Bade Fomac7a V2 CRC

Test Bank to Accompany
Foundations of
Macroeconomics
Volume 2
Seventh Edition
by
Bade/Parkin
Pearson Education
c.2015
6/9/14
Contents
Chapter 8
Potential GDP and the Natural Unemployment Rate ................................................ 723
Chapter 9
Economic Growth ............................................................................................................ 799
Chapter 10
Finance, Saving, and Investment ................................................................................... 877
Chapter 11
The Monetary System ..................................................................................................... 973
Chapter 12
Money, Interest, and Inflation ..................................................................................... 1085
Chapter 13
Aggregate Supply and Aggregate Demand ............................................................... 1172
Chapter8 PotentialGDPandthe
NaturalUnemploymentRate
8.1 PotentialGDP
1) TheClassicalmacroeconomicmodelproposesthat
A) governmentinterventionisrequiredtohelptheeconomyreachitspotential.
B) realGDPequalspotentialGDPaslongasinflationequalszero.
C) changesinthequantityofmoneyarecriticalindrivingeconomicgrowth.
D) marketsworkefficientlytoproducethebestmacroeconomicoutcomes.
E) socialismproducesthemostefficienteconomicoutcomesforasociety.
Answer: D
Topic: Macroeconomicmodels
Skill: Level4:Applyingmodels
Section: Checkpoint8.1
Status: Old
AACSB: Reflectivethinking
2) TheKeynesianmacroeconomicmodelstatesthat
A) theeconomyisinherentlyunstableandgovernmentinterventionisrequiredtomaintain
continuedeconomicgrowth.
B) marketsworkefficientlytoproducethebestmacroeconomicoutcomes.
C) fluctuationsinthequantityofmoneyareresponsibleformosteconomicrecessions.
D) changesintechnologygeneratebusinesscycles.
E) theeconomyisfairlystable.
Answer: A
Skill: Level3:Usingmodels
Status: Old
3) AccordingtheKeynesianmacroeconomicmodel,whichofthefollowingwasresponsiblefor
startingtheGreatDepression?
A) toolittleprivatespending
B) toolittlegovernmentspending
C) hightaxes
D) decreasesinthequantityofmoney
E) decreasesintechnology
Answer: A
Status: Old
Page723
Copyright2015PearsonEducation,Inc.
4) WhichofthefollowingideasreflecttheMonetaristmacroeconomicmodel?
i) TheMonetaristmodelsupportstheClassicalmodel,ingeneral.
ii) Decreasesinthegrowthrateofthequantityofmoneytriggerrecessions.
iii) Governmentinterventionisanappropriatetooltosteadytheeconomy.
A) iandii
B) ionly
C) i,iiandiii
D) iiandiii
E) iandiii
Answer: A
Status: Old
5) TheMonetaristmodelexpandstheKeynesianmodelbyproposingthat
A) decreasesinthequantityofmoneyleadtohigherinterestrates.
B) thegovernmentshouldlowertaxespromoteeconomicgrowth.
C) decreasesintaxratesgeneratehigherconsumption.
D) decreasesinthegrowthrateofthequantityofmoneytriggerexpansionsbycontrolling
inflation.
E) marketsshouldbeleftalonetodeterminetheoptimaloutcome.
Answer: A
Status: Old
6) TheLucasWedgeshows
A) thenegativeimpactaslowdowninrealGDPgrowthhasonpotentialGDP.
B) theincreasedimpactofgovernmentspendingonrealGDP.
C) thenegativeimpactinflationhasonconsumerspending.
D) thepositiveimpactlowertaxeshaveonrealGDP.
E) whetheracountryneedstoslowitsrealGDPgrowthrate.
Answer: A
Topic: EyeontheU.S.economy
Skill: Level2:Usingdefinitions
Status: Old
AACSB: Writtenandoralcommunication
Page724
7) TheLucasWedgeisestimatedto
A) totalover$406,000perpersonasaresultoftheslowdowninthegrowthrateofrealGDP.
B) havereachedabout$13,000perpersoninthelastyear.
C) beabout2percentofrealGDPperyear.
D) benegativeduetothesevererecessionin2008-2009.
E) bepositiveinsomeyearsandnegativeinothers.
Answer: A
Status: Revised
8) Whichofthefollowingwouldhavethebiggestpayoff?
A) restoringrealGDPgrowthtoits1960sgrowthrate
B) eliminatingtheOkunGap
C) increasingtheOkunGap
D) makingtheOkunGapequaltheLucasWedge
E) increasingtheLucasWedge
Answer: A
Status: Old
9) ThelevelofrealGDPtheeconomyproducesatfullemploymentiscalled
A) sustainableGDP.
B) nominalGDP.
C) potentialGDP.
D) maximumGDP.
E) LucasGDP.
Answer: C
Topic: PotentialGDP
Skill: Level1:Definition
Status: Revised
10) ThelevelofrealGDPtheeconomyproducesatfullemploymentis
A) nominalGDP.
B) potentialGDP.
C) neverreachedinreality.
D) calledtheLucaslevel.
E) realGDP.
Answer: B
Topic: PotentialGDP
Status: Revised
Page725
11) SupposethatAustraliahasfullyemployedallofitsresources.Thissituationmeansthat
Australia
A) isoperatingatitspotentialGDP.
B) isgrowingatafasterratethantheUnitedStates.
C) hasanegativeOkunGap.
D) hasapositiveLucasWedge.
E) isexperiencingzerounemployment.
Answer: A
Topic: PotentialGDP
Status: Old
12) Iftheeconomyisfullyemployed,whichofthefollowingistrue?
A) Thepricelevelequals100.
B) RealandnominalGDPareequal.
C) RealandpotentialGDPareequal.
D) Theunemploymentrateiszero.
E) RealGDPcannotincrease.
Answer: C
Topic: PotentialGDP
Status: Old
13) PotentialGDPisthelevelof
A) realGDPthattheeconomywouldproduceifitwasatfullemployment.
B) nominalGDPthattheeconomywouldproduceifitwasatfullemployment.
C) realGDPthattheeconomywouldproduceiftherewasnoinflation.
D) nominalGDPthattheeconomywouldproduceiftherewasnoinflation.
E) realGDPthattheeconomywouldproduceiftherewasnounemployment.
Answer: A
Topic: PotentialGDP
Status: Old
Page726
14) PotentialGDPis
A) equaltothemaximumamountofgoodsandservicesthatcanbeproducedatanygiven
time.
B) anothernameforrealGDP.
C) thelevelofoutputproducedwhentheeconomyisfullyemployed.
D) ameasureoftheshorttermfluctuationsinrealGDP.
E) anothernamefornominalGDP.
Answer: C
Topic: PotentialGDP
Status: Old
15) PotentialGDP
A) isthesameasrealGDP.
B) isthesameasnominalGDP.
C) isanothernamefortheLucasWedge.
D) isthelevelofoutputproducedwhentheeconomyisfullyemployed.
E) showsthattheOkunGapvastlyexceedstheLucasWedge.
Answer: D
Topic: PotentialGDP
Status: Old
16) IfNewZealandisoperatingatpotentialGDP,whichofthefollowingistrue?
i) NewZealandonlyhasfrictionalandstructuralunemployment.
ii) ThereisnoinflationinNewZealand.
iii) NewZealandhaspositivenetexports.
A) i,iiandiii
B) ionly
C) iandii
D) iandiii
E) iionly
Answer: B
Topic: PotentialGDP
Status: Old
Page727
17) TheideathatpotentialGDPisthesustainableupperlimitofproductionmeansthat
A) realGDPmaybetemporarilylargerthanpotentialGDP,butnotpermanently.
B) theeconomyisoperatingenvironmentallyefficiently.
C) realGDPmaybetemporarilylessthanpotentialGDP.
D) inflationmustalwaysoccurinagrowingeconomy.
E) unemploymentcanonlytemporarilybezeroinahealthyeconomy.
Answer: A
Topic: PotentialGDP
Status: Old
18) SupposeaneconomiststatedthatBrazilhadachieveditspotentialGDP2013.Thiswould
implythatatthislevelofrealGDP,Brazilexperienced
A) peakinitsbusinesscyclein2013.
B) unemploymentequaltozero.
C) inflationequaltozero.
D) fullemployment.
E) anegativeOkunGap.
Answer: D
Topic: PotentialGDP
Status: Old
19) SupposeGermanyseconomyisexperiencingfullemployment.Thismeansthat,inGermany,
A) theunemploymentrateisequaltozero.
B) realGDPisequaltopotentialGDP.
C) realGDPisgreaterthanpotentialGDP.
D) potentialGDPisgreaterthanrealGDP.
E) realGDPequalsnominalGDP.
Answer: B
Topic: PotentialGDP
Status: Old
Page728
20) Atfullemployment,actual________equals________.
A) nominalGDP;potentialGDP
B) realGDP;potentialGDP
C) realGDP;nominalGDP
D) potentialGDP;nominalGDP
E) unemployment;zero
Answer: B
Topic: PotentialGDP
Status: Old
21) Whichofthefollowingistrue?
A) RealGDPfluctuatesaroundpotentialGDP.
B) PotentialGDPfluctuatesaroundnominalGDP.
C) NominalGDPfluctuatesaroundrealGDP.
D) RealGDPneverequalspotentialGDP.
E) TheOkunGapsaremuchlargerthantheLucasWedge.
Answer: A
Topic: PotentialGDP
Status: Old
22) Overthebusinesscycle,realGDPfluctuatesaround
A) thebusinesscycletrough.
B) thebusinesscyclepeak.
C) nominalGDP.
D) potentialGDP.
E) theLucasWedge.
Answer: D
Topic: PotentialGDP
Status: Old
Page729
23) WhichofthefollowingstatementorstatementsarecorrectaboutpotentialGDP?
i. ActualrealGDPequalspotentialGDPwhentheeconomyisatfullemployment.
ii. RealGDPcanbelessthanpotentialGDP.
iii. WhenrealGDPequalspotentialGDP,italsoequalsnominalGDP.
A) ionly
B) iionly
C) iiandiii
D) iandii
E) i,ii,andiii
Answer: D
Topic: PotentialGDP
Status: Old
24) Choosewhichstatementismostcorrect.
A) RealGDPcanneverexceedpotentialGDP.
B) RealGDPmustalwaysequalpotentialGDP.
C) Attimes,realGDPcanexceedpotentialGDP.
D) NominalGDPcanneverexceedpotentialGDP.
E) NominalGDPmustalwaysequalpotentialGDP.
Answer: C
Topic: Abovefull-employmentequilibrium
Status: Old
25) TheamountofrealGDPproducedatanyonetimedependson
i) afixedamountofcapital.
ii) afixedleveloftechnology.
iii) decisionspeoplemakeaboutleisureversusworking.
A) iionly
B) iiandiii
C) iandii
D) ionly
E) i,iiandiii
Answer: E
Topic: Productionfunction
Status: Old
Page730
26) ThesustainableupperlimitofrealGDPisalevelofGDPthatis
A) greaterthanpotentialGDP,butbyhowmuchgreaterisunknownandcontroversial.
B) lessthanpotentialGDP,butbyhowmuchlessisunknownandcontroversial.
C) potentialGDP.
D) determinedonlybywhatisthefullemploymentequilibriuminthelabormarket.
E) Noneoftheaboveanswersiscorrectbecausethereisno sustainableupperlimittoreal
GDPbecauserealGDPcanalwaysbeincreased.
Answer: C
Topic: PotentialGDP
Status: Old
27) Asaneconomicexpansionapproachesitspeak,itisverylikelythatrealGDPwill
A) exceednominalGDP.
B) exceedpotentialGDP.
C) equalnominalGDPbutnotpotentialGDP.
D) belessthanpotentialGDP.
E) equalnominalGDPandequalpotentialGDP.
Answer: B
Topic: PotentialGDP
Status: Old
28) Duringabusinesscyclerecession,itisverylikelythatrealGDPwill
A) exceednominalGDP.
B) belessthanpotentialGDP.
C) equalnominalGDPbutnotequalpotentialGDP.
D) equalnominalGDPandequalpotentialGDP.
E) begreaterthanpotentialGDP.
Answer: B
Topic: PotentialGDP
Status: Old
Page731
29) AcountryreportsthatitsactualrealGDPisgreaterthanitspotentialGDP.Itmustbethat
A) anerrorwasmadewhencalculatingactualrealGDP.
B) thepricelevelisincreasing.
C) moreworkersdecidedtoquitworkinordertoenjoyleisuretime.
D) theexcessbywhichrealGDPexceedspotentialGDPisonlytemporary,andeventually
realGDPwilldecreasetobeequaltopotentialGDP.
E) NoneoftheaboveanswersiscorrectbecauseitisimpossibleforacountrysrealGDPto
exceeditspotentialGDP.
Answer: D
Topic: PotentialGDP
Status: Old
30) AcountryspotentialGDPisdetermined,inpart,by
A) theequilibriumpricelevel.
B) demandandsupplyinthelabormarket.
C) theLucasWedge.
D) actualrealGDP.
E) theOkunGap.
Answer: B
Topic: Productionfunctionandlabormarketbasics
Status: Old
31) TodetermineGDPfromtheproductionfunction,weneedtoknow
A) thequantityoflaboremployed.
B) thequantityoflaboravailableforwork.
C) theunemploymentrate.
D) thequantityoflaborsuppliedbyfirms.
E) therealwagerate.
Answer: A
Topic: Productionfunctionandlabormarketbasics
Status: Old
Page732
32) Atanygiventime,whichfactorofproductionisNOT fixed?

A) labor
B) technology
C) entrepreneurship
D) land
E) money
Answer: A
Status: Old
33) Theproductionfunctionisarelationshipbetweentheamountoflaboremployedand
A) themaximumquantityofrealGDPthatcanbeproduced.
B) themaximumquantityofnominalGDPthatcanbeproduced.
C) thewageratepaidtotheworkers.
D) allotherresourcesatdifferentlevelsofemployment.
E) theamountoflaborworkerssupply.
Answer: A
Status: Old
34) Theproductionfunctiondescribestherelationshipbetween
A) therealwageandthequantityoflaborsupplied.
B) realGDPandthequantityoflaboremployed.
C) realandpotentialGDP.
D) realandnominalGDP.
E) potentialGDPandtherealwagerate.
Answer: B
Status: Old
35) The________describestherelationshipbetweentheamountoflaboremployedandrealGDP.
A) productionfunction
B) productionpossibilitiesfrontier
C) LucasWedge
D) inflationrate
E) OkunGap
Answer: A
Status: Old
Page733
36) TheproductionfunctionshowsthatpotentialGDPincreaseswhenthe
A) pricelevelrises.
B) pricelevelfalls.
C) inflationratefalls.
D) quantityoflaboremployedincreases.
E) thewageratefalls.
Answer: D
Status: Old
37) Theproductionfunctiondisplays
A) increasingreturns.
B) realreturns.
C) diminishingreturns.
D) averagereturns.
E) normalreturns.
Answer: C
Topic: Diminishingreturns
Status: Old
38) Diminishingreturnsmeansthat
A) eachadditionalunitoflaborproducessuccessivelylessrealGDP.
B) hiringmorelaborresultsinlessrealGDP.
C) eachextraunitofrealGDPproducedrequireslesslabor.
D) eachadditionalunitoflaborproducessuccessivelymorerealGDP.
E) hiringmorelabormustlowertherealwagerate.
Answer: A
Status: Old
Page734
39) TheideaofdiminishingreturnsmeansthatrealGDP________asthequantityoflabor
increases.
A) increasesataslowerrate
B) decreasesataslowerrate
C) increasesatafasterrate
D) decreasesatafasterrate
E) doesnotchange
Answer: A
Status: Old
40) Accordingtotheproductionfunction,asthequantityoflaboremployedincreases,realGDP
increases
A) atanincreasingrate.
B) atadecreasingrate.
C) ataconstantrate.
D) andtheneventuallydecreases.
E) untilitreachespotentialGDP,andthenitnolongerchanges.
Answer: B
Status: Old
41) Asadditionalunitsoflaborhoursareemployed,holdingallotherfactorsconstant,alongthe
productionfunction,
A) realGDPincreasesatanincreasingrate.
B) nominalGDPdecreasesatanincreasingrate.
C) realGDPincreasesatadecreasingrate.
D) realGDPincreaseataconstantrate.
E) realGDPinitiallydecreasesandthenstartstoincrease.
Answer: C
Status: Old
Page735
42) Theideathattheproductionfunctionexhibits_______impliesthat________.
A) diminishingreturns;theLucasWedgeincreasesatoutputincreases
B) diminishingreturns;eachadditionalunitoflaboremployedgeneratesan
ever-decreasingamountofrealGDP
C) increasingreturns;potentialGDPisalwaysincreasing
D) increasingreturns;outputshouldincreasesteadilyastechnologygrows
E) constantreturns;eachadditionalunitoflaboremployedgeneratesanincreasingamount
ofrealGDP
Answer: B
Status: Old
AACSB: Analyticalthinking
43) Asthequantityoflaboremployedincreases,theproductionfunctionsexhibitsa
A) positive,linearrelationship.
B) positiverelationship,witheachadditionalunitoflaborproducinglessadditionalreal
GDP.
C) positiverelationship,witheachadditionalunitoflaborproducingmoreadditionalreal
GDP.
D) negative,linearrelationship.
E) U-shapedcurve.
Answer: B
Status: Old
44) Diminishingreturnsalongaproductionfunctionmeansthateachadditionalhouroflabor
employed
A) producesasuccessivelysmalleradditionalamountofrealGDP.
B) producesasuccessivelylargeradditionalamountofrealGDP.
C) producesaconstantadditionalamountofrealGDP.
D) doesnotproduceanyadditionalrealGDP.
E) forcestherealwageratetorise.
Answer: A
Status: Old
Page736
45) Theproductionfunctionshowsthatasemploymentincreases,realGDP
A) increasesatanincreasingrate.
B) increasesatadecreasingrate.
C) increasesataconstantrate.
D) decreasesatadecreasingrate.
E) increasesuntilitreachespotentialGDPandthenitstartstodecrease.
Answer: B
Status: Old
46) Diminishingreturns,sothateachadditionalhouroflaboremployedproducessuccessively
smalleradditionalamountsofrealGDP,existbecause
A) laborisnotveryproductive.
B) extralaborproducesmoreoutput.
C) allotherfactorsareheldfixed.
D) thepricelevelrisesasmoreworkersareemployed.
E) additionalworkersarepaidhigherwagerates.
Answer: C
Status: Old
47) Asmorelaborishired,movingalongtheproductionfunction,diminishingreturnsoccur
because
A) workersareoverworkedandsotheirproductivitydecreases.
B) thewageratepaidistoolowandsoworkersdecreasetheirworkeffort.
C) therearefixedquantitiesofotherresources.
D) therealwageratemustincreaseinordertohireadditionalworkers.
E) realGDPincreasesmorerapidlythemoreworkersarehired.
Answer: C
Status: Old
Page737
48) Areasonanationfacesdiminishingreturnsalongaproductionfunctionisbecause
A) unemploymentalwaysexists.
B) potentialGDPisfixed.
C) thequantityofphysicalcapitalisfixed.
D) fullemploymentisnotpossible.
E) thewagerateisfixedwhilemovingalongtheproductionfunction.
Answer: C
Status: Old
49) ________intheUnitedStates________inmostEuropeancountries.
A) GDPperhour;isgreaterthanGDPperhour
B) Averageweeklyhours;aregreaterthanaverageweeklyhours
C) TheOkunGap;isequaltotheOkunGap
D) TheLucasWedge;isgreaterthantheLucasWedge
E) BothAandBaretrue.
Answer: E
Topic: Eyeontheglobaleconomy,whydoAmericansearnmore
Status: Old
50) ThegapinGDPbetweentheUnitedStatesandEuropecanbeexplainedbythefactthat
A) U.S.laborismoreproductivethanEuropeanlabor.
B) pricesarehigherintheUnitedStates.
C) theOkunGapislargerintheUnitedStates.
D) incometaxesarehigherintheUnitedStates.
E) equilibriumemploymentishigherinEurope.
Answer: A
Status: Old
Page738
51) Employinganadditional1billionhoursoflaborincreasesrealGDPby$12billion.Employing
another1billionhoursbeyondthefirst1billionincreasesrealGDPby$11billion.Hencewe
canconcludefromthisinformationthatasemploymentincreases,realGDP
A) increasesatanincreasingrate.
B) decreasesatanincreasingrate.
C) decreasesatadecreasingrate.
D) increasesatadecreasingrate.
E) fallsfrom$12billionto$11billionasmoreworkersarehired.
Answer: D
Status: Old
52) Ifaddinganinitial100billionlaborhoursperyearincreasesrealGDPby$3trillion,
diminishingreturnsinformsusthatanadditional100billionlaborhoursperyearwillincrease
realGDPby
A) exactly$3trillion.
B) lessthan$3trillion.
C) morethan$3trillion.
D) eitherexactly$3trillionorbylessthan$3trillion,dependingonwhethertherealwage
rateremainsconstantorrises.
E) someamountbutthereisnotenoughinformationtotellbyhowmuch.
Answer: B
Status: Old
Page739
Labor
RealGDP
(billionsofhours (trillionsof
peryear)
2009dollars
70
4.0
90
4.7
110
5.2
130
5.4
150
5.5
53) Thetableabovegivesanationsproductionfunction.Whichofthefollowingis NOTan
attainablecombinationofrealGDPandlabor?
A) realGDPof$4.0trillionandlaborof90billionhoursperyear
B) realGDPof$4.7trillionandlaborof110billionhoursperyear
C) realGDPof$4.0trillionandlaborof70billionhoursperyear
D) realGDPof$5.2trillionandlaborof90billionhoursperyear
E) realGDPof$5.5trillionandlaborof150billionhoursperyear
Answer: D
Status: Old
54) In2011,realGDPintheUnitedStateswas$60perhourworked.InmajorEuropean
economies,realGDPaveragedon$48perhourworked.Thisdifferenceisexplainedbythe
pointsthat________and________.
A) AmericansworkmorehoursthanEuropeans;Americansproducemoreperhourthan
Europeans
B) AmericansareequallyasproductiveasEuropeans;Americansworkmorehourson
average
C) AmericansworkthesamenumberofhoursperweekasEuropeansonaverage;
Americansarelessproductiveduetotechnologydifferences
D) AmericanstakemorevacationsthanEuropeans;Americanstakemoresickdaysthan
Europeans
E) AmericansworklesshoursthanEuropeans;Americanstakelesssickdaysthan
Europeans
Answer: A
Topic: RealGDP
Status: New
AACSB: Applicationofknowledge
Page740
55) Theabovefigureshowsanationsproductionfunction.PointA is
A) attainableiftheeconomyisinefficient.
B) unattainablegiventhestateoftheeconomy.
C) attainableifthenationusesresourcesefficiently.
D) themaximumamountofrealGDPthenationcanproduce.
E) thelabormarketequilibriumquantityofemploymentandrealGDP.
Answer: B
Status: Old
56) Theabovefigureshowsanationsproductionfunction.PointB is
A) unattainable.
B) attainableifthenationusesresourcesinefficiently.
C) attainableifthenationusesresourcesefficiently.
D) themaximumamountofrealGDPthenationcaneverproduce.
E) BothanswersCandDarecorrect.
Answer: C
Status: Old
Page741
57) Theabovefigureshowsanationsproductionfunction.PointC is
A) unattainablegiventhenationsresourcelevel.
B) attainableifthenationusesresourcesefficiently.
C) attainableifthenationusesresourcesinefficiently.
D) themaximumamountofrealGDPthenationcanproduce.
E) thelabormarketequilibriumpoint.
Answer: C
Status: Old
58) Theabovefigureshowsanationsproductionfunction.PointBis________and________
because________.
A) attainable;efficient;thenationisusingresourcesefficiently
B) attainable;inefficient;thenationisusingresourcesinefficiently
C) unattainable;inefficient;thenationisusingresourcesinefficiently
D) unattainable;inefficient;thenationisusingresourcesefficientlybuttheycouldbemore
efficient
E) unattainable;efficient;thenationwouldbeusingresourcesefficientlyiftheycouldattain
thislevelofproduction
Answer: A
Status: New
59) Theabovefigureshowsanationsproductionfunction.PointCis________and________
because________.
A) attainable;inefficient;thenationisusingresourcesinefficiently
B) attainable;efficient;thenationisusingresourcesefficiently
C) unattainable;inefficient;thenationisusingresourcesinefficiently
D) unattainable;inefficient;thenationisusingresourcesefficientlybuttheycouldbemore
efficient
E) unattainable;efficient;thenationwouldbeusingresourcesefficientlyiftheycouldattain
thislevelofproduction
Answer: A
Status: New
Page742
60) Theabovefigurethatmostaccuratelyshowsaproductionfunctionis
A) FigureA.
B) FigureB.
C) FigureC.
D) FigureD.
E) BothFigureAandFigureB;FigureAforaneconomywithanexcessoflaborandFigure
Bforaneconomywithashortageoflabor.
Answer: B
Status: Old
Page743
61) Basedontheproductionfunctionintheabovefigure,whichofthefollowingisanattainable
combinationoflaborandrealGDP?
i. 300billionhoursoflaborandrealGDPof$20trillion
ii. 300billionhoursoflaborandrealGDPof$8trillion
iii. 100billionhoursoflaborandrealGDPof$12trillion
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) iandii
Answer: B
Status: Old
62) SupposethattheAustralianeconomyinitiallyuses50billionhoursoflabortoproduce$5
trillionofrealGDP.If50billionmorehoursareemployedandAustraliasrealGDPincreases
by$4trillionmore,
A) Australiasproductionfunctionexhibitsdiminishingreturns.
B) Australiasproductionfunctionexhibitsincreasingreturns.
C) AustraliahasanOkunWedgeof$1trillion.
D) AustraliahaspositiveLucasWedge.
E) Australiasproductionpossibilityfrontierhasapositiveslope.
Answer: A
Status: Old
Page744
63) Therealwagerateisthe________dividedbythe________.
A) quantityoflabordemanded;quantityoflaborsupplied
B) nominalwagerate;pricelevel
C) quantityoflaborsupplied;quantityoflabordemanded
D) nominalwagerate;inflationrate
E) equilibriumquantityofemployment;potentialGDP
Answer: B
Topic: Realwagerate
Status: Old
64) Supposethepriceofaproductis$4andthenominalwagethatthefirmmustpayis$20.Then
thefirmsrealwageis
A) $20.
B) $80.
C) $5.
D) $0.20.
E) $4.
Answer: C
Topic: Realwagerate
Status: Old
65) Thebenefittothefirmofhiringanotherworkeris
A) thenominalwage.
B) thepricelevel.
C) therealwage.
D) theextraoutputproducedbytheworker.
E) measuredastheheightoftheproductionfunction.
Answer: D
Topic: Demandforlabor
Status: Old
66) Thequantityoflabordemandedisthelaborhoursall
A) firmsplantohireatagivenrealwagerate.
B) firmsplantohireatagivennominalwagerate.
C) employeesplantoworkatagivenrealwagerate.
D) employeesplantoworkatagivennominalwagerate.
E) BothanswersAandCarecorrect.
Answer: A
Status: Old
Page745
67) Thetotallaborhoursthatallthefirmsintheeconomyplantohireduringagiventimeperiod
atoneparticularrealwagerateisthe
A) demandforlabor.
B) quantityoflabordemanded.
C) supplyoflabor.
D) quantityoflaborsupplied.
E) quantityofjobssupplied.
Answer: B
Status: Old
68) Iftherealwageratedecreasesfrom$14.00perhourto$13.00perhour,the
A) quantitydemandedoflaborincreases.
B) demandforlaborincreases.
C) quantitysuppliedoflaborincreases.
D) supplyoflaborincreases.
E) equilibriumquantityofemploymentmustdecrease.
Answer: A
Status: Old
69) Whenallotherinfluencesonfirmshiringplansremainthesame,the
A) lowertherealwagerate,thegreateristhequantityoflaborsupplied
B) highertherealwagerate,thegreateristhequantityoflabordemanded.
C) lowertherealwagerate,thesmalleristhequantityoflabordemanded.
D) lowertherealwagerate,thegreateristhequantityoflabordemanded.
E) Noneoftheaboveanswersiscorrectbecausefirmshiringdecisionsdependonhow
profitablehiringaworkeris,whichdependsonhowmuchaddedprofittheworkercan
create.
Answer: D
Status: Old
Page746
70) Thelowertherealwagerate,the
A) fewerworkersfirmscanprofitablyhire.
B) moreworkersfirmscanprofitablyhire.
C) moreworkerswillsupplylabor.
D) higherthenominalwagerate.
E) largerthequantityoflaborsupplied.
Answer: B
Status: Old
71) Thedemandforlaborreflectsthepointthatthe
A) lowertherealwagerate,thegreaterthequantityoflabordemanded.
B) highertherealwagerate,thegreaterthequantityoflabordemanded.
C) realwageratedoesnotaffectthequantitydemandedoflabor.
D) nominalwagerateandnottherealwageratedeterminesthequantityoflabor
demanded.
E) demandforlabordependsonthesupplyoflabor.
Answer: A
Status: Old
72) Anincreaseintherealwagerate________thequantityoflabordemandedand________the
quantityoflaborsupplied.
A) increases;increases
B) increases;decreases
C) decreases;increases
D) decreases;decreases
E) doesnotchange;doesnotchange
Answer: C
Topic: Demandforlabor,supplyoflabor
Status: Old
Page747
73) Thedemandforlaborcurveis
A) averticallinebecausefirmshavetohirelabor.
B) upwardsloping,showingthatastherealwagerateincreases,moreworkersarehired.
C) ahorizontallinebecauseweassumethattherealwagerateisfixed.
D) downwardsloping,showingthatthequantityoflabordemandedincreaseswhenthe
realwagefalls.
E) U-shaped.
Answer: D
Status: Old
74) Afirmsdemandforlabordependsonthe
A) nominalwageratebecauseitpaysworkersindollars.
B) realwagerate,whichequalsthenominalwagedividedbythepricelevel.
C) realwagerate,whichequalsthenominalwagedividedbythehoursworked.
D) nominalwagerate,whichequalstherealwagedividedbythepricelevel.
E) supplyoflabor.
Answer: B
Status: Old
75) Thequantityoflabordemandedbyafirmdependsupon
A) thenominalwageratenottherealwagerate.
B) therealwageratenotthenominalwagerate.
C) boththerealwagerateandthenominalwagerate.
D) neithertherealwageratenorthenominalwagerate.
E) eithertherealwagerateorthenominalwagerate,dependingwhetherthepricelevelis
increasingordecreasing.
Answer: B
Status: Old
Page748
76) Afirmhireslaboruptothepointwherethe
A) realwagerateequalsthenominalwagerate.
B) additionalhouroflaborproducesextraoutputthatequalstherealwagerate.
C) additionalhouroflaborproducesextraoutputthatequalsthenominalwagerate.
D) firmcanselltheextraoutput.
E) realwagerateexceedsthenominalwagerate.
Answer: B
Status: Old
77) Firmshiremorelaboraslongas
A) therealwagerateislessthantheadditionaloutputthelaborproduces.
B) therealwagerateisgreaterthantheadditionaloutputthelaborproduces.
C) extralaborwillproducemoreoutput.
D) thenominalwagerateexceedstherealwagerate.
E) thenominalwagerateislessthantherealwagerate.
Answer: A
Status: Old
78) Aslongasanadditionalworkerhiredbyafirmproduces
A) moreoutputthantherealwagerate,thefirmwillhirethatworker.
B) moreoutputthantherealwagerate,thefirmwillnothirethatworker.
C) lessoutputthantherealwagerate,thefirmwillhirethatworker.
D) someoutput,thefirmwillhirethatworker.
E) moreoutputthanthenominalwagerate,thefirmwillhirethatworker.
Answer: A
Status: Old
79) HersheyChocolateFactorypaysamoneywagerateequalto$30perhourandsellsitscandy
barsfor$1.50each.HersheyChocolateFactoryshouldhirelaboruntilanadditionalunitof
laborproduces________candybarsanhour.
A) 45
B) 1.5
C) 20
D) 30
E) 10
Answer: C
Status: Old
Page749
80) TheBubbyGumfactoryproducesbubblegum.Joanneisoneoftheemployees,andshe
produces10packsofbubblegumperhour.Joannesmoneywagerateis$12perhour.Based
onthisinformation,theBubbyGumcompanyshould
A) keepJoannebecauseshecreatesaprofitforthefirm.
B) fireJoannebecauseshecreatesalossforthefirm.
C) decreaseJoanneswageratebecausesheispaidtoomuch.
D) increaseitsdemandforlabor.
E) NoneoftheaboveanswersiscorrectbecausemoreinformationaboutJoannesrealwage
isneededtodecidewhattodo.
Answer: E
Status: Old
produces10packsofbubblegumperhour.Joannesmoneywagerateis$12perhour.Ifa
packetofbubblegumsellsfor$1.00,then
A) Joanneiscreatinga$2.00perhourlossforthefirm.
B) Joanneiscreatinga$2.00perhourprofitforthefirm.
C) theBubbyGumcompanyshoulddecreasethepriceofthebubblegumsoitsellsmore
andmakesalargerprofit.
D) theBubbyGumcompanyshouldpayJoannemore.
E) NoneoftheaboveanswersiscorrectbecausemoreinformationaboutJoannesrealwage
isneededtodecidewhattodo.
Answer: A
Status: Old
produces10packsofbubblegumperhour.Joannesmoneywagerateis$12perhour.Ifa
packetofbubblegumsellsfor$1.00,thenJoanne________because________.
A) iscreatinga$2.00perhourlossforthefirm;herrealwagerateismorethanheroutput
perhour
B) iscreatinga$2.00perhourprofitforthefirm;herrealwagerateismorethanheroutput
perhour
C) shouldrecommendthattheBubbyGumcompanyshoulddecreasethepriceofthe
bubblegum;itwouldsellmoreandbringalargerprofit
D) shouldaskforaraiseinpay;thenherrealwagewouldbelessthanheroutputperhour
E) isthelastpersontheBubbyGumpcompanywillemploy;anadditionalhirewould
produceequaltheamountofadditionallabortorealwageperhour
Answer: A
Status: New
Page750
83) Tomaximizeprofits,firmshirelaboraslongas
A) eachadditionalhourhiredproducesmoreadditionaloutputthantherealwagerate.
B) thetotalhourshiredproducesmoreadditionaloutputthantherealwagerate.
C) eachadditionalhourhiredproducesmoreadditionaloutputthanthenominalwagerate.
D) thequantityoflaborsuppliedincreasesastherealwagerateincreases.
E) workerscontinuetosupplylabortothefirm.
Answer: A
Status: Old
84) Forahousehold,theopportunitycostofnotworkingisthe
A) nominalwagerate.
B) realwagerate.
C) costofliving.
D) pricelevel.
E) demandforlabor.
Answer: B
Topic: Supplyoflabor
Status: Old
85) Whichofthefollowingstatementsis(are)true?
i. Astherealwagerateincreases,thehouseholdsincomedecreases,whichinfluences
peopletoworkmorehours.
ii. Astherealwagerateincreases,thequantityoflabordemandedincreases.
iii. Astherealwagerateincreases,theopportunitycostofnotworkingincreases.
A) ionly
B) iionly
C) iiionly
D) iandiii
E) i,ii,andiii
Answer: C
Status: Old
Page751
86) Asdemonstratedbythelaborsupplyschedule,thequantityoflaborsupplieddependson
A) thenominalwage.
B) theamountoflaborthatfirmswanttohire.
C) therealwage.
D) thevalueofthedollar.
E) workersproductivity.
Answer: C
Status: Old
87) Thesupplyoflaborisdefinedastherelationshipbetweentherealwagerateandthe
A) quantityoflaborsuppliedbyfirms.
B) amountofjobssuppliedbyfirms.
C) quantityoflaborsuppliedbyhouseholds.
D) amountofjobssuppliedbyhouseholds.
E) equilibriumquantityofemployment.
Answer: C
Status: Old
88) Whichofthefollowingstatementsistrue?
A) Accordingtothelaborsupplycurve,astherealwagerises,employersarewillingto
providemorejobs.
B) Accordingtothelaborsupplycurve,astherealwagerises,workersarewillingto
providemorehoursoflabor.
C) Accordingtothelaborsupplycurve,astherealwagerises,employersarewillingto
providefewerjobs.
D) Accordingtothelaborsupplycurve,astherealwagerises,workersarewillingto
providefewerhoursoflabor.
E) Accordingtothelaborsupplycurve,astherealwagerises,moreworkersleavethelabor
force.
Answer: B
Status: Old
Page752
89) Householdsincreasethequantityoflaborsuppliedwhenthe
A) realwageraterisesbecausetheopportunitycostofnotworkingfalls.
B) nominalwageraterisesbecausetherealwageratemustalsorise.
C) realwageraterisesbecausetheopportunitycostofnotworkingrises.
D) nominalwageratefallsbecausetheopportunitycostofnotworkingrises.
E) incometaxrisesbecauseanincreaseintheincometaxincreasesthedemandforlabor.
Answer: C
Status: Old
90) Householdsincreasethequantityoflaborsuppliedwhen
A) therealwagerateincreases.
B) therealwageratedecreases.
C) jobopportunitiesincrease.
D) thenominalwagedecreasesandthepricelevelrises.
E) incometaxesincrease.
Answer: A
Status: Old
91) Holdingallotherinfluencesconstant,thequantityoflaborsuppliedinagiventimeperiod
depends
A) inverselyontherealwageratesothatahigherrealwagedecreasesthequantityoflabor
supplied.
B) directlyontherealwageratesothatahigherrealwageincreasesthequantityoflabor
supplied.
C) inverselyonthequantityoflabordemanded.
D) onthemoneywageratenottherealwagerate.
E) directlyonthequantityoflabordemanded.
Answer: B
Status: Old
Page753
92) Whenallotherinfluencesonworkplansremainthesame,the
A) lowertherealwagerate,thesmallerthequantityoflaborsupplied.
B) highertherealwagerate,thegreaterthequantityoflabordemanded.
C) lowertherealwagerate,thegreaterthequantityoflaborsupplied.
D) lowertherealwagerate,thesmallerthequantityoflabordemanded.
E) lowertherealwagerate,thelargerthelaborforceparticipation.
Answer: A
Status: Old
93) Thequantityoflaborsuppliedincreasesastherealwagerisesbecause
A) higherrealwagesmeanthatnominalwageshaveincreased.
B) theopportunitycostofworkingincreases.
C) thequantityoflabordemandedincreases.
D) theopportunitycostofleisurerises.
E) laborforceparticipationdecreasessothatonlyseriousworkersareleftinthelaborforce.
Answer: D
Status: Old
94) Astherealwageraterises,theopportunitycostof
A) workingrises.
B) savingrises.
C) leisurerises.
D) leisurefalls.
E) buyinggoodsandservicesrises.
Answer: C
Status: Old
95) Thelaborforceparticipationrate
A) increasesastherealwageincreases.
B) decreasesastherealwageincreases.
C) hasnothingtodowiththerealwagerate.
D) increasesastheopportunitycostofworkingincreases.
E) isoneofthemajorreasonsthatfirmspayefficiencywages.
Answer: A
Topic: Laborforceparticipation
Status: Old
Page754
96) Thelabormarketisinequilibriumwhenever
A) thenominalwagerateisdecreasing.
B) thenominalwagerateisincreasing.
C) thenominalwagerateisnotchanging.
D) therealwagerateisincreasing.
E) thequantityoflabordemandedequalsthequantityoflaborsupplied.
Answer: E
Topic: Labormarketequilibrium
Status: Old
97) Asurplusoflaboriseliminatedby________intherealwagerateandashortageoflaboris
eliminatedby________intherealwagerate.
A) anincrease;anincrease
B) anincrease;adecrease
C) adecrease;anincrease
D) adecrease;adecrease
E) Noneoftheaboveanswersiscorrectbecauseshortagesandsurplusesareeliminatedby
changesinthedemandforlaborandthesupplyoflabor,notthewagerate.
Answer: C
Status: Old
98) Asurplusinthelabormarketindicatesthatthe
A) realwagerateisabovetheequilibriumwageratebutitistoolowtoeliminatethe
surplusoflabor.
B) quantityoflabordemandedislessthanthequantityoflaborsupplied.
C) realwageratehastorisebeforethelabormarketwillreachequilibrium.
D) workersarenotlookingforworkbecausetheyenjoytheirleisuretime.
E) realwagerateislessthantheequilibriumwagerate.
Answer: B
Status: Old
Page755
99) Whenthelabormarketisinequilibriumsothatthequantityoflaborsuppliedequalsthe
quantitydemanded,
A) thereisnounemployment.
B) theeconomyisatfullemployment.
C) nominalGDPequalsrealGDP.
D) thereisnoinflation.
E) realGDPmightbemorethan,lessthan,orequaltopotentialGDP.
Answer: B
Status: Old
100) Whenthelabormarketisinequilibrium,
i. thequantitydemandedoflaborequalsthequantitysupplied.
ii. thereisfullemployment.
iii. potentialGDPisproduced.
A) ionly
B) iionly
C) iiionly
D) iandiii
E) i,ii,andiii
Answer: E
Status: Old
101) Whenthelabormarketisinequilibrium,
A) thereisexcesslaborsupplied,whichkeepsrealGDPlessthanpotentialGDP.
B) thereisfullemployment,whichmeansthatrealGDPequalspotentialGDP.
C) therealwageratefallstoequalthenominalwageratebecauserealGDPisgreaterthan
potentialGDP.
D) therealwageraterisestoallowrealGDPtoequalpotentialGDP.
E) thereisfullemploymentbutrealGDPmightbegreaterthan,lessthan,orequalto
potentialGDP.
Answer: B
Status: Old
Page756
102) Inalabormarketwithoutanefficiencywage,minimumwage,orunionwage,whenthereal
wagerateexceedstheequilibriumrealwagerate,thereisa________oflaborandthereal
wageratewill________.
A) surplus;fall
B) shortage;fall
C) shortage;rise
D) surplus;rise
E) surplus;notchangebecauseonlyefficiencywagesorunionwagescanchange.
Answer: A
Status: Old
Realwagerate
(2009dollars
perhour)
40
35
30
25
20
15
Quantityoflabor
demanded
(billionsofhours
peryear)
200
220
240
260
280
300
Quantityoflabor
supplied
(billionsofhours
peryear)
320
310
300
290
280
270
103) Thetableaboveshowsthelabordemandandlaborsupplyschedulesforanation.The
equilibriumrealwagerateis________andtheequilibriumquantityoflaboris________
billionsofhoursperyear.
A) $25;260
B) $20;280
C) $20;260
D) $15;260
E) $40;320
Answer: B
Status: Old
Page757
Employment
Quantityoflabor Quantityoflabor
(billions
RealGDP
demanded
supplied
ofhours
(billionsof
Realwagerate (billionsofhours (billionsofhours
peryear)
2009dollars)
(2009dollars)
peryear)
peryear)
60
2.0
50
80
100
70
3.0
40
90
90
80
3.7
30
100
80
90
4.2
110
70
20
110
4.5
10
120
60
104) Thetablesaboveshowanationslabordemandandlaborsupplyschedulesanditsproduction
function.Theequilibriumrealwagerateis________andtheequilibriumquantityoflaboris
________billionhoursperyear.
A) $50;100
B) $40;90
C) $30;80
D) $40;80
E) $20;110
Answer: B
Topic: FullemploymentandpotentialGDP
Status: Old
105) Thetablesaboveshowanationslabordemandandlaborsupplyschedulesanditsproduction
function.Giventheequilibriuminthelabormarket,potentialGDPis
A) $3.0trillion.
B) $3.7trillion.
C) $4.2trillion.
D) $4.5trillion.
E) $2.0trillion.
Answer: C
Status: Old
106) IntheUnitedStatesbetweenthe1970sandthe2000s,theproductivityoflaborincreased.This
increaseledto
A) anincreaseinthedemandforlabor.
B) anincreaseinthesupplyoflabor.
C) adownwardshiftoftheproductionfunction.
D) adecreaseinthesupplyoflabor.
E) nochangeineitherthedemandfororthesupplyoflabor.
Answer: A
Status: Old
Page758
107) ________adoptstheviewthataggregatefluctuationsareanaturalconsequenceofan
expandingeconomy.
A) Classicalmacroeconomics
B) Keynesianeconomics
C) Thenewmacroeconomics
D) TheLucasWedge
E) TheOkunGap
Answer: C
Topic: Newmacroeconomics
Status: Old
108) PotentialGDP
A) isthequantityofGDPproducedwhentheeconomyisatfullemploymentofall
resources.
B) canneverbeexceeded.
C) canneverbeattained.
D) isanothernameforrealGDP.
E) isanothernamefornominalGDP.
Answer: A
Topic: PotentialGDP
Status: Old
109) Withfixedquantitiesofcapital,land,andentrepreneurshipandfixedtechnology,theamount
ofrealGDPproducedincreaseswhen________increases.
i. thequantityoflaboremployed
ii. theinflationrate
iii. thepricelevel
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: A
Topic: PotentialGDP
Status: Old
Page759
110) Theproductionfunctiongraphstherelationshipbetween
A) nominalGDPandrealGDP.
B) realGDPandthequantityoflaboremployed.
C) realGDPandcapital.
D) nominalGDPandthequantityoflaboremployed.
E) realGDPandthesupplyoflabor.
Answer: B
Status: Old
111) Thequantityoflabordemandeddefinitelyincreasesifthe
A) realwageraterises.
B) realwageratefalls.
C) nominalwageraterises.
D) nominalwageratefalls.
E) supplyoflabordecreases.
Answer: B
Status: Old
112) Thesupplyoflaborcurvehasa________slopebecauseastherealwageraterises,________.
A) negative;firmshirefewerworkers
B) positive;theopportunitycostofleisurerises
C) positive;theopportunitycostofleisurefalls
D) negative;householdsworkmorehours
E) positive;firmsoffermorejobs
Answer: B
Status: Old
Page760
113) Therealwagerateis$35anhour.Atthiswageratethereare100billionlaborhourssupplied
and200billionlaborhoursdemanded.Thereisa
A) shortageof300billionhoursoflabor.
B) shortageof100billionhoursoflabor.
C) surplusof100billionhoursoflabor.
D) surplusof300billionhoursoflabor.
E) shortageof200billionhoursoflabor.
Answer: B
Status: Old
114) Whenthelabormarketisinequilibrium,realGDP________potentialGDP.
A) isgreaterthan
B) isequalto
C) islessthan
D) mightbegreaterthan,lessthan,orequalto
E) isnotcomparableto
Answer: B
Status: Old
115) ComparedtotheU.S.productionfunction,theEuropeanproductionfunctionis
A) higher.
B) lower.
C) thesame.
D) lowerthantheU.S.productionfunctionatlowlevelsofemploymentandhigherthanthe
U.S.productionfunctionathighlevelsofemployment.
E) higherthantheU.S.productionfunctionatlowlevelsofemploymentandlowerthanthe
U.S.productionfunctionathighlevelsofemployment.
Answer: B
Status: Old
Page761
8.2 TheNaturalUnemploymentRate
1) Theunemploymentrateatfullemploymentis
A) zero.
B) thenaturalunemploymentrate.
C) equaltotherationedrateofunemployment.
D) undefinedbecausetheeconomyisneveratfullemployment.
E) equaltheamountofunemploymentcausedbyjobsearch.
Answer: B
Topic: Naturalunemploymentrate
Status: Old
2) Whichofthefollowingexplainthenaturalrateofunemployment?
i. jobsearch
ii. theOkunGap
iii. theproductionfunction
A) iandiii
B) ionly
C) iiionly
D) iiandiii
E) iandii
Answer: B
Status: Old
3) Thenaturalunemploymentrateistheresultof
A) badgovernmentpolicies.
B) insufficientdemandforlabor.
C) jobsearchandjobrationing.
D) theLucasWedge.
E) theOkunGap.
Answer: C
Status: Old
4) Supposejobsearchhasdecreasedoverthelastseveralyears.Thisdecreasecouldbearesultof
i. achangeinunemploymentbenefits.
ii. apositivestructuralchange.
iii. ahigherinflationrate.
A) iionly
B) ionly
C) iandii
D) iiandiii
E) iandiii
Answer: C
Topic: Jobsearch
Status: Old
Page762
5) Theincreaseintheaverageunemploymentrateinthe1970swastheresultof
A) thereductionofoverlygenerousunemploymentbenefitsinthe1970s.
B) anincreaseinthebirthrateintheearly1970s.
C) anincreaseinthebirthrateinthelate1940sandearly1950s.
D) higherrealwagerates.
E) repeatedincreasesintheminimumwage.
Answer: C
Topic: Demographicchange
Status: Old
6) AnewspaperheadlinereadsANewWaveofWorkersEnterstheJobMarket!Thiswaveof
young,newentrantstothelabormarketislikelytoleadto
A) anincreaseinthenaturalunemploymentrate.
B) adecreaseintheunemploymentrate.
C) noeffectontheunemploymentrate.
D) adecreaseinthecountryspotentialGDP.
E) adecreaseinthenaturalunemploymentratebutanincreaseintheactualunemployment
rate.
Answer: A
Topic: Demographicchange
Status: Old
7) Whichofthefollowingincreasesfrictionaland/orstructuralunemployment?
i. moreyoungworkersenteringthelaborforce
ii. moregenerousunemploymentbenefits
iii. astructuralslumpwithsomeindustriesdying
A) ionly
B) iionly
C) iiionly
D) iandii
E) i,ii.andiii
Answer: E
Topic: Demographicchange,unemploymentbenefits
Status: Old
Page763
8) Thelengthoftimeanunemployedpersonsearchesforajobislikelytoincreaseas
A) theworkingagepopulationgetsolder.
B) thebirthratedeclines.
C) newtechnologiesmakeworkersmoreproductive.
D) unemploymentbenefitsbecomemoregenerous.
E) jobrationingdecreases.
Answer: D
Topic: Demographicchange,unemploymentbenefits
Status: Old
9) Iftheamountpaidasunemploymentbenefitsdecreases,theopportunitycostofjobsearch
A) risesandpeoplewouldstayunemployedlonger.
B) isnotaffectedbecauseunemploymentbenefitsdonotchangejobavailability.
C) risesandpeoplestayunemployedforashortertime.
D) fallsandpeoplestayunemployedforashortertime.
E) fallsandpeoplestayunemployedforalongertime.
Answer: C
Topic: Unemploymentbenefits
Status: Old
10) Moregenerousunemploymentbenefits________theopportunitycostoflookingforanewjob
andtherefore________thejobsearchprocess
A) lower;extend
B) lower;shorten
C) raise;extend
D) raise;shorten
E) lower;doesnotchange
Answer: A
Status: Old
Page764
11) Thenaturalunemploymentrateishigherif
A) unemploymentbenefitsbecomemoregenerous.
B) thereisadecreaseintheworking-agepopulation.
C) therearefewertwo-incomehouseholds.
D) manyofthenewjobscreatedrequireskillspossessedbytheavailablelabor.
E) efficiencywagesarelower.
Answer: A
Status: Old
12) Thelowertheamountofunemploymentbenefitscitizensreceive,the
A) highertheopportunitycostofjobsearch.
B) lowertheopportunitycostofjobsearch.
C) thehigherthenaturalunemploymentrate.
D) thelongerpeoplesearchforjobs.
E) higherthewagepeoplemustbeofferedbeforetheyacceptajob.
Answer: A
Status: Old
13) Thelengthoftimepeoplespendinsearchofajobincreasesif
A) thepopulationages.
B) unemploymentbenefitsincrease.
C) thecriterianecessarytoqualifyforunemploymentbenefitsincreases.
D) thereisasuddenchangeintechnology.
E) theminimumwageisdecreased.
Answer: B
Status: Old
Page765
14) Franceisconsideringimplementingpoliciesthatwillreducethedurationofjobsearch.A
possibleoptionisforFranceto
A) increasetheminimumwage.
B) helpnegotiatehigherunionbenefitsforemployedworkers.
C) reduceunemploymentbenefits.
D) requireallresidentsbetweentheagesof19and26toobtainapart -timeorfull-timejob.
E) BothanswersAandBarecorrect.
Answer: C
Status: Old
15) IfwecomparetheCanadiannaturalunemploymentratetotheU.S.naturalunemployment
rate,wefindthatformostyearssince1980
A) theyareessentiallythesamebecausewehavealotincommon.
B) theCanadianrateishigher,possiblytheresultofhigherunemploymentbenefitsin
Canadaformostofthoseyears.
C) theU.S.rateishigher,possiblytheresultofgreaterjobsearchwithinalargercountry.
D) theCanadianrateishigher,possiblytheresultofhigherunemploymentbenefitsinthe
UnitedStatesformostofthoseyears.
E) TheU.S.rateishigher,possiblytheresultofmorestructuralchangeoccurringinthe
UnitedStates.
Answer: B
Topic: Eyeontheglobaleconomy,unemploymentbenefits
Status: Revised
16) Structuralchangeinfluencestheunemploymentrateandsuchstructuralchangeiscreatedby
changesin
A) realGDP.
B) theseasons.
C) technology.
D) population.
E) theminimumwage.
Answer: C
Topic: Structuralchange
Status: Old
Page766
17) Jobrationingoccurswhentherealwagerateis
A) belowtheequilibriumwageratesothereisanexcesssupplyoflabor.
B) abovetheequilibriumwageratesothereisashortageoflabor.
C) equaltotheequilibriumwageratesothereisnoexcesssupplyoflabor.
D) abovetheequilibriumwageratesothereisanexcesssupplyoflabor.
E) BothanswersAandDarecorrectbecausewhenevertherealwagerateisaboveorbelow
theequilibriumwagerate,thereisanexcesssupplyoflabor.
Answer: D
Topic: Jobrationing
Status: Old
18) Whichofthefollowingcreatesjobrationing?
A) Therealwagerateisbelowtheequilibriumlevel.
B) Therealwagerateisabovetheequilibriumlevel.
C) Therealwagerateisequaltotheequilibriumlevel.
D) Jobsearchdecreases.
E) Anincreaseinunemploymentbenefits.
Answer: B
Topic: Jobrationing
Status: Old
19) Jobrationingoccurswhentherealwageis________theequilibriumlevelandthereisa
________oflabor.
A) above;shortage
B) above;surplus
C) below;shortage
D) below;surplus
E) equalto;shortage
Answer: B
Topic: Jobrationing
Status: Old
Page767
20) Whichofthefollowingcanresultinjobrationing?
i. minimumwage
ii. unionwage
iii. diminishingreturns
A) ionly
B) iionly
C) iiionly
D) iandii
E) i,ii,andiii
Answer: D
Topic: Jobrationing
Status: Old
21) Supposethefull-employmentequilibriumrealwagerateis$11perhourwhiletheactualreal
wagerateis$12perhour.Iftheactualrealwageratedoesnotchange,then
A) jobrationingwilloccur.
B) jobsearchwilldecline.
C) apositiveOkunGapwilloccur.
D) theproductionfunctionwillshiftdownward.
E) jobrationingwilldecrease.
Answer: A
Topic: Jobrationing
Status: Old
22) Efficiencywages,aboveequilibriumminimumwagerates,andhigherunionwagesarelikely
to
A) increasethenaturalunemploymentrate.
B) increasecyclicalunemployment.
C) reducetheequilibriumrealwagerate.
D) increasetheequilibriumrealwagerate.
E) decreasethenaturalunemploymentrate.
Answer: A
Topic: Jobrationing
Status: Old
Page768
23) Thepresenceofefficiency,minimumandunionwages
A) canexplainjobrationingbecausetheylowerthenaturalunemploymentrate.
B) canexplainjobrationingbecausetheyraisetherealwagerateaboveequilibrium.
C) canexplainjobrationingbecausetheylowertherealwageratebelowequilibrium.
D) doesnotaffectjobrationingbecausetheyaffectonlytheamountofjobsearch.
E) cannotexplainjobrationingbecausetheyareanaturalpartoftheeconomy.
Answer: B
Topic: Jobrationing
Status: Old
24) Efficiencywagesare
A) mandatedbylaw.
B) setbelowtheequilibriumleveloftherealwage.
C) offeredbyfirmswhowanttoreduceturnoverinthelaborforce.
D) specialwagesofferedtoteenagers.
E) theresultofdemographicchange.
Answer: C
Topic: Efficiencywage
Status: Old
25) Anefficiencywage
A) issetabovetheequilibriumrealwageratetoinducegreaterworkeffort.
B) issetbelowtheequilibriumrealwageratetoreducelaborcosts.
C) increasesthesupplyoflaborandthereforeincreasespotentialGDP.
D) increasesthedemandforlaborandthereforeincreasespotentialGDP.
E) reducesfrictionalunemployment.
Answer: A
Status: Old
26) Anefficiencywageisdesignedto
A) inducemoreworkeffort.
B) keeptheminimumwagefromrising.
C) keeptheminimumwagefromfalling.
D) toinducemoreemployment.
E) decreasetheneedforworkerstosearchforjobs.
Answer: A
Status: Old
Page769
27) Anefficiencywageisdesignedto________workeffortandto________laborturnover.
A) decrease;lower
B) decrease;raise
C) increase;raise
D) increase;lower
E) notchange;decrease
Answer: D
Status: Old
28) Anefficiencywageis________becausetheresultis________.
A) setabovetheequilibriumrealwage;reducedturnoverandlessworkeffort
B) setabovetheequilibriumrealwage;increasedturnoverandmoreworkeffort
C) setbelowtheequilibriumrealwage;reducedturnoverandmoreworkeffort
D) setabovetheequilibriumrealwage;reducedturnoverandmoreworkeffort
E) notoftenused;notmuchdifferentfromminimumwageuse
Answer: D
Status: New
29) Anefficiencywage________because________.
A) decreasesjobrationing;therealwagerateisloweredbelowtheequilibrium
B) increasesjobrationing;therealwagerateisloweredbelowtheequilibrium
C) decreasesjobrationing;therealwagerateisraisedabovetheequilibrium
D) increasesjobrationing;therealwagerateisraisedabovetheequilibrium
E) isusedoften;itisinexpensiveandeffective
Answer: D
Status: New
Page770
30) Efficiencywagesare
A) thelegalminimumwageafirmcanpayaworker.
B) apossiblecauseofjobrationingbecausetheydrivewagesbelowtheirequilibriumlevel.
C) apossiblecauseofjobrationingbecausetheydrivewagesabovetheirequilibriumlevel.
D) apossiblecauseofjobrationingbecausetheyforcewagestoequaltheirequilibrium
level.
E) anothernamefortheequilibriumwage.
Answer: C
Status: Old
31) Thefigureaboveshowsthemarketforfastfoodrestaurantemployeesinacollegetownina
smallnationtotheEast.ThelocalTacoBellpaysitsworkers$12anhour.Thiswagerateis
A) anefficiencywageaimedatreducingemployeeturnover.
B) designedreducetheunemploymentrate.
C) anefforttoincreasethedemandforlabor.
D) theactualequilibriumwagerate.
E) illegalbecausetheequilibriumwagerateis$6anhour.
Answer: A
Status: Old
Page771
32) Thefigureaboveshowsthelabormarketinasmalltown.Ifthegovernmentimposesawage
of$10thatfirmsmustatleastpay,
A) thegovernmenthasimposedaminimumwageandmarketforcesarenotallowedto
work.
B) thegovernmenthasimposedanefficiencywage.
C) jobsearchwilldecrease.
D) jobrationingwilldecrease.
E) inflationwilloccuraswagesrise.
Answer: A
Topic: Minimumwage,search
Status: Old
33) Thefigureaboveshowsthelabormarketinasmalltown.Ifthegovernmentimposes________
thatfirmsmustatleastpay,theeffectwillbe________because________.
A) aminimumwageof$10;anincreaseinunemployment;asurplusoflaboriscreated
B) aminimumwageof$10;adecreaseinunemployment;ashortageoflaboriscreated
C) anefficiencywageof$10;adecreaseinunemployment;asurplusoflaboriscreated
D) anefficiencywageof$10;anincreaseinunemployment;ashortageoflaboriscreated
E) aminimumwageof$10;nochangeinunemployment;itwillnotaffecthowfirms
demandlabor
Answer: A
Topic: Minimumwage,search
Status: New
34) Toincreaseworkersincomes,theCityofNewYorksgovernmentsetawagebelowwhichitis
illegalforemployerstopayemployees.Thiswageisreferredtoasthe
A) minimumwage.
B) efficiencywage.
C) governmentwage.
D) unionwage.
E) citywage.
Answer: A
Topic: Minimumwage
Status: Old
Page772
35) Aminimumwageratethatisset________theequilibriumrealwageratecreatesa________of
labor.
A) above;surplus
B) above;shortage
C) below;surplus
D) below;shortage
E) equalto;shortage
Answer: A
Topic: Minimumwage
Status: Old
36) Iftheminimumwagerateissetabovetheequilibriumwagerate,then
A) unemploymentdefinitelyincreases.
B) unemploymentdefinitelydecreases.
C) unemploymentdefinitelydoesnotchange.
D) unemploymenteitherdecreasesordoesnotchange.
E) Noneoftheaboveanswersiscorrectbecausetheminimumwagedecreasessearchbutits
effectonunemploymentisambiguous.
Answer: A
Topic: Minimumwage
Status: Old
37) Theminimumwageisa
A) possiblecauseofjobsearchbecauseitlowerswagesbelowtheirequilibrium.
B) possiblecauseofjobrationingbecauseitlowerswagesbelowtheirequilibrium.
C) governmentestablishedhighestwagethatislegaltopay.
D) possiblecauseofjobrationingbecauseitraiseswagesabovetheirequilibrium.
E) factorthatdecreasesunemploymentbecausefewerpeoplesearchforworkifthe
minimumwageisincreased.
Answer: D
Topic: Minimumwage
Status: Old
Page773
38) Aminimumwagesetabovetheequilibriumwagerate
A) increasesthenaturalunemploymentrate.
B) increasesthedemandforlabor.
C) increasesthenumberofworkersemployed.
D) decreasesjobrationing.
E) decreasesthenaturalunemploymentratebecausefewerworkerswillbecome
unemployed.
Answer: A
Topic: Minimumwage
Status: Old
39) Whichofthefollowingwillincreasethenaturalunemploymentrate?
i. aminimumwagesetabovetheequilibriumwagerate
ii. efficiencywages
iii. union-negotiatedwages
A) ionly
B) iandii
C) iandiiionly
D) iiandiiionly
E) i,iiandiii
Answer: E
Status: Old
40) Iftheminimumwageisset
A) belowtheequilibriumwagerate,itwillcreateunemployment.
B) abovetheequilibriumwagerate,itwillcreateunemployment.
C) equaltotheequilibriumwagerate,itwillcreateashortageoflabor.
D) belowtheequilibriumwagerate,itwillcreateashortageoflabor.
E) equaltotheequilibriumwagerate,itwillcreateasurplusoflabor.
Answer: B
Topic: Minimumwage
Status: Old
Page774
Realwagerate Quantityoflabordemanded Quantityoflaborsupplied

