-B) federal de't-C) net ta/ re&enue- !) fiscal drag-

") What is the largest e/penditure source in the go&ernment s 'udget?ʹ

A) consumptionB) transfer pamentsC) net interest paments !) net su'sidies

78



%) What is the largest source of re&enue in the go&ernment s 'udget?ʹ

A) social insuranceB) indirect 'usiness ta/esC) corporate ta/es !) personal ta/es

) A go&ernment s de't is reduced when itʹ

A) 'alances is 'udget-B) sells more 'onds-C) runs a deficit-!) runs a surplus-

3) When a go&ernment runs a deficit

A) its de't increases-B) it must raise ta/esC) its de't decreases- !) it must cut spending-

2 True/False

1) The amount the go&ernment owes to the pu'lic is the deficit-") If ta/ receipts are less than go&ernment e/penditures the go&ernment is running a deficit-%) If the go&ernment runs a deficit5 then the go&ernment de't increases-) !efense spending is the largest part of the 6-0- go&ernment spending-

3) The go&ernment 'udget is 'alanced when ta/ receipts e,ual go&ernment spending-

.4 The -conom* s "nfluence on the Go,ernment 7u+$etʹ

1) Which of the following is a CO>>2CT se,uence of e&ents during a recession?A) unemploment falls5 income falls5 ta/ re&enue falls5 unemploment 'enefits rise5 and the 'udget deficit risesB) unemploment rises5 income falls5 ta/ re&enue falls5 unemploment 'enefits rise5 and the 'udget deficit risesC) unemploment rises5 income falls5 ta/ re&enue rises5 unemploment 'enefits fall5 and the

'udget deficit falls!) unemploment rises5 income rises5 ta/ re&enue rises5 unemploment 'enefits rise5 and

the 'udget deficit rises

") Which of the following is a CO>>2CT se,uence of e&ents during an e/pansion?A) unemploment falls5 income falls5 ta/ re&enue falls5 unemploment 'enefits rise5 and the 'udget deficit fallsB) unemploment rises5 income falls5 ta/ re&enue falls5 unemploment 'enefits rise5 and the 'udget deficit risesC) unemploment rises5 income falls5 ta/ re&enue rises5 unemploment 'enefits fall5 and the 'udget deficit falls!) unemploment falls5 income rises5 ta/ re&enue rises5 unemploment 'enefits fall5 and the

'udget deficit falls

%) The presence of automatic sta'ili$ers means that the federal deficit is than itotherwise would 'e in a recession and than it otherwise would 'e in an e/pansion-

79



A) larger smallerB) smaller larger C) smaller smaller !) larger larger

) !uring a recession5 automatic sta'ili$ers cause the federal deficit toA) decrease- B) either increase or decrease-C) remain unchanged- !) increase-

3) An e/ample of an automatic sta'ili$er isA) the food stamp program-B) changing the ta/ laws to increase the marginal ta/ rates-C) the inde/ation of social securit 'enefits to the consumer price inde/-!) the interest the go&ernment pas on loans-

4) If the econom is in a recession5 the full(emploment deficit is the actual deficit-A) larger than B) e,ual toC) smaller than!) e,ual to or larger than

8) If the econom s full(emploment output is 4 trillion5 actual output is %-3 trillion5 and the 'udget deficit is "ʹ

'illion5 the deficit in this case is #nown as aA) natural emploment deficit-B) cclical deficit-C) structural deficit-

!) de't deficit-

9) If the econom s full(emploment output is @ trillion5 actual output is @ trillion5 and the 'udget deficit is "ʹ

'illion5 the deficit in this case is #nown as aA) natural emploment deficit-B) cclical deficit-C) structural deficit-!) fiscal deficit-

@) Assume that in the 6nited 0tates the actual deficit is % 'illion- If the 6nited 0tates were atfull emploment5 the deficit would 'e 1 'illion- The structural deficit in the 6nited 0tates isA) 1 'illion-

B) " 'illion-C) % 'illion- !) 'illion-

1) Assume that in the Atlantis the actual deficit is " 'illion- If the Atlantis were at full emploment5 the deficitwould 'e 3 'illion- The structural deficit in the Atlantis isA) 1 'illion- B) " 'illion-C) 3 'illion- !) 13 'illion-

11) In which case will the go&ernment collect more ta/ re&enue?A) D ta/ rate and 5 a&erage incomeB) @D ta/ rate and 15 a&erage income

80



C) "D ta/ rate and @5 a&erage income!) D ta/ rate and 95 a&erage income

1") If ta/es are a function of income5 then the AE function isA) flatter than if ta/es are a lump(sum amount-B) steeper than if ta/es are a lump(sum amount-C) &ertical-!) downward sloping-

2 True/False

1) !uring recessions5 automatic sta'ili$ers wor# to reduce go&ernment e/penditures and increase o&ernmentre&enues-") The structural deficit is the deficit at full emploment-%) In an e/pansion the 6-0- federal go&ernment deficit automaticall grows-) Automatic sta'ili$ers include those elements of go&ernment spending that automaticall grow during arecession-

@-3 Appendi/ A !eri&ing the iscal *olic Multipliers1) The formula for the go&ernment spending multiplier isA) 1H=1 < MPC )-B) 1H MPS -C) 1H MPC -!) 1H=1 < MPS )-

") If the MPS is -"5 the ta/ multiplier isA) (- B) (1-11-

C) (@- !) (3-

%) If the MPS is -15 the go&ernment spending multiplier isA) 1-B) 1-11-C) 3- !) "-

) The formula for the ta/ multiplier is

A) (= MPS H MPC )-B) MPS H MPC -C) (= MPC H MPS )-!) (1H MPS -

3) If the MPC is -@5 the ta/ multiplier isA) (@-B) (1- C) (1-1-!) 1-

4) The 'alanced('udget multiplier A) e,uals -B) is greater than 'ut less than 1-

81



C) is greater than 1- !) e,uals 1-

2 True/False

1) As the MPC decreases5 the go&ernment spending multiplier increases-") The 'alanced('udget multiplier wor#s whene&er the go&ernment increases spending and increases ta/es ' thesame amount-

.6 8ppen+i9 7 The Case in hich Ta9 &e,enues epen+ on "ncome

1) Assume that ta/es depend on income- The MPC is -9 and t is -"3- The go&ernment spending multiplier isA) 1-48-B) "-3-C) 3-!) 1-

") Assume that ta/es depend on income- The MPC is -@ and t is -%- The go&ernment spending multiplier isA) 1-B) "-8-C) 1-18- !) 1-"-

%) Assume that ta/es depend on income- The MPC is -3 and t is -"- If go&ernment spending increases ' 1 'illion5 the e,uili'rium le&el of output will increase 'A) 14-8 'illion- B) "3 'illion- C) 3 'illion-!) 1 'illion-

) If ta/es depend on income and the MPC is -4 and t is -%5 the ta/ multiplier isA) (1-8"-B) (1-%- C) ("-- !) ("-"-

4) Assume that ta/es depend on income and the MPC is -4 and t is -%- An increase in ta/es of 1 'illion willdecrease e,uili'rium income 'A) 18-" 'illion-

B) 1-% 'illion-C) "- 'illion- !) ""- 'illion-

8) If ta/es depend on income5 then the magnitude of the go&ernment spending multiplier it would 'e ifta/es were a lump(sum amount-A) could 'e either larger than or smaller thanB) is larger thanC) is e,ual to what!) is smaller than

9) If ta/es depend on income5 then the a'solute &alue of the ta/ multiplier it would 'e if

82



ta/es were a lump(sum amount-A) could 'e either larger than or smaller thanB) is larger thanC) is e,ual to what!) is smaller than

@) As the ta/ rate increases5 the go&ernment spending multiplier A) increases-B) decreases-C) does not change-!) could either increase or decrease depending on the &alue of the MPC -

1) As the ta/ rate increases5 the a'solute &alue of the ta/ multiplier A) increases-B) decreases-C) does not change-!) could either increase or decrease depending on the &alue of the MPC -

2 True/False

1) When ta/es depend on income5 a higher ta/ rate implies a higher go&ernment spending multiplier-") When the M*C is -9 and t is -5 then the go&ernment spending multiplier is a'out (1-3-%) If the M*0 is -"3 and t is -5 then the ta/ multiplier is a'out ("-@4-) If the M*0 is - and t is -%5 then the ta/ multiplier is a'out (1-%-3) When the ta/ rate increases5 the a'solute &alue of the ta/ multiplier falls-

83



Chapter 6 The Mone* :uppl* an+ the Fe+eral &eser,e :*stem1-1 An O&er&iew of Mone1) Mone isA) the same as income-B) anthing that is generall accepted as a medium of e/change-

C) the &alue of all coins and currenc in circulation at an time-!) 'ac#ed ' gold in ort no/-

") An transaction that in&ol&es e/changing one good for another without using mone isconsidered aA) li,uidit transaction-B) 'arter transaction-C) deferred pament-!) 'lac# mar#et e/change-

%) 7aco' ma#es e/cellent tamales and Amanda is &er good at mowing lawns- Amanda agrees tomow 7aco' s lawn5 if he ma#es her a do$en tamales- This is an e/ample of ʹ

A) legal tender-B) 'arter-C) commodit mone-!) fiat mone-

) Which of the following factors causes the 'arter sstem to 'e inefficient?A) Its cost of transaction is too low-B) The cost associated with information search is too low-C) It re,uires a dou'le coincidence of wants-!) It re,uires high li,uidit-

3) 7osie wants to trade swimming lessons for coo#ing lessons- Maria wants to trade coo#inglessons for swimming lessons- 7osie and Maria ha&eA) the 'asis for a li,uidit e/change- B) a dou'le incidence of demand-C) the 'asis for a dou'le fiat e/change-!) a dou'le coincidence of wants-

4) The de&elopment of mone as a medium of e/change has facilitated the e/pansion of trade 'ecauseA) holding mone increases people s wealth-ʹ

B) holding mone increases people s income-ʹ

C) mone eliminates the dou'le coincidence of wants pro'lem-ʺ ʺ

!) no other mediums of e/change are a&aila'le-

8) When mone is used as a medium of e/changeA) the need for a 'arter sstem diminishes-B) the cost of transactions increases-C) the need for a 'an#ing sstem in the econom decreases-!) it reduces the num'er of transactions in the econom-

9) Bett won 3 in a po#er tournament- 0he deposits her 3 winnings into a mone mar#et fund so that shecan use the mone ne/t ear to help her pa for a trip to Fas :egas- This is an e/ample of mone ser&ing as a=n)

A) unit of account- B) medium of e/change-

84



C) store of &alue- !) in&estment good-

@) When ou pa 9 for salad ou ordered for lunch5 ou are using mone as a=n)A) store of &alue-B) in&estment good-C) medium of e/change- !) unit of account-

1) :eronica recei&ed a federal income ta/ re'ate chec# of 4 in Ma "9- :eronica put this mone in a sa&ingaccount so that she could spend it when she went on &acation in 7ul "9- This is an e/ample of mone ser&ing asa=n)A) store of &alue- B) medium of e/change-C) unit of account- !) in&estment good-

11) When ou #eep our sa&ings in a sa&ing account5 ou are using mone as a=n)A) in&estment good-B) store of &alue-C) medium of e/change-!) unit of account-

1") The main disad&antage of using mone as a store of &alue is thatA) mone is not porta'le-B) it re,uires a dou'le coincidence of wants-C) currenc is intrinsicall worthless-!) the &alue of mone actuall falls when the prices of goods and ser&ices rise-

1%) The li,uidit propert of mone is the propert that ma#es moneA) a good medium of e/change and a good unit of account-B) a good store of &alue and a good unit of account-C) a good medium of e/change and a good store of &alue-!) a good store of &alue and a good standard of deferred pament-

1) When the manager of a department store attaches price tags to hisHher products5 heHshe is using mone as aA) medium of e/change-B) store of &alue-C) unit of transfer-!) unit of account-

13) Circuit Cit5 a retailer of electronics5 has "5 different products in in&entor- Circuit Cit reports its in&entoris worth 1" million- This is an e/ample of using mone as aA) medium of e/change-B) unit of account-C) standard of deferred pament- !) store of &alue-

14) !enn s lists the price of a .rand 0lam Brea#fast at -@@ a plate- Fisting the price on the menuʹ

is an e/ample of mone ser&ing as a=n)A) store of &alue-B) unit of account-C) medium of e/change- !) in&estment good-

85



18) When Me/ico e/periences a period of high inflation and Me/icans lose confidence in their peso as a store of&alue5 which of the following would 'e most li#el to occur?A) The demand for pesos would increase-B) The 'uing power of the peso would increase-C) The &alue of foreign currencies would depreciate relati&e to the peso-!) Me/icans would use a different currenc as a medium of e/change-

19) A currenc that is not 'ac#ed ' gold5 sil&er5 or an other precious commodit e,ual to the face &alue of themone is #nown asA) fa#e mone- B) wea# mone-C) to#en mone-!) commodit mone-

1@) After World War II5 cigarettes were used as mone in .erman- This is an e/ample of

A) fiat mone-B) legal mone-C) to#en mone- !) commodit mone-

") The 6-0- dollar is an e/ample of fiat mone 'ecauseA) it is the strongest currenc in the world-B) it is the most widel used currenc in international trade-C) it is 'ac#ed ' a large reser&e of gold and sil&er-!) ' law5 it is decreed as mone-

"1) Which of the following is an e/ample of fiat mone?A) cigarettes B) an ounce of goldC) a 6-0- one(hundred dollar 'ill !) a go&ernment 'ond

"") Mone that a go&ernment has re,uired to 'e accepted in settlement of de'ts isA) fiat mone- B) commodit mone-C) 'arter mone-

!) legal tender-

"%) To ensure that paper mone will 'e accepted5 the 6-0- go&ernment implicitl promises the pu'lic thatA) it will not print mone so fast that it loses its &alue-B) it will not change the rate at which the dollar is e/changed for other currencies-C) it will alwas remain the strongest currenc of all industriali$ed nations-!) the 6-0- monetar sstem will alwas 'e 'ac#ed ' a precious metal-

") Currenc de'asement occurs whenA) the &alue of mone falls as a result of a rapid increase in its suppl-B) the go&ernment re,uires that a certain form of mone must 'e accepted in settlement of de'ts-C) items are designated as mone that are intrinsicall worthless-!) items are used as mone that also ha&e intrinsic &alue in some other use-

86



"3) Assume that in the countr of 0almon5 the go&ernment tripled the mone suppl o&ernight- As a result of thisaction5 the price of a loaf of 'read increased from 1 'ill to 1 'ills- This is an e/ample of A) a change in the legal tender-B) a change from commodit mone to fiat mone-C) currenc de'asement-!) deflation-

"4) Currenc held outside 'an#s < demand deposits < tra&elers chec#s < other chec#a'le deposits ;A) M %- B) M " ( M 1-C) M % ( M 1- !) M 1-

"8) Transaction mone isA) M 1-

B) M "-C) M %- !) M -

"9) Tra&eler s chec#s areʹ

A) not mone-B) included in M 1 and M "-C) not included in M "- !) not included in M 1-

"@) Which of the following is included in M "5 'ut not included in M 1?

