Reference no: EM131098215

Multiple Choice Questions-

1. If you use a check to purchase a textbook, the check is

a. the unit of value

b. the means of payment

c. the means of payment and the unit of value

d. outside the monetary system

e. worth less than an equivalent amount of currency

2. Everything else constant, who is least likely to lose from unexpected inflation?

a. a retired person whose pension payments are fixed in dollars

b. a person with a large amount of money deposited in a savings account

c. a bank scheduled to receive fixed nominal mortgage payments

d. a homeowner scheduled to make fixed nominal mortgage payments

e. a consumer who spends extra time shopping for the lowest prices

3. Suppose that a labor union leader is trying to bargain for an increase in union workers' real wages of 5 percent. If he expected the price level to rise at a rate of 3 percent this year, how much would nominal wages need to increase for him to accomplish his objective?

a. 2 percent

b. 3 percent

c. 5 percent

d. 8 percent

e. 15 percent

4. When borrowing money to purchase an automobile, Raul has the choice between a fixed nominal interest rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than the fixed rate loans. Given that, under what circumstances would Raul most likely want to borrow money at the higher fixed rate?

a. when he expects the inflation rate to rise

b. when he expects the inflation rate to decrease

c. when he expects the inflation rate to remain unchanged

d. when he expects the price level to remain stable

e. when he expects the government to act to lower the inflation rate

5. The short-run macro model

a. is an attempt to explain why the economy tends to perform better in the short run than in the long run

b. was developed during the Great Depression to explain the economy's continuing poor performance

c. lost its popularity during the 1950s

d. was developed during the early 19th century

e. explains the forces that work to drive the economy to full employment

6. Which of the following is true for a market that clears?

a. An excess supply of anything traded will lead to a fall in its price.

b. An excess demand of anything traded will lead to a fall in its price.

c. An excess supply of anything traded will lead to a rise in its price.

d. An excess demand of anything traded will not lead to a price change.

e. A high price will lead to a high demand.

7. In a labor market diagram, the point at which the labor supply curve crosses the labor demand curve is

a. the point at which all workers are employed at the salary at which they would prefer to be employed

b. the point at which all jobs are filled at the wage employers prefer to pay

c. the point at which everyone who wants to work is able to find a job

d. a point at which we have excess labor supply, causing unemployment

e. the point at which excess demand for labor drives the wage rate upward

8. Diminishing returns to labor occur for two primary reasons: 1) as we keep adding new workers, it becomes increasingly difficult to obtain productivity gains through additional specialization; and 2) each additional worker we add has less land and capital to work with.

a. True

b. False

9. Say's Law is the idea that

a. in the long run, the economy reaches full employment automatically

b. the aggregate production function, along with the labor market, determines the economy's level of output

c. total output will always exceed total spending

d. whenever a good or service is produced, an equal amount of income is created

e. markets always clear

10. What is the price of funds in the loanable funds market?

a. the real wage rate

b. the Consumer Price Index

c. the interest rate

d. the profit rate

e. the GDP price index

11. The classical model is based on the assumption that

a. all markets clear

b. all demand curves are horizontal

c. all supply curves are vertical

d. the government's budget is always balanced

e. the quantity of loanable funds demanded is independent of the interest rate

12. Rich countries (measured by GDP per capita) tend to have __________ infant mortality rates, __________ life expectancies at birth, and __________ adult literacy rates than poor countries.

a. higher; higher; higher

b. lower; higher; higher

c. lower; lower; higher

d. lower; lower; lower

e. lower; higher; lower

13. Growth in employment can result from either an increase in labor supply or an increase in labor demand.

a. True

b. False

14. An increase in the supply of labor will, everything else equal,

a. increase the real wage rate and increase employment

b. increase the real wage rate and decrease employment

c. reduce the real wage rate and increase employment

d. reduce the real wage rate and decrease employment

e. increase the demand for labor and increase employment

15. According to the classical model, total employment will increase when

a. the birth rate increases

b. the government creates more jobs

c. the labor force increases

d. individuals receive more education

e. there is a recession

16. Refer to Figure 8-2. An increase in output from A to B could be caused by an increase in

a. labor demand only

b. labor supply only

c. labor demand or in labor supply

d. technology only

e. the capital stock

17. Which of the following statements best describes the U.S. labor force since World War II?

a. Total employment grew, but the labor force participation rate fell.

b. Total employment grew, and so did the labor force participation rate.

c. Total employment grew, but the labor force participation rate remained unchanged.

d. Total employment remained constant, but the labor force participation rate fell.

e. Total employment remained constant, but the labor force participation rate rose.