(2009dollars
(millionsofhours
(millionsofhours
perhour)
permonth)
permonth)
5
360
260
10
325
275
15
300
300
20
280
330
25
250
350
41) Accordingtotheabovetable,iftheminimumwageissetat$20perhour,then
A) thereisanexcessdemandforlabor.
B) thequantityoflaborsuppliedexceedsthequantityoflabordemandedby50million
hourspermonth.
C) thequantityoflabordemandedwillincreaseuntilitisequaltothequantityoflabor
supplied.
D) thelabordemandcurvewillshiftuntil$20isthenewequilibriumrealwagerate.
E) thelaborsupplycurvewillshiftuntil$20isthenewequilibriumrealwagerate.
Answer: B
Topic: Minimumwage
Status: Old
Realwagerate Quantityoflabordemanded
(2009dollars
(millionsofhours
perhour)
permonth)
7.15
90
7.65
70
8.00
60
8.50
45
9.00
20
Quantityoflaborsupplied
(millionsofhours
permonth)
25
32
60
70
85
42) Thetableabovegivesthelabormarketforasmallforeigneconomy.Equilibriuminthelabor
marketoccursatarealwagerateof
A) $7.15perhour.
B) $7.65perhour.
C) $8.00perhour.
D) $8.50perhour.
E) $9.00perhour.
Answer: C
Topic: Thelabormarket
Status: Old
Page775
43) Thetableabovegivesthelabormarketforasmallforeigneconomy.Aminimumwagelaw
thatsetstheminimumwageat$8.50perhourproduces
A) equilibriuminthelabormarket.
B) alaborsurplusof25millionhours.
C) alaborshortageof25millionhours.
D) alaborsurplusof$0.50perhour.
E) alaborsurplusof65millionhours.
Answer: B
Topic: Minimumwage
Status: Old
44) Thetableabovegivesthelabormarketforasmallforeigneconomy.A(n)________would
create________.
A) minimumwageof$5.00;anincreaseinjobrationing.
B) union-negotiatedwageof$7.50;unemploymentandjobrationing.
C) efficiencywageof$8.00;unemploymentandjobrationing.
D) efficiencywageof$9.00;anincreaseinjobrationing.
E) minimumwageof$9.00;adecreaseinjobsearch.
Answer: D
Topic: Jobrationing
Status: Old
Page776
45) Intheabovefigure,aminimumwagewillnotchangetheunemploymentrateifitissetat
A) $6.00.
B) $9.00.
C) $12.00.
D) BothBandCarecorrectbecauseanywageratethatexceeds$9perhourhasnoeffecton
theunemploymentrate.
E) Noneoftheabovebecausetheminimumwagealwaysaffectstheunemploymentrate.
Answer: A
Topic: Minimumwage
Status: Old
46) Intheabovefigure,a(n)________wouldbeset________.
A) efficiencywage;above$9.00andwouldincreasethenaturalrateofunemployment
B) effectiveminimumwage;above$6.00.
C) unionwage;above$9.00butwouldnotaffectthenaturalrateofunemployment.
D) efficiencywage;above$6.00.
E) efficiencywage;below$9.00
Answer: A
Topic: Unemploymentrate
Status: Old
Page777
47) Itisestimatedthat,ontheaverageandwithouttakingaccountofskilldifferentials,union
wagesare
A) lessthannonunionwages.
B) equaltononunionwages.
C) 30percenthigherthannonunionwages.
D) 100percenthigherthannonunionwages.
E) 66percenthigherthannonunionwages.
Answer: C
Topic: Unionwage
Status: Revised
48) Itisestimatedthat,ontheaverageandtakingaccountofskilldifferentials,unionwagesare
A) lessthannonunionwages.
B) equaltononunionwages.
C) 10-25percenthigherthannonunionwages.
D) 100percenthigherthannonunionwages.
E) 66percenthigherthannonunionwages.
Answer: C
Topic: Unionwage
Status: New
49) Itisestimatedthat,ontheaverageand________,unionwagesare________because________.
A) withouttakingaccountofskilldifferentials;15-20percenthigherthannonunionwages;
employersarebiasedagainstnonunionworkers
B) takingaccountofskilldifferentials;30percenthigherthannonunionwages;insome
industriesunionworkersperformjobsthatrequiregreaterskillthannonunionworkers
andemployersshowbiasagainstnonunionworkers
C) withouttakingaccountofskilldifferentials;30percenthigherthannonunionwages;in
someindustriesunionworkersperformjobsthatrequiregreaterskillthannonunion
workers
D) takingaccountofskilldifferentials;30percenthigherthannonunionwages;union
workersarebetterqualifiedthannonunionworkers
E) withouttakingaccountofskilldifferentials;equaltononunionwages;differentiating
basedonunionmembershipisdiscriminationandillegal
Answer: C
Topic: Unionwage
Status: New
Page778
50) Thepresenceofunionwagesleadsto
A) afallintherealwagerateasfewerpeoplearehired.
B) afallintherealwagerateasmorepeoplearehired.
C) lessjobsearchasmoreworkersarehired.
D) jobrationingbecausetherealwageexceedstheequilibriumrealwage.
E) lowerunemploymentbecauseworkersdonotwanttolosethehighunionwagetheyare
beingpaid.
Answer: D
Topic: Unionwage
Status: Old
51) TheFairLaborStandardsActoriginally settheminimumwageat

A) $1.25in1983.
B) $1.25in1938.
C) $0.25in1938.
D) $0.25in1983.
E) $3.00in1960.
Answer: C
Topic: EyeontheU.S.economy,thefederalminimumwage
Status: Old
52) Therealminimumwagerate
A) hasgenerallyincreasedsince1967.
B) hasgenerallydecreasedduringthe1970sand1980sandhasfluctuatedarounda$6.50
perhouraveragesincethemid-1980s.
C) wasatitshighestlevelin1995.
D) fellafter1967untilitreachedaminimumaround1985andhasgenerallyrisensincethen.
E) hasstayedintherangebetween$6and$5(measuredin2009dollarsperhour)since
1967.
Answer: B
Topic: EyeontheU.S.economy,thefederalminimumwage
Status: Revised
Page779
53) Thetwofundamentalcausesofunemploymentatfullemploymentare
A) seasonaljobsandtechnologicalchange.
B) foreigncompetitionandfinancialbankruptcies.
C) jobsearchandjobrationing.
D) decreasesinlaborproductivityandmoregenerousretirementbenefits.
E) demographicchangeanddecreasesinthedemandforlabor.
Answer: C
Status: Old
54) IntheUnitedStatessince1960,theaverageunemploymentratewashighestduringthedecade
ofthe
A) 1960s.
B) 1970s.
C) 1980s.
D) 1990s.
E) 2000s.
Answer: C
Topic: Eyeonthepast,averageunemploymentrates
Status: Old
55) Jobsearchisdefinedas
A) theactivityoflookingforanacceptable,vacantjob.
B) sayingyouarelookingforajobwhenyouareactuallynotlooking.
C) attendingschooltoincreaseyouremployability.
D) equivalenttojobrationing.
E) beingpaidanefficiencywage.
Answer: A
Topic: Jobsearch
Status: Old
56) Themoregeneroustheamountofunemploymentbenefits,the
A) highertheopportunitycostofjobsearch.
B) lowertheopportunitycostofjobsearch.
C) shorterthetimespentsearchinguntilacceptingasuitablejob.
D) shorterthetimespentsearchingforasuitablejobandthehighertheopportunitycostof
beingunemployed.
E) lowerthenaturalunemploymentrate.
Answer: B
Status: Old
Page780
57) Theexistenceofunionwages,efficiencywages,andtheminimumwage
A) raisestherealwagerateabovetheequilibriumwagerateandcreatesashortageoflabor.
B) lowerstherealwageratebelowtheequilibriumwagerateandcreatesashortageof
labor.
C) raisestherealwagerateabovetheequilibriumwagerateandraisesthenatural
unemploymentrate.
D) doesnothaveanimpactontheequilibriumwagerateorontheamountof
unemployment.
E) raisestherealwagerateabovetheequilibriumwagerateandlowersthenatural
unemploymentrate.
Answer: C
Topic: Jobrationing
Status: Old
58) Jobrationingoccursif
A) theminimumwageissetbelowtheequilibriumwagerate.
B) anefficiencywageissetbelowtheequilibriumwagerate.
C) aunionwageissetbelowtheequilibriumwagerate.
D) therealwagerateispushedabovetheequilibriumwagerate.
E) theLucaswedgeispositive.
Answer: D
Topic: Jobrationing
Status: Old
59) Intelwantstoattractthemostproductiveandknowledgeableworkers.Toachievethisgoalit
couldpay________wage.
A) anefficiency
B) aminimum
C) anominal
D) anequilibrium
E) aLucaswedge
Answer: A
Status: Old
Page781
60) Collectivebargainingbyunionscanresultinaunionwageratethatis________the
equilibriumrealwagerateandcreatesa________oflabor.
A) above;surplus
B) above;shortage
C) below;surplus
D) below;shortage
E) equalto;surplus
Answer: A
Topic: Unionwage
Status: Old
Page782
8.3 ChapterFigures
1) ThefigureaboveshowstheU.S.productionfunction.Howwouldanincreaseincapitalbe
showninthefigure?
A) anupwardshiftorrotationoftheproductionfunction
B) adownwardshiftorrotationoftheproductionfunction
C) amovementfrompointA topointB
D) amovementfrompointC topointB
E) Noneoftheabovebecausetheeffectsofanincreaseincapitalcannotbeshowninthe
figure.
Answer: A
Status: Old
Page783
2) ThefigureaboveshowstheU.S.productionfunction.Howwouldanincreasein
unemploymentbenefitsbeshowninthefigure?
A) amovementfrompointC topointB
B) amovementfrompointA topointB
C) anupwardshiftorrotationoftheproductionfunction
D) adownwardshiftorrotationoftheproductionfunction
E) Noneoftheabovebecausetheeffectsofanincreaseinunemploymentbenefitscannotbe
showninthefigure.
Answer: A
Status: Old
3) ThefigureaboveshowstheU.S.productionfunction.Howwouldanincreaseinincometaxes
beshowninthefigure?
A) amovementfrompointC topointB
B) amovementfrompointA topointB
C) anupwardshiftorrotationoftheproductionfunction
D) adownwardshiftorrotationoftheproductionfunction
E) Noneoftheabovebecausetheeffectsofanincreaseintaxescannotbeshowninthe
figure.
Answer: A
Status: Old
Page784
4) ThefigureaboveshowstheU.S.demandforlaborcurve.Ifthereisasimultaneousincreasein
thenominalwagerateof10percentanda10percentincreaseinthepricelevel,therewillbea
A) rightwardshiftofthedemandforlaborcurve.
B) leftwardshiftofthedemandforlaborcurve.
C) movementdownwardalongthedemandforlaborcurvefromapointsuchas Atoa
pointsuchasB.
D) movementupwardalongthedemandforlaborcurvefromapointsuchas Ctoapoint
suchasB.
E) Noneoftheaboveanswersiscorrectbecausethereisnochangeinthedemandforlabor
curve.
Answer: E
Topic: Demandforlaborcurve
Status: Old
Page785
5) ThefigureaboveshowstheU.S.supplyoflaborcurve.Ifthereisasimultaneousincreasein
thenominalwagerateof10percentanda10percentincreaseinthepricelevel,therewillbea
A) rightwardshiftofthesupplyoflaborcurve.
B) leftwardshiftofthesupplyoflaborcurve.
C) movementdownwardalongthesupplyoflaborcurvefromapointsuchas Atoapoint
suchasB.
D) movementupwardalongthesupplyoflaborcurvefromapointsuchas Ctoapoint
suchasB.
E) Noneoftheaboveanswersiscorrectbecausethereisnochangeinthesupplyoflabor
curve.
Answer: E
Topic: Supplyoflaborcurve
Status: Old
Page786
6) ThefigureaboveshowstheU.S.supplyoflaborcurve.Anincreaseintheincometaxrate
leadstoa
A) rightwardshiftofthesupplyoflaborcurve.
B) movementupwardalongthesupplyoflaborcurvefromapointsuchas Ctoapoint
suchasB.
C) movementdownwardalongthesupplyoflaborcurvefromapointsuchas Atoapoint
suchasB.
D) leftwardshiftofthesupplyoflaborcurve.
E) Noneoftheaboveanswersiscorrectbecausethereisnochangeinthesupplyoflabor
curve.
Answer: D
Status: Old
7) ThefigureaboveshowstheU.S.supplyoflaborcurve.Whatwastheeffectofthedeclinein
birthratesduringthe1960sand1970sonthesupplyoflaborcurveinthe1980s?
A) arightwardshiftofthesupplyoflaborcurve
B) Thesupplyoflaborcurvebecamesteeper.
C) amovementdownwardalongthesupplyoflaborcurvefromapointsuchasAtoapoint
suchasB
D) aleftwardshiftofthesupplyoflaborcurve
E) Noneoftheaboveanswersiscorrectbecausetherewasnochangeinthesupplyoflabor
curve.
Answer: D
Status: Old
8.4 IntegrativeQuestions
1) Ifthegovernmentincreasesunemploymentbenefits,thenthelabor
A) demandcurveshiftsrightward.
B) demandcurveshiftsleftward.
C) supplycurveshiftsrightward.
D) supplycurveshiftsleftward.
E) BothanswersBandDarecorrect.
Answer: D
Topic: Integrative
Section: Integrative
Status: Old
Page787
2) Ifthegovernmentincreasesunemploymentbenefits,thentheequilibriumamountof
employment________andpotentialGDP________.
Answer: D
Topic: Integrative
Status: Old
3) Ifthegovernmentraisesincometaxes,thenthelabor
A) demandcurveshiftsrightward.
B) demandcurveshiftsleftward.
C) supplycurveshiftsrightward.
D) supplycurveshiftsleftward.
E) BothanswersBandDarecorrect.
Answer: D
Topic: Integrative
Status: Old
4) Ifthegovernmentraisesincometaxes,thentheequilibriumamountofemployment________
andpotentialGDP________.
Answer: D
Topic: Integrative
Status: Old
Page788
5) Anincreaseinthetimespentonjobsearch
A) decreasespotentialGDP.
B) decreasestheunemploymentrate.
C) decreasesthelaborforceparticipationrate.
D) decreasesthedemandforlabor.
E) decreasestherealwagerate.
Answer: A
Topic: Integrative
Status: Old
6) Thesmallertheextentofjobrationing,the
A) lowerpotentialGDP.
B) lowertheunemploymentrate.
C) lowerthelaborforceparticipationrate.
D) higherthelaborsupply.
E) highertherealwagerate.
Answer: B
Topic: Integrative
Status: Old
8.5 Essay:PotentialGDP
1) DefinepotentialGDP.UnderwhatcircumstancesdoesactualrealGDPfallshortofpotential
GDP,equalpotentialGDP,andexceedpotentialGDP?
Answer: PotentialGDPisthelevelofrealGDPthattheeconomyproduceswhenitisatfull
employment.PotentialGDPcanbecontrastedwithactualrealGDP,theamountofreal
GDPthecountryactuallyproduces.ActualrealGDPcanbelessthanpotentialGDP
whentheeconomyisproducingatlessthanfullemployment,thatis,whenthereisless
thanfullemploymentinthelabormarket.ActualrealGDPequalspotentialGDPwhen
theeconomyisproducingatfullemployment.ActualrealGDPcanexceedpotential
GDPtemporarilyastheeconomyapproachesandthenrecedesfromabusinesscycle
peak.
Topic: PotentialGDP
Status: Old
Page789
2) BrieflydefinerealandpotentialGDP,andexplaintherelationshipbetweenrealGDPand
potentialGDP.HowcanwemeasurepotentialGDP?
Answer: RealGDPistheactuallevelofGDP,adjustedforinflation.PotentialGDPiswhatthe
GDPwouldbeiftheeconomywasfullyemployed.Becauseofthebusinesscycle,real
GDPfluctuatesaroundpotentialGDP.ThusrealGDPissometimesgreaterthan
potentialGDP,sometimessmallerthanpotentialGDP,andsometimesequalto
potentialGDP.Overtime,thelarger-than-normalandsmaller-than-normalvalues
canceloutandwecanestimatepotentialGDPbyusingtheaverageofrealGDP.
Topic: PotentialGDP
Status: Old
3) Discusstheproductionfunction.Howdoestheproductionfunctionrelatetothelabormarket
andpotentialGDP?
Answer: TheproductionfunctionshowsthemaximumamountsofrealGDPthatcanbe
producedasthequantityoflaborchanges,holdingconstantallotherinfluenceson
production.Asthequantityoflaborincreases,realGDPincreasesbutatadecreasing
rate,thatis,theproductionfunctionshowsdiminishingreturns.Theproduction
functionstandsbetweenthelabormarketandpotentialGDP.Inparticular,the
quantityofemploymentisdeterminedinthelabormarket.Theproductionfunction
thenshowstheamountofrealGDPthatisproducedbythisquantityofemployment.
Whenthequantityofemploymentdeterminedinthelabormarketistheequilibrium
quantity,thentheamountofrealGDPproducedispotentialGDP.
Status: Old
4) Definetheproductionfunction.Discusswhytheproductionfunctionexhibitsdiminishing
returns.
Answer: Theproductionfunctionistherelationshipthatshowsthemaximumquantityofreal
GDPthatcanbeproducedasthequantityoflaboremployedchangesandallother
influencesonproductionremainthesame.Theproductionfunctionexhibits
diminishingreturnsbecausethequantityofcapital(andotherresources)isfixed.As
morelaborishired,theextraoutputproduceddecreasesbecausetheextraworkers
havelesscapitalwithwhichtowork.Asaresult,theadditionalworkerscannot
produceasmuchadditionaloutputasdidthepreviouslyhiredworkers.
Status: Old
Page790
5) Explainhowtherealwageandtheextraoutputproducedbyeachworkerdeterminethe
quantityoflabordemandedbyafirm.
Answer: Thefirmcomparesthecostofhiringanextraworker(therealwage)tothebenefit(the
extraoutputproducedbyanextraworker).Becausethefirmwantstomakeaprofit,it
hirestheworkeraslongastheextraoutputisgreaterthantherealwage.Thusthefirm
willdemand(hire)thequantityofworkerssuchthattheextraoutputproducedbythe
workerisgreaterthanorequaltotherealwagerate.Becauselaborhasdiminishing
returns,thereissomepointatwhichthelastworkerhiredproducesjustenoughoutput
tojustifythewagerateandsoadditionalworkerswillnotbehired.
Status: Old
6) ExplainhowthelabormarketandtheproductionfunctiondeterminepotentialGDP.
Answer: Thelabormarketdeterminestheequilibriumquantityoflabor.Inotherwords,the
amountofemploymentisdeterminedbysupplyanddemandinthelabormarket.The
productionfunctionshowstheamountofoutput,realGDP,thatisproducedforall
differentamountsofemployment.Inotherwords,theproductionfunctionconverts
theamountofemploymentfromthelabormarketintorealGDP.Ifthelabormarketis
inequilibrium,sothatthelevelofemploymentisequaltofullemployment,thenthe
amountofrealGDPproduced,determinedfromtheproductionfunctionispotential
GDP.
Status: Old
Page791
Employment
RealGDP
Labordemand
Laborsupply
(billionsof (billionsof2005
(billionsof Realwagerate
(billionsof
hoursperyear)
dollars)
hoursperyear) (2009dollars) hoursperyear)
6
95
0
30
6
5
90
1
25
5
4
80
2
20
4
3
60
3
15
3
2
30
4
10
2
7) Thefirsttableabovegivesthelabordemandandlaborsupplyschedulesforanation.The
secondtablegivesitsproductionfunction.
a. Whataretheequilibriumrealwagerateandthelevelofemployment?
b. WhatispotentialGDP?
Answer: a. Theequilibriumrealwagerateis$15anhourbecausethisistherealwageratefor
whichthequantityoflabordemandedequalsthequantitysupplied.Theequilibrium
levelofemploymentis3billionhoursayear.
b. Withemploymentequalto3billionhoursperyear,potentialGDPisequalto$60
billion.
Status: Old
Labordemand
Laborsupply
Employment
RealGDP
Realwagerate
(billionsof
(billionsof
(billionsof (trillionsof2009
(2009dollars) hoursperyear) hoursperyear)
hoursperyear)
dollars)
30
100
700
200
3.0
25
200
600
300
4.0
20
300
500
400
4.8
15
400
400
500
5.4
10
500
300
600
5.8
b. WhatispotentialGDP?
b. Withemploymentequalto400billionhoursperyear,potentialGDPisequalto$4.8
trillion.
Status: Old
Page792
Labordemand
Realwagerate
(billionsof
(2009dollars) hoursperyear)
5
360
10
325
15
300
20
280
Employment
RealGDP
Laborsupply
(billionsof (trillionsof2009
(billionsof
hoursperyear)
dollars)
hoursperyear)
100
2.0
260
200
3.0
275
300
3.8
300
400
4.4
330
b. WhatispotentialGDP?Ifyoucannotdetermineapreciseamount,givetherangeinwhich
potentialGDPmustlie.
b. Withemploymentequalto300billionhoursperyear,potentialGDPisequalto$3.8
trillion.
Status: Old
Page793
10) Overthelastdecade,acountryexperiencesasignificantincreaseinlaborproductivity.
a. Drawandlabelalabormarketsupplyanddemanddiagram.Showhowtheequilibrium
realwagerateandtheequilibriumquantityoflaborchangeasproductivityincreases.
b. Drawandlabelaproductionfunction.ShowhowpotentialGDPchangesaslabor
productivityincreases.
Answer:
a. Thefigureaboveshowstheeffectofanincreaseinproductivityinthelabormarket.
Theincreaseinproductivityshiftsthelabordemandcurverightwardand,as
illustrated,raisestherealwagerateandincreasesthequantityofemployment.
b. Theproductionfunctionshiftsupwardasshowninthefigure.PotentialGDP
increasesfortworeasons:thereisagreaterquantityoflabor,andthenewproduction
functionishigherthantheoldone.
Page794
Status: Old
8.6 Essay:TheNaturalUnemploymentRate
1) Lookingoverthelastsixdecadessince1950,howdidtheaverageU.S.unemploymentrate
duringthe2000scomparetotheotherfivedecades?
Answer: Theaverageunemploymentrateduringthe2000swasessentiallytiedforthesecond
highestdecade-averageunemploymentrateforthefivedecadessince1950.The
decade-averageunemploymentrateduringthe2000swashigherthantheaverage
unemploymentratesduringthe1950s,1960s,and1990s.Itwasbasicallytiedwiththe
decadeaverageunemploymentrateduringthe1970sandwaslowerthehighestdecade
averageunemploymentrateduringthe1980s.
Topic: Eyeonthepast,unemploymentrates
Status: Old
2) Whatistheeffectofanincreaseinunemploymentbenefitsontheunemploymentrate?
Answer: Anincreaseinunemploymentbenefitsdecreasestheoverallcostsofbeingunemployed.
Asaresultitincreasesthelengthoftimeunemployedworkerssearchforanewjoband
henceincreasestheunemploymentrate.
Status: Old
3) Formostyearssince1980,thenaturalunemploymentratewashigherinCanadathaninthe
UnitedStates.Whatpossibleexplanationforsomeofthisdifferencehasbeensuggested?
Answer: Quitelikelyunemploymentbenefitsareatleastpartofthereasonwhythenatural
unemploymentratehasbeenhigherinCanadathanintheUnitedStates.Canadahas
moregenerousandmorewidelyavailableunemploymentbenefitsthanthedoesthe
UnitedStates.ThisdifferencegivesworkersinCanadatheincentivetosearchlongerfor
jobs,whichraisesthenaturalunemploymentrateinCanada.
Topic: Eyeontheglobaleconomy,unemploymentbenefits
Status: Old
Page795
4) Whatisjobsearchandwhatistherelationshipbetweenjobsearchandunemployment?What
factorscanaffecttheamountofjobsearch?Brieflydiscusstheeffectofeachfactor.
Answer: Jobsearchistheactivityoflookingforasuitablejob.Unemployedworkersare
searchingforajob,andsothelongertheseworkerssearch,thegreatertheamountof
unemployment.Threemajorfactorsaffecttheamountofjobsearch:demographic
change,unemploymentbenefits,andstructuralchange.Demographicchangerefersto
thefactthatattimestherearemoreyoungpeoplelookingfortheirfirstjobsandat
othertimestherearefeweryoungpeoplesearchingforajob.Whenmoreyoungpeople
aresearching,theunemploymentraterisesandwhenfeweryoungpeopleare
searching,theunemploymentratefalls.Unemploymentbenefitsaffecttheamountof
jobsearch.Anincreaseinunemploymentbenefitslowersthecostofremaining
unemployedandsoworkerssearchforlongerperiodsoftime.Asaresult,the
unemploymentraterises.Finally,structuralchangeaffectstheamountofjobsearch.
Structuralchangeistheresultoftechnologicalchange.Attimes,thischangecreatesa
slumpduringwhichworkersfromfailingindustriesarenotgoodmatchesforthejobs
createdinboomingsectors.Inthiscase,theamountofjobsearchandunemployment
rises.Atothertimes,theworkersreleasedbytheslowingsectorshaveskillsthatare
goodmatchesfortheexpandingsectorsandsotheamountofjobsearchand
unemploymentfalls.
Topic: Jobsearch
Status: Old
5) Explainhowsomestructuralchangescanincreasethenaturalunemploymentratewhileother
structuralchangescandecreasethenaturalunemploymentrate.
Answer: Anystructuralchangecreatessomejobsanddestroysothers.Theeffectofstructural
changeonthenaturalunemploymentratedependsonhowwelltheskillsrequiredfor
thenewjobsalignwiththeskillspossessedbyworkerslookingforjobsandhowwell
thelocationsofthejobsalignwiththeworkerslookingforjobs.Iftheskillsand
locationsaresimilar,sothatthejobsaregoodmatchesforpeoplelookingforwork,then
thestructuralchangebringsastructuralboomandthenaturalunemploymentrate
decreases.However,iftheskillsandlocationsaredifferent,sothattheworkerslooking
forworkarenotgoodmatchesforthenewlycreatedjobs,structuralchangecreatesa
structuralslumpandthenaturalunemploymentraterises.
Topic: Structuralchange
Status: Old
Page796
6) Whatfactorscanleadtherealwageratetobeaboveitsfull-employmentequilibriumlevel?
Answer: Thereareatleastthreereasonswhytherealwageratemightbeaboveitsequilibrium
level.First,firmsmightpayanefficiencywage,whichisawageratesetabovethe
full-employmentequilibriumwagerateinordertoinducegreaterworkeffortfrom
workers.Second,aminimumwagelawmightsetaminimumwagethatisabovethe
full-employmentequilibriumwagerate.Finally,aunionmightnegotiateawagerate
thatisabovethefull-employmentequilibriumlevel.
Topic: Realwagerate
Status: Old
7) Jobrationingoccurswhenthequantityoflabordemandedexceedsthequantitysupplied.Is
thepreviousstatementtrueorfalse?Explainyouranswer.
Answer: Thestatementisfalse.Jobrationingoccurswhenthequantityoflaborsuppliedexceeds
thequantitydemanded.Inthiscircumstance,jobsmustbeapportioned rationed
amongthepeoplewillingtowork.
Topic: Jobrationing
Status: Old
8) Whatisjobrationingandhowdoesitrelatetounemployment?Whatfactorscanleadtojob
rationing?Brieflyexplainthesefactors.
Answer: Jobrationingoccurswhentherealwageisaboveitsequilibriumlevelandthereisa
surplusoflabor.Inthiscase,notalltheworkerswhoarelookingforworkcanfindjobs
andthereforethejobsmustsomehowbedividedrationedamongthem.Threefactors
canaccountforjobrationing:efficiencywage,theminimumwage,andunionwage.An
efficiencywageisawageratesetbyafirmabovetheequilibriumwagerate.An
efficiencywagemotivatesthefirmsworkerstoworkhardinordertokeeptheirjobs
becausetheworkersknowthatiftheyarefired,thewageratetheywillgetatanewjob
probablywillbelessthantheefficiencywage.Theminimumwageisagovernment
regulationthatsetsthelowestlegalwage.Iftheminimumwageissetabovethe
equilibriumwagerate,theequilibriumwageratebecomesillegaland,becausethe
minimumwageexceedstheequilibriumwage,asurplusoflaborresults.Finally,a
unionwageisawageratethatresultsfrombargainingbetweenafirmandalabor
union.Typicallythelaborunioncannegotiateawageratethatexceedstheequilibrium
levelinacompetitivemarketandso,onceagain,thereisasurplusoflabor.
Topic: Jobrationing
Status: Old
Page797
9) Whatfactorscanpushtherealwagerateaboveitsequilibriumlevel?Brieflyexplaineach
factor.
Answer: Thethreefactorsthatcanpushtherealwagerateabovetheequilibriumwagerateare
efficiencywages,theminimumwage,andunionwages.Anefficiencywageisawage
ratethatissetbyafirmabovetheequilibriumwagerate.Theideaisthatthefirms
workerswillworkhardinordertokeeptheirjobsbecausetheyknowthatiftheyare
firedthe(equilibrium)wagetheyarelikelytogetatanewjobwillbelessthanthe
efficiencywage.Theminimumwageisagovernmentregulationthatsetsthelowest
legalwage.Iftheminimumwageissetabovetheequilibriumwagerate,the
equilibriumwageratebecomesillegal.Finally,aunionwageisawageratethatresults
frombargainingbetweenafirmandalaborunion.Typicallythelaborunioncan
negotiateawageratethatexceedstheequilibriumlevelinacompetitivemarket.
Topic: Jobrationing
Status: Old
10) Whatisanefficiencywageandwhateffectdoesithaveinthelabormarket?
Answer: Anefficiencywagerateisawagethatissetbyafirmabovetheequilibriumwagerate
inordertomotivatethefirmsworkerstoworkhard.Theideaisthatworkerswillwork
hardinordertokeeptheirjobsbecausetheyknowthatiftheyarefiredthe
(equilibrium)wageratetheyarelikelytogetatanewjobwillbelessthantheefficiency
wage.Anefficiencywageisoneofthefactorsthatpushthewagerateaboveits
equilibriumandtherebycreateunemployment.
Status: Old
Page798
Chapter9 EconomicGrowth
9.1 TheBasicsofEconomicGrowth
1) Economicgrowthisdefinedas
A) adecreaseintherateofinflation.
B) anincreaseinemployment.
C) asustainedexpansionofproductionpossibilities.
D) anincreaseinthewagerate.
E) anincreaseinthenationspopulation.
Answer: C
Topic: Economicgrowth
Status: Old
2) Economicgrowthisasustainedexpansionofproductionpossibilities,asmeasuredbythe
increasein________overtime.
A) realGDP
B) population
C) inflation
D) thepricelevel
E) employment
Answer: A
Status: Old
3) Acountrywilllikelyexperienceanincreaseinpovertyif
A) itspopulationdecreasesovertime.
B) itsrealGDPgrowthratedecreasesorslowsovertime.
C) itsinflationratedecreasesorslowsovertime.
D) itsrealGDPperpersongrowthrateincreasesovertime.
E) itdoesnotreceiveforeignaid.
Answer: B
Status: Old
Page799
4) Economicgrowthisdefinedasequaltotheincreasein
A) employment.
B) population.
C) realGDP.
D) thepricelevel.
E) theinflationrate.
Answer: C
Status: Old
5) Whichofthefollowingvariablesisusedtodetermineacountryseconomicgrowth?
i. realGDP
ii. wages
iii. inflation
A) iandiionly
B) i,iiandiii
C) iiandiii
D) ionly
E) iandiii
Answer: D
Status: Old
6) ThegrowthrateofrealGDPequals
A) [(employmentinthecurrentyear- employmentinpreviousyear)/employmentin
previousyear]100.
B) [(realGDPincurrentyear- realGDPinpreviousyear) realGDPinpreviousyear]
100.
C) [(realGDPinpreviousyear- realGDPincurrentyear) realGDPinpreviousyear]
100.
D) [(realGDPincurrentyear- realGDPinpreviousyear) realGDPincurrentyear] 100.
E) (realGDPincurrentyear- realGDPinpreviousyear) 100.
Answer: B
Status: Old
Page800
7) IfrealGDPwas$13.1trillionin2013and$13.3in2014,whatisthegrowthrate?
A) 15.0percent
B) -1.5percent
C) 1.5percent
D) $0.2trillion
E) 2.1percent
Answer: C
Topic: Calculatinggrowthrates
Status: Old
8) SupposeFrancesrealGDPgrewfrom$750billionin2010to$821billionin2011.Whatwas
thegrowthrateofFrancesrealGDP?
A) 10percent
B) 9.5percent
C) 9.1percent
D) 8.6percent
E) $71billion
Answer: B
Topic: Growthrate
Status: Old
9) U.S.realGDPin2007was$13.25trillionandU.S.realGDPin2008was$13.31trillion.What
wastheeconomicgrowthrateoftheUnitedStatesduringthisperiod?
A) 18percent
B) -1.36percent
C) 0.45percent
D) 6.9percent
E) $1.8trillion
Answer: C
Status: Revised
Page801
10) IfrealGDPinyear1is$72millionandrealGDPinyear2is$87million,thenthegrowthrate
ofrealGDPis
A) 15percent.
B) $15million.
C) 20.8percent.
D) 17percent.
E) 83percent.
Answer: C
Status: Old
11) In2008,realGDPintheUnitedStateswas$13,312billion.In2009,realGDPintheUnited
Stateswas$13,112billion.WhatwastheU.S.economicgrowthratefrom2008to2009?
A) -1.5percent
B) 1.5percent
C) 0.98percent
D) 0.12percent
E) $200million
Answer: A
Topic: Growthrate
Status: Old
RealGDP
Year (trillionsof2009dollars)
2009
7.00
2010
7.50
2011
8.25
Population
(millionsofpeople)
100.0
105.0
110.0
12) Usingthedatainthetableabove,thegrowthrateofrealGDPfor2010isequalto
A) 9.09percent.
B) 7.00percent.
C) 5.00percent.
D) 4.76percent.
E) 10.0percent.
Answer: B
Status: Old
Page802
13) Usingthedatainthetableabove,realGDPperpersonin2009is
A) $70,000.
B) $71,429.
C) $75,000.
D) $70trillion.
E) 7percent.
Answer: A
Status: Old
14) Usingthedatainthetableabove,thegrowthrateofrealGDPhas
A) increasedfromyeartoyear.
B) increasedmorerapidlyfromyeartoyear.
C) remainedconstantfromyeartoyear.
D) slowedfromyeartoyear.
E) probablychanged,butmoreinformationisneededaboutthepriceleveltodetermineby
howmuchithaschanged.
Answer: A
Status: Old
15) SupposeIndiawantstomeasurehowmuchthestandardoflivinghaschangedoverthelast
decade.WhichpieceofdatashouldIndiause?
A) population
B) realGDPperperson
C) realGDP
D) wages
E) inflation
Answer: B
Topic: Standardofliving
Status: Old
Page803
16) Tomeasurethechangeinthestandardofliving,itisbesttousethegrowthrate
A) fromtheRuleof70.
B) ofrealGDP.
C) ofthepopulation.
D) ofrealGDPperperson.
E) ofthepricelevel.
Answer: D
Status: Old
17) Ingrowththeory,thechangeinacountrysstandardoflivingismeasuredbythechangein
A) realGDPperperson.
B) realGDP.
C) thenationscapitalstock.
D) wagesperperson.
E) employment.
Answer: A
Status: Old
18) Ameasureofgrowthinthestandardoflivingisthegrowthin
A) realGDP.
B) population.
C) realGDPminusthegrowthinpopulation.
D) populationminusthegrowthinrealGDP.
E) employment.
Answer: C
Status: Old
19) Growthinthestandardoflivingismeasuredbytheincreasein
A) realGDP.
B) theRuleof70.
C) employment.
D) realGDPperperson.
E) consumption.
Answer: D
Status: Old
Page804
20) ThegrowthrateofrealGDPperpersonequalsthe
A) populationgrowthrateplusthegrowthrateofrealGDP.
B) changeintheeconomicgrowthratedividedbythechangeinthepopulationgrowthrate.
C) theeconomicgrowthrateperpersondividedbythechangeinthepopulationgrowth
rate.
D) growthrateofrealGDPminusthegrowthrateofthepopulation.
E) populationgrowthrateplusthegrowthrateofrealGDPthendividedbytheinitiallevel
ofrealGDP.
Answer: D
Topic: Growthrate,realGDPperperson
Status: Old
21) IfrealGDPgrowsatafasterratethandoespopulation,thenthestandardofliving,as
measuredbyrealGDPperperson,
A) improves.
B) worsens.
C) remainsthesame.
D) cannotbemeasured.
E) eitherimproves,worsens,orstaysthesame,dependingonthesizeofthepopulationand
theactuallevelofrealGDP.
Answer: A
Status: Old
22) Thepopulationinthecurrentyearis31.5millionandtherealGDPis$814million.The
previousyearsstatisticswereapopulationof31millionandarealGDPof$800million.The
changeinthestandardofliving,measuredbygrowthinrealGDPperperson,is
A) 1.6percent.
B) 7.75percent.
C) 0.13percent.
D) 6percent.
E) 0percent.
Answer: C
Status: Old
Page805
23) Assumethepopulationgrowthrateis2percentandtherealGDPgrowthrateis5percent.The
changeinstandardofliving,asmeasuredbythegrowthrateinrealGDPperperson,is
A) 7percent.
B) 2.5percent.
C) 5percent.
D) 3percent.
E) -3percent.
Answer: D
Status: Old
24) RealGDPinthecountryofOzisgrowingat5percentanditspopulationisgrowingat2
percent.InthecountryofLilliput,realGDPisgrowingat4percentanditspopulationis
growingat0.5percent.Thus,
A) realGDPperpersoninOzisgrowingatafasterratethaninLilliput.
B) realGDPperpersoninLilliputisgrowingatafasterratethaninOz.
C) realGDPperpersoninLilliputisgrowingatthesamerateasinOz.
D) realGDPperpersoninLilliputisgrowingataratethatisnotcomparabletothatinOz.
E) WeneedmoreinformationtodetermineifrealGDPperpersoninLilliputisgrowing
fasterorslowerthanrealGDPperpersoninOz.
Answer: B
Status: Old
25) IftheU.S.populationgrewata0.9percentandrealGDPgrewata4.4percentduringthe
sameperiod,whatwasthegrowthrateofrealGDPperperson?
A) 3.5percent
B) 5.3percent
C) 4.0percent
D) -3.5percent
E) 4.4percent
Answer: A
Status: Old
Page806
26) IfrealGDPgrowsatarateof6percentandpopulationgrowsatarateof2percent,thenreal
GDPperpersongrowsatarateof
A) 4percent.
B) 2percent.
C) 0.5percent.
D) -3percent.
E) 8percent.
Answer: A
Status: Old
27) IcelandsrealGDPgrowsatarateof2.6percentandpopulationgrowsatarateof0.8percent.
IcelandsrealGDPperpersongrowsatarateof
A) 1.8percent.
B) 2.6percent.
C) 3.4percent.
D) 3.0percent.
E) 3.2percent.
Answer: A
Status: Old
28) IfaneconomysgrowthrateofrealGDPis3percentperyearandthegrowthrateofthe
populationis2.5percentperyear,thegrowthrateofrealGDPperpersonis
A) 3+2.5=5.5percentperyear.
B) [(3-2.5)2.5]100=20percentperyear.
C) [(2.5-3)3]100=16.6percentperyear.
D) 3-2.5=0.5percentperyear.
E) 2.5-3=-0.5percentperyear.
Answer: D
Status: Old
Page807
29) In2009,U.S.realGDPdecreasedby3percentandthepopulationgrewby1percent.Thus,real
GDPperperson
A) increased2percent.
B) decreased2percent.
C) increased4percent.
D) decreased4percent.
E) decreased3percent.
Answer: D
Status: Old
30) IfacountryexperiencesarealGDPgrowthrateof1percentandpopulationgrowthof2
percent,thenthegrowthrateofrealGDPperpersonis
A) 3percent.
B) 2percent.
C) 1percent.
D) -1percent.
E) 0percent.
Answer: D
Status: Old
31) During2008,SwazilandhadarealGDPgrowthrateof1.8percentandarealGDPgrowthrate
perpersonof-1.3percent.TheseratesindicatethatinSwaziland
A) therewasanerrorwhencalculatingthegrowthratesbecausethegrowthrateofreal
GDPperpersoncannotbenegative.
B) thepopulationgrowthratewasnegative.
C) thepopulationgrewatafasterratethanrealGDP.
D) povertylevelsaredeclining.
E) realGDPgrewmorerapidlythandidthepopulation.
Answer: C
Skill: Level5:Criticalthinking
Status: Old
Page808
32) InIndialastyear,thegrowthrateofrealGDPwas3.5percentandthepopulationgrewfrom
1,000millionpeopleto1,100million.RealGDPperperson
A) increasedby13.5percent.
B) decreasedby6.5percent.
C) increasedby6.5percent.
D) decreasedby13.5percent.
E) increasedby3.5percent.
Answer: B
Status: Old
33) BelgiumsrealGDPperpersonis$33,000andAustriasis$34,700.Thepopulationgrowthrate
inBelgiumis0.13percentandthegrowthrateofrealGDPis3.0percent.Thepopulation
growthrateinAustriais0.08percentandthegrowthrateofrealGDPis3.3percent.Ifthese
growthratescontinue,howmanyyearswillittakeforBelgiumsrealGDPperpersontoequal
AustriasrealGDPperperson?
A) BelgiumsstandardoflivingwillneverequalAustrias.
B) justover23years
C) justover24years
D) justover21years
E) over230years
Answer: A
Status: Old
34) IfCountryAsrealGDPisgrowingat6percentperyearandCountryBsrealGDPisgrowing
at6percentperyear,thenthestandardoflivingis
A) growingmorerapidlyinCountryA.
B) higherinCountryB.
C) changingatthesamerateinCountryAandCountryB.
D) growingmoreslowlyinCountryA.
E) changingatthesamerateinCountryAandCountryBonlyiftherateofpopulation
growthisthesameinbothcountries.
Answer: E
Status: Old
Page809
35) IfCountryAsrealGDPperpersonisgrowingat6percentandCountryBsrealGDPper
personisgrowingat3percent,then
A) thestandardoflivingishigherinCountryA.
B) thestandardoflivingishigherinCountryB.
C) thestandardoflivingisgrowingmorerapidlyinCountryA.
D) Wecannotsaywhosestandardoflivingisgrowingmorerapidlywithoutknowingthe
populationgrowthrate.
E) Wecannotsaywhosestandardoflivingisgrowingmorerapidlywithoutknowingthe
growthrateofrealGDP.
Answer: C
Status: Old
Year
Year1
Year2
RealGDP
Population
(millionsof2009dollars) (millionsofpeople)
500
10
550
11
36) Accordingtothedatainthetableabove,
A) thestandardoflivingimprovedbetweenyear1andyear2.
B) thestandardoflivingworsenedbetweenyear1andyear2.
C) asmeasuredbyrealGDPperperson,thestandardoflivingremainedthesamebetween
year1andyear2.
D) realGDPgrewmorerapidlythanpopulationbetweenyear1andyear2.
E) realGDPgrewmoreslowlythanpopulationbetweenyear1andyear2.
Answer: C
Status: Old
37) Accordingtothedatainthetableabove,realGDPgrewatarateof________betweenyear1
andyear2.
A) 10percent
B) 1percent
C) 50percent
D) 5percent
E) 55percent
Answer: A
Status: Old
Page810
38) Accordingtothedatainthetableabove,realGDPperpersongrewatarateof________
betweenyear1andyear2.
A) 10percent
B) 0percent
C) 1percent
D) 5percent
E) 50percent
Answer: B
Status: Old
39) TheRuleof________canbeusedtocalculatethenumberofyearsthatittakesforthelevelofa
variableto________.
A) 20;double
B) 70;triple
C) 70;double
D) 20;triple
E) thumb;double
Answer: C
Topic: Ruleof70
Status: Old
40) TheRuleof70statesthatthelevelofavariablewilldoublein
A) 70years.
B) thenumberofyearsequaltothevariablesannualrateofgrowthdividedby70.
C) thenumberofyearsequalto70dividedbythevariablesannualgrowthrate.
D) thenumberofyearsequaltothevariablesannualgrowthrateminus70.
E) thenumberofyearsequalto70multipliedbythevariablesannualgrowthrate
expressedasadecimal.
Answer: C
Topic: Ruleof70
Status: Old
Page811
41) TheRuleof70,asappliedtorealGDPgrowth,canbeusedtofindthe
A) realGDPgrowthratenecessarytodoublegrowth.
B) numberofyearsittakesforthelevelofrealGDPtodouble.
C) growthrateofrealGDP.
D) numberofyearsittakesforthegrowthrateofrealGDPtodouble.
E) populationgrowthratenecessarytodoubletheGDPgrowthrate.
Answer: B
Topic: Ruleof70
Status: Old
42) TheRuleof70canbeusedtocalculatethe
A) economicgrowthratepermonth.
B) populationgrowthrateperyear.
C) numberofyearsitwouldtakeforthelevelofanyvariabletodouble.
D) 70percentleveloftheeconomicgrowthrate.
E) economicgrowthrateperyear.
Answer: C
Topic: Ruleof70
Status: Old
43) ApproximatelyhowlongwillittakeEthiopiatodoubleitsrealGDPperpersonof$100ifits
growthrateofrealGDPperpersonis0.9percent?
A) 63years
B) 77.7years
C) 70years
D) 109years
E) 100years
Answer: B
Topic: Ruleof70
Status: Old
44) IfCountryAsrealGDPgrowsatarateof14percentperyear,abouthowmanyyearswillit
takeforCountryAsrealGDPtodouble?
A) 10
B) 7
C) 5
D) 30
E) 14
Answer: C
Topic: Ruleof70
Status: Old
Page812
45) AccordingtotheRuleof70,ifacountrygrowsat2.0percentperyearinsteadof1.5percent
peryear,howmanyfeweryearswillittaketodoubleitslevelofrealGDP?
A) Itwilltake11.6yearsfewer.
B) Itwilltake35yearsfewer.
C) Itwilltake58.3yearsfewer.
D) Itwilltake20yearsfewer.
E) Itwilltake17.9yearsfewer.
Answer: A
Topic: Ruleof70
Status: Old
46) Theannualgrowthrateofaneconomyis10percent.TheeconomysGDPwilldoubleinabout
________years.
A) 7
B) 10
C) 12
D) 14
E) 20
Answer: A
Topic: Ruleof70
Status: Old
47) Usingtheruleof70,asustained3percentperyearrealGDPgrowthratewill
A) lastfor70years.
B) doublethecurrentlevelofrealGDPinabout23years.
C) doublethecurrentlevelofrealGDPinabout210years.
D) doublethecurrentlevelofrealGDPinabout70years.
E) doublethecurrentlevelofrealGDPinabout40years.
Answer: B
Topic: Ruleof70
Status: Old
48) AnationsannualgrowthrateofrealGDPperpersonis2percent.Itsstandardoflivingwill
A) doublein35years.
B) notchangebecauseitspopulationisgrowing.
C) fallbecauseofitspopulationgrowth.
D) doublein10years.
E) doublein50years.
Answer: A
Topic: Ruleof70
Status: Old
Page813
49) IfacountryexperiencesarealGDPgrowthrateof6percent,realGDPwilldoublein
A) 10years.
B) 11.67years.
C) 14years.
D) 17.5years.
E) 16.67years.
Answer: B
Topic: Ruleof70
Status: Old
50) Thisyear,realGDPperpersoninCountryAiseighttimesrealGDPperpersoninCountryB.
IfCountryBsrealGDPperpersongrowsatarateof5percent,abouthowmanyyearswillit
takeforCountryBtoreachthelevelofrealGDPperpersoninCountryAinthisyear?
A) 14years
B) 28years
C) 56years
D) 42years
E) ItwillneverreachCountryAslevelofGDPperperson.
Answer: D
Topic: Ruleof70
Status: Old
51) ThisyearIcelandhasarealGDPperpersonthatisapproximately8timesgreaterthanthatof
CapeVerde.CapeVerdesgrowthrateofrealGDPperpersonwas5.2percent.IfCapeVerde
maintainsthiscurrentgrowthrate,approximatelyhowmanyyearswillittakeforCape
VerdesrealGDPperpersontoreachthesamelevelthatIcelandhasthisyear?
A) 13.5years
B) 20years
C) 27years
D) 40years
E) 54years
Answer: D
Topic: Ruleof70
Status: Old
Page814
52) Ifittook20yearsforrealGDPtodouble,whatwasthegrowthrateofrealGDP?
A) 4.5percent
B) 3.0percent
C) 3.5percent
D) 4percent
E) 5percent
Answer: C
Topic: Ruleof70
Status: Old
53) Inthisyear,CountryAhasarealGDPperpersonthatis4timesgreaterthanthatofCountry
B.CountryBsgrowthrateofrealGDPperpersonis3.5percentperyear.Howmanyyears
willittakeforCountryBsrealGDPperpersontoreachthesamelevelthatCountryAhadin
thisyear?
A) 10years
B) 20years
C) 40years
D) 60years
E) 56years
Answer: C
Topic: Ruleof70
Status: Old
54) SupposeMexicosrealGDPperpersonin2008is$6,000andtheU.S.realGDPperpersonis
$24,000.MexicohasannualgrowthinrealGDPperpersonof5percent.Approximatelyhow
manyyearswillittakeMexicotoequal$24,000ofrealGDPperperson?
E) 40years
A) 14years
B) 18years
C) 28years
D) 36years
Answer: C
Topic: Ruleof70
Status: Old
55) Overthepast110years,realGDPperpersonintheUnitedStateshasgrownatanaveragerate
ofabout________peryear.
A) 1percent
B) 2percent
C) 5percent
D) 10percent
E) 7.5percent
Answer: B
Topic: Eyeonthepast,howfasthasrealGDPperpersongrown?
Status: Revised
Page815
56) Fortheworld,whatperiodoftimeexperiencedthefastestgrowthrateofrealGDPperperson?
A) around500B.C.
B) around400A.D.
C) between1000A.D.and1500A.D.
D) afterabout1850A.D.
E) between1500A.D.and1850A.D.
Answer: D
Status: Old
57) RealGDPperpersonaveraged$150ayear(in2009dollars)from1,000,000BCuntil1620.
Duringthistimetherewasaperiodwhenitroseto________around________because
________.
A) $210;1620;thePilgrimFathersbegantoarriveintheAmericas
B) $210;1492;ColumbussailedtotheAmericas
C) $140;400BC;theRomanEmpirecollapsed
D) $190;500BC;ofthegainsfromhumancapitalwhileAristotleandPlatowereteachingin
Athens
E) a1-millionyearhigh;the1340s;theBlackDeathgrippedEurope
Answer: D
Status: New
58) RealGDPperpersonaveraged$150ayear(in2009dollars)from1,000,000BCuntil1620.Then
in________realGDPbegantoincreasewithoutlimitandby1850hadrisentotwiceits1650
levelbecause________.
A) 1650;thePilgrimsarrivedintheAmericas
B) 1750;ColumbusarrivedintheAmericas
C) 1650;oftheIndustrialRevolution
D) 1750;oftheIndustrialRevolution
E) 1776;UnitedStateswasfounded
Answer: D
Status: New
Page816
59) Sincethebeginningofthe20thcenturythedecadewiththeslowestrealGDPperperson
growthrateotherthanthe1930sis________becauseofthe________.
A) 2000-2010;thewaronterror
B) 1990-2000;fearofY2K
C) 1930-1940;GreatDepression
D) 2000-2010;2008/2009deeprecession
E) 2010-2020;Keynesianeconomicpoliciesbeingusedmorefrequentlythaninthe1930s
Answer: D
Status: New
60) Theeconomicgrowthrateismeasuredasthe
A) annualpercentagechangeofrealGDP.
B) annualpercentagechangeofemployment.
C) amountofrealGDP.
D) annualpercentagechangeofthepopulation.
E) amountofpopulation.
Answer: A
Status: Old
61) Economicgrowthisasustainedexpansionofproductionpossibilitiesmeasuredastheincrease
in________overagivenperiod.
A) realGDP
B) realGDPperperson
C) thestandardofliving
D) capitalperperson
E) population
Answer: A
Status: Old
Page817
62) Theeconomicgrowthrateisexpressedasthe
A) annualpercentagechangeofrealGDPperperson.
B) growthrateofrealGDPminusthegrowthrateofpopulation.
C) standardofliving.
D) annualpercentagechangeofrealGDP.
E) growthrateofthepopulation.
Answer: D
Status: Old
63) RealGDPis$9trillioninthecurrentyearand$8.6trillioninthepreviousyear.Theeconomic
growthratebetweentheseyearshasbeen
A) 10.31percent.
B) 4.65percent.
C) 5.67percent.
D) 7.67percent.
E) $0.4trillion.
Answer: B
Status: Old
RealGDP
Year (trillionsof2009yen)
1997
484
1996
480
64) ThetablegivesinformationabouttheeconomyofJapan.Theeconomicgrowthratein1997is
________percent.
A) 8.0
B) 0.8
C) 0.08
D) 0.008
E) 4
Answer: B
Status: Old
Page818
65) Thestandardoflivingismeasuredby
A) realGDP.
B) employment.
C) employmentperperson.
D) realGDPperperson.
E) thepopulation.
Answer: D
Status: Old
66) IfthegrowthrateofpopulationisgreaterthananationsgrowthrateofrealGDP,thenitsreal
GDPperperson
A) falls.
B) rises.
C) doesnotchange.
D) mightrise,fall,ornotchange.
E) cannotbemeasured.
Answer: A
Status: Old
Employment
RealGDP
Year (millionsofpeople) (billionsof2009francs)
1998
58.85
8,243.9
1997
58.61
7,992.2
67) ThetableabovegivesinformationabouttheeconomyofFrance.ThegrowthrateofrealGDP
perpersonin1998is________percent.
A) 3.1
B) 0.4
C) 3.6
D) 4.0
E) 1.9
Answer: C
Status: Revised
68) IfrealGDPincreasesby6percentandatthesametimethepopulationincreasesby2percent,
thenrealGDPperpersongrowsby
A) 6percent.
B) 4percent.
C) 2percent.
D) 8percent.
E) 3percent.
Answer: B
Status: Old
Page819
69) IfrealGDPgrew5percentlastyearandthepopulationgrew2percent,thenrealGDPper
persongrewby________percent.
A) 10
B) 5
C) 3
D) 2
E) 7
Answer: C
Status: Old
70) IfacountryexperiencesarealGDPgrowthrateof4percent,realGDPwilldoublein
A) 14years.
B) 17.5years.
C) 23.3years.
D) 35years.
E) 25years.
Answer: B
Topic: Ruleof70
Status: Old
71) Supposethatinthefuture,realGDPperpersongrows2percentayearintheUnitedStates
and4percentayearinChina.ItwilltakerealGDPperpersonapproximately________years
todoubleintheUnitedStatesandapproximately________yearstodoubleinChina.
D) 50;25
E) 20;10
A) 70;35
B) 35;17.5
C) 35;8.75
Answer: B
Topic: Ruleof70
Status: Old
RealGDP
Year (billionsof2009pesetas)
1998
45,901
1997
44,224
72) ThetableabovegivesinformationabouttheeconomyofSpain.Ifthegrowthratein1998is
maintained,realGDPwilldoublein________years.
A) 4
B) 19
C) 10
D) 18
E) 25
Answer: D
Topic: Ruleof70
Status: Old
Page820
9.2 LaborProductivityGrowth
1) Laborproductivityisdefinedas
A) totalrealGDP.
B) realGDPperperson.
C) totaloutputmultipliedbytotalhoursoflabor.
D) realGDPperhouroflabor.
E) hoursofworkperperson.
Answer: D
Topic: Sourcesofgrowth,laborproductivity
Status: Old
2) Laborproductivityequals
A) realGDP.
B) realGDPperhouroflabor.
C) thetotalproductionoflabor.
D) thequantityoflaborhoursdividedbyrealGDP.
E) realGDPdividedbytheamountofhumancapital.
Answer: B
Topic: Laborproductivity
Status: Old
3) Laborproductivityisequaltothequantityof
A) realGDPproducedbyonehouroflabor.
B) workersemployedduringonehour.
C) realGDPconsumedbythetotalpopulationinonehour.
D) realGDP.
E) workerswhoaregainfullyemployed.
Answer: A
Status: Old
Page821
4) ThequantityofrealGDPproducedbyonehouroflaborisdefinedas
A) realGDPperperson.
B) theadvanceintechnology.
C) thegrowthrateoftechnology.
D) laborproductivity.
E) economicgrowth.
Answer: D
Status: Old
5) Laborproductivityiscalculatedas
A) (realGDPaggregatehours).
B) (realGDPaggregatehours numberofworkers).
C) (realGDPnumberofworkersratioofcapitalperworker).
D) (realGDPtechnologylevel).
E) (realGDPaggregatehours numberofworkers)100.
Answer: A
Status: Old
6) Sustainedincreasesinthestandardoflivingdependon
A) increasesinthequantityoflabor.
B) increasesinthepopulation.
C) increasesinaggregatehours.
D) increasesinlaborproductivity.
E) decreasesinlaborproductivity.
Answer: D
Topic: Sourcesofgrowth,laborproductivity
Status: Old
Page822
7) Anincreaseinlaborproductivity
A) increasesthestandardofliving.
B) decreasesthestandardofliving.
C) mightbetheresultofanincreaseinthequantityoflabor.
D) generallyoccurswhenphysicalcapitaldecreasesbecausefirmsmustthenhiremore
workers.
E) cannotoccurwithoutacorrespondingincreaseinemployment.
Answer: A
Status: Old
8) Lastyear,inanationfartotheSouth,realGDPwas$90millionand900,000workerswere
employed.ThisyearrealGDPis$100million,950,000workersareemployed,andthenumber
ofhourseachworkerworksperyeardidnotchange.Hence,laborproductivity
A) hasincreased.
B) hasdecreased.
C) hasremainedconstant.
D) cannotbecomparedbetweenthetwoyearsbecauseboth realGDPandthenumberof
workersincreased.
E) mighthavechanged,butmoreinformationisneededtodetermineifitchanged.
Answer: A
Status: Old
9) IfrealGDPis$6,460billion,thepopulationis184.6millionpeople,andaggregatehoursis170
billionhours,laborproductivityis
A) $2.63anhour.
B) $2.86anhour.
C) $35,000.
D) $38.00anhour.
E) 920hours.
Answer: D
Status: Old
Page823
10) RealGDPis$700billion,averagehoursworkedperweekis42andaggregatehoursis150
billionhours.Whatistheeconomyslaborproductivity?
A) $1.80perhour
B) $3.75perhour
C) $16.67perhour
D) $4.67perhour
E) $4.50perhour
Answer: D
Status: Revised
11) Laborproductivitygrowthdependson
i. savingandinvestment.
ii. increasesinhumancapital.
iii. technologicalgrowth.
A) ionly
B) iionly
C) iiionly
D) Bothiiandiii
E) i,ii,andiii
Answer: E
Topic: Increaseinlaborproductivity
Status: Old
12) Laborforceproductivityhasincreasedfrom$30perhourto$32perhouroverthepastyear.
Thiscouldresultfrom
A) onlyanincreaseinrealGDP.
B) anincreaseinrealGDPwithnochangeintheaggregatehoursoradecreaseinaggregate
hourswithnochangeinrealGDP.
C) onlyadecreaseinaggregatehours.
D) anincreaseinthelaborforceparticipationrate.
E) anincreaseinpopulation.
Answer: B
Status: Old
Page824
13) Inrecentyears,Taiwanhasexperiencedincreasesinsavingsandinvestment.Asaresultofthe
higherinvestmentandsaving,weexpect
i. increasesinphysicalcapital.
ii. increasesintheinflationrate.
iii. advancesintechnology.
A) iandiii
B) iandii
C) iionly
D) iiandiii
E) i,iiandiii
Answer: A
Topic: Increaseinlaborproductivity,physicalcapital
Status: Old
14) Ifthestockofphysicalcapital(thatismachinery,equipment,etc.)andhumancapitalremains
thesameandthepopulationincreases,then
A) laborproductivitywillincrease.
B) laborproductivitywilldecrease.
C) thestandardoflivingwillincrease.
D) thenewlaborwillbemoreproductive.
E) realGDPdecreases.
Answer: B
Status: Old
15) Thewidespreadadoptionofcomputersintheworkplacehaslikelyledto
A) nochangeinthequantityoflaborhours.
B) anincreaseinlaborproductivitybecausecomputersareacapitalgood.
C) adecreaseinlaborproductivitybecausecomputersareacapitalgood.
D) adecreaseinhumancapitalbecausecomputersarephysicalcapital.
E) anincreaseinthesupplyoflaborbecausepeopleareneededtooperatethecomputers.
Answer: B
Status: Old
Page825
16) Anincreaseincapitalbringsalargeincreaseinoutputata________quantityofcapitalanda
smallincreaseinoutputata________quantityofcapitalbecauseof________.
A) small;large;increasingreturnsalongtheproductivitycurve
B) small;large;diminishingreturnsalongtheproductivitycurve
C) large;small;diminishingreturnsalongtheproductivitycurve
D) large;small;increasingreturnsalongtheproductivitycurve
E) large;small;thegreaterthequantityofcapitalthegreatertheoutput
Answer: B
Status: New
17) Whichofthefollowingarerequiredforeconomicgrowth?
i. moregoodsandservicesproducedperhourofwork
ii. anincreaseintheaveragehoursoflaborperperson
iii. anincreaseinprices
A) iandiii
B) iandii
C) iiandiii
D) ionly
Answer: B
Status: Old
18) Areasonforanincreaseinlaborproductivitygrowthis
A) anincreaseinpeopleshumancapital.
B) adecreaseinthecapitalstocksothatfirmsmusthiremoreworkers.
C) growthinthesupplyoflabor.
D) anincreaseinthepopulationsothatfirmshiremoreworkers.
E) anincreaseinthequantityoflabor.
Answer: A
Topic: Increaseinlaborproductivity,humancapital
Status: Old
19) Humancapitalreferstothe
A) accumulatedskillandknowledgeofhumanbeings.
B) accumulatedequipmentusedbyhumanbeings.
C) accumulationofmoneybyhumanbeings.
D) accumulationofmoneyandequipmentusedbyhumanbeings.
E) accumulatedfinancialcapitalpeoplehaveacquired.
Answer: A
Status: Old
Page826
E) iionly
20) Humancapitalisdefinedasthe
A) amountofmachineryhumanbeingshave.
B) numberoffactoriesbuiltforhumanbeings.
C) accumulatedskillandknowledgeofhumanbeings.
D) accumulatedamountofmachineryandfactorieshumanbeingsown.
E) skillsthatpeoplearebornwith.
Answer: C
Status: Old
21) Increasesinhumancapitalcancome
A) onlyfromformalschooling.
B) fromemployingmoremachinery.
C) onlyfromon-the-jobexperience.
D) fromformaleducationandon-the-joblearning.
E) fromnowherebecausewhateverhumancapitalanindividualpossessesiswhatheorshe
wasbornwith.
Answer: D
Status: Old
22) Expansionofanationshumancapitalcanbeachievedthrough
A) educationandtraining.
B) educationandsaving.
C) educationandtechnologyimprovements.
D) educationonly.
E) nothingbecausehumancapitalisdeterminedbytheskillspeoplearebornwith.
Answer: A
Status: Old
Page827
23) Humancapitalisacquired
A) onlyinschool.
B) onlythroughon-the-jobtraining.
C) onlythroughjobexperience.
D) throughschooling,jobtraining,andexperience.
E) onlyatbirth,thatis,itspeoplesinborntalents.
Answer: D
Status: Old
24) Advancesintechnologyandgrowthinhumancapital________because________.
A) shifttheproductivitycurvedownward;laborandcapitalbecomelessproductive
B) shifttheproductivitycurvedownward;laborandcapitalbecomemoreproductive
C) shifttheproductivitycurveupward;laborandcapitalbecomelessproductive
D) shifttheproductivitycurveupward;laborandcapitalbecomemoreproductive
E) donotshifttheproductivitycurve;thereisamovementalongtheproductivitycurve
Answer: D
Status: New
25) Theexpansionofhumancapitalandthediscoveryofnewtechnologies________because
________.
A) aresubjecttodiminishingreturns;theyshifttheproductivitycurvedownward
B) aresubjecttodiminishingreturns;theyshifttheproductivitycurveupward
C) arenotsubjecttodiminishingreturns;theyshifttheproductivitycurvedownward
D) arenotsubjecttodiminishingreturns;theyshifttheproductivitycurveupward
E) arenotsubjecttodiminishingreturns;theyresultinamovementalongtheproductivity
curve
Answer: D
Status: New
Page828
26) Laborproductivityincreasesif
i. humancapitaldecreases.
ii. technologyadvances.
iii. qualityofeducationdecreases.
A) ionly
B) iionly
C) iiionly
D) Bothiandii
E) Bothiiandiii
Answer: B
Topic: Increaseinlaborproductivity,technology
Status: Old
27) ________increaseswitheducation,training,andjobexperience.
i. Physicalcapital
ii. Humancapital
iii. Financialcapital
A) ionly
B) iionly
C) iiionly
D) bothiiandiii
E) i,ii,andiii
Answer: B
Status: Old
28) U.S.laborproductivityslowedduringthe1970sbecauseof
i. increasinggovernmenttaxesandregulationsonproduction.
ii. thenecessitytocopewithenergypriceincreases.
iii. inflation,whichshortenedthehorizonoverwhichbusinessesmadetheirborrowingplans.
A) ionly
B) iionly
C) iiionly
D) Bothiandii
E) i,ii,andiii
Answer: E
Topic: EyeontheU.S.economy,U.S.laborproductivitygrowth
Status: Old
Page829
29) Overthelast50years,U.S.laborproductivitygrewthefastestduringthe________becauseof
________.
A) 1900s;thewaronterrorandreturntothebasicsofeducation
B) 1990s;advancementsinhealthcareduetotheunlockingofthehumangenome
C) 1980s;theinventionofthecomputerandtheoilembargo
D) 1970s;anincreaseingovernmenttaxesandexpandedregulations
E) 1960s;fastpacedtechnologicalchangeandlargeincreasesinhumancapital
accumulation
Answer: E
Topic: EyeontheU.S.economy,U.S.laborproductivitygrowth
Status: New
30) Thelawofdiminishingmarginalreturnsstatesthat
A) outputincreasesataconstantrateasmorecapitalisadded.
B) outputdecreasesataconstantrateasmorecapitalisadded.
C) asbothlaborandcapitalareincreased,outputdoesnotchange.
D) asbothlaborandcapitalareincreased,outputincreasesatadecreasingrate.
E) outputincreasesatadecreasingrateasmorecapitalisadded.
Answer: E
Topic: Lawofdiminishingmarginalreturns
Status: Old
31) Accordingtothelawofdiminishingreturns,anadditionalunitof
A) capitalproducesmoreoutputthananadditionalunitoflabor.
B) labordecreasesoutput.
C) capitalproducesthesameamountofoutputasanadditionalunitoflabor.
D) capitalproducesmoreoutputthanthepreviousunit.
E) capitalproduceslessoutputthanthepreviousunit.
Answer: E
Status: Old
Page830
32) Theshapeoftheproductivitycurvereflectsthe
A) effectsofcapitalaccumulation.
B) effectsoftechnologicalprogress.
C) changeinlaborproductivityashumancapitalincreases.
D) lawofdiminishingmarginalreturns.
E) effectsofpopulationgrowth.
Answer: D
Status: Old
33) Theproductivitycurveisarelationshipbetween
A) realGDPperhouroflaborandcapitalperhouroflabor,withtechnologyheldconstant.
B) nominalGDPperhouroflaborandcapitalperhouroflabor,withtechnologyheld
constant.
C) realGDPperhouroflaborandcapitalperhouroflaborwhenevertechnologicalgrowth
occurs.
D) realGDPperunitofcapitalandcapitalperhouroflabor,withtechnologyheldconstant.
E) capitalperhouroflaborandtechnologicalgrowth.
Answer: A
Topic: Productivitycurve
Status: Old
34) Theproductivitycurveisarelationshipbetween________and________.
A) realGDP;hoursoflabor
B) realGDP;capital
C) realGDPperhouroflabor;capital
D) capitalperhouroflabor;laborperhourofcapital
E) realGDPperhouroflabor;capitalperhouroflabor
Answer: E
Status: Old
Page831
35) Adiagramofaproductivitycurvehas
A) realGDPperhouroflaboronthey-axisandcapitalperhouroflaboronthex-axis.
B) realGDPperhouroflaboronthey-axisandhoursoflaboronthex-axis.
C) capitalperhouroflaboronthey-axisandrealGDPperhouroflaboronthex-axis.
D) realwagesperhouronthey-axisandrealGDPperhouroflaboronthex-axis.
E) realGDPperhouroflaboronthey-axisandrealwagesperhouronthex-axis.
Answer: A
Status: Old
36) Theproductivitycurve
A) hasapositiveslope.
B) hasanegativeslope.
C) isvertical.
D) ishorizontal.
E) isU-shaped.
Answer: A
Status: Old
37) SupposethatanIntelworkerrearrangesexistingmachinesandlaborandincreasesthe
quantityofchipsIntelcanproduce.Usingtheproductivitycurvegraphed,thisinnovation
wouldbedescribedas
A) amovementupwardalongthecurve.
B) amovementdownwardalongthecurve.
C) ashiftofthecurveupward.
D) ashiftofthecurvedownward.
E) nochangetotheproductivitycurve.
Answer: C
Status: Old
Page832
38) Ifcapitalperhouroflaborincreases,GDPperhouroflabor
A) decreasesforagivenleveloftechnology.
B) increasesbecausetheleveloftechnologyadvances.
C) increasesforagivenleveloftechnology.
D) decreasesbecausetheleveloftechnologydecreases.
E) changesonlyiftechnologyalsoadvances.
Answer: C
Status: Old
39) Ifcapitalperhouroflabordecreases,realGDPperhouroflabor
A) decreasesbecausetheleveloftechnologydecreases.
B) increasesbecausetheleveloftechnologyincreases.
C) increasesforagivenleveloftechnology.
D) decreasesforagivenleveloftechnology.
E) changesonlyiftechnologyalsoadvances.
Answer: D
Status: Old
40) Iftheleveloftechnologyrises,GDPperhouroflabor
A) increasesforanylevelofcapitalperhouroflabor.
B) increasesbecausethelevelofcapitalperhouroflaborincreases.
C) decreasesforagivenlevelofcapitalperhouroflabor.
D) decreasesbecausethelevelofcapitalperhouroflabordecreases.
E) doesnotchangebecauseGDPincreasesonlywhencapitalorlaborincreases.
Answer: A
Topic: Productivitycurve,technologicaladvance
Status: Old
41) Atechnologicalchange________andachangeinthecapitalstock________.
A) shiftstheproductivitycurve;shiftstheproductivitycurve
B) shiftstheproductivitycurve;createsamovementalongtheproductivitycurve
C) createsamovementalongtheproductivitycurve;shiftstheproductivitycurve
D) doesnotchangetheproductivitycurve;createsamovementalongtheproductivitycurve
E) doesnotchangetheproductivitycurve;shiftstheproductivitycurve
Answer: B
Status: Old
Page833
42) Theexpansionofhumancapitalandthediscoveryofnewtechnologies________because
________.
A) decreaserealGDP;theyshifttheproductivitycurvedownward
B) decreaserealGDP;theyshifttheproductivitycurveupward
C) increaserealGDP;theyshifttheproductivitycurvedownward
D) increaserealGDP;theyshifttheproductivitycurveupward
E) increaserealGDP;theyresultinamovementupwardalongtheproductivitycurve
Answer: D
Status: New
43) Increasesincapitalperworker________because________.
A) increaserealGDP;theyshifttheproductivitycurvedownward
B) increaserealGDP;theyshifttheproductivitycurveupward
C) increaserealGDP;theycreateamovementdownwardalongtheproductivitycurve
D) increaserealGDP;theycreateamovementupwardalongtheproductivitycurve
E) mayincreaseordecreaserealGDP;theresultisamovementalongtheproductivity
curvebutthedirectiondependsonotherfactorsnotgiven
Answer: D
Status: New
44) Laborproductivityequals________.
A) realGDPaggregatehours
B) realGDPaggregatehours
C) aggregatehoursrealGDP
D) aggregatehourslaborproductivity
E) aggregatehourslaborproductivity
Answer: B
Status: Old
Page834
45) Laborproductivityequals
A) realGDPdividedbythecapitalstock.
B) realGDPdividedbythepopulation.
C) totalwagesdividedbyrealGDP.
D) realGDPdividedbyaggregatehours.
E) aggregatehoursdividedbyemployment.
Answer: D
Status: Old
46) IfrealGDPis$1,200billion,thepopulationis60million,andaggregatehoursare80billion,
laborproductivityis
A) $5.00anhour.
B) $6.67anhour.
C) $15.00anhour.
D) $20,000.
E) $150anhour.
Answer: C
Status: Old
47) Ifaggregatehoursare100billionhoursandlaborproductivityis$40anhour,thanrealGDP
equals
A) $100billion.
B) $40billion.
C) $100trillion.
D) $2.5trillion.
E) $4trillion.
Answer: E
Status: Old
Page835
48) Whichofthefollowinglistsgivesfactorsthatincreaselaborproductivity?
A) savingandinvestmentinphysicalcapital,andwageincreases
B) expansionofhumancapital,laborforceincreases,anddiscoveryofnewtechnologies
C) expansionofhumancapital,populationgrowth,anddiscoveryofnewtechnologies
D) savingandinvestmentinphysicalcapital,expansionofhumancapital,anddiscoveryof
newtechnologies
E) laborforceincreasesandwageincreases
Answer: D
Status: Old
49) Growthinphysicalcapitaldependsmostdirectlyuponthe
A) amountofsavingandinvestment.
B) numberoffirmsinthenation.
C) speedofpopulationgrowth.
D) amountofgovernmentexpenditures.
E) levelofhumancapital.
Answer: A
Topic: Sourcesofeconomicgrowth
Status: Old
50) Theproductivitycurveshiftsupwardwhen
A) physicalcapitalincreases.
B) humancapitaldecreases.
C) hoursoflaborincrease.
D) hoursoflabordecrease.
E) technologyadvances.
Answer: E
Status: Old
Page836
9.3 EconomicGrowthTheories:OldandNew
1) ThomasMalthuswasaneconomistwhocontributedtothe________theoryofgrowth.
A) classical
B) neoclassical
C) newgrowth
D) socialist
E) Keynesian
Answer: A
Topic: Classicalgrowththeory
Status: Old
2) TheMalthusiantheory
A) isalsocalledtheclassicalgrowththeoryandpredictsthatwewillrunoutofresources.
B) isalsocalledtheneoclassicalgrowththeory.
C) predictsthattherealGDPperpersonwillcontinuetoincreaseaslongastechnology
increases.
D) claimsthatthesubsistencewagewillincreaseovertime.
E) showsthattheproductionfunctionwillshiftupwardcontinuously.
Answer: A
Status: Old
3) Akeyelementoftheclassicalgrowththeoryisthat
A) economicgrowthcanbesustainedaslongasgovernmentinterventiondoesnotoccur.
B) increasesintechnologydriveeconomicgrowth.
C) anincreaseinpopulationleadstoincreaseinlaborsupplyandadeclineinrealGDPper
person.
D) lowtaxespromoteeconomicgrowth.
E) marketforcesdriveeconomicgrowth.
Answer: C
Status: Old
Page837
4) Theclassicaltheorywasdevelopedinthelate18thandearly19thcenturies
A) andthereforeisnotacceptedtoday.
B) duringatimeofpopulationdecline.
C) andhasproponentstodaywhofearpopulationgrowthandoverpopulation.
D) andcannotbeexplainedusingthemoderntooloftheproductivityfunction.
E) andstillappliestothemostdevelopednationstoday,thoughnottothelessdeveloped
nations.
Answer: C
Status: Old
5) Classicalgrowththeorypredictsthatinthelongruntherewillbe
A) zeroeconomicgrowth.
B) positiveeconomicgrowth.
C) negativeeconomicgrowth.
D) sustainedincreasesintheproductivitygrowthrate.
E) sustainedincreasesineconomicgrowth.
Answer: A
Status: Old
6) Accordingtoclassicalgrowththeory,peopleearnonlyasubsistencerealincomebecauseof
growthin
A) technology.
B) capital.
C) population.
D) employment.
E) laborproductivity.
Answer: C
Status: Old
Page838
7) Whichofthefollowingarepredictedbytheclassicalgrowththeory?
i. Populationgrowthwillendeconomicgrowth.
ii. RealGDPperpersonwillreturntosubsistencelevel.
iii. Technologydrivespersistenteconomicgrowth.
A) iandii
B) i,iiandiii
C) ionly
D) iionly
E) iandiii
Answer: A
Status: Old
8) IfrealGDPperpersonrisesabovethesubsistencelevelthen,accordingtoclassicalgrowth
theory,
A) populationgrowthwillslowdown.
B) apopulationexplosionwilloccur.
C) laborproductivitygrowthpermanentlyincreases.
D) realGDPperpersonwillremainabovethesubsistencelevel.
E) realGDPperpersonwillfallbelowthesubsistencelevel.
Answer: B
Status: Old
9) Accordingtoclassicalgrowththeory,iflaborproductivityincreases,
A) thepopulationgrowsandeventuallyrealGDPreturnstothesubsistencelevel.
B) thepopulationgrowsbutmoreslowlythanrealGDPsothatpeoplesincomesare
permanentlyhigher.
C) thepursuitofprofitcausesfurtherincreasesincapitalperhourandtechnologyand
economicgrowthcontinuesindefinitely.
D) thegrowthrateofrealGDPperpersonpermanentlyincreases.
E) peoplesavemore,whichincreasesthecapitalperhourevenmore,andsoeconomic
growthcontinuesindefinitely.
Answer: A
Status: Old
Page839
10) ClassicalgrowththeorypredictsthatincreasesinrealGDPperpersonwill
A) notlastbecausehigherincomeleadstoapopulationexplosion.
B) lastbecausehighergrowthleadstonewtechnology.
C) lastbecausepeoplemakechoicesinthepursuitofhigherprofits.
D) notlastbecausehigherincomeencouragessmallerfamiliesandalowerpopulation
growthrate.
E) lastonlyifthegovernmentdirectsfirmstomakemoreinvestmentsincapitalandnew
technology.
Answer: A
Status: Old
11) Classicalgrowththeorypredictsthateconomicgrowth
A) willcontinueattheclassicalrateof3percentforever.
B) willeventuallystopbecauseofpopulationgrowth.
C) occursbecauseofhard-workingcitizens.
D) ismerelyanillusion.
E) decreasesthesupplyoflabor.
Answer: B
Status: Old
12) Theclassicalgrowththeoryassertsthat
A) economicgrowthwillcontinueindefinitely.
B) economicgrowthandpopulationgrowthcomplementeachother.
C) populationgrowthincreasesanationseconomicgrowth.
D) populationgrowthwillleadtopeopleearningonlyasubsistencelevelofincome.
E) populationgrowthleadstomoregrowthintechnology.
Answer: D
Status: Old
Page840
13) Inclassicalgrowththeory,ifrealGDPperpersonisabovethesubsistencelevel,
A) theeconomywillkeepgrowingwithoutlimit.
B) populationgrowsandlowersrealGDPperpersontoitssubsistencelevel.
C) technologicalgrowthoccursandkeepsrealGDPperpersonaboveitssubsistencelevel.
D) thepursuitofprofitwillcauseeconomicgrowthtoaccelerate.
E) NoneoftheaboveiscorrectbecausetheclassicalgrowththeoryassertsthatrealGDPper
personcanneverexceedthesubsistencelevel.
Answer: B
Status: Old
14) Classicalgrowththeorypredicts
A) aslowdowninpopulationgrowthovertime.
B) realGDPperpersonwillremainatthesubsistencelevelovertime.
C) sustainedincreasesineconomicgrowthinthelongrun.
D) thepopulationgrowthrateslowsasrealGDPperpersonrises.
E) sustainedincreasesinthestandardoflivinginthelongrun.
Answer: B
Status: Old
15) Thenewgrowththeorywasdevelopedby________andproposesthat________.
A) PaulRomer;thedesireforprofitsdrivesincreasesinrealGDPperperson
B) RobertSolow;increasesintechnologygrowthareresponsibleforeconomicgrowth
C) ThomasMalthus;increasesinpopulationdrivewagestotheirsubsistencelevel
D) AdamSmith;marketswilldeterminetheappropriateeconomicgrowthrate
E) BenBernanke;changesinthemoneysupplydriveeconomicgrowth
Answer: A
Topic: Newgrowththeory
Status: Old
Page841
16) Inexplainingeconomicgrowth,newgrowththeorystressestheroleplayedby
A) humanchoices.
B) populationmoderation.
C) womenintheworkforce.
D) theparticipationrateofelderlyworkers.
E) thegovernmentindirectingthenationsinvestments.
Answer: A
Status: Old
17) Accordingtothenewgrowththeory,whichofthefollowingpromoteeconomicgrowth?
i. discoveriesthatbringprofit
ii. choicesthatexpandhumancapital
iii. randomeventsthatcreatetechnologychange
A) iandiii
B) iandii
C) i,iiandiii
D) iionly
E) ionly
Answer: B
Status: Old
18) Innewgrowththeory,growthinrealGDPperpersonoccursbecause
i. humancapitalgrowsindefinitely.
ii. technologyadvancesasaresultofchoicesindividualsmake.
iii. profitincentivesencouragetechnologicalchange.
A) ionly
B) iionly
C) iiionly
D) bothiandiii
E) i,ii,andiii
Answer: E
Status: Old
Page842
19) Newgrowththeoryassertsthat
i. humancapitalgrowsbecauseofchoices.
ii. discoveriesresultfromchoices.
iii. competitionbringsprofits.
A) ionly
B) iionly
C) iiionly
D) bothiandiii
E) bothiandii
Answer: E
Status: Old
20) Accordingtothenewgrowththeory,realGDPperpersongrowsbecause
A) thepopulationincreases.
B) thelaborforceparticipationrateincreases.
C) peoplemakechoicesinpursuitofprofits.
D) theretirementageincreases.
E) thegovernmentsubsidizesfirmsresearchanddevelopment.
Answer: C
Status: Old
21) Thenewgrowththeoryassertsthatprofitsare
A) permanent,becausetheyarederivedfromdiscoveries.
B) temporary,becausethediscoveriesthatleadtoprofitsareeventuallyusedbyall.
C) anillusion,sincecostsareneverfullycovered.
D) permanent,becausephysicalactivitiescanbereplicated.
E) notanessentialcomponentdeterminingwhethertheeconomygrowsornot.
Answer: B
Status: Old
Page843
22) Thenewgrowththeoryassertsthat
A) thepopulationgrowthratewillincreasewhenrealGDPperpersonincreases.
B) adiscoverycanbeusedbyonlyoneperson,thediscoverer.
C) technologyimprovesslowlywhilepopulationgrowsrapidly.
D) productionprocessescanbereplicatedatmanydifferentfirmsintheeconomy.
E) eventuallypeopleearnonlyasubsistenceliving.
Answer: D
Status: Old
23) Acentralthemeofthenewgrowththeoryisthat
A) firmsdontreallyexperienceprofit.
B) humanscanworkharderthanpreviouslythought.
C) theeconomydoesntexperiencediminishingreturns.
D) firmsdontexperiencediminishingreturns.
E) thegovernmentismoreefficientthanprivatemarkets.
Answer: C
Status: Old
24) Thenewgrowththeory
A) correctsforpoorestimatesofpopulationgrowth.
B) eliminatestechnologicaladvancesfromthegrowthpicture.
C) appliestoonlyverypoor,less-developednations.
D) explainsthesourceoftechnologicaladvances.
E) assertsthateconomicgrowthcanberapidbutcanonlypersistforalimitedperiodof
time.
Answer: D
Status: Old
Page844
25) Newgrowththeoryassertsthat________willleadustogreaterproductivityandeconomic
growth.
A) newmachinery
B) governmentregulation
C) unlimitedwants
D) leisuretime
E) nothing
Answer: C
Status: Old
26) Whichofthefollowingstatementsislikelytobemadebysomeonewhobelievesinthenew
growththeory?
A) Populationgrowthwilllimitlong-rungainsinrealGDPperperson.
B) Competitionwillencouragediscoveriesofnewideasleadingtogreatereconomic
growth.
C) AlthoughtechnologicalchangesincreaserealGDP,thesechangesarerandomand
unexplainable.
D) Choicesmadebyhumancapitalarelikelytobeinefficient.
E) Economicgrowthwilleventuallyslow.
Answer: B
Status: Old
27) Thenewgrowththeoryscomparisonoftheeconomytoaperpetualmotionmachineimplies
that
A) permanentgrowthisnotpossible.
B) theeconomywillforevercreateanddestroyjobs.
C) overpopulationwilleventuallyovertaketheresourcesoftheplanet.
D) technologychangesjusthappen.
E) laborproductivityhasnoinfluenceontheeconomy.
Answer: B
Status: Old
Page845
28) WhichofthefollowingtheoriespredictsthattherecanbenosustainedriseinrealGDPper
personabovethesubsistencelevel?
i. Classicalgrowththeory
ii. Newgrowththeory
A) ionly
B) iionly
C) Neitherinorii
D) Bothiandii
E) NoneoftheabovebecausewhethertheriseinrealGDPperpersonissustainedornot
dependsonwhatcreatedtherise.
Answer: A
Status: Old
29) Classicalgrowththeorypredictsthatincreasesin
A) realGDPperpersonarepermanentandsustainable.
B) realGDPperpersonaretemporaryandnotsustainable.
C) resourcespermanentlyincreaselaborproductivity.
D) resourcespermanentlyincreaserealGDPperperson.
E) competitionincreaseeconomicgrowth.
Answer: B
Status: Old
30) IfrealGDPperpersonisabovethesubsistencelevelthen,accordingtoclassicalgrowth
theory,
A) thepopulationwillincrease.
B) thepopulationwilldecrease.
C) thestandardoflivingwillcontinuetoimprove.
D) laborproductivitywillincrease.
E) moretechnologicaladvancesoccur.
Answer: A
Status: Old
Page846
31) Accordingtoclassicalgrowththeory,whenrealGDPperperson________,thepopulation
grows.
A) islessthanthesubsistencerealincome
B) exceedsthesubsistencerealincome
C) exceedscapitalperhouroflabor
D) islessthancapitalperhouroflabor
E) isconstant
Answer: B
Status: Old
32) Newgrowththeorypredictsthat
A) economicgrowthisonlytemporary.
B) economicgrowthcanlastindefinitely.
C) economicgrowthiserodedbychangesintaxes.
D) governmentpoliciescandonothingtofosterincreasedgrowth.
E) ultimatelypeopleearnasubsistencewage.
Answer: B
Status: Old
33) Thenewgrowththeorystatesthat
A) technologicaladvancesaretheresultofrandomchance.
B) technologicaladvancesaretheresultofdiscoveriesandchoices.
C) technologicaladvancesaretheresponsibilityofthegovernment.
D) thesubsistencelevelincomeleadstotechnologicaladvances.
E) itisimpossibletoreplicateproductionactivities.
Answer: B
Status: Old
Page847
34) Accordingtonewgrowththeory,growth
A) occurswhenrealGDPgreaterthanthesubsistencelevel.
B) isunending.
C) endswhencompetitiondisappears.
D) dependsonthepopulationgrowthrate.
E) cannotbesustainedwithoutgovernmenthelp.
Answer: B
Status: Old
35) Thetheorythatsuggeststhatourunlimitedwantswillleadtoperpetualeconomicgrowthis
the
A) classicalgrowththeory.
B) sustainedgrowththeory.
C) oldgrowththeory.
D) newgrowththeory.
E) Malthusiangrowththeory.
Answer: D
Status: Old
36) Accordingtothenewgrowththeory,________isthefactorthatmotivatestechnological
change.
A) randomchance
B) profit
C) diminishingreturns
D) thereplicationofactivities
E) decisionsabouthowmuchhumancapitaltoacquire
Answer: B
Status: Old
Page848
9.4 AchievingFasterGrowth
1) Atitsmostbasiclevel,economicgrowthdependson
A) creatingtherightincentives.
B) savingbythegovernment.
C) governmentleadership.
D) governmentsfixingpricestoencouragestability.
E) politicalfreedom.
Answer: A
Topic: Preconditionsforgrowth
Status: Old
2) Ifacountrylacks________,economicgrowth________.
A) ademocraticformofgovernment;cannotoccur
B) aproperincentivesystem;cannotoccur
C) purecapitalism;willbeslowercomparedtoothercountries
D) aproperincentivesystem;willoccuratapacesuggestedbythenewgrowththeory
E) economicfreedom;willincreaseatafasterpace
Answer: B
Status: Old
3) Thepresenceofanincentivesystemthatencouragesgrowth
A) guaranteesthatgrowthwilloccur.
B) createstherightconditionsforgrowthtooccur.
C) cannotexistinpoorcountries.
D) existedeveninhunter-gatherersocieties.
E) meansthatthegovernmentmustbeademocracy.
Answer: B
Status: Old
Page849
4) AllofthefollowingarepreconditionsforeconomicgrowthEXCEPT
i. propertyrights.
ii. democracy.
iii. freemarkets.
A) ionly
B) iionly
C) iiionly
D) Bothiandii
E) i,ii,andiii
Answer: B
Status: Old
5) Akeyreasonwhysomenationsshowlittleornogrowthis
A) overpopulationthatoveruseslimitedresources.
B) lackofincentivestoundertakeactionstowardgrowth.
C) toomuchprivatepropertynotdirectedbythegovernment.
D) patentsinrichnationsthatkeeptechnologyonlyfortherich.
E) toomuchinternationaltradesothatalleconomicgrowthspillsovertoforeigners.
Answer: B
Status: Old
6) Animportantconditionrequiredforeconomicgrowthis
A) ademocraticgovernment.
B) atotalitariangovernment.
C) alibertariangovernment.
D) economicfreedom.
E) theincentivetolimitinternationaltradesothatalleconomicgrowthremainswithinthe
country.
Answer: D
Topic: Preconditionsforgrowth,economicfreedom
Status: Old
Page850
7) Abasicpreconditionnecessarytoachieveeconomicgrowthis
A) well-functioningfactories.
B) well-beingofsociety.
C) awell-functioninglegalsystem.
D) awell-organizedworkforce.
E) astrongcentralgovernmentthatdirectsthenationsresearchanddevelopmentactivities.
Answer: C
Status: Old
8) Economicfreedom
A) isnotimportantfornationstogrow.
B) mustcomefromademocraticgovernment.
C) isfounded,inpart,ontheruleoflaw.
D) iscreatedwhenthenationimposesmanyregulationsonbusinesses.
E) isharmedbyhavingtoomanypropertyrights.
Answer: C
Status: Old
9) Economicfreedomrequires
A) thattherearenoregulationsandrestrictionssetonbusinessesandhouseholdsbythe
government.
B) theruleoflawandtheabilitytoenforcethelaws.
C) stronglaborunions.
D) freedomtobribegovernmentofficials.
E) thatthegovernmentbeademocracy.
Answer: B
Status: Old
Page851
10) Economicfreedomprovidesthe
A) politicalsystemthatencouragesdemocracy.
B) socialsystemthatsupportsfamilies.
C) productionsystemthatdiscouragespropertyrights.
D) incentivesystemthatencouragesgrowth-producingactivities.
E) necessaryalternativetofreemarkets.
Answer: D
Status: Old
11) Countriesthatenjoyeconomicgrowth
A) havepropertyrightsandmarketswhichprovideincentivesfordiscoveringnew
technologies.
B) haveeconomiesthatallowthegovernmenttomakedecisionsineveryonesbestinterests.
C) restrictinternationaltradesothatdomesticindustriescangrow.
D) placehightaxesonsavingandinvestment.
E) placecontrolsonpropertyrightssothatfirmsareprotectedfromcompetition.
Answer: A
Status: Old
12) Foreconomicfreedomtoexist,
A) copyrightlawsmustbeabolishedandmarketssupervisedbythegovernment.
B) democracymustexist.
C) propertyrightsmustbeprotectedandmarketsmustbefree.
D) humancapitalmustbegivenawayfree.
E) moneymustbefree.
Answer: C
Status: Old
Page852
13) HongKongisanexampleofaneconomythat
A) doesnotexperienceeconomicgrowthbecauseitisnotademocracy.
B) experienceseconomicgrowthinspiteofthefactthatislacksdemocraticfreedom.
C) growsmoreslowlythanotherAsiancountriesbecausepropertyrightsarenotvalued.
D) needstopromoteinvestmentsothateconomicgrowthcanoccur.
E) lackseconomicfreedomandthereforeexperiencestheslowesteconomicgrowthofall
developedeconomies.
Answer: B
Status: Old
14) Aconditionnecessaryforacountrytoachieveeconomicgrowthis
A) hightaxratessothegovernmentcanpurchasealotofcapitalequipment.
B) strictenvironmentalregulations.
C) economicfreedom.
D) governmentcontrolofthebankingsystem.
E) democracy.
Answer: C
Topic: Preconditionstoeconomicgrowth,economicfreedom
Status: Old
15) Economicfreedomisapreconditionforeconomicgrowth.Whichofthefollowingisa
characteristicofeconomicfreedom?
i. Ademocraticformofgovernment
ii. Propertyrightsmustbeprotected.
iii. Thegovernmentmustsupportandpayforinventionsandinnovations.
A) ionly
B) iionly
C) Bothiandii
D) Bothiiandiii
E) Bothiandiii
Answer: B
Status: Old
Page853
16) Economicfreedomispresent,atleastinpart,when
A) therearenopropertyrightstolimitpeoplesfreedom.
B) thereisnoprivateproperty.
C) peopleareabletomakepersonalchoices.
D) thereisnogovernment.
E) moneyisfree.
Answer: C
Status: Old
17) Economicgrowthissloworabsentinsomeeconomiesbecausethoselack
A) politicalfreedom.
B) economicfreedom.
C) democracy.
D) culturalfreedom.
E) astronggovernment.
Answer: B
Status: Old
18) Akeyreasonwhysomecountriesaregrowingveryslowlyis
A) theylackademocraticgovernment.
B) theylackeconomicfreedom.
C) theirinflationrateistoohigh.
D) theyaretoopoor,sothereisnosaving.
E) thereistoomuchcompetitionwithintheireconomies.
Answer: B
Status: Old
Page854
19) Areasonwhymanyofthethirdworldcountriesarenotachievinganincreaseintheir
standardoflivingisthatthey
A) donthaveenoughnaturalresources.
B) donthavestrongmilitarypowertoforcepeopletoworkharder.
C) donthavesocialinstitutionswithastrongruleoflawandeconomicfreedom.
D) stronglyencouragedinternationaltrade.
E) donthaveastrongcentralgovernment.
Answer: C
Status: Old
20) Propertyrights
A) dontincludeintellectualproperty.
B) dontincludefinancialproperty.
C) dontincludephysicalproperty.
D) includephysical,financial,andintellectualproperty.
E) slowtheeconomicgrowthbyplacinglimitsonwhocanusewhat.
Answer: D
Topic: Preconditionsforgrowth,propertyrights
Status: Old
21) Propertyrightsassurepeoplethat
A) thegovernmentwillnotconfiscatetheirincomeorsavings.
B) thegovernmentwillprovideaminimumstandardofliving.
C) thefactorsofproductionandgoodsareownedjointlybythegovernmentandthe
people.
D) economicgrowthwillenhancegovernmentinvolvementintheeconomy.
E) internationaltradewillbelimited.
Answer: A
Topic: Preconditionstoeconomicgrowth,propertyrights
Status: Old
Page855
22) JoseandJuliawerediscussingthenecessarycomponentstoachieveeconomicgrowth.Jose
statedthattheeconomymustincludefreemarkets,specializationandtrade,andanethical
judicialsystem.JuliaremindedJosethatanotherkeycomponentis
A) freedomofspeech.
B) freedomofreligion.
C) aguaranteedhighrateofreturnonsavings.
D) propertyrights.
E) democracy.
Answer: D
Status: Old
23) Onepossiblewayofachievingfastereconomicgrowthisto
A) regulatetheamountofinternationaltradeandlimititsothatnottoomuchoccurs.
B) limitresearchanddevelopmentbecauseresearchanddevelopmentdoesnotcontribute
anythingtotodaysproduction.
C) assignthegovernmentownershipofallcapital.
D) protectpropertyrightsandfreemarkets.
E) taxsavingsothatpeoplespendmoreandfirmsprofitsarehigher.
Answer: D
Status: Old
24) Whichofthefollowingareimportantforcountriestopromotewithpropertyrightsand
incentivesifeconomicgrowthistooccur?
i. specialization
ii. savingandinvestment
iii. increasesinhumancapital
iv. discoveryofnewtechnology
A) i,ii,iiiandiv.
B) iiandiii.
C) iiiandiv.
D) iiandiv.
E) i,iiandivonly.
Answer: A
Status: Old
Page856
25) OnewaytoachievefastergrowthinGDPperpersonistoincreasethe
A) numberofwomenworkinginthehomeratherthanintheworkforce.
B) growthrateofthequantityofmoney.
C) growthrateofhumancapital.
D) growthrateofthepopulation.
E) limitsoninternationaltradeinordertokeepmoreoftotalspendingondomestically
producedgoods.
Answer: C
Topic: Preconditionsforgrowth,humancapital
Status: Old
26) Thefollowinggovernmentpolicieswillhelpachievefastereconomicgrowth EXCEPT