A) currenc held outside 'an#sB) tra&elers chec#sC) demand deposits !) sa&ings accounts

%) 7aime transfers "53 from his chec#ing account to his sa&ings account- This transaction willA) decrease 'oth M 1 and M "-B) not change M 1 and decrease M "-C) decrease M 1 and not change M "-!) increase 'oth M 1 and M "-

%1) >u' transfers 8 from her sa&ing account to her chec#ing account- This transaction willA) increase M 1 and not change M "- B) not change M 1 and decrease M "-C) increase 'oth M 1 and M "- !) decrease 'oth M 1 and M "-

%") Tedd transfers 183 from his mone mar#et fund to his chec#ing account- This transaction willA) decrease M " and increase M 1-B) increase M 15 'ut lea&e M " unchanged-C) decrease M 1 and increase M "-!) decrease 'oth M 1 and M "-

%%) Which of the following would NOT 'e counted as part of M 1?A) demand deposits B) tra&eler s chec# ʹ

87



C) mone mar#et accounts !) currenc

%) 0a&ing account 'alances are included inA) M 1-B) M "-C) neither M 1 nor M "- !) 'oth M 1 and M "-

%3) Which of the following would NOT 'e included in M "?A) demand deposits B) mone mar#et accountsC) chec#ing accounts !) Treasur 'onds

%4) Included in M " areA) 'an# loans-B) credit cards-

C) 'an# capital-!) demand deposits-

%8) Which of the following would NOT 'e included in M 1?A) demand deposits B) mone mar#et accountsC) chec#ing accounts!) tra&eler s chec#sʹ

%9) Currenc held outside 'an#s is included inA) 'oth M 1 and M "-B) M " onl-

C) M 1 onl-!) neither M 1 nor M "-

%@) Close su'stitutes for transactions mone are #nown asA) fiat monies-B) near monies-C) commodit monies- !) to#en monies-

) Which of the following is the 'est e/ample of a near mone?A) a &alua'le paintingB) a dollar 'ill

C) a Treasur 'ond!) a mone mar#et account

1) An e,uation for M 1 isA) M " < 0a&ings Accounts ( Currenc Geld Outside Ban#s < Other Near Monies-B) M " ( 0a&ings Accounts ( Mone Mar#et Accounts ( Other Near Monies-C) Mone Mar#et Accounts < Automatic(transfer 0a&ings Accounts-!) M " < Near Monies-

") The main ad&antage of using M " instead of M 1 as the measure for mone is thatA) M " can 'e measured more accuratel-B) M " includes onl instantl accessi'le assets-C) M " is sometimes more sta'le-

88



!) M " &aries as the interest rate &aries-

%) Commercial 'an#sA) implement monetar polic-B) are nonprofit organi$ations that lend and 'orrow funds-C) are financial intermediaries that lend funds and accept deposits-!) hold reser&es against 'an# capital-

) Among the assets of a commercial 'an# areA) loans-B) demand deposits-C) sa&ings deposits-!) time deposits-

3) Among the lia'ilities of commercial 'an#s areA) loans-

B) demand deposits-C) reser&es- !) go&ernment securities-

4) Net worth isA) assets ( lia'ilities-B) assets < capital-C) assets ( capital-!) assets < lia'ilities-

2 True/False

1) When ou use mone to fill our car with gas e&er wee#5 ou are using mone as a unit of account-

") Mone is anthing that generall is accepted as a medium of e/change-%) In an econom that uses fiat mone5 there is no need for dou'le coincidence of wants-) When ou ta#e 1 from our sa&ing account and deposit it in our chec#ing account5 M " decreases-3) If all 'an#s are loaned up and so will not ma#e further loans5 a 15 deposit creates 15 in new mone-4) iat mone is mone the go&ernment sas is mone-8) The M1 definition of mone includes mone mar#et accounts-9) The M" definition of mone includes demand deposits-

13.2 ;o' 7ans Create Mone*

1) Napoli National Ban# has lia'ilities of % million and net worth of "5- Napoli National Ban# s assets areʹ

A) "5-

B) % millionC) %-" million- !) "-9 million-

") 0aturn Count 0a&ings and Foan has lia'ilities of 5 and net worth of 1"35- 0aturnCount 0a&ings and Foan s assets areʹ

A) 3"35- B) "835- C) 5- !) 1"35-%) Thompson National Trust has assets of 35 and lia'ilities of 5- Thompson National Trust s netʹ

worth isA) @5-B) 5-

89



C) 15- !) 35-

) A commercial 'an# listsA) loans as lia'ilities- B) deposits as lia'ilities-C) re,uired reser&es as lia'ilities-!) e/cess reser&es as lia'ilities-

3) Things that a firm owns that are worth something are classified asA) lia'ilities- B) assets- C) deposits-!) net worth-

4) Which of the following is considered a lia'ilit to a 'an#?A) time deposits

B) reser&esC) the 'an# s loansʹ

!) the 'an# s 'uildings and e,uipmentʹ

8) The central 'an# of the 6nited 0tates is #nown as theA) ederal >eser&e 0stem-B) ederal !eposit Insurance Corporation-C) !epartment of the Treasur-!) ederal 0a&ings and Foan Insurance Corporation-

9) A loan made ' a 'an# is considered of that 'an#-A) a lia'ilit

B) capitalC) net worth !) an asset

@) A chec#ing deposit in a 'an# is considered of that 'an#-A) an assetB) a lia'ilitC) net worth!) capital

Refer to the information provided in Table 1#.1 below to answer the questions that follow.

Table 13.1

1) >efer to Ta'le 1-1- The re,uired reser&e ratio is "3D- If the irst Charter Ban# is meeting its reser&ere,uirement and has no e/cess reser&es5 its reser&es e,ualA) 1-

90



B) "- C) 4-!) %-

11) >efer to Ta'le 1-1- The re,uired reser&e ratio is "3D- If the irst Charter Ban# is meeting itsreser&e re,uirement and has no e/cess reser&es5 its loans e,ualA) @- B) 15- C) 4- !) 159-

1") >efer to Ta'le 1-1- irst Charter Ban# s total assets areʹ

A) 15"- B) - C) 9- !) "5

Refer to the information provided in Table 1#.2 below to answer the questions that follow.Table 13.2

1%) >efer to Ta'le 1-"- irst Commercial Ban# s e/cess reser&es e,ual -ʹ

A) 45 B) 155 C) "5 !) 1535

1) >efer to Ta'le 1-"- The re,uired reser&e ratioA) is 3D-B) is 1D-C) is "D-!) cannot 'e determined from the gi&en information-

13) >efer to Ta'le 1-"- irst Commercial Ban# s total loans e,ual -ʹ

A) 155B) 355 C) "535 !) 1585-

Refer to the information provided in Table 1#.3 below to answer the questions that follow.Table 13.#

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14) >efer to Ta'le 1-%- The net worth of *eople s Ban# is -ʹ

A) 155 B) "5

C) 95 !) %5

18) >efer to Ta'le 1-%- The re,uired reser&e ratio isA) "3D-B) "D-C) 3D- !) 1D-

19) >efer to Ta'le 1-%- *eople s Ban# e/cess reser&es are -ʹ

A) "5 B) 15

C) %5 !) 5

1@) >efer to Ta'le 1-%- Total loans of *eople s Ban# e,ual -ʹ

A) 15B) 5C) 35 !) 95

") Crescent Cit Ban# has " million in deposits- Crescent Cit Ban# is meeting its reser&e re,uirement and hasno e/cess reser&es- It has million in reser&es- Crescent Cit Ban# faces a re,uired reser&e ratio of A) 3D-

B) D-C) "D- !) "3D-

"1) Narnia National Ban# has 83 million in deposits- The re,uired reser&e ratio is %D- Narnia National Ban# must #eep in reser&es-A) 1"3 millionB) 13 millionC) ""3 million !) "3 million

"") Neon Ban# has % million in deposits- The re,uired reser&e ratio is "3D- Neon Ban# must

#eep in reser&es-A) "83 million

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B) 13 millionC) 83 million!) 1" million

"%) The Intracoastal Ban# has 3 million in deposits and 35 in reser&es- If the re,uiredreser&e ratio is 3D5 e/cess reser&es are e,ual toA) 1"35- B) 35- C) $ero- !) "35-

") The Ban# of Arugula has @ million in deposits and @5 in reser&es- If the re,uired reser&e ratio is 1D5e/cess reser&es are e,ual toA) @5-B) 195- C) 915- !) $ero-

"3) The Ban# of >ed Oa# has " million in deposits and 5 in reser&es- If e/cess reser&es aree,ual to 155 the re,uired reser&e ratio isA) 13D-B) 1D-C) "D-!) 3D-

Refer to the information provided in Table 1#.4 below to answer the questions that follow -Table 13.4

"4) >efer to Ta'le 1-- If the re,uired reser&e ratio is 13D5 irst Charter Ban# A) is loaned up-

B) has too few reser&es on hand-C) is meeting its re,uired reser&e ratio and has "5 in e/cess reser&es-!) has e/cess reser&es of 15-

"8) >efer to Ta'le 1-- irst Charter Ban# could ma#e additional5 first round loans of 5 if the re,uired reser&e ratio wereA) 1D-B) 9D-C) 8-3D-!) 1"D-

"9) >efer to Ta'le 1-- If the re,uired reser&e ratio were changed to 3D and irst Charter Ban# continues to hold15"5 in reser&es5 its e/cess reser&es will 'e

93



A) 45- B) 155-C) 95-!) 5-

"@) !ollar Ban# is currentl loaned up- If the re,uired reser&e ratio is lowered5A) !ollar Ban# s net worth will increase-ʹ

B) !ollar Ban# will ha&e e/cess reser&es that it can lend out-C) !ollar Ban# will still 'e loaned up 'ecause it did not recei&e an additional deposits-!) !ollar Ban# s actual reser&es will increase5 'ut it will still 'e loaned up-ʹ

%) When a 'an# has no e/cess reser&es5 and thus can ma#e no more loans5 it is said to 'eA) 'an#rupt-B) ripe for a ta#eo&er-C) in recei&ership-!) loaned up-

%1) Commercial 'an#s create mone throughA) printing treasur notes-B) ma#ing loans-C) facilitating 'orrowing from the ederal >eser&e to the pu'lic-!) reducing ris# in the econom-

%") The multiple ' which total deposits can increase for e&er dollar increase in reser&es is theA) re,uired reser&e ratio- B) 'an# s line of credit-ʹ

C) deposit insurance limit-

!) mone multiplier-

%%) 0uppose the re,uired reser&e ratio is "D- A million cash deposit will5 at most5 allow an e/pansion of themone suppl toA) " million-B) 9 million-C) " million- !) 9 million-

%) 0uppose the re,uired reser&e ratio is 13D- A 1 million deposit will5 at most5 allow ane/pansion of the mone suppl toA) 18-3 million-

B) "3 million-C) 13 million-!) 44-8 million-

%3) The re,uired reser&e ratio is 3D- The mone multiplier isA) -3- B) 3-C) 13-!) "-

%4) The re,uired reser&e ratio is 3D- The mone multiplier isA) "-3-B) 1-

94



C) 3-!) "-

%8) If the mone multiplier is 95 the re,uired reser&e ratio isA) 9D- B) 14D- C) 1"-3D-!) "D-

%9) Assume that 'an#s 'ecome more conser&ati&e in their lending policies and start holding somee/cess reser&es- Compared to a situation in which 'an#s are not holding e/cess reser&es5 thesi$e of the mone suppl will 'eA) $ero- B) larger- C) the same-!) smaller-

%@) As commercial 'an#s #eep more e/cess reser&es5 mone creationA) increases- B) decreases-C) remains the same- !) could either increase or decrease-

Refer to the information provided in *%enario 1#.1 below to answer the questions that follow -0C2NA>IO 1-1 The following ta'le shows the changes in deposits5 reser&es5 and loans of 'an#s as aresult of a 15 initial deposit in Ban# No- 1- Assume all 'an#s are loaned up-

) >efer to 0cenario 1-1- What is the re,uired reser&e ratio?A) D B) 3DC) 9D

!) 1D

1) >efer to 0cenario 1-1- What is the mone multiplier in this econom?A) " B) 1 C) 3 !) 14-48

") >efer to 0cenario 1-1- Based on the initial 15 deposit5 the mone suppl will5 at most5 e/pand toA) 1 million-B) " million-C) 3 million-

!) 14-48 million-

95



%) >efer to 0cenario 1-1- If the re,uired reser&e ratio were changed to 1D5 total loans of Ban# No- " will changetoA) 915- B) @5- C) 935-!) 885-

2 True/False

1) Onl the re,uired reser&e ratio determines how much mone the ederal >eser&e can create-") 2/cess reser&es in a 'an# are the difference 'etween re,uired reser&es and the 'an# s total net worth-ʹ

%) Among the assets of commercial 'an#s are demand deposits-) The amount of mone 'an#s can loan out is determined ' the discount rate-3) Among the lia'ilities of commercial 'an#s are deposits-4) 0ince the must lend mone to ma#e mone5 all 'an#s are necessaril insol&ent-

13.# The Fe+eral &eser,e :*stem1) The ederal >eser&e 0stem consists of ederal >eser&e Ban#s-A) 9 B) 1C) 1" !) 1

") Which of the following acti&ities is one of the responsi'ilities of the ederal >eser&e?A) issuing new 'onds to finance the federal 'udget deficitB) loaning mone to other countries that are friendl to the 6nited 0tatesC) assisting 'an#s that are in a difficult financial position

!) auditing the &arious agencies and departments of the federal go&ernment

%) Among the mem'ers of the ederal Open Mar#et CommitteeA) is the 0ecretar of the Treasur-B) is the Comptroller of the Currenc-C) are the se&en mem'ers of the Board of .o&ernors of the ed-!) is the Chair of the 0enate Ban#ing Committee-

) The Board of go&ernors of the edA) are appointed ' the Gouse of >epresentati&es-

B) has 1" mem'ers-C) ha&e a 8(ear term-!) is head,uartered in Washington5 !-C-

3) The edA) issues deposits to the pu'lic- B) lends mone to foreign go&ernments-C) clears inter('an# paments- !) lends mone to the pu'lic-

2 True/False

1) The *resident of the NK ederal >eser&e Ban# is alwas a mem'er of the ederal Open Mar#et committee-

96



") The Chair of the ed also ser&es as one of the >eser&e Ban# *residents-%) The ed acts as a lender of last resort for the 'an#ing sstem-) The mem'ers of the Board of .o&ernors of the ed ma#e up a ma+orit of the ederal Open Mar#et committee-3) The ed is a di&ision of the !epartment of the Treasur-

13.4 ;o' the Fe+eral &eser,e Controls the Mone* :uppl*

1) Which of the following instruments is NOT used ' the ederal >eser&e to change the mone suppl?A) the discount rate B) the re,uired reser&e ratioC) the federal ta/ code !) open mar#et operations

") The ederal Open Mar#et Committee =OMC) directs the Open Mar#et !es# toA) determine the re,uired reser&e ratio- B) determine the discount rate-C) 'u or sell go&ernment securities-

!) determine the federal funds rate-

%) Which of the following is NOT a tool a&aila'le to the ed to change the suppl of mone?A) open mar#et operations B) the re,uired reser&e ratioC) the mone multiplier !) the discount rate

) The discount rate isA) the interest rate commercial 'an#s charge each other for 'orrowing funds-B) the interest rate commercial 'an#s charge their new customers-C) the interest rate the ed charges commercial 'an#s for 'orrowing funds-!) the interest rate commercial 'an#s charge their most creditworth customers-

3) A decrease in the re,uired reser&e ratioA) will increase the mone suppl- B) will decrease the mone suppl-C) will not change the mone suppl- !) will decrease the discount rate-

4) Assume that all commercial 'an#s are loaned up- Total deposits in the 'an#ing sstem are " million- There,uired reser&e ratio is increased- The mone suppl willA) decrease-B) increase-C) not change 'ecause there was no change in deposits-!) not change 'ecause the re,uired reser&e ratio has no impact on mone suppl-

8) The ed has tended not to use changes in the reser&e re,uirement as a means of controlling the mone suppl

'ecauseA) onl 'an#s that are mem'ers of the ed are su'+ect to reser&e re,uirements5 and most 'an#s do not 'elong to theed-B) a change in the reser&e re,uirement has onl a &er small impact on the mone suppl-C) it is a crude monetar polic tool 'ecause a change in the re,uirement does not affect 'an#s until a'out twowee#s after the change is implemented-!) it ta#es a long time for the Congress to appro&e a change in the reser&e re,uirement-

9) The interest rate 'an#s pa to 'orrow mone from the ed is theA) federal funds rate- B) discount rate-C) prime lending rate- !) reser&e rate-

97



@) Which of the following represents an action ' the ederal >eser&e that is designed to increase the monesuppl?A) a decrease in the re,uired reser&e ratioB) an increase in the discount rateC) a decrease in federal ta/ rates!) selling go&ernment securities in the open mar#et

1) Which of the following represents an action ' the ederal >eser&e that is designed to increase the monesuppl?A) 'uing go&ernment securities in the open mar#etB) an increase in the re,uired reser&e ratioC) a decrease in federal spending!) an increase in the discount rate

11) Of the tools a&aila'le to the ed to regulate the mone suppl5 which is the least used?A) the federal funds rate B) the reser&e ratio

C) ta/ cutting !) the open(mar#et operations

1") If the ed sells go&ernment securities5 then there isA) an increase in the suppl of mone-B) a decrease in the suppl of mone-C) a decrease in the discount rate-!) an increase in the re,uired reser&e ratio-

1%) Which of the following represents an action ' the ederal >eser&e that is designed to decrease the monesuppl?A) a decrease in the discount rate

B) a decrease in federal spendingC) selling go&ernment securities in the open mar#et!) a decrease in the re,uired reser&e ratio

1) When the ed raises the re,uired reser&e ratio5 the 'an#s e/cess reser&es will initiall and the moneʹ

suppl -A) remains constant decreases B) decrease decreasesC) increase remain constant!) increase increases

13) The 'est instrument for controlling wee#(to(wee# changes in the mone suppl is

A) the re,uired reser&e ratio- B) moral suasion-C) open(mar#et operations- !) the discount rate-