18. In the loanable funds market, an increase in the desire to save is translated into a(n)

a. increase in investment spending and slower growth in the capital stock

b. decrease in investment spending and slower growth in the capital stock

c. decrease in investment spending and faster growth in the capital stock

d. increase in investment spending and faster growth in the capital stock

e. increase in investment spending but with no growth in the capital stock

19. Which of the following policies would be most likely to encourage households to save more?

a. linking social security benefits to contributions into the system

b. increasing social security benefits to all recipients, regardless of their contribution into the system

c. elimination of the tax deduction on individual retirement account (IRA) contributions

d. replacement of sales and excise taxes with an income tax

e. elimination of government insurance of bank deposits

20. Government budget deficits

a. discourage household saving, which increases interest rates and reduces planned investment spending

b. encourage household saving, which increases the funds available for planned investment spending

c. reduce the demand for funds, lower interest rates, and increase planned investment spending

d. discourage planned investment spending by putting upward pressure on interest rates

e. stimulate economic growth by encouraging capital investment

21. Governments have learned that a(n)

a. increased budget deficit tends to reduce interest rates and increase investment, thus increasing the growth of the capital stock

b. reduced budget deficit tends to reduce interest rates and increase investment, thus increasing the growth of the capital stock

c. reduced budget deficit tends to increase interest rates and increase investment, thus increasing the growth of the capital stock

d. reduced budget deficit tends to increase interest rates and increase investment, thus reducing the growth of the capital stock

e. increased budget deficit tends to increase interest rates and increase investment, thus reducing the growth of the capital stock

22. An increase in the stock of human capital would

a. shift the production function upward, lowering productivity and raising living standards

b. shift the production function upward, raising productivity and living standards

c. cause the economy to move along a fixed production function, increasing both productivity and living standards

d. cause the economy to move along a fixed production function, reducing both productivity and living standards

e. shift the production function downward, reducing both productivity and living standards

23. The existence of recessions highlights

a. the strengths of the Federal Reserve

b. the need for the "other things equal" assumption

c. our failure to consider differences between the short run and long run

d. how confusing the economy can become

e. the interdependence between production and income

24. Which of the following is a common reaction to an increase in the interest rate?

a. a decline in oil prices

b. a war

c. a decrease in spending on new homes

d. an expansion

e. an increase in military spending

25. If autonomous consumption is $5,000, the MPC is 0.7, net taxes are $2,000, investment spending is $4,000, and government purchases equal $2,500, and NX = $0, what is equilibrium GDP?

a. $14,428.6

b. $33,666.7

c. $40,800

d. $43,000

e. $45,000

26. If the MPC is 0.75, what is the value of the tax multiplier?

a. -1.33

b. 3.0

c. -3.0

d. 4.0

e. -4.0

27. If the tax multiplier is -4.0, what is the marginal propensity to consume?

a. 0.66

b. 0.75

c. 0.50

d. 0.80

e. 0.25

28. The focus of the short-run macro model is on the role of

a. spending in explaining economic fluctuations

b. labor in explaining economic fluctuations

c. financial markets in explaining economic fluctuations

d. output in explaining economic fluctuations

e. production in explaining economic fluctuations

29. If net taxes decrease, which of the following would occur?

a. Disposable income decreases, consumption at any income level increases, and the consumption-income line shifts upward.

b. Disposable income increases, consumption at any income level increases, and the consumption-income line shifts downward.

c. Disposable income increases, consumption at any income level increases, and the consumption-income line shifts upward.

d. Disposable income decreases, consumption at any income level decreases, and the consumption-income line shifts downward.

e. Disposable income increases, consumption at any income level decreases, and the consumption-income line shifts downward.