A) discouragingsavingandencouragingspending.
B) encouragingresearchanddevelopment.
C) establishingandprotectingpropertyrights.
D) improvingthequalityofeducation.
E) increasingsaving.
Answer: A
Topic: Policiesforfastergrowth,saving
Status: Old
27) IfTurkeywantstopromotefastereconomicgrowth,itwillneedto
A) promoteincentivesystemstoencouragesaving,researchanddevelopment,increased
tradeandimprovededucation.
B) restricteconomicfreedomsothegovernmenthasbettercontrolofmarkets.
C) restrictinternationaltradetoprotectsitsownworkers.
D) promotegovernmentinterventiontohelpmarketsdetermineincentives.
E) restrictpropertyrightssothatindividualscanbettershareinventions.
Answer: A
Topic: Policiesforfastergrowth
Status: Old
Page857
28) Retirementsavingsaccounts,suchasIRAs,helpincreaseeconomicgrowthbecause
A) peoplehaveanincentivetoworkharderandlongerhourstosaveforthefuture.
B) theykeeptheinterestrateshigh.
C) savingsfinancesinvestment.
D) governmentinveststhem.
E) theyencourageinternationaltrade.
Answer: C
Status: Old
A) encouragesaving.
B) protecttheeconomyfrominternationaltrade.
C) limitinvestmentbecauseinvestmentaddsnothingtoproductiontoday.
D) eliminatepropertyrightsbecausetheypreventpeoplefromusingotherpeoplesideas.
E) taxsavingsothatpeoplespendmoreandbusinessesmakemoreprofit.
Answer: A
Status: Old
30) EastAsianeconomieshavegrown
A) rapidlybecauseofhighsavingrates.
B) rapidlydespitealackofpropertyrights.
C) slowlybecauseofalackofpropertyrights.
D) slowlybecauseoflowsavingrates.
E) rapidlybecausetheyvirtuallyeliminatedinternationaltrade.
Answer: A
Status: Old
31) Oneofthepossiblerolesgovernmentscanplayinsponsoringgrowthisto
A) providetaxincentivestoencouragesaving.
B) ownmoreofthenationsresourcesinordertoputthemtouse.
C) closethenationtotradeinordertoprotectitsdomesticproducers.
D) makedecisionsforitscitizensastothemostsuitablejob.
E) limittheuseofpropertyrightsinordertodecreasetheharmtheycreate.
Answer: A
Status: Old
Page858
32) Manyeconomistsarguethatanincentivetosaveis
A) highincometaxrates.
B) ataxonconsumptionratherthanonincome.
C) ataxonincomeratherthanataxonconsumption.
D) greatergovernmentregulationofthebankingandsecuritiesindustries.
E) strengtheningthepropertyrightsthatsavershavetothephysicalcapitaltheypurchase.
Answer: B
Status: Old
A) abolishthesystemofpatentsandcopyrightssothateveryonecanusepeoplesideas.
B) limitinternationaltradetoonlyafewcountriessothatthenationisnothurtbytoomuch
trade.
C) encourageresearchanddevelopment.
D) limitschoolinginordertohavemorepeopleinthelaborforce,producinggoodsand
services.
E) promotetaxsavingsothatpeoplespendmoreandbusinessesprofitsarelarger.
Answer: C
Topic: Preconditionsforgrowth,R&D
Status: Old
A) limitinternationaltrade.
B) encourageinternationaltrade.
C) limitresearchanddevelopmentandconcentrateonproductionofgoodsandservices.
D) abolishthesystemofpatentsandcopyrightssothateveryonecanusepeoplesideas.
E) letthegovernmentdecidewhatresearchanddevelopmentshouldbeundertaken.
Answer: B
Topic: Policiesforfastergrowth,internationaltrade
Status: Old
Page859
35) Encouraginginternationaltradewill
A) sloweconomicgrowthwhenacountryisforcedtospecializeandtradewithother
countries.
B) sloweconomicgrowthasmanyworkerslosetheirjobstoforeignworkers.
C) speedeconomicgrowthasworkersdiversifytheirknowledgeandlimittrade.
D) speedeconomicgrowthasworkersspecializeandtradewithothers.
E) speedeconomicgrowthbecauseinternationaltradelimitstheharmdonebyproperty
rights.
Answer: D
Status: Old
36) Thefastestgrowingnationstoday
A) arenotsavingbutinsteadareinvesting.
B) haveerectedmanytradebarrierstoprotectdomesticfirms.
C) havethefastestgrowingexportsandimports.
D) havenon-democraticpoliticalsystems.
E) havethegovernmentdirectingalltheirresearchanddevelopment.
Answer: C
Status: Old
37) Chinasgrowthratehas________thatofmostothercountries,________.
A) topped;butitsrealGDPperpersonisstilllowerthanotherindustrializedcountries
B) laggedbehind;anditsrealGDPisclosetootherAsianeconomies
C) laggedbehind;butitsrealGDPperpersonishigherthanotherAsianeconomies
D) topped:butitsrealGDPperpersondeclinedin2008-09
E) equalled;anditsrealGDPperpersondeclinedin2008-09
Answer: A
Topic: Eyeonconvergenceandgaps
Status: Old
Page860
38) Governmentsshouldpromoteeducationbecauseeducationcontributestothenations
A) employment.
B) freemarkets.
C) economicgrowthpotential.
D) internationaltrade.
E) protectionofpropertyrights.
Answer: C
Topic: Policiesforfastergrowth,education
Status: Old
39) Brianisrunningforstatesenatorandifelected,pledgestoimproveeconomicgrowth.His
planforeconomicgrowthincludesincreasingspendingonpubliceducationandprovidingtax
incentivestoencourageimprovedprivateeducation.Hisplanislikelyto
A) sloweconomicgrowthbecauseitincludesaprovisionforprivateeducation.
B) havenoeffectoneconomicgrowthbecausepropertyrightsarenotchanged.
C) speedeconomicgrowthasthequalityofresourcesimprove.
D) failbecausetheprovisionforprivateeducationlimitsgovernmentinvolvementin
education.
E) havenoeffectoneconomicgrowthbecausegovernmentspendingcannotaffectthe
economicgrowthrate.
Answer: C
Status: Old
40) IfKenyainstitutespoliciesthatsupporteconomicfreedomandgrowth,itislikelythatKenya
will
A) immediatelyreapthebenefitsofdoubledigitincreaseineconomicgrowth.
B) immediatelyreapthebenefitsofa4percentto6percentincreaseineconomicgrowth.
C) slowlyreapthebenefitsofeconomicgrowthastheeconomygrowsovertime.
D) losecontroloftheeconomyandplungeintoalongrecession.
E) sufferfromtoomuchcompetitionwithinitseconomy.
Answer: C
Topic: Fastergrowth,thedifferencepolicymakes
Status: Old
Page861
41) WhichofthefollowingisNOT anecessarypreconditionforeconomicgrowth?