14) Which of the following statements is AF02?A) Open(mar#et operations can 'e used ' the ederal >eser&e with some precision-B) Open(mar#et operations are e/tremel fle/i'le-C) The ederal >eser&e underta#es open(mar#et operations on an infre,uent 'asis-!) Open(mar#et operations ha&e a fairl predicta'le effect on the suppl of mone-

18) An open(mar#et purchase of securities ' the ed results in in reser&es and in the suppl of mone-A) an increase a decrease

98



B) a decrease a decreaseC) an increase an increase !) a decrease an increase

1@) Assume there is no lea#age from the 'an#ing sstem and that all commercial 'an#s are loanedup- The re,uired reser&e ratio is 14D- If the ed sells 3 million worth of go&ernment securitiesto the pu'lic5 the change in the mone suppl will 'eA) (14 million B) (%1-"3 million-C) ("1 million-!) (11-83 million-

"1) The mone suppl has increased from 1- trillion to 1-3 trillion- Which of the following could ha&e causedthis increase?A) The ed sold go&ernment securities to the pu'lic-B) Consumers who were holding mone outside the 'an#ing sstem deposit this mone-C) The ed increased the discount rate-

!) Commercial 'an#s 'egan to hold e/cess reser&es-

"") If the ed sets the mone suppl independent of the interest rate5 then the mone suppl cur&e isA) upward sloping- B) downward sloping-C) &ertical- !) hori$ontal-

2 True/False

1) A decrease in the re,uired reser&e ratio increases the mone suppl-

") A sale of go&ernment securities to the pu'lic ' the ederal >eser&e will increase the mone suppl-%) The discount rate cannot 'e used to control the mone suppl with great precision 'ecause its effects on 'an#sʹ

demand for reser&es are uncertain-) The tool most fre,uentl used ' the ed to change the mone suppl is changing the re,uired reser&e ratio-3) If the ed 'us securities on the open mar#et5 it will increase the mone suppl-

99



Chapter ! Mone* eman+ an+ the -uilibrium "nterest &ate11.1 The eman+ for Mone*

1) When ou deposit 1 in a 'an#5 the 'an# A) pas ou an interest rate and the deposit is a lia'ilit to ou-B) charges ou an interest rate and the deposit is a lia'ilit to ou-

C) pas ou an interest rate and the deposit is a lia'ilit to the 'an#-!) pas ou an interest rate and the deposit is an asset to the 'an#-

") When ou 'orrow "5 from a 'an#5 ou an interest rate and the loan is -A) pa a lia'ilit to ou B) pa an asset to ouC) recei&e a lia'ilit to ou!) pa a lia'ilit to the 'an#

%) Kour M1 mone demand is the amount of mone ou wish toA) earn-B) accumulate 'efore ou retire-

C) earn per hour-!) lea&e outside an interest('earing account-

) :eronica s income is 5 a month- 0he deposits 9 in a sa&ing account5 'us % worth of do&ernmentʹ

securities5 and lea&es the rest for dail transactions- :eronica s transaction mone demand isʹ

A) 351- B) "5@- C) %5"- !) %58-

3) Mar is paid on the 1st of e&er month and her rent is due on the 13th of e&er month- This is an e/ample of theA) cash flow pro'lem-B) financial float-C) mone management pro'lem-!) nonsnchroni$ation of income and spending-

4) The a&erage monthl 'alance in Ton s 'an# account is 43- Ton spends the same amount of mone each daʹ

during the month and at the end of the month his account 'alance is -Ton s monthl starting 'alance isʹ

A) 43- B) 15%- C) @83-

!) "1-48-

@) The a&erage monthl 'alance in Bo'' s 'an# account is %5- Bo'' spends the same amount of mone eachʹ

da during a %(da month5 and at the end of the month his account 'alance is - Bo'' spends his mone at aconstant rate of per da-A) 83 B) 1C) "!) %

11) An increase in the interest rate willA) ha&e no impact on the optimal mone 'alance-

100



B) increase the optimal mone 'alance-C) lower the optimal mone 'alance-!) either increase or decrease the optimal mone 'alance depending on the le&el of current householdwealth-

1") 7ohn s optimal mone 'alance has increased- This could ha&e 'een caused 'ʹ

A) a reduction in the costs paid for switching from 'onds to mone-B) a decrease in the price of 'onds-C) a decrease in the amount of transactions spending-!) a decrease in the interest rate-

1) The interest rate paid on 'onds increases from D to 8D- This will causeA) no change in the optimal 'alance of mone 'ecause chec#ing deposits don t earn interest-ʹ

B) the optimal 'alance of mone to increase 'ecause it raises the opportunit costs of holding mone-C) the optimal 'alance of mone to decrease 'ecause it raises the opportunit cost of holding mone-!) the optimal 'alance of mone to increase 'ecause it reduces the opportunit cost of holding mone-

13) The price of 'onds areA) positi&el related-B) negati&el related-C) sometimes positi&el related and other times negati&el related5 depending on the 'ond paments-!) not related-

14) 2rnesto 'ought a 1D 'ond a ear ago for 135- The mar#et interest rate has increased to"D- 2rnesto wants to sell the 'ond- To 'e a'le to sell the 'ond 2rnesto must charge a price of no more thanA) 1%53-

B) 1"5- C) 853- !) %583-

19) Which one or more of the following is a moti&e for holding mone?A) the transaction moti&eB) the asset moti&eC) the speculati&e moti&e !) all of the a'o&e

1@) The speculati&e demand for mone isA) positi&el related to income- B) positi&el related to interest rate-C) negati&el related to interest rate- !) negati&el related to income-

") The transactions demand for mone isA) positi&el related to aggregate income- B) positi&el related to the interest rate-C) negati&el related to the price le&el- !) negati&el related to the interest rate-

101



"1) As the interest rate falls5 people hold mone instead of 'onds 'ecause the opportunit cost of holdingmone has -A) more fallen B) less fallen C) less risen !) more risen

"") If interest rates are lower than what indi&iduals consider normal5 the willA) increase their transaction mone demand-B) increase their speculati&e mone demand-C) decrease their speculati&e mone demand-!) decrease their transaction mone demand-

"%) If interest rates increase to a &er high le&el5 people will most li#el holdA) more 'onds and less cash- B) less 'onds and less cash-C) less 'onds and more cash- !) more 'onds and more cash-

") Which of the following will most li#el cause a decrease in the ,uantit of mone demand?A) an increase in the price le&el B) an increase in the interest rateC) an increase in income

!) a decrease in the interest rate

"3) The transaction demand for mone depends on all of the following 2C2*TA) income- B) the price le&el-C) the interest rate- !) the amount of transactions spending-

"4) The transaction demand for mone depends onA) the mone suppl- B) the price le&el-

C) 'ond prices- !) the interest rate-

"8) The speculati&e demand for moneA) increases when income increases a'o&e normal-B) decreases when interest rates decrease 'elow normal-C) increases when interest rates decrease 'elow normal-!) decreases when the price le&el decreases 'elow normal-

"9) The transaction demand for moneA) decreases when interest rates decrease 'elow normal-B) increases when interest rates increase a'o&e normal-C) decreases when interest rates increase a'o&e normal-

102



!) increases when the price le&el rises-

"@) When the interest rate rises5 'ond &aluesA) rise-B) fall-C) are unchanged 'ecause the interest rate paid on a 'ond is fi/ed-!) will either increase or decrease depending on the tpe of 'ond-

%) If the interest rate is higher than normal5 people are more li#el to holdA) 'onds instead of mone 'ecause as the interest rate starts to rise5 the &alue of the 'onds will increase-B) 'onds instead of mone 'ecause the opportunit cost of mone is high-C) mone instead of 'onds 'ecause the 'ro#erage fees and other costs of 'uing 'onds are high when the interestrate is low-!) mone instead of 'onds 'ecause there is a speculati&e moti&e for holding a larger amount of mone-

Refer to the information provided in Fiure 11.1 below to answer the questions that follow.

Fi$ure 11.1

%1) >efer to igure 11-1- A mo&ement from *oint D to *oint A can 'e caused 'A) a decrease in the interest rate- B) an increase in income-C) a decrease in the price le&el- !) an increase in the interest rate-

%") >efer to igure 11-1- A mo&ement from *oint B to *oint A can 'e caused 'A) a decrease in income-

103



B) an increase in the price le&el-C) a decrease in the interest rate- !) an increase in the interest rate-

%%) >efer to igure 11-1- A mo&ement from *oint B to *oint D can 'e caused 'A) a decrease in income- B) an increase in the interest rate-C) a decrease in the interest rate- !) an increase in income-

%) >efer to igure 11-1- All of the following e&ents can cause a mo&ement from *oint E to *oint A2C2*TA) an increase in income- B) an increase in the price le&el-C) a decrease in the interest rate- !) an increase in transactions-

%3) >efer to igure 11-1- The mone demand cur&e will shift from M d" to M d1 if A) the price le&el increases- B) income decreases-C) interest rates fall- !) interest rates rise-

%4) >efer to igure 11-1- The mo&ement from C to B could 'e cause 'A) a decrease in the interest rate- B) an increase in the interest rate-

C) a decrease in income-!) an increase in the price le&el-


Fi$ure 11.2

104



%8) >efer to igure 11-"- 0uppose mone demand is currentl at *oint A- An increase mone demand could 'ecaused 'A) an increase in the interest rate- B) an increase in income-C) a decrease in the interest rate- !) a decrease in income-

%9) >efer to igure 11-"- 0uppose mone demand is currentl at *oint A- A decrease in the interest rate to 3D5ceteris pari'us5 will li#elA) decrease the ,uantit of mone demanded from " million to 1 million-B) increase the ,uantit of mone demanded from 1 million to " million-C) increase the ,uantit of mone demanded from 1 million to 13 million-!) increase the ,uantit of mone demanded from 13 million to % million-

%@) >efer to igure 11-"- 0uppose the mone demand is currentl at *oint D- A mo&ement to point C could 'e

caused 'A) a decrease in the interest rate- B) a decrease in the price le&el-C) an increase in the interest rate-!) an increase in the price le&el-

) >efer to igure 11-"- 0uppose that mone demand is currentl at *oint B- A mo&ement to *oint D could 'ecaused 'A) an increase in income5 ceteris pari'usB) an increase in the price le&el5 ceteris pari'usC) a decrease in the price le&el5 ceteris pari'us

!) a decrease in the interest rate5 ceteris pari'us

1) Which of the following causes the ,uantit demanded of mone to increase?A) an increase in income B) a decrease in incomeC) a decrease in the price le&el!) a decrease in the interest rate

") The moti&e shifts the mone demand cur&e5 and the moti&e causes mo&ements along thesame mone demand cur&e-

A) speculati&e transactionB) transaction precautionarC) transaction speculati&e!) precautionar transaction

%) If a 'ond is to pa off one ear from now for "" and is purchased for "5 what is the interest rate?A) 3D B) 1D C) "D!) D

105



) If a 'ond is to pa off one ear from now for 9 and is purchased for 95 what is theinterest rate?A) 3DB) 9DC) 1D !) "D

3) If a 'ond is to pa off one ear from now for 4 is "D5 what is the priceof the 'ond?A) 1" B) 3 C) 4!) 8"

2 True/False

1) A mismatch 'etween the timing of mone inflow to the household and the timing of mone outflow forhousehold e/penses is #nown as the nonsnchroni$ation of income and spending-") Fess switching from 'onds to mone means less interest re&enue lost5 'ut higher mone management costs-%) The optimal mone 'alance will increase as the interest rate rises5 ceteris pari'us-) When interest rates fall5 'ond &alues rise-3) If people thin# interest rates are a'o&e their normal le&els5 the will want to hold 'onds in anticipation of acapital gain when interest rates fall to their normal le&el-4) In&estors ma wish to hold 'onds when interest rates are low with the hope of selling them when interest ratesincrease-8) A decrease in the price le&el will lead to an increase in the interest rate-9) An e/cess demand for mone dri&es interest rates down-

11.2 The -uilibrium "nterest &ate


Fi$ure 11.#

106



1) >efer to igure 11-%- At an interest rate of 4D5 there is aA) shortage of mone will decline-B) shortage of mone will rise-C) surplus of mone will decline-!) surplus of mone will rise-

") >efer to igure 11-%- At an interest rate of %D5 there is aA) shortage of mone will decline-B) shortage of mone will rise-C) surplus of mone will decline-!) surplus of mone will rise-

%) >efer to igure 11-%- A decrease in the .!*5 ceteris pari'us5 will li#elA) increase the e,uili'rium interest rate without changing e,uili'rium mone holdings-B) decrease 'oth the e,uili'rium interest rate and e,uili'rium mone holdings-C) increase the e,uili'rium interest rate and decrease e,uili'rium mone holdings-!) decrease the e,uili'rium interest rate without changing e,uili'rium mone holdings-

) >efer to igure 11-%- An increase in the price le&el5 ceteris pari'us5 will li#elA) increase 'oth the e,uili'rium interest rate and e,uili'rium mone holdings-B) decrease the e,uili'rium interest rate without changing e,uili'rium mone holdings-C) increase the e,uili'rium interest rate without changing e,uili'rium mone holdings-!) #eep the e,uili'rium interest constant and increase e,uili'rium mone holdings-

3) >efer to igure 11-%- An increase in the mone suppl5 ceteris pari'us5 will li#elA) increase the e,uili'rium interest rate and decrease e,uili'rium mone holdings-B) increase the e,uili'rium interest rate without changing e,uili'rium mone holdings-C) decrease the e,uili'rium interest rate and increase e,uili'rium mone holdings-!) decrease the e,uili'rium interest rate without changing e,uili'rium mone holdings-

4) >efer to igure 11-%- A decrease in the mone suppl and an increase in the .!* will5 for sure5A) increase the e,uili'rium interest rate- B) decrease the e,uili'rium interest rate-C) increase e,uili'rium mone holdings- !) decrease e,uili'rium mone holdings-


Fi$ure 11.4

107



8) >efer to igure 11-- At an interest rate of 9D5 there isA) an e/cess demand for mone of 'illion-B) an e/cess suppl of mone of 9 'illion-C) an e/cess suppl of mone of 'illion-!) an e/cess demand for mone of 9 'illion-

9) >efer to igure 11-- At an interest rate of %D5 there isA) an e/cess suppl of mone of 'illion-B) an e/cess suppl of mone of 9 'illion-C) an e/cess demand for mone of 9 'illion-!) an e/cess demand for mone of 'illion-

@) >efer to igure 11-- The mone mar#et will 'e in e,uili'rium at an interest rate of A) D-B) 9D-

C) 3D-!) %D-

1) >efer to igure 11-- At an interest rate of 9D5 firms and householdsA) will attempt to increase their holdings of mone ' selling 'onds-B) are satisfied with the amount of mone the are holding-C) will attempt to increase 'oth their holdings of mone and their holdings of 'onds-!) will attempt to reduce their holdings of mone ' 'uing 'onds-

11) >efer to igure 11-- At an interest rate of %D5 firms and householdsA) are satisfied with the amount of mone the are holding-

B) will attempt to increase their holdings of mone ' selling 'onds-C) will attempt to increase 'oth their holdings of mone and their holdings of 'onds-!) will attempt to reduce their holdings of mone ' 'uing 'onds-

1") >efer to igure 11-- At an interest rate of 3D5 firms and householdsA) are satisfied with the amount of mone the are holding-B) will attempt to reduce their holdings of mone ' 'uing 'onds-C) will attempt to increase their holdings of mone ' selling 'onds-!) will attempt to increase 'oth their holdings of mone and their holdings of 'onds-

1%) What will happen to the e,uili'rium interest rate when 'oth mone suppl and .!* decrease?A) The e,uili'rium interest rate increases-B) The e,uili'rium interest rate decreases-C) The e,uili'rium interest rate remains constant-!) The impact on the e,uili'rium interest rate is am'iguous-

1) If the ,uantit of mone demanded is greater than the ,uantit of mone supplied5 then the interest rate willA) change in an uncertain direction- B) rise-C) remain constant- !) fall-

108



13) A shortage in the mone mar#et causesA) a decrease in the e,uili'rium interest rate-B) an increase in the ,uantit demanded of mone-C) an increase in the e,uili'rium interest rate-!) a decrease in the mone suppl-

14) A surplus in the mone mar#et causesA) a decrease in the e,uili'rium interest rate-B) a decrease in the mone suppl-C) an increase in the demand for mone-!) a decrease in the ,uantit demanded of mone-


Fi$ure 11.5

18) >efer to igure 11-3- Assume the interest rate e,uals D and the mone suppl decreases from M s1 to M s - If the interest rate remains at DA) mone demand will increase-B) mone demand will decrease-C) there will 'e an e/cess demand for mone of " million-!) there will 'e an e/cess suppl of mone of " million-