30. In the short-run macro model, firms that sell more than they produce will respond by

a. reducing output

b. increasing output

c. reducing prices

d. raising prices

e. not changing production because the market will adjust on its own

31. In the short-run macro model, if the economy is in equilibrium, it must also be operating at full employment.

a. True

b. False

32. If firms increase their investment spending, the resulting change in equilibrium GDP is equal to the change in investment spending

a. multiplied by 2.5

b. alone

c. multiplied by the expenditure multiplier

d. divided by the marginal propensity to consume

e. plus the change in consumption spending

33. Which of the following is considered to be the major cause of the recession of 2001?

a. decrease in consumption spending

b. decrease in investment spending

c. decrease in government spending

d. none of the above

34. Who owns a commercial bank?

a. its depositors

b. its stockholders

c. lenders

d. savers

e. the Federal Reserve

35. If a commercial bank has assets valued at $200 million and a net worth of $20 million, what is the value of the bank's liabilities?

a. not enough information to determine

b. $20 million

c. $220 million

d. $180 million

e. $200 million

36. If the total amount of demand deposits in the country increases by $12,000 after the Fed purchases $6,000 in bonds, what is the required reserve ratio?

a. 0.4

b. 0.1

c. 0.2

d. 0.5

e. 0.3

37. Even a bank in good financial health can fail if there is a run on the bank.

a. True

b. False

38. An open market purchase of bonds by the Fed

a. drains reserves from the banking system and decreases the money supply

b. injects reserves into the banking system and increases money demand

c. injects reserves into the banking system and increases the money supply

d. drains reserves from the banking system and increases the money supply

e. injects reserves into the banking system and decreases the money supply

39. Open market sales of bonds by the Federal Reserve drain reserves from the banking system and shift

a. the allocation of wealth between bonds and stocks

b. the economy toward a trough in the business cycle

c. the money supply curve leftward

d. reserves to nonmember banks

e. the demand for money curve leftward

40. If the price of bonds falls, the

a. demand for bonds will rise

b. supply of bonds will fall

c. supply of bonds will rise

d. interest rate will rise

e. interest rate will fall

41. If the Fed wishes to increase the interest rate, it can do so by

a. selling bonds

b. buying bonds

c. increasing the money supply

d. setting a higher prime lending rate

e. encouraging the public to buy bonds

42. If the Fed conducted an open market sale of bonds, what would most likely happen in the bond market?

a. The excess demand for bonds would cause the price of bonds to fall.

b. The excess supply of bonds could cause the price of bonds to rise.

c. There would be no effect in the bond market.

d. The excess supply of bonds would cause the price of bonds to fall.

e. The excess demand for bonds would cause the price of bonds to rise.

43. An increase in the money supply will increase both money demand and output.

a. True

b. False

44. In the short-run macro model, a decrease in the money supply will

a. move the economy to the right along the aggregate expenditure line

b. move the economy to the left along the aggregate expenditure line

c. shift the aggregate expenditure line upward

d. shift the aggregate expenditure line downward

e. not affect the aggregate expenditure line

45. An increase in government purchases will increase GDP by an amount equal to the change in government purchases times the expenditure multiplier.

a. True

b. False

46. An increase in government purchases, an increase in the interest rate, and an increase in consumption all shift the aggregate expenditure line upward.

a. True

b. False

47. If autonomous consumption decreases, which of the following is the most likely effect in the short run?

a. a decrease in output, an increase in money demand, and an increase in the interest rate

b. an increase in output, a decrease in money demand, and a decrease in the interest rate

c. a decrease in output, a decrease in money demand, and a decrease in the interest rate

d. an increase in output, an increase in money demand, and a decrease in the interest rate

e. an increase in output, an increase in money demand, and an increase in the interest rate

48. Due to the multiplier effect, a decrease in investment spending

a. is greater than the resulting decrease in GDP

b. has a minimal impact on the economy

c. causes the money supply to increase

d. leads to an even larger decrease in output

e. results in increased autonomous consumption

49. Which of the following is not a reason why wages respond slowly to changes in output?

a. Many labor contracts specify wages for up to three years.

b. The process of wage setting in large corporations is slow moving.

c. Frequent wage changes can reduce worker morale and reduce productivity.

d. Firms benefit from having a reputation of paying stable wages.

e. The labor supply and demand curves move rapidly to clear labor markets.

50. A negative demand shock

a. shifts the AD curve to the right

b. decreases real GDP and increases the price level in the short run

c. is the result of an increase in money demand

d. results in a movement down and to the right along the AD curve

e. decreases both real GDP and the price level in the short run