A) economicfreedom
B) democracy
C) propertyrights
D) freemarkets
E) ALLoftheabovearenecessarypreconditions.
Answer: B
Status: Old
42) Whichofthefollowingcharacteristicsisapreconditionforeconomicgrowth?
i. economicfreedom
ii. freemarkets
iii. activegovernmentpolicytodiscouragesaving
A) ionly
B) iionly
C) iiionly
D) Bothiandii
E) Bothiiandiii
Answer: D
Status: Old
43) Economicfreedommeansthat
A) firmsareregulatedbythegovernment.
B) somegoodsandservicesarefree.
C) peopleareabletomakepersonalchoicesandtheirpropertyisprotected.
D) theruleoflawdoesnotapply.
E) thenationsgovernmentisademocracy.
Answer: C
Status: Old
Page862
44) Propertyrightsprotect
A) onlytherightstophysicalproperty.
B) onlytherightstofinancialproperty.
C) allrightsexceptrightstointellectualproperty.
D) rightstophysicalproperty,financialproperty,andintellectualproperty.
E) thegovernmentsrighttoimposetaxes.
Answer: D
Status: Old
45) Activitiesthatencouragefastergrowthare
A) highlevelsofsavingandinvestmentinhumancapital.
B) highlevelsofconsumptionandlowlevelsofsavings.
C) taxesonsavingthatservetoencouragemorespendingandlesssaving.
D) imposingtradebarrierstolimitinternationaltradeandtherebyprotectnational
industries.
E) limitingpropertyrightssothateveryonecanuseanyinvention.
Answer: A
Status: Old
46) WhichofthefollowingstatementsisFALSE?
A) Savinghelpscreateeconomicgrowth.
B) Improvementsinqualityofeducationareimportantforeconomicgrowth.
C) Freeinternationaltradehelpscreateeconomicgrowth.
D) FasterpopulationgrowthisthekeytogrowthinrealGDPperperson.
E) Economicfreedomrequirespropertyrights.
Answer: D
Status: Old
Page863
47) Inordertoincreaseeconomicgrowth,agovernmentcan
A) discourageresearchanddevelopment.
B) decreasefundingoneducation.
C) discouragespecializationandtrade.
D) establishpropertyrightsandalegalsystem.
E) taxsavinginordertoencouragemorespending.
Answer: D
Status: Old
48) Saving
A) slowsgrowthbecauseitdecreasesconsumption.
B) financesinvestmentwhichbringscapitalaccumulation.
C) hasnoimpactoneconomicgrowth.
D) isverylowinmostEastAsiannations.
E) isimportantforacountrytogainthebenefitsofinternationaltrade.
Answer: B
Status: Old
49) Agovernmentpolicythattaxessavinginordertodiscouragesavingandencouragespending
will
A) sloweconomicgrowth.
B) speedeconomicgrowth.
C) createagreaterincentiveforpeopletospecialize.
D) strengthenpeoplespropertyrights.
E) increasethegrowthrateofcapital.
Answer: A
Status: Old
Page864
50) Thefastestgrowingnationstodayarethosewith
A) barriersthatsignificantlylimitinternationaltrade.
B) thefastestgrowingexportsandimports.
C) governmentinterventioninmarketstoensurehighprices.
D) fewfundsspentonresearchanddevelopment.
E) theleastsaving.
Answer: B
Status: Old
51) Economicgrowthisenhancedby
A) freeinternationaltrade.
B) limitinginternationaltradesothatthedomesticeconomycanprosper.
C) discouragingsaving,becauseincreasedsavingmeanslessspending.
D) ignoringincentivesystems.
E) increasingwelfarepaymentstothepoorsotheycanaffordtobuygoods.
Answer: A
Status: Old
1) EconomicgrowthinCubahasbeenslow.Whatcanbestexplaintheslowgrowth?
A) lackofeconomicresources
B) lackofincentivemechanismsandeconomicfreedom
C) laborproductivityislow.
D) anon-democraticformofgovernment
E) toomuchcompetitionwithintheeconomy
Answer: B
Topic: Integrative
Status: Old
Page865
2) Theideaofcontinuouseconomicgrowthasaperpetualmotionmachinebestreflectsthe
predictionofwhichgrowththeory?
A) theclassicalgrowththeory
B) thetraditionalgrowththeory
C) theKeynesiangrowththeory
D) thenewgrowththeory
E) nogrowththeory
Answer: D
Topic: Integrative
Status: Old
3) WorkersintheUnitedStatesare________workersinChinabecause________.
A) moreproductivethan;workersintheUnitedStateshavemorecapitalperworker.
B) moreproductivethan;therearemorecollege-educatedworkersintheUnitedStates.
C) lessproductivethan;therearefewerworkersintheUnitedStates.
D) lessproductivethan;thelaborforceparticipationrateislowerintheUnitedStates.
E) equallyasproductiveas;ChinasrealGDPperpersonequalstheU.S.realGDPper
person.
Answer: A
Topic: Integrative
Status: Old
4) Thepresenceofgovernmentcorruptioninsomecountries
A) slowstheireconomicgrowth.
B) speedstheireconomicgrowth.
C) invalidatesthenewgrowththeoryspredictions.
D) supportstheclassicalgrowththeoryspredictions.
E) invalidatestheneoclassicalgrowththeoryspredictions.
Answer: A
Topic: Integrative
Status: Old
Page866
5) Whichofthefollowingpoliciesencourageseconomicgrowth?
A) increasedtaxesonincomeandbusinessprofits
B) reductionofgovernmentsupportofhighereducation
C) hightariffsandstrictimportquotasonforeign-madeproducts
D) creationoftaxfreesavingsaccounts
E) limitingtheyearspeoplespendineducationsothattheycanstartproductivework
Answer: D
Topic: Integrative
Status: Old
9.6 Essay:TheBasicsofEconomicGrowth
1) WhyisgrowthinGDPdifferentfromgrowthinanationsstandardofliving?Isitpossiblefor
anationsGDPtogrowwhileitsstandardoflivingfalls?
Answer: ThestandardoflivingismeasuredbyrealGDPperperson,sogrowthinthestandard
oflivingequalsgrowthinrealGDPperperson.ThegrowthrateofrealGDPperperson
equalsthegrowthrateofrealGDPminusthegrowthrateofthepopulation.Henceitis
indeedpossibleforanationsGDPtogrow,whileitsstandardoflivingdecreases.This
outcomeoccurswheneverthepopulationgrowsmorerapidlythanrealGDP.
Status: Old
2) Howdowecalculategrowthinanationsstandardofliving?
Answer: ThestandardoflivingismeasuredbyrealGDPperperson.Thusgrowthinthe
standardoflivingiscalculatedusingthegrowthrateofrealGDPperperson.
Status: Old
3) WhatistheRuleof70?
Answer: TheRuleof70isthatthenumberofyearsittakesforthelevelofanyvariabletodouble
isapproximately70dividedtheannualpercentagegrowthrateofthevariable.
Topic: Ruleof70
Status: Old
Page867
4) Anationspopulationwas250millionlastyearandis255millionthisyear.IfitsrealGDPwas
$8.5trillionlastyearandis$8.8trillionthisyear,whatisitsgrowthrateofrealGDPper
person?
Answer: LastyearrealGDPperpersonequaled($8.5trillion)/(250million)=$34,000perperson.
Thisyear,realGDPperpersonis$34,510perperson.ThusthegrowthinrealGDPper
$34,510-$34,000
100=1.5percent.
personequals
$34,000
Status: Old
RealGDP
Population
Year (billionsof2009dollars) (millionsofpeople)
1961
2,432
184
1962
2,578
186
5) U.S.realGDPperpersongrewrapidlyintheearly1960s.ThetableabovehasU.S.realGDP
andpopulationfor1961and1962.
a. WhatwasU.S.realGDPperpersonin1961?
b. WhatwasU.S.realGDPperpersonin1962?
c. Between1961and1962,howrapidlydidU.S.realGDPperpersongrow?
Answer: a.
b.
c.
U.S.realGDPperpersonin1961= ($2,432billion)/(184million)=$13,217.
U.S.realGDPperpersonin1962=($2,578billion)/(186million)=$13,860.
$13,860-$13,217
100=4.9
ThegrowthrateofrealGDPperpersonequals
$13,217
percent.
Status: Old
6) Ifanationspopulationgrowsat2percentanditsrealGDPgrowsat4percent,whatisthe
growthrateofrealGDPperperson?
Answer: ThegrowthrateofrealGDPperpersonequalsthegrowthrateofrealGDPminusthe
populationgrowthrate.Hence,inthequestionathand,therealGDPperpersongrowth
rateequals4percentminus2percent,or2percent.
Status: Old
Page868
7) SupposethatrealGDPgrowsat3percentperyear.WhatisthegrowthrateofrealGDPper
personifthepopulationgrowsat:
a. 2percent?Whathappenstothestandardofliving?
b. 3percent?Whathappenstothestandardofliving?
c. 4percent?Whathappenstothestandardofliving?
Answer: a. ThegrowthrateofrealGDPperpersonequalsthegrowthrateofrealGDPminus
thepopulationgrowthrate.HencethegrowthrateofrealGDPperpersonequals3
percentminus2percentor1percent.ThestandardoflivingincreasesbecauserealGDP
perpersonincreases.
b. ThegrowthrateofrealGDPperpersonequals3percentminus3percentor0
percent.ThestandardoflivingdoesnotchangebecauserealGDPperpersondoesnot
change.
c. ThegrowthrateofrealGDPperpersonequals3percentminus4percentor -1
percent.ThestandardoflivingdecreasesbecauserealGDPperpersondecreases.
Status: Old
8) During2005,realGDPinIrelandgrew9.8percent.IfIrelandmaintainsthislevelofgrowthin
thefuture,realGDPwilldoubleinapproximatelyhowmanyyears?
Answer: Withanannualgrowthrateof9.8percent,theRuleof70showsthatIrelandsrealGDP
willdoubleinapproximately709.8=7.1years.
Topic: Ruleof70
Status: Old
9) SupposerealGDPgrowsat7percentperyearandthepopulationgrowsat2percentperyear.
HowmanyyearswillittakeforrealGDPandrealGDPperpersontodouble?
Answer: UsetheRuleof70forbothanswers.ThegrowthrateofrealGDPisgiveninthe
question,andsotheRuleof70directlyindicatesthatrealGDPdoublesin70 7=10
years.TodeterminethenumberofyearsittakesforrealGDPperpersontodouble,itis
necessarytocalculatethegrowthrateofrealGDPperperson.Thegrowthrateofreal
GDPperpersonequals7percentminus2percentor5percentperyear.HencetheRule
of70showsthatrealGDPperpersondoublesin705=14years.
Topic: Ruleof70
Status: Old
Page869
9.7 Essay:LaborProductivityGrowth
1) RealGDPcanincreaseeitherbecausethequantityoflaborincreasesorbecauselabor
productivityincreases.WhatistheeffectonthestandardoflivingifrealGDPincreases
because
a. thequantityoflaborincreases?
b. laborproductivityincreases?
Answer: a. AnincreaseinrealGDPbecausethequantityoflaborincreaseshasnoeffectonthe
standardofliving.
b. AnincreaseinrealGDPbecauselaborproductivityincreasesbooststhenations
standardofliving.
Status: Old
2) WhatistheeffectonrealGDPperpersoniflaborproductivityincreases?Whatistheeffecton
thenationsstandardofliving?
Answer: RealGDPequals(aggregatehours) (laborproductivity).Henceanincreaseinlabor
productivityincreasesrealGDP.RealGDPperpersonequals(realGDP)(population).
ThereforeanincreaseinrealGDPwithnochangeinthepopulationincreasesrealGDP
perperson.ThenationsstandardoflivingismeasuredbyrealGDPperperson.So,an
increaseinlaborproductivityboostsrealGDPperpersonandthereforebooststhe
nationsstandardofliving.
Status: Old
3) RealGDPequals$12trillionandaggregatehoursequals300billionhours.Whatdoeslabor
productivityequal?
Answer: Laborproductivityisdefinedas(realGDP aggregatehours),solaborproductivity
equals($12trillion300billionhours)=$40perhour.
Status: Old
4) Laborproductivityis$30perhourandaggregatehoursare165billionhours.Whatdoesreal
GDPequal?
Answer: RealGDPequals(laborproductivity aggregatehours)
=($30perhour165billionhours)=$4,950billion.
Status: Old
Page870
5) Laborproductivityis$20perhourandaggregatehoursare400billionhours.
a. WhatdoesrealGDPequal?
b. Becauseoftechnologicaladvances,laborproductivitydoublesto$40perhour.
Furthermore,assumethataggregatehoursdecreaseto300billionhours.WhatdoesrealGDP
equal?
Answer: a. RealGDPequals(laborproductivity aggregatehours)
=($20perhour400billionhours)=$8trillion.
b. RealGDPnowequals$12trillion.
Status: Old
6) Definelaborproductivity.Discusstherelationshipbetweenlaborproductivity,humancapital
growth,andtechnologychange.
Answer: LaborproductivityisrealGDPperhouroflabor,soitequals(realGDP)(aggregate
hours).Theexpansionofhumancapitalandthediscoveryofnewtechnologyaretwo
factorsthatincreaselaborproductivity.Increasinghumancapitalincreaseslabor
productivitybecauseworkersskillsandknowledgeincrease,whichallowsthemto
producemoregoodsandserviceswithoutboostingaggregatehours.Similarly,the
discoveryanduseofnewtechnologiesallowsworkerstoproducemoregoodsand
serviceswithoutincreasingaggregatehours.
Status: Old
7) Listandexplainthethreefactorsthatcanincreaselaborproductivity.
Answer: Thethreefactorsthatcanincreaselaborproductivityaresavingandinvestmentin
physicalcapital,expansionofhumancapital,anddiscoveryofnewtechnology.Saving
andinvestinginphysicalcapitalincreasestheamountofcapitalperworkerandthereby
increasesworkersproductivity.Increasingtheamountofhumancapitalmeansthat
workersskills,knowledge,andtalentsincrease,whichtherebyincreasestheir
productivity.And,thediscoveryanduseofnewtechnologiesallowsworkersto
producemoregoodsandservicesthanbefore,whichincreasestheirproductivity.
Status: Old
Page871
8) Whatarethesourcesofhumancapital?
Answer: Humancapital,theaccumulatedskillsandknowledgepeoplepossess,comesfromboth
formaleducationandtraining,andfromon -the-jobexperience.On-the-jobexperience
createslearningbydoing,inwhichworkersbecomemoreknowledgeableaboutthe
bestwaytoaccomplishataskastheydothetask.
Topic: Laborproductivity,humancapital
Status: Old
9) Explaintheproductivitycurveandhowthecomponentsinteract.
Answer: TheproductivitycurveisarelationshipthatshowshowrealGDPperhouroflabor
variesastheamountofcapitalperhouroflaborchangeswithnochangeintechnology.
Anincreaseintheamountofcapitalperhouroflaborleadstoamovementalonga
productivitycurve.Anincreaseintechnologyshiftstheproductivitycurveupward.
Status: Old
10) Whatdoesaproductivitycurvereflect?Whatleadstomovementsalongaproductivitycurve
andwhatleadstoshiftsinaproductivitycurve?
Answer: Theproductivitycurveshowstherelationshipbetweentheamountofcapitalperhour
oflaborandrealGDPperhouroflabor,thatis,betweencapitalperhourlaborand
laborproductivity.Thecurveisupwardsloping,but,duetodiminishingreturns,the
slopebecomeslesssteepascapitalperhouroflaborincreases.Iftheamountofcapital
perhouroflaborchanges,thereisamovementalongtheproductivitycurve.Ifthe
amountofhumancapitalincreasesand/ortechnologyadvanceoccurs,theproductivity
curveshiftsupward.
Status: Old
Page872
11) Whatisthelawofdiminishingreturns?Giveanexampleofwhatthelawofdiminishing
returnsimplies.
Answer: Thelawofdiminishingreturnsistheobservationthatasthequantityofoneinput
increaseswiththequantitiesofallotherinputsremainingthesame,outputincreases
butbyeversmallerincrements.Hence,asmoreworkers(orcapital)areusedbyafirm,
eachadditionalworker(orunitofcapital)increasesoutput,butbylessthanprevious
worker(orunitofcapital).Forinstance,alawfirmmighthaveoneparalegaltyping
briefsononepersonalcomputer.Hiringanadditionalparalegalwillincreasethe
numberofbriefs,butwithonlyonepersonalcomputer,theadditionalparalegalwillnot
doublethenumberofbriefs.Similarly,buyinganothercomputer,whileemployingonly
oneparalegal,mightincreasethenumberofbriefstyped,butwillnotdoublethe
number.
Status: Old
9.8 Essay:EconomicGrowthTheories:OldandNew
1) Intheclassicaltheoryofgrowth,whatisthefinaloutcomeofanincreaseingrowthandlabor
productivity?
Answer: Intheclassicalgrowththeory,ariseinlaborproductivityandtheresultingeconomic
growthresultinapopulationexplosionthatdrivesrealGDPperpersonbacktothe
subsistencelevel.Intheclassicalviewpoint,resourcesarelimitedandtechnological
changeoccursinfrequently,sothattechnologicaladvancesarenotsufficientto
compensateforthelackofresources.Hence,inthelongrunpeopleearnonlya
subsistencelevelofrealincome.
Status: Old
Page873
2) Ofthetwoeconomicgrowththeories,whichisthemostoptimisticaboutthechancesofreal
GDPperpersongrowingindefinitely?Whichisthemostpessimistic?Whataccountsforthe
differences?
Answer: Themostoptimisticisthenewgrowththeory,whichconcludesthatrealGDPper
personcancontinuetogrowindefinitely.Themostpessimisticistheclassicaltheory,
whichconcludesthatgrowthinrealGDPperpersonwillstopandthatpeoplewill
produceonlythesubsistencelevelofrealGDPperperson.Thedifferenceinthetwo
conclusionscanbetracedtodifferencesinassumptionsinthreekeyareas.First,thenew
growththeoryconcludesthattechnologywilladvanceforeverbecausepeople,seeking
profit,makedecisionstodevelopnewtechnology.Classicalgrowththeoryassumesthat
technologicaladvancesarerareandinfrequent.Second,thenewgrowththeoryassumes
thattheeconomyisnotsubjecttodiminishingreturns.Hence,astheeconomy
accumulatesmorecapital,thereturnstocapitaldonotdiminishandsotheincentiveto
addyetmorecapitalcontinuesundiminished.Theclassicalgrowththeoryassumesthat
capital(andlabor)issubjecttodiminishingreturns.Thusasmorecapitalis
accumulated,thereturnsdiminish,andsotheincentivetocontinueaddingmorecapital
disappears.Thusthecapitalstockeventuallystopsgrowing.Finally,thenewgrowth
theoryassumesthatthepopulationdoesnotgrowmorerapidlyasrealGDPperperson
increases.TheclassicaltheoryassumesthatwheneverrealGDPperpersonexceedsthe
subsistencelevel,rapidpopulationgrowthoccursand,becauseofdiminishingreturns
tolabor,theincreasedpopulationdrivesthelevelofrealGDPbacktothesubsistence
amount.
Status: Old
3) Whatdotheclassicalgrowththeoryandthenewgrowththeorypredictforglobalgrowth
amongstdifferentnations?Commentontheaccuracyofthepredictions.
Answer: Theclassicalgrowththeorypredictsthatnationswillproduceonlythesubsistencelevel
ofrealGDPperperson.Thispredictionisincorrect.Accordingtothetheory,each
countryisdriventothesubsistencelevelbyincreasedpopulationgrowthwheneverreal
GDPperpersonexceedsthesubsistenceamount.Hencetheclassicaltheorypredicts
thatthenationswiththehighestlevelsofrealGDPperpersonwillbethenationsin
whichrealGDPperpersonisfallingthemostrapidly.Thispredictionalsoiswildlyat
variancewiththefacts.
Thenewgrowththeorypredictsthatnationswillgrowindefinitelyandthatthe
growthratedependsontheincentiveswithineachnationtosave,invest,accumulate
humancapital,anddevelopnewtechnology.Hencethenewgrowththeorypredicts
thatrealGDPperpersonwillconvergeamongsomenations(thosewithsimilar
incentives)whilethegapsinrealGDPperpersonamongothernationswillpersist.This
predictionisaccurate.
Topic: Growthintheglobaleconomy
Status: Old
Page874
9.9 Essay:AchievingFasterGrowth
1) Whatiseconomicfreedomandwhyisitimportantforeconomicgrowth?
Answer: Economicfreedomisaconditionwhenpeopleareabletomaketheirownchoices,their
privatepropertyisprotected,andtheyarefreetotradeinmarkets.Economicfreedomis
anecessarypreconditionforeconomicgrowthbecauseallthreeaspectsofeconomic
freedomarehighlygrowthenhancing.Peoplearethebestjudgesoftheirowninterests
andabilities,soallowingthemtomaketheirowndecisionscreatesthebestdecisions
aboutwhatactivitieswillbeundertaken.Protectingprivatepropertyisnecessaryin
ordertogivepeopletheincentivestospecializeandtradeaswellastosaveandinvest,
allactionsthatwillincreaseeconomicgrowth.Lettingpeopletradeinfreemarkets
againrespectspeoplesabilitiestomakethebestdecisionsforthemselves,andalso
increasespeoplesincentivestospecializeandtrade.
Topic: Economicfreedom
Status: Old
2) Whyiseconomicgrowthsoslowornon-existentinmanythirdworldcountries?What
policieswouldyouproposetoimprovethesituation?
Answer: Slow-growingthirdworldcountriesgenerallylackthenecessarypreconditionsfor
economicgrowth:economicfreedom,securepropertyrights,andfreelyfunctioning
markets.Inmanyofthesenations,acorruptlegalsystemandgovernmentmeansthat
theruleoflawandpropertyrightsareabsent.Inordertoincreaseeconomicgrowthin
thesenations,policiesthatcreateeconomicfreedom,securepropertyrights,andfree
marketsmustbeadopted.Itdoesnotmatterifthesepoliciesareadoptedbya
democraticgovernmentorbyanauthoritariangovernment,thekeypointisthatthey
arenecessaryforthenationtogrow.Thus,specificpoliciesincludecreatinganefficient
legalsystemthatrespectstheruleoflawandenforcespropertyrightsandcontracts;
eliminatinggovernmentcorruptionthatunderminestheruleoflaw;and,inorderto
establishfreemarkets,decreasinggovernmentbureaucracyandlimitstotrade,suchas
hightaxes,regulations,andimportbans.
Status: Old
Page875
3) Whatpoliciescanagovernmentundertaketoachievefastereconomicgrowth?
Answer: Thereareseveralpoliciesagovernmentcanundertake.Firstthegovernmentmust
insurethatthepreconditionsforgrowtharepresent.Thegovernmentmustinsurethat
economicfreedomexists,thatpropertyrightsareenforced,andthatmarketsarefree.
Afterthesecrucialpreconditionsareinplace,thegovernmentcancreateincentive
mechanismstosave,invest,andinnovate;canencouragesaving;canencourage
researchanddevelopment;canencourageinternationaltrade;andcanimprovethe
qualityofeducation.
Status: Old
4) Acountrysleadershipbelievesthattheneoclassicalgrowththeoryiscorrect.Thecountry
alreadyhasthenecessarypreconditionsforgrowth,sosuggestpolicychangesthegovernment
mightenacttohelpspeedeconomicgrowth.
Answer: Thepolicychangesshouldencouragetechnologicalinnovationandcapitalformation
becausethesearethekeyenginesofgrowthwithintheneoclassicalgrowththeory.
Hence,thegovernmentshouldencourageresearchanddevelopment,possiblyby
directlyfundingresearchanddevelopment.Inaddition,thegovernmentshould
supportpoliciesthatincreasesaving,becauseanincreaseinsavingwillleadto
increasedinvestmentandhencenewcapital,someofwhichwillhavethenew
technologiesembodiedinit.
Topic: Policiesforfastergrowth,researchanddevelopment
Status: Old
5) Whyarethegovernmentsofdevelopedcountriesconcernedaboutthequalityofeducationin
theircountries?Whateffectdoeseducationplayindeterminingthecountryseconomic
growthrateanditsstandardofliving?Whydoesithavethiseffect?
Answer: Improvingthequalityofeducationisanimportantpolicythatthegovernmentcan
undertaketoincreasethenationseconomicgrowthrate.Ahigherqualityeducation
increasesthenationshumancapital.Increasesinhumancapitalboostlabor
productivityand,inturn,theincreaseinlaborproductivityraisesthenationseconomic
growthrateaswellasitsstandardofliving.
Status: Old
Page876
Chapter10 Finance,Saving,andInvestment
10.1 FinancialInstitutionsandMarkets
1) Economistsusethewordcapitaltomean
A) thetools,instruments,andotherproducedgoodsusedtoproducegoodsandservices.
B) thefundsthatfirmsusetobuyandoperatetheirbusinesses.
C) purchasesinthemarketforstocksandbonds.
D) theworkersthatfirmsemploytoproducegoodsandservices.
E) peoplesskillsandtalents.
Answer: A
Topic: Physicalcapital
Status: Old
2) FederalExpressspurchaseoftrucksandplanes
A) isfinancialcapital.
B) includesdepreciation.
C) isanexampleofphysicalcapital.
D) createswealth.
E) reflectscapitalgains.
Answer: C
Status: Old
3) Thedistinctionbetweenphysicalandfinancialcapitalisthat
A) physicalcapitalisequaltofinancialcapitalplusdepreciation.
B) financialcapitalisusedtopurchaseandoperatephysicalcapital.
C) thevalueoffinancialcapitaldependsontheamountofavailablephysicalcapital.
D) physicalcapitalisequaltofinancialcapitalminusdepreciation.
E) financialcapitaldepreciatesandphysicalcapitaldoesnot.
Answer: B
Topic: Physicalcapitalandfinancialcapital
Status: Old
Page877
4) Financialcapital
A) isaccumulatedinvestment.
B) isanothernameforthemachinesandtoolsthatbusinessesbuy.
C) isindependentofphysicalcapital.
D) dependsonsavingandborrowingdecisions.
E) depreciateseachyear.
Answer: D
Topic: Financialcapital
Status: Old
5) Financialcapitalisusedtohelpfinance
A) consumptionexpenditurebyhouseholds.
B) thepurchaseofphysicalcapitalbyfirms.
C) grossinvestmentbutnotnetinvestment.
D) netinvestmentbutnotgrossinvestment.
E) peoplessavings.
Answer: B
Status: Old
6) Thefundsfirmsusetobuyandoperatephysicalcapitalarereferredtoas
A) physicalcapital.
B) financialcapital.
C) governmentcapital.
D) humancapital.
E) businesscapital.
Answer: B
Status: Old
7) Anexampleoffinancialcapitalis
A) machines.
B) buildings.
C) computers.
D) bonds.
E) thetalentsofahighlypaidmoviestar.
Answer: D
Status: Old
Page878
8) ________increasesthequantityofcapital,and________decreasesthequantityofcapital.
A) Netinvestment;grossinvestment
B) Investment;depreciation
C) Depreciation;netinvestment
D) Investment;saving
E) Grossinvestment;netinvestment
Answer: B
Topic: Depreciation,investment
Status: Old
9) ________decreasesafirmscapitalstock,and________increasesitscapitalstock.
A) Saving;depreciation
B) Saving;investment
C) Depreciation;investment
D) Time;depreciation
E) Investment;saving
Answer: C
Topic: Depreciation,investment
Status: Old
10) Thetotalamountspentonnewcapitalgoodsiscalled
A) netinvestment.
B) grossinvestment.
C) depreciation.
D) financialcapital.
E) wealth.
Answer: B
Topic: Grossinvestment
Status: Old
Page879
11) Whichofthefollowingiscorrect?
A) Grossinvestmentequalsnetinvestmentminusdepreciation.
B) Netinvestmentisthesameascapitalconsumption.
C) Grossinvestmentisthetotalspentoncapital.
D) Netinvestmentisthetotalspentoncapital.
E) Thechangeinthenationscapitalstockoverayearequalstheamountofgross
investment.
Answer: C
Topic: Grossinvestment,netinvestment
Status: Old
12) Thetotalamountspenttobuynewphysicalcapitalandreplaceoldcapitalisreferredtoas
A) depreciation.
B) netinvestment.
C) savings.
D) grossinvestment.
E) wealth.
Answer: D
Status: Old
13) BillsLawnservicestartstheyearwith20lawnmowers.Duringtheyear,3mowersbreakand
arenotworthfixing.Billalsoexpandshisbusinessandbuys10moremowers.Billsgross
investmentis________mowers.
A) 10
B) 13
C) 7
D) 27
E) 30
Answer: A
Status: Old
Page880
14) Duringtheyear,supposeacountrystotalpurchasesofnewlyproducedcapitalgoodsis
$2,000billion,issues$1,600billionofstockcertificates,andhas$500billionindepreciation.
Grossinvestmentinthiscountryequals
A) $2,000billion.
B) $2,500billion.
C) $3,600billion.
D) $4,100billion.
E) $2,100billion.
Answer: A
Status: Old
15) OnJanuary1,RicksPhotoowned$50,000ofequipment.Duringtheyear,thevalueofthe
equipmentfellby$10,000,plusRickbought$25,000innewequipment.Rickscompany
experienced
A) $10,000ofdepreciation.
B) $40,000ofdepreciation.
C) anincreaseofnewcapitalby$10,000.
D) anincreaseofnetinvestmentof$35,000.
E) achangeintotalfinancialcapitalof$15,000.
Answer: A
Topic: Depreciation
Status: Old
16) Grossinvestmentequals
A) netinvestmentplusdepreciation.
B) netinvestmentminusdepreciation.
C) grossfinancialcapitalminusdepreciation.
D) grossfinancialcapitalplusdepreciation.
E) netinvestmentfinancialinvestment.
Answer: A
Status: Old
Page881
17) Netinvestmentequals
A) newcapitalplusoldcapital.
B) capitalplusdepreciation.
C) grossinvestmentminusdepreciation.
D) grossinvestmentplusdepreciation.
E) theamountofnationalwealth.
Answer: C
Topic: Netinvestment
Status: Old
18) Netinvestmentequals
A) grossfinancialcapitalminusstockdividends.
B) depreciationplusgrossinvestment.
C) grossinvestmentminusinterestpayments.
D) grossinvestmentminusdepreciation.
E) depreciationminusgrossinvestment.
Answer: D
Status: Old
19) Netinvestmentis
A) thesameasgrossinvestment.
B) thesameasdepreciation.
C) grossinvestmentminusdepreciation.
D) grossinvestmentplusdepreciation.
E) thesameaswealth.
Answer: C
Status: Old
20) Whichofthefollowingstatementsiscorrect?
A) Grossinvestmentminusfinancialcapitalequalsnetinvestment.
B) Netinvestmentplusdepreciationequalsgrossinvestment.
C) Netinvestmentpluscorporateprofitsequalsgrossinvestment.
D) Netinvestmentisgreaterthangrossinvestment.
E) Netinvestmentminusdepreciationequalsgrossinvestment.
Answer: B
Status: Old
Page882
21) Ifaneconomysdepreciationisgreaterthanitsgrossinvestment,then
A) netinvestmentispositiveandsavingisnegative.
B) theeconomyscapitalstockdecreases.
C) netinvestmentispositiveandsavingispositive.
D) netinvestmentisnegativeandsavingisnegative.
E) netinvestmentmustequalsaving.
Answer: B
Status: Old
22) TheZonamocompanyproduceswastedisposalmachinesandsellsthemtomilitariesallover
theworld.Thecompanystartedlastyearwith$10millionofcapitalonhandandinvested$15
millioninnewcapitalthroughouttheyear.Attheendoftheyear,thecompanyscapitalstock
was$17million.Hence,fortheyear,depreciationequaled________andnetinvestment
equaled________.
A) $8million;$7million
B) $7million;$8million
C) $25million;$5million
D) $5million;$5million
E) $8million;$15million
Answer: A
Status: Old
23) ThelocalAlliedMovingCompanybeginsthisyearwithcapitalequalto$250,000.Duringthe
yearthefirmdepreciates$150,000worthofitscapitalandendstheyearwithcapitalequalto
$250,000.WhichstatementcorrectlysummarizesAlliedMovingCompanysinvestment?
A) AlliedMovingCompanymadenocapitalinvestmentduringtheyear.
B) AlliedMovingCompanymadenogrossinvestmentduringtheyear.
C) AlliedMovingCompanymadenonetinvestmentduringtheyear.
D) AlliedMovingCompanymadenetinvestmentof$150,000duringtheyear.
E) AlliedMovingCompanymadegrossinvestmentof$250,000duringtheyear.
Answer: C
Status: Old
Page883
arenotworthfixing.Billalsoexpandshisbusinessandbuys10moremowers.Billsnet
investmentis________mowers.
A) 10
B) 13
C) 7
D) 27
E) 20
Answer: C
Status: Old
arenotworthfixing.Billalsoexpandshisbusinessandbuys10moremowers.Billscapitalat
theendoftheyearis________mowers.
A) 20
B) 30
C) 27
D) 33
E) 10
Answer: C
Topic: Capital
Status: Revised
26) Atthebeginningoftheyear,AAA-1Towingownstrucksandbuildingsforatotalvalueof$1
million.Duringtheyear,itinvests$250,000toreplacetowingtrucksworth$230,000destroyed
inafloodandtocover$50,000worthofdepreciation.AAA-1Towingsnetinvestmentwas
A) $200,000.
B) $20,000.
C) $280,000.
D) -$30,000.
E) $250,000.
Answer: D
Status: Old
27) Atthebeginningoftheyear,AAA-1Towingownstrucksandbuildingsforatotalvalueof$1
million.Duringtheyear,itinvests$250,000toreplacetowingtrucksworth$230,000destroyed
inafloodandtocover$50,000worthofdepreciation.AAA-1Towingscapitalstockattheend
oftheyearwas
A) $970,000.
B) $1,250,000.
C) $950,000.
D) $1,280,000.
E) $1,020,000.
Answer: A
Status: Old
Page884
experienced
A) netinvestmentof$15,000.
B) anincreaseinfinancialcapitalof$65,000.
C) adecreaseinfinancialcapitalof$15,000.
D) depreciationof$15,000.
E) grossinvestmentof$50,000.
Answer: A
Status: Revised
experienced________because________.
A) netinvestmentof$15,000;netinvestmentequalsgrossinvestmentminusdepreciation
B) grossinvestmentof$15,000;grossinvestmentequalsnetinvestmentminusdepreciation
C) grossinvestmentof$40,000;grossinvestmentequalsnetinvestmentplusdepreciation
D) netinvestmentof$15,000;netinvestmentequalsbeginningyearfinancialcapitalminus
depreciationsandinvestment
E) depreciationof$15,000;depreciationequalsinvestmentinnewproductsminuslossin
values
Answer: A
Status: New
30) OnJanuary1,DerekhadCDrecordingdevicesvaluedat$30,000.Duringtheyear,thevalueof
Dereksdevicesdepreciatedby$20,000.Hespent$30,000onnewdevices.Dereksnet
investmentwas________andattheendoftheyearDerekhadcapitalvaluedat________.
A) $10,000;$40,000
B) $30,000;$40,000
C) $20,000;$60,000
D) $40,000;$70,000
E) $10,000;$60,000
Answer: A
Status: Old
Page885
31) During2013,acountrystotalpurchasesofnewlyproducedcapitalgoodsare$1,000billion,
thecountryissues$750billionofstockcertificates,andthereis$200billionofdepreciation.
Netinvestmentinthiscountryequals
A) $800billion.
B) $1,550billion.
C) $1,000billion.
D) $1,750billion.
E) $550billion.
Answer: A
Status: Old
32) Thechangeinthequantityofcapitalfromoneperiodtothenextisequalto
A) netinvestment.
B) grossinvestment.
C) depreciation.
D) financialinvestment.
E) wealth.
Answer: A
Status: Old
33) Whichofthefollowingequalsthechangeinaneconomyscapitalstockfromoneperiodtothe
next?
A) depreciation
B) grossinvestment
C) netinvestment
D) wealth
E) stock
Answer: C
Status: Old
Page886
34) Thedifferencebetweentheamountofcapitalatthebeginningofayearandtheamountof
capitalattheendoftheyearisequalto
A) netinvestment.
B) capitalconsumption.
C) grossinvestment.
D) financialconsumption.
E) depreciation.
Answer: A
Status: Old
35) U.S.capitalattheendof2012equalsU.S.capitalatthebeginningof2012plus
A) nothing,becausecapitalcantchangeinjustoneyear.
B) grossinvestmentduring2012.
C) grossinvestmentduring2012minusnetinvestmentin2012.
D) netinvestmentduring2012.
E) depreciationduring2012minusgrossinvestmentduring2012.
Answer: D
Status: Old
36) Wealthisto________ascapitalstockisto________.
A) saving;investment
B) income;earnings
C) investment;saving
D) income;netinvestment
E) saving;depreciation
Answer: A
Topic: Wealthandsaving
Status: Old
Page887
37) Economistsusethetermwealthtomean
A) thesamethingasincome.
B) whatapersonearns.
C) whatapersonowns.
D) theamountofincomethatisspentandnotsaved.
E) apersonsinvestment.
Answer: C
Topic: Wealth
Status: Old
38) Wealthis
A) definedasthemoneyinyoursavingsaccount.
B) anothernameforincome.
C) thevalueofallthethingsthatapersonowns.
D) equivalenttosaving.
E) thesameasinvestmentinfinancialcapital.
Answer: C
Topic: Wealth
Status: Old
39) Ahouseholdincreasesitswealthby
A) spendingmoreonconsumptiongoods.
B) saving.
C) increasingitscapitalconsumption.
D) decreasingitsdepreciation.
E) makingsurethatitsnetinvestmentexceedsitsgrossinvestment.
Answer: B
Status: Old
Page888
40) Ifcapitalgainsequalzero,thentheNgfamilyswealthattheendoftheyearequalstheir
wealthatthebeginningoftheyear
A) minuspersonalincometaxes.
B) plussaving.
C) minusconsumption.
D) plusincome.
E) plusconsumptionminusincome.
Answer: B
Topic: Wealth
Status: Old
41) Duringthisyear,Barbaraearned$60,000asafinancialanalyst,paidtaxesof$5,000and
consumed$53,000.IfBarbaraswealthwas$4,000atthebeginningoftheyear,attheendofthe
yearBarbaraswealthwas
A) $2,000.
B) $4,000.
C) $5,000.
D) $6,000.
E) $60,000.
Answer: D
Topic: Wealth
Status: Old
42) Assumingtherearenocapitalgains,anationswealthatthestartofayearisequaltothe
wealthatthestartofthepreviousyearplus
A) nothingbecausewealthdoesnotchangefromoneyeartothenext.
B) income.
C) savingduringtheyear.
D) incomeminussavingduringtheyear.
E) savingminusdepreciationduringtheyear.
Answer: C
Topic: Nationalwealth
Status: Old
Page889
43) Duringtheyearacountrysincomewas$6.0trillionanditsconsumptionwas$5.5trillion.At
thestartoftheyearitswealthwas$30.0trillion.Thecountryswealthattheendoftheyear
was
A) $30.0trillion.
B) $30.5trillion.
C) $35.5trillion.
D) $36.0trillion.
E) $6.0trillion.
Answer: B
Topic: Nationalwealth
Status: Old
44) Toacquirefinancialcapital,afirmcan
i. obtainaloanfromabank.
ii. issuestock.
iii. issuebonds.
A) ionly
B) iionly
C) iiionly
D) iandiii
E) i,ii,andiii
Answer: E
Topic: Financialmarkets
Status: Old
45) Adocumentthatpromisestopayspecifiedsumsofmoneyonspecifieddatesandisadebtto
theissueriscalled
A) astock.
B) abond.
C) netinvestment.
D) depreciation.
E) grossinvestment.
Answer: B
Topic: Bond
Status: Old
Page890
46) WhenBankofAmericafinancesyourpurchaseofanewcar,youare
A) lendinginthecapitalmarket.
B) borrowinginthebondmarket.
C) lendinginthebondmarket.
D) borrowingintheloanmarket.
E) borrowinginthestockmarket.
Answer: D
Topic: Loanmarket
Status: Old
47) Whichofthefollowingaretypicallyfinancedintheloanmarket?
i. amortgageforahouse
iii. creditcardbalances
iii. thepurchaseofashareofstockinacorporation.
A) iandiii
B) ionly
C) i,iiandiii
D) iandii
E) iiandiii
Answer: D
Topic: Loanmarket
Status: Old
48) Whichofthefollowingaretypicallyfinancedinabondmarket?
i. amortgageforahouse
ii. stategovernmentborrowingforanewroadproject
iii. yourpurchaseof4000sharesofstockinGoogle
A) iionly
B) iandii
C) iiandiii
D) ionly
Answer: A
Topic: Bondmarket
Status: Old
Page891
E) iandiii
49) Lulupurchasedasecuritythatpromisestopay$50twiceayearfromJanuary15,2012to
January15,2016andthenpay$1,000onJanuary15,2016.Thesecurityisadebttothe
companythatissuedit.Thesecurityisa
A) depreciatingasset.
B) bond.
C) shareofstock.
D) physicalcapital.
E) netinvestmenttothecompanythatissuedit.
Answer: B
Topic: Bond
Status: Old
50) Ashareofstockisa
A) promisetopayspecifiedsumsofmoneyonspecifieddates.
B) certificateofownershipandclaimtotheprofitsmadebyafirm.
C) collectionoffundsthattravelstheworldlookingforthehighestreturn.
D) setofdemandersandsuppliersforthesavingsofhouseholds.
E) formofinvestmentinphysicalcapital.
Answer: B
Topic: Stock
Status: Old
51) Acertificateofownershipandclaimtopartofafirmsprofitsiscalled
A) astock.
B) abond.
C) acertificateofdeposit.
D) depreciation.
E) physicalcapital.
Answer: A
Topic: Stock
Status: Old
Page892
52) Whichofthefollowingaretypicallyfinancedinastockmarket?
i. sharessoldbyafirmtofinanceitsinternationalgrowthplans
ii. newmortgagesforhomebuyers
iii. creditcardbalances
A) ionly
B) i,iiandiii
C) iiandiii
D) iionly
E) iandiii
Answer: A
Topic: Stockmarket
Status: Old
53) Whichofthefollowingrepresentsownershipofafirm?
A) stocks
B) bonds
C) short-termsecurities
D) loans
E) commodities
Answer: A
Topic: Stock
Status: Old
54) Adistinctionbetweenstocksandbondsisthat
A) bondscanbetradedmanytimesinthebondmarket,whilestocksarenon-transferable.
B) althoughthereturnonabondisdeterminedbytheforcesofsupplyanddemand,the
returnonastockissetbythestockexchange.
C) bondscannotbesoldtoanyoneotherthanthecompanythatissueditwhilestockscanbe
resoldtoanyone.
D) stocksrepresentownershipclaimstothecompanyandbondsdonot.
E) bondsmustbeheldforafixednumberofyearswhereasstockscanbeboughtandsoldat
anytime.
Answer: D
Topic: Bondsversusstocks
Status: Old
Page893
55) Astockholder________anownerofthefirm,andabondholder________anownerofthe
firm.
A) is;is
B) is;isnot
C) isnot;is
D) isnot;isnot
E) mightbe;isnot
Answer: B
Topic: Bondsversusstocks
Status: Old
56) Investmentbanksdifferfromcommercialbanksinthefactthat
A) investmentbankshelpotherfinancialinstitutionsandgovernmentsengageinfinancial
marketswhilecommercialbanksworkwithindividuals.
B) investmentbanksworkonlywithwealthycustomerswhilecommercialbanksworkonly
withprivatefirms.
C) commercialbanksservicetheneedsoflocalgovernmentswhileinvestmentbankswork
withthefederalgovernment.
D) commercialbanksissuestocksandbondswhileinvestmentbanksdonot.
E) commercialbankssellstocksonbehalfoftheircustomerswhileinvestmentbanksjust
financeloans.
Answer: A
Topic: Investmentbanks
Status: Old
57) WhatdoFannieMaeandFreddieMachaveincommon?
A) Theyarebothgovernment-sponsoredmortgagelenders.
B) Theyarebothinvestmentbanks.
C) Theyarebothpensionfunds.
D) Bothfirmswentoutofbusinessinthe2008financialcrisis.
E) Bothfirmsissuebondsonbehalfofthegovernment.
Answer: A
Topic: FannieandFreddie
Status: Old
Page894
58) WhichofthefollowingisNOT anexampleofphysicalcapital?

A) abuilding
B) abond
C) adumptruck
D) alawnmower
E) acomputer
Answer: B
Status: Old
59) Thedecreaseinthevalueofthecapitalthatresultsfromitsuseandobsolescenceis
A) appreciation.
B) deconstruction.
C) depreciation.
D) grossinvestment.
E) netinvestment.
Answer: C
Topic: Depreciation
Status: Old
60) Whichofthefollowingformulasiscorrect?
A) Netinvestment=grossinvestment+ depreciation
B) Netinvestment=grossinvestment+ capital
C) Netinvestment=grossinvestment- depreciation
D) Netinvestment=grossinvestment- saving
E) Netinvestment=grossinvestment- wealth
Answer: C
Status: Old
61) IntelscapitalattheendoftheyearequalsIntelscapitalatthebeginningoftheyear
A) minusitsstockdividends.
B) plusnetinvestment.
C) minusdepreciation.
D) plusgrossinvestment.
E) plusdepreciation.
Answer: B
Status: Old
Page895
62) Economistsusethetermfinancialmarketstomeanthemarketsinwhich
A) firmspurchasetheirphysicalcapital.
B) firmssupplytheirgoodsandservices.
C) householdssupplytheirlaborservices.
D) firmsgetthefundsthattheyusetobuyphysicalcapital.
E) thegovernmentborrowstofundanybudgetsurplus.
Answer: D
Status: Old
63) WhenastudentusesacreditcardtobuyaniPod,thestudentis
A) borrowinginthebondmarket.
B) lendinginthebondmarket.
C) lendingintheloanmarket.
D) borrowingintheloanmarket.
E) lendinginthestockmarket.
Answer: D
Status: Old
64) WhichofthefollowingisNOT afinancialinstitution?

A) aninsurancecompany
B) apensionfund
C) FreddieMac
D) acommercialbank
E) Noneoftheaboveiscorrectbecausetheyareallfinancialinstitutions.
Answer: E
Status: Old
Page896
65) Ifthemarketvalueofwhatithaslentislessthanthemarketvalueofwhatithasborrowed,a
financialinstitutionsnetworthis________anditis________.
A) negative;illiquidbutnotnecessarilyinsolvent
B) negative;insolventbutnotnecessarilyilliquid
C) positive;illiquidandinsolvent
D) negative;illiquidandinsolvent
E) positive;insolventbutnotnecessarilyilliquid
Answer: B
Status: Revised
66) Abondspriceis$80andthebondpays$8ininteresteveryyear.Thebondsinterestrateis
________.
A) 8percent
B) 10percent
C) 4percent
D) 80percent
E) Noneoftheabovearecorrect.
Answer: B
Topic: Interestrates
Status: Old
10.2 TheLoanableFundsMarket
1) Onetypeofdemanderintheloanablefundsmarket
A) wantsfundstopurchasefinancialcapital.
B) wantsfundstopurchasephysicalcapital.
C) lendsfundstopurchasefinancialcapital.
D) lendsfundstopurchasephysicalcapital.
E) wantsphysicalcapitalinordertopurchasefinancialcapital.
Answer: B
Topic: Loanablefundsmarket
Status: Old
Page897
2) Thedemandforloanablefundsincludesdemandfor
i. loans.
ii. stocks.
iii. bonds.
A) i,iiandiii
B) ionly
C) iandii
D) iiionly
E) iiandiii
Answer: A
Topic: Demandforloanablefunds
Status: Old
3) Intheloanablefundsmarket,demandersoffundsare________andsuppliersoffundsare
________.
A) firmsandthegovernmentifithasabudgetsurplus;householdsandthegovernmentifit
hasabudgetdeficit
B) firmsandthegovernmentifithasabudgetdeficit;householdsandthegovernmentifit
hasabudgetsurplus
C) householdsandthegovernmentifithasabudgetsurplus;firmsandthegovernmentifit
hasabudgetdeficit
D) householdsandthegovernmentifithasabudgetdeficit;firmsandthegovernmentifit
hasabudgetsurplus
E) householdsandfirms;thegovernmentifithasabudgetdeficit
Answer: B
Status: Old
4) Intheloanablefundsmarket,whichofthefollowingisanexampleofinvestmentdemand?
A) Marybuyingstocksforherretirementportfolio
B) GeorgepurchasingUnitedStatessavingsbondsforhissonscollegefund
C) Scottpurchasingarookie-yearbaseballcardforlastyearsWorldSeriesMVP
D) Brian,ownerofBryanGames,purchasingcomputerstoenhancetheproductionof
games
E) Markbuyingraregoldcoins
Answer: D
Topic: Investmentdemand
Status: Old
Page898
5) Theopportunitycostofthefinancialresourcesusedtofinancethepurchaseofcapitalis
A) therealinterestrate.
B) thesupplyofinvestment.
C) capitalinvestment.
D) thequantityofinvestmentdemanded.
E) thepriceofthecapitalgoodspurchased.
Answer: A
Status: Old
6) ________reflectsauseofloanablefunds,while________reflectsasupplyofloanablefunds.
A) Businessinvestment;thegovernmentbudgetdeficit.
B) Internationalinvestment;businessinvestment.
C) Thegovernmentbudgetdeficit;privatesaving.
D) Agovernmentbudgetsurplus;agovernmentbudgetdeficit.
E) Internationalborrowing;agovernmentbudgetdeficit.
Answer: C
Status: Old
7) Ifafirmwantstoborrow$10millionandtherealinterestrateincreasesfrom5percentto6
percent,thenthecostoftheinvestmenthasincreasedby
A) $1millionperyear.
B) $100,000peryear.
C) $6millionperyear.
D) $600,000peryear.
E) nothingbecausetherealinterestrateisthereturnthefirmwillearnonitsinvestment.
Answer: B
Status: Old
Page899
8) Otherthingsremainingthesame,astherealinterestrateincreases,
A) firmswillborrowmorefunds.
B) firmswillborrowlessfunds.
C) firmsdemandforfundswillnotchange.
D) firmswillpurchasenewcapitalwithitsownfundsinsteadoftakingaloan.
E) thedemandforloanablefundscurveshiftsleftward.
Answer: B
Topic: Quantityofloanablefundsdemanded
Status: Old
9) Otherthingsremainingthesame,the________therealinterestrate,the________.
A) lower;greaterthequantityofloanablefundsdemanded
B) lower;greaterthedemandforloanablefunds
C) higher;greaterthequantityofloanablefundsdemanded
D) higher;greaterthedemandforloanablefunds
E) lower;greaterthequantityofloanablefundssupplied
Answer: A
Status: Old
10) Supposetherealinterestrateincreasesfrom4percentto6percent.Asaresult,
A) governmentsdecreasethequantitysuppliedofloanablefunds.
B) firmsincreasetheirdemandforloanablefunds.
C) governmentsdecreasetheirdemandforloanablefunds.
D) firmsdecreasethequantitydemandedofloanablefunds.
E) governmentsincreasethesupplyofloanablefunds.
Answer: D
Status: Old
11) Iftherealinterestraterises,
A) thequantityofloanablefundsdemandedincreases.
B) thequantityofloanablefundsdemandeddecreases.
C) thereisismovementdownalongthedemandforloanablefundscurve.
D) thedemandforloanablefundscurveshiftsleftward.
E) thedemandforloanablefundscurveshiftsrightward.
Answer: B
Status: Old
Page900
12) Anincreaseinthequantityofloanablefundsdemandedoccurswhen
A) therealinterestratefalls.
B) therealinterestraterises.
C) thesupplyofloanablefundsdecreases.
D) theexpectedprofitrises.
E) wealthdecreases.
Answer: A
Status: Old
13) Thequantityofloanablefundsdemandedincreasesiftherealinterestratefalls,allother
thingsremainingthesame,becausetherealinterestrate
A) determinesthecostofliving.
B) istheopportunitycostofinvestment.
C) affectsthequantityofsavingsupplied.
D) isnotrelatedtothepriceofbondsandstocks.
E) affectsthesupplyofsavingwhich,inturn,determinesthequantityofinvestment.
Answer: B
Status: Old
14) Astheeconomyentersastrongexpansion,thenfirmsdemandforloanablefunds
A) increasesbecauseexpectedprofitincreases.
B) decreasesbecauseexpectedprofitdecreases.
C) increasesbecausethenominalinterestraterises.
D) decreasesbecausethenominalinterestratefalls.
E) increasesbecausetherealinterestraterises.
Answer: A
Topic: Demandforloanablefunds
Status: Old
Page901
15) FordMotorCorporationisconsideringpurchasingnewtechnologythatwillincrease
productivitybytwentypercent.IfFordMotorCorporationdecidestomakethisinvestmentat
thegoingrealinterestrate,then
A) thequantityofloanablefundsdemandedincreases.
B) thesupplyofloanablefundsincreases.
C) thedemandforloanablefundsincreases.
D) Fordsprofitswilldecline.
E) savingincreases.
Answer: C
Topic: Changesinthedemandforloanablefunds
Status: Old
16) Thedemandforloanablefunds
A) increasesinanexpansionanddecreasesinarecession.
B) decreasesinanexpansionandincreasesinarecession.
C) increasesifpopulationgrowthdeclines.
D) increasesiftheexpectedrateofprofitdecreases.
E) increasesifwealthincreases.
Answer: A
Status: Old
17) Whichofthefollowingdecreasesthedemandforloanablefundsandshiftsthedemandfor
loanablefundscurveleftward?
A) Therealinterestraterises.
B) Theeconomyexperiencesarecession.
C) Technologythatincreasesproductivityisintroduced.
D) Aneconomyexperiencesarapidincreaseinpopulation.
E) Wealthdecreases.
Answer: B
Status: Old
Page902
18) Technologicalchangecanincreasethedemandforloanablefundsbecauseit
A) lowerstheinterestrate.
B) canincreasetheexpectedprofit.
C) haslittleeffectonproductioncost.
D) decreasestheneedforadditionalequipment.
E) increasespeoplesexpectedfuturedisposableincome.
Answer: B
Status: Old
19) Thedemandforloanablefundscurveshiftsinresponsetochangesin
B) theamountofhouseholdsavings.
C) expectedprofits.
D) theexpectedfuturedisposableincome.
E) wealth.
Answer: C
Status: Old
20) Thedemandforloanablefundsincreasesif
A) technologicalgrowthslows.
B) populationgrowthslows.
C) expectedprofitincreases.
D) firmsfeararecession.
E) wealthincreases.
Answer: C
Status: Old
Page903
21) Thedemandforloanablefundscurveshowstherelationshipbetweenthequantityofloanable
fundsdemandedand
B) thepricelevel.
C) thecapitalstock.
D) depreciation.
E) theexpectedrateofprofit.
Answer: A
Topic: Demandforloanablefundscurve
Status: Old
22) Thedemandforloanablefundscurveshowsthe
A) negativerelationshipbetweentheinterestrateandthequantityofloanablefunds
demanded.
B) positiverelationshipbetweentheinterestrateandthequantityofloanablefunds
demanded.
C) negativerelationshipbetweenthedemandforloanablefundscurveandthesupplyof
loanablefundscurve.
D) positiverelationshipbetweenthedemandforloanablefundscurveandthesupplyof
loanablefundscurve.
E) U-shapedrelationshipbetweentheinterestrateandthequantityofloanablefunds
demanded.
Answer: A
Status: Old
23) Thedemandforloanablefundscurveillustrates
A) thequantityofloanablefundsdemandedatanygivenlevelofdisposableincome.
B) thequantityofloanablefundsdemandedatanygivenleveloftherealinterestrate.
C) thequantityofloanablefundssuppliedtotheloanablefundsmarketatanygivenlevel
ofdisposableincome.
D) howthequantityofloanablefundsdemandedchangeswhenthepeoplesexpectations
abouttheirfutureincomechanges.
E) howthequantityofloanablefundsdemandedchangeswhenwealthchanges.
Answer: B
Status: Old
Page904
24) Thedemandforloanablefundscurveshowsthatthehighertherealinterestrate,the
A) smallerthequantityofloanablefundsdemanded.
B) smallerthedemandforloanablefunds.
C) largerthequantityofloanablefundsdemanded.
D) largerthedemandforloanablefunds.
E) moretheloanablefundsdemandcurveshiftsleftward.
Answer: A
Status: Old
25) Thedemandforloanablefundscurveslopesdownwardbecausethe
A) highertherealinterestrate,thelowerthecostofinvestment.
B) expectedrateofprofitisrelatedpositivelytotherealinterestrate.
C) priceofbondsandstocksisnotrelatedtotherealinterestrate.
D) realinterestrateistheopportunitycostofinvestment.
E) expectedrateofprofitisfactorthatrewardsfirmsfortheirinvestment.
Answer: D
Status: Old
26) Iftherealinterestratefalls,thereis
A) anupwardmovementalongthedemandforloanablefundscurve.
B) adownwardmovementalongthedemandforloanablefundscurve.
C) arightwardshiftofthedemandforloanablefundscurve.
D) aleftwardshiftofthedemandforloanablefundscurve.
E) aleftwardshiftofthesupplyofloanablefundscurve.
Answer: B
Status: Old
Page905
27) Whichofthefollowingoccursiftherealinterestratefalls?
A) Thedemandforloanablefundsincreasesandthedemandforloanablefundscurveshifts
rightward.
B) Thedemandforloanablefundsdecreasesandthedemandforloanablefundscurve
shiftsleftward.
C) Thequantityofloanablefundsdemandedincreasesandthereisamovementdown
alongthedemandforloanablefundscurve.
D) Thequantityofloanablefundsdemandeddecreasesincreasesandthereisamovement
upalongthedemandforloanablefundscurve.
E) Thequantityofloanablefundsdemandedincreasesandthedemandforloanablefunds
curveshiftsrightward.
Answer: C
Status: Old
28) Afallintherealinterestratebringsa
A) movementdownalongthedemandforloanablefundscurvebutnoshiftinthecurve.
B) rightwardshiftofthedemandforloanablefundscurvebutnomovementalongthe
curve.
C) movementupalongthedemandforloanablefundscurve.
D) leftwardshiftofthedemandforloanablefundscurve.
E) movementdownalongthedemandforloanablefundscurveandarightwardshiftofthe
demandforloanablefundscurve.
Answer: A
Status: Old
29) Inabusinesscyclerecession,whichofthefollowingoccurs?
A) Investmentdemandincreasesandthedemandforloanablefundscurveshiftsrightward.
B) Investmentdemanddecreasesandthedemandforloanablefundscurveshiftsleftward.
C) Thequantityofinvestmentdemandedincreasesandthereisamovementdownalong
thedemandforloanablefundscurvebutnoshiftinthecurve.
D) Thequantityofinvestmentdemandeddecreasesincreasesandthereisamovementup
alongthedemandforloanablefundscurvebutnoshiftinthecurve.
E) Thequantityofinvestmentdemandeddecreasesand thereisarightwardshiftofthe
Answer: B
Status: Old
Page906
30) Duringarecession,firmsexpectedprofitfrominvestment________sothedemandfor
loanablefundscurve________.
A) falls;shiftsrightward
B) falls;shiftsleftward
C) rises;shiftsrightward
D) rises;shiftsleftward
E) falls;doesnotshift
Answer: B
Status: Old
31) Whathappenstothedemandforloanablefundscurvewhentheeconomyentersarecession?
A) Thedemandforloanablefundscurveshiftsrightwardbecausetherealinterestratefalls.
B) Thedemandforloanablefundscurveshiftsleftwardbecausetherealinterestratefalls.
C) Thedemandforloanablefundscurveshiftsrightwardbecauseexpectedprofitfalls.
D) Thedemandforloanablefundscurveshiftsleftwardbecauseexpectedprofitfalls.
E) Thedemandforloanablefundscurveshiftsleftwardbecausewealthdecreases.
Answer: D
Status: Old
32) Thedemandforloanablefundscurveshiftsrightwardwhen
A) therealinterestraterises.
B) therealinterestratefalls.
C) expectedprofitincreases.
D) expectedprofitdecreases.
E) wealthrises.
Answer: C
Status: Old
Page907
33) Whentheexpectedprofit________,investmentdemand________andthedemandfor
loanablefundscurveshifts________.
A) falls;decreases;leftward
B) rises;increases;leftward
C) falls;decreases;rightward
D) rises;decreases;rightward
E) falls;increases;rightward
Answer: A
Status: Old
34) Anincreaseintheexpectedprofitfromnewcapitalbringsabouta
A) movementupalongthedemandforloanablefundscurve.
B) movementdownalongthedemandforloanablefundscurve.
C) rightwardshiftofthedemandforloanablefundscurve.
D) leftwardshiftofthedemandforloanablefundscurve.
E) rightwardshiftofthesupplyofloanablefundscurve.
Answer: C
Status: Old
35) Whichofthefollowingoccursiftheexpectedprofitincreases?
A) Investmentdemandincreasesandthedemandforloanablefundscurveshiftsrightward.
B) Investmentdemanddecreasesandthedemandforloanablefundscurveshiftsleftward.
C) Thequantityofinvestmentdemandedincreasesandthereisamovementdownalong
thedemandforloanablefundscurve.
D) Thequantityofinvestmentdemandeddecreasesandthereisamovementupalongthe
E) Thesavingsincreasesandthesupplyofloanablefundscurveshiftsrightward.
Answer: A
Status: Old
Page908
36) Iffirmsbecamemoreoptimisticaboutthefutureoftheeconomy,whichofthefollowing
occurs?
A) Investmentdemandincreases,andthedemandforloanablefundscurveshifts
rightward.
B) Investmentdemanddecreases,andthedemandforloanablefundscurveshiftsleftward.
C) Thequantityofinvestmentdemandedincreases,andthereisamovementdownalong
thedemandforloanablefundscurve.
D) Thequantityofinvestmentdemandeddecreases,andthereisamovementupalongthe
E) Thesavingdecreases,andthesupplyofloanablefundscurveshiftsleftward.
Answer: A
Status: Old
37) Inthefigureabove,therightwardshiftfromthedemandforloanablefundscurveDLF 1 tothe

demandforloanablefundscurveDLF 2 ,couldbetheresultof
A) ariseintheinterestrate.
B) anincreaseinwealth.
C) anincreaseinexpectedprofit.
D) adecreaseinexpectedprofit.
E) afallintheinterestrate.
Answer: C
Status: Old
Page909
38) Inthefigureabove,theshiftfromDLF 1 toDLF 2 couldresultfrom

A) theeconomyenteringastrongexpansion.
B) anincreaseinthenominalinterestrate.
C) adecreaseintherealinterestrate.
D) anincreaseinagovernmentbudgetsurplus.
E) theeconomyenteringarecession.
Answer: A
Status: Old
39) Inthefigureabove,theleftwardshiftfromthedemandforloanablefundscurve DLF 1 tothe

A) adecreaseininterestratesduringaneconomicrecession.
B) anincreaseininterestratesduringaneconomicexpansion.
C) theeconomyenteringarecession.
D) agovernmentbudgetsurplus.
E) theeconomyenteringanexpansion.
Answer: C
Status: Old
40) Inthefigureabove,theleftwardshiftfromthedemandforloanablefundscurve DLF 1 tothe

A) afallintheinterestrate.
B) adecreaseinexpectedprofit.
C) anadvancementintechnology.
D) anincreaseinthepopulation.
E) ariseintheinterestrate.
Answer: B
Status: Old
Page910
41) Thesupplyofloanablefundsisfrom
A) householdsandthegovernmentifithasabudgetsurplus.
B) householdsandthegovernmentifithasabudgetdeficit.
C) firmsandthegovernmentifithasabudgetsurplus.
D) firmsandthegovernmentifithasabudgetdeficit.
E) householdsandfirms.
Answer: A
Topic: Supplyofloanablefunds
Status: Old
42) Thequantityofloanablefundssuppliedincreasesiftherealinterestraterises,allotherthings
remainingthesame,becausethe
A) realinterestrateistheopportunitycostofsaving.
B) realinterestrateistheopportunitycostofconsumption.
C) costoflivingisdeterminedbytherealinterestrate.
D) realinterestrateisinverselyrelatedtothecostofbuyingoncredit.
E) demandforinvestmentincreaseswhentherealinterestraterises.
Answer: B
Status: Old
43) Thequantityofloanablefundssuppliedincreasesifthe________,allotherthingsremaining
thesame,becausethe________.
A) realinterestraterises;realinterestrateistheopportunitycostofsaving
B) realinterestraterises;realinterestrateistheopportunitycostofconsumption
C) realinterestraterises;costoflivingisdeterminedbytherealinterestrate
D) realinterestratefalls;realinterestrateistheopportunitycostofconsumption
E) realinterestratefalls;realinterestrateistheopportunitycostofsaving
Answer: B
Status: New
Page911
44) Therealinterestrateis________relatedtothesupplyofloanablefundsbecause________.
A) positively;theopportunitycostofconsumptionexpenditureincreasesastherealinterest
raterises
B) negatively;theopportunitycostofconsumptionexpenditureincreasesastherealinterest
raterises
C) positively;peoplearemotivatedtoincreasetheirconsumptionexpenditureasthereal
interestraterises
D) negatively;peoplearemotivatedtosavemoreastherealinterestraterises
E) Noneoftheaboveanswersiscorrect.
Answer: A
Status: Old
45) Iftherealinterestratefalls,peopledecideto________becausetheopportunitycostof
________.
A) increasetheirconsumptionexpenditure;savinghasdecreased
B) increasetheirconsumptionexpenditure;consumptionhasdecreased
C) decreasetheirconsumptionexpenditure;consumptionhasdecreased
D) savemore;savinghasdecreased
Answer: B
Status: Old
46) Iftheinterestrateonstudentloans________,studentswill________.
A) risesfrom6percentto12percent;increasetheirsavinginordertopaybacktheloan
sooner
B) risesfrom6percentto12percent;increasetheirconsumptionbeforeitbecomestoo
expensive
C) fallsfrom6percentto1percent;increasetheirsavinginordertopaybacktheloan
sooner
D) fallsfrom6percentto1percent;notchangetheirsavingbutwillchangetheirinvestment
Answer: A
Status: Old
Page912
47) Increasingsavingsand________gohandinhandbecausetheyboth________.
A) decreasingexpenditures;aretheresultofanincreaseinrealinterestratesontheloanable
fundsmarket
B) decreasingexpenditures;aretheresultofanincreaseinnominalinterestratesonthe
loanablefundsmarket
C) increasingexpenditures;aretheresultofanincreaseinrealinterestratesontheloanable
fundsmarket
D) increasingexpenditures;aretheresultofanincreaseinnominalinterestratesonthe
loanablefundsmarket
Answer: A
Status: New
48) Thesupplyofloanablefundsscheduleshowsthatthe
A) highertherealinterestrate,thegreaterthequantityofloanablefundssupplied.
B) highertherealinterestrate,thegreatertheopportunitycostofsupplyingloanablefunds.
C) highertherealinterestrate,thelowertheprofitfrommakingnewinvestment.
D) lowertherealinterestrate,thegreaterthequantityofloanablefundssupplied.
E) highertherealinterestrate,themorethesupplyofloanablefundscurveshifts
rightward.
Answer: A
Status: Revised
49) Anincreaseintherealinterestrate
A) hasnoeffectontheloanablefunds.
B) increasesthequantityofloanablefundssupplied.
C) increasescurrentconsumption.
D) decreasesthequantityofloanablefundssupplied.
E) shiftsthesupplyofloanablefundscurverightward.
Answer: B
Status: Old
Page913
50) Astherealinterestraterises,thequantityofloanablefundssupplied________andthe
quantityofloanablefundsdemanded________.
Answer: B
Topic: Supplyofloanablefunds,demandforloanablefunds
Status: Old
51) Adecreaseinpeoplesdisposableincome
A) increasessaving.
B) increasesconsumption.
C) decreasessaving.
D) increasessavinganddecreaseconsumption.
E) increasesinvestmentdemand.
Answer: C
Topic: Changesinsavingsupply
Status: Old
52) Astheeconomyentersanexpansionsothatpeoplesexpectedfutureincomesrise,therewill
be
A) anincreaseinthesupplyofloanablefunds.
B) aleftwardshiftinthesupplyofloanablefundscurve.
C) adecreaseinthenominalinterestrate.
D) aleftwardshiftinthedemandforloanablefundscurve.
Answer: A
Topic: Changesinsavingsupply
Status: Old
Page914
53) Whendisposableincomeincreases,savingwill
A) decrease,andthereisamovementdownwardalongthesupplyofloanablefundscurve.
B) increase,andthereisamovementupwardalongthesupplyofloanablefundscurve.
C) notchange.
D) increase,andthesupplyofloanablefundscurveshiftsrightward.
E) decrease,andthesupplyofloanablefundscurveshiftsleftward.
Answer: D
Topic: Changesinthesupplyofloanablefunds
Status: Old
54) Ifthedisposableincomedecreases,then
A) thesupplyofloanablefundsincreases.
B) thesupplyofloanablefundsdecreases.
C) thequantityofloanablefundsdemandedincreases.
D) thequantityofloanablefundssupplieddecreases.
E) thedemandforloanablefundsincreases.
Answer: B
Status: Old
55) Ifexpectationsaboutfutureincomechange,thereis
A) nochangeinsavinguntilincomeactuallychanges.
B) adecreaseinsavingifpeopleexpectincometoincreaseinthefuture.
C) anincreaseinsavingifpeopleexpectincometoincreaseinthefuture.
D) adecreasesavingifpeopleexpectincometodecreaseinthefuture.
E) achangeinthequantityofloanablefundssuppliedandamovementalongthesupplyof
loanablefundscurve.
Answer: B
Status: Old
Page915
56) Ifexpectedfutureincomeincreases,then
A) thesupplyofloanablefundsincreases.
B) thesupplyofloanablefundsdecreases.
C) thequantityofloanablefundsdemandedincreases.
D) thequantityofloanablefundssupplieddecreases.
E) thedemandforloanablefundsdecreases.
Answer: B
Status: Old
57) In2008thefallinthevalueofthestockmarketdecreasedpeopleswealth.Asaresultofthis
changealone,thesupplyofloanablefunds
A) increased.
B) didnotchange,andtherewasnomovementalongthesupplyofloanablefundscurve.
C) decreased.
D) didnotchange,andtherewasanupwardmovementalongthesupplyofloanablefunds
curve.
E) didnotchange,andtherewasadownwardmovementalongthesupplyofloanable
fundscurve.
Answer: A
Status: Old
58) When________changes,thesupplyofloanablefundscurveshifts.
A) theexpectedrateofprofit
B) peoplesexpectedfutureincome
C) thepricelevel
D) animalspirits
E) investment
Answer: B
Topic: Shiftsofthesupplyofloanablefundscurve
Status: Old
Page916
59) Whichofthefollowingfactorschangessavingsupplyandhenceshiftsthesupplyofloanable
fundscurve?
i. disposableincome
ii. wealth
iii. expectedprofit
A) ionly
B) iionly
C) iiionly
D) iandii
E) i,ii,andiii
Answer: D
Topic: Supplyofloanablefundscurve
Status: Old
60) Whichofthefollowingshiftsthesupplyofloanablefundscurve?
A) changeintherealinterestrate
B) changeininvestmentdemand
C) changeindisposableincome
D) changeinexpectedprofit
E) changeinanimalspirits
Answer: C
Status: Old
61) Afallintherealinterestratebringsa
A) movementupalongthesupplyofloanablefundscurve.
B) rightwardshiftofthesupplyofloanablefundscurve.
C) movementdownalongthesupplyofloanablefundscurve.
D) leftwardshiftofthesupplyofloanablefundscurve.
E) rightwardshiftofthedemandforloanablefundscurve.
Answer: C
Status: Old
Page917
62) Iftherealinterestraterises,thenthe
A) supplyofsavingincreasesandthesupplyofloanablefundscurveshiftsrightward.
B) supplyofsavingdecreasesandthesupplyofloanablefundscurveshiftsleftward.
C) quantityofsavingincreasesandthereisamovementupalongthesupplyofloanable
fundscurve.
D) quantityofsavingdecreasesandthereisamovementdownalongthesupplyofloanable
fundscurve.
E) demandforinvestmentdecreasesandthedemandforloanablefundscurveshifts
leftward.
Answer: C
Status: Old
63) Iftherealinterestrate
A) rises,thesupplyofloanablefundscurveshiftsrightward.
B) rises,thesupplyofloanablefundscurveshiftsleftward.
C) falls,thereisamovementalongthesupplyofloanablefundscurvetoahigherquantity
ofsaving.
D) falls,thereisamovementalongthesupplycurveofloanablefundstoalowerquantityof
loanablefunds.
E) falls,thesupplyofloanablefundscurveshiftsleftward.
Answer: D
Status: Old
64) Thesupplyofloanablefundscurvehasapositiveslopebecausethe
A) highertherealinterestrate,thelowerthereturntosaving.
B) averagereturninthestockmarketisdirectlyrelatedtotherealinterestrate.
C) lowertherealinterestrate,thehigherthereturntosaving.
D) lowertherealinterestrate,thelowerthereturntosaving.
E) quantityofinvestmentincreaseswhentherealinterestrateincreases.
Answer: D
Status: Old
Page918
65) Ifwealth________,thensavingincreases,whichisshownbya________.
A) increases;movementupwardalongthesupplyofloanablefundscurve
B) decreases;movementdownwardalongthesupplyofloanablefundscurve
C) increases;rightwardshiftofthesupplyofloanablefundscurve
D) decreases;rightwardshiftofthesupplyofloanablefundscurve
E) increases;leftwardshiftofthesupplyofloanablefundscurve
Answer: D
Status: Old
66) WhichofthefollowingfactorsdoesNOT shiftthesupplyofloanablefundscurve?