19) >efer to igure 11-3- If the mone suppl decreases from M s1 to M s 5A) mone demand must increase for the mone mar#et to return to e,uili'rium-B) the interest rate will fall to D-C) the interest rate will increase to 4D-!) the mone mar#et will return to e,uili'rium onl if the mone suppl is decreased to its original le&el-

1@) >efer to igure 11-3- The mone suppl cur&e will shift from M s to M s1 if A) the ed increases the reser&e re,uirement-B) the ed increases the discount rate-C) the e,uili'rium le&el of output increases-!) the ed 'us 6-0- go&ernment securities in the open mar#et-

") >efer to igure 11-3- The mone suppl cur&e will shift from M s1 to M s if

109



A) the ed increases the reser&e re,uirement-B) the ed decreases the discount rate-C) the e,uili'rium le&el of output increases-!) the ed 'us 6-0- go&ernment securities in the open mar#et-

"1) >efer to igure 11-3- If the mone suppl increases from M s to M s1 5A) mone demand must decrease for the mone mar#et to return to e,uili'rium-B) the interest rate will decrease to D-C) the interest rate will increase to 9D-!) the mone mar#et will return to e,uili'rium onl if the mone suppl is increased to its original le&el-

"") >efer to igure 11-3- The mone suppl cur&e will shift from M s1 to M s 5 if A) the ed increases the discount rate-B) the price le&el increases-C) the e,uili'rium le&el of output decreases-

!) the ed 'us 6-0- go&ernment securities in the open mar#et-

"%) If there is a surplus in the mone mar#et5 the ed can eliminate it 'A) increasing mone demand-B) decreasing mone demand-C) increasing mone suppl- !) decreasing mone suppl-

") A shortage in the mone mar#et can 'e eliminated throughA) an increase in .!*-

B) an increase in the price le&el-C) a decrease in interest rates- !) an increase in mone suppl-

"3) When the ed sells go&ernment securities5 ceteris pari'us5 the mone suppl shifts to the and thee,uili'rium interest rate -A) left rises B) right rises C) right falls !) left falls

"4) !ecreasing the re,uired reser&e ratio shifts the mone suppl cur&e to the and thee,uili'rium interest rate-A) left increases B) right increasesC) left decreases!) right decreases

"8) An increase in the le&el of aggregate output and the purchase of go&ernment securities ' the ed will ha&ewhat effect on the e,uili'rium interest rate?A) no effect on the interest rateB) a decrease in the interest rateC) an increase in the interest rate!) an indeterminate effect on the interest rate

110



"9) Which of the following pairs of e&ents will definitel lead to an increase in the e,uili'rium interest rate?A) the sale of go&ernment securities ' the ederal >eser&e and an increase in the price le&elB) a decrease in the discount rate and an increase in the le&el of aggregate outputC) the purchase of go&ernment securities ' the ederal >eser&e and a decrease in the price le&el!) an increase in the re,uired reser&e ratio and a decrease in the le&el of aggregate output

"@) Which of the following pairs of e&ents will definitel lead to a decrease in the e,uili'rium interest rate?A) the purchase of go&ernment securities ' the ederal >eser&e and a increase in the le&el of aggregate outputB) an increase in the discount rate and an increase in the price le&elC) a decrease in the re,uired reser&e ratio and a decrease in the le&el of aggregate output!) the sale of go&ernment securities ' the ederal >eser&e and a decrease in the price le&el

%) An increase in the discount rate and an increase in the le&el of aggregate output will ha&e what effect on the

e,uili'rium interest rate?A) an increase in the interest rateB) a decrease in the interest rateC) no effect on the interest rate!) an indeterminate effect on the interest rate


Fi$ure 11.6

%1) >efer to igure 11-4- The demand for mone cur&e will shift from M d1to M d if A) the ed sells go&ernment securities on the open mar#et-B) the price le&el decreases-C) the interest rate increases-

!) the aggregate le&el of output increases-

111



%") >efer to igure 11-4- If the demand for mone cur&e shifts from M d1 to M d 5 the e,uili'rium interest rate willA) increase from 3D to 8D- B) increase from 3D to 1D-C) decrease from 8D to 3D-!) remain at 8D-

%%) >efer to igure 11-4- If the demand for mone cur&e shifts from M d1 to M d remains at 3D5 there will'eA) an e/cess demand for mone- B) an e/cess suppl of mone-C) an e,uili'rium in the mone mar#et- !) an e,uili'rium in the 'ond mar#et-

%) Which of the following leads to an increase in the interest rate?A) a decrease in the price le&elB) a decrease in aggregate output

C) a sale of go&ernment securities ' the ed!) a decrease in the discount rate

%3) Which of the following leads to a decrease in the interest rate?A) an increase in the price le&elB) a sale of go&ernment securities ' the edC) an increase in the .!*!) a decrease in the re,uired reser&e ratio

Refer to the information provided in Fiure 11.7 below to answer the questions that follow.Fi$ure 11.!

%4) >efer to igure 11-8- The demand for mone cur&e will shift from M d to M d1 if

A) the ed sells go&ernment securities on the open mar#et-B) the price le&el decreases-

112



C) the interest rate increases-!) the le&el of aggregate output increases-

%8) >efer to igure 11-8- If the demand for mone cur&e shifts from M d to M d1 5 the e,uili'rium interest rate willA) decrease from 8D to 3D- B) increase from 3D to 8D-C) increase from 3D to 4D-!) remain at 3D-

%9) >efer to igure 11-8- If the demand for mone cur&e shifts from M d to M d1 remains at 3D5 there will 'eA) an e/cess demand for mone-B) an e/cess suppl of mone-C) an e,uili'rium in the mone mar#et- !) an e,uili'rium in the 'ond mar#et-

%@) A decrease in aggregate output5 ceteris pari'us5 will cause the demand for mone to and the interest rate to -A) increase increaseB) increase decreaseC) decrease decrease !) decrease increase

) An increase in the price le&el5 ceteris pari'us5 will cause the demand for mone to to -A) increase increase B) increase decrease

C) decrease decrease !) decrease increase

1) As the num'er of transactions in the econom decreases5A) the suppl of mone increases- B) the suppl of mone decreases-C) the demand for mone increases- !) the demand for mone decreases-

") Which of the following e&ents will lead to a decrease in the e,uili'rium interest rate?

A) an increase in the le&el of aggregate outputB) a decrease in the re,uired reser&e ratioC) an increase in the price le&el!) a sale of go&ernment securities ' the ederal >eser&e

%) Which of the following e&ents will lead to an increase in the e,uili'rium interest rate?A) a decrease in the le&el of aggregate outputB) a decrease in the discount rateC) an increase in the price le&el!) a purchase of go&ernment securities ' the ederal >eser&e

113



2 True/False

1) If the ederal >eser&e wants interest rates to increase5 it will sell 'onds-") A sale of go&ernment securities ' the ederal >eser&e will put downward pressure on the e,uili'rium interestrate-%) To increase the mone suppl and decrease interest rates5 the ed could purchase go&ernment securities-) If mone demand falls5 then the interest rate will rise-3) If the ederal >eser&e lowers the discount rate5 then the mone suppl will rise-4) If the ederal >eser&e lowers the re,uired reser&e ratio5 then the mone suppl will fall-

11.# Looin$ 8hea+ The Fe+eral &eser,e an+ Monetar* Polic*

1) In a period of high inflation5 the ed would most li#elA) decrease the discount rate- B) tighten monetar polic-C) decrease the re,uired reser&e ratio-!) ease monetar polic-

") In a period of high unemploment5 the ed would most li#elA) tighten monetar polic- B) ease monetar polic-C) ease fiscal polic- !) tighten fiscal polic-

%) When economists refer to eas monetar polic5 the mean that the ederal >eser&e is ta#ingʺ ʺ

actions that willA) increase the demand for mone-B) decrease the demand for mone-C) e/pand the mone suppl-

!) contract the mone suppl-

) An e/ample of a tight monetar polic isA) a decrease in the reser&e re,uirement-B) the ed selling go&ernment securities in the open mar#et-C) a decrease in the discount rate-!) a decrease in the federal funds rate-

3) An e/ample of a tight monetar polic isA) an increase in the reser&e re,uirement-B) the ed 'uing go&ernment securities in the open mar#et-C) a decrease in the prime lending rate-

!) a decrease in the discount rate-

4) When economists refer to tight monetar polic5 the mean that the ederal >eser&e is ta#ingʺ ʺ

actions that willA) increase the demand for mone- B) decrease the demand for mone-C) e/pand the mone suppl- !) contract the mone suppl-

8) Which of the following is an e/ample of an eas monetar polic?A) an increase in the reser&e re,uirementB) a decrease in the discount rateC) an increase in the federal funds rate!) the ed selling go&ernment securities in the open mar#et

114



2 True/False

1) Tight monetar polic stimulates the econom-") If the ederal >eser&e lowers the discount rate it is tightening monetar polic-%) If the ederal >eser&e raises reser&e re,uirements it is easing monetar polic-) Monetar tightening causes the e,uili'rium interest rate to fall-3) When the ederal >eser&e sells go&ernment securities it is tightening monetar polic-

") The interest rate that commercial 'an#s charge each other for 'orrowing and lending reser&es is calledA) the commercial rate- B) the price interest rate-C) the federal funds rate- !) the discount rate-

%) Which of the following tpes of interest rates change dail?A) the prime rate B) the federal funds rateC) the discount rate !) the corporate rate

) On an unsecured loan5 our 'an# will highl li#el charge an interest rateA) 'elow the prime rate- B) a'o&e the prime rate-C) 'elow the discount rate- !) 'elow the federal funds rate-

3) Assume the one(ear interest rate on a 'ond is 9D and the e/pected one(ear rate a ear from now is 1"D-According to the e/pectations theor of the term structure of interest rates5 the two(ear rate will 'eA) 9D-B) 1D- C) 1"D- !) ""D-

4) Assume the current one(ear interest rate on a 'ond is "D5 and the one(ear e/pected rate a ear from now is%D- According to the e/pectations theor of the term structure of interest rates5 the two(ear interest rate isA) "D-B) %D- C) 3D-

!) "-3D-

8) The interest rate on a two(ear securit will continue to ad+ust until it is e,ual toA) half the interest rate on a one(ear securit-B) twice the interest rate on a one(ear securit-C) an a&erage of the current one(ear rate and the e/pected one(ear rate for ne/t ear-!) the sum of the current one(ear rate and the e/pected one(ear rate for ne/t ear-

9) The ed can influence long(term interest rates 'A) influencing the current one(ear rate-B) affecting people s e/pectations of future short(term rates-ʹ

C) influencing the demand for mone in the short run-!) 'oth A and B are correct

115



@) .o&ernment securities that mature in less than a ear are calledA) ederal funds 'onds- B) go&ernment 'onds-C) ederal >eser&e 'onds- !) Treasur 'ills-

1) What is the most widel followed short(term interest rate?A) The federal funds rate B) The three(month Treasur 'ill rateC) The commercial paper rate !) The go&ernment 'ond rate

11) .o&ernment securities with terms of more than one ear are calledA) Treasur 'illsB) federal funds 'onds-

C) capital 'ills- !) go&ernment 'onds-

1") The interest rate that 'an#s are charged when the 'orrow reser&es from other 'an#s is theA) federal funds rate- B) AAA corporate 'ond rate-C) commercial paper rate- !) prime rate-

1%) The federal funds rate is a

A) one(month rate-B) one(wee# rate-C) one(da rate- !) one(ear rate-

1) ederal funds areA) inter'an# loans-B) raised ' ta/es-C) loans that 'an#s get from the ed-!) 'onds issued ' the federal go&ernment-

13) The rate that the ed controls most closel through its open(mar#et operations is theA) prime rate-B) federal funds rate-C) commercial paper rate- !) go&ernment 'onds rate-

14) The rate that the least ris# firms pa on 'onds that the issue is theA) prime rate- B) triple(A corporate 'ond rate-C) commercial paper rate-!) federal funds rate-

116



2 True/False

1) ederal funds rate is the ta/ rate on income-") Commercial paper is a short term IO6 of a corporation-%) The two ear interest rate is an a&erage of the e/pected interest rate each of the two ears-) The ed can affect long term interest rates ' affecting the e/pectations of people-

11.5 8ppen+i9 7 The eman+ for Mone* 8 <umerical -9ample

Refer to the information provided in Table 11.1 below to answer the questions that follow -Table 11.1

1) >efer to Ta'le 11-1- If it costs 11 each time a 'ond is sold5 the optimal a&erage mone holdings areA) 4- B) -

C) %- !) "-

") >efer to Ta'le 11-1- If it costs 8 each time a 'ond is sold5 the optimal a&erage mone holdings areA) 4- B) - C) %- !) "-

%) >efer to Ta'le 11-1- If the period co&ered ' Ta'le 11-1 is one ear5 the interest rate paid on 'ondsA) is "D-B) is %D-C) is 3D-!) cannot 'e determined from this information-

) >efer to Ta'le 11-1- If it costs @ each time a 'ond is sold5 the optimal num'er of switches isA) 1-B) "- C) %-

!) -

117



3) >efer to Ta'le 11-1- If it costs 1% each time a 'ond is sold5 the highest profit a&aila'le isA) 4- B) 1%- C) 18- !) "1-

4) >efer to Ta'le 11-1- At a price of the optimal num'er of switches is -A) 8 " B) @ 1C) 11 " !) 1% %

8) >efer to Ta'le 11-1- At a price of the optimal num'er of switches is -A) 8 1 B) @ %

C) 11!) 1%

118



Chapter 9 Aggregate !emand in the .oods and Mone Mar#ets12.1 Planne+ "n,estment

1) The mar#et in which the e,uili'rium le&el of aggregate output is determined is theA) la'or mar#et- B) 'ond mar#et-

C) mone mar#et- !) goods mar#et-

") The mar#et in which the e,uili'rium le&el of the interest rate is determined is theA) mone mar#et- B) goods mar#et-C) la'or mar#et- !) ser&ices mar#et-

%) The two lin#s 'etween the goods mar#et and the mone mar#et are

A) income and the inflation rate-B) the interest rate and the unemploment rate-C) income-!) the inflation rate and the unemploment rate-

) Which of the following is determined in the goods mar#et?A) the e,uili'rium interest rateB) mone demandC) income !) mone suppl

3) Which of the following is determined in the mone mar#et?A) the e,uili'rium interest rate B) incomeC) emploment!) the go&ernment 'udget

4) If planned in&estment is perfectl unresponsi&e to changes in the interest rate5 the planned in&estment scheduleA) has a negati&e slope-B) is hori$ontal-

C) is &ertical- !) has a positi&e slope-

8) If planned in&estment is perfectl responsi&e to changes in the interest rate5 the plannedin&estment scheduleA) has a negati&e slope- B) is hori$ontal-C) is &ertical-!) has a positi&e slope-

9) The mone mar#et and the goods mar#et are lin#ed through the impact of the interest rate onA) go&ernment spending-

119



B) planned in&estment-C) mone suppl- !) unplanned spending-

@) Which of the following e,uations represents e,uili'rium in the goods mar#et?A) Y ; M s.

B) M d ; C < I < G.

C) M d ; M s.

!) Y ; C < I < G.


Fi$ure 12.1

1) >efer to igure 1"-1- If the interest rate drops from 9D to D5 planned in&estmentA) increases5 causing aggregate e/penditure and aggregate output to fall-B) increases5 causing aggregate e/penditure to fall-C) decreases5 causing 'oth aggregate e/penditure and aggregate output to rise-!) increases5 causing 'oth aggregate e/penditure and aggregate output to rise-

11) >efer to igure 1"-1- If the interest rate rises from D to 9D5 planned in&estmentA) decreases5 causing 'oth aggregate e/penditure and aggregate output to fall-B) increases5 causing aggregate e/penditure to fall-C) decreases5 causing 'oth aggregate e/penditure and aggregate output to rise-!) increases5 causing 'oth aggregate e/penditure and aggregate output to rise-

1") >efer to igure 1"-1- If the interest rate increases from D to 9D5A) aggregate e/penditure increases-B) e,uili'rium aggregate output decreases-C) planned e/penditure increases-!) 'oth aggregate e/penditure and aggregate output increase-

120



1%) >efer to igure 1"-1- If the interest rate decreases from 9D to D5A) aggregate e/penditure increases-B) e,uili'rium aggregate output decreases-C) planned e/penditure decreases-!) the mone suppl will increase-


Table 12.1

1) >efer to Ta'le 1"-1- If the interest rate dropped from 13D to 4D5 planned in&estment would ' 'illion-A) increase 1" B) increase 19 C) decrease 1"!) decrease 19

13) >efer to Ta'le 1"-1- 0uppose the e/penditure multiplier is %- An increase in the interest rate from 4D to @D5ceteris pari'us5 wouldA) increase planned e/penditure ' 1" 'illion-B) increase aggregate e/penditure ' 1" 'illion-C) decrease e,uili'rium output ' 1" 'illion-!) decrease planned in&estment ' 1" 'illion-

14) >efer to Ta'le 1"-1- 0uppose the e/penditure multiplier is - A drop in the interest rate from 13D to @D5 ceteris

pari'us5 would increase e,uili'rium output ' 'illion-A) %"B) "C) " !) 14

18) >efer to Ta'le 1"-1- 0uppose the e/penditure multiplier is 3 and the initial interest rate is 1"D- A mo&e to whatinterest rate will increase e,uili'rium output ' 'illion?A) %D B) 4DC) @D

!) 19D

121



19) >efer to Ta'le 1"-1- 0uppose the e/penditure multiplier is 35 the initial interest rate is @D5 and the initiale,uili'rium output is 4 'illion- What is the interest rate that increases e,uili'rium output to 9 'illion?A) 1"D B) 13D C) 4D !) %D

1@) >efer to Ta'le 1"-1- 0uppose the e/penditure multiplier is 15 and the initial interest rate is13D- What would 'ethe impact on the e,uili'rium output if the interest rate fell to 4D?A) It would increase ' 15" 'illion- B) It would decrease ' 15" 'illion-C) It would decrease ' %54 'illion- !) It would increase ' %54 'illion-

2 True/False

1) The interest rate affects the goods mar#et through its impact on mone demand-") Income is determined in the mone mar#et-%) The mone mar#et is lin#ed to the goods mar#et through the impact of interest rates on planned in&estment-

12.2 -uilibrium in 7oth the Goo+s an+ Mone* Marets

1) The interest rate is determined in theA) mone mar#et and has no influence on the goods mar#et-B) mone mar#et and influences the le&el of planned in&estment and thus the goods mar#et-C) goods mar#et and has no influence on the mone mar#et-

!) goods mar#et and influences the le&el of planned in&estment and thus the mone mar#et-

") Output is determined inA) the goods mar#et and also influences mone demand-B) the mone mar#et and also influences mone demand-C) the goods mar#et with no influence from the mone mar#et-!) the mone mar#et with no influence on the goods mar#et-

%) When income increases5 the mone demand cur&e shifts to the 5 which theinterest rate with a fi/ed mone suppl-

A) right increases B) right decreasesC) left increases !) left decreases

) When income 5 the mone cur&e shifts to the right-A) increases demandB) increases supplC) decreases demand !) decreases suppl

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2 True/False

1) When aggregate output falls5 mone demand fall-") The mone mar#et is lin#ed to the goods and ser&ices mar#et ' the impact of income on the demand for mone-

12.# Polic* -ffects in the Goo+s an+ Mone* Marets

1) iscal polic affects the goods mar#et throughA) changes in mone suppl-B) changes in ta/es and mone suppl-C) changes in go&ernment spending and mone suppl-!) changes in ta/es and go&ernment spending-

") iscal polic affects the mone mar#et through its effect onA) income and mone suppl-B) income and mone demand-

C) mone suppl and mone demand- !) mone suppl and income-

%) Monetar polic affects the goods mar#et through its effect onA) the interest rate and planned in&estment-B) the interest rate and mone demand-C) income and planned in&estment-!) income and mone demand-

) Which of the following is an e/ample of an e/pansionar fiscal polic?

A) the ed selling go&ernment securities in the open mar#etB) the federal go&ernment increasing the marginal ta/ rate on incomes a'o&e "5C) the federal go&ernment increasing the amount of mone spent on pu'lic health programs!) the federal go&ernment reducing pollution standards to allow firms to produce more output

3) The o'+ecti&e of a contractionar fiscal polic is toA) reduce unemploment- B) increase growth in output-C) reduce inflation- !) increase stagflation-

4) The o'+ecti&e of an e/pansionar fiscal polic is toA) reduce unemploment-B) reduce inflation-C) reduce growth in output- !) reduce growth in international trade-

8) A decrease in the mone suppl aimed at decreasing aggregate output is referred to asA) contractionar fiscal polic-B) e/pansionar fiscal polic-C) e/pansionar monetar polic- !) contractionar monetar polic-

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9) An e/ample of a contractionar monetar polic isA) an increase in the re,uired reser&e ratio-B) a decrease in the discount rate-C) a reduction in the ta/es 'an#s pa on their profits-!) the ed 'uing go&ernment securities in the open mar#et-

@) An e/ample of an e/pansionar monetar polic isA) a decrease in the re,uired reser&e ratio-B) the ed selling 'onds in the open mar#et-C) an increase in the re,uired reser&e ratio-!) a law placing a ceiling on the ma/imum interest rate that 'an#s can pa to depositors-

1) An intended goal of contractionar fiscal and monetar polic isA) an increase in interest rates-B) an increase in the price le&el-C) a decrease in the unemploment rate-!) a decrease in the le&el of aggregate output-


Fi$ure 12.4

11) >efer to igure 1"-- *lanned in&estment could decrease from 1" million to 9 million if A) the go&ernment increases go&ernment purchases-B) the ed increases the mone suppl-C) the go&ernment reduces go&ernment purchases-!) the go&ernment increases net ta/es-

1") >efer to igure 1"-- *lanned in&estment could decrease from 14 million to 1" million if A) the go&ernment reduces go&ernment purchases-B) the ed 'us 'onds in the open mar#et-C) the go&ernment reduces net ta/es-

!) firms e/pect their sales to decrease in the future-

124



1%) >efer to igure 1"-- *lanned in&estment could increase from 9 million to 1" million if A) the go&ernment increases go&ernment purchases-B) the go&ernment decreases net ta/es-C) the ed sells 'onds in the open mar#et-!) the ed reduces the re,uired reser&e ratio-

1) >efer to igure 1"-- *lanned in&estment could decrease from 1" million to 9 million if A) the go&ernment increases net ta/es-B) the go&ernment increases go&ernment purchases-C) the ed 'us 'onds in the open mar#et-!) Both B and C

13) >efer to igure 1"-- *lanned in&estment could decrease from 14 million to 1" million if A) the go&ernment reduces go&ernment purchases-B) the ed sells 'onds in the open mar#et-C) the ed lowers the discount rate-!) B and C

14) >efer to igure 1"-- *lanned in&estment could increase from 9 million to 1" million if A) the go&ernment increases go&ernment purchases-B) the go&ernment increases net ta/es-C) the ed sells 'onds in the open mar#et-!) the ed lowers the discount rate-

18) Which of the following se,uence of e&ents follows an e/pansionar monetar polic?A) r↑⇒ I↓⇒ AE↓⇒ Y↓.

B) r↑⇒ I↑⇒ AE↓⇒ Y↑.

C) r↓⇒ I↑⇒ AE↑⇒ Y↑.

!) r↓⇒ I↓⇒ AE↓⇒ Y↓.

19) Which of the following se,uence of e&ents follows a rise in the discount rate?A) r↓⇒ I↓⇒ AE↓⇒ Y↑.

B) r↑⇒ I↓⇒ AE↓⇒ Y↓.

C) r↓⇒ I↑⇒ AE↑⇒ Y↑.

!) r↑⇒ I↑⇒ AE↑⇒ Y↑.

1@) Which of the following se,uence of e&ents follows an e/pansionar fiscal polic?A) AE P K Y P K M dQ K r Q K I Q K AE Q-B) AE P K Y P K M dP K r P K I Q K AE Q-

C) AE Q K Y Q K M dQ K r Q K I P K AE P-!) AE Q K Y P K M dQ K r Q K I Q K AE Q-

") Which of the following se,uence of e&ents follows an increase in net ta/es?A) AE P K Y P K M dP K r P K I P K AE P-

B) AE Q K Y P K M dQ K r P K I Q K AE Q-C) AE P K Y P K M dQ K r Q K I Q K AE Q-

!) AE Q K Y Q K M dQ K r Q K I P K AE P-

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"1) If planned in&estment decreases as the interest rate increases5 the si$e of the go&ernment spending multiplierwill 'eA) $ero-B) larger than the go&ernment spending multiplier that would result if planned in&estment were independent of theinterest rate-C) the same as the go&ernment spending multiplier that would result if planned in&estment were independent of theinterest rate-!) smaller than the go&ernment spending multiplier that would result if planned in&estment were independent ofthe interest rate-

"") If planned in&estment decreases as the interest rate increases5 the a'solute &alue of the ta/multiplier will 'eA) the same as the a'solute &alue of the ta/ multiplier that would result if planned in&estment were independent ofthe interest rate-B) larger than the a'solute &alue of the ta/ multiplier that would result if planned in&estment were independent ofthe interest rate-

C) smaller than the a'solute &alue of the ta/ multiplier that would result if planned in&estment were independent of the interest rate-!) $ero-

Refer to the information provided in Table 12.2 below and the followin three assumptions to answer the

questions that follow.

Table 12.2

Assume the following for the long run1- or e&er 1D increase =decrease) in interest rate5 planned in&estment decreases =increases) ' 3 'illion-"- or e&er 1 'illion increase =decrease) in go&ernment spending5 interest rate increases =decreases) ' 1D-%- The MPC ; -9

"%) >efer to Ta'le 1"-"- Assuming the econom is in e,uili'rium5 how much is e,uili'rium output?

A) 83 'illion-B) @ 'illion C) 153 'illion!) 15%3 'illion

") >efer to Ta'le 1"-"- When go&ernment spending increases ' % 'illion5 the crowding(out effect can 'erepresented ' aA) % 'illion decrease in in&estment-B) 13 'illion decrease in in&estment-C) %D decrease in the interest rate-!) 1D increase in the interest rate-

126



"3) >efer to Ta'le 1"-"- Ta#ing the crowding(out effect into consideration5 if go&ernmentspending increases ' % 'illion5 e,uili'rium outputA) increases ' 13 'illion- B) increases ' ""3 'illion-C) decreases ' 13 'illion-!) increases ' 83 'illion-

"4) >efer to Ta'le 1"-"- Ta#ing the crowding(out effect into consideration5 if go&ernmentspending increases ' 3 'illion5 the new e,uili'rium output isA) 151 'illion-B) 15183 'illion- C) 15% 'illion-!) 15 'illion-

"8) The se&erit of the crowding(out effect will 'e reduced if

A) the ed increases the mone suppl at the same time the federal go&ernment increasesgo&ernment spending-B) the ed decreases the mone suppl at the same time the federal go&ernment increasesgo&ernment spending-C) the ed does not change the mone suppl when the go&ernment increases go&ernmentspending-!) 'usiness firms 'ecome pessimistic a'out the future-

"9) If the ed decreases the mone suppl at the same time the federal go&ernment decreases go&ernmentspending5 the crowding(out effectA) will not 'e affected-B) will 'e increased-

C) will 'e reduced-!) could either increase or decrease depending on the sensiti&it of planned in&estment tothe interest rate-

"@) The steeper the planned in&estment schedule =cur&e)A) the larger is the crowding(out effect-B) the smaller is the crowding(out effect-C) the larger is the change in planned in&estment as a result of changes in the interest rate-!) the smaller is the change in mone demand as a result of changes in the interest rate-

%) The flatter the planned in&estment schedule =cur&e)A) the smaller is the change in planned in&estment as a result of changes in the interest rate-B) the smaller is the crowding(out effect-C) the larger is the crowding(out effect-!) the larger is the change in mone demand as a result of changes in the interest rate-Answer%1) If planned in&estment does not fall when the interest rate rises5 there will 'eA) a slight crowding(out effect-B) a su'stantial crowding(out effect-C) no crowding(out effect-!) a complete crowding(out effect-

127



%") Which of the following reduces the se&erit of the crowding(out effect whene&er go&ernmentspending increases?A) An e/pansionar monetar polic B) An e/pansionar fiscal policC) A contractionar monetar polic!) A contractionar fiscal polic

%%) There will 'e no crowding(out effect when the go&ernment increases spending and the planned in&estment schedule =cur&e) isA) &ertical- B) downward sloping-C) upward sloping- !) hori$ontal-

%) If firms sharpl increase the num'er of in&estment pro+ects underta#en when interest rates falland sharpl reduce the num'er of in&estment pro+ects underta#en when interest ratesincrease5 then5 ignoring the crowding out effect5

A) e/pansionar fiscal polic will 'e &er effecti&e-B) e/pansionar monetar polic will 'e &er effecti&e-C) contractionar fiscal polic will 'e &er effecti&e-!) contractionar monetar polic will not 'e &er effecti&e-

%3) If planned in&estment is sensiti&e to the interest rate5 an increase in the interest rate causes theA) aggregate e/penditure cur&e to shift down-B) aggregate e/penditure cur&e to shift up-C) long(run aggregate suppl cur&e to shift out-!) in&estment demand schedule to shift to the right-

%4) Monetar polic can 'e effecti&e onl if A) the mone suppl reacts to changes in the interest rate-B) planned in&estment reacts to changes in the interest rate-C) mone demand reacts to changes in the interest rate-!) go&ernment spending reacts to changes in the interest rate-

%9) Assume that in&estment spending depends on the interest rate- As the suppl of mone is increased5 the interestrate and planned in&estment spending -A) falls increasesB) falls decreasesC) rises decreases

!) rises increases

%@) If the interest rate is so high that it is hurting economic growth5 the recommended policaction should 'eA) an e/pansionar fiscal polic-B) an e/pansionar monetar polic-C) a contractionar monetar polic-!) the demand for mone should 'e increased-

) Monetar polic affects the mone mar#et 'A) changing the interest rate5 which changes planned in&estment-B) directl increasing consumption5 which increases aggregate output-

128



C) changing the mone suppl5 which changes the interest rate-!) changing the le&el of aggregate output5 which changes the le&el of planned e/penditure-

1) If the in&estment demand cur&e is &ertical5A) 'oth monetar and fiscal polic are ineffecti&e-B) 'oth monetar and fiscal polic are effecti&e-C) monetar polic is effecti&e5 'ut fiscal polic is ineffecti&e-!) monetar polic is ineffecti&e5 'ut fiscal polic is effecti&e-

") If the federal go&ernment is reducing net ta/es to stimulate the econom at the same time theed is selling 'onds in the open mar#et5 the effecti&eness of the e/pansionar fiscal polic will 'eA) increased5 'ecause the ed s actions will result in higher interest rates-ʹ

B) reduced5 'ecause the ed s actions will result in higher interest rates-ʹ

C) increased5 'ecause the ed s actions will result in lower interest rates-ʹ

!) reduced5 'ecause the ed s actions will result in lower interest rates-ʹ

%) If the ed accommodates a fiscal e/pansion ' increasing the mone suppl so that the interestrate increases onl a little5 the crowding(out effect willA) 'e $ero-B) increase-C) decrease5 'ut still 'e positi&e- !) 'ecome infinitel large-


Fi$ure 12.5

) >efer to igure 1"-3- As a result of an e/pansionar fiscal polic5 the largest crowding(outeffect occurs if the planned in&estment schedule =cur&e) is similar to the one in *anel -A) A

B) BC) C !) !

129



3) >efer to igure 1"-3- Assume the current e,uili'rium output is 3 'illion5 the spending multiplier is 35 andthe go&ernment increases purchases ' 1 'illion- If the new e,uili'rium output increases to 3% 'illion5 mostli#el the planned in&estment schedule =cur&e) is similar to the one in *anel -A) A B) B C) C !) !

4) >efer to igure 1"-3- Assume the current e,uili'rium output is 3 'illion5 the spendingmultiplier is 35 and the go&ernment increased spending ' 1 'illion- If the new e,uili'riumoutput increased to 33 'illion5 most li#el the planned in&estment schedule =cur&e) is similar to the one in *anel -A) A B) B C) C

!) !

8) Which of the following actions is an e/ample of an e/pansionar fiscal polic?A) an increase in the discount rateB) a decrease in defense spendingC) a sale of go&ernment securities in the open mar#et!) a decrease in net ta/es-

9) Which of the following se,uence of e&ents occurs in response to an e/pansionar fiscal polic?