i. changeindisposableincome
ii. changeinwealth
iii. changeinexpectedprofit
A) ionly
B) iionly
C) iiionly
D) iandii
E) iiandiii
Answer: C
Status: Old
67) Thesupplyofloanablefundscurvehasa________slopeandthedemandforloanablefunds
curvehasa________slope.
A) positive;positive
B) positive;negative
C) negative;positive
D) negative;negative
E) vertical;horizontal
Answer: B
Topic: Supplyofloanablefundscurve,demandforloanablefundscurve
Status: Old
Page919
68) Inwhichofthefollowingcaseswouldthesupplyofloanablefundscurveshiftrightward?
A) Joeisworriedaboutcutbacksathisfirm,sohisexpectedfutureincomefalls.
B) InJune,Sallylearnsthatatyearsendshewillreceiveabonusthatwilldoubleher
currentsalary.
C) Thestockmarketbooms,sopeopleswealthincreases.
D) Theeconomymovesintoarecession.
E) Investmentdemandincreases.
Answer: A
Status: Old
69) Adecreaseinhouseholdsdisposableincome________savingsupply,andthesupplyof
loanablefundscurve________.
A) decreases;shiftsrightward
B) decreases;shiftsleftward
C) increases;shiftsrightward
D) increases;shiftsleftward
E) doesnotchange;doesnotshift
Answer: B
Status: Old
70) Anincreaseindisposableincomeleadstoa
A) leftwardshiftofthedemandforloanablefundscurve.
B) downwardmovementalongthesupplyofloanablefundscurve.
C) rightwardshiftofthesupplyofloanablefundscurve.
Answer: C
Status: Old
Page920
71) Adecreaseinwealthleadstoa
A) leftwardshiftofthedemandforloanablefundscurve.
Answer: C
Status: Old
72) Anincreaseinwealth________savingsupply,andthesupplyofloanablefundscurve
________.
Answer: B
Status: Old
73) Whenwealth________,savingsupply________,andthesupplyofloanablefundscurveshifts
________.
A) decreases;decreases;leftward
B) increases;increases;leftward
C) decreases;decreases;rightward
D) increases;decreases;leftward
E) increases;increases;rightward
Answer: D
Status: Old
Page921
74) Anincreaseinpeoplesexpectedfuturedisposableincome________savingsupply,andthe
supplyofloanablefundscurve________.
Answer: B
Status: Old
75) Adecreaseinexpectedfutureincomeleadstoa
A) rightwardshiftofthedemandforloanablefundscurve.
E) leftwardshiftofthedemandforloanablefundscurve.
Answer: C
Status: Old
Page922
76) SupposethattheinitialsupplyofloanablefundscurveisSLF1 .Inthefigureabove,anincrease

intherealinterestrateleadsto
i. ashiftinthesupplyofloanablefundscurvefromSLF1 toSLF2 .
ii. ashiftinthesupplyofloanablefundscurvefromSLF1 toSLF3 .
iii. amovementalongthesupplyofloanablefundscurveSLF1 .
iv. nochangewhatever.
A) ionly
B) iionly
C) iiionly
D) iandiii
E) ivonly
Answer: C
Status: Old
77) Inthefigureabove,theshiftinthesupplyofloanablefundscurvefromSLF1 toSLF2 couldbe

theresultof
A) anincreaseintherealinterestrate.
B) adecreaseindisposableincome.
C) anincreaseinexpectedrateofprofit.
D) adecreaseinwealth
E) anincreaseinexpectedfuturedisposableincome.
Answer: D
Status: Old
Page923
78) Intheloanablefundsmarket,ashortageofloanablefundsoccurswhenthe
A) demandforloanablefundsexceedssupplyofloanablefunds.
B) supplyofloanablefundsexceedsdemandforloanablefunds.
C) quantityofloanablefundssuppliedexceedsthequantityofloanablefundsdemanded.
D) quantityofloanablefundsdemandedexceedsthequantityofloanablefundssupplied.
E) supplyofloanablefundscurveshiftsrightward.
Answer: D
Topic: Loanablefundsmarketequilibrium
Status: Old
79) Iftherealinterestrateislessthantheequilibriumrealinterestrate,thereisa________of
loanablefunds,and________.
A) surplus;someborrowerscannotfindthefundstheywant
B) shortage;someborrowerscannotfindthefundstheywant
C) surplus;borrowershaveaneasytimefindingthefundstheywant
D) shortage;borrowershaveaneasytimefindingthefundstheywant
E) shortage;saversincreasetheirsavingsupplytorestoretheequilibrium
Answer: B
Status: Old
80) Whentherealinterestrate________theequilibriumrealinterestrate,thereisa________of
loanablefundsandtherealinterestrate________.
A) exceeds;surplus;rises
B) islessthan;surplus;rises
C) exceeds;shortage;rises
D) islessthan;shortage;rises
E) islessthan;shortage;falls
Answer: D
Status: Old
Page924
81) Ifasurplusofloanablefundsexistsintheloanablefundsmarket,therealinterestrate
________andthequantityofsaving________.
A) rises;increases
B) rises;decreases
C) falls;increases
D) falls;decreases
E) falls;doesnotchange
Answer: D
Status: Old
82) Theequilibriumrealinterestrateis5percent.Iftherealinterestrateis
A) 3percent,thenthesupplyofloanablefundscurvewillshiftleftwardasnewsaversenter
themarket.
B) 6percent,thedemandforloanablefundscurvewillshiftrightwardasfirmsenterthe
markettoborrowatthelowerrate.
C) 8percent,thereisasurplusofloanablefunds.
D) 2percent,thereisashortageofloanablefunds.
E) anythingotherthan5percent,thesupplyofloanablefundscurveand/orthedemandfor
loanablefundscurvewillshifttomovetherealinterestrateto5percent.
Answer: C
Status: Old
83) Intheloanablefundsmarket,iftherealinterestrateishigherthantheequilibriumrealinterest
rate,
A) thereisashortageofloanablefunds.
B) thereisasurplusofloanablefunds.
C) thereisasurplusofinvestment.
D) thedemandforloanablefundscurveshiftsrightwardtorestoretheequilibrium.
E) thedemandforloanablefundscurveshiftsleftwardtorestoretheequilibrium.
Answer: B
Status: Old
Page925
84) Atthecurrentinterestrate,thequantityofloanablefundssuppliedisgreaterthanthequantity
ofloanablefundsdemanded.Therefore
A) therealinterestrateisbelowtheequilibriumlevel.
B) therealinterestrateisabovetheequilibriumlevel.
C) equilibriumwillnotbeachieveduntilsomethingshiftsthesupplyofloanablefunds
curveleftward.
D) equilibriumwillnotbeachieveduntilsomethingshiftsthedemandforloanablefunds
curverightward.
E) equilibriumwillnotbeachieveduntilsomethingshiftsthesupplyofloanablefunds
curverightward.
Answer: B
Status: Old
85) Whentherealinterestrate________theequilibriumrealinterestrate,thereisa________of
loanablefundsandtherealinterestrate________.
A) exceeds;surplus;falls
B) islessthan;surplus;rises
C) exceeds;shortage;rises
D) islessthan;shortage;falls
E) exceeds;surplus;rises
Answer: A
Status: Old
Page926
86) Thefigureaboveshowstheloanablefundsmarket.Theequilibriumrealinterestrateis
________,andtheequilibriumquantityofloanablefundsis________.
A) 6percent;$2.0trillion
B) 4percent;$2.5trillion
C) 8percent;$1.5trillion
D) 0percent;$3.5trillion
E) 4percent;$1.5trillion
Answer: A
Status: Old
87) Thefigureaboveshowstheloanablefundsmarket.Iftherealinterestrateis2percent,then
A) therewillbegovernmentinterventioninthemarkettomakesurethereisnocreditcrisis.
B) therewillbealeftwardshiftinthedemandforloanablefundscurve.
C) thereisasurplusintheloanablefundsmarket.
D) thereisashortageintheloanablefundsmarket
E) thedemandforloanablefundscurvewillshiftrightward.
Answer: D
Topic: Capitalmarketequilibrium
Status: Old
Page927
88) Thefigureaboveshowstheloanablefundsmarket.Iftherealinterestrateis10percent,then
A) thereisashortageintheloanablefundsmarket.
B) thereisasurplusintheloanablefundsmarket.
C) theinterestratemustincrease.
D) thegovernmentmustinterveneinordertopreventacreditcrisis.
E) saverswillexitthemarketbecauseofthehighopportunitycostofsaving.
Answer: B
Status: Revised
89) Thefigureaboveshowstheloanablefundsmarket.Theequilibriumrealinterestrateis
________percent,andtheequilibriumquantityofloanablefundsis________.
A) 4;$1.8trillion
B) 6;$1.6trillion
C) 8;$1.4trillion
D) 4;$1.4trillion
E) 8;$1.8trillion
Answer: B
Status: Old
Page928
90) Thefigureaboveshowstheloanablefundsmarket.Ataninterestrateof
A) 8percent,thereisasurplusofloanablefunds.
B) 8percent,thequantitydemandedofloanablefundsexceedsthequantitysupplied.
C) 4percent,thequantitysuppliedofloanablefundsequals$18trillion.
D) 6percent,thequantitydemandedofloanablefundsequals$14trillion.
E) 4percent,thereisasurplusofloanablefunds.
Answer: A
Status: Old
91) Thefigureaboveshowstheloanablefundsmarket.Ataninterestrateof
A) 4percent,thereisasurplusofloanablefunds.
B) 4percent,thereisashortageofloanablefunds.
C) 8percent,thequantityofloanablefundssuppliedis$14trillion.
D) 8percent,thequantitydemandedofloanablefundsis$18trillion.
E) 6percent,saverswillexitthemarketbecausetherewardtosavingistoolow.
Answer: B
Status: Old
92) Supposethatthereisanincreaseindisposableincomeandsimultaneouslyanincreaseinthe
expectedprofitabilityofinvestment.Asaresult,theequilibriumrealinterestrate________
andtheequilibriumquantityofloanablefunds________.
A) rises;increases
B) falls;increases
C) remainsunchanged;increases
D) mightrise,fall,orremainunchanged;increases
E) mightrise,fall,orremainunchanged;decreases
Answer: D
Status: Old
Page929
93) Supposethatthereisanincreaseinexpectedfuturedisposableincomeandsimultaneouslyan
increaseintheexpectedprofitabilityofinvestment.Asaresult,theequilibriumrealinterest
rate________andtheequilibriumquantityofloanablefunds________.
A) rises;mightincrease,decrease,ornotchange
B) rises;increases
C) rises;decreases
D) falls;mightincrease,decrease,ornotchange
E) falls;increases
Answer: A
Status: Old
94) Supposefirmsbecomemoreoptimisticabouttheeconomysabilitytoavoidarecessionand
hencetheexpectedprofitincreases.Asaresult,thedemandforloanablefundscurveshifts
________andtherealinterestrate________.
A) rightward;rises
B) rightward;falls
C) leftward;rises
D) leftward;falls
E) rightward;doesnotchange
Answer: A
Status: Old
95) Adecreaseinexpectedprofit
A) lowerstheequilibriumrealinterestrate.
B) raisestheequilibriumrealinterestrate.
C) increasesthedemandforloanablefunds.
D) decreasesthesupplyofloanablefunds.
E) increasesthesupplyofloanablefunds.
Answer: A
Status: Old
Page930
96) Iftherealinterestratefalls,otherthingsbeingthesame,thequantityofloanablefunds
demanded________andthequantityofloanablefundssupplied________.
A) increases;decreases
B) increases;increases
C) decreases;doesnotchange
D) doesnotchange;decreases
E) decreases;decreases
Answer: A
Topic: Supplyofloanablefunds,demandforloanablefunds
Status: Old
97) Thedemandforloanablefunds
A) increasesinarecession.
B) decreasesinanexpansion.
C) increaseswhenfirmsareoptimisticabouttheprofitfrominvestingincapital.
D) increaseswhenwealthincreases.
E) decreaseswhenwealthincreases.
Answer: C
Status: Old
98) Otherthingsremainingthesame,a________intherealinterestrate________thequantityof
savingsuppliedand________thequantityofloanablefundssupplied.
A) fall;increases;increases
B) rise;increases;increases
C) fall;increases;decreases
D) fall;decreases;increases
E) rise;increases;decreases
Answer: B
Topic: Savingsupply
Status: Old
Page931
99) Anincreaseinwealthleadsto________loanablefunds.
A) anincreaseinthesupplyof
B) anincreaseinthedemandfor
C) adecreaseinthesupplyof
D) adecreaseinthedemandfor
E) nochangeineitherthesupplyofloanablefundsorthedemandfor
Answer: C
Status: Old
100) Iftherealinterestratefalls,thereis
A) anupwardmovementalongthesupplyofloanablefundscurve.
B) adownwardmovementalongthesupplyofloanablefundscurve.
C) arightwardshiftofthesupplycurveofloanablefundsandnoshiftinthedemandfor
loanablefundscurve.
D) aleftwardshiftofthesupplyofloanablefundscurveandnoshiftinthedemandfor
loanablefundscurve.
E) aleftwardshiftofthesupplyofloanablefundscurveandarightwardshiftinthe
Answer: B
Status: Old
101) If,atthecurrentinterestrate,thequantityofloanablefundssuppliedislessthanthequantity
ofloanablefundsdemanded,then
A) thesupplyofloanablefundscurveshiftsrightwardandtherealinterestraterises.
B) thesupplyofloanablefundscurveshiftsleftwardandtherealinterestratefalls.
C) therealinterestratefalls.
D) therealinterestraterises.
E) thesupplyofloanablefundscurveshiftsleftwardandtherealinterestraterises.
Answer: D
Status: Old
Page932
102) Ifexpectedprofitfalls,thedemandforloanablefundscurveshifts________,andthereal
interestrate________.
A) rightward;rises
B) rightward;falls
C) leftward;rises
D) leftward;falls
E) leftward;doesnotchange
Answer: D
Status: Old
10.3 GovernmentinLoanableFundsMarket
1) Foragovernmenttoaddtothesupplyofloanablefunds,itmust
A) borrow.
B) haveabudgetsurplus.
C) haveabudgetdeficit.
D) raisetherealinterestrate.
E) increaseitsinvestmentdemand.
Answer: B
Topic: Governmentsaving
Status: Old
2) Ifagovernmenthasabudgetdeficit,itmust
A) borrowintheloanablefundsmarket.
B) increasetaxes.
C) lowertherealinterestrate.
D) decreaseitsexpenditures.
E) decreasetaxes.
Answer: A
Status: Old
Page933
3) Governmentsavingisequalto
A) thequantityofinvestmentdemanded.
B) nettaxesminusgovernmentexpenditures.
C) nettaxesplusgovernmentexpenditures.
D) privatesavingsminusgovernmentexpenditures.
E) nettaxes.
Answer: B
Status: Old
4) IfthereisnoRicardo-Barroeffect,thegovernment
A) playsnodirectroleintheloanablefundsmarketbecauseitdoesntaffecteitherthe
demandforloanablefundsorthesupplyofloanablefunds.
B) alwayshasnegativesavingandthereforelowerstherealinterestrate.
C) onlyaffectsthedemandforloanablefundscurveintheloanablefundsmarket.
D) increasesthesupplyofloanablefundsifithasabudgetsurplusandshiftsthesupplyof
loanablefundscurve.
E) hasnoeffectbecauseprivatesavingchangestooffsettheeffectthatthegovernments
budgetdeficitorsurplusmightotherwisehave.
Answer: D
Status: Old
5) IfthereisnoRicardo-Barroeffect,anincreaseinthegovernmentbudgetsurplus
A) decreasesprivatesaving.
B) increasesprivatesaving.
C) decreasesthesupplyofloanablefunds.
D) increasesthesupplyofloanablefunds.
E) hasnoeffectonthedemandforloanablefunds,thesupplyofloanablefunds,orthereal
interestrate.
Answer: D
Status: Old
Page934
6) IfthereisnoRicardo-Barroeffect,agovernmentbudgetsurplus
A) increasesthesupplyofloanablefunds.
B) decreasesthesupplyofloanablefunds.
C) increasesthedemandforloanablefunds.
D) decreasesthedemandloanablefunds.
E) hasnoeffectonthedemandforloanablefunds,thesupplyofloanablefunds,orthereal
interestrate.
Answer: A
Status: Old
7) IfthereisnoRicardo-Barroeffect,anincreaseinthegovernmentbudgetsurpluswill
A) decreasethesupplyofloanablefunds.
B) raisetherealinterestrate.
C) lowertherealinterestrate.
D) decreasethedemandforloanablefunds.
E) notchangethedemandforloanablefunds,thesupplyofloanablefunds,orthereal
interestrate.
Answer: C
Topic: Effectofagovernmentbudgetsurplus
Status: Old
8) IfthereisnoRicardo-Barroeffect,anincreaseinthegovernmentbudgetdeficit
A) raisestheequilibriumrealinterestrate.
B) lowerstheequilibriumrealinterestrate.
C) decreasesthedemandforloanablefunds.
D) decreasesthesupplyofloanablefunds.
Answer: A
Topic: Effectofagovernmentbudgetdeficit
Status: Old
Page935
9) IfthereisnoRicardo-Barroeffect,agovernmentbudgetsurplus________thetotalsupplyof
loanablefundsand________therealinterestrate.
A) increases;raises
B) increases;lowers
C) decreases;raises
D) decreases;lowers
Answer: B
Status: Old
10) WithnoRicardo-Barroeffect,agovernmentbudgetsurplus
A) decreasesthesupplyofloanablefundsandlowerstherealinterestrate.
B) decreasesthedemandforloanablefundsandincreasestherealinterestrate.
C) increasesthedemandforloanablefundsandlowerstherealinterestrate.
D) increasesthesupplyofloanablefundsandlowerstherealinterestrate.
E) increasesthedemandforloanablefundsandraisestherealinterestrate.
Answer: D
Status: Old
11) Supposethegovernmenthasabudgetsurplusof$2billion.IfthereisnoRicardo -Barroeffect,

whatoccurs?
A) Thesupplyofloanablefundscurveshiftsrightward,loweringtheinterestrate,and
increasinginvestment.
B) Thedemandforloanablefundscurveshiftsrightward,raisingtheinterestrate,and
C) Thesupplyofloanablefundscurveshiftsleftward,raisingtheinterestrate,and
decreasinginvestment.
D) Thedemandforloanablefundscurveshiftsleftward,loweringtheinterestrate,and
decreasinginvestment.
E) Thesupplyofloanablefundscurveshiftsleftward,loweringtheinterestrate,and
Answer: A
Status: Old
Page936
12) Chinasgovernmentrunsabudgetsurplus.Asaresult,
A) ifthereisnoRicardo-Barroeffect,thesupplyofloanablefundscurveliestotherightof
theprivatesupplyofloanablefundscurve.
B) interestratesshouldincrease.
C) theRicardo-Barroeffectpredictsthattherealinterestratewillincrease.
D) thequantityofloanablefundsdecreases.
E) savingwillexceedinvestment.
Answer: A
Status: Old
13) Indiasgovernmentrunsagovernmentbudgetsurplus.IfthereisnoRicardo -Barroeffect,the

surplusmeansthatthe
A) privatesupplyofloanablefundscurveliestotheleftofthesupplyofloanablefunds
curve.
B) privatedemandforloanablefundscurveliestotheleftofthedemandforloanablefunds
curve.
C) privatesupplyofloanablefundscurveliestotherightofthesupplyofloanablefunds
curve.
D) privatesupplyofloanablefundscurveisthesameasthesupplyofloanablefundscurve.
Answer: A
Status: Old
14) IfthereisnoRicardo-Barroeffect,whenthegovernmentrunsabudgetsurplus,it
A) competeswithbusinessesforprivatesaving.
B) shiftsthesupplyofloanablefundscurveleftward.
C) shiftsthedemandforloanablefundscurveleftward.
D) contributestofinancinginvestment.
E) shiftsthedemandforloanablefundscurverightward.
Answer: D
Status: Old
Page937
15) IfthereisnoRicardo-Barroeffect,agovernmentbudgetsurplus________thesupplyof
loanablefundsand________equilibriuminvestment.
Answer: A
Status: Old
Investment Privatesaving
Nettaxes Governmentexpenditures
Realinterestrate (billionsof
(billionsof
(billionsof
(billionsof
(percentperyear) 2009dollars) 2009dollars) 2009dollars)
2009dollars)
3
60
20
40
20
4
50
30
40
20
5
40
40
40
20
6
30
50
40
20
7
20
60
40
20
16) Thetableabovegivesanationsinvestmentdemandandsavingsupplyschedules.Italsohas
thegovernmentsnettaxesandexpenditures.Thegovernmenthasabudget
A) surplusof$60billion.
B) surplusof$20billion.
C) deficitof$20billion.
D) deficitof$60billion.
E) surplusof$40billion.
Answer: B
Status: Old
thegovernmentsnettaxesandexpenditures.Whentherealinterestrateis4percent,the
supplyofloanablefundsisequalto
A) $80billion.
B) $30billion.
C) $50billion.
D) $90billion.
E) $10billion.
Answer: C
Status: Old
Page938
thegovernmentsnettaxesandexpenditures.Theloanablefundsmarketisinequilibrium
whentherealinterestrateis
A) 4percent.
B) 5percent.
C) 6percent.
D) 7percent
E) 3percent
Answer: A
Status: Old
19) Inthefigureabove,theSLFcurveisthesupplyofloanablefundscurveandthePSLFcurveis
theprivatesupplyofloanablefundscurve.Giventhesecurves,thereisagovernmentbudget
________andthereforetherealinterestrateis________thanitwouldbeotherwise.
A) surplus;higher
B) surplus;lower
C) deficit;higher
D) deficit;lower
E) deficit;notdifferent
Answer: B
Status: Old
Page939
theprivatesupplyofloanablefundscurve.Theequilibriuminterestrateis________percent
andtheequilibriumquantityofloanablefundsis________.
A) 6;$1.6trillion
B) 6;$2.0trillion
C) 4;$1.4trillion
D) 4;$1.8trillion
E) 4;$2.0trillion
Answer: D
Status: Old
theprivatesupplyofloanablefundscurve.IfthereisnoRicardo -Barroeffectandthe
governmentnowrunsabalancedbudget,
A) theinterestratewillincreasefrom4percentto6percent.
B) theequilibriuminterestrateis6percentandinvestmentis$1.6trillion.
C) theequilibriuminterestrateis4percentandinvestmentis$1.8trillion.
D) thereisasurplusofinvestmentfundsandtheinterestratefallsto4percent.
E) thereisshortageofinvestmentfundsof$0.4trillion.
Answer: B
Status: Old
theprivatesupplyofloanablefundscurve.IfthereisnoRicardo -Barroeffect,thefigure
showsasituationinwhichthegovernmenthasabudget
A) surplusof$0.2trillion.
B) deficitof$0.2trillion.
C) surplusof$1.4trillion.
D) deficitof$1.6trillion.
E) surplusof$1.8trillion.
Answer: A
Status: Old
Page940
23) Inthefigureabove,ifthereisnoRicardo-Barroeffect,thegovernmenthasa________because
________.
A) budgetsurplus;theSLFcurveliestotherightofthePSLF curve.
B) budgetdeficit;theSLFcurveliestotherightofthePSLF curve.
C) balancedbudget;thereisnoRicardo-Barroeffect.
D) budgetsurplus;thereisnoRicardo-Barroeffect.
E) budgetdeficit;thereisnoRicardo-Barroeffect.
Answer: A
Status: New
24) Inthefigureabove,ifthereisnoRicardo-Barroeffect,thegovernmenthasabudget________
becausethe________.
A) surplusof0.2trillion;SLF curveliestotherightofthePSLF curve.
B) surplusof0.4trillion;SLF curveshowsalargerquantityofLFthanthePSLFcurve.
C) deficitof0.2trillion;SLF curveliestotherightofthePSLF curve.
D) deficitof0.4trillion;SLF curveshowsasmallerquantityofLFthanthePSLFcurve.
E) surplusof-0.2trillion;SLF curveliestotherightofthePSLF curve.
Answer: A
Status: New
Page941
theprivatesupplyofloanablefundscurve.Theequilibriuminterestrateis________percent
andtheequilibriumquantityofloanablefundsis________.
A) 6;$12trillion
B) 6;$14trillion
C) 4;$13trillion
D) 4;$11trillion
E) 4;$14trillion
Answer: C
Status: Old
Page942
26) Inthefigureabove,theDLFcurveisthedemandforloanablefundscurveandthePDLF curve

istheprivatedemandforloanablefundscurve.IfthereisnoRicardo-Barroeffect,thefigure
showsasituationinwhichthegovernmenthasabudget
A) deficitof$1trillion.
B) surplusof$1trillion.
C) deficitof$0.5trillion.
D) deficitof$1.5trillion.
E) surplusof$0.5trillion.
Answer: A
Status: Old
27) Inthefigureabove,theDLFcurveisthedemandforloanablefundscurveandthePDLF curve

istheprivatedemandforloanablefundscurve.IfthereisnoRicardo-Barroeffect,thefigure
showsthesituationinwhichthegovernmenthasa________sothattheequilibriumreal
interestrateis________andtheequilibriumquantityofinvestmentis________.
A) budgetsurplus;4percent;$1trillion
B) budgetdeficit;4percent;$1trillion
C) budgetdeficit;6percent;$1.5trillion
D) budgetsurplus;6percent;$1.5trillion
E) balancedbudget;6percent;$1.5trillion
Answer: C
Status: Old
Page943
28) IfthereisnoRicardo-Barroeffect,agovernmentbudgetdeficitincreases
A) privatesavingsandraisestherealinterestrate.
B) thesupplyofloanablefundsandraisestherealinterestrate.
C) thedemandforloanablefundsandraisestherealinterestrate.
D) investmentdemandandlowerstherealinterestrate.
E) privatesavingsandlowerstherealinterestrate.
Answer: C
Topic: Crowding-outeffect
Status: Old
29) Thecrowding-outeffectisthetendencyfor
A) lowerprivatesavingtodecreaseinvestment.
B) highergovernmentbudgetdeficitstoincreasetotalsavings.
C) highergovernmentbudgetdeficitstodecreaseinvestment.
D) higherprivatesavingstodecreasegovernmentbudgetsurpluses.
E) lowerprivatesavingtoincreasethebudgetdeficit.
Answer: C
Status: Old
30) Thetendencyforhighergovernmentbudgetdeficitstodecreaseinvestmentiscalledthe
A) deficiteffect.
B) Ricardo-Barroeffect.
C) wealtheffect.
D) crowding-outeffect.
E) inflationeffect.
Answer: D
Status: Old
Page944
31) Thecrowding-outeffectimpliesthatagovernmentbudgetdeficit________thedemandfor
loanablefundsand________equilibriuminvestment.
Answer: B
Status: Old
32) IfthereisnoRicardo-Barroeffect,anincreaseinthebudgetdeficit
A) decreasestheamountofinvestment.
B) lowerstheequilibriumrealinterestrate.
C) increasestheamountofinvestment.
D) decreasesthedemandforloanablefunds.
Answer: A
Status: Old
33) Thecrowding-outeffectdescribeshowagovernmentbudget________________thereal
interestrateandthereby________equilibriuminvestment.
A) deficit;raises;decreases
B) deficit;lowers;increases
C) surplus;raises;decreases
D) surplus;lowers;decreases
E) deficit;lowers;decreases
Answer: A
Status: Old
Page945
34) Supposethegovernmentsbudgetdeficitincreasesby$500billion.IfthereisnoRicardo -Barro

effect,whatoccurs?
A) Thedemandforloanablefundscurveshiftsrightward,therealinterestraterises,andthe
quantityofloanablefundsincreases.
B) Thesupplyofloanablefundscurveshiftsleftward,therealinterestraterises,andthe
quantityofloanablefundsdecreases.
C) Thedemandforloanablefundscurveshiftsleftward,therealinterestratefalls,andthe
quantityofloanablefundsdecreases.
D) Thesupplyofloanablefundscurveshiftsrightward,therealinterestratefalls,andthe
E) Thesupplyofloanablefundscurveshiftsleftward,therealinterestraterises,andthe
Answer: A
Status: Old
35) Acountryinitiallyhasanequilibriumrealinterestrateof4percentandanequilibrium
quantityofinvestmentof$2trillion.Thegovernmentsbudgetdeficitthenincreases.
Accordingtothecrowding-outeffect,the
A) demandforloanablefundscurveshiftsleftward,therealinterestratefalls,and
investmentincreases.
B) supplyofloanablefundscurveshiftsrightward,therealinterestraterises,and
C) demandforloanablefundscurveshiftsrightward,therealinterestratefalls,and
D) demandforloanablefundscurveshiftsrightward,therealinterestraterises,and
investmentdecreases.
E) supplyofloanablefundscurveshiftsleftward,therealinterestratefalls,andinvestment
decreases.
Answer: D
Status: Old
Page946
36) Supposethegovernmenthasabudgetdeficitof$2billion.IfthereisnoRicardo -Barroeffect,

howmuchcrowdingoutofinvestmentoccurs?
A) morethan$2billion
B) somecrowdingoutoccurs,butlessthan$2billion
C) exactlyequalto$2billiondollars
D) Nocrowdingoutoccursandinvestmentdoesnotchange.
E) Nocrowdingoutoccursbecauseinvestmentincreases.
Answer: B
Status: Old
37) AccordingtotheRicardo-Barroeffect,agovernmentbudget
A) surplusincreasesprivatesavingsupply.
B) deficitincreasesprivatesavingsupply.
C) deficitdecreasesprivatesavingsupply.
D) surplusdecreasesprivateinvestmentdemand.
E) deficitdecreasesprivateinvestmentdemand.
Answer: B
Topic: Ricardo-Barroeffect
Status: Old
38) AccordingtotheRicardo-Barroeffect,anincreaseinthegovernmentbudgetdeficit
A) doesnotchangetherealinterestrate.
B) lowerstherealinterestrate.
C) shiftsthesupplyofloanablefundscurveleftward.
D) hasnoeffectonthenominalinterestratebutdoeschangetherealinterestrate.
E) shiftsthedemandforloanablefundscurveleftward.
Answer: A
Status: Old
Page947
39) TheRicardo-Barroeffectreferstohow________inresponsetoagovernmentbudget
________.
A) investmentdemandchanges;surplus
B) investmentdemandchanges;deficit
C) savingsupplychanges;deficit
D) governmentbudgetchanges;surplusordeficit
E) investmentdemandandsavingsupplychange;surplus
Answer: C
Status: Old
40) ApredictionoftheRicardo-Barroeffectis
A) alargerincreaseintherealinterestratewhenthegovernmentrunsabudgetdeficit.
B) alargerdecreaseintherealinterestratewhenthegovernmentrunsabudgetsurplus.
C) noeffectontherealinterestratewhenthegovernmentrunsabudgetdeficit.
D) alargerdecreaseininvestmentwhenthegovernmentrunsabudgetdeficit.
E) alargerdecreaseininvestmentwhenthegovernmentrunsabudgetsurplus.
Answer: C
Status: Old
41) TheRicardo-Barroeffectarguesthatthecrowding-outeffect
A) istheresultofagovernmentbudgetsurplusandhigherinterestrates.
B) willnotoccur,becausetheprivatesavingsupplywillchangetooffsetanychangeinthe
governmentbudgetdeficit.
C) istheresultofthegovernmentbudgetdeficitandhigherinterestrates.
D) willoccur,becausetheprivatesavingsupplywillchangetooffsetanychangeinthe
governmentbudgetdeficit.
E) isstrongerwhenthegovernmentrunsabudgetsurplusthanwhenitrunsabudget
deficit.
Answer: B
Status: Old
Page948
42) TheRicardo-Barroeffectisbasedontheideathat________whenthegovernmenthasa
budgetdeficit.
A) peopledecreasetheirprivatesaving
B) peopleincreasetheirprivatesaving
C) investmentdemandincreasesbecauseexpectedfutureprofitsincrease
D) investmentdemanddecreasesbecauseofthehigherrealinterestrate
E) peopleimmediatelyincreasetheirtaxpayments
Answer: B
Status: Old
43) EvidencetosupporttheRicardo-Barroeffectwouldshowthat
A) highergovernmentbudgetdeficitsdecreaseinvestment.
B) highergovernmentbudgetsurplusesdecreaseinvestment.
C) governmentbudgetdeficitsincreasehouseholdconsumption.
D) governmentbudgetdeficitshavenoeffectontherealinterestrateorinvestment.
E) highergovernmentbudgetdeficitsraisetherealinterestrate.
Answer: D
Status: Old
44) Supposethegovernmenthasabudgetdeficitof$2billion.IftheRicardo -Barroeffectis

correct,thenhowmuchcrowdingoutofinvestmentoccurs?
A) morethan$2billion
B) somecrowdingoutoccurs,butlessthan$2billion
C) exactlyequalto$2billiondollars
D) Nocrowdingoutoccursandinvestmentdoesnotchange.
E) Nocrowdingoutoccursbecauseinvestmentincreasesby$2billion.
Answer: D
Status: Old
Page949
Realinterestrate
(percentperyear)
3
4
5
6
7
8
9
Demandforloanablefunds Supplyofloanablefunds
(billionsof
(billionsof
2009dollars)
2009dollars)
750
450
700
500
650
550
600
600
550
650
500
700
450
750
45) Theabovetablehastheprivatedemandforloanablefundsandtheprivatesupplyofloanable
fundsschedules.Ifthegovernmentbudgetsurplusis$200billion,andthereisno
Ricardo-Barroeffect,theequilibriumrealinterestrateis________andtheequilibrium
quantityofloanablefundsis________.
A) 6percent;$600billion
B) 4percent;$700billion
C) 8percent,$500billion
D) 8percent;$700billion
E) 4percent;$500billion
Answer: B
Status: Old
fundsschedules.Ifthegovernmentbudgetdeficitis$200billion,andthereisno
Ricardo-Barroeffect,theequilibriumrealinterestrateis________andtheequilibrium
quantityofinvestmentis________.
Answer: C
Status: Old
Page950
fundsschedules.Ifthegovernmentbudgetsurplusis$200billion,andthereisaRicardo -Barro
effect,theequilibriumrealinterestrateis________andtheequilibriumquantityofloanable
fundsis________.
Answer: A
Status: Old
fundsschedules.Ifthegovernmentbudgetdeficitis$200billion,andthereisaRicardo -Barro
effect,theequilibriumrealinterestrateis________andtheequilibriumquantityofinvestment
is________.
Answer: A
Status: Revised
49) Duringfinancialcrisisof2008-09,thegovernmentrescuedfinancialfirmsandtheauto
industry.Asaresult,
A) thegovernmentsbudgetdeficitincreased,thegovernmentsdemandforloanablefunds
increasedandprivateinvestmentwascrowdedout.
B) realinterestratesdecreased.
C) thesupplyofloanablefundsdecreasedinresponsetothegovernmentsbudgetdeficit.
D) theprivatedemandforloanablefundsincreased.
E) thegovernmentsrescueplancreatedasurplusofloanablefunds.
Answer: A
Topic: Didtherescueplancrowdoutinvestment?
Status: Old
Page951
50) Asaresultofthegovernmentsrescueoffinancialfirmsandtheautoindustryin2008,which
ofthefollowingoccurred?
i) Thegovernmentsdemandforloanablefundsincreasedtherealinterestrate.
ii) Investmentexpenditureswerecrowdedout.
iii) Thesupplyofloanablefundscurveshiftedleftward.
A) iandii
B) i,iiandiii
C) ionly
D) iionly
E) iiandiii
Answer: A
Topic: Didtherescueplancrowdoutinvestment?
Status: Old
51) WithnoRicardo-Barroeffect,agovernmentbudgetsurplus
A) increasesthesupplyofloanablefunds.
B) increasesthedemandforloanablefunds.
C) decreasesthesupplyofloanablefunds.
D) decreasesthedemandforloanablefunds.
E) hasnoeffectoneitherthesupplyorthedemandforloanablefunds.
Answer: A
Status: Old
52) Supposethegovernmenthasabudgetsurplus.Then
A) privatesavingisequaltoinvestment.
B) privatesavingisgreaterthaninvestmentandgovernmentsavingispositive.
C) privatesavingislessthaninvestmentandgovernmentsavingispositive.
D) privateinvestmentisgreaterthanthesumofgovernmentsavingandprivatesaving.
E) privatesavingisgreaterthaninvestmentandgovernmentsavingisnegative.
Answer: C
Status: Old
Page952
53) WhenthereisnoRicardo-Barroeffect,agovernmentbudgetsurplus________therealinterest
ratebecausethe________loanablefundsincreases.
A) raises;demandfor
B) lowers;demandfor
C) raises;supplyof
D) lowers;supplyof
E) Noneoftheaboveanswersiscorrectbecausetherealinterestratedoesnotchange.
Answer: D
Status: Revised
54) Thecrowding-outeffectreferstohowagovernmentbudgetdeficit
A) shiftsonlythesupplyofloanablefundscurveleftward.
B) shiftsonlythedemandforloanablefundscurveleftward.
C) shiftsboththedemandforandthesupplyofloanablefundscurvesleftward.
D) decreasestheequilibriumquantityofinvestment.
E) increasestheequilibriumquantityofinvestment.
Answer: D
Status: Old
55) IfthereisnoRicardo-Barroeffect,agovernmentbudgetdeficitwill________theequilibrium
realinterestrateand________theequilibriumquantityofinvestment.
A) raise;increase
B) raise;decrease
C) lower;increase
D) lower;decrease
E) notchange;notchange
Answer: B
Status: Old
Page953
56) TheRicardo-Barroeffectsaysthatagovernmentbudgetdeficitleadsto
A) ahigherrealinterestrate.
B) alowerrealinterestrate.
C) nochangeintherealinterestrate.
D) anincreaseindemandforloanablefunds.
E) anincreaseinthequantityofinvestment.
Answer: C
Status: Old
57) WhentheU.S.governmentlaunchedamassiverescueplaninresponsetothe2008 -2009

financialcrisis,oneofthemainactionstakenwasto________becausethedesirewastolessen
theseverityoftherecessionby________.
A) increasethesupplyofloanablefunds;encouragingdecreaseininvestment
B) decreasethesupplyofloanablefunds;encouragingdecreaseininvestment
C) increasethesupplyofloanablefunds;limitingthedecreaseininvestment
D) decreasethesupplyofloanablefunds;limitingthedecreaseininvestment
E) increasethedemandofloanablefunds;encouragingdecreaseininvestment
Answer: C
Status: New
58) WhentheU.S.governmentlaunchedamassiverescueplaninresponsetothe2008 -2009

financialcrisis,theoveralldemandforloanablefunds________becausethe________.
A) increased;demandbyhouseholds,businesses,andfinancialinstitutionsincreasedasdid
thefederalgovernmentdemand
B) decreased;demandbyhouseholds,businesses,andfinancialinstitutionschangedbythe
sameamountasthefederalgovernmentdemand
C) decreased;demandbyhouseholds,businesses,andfinancialinstitutionsdecreasedby
morethanthefederalgovernmentdemandincreased
D) increased;demandbyhouseholds,businesses,andfinancialinstitutionsincreasedby
morethanthefederalgovernmentdemandincreased
E) didnotchange;demandbyhouseholds,businesses,andfinancialinstitutionschanged
bythesameamountasthefederalgovernmentdemand
Answer: C
Status: New
Page954
59) In2007therealinterestrateintheUnitedStateswas2percent.By2013,theequilibriumreal
interestintheUnitedStateswas________becausethe________.
A) 3.5percent;UnitedStatesbegantorecoverfromthedeeprecessionandfinancialcrisisof
2008-2009
B) 0.5percent;UnitedStatesbegantorecoverfromthedeeprecessionandfinancialcrisisof
2008-2009
C) 0.5percent;UnitedStatesexperiencedadeeprecessionasaresultofafinancialcrisisin
2008-2009
D) 3.5percent;UnitedStatesexperiencedadeeprecessionasaresultofafinancialcrisisin
2008-2009
E) notyetcalculated;effectsofthefinancialcrisisof2008-2009havenotyetbeentallied
Answer: C
Topic: Realinterestrate
Status: New
Page955
10.4 ChapterFigures
Thefigureaboveshowsthedemandforloanablefundscurve.
1) Inthefigureabove,amovementfrompointA topointC canbetheresultof
A) anincreaseinexpectedprofit.
C) ariseintherealinterestrate.
D) afallintherealinterestrate.
E) anincreaseinthegovernmentbudgetdeficit.
Answer: D
Status: Old
Page956
2) Ifthedemandforloanablefundscurveshiftsrightwardfromthecurveshowninthefigure
above,theshiftcouldbetheresultof
A) anincreaseinexpectedprofit.
E) adecreaseinrealGDP.
Answer: A
Status: Old
Thefigureaboveshowsthesupplyofloanablefundscurve.
3) Inthefigureabove,amovementfrompointA topointC canbetheresultof
A) afallinexpectedfutureincome.
B) anincreaseindisposableincome.
E) anincreaseinwealth.
Answer: C
Status: Old
Page957
4) Ifthesupplyofloanablefundscurveshiftsrightwardfromthecurveshowninthefigure
A) afallinexpectedfutureincome.
C) adecreaseinthedemandforloanablefunds.
D) adecreaseinthesupplyofloanablefunds.
Answer: A
Status: Old
A) ariseinexpectedfutureincome.
B) anincreaseindisposableincome.
Answer: B
Status: Old
A) ariseinexpectedfutureincome.
E) adecreaseinwealth.
Answer: E
Status: Old
Page958
1) Ifinvestmentdemandincreases,theequilibriumrealinterestrate________andthe
equilibriumquantityofinvestment________.
A) rises;increases
B) rises;decreases
C) falls;increases
D) falls;decreases
Answer: A
Topic: Integrative
Status: Old
2) Ifsavingsupplydecreases,theequilibriumrealinterestrate________andtheequilibrium
quantityofinvestment________.
A) rises;increases
B) rises;decreases
C) falls;increases
D) falls;decreases
Answer: B
Topic: Integrative
Status: Old
3) Inthelate1990s,theU.S.federalgovernmenthadabudgetsurplus.Ifthereisno
Ricardo-Barroeffect,thesesurpluses________thesupplyofloanablefundsand________the
realinterestrate.
A) increased;raised
B) increased;lowered
C) decreased;raised
D) decreased;lowered
E) didnotchange;didnotchange
Answer: B
Topic: Integrative
Status: Old
Page959
4) In2012,theU.S.federalgovernmentbudgethadabudgetdeficit.IfthereisnoRicardo -Barro
effect,thisdeficit________thedemandforloanablefundsand________therealinterestrate.
A) increased;raised
B) increased;lowered
C) decreased;raised
D) decreased;lowered
Answer: A
Topic: Integrative
Status: Old
5) Inthelate1990s,theU.S.federalgovernmenthadabudgetsurplus.Ifthereisno
Ricardo-Barroeffect,thebudgetsurplus________therealinterestrateand________the
equilibriumquantityofinvestment.
A) raised;increased
B) raised;decreased
C) lowered;increased
D) lowered;decreased
Answer: C
Topic: Integrative
Status: Old
6) In2012,theU.S.federalgovernmenthadabudgetdeficit.IfthereisnoRicardo -Barroeffect,
thebudgetdeficit________therealinterestrateand________theequilibriumquantityof
investment.
A) raised;increased
B) raised;decreased
C) lowered;increased
D) lowered;decreased
Answer: B
Topic: Integrative
Status: Old
Page960
7) Crowdingoutcanoccurwhenagovernmentbudget________raisestherealinterestrateand
theequilibriumquantityofinvestment________.
A) surplus;increases
B) surplus;decreases
C) deficit;increases
D) deficit;decreases
E) surplus;doesnotchange
Answer: D
Topic: Integrative
Status: Old
8) WhatdoestheRicardo-BarroEffectpredict?
A) Thelevelofsavinginadevelopedeconomywillbeverylow.
B) Thereisnowaytoexplainanimalspiritsorirrationalexuberance.
C) Privatesavingwilloffsettheimpactofgovernmentborrowing.
D) Governmentbudgetdeficitscrowdoutprivateinvestment.
E) Netinvestmentandgrossinvestmentwillbeequal.
Answer: C
Topic: Integrative
Status: Old
9) IfthegovernmentrunsabudgetdeficittofightawarandthereisnoRicardo -Barroeffect,
whatisanimpactofthedeficit?
A) Thequantityofprivatesavingdecreases.
B) Firmspurchasemorecapitalequipment.
C) Animalspiritsorirrationalexuberanceiscreated.
D) Therealinterestraterises.
E) Thequantityofinvestmentincreases.
Answer: D
Topic: Integrative
Status: Old
Page961
10.6 Essay:FinancialInstitutionsandMarkets
1) Whatisthedifference,ifany,betweenphysicalcapitalandfinancialcapital?
Answer: Physicalcapitalreferstotheactualtools,machinery,instruments,andbuildingsthat
havebeenproducedinthepastandarenowbeingusedtoproduceadditionalgoods
andservices.Financialcapitalreferstothefundsusedtopurchasethephysicalcapital.
Financialcapitalincludesstocksandbonds.
Topic: Physicalcapitalandfinancialcapital
Status: Old
2) Definegrossinvestmentandnetinvestment.Discusstherelationshipbetweengross
investmentandnetinvestment.
Answer: Grossinvestmentisthetotalamountspentonnewcapitalgoodstoincreasethe
quantityofcapitalandreplacethedepreciatedcapital.Netinvestmentistheamount
spentonnewcapitalthatexceedsthevalueofthedepreciatedcapitalor,inotherwords,
netinvestmentequalsgrossinvestmentminusdepreciation.Netinvestmentisequalto
thechangeinthecapitalstock.
Status: Old
3) Whatisthedistinctionbetweengrossinvestmentandnetinvestment?
Answer: Grossinvestmentisthetotalspendingoncapitalgoods.Netinvestmentequalsgross
investmentminusdepreciation.Fromoneyeartothenext,thecapitalstockincreasesby
theamountofnetinvestment.
Status: Old
4) Whenacompanysdepreciationislargerthanitsgrossinvestment,netinvestmentbecomes
negativeandthefirmscapitalstockdecreases.Isthepreviousstatementcorrectorincorrect?
Explainyouranswer.
Answer: Thestatementiscorrect.Netinvestmentequalsgrossinvestmentminusdepreciation.If
depreciationislargerthangrossinvestment,netinvestmentwillbenegative.Net
investmentisthechangeinthecapitalstock,andsothecompanyscapitalstock
decreases.Essentially,becausedepreciationislargerthanthecompanysgross
investment,thecompanyisnotbuyingenoughcapitaltoreplacethecapitalthat
depreciated.Asaresult,thetotalamountofthecompanyscapitaldecreases.
Status: Old
Page962
5) Iswealththesamethingasincome?
Answer: No,wealthisdifferentfromincome.Wealthisthevalueofwhatpeopleown.Income,
however,isanamountthatisreceivedduringagiventimeperiod.
Topic: Wealth
Status: Old
6) Definewealth.Whatistherelationshipbetweenwealthandsaving?
Answer: Wealthisthevalueofallthethingsthatareowned.Theamountofsavingisaddedto
wealth.
Topic: Wealth
Status: Old
7) Ifafirmwantstobuyapieceofcapitalequipment,isthisfirmademanderorsupplierinthe
financialmarket?
Answer: Afinancialmarketiswherefirmsgetthefundstobuycapital.So,ifthefirmwantsto
buyapieceofcapitalequipment,thefirmwillbelookingforfundstoborrow.Hence
thefirmisademanderinthefinancialmarket.
Status: Old
8) Inthenationsfinancialmarkets,whatarethevariouswaysafirmcanobtainfinancialcapital?
Answer: Afirmcanobtainfinancialcapitalbyissuingsharesofstock,sellingbonds,issuinga
commercialbill,orborrowingfundsfrombanksandotherfinancialinstitutions.
Status: Old
Page963
9) Listthreedifferenttypesoffinancialmarketsanddiscussthetypeoffinancialinstruments
tradedinthemarkets.
Answer: Financialmarketsarethestockmarket,thebondmarket,andtheloanmarket.Thestock
marketisamarketinwhichsharesinthestocksofcompaniesaretraded.Theseshares
givethestockholderpartialownershipinthecompanyandaclaimonthecompanys
profit.Thebondmarketisamarketinwhichbondsissuedbycompaniesand
governmentsaretraded.Abondisapromisetopayaspecifiedsumofmoneyon
specifieddatesandisadebtfortheissuerofthebond.Theloanmarketisthemarketfor
loansfrombanks.Firmscanborrowfundsfrombanks.Theseloansaregenerallynot
traded.
Status: Old
10) Describetwomaindifferencesbetweenbondsandstocks.
Answer: Stocksrepresentownershipoftheissuingcompany,whereasbondsareadebtofthe
issuingcompany.Becausestocksrepresentownershipofacompany,astockholderhas
aclaimon(part)ofthecompanysprofit.Bondholders,however,havenoclaimonthe
companysprofit.Instead,theyhaveapromisebythecompanytopaythemspecified
amountsofmoneyatspecifieddatesinthefuture.
Topic: Stocksandbonds
Status: Old
11) Doesastockcertificateorabondrepresentownershipofacompanyandaclaimonitsprofits?
Answer: Astockcertificaterepresentsownershipofacompany.Abondisadebtoftheissuing
company,notanownershipclaimonthecompany.
Topic: Stocksandbonds
Status: Old
12) Atthebeginningoftheyear,Beckyswealthwas$30,000.Duringtheyear,sheearned$50,000
ofincome,paid$6,000intaxesandconsumed$43,000ofgoodsandservices.WhatisBeckys
wealthattheendoftheyear?
Answer: Beckyswealthis$31,000,thesumofherinitialwealth($30,000)plushernewsavingof
$1,000.
Status: Old
Page964
13) Atthebeginningoftheyear,UnitedDeliveryhadtrucksvaluedat$1.3million.Duringthe
year,UnitedDeliverypurchasednewtrucksvaluedat$500,000.Ifthevalueofthetrucksatthe
endoftheyearwas$1.5million,whatistheamountofitsnetinvestmentanditsdepreciation
duringtheyear?
Answer: Netinvestmentisthechangeinthecapitalstockfromoneperiodtothenext.Hencefor
UnitedDelivery,netinvestmentequals$1.5million-$1.3million=$200,000.Net
investmentalsoequalsgrossinvestmentminusdepreciation.Thusdepreciationequals
grossinvestmentminusnetinvestment.Grossinvestment,thetotalamountspenton
newcapitalequipment,was$500,000.Netinvestmentwascalculatedtobe$200,000.
Thereforedepreciationequals$500,000-$200,000=$300,000.
Topic: Capitalandinvestment
Status: Old
10.7 Essay:TheLoanableFundsMarket
1) Anincreaseintherealinterestrateincreasesthequantityofinvestment.Istheprevious
statementcorrectorincorrect?
Answer: Thestatementisfalse.Theinterestrateistheopportunitycostofthefundsusedto
makeaninvestment.Henceanincreaseintheinterestratedecreasesthequantityof
investmentdemanded.
Status: Old
2) Explaintherelationshipbetweentherealinterestrateandinvestmentdemand.Comparethat
relationshiptotherelationshipbetweenexpectedprofitandinvestmentdemand.
Answer: Therealinterestratedeterminesthequantityofinvestmentdemanded.Thereisan
inverserelationshipbetweentherealinterestrateandthequantityofinvestment
demanded.Expectedprofitaffectsinvestment.Anincreaseintheexpectedprofitfrom
investingincreasesinvestment.Hencethereisapositiverelationshipbetween
investmentandexpectedprofit.
Topic: Investmentdemand,expectedprofit
Status: Old
3) Howdoesanincreaseinexpectedprofitaffectinvestmentdemandandthedemandfor
loanablefundscurve?
Answer: Anincreaseinexpectedprofitincreasesinvestmentandshiftsthedemandforloanable
fundscurverightward.
Topic: Investmentdemand,expectedprofit
Status: Old
Page965
4) Doesachangeintherealinterestrateshiftthesupplyofloanablefundscurve?Explainyour
answer.
Answer: Achangeintherealinterestratedoesnotshiftthesupplyofloanablefundscurve.
Instead,thechangeintherealinterestrateresultsinachangeinthequantityof
loanablefundssuppliedandamovementalongthesupplyofloanablefundscurve.The
supplyofloanablefundscurveshiftsifsomefactorthatinfluencesthesupplyof
loanablefundsotherthantherealinterestratechanges.
Status: Old
5) Whatarethefactorsthatchangesavingandshiftthesupplyofloanablefundscurve?
Answer: Therearethreemainfactorsthatchangesavingandshiftthesupplyofloanablefunds
curve:disposableincome,wealth,andtheexpectedfutureincome.Thehigherthe
disposableincome,themorepeoplesave,soanincreaseindisposableincomeshiftsthe
supplyofloanablefundscurverightward.Thehigherwealth,thelesspeoplesave
becausehouseholdsfeelricheranddonotseetheneedtosave.Thusanincreasein
wealthshiftsthesupplyofloanablefundscurveleftward.Finally,thehigherthe
expectedfutureincome,thelesspeoplesavetoday.Thusanincreaseintheexpected
futureincomeshiftsthesupplyofloanablefundscurveleftward.
Status: Old
6) Explainhoweachofthefollowingeventswouldaffectthesupplyofloanablefundscurve:
a. Theeconomyisinarecessionsopeoplesdisposableincomeislower.
b. Thestockmarketisboomingsopeopleswealthishigher.
c. Thefuturelooksabitmoregrim,soexpectedfutureincomeislower.
d. Therealinterestrateincreases.
Answer: a. Disposableincomeislower,sosavingisdecreased.Thesupplyofloanablefunds
curveshiftsleftward.
b. Peoplearewealthier,sotheysaveless.Thesupplycurveofloanablefundsshifts
leftward.
c. Expectedfutureincomeislower,sopeoplesavemore.Thesupplyofloanablefunds
curveshiftsrightward.
d. Thequantityofsavingincreases.Thereisanupwardmovementalongthesupplyof
loanablefundscurvebutnoshiftinthecurve.
Status: Old
Page966
7) Ashortageintheloanablefundsmarketoccurswhenthequantityofloanablefundssupplied
exceedsthequantityofloanablefundsdemanded.Explainwhythisstatementiscorrector
incorrect.
Answer: Thestatementisincorrectbecauseashortageoccurswhenthequantityofloanable
fundsdemandedexceedsthequantityofloanablefundssupplied.
Status: Old
8) Intheloanablefundsmarket,whenthereisashortageoffunds,therealinterestratewill
increase.Explainwhetherthepreviousstatementiscorrectornot.
Answer: Thestatementiscorrect.Theshortageofloanablefundsmeansthattherearefirms
attemptingtoobtainloanswhocannotdoso.Asaresult,therealinterestratewillrise
untilequilibriumisattained.
Status: Old
9) Intheloanablefundsmarket,whatwillchangetoeliminateashortageofloanablefundsand
howistheshortageeliminated?
Answer: Therealinterestratechangestoeliminatetheshortageoffunds.Ashortageoffunds
meansthatbusinesseswanttoborrowmorethanhouseholdsarewillingtoloan.
(Alternatively,thequantityofloanablefundsdemandedexceedsthequantityof
loanablefundssupplied.)Theshortageoffundsmeansthatsomebusinessesarewilling
topayahigherinterestrateinordertosecurealoan.Therealinterestraterises,andas
itdoesso,thequantityofloanablefundsdemandeddecreases(thatis,thequantityof
investmentdemandeddecreases)andthequantityofloanablefundssuppliedincreases
(thatis,thequantityofsavingsincreases).Bothchangeshelpeliminatetheshortageof
loanablefunds,andsotherealinterestraterisesuntilitreachesitsequilibriumvalue.
Status: Old
Page967
10) Howdoeseachofthefollowingshiftthesupplyofloanablefundsandthedemandfor
loanablefundscurves?Whatistheeffectofeachontheequilibriumrealinterestrateand
equilibriumquantityofloanablefunds?
a. Householdsdisposableincomesincrease
b. Anincreaseinexpectedprofit
Answer: a. Savingincreasesandthesupplyofloanablefundscurveshiftsrightward.Thereal
interestratefallsandthequantityofloanablefundsincreases.
b. Investmentdemandincreasesandthedemandforloanablefundscurveshifts
rightward.Therealinterestraterisesandthequantityofloanablefundsincreases.
Status: Old
11) Supposeagovernmenttaxcutincreasesdisposableincome.Ifthereisnochangeinthe
governmentdeficitorsurplus,whateffectwouldthistaxcuthaveonthesupplyofloanable
fundsandthedemandforloanablefunds?Whatwillhappentotherealinterestrate?
Answer: Byincreasingdisposableincome,thetaxcutwillincreasesaving.Thesupplycurveof
loanablefundswillshiftrightward.Therealinterestratewilldecrease,thequantityof
loanablefundswillincrease,andtherewillbenochangeinthedemandforloanable
fundscurve.
Status: Old
Realinterestrate Demandforloanablefunds Supplyofloanablefunds

(percentperyear) (billionsof2009dollars) (billionsof2009dollars)
10
7
15
8
9
13
6
11
11
4
14
9
2
17
7
12) Thetableaboveshowsthesupplyofloanablefundsandthedemandforloanablefunds
schedules.
a. Whatistheequilibriumrealinterestrateandtheequilibriumquantityofloanablefunds?
b. Iftherealinterestrateis4percent,isthereashortageorsurplus?Whatwillhappeninthe
market?
Answer: a. Theequilibriumrealinterestrateis6percentandtheequilibriumquantityof
loanablefundsis$11billion.
b. Iftherealinterestrateis4percent,thereisashortageofloanablefunds.The
shortagemeansthatthequantityoffundsdemandedforinvestmentexceedsthe
quantitysupplied,sotherealinterestratewillrisetoitsequilibriumof6percent.
Status: Old
Page968
13) Usingthefigureabove,showtheeffectontherealinterestrateandthequantityofloanable
fundsofanincreaseinexpectedprofit.
Answer:
Theincreaseinexpectedprofitincreasesinvestmentandshiftsthedemandforloanable
fundscurverightward.Asthefigureshows,theresultisthattherealinterestraterises
(to8percentinthefigure)andtheequilibriumquantityofloanablefundsincreases(to
$4trillioninthefigure).
Status: Old
Page969
10.8 Essay:GovernmentinLoanableFundsMarket
1) IgnoringtheRicardo-Barroeffect,whatimpactdoesthegovernmenthaveintheloanable
fundsmarket?
Answer: Thegovernmenthastwoeffectsinthemarketforloanablefunds.First,ifthe
governmenthasabudgetsurplus,itaddstoprivatesavingandincreasesthesupplyof
loanablefunds.Second,ifagovernmenthasabudgetdeficit,itincreasesthedemand
forloanablefunds.
Status: Old
2) Explainhowagovernmentbudgetdeficitmightcrowdoutprivateinvestment.
Answer: IfthereisnoRicardo-Barroeffect,agovernmentbudgetdeficitincreasesthedemand
forloanablefunds.Asaresult,theequilibriumrealinterestraterisesandthe
equilibriumquantityofloanablefundsincreases.Buttheriseintherealinterestrate
decreasesinvestment.Thegovernmentsbudgetdeficithasthuscrowdedout
investment.
Status: Old
3) Thecrowding-outeffectoccurswhenagovernmentbudgetsurplusreducesprivatesavings.
Isthepreviousstatementtrueorfalse?Explainyouranswer.
Answer: Thestatementisfalse.Thecrowding-outeffectoccurswhenagovernmentbudget
deficitreducesinvestment,notsaving.Indeed,thecrowding-outeffectpredictsthata
governmentbudgetdeficitresultsinahigherrealinterestrate,whichincreasesthe
quantityofprivatesavings.
Status: Old
4) Agovernmentsurpluscandecreaseinvestmentthroughthecrowding-outeffectbecausethe
surplusdecreasesthesupplyofloanablefunds.Isthepreviousassertionrightorwrong?
Why?
Answer: Theassertioniswrongontwocounts.First,thecrowding-outeffectassertsthata
governmentbudgetdeficitnotasurplusdecreasesinvestment.Second,agovernment
surplusincreasesnotdecreasesthesupplyofloanablefunds.
Status: Old
Page970
5) Accordingtothecrowding-outeffect,ifthegovernmentrunsabudgetdeficitof$100billion,
whatisthechangeintheequilibriumquantityofinvestment?
Answer: Investmentdecreases.Thegovernmentbudgetdeficitincreasesthedemandforloanable
fundsand,asaresult,therealinterestraterises.Theincreaseintherealinterestrate
decreasesthequantityofinvestment.However,thedecreaseininvestmentislessthan
$100billionbecausethehigherrealinterestratealsoincreasesthequantityofprivate
saving.
Status: Old
6) Whatisthecrowding-outeffectandhowdoesitoperate?Whatisitsrelationshiptothe
Ricardo-Barroeffect?
Answer: Thecrowding-outeffectisthetendencyforagovernmentbudgetdeficittodecrease
investment.Agovernmentbudgetdeficitincreasesthedemandforloanablefunds.If
privatesaversdonotchangetheirsaving,sothattheprivatesupplyofsavingdoesnot
change,agovernmentbudgetdeficitraisestheequilibriumrealinterestrateand
decreasestheequilibriumquantityofinvestment.TheRicardo-Barroeffectassertsthat
peoplechangetheirprivatesavinginresponsetoagovernmentbudgetdeficit.In
particular,whenthegovernmenthasabudgetdeficit,peopleincreasetheirsavingby
theamountofthedeficit.Asaresult,boththedemandforloanablefundsandthe
supplyofloanablefundsincreasebythesameamountsothereisnoimpactonthe
equilibriumrealinterestrateorontheequilibriumquantityofinvestment.
Topic: Crowding-outeffect,Ricardo-Barroeffect
Status: Old
7) DiscusswhyabudgetdeficitresultsinadifferentrealinterestrateundertheRicardo -Barro
effectthanunderthecrowding-outeffect.
Answer: TheRicardo-Barroeffectholdsthatabudgetdeficithasnoeffectonrealinterestrates.
Agovernmentbudgetdeficitincreasesthedemandforloanablefunds.The
Ricardo-Barroeffectarguesthatrationaltaxpayersknowthatabudgetdeficittoday
meanshighertaxestomorrow.Asaresult,taxpayersincreasetheirsavingstoday.The
higherprivatesavingincreasesthesupplyofloanablefunds.Becauseboththedemand
forloanablefundsandthesupplyofloanablefundsincreasebythesameamount,there
isnochangeintherealinterestrate.
Thecrowding-outeffectholdsthatabudgetdeficitincreasesrealinterestrates.
Thecrowding-outeffectarguesthatabudgetdeficithasnoeffectonthesupplyof
loanablefunds.Henceonlythedemandforloanablefundsincreasessothatthereal
interestraterises.
Topic: Crowding-outeffect,Ricardo-Barroeffect
Status: Old
Page971
8) AccordingtotheRicardo-Barroeffect,ifthegovernmentrunsabudgetdeficitof$100billion,
byhowmuchdoestheamountofequilibriuminvestmentincreaseordecrease?
Answer: Equilibriuminvestmentdoesnotincreaseordecrease.Thereisnochangeintheamount
ofinvestmentbecauseprivatesavingchangestopreciselyoffsetthegovernmentbudget
deficit.Inotherwords,the$100billiondeficitleadstoanincreaseinprivatesavingof
$100billionwhichexactlymatchestheincreaseinthedemandforloanablefunds.Asa
result,neithertheequilibriumrealinterestratenortheequilibriumamountofloanable
fundschanges.
Status: Old
9) AccordingtotheRicardo-Barroeffect,whatistheeffectontherealinterestrateofa
governmentbudgetsurplus?
Answer: Thegovernmentbudgetsurplus,byitself,increasesthesupplyofloanablefunds.
HowevertheRicardo-Barroeffectassertsthatpeopledecreasetheirprivatesavingbythe
exactlysameamount.Thischangepreciselyoffsetstheeffectthegovernmentbudget
surplushasonthesupplyofloanablefunds.Thusagovernmentsurplushasnoeffect
ontheequilibriumrealinterestrate.
Status: Old
Realinterestrate Demandforloanablefunds Supplyofloanablefunds

(percentperyear) (billionsof2009dollars) (billionsof2009dollars)
12
8.0
13.0
10
9.5
12.0
8
11.0
11.0
6
12.5
10.0
4
14.0
9.0
2
15.5
8.0
10) Thetableabovegivesthedemandforloanablefundsandprivatesupplyofloanablefunds
schedules.
a. Whatistheequilibriumrealinterestrateandquantityofloanablefunds?
b. Supposethatthegovernmenthasabudgetsurplusof$2.5billion.Ifthereisno
Ricardo-Barroeffect,whatistheequilibriumrealinterestrateandquantityofloanablefunds?
Answer: a. Theequilibriumrealinterestrateis8percentandthequantityofloanablefundsis
$11.0billion.
b. Add$2.5billiontoeachquantityofthesupplyofloanablefundsschedule.The
equilibriumrealinterestratebecomes6percentandtheequilibriumquantityof
loanablefundsincreasesto$12.5billion.
Status: Old
Page972
Chapter11 TheMonetarySystem
11.1 WhatIsMoney?
1) Whichstatementaboutmoneyismostcorrect?
A) Moneyisanewinventionandonlyincludesdollarbillsandcoins.
B) Moneyisanewinventionandcanincludeanythingthatisacceptedasameansof
payment.
C) Moneyhasbeenaroundforalongtimeandcanincludeanythingthatisacceptedasa
meansofpayment.
D) Moneyhasbeenaroundforalongtimeandonlyincludesdollarbillsandcoins.
E) Moneyhasbeenaroundforalongtimeandonlyincludescheckingandsavings
accounts.
Answer: C
Topic: Money
Status: Old
2) Foracommodityortokentobemoneyitmust
A) beacceptedinexchangeforallothergoodsandservices.
B) haveadoublecoincidenceofwants.
C) bebackedbygovernmentpreciousmetals,likegold.
D) bepaper.
E) beissuedbythegovernmentoragovernmentagency.
Answer: A
Topic: Money
Status: Old
3) Moneyisanycommodityortokenthatis
A) backedbygold.
B) generallyacceptedasameansofmeasurement.
C) generallyacceptedasameansofpayment.
D) issuedbythegovernment.
E) astoreofvalue.
Answer: C
Topic: Money
Status: Old
Page973
4) Moneyisanycommodityortokenthat
A) isgenerallyacceptedasameansofpayment.
B) isbackedupandcontrolledbythegovernment.
C) isnaturallyacceptedbyhouseholdstoaccumulatewealth.
D) doesnotchangeinvalueovertime.
E) isbackedbygold.
Answer: A
Topic: Money
Status: Old
5) Inorderforanygivencommoditytobeconsideredmoney,ithasto
A) havesomeintrinsicvalue.
B) begenerallyacceptableasameansofpayment.
C) beissuedandcontrolledbysomegovernmentalinstitution.
D) beconvertibleintogoldorsilver.
E) beusedinbartertransactions.
Answer: B
Topic: Money
Status: Old
6) Foranythingtobeconsideredmoneyitmustbe
A) avaluablecommodity,suchasgold.
B) atoken,suchasagreenpieceofpaper.
C) eitheracommodityoratoken,aslongasitisgenerallyacceptedasameansofpayment.
D) amysticaltoken,suchaswhaleteeth.
E) usedinbartertransactions.
Answer: C
Topic: Money
Status: Old
7) Acommontraitofmoneythroughhistoryandacrossculturesisthatmoney
A) alwayshadmysticalproperties.
B) wasalwaysissuedbythelocalgovernment.
C) wasalwaysbasedongoldorsomeotherpreciouscommodity.
D) wasalwaysgenerallyacceptedasameansofpayment.
E) wasalwaysfiatmoney.
Answer: D
Topic: Money
Status: Old
Page974
8) Moneyisbestdefinedas
A) anythingthathasvalue.
B) anythingacceptedasameansofpayment.
C) anythingthatcanbesoldtopayforsomething.
D) currency.
E) anythingthatisbackedbygold.
Answer: B
Topic: Money
Status: Old
9) Moneymustbe________whichincludesthefactthatisshould________.
A) inphysicalform;notbetransferableusingelectronicmeans
B) acceptedasameansofpaymentacrosscountriesborders;notbefiatmoney
C) generallyacceptedasameansofpayment;berecognizableanddivisibleintosmallparts
D) whateverisusedinabartersystem;transferableacrosscountriesborders
E) backedbygold;notdecreaseinvalueovertime
Answer: C
Topic: Whatismoney?
Status: Old
10) Foranassettobeameansofpayment,theasset
A) isvaluableandbackedbygold.
B) isvaluableandbackedbythegovernment.
C) canbeusedtosettleadebt.
D) requiresadoublecoincidenceofwants.
E) mustbeusedwhenbartering.
Answer: C
Topic: Whatismoney?
Status: Old
Page975
11) Thefunctionsofmoneyare
A) mediumofexchange,unitofaccount,andstoreofvalue.
B) mediumofexchange,theabilitytobuygoodsandservices,andtheabilitytopayoff
debts.
C) mediumofexchange,theabilitytobuygoodsandservices,andcheckingaccounts.
D) creditcards,checkingaccounts,currency,andcoins.
E) storeofvalue,useasabartermechanism,andunitofaccount.
Answer: A
Topic: Functionsofmoney
Status: Old
12) Moneyservesasa
A) meansofpayment,legalobligation,andpublictax.
B) mediumofexchange,unitofaccount,andstoreofvalue.
C) meansofsettlingdebts,transactionlubricant,andprivatecommodity.
D) meansofworkerexploitationandcapitalistenrichment.
E) meanstoconductbartertransactions.
Answer: B
Status: Old
13) WhichofthefollowingisNOT amongtheprimaryfunctionsofmoney?

A) unitofaccount
B) storeofvalue
C) indicatorofsupply
D) mediumofexchange
E) anobjectthatisgenerallyacceptedinreturnforgoodsandservices
Answer: C
Status: Old
14) MoneyperformsallofthefollowingfunctionsEXCEPT servingasa

i. mediumofexchange.
ii. unitofaccount.
iii. bartermechanism.
A) ionly
B) iionly
C) iiionly
D) iandii
Answer: C
Status: Old
Page976
E) iiandiii
15) Whenyoujointhelocalorganicfoodmarketandthenbuyproduceeachmonth,moneyis
usedas
A) onlyastoreofvalue.
B) onlyaunitofaccount.
C) amediumofexchangeandastoreofvalue.
D) amediumofexchangeandaunitofaccount.
E) astoreofvalueandaunitofaccount.
Answer: D
Status: Old
16) Barterrequiresthe
A) useofcommoditymoneyasamediumofpayment.
B) useoffiatmoneyasamediumofexchange.
C) thetriplenon-coincidenceofwants.
D) exchangeofgoodsandservicesdirectlyforothergoodsandservices.
E) useofmoneyasaunitofaccount.
Answer: D
Topic: Functionsofmoney,mediumofexchange
Status: Old
17) Themediumofexchangeisdefinedas
A) barter.
B) theexchangeofgoodsandservicesdirectlyforgoodsandservices.
C) anobjectthatisacceptedinreturnforgoodsandservices.
D) creditcards.
E) anitemthatcanbestoredandholditsvalueovertime.
Answer: C
Status: Old
Page977
18) Abartersystemofpaymentis
A) similartoamoneysystemofpaymentbecausebothrequireadoublecoincidenceof
wants.
B) similartoamoneysystemofpaymentbecausebothuseoneassetasaunitofaccount.
C) differentfromamoneysystemofpaymentbecausethebartersystemisabetterunitof
account.
D) differentfromamoneysystemofpaymentbecausemoneydoesnotrequireadouble
coincidenceofwants.
E) similartoamoneysystemofpaymentbecausebothareusedasstoresofvalueandunits
ofaccount.
Answer: D
Topic: Barter
Status: Old
19) Inperformingwhichofitsprimaryfunctionsdoesmoneysolvetheproblemofthedouble
coincidenceofwants?
A) mediumofexchange
B) unitofaccount
C) storeofvalue
D) bartersystem
E) moneysupply
Answer: A
Topic: Barter
Status: Old
20) Thedoublecoincidenceofwantsis
A) whatisneededtousemoney.
B) eliminatedwiththeuseofmoney.
C) eliminatedwhenwebarterinsteadofusingmoney.
D) howvalueisstoredwhenwetransactwithmoney.
E) moneysroleasaunitofaccount.
Answer: B
Topic: Barter
Status: Old
Page978
21) Whenweusemoneytopurchasegoodsandservices,weareusingmoneyasa
A) unitofaccount.
B) reserveofwealth.
C) mediumofexchange.
D) storeofvalue.
E) barteringtool.
Answer: C
Status: Old
22) Whenyouusecurrencytobuylunch,moneyisperformingwhichfunction?
A) mediumofexchange
B) unitofpurchase
C) storeofvalue
D) bartertoken
E) unitofcurrency
Answer: A
Status: Old
23) Whatisaproblemwithbarterthatmakesitsodifficulttouse?
A) Individualshavetoproducesomethingtotradewith.
B) Barterrequiresadoublecoincidenceofwants.
C) Barterisveryefficientbutillegalbecauseitavoidstaxation.
D) Barterrequiresuseofonlyfiatmoney.
E) Barteromitsthestoreofvalueroleformoney.
Answer: B
Status: Old
24) Whichofthefollowingbestdescribesadoublecoincidenceofwants?
A) Twobuyerswantthesamegood.
B) Neitherbuyerwantsagood.
C) Youhavewhatanotherwantsandyouwantwhattheyhave.
D) Abuyerandasellerratherthantwobuyersortwosellersmustmeet.
Answer: C
Status: Old
Page979
25) Theunitofaccountisdefinedas
A) theexchangeofgoodsandservicesdirectlyforothergoodsandservices.
B) barter.
C) anobjectthatisacceptedinreturnforgoodsandservices.
D) anagreeduponmeasureforstatingpricesofgoodsandservices.
E) themediumofexchange.
Answer: D
Topic: Functionsofmoney,unitofaccount
Status: Old
26) Ifyoushopforacaronlineandcomparecarpricesacrossdealerships,moneyisfunctioningas
a
A) mediumofexchange.
B) unitofaccount.
C) meansofpayment.
D) storeofvalue.
E) bartermechanism.
Answer: B
Status: Old
27) Thefunctionofmoneythathelpsassesstheopportunitycostofanactivityismoneysuseasa
B) storeofvalue.
C) unitofaccount.
D) storeofdebt.
E) bartertool.
Answer: C
Status: Old
Page980
28) Whenweputapricetagongoodsandservices,weareusingmoneyasa
A) storeofvalue.
B) mediumofexchange.
C) bartertoken.
D) unitofaccount.
E) meansofpayment.
Answer: D
Status: Old
29) Whenyouseeamansionandthinktoyourselfthatitmustbeworthamilliondollars,youare
usingmoneytoperformwhichfunction?
A) mediumofexchange
B) unitofaccount
C) storeofvalue
D) meansofpayment
E) methodofavoidingbarter
Answer: B
Status: Old
30) Moneyisusedasa________whenyouvisitthelocalfarmersmarketandcompareprices
acrossdifferentvendors.
A) meansofpayment
B) unitofaccount
C) storeofvalue
D) mediumofexchange
E) measureofbarter
Answer: B
Status: Old
Page981
31) Whenmoneyisusedtocomparetherelativepriceofaburritoandataco,moneyisbeingused
asa
B) storeofvalue.
C) measurementofinflation.
D) unitofaccount.
E) tokenofbartering.
Answer: D
Status: Old
32) Thestoreofvaluefunctionisdefinedasthe
A) pricingofgoodsandservicesinonemeasure.
B) exchangeofgoodsandservicesdirectlyforothergoodsandservices.
C) holdingofmoneyfromonetransactiontobeusedlaterinanothertransaction.
D) doublecoincidenceofwantsthatisusedinthedebateoverbarterversusmoney.
E) useofmoneyasamediumofexchange.
Answer: C
Topic: Functionsofmoney,storeofvalue
Status: Old
33) Whenwekeeppartofourwealthinabankcheckingaccount,weareusingmoneyasa
A) storeofvalue.
B) mediumofexchange.
C) bartertoken.
D) unitofaccount.
E) unitofcurrency.
Answer: A
Status: Old
Page982
34) Whenwekeeppartofourwealthinabankcheckingaccount,weareusingmoneyasa
________because________.
A) storeofvalue;weareholdingthemoneytoexchangeforgoodsatalatertime
B) mediumofexchange;weareholdingthemoneytogaininterestearned
C) bartertoken;weareholdingthemoneytoexchangeforgoodsatalatertime
D) unitofaccount;weareholdingthemoneytoexchangeforgoodsatalatertime
E) unitofcurrency;wehaveagreeduponthevalueofthemoneywithbank
Answer: A
Status: New
35) Keeping$20incurrencytobeabletobuygasoline,moneyisperformingwhichfunction?
A) mediumofexchange
B) unitofaccount
C) storeofvalue
D) bartermechanism
E) symboloffiat
Answer: C
Status: Old
36) Thewordfiatis
A) usedtodescribetodaysmoneybecauseitismoneysetbylaw.
B) usedtodescribemoneyfromwhenKingsruledbydecreeorfiat.
C) thetermusedtodefinetheconceptofbarter.
D) anotherwordtomeanthedoublecoincidenceofwants.
E) Latinforbackedbygold.
Answer: A
Topic: Fiatmoney
Status: Old
Page983
37) Moneytoday
A) isthedemandforloanablefunds.
B) isthesupplyofloanablefunds.
C) isonlycurrencyinsidebanks.
D) isfiatmoney.
E) intheUnitedStates,isonlydollarbillsandcoins.
Answer: D
Topic: Fiatmoney
Status: Old
38) TheU.S.dollariscalled
A) fiatmoneybecausethelawdecreesitismoney.
B) faithmoney.
C) commoditymoney,becauseitisconvertibleintogold.
D) frailmoneybecausewearandtearruinspaperbills.
E) convertiblemoneybecausethegovernmentstandsreadytoconvertitintogoldorsilver.
Answer: A
Topic: Fiatmoney
Status: Old
39) Fiatmoneymeans
A) Italiancurrency.
B) moneysvaluedoesnotchange.
C) thegovernmenthasdecreedthatsomethingismoney.
D) themoneycanbeconvertedintogold.
E) onlycurrencycountsasmoney.
Answer: C
Topic: Fiatmoney
Status: Old
40) Theobjectsthatweuseasmoneytodayare
A) checksandcreditcards.
B) currencyandchecks.
C) currencyanddeposits.
D) depositsandchecks.
E) currency,deposits,andgold.
Answer: C
Topic: Whatisincludedinmoney
Status: Old
Page984
41) Whichstatementmostaccuratelycapturesthestateofmoneytoday?
A) Moneytodayincludescurrency,bankdepositsandchecks.
B) Moneytodayincludescurrencyandchecksbutnotbankdeposits.
C) Moneytodayincludesbankdepositsandcurrencybutnotchecks.
D) Moneytodayincludesbankdepositsandchecksbutnotcurrency.
E) Moneytodayincludeschecksandcreditcards.
Answer: C
Status: Old
42) Whichofthefollowingisanexampleofmoney?
A) currencyinyourwallet
B) currencyinsidethebanks
C) checkswrittenaspaymentforagoodorservice
D) creditcardusedasapaymentforagoodorservice
E) adebitcard
Answer: A
Status: Old
43) Theobjectsweuseasmoneytodayinclude
A) currencyinsidebanksandbankdeposits.
B) currencyoutsidethebanksandbankdeposits.
C) onlycurrencyoutsidethebanks.
D) onlydepositsinsidethebanks.
E) creditcardsanddebitcards.
Answer: B
Status: Old
Page985
44) Checkabledepositsaremoneybecause
A) theyareprotectedbytheFederalReserve.
B) theyareguaranteedbybanks.
C) checksbouncewhentherearenotenoughfundstocashthem.
D) theycanbeconvertedintocurrencyondemandandareuseddirectlyasameansof
payment.
E) onlybanksandotherfinancialinstitutionscanofferthem.
Answer: D
Status: Old
45) Whichofthefollowingisthebestexampleofmoney?
A) phonecard
B) checkabledeposit
C) creditcard
D) gold
E) shareofIntelstock
Answer: B
Status: Old
46) Whichofthefollowingismoney?
A) creditcard
B) debitcard
C) e-checks
D) checkabledeposit
E) checks
Answer: D
Status: Old
Page986
A) acreditcardwithnocreditleft
B) thecheckyouwritetopaytuition
C) acreditcardthatstillhascreditavailableonit
D) acheckabledepositinyourbank
E) thecurrentcreditavailableonacreditcard
Answer: D
Status: Old
A) debitcards
B) e-checks
C) creditcards
D) checkabledeposits
E) checks
Answer: D
Status: Old
49) Checksarenotmoneybecausethey
A) arejustinstrumentstotransfermoneybetweenbanks.
B) arenotguaranteedbybanks.
C) canbouncewhentherearenotenoughfundstocashthem.
D) arenotissuedbythegovernment.
E) arenotalwaysacceptedwhentryingtopurchasegoodsorservices.
Answer: A
Status: Old
50) Ifyouuseachecktopayyourmonthlyrent,
A) thecheckisconsideredmoneybecauseyoureceivedsomethinginreturn.
B) thecheckisnotmoneybecauseitisjustaninstructiontoyourbanktomakeapayment.
C) youhaveusedmoneybecausethelandlordaccepteditasameansofpayment.
D) thecheckbecomesmoneywhenitarrivesatthelandlordsbank.
E) thecheckisnotmoneybecauseitisnotpartofM1.
Answer: B
Status: Old
Page987
51) Acreditcardis
A) money.
B) bartermoney.
C) notmoney.
D) fiatmoney.
E) notmoney,butthecardscreditlineismoney.
Answer: C
Status: Old
52) Creditcardsare
A) aformofmoneyusedtomakepurchases.
B) aspecialIDcardthatisnotmoney.
C) aspecialIDcardthatisthesameasmoney.
D) aformofmoneythatisnotgenerallyaccepted.
E) includedintheM1measureofmoney.
Answer: B
Status: Old
53) Whenyouuseacreditcardtopayyourtuition,
A) youveusedthecreditcardasmoneybecauseitisameansofpayment.
B) thecreditcardisnotmoneybutisanIDcardforaninstantloan.
C) thecreditcardisnotmoneybecauseitinvolvesanelectronictransaction.
D) thecreditcardisnotmoneybecauseitisnotofficiallyissuedbythegovernment.
E) youveusedthecreditcardasmoneybecauseyoureceivedsomethinginreturn.
Answer: B
Status: Old
54) Creditcardsare
i. agenerallyacceptedformofpaymentandthereforepartofM1.
ii. includedinM1becauseyouwriteachecktopayyourmonthlybill.
iii. ameansofborrowingmoney.
A) ionly
B) iionly
C) iiionly
D) iandii
Answer: C
Status: Old
Page988
E) iandiii
55) WhenDalebuysanewcomputerfor$1,000usingacreditcard,
A) heistakingoutaloanfor$1,000.
B) hisbankaccountdecreasesby$1,000.
C) thecreditcardisactingasmoney.
D) themoneysupplydecreasesby$1,000.
E) thecreditcardisperformingthefunctionofanunitofaccount.
Answer: A
Status: Old
56) Debitcardsande-checksarenotmoneybecause
A) theycanbeforgedeasily.
B) theycanfailtheirpurposeofbeingmediumsofexchangeasaresultoftechnical
difficulties.
C) theyarejustinstrumentstotransfermoneybetweenpeople.
D) notallbanksofferthemandnotallbusinessesacceptthem.
E) theyarenotregulatedbythegovernment.
Answer: C
Status: Old
57) Adebitcardis
A) moneybecauseitisameansofpayment.
B) notmoneybutisusedtotransferbankdepositswhicharemoney.
C) moneybecauseitisgenerallyacceptedasameansofpayment.
D) notmoneybecauseitisnotofficiallyissuedbythegovernment.
E) partoftheM2moneysupplybutnotpartoftheM1moneysupply.
Answer: B
Status: Old
Page989
58) Whichofthefollowingareconsideredmoney?
i. electronicchecks
ii. paperchecks
iii. thedeposittransferredusingane-check
A) i,iiandiii
B) iandiii
C) iandii
D) iiionly
E) iiandiii
Answer: D
Status: Old
59) AnofficialmeasureofmoneyintheUnitedStatesisM1,whichincludesthesumof
A) checkabledepositsplussmalltimedeposits.
B) currencypluscheckabledeposits.
C) currencypluscreditcardtransactions.
D) currencyplustravelerschecksplustimedeposits.
E) currencyplustravelerscheckspluscheckabledepositsplussmalltimedepositsplus
moneymarketfundsandotherdeposits.
Answer: B
Topic: M1
Status: Old
60) M1iscomposedof
A) currencyheldbyindividualsandbusinesses,travelerschecks,andcheckabledeposits
ownedbyindividualsandbusinesses.
B) checkabledepositsownedbyindividualsandbusinesses,savingdeposits,and
certificatesofdeposit.
C) currencyinsideofbanks,travelerschecks,andgovernment-issuedchecks.
D) travelerschecks,creditcards,ande-cash.
E) currencyheldbyindividualsandbusinesses,travelerschecks,andthecreditlineon
creditcards.
Answer: A
Topic: M1
Status: Old
Page990
61) WhichofthefollowingareincludedintheM1definitionofmoney?
A) currencyandcheckabledeposits
B) currencyandsavingsdeposits
C) travelerschecksandmoneymarketmutualfunds
D) currencyandsmalltimedeposits
E) travelerschecksandsavingsdeposits
Answer: A
Topic: M1
Status: Old
62) M1isdefinedasameasureofmoneyincluding,inpart,
A) checkabledepositsandcurrency.
B) timedepositsandcurrency.
C) currencyandsavingsdeposits.
D) timedepositsandmoneymarketfunddeposits.
E) thelinesofcreditoncreditcardsandcurrency.
Answer: A
Topic: M1
Status: Old
63) WhichofthefollowingitemsisincludedintheM1moneysupply?
A) $10billsintheBankofAmerica
B) a$5,000studentloangrantedtoaU.S.citizen
C) coinsinaPepsivendingmachine,waitingtobeusedaschange
D) a$5,000lineofcreditonanewlygraduatedstudentscreditcard
E) $1,500inastudentssavingaccount
Answer: C
Topic: M1
Status: Old
64) WhichofthefollowingisNOT acomponentofM1?

A) demanddeposits
B) travelerschecks
C) savingsdeposits
D) currency
E) BothanswersCandDarecorrect.
Answer: C
Topic: Officialmeasuresofmoney
Status: Old
Page991
65) IfRobdeposits$300incurrencyintohissavingsaccountatBankofAmerica,
A) M1decreases.
B) M1doesnotchange.
C) M2increases.
D) M2decreases.
E) M1andM2bothincrease.
Answer: A
Topic: M1
Status: Old
66) Supposeyouuseyourdebitcardtobuysodafromasodamachine.Whichofthefollowingis
trueregardingthetransaction?
A) Thedebitcardisnotmoney;itsonlyaninstructiontomakealoan.
B) Thedebitcardismoney;yourusereflectstheexchangeofagood.
C) Thedebitcardisnotmoney;itsuseisonlyatooltocausemoneytomovefromyour
account.
D) Yourusemakesthedebitcardmoney,asfundsaretransferredbetweenyouraccount
andthemachineowner.
E) Usingthedebitcardislikeusingacheckandis,therefore,money.
Answer: C
Topic: Money
Status: Old
67) WhenMariadeposits$100incurrencyinhercheckabledepositatBankofAmerica,the
immediateeffectisthatthequantityofM1
A) decreases.
B) doesnotchange.
C) increases.
D) changes,butthedirectionofthechangedependsonwhetherthedepositwasaccepted
byathriftinstitutionoracommercialbank.
E) changesonlyifBankofAmericadoesnothaveexcessreserves.
Answer: B
Topic: M1
Status: Old
Page992
68) WhenMariadeposits$100incurrencyinhercheckabledepositatBankofAmerica,the
immediateeffectisthatthequantityofM1________because________.
A) decreases;checkabledepositsareincludedinM2butarenotincludedinM1
B) doesnotchange;bothcurrencyandcheckabledepositsareincludedinM1
C) increases;bothcurrencyandcheckabledepositsareincludedinM1
D) changes,butthedirectionofthechangecannotbedetermined;thedirectionofthe
changedependsonwhatBankofAmericadoeswiththedeposit
E) changesonlyifBankofAmericahasexcessreserves;ifthebankdoesnothaveexcess
reserves,theoveralleffecttoM1istoosmalltonotice
Answer: B
Topic: M1
Status: New
69) Whenpeoplemakedepositsofcurrencyintoabank,thequantityofM1
A) immediatelydecreasesbytheamountofthedeposit.
B) immediatelyincreasesbytheamountofthedeposit.
C) doesnotimmediatelychange.
D) immediatelychangesbutwhetheritincreasesordecreasesdependsonwhetherthebank
hadexcessreservesordidnothaveexcessreserves.
E) changesonlyifthedepositisanopenmarketoperation.
Answer: C
Topic: M1
Status: Old
70) Ifyoudeposit$1,000incashinyourcheckabledepositatyourbank,thequantityofM1
immediately
A) increasesby$1,000.
B) decreasesby$1,000.
C) increasesby$2,000.
D) doesnotchangeinsize.
E) changes,butmoreinformationabouttherequiredreserveratioisnecessarytodetermine
theamountofthechange.
Answer: D
Topic: M1
Status: Old
Page993
71) InDecember2009,currencywas$400billion,travelerscheckswere$5billion;checkable
depositsownedbyindividualsandbusinesseswere$600billion,savingdepositswere$2,00
billion,timedepositswere$1,500billion;andmoneymarketfundswere$1,200billion.What
wastheM1inDecember2009?
A) M1=$405billion
B) M1=$1,005billion
C) M1=$3,005billion
D) M1=$3500billion
E) M1=$3505billion
Answer: B
Topic: M1
Status: Old
72) IfJoewithdrawsa$100billfromhischeckingaccountandJackdepositsanother$100billin
hissavingsaccount,byhowwillM1andM2change?
A) M1willdecrease,butM2willremainthesame.
B) M1willincrease,andM2willincrease.
C) M2willdecreaseby$100.
D) BothM1andM2willremainthesame.
E) M1willremainthesame,andM2willincrease.
Answer: A
Topic: M1,M2
Status: Old
73) Susanjustsoldhertextbooksfor$200cashanddepositedthecashshereceivedinher
checkingaccount.Thistransactionhas
A) increasedthequantityofM1.
B) decreasedthequantityofM1.
C) increasedthequantityofM2.
D) decreasedthequantityofM2.
E) notchangedeitherM1orM2.
Answer: E
Topic: M1,M2
Status: Old
Page994
74) M2consistsof
A) M1plustravelerschecks.
B) M1plussavingdeposits,smalltimedeposits,andmoneymarketfunds.
C) M1pluscheckabledeposits.
D) M1pluscurrencyatthebanks.
E) M1plusFederalReservenotes.
Answer: B
Topic: M2
Status: Old
75) WhichofthefollowingareincludedintheM2definitionofmoney?
A) currencyoutsideofbanksandcheckabledeposits
B) currencyoutsideofbanksandcreditlinesoncreditcards
C) timedepositsandthevalueofprimegradebonds
D) currencybothinsideandoutsideofbanks
E) currencyinsideofbanksandbanksreserves
Answer: A
Topic: M2
Status: Old
76) IfwelookatthecomponentsofM2,wefindthat
A) moneymarketfundsarethelargestcomponent.
B) savingsdepositsarethelargestcomponent.
C) currencyisthelargestcomponent.
D) banksreservesarethelargestcomponent.
E) loansarethelargestcomponent.
Answer: B
Topic: M2
Status: Old
Page995
77) InDecember2009,currencyoutsideofbankswas$400billion,travelerscheckswere$5billion;
checkabledepositsownedbyindividualsandbusinesseswere$600billion,savingdeposits
were$2,000billion,timedepositswere$1,500billion;andmoneymarketfundswere$1,200
billion.WhatwastheM2inDecember2009?
A) M2=$5,705billion
B) M2=$3705billion
C) M2=$1,005billion
D) M2=$2,505billion
E) M2=$5,700billion
Answer: A
Topic: M2
Status: Old
78) Ifcurrencyoutsideofbanksis$800billion;travelerschecksare$10billion;checkabledeposits
ownedbyindividualsandbusinessesare$700billion;savingsdepositsare$4,000billion;
smalltimedepositsare$1,000billion;andmoneymarketfundsandotherdepositsare$800
billion,thenM2equals________billion.
A) $7,310
B) $5,800
C) $2,510
D) $1,510
E) $710
Answer: A
Topic: M2
Status: Old
Amount
(dollars)
Checkabledeposits
350
Savingsdeposits
900
Moneymarketfunds
500
Smalltimedeposits
600
Travelerschecks
10
Currencyoutsideofbanks 250
79) TheabovetablehasinformationaboutthehypotheticaleconomyofRobotica.Basedonthe
data,thesizeofM1is
A) $610billion.
B) $1,510billion.
C) $600billion.
D) $1,110billion.
E) $2,600billion.
Answer: A
Topic: M1
Status: Old
Page996
80) TheabovetablehasinformationaboutthehypotheticaleconomyofRobotica.Basedonthe
data,thesizeofM2is
A) $2,600billion.
B) $2,610billion.
C) $610billion.
D) $600billion.
E) $1,710billion.
Answer: B
Topic: M2
Status: Old
81) Physicalcurrencyis________popularthane -cash,________.

A) less;andbothareportableandrecognizable
B) more;andbothareportableandrecognizable
C) more;butonlyphysicalcurrencyisportableandrecognizable
D) more;andbothareportable,untraceableandanonymous
E) less;butbothareportable,untraceableandanonymous
Answer: D
Topic: Money
Status: Old
82) ________likeacheckand________consideredmoney.
A) Debitcardswork;arenot
B) Debitcardswork;are
C) E-checkswork;are
D) E-cashworks;isnot
E) E-cashworks;is
Answer: A
Topic: Money
Status: Old
Page997
83) Whichofthefollowingbestdefineswhatmoneyisnowandwhatithasbeeninthepast?
A) currency
B) currencypluscheckingdeposits
C) currencypluscreditcards
D) anythingacceptedasameansofpayment
E) anythingusedasastoreofvalue
Answer: D
Topic: Money
Status: Old
84) WhichofthefollowingisNOT afunctionofmoney?

i. unitofaccount
ii. storeofvalue
iii. unitofdebt
A) ionly
B) iionly
C) iiionly
D) bothiiandiii
E) bothiandii
Answer: C
Status: Old
85) Barteris
A) theexchangeofgoodsandservicesformoney.
B) thepricingofgoodsandserviceswithoneagreeduponstandard.
C) theexchangeofgoodsandservicesdirectlyforothergoodsandservices.
D) agenerallyacceptedmeansofpayment.
E) storingmoneyforuseatalaterdate.
Answer: C
Topic: Barter
Status: Old
Page998
86) Ifsomeoneburiesmoneyinatincanbeneathatree,themoneyisfunctioningasa
B) unitofaccount.
C) meansofpayment.
D) storeofvalue.
E) barteringtool.
Answer: D
Status: Old
87) Creditcards,debitcards,ande-checksare
A) alwayscountedasmoney.
B) notmoney.
C) sometimescountedasmoney,dependingonhowtheyareused.
D) sometimescountedasmoney,dependingonwhatispurchased.
E) sometimescountedasmoney,dependingonwhatmeasureofmoneyisbeingused.
Answer: B
Status: Old
88) WhichofthefollowingcountsaspartofM1?
A) $5,000worthofgold
B) $5,000worthofgovernmentbonds
C) $5,000inacheckingaccount
D) $5,000creditlineonacreditcard
E) $5,000ofrealestate
Answer: C
Topic: M1
Status: Old
Page999
89) M2equals
A) M1andisjustanothernameforcurrencyoutsideofbanks.
B) M1plussavingsdeposits,smalltimedeposits,andmoneymarketfunddeposits.
C) M1minustravelerschecksbecausetheyarenotreallymoney.
D) currencyplussavingsdeposits,alltimedeposits,andmoneymarketfundsandother
deposits.
E) M1plussavingsdepositsandsmalltimedepositsminusmoneymarketfunddeposits.
Answer: B
Topic: M2
Status: Old
90) Ifcurrencyoutsideofbanksis$800billion;travelerschecksare$10billion;checkabledeposits
ownedbyindividualsandbusinessesare$700billion;savingsdepositsare$4,000billion;
smalltimedepositsare$1,000billion;andmoneymarketfundsandotherdepositsare$800
billion,thenM1equals________billion.
A) $7,310
B) $5,800
C) $2,510
D) $1,510
E) $710
Answer: D
Topic: M1
Status: Old
11.2 TheBankingSystem
1) Acommercialbankisdefinedas
A) anyinstitutionthatacceptsdeposits.
B) afirmthatischarteredtoacceptdepositsandmakeloans.
C) theinstitutionthatsetsregulationsforcommercialactivities.
D) afirmthatobtainsfundsbysellingsharesandthenbuysU.S.Treasurybills.
E) anyinstitutionthatmakesloans.
Answer: B
Topic: Commercialbanks
Status: Old
Page1000
2) Whichstatementismostcorrectaboutthetypesofdepositsacommercialbankcanaccept?
A) Acommercialbankacceptschecking,savingsandtimedeposits.
B) Acommercialbankcanonlyacceptcheckingdepositsfromcommercialenterprises.
C) Acommercialbankacceptssavingsandtimedeposits,butnotcheckingdeposits.
D) Acommercialbankdoesnotacceptdepositsbutsellsshares.
E) Acommercialbankcanacceptloandeposits,reservedeposits,andcheckabledeposits.
Answer: A
Topic: Commercialbanks
Status: Old
3) Thegoalofacommercialbankisto
A) establishgoodregulationsforcommercialactivities.
B) makeonlysafe,no-riskloans.
C) maximizeitsstockholderswealth.
D) minimizeitstaxespaidtostategovernments.
E) acceptonlydepositsmadeinmoney.
Answer: C
Topic: Banksprofit
Status: Old
4) Banksearnaprofitby
A) keepingasmanyreservesonhandaspossible.
B) makingloansatalowerinterestratethantheratethattheyofferontheirdeposits.
C) charginganinterestrateontheirdepositorsaccounts.
D) makingloansatahigherinterestratethantheratesthattheyofferontheirdeposits.
E) notpayinginterestontheirreserves.
Answer: D
Topic: Banksprofit
Status: Old
Page1001
5) Whichofthefollowingareassetsofcommercialbanks?
i. reserves
ii. loans
iii. deposits
A) ionly
B) iionly
C) iandii
D) iiandiii
E) i,ii,andiii
Answer: C
Topic: Banksassets
Status: Old
6) Banksgenerallyearnthehighestinterestrate
A) onservicechargesonindividualscheckingaccounts.
B) bymakingloanstobusinessfirms.
C) bymakingmortgageloanstoindividuals.
D) bymakingcreditcardloans.
E) bybuyinggovernmentsecurities.
Answer: D
Topic: Banksassets
Status: Old
7) Thelargestcategoryofcommercialbanksassetsis
A) loans.
B) reserves.
C) currency.
D) securities.
E) checkabledeposits.
Answer: A
Topic: Banksassets
Status: Old
Page1002
8) WhichofthefollowingisNOT heldasanassetbybanks?
A) reserves
B) loans
C) securities
D) currencyinthebanksvaults
E) checkabledeposits
Answer: E
Topic: Banksassets
Status: Old
9) Whichofthefollowingdescribestheinventionofbanking?
A) TheBritishEmpirecreatedabankingsystemtofunditsexplorationoftheNewWorld.
B) MembersoftheNewYorkStockExchangefoundedtheBankofAmericainthe1700s.
C) Goldsmithsinthesixteenthcenturyissuedgoldreceiptswhichentitleditsownersto
reclaimtheirgoldondemand.
D) ClergyintheRenaissancecreatedthebankingsystemtohelpfurtherthegrowthofthe
church.
E) TheUnitedStatesgovernmentfoundedtheFederalReservein1913.
Answer: C
Topic: EyeonthePast:TheInventionofBanking
Status: Old
10) Whengoldsmithsissuedreceiptstogoldowners,andthosegoldreceiptscirculatedwhilegold
stayedinthegoldsmithssafes,
A) thegoldreceiptswereconsideredmoneybecausetheywereusedasameansofpayment.
B) aninfantbankingsystemdevelopedinsixteenthcenturyEurope.
C) fiatmoneywascreated.
D) moneywasinvented.
E) BothAandBarecorrect.
Answer: E
Topic: EyeonthePast:TheInventionofBanking
Status: Old
Page1003
11) Acommercialbanksreservesareequaltotheamountof
A) thebanksdeposits.
B) thebanksgovernmentsecurities.
C) thebanksloans.
D) currencyinthebanksvaultplusthebalanceonitsreserveaccountataFederalReserve
Bank.
E) onlythecurrencyinitsvault.
Answer: D
Topic: Banksreserves
Status: Old
12) In2013bankskeptreservesequaltoabout________oftheirassets.
A) 75percent
B) 25percent
C) 18percent
D) 50percent
E) 37percent
Answer: C
Status: Revised
13) Commercialbankreservesaretypicallylessthan1percentoftotalassets,howeverin2013
bankreserves________becauseof________.
A) rosetoaround88percent;thefinancialcrisisof2008-2009
B) droppeddrasticallytonearzero;thefinancialcrisisof2008-2009
C) rosetoaround18percent;thefinancialcrisisof2008-2009
D) droppeddrasticallytonearzero;thewaveofnaturaldisastersexperiencedinthenation
andaroundtheworld
E) rosedrasticallytoaround18percent;thewaveofnaturaldisastersexperiencedinthe
nationandaroundtheworld
Answer: C
Status: New
Page1004
14) Whenacommercialbankreceivesadeposit,itmustkeeppartofthedepositascashreserves
tosatisfyits
A) securitiesandloans.
B) requiredreserves.
C) excessreserves.
D) interbankloans.
E) loanrequirements.
Answer: B
Status: Old
15) Abankhascheckabledepositsof$1,000,000,loansof$600,000,andgovernmentsecuritiesof
$400,000.Iftherequiredreserveratiois5percent,theamountofrequiredreservesis
A) $100,000.
B) $30,000.
C) $50,000.
D) $80,000.
E) $20,000.
Answer: C
Topic: Requiredreserveratio
Status: Old
16) Abankhas$250incheckingdeposits,$1,000insavingsdeposits,$1,200intimedeposits,
$1,000inloanstobusinesses,$400inoutstandingcreditcardbalances,$800ingovernment
securities,$25incurrencyinitsvault,and$25indepositsattheFed.Ofthese,________are
partofM2.
A) $3,450
B) $2,450
C) $2,850
D) $2,200
E) $2,600
Answer: B
Topic: Banksdeposits
Status: Old
17) Abankhas$250incheckingdeposits,$1,000insavingsdeposits,$1,200intimedeposits,
$1,000inloanstobusinesses,$400inoutstandingcreditcardbalances,$800ingovernment
securities,$25incurrencyinitsvault,and$25indepositsattheFed.Thebanksreservesare
equalto
A) $25.
B) $275.
C) $2,225
D) $50.
E) $350.
Answer: D
Status: Old
Page1005
Amount
(dollars)
Checkingdeposits
600
Savingsdeposits
1000
Timedeposits
1,500
Loans
1,200
Governmentsecurities
2,000
Outstandingcreditcardbalances
400
Currencyinvault
10
DepositsinreserveaccountattheFed
20
18) Theabovetablegivesassetsanddepositsfora(small)bank.Thebanksdepositsthatarepart
ofM1areequalto
A) $1,600.
B) $600.
C) $3,100.
D) $3,130.
E) $30.
Answer: B
Status: Old
19) Theabovetablegivesassetsanddepositsfora(small)bank.Thebanksdepositsthatarepart
ofM2areequalto
A) $600.
B) $1600.
C) $3,100.
D) $30.
E) $5,100.
Answer: C
Status: Old
20) Theabovetablegivesassetsanddepositsfora(small)bank.Thebanksreservesareequalto
A) $20.
B) $30.
C) $600.
D) $630.
E) $620.
Answer: B
Status: Old
Page1006
21) Ciscoisconsideringopeningafinancialinstitutionthatacceptssavingsdepositsfromonlyits
employeesandmakesloanstoonlyitsemployees.Thebestdescriptionofthisfinancial
institutionisthatitisa
A) creditunion.
B) commercialbank.
C) savingsandloanassociation.
D) savingsbank.
E) federalgovernmentcharteredcreditbank.
Answer: A
Topic: Creditunion
Status: Old
22) Whichofthefollowingisathriftinstitution?
i. acreditunion
ii. theFed
iii. asavingsbank
A) ionly
B) iionly
C) iiionly
D) Bothiandiii
E) i,ii,andiii
Answer: D
Topic: Thriftinstitutions
Status: Old
23) Acommercialbanksmaingoalisto
A) provideloanstoitscustomers.
B) maximizethewealthofitsstockholders.
C) helpthegovernmentwhenitneedsmoney.
D) lendmoneytotheFederalReserveBanks.
E) opencheckingaccounts.
Answer: B
Topic: Banksprofit
Status: Old
Page1007
24) Whichofthefollowinglistsincludesonlybanksassets?
A) liquidassets,loans,securities,andreserves
B) reserves,savingsdeposits,securities,andloans
C) reserves,securities,liquidassets,andsavingsdeposits
D) securities,reserves,checkabledeposits,andliquidassets
E) reserves,checkabledeposits,securities,andloans
Answer: A
Topic: Banksassets
Status: Old
25) Acommercialbanksreservesare
A) bondsissuedbytheU.S.governmentthatareverysafe.
B) theprovisionoffundstobusinessesandindividuals.
C) currencyinitsvaultplusthebalanceonitsreserveaccountataFederalReserveBank.
D) savingsandtimedeposits.
E) itsloans.
Answer: C
Status: Old
26) Abankhas$400incheckabledeposits,$800insavingsdeposits,$700intimedeposits,$900in
loanstobusinesses,$300inoutstandingcreditcardbalances,$500ingovernmentsecurities,
$10incurrencyinitsvault,and$20indepositsattheFed.Thebanksdepositsthatarepartof
M1areequalto
A) $1,900.
B) $400.
C) $1,210.
D) $530.
E) $410.
Answer: B
Status: Old
Page1008
27) Whichofthefollowingacceptdepositsfromorsellsharestothegeneralpublic?
i. moneymarketfunds
ii. thriftinstitutions
iii. commercialbanks
A) ionly
B) iionly
C) iiionly
D) Bothiiandiii
E) i,ii,andiii
Answer: E
Topic: Depositoryinstitutions
Status: Old
28) Whichofthefollowingisathriftinstitution?
A) asavingsandloanassociation
B) amoneymarketfund
C) acommercialbank
D) aloaninstitution
E) theFederalReserve
Answer: A
Topic: Thriftinstitutions
Status: Old
11.3 TheFederalReserveSystem
1) Apublicauthoritythatprovidesbankingservicestocommercialbanksandregulatesfinancial
institutionsandmarketsiscalleda
A) commercialbank.
B) thriftinstitution.
C) centralbank.
D) moneymarketfund.
E) mint.
Answer: C
Topic: Centralbanks
Status: Old
Page1009
2) Allofthefollowingarefinancialinstitutionsthatacceptdepositsandmakeloanstopeople
andbusinessesEXCEPT
A) commercialbanks.
B) savingsandloans.
C) creditunions.
D) centralbanks.
E) savingsbanks.
Answer: D
Topic: Centralbanks
Status: Old
3) Asthecentralbank,theFederalReserveSystemprovidesbankingservicesto
A) individualsandcontrolsthequantityofmoney.
B) thegovernmentandthestockmarket.
C) foreigncorporationsanddeterminestheexchangerate.
D) banksandregulatesfinancialinstitutionsandmarkets.
E) banksanddetermineshowmuchtheU.S.governmentwillborrow.
Answer: D
Topic: Centralbanks
Status: Old
4) BecausetheFederalReserveSystemisacentralbank,itprovidesbankingservicesto
A) businessesonly.
B) consumersandbusiness.
C) commercialbanks.
D) noone.
E) thegovernmentonly.
Answer: C
Topic: Centralbanks
Status: Old
Page1010
5) TheFederalReserveSystemprovidesbankingservicesto________because________.
A) consumersandbusinesses;itisacentralbankwithresponsibilitiestotheentireU.S.
population
B) banksandbusinesses;itisacentralbankwiththeprimarypurposeofregulating
financialinstitutionsandmarkets
C) commercialbanks;itisacentralbankwiththeprimarypurposeofregulatingfinancial
institutionsandmarkets
D) noone;itisacentralbankwiththeprimarypurposeofregulatingfinancialmarkets
E) FDICinsuredbanks;theyaretheonesthathavepaidtheirmembershipfeesandtheonly
onestheU.S.centralbankguarantees
Answer: C
Topic: Centralbanks
Status: New
6) TheFedisacentralbankandassuch
A) doesbusinessonlywiththefederalgovernment.
B) providesbankingservicestobanksbutnotindividuals.
C) providesbankingservicestoindividualsandfirms.
D) doesbusinesswithinternationalorganizationssuchastheUnitedNations.
E) iswheretheFederalGovernmentturnswhenitneedstoborrow.
Answer: B
Topic: Centralbanks
Status: Old
7) WhatisthecentralbankoftheUnitedStates?
A) ThereisnocentralbankintheUnitedStates.
B) TheDepartmentofTreasury
C) TheFederalReserveSystem
D) Eachstatehasitsowncentralbank,which,whenalltakentogether,constitutethecentral
bankoftheUnitedStates.
E) TheU.S.Mint
Answer: C
Topic: FederalReserveSystem
Status: Old
Page1011
8) ________thequantityofmoneyintheUnitedStates.
A) TheStateDepartmentregulates
B) TheDepartmentofTreasuryregulates
C) TheFederalReserveSystemregulates
D) Commercialbanksregulate
E) ThePresidentoftheUnitedStatesregulates
Answer: C
Status: Old
9) TheFederalReserveSystemisorganizedinto
A) onelargedistrictcoveringtheentireUnitedStates.
B) threedistricts,oneforeachofthecountriesinNorthAmerica.
C) 12districts,dividinguptheUnitedStates.
D) 12districts,dividingupthecountriesinNorthAmerica.
E) 50districts,oneperstate.
Answer: C
Status: Old
10) Conductingthenationsmonetarypolicyisthedutyofthe
A) DepartmentofCommerce.
B) U.S.Treasurydepartment.
C) FederalReserveSystem.
D) FederationofBanks.
E) FederalBankSupervisor.
Answer: C
Status: Old
11) Whoregulatesthequantityofmoneycirculatingintheeconomy?
A) theFederalReserve
B) thebankingsystem
C) theU.S.Congress
D) thePresidentoftheUnitedStates
E) TheU.S.CongressandthePresidentsharethecontrol.
Answer: A
Topic: FederalReserve
Status: Old
Page1012
12) TheFederalReserveSystemisorganizedinto________FederalReservedistricts.
A) 6
B) 10
C) 12
D) 15
E) 50
Answer: C
Status: Old
13) AllofthefollowingareelementsinthestructureoftheFedEXCEPT the

A) FederalOpenMarketCommittee.
B) ExecutiveCounciltotheGovernor.
C) 12FederalReserveBanks.
D) BoardofGovernors.
E) presidentsofthe12FederalReserveBanks.
Answer: B
Status: Old
14) TheBoardofGovernorsoftheFederalReserveis
A) thecollectionofthe12presidentsoftheFederalReserveBanks.
B) aseven-memberboard,eachoneservinga14-yearterm.
C) a14-memberboard,eachoneservingaseven-yearterm.
D) themainpolicy-makingbodyoftheFed.
E) aseven-memberboard,eachoneservingaone-yearterm.
Answer: B
Topic: FederalReserveSystem,BoardofGovernors
Status: Old
15) TheBoardofGovernorsoftheFederalReserveSystemhas
A) sevenmembersservingfor12-yearterms.
B) 12membersservingforseven-yearterms.
C) sevenmembersservingforseven-yearterms.
D) sevenmembersservingfor14-yearterms.
E) sevenmembersservinglifeterms.
Answer: D
Status: Old
Page1013
16) TheBoardofGovernorshas
A) sevenmembersappointedto14-yearterms.
B) 14membersappointedto10-yearterms.
C) fourmembersappointedtoseven-yearterms.
D) 14membersappointedtofour-yearterms.
E) sevenmembersappointedforlife.
Answer: A
Status: Old
17) TheFederalOpenMarketCommitteeis
A) themainpolicymakingbodyoftheFed.
B) aseven-memberboard,eachservinga14-yearterm.
C) comprisedofthepresidentsofthe12FederalReserveBanks.
D) anothernamefortheBoardofGovernors.
E) thegovernmentcommitteechargedwithdeterminingincometaxrates.
Answer: A
Topic: FOMC
Status: Old
18) ThemainpolicymakingbodyoftheFederalReserveSystemisthe
A) BoardofGovernorsoftheFederalReserveSystem.
B) BoardofPresidentsoftheFederalReserveBanks.
C) FederalOpenMarketCommittee.
D) BoardofAdvisors.
E) FederalMonetaryConditionsBoard.
Answer: C
Topic: FOMC
Status: Old
19) WhichofthefollowingFederalReserveBankscarriesoutthedecisionsoftheFOMC?
A) theKansasCityFederalReserveBank
B) theNewYorkFederalReserveBank
C) theDallasFederalReserveBank
D) theSanFranciscoFederalReserveBank
E) theAtlantaFederalReserveBank
Answer: B
Topic: FOMC
Status: Old
Page1014
20) ThevotingmembersoftheFederalOpenMarketCommitteeconsistsofthe
A) sevenBoardofGovernormembersandthe12FederalReserveBankpresidents.
B) sevenBoardofGovernormembersandfiveFederalReserveBankpresidents.
C) 12BoardofGovernormembersandthesevenFederalReserveBankpresidents.
D) 12BoardofGovernormembersandthefiveFederalReserveBankpresidents.
E) sixBoardofGovernormembersandsixFederalReserveBankpresidents.
Answer: B
Topic: FOMC
Status: Old
21) TheFederalOpenMarketCommitteeconsistsof
A) 12members,allofwhomarethepresidentsofFederalReserveBanks.
B) 12members,sevenofwhomarethemembersoftheBoardofGovernors,fourofwhom
arepresidentsofFederalReserveBanks,andthepresidentoftheUnitedStates.
C) 12members,sevenofwhomarethemembersoftheBoardofGovernorsandfiveof
whomarepresidentsofFederalReserveBanks.
D) 12committees,allservingontheBoardofGovernors.
E) 12members,splitevenlysothatsixofwhomaremembersoftheBoardofGovernors
andsixofwhomarepresidentsofFederalReserveBanks.
Answer: C
Topic: FOMC
Status: Old
22) Inordertoinfluencetheinterestrate,theFederalReserveSystemcanimmediatelyadjustthe
A) reservesofthebankingsystem.
B) inflationlevel.
C) unemploymentrate.
D) taxesthatcitizensmustpay.
E) amountthegovernmentborrows.
Answer: A
Topic: Monetarypolicy
Status: Old
Page1015
23) ThefourmainpolicytoolstheFederalReserveSystemusestoinfluencetheinterestrateare
setting
A) theprimerate,openmarketoperations,extraordinarycrisismanagementandsettingthe
excessreserveratio.
B) quantitativeeasing,marketinterestrateandthediscountrate,aswellasopenmarket
operations.
C) thediscountrate,openmarketoperations,extraordinarycrisismeasuresandsettingthe
requiredreserveratio.
D) crediteasing,thediscountrate,settingtaxrates,andsettingtherequiredreserveratio.
E) quantitativeeasing,openmarketoperations,settingtaxrates,andsettingtherequired
reserveratio.
Answer: C
Topic: Fedpolicytools
Status: Old
24) WhichofthefollowingisNOT oneoftheFedsmonetarypolicytools?