A) Aggregate output decreases5 causing mone demand to decrease5 causing the interest rate to decrease and planned in&estment to increase-B) Aggregate output decreases5 causing mone demand to increase5 causing interest rates to increase and plannedin&estment to decrease-C) Aggregate output increases5 causing mone demand to increase5 causing interest rates to increase and plannedin&estment to decrease-!) Aggregate output decreases5 causing the demand for mone to increase5 causing interest rates to increase and

planned in&estment to increase-


Fi$ure 12.6

130



@) >efer to igure 1"-4- After go&ernment purchases are reduced5 the planned aggregate e/penditure function mashift from C < I < . toʹ C < I <ʹ G 'ecause the reduction in output will causeʹ

A) mone suppl to increase5 the interest rate to decrease5 and planned in&estment to increase-B) mone suppl to decrease5 the interest rate to decrease5 and planned in&estment to increase-C) mone demand to decrease5 the interest rate to decrease5 and planned in&estment to increase-!) mone demand to increase5 the interest rate to decrease5 and planned in&estment to increase-

3) >efer to igure 1"-4- The initial aggregate e/penditure function is gi&en ' C < I < G- A decrease ingo&ernment spending shifts the aggregate e/penditure function to C < I < G - If in&estment does NOT depend onʹ

the interest rate5 the multiplier A) is -3-B) is 1-%%-C) is "-!) cannot 'e determined from the information a&aila'le-

31) >efer to igure 1"-4- If in&estment does NOT depend on the interest rate5 the change in go&ernment purchasesthat decreases income from 'illion to 1 'illion isA) an increase of 13 'illion-B) a decrease of 13 'illion-C) a decrease of % 'illion-!) cannot 'e determined from the information a&aila'le-

3") >efer to igure 1"-4- If in&estment !O20 depend on the interest rate5 the change in planned in&estment that thedecrease in go&ernment spending 'rought a'out so that income fell from 'illion to " 'illion rather than1 'illion would ha&e 'eenA) an increase of 3 'illion-

B) a decrease of 1 'illion-C) a decrease of " 'illion-!) cannot 'e determined from the information a&aila'le-


Fi$ure 12.!

131



3%) >efer to igure 1"-8- What is the multiplier in this econom?A) "B) C) 3 !) 1

3) >efer to igure 1"-8- The initial aggregate e/penditures are represented ' the line AE - If thego&ernment increases spending ' 1 'illion and the aggregate e/penditures cur&e shifts to AE 15 we #now for sure thatA) there is 1 'illion decline in planned in&estment-B) there is total crowding(out effect-C) the planned in&estment schedule is &ertical-!) the planned in&estment schedule is downward sloping-

33) >efer to igure 1"-8- The initial aggregate e/penditures are represented ' the line AE - If the go&ernmentincreases spending ' 1 'illion and the aggregate e/penditures cur&e shifts to AE "5 we #now for sure that

A) the interest rate does not change as a result of fiscal polic-B) planned in&estment is perfectl insensiti&e to changes in the interest rate-C) there is total crowding(out effect-!) the planned in&estment schedule is hori$ontal-

34) >efer to igure 1"-8- The initial aggregate e/penditures are represented ' the line AE - If the go&ernmentincreases spending ' 1 'illion and the aggregate e/penditures cur&e remains AE 5 we #now for sure thatA) the interest rate does not change as a result of fiscal polic-B) planned in&estment is perfectl insensiti&e to changes in the interest rate-C) there is total crowding(out effect-!) the planned in&estment schedule is downward sloping-

38) If in&estment depends on the interest rate5 a decrease in net ta/es will cause aggregate output to thanif in&estment doesn t depend on the interest rate-ʹ

A) increase ' more B) increase ' lessC) decrease ' more !) decrease ' less

39) A decrease in the mone suppl aimed at decreasing aggregate output isA) an e/pansionar fiscal polic- B) a contractionar monetar polic-

C) a contractionar fiscal polic- !) an e/pansionar monetar polic-

3@) Which of the following is the se,uence of e&ents following a contractionar monetar polic?A) Mone demand increases K interest rates increase K planned in&estment falls and aggregate output falls-

B) Interest rates increase K planned in&estment decreases K aggregate output decreases Kmone demanddecreases-C) Interest rates decrease K planned in&estment decreases K aggregate output decreases Kmone demanddecreases-!) Aggregate output falls K the demand for mone falls K interest rates rises K planned in&estment decreases-

132



Refer to the information provided in Fiure 12.! below to answer the questions that follow.

Fi$ure 12.(

4) >efer to igure 1"-9- Interest rate r 1 is greater than interest rate r - Which of the following would ha&ecaused the planned aggregate e/penditure function to shift from C < I < G to C < I <ʹ G?A) a contractionar monetar policB) a contractionar fiscal policC) a decrease in the cost of capital relati&e to la'or !) an e/pansionar monetar polic

41) Which of the following actions is an e/ample of an e/pansionar monetar polic?A) a reduction in federal spending on education

B) a purchase of go&ernment securities in the open mar#etC) an increase in the discount rate!) an increase in income ta/ rates

4") If ou are concerned that the inflation rate is too high5 which of the following policies wouldou recommend?A) a decrease in the mone suppl B) an increase in the mone supplC) a decrease in income ta/ rates !) an increase in go&ernment spending

4%) The com'ination of monetar and fiscal policies in use at a gi&en time is referred to as theA) crowding(out mi/-B) polic mi/-C) discretionar mi/- !) pac#age mi/-

4) A polic mi/ that consists of a contractionar fiscal polic and an e/pansionar monetar polic wouldA) 'e neutral with respect to the composition of aggregate spending in the econom-B) lead to higher interest rates-C) fa&or go&ernment spending o&er in&estment spending-!) fa&or in&estment spending o&er go&ernment spending-

133



44) A polic mi/ of an e/pansionar fiscal polic and a contractionar monetar polic would causeA) output to decrease and interest rates to decrease-B) output to decrease and interest rates to increase-C) output to decrease and interest rates to either increase5 decrease5 or remain unchanged-!) output to either increase5 decrease5 or remain unchanged and interest rates to increase-

48) A polic mi/ of an e/pansionar fiscal polic and an e/pansionar monetar polic wouldcause output to and interest rates to -A) increase increaseB) increase increase5 decrease5 or remain unchangedC) increase5 decrease5 or remain unchanged increase!) decrease increase

49) The polic mi/ of a contractionar fiscal polic and a contractionar monetar polic would cause output to 5 and interest rates to -

A) decrease increase5 decrease5 or remain unchangedB) decrease decreaseC) decrease increase!) increase5 decrease5 or remain unchanged decrease

8) The polic mi/ that would cause the interest rate to decrease and in&estment to increase5 'ut ha&e anindeterminate effect on aggregate output5 is a mi/ of A) contractionar fiscal polic and e/pansionar monetar polic-B) e/pansionar fiscal polic and contractionar monetar polic-C) e/pansionar fiscal polic and e/pansionar monetar polic-!) contractionar fiscal polic and contractionar monetar polic-

81) If the ed increases the mone suppl5 there will initiall 'eA) a surplus of mone and the e,uili'rium interest rate will rise-B) a surplus of mone and the e,uili'rium interest rate will fall-C) a shortage of mone and the e,uili'rium interest rate will rise-!) a shortage of mone and the e,uili'rium interest rate will fall-

8") If the ed decreases the mone suppl5 there will initiall 'eA) a shortage of mone and the e,uili'rium interest rate will rise-B) a shortage of mone and the e,uili'rium interest rate will fall-C) a surplus of mone and the e,uili'rium interest rate will rise-!) a surplus of mone and the e,uili'rium interest rate will fall-

8%) If .!* increases5 there will initiall 'eA) a shortage of mone and the e,uili'rium interest rate will rise-B) a shortage of mone and the e,uili'rium interest rate will fall-C) a surplus of mone and the e,uili'rium interest rate will rise-!) a surplus of mone and the e,uili'rium interest rate will fall-

8) If .!* decreases5 there will initiall 'eA) a surplus of mone and the e,uili'rium interest rate will rise-B) a surplus of mone and the e,uili'rium interest rate will fall-C) a shortage of mone and the e,uili'rium interest rate will rise-!) a shortage of mone and the e,uili'rium interest rate will fall-

134



2 True/False

1) iscal polic affects the mone mar#et through its impact on income and mone demand-") Monetar polic affects the goods mar#et through its impact on the interest rate and planned in&estment-%) The tendenc for increases in go&ernment purchases to cause reductions in pri&ate sa&ing is #nown as thecrowding(out effect-) As the interest sensiti&it of in&estment demand increases5 the si$e of the crowding(out effect increases-3) If planned in&estment falls as the interest rate rises5 there will 'e no crowding(out effect-4) The more sensiti&e planned in&estment is to the interest rate5 the less effecti&e fiscal polic-8) The more sensiti&e planned in&estment is to the interest rate5 the less the effecti&eness of monetar polic-9) If the ed wants to reduce the inflation rate5 it should lower the discount rate-@) If the ed wants to reduce the inflation rate5 it should sell 'onds in the open mar#et-1) The polic mi/ of a contractionar monetar polic and a contractionar fiscal polic will5 unam'iguousl5lead to a decrease in the interest rate-

12.4 The 8$$re$ate eman+ 08 Cur,e1) In an econom5 when the price le&el falls5 consumers and firms 'u more goods and ser&ices-This relationship is represented ' theA) aggregate e/penditures cur&e- B) aggregate demand cur&e-C) short(run aggregate suppl cur&e- !) long(run aggregate suppl cur&e-

") The aggregate demand cur&e shows a relationship 'etween and total,uantit of output -A) positi&e the interest rate demanded

B) negati&e the price le&el suppliedC) positi&e the price le&el demanded!) negati&e the price le&el demanded

%) The aggregate demand cur&e shows that5 ceteris pari'us5A) at higher price le&els5 total ,uantit of output demanded is higher-B) at lower price le&els5 total ,uantit of output supplied is lower-C) at lower price le&els5 total ,uantit of output demanded is higher-!) at higher price le&els5 total ,uantit of output supplied is lower-

) The aggregate demand cur&eA) is an upward sloping cur&e- B) is a downward sloping cur&e-C) ma slope upward or downward- !) is hori$ontal-

3) Mone demand is a function of all of the following 2C2*TA) interest rate- B) price le&el-C) mone suppl- !) aggregate output-

135



4) The ,uantit of aggregate output demanded will fall if A) the interest rate is reduced-B) the price le&el increases-C) the mone suppl is increased- !) net ta/es are reduced-

Refer to the information provided in Fiure 12.1# below to answer the questions that follow.

Fi$ure 12.13

8) >efer to igure 1"-1- The mone demand cur&e will shift from M d to M d1 5 if A) the price le&el decreases- B) the interest rate decreases-C) the le&el of aggregate output increases- !) the inflation rate increases-

9) >efer to igure 1"-1- If the mone demand cur&e shifts from M d to M d1 5A) planned in&estment will decrease and aggregate output will decrease-B) planned in&estment will decrease and aggregate output will increase-C) planned in&estment will increase and aggregate output will decrease-!) planned in&estment will increase and aggregate output will increase-

@) Which of the following se,uence of e&ents is T>62?A) P P K M dQ K r PB) P P K M dP K r Q

C) Y P K M dQ K r P!) Y P K M dP K r P

1) As the price le&el in the econom increases5 which of the following se,uence of e&ents occurs?A) M dP K r P K I P K AE Q

B) M dQ K r P K I P K AE PC) M dP K r P K I Q K AE Q

!) M dQ K r P K I Q K AE Q

136



11) As the price le&el in the econom decreases5 which of the following se,uence of e&ents occurs?A) M dQ K r P K ADQB) M dP K r P K ADPC) M dQ K r Q K ADQ

!) M dQ K r Q K ADP

1") Aggregate demand rises when the price le&el decreases 'ecause the lower price le&el causesA) the mar#et demand for all goods and ser&ices to decrease-B) the suppl of mone to decrease-C) the demand for mone to rise causing interest rates to fall-!) the demand for mone to fall causing interest rates to fall-

1%) Aggregate demand decreases when the price le&el rises 'ecause the higher price le&elA) means that people can afford to 'u more goods-B) causes the demand for mone to increase5 causing interest rates to rise-C) means that the prices of some goods fall relati&e to the prices of other goods-!) causes the interest rate to fall-

1) Which of the following statements is T>62?A) The aggregate demand cur&e is the sum of all mar#et demand cur&es in the econom-B) 2ach point on the aggregate demand cur&e corresponds to a point at which 'oth thegoods mar#et and the mone mar#et are in e,uili'rium-

C) The aggregate demand cur&e is a mar#et demand cur&e-!) Onl the goods mar#et is in e,uili'rium at each point on the aggregate demand cur&e-

13) An increase in the mone suppl will cause planned in&estment to and consumptionto -A) decrease decrease B) decrease increaseC) increase increase !) increase decrease

14) The le&el of aggregate output demanded falls when the price le&el rises5 'ecause the resulting increase in theinterest rate will lead toA) higher in&estment spending and higher consumption spending-B) lower in&estment spending and higher consumption spending-C) higher in&estment spending and lower consumption spending-!) lower in&estment spending and lower consumption spending-

18) The aggregate demand cur&e slopes downward 'ecause at higher price le&elA) the purchasing power of consumers assets declines and consumption increases-ʹ

B) producers can get more for what the produce5 and the increase production-

C) the purchasing power of consumers assets declines and consumption decreases-ʹ

!) the purchasing power of consumers assets increases and consumption increases-ʹ

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19) When changes in the price le&el cause changes in the interest rate and5 thus5 changes inaggregate output demanded5 we call this effectA) the multiplier effect- B) the real wealth effect-C) the real income effect- !) the consumption lin#-

1@) When the general price le&el rises5A) consumption falls as a result of the real wealth effect-B) consumption increases as a result of the multiplier effect-C) in&estment rises as a result of the real wealth effect-!) in&estment rises as a result of the multiplier effect-

") The change in consumption 'rought a'out ' a change in purchasing power of sa&ings thatresults from a change in the price le&el is the

A) consumption effect-B) mone suppl effect-C) real wealth effect-!) interest rate effect-

"1) At e&er point along the aggregate demand cur&e5 the le&el of aggregate output demanded isA) greater than planned aggregate e/penditure-B) less than planned aggregate e/penditure-C) e,ual to planned aggregate e/penditure-!) unrelated to the concept of planned aggregate e/penditure-

"") At e&er point along the aggregate demand cur&e =assuming no foreign sector)5A) G ; T -B) S ; I -C) Y ; C -!) Y ; C < I < G-

"%) A decrease in the ,uantit of mone supplied at a gi&en price le&el causesA) no change in aggregate demand-B) a decrease in aggregate demand-C) an increase in aggregate demand-

!) an increase in aggregate suppl-

") When the ,uantit of mone supplied decreases5 at a gi&en price le&elA) the aggregate demand cur&e shifts leftward-B) the aggregate demand cur&e shifts rightward-C) the econom mo&es along the aggregate demand cur&e-!) the aggregate demand does not change-

"3) An increase in go&ernment purchases shifts the cur&e to the -A) aggregate demand left B) aggregate suppl leftC) aggregate demand right !) aggregate suppl right

138



"4) The aggregate demand cur&e would shift to the left if A) go&ernment spending were increased- B) net ta/es were increased-C) the mone suppl were increased- !) the cost of energ were to decrease-

"8) A decrease in net ta/es at a gi&en price le&el leads toA) no change in aggregate demand- B) an increase in aggregate demand-C) a decrease in aggregate demand-!) a decrease in aggregate suppl-

"9) A rightward shift in the aggregate demand cur&e can 'e caused 'A) a decrease in go&ernment spending-B) an increase in ta/es-

C) a decrease in mone suppl-!) the ed 'uing go&ernment 'onds-

"@) The aggregate demand shifts to the left if A) the go&ernment increases spending-B) the ed sells go&ernment 'onds-C) the go&ernment decreases ta/es-!) the ed decreases the re,uired reser&e ratio-

%) The aggregate demand increases5 if

A) the go&ernment increases spending-B) the ed sells go&ernment 'onds-C) the go&ernment increases ta/es- !) the ed raises the discount rate-

%1) The aggregate demand increases5 if A) the go&ernment decreases spending-B) the ed sells go&ernment 'onds-C) the go&ernment decreases ta/es-!) the ed increases the re,uired reser&e ratio-

%") The aggregate demand cur&e increases if A) the ed increase the discount rate-B) the ed 'us go&ernment 'onds-C) the ed increases the re,uired reser&e ratio-!) the go&ernment increases ta/es-

139




Fi$ure 12.11

%%) >efer to igure 1"-11- An aggregate demand shift from AD" to AD can 'e caused 'A) a decrease in the price le&el- B) an increase in the price le&el-C) a decrease in ta/es- !) a decrease in mone suppl-

%) >efer to igure 1"-11- An aggregate demand shift from AD1 to AD can 'e caused 'A) a decrease in go&ernment spending-B) an increase in mone suppl-C) a decrease in the price le&el- !) an increase in the price le&el-

%3) >efer to igure 1"-11- 0uppose the econom is at *oint A5 an increase in the price le&el cancause a mo&ement to *ointA) E -B) B-C) C -!) D-

%4) >efer to igure 1"-11- 0uppose the econom is at *oint A5 a decrease in the price le&el cancause a mo&ement to *ointA) E - B) B-C) C - !) D-

%8) >efer to igure 1"-11- 0uppose the econom is at *oint A5 a decrease in ta/es can cause amo&ement to *ointA) E -

140



B) B-C) C - !) D-

%9) >efer to igure 1"-11- 0uppose the econom is at *oint A5 an increase in mone demand couldcause a mo&ement to *ointA) E - B) B-C) C - !) D-

%@) >efer to igure 1"-11- 0uppose the econom is at *oint A5 an decrease in go&ernment purchases can cause a mo&ement to *ointA) E -B) B-

C) C - !) D-

) >efer to igure 1"-11- 0uppose the econom is at *oint A an increase in go&ernment purchasescan cause a mo&ement to *ointA) E -B) B- C) C - !) D-

2 True/False

1) The aggregate demand cur&e is the sum of all demand cur&es of all goods and ser&ices in the econom-") The wealth effect e/plains wh the aggregate suppl cur&e is hori$ontal in the long run-%) A higher interest rate increases 'oth planned in&estment and consumption spending-) A decrease in net ta/ation increases aggregate demand-3) A decrease in the price le&el raises the real &alue of wealth-4) An increase in the suppl of mone will shift the aggregate demand cur&e to the right-8) A decrease in go&ernment spending shifts aggregate demand to the left-9) The aggregate demand cur&e shows that at higher price le&els the total ,uantit of output demanded is greater-@) If the ed 'us go&ernment securities5 it decrease the mone suppl and aggregate demand-1) An increase in the price le&el cause aggregate demand to increase -

12.5 8ppen+i9 The ":%LM ia$ram

1) 2ach point on the LM cur&e represents the e,uili'rium point in theA) goods mar#et for the gi&en interest rate-B) mone mar#et for the gi&en &alue of aggregate output-C) goods mar#et for the gi&en le&el of go&ernment spending-!) mone mar#et for the gi&en le&el of the mone suppl-

141



Refer to the information provided in Fiure 12." below to answer the questions that follow.