A) changingthediscountrate
B) conductingopenmarketpurchasesofgovernmentsecurities
C) changingthecouponrate
D) changingtherequiredreserveratio
E) conductingopenmarketsalesofgovernmentsecurities
Answer: C
Status: Old
25) WhichofthefollowingisatooltheFederalReserveSystemcanusetoregulatethequantityof
money?
i. changingthediscountrate
ii. conductingopenmarketoperations
iii. changingtherequiredreserveratio
A) ionly
B) iionly
C) iiandiii
D) iandii
E) i,ii,andiii
Answer: E
Status: Old
Page1016
26) WhichofthefollowingisapolicytooloftheFed?
i. settingtherequiredreserveratios
ii. conductingopenmarketoperations
iii. quantitativeeasing
A) ionly
B) iionly
C) iiionly
D) Bothiandii
E) i,ii,andiii
Answer: E
Status: Old
27) TheFedinfluencestheinterestratebyusingwhichofthefollowingtools?
i. openmarketoperations
ii. taxesonbankaccounts
iii. changesinrequiredreserveratios
A) ionly
B) iionly
C) iiionly
D) Bothiandiii
E) i,iiandiii
Answer: D
Status: Old
28) WhichofthefollowingarepolicytoolsusedbytheFederalReserve?
i. thefederalpersonalincometax
ii. openmarketoperations
iii. changingtherequiredreserveratio
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: D
Status: Old
Page1017
29) WhichofthefollowingisatooltheFedusestoadjustthequantityofmoney?
i. TheFedcanchangetheinterestratebankschargeforloanstotheirprimecustomers.
ii. TheFedcanchangethediscountrateonloanstobanks.
iii. TheFedcanbuyorsellgovernmentsecurities.
D) iandiii
E) iiandiii
A) ionly
B) iionly
C) iiionly
Answer: E
Status: Old
30) Requiredreserveratiosaretheminimumamountof
A) depositsanyonebankisallowedtoacceptaspercentageofitscapital.
B) reservesanyonebankmustholdasapercentageofitsloans.
C) reservesanyonebankmustholdasapercentageofitsdeposits.
D) depositsanyonebankmustholdasapercentageofitsreserves.
E) reservesanyonebankmustholdasapercentageofitstotalassets.
Answer: C
Topic: Fedpolicytools,requiredreserveratio
Status: Old
31) Therequiredreserveratiois10percentandCharliedeposits$3,000inhercheckingaccount.
Thebankmust
A) increasereservesby$3,000.
B) increasereservesby$300.
C) decreasereservesby$3,000.
D) decreasereservesby$300.
E) notchangeitsreservesuntilCharliedecidestowithdrawherfunds.
Answer: B
Status: Old
Page1018
32) Therequiredreserveratioistheminimumpercentageof________thatbanksarerequiredto
holdbyregulation.
A) reservesastotalassets
B) depositsastotalassets
C) reservesasdeposits
D) depositsasreserves
E) reservesastotalliabilities
Answer: D
Status: Old
33) Therequiredreserveratioisthe
A) amountofexcessreservesthebankholdsjustincase.
B) totalamountofreservesthebankholdsinitsvaults.
C) totalamountofreservesthebankholdsattheFed.
D) amountofreservesbanksarerequiredbytheFedtobeheldasapercentageofthebanks
deposits.
E) amountofreservesbanksarerequiredbytheFedtobeheldasapercentageofthebanks
loans.
Answer: D
Status: Old
A) requiredreserves=(totaldeposits) (excessreserveratio)
B) requiredreserves=(totalreserves) (excessreserveratio)
C) requiredreserves=(totaldeposits) (requiredreserveratio)
D) requiredreserves=(totaldeposits) (requiredreserveratio)
E) requiredreserves=(totaldeposits) (requiredreserveratio)- excessreserves
Answer: C
Status: Old
Page1019
35) TheinterestratetheFederalReservechargesabankwhenitborrowsreservesfromtheFedis
calledthe
A) marketinterestrate.
B) federalfundsrate.
C) discountrate.
D) primerate.
E) borrowingrate.
Answer: C
Topic: Fedpolicytools,discountrate
Status: Old
36) Thediscountrateisthe
A) banksrealinterestrate.
B) interestrateatwhichtheFedwillloanreservestocommercialbanks.
C) interestratebankschargetheFedwhentheFedborrowsfromthebanks.
D) nameoftheinterestratebankschargetheirmostcredit-worthyborrowers.
E) interestratepaidonU.S.governmentsecurities.
Answer: B
Status: Old
37) Thediscountrateis
A) theinterestratepaidwhenabankborrowsreservesfromanotherbank.
B) theinterestratepaidwhenacommercialbankborrowsreservesfromtheFed.
C) thereductionintheinterestrategiventothebanksbestcustomers.
D) anothernameforthelong-terminterestrate.
E) theinterestratetheFedpaysbanksforthereservesthebankskeepattheFed.
Answer: B
Status: Old
Page1020
38) Thediscountrateis
A) theinterestratethatcommercialbankshavetopayforanyreservesthattheyborrow
fromthenon-bankpublic.
B) theinterestratethatcommercialbankshavetopaytotheownersofbankdeposits.
C) equaltothenominalinterestrateminustheinflationrate.
D) theinterestratethatcommercialbankspayforreservesthattheyborrowfromtheFed.
E) theinterestratethatcommercialbanksreceiveforthereservesthattheyhaveonreserve
attheFed.
Answer: D
Status: Old
39) IftheFedincreasesthediscountrate,
A) commercialbankspayahigherinterestrateiftheyborrowfromtheFed.
B) commercialbankspayalowerinterestrateiftheyborrowfromtheFed.
C) commercialbanksassetsincrease.
D) commercialbanksfinditmoreprofitabletoincreasetheirloanstobusinesses.
E) commercialbanksincreasetheirlendingtotheFed.
Answer: A
Status: Old
40) IftheFedincreasesthediscountrate,commercialbankspaya________interestrateifthey
borrowmoneyfromtheFedandwilltherefore________.
A) higher;borrowlessmoneyfromtheFedandmakefewerloanstoconsumers
B) higher;borrowmoremoneyfromtheFedandmakemoreloanstoconsumers
C) lower;borrowmoremoneyfromtheFedandmakemoreloanstoconsumers
D) lower;borrowlessmoneyfromtheFedandmakefewerloanstoconsumers
E) higher;depositmoremoneyintotheirreservesattheFed
Answer: A
Status: New
Page1021
41) Openmarketoperationsarethe
A) purchaseorsaleofgovernmentsecuritiesbytheFed.
B) lendingofreservestothebankingsystembytheFed.
C) borrowingofreservesbytheFedfromthebankingsystem.
D) minimumpercentageofloansthatbanksmustretainasreservesintheopenmarket.
E) purchaseorsaleofgoldbytheFed.
Answer: A
Topic: Fedpolicytools,openmarketoperations
Status: Old
42) OpenmarketoperationsarewhentheFedbuysorsells
A) governmentsecuritiesfromthegovernment.
B) corporatesecuritiesfrombanksorsomeotherbusiness.
C) governmentsecuritiesfrombanksorsomeotherbusiness.
D) corporatesecuritiesfromthegovernment.
E) gold.
Answer: C
Status: Old
43) WhentheFedengagesinopenmarketoperations,itisbuyingorselling
A) capitalequipment.
B) U.S.governmentsecuritiesnewlyissuedbytheU.S.Treasury.
C) U.S.governmentsecurities.
D) loansmadetobankstomeetthelegalreserverequirementratio.
E) gold.
Answer: C
Status: Old
44) Inresponsetothefinancialcrisisin2008,theFedcreatedwhichofthefollowingpolicytools?
A) quantitativeeasing
B) therequiredreserveratio
C) thediscountrate
D) thefederalfundsrate
E) openmarketoperations
Answer: A
Topic: Fedpolicytools,crisismeasures
Status: Old
Page1022
45) WhichofthefollowingpolicytoolsdidtheFedcreatein2008toaddressthefinancialcrisis?
i) quantitativeeasing
ii) crediteasing
iii) openmarketoperations
A) iandii
B) ionly
C) iionly
D) iandiii
E) iiandiii
Answer: A
Topic: Fedpolicytools,crisismeasures
Status: Old
46) QuantitativeeasingbytheFedrefersto
A) thecreationofbankreservesbyengaginginlarge -scaleopenmarketoperationatvery
lowinterestrates.
B) sellingprivatesecuritiesissuedbytheFed.
C) decreasingthemoneysupplyduringarecessiontopreventinflation.
D) loweringthefederalfundsratewhileincreasingthediscountrate.
E) loweringtherequiredreserveratiotozeropercent.
Answer: A
Topic: Quantitativeeasing
Status: Old
47) IftheFedengagesinquantitativeeasing,ithaslikely
A) decreasedthefederalfundsratetoalmostzerobybuyinglargesumsofsecurities.
B) increasedthediscountratetopreventinflation.
C) decreasedthediscountratebysellingitsownsecurities.
D) increasedthefederalfundsratebysellingprivatesecurities.
E) startedpayinginterestonrequiredreserves.
Answer: A
Status: Old
Page1023
48) In2008,theFedcreatedanewpolicytoolcalled
A) quantitativeeasing,whichallowedtheFedtobuyprivatesecuritiesaswellas
governmentsecurities.
B) quantitativeeasing,whichrequiredtheFedtopayinterestonrequiredreserves.
C) openmarketoperations,whichrequiredtheFedtobuysecuritiesfromonlythefederal
government.
D) federalfundszero-rate,whichrequiredtheFedtolowertheratetonearzeropercent.
E) interestratereductions,whichallowedtheFedtolowerinterestratespaidtobanks.
Answer: A
Status: Old
49) ________bytheFedmeansthattheFed________.
A) Crediteasing;boughtprivatesecuritiesfromfinancialinstitutions
B) Crediteasing;madeloansdirectlytohomebuyers
C) Crediteasing;triedtolowerlong-terminterestrates
D) Quantitativeeasing;requiredprivatebankstoincreasetheirlendingtohomebuyers
E) Quantitativeeasing;decreasedintherequiredreserveratio
Answer: A
Topic: Crediteasing
Status: Old
50) Thepolicytoolofcrediteasingreferstothe________.
A) Fedspurchaseofprivatesecuritiestostimulatebankslending
B) Fedsrequirementthatthefederalgovernmentmustlendtodirectlytohomebuyers
C) federalgovernmentsrequirementthattheFedmustlenddirectlytohomebuyers
D) Fedsloweringofthefederalfundsratetozero
E) Treasurysissuanceoffederaldebttofinancehomebuying
Answer: A
Topic: Crediteasing
Status: Old
Page1024
51) Themonetarybaseisthesumof
A) FederalReservenotesandbanksreservesattheFed.
B) coins,FederalReservenotes,andindividualsdepositsattheFed.
C) FederalReservenotes,TreasurydepositsattheFed,banksreservesattheFed,andcoins.
D) coins,FederalReservenotes,andbanksreservesattheFed.
E) coins,FederalReservenotes,andgoldattheFed.
Answer: D
Topic: Monetarybase
Status: Old
52) Themonetarybaseisequalto
A) banksassetsplusliabilities.
B) FederalReservenotespluscoinsplusbanksreservesattheFed.
C) checkabledepositspluscoinsplustravelerschecks.
D) checkabledepositspluscoinsplusbanksassets.
E) M2minusM1.
Answer: B
Topic: Monetarybase
Status: Old
53) Themonetarybaseisequalto
A) M1.
B) M2.
C) currencyandcoinsincirculationpluscheckabledeposits.
D) thesumofcoins,FederalReservenotes,andbanksreservesattheFed.
E) thesumofcoins,FederalReservenotes,andgoldattheFed.
Answer: D
Topic: Monetarybase
Status: Old
54) Themonetarybaseisequaltothesumofcoins,
A) currencyandbanksreservesattheFederalReserve.
B) currencyandcheckabledepositsatbanks.
C) currency,banksreservesattheFederalReserveandcheckabledepositsatbanks.
D) andcheckabledepositsatbanks.
E) U.S.governmentsecuritiesownedbytheFederalReserveandFederalReservenotes.
Answer: A
Topic: Monetarybase
Status: Old
Page1025
55) ThemonetarybasedoesNOTincludewhichofthefollowingitems?
i. FederalReservenotes
ii. banksreservesattheFederalReserve
iii. U.S.governmentsecuritiesownedbytheFederalReserve
A) ionly
B) iionly
C) iiionly
D) bothiandii
E) bothiiandiii
Answer: C
Topic: Monetarybase
Status: Old
56) RegulatingtheamountofmoneyintheUnitedStatesisoneofthemostimportant
responsibilitiesofthe
A) StateDepartment.
B) stategovernments.
C) TreasuryDepartment.
D) FederalReserve.
E) U.S.Mint.
Answer: D
Status: Old
57) TheBoardofGovernorsoftheFederalReserveSystemhas
A) 12membersappointedbythepresidentoftheUnitedStates.
B) 12memberselectedbythepublic.
C) sevenmembersappointedbythepresidentoftheUnitedStates.
D) sevenmemberselectedbythepublic.
E) sevenmembersappointedtolifeterms.
Answer: C
Status: Old
Page1026
58) TheBoardofGovernorsoftheFederalReserveSystemhassevenmembersappointedbythe
________thatserveatermof________inorderto________.
A) U.S.congress;4years;fulfillamandatewithintheU.S.constitution
B) U.S.senate;14years;providecontinuityinthegoverningoftheU.S.economy
C) U.S.presidentandconfirmedbytheU.S.senate;14years;providecontinuityinthe
governingoftheU.S.economy
D) U.S.presidentandconfirmedbytheU.S.congress;14years;providecontinuityinthe
governingoftheU.S.economy
E) U.S.presidentandconfirmedbytheU.S.senate;4years;fulfillamandatewithintheU.S.
constitution
Answer: C
Status: New
59) TheFedspolicyisdeterminedbythe
A) FederalOpenMarketCommittee.
B) ExecutiveCounciltotheGovernor.
C) RegionalFederalReserveBanks.
D) BoardofGovernors.
E) FederalMonetaryPolicyCommittee.
Answer: A
Topic: FOMC
Status: Old
60) TheFedspolicytoolsinclude
A) requiredreserveratios,thediscountrate,openmarketoperations,andextraordinary
crisismeasures.
B) holdingdepositsfortheU.S.government,reserverequirements,andthediscountrate.
C) settingregulationsforlendingstandardsandextraordinarycrisismeasures.
D) supervisionofthebankingsystemandbuyingandsellingcommercialbanks.
E) requiredreserveratios,incometaxrates,andopenmarketoperations.
Answer: A
Status: Old
Page1027
61) Theminimumpercentofdepositsthatbanksmustholdandcannotloanisdeterminedbythe
A) interestrate.
B) discountrate.
C) requiredreserveratio.
D) federalfundsrate.
E) ratioofM2toM1.
Answer: C
Status: Old
62) Thediscountrateistheinterestratethat
A) commercialbankschargetheircustomers.
B) commercialbankschargeeachotherfortheloanofreserves.
C) theFedchargesthegovernmentforloans.
D) theFedchargescommercialbankswhenitloansreservestothebanks.
E) theFedpayscommercialbanksontheirreservesheldattheFed.
Answer: D
Status: Old
63) Themonetarybaseisthe
A) minimumreservebanksmustholdtocoveranylossesfromunpaidloans.
B) sumofcoins,FederalReservenotes,andbanksreservesattheFed.
C) sumofgoldandforeignexchangeheldbytheFed.
D) sumofgovernmentsecuritiesandloanstobanksheldbytheFed.
E) sumofcoins,requiredreserves,andbanksloans.
Answer: B
Topic: Monetarybase
Status: Old
Page1028
64) IfFederalReservenotesandcoinsare$765billion,andbanksreservesattheFedare$8
billion,thegoldstockis$11billion,andtheFedowns$725billionofgovernmentsecurities,
whatdoesthemonetarybaseequal?
A) $765billion
B) $773billion
C) $776billion
D) $744billion
E) $1,509billion
Answer: B
Topic: Monetarybase
Status: Old
65) IftheFederalReserve________therequiredreserveratio,theinterestrate________.
A) lowers;rises
B) lowers;falls
C) raises;doesnotchange
D) raises;falls
E) Notenoughinformationisgivenbecausetheeffectdependsalsoonthesizeofthe
monetarybase.
Answer: B
Status: Old
66) IftheFederalReservelowerstherequiredreserveratio,peoplewillenduptakingout
________becausetheinterestrates________.
A) fewerloans;willrise
B) moreloans;willfall
C) thesamenumberofloans;willnotchange
D) moreloans;willrise
E) fewerloans;arecontrolledbytheeconomicconditionsalone
Answer: B
Status: New
Page1029
11.4 RegulatingtheQuantityofMoney
1) NewmoneyiscreatedintheU.S.economyby
A) increasedfederalgovernmentexpenditures.
B) banksthatcreatecheckabledeposits.
C) theU.S.Treasury.
D) U.S.DepartmentofMint.
E) theU.S.Congress.
Answer: B
Topic: Howbankscreatemoney
Status: Old
2) Bankscreatemoneyby
A) printingdollarbillswithoutlimit.
B) creatingdepositswithoutlimit.
C) printingmoneyuptotheirrequiredreservelimit.
D) makingloansandcreatingdeposits,aprocessthatislimitedbythesizeofbanksexcess
reserves.
E) buyingU.S.governmentsecuritieswithcash.
Answer: D
Status: Old
A) printingpapermoney.
B) mintingcoins.
C) makingloans.
D) buyinggovernmentsecurities.
E) Noneoftheabovebecausebankscannotcreatemoney;onlytheFederalReservecan
createmoney.
Answer: C
Status: Old
Page1030
4) Whenabankreceivesdeposits,
A) itmustholdtheentireamountasreservesincaseofwithdrawal.
B) theFedrequiresittoholdonlyasmallpercentageasreserves.
C) itanditalonedecideshowmuchitwillholdasreserves.
D) itsliabilitiesincreaseinamountbutitsassetsdonotchange.
E) itsassetsincreaseinamountbutitsliabilitiesdonotchange.
Answer: B
Status: Old
A) printingcurrency.
B) askingtheFedtoprintmorecurrency.
C) lendingtotheFed.
D) makingloans.
E) buyinggovernmentsecurities.
Answer: D
Status: Old
6) Theamountofloansthatabankcancreateislimitedby
A) alawenactedbyCongress.
B) thebanksexcessreserves.
C) adirectivefromtheFederalReserveSystem,whichtakesintoaccountthebanks
financialstability.
D) therealinterestrate.
E) thebanksgovernmentsecurities.
Answer: B
Status: Old
Page1031
7) Theprocessofmoneycreationbythebankingsystemislimited,inpart,bythe
A) numberofbanks.
B) desiredreserveratio.
C) numberofdepositors.
D) ComptrolleroftheCurrency.
E) lawspassedeachyearbytheU.S.Congress.
Answer: B
Status: Old
8) AssumetheFirstBankofTownsvillemakesaloanof$2,500.Thisloanwill
A) increasethequantityofmoneyinitiallyby$2,500.
B) decreasethequantityofmoneyinitiallyby$2,500.
C) havenochangeonthequantityofmoney,justitscomposition.
D) increasetheFirstBankofTownvillesliabilitiesattheFed.
E) increasetheFirstBankofTownvillesreserves.
Answer: A
Status: Old
9) WhentheFirstBankofTownsvillemakesaloan,it
A) printsmoney.
B) borrowsthemoneyfromtheFed.
C) createsacheckabledeposit.
D) decreasesthequantityofmoney.
E) increasesitsreserves.
Answer: C
Status: Old
Page1032
10) Ifthedesiredreserveratiois15percent,thenforeverydollarthatisdepositedinthebank,the
bankwill
A) keep15centsasreserves.
B) keep85centsasreserves.
C) keep85centsasreservesandloan85cents.
D) loan15cents.
E) keep15centsasreservesandloan15cents.
Answer: A
Topic: Desiredreserveratio
Status: Old
11) Rileydeposits$4,000cashinhercheckabledepositatFershurBank.Ifthedesiredreserveratio
is5percent,FershurBanks
A) desiredreservesincreaseby$4,000.
B) assetsanditsliabilitieschangeinoppositedirections.
C) desiredreservesincreaseby$200anditsexcessreservesincreaseby$3,800.
D) excessreservesincreaseby$4,000.
E) liabilitiesdonotchangebutitsassetsincrease.
Answer: C
Status: Old
12) Supposethedesiredreserveratiois10percent.IfUrbanBankhastotaldepositsof$1000and
totalassetsof$10,000,theamountofdesiredreservesis
A) $100.
B) $900.
C) $1,000.
D) $9,000.
E) $1,100.
Answer: A
Status: Old
13) Abankhas$200ofreservesand$4,000ofdeposits.Itisjustmeetingitsdesiredreservesand
hasnoexcessreserves.Thusthedesiredreserveratiois
A) 10percent.
B) 20percent.
C) 25percent.
D) 5percent.
E) $200.
Answer: D
Status: Old
Page1033
14) Ifthedesiredreserveratiois7percentandabankhas$10,000ofdeposits,thenitsdesired
reservesare
A) $7.
B) $700.
C) $9,300.
D) $930.
E) $7,000.
Answer: B
Status: Old
15) WhenZanedeposits$20,000cashinhischeckabledepositattheCiticorpandtheCiticorps
desiredreservesincreaseby$5,000,thedesiredreserveratiois
A) 5percent.
B) 75percent.
C) 25percent.
D) 20percent.
E) $5,000.
Answer: C
Status: Old
16) Abankreportsreservesof$500,000,physicalcapitalof$200,000,loansof$1,000,000,deposits
of$1,000,000,andownersequityof$500,000.Ifthedesiredreserveratiois5percent,the
banksdesiredreservesare
A) $10,000.
B) $25,000.
C) $50,000.
D) $1,000,000.
E) $500,000.
Answer: C
Status: Old
Page1034
17) TheBanksoftheMississippihasexcessreservesof$20,000,desiredreservesof$80,000andthe
desiredreserveratiois5percent.Whatisthetotalamountofdepositsinthisbank?
A) $5,000
B) $1,000,000
C) $1,600,000
D) $100,000
E) $180,000
Answer: C
Status: Old
18) Thepartofacommercialbanksreservesthatarelargerthandesiredarecalled
A) additionalreserves.
B) requiredreserves.
C) excessreserves.
D) nonrequiredreserves.
E) unnecessaryreserves.
Answer: C
Topic: Excessreserves
Status: Old
19) Bankscanmakeloansaslongastheyhave
A) deposits.
B) reserves.
C) requiredreserves.
D) excessreserves.
E) excessgovernmentsecurities.
Answer: D
Status: Old
Page1035
20) Actualreservesareequalto
A) minimumbalancesplusdesiredreserves.
B) requiredreservesplusfractionaldeposits.
C) excessreservesplusliabilities.
D) desiredreservesplusexcessreserves.
E) governmentsecuritiespluscashinthebanksvault.
Answer: D
Status: Old
21) WhenGraycedeposits$4,000cashinhercheckabledepositattheBeachBankandtheBeach
Banksexcessreservesincreaseby$3,600,thedesiredreserveratiois
A) 5percent.
B) 10percent.
C) 15percent.
D) 90percent.
E) $400.
Answer: B
Status: Old
22) IfBulgeBankhasadesiredreserveratioof10percent,loansof$25,000,depositsof$100,000,
vaultcashof$10,000,andreservesattheFedof$65,000,thenthebank
A) hasnoremainingcapacitytomakeloans.
B) doesnothaveenoughreservestomeetitsrequirement.
C) hasexcessreservesof$65,000.
D) hasexcessreservesof$55,000.
E) hasexcessreservesof$75,000.
Answer: C
Status: Old
Page1036
23) TheCommerceBankofBeverlyHillshastotaldepositsof$1,000,000andtotalreservesof
$220,000.Thedesiredreserveratiois10percent.Thebanksexcessreservesare
A) $22,000.
B) $120,000.
C) $100,000.
D) $80,000.
E) $1,000,000.
Answer: B
Status: Old
24) Abankhasdepositsof$400,reservesof$50,andthedesiredreserveratiois7percent.The
banksexcessreservesare
A) $0.
B) $22.
C) $28.
D) $3.50
E) $50.
Answer: B
Status: Old
25) Supposethedesiredreserveratiois10percent.IftheCommerceBankhastotaldepositsof
$20,000,totalassetsof$10,000,andactualreservesof$8000,theamountofexcessreservesis
A) $2,000.
B) $6,000.
C) $800.
D) $100.
E) $0.
Answer: B
Status: Old
26) Abankhasdepositsof$100,000,reservesof$20,000,andloansof$80,000.Ifthedesired
reserveratiois10percent,thenitsexcessreservesare
A) 0.
B) $8,000.
C) $10,000.
D) $2,000.
E) $12,000.
Answer: C
Status: Old
Page1037
27) Therequiredreserveratiois20percentandbankshavenoexcessreserves.Katiedeposits$300
inherbank.WhatarethebanksexcessreservesimmediatelyafterKatiemakesherdeposit?
A) $30
B) $90
C) $240
D) $60
E) $300
Answer: C
Status: Old
28) IfJosedeposits$2,000inhisbankandthedesiredreserveratiois10percent,whatisthe
amountofnewloansthatthebankcanmake?
A) $2,000
B) $200
C) $1,800
D) $1,900
E) $2,200
Answer: C
Status: Old
29) Supposeabankhas$1,000indepositsand$100inreserves.Ifthedesiredreserveratiois5
percent,howmuchcanthisbankincreaseitsloans?
A) $0
B) $400
C) $80
D) $50
E) $100
Answer: D
Status: Old
30) Thedesiredreserveratiois10percentandbankshavenoexcessreserves.Julietdeposits$300
inherbank.WhatisthemaximumthatJulietsbankcannowloan?
A) $3,000
B) $270
C) $30
D) $330
E) $300
Answer: B
Topic: Moneycreationprocess
Status: Old
31) Thedesiredreserveratiois3percent.Robertdeposits$3,000inBankAmerica.BankAmerica
keepsitsminimumdesiredreservesandlendstheexcesstoFredrica.HowmuchdoesBank
AmericalendtoFredrica?
A) $3,000
B) $2,910
C) $300
D) $2700
E) $900
Answer: B
Status: Old
Page1038
32) Thedesiredreserveratiois10percent.Joedeposits$1,000inBankA.BankAkeepsits
minimumdesiredreservesandlendstheexcesstoFred.FredspendshisloanatJ.C.Penney.
J.C.PenneydepositsthecheckitreceivesfromFredinBankB.BankBkeepsitsminimum
desiredreservesandlendstheexcesstoMary.HowmuchcanBankBlendtoMary?
A) $900
B) $90
C) $810
D) $100
E) $1,000
Answer: C
Status: Old
33) WheneversomebodydepositsacheckfrombankAintoacheckabledepositatbankB,bank
Asreserves________andbankBsreserves________.
A) increase;decrease
B) increase;increase
C) decrease;decrease
D) decrease;increase
E) donotchange;donotchange
Answer: D
Topic: Clearingchecks
Status: Old
34) WhentheFedbuysorsellssecurities,itisconducting________operation.
A) agovernmentdebt
B) anopenmarket
C) amoneymultiplier
D) adeposit
E) acurrency
Answer: B
Topic: Openmarketoperation
Status: Old
35) Openmarketoperationsaredefinedas
A) abankborrowingfromtheFed.
B) thebuyingandsellingofsecuritiesbytheFed.
C) thebuyingandsellingofsecuritiesbetweenbanks.
D) theamountbankscanlendoneachdeposit.
E) abankmakingaloantotheFed.
Answer: B
Status: Old
Page1039
36) IftheFedmakesanopenmarketpurchaseof$1millionofgovernmentsecurities,the
monetarybase
A) isdecreasedby$1million.
B) isunchangedinsize,thoughitscompositionchanges.
C) isincreasedby$1million.
D) willdecreasebyamultipleof$1millionovertime.
E) willincreasebyamultipleof$1millionovertime.
Answer: C
Topic: Openmarketoperationandthemonetarybase
Status: Old
37) Assumethedesiredreserveratiois10percent,banksloanallexcessreservesandthecurrency
drainiszero.IftheFedsells$100millionofU.S.governmentsecuritiestoBoiseBank,the
monetarybaseincreasesby
A) $1million.
B) $10million.
C) $100million.
D) $1,000million.
E) $90million.
Answer: C
Status: Old
38) WhentheFedbuyssecuritiesfromthepublic,banksreserves________andthequantityof
money________.
A) increase;increases
B) increase;decreases
C) decrease;increases
D) decrease;decreases
E) donotchange;increases
Answer: A
Status: Old
Page1040
39) WhentheFed________,thequantityofbanksreservesdecreases.
A) hikestaxes
B) buysgovernmentsecurities
C) sellsgovernmentsecurities
D) lowerstherequiredreserveratio
E) raisestherequiredreserveratio
Answer: C
Status: Old
40) WhentheFedbuysgovernmentsecurities,theimmediateeffectofthepurchaseisthatbanks
A) reservesincrease.
B) depositsincrease.
C) assetsincrease.
D) reservesdecrease.
E) loansdecrease.
Answer: A
Status: Old
41) WhentheFedbuys$100millionofsecuritiesfromacommercialbankthe
A) monetarybaseincreases.
B) moneysupplydecreases.
C) banksreservesdecrease.
D) requiredreserveratiodecreases.
E) bankisriskingitsdepositorsmoney.
Answer: A
Status: Old
42) Ifthereserverequirementis20percentandtheFedbuys$10,000worthofTreasurybonds,
whatisthechangeinthebankstotalreserves?
A) $2,000
B) $10,000
C) $20,000
D) $8,000
E) $100,000
Answer: B
Status: Revised
Page1041
43) WhentheFedsells$100millionofsecuritiestoacommercialbank,the
A) monetarybaseincreases.
B) moneysupplyincreases.
C) banksreservesdecrease.
D) requiredreserveratiodecreases.
E) banksreservesdonotchange.
Answer: C
Status: Old
44) WhentheFedpurchasesgovernmentsecurities,
A) excessreservesinthebankingsystemincrease,leadingtomoreloansbeingmade.
B) requiredreservesinthebankingsystemincrease,leadingtomoreloansbeingmade.
C) excessreservesinthebankingsystemdecrease,leadingtofewerloansbeingmade.
D) requiredreservesinthebankingsystemdecrease,leadingtofewerloansbeingmade.
E) themonetarybasedoesnotchange.
Answer: A
Status: Old
45) WhentheFedpurchasesgovernmentsecurities________loansendupbeingmadebecause
________.
A) more;excessreservesinthebankingsystemincrease
B) more;excessreservesinthebankingsystemdecrease
C) fewer;excessreservesinthebankingsystemincrease
D) fewer;excessreservesinthebankingsystemdecrease
E) fewer;requiredreservesinthebankingsystemincreasebutdesiredreservesdecrease
Answer: A
Status: New
Page1042
46) Toincreasethequantityofmoneyintheeconomy,theFederalReservecan
A) printmoremoneyandgiveittothebanks.
B) increasetherequiredreserveratio.
C) buygovernmentbondsinanopenmarketoperation.
D) sellgovernmentbondsinanopenmarketoperation.
E) cuttaxes.
Answer: C
Status: Old
47) WhentheFed________securitiesinanopenmarketoperation,banksreserves________,and
thereforelending________.
A) sells;increase;increases
B) buys;increase;increases
C) sells;decrease;increases
D) buys;decrease;decreases
E) buys;donotchange;doesnotchange
Answer: B
Status: Old
48) TheFedbuys$100millionU.S.governmentsecuritiesfromBankofAmerica.Bankof
Americasbalancesheetshowsthistransactionas________intotalassetsand________in
reserves.
A) nochange;a$100milliondecrease
B) nochange;a$100millionincrease
C) a$100millionincrease;nochange
D) a$100millionincrease;a$100millionincrease
E) a$100milliondecrease;a$100milliondecrease
Answer: B
Status: Old
Page1043
49) IftheFedpurchasessecuritiesintheamountof$100,000fromFirstUnionBank,thenthe
A) assetsofFirstUnionBankdecreaseby$100,000.
B) assetsoftheFeddecreaseby$100,000.
C) assetsofFirstUnionBankchangeincompositionbutnotinamount.
D) liabilitiesoftheFedchangeincompositionbutnotinamount.
E) liabilitiesofFirstUniondecreaseby$100,000.
Answer: C
Status: Old
50) TheFedpurchases$100millionofU.S.governmentsecuritiesfromFirstNationalBank.The
balancesheetforFirstNationalBankshows________initstotalassetsand________initstotal
liabilities.
A) a$100millionincrease;a$100millionincrease
B) a$100milliondecrease;a$100millionincrease
C) a$100millionincrease;a$100milliondecrease
D) nochange;nochange
E) a$100millionincrease;nochange
Answer: D
Status: Old
51) SupposetheFedbuys$1millionofgovernmentsecuritiesfromBankOne,alargecommercial
bank.BankOnesreserves________anditsdeposits________.
A) increaseby$1million;donotchange
B) increaseby$1million;increaseby$1million
C) donotchange;increaseby$1million
D) donotchange;donotchange
E) decreaseby$1million;donotchange
Answer: A
Status: Old
Page1044
52) TheFedsells$300millionU.S.governmentsecuritiestocommercialbanks.Thisactionleadsto
________inFedassetsand________inFedliabilities.
A) a$300millionincrease;a$300millionincrease
B) a$300millionincrease;a$300milliondecrease
C) nochange;nochange
D) a$300milliondecrease;a$300milliondecreasein
E) a$300milliondecrease;a$300millionincrease
Answer: D
Status: Old
53) WhentheFedsellsgovernmentsecuritiestobanks,thesale
A) increasesbanksreserves.
B) increasesthequantityofmoney.
C) createsmoreexcessreserves.
D) decreasesbanksreserves.
E) increasesthemonetarybase.
Answer: D
Status: Old
54) AnopenmarketpurchaseofsecuritiesbytheFedleadstoallofthefollowingEXCEPT
A) aninitialincreaseinexcessreserves.
B) anincreaseinbanklending.
C) adecreaseinthequantityofmoney.
D) anincreaseinbanksreserves.
E) anincreaseinthemonetarybase.
Answer: C
Status: Old
Page1045
55) IftheFedsellsgovernmentsecuritiestoamemberofthenonbankpublic,thentheresulting
effectonthequantityofmoneyis
A) muchlargerthanifthesecuritiesweresoldtoabank.
B) muchsmallerthanifthesecuritiesweresoldtoabank.
C) thesameasifthesecuritiesweresoldtoabank.
D) thatthereisnochangeinthequantityofmoney.
Answer: C
Status: Old
56) Comparingtheeffectonthemonetarybasebetweenanopenmarketpurchaseofgovernment
securitiesfromabankandthesameopenmarketoperationconductedwiththegeneralpublic,
themonetarybase
A) increasesbyalargeramountifthegeneralpublicsellsthesecuritiesthanifabanksells
thesecurities.
B) increasesbyalargeramountifabanksellsthesecuritiesthanifthegeneralpublicsells
thesecurities.
C) doesnotchangeifitisthegeneralpublicthatsellsthesecurities.
D) increasesbythesameamountifthegeneralpublicsellsthesecuritiesorifabanksells
thesecurities.
E) decreasesbythesameamountifthegeneralpublicsellsthesecuritiesorifabanksells
thesecurities.
Answer: D
Status: Old
57) IftheFedbuysgovernmentsecuritiesfromthenon-bankpublic,then
A) reservesatbanksdecrease.
B) loansatbanksdecrease.
C) depositsatbanksincreaseandbanksreservesdecrease.
D) depositsatbanksincreaseandbanksreservesincrease.
E) depositsatbanksdecreaseandbanksreservesincrease.
Answer: D
Status: Old
Page1046
58) TheFedpurchases$1millionofU.S.governmentsecuritiesfromFirstBank.Thedesired
reserveratiois10percent,thecurrencydrainratioiszero,andbanksloanallexcessreserves.
TheFedspurchaseincreasesFirstBanksexcessreservesbyhowmuch?
A) $900,000
B) $1,000,000
C) $1,100,000
D) $10,000,000
E) $100,000
Answer: B
Status: Old
59) Whenthedesiredreserveratiois10percent,supposetheFedbuys$1,000,000ofgovernment
securitiesfrombanks.Asaresult,thebanksexcessreserves
A) increaseby$900,000.
B) increaseby$1,000,000.
C) increaseby$10,000.
D) decreaseby$10,000.
E) decreaseby$1,000,000.
Answer: B
Status: Old
60) TheFUNBankhasnoexcessreserveswhenanewdepositof$20,000ismade.Thedesired
reserveratiois5percent.Afterthedeposit,butbeforemakinganyloans,howmuchdoesThe
FUNBankhaveinexcessreserves?
A) $1,000
B) $20,000
C) $9,000
D) $19,000
E) $21,000
Answer: D
Status: Old
Page1047
61) Whenabankreceives$100,000innewdeposits,theamountofloansthebankcanmakeis
limitedby
A) federallaw.
B) theannualfederalbudget.
C) theTreasuryDepartment.
D) itsdesiredreserveratio.
E) statelaw,withbanksindifferentstatesbeingabletomakedifferentamountsofloans.
Answer: D
Status: Old
62) Atanypointintime,asinglebankcanloananamountequalto
A) itsexcessreserves.
B) itsrequiredreserves.
C) itsgovernmentsecurities.
D) theamountofloansthebankmadeinthepast.
E) itstotalreserves.
Answer: A
Status: Old
63) AssumeFirstCentralBankhasadesiredreserveratioof15percent;$80,000intotaldeposits,
loansequalto$60,000,andhas$20,000inactualreserves.FirstCentralcanmakeadditional
loanstotaling
A) $8,000.
B) $12,000.
C) $20,000.
D) $60,000.
E) $80,000.
Answer: A
Status: Old
64) BankOnehasreservesof$100,000,governmentsecuritiesof$200,000,loansof$700,000,and
checkabledepositsof$800,000.Ifthedesiredreserveratiois10percent,BankOnecanmake
additionalloanstotaling
A) $0.00.
B) $10,000.
C) $20,000.
D) $80,000.
E) $100,000.
Answer: C
Status: Old
Page1048
65) Anewbankhasreservesof$600,000,checkabledepositsof$500,000,andgovernment
securitiesof$100,000.Ifthedesiredreserveratiois10percent,theamountofloansthisbank
canmakeis
A) $50,000.
B) $60,000.
C) $540,000.
D) $550,000.
E) $600,000.
Answer: D
Status: Old
66) Ifasinglebankhas$25,000inexcessreservesandthedesiredreserveratiois20percent,what
isthemaximumthisbankcanloan?
A) $5,000
B) $20,000
C) $25,000
D) $125,000
E) $30,000
Answer: C
Status: Old
67) A-1bankinitiallyhasnoexcessreserves.Ifthedesiredreserveratiois10percentandanew
depositof$10,000ismadeinA -1,thenA-1
A) isrequiredtoholdthedepositinitsreserves.
B) canimmediatelyloanamultipleofthe$10,000.
C) canimmediatelyloan$9,000.
D) canimmediatelyloan$100,000.
E) canimmediatelyloan$10,000.
Answer: C
Status: Old
68) Acurrencydrainis
A) anincreaseincurrencyheldoutsidebanks.
B) whentheFedbuyssecurities,butitisnotwhentheFedsellssecurities.
C) whentheFedsellssecurities,butitisnotwhentheFedbuyssecurities.
D) whentheFedeitherbuysorsellssecurities.
E) whentheFedraisestherequiredreserveratio.
Answer: A
Topic: Currencydrain
Status: Old
Page1049
69) Acurrencydrainoccurswhenthe
A) Fedincreasestherequiredreserveratio.
B) FedsellsU.S.governmentsecurities.
C) non-bankpublicincreasesitsholdingsofcurrencyoutsidethebankingsystem.
D) banksreducethenumberofloanstheycreatewiththeirexcessreserves.
E) FedbuysU.S.governmentsecurities.
Answer: C
Status: Old
70) Thecurrencydrainreducestheamountof
A) reservesavailabletobankstomakeloans.
B) currencytheFedhasoutstandingintheeconomy.
C) currencyavailableforbankstoborrowfromtheFed.
D) themonetarybase.
E) openmarketoperationstheFedcanmake.
Answer: A
Status: Old
71) Acurrencydrain________theamountofbankreservesavailabletobankstomakeloans
because________.
A) reduces;peopleareholdingmoremoneyoutsideofthebanks
B) increases;peopleareholdinglessmoneyoutsideofthebanks
C) reduces;peopleareholdinglessmoneyoutsideofthebanks
D) reducesthemonetarybase;peopleareholdingmoremoneyoutsideofthebanks
E) reduces;peopleareholdingontothemoneythebankscouldhaveborrowedfromthe
Fed
Answer: A
Status: New
Page1050
72) SupposetheFederalReservebuys$50millionworthofsecuritiesfromacommercialbank.As
aresult,themonetarybase________,andthequantityofmoneywill________$50milliondue
tothe________.
A) increases;increasebymorethan;moneymultiplier
B) decreases;decreasebymorethan;moneymultiplier
C) increases;increasebymorethan;expendituremultiplier
D) decreases;decreasebylessthan;expendituremultiplier
E) increases;decreaseby;currencydrain
Answer: A
Topic: Moneymultiplier
Status: Old
73) Themoneymultiplieristhe
A) fractionofthemonetarybasethatiskeptincurrency.
B) factorbywhichachangeinthemonetarybaseismultipliedtogivethechangeinthe
quantityofmoney.
C) factorbywhichachangeinthedepositsbaseismultipliedtogivethechangeinthe
monetarybase.
D) proportionbywhichachangeinthequantityofmoneychangesthemonetarybase.
E) numberoftimesthattheFedconductsopenmarketoperationsinamonth.
Answer: B
Status: Old
74) Thenumberbywhichachangeinthemonetarybaseismultipliedtofindtheresultingchange
inthequantityofmoneyiscalledthe
A) desiredreserveratio.
B) moneymultiplier.
C) currencymultiplier.
D) currencydrain.
E) openmarketoperation.
Answer: B
Status: Old
Page1051
75) Ifthemoneymultiplieris3.0,a$1,000increaseinthemonetarybase
A) increasesquantityofmoneyby$3,000.
B) decreasesquantityofmoneyby$3,000.
C) increasesthemonetarybaseby$300.
D) increasesthemoneymultiplierby3percent.
E) decreasesthequantityofmoneyby3percent.
Answer: A
Status: Old
76) C/DisthecurrencydrainratioandR/D isthedesiredreserveratio.Themoneymultiplier