Fi$ure 12.

") >efer to igure 1"-@- An e/pansionar fiscal polic shifts the cur&e to the -A) IS left B) LM right C) IS right

!) LM left

%) >efer to igure 1"-@- A contractionar monetar polic shifts the cur&e to the-A) LM right B) IS right C) IS left !) LM left

) >efer to igure 1"-@- As a result of 5 the e,uili'rium interest rate increases and thee,uili'rium output le&el increases-A) an e/pansionar monetar polic B) a contractionar monetar polic

C) an e/pansionar fiscal polic !) a contractionar fiscal polic

3) >efer to igure 1"-@- As a result of 5 the e,uili'rium interest rate increases and thee,uili'rium output le&el decreases-A) an e/pansionar monetar polic B) a contractionar monetar policC) an e/pansionar fiscal polic!) a contractionar fiscal polic

4) >efer to igure 1"-@- Which polic mi/ would definitel increase the e,uili'rium interest rate?A) An e/pansionar monetar polic and an e/pansionar fiscal polic

B) A contractionar monetar polic and a contractionar fiscal policC) An e/pansionar fiscal polic and a contractionar monetar polic

142



!) An e/pansionar monetar polic and a contractionar fiscal polic

8) 2ach point on the IS cur&e represents the e,uili'rium point in theA) goods mar#et for the gi&en le&el of go&ernment spending-B) mone mar#et for the gi&en &alue of aggregate output-C) goods mar#et for the gi&en interest rate-!) mone mar#et for the gi&en le&el of the mone suppl-

9) If the com'ination r ; 1D and Y ; " 'illion is on the IS cur&e5 we #now that the com'ination r ; 1D and Y

; % 'illion consists of anA) output le&el that is too high to maintain e,uili'rium in the goods mar#et with an interest rate of 1D-B) interest rate that is too high to maintain e,uili'rium in the mone mar#et with an output of % 'illion-C) interest rate that is too low to maintain e,uili'rium in the goods mar#et with an output of % 'illion-!) output le&el that is too low to maintain e,uili'rium in the goods mar#et with an interest rate of 1D-

@) The cur&e that illustrates the positi&e relationship 'etween the e,uili'rium &alues of aggregateoutput in the mone mar#et is the

A) mone demand cur&e- B) mone suppl cur&e-C) LM cur&e- !) IS cur&e-

1) If the com'ination r ; 3D and Y ; 1 'illion is on the LM cur&e5 we #now that the com'ination r ; 8D andY ; 1 'illion consists of anA) output le&el that is too high to maintain e,uili'rium in the mone mar#et with an interest rate of 8D-B) interest rate that is too high to maintain e,uili'rium in the mone mar#et with an output of 1 'illion-C) interest rate that is too low to maintain e,uili'rium in the goods mar#et with an output of 1 'illion-!) output le&el that is too low to maintain e,uili'rium in the goods mar#et with an interest rate of 8D-

2 True/False

1) The I0 cur&e shows com'inations of income and interest rates consistent with e,uili'rium in the mone mar#et-") If the mone suppl decreases5 then the FM cur&e decreases-%) If go&ernment spending increases5 then the I0 cur&e increases-) If net ta/es decrease5 then the I0 cur&e rises-3) 2/pansionar fiscal polic decreases the I0 cur&e-

143



Chapter @ Aggregate 0uppl and the 2,uili'rium *rice Fe&el1#.1 The 8$$re$ate :uppl* Cur,e

1) The graph that shows the relationship 'etween the aggregate ,uantit of output supplied ' all the firms in aneconom and the o&erall price le&el isA) the aggregate suppl cur&e-

B) the aggregate production function-C) the production possi'ilities frontier- !) the aggregate demand cur&e-

") The ,uantit of output supplied at different price le&els is represented ' theA) production function- B) aggregate demand cur&e-C) aggregate suppl cur&e- !) aggregate e/penditures cur&e-

%) The aggregate suppl cur&eA) is the sum of the indi&idual suppl cur&es in the econom-

B) is a mar#et suppl cur&e-C) em'odies the same logic that lies 'ehind an indi&idual firm s suppl cur&e-ʹ

!) relates output with the price le&el-

) It is &er important to distinguish 'etween the short run and the long run when we are discussingA) the aggregate demand- B) the aggregate e/penditures-C) the aggregate suppl- !) changes in the price le&el-


Fi$ure 1#.#

3) >efer to igure 1%-%- Between the output le&els of 3 'illion and 15 'illion5 the relationship 'etween the

price le&el and output isA) constant- B) negati&e-

144



C) positi&e-!) indeterminate-

4) >efer to igure 1%-%- This econom reaches capacit atA) 3 'illion-B) 15 'illion-C) 153 'illion-!) an output le&el that is indeterminate from this information 'ecause aggregate demand isnot gi&en-

8) >efer to igure 1%-%- At aggregate output le&els 'elow 3 'illion5 this econom is most li#el e/periencingA) rapid increases in the growth rate of the mone suppl-B) a 'oom-C) e/cess demand-!) e/cess capacit-

9) >efer to igure 1%-%- At aggregate output le&els a'o&e 153 'illion5 firms in this econom aremost li#el e/periencingA) costs increasing as fast as output prices-B) costs lagging 'ehind increases in output prices-C) costs falling as prices output increase-!) costs rising faster than output prices-


Fi$ure 1#.4

@) >efer to igure 1%-- Between the output le&els of % 'illion and 4 'illion5 the relationship 'etween the price le&el and output isA) negati&e-B) positi&e-C) constant-

!) There is no relationship 'etween the price le&el and output-

145



1) >efer to igure 1%-- This econom reaches capacit atA) % 'illion-B) 4 'illion-C) @ 'illion-!) an output le&el that is indeterminate from this information 'ecause aggregate demand is not gi&en-

11) What determines the slope of the aggregate suppl cur&e isA) how fast the price of factors of production respond to changes in the price le&el-B) how much more the econom can produce without an change in the price le&el-C) how fast the output le&el changes after a technological ad&ance-!) none of the a'o&e

1") When the aggregate suppl cur&e is hori$ontal5A) the price of factors of production is fi/ed5 with little or no upward pressure on price-B) the econom is close to full capacit-

C) resources are 'eing utili$ed at full capacit-!) the prices le&el increases with additional production-

1%) When the aggregate suppl cur&e is &ertical5 which of the following is NOT true?A) The econom is at capacit-B) The econom is producing the ma/imum sustaina'le le&el of output-C) An increase in the price le&el will not cause an increase in aggregate output-!) The econom is e/panding ,uic#l-

1) If the econom is operating on the relati&el &ertical segment of the aggregate suppl cur&e5 an increase inaggregate demand causes a change in the price le&el and a change in output-A) small small

B) 'ig 'ig C) 'ig small!) small 'ig

13) If the econom is operating wa 'elow capacit5 an increase in aggregate demand causes a change inthe price le&el and change in output-A) 'ig 'ig B) 'ig smallC) small 'ig !) small small

14) An increase in aggregate demand when the econom is operating at high le&els of output is li#el to result in

A) a large increase in 'oth output and the o&erall price le&el-B) an increase in the o&erall price le&el 'ut little or no increase in output-C) an increase in output 'ut little or no increase in the o&erall price le&el-!) little or no increase in either output or the o&erall price le&el-

18) An increase in aggregate demand when the econom is operating at full capacit is li#el to result inA) an increase in 'oth output and the o&erall price le&el-B) an increase in output 'ut no increase in the o&erall price le&el-C) an increase in the o&erall price le&el 'ut no increase in output-!) no increase in either output or the o&erall price le&el-

146



19) An increase in the price le&el is li#el to increase the aggregate amount of output supplied in the short run 'ecauseA) interest rate is high in the short(run-B) wages and interest rates are relati&el fi/ed in the short(run-C) wages change in the short(run-!) the aggregate suppl cur&e is &ertical in the short(run-

1@) When the econom is producing at full capacit5 the aggregate suppl cur&e 'ecomesA) hori$ontal- B) downward sloping-C) &ertical-!) upward sloping-

") If input prices changed at e/actl the same rate as output prices5 the aggregate suppl cur&ewould 'e

A) &ertical-B) upward sloping-C) hori$ontal- !) downward sloping-

"1) A mo&ement down the aggregate suppl cur&e is caused ' a=n)A) decrease in aggregate suppl-B) increase in aggregate suppl-C) decrease in the price le&el-!) increase in the price le&el-

"") If there is a decrease in the percentage of emploees whose wages ad+ust automaticall withchanges in the price le&el5 the aggregate suppl cur&e will 'ecomeA) steeper-B) flatter-C) hori$ontal-!) &ertical-

"%) If there is an increase in the percentage of emploees whose wages ad+ust automaticall withchanges in the price le&el5 the aggregate suppl cur&e will 'ecomeA) steeper-

B) flatter- C) hori$ontal- !) &ertical-

") Coal is used as a source of energ in man manufacturing processes- Assume a long stri#e ' coal minersreduced the suppl of coal and increased the price of coal- This would causeA) the short(run aggregate suppl cur&e to shift to the right-B) the short(run aggregate suppl cur&e to 'ecome flatter-C) the short(run aggregate suppl cur&e to shift to the left-!) the short(run aggregate suppl cur&e to 'ecome nearl &ertical at all le&els of output-

147



"4) All of the following shift the short(run aggregate suppl cur&e 2C2*TA) a change in the price le&el-B) a change in the price of oil-C) a change in the price of raw material-!) a change in wages as a result of a la'or stri#e-

"8) Which of the following would cause the short(run aggregate suppl cur&e to shift to the right?A) higher energ pricesB) an increase in ta/esC) increases in go&ernment regulation!) retired wor#ers reentering the la'or force


Fi$ure 1#.5

"@) >efer to igure 1%-3- An increase in aggregate suppl is represented 'A) a mo&ement from *oint B to *oint A along AS 1-B) a mo&ement from *oint B to *oint C along AS1-C) a shift from AS 1 to AS "-!) a shift from AS 1 to AS -

%) >efer to igure 1%-3- !uring the 1@9s5 man firms in the 6nited 0tates were not in&esting in new capital- Thiswould ha&e causedA) the short(run aggregate suppl cur&e to shift from AS 1 to AS -B) the short(run aggregate suppl cur&e to shift from AS 1 to AS "-C) the econom to mo&e from *oint B to *oint A along AS 1-!) the econom to mo&e from *oint C to *oint B along AS 1-

%1) >efer to igure 1%-3- A decrease in aggregate suppl is represented 'A) a mo&ement from *oint B to *oint A along AS 1-B) a mo&ement from *oint B to *oint C along AS1-C) a shift from AS 1 to AS "-

!) a shift from AS 1 to AS -

148




Fi$ure 1#.6

%3) >efer to igure 1%-4- 0uppose the econom is at *oint A5 an increase in aggregate demandmo&es the econom to *ointA) E -B) B-C) C -!) D-

%4) >efer to igure 1%-4- 0uppose the econom is at *oint A5 an oil price increase could mo&e theeconom to *ointA) E -B) B-C) C -!) D-

%8) The rationale underling policies to deregulate the econom is that these policies wouldA) increase the aggregate demand cur&e-B) decrease the short(run aggregate suppl cur&e-C) decrease the aggregate demand cur&e-

!) increase the short(run aggregate suppl cur&e-

%9) An oil price increase wouldA) increase the aggregate demand cur&e-B) decrease the short(run aggregate suppl cur&e-C) decrease the aggregate demand cur&e-!) increase the short(run aggregate suppl cur&e-

2 True/False

1) If input prices change at e/actl the same rate as output prices5 the aggregate suppl cur&e will 'e &ertical-") If the price le&el falls5 the aggregate suppl decreases as a result of the aggregate demand cur&e shifting left-

149



%) An increase in the price of a #e input in production5 li#e oil5 increases aggregate suppl-) An increase in the price le&el will cause a decrease in the aggregate amount of output supplied-3) A decrease in ta/es on 'usiness in&estments will increase aggregate suppl-

1#.2 The -uilibrium Price Le,el


Fi$ure 1#.!

1) >efer to igure 1%-8- 0uppose the e,uili'rium output is initiall 4 'illion- An e/pansionar monetar polic e,uili'rium output and the price le&el-A) decreases lea&es unchanged B) lea&es unchanged increasesC) increases increases!) increases decreases

") >efer to igure 1%-8- 0uppose the e,uili'rium output is initiall 4 'illion- An oil em'argo would pro'a'lA) increase 'oth the e,uili'rium output and the price le&el-B) decrease the e,uili'rium output and increase the price le&el-C) increase the e,uili'rium output and decrease the price le&el-

!) decrease 'oth the e,uili'rium output and the price le&el-

%) >efer to igure 1%-8- 0uppose the e,uili'rium output is initiall 4 'illion- A decrease inwages and an increase in go&ernment spending will5 for sure5 increaseA) 'oth the e,uili'rium output and the price le&el-B) the price le&el-C) e,uili'rium output-!) e,uili'rium output and decrease the price le&el-

) >efer to igure 1%-8- Which of the following will5 unam'iguousl5 increase the price le&el?

A) an increase in mone suppl and an influ/ of immigrantsB) a decrease in personal income ta/ and an increase in corporate profit ta/

150



C) an increase in personal income ta/ and an oil em'argo!) an increase in go&ernment spending and a decrease in the price of raw material

3) >efer to igure 1%-8- To unam'iguousl decrease the price le&elA) the ed could 'u 'onds and the go&ernment could increase the corporate profit ta/-B) personal income ta/es could decrease and corporate profit ta/es could increase-C) the ed could sell 'onds and the go&ernment could lower the corporate profit ta/-!) go&ernment spending could increase and the price of raw materials could decrease-

4) To increase the price le&el the go&ernment could adopt policies thatA) increase aggregate suppl and aggregate demand-B) decrease aggregate suppl and aggregate demand-C) increase aggregate suppl and decrease aggregate demand-!) decrease aggregate suppl and increase aggregate demand-

8) To increase output the go&ernment could adopt policies thatA) increase aggregate suppl and aggregate demand-B) decrease aggregate suppl and aggregate demand-C) increase aggregate suppl and decrease aggregate demand-!) decrease aggregate suppl and increase aggregate demand-

9) To decrease the price le&el the go&ernment couldA) encourage education and increase go&ernment spending-B) adopt policies that increase input prices and increase net ta/es-C) lower the corporate profits ta/ and ha&e the ed raise the discount rate-

!) raise ta/es on corporate profits and lower federal income ta/es-

@) To decrease output the go&ernment couldA) encourage education and increase go&ernment spending-B) adopt policies that increase input prices and increase net ta/es-C) lower the corporate profits ta/ and ha&e the ed raise the discount rate-!) raise ta/es on corporate profits and lower federal income ta/es-

1) To increase output the go&ernment couldA) encourage education and decrease net ta/es-

B) lower paroll ta/es and increase go&ernment spending-C) lower the corporate profits ta/ and ha&e the ed 'u 'onds in the open mar#et-!) all of the a'o&e

2 True/False

1) Whene&er the aggregate suppl cur&e intercepts the aggregate demand cur&e5 the econom is producing fullemploment output-") An increase in the price of inputs will most li#el lead to a higher price le&el-%) If the ed sells securities on the open mar#et5 the price le&el will rise-) !ecreasing go&ernment e/penditures and decreasing ta/es on corporate profits are two policies that 'oth wor# todecrease the price le&el-3) >aising net ta/es and and an oil em'argo will 'oth ha&e an effect towards increasing the price le&el-

151



1#.# The Lon$%&un 8$$re$ate :uppl* Cur,e

Refer to the information provided in Fiure 13.! below to answer the questions that follow.

Fi$ure 1#.(

1) >efer to igure 1%-9- Which of the following statements characteri$es an output le&el of 9 'illion?A) It is sustaina'le o&er the long run without inflation-B) It is achie&a'le onl in the long run-C) It is attaina'le in the short run 'ut it is associated with increases in the price le&el-!) It can 'e achie&ed onl if in&estment is independent of the interest rate-

") >efer to igure 1%-9- *otential outputA) is million-B) is 8 million-C) is 9 million-!) cannot 'e determined from this information 'ecause aggregate demand is not gi&en-

%) >efer to igure 1%-9- The le&el of aggregate output that can 'e sustained in the long runwithout inflationA) is million-B) is 8 million-C) is 9 million-!) cannot 'e determined from this information 'ecause aggregate demand is not gi&en-

) The le&el of aggregate output that can 'e sustained in the long run without inflation is #nown asA) nominal output-B) real output-C) mone output-!) potential output-

152



3) If e,uili'rium output 5 the price le&el rises-A) actual is 'elow potential .!*B) potential is e,ual to actual .!*C) potential e/ceeds actual .!* !) actual e/ceeds potential .!*

4) When the increases5 then potential output increases-A) long(run aggregate supplB) short(run aggregate supplC) long(run aggregate demand!) short(run aggregate demand

8) *otential output is e,ual toA) long run aggregate demand-B) short(run aggregate demand-C) short(run aggregate suppl-

!) long(run aggregate suppl-

9) The long(run aggregate suppl cur&e is &ertical5 if A) wages and other costs full ad+ust to changes in prices in the long(run-B) the go&ernment follows optimal fiscal polic-C) technolog is fi/ed-!) the ed follows optimal monetar polic-

2 True/False

1) If the econom produces full emploment output5 an e/pansionar monetar polic increases output 'ut not the price le&el-") A recessionar gap means that aggregate planned e/penditures are less than potential output-

%) An inflationar gap happens when aggregate planned e/penditure is greater than full capacit-) enes 'elie&ed that fiscal polic and monetar polic are effecti&e-3) *otential output is the most that can 'e produced in an econom at a particular point in time-4) If wages do not full ad+ust to changes in prices5 the aggregate suppl cur&e is &ertical-

1#.4 Monetar* an+ Fiscal Polic* -ffects

1) If a decrease in net ta/es in the 6nited 0tates resulted in a &er large increase in aggregate output and a &ersmall increase in the price le&el5 then the 6-0- econom must ha&e 'eenA) on the &er steep part of the short(run aggregate suppl cur&e-B) on the &er flat part of the short(run aggregate suppl cur&e-C) on the &er steep part of the short(run aggregate demand cur&e-

!) on the &er flat part of the short(run aggregate demand cur&e-

") If a decrease in the 6-0- mone suppl resulted in a &er large change in the price le&el and a &er small changein aggregate output5A) then in the 6-0- econom in&estment demand must not 'e sensiti&e to the interest rate-B) then the 6-0- econom must ha&e 'een on the &er steep part of its short(run aggregate suppl cur&e-C) then the 6-0- econom must ha&e 'een on the &er flat part of its short(run aggregate suppl cur&e-!) then the 6-0- aggregate demand cur&e must 'e &er steep-

%) An increase in go&ernment spending will completel crowd out in&estment if A) mone suppl is increased at the same time-B) mone demand is not sensiti&e to the interest rate-

153



C) the econom is operating at capacit-!) the econom is operating well 'elow capacit-

) 2conomic policies are ineffecti&e concerning ,uantities of output directl whenA) the aggregate suppl cur&e is flat-B) the aggregate demand is flat-C) the aggregate suppl is &ertical-!) the econom is not producing at capacit-

3) 2conomic policies are effecti&e at changing output whenA) the econom is not producing at capacit-B) the econom is producing at its potential output-C) the unemploment rate is at the natural rate-!) the aggregate suppl cur&e is &ertical-

4) If the long(run aggregate suppl cur&e is &ertical5 the multiplier effect of a change in net ta/eson aggregate output in the long runA) depends on the price le&el- B) is one-C) is $ero- !) is infinitel large-

8) A sustained increase in the o&erall price le&el isA) stagflation- B) a recession-

C) a price inde/-!) inflation-

Refer to the information provided in Fiure 13." below to answer the questions that follow.

Fi$ure 1#.

154



9) >efer to igure 1%-@- 0uppose the econom is currentl at *oint A producing potential output Y - If thego&ernment increases spending5 the econom mo&es to *oint in the short(run and to *oint inthe long(run-A) D E

B) B C

C) C B!) B D

@) >efer to igure 1%-@- If the econom is currentl at *oint D producing output le&el Y "5 which of the following is NOT true?A) The econom is operating 'elow full emploment-B) Input prices are li#el to fall-C) Aggregate suppl shifts to the right and the econom ends up at *oint E -!) The econom is operating a'o&e full emploment-

1) >efer to igure 1%-@- If the econom is at point A currentl producing Y and the ed decreases the monesuppl5 the econom will mo&e to *oint in the short run and to *oint in the long run-A) B C

B) D E

C) E D!) C B

11) >efer to igure 1%-@- This econom cannot continue to produce Y 1 =or at point B) 'ecauseA) the price of raw material and wages will increase shifting the aggregate suppl cur&e to AS 1-B) the price of inputs will decrease5 shifting the aggregate suppl cur&e to AS "-C) the price of raw material will increase5 shifting the aggregate demand cur&e to AD"-!) all of the a'o&e

1") >efer to igure 1%-@- or this econom to produce Y 1 and sustain it without inflationA) the price of oil must increase-B) the go&ernment must implement an e/pansionar fiscal polic-C) the go&ernment must implement an e/pansionar monetar polic-!) potential output must increase-

2 True/False

1) 2/pansionar economic policies are things the go&ernment can do to decrease aggregate demand or aggregatesuppl-") If the econom is on the steep part of its aggregate suppl cur&e5 e/pansionar polic will mostl increase the

price le&el-%) !ecrease in net ta/es5 increase in the mone suppl and increase in go&ernment spending are contractionar

policies-) An earth ,ua#e and a foreign oil em'argo would 'e contractionar policies-3) If the aggregate suppl cur&e is &ertical in the long(run5 then neither monetar nor fiscal polic will affectaggregate output in the long(run-

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1#.5 Causes of "nflation

Refer to the information provided in Fiure 13.1# below to answer the questions that follow.

Fi$ure 1#.13

1) >efer to igure 1%-1- Cost(push inflation occurs if A) the econom mo&es from *oint A to *oint B on aggregate suppl cur&e AS 1-B) the econom mo&es from *oint A to *oint C on the aggregate suppl cur&e AS 1-C) the aggregate suppl cur&e shifts from AS 1 to AS -!) the aggregate suppl cur&e shifts from AS 1 to AS "-

") >efer to igure 1%-1- Assume the econom is at *oint A- Gigher oil prices shift the aggregate suppl cur&e to

AS "- If the go&ernment decides to counter the effects of higher oil prices ' increasing go&ernment spending5 thenthe price le&el will 'e than P " and output will 'e than Y "-A) greater greater B) greater lessC) less less!) less greater

) >efer to igure 1%-1- Assume the econom is currentl at *oint A on aggregate suppl cur&e AS 1- An increasein inflationar e/pectations that causes firms to increase their pricesA) shifts the aggregate suppl cur&e to AS -B) shifts the aggregate suppl cur&e to AS "-

C) mo&es the econom to *oint C on aggregate suppl cur&e AS 1-!) mo&es the econom to *oint B on aggregate suppl cur&e AS 1-

3) A rightward shift in the aggregate demand cur&e generates a inflation and output-A) demand(pull lower B) cost(push higher C) demand(pull higher!) cost(push lower

4) A sudden increase in the price of oil causes a inflation and output-A) demand(pull lower B) cost(push higher C) demand(pull higher !) cost(push lower

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9) or an econom to e/perience 'oth a recession and inflation at the same time5A) the aggregate suppl cur&e must shift to the right-B) the aggregate suppl cur&e must shift to the left-C) the aggregate demand cur&e must shift to the left-!) the aggregate demand cur&e must shift to the right-

@) A=n) in inflationar e/pectations that causes firms to decrease their prices shifts the aggregate supplcur&e to the -A) increase right B) increase left C) decrease right !) decrease left

1) An increase in inflationar e/pectations that causes firms to increase their prices shifts theA) aggregate suppl cur&e to the left- B) aggregate demand cur&e to the left-C) aggregate suppl cur&e to the right- !) aggregate demand cur&e to the right-

11) !uring the fall of 1@@%5 prices were increasing ' 1D an hour in Bosnia- This is an e/ample of A) an e/pectations inflation-B) natural inflation-C) hperinflation- !) monetar inflation-

1") !uring the earl 1@9s5 prices were increasing ' appro/imatel "5D a ear in Argentina- This is ane/ample of A) hperinflation-B) monetar inflation-C) an e/pectations inflation-!) moderate inflation-

1%) 2conomists generall agree that for a sustained inflation to occur5A) the go&ernment must 'e accommodating it ' increasing go&ernment spending-

B) the ederal >eser&e must 'e accommodating it ' increasing the mone suppl-C) the go&ernment must 'e accommodating it ' decreasing ta/es-!) the ederal >eser&e must 'e accommodating it ' decreasing the mone suppl-

1) or the ed to #eep the interest rate unchanged as the go&ernment increases spending5 the ed must continue toA) increase the mone suppl- B) decrease the mone suppl-C) decrease the demand for mone- !) increase the demand for mone-

13) Man economists 'elie&e that sustained inflation is accommodated ' a=n)A) e/pansionar fiscal polic-

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B) e/pansionar monetar polic-C) contractionar fiscal polic-!) contractionar monetar polic-

14) According to the simple enesian &iew5 the aggregate suppl cur&e isʺ ʺ

A) &ertical until it reaches full capacit and then 'ecomes hori$ontal-B) downward sloping o&er all le&els of output-C) upward sloping o&er all le&els of output-!) hori$ontal until it reaches full capacit and then 'ecomes &ertical-

18) According to the simple enesian &iew5 if the econom is at capacit5 an e/pansionar polic willʺ ʺ

A) increase output5 'ut not the price le&el-B) increase the price le&el5 'ut not output-C) increase 'oth the price le&el and output-!) increase neither the price le&el nor output-

19) According to the simple enesian &iew5 if the econom has e/cess capacit5 an e/pansionar polic willʺ ʺ

5 gi&en that the econom continues to ha&e e/cess capacit e&en after the polic-A) increase output 5 'ut not the price le&elB) increase the price le&el5 'ut not outputC) increase 'oth the price le&el and output!) increase neither the price le&el nor output

1@) A=n) gap occurs when planned aggregate e/penditure is capacit output-A) recessionar greater than

B) recessionar e,ual toC) inflationar greater than!) inflationar e,ual to

") According to the simple enesian &iew5 if the econom is 'elow full capacit5 an increase in aggregateʺ ʺ

demand will causeA) output to fall and the price le&el to increase in the short run-B) the le&el of output to rise5 'ut no change in the price le&el will occur in the short run-C) the price le&el to increase5 'ut no change in output will occur in the short run-!) 'oth output and the price le&el to rise in the short run-

2 True/False

1) Inflation due to a decrease in aggregate demand is called demand pull inflation-") Inflation is an increase in the o&erall price le&el-%) 0uppl(side inflation is caused ' increases in the aggregate suppl cur&e-) >ising output coupled with falling prices is called stagflation-3) 2/pectations of higher future prices cause firms to lower prices toda to sell their product 'efore prices rise-

1#.6 The 7eha,ior of the Fe+

1) in go&ernment spending and in ta/es will cause the deficit to decrease-A) A decrease an increaseB) An increase a decreaseC) A decrease a decrease !) An increase an increase

158



") A decrease in go&ernment spending and an increase in ta/es will cause theA) deficit to decrease-B) deficit to remain unchanged-C) deficit to increase- !) surplus to increase slightl-

%) If the numerical &alue of the go&ernment spending multiplier is greater than the numerical &alue of the ta/multiplier5 then une,ual increases in spending and ta/es willA) decrease .!*-B) not change .!*-C) increase .!*-!) cannot 'e determined from the gi&en information

) If the numerical &alue of the go&ernment spending multiplier is greater than the numerical &alue of the ta/multiplier5 then e,ual decreases in spending and ta/es willA) increase .!*-B) decrease .!*-

C) increase .!* slightl-!) not change .!*-

3) If the numerical &alue of the go&ernment spending multiplier is greater than the numerical &alue of the ta/multiplier5 then e,ual increases in spending and ta/es willA) increase .!*- B) decrease .!*-C) 'e contractionar- !) not change .!*-


Fi$ure 15.#

4) >efer to igure 13-%- If the econom is currentl at the intersection of AS and AD5 the ed is most li#el toA) decrease the mone suppl to mo&e the econom closer to capacit-B) decrease the mone suppl to reduce the inflationar pressures-C) increase the mone suppl to reduce inflationar pressures-!) increase the mone suppl to reduce unemploment-

159



8) >efer to igure 13-%- If the econom is currentl at the intersection of AS and AD5 an e/pansionar monetar polic which does not shift AD to the upward sloping portion of the AS cur&e willA) 'e an inflationar polic-B) not 'e an inflationar polic-C) not 'e effecti&e-!) increase the price le&el without increasing output-

9) >efer to igure 13-%- If the econom is currentl at the intersection of AS and AD5 stagflation would 'e caused 'A) an increase in AS - B) a decrease in AS -C) an increase in AD-!) a decrease in AD-

@) >efer to igure 13-%- 0tagflation would cause

A) a higher price le&el and lower output- B) a higher price le&el and higher output-C) a lower price le&el and lower output-!) a lower price le&el and higher output-

1) >efer to igure 13-%- 0tagflation would NOT 'e caused ' aA) decrease in AS -B) higher price le&el with lower output-C) higher price le&el with higher unemploment-!) shift to the right of A!-

11) When there is stagflation5 the polic choices facing the 2! areA) increasing monetar growth to increase .!* 'ut that will ma#e inflation worse-B) increasing monetar growth to increase .!* and reduce inflation-C) reducing monetar growth to reduce inflation5 'ut that will ma#e shortfall in .!* worse-!) A and C


Fi$ure 15.4

160



1") >efer to igure 13-- If the econom is currentl at the intersection of AS and AD5 the ed shouldA) increase mone suppl to reduce the unemploment rate-B) increase mone suppl to mo&e closer to capacit-C) decrease mone suppl to reduce inflationar pressures-!) decrease mone suppl to increase output-

1%) >efer to igure 13-- If the econom is currentl at the intersection of AS and AD5 a contractionar monetar policA) does not create a recession-B) is an inflationar polic-C) is a recessionar polic- !) none of the a'o&e

1) The ederal >eser&e s polic to lean against the wind means thatʹ ʺ ʺ

A) interest rates are decreased as the econom e/pands-B) reser&e re,uirements are decreased as the econom e/pands-C) reser&e re,uirements are decreased significantl during an economic e/pansion-

!) interest rates are increased graduall as the econom e/pands-

13) The ederal >eser&e s polic to lean against the wind means thatʹ ʺ ʺ

A) the 2! increases mone growth as the econom slows-B) the 2! slows mone growth as the econom slows-C) the 2! lowers ta/es as the econom slows-!) the 2! raises re,uired reser&es as the econom slows-

14) An economic condition characteri$ed ' high unemploment and e/cessi&e inflation is calledA) stagflation

self study quiz and exercises final 17 march 20113 (2)

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