equals
1+C/D
.
A)
R/D+C/D
B)
1+R/D
.
R/D+C/D
C)
1+R/D
.
1+C/D
D)
R/D-C/D
.
1+R/D
E)
R/D+C/D
.
1+C/D
Answer: A
Status: Old
77) TheFedpurchases$1millionofU.S.governmentsecuritiesfromFirstBank.Thedesired
reserveratiois10percent,thecurrencydrainratioiszero,andbanksloanallexcessreserves.
Themoneymultiplierisequalto
A) 0.10.
B) 1.0.
C) 10.0.
D) 100.0.
E) $1million.
Answer: C
Status: Old
Page1052
78) Supposethecurrencydrainratiois33.33percentandthedesiredreserveratiois10percent.
Themoneymultiplierequals
A) 4.27.
B) 3.00.
C) 3.08.
D) 2.50.
E) 6.67.
Answer: C
Status: Old
79) Ifthecurrencydrainratiois0.2andthedesiredreserveratiois0.03,themoneymultiplieris
A) 0.76.
B) 6.67.
C) 3.23.
D) 4.46.
E) 5.22.
Answer: E
Status: Old
80) Supposethecurrencydrainratiois25percentandthedesiredreserveratiois20percent.The
moneymultiplierequals
A) 4.00.
B) 3.00.
C) 2.78.
D) 2.00.
E) 5.42.
Answer: C
Status: Old
81) Ifthecurrencydrainratiois30percentandthedesiredreserveratiois10percent,themoney
multiplieris
A) 0.80.
B) 1.25.
C) 3.25.
D) 5.00.
E) 10.0.
Answer: C
Status: Old
82) Themonetarymultiplieris3andthechangeinthemonetarybaseis$100,000.Howmuchwill
thequantityofmoneyincrease?
A) $300,000
B) $200,000
C) $100,000
D) $70,000
E) $33,333
Answer: A
Status: Old
Page1053
83) Ifthecurrencydrainratioiszero,whichofthefollowingsituationsleadstothegreatesttotal
increaseinthequantityofmoney?
A) anincreaseinthemonetarybaseof$100,000whenthedesiredreserveratiois5percent
B) anincreaseinthemonetarybaseof$120,000whenthedesiredreserveratiois10percent
C) anincreaseinthemonetarybaseof$200,000whenthedesiredreserveratiois20percent
D) anincreaseinthemonetarybaseof$250,000whenthedesiredreserveratiois15percent
E) anincreaseinthemonetarybaseof$100,000whenthedesiredreserveratiois50percent
Answer: A
Status: Old
84) TheFedbuys$50,000ofgovernmentsecurities.Thedesiredreserveratiois10percentandthe
currencydrainratioiszero.Whatwillbethechangeinthequantityofmoney?
A) $5,000
B) $50,000
C) $500,000
D) $5,000,000
E) $0
Answer: C
Status: Old
A) $5,000
B) $20,000
C) $25,000
D) $125,000
E) $50,000
Answer: D
Status: Old
86) Ifthedesiredreserveratiois10percentandthereisnocurrencydrain,thena$100increasein
themonetarybaseleadsthebankingsystemtoincreasethequantityofmoneyby
A) $1,000.
B) $400.
C) $900.
D) $110.
E) $1,100.
Answer: A
Status: Old
Page1054
87) Supposethedesiredreserveratiois20percentandthereisnocurrencydrain.Thena$1
increaseinthemonetarybaseleadstothebankingsystemtoincreasethequantityofmoney
by
A) $0.02.
B) $4.
C) $5.
D) $20.
E) $2.
Answer: C
Status: Old
88) Supposethedesiredreserveratiois10percentandthereisnocurrencydrain.Thena$200
increaseinthemonetarybaseresultsinthebankingsystemincreasingthequantityofmoney
by
A) $200.
B) $2,000.
C) $20.
D) $10.
E) $2,190.
Answer: B
Status: Old
89) Iftherequiredreserveratiois15percent,thereisnocurrencydrain,andbanksloanalloftheir
excessreserves,anincreaseinthemonetarybaseof$20,000leadstoatotalincreaseinthe
quantityofmoneyof
A) $3,000.
B) $20,000.
C) $133,333.
D) $200,000.
E) $300,000.
Answer: C
Status: Old
90) TheFedconductsanopenmarketpurchaseofsecuritiesof$5,000.Ifthecurrencydrainratiois
0percentandthedesiredreserveratiois10percent,thenthetotalincreaseinthequantityof
moneyis
A) $5,000.
B) $20,000.
C) $50,000.
D) $10,000.
E) $4,000.
Answer: C
Status: Old
Page1055
91) SupposetheFedsells$100ofgovernmentsecurities.Ifthedesiredreserveratiois20percent
andthereisnocurrencydrain,thenthequantityofmoney
A) decreasesby$100.
B) decreasesby$500.
C) decreasesby$400.
D) increasesby$100.
E) decreasesby$80.
Answer: B
Status: Old
A) $20,000
B) $400,000
C) $399,980
D) $19,000
E) $5,000
Answer: B
Status: Old
93) IftheFedbuys$10millionofgovernmentsecuritieswhenthedesiredreserveratiois20
percentandthecurrencydrainratiois5percent,thequantityofmoney
A) increasesby$42million.
B) increasesby$50million.
C) decreasesby$42million.
D) decreasesby$50million.
E) increasesby$7.5million.
Answer: A
Status: Old
94) Whichofthefollowingreducesthemoneymultiplier?
A) Banksloanalltheirexcessreserves.
B) Bankcustomersholdsomeoftheloanproceedsascurrencyoutsidethebankingsystem.
C) TheFedreducestherequiredreserveratio.
D) Banksimposeacurrencydrainonbankcustomers.
E) TheFedsellsU.S.governmentsecurities.
Answer: B
Topic: Sizeofmoneymultiplier
Status: Old
Page1056
95) Thequantityofmoneydecreasesif
A) thecurrencydrainratioincreases.
B) thedesiredreserveratiodecreases.
C) banksloanallexcessreserves.
D) theTreasuryDepartmentissuesfewergovernmentsecurities.
E) theFedbuysU.S.governmentsecurities.
Answer: A
Status: Old
96) ________inthecurrencydrainratioand________inthedesiredreserveratio________the
moneymultiplier.
A) Anincrease;anincrease;increase
B) Anincrease;adecrease;decrease
C) Adecrease;anincrease;decrease
D) Adecrease;adecrease;increase
E) Anincrease;adecrease;increase
Answer: D
Status: Old
97) Anincreaseinthecurrencydrainratio________.
A) increasesthesizeofthemoneymultiplier
B) decreasesthesizeofthemoneymultiplier
C) increasesthedepositsinallbanks
D) decreasesthesizeofthemonetarybase
E) increasesthesizeofthemonetarybase
Answer: B
Status: Old
Page1057
98) Anincreaseinthecurrencydrainratio
A) decreasesthesizeofthemoneymultiplier.
B) increasesthesizeofthemoneymultiplier.
C) increasesthemoneysupply.
D) decreasestherequiredreserveratio.
E) increasesthedesiredreserveratio.
Answer: A
Status: Old
99) Ifthereisanincreaseintheamountofcurrencyheldoutsidebanks,thenthe
A) monetarybasewilldecrease.
B) quantityofmoneywillincrease.
C) quantityofmoneyandthemonetarybasewilldecrease.
D) quantityofmoneywilldecrease.
E) quantityofmoneywillnotchange.
Answer: D
Status: Old
A) decreasesthemonetarybase.
C) increasesbankreserves.
D) doesnotchangetheamountofthemonetarybase.
E) doesnotchangethequantityofmoney.
Answer: D
Status: Old
A) decreasesthequantityofmoney.
B) decreasesthemonetarybase.
C) increasesbanksreserves.
D) increasesbanksdeposits.
E) hasnoeffectontheamountofthemonetarybaseorthequantityofmoney.
Answer: A
Status: Old
Page1058
102) ________increasesthesizeofthemoneymultiplier.
A) Anincreaseinthecurrencydrainratio
B) AnopenmarketpurchaseofgovernmentsecuritiesbytheFed
C) Areductioninthedesiredreserveratio
D) AnopenmarketsaleofgovernmentsecuritiesbytheFed
E) Anincreaseinthesizeofopenmarketoperations
Answer: C
Status: Old
103) Ifthemonetarybasedoesnotchangeandthedesiredreserveratioincreases,themoney
multiplier________andthequantityofmoney________.
E) decreases;doesnotchange
Answer: D
Status: Old
104) The________thedesiredreserveratio,the________the________inthequantityofmoney
createdfromaninitialincreaseof$100,000inthemonetarybase.
A) larger;larger;decrease
B) larger;larger;increase
C) larger;smaller;decrease
D) smaller;larger;decrease
E) smaller;larger;increase
Answer: E
Status: Old
Page1059
105) Whenpartofabankloandoesnotreturntothebankingsystembutratherremainsoutsidethe
bankingsystemascurrency,thenthemoneymultiplier________insizeandtheamountof
moneycreatedbyanopenmarketoperation________.
A) increases;decreases
B) doesnotchange;increases
C) decreases;decreases
D) increases;increases
Answer: C
Status: Old
106) Decisionsof________determinethemagnitudeofthemonetarymultiplier.
A) onlytheFed
B) onlythepublic
C) boththeFedandthepublic
D) neithertheFednorthepublic
E) theFedandtheU.S.Congress
Answer: C
Status: Old
107) AsaresultoftheFedsactionsduringthe2008financialcrisisandbankslendingpolicies,
A) theM2moneymultiplierhasfallenfromabout9toabout4.
B) theM2moneymultipliermorethandoubled.
C) themonetarybasedecreasedby50percent.
D) theratioofcurrencytoM2depositsmorethandoubled.
E) thereserverequirementratioincreased.
Answer: A
Topic: Eyeoncreatingmoney
Status: Old
Page1060
108) AsaresultoftheFedsactionsduringthe2008financialcrisisandbankslendingpolicies,the
moneymultiplier________asadirectresultofthe________.
A) fellfromabout9toabout4;surgeinbanksdesiredreserveratiosastheytookonless
risk
B) rosefromabout4toabout9;surgeinbanksdesiredreserveratiosastheytookonless
risk
C) fellfromabout9toabout4;lowriskexperiencedbybanksbecauseoftheFDIC
increasingtheirdefaultcoverageamounts
D) rosedrastically;consistentdecreaseinbanksdesiredreserveratiosastheytookonless
risk
E) decreaseddrastically;consistentdecreaseinbanksdesiredreserveratiosastheytookon
lessrisk
Answer: A
Status: New
109) Asof2013,theU.S.monetarybasehas________its2007level,thelevelheldbeforethe2008
financialcrisis,asadirectresultof________.
A) quadrupled;theFedsactionswithquantitativeeasing
B) doubled;theFedsactionswithquantitativeeasing
C) tripled;theFedsactionswithquantitativeeasing
D) quadrupled;theFedsactionsandtheresultingreductionofthemoneymultiplier
E) tripled;theFedsactionsandtheresultingreductionofthecurrencydrain
Answer: A
Status: New
110) TheM2multiplierintheUnitedStatesiscurrentlyabout
A) 1.
B) 4.
C) 16.
D) 50.
Answer: B
Status: Old
Page1061
E) 23.
111) Duringthe2008financialcrisis,banksrestricted________,andtheM2moneymultiplier
________.
A) lending;decreased
B) lending;increased
C) deposits;increased
D) buyingsecurities;increased
E) deposits;decreased
Answer: A
Status: Old
112) Excessreservesarethe
A) sameastherequiredreserves.
B) amountofreservestheFedrequiresbankstohold.
C) amountofreservesheldoverwhatisdesired.
D) amountofreservesabankholdsattheFed.
E) amountofreservesbankskeepintheirvaults.
Answer: C
Status: Old
113) Bankscanmakeloansuptoanamountequaltotheir
A) totaldeposits.
B) totalreserves.
C) requiredreserves.
D) excessreserves.
E) totalgovernmentsecurities.
Answer: D
Status: Old
Page1062
114) IftheFedbuysgovernmentsecurities,then
A) thequantityofmoneyisnotchanged,justitscomposition.
B) newbankreservesarecreated.
C) thequantityofmoneydecreases.
D) bankreservesaredestroyed.
E) banksexcessreservesdecrease.
Answer: B
Status: Old
115) TheCitizensFirstBanksells$100,000ofgovernmentsecuritiestotheFed.Thissale
immediately
B) decreasesthebankscheckabledeposits.
C) increasesthebanksreserves.
D) decreasesthebanksassets.
E) increasesthebanksrequiredreserves.
Answer: C
Status: Old
116) WhentheFedconductsanopenmarketpurchase,thefirstroundchangesinthemoney
creationprocessarethatexcessreserves________,bankdeposits________,andthequantityof
money________.
A) decrease;decrease;decreases
B) increase;donotchange;increases
C) decrease;increase;doesnotchange
D) donotchange;increase;increases
E) increase;increase;increases
Answer: E
Status: Old
Page1063
117) Acurrencydrainiscash________andhas________effectonthemoneymultiplier.
A) drainingintothebanks;no
B) drainingintothebanks;an
C) heldoutsidethebanks;an
D) heldattheFed;an
E) heldasreserves;no
Answer: C
Status: Old
118) Themoneymultiplierisusedtodeterminehowmuchthe
A) monetarybaseincreaseswhentheFedpurchasesgovernmentsecurities.
B) quantityofmoneyincreaseswhenthemonetarybaseincreases.
C) monetarybaseincreaseswhenthequantityofmoneyincreases.
D) quantityofmoneyincreaseswhentherequiredreserveratioincreases.
E) monetarybaseincreaseswhentheFedsellsgovernmentsecurities.
Answer: B
Status: Old
119) TheFedmakesanopenmarketoperationpurchaseof$200,000.Thecurrencydrainratiois
33.33percentandthedesiredreserveratiois10percent.Byhowmuchdoesthequantityof
moneyincrease?
A) $800,000
B) $333,333
C) $2,000,000
D) $615,416
E) $465,116
Answer: D
Status: Revised
Page1064
1) Moneymarketmutualfunds
A) areincludedinM2butnotM1.
B) areincludedinM1butnotM2.
C) areincludedinM1andM2.
D) arethelargestpartofthemonetarybase.
E) Noneoftheaboveiscorrect.
Answer: A
Topic: Integrative
Status: Old
2) WhichofthefollowingfinancialinstitutionsdoesNOT havetomeetminimumreserveratios?
i. theFed
ii. commercialbanks
iii. creditunions
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: A
Topic: Integrative
Status: Old
3) Ifthedesiredreserveratioincreases,then
A) banksdesiredreservesincreaseandtheirexcessreservesdecrease.
B) bankcustomersbecomemorewillingtomakedepositsinbanks.
C) banksareabletomakemoreloans.
D) bankscanbuymoregovernmentsecurities.
E) theFedhassuppliedbankswithmorereserves.
Answer: A
Topic: Integrative
Status: Old
Page1065
4) Ifthedesiredreserveratiodecreases,then
A) banksdesiredreservesincreaseandtheirexcessreservesdecrease.
B) bankcustomersbecomemorewillingtomakedepositsinbanks.
C) banksareabletomakemoreloans.
D) banksareforcedtobuyfewergovernmentsecurities.
E) banksdesiredreservesdecreaseandtheirexcessreservesdonotchange.
Answer: C
Topic: Integrative
Status: Old
5) IftheFedbuysa$100,000governmentsecurityfromabankwhenthedesiredreserveratiois
20percentandthecurrencydrainratiois5percent,thebankcanloanamaximumof
A) $75,000.
B) $80,000.
C) $100,000.
D) $95,000.
E) $85,000.
Answer: B
Topic: Integrative
Status: Old
6) IftheFedbuysa$100,000governmentsecurityfromabankwhenthedesiredreserveratiois
10percentandthecurrencydrainratiois50percent,thebankcanloanamaximumof
A) $50,000.
B) $40,000.
C) $100,000.
D) $90,000.
E) $60,000.
Answer: D
Topic: Integrative
Status: Old
11.6 Essay:WhatIsMoney?
1) Definemoneyandlistitsfunctions.
Answer: Moneyisanycommodityortokenthatisgenerallyacceptedasameansofpayment.It
hasthreemainfunctions.Itservesasamediumofexchange,aunitofaccount,anda
storeofvalue.
Topic: Money
Status: Old
Page1066
2) Listanddefinethethreefunctionsofmoney.
Answer: Thethreefunctionsofmoneyareamediumofexchange,aunitofaccount,andastore
ofvalue.Amediumofexchangeisanobjectthatisgenerallyacceptedinexchangefor
goodsandservices.Aunitofaccountisanagreeduponmeasureforstatingtheprices
ofgoodsandservices.Astoreofvalueisanythingthatcanbeheldandlaterexchanged
forgoodsandservices.Moneyservesallthreeofthesefunctions.
Status: Old
3) Whatisbarter?Whatisadoublecoincidenceofwants?Howdoestheexistenceofmoney
affectbarter?
Answer: Barteristhedirectexchangeofonegoodorserviceforanother.Barterisinefficient
becauseitrequiresadoublecoincidenceofwants,thatis,thegoodonepersonoffers
forexchangemustbethegoodthetradingpartnerwantsandthetradingpartnersgood
mustbewhatthefirstpersonwants.Theexistenceofmoneymeansthatwedonotneed
toengageinbarter.Instead,wecansellagoodorserviceformoneyandthenusethe
moneytopurchaseanothergoodorservicewedesire.Thereisnonecessityforthe
doublecoincidenceofwantsbecausetheselleriswillingtoacceptmoneyfromany
buyer.
Topic: Barter
Status: Old
4) Explainwhichofthefollowingcountasmoney.
a. acheckinAnnscheckbook
b. currencyinAnnsbank
c. currencyinAnnspurse
d. Annscheckingdeposit
Answer: Onlyparts(c),currencyinAnnspurse,and(d),Annscheckingdeposit,aremoney.
Annscheck,giveninpart(a),isamethodoftransferringmoneyfromAnntosomeone
else.Thusthecheck(itself)isnotmoney.Part(b),thecurrencyinAnnsbank,isnot
moneyuntilsomeonewithdrawsitbecausecurrencyinsideabankdoesnotcountas
money.
Topic: Money
Status: Old
Page1067
5) Whatisfiatmoney?
Answer: Fiatmoneyisobjectsthataremoneybecausethelawdeclaresthemtobemoney.
Todaysmoneyisfiatmoney.Inpasttimes,moneyusedtobeitems,suchassaltor
gold,thathadanintrinsicvalue,thatis,avalueoftheirownoutsideoftheirroleas
money.
Topic: Fiatmoney
Status: Old
6) Eventhoughwecanconvertthemintomoney,depositsatbanksarenotmoney.Isthe
previousstatementcorrectornot?
Answer: Thestatementisincorrect.Somedepositsatbanks,suchascheckabledeposits,area
meansofpaymentandfulfillallthefunctionsofmoney.Thesedepositsaretherefore
money.
Topic: Deposits
Status: Old
7) Arechecksmoney?
Answer: Checksareinstructionstotransferfundsfromonepersonscheckingaccounttoanother
personscheckingaccount.Checksarenotmoney,butthecheckingaccountdeposits
thatthechecktransfersaremoney.
Topic: Checks
Status: Old
8) Creditcardsareconsideredmoneybecausetheyservetopurchasegoodsandservices.Isthe
previousstatementtrueorfalse?
Answer: Thestatementisfalse.CreditcardsareanIDcardthat,whenpresented,allowthe
ownertogetanimmediateloan.Aloanisnotmoneybecausealoanneedstoberepaid
withmoney.Thusacreditcardisnotmoney.
Topic: Creditcard
Status: Old
Page1068
9) Arecreditcardsordebitcardsmoney?Explainyouranswer.
Answer: Neithercreditcardsnordebitcardsaremoney.CreditcardsareatypeofIDcardthat,
whenpresented,allowtheownertogetanimmediateloan.Theloanisnotmoney;
indeed,itmustberepaidusingmoney.Adebitcardallowsthecustomertopay
immediatelyforhisorherpurchasebytransferringmoneyfromthecustomers
checkingaccounttothesellersaccount.Debitcardsaresimilartochecksinsofarasthey
areessentiallyinstructionstomovemoneyfromonepersontoanother.Thefunds
transferredaremoney,thedebitcardisnotmoney.
Topic: Creditcard,debitcard
Status: Old
10) WhatmakesupM1?IsM1largerorsmallerthanrealGDP?
Answer: M1isthesumofcurrencyheldbyindividualsandbusinessespluscheckabledeposits
ownedbyindividualsandbusinessesplustravelerschecks.AlltheassetsinM1are
acceptedasmeansofpaymentandsoalltheassetsaremoney.M1ismuchsmallerthan
realGDP.RealGDPisabout7timeslargerthanM1.
Topic: M1
Status: Old
11) WhatassetsareincludedinM1?InM2?IsallofM1andM2money?IfsomeassetsofM1or
M2arenotmoney,whyaretheyincludedinM1orM2?
Answer: M1isthesumofcurrencyheldbyindividualsandbusinessespluscheckabledeposits
ownedbyindividualsandbusinessesplustravelerschecks.AlltheassetsinM1are
acceptedasmeansofpaymentandsoalltheassetsaremoney.M2includesallofM1
plussavingsdeposits,smalltimedeposits,andmoneymarketfunds.Somecomponents
ofM2,suchastimedeposits,arenotmoneybecausetheyarenotameansofpayment.
Buttheyareeasilyconvertibleintomoney,whichiswhytheyareincludedinM2.
Topic: M1,M2
Status: Old
12) ExplainwhatisincludedinM1andM2.IsallofM1money?IsallofM2money?
Answer: M1isequaltothesumofcurrencyheldbyindividualsandbusinessesplustravelers
checkspluscheckingdepositsownedbyindividualsandbusinesses.Theseassetsareall
moneybecausetheyareallameansofpayment.M2isequaltoM1plussavingdeposits
plussmalltimedepositsplusmoneymarketfunds.NotallofM2ismoneybecausenot
allofM2areameansofpayment.Inotherwords,somepartsofM2,suchastime
deposits,cannotbeuseddirectlytomakeapurchase.
Topic: M1,M2
Status: Old
Page1069
13) Whatislarger:M1orM2?Why?
Answer: M2islargerthanM1.M2includesM1plusadditionalassets,soM2mustbelargerthan
M1.InJune,2011,M1wasapproximately$1,950billionandM2wasabout5times
largeratapproximately$9,100billion.
Topic: M1,M2
Status: Old
14) Bydefinition,allpartsofM2aremoney.Isthepreviousstatementcorrectornot?Explain
youranswer.
Answer: Thestatementisincorrect.ManyoftheassetsinM2aremoney.Butnotalltheassetsare
money.Someofthesavingsdeposits,timedeposits,andmoneymarketfundsarenot
meansofpaymentandhencearenotmoney.ButtheyareincludedinM2becausethey
areeasilyconvertedintomoney.
Topic: M2
Status: Old
15) Ifyouhaveassetsthatinclude$50incash,acheckingaccountwith$135,asavingsaccount
with$500,andajarofcoinsforlaundryof$15.75,howmuchM1doyouhave?
Answer: Youhave$200.75ofM1,comprisedofthe$50incash,plusthe$135inthechecking
account,plusthe$15.75jarofcoins.
Topic: M1
Status: Old
16) Ifyouhold$25incash,have$150inacheckingaccount,andhave$250inasavingsaccount,
howmuchofM2doyouhave?
Answer: AlloftheassetsmentionedareincludedinM2,soyouhave$25+$150+$250= $425of
M2.
Topic: M2
Status: Old
Page1070
11.7 Essay:TheBankingSystem
1) Whataretheinstitutionsthatmakeupthenationsbankingsystem?
Answer: PartofthenationsbankingsystemistheFederalReserveSystem.Theotherpart
consistsofthebanksandotherinstitutionsthatacceptdepositsandthatprovidethe
servicesthatenablepeopleandbusinessestomakeandreceivepayments.Thereare
threegeneraltypesoffinancialinstitutions:commercialbanks,thriftinstitutions,and
moneymarketfunds.
Topic: Monetaryinstitutions
Status: Old
2) WhatarethethreetypesoffinancialinstitutionsthatacceptdepositsthatarepartoftheU.S.
moneysupply?Brieflydescribeeachofthethreetypesoffinancialinstitutions.
Answer: Thethreeinstitutionsarecommercialbanks,thriftinstitutions,andmoneymarket
funds.Commercialbanksarefinancialfirmsthatacceptdepositsandmakeloans.There
areabout8,600commercialbanksintheUnitedStates.Thriftinstitutionsinclude
savingsandloanassociations,savingsbanks,andcreditunions.Thesefirmsalsoaccept
depositsandmakeloans.Thelasttypeoffinancialinstitutionismoneymarketfunds.
Moneymarketfundsobtainfundsbysellingsharesandusingtheproceedstobuy
assetssuchasU.S.Treasurybills.
Topic: Monetaryinstitutions
Status: Old
3) Explainwhatismeantbythephraseabanksbalancingact.
Answer: Banksacceptdepositsandmakeloanswiththefundstheyreceivefromthedeposits.
Banksprofitiftheinterestratetheychargeontheirloansexceedstheinterestratethey
payontheirdeposits.Loansaremadeforaspecifiedlengthoftimeandcannotbecalled
inbeforetheyaredue.However,depositscanbewithdrawnatanytimebythe
depositors.Thereforeabankmustperformabalancingact:Itisriskytolendtoomuch
ofthedepositsandruntheriskofmasswithdrawalsthatwouldcreateacrisisforthe
bank.However,itisbymakingloansthatthebankearnsaprofit.
Topic: Bankprofit
Status: Old
Page1071
4) Banksmakeaprofitbypayingdepositorsahighratetoattractfundsandmakingloansata
lowratetoencourageborrowing.Isthepreviousstatementcorrectornot?
Answer: Thestatementisincorrect.Banksmakeaprofitiftheinterestratetheycollectonthe
loanstheymakeexceedstheinterestratetheymustpayonthedepositstheyattract.
Topic: Bankprofit
Status: Old
5) Banksholdabout50percentoftheirassetsasreserves.Isthepreviousstatementcorrector
not?
Answer: Thestatementisincorrect.In2011bankskeptanaverageof13percentoftheirassetsas
reserves.
Status: Old
6) Tocountasrequiredreserves,thereservesmustbeondepositatthebanksdistrictFederal
ReserveBank.Isthepreviousstatementcorrectorincorrect?
Answer: Thestatementisincorrect.Currencyheldinthebanksvaultalsocountsasreserves.
Status: Old
7) TheFirstNationalBankofTownvillehas$125,000inU.S.governmentsecurities,$200,000in
savingsaccounts,$300,000incheckingaccounts,$50,000initsreserveaccountattheFed,
$10,000ofcurrencyinitsvault,andloansof$250,000.Whatistheamountofitsreserves?
Answer: ReservesincludethebanksdepositinitsreserveaccountattheFedandthecurrencyin
itsvault.Therefore,theFirstNationalBankofTownvillehas$50,000 +$10,000=$60,000
inreserves.
Status: Old
8) TheSecondNationalBankofTownvillehas$400,000incheckingdeposits,$125,000insavings
deposits,$500,000inloans,$20,000initsreserveaccountattheFed,and$5,000ofcurrencyin
itsvault.Whatistheamountofitsreserves?
Answer: ReservesincludethebanksdepositinitsreserveaccountattheFedandthecurrencyin
itsvault.ThereforetheSecondNationalBankofTownvillehas$20,000+$5,000=
$25,000inreserves.
Status: Old
Page1072
9) TheSecondNationalBankofTownvillehas$400,000incheckingdeposits,$125,000insavings
deposits,$500,000inloans,$20,000initsreserveaccountattheFed,and$5,000ofcurrencyin
itsvault.WhatistheamountoftheseassetsandliabilitiesthatisinM1?
Answer: TheonlydepositthatisinM1isthecheckingdeposits,sotheamountthatisinM1is
checkingdepositsof$400,000.
Topic: Banksbalancesheet
Status: Old
10) Abankhascheckingdepositsof$400,savingdepositsof$900,timedepositsof$900,loansof
$950,governmentsecuritiesof$900,outstandingcreditcardbalancesof$400,currencyinits
vaultof$40,anddepositsinitsreserveaccountattheFedof$40.
a. WhatistheamountofthisbanksdepositsthatareinM1?
b. WhatistheamountofthisbanksdepositsthatareinM2?
c. Whatistheamountofthisbanksreserves?
Answer: a. TheonlydepositthatisinM1isthecheckingdeposits,sotheamountofthisbanks
depositsthatareinM1is$400.
b. DepositsinM2includecheckingdeposits,savingdeposits,andtimedeposits.
ThereforetheamountofthisbanksdepositsthatareinM2equals$400 +$900+$900=
$2,200.
c. Reservesarethesumofthecurrencyinthebanksvaultplusitsdepositsinits
reserveaccountattheFed.Thereforethebanksreservesare$40+$40=$80.
Topic: Banksbalancesheet
Status: Old
11.8 Essay:TheFederalReserveSystem
1) TheFederalReserveisthenationscentralbank.Therefore,doesitprovidebankingservicesto
individualcitizens?
Answer: No,becauseitisthenationscentralbank,theFederalReserveprovidesbanking
servicestothenationsbanksbutnottoindividualcitizens.
Topic: Centralbanks
Status: Old
2) DoestheFederalReserveconductboththenationsmonetarypolicyanditsfiscalpolicy?
Answer: TheFederalReservedoesnotconductbothfiscalandmonetarypolicy.TheFederal
Reserveisresponsibleforonlythenationsmonetarypolicybutitdoesnotconductthe
nationsfiscalpolicy.
Topic: StructureoftheFederalReserve
Status: Old
Page1073
3) ArethemembersoftheBoardofGovernorsoftheFederalReserveSystemelectedofficials?
Answer: No,themembersarenotelected.TheyareappointedbythepresidentoftheUnited
States(for14-yearterms)andconfirmedbytheU.S.Senate.
Status: Old
4) ThepresidentofwhichFederalReserveBankisalwaysavotingmemberoftheFOMC?Why?
Answer: ThepresidentoftheNewYorkFederalReserveBankisalwaysavotingmemberofthe
FOMC.ThepresidentsoftheotherFederalReserveBanksrotateonandoffasvoting
members.ThepresidentoftheNewYorkFederalReserveBankisalwaysavoting
memberbecausetheNewYorkFederalReserveBankimplementstheFedspolicy
decisions.
Topic: FOMC
Status: Old
5) WhatistheFOMC?WhoarethemembersoftheFOMC?WhatpolicydoestheFOMCdecide?
Answer: TheFOMCistheFederalOpenMarketCommittee.AllsevenmembersoftheBoardof
Governorsandthe12FederalReserveBankpresidentsattendanddiscusstheeconomy
attheFOMCmeeting.ThevotingmembersoftheFOMC,however,areonlytheseven
membersoftheBoardofGovernors,thepresidentoftheFederalReserveBankofNew
York,andfourpresidentsoftheremainingFederalReserveBankswhoserveonan
annualrotatingbasis.TheFOMCmeetsapproximatelyeverysixweekstoreviewthe
stateoftheeconomyanddecidethemonetarypolicyactionstobecarriedoutbythe
FederalReserveBankofNewYork.
Topic: FOMC
Status: Old
6) BecausemonetarypolicymustbeapprovedbythepresidentoftheUnitedStates,the
presidentischairoftheFederalOpenMarketCommittee.Analyzethepreviousstatement is
itcorrectorincorrect?
Answer: Thestatementisincorrectonseveraldimensions.First,monetarypolicydoesnotneed
tobeapprovedbythePresidentoftheUnitedStates.Second,thepresidentofthe
UnitedStatesisnotchairoftheFederalOpenMarketCommittee,FOMC.Third,the
presidentoftheUnitedStatesisnotevena memberoftheFOMC!ThechairoftheFOMC
isthechairoftheFederalReservesBoardofGovernors.
Topic: FOMC
Status: Old
Page1074
7) WhatistheinteractionbetweentheFederalReservedistrictsandtheBoardofGovernorsof
theFederalReserveSystem?
Answer: TheFederalReserveSystemdividesthenationinto12regions,eachwithaFederal
ReserveBank.EachFederalReserveBankhasanine -memberboardofdirectors.Ofthe
ninemembers,sixareelectedbythecommercialbankswithintheFederalReserve
districtandthreeareappointedbytheBoardofGovernors.Thedirectorsofeach
FederalReserveBankappointthepresidentofthebank,subjecttoapprovalfromthe
BoardofGovernors.
Status: Old
8) WhatisthestructureoftheFederalReserveBankSystem?
Answer: ThekeyelementsinthestructureoftheFedare:
a. TheBoardofGovernors.TheBoardofGovernorshassevenmemberswhoare
appointedbythePresidentoftheUnitedStatesandconfirmedbytheSenate,eachfora
14-yearterm.
b. TheRegionalFederalReserveBanks.Thereare12regionalbanks,oneforeachof
the12FederalReservedistricts.Eachofthese12bankshasninedirectorswhoappoint
thebankspresident,whichissubjecttoapprovalbytheBoardofGovernors.
c. TheFederalOpenMarketcommitteeorFOMC.TheFOMCistheFedsmain
policy-makingcommittee.Ithas12votingmembers.Sevenofthemembersareonthe
BoardofGovernors.OneofthemembersisthepresidentoftheFederalReserveBankin
NewYork.TheotherfourmembersarepresidentsofotherFederalReserveBanks.
Whichfourpresidentsarememberschangesonanannualrotatingbasis.
Status: Old
9) BrieflydescribetheFederalReserveSystem,howitisgoverned,anditsrolesintheeconomy.
Answer: TheFederalReserve,orFed,istheU.S.centralbank.TheFedconsistsoftwelveregional
FederalReserveBanksscatteredacrosstheUnitedStates.Thesebanksareoverseenby
theBoardofGovernors,asevenmemberboardlocatedinWashingtonD.C.,whose
membersareappointedbythePresidentoftheUnitedStatesandconfirmedbythe
Senate.TheFederalOpenMarketCommittee,orFOMC,isthegroupwithintheFed
thatsetsthenationsmonetarypolicy.ThevotingmembersoftheFOMCconsistofthe
chairandothersixmembersoftheBoardofGovernors,thepresidentoftheFederal
ReserveBankofNewYork,andfourpresidentsoftheotherregionalFederalReserve
Banks,onayearlyrotatingbasis.TheFedsprimarilyroleintheeconomyistosetand
conductthenationsmonetarypolicy.TheFedalsoprovidesbankingservicestobanks
andhelpsregulatethenationsfinancialinstitutionsandmarkets.
Status: Old
Page1075
10) ListtheFedsmainpolicytoolsandbrieflyexplaineachone.
Answer: TheFedsmainpolicytoolsare:requiredreserveratios,thediscountrate,openmarket
operations,andextraordinarycrisismeasures.Banksandthriftsarerequiredtoholda
minimumpercentageofdepositsasreserves.Thisminimumpercentageisdetermined
bytheFedandisknownasarequiredreserveratio.Thediscountrateistheratethatthe
Fedchargescommercialbanksthatborrowreservesfromit.Anopenmarketoperation
isthebuyingandsellingofgovernmentbondsbytheFedintheopenmarket.
Extraordinarycrisismeasureshavebeenundertakensincethefinancialcrisisof2008.
Theyconsistofquantitativeeasing,whentheFedcreatesamassiveamountofreserves
ataverylow--possiblyzero--federalfundsrate,crediteasing,whentheFedbuys
privatesecuritiesormakesloanstofinancialinstitutionstostimulatetheirlending,and
operationtwist,whentheFedbuyslong-termsecuritiesandsellsshort-termsecurities
tolowerlong-terminterestrates.
Status: Old
11) Whatisthediscountrate?
Answer: ThediscountrateistheinterestratethattheFedchargesbankswhenthebanksborrow
reservesfromtheFed.
Status: Old
12) TheFederalReservereportsthatithascoinsvaluedat$10billion,bankreservesattheFedof
$15billion,goldvaluedat$10billion,FederalReservesnotesof$400billion,andU.S.
governmentsecuritiesof$300billion.Whatisthesizeofthemonetarybase?
Answer: Themonetarybaseisthesumofcoins,FederalReservenotes,andbanksreservesatthe
FederalReserve.Thereforethemonetarybaseequals
$10billion+$400billion+$15billion=$425billion.
Topic: Monetarybase
Status: Old
Page1076
11.9 Essay:RegulatingtheQuantityofMoney
1) Describehowactualreservesarecalculated.Explainthedifferencebetweenrequiredreserves
andexcessreserves.Howdoreservesaffecttheamountofloansabankcanmake?
Answer: ActualreservesareequaltothebanksreservesitkeepsondepositattheFederal
Reserveplusthecurrencyinthebanksvault.Requiredreservesareequaltothe
requiredreserveratiomultipliedbythebanksdeposits.Banksmightwanttokeep
reservesoverandabovetheirrequiredreserves.Theamountofreservesbankswantto
keepistheirdesiredreserves.Excessreservesequalactualreservesminusdesired
reserves.Abankcanmakeloansequaltotheamountofitsexcessreserves.
Topic: Requiredreserves
Status: Old
2) Abankcanonlyuseitsexcessreservestomakeloans,whilerequiredreservescanonlybe
usedtobuyU.S.governmentsecurities.Explainwhetherthepreviousstatementiscorrector
incorrect.
Answer: Thestatementisincorrectontwodimensions.First,abankcanuseexcessreservesto
buygovernmentsecuritiesaswellasmakeloans.Second,abankisnotallowedtouse
itsrequiredreservetobuyU.S.governmentsecurities.Requiredreservesmustbekept
intheformofreserves,whichareeitherreservedepositsthebankhasmadeatthe
FederalReserveorcashinthebanksvault.
Status: Old
3) Abankreportsreservesof$100,000,governmentsecuritiesof$250,000,loansof$750,000,
checkabledepositsof$900,000,andownersequityof$200,000.Thedesiredreserveratiois10
percentandthebankwantstoholdasreservesonlytheamountitisrequiredtohold.Whatis
theamountofexcessreservesforthisbank?Showyourwork.
Answer: Excessreservesequaltheactualreservesminusthedesiredreserves.Theactualreserves
are$100,000.Thebankdesirestokeep10percentofitscheckabledepositsasreserves,
sothedesiredreservesare($900,000)0.10=$90,000.Thusexcessreservesequal
$100,000-$90,000=$10,000.
Status: Old
Page1077
4) Thedesiredreserveratiois10percent.FlyByNightBankhasdepositsof$250,000and
reservesof$25,000.Whatistheamountofitsexcessreserves?
Answer: Thebankhasnoexcessreserves.Itdesirestohave($250,000) (0.10)=$25,000as
desiredreserves.Itsactualreservesequal$25,000.Thereforeitsexcessreservesequal
$25,000-$25,000,or$0.
Status: Old
5) Abankhasreservesof$50,depositsof$100,loansof$20,andgovernmentsecuritiesof$30.
Assumethedesiredreserveratiois20percent.
a. Whatarethebanksassetsandwhatareitsliabilities?
b. Howmuchdoesthebankhaveinexcessreserves?
c. Whatcanthebankdowithitsexcessreservesthatwillaffectthequantityofmoney?
Answer: a. Assetsarereserves,loans,andsecurities.Liabilitiesaredeposits.
b. Theexcessreservesare$30,equaltotheactualreservesof$50minusthedesired
reservesof$20(=20percentof$100ofdeposits).
c. Thebankcanuseitsexcessreservestomakeloans.Whenitmakestheloan,itwill
increasethequantityofmoney.
Topic: Moneycreation
Status: Old
6) Explaintheprocessbywhichthebankingsystemcreatesmoney.
Answer: Whenabankgainsexcessreserves,itusestheexcessreservestomakealoan.The
personorabusinessreceivingtheloanreceivesadepositmoney!Theborrowerthen
generallyspendstheloananditendsupasadepositmoneyinanothercompanys
account.Thatcompanysbankthengainssomeexcessreserves,whichitloans,andso
moremoneyiscreated.Thusthebankingsystemcreatesmoneybymakingloans.
Topic: Moneycreation
Status: Old
7) DoesanopenmarketoperationinwhichtheFedbuyssecuritiesfromthegeneralpublic
decreaseorincreasethebankingsystemsreserves?
Answer: AnopenmarketpurchaseofgovernmentsecuritiesbytheFedincreasesthebanking
systemsreserves.
Status: Old
Page1078
8) TheFedconductsanopenmarketoperationandbuys$50,000ofgovernmentsecuritiesfrom
CommerceBank.Thedesiredreserveratiois25percent.WhatisthechangeinCommerce
Bankstotalreservesanditsexcessreserves?
Answer: WhentheFedbuys$50,000ofgovernmentsecuritiesfromCommerceBank,Commerce
Bankstotalreservesincreaseby$50,000.Noneofthesereservesaredesiredreserves,so
CommerceBanksexcessreservesalsoincreaseby$50,000.
Status: Old
9) IftheFedsells$100millionofU.S.governmentsecurities,whathappenstothequantityof
money?
Answer: IftheFedsells$100millionofU.S.governmentsecurities,themonetarybasedecreases
and,alongwithit,thequantityofmoneydecreases.Themoneymultipliershowsthat
thequantityofmoneydecreasesbymorethan$100million.
Status: Old
10) WhentheFedbuysagovernmentsecurity,whathappenstothemonetarybaseandthe
quantityofmoney?Whichchangesbymoreordobothchangebythesameamount?
Answer: WhentheFedbuysagovernmentsecurity,boththemonetarybaseandthequantityof
moneyincrease.Asreflectedbythemoneymultiplier,theincreaseinthequantityof
moneyexceedstheincreaseinthemonetarybase.
Status: Old
11) WhentheFedmakesanopenmarketpurchaseofgovernmentsecurities,thequantityof
moneywilleventuallydecreasebyafractionoftheinitialchangeinthemonetarybase.Isthe
previousstatementcorrectorincorrect?Explainyouranswer.
Answer: Thestatementiswrongontwocounts.First,iftheFedmakesanopenmarketpurchase
ofgovernmentsecurities,thequantityofmoneywillincreaseratherthandecrease.
Second,themoneymultiplierpointsoutthatthechangeinthequantityofmoneywill
begreaterthan,notlessthan,theinitialchangeinthemonetarybase.
Status: Old
Page1079
12) Ifabankreceivesanadditionaldepositof$50,000andthedesiredreserveratiois20percent,
whatistheamountofnewloansthebankcanmake?
Answer: Thebankcanmakeloansequaltoitsexcessreserves.Withthe$50,000deposit,the
banksdesiredreservesare($50,0000.20)=$10,000,sothebankhasexcessreservesof
$40,000.Thereforethebankcanmake$40,000ofloans.
Topic: Theroundsofmoneycreation
Status: Old
13) Howcananewdepositof$10,000atonebankcreateothernewdepositsatotherbanks?
Supposethedesiredreserveratiois10percentandpeoplekeepnocurrencyoutsideofthe
banks.Whatwillbethenewamountofdepositsinthesecondandthirdrounds?
Answer: Whenthebankreceivesanewdepositof$10,000,itwillloansomeofthedeposit.The
proceedsoftheloanwillbedepositedinanotherbank,whichwillthenloansomeofits
newdeposits.Henceaninitialdepositatonebankleadstodepositsatotherbanks.
Withthedesiredreserveratioof10percent,thefirstbankkeeps$1,000asreserves
(10percentof$10,000)anditcanloantheremainder,$9,000.Thusthedepositatthe
secondroundbankwillbe$9,000.Thesecondroundbankkeeps$900asreserves(10
percentof$9,000)andcanloantheremainder,$8,100.Thedepositinthethirdround
bankwillbe$8,100.
Status: Old
14) TheFedconductsanopenmarketoperationandincreasesabanksexcessreservesby$2,000.
Explainthefirstfiveroundsofthemoneycreationprocessifthedesiredreserveratiois25
percentandifpeoplekeepnocurrencyoutsideofthebankingsystem.
Answer: Inroundone,thebankgains$2,000ofreserveswhichitlends.Thenextbankreceivesas
adeposittheamountoftheloan.Thebankkeeps$500asdesiredreservesandlends
$1,500.Inroundthree,thethirdbankreceivesthe$1,500inadeposit.Itkeeps25
percent,or$375,asdesiredreservesandlendstherest,$1,125.Inroundfour,thefourth
bankreceivesthe$1,125inadeposit.Itkeeps25percent,$281.25,asdesiredreserves
andlendstheremainder,$843.75.Finallyinroundfive,thenextbankreceivesthe
$843.75inadeposit.Itkeeps$210.94asdesiredreservesandlendstherest,$632.81.
Status: Old
Page1080
15) Ifthecurrencydrainratioincreases,themonetarybasedecreases.Explainwhetherthe
previousstatementiscorrectorincorrect.
Answer: Thestatementisfalse.Ifthecurrencydrainratioincreases,themoneymultiplier(and
thequantityofmoney)decreasesbutthemonetarybaseitselfisunaffected.
Status: Old
16) Whatisacurrencydrain?Howandwhydoesitaffectthemoneymultiplier?
Answer: Anincreaseincurrencyheldoutsidethebanksisacurrencydrain.Acurrencydrain
decreasesthesizeofthemoneymultiplier.Themoneymultiplierexistsbecausewhen
banksloantheirexcessreserves,thefundswindupinotherbanksasexcessreserves,
wheretheyareloanedonceagain.Asaresult,aninitialincreaseinreservesandthe
monetarybasewindupincreasingthequantityofmoneybyamagnifiedamount.A
currencydrainmeansthatwhenbanksmakeloans,someofthefundsaretakenoutas
cashandnotdepositedbackinanotherbank.Thustheotherbanksexcessreservesdo
notincreaseasmuch,sotheamountthattheycanloanisdecreased.Thedecreasein
loansmeansthattheultimateincreaseinthequantityofmoneyisless,sothatthe
moneymultiplierissmaller.
Status: Old
17) Howdoesacurrencydrainaffectthemoneymultiplier?
Answer: Ifthecurrencydrainiszerosothatallmoneycreatedisdepositedinbankaccounts,the
moneymultiplierisequaltoonedividedbythedesiredreserveratio.Ifthecurrency
drainispositive,thensomenewlycreatedmoneyisheldincashandisnotdepositedin
bankaccounts.Inthiscase,themoneymultiplierissmallersothatachangeinthe
monetarybaseleadstoasmallerchangeinthequantityofmoney.
Status: Old
Page1081
18) Explainhowthecurrencydrainratioaffectsthesizeofthemoneymultiplier.Inyour
explanation,supposethatinoneroundofthemoneycreationprocessabankgains$1million
innewdepositsandreserves.Furthersupposethatthedesiredreserveratiois10percentand
thecurrencydrainratiois50percent.
Answer: Thecurrencydrainratiodecreasesthesizeofthemoneymultiplier.Themoney
multiplierreflectsthefactthatthebankingsystemhasamagnifiedeffectonanychange
inreservesbecausethereservesareloanedbymanybanks.Acurrencydraindecreases
theamountofreservesthatstaywithinthebankingsystem.
Forexample,takethebankthatgains$1millioninnewdepositsandreserves.With
thedesiredreserveratioequalto10percent,startbyassumingthereisnocurrency
drain.Inthiscase,thedesiredreserveratioof10percentmeansthatthebankkeeps
$100,000asreservesandsoitwillloan$900,000.The entire$900,000willbedepositedin
asecondbank.Theentire$900,000depositaddstotheinitial$1milliondeposittocreate
$1.9millionofnewmoney.Thatbankwillthenkeep$90,000asreservesandloan
$810,000.Inthisstage,theentire$810,000willbedepositedinathirdbankandsothe
totalnewmoney(sofar)createdwillbecome$2.71million.Now,supposethatthereisa
currencydrain,saythecurrencydrainratiois50percent.Inthiscase,ofthe$900,000
firstloan,only$600,000isdepositedinthesecondbankbecause$300,000(50percentof
the$600,000ofdeposits)iskeptoutsidethebanksascurrency.Hencethesecondbank,
whichkeeps$60,000asreserves,canloanonly$540,000.Andofthisloanandensuing
deposit,50percentor$180,000iskeptascurrencyandonly$360,000isleftdepositedin
thethirdbank.Thereforetheamountthateachbankcanloanisreducedandsothe
ultimateeffectonthequantityofmoneyisdecreased.
Status: Old
19) Ifthecurrencydrainratioincreases,howcantheFedadjustthemonetarybasetooffsetthe
effectonthequantityofmoney?
Answer: Ifthecurrencydrainratioincreases,thesizeofthemoneymultiplierdecreases,which
decreasesthequantityofmoney.Tomaintainthequantityofmoneyatitsinitial
amountbychangingthemonetarybase,theFedmustincreasethemonetarybase.
Status: Old
Page1082
20) SupposetheFedconductsanopenmarketoperationinwhichitbuysgovernmentsecurities
fromacommercialbank.Whyisthereamultipliereffectonthequantityofmoney?
Answer: WhentheFedbuysgovernmentsecuritiesfromabank,thepaymenttothebankisin
theformofreserves.Hencethebankgainsexcessreserves.Thebankcanloanthese
excessreserves.Whentheloanisspent,therecipientsdepositsomeorallofthefundsin
theirbanks.Thesebanksgaindeposits(whichincreasethequantityofmoney)aswellas
excessreserves.Thesecondroundbanksthenloantheirexcessreserves.Andwhen
theseloansarespent,onceagaintherecipientsdepositsomeorallofthefundsintheir
banks.Thesethird-roundbankstherebygaindeposits(whichfurtherincreasesthe
quantityofmoney)aswellasexcessreserves.Thesereservesareloaned,spent,andthen
depositedinafourthroundofbanks,whichstillfurtherincreasesthequantityof
money.Hencetheprocessofloaninganddepositingtheproceedsincreasesthequantity
ofmoneybyamultipleoftheinitialamountoftheopenmarketoperation.
Status: Old
21) Ifthecurrencydrainratiois40percentandthedesiredreserveratiois15percent,whatdoes
themoneymultiplierequal?
Answer: Themoneymultiplieris2.55.Themoneymultiplierequals
andR/D=0.15.Therefore,themoneymultiplierequals
1+C/D
withC/D=0.40
R/D+C/D
1.40
1+0.40
=
=2.55.
0.15+0.40 0.55
Status: Old
22) Supposethecurrencydrainis20ratiopercentandthedesiredreserveratiois10percent.
a. Whatdoesthemoneymultiplierequal?
b. IftheFedpurchases$10millionofU.S.governmentsecurities,byhowmuchwillthe
quantityofmoneyincreaseordecrease?
Answer: a.
Themoneymultiplieris4.00.Themoneymultiplierequals
0.20andR/D=0.10.Therefore,themoneymultiplierequals
1+C/D
withC/D=
R/D+C/D
1.20
1+0.20
=
=4.00.
0.10+0.20 0.30
b. IftheFedpurchases$10millionofU.S.governmentsecurities,thequantityof
moneyincreasesby($10million4.00)=$40.0million.
Status: Old
Page1083
23) TheFedpurchases$100,000ofU.S.governmentsecuritiesfromOneBank.Assumingthe
desiredreserveratiois10percent,banksloanallexcessreserves,andthecurrencydrainis20
percent,howmuchdoesthequantityofmoneyincrease?
Answer: Thequantityofmoneyincreasesby(moneymultiplier $100,000).Themoney
1+C/D
multiplierequals
withC/D=0.20andR/D=0.10.Therefore,themoney
R/D+C/D
multiplierequals
1.20
1+0.20
=
=4.00.Sothequantityofmoneyincreasesby
0.10+0.20 0.30
(4.00)($100,000)=$400,000.
Status: Old
Page1084
Chapter12 Money,Interest,andInflation
12.1 MoneyandtheInterestRate
1) Thequantityofmoneydemandedisthe
A) averagedailyvolumeofbankaccountwithdrawals.
B) amountthatpeopleandbusinesseschoosetohold.
C) fractionofcashholdingsinanaverageinvestmentportfolio.
D) incomeandvolumeofprofitsthatpeopleandbusinesseswouldliketoreceive.
E) sumofcheckableandsavingsdepositsatbanks.
Answer: B
Topic: Money
Status: Old
2) Thequantityofmoneydemanded
A) isthetotalcurrencyincirculation.
B) isthesameasthemoneysupply.
C) isequaltorealGDP.
D) isthemoneythatpeoplechoosetohold.
E) changesonlywhenrealGDPchanges.
Answer: D
Topic: Money
Status: Old
3) Whenyouaccumulatemoremoney,
A) themarginalbenefitofholdingmoneydecreases.
B) theopportunitycostofholdingmoneydecreases.
C) yourmarginaltaxratefalls.
D) youearnalowerrateofinterestonyourcheckabledeposit.
E) theinterestrateyouarepaidonyourcurrencyincreases.
Answer: A
Topic: Benefitofholdingmoney
Status: Old
Page1085
4) Whentheopportunitycostofholdingmoneyincreases,then
A) peoplewanttoholdmoremoney.
C) thenominalinterestratefalls.
D) peoplewanttoholdlessmoney.
E) thequantityofmoneysuppliedincreases.
Answer: D
Topic: Opportunitycostofholdingmoney
Status: Old
5) Asopportunitycostofholdingmoneyincreases,peoplecan
A) donothing.
B) trytomaximizemarginalbenefit.
C) findabetterjob.
D) seeksubstitutesformoney.
E) increasethedemandformoneybutnotthequantityofmoneytheyhold.
Answer: D
Status: Old
6) Theopportunitycostofholdingmoneyisthatyou
A) runagreaterriskofbeingrobbed.
B) payahighertaxrate.
C) foregointerestonanalternativeasset.
D) havetroublebalancingyourcheckbook.
E) mustmakemoretripstothebanktomanagethemoney.
Answer: C
Status: Old
7) Theopportunitycostofholdingmoneyinsteadofaninterestearningassetisthe
A) realinterestrate.
B) nominalinterestrate.
C) inflationrateminusthenominalinterestrate.
D) inflationrate.
E) inflationrateminustherealinterestrate.
Answer: B
Status: Old
Page1086
8) Theopportunitycostofholdingmoneyisthe
A) nominalinterestrate.
B) realinterestrate.
C) inflationrate.
D) timeittakestogototheATMorbank.
E) growthrateofrealGDP.
Answer: A
Status: Revised
9) Whenthenominalinterestratefalls,theopportunitycostofholdingmoney
A) decreasesandthedemandformoneycurveshiftsleftward.
B) decreasesandthereisamovementdownwardalongthedemandformoneycurve.
C) increasesandthereisamovementupwardalongthedemandformoneycurve.
D) decreasesandthedemandformoneycurveshiftsrightward.
E) increasesandthedemandformoneycurveshiftsrightward.
Answer: B
Status: Old
10) Thequantityofmoneydemandedwilldecreaseifthe
A) inflationratedecreases.
B) nominalinterestratedecreases.
C) realinterestratedecreases.
D) nominalinterestrateincreases.
E) pricelevelrises.
Answer: D
Status: Old
11) Thelowerthenominalinterestrate,the
A) greaterthedemandformoney.
B) greaterthequantityofmoneydemanded.
C) greaterthequantityofmoneysupplied.
D) smallerthedemandforgoodsandservices.
E) smallerthequantityofmoneydemanded.
Answer: B
Status: Old
Page1087
12) The________thenominalinterestrate,the________isthequantityofmoneydemanded.
A) lower;greater
B) lower;smaller
C) higher;greater
D) morevariable;smaller
E) Noneoftheabovebecausethenominalinterestratedoesnotinfluencethequantityof
moneydemanded.
Answer: A
Status: Old
13) Maryhas$1,000andisconsideringpurchasinga$1,000bondthatpays7percentinterestper
year.Marydecidesnottobuythebondandholdsthe$1,000ascash.Iftheinflationrateis4
percent,theopportunitycostofholdingthe$1,000asmoneyis
A) $30.00.
B) $40.00.
C) $70.00.
D) $110.00.
E) $100.00.
Answer: C
Status: Old
14) Supposeyoucanearn5percentonyoursavingsaccountifyoudeposit$500init.Theinflation
rateis3percent.Theopportunitycostofholdingthe$500asmoneyis
A) $25.
B) $100.
C) $80.
D) $525.
E) $30.
Answer: A
Status: Old
15) Therelationshipbetweenthenominalinterestrate,therealinterestrate,andtheinflationrate
isthatthe
A) realinterestrateisequaltothenominalinterestrateplustheinflationrate.
B) nominalinterestrateisequaltotherealinterestrateplustheinflationrate.
C) realinterestrateisequaltothenominalinterestratemultipliedbytheinflationrate.
D) nominalinterestrateisequaltotherealinterestratedividedbytheinflationrate.
E) nominalinterestrateisequaltotherealinterestrateminustheinflationrate.
Answer: B
Status: Old
Page1088
16) Therealinterestrateequalsthe
A) nominalinterestrate-inflationrate.
B) (nominalinterestrateinflationrate) 100.
C) inflationrate-nominalinterestrate.
D) (nominalinterestrateinflationrate)/100.
E) nominalinterestrateinflationrate.
Answer: A
Status: Old
17) Thedifferencebetweenthenominalinterestrateandtherealinterestrateisthe
A) inflationrate.
B) unemploymentrate.
C) GDPgrowthrate.
D) moneygrowthrateminusthegrowthrateofrealGDP.
E) pricelevel.
Answer: A
Status: Old
18) Inthelongrun,thenominalinterestrateis
A) negativelyrelatedtothepricelevel.
B) positivelyrelatedtothepricelevel.
C) negativelyrelatedtotheinflationrate.
D) positivelyrelatedtotheinflationrate.
E) notrelatedtothepricelevelortheinflationrate.
Answer: D
Status: Old
19) Youhavea$500savingbond.Thenominalinterestrateis10percent,andtheinflationrateis4
percent.Afterayear,inrealtermsyouhaveearned
A) $70.
B) $40.
C) $50.
D) $30.
E) $510.
Answer: D
Status: Old
Page1089
20) Youhavea$500savingbond.Ifthenominalinterestrateis10percent,thentheinflationrate
mustbe
A) zero,otherwiseyouwouldsellthebond.
B) 10percentifinrealtermsyouearned$200.
C) 4percentifinrealtermsyouearned$70.
D) 4percentifinrealtermsyouearned$30.
E) 10percentifinrealtermsyouearned$100.
Answer: D
Status: New
21) Supposethenominalinterestrateonasavingsbondis7percentayearandtheinflationrateis
4.5percentayear.Howmuchistherealinterestrate?
A) 1.56percent
B) 11.5percent
C) 2.5percent
D) 7percent
E) 4.5percent
Answer: C
Status: Old
22) Iftheinflationrateis2.5percentandthenominalinterestrateis10percent,thenthereal
interestrateis
A) 2.5percent.
B) 7.5percent.
C) -7.5percent.
D) -2.5percent.
E) 12.5percent.
Answer: B
Status: Old
Page1090
23) Iftheinflationrateis5percentandtherealinterestrateis2.5percent,thenthenominal
interestrateis
A) -2.5percent.
B) 2percent.
C) 7.5percent.
D) 2.5percent.
E) 10percent.
Answer: C
Status: Old
24) Iftherealinterestrateis8percentandtheinflationrateis2.5percent,thenthenominal
interestrateis
A) 10.5percent.
B) 2.5percent.
C) 5.5percent.
D) 8percent.
E) 3.2percent.
Answer: A
Status: Old
25) Barbaraiswillingtoloan$10,000ifshecanearnarealinterestrateof6percent.Everything
elsethesame,iftheinflationrateis2percent,shewouldagreetoloanthe$10,000ifthe
nominalinterestrateis
A) 4percent.
B) 10percent.
C) 3percent.
D) 8percent.
E) 12percent.
Answer: D
Status: Old
Page1091
26) Barbaraiswillingtoloan$10,000ifshecanearnarealinterestrateof6percent.Everything
elsethesame,iftheinflationrateis2percent,shewouldagreetoloanthe$10,000ifthe
nominalinterestrateis________because________.
A) 8percent;shewouldearnmorethanherdesiredamountof6percent
B) 4percentorhigher;shewouldnotearnherdesiredamountof6percentifthenominal
interestratewasanylower
C) 4percentorlower;shewouldnotearnherdesiredamountof6percentifthenominal
interestratewasanyhigher
D) 8percentorhigher;shewouldnotearnherdesiredamountof6percentifthenominal
interestratewasanylower
E) 8percentorlower;shewouldnotearnherdesiredamountof6percentifthenominal
interestratewasanyhigher
Answer: D
Status: New
27) Assumeyouhaveacreditcardbalanceof$2,000at15percentandtheinflationrateis3
percent.Whatarethenominalandrealinterestrates?
A) 15percentnominaland3percentreal
B) 3percentnominaland12percentreal
C) 15percentnominaland12percentreal
D) 15percentnominaland18percentreal
E) 12percentnominaland15percentreal
Answer: C
Status: Old
28) Thenominalinterestrateis12percentandtheinflationrateis4percent.Theopportunitycost
ofholdingadollarforayearis
A) 12cents.
B) 16cents.
C) 88cents.
D) 8cents.
E) 48cents.
Answer: A
Status: Old
Page1092
29) Theopportunitycostofholdingmoney
A) increasesasthenominalinterestrateincreases.
B) decreasesasthenominalinterestrateincreases.
C) doesnotchangewiththechangesinthenominalinterestrate.
D) isfixedatallinterestrates.
E) isthepricelevel.
Answer: A
Topic: Demandformoney
Status: Old
30) Thedemandformoneycurveshowstherelationshipbetweenthequantityofmoney
demandedand
A) thenominalinterestrate.
B) therealinterestrate.
C) theinflationrate.
D) thepricelevel.
E) realGDP.
Answer: A
Status: Old
31) Whichofthefollowingincreasesthequantityofmoneydemanded?
A) ariseinthenominalinterestrate
B) ariseintheinflationrate
C) ariseintherealinterestrate
D) afallinthenominalinterestrate
E) anincreaseinrealGDP
Answer: D
Status: Old
Page1093
32) Whenthenominalinterestratefalls,thereis
A) anupwardmovementalongthedemandformoneycurve.
B) adownwardmovementalongthedemandformoneycurve.
C) arightwardshiftofthedemandformoneycurve.
D) aleftwardshiftofthedemandformoneycurve.
E) nomovementalongthedemandformoneycurveandthecurvedoesnotshift.
Answer: B
Status: Old
33) Anincreaseinthenominalinterestrateleadsto
A) arightwardshiftinthedemandformoneycurve.
B) amovementupwardalongthedemandformoneycurve.
C) aleftwardshiftinthedemandformoneycurve.
D) amovementdownwardalongthedemandformoneycurve.
E) neitherashiftinnoramovementalongthedemandformoneycurve.
Answer: B
Status: Old
34) Thedemandformoneycurveslopesdownwardbecauseariseinthenominalinterestrate
________theopportunitycostofholdingmoneyandtherefore________thequantityofmoney
demanded.
E) increases;doesnotchange
Answer: B
Status: Old
Page1094
35) Thedemandformoneyscheduleshowsthe________relationshipbetweenmoneydemand
andthenominalinterestratewhichmeansthatasthe________.
A) negative;nominalinterestrateincreases,theopportunitycostofholdingmoney
increases
B) negative;nominalinterestrateincreases,theopportunitycostofholdingmoney
decreases
C) positive;nominalinterestrateincreases,theopportunitycostofholdingmoneyincreases
D) positive;nominalinterestrateincreases,theopportunitycostofholdingmoney
decreases
E) negative;opportunitycostofholdingmoneyincreases,thenominalinterestrate
increases
Answer: A
Status: Old
36) Whenthenominalinterestrateincreases,the
A) quantityofmoneydemandedincreasesandthereisamovementupwardalongthe
demandformoneycurve.
B) quantityofmoneydemandeddecreasesandthereisamovementupwardalongthe
C) demandformoneyincreasesandthedemandformoneycurveshiftsrightward.
D) demandformoneydecreasesandthedemandformoneycurveshiftsleftward.
E) supplyofmoneycurveshiftsrightward.
Answer: B
Status: Old
37) Asthenominalinterestrateincreases,theopportunitycostofholdingmoney________and
thequantityofmoneydemanded________.
E) increases;doesnotchangebecausepeopleneedmoney
Answer: B
Status: Old
Page1095
38) Iftheinterestraterisesfrom1percentto3percent,the________decreasesandthe
opportunitycostofholdingmoney________.
A) quantityofmoneydemanded;rises
B) quantityofmoneydemanded;falls
C) quantityofmoneysupplied;rises
D) quantityofmoneysupplied;falls
E) demandformoney;rises
Answer: A
Status: Old
39) In2009,theinterestratefellbelow1percentintheUnitedStates.Asaresult,therewasa
A) leftwardshiftinthesupplyofmoneycurve.
B) rightwardshiftinthedemandformoneycurve.
C) movementdownwardalongthedemandformoneycurve.
D) movementupwardalongthedemandformoneycurve.
E) movementupwardalongthemoneysupplycurve.
Answer: C
Status: Old
40) AstheeconomyentersastrongexpansioninwhichrealGDPincreases,whichofthefollowing
occurs?
A) Thedemandformoneycurveshiftsrightward.
B) Thedemandformoneycurveshiftsleftward.
C) Thedemandformoneydecreasesandthereisamovementupwardalongthedemand
formoneycurve.
D) Thedemandformoneyincreasesandthereisamovementdownwardalongthedemand
formoney
curve.
E) Thenominalinterestratefallsasthedemandformoneycurveshiftsleftward.
Answer: A
Status: Old
Page1096
41) Thequantityofmoneydemandedisproportionalto
A) theinflationrate.
B) realGDP.
C) thepricelevel.
D) therealinterestrate.
E) thenominalinterestrate.
Answer: C
Topic: Demandformoney,pricelevel
Status: Old
42) Thedemandformoneyis
A) positivelyrelatedtothepricelevel.
B) positivelyrelatedtothenominalinterestrate.
C) negativelyrelatedtothepricelevel.
D) negativelyrelatedtorealGDP.
E) positivelyrelatedtotherealinterestrate.
Answer: A
Status: Old
43) Ifthepricelevelincreases,the
A) demandformoneyincreases.
B) demandformoneydecreases.
C) quantityofmoneydemandedincreases.
D) quantityofmoneydemandeddecreases.
E) demandformoneydoesnotchangeandthequantityofmoneydemandeddoesnot
change.
Answer: A
Status: Old
Page1097
44) SupposethatthepriceleveldoesnotchangewhilerealGDPdecreases.Asaresult,
A) thedemandformoneyincreasesandthedemandformoneycurveshiftsrightward.
B) thesupplyofmoneycurveshiftsleftward.
C) thesupplyofmoneycurveshiftsrightward.
D) thequantityofmoneydemandeddecreasesandthereisamovementdownwardalong
thedemandformoneycurve.
E) thedemandformoneydecreasessothathouseholdsandfirmsholdsmalleramountsof
money.
Answer: E
Status: Old
45) Whenthepricelevelincreases,peopledemand________moneyandthedemandformoney
curve________.
A) more;shiftsrightward
B) more;shiftsleftward
C) less;shiftsrightward
D) less;shiftsleftward
E) thesameamountof;doesnotshift
Answer: A
Status: Old
46) Thedemandformoneyincreasesandthedemandformoneycurveshiftsrightwardif
A) therealinterestrateincrease.
B) thenominalinterestrateincreases.
C) thepricelevelincreases.
D) theinflationrateincreases.
E) realGDPdecreases.
Answer: C
Status: Old
Page1098
47) Ifthepricelevelrises,thereis
A) anupwardmovementalongthedemandformoneycurveandthecurvedoesnotshift.
B) adownwardmovementalongthedemandformoneycurveandthecurvedoesnotshift.
E) nomovementalongthedemandcurveformoneyandthecurvedoesnotshift.
Answer: C
Status: Old
48) Ifthepricelevelfalls,the
D) quantityofmoneydemandeddecreases.
E) demandformoneydoesnotchangeandthequantityofmoneydemandeddoesnot
change.
Answer: B
Status: Old
49) The________thepricelevel,the________.
A) higher;greaterthedemandformoney
B) higher;smallerthedemandformoney
C) lower;greaterthedemandformoney
D) higher;greaterthesupplyofmoney
E) higher;smallerthesupplyofmoney
Answer: A
Status: Old
Page1099
50) Anincreaseinthepricelevelleadstoa
A) rightwardshiftinthedemandformoneycurve.
B) movementupwardalongthedemandformoneycurveandnoshiftofthecurve.
C) leftwardshiftinthedemandformoneycurve.
D) movementdownwardalongthedemandformoneycurveandnoshiftofthecurve.
E) rightwardshiftofthesupplyofmoneycurve.
Answer: A
Status: Old
51) Anincreaseinthepricelevelleadsto________inthedemandformoney,andanincreasein
realGDPleadsto________inthedemandformoney.
E) nochange;anincrease
Answer: A
Topic: Demandformoney,pricelevelandrealGDP
Status: Old
52) IfrealGDPdecreases,the
D) supplyofmoneydecreases.
E) supplyofmoneyincreases.
Answer: B
Topic: Demandformoney,realGDP
Status: Old
Page1100
53) AnincreaseinrealGDPaffectsthedemandformoneybecause
A) whenrealGDPincreases,moremoneyisneededtomakeexpenditures.
B) atthehigherpricelevel,ittakesmoredollarstomakeexpenditures.
C) taxpaymentsrisebecausemoreincomeisearned.
D) thereisaninverserelationshipbetweenthequantitymoneydemandedandnominal
GDP.
E) thelargerrealGDP,thehighertherealinterestrate.
Answer: A
Status: Old
54) The________realGDP,the________.
A) larger;largerthedemandformoney
B) larger;smallerthedemandformoney
C) smaller;largerthedemandformoney
D) larger;largerthesupplyofmoney
E) larger;smallerthesupplyofmoney
Answer: A
Status: Old
55) Allelsethesame,whenrealGDPincreases,the
A) demandformoneydecreases.
B) demandformoneyincreases.
C) supplyofmoneydecreases.
D) supplyofmoneyincreases.
E) supplyofmoneydoesnotchange,andthedemandformoneydoesnotchange.
Answer: B
Status: Old
Page1101
56) Thedemandformoneyincreasesandthedemandcurveformoneyshiftsrightwardasaresult
of
A) anincreaseinrealGDP.
B) adecreaseintherealinterestrate.
C) anincreaseintheuseofcreditcards.
D) adecreaseinthepricelevel.
E) adecreaseinthenominalinterestrate.
Answer: A
Status: Old
57) IfrealGDPdecreases,thereis
A) anupwardmovementalongthedemandformoneycurveandnoshiftofthecurve.
B) adownwardmovementalongthedemandformoneycurveandnoshiftofthecurve.
E) nomovementalongthedemandformoneycurveandthecurvedoesnotshift.
Answer: D
Status: Old
58) WhenrealGDPincreases,thedemandformoney________andthedemandformoneycurve
________.
A) increases;shiftsrightward
B) increases;shiftsleftward
C) decreases;shiftsrightward
D) decreases;shiftsleftward
Answer: A
Status: Old
Page1102
59) Thedemandformoneyincreasesandthedemandformoneycurveshiftsrightwardif
A) therealinterestrateincreases.
B) thenominalinterestrateincreases.
C) realGDPincreases.
D) theinflationrateincreases.
E) thepricelevelfalls.
Answer: C
Status: Old
60) AnincreaseinrealGDPleadsto
B) amovementupwardalongthedemandformoneycurvebutnoshiftofthecurve.
D) amovementdownwardalongthedemandformoneycurvebutnoshiftofthecurve.
E) neitherashiftinthedemandformoneycurvenoramovementalongthecurve.
Answer: A
Status: Old
61) DuringaneconomicexpansionwhenrealGDPincreases,the
C) supplyofmoneydecreases.
D) nominalinterestrateisconstant.
E) realinterestrateisconstant.
Answer: A
Status: Old
62) Duringaneconomicexpansion,thedemandformoney________because________.
A) increases;realGDPincreases
B) increases;nominalGDPdoesnotchange
C) decreases;realGDPincreases
D) decreases;nominalGDPincreases
E) doesnotchange;peoplemakemorepurchaseswithcreditcards
Answer: A
Status: New
Page1103
63) Duringa(n)________thedemandformoneydecreasesbecause________.
A) recession;realGDPdecreases
B) expansion;realGDPdecreases
C) recession;nominalGDPincreases
D) recession;thepricelevelrises
E) equilibrium;realGDPdecreases
Answer: A
Status: New
64) Whichofthefollowingshiftsthedemandformoneycurve?
i. changeinthenominalinterestrate
ii. changeinrealGDP
iii. changeinthepricelevel
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: D
Status: Old
65) Whichstatementmostaccuratelydescribestheeffectfinancialtechnologyhashadonthe
demandformoneyintheUnitedStates?
A) Advancesinfinancialtechnologyhavealldecreasedthedemandformoney.
B) Advancesinfinancialtechnologyhaveallincreasedthedemandformoney.
C) Someadvancesinfinancialtechnologyhaveincreasedthedemandformoneywhile
othershavedecreasedit.
D) Advancesinfinancialtechnologyhavehadnoeffectonthedemandformoney.
E) Itisnotpossibletotellwhatwouldbetheeffectbecausefinancialtechnologyhasnot
changedoverthepastthreedecades.
Answer: C
Status: Old
Page1104
66) Advancesinfinancialtechnology
A) mustincreasethedemandformoney.
B) mustdecreasethedemandformoney.
C) havenoeffectonthedemandformoneyoronthesupplyofmoney.
D) mightincreaseordecreasethedemandformoney.
E) affectonlythesupplyofmoney.
Answer: D
Status: Old
67) Theincreaseduseofcreditcardsleadsto
B) amovementupwardalongthedemandformoneycurve.
D) amovementdownwardalongthedemandformoneycurve.
E) nomovementalongthedemandcurveformoneynorashiftinthedemandcurve.
Answer: C
Topic: Demandformoney,creditcards
Status: Old
68) Asmoreandmorebusinessesacceptcreditcards,the
D) supplyofmoneydecreases.
E) quantityofmoneydemandeddecreases.
Answer: B
Status: Old
69) Ifcreditcardusageexhibitsasharpincrease,thereis
A) anupwardmovementalongthedemandformoneycurve.
B) adownwardmovementalongthedemandformoneycurve.
E) aleftwardshiftofthesupplyofmoneycurve.
Answer: D
Status: Old
Page1105
70) AllofthefollowingshiftthedemandformoneycurveEXCEPT
A) animprovementinfinancialtechnology.
B) anincreaseinrealGDP.
C) ariseinthenominalinterestrate.
D) adecreaseinrealGDP.
E) anincreaseinthepricelevel.
Answer: C
Status: Old
71) Intheabovefigure,amovementfrompointA topointB represents

A) anincreaseinthedemandformoneythatmightbetheresultofanincreaseinrealGDP.
B) adecreaseinthedemandformoneythatmightbetheresultofafallinthepricelevel.
C) adecreaseinthequantityofmoneydemanded.
D) anincreaseinthequantityofmoneydemanded.
E) anincreaseinthedemandformoneythatmightbetheresultofafallinthepricelevel.
Answer: D
Status: Old
Page1106
72) Intheabovefigure,amovementfrompointB topointC represents

A) anincreaseinthedemandformoneythatmightbetheresultofanincreaseinrealGDP.
B) adecreaseinthedemandformoneythatmightbetheresultofanincreaseinrealGDP.
C) adecreaseinthequantityofmoneydemanded.
D) anincreaseinthequantityofmoneydemanded.
E) anincreaseinthedemandformoneythatmightbetheresultofafallinthepricelevel.
Answer: A
Status: Old
73) From1970to2010,asafractionofGDP,thequantityofmoneythatpeopleandbusinesses
haveheldhasbeen
A) decreasing.
B) increasing.
C) fluctuatingerratically.
D) independentofpeoplesuseofcreditcards.
E) changingonlyastheinterestratechanged.
Answer: A
Topic: EyeontheU.S.economy,moneyandcreditcards
Status: Old
74) Since1970,asapercentofGDP,M1heldhassteadilydecreased.Whichofthefollowingcan
accountforthisfact?
A) RealGDPhasincreasedsince1970.
B) Thepricelevelhasrisensince1970.
C) Creditcardshavebecomemorewidelyavailablesince1970.
D) Thenominalinterestratehassteadilyrisensince1970.
E) Thenominalinterestratehassteadilyfallensince1970.
Answer: C
Status: Old
Page1107
75) IntheUnitedStatessince1970,thequantityofM1moneypeopleholdasapercentageofGDP
has
A) increased.
B) decreased.
C) remainedconstant.
D) increasedatfirstandthedecreased.
E) decreasedatfirstandthenincreased.
Answer: B
Status: Old
76) Asaresultofincreaseduseofcreditcards,
A) thedemandformoneyhasdecreasedandthedemandformoneycurvehasshifted
leftward.
B) thedemandformoneyhasdecreasedandtherehasbeenamovementupalongthe
C) thedemandformoneyhasdecreasedandtherehasbeenamovementdownalongthe
D) theequilibriumnominalinterestratehasincreasedandbondpriceshavedecreased.
E) theequilibriumnominalinterestratehasdecreasedandbondpriceshavefallen.
Answer: A
Status: Old
77) From1970to2007thequantityofM1fellfrom20percentofGDPtolessthan10percent.This
changeisbecausetheownershipofcreditcards________duringthistimeperiodsince
________.
A) expandedfrom18percentto76percent;creditcardsbecamemorewidelyavailableand
utilized
B) fellfrom76percentto18percent;creditcardsbecamelesswidelyavailableandutilized
C) remainedunchanged;creditcardsdonotaffectthequantityofmoney
D) fellfrom76percentto18percent;therewereseveralrecessionsduringthatperiod
E) expandedfrom18percentto76percent;therewereseveralrecessionsduringthatperiod
Answer: A
Status: New
Page1108
78) From1970to2007householdsheld________because________.
A) lessmoneyrelativetoincome;peoplebeganusingcreditcardsmoreoften
B) lessmoneyrelativetoincome;peoplebeganusingcreditcardslessoften
C) lessmoneyrelativetoincome;thepricelevelbegantorise
D) moremoneyrelativetoincome;peoplebeganusingcreditcardsmoreoften
E) moremoneyrelativetoincome;peoplebeganusingcreditcardslessoften
Answer: A
Status: New
79) Thesupplyofmoneycurveis
A) upwardsloping,showingtheinfluenceoftheinterestrate.
B) horizontalbecauseinterestratesarefixedatanyonemoment.
C) verticalbecausethequantityofmoneyisfixedatanyonemoment.
D) downwardsloping,showingthenegativeinfluenceoftheinterestrate.
E) horizontalbecausetheFedcontrolsthequantityofmoneysupplied.
Answer: C
Topic: Supplyofmoney
Status: Old
80) Inthedemandandsupplymodelofthemoneymarket,the
i. supplyofmoneycurveisaverticalstraightline.
ii. supplyofmoneyisthequantitythatmustbeheldbyhouseholdsandfirms.
iii. quantityofmoneyisdeterminedbyFedactions.
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: E
Status: Old
Page1109
81) Onanygivenday,________changestoachieveequilibriuminthemoneymarket.
A) realGDP
B) thepricelevel
C) theinflationrate
D) thenominalinterestrate
E) therealinterestrate
Answer: D
Topic: Moneymarketequilibrium
Status: Old
82) Everyday,________changestomakethequantityofmoneydemandedequalthequantityof
moneysupplied.
A) realGDP
B) themoneysupply
C) thepricelevel
D) thenominalinterestrate
E) theinflationrate
Answer: D
Status: Old
83) Inthemoneymarket,ifthenominalinterestrateisbelowtheequilibriumlevel,
A) thequantityofmoneydemandedexceedsthequantityofmoneysupplied.
B) thequantityofmoneysuppliedexceedsthequantityofmoneydemanded.
C) assetpriceswillrise.
D) thedemandformoneycurvewillshiftleftward.
E) thesupplyofmoneycurvewillshiftleftward.
Answer: A
Status: Old
Page1110
84) Supposethattheequilibriumnominalinterestrateis4percentandtheequilibriumquantityof
moneyis$1trillion.Atanyinterestrateabove4percent,
A) lessthan$1trillionwillbedemandedandbondpriceswillincrease.
B) lessthan$1trillionwillbedemandedandbondpriceswillfall.
C) morethan$1trillionwillbesuppliedandbondpriceswillfall.
D) morethan$1trillionwillbesuppliedandtheinterestratewillrise.
E) thereisashortageofmoneyandtheinterestratewillrise.
Answer: A
Status: Old
85) Supposethattheequilibriumnominalinterestrateis5percentandtheequilibriumquantityof
moneyis$1trillion.Atanyinterestratebelow5percent,
A) theinterestratewillriseandbondpriceswillfall.
B) theinterestratewillfallandbondpriceswillfall.
C) therewillbeasurplusofmoneyandbondpriceswillfall.
D) therewillbeasurplusofmoneyandbondpriceswillincrease.
E) thesupplyofmoneywilldecrease.
Answer: A
Status: Old
86) Ifthequantityofmoneydemandedisgreaterthanthequantitysupplied,thenintheshortrun
the
A) demandforfinancialassetsincreases.
B) nominalinterestratefalls.
C) nominalinterestraterises.
D) priceoffinancialassetsrises.
E) pricelevelrises.
Answer: C
Status: Old
Page1111
87) Ifthenominalinterestrateislessthantheequilibriumnominalinterestratedeterminedinthe
moneymarket,thenhouseholdsandfirms
A) areholdingmoremoneythantheyprefer.
B) areholdinglessmoneythantheyprefer.
C) expectthenominalinterestratetodecrease.
D) expectthepriceleveltoincrease.
E) expectrealGDPtoincrease.
Answer: B
Status: Old
88) Ifthenominalinterestrateislessthantheequilibriumnominalinterestratedeterminedinthe
moneymarket,thenintheshortrunhouseholdsandfirms
A) sellfinancialassets.
B) buyfinancialassets.
C) raisethepricelevel.
D) lowerthepricelevel.
E) increaserealGDP.
Answer: A
Status: Old
89) Whenhouseholdsandfirmssellfinancialassets,suchasgovernmentsecurities,the
A) nominalinterestratefalls.
B) marketpriceofthesecuritiesincreases.
C) nominalinterestraterises.
D) demandformoneycurveshiftsleftward.
E) supplyofmoneycurveshiftsleftward.
Answer: C
Status: Old
Page1112
90) Whenthenominalinterestrateis________theequilibriuminterestrate,thequantityofmoney
demandedislessthanthequantityofmoneysupplied;whenthenominalinterestrateis
________theequilibriuminterestrate,thequantityofmoneydemandedexceedsthequantity
ofmoneysupplied.
A) lessthan;greaterthan
B) equalto;lessthan
C) greaterthan;equalto
D) greaterthan;lessthan
E) equalto;greaterthan
Answer: D
Status: Old
91) Inthemoneymarket,ifthequantityofmoneysuppliedexceedsthequantityofmoney
demanded,thenominalinterestratewill________andthepricesofassetswill________.
A) rise;increase
B) rise;decrease
C) fall;increase
D) fall;decrease
E) fall;notchange
Answer: C
Status: Old
92) Ifthequantityofmoneysuppliedisgreaterthanthequantityofmoneydemanded,thenthe
A) nominalinterestraterises.
C) priceoffinancialassetsfalls.
D) moneysupplydecreases.
E) pricelevelfalls.
Answer: B
Status: Old
Page1113
93) WhentheFedchangesthequantityofmoney,thereisanimmediateeffecton
A) thenominalinterestrate.
B) realGDP.
C) thepricelevelbutnottheinflationrate.
D) theinflationratebutnotthepricelevel.
E) thepricelevelandtheinflationrate.
Answer: A
Status: Old
94) IftheFedwantstoraisetheinterestrate,intheshortruninthemoneymarkettheFed
C) shiftsthedemandformoneycurveleftward.
D) shiftsthedemandformoneycurverightward.
E) directlyraisestheinterestrateanddoesnothingtoeitherthesupplyofmoneyorthe
demandformoney.
Answer: A
Status: Old
95) IftheFedisworriedaboutinflationandwantstoraisetheinterestrate,intheshortrunitcan
A) increasethedemandformoney.
B) increasethequantityofmoney.
C) decreasethedemandformoney.
D) decreasethequantityofmoney.
E) directlyraisetheinterestratewithoutaffectingeitherthedemandformoneyorthe
supplyofmoney.
Answer: D
Status: Old
Page1114
96) Inthemoneymarket,intheshortrunifthequantityofmoneyexceedsthequantityofmoney
demanded,thentoachieveequilibriumthe
A) supplyofmoneyincreases.
C) inflationrateincreases.
D) demandformoneyincreases.
E) pricelevelrises.
Answer: B
Status: Old
97) Inthemoneymarket,intheshortruninordertodecreasethenominalinterestrate,theFed
must
A) increasethequantityofmoney.
B) increasethediscountrate.
C) decreasethedemandformoney.
D) decreasethequantityofmoney.
E) directlylowertheinterestrateandnotchangeeitherthedemandformoneyorthe
supplyofmoney.
Answer: A
Status: Old
98) Intheshortrun,whentheFedincreasesthequantityofmoney,the
B) priceleveldecreases.
C) nominalinterestratefalls.
D) quantitydemandedofmoneydecreases.
E) demandformoneydecreases.
Answer: C
Status: Old
Page1115
99) Otherthingsthesame,iftheFedincreasesthequantityofmoney,thesupplyofmoneycurve
shifts
A) rightwardandthenominalinterestratedecreases.
B) leftwardandthenominalinterestrateincreases.
C) rightwardandtherealinterestrateincreases.
D) leftwardandtherealinterestrateincreases.
E) leftwardandthenominalinterestratedecreases.
Answer: A
Status: Old
100) Otherthingsthesame,iftheFedincreasesthequantityofmoney,the________because
________.
A) nominalinterestratedecreases;thesupplyofmoneycurveshiftsrightward
B) nominalinterestratedecreases;thesupplyofmoneycurveshiftsleftward
C) nominalinterestratedoesnotchange;onlytherealinterestrateiseffected
D) nominalinterestrateincreases;thesupplyofmoneycurveshiftsrightward
E) nominalinterestrateincreases;thesupplyofmoneycurveshiftsleftward
Answer: A
Status: New
101) Inthemoneymarket,ifrealGDPincreases,thenthedemandformoney________andthe
equilibriumnominalinterestrate________.
A) increases;rises
B) increases;falls
C) decreases;rises
D) decreases;falls
Answer: A
Status: Old
Page1116
102) Inthemoneymarket,ifthepricelevelrises,thenthedemandformoney________andthe
equilibriumnominalinterestrate________.
A) increases;rises
B) increases;falls
C) decreases;rises
D) decreases;falls
Answer: A
Status: Old
103) Achangeinfinancialtechnologythatreducestheneedtoholdcashbalances________the
demandformoneyand________theequilibriumnominalinterestrate.
A) increases;raises
B) increases;lowers
C) decreases;raises
D) decreases;lowers
Answer: D
Status: Old
Page1117
104) Intheabovefigure,iftheinterestrateis8percentperyear,thequantityofmoneydemanded
is
A) lessthanthequantityofmoneysupplied,andtheinterestratewillchange.
B) greaterthanthequantityofmoneysupplied,andtheinterestratewillchange.
C) lessthanthequantityofmoneysupplied,andthedemandcurveformoneywillshift.
D) greaterthanthequantityofmoneysupplied,andthedemandcurveformoneywillshift.
E) greaterthanthequantityofmoneysupplied,andthesupplycurveofmoneywillshift.
Answer: A
Status: Old
105) Intheabovefigure,theequilibriuminterestrateis________andtheequilibriumquantityof
moneyis________trillion.
A) 8percent;$1.2
B) 4percent;$0.6
C) 4percent;$1.2
D) 8percent;$0.6
E) 0percent;$1.2
Answer: B
Status: Old
Page1118
is
C) lessthanthequantityofmoneysupplied,andthedemandformoneycurvewillshift.
D) greaterthanthequantityofmoneysupplied,andthedemandformoneycurvewillshift.
E) greaterthanthequantityofmoneysupplied,andthesupplyofmoneycurvewillshift.
Answer: B
Status: Old
is
C) lessthanthequantityofmoneysupplied,andthedemandformoneycurvewillshift.
D) greaterthanthequantityofmoneysupplied,andthedemandformoneycurvewillshift.
E) greaterthanthequantityofmoneysupplied,andthesupplyofmoneycurvewillshift.
Answer: B
Status: Old
108) Intheabovefigure,iftheinterestrateis2percentperyear,the________because________.
A) interestratewillchange;thequantityofmoneydemandedislessthanthequantityof
moneysupplied
B) interestratewillchange;thequantityofmoneydemandedisgreaterthanthequantityof
moneysupplied
C) demandformoneycurvewillshift;thequantityofmoneydemandedislessthanthe
quantityofmoneysupplied
D) demandformoneycurvewillshift;thequantityofmoneydemandedisgreaterthanthe
E) supplyofmoneycurvewillshift;thequantityofmoneydemandedisgreaterthanthe
Answer: B
Status: New
Page1119
Quantityof
Quantityof
Nominalinterestrate moneydemanded moneysupplied
(percentperyear) (trillionsofdollars) (trillionsofdollars)
5
2.9
2.5
6
2.8
2.5
7
2.7
2.5
8
2.6
2.5
9
2.5
2.5
10
2.4
2.5
109) Theabovetablehasthedemandandsupplyschedulesformoney.Whatistheequilibrium
nominalinterestrate?
A) 5percent
B) 9percent
C) 8percent
D) 7percent
E) 6percent
Answer: B
Status: Old
110) Theabovetablehasthedemandandsupplyschedulesformoney.IftheFedincreasesthe
quantityofmoneyby$0.1trillion,thenewequilibriumnominalinterestrateis
A) 8percent.
B) 9percent.
C) 7percent.
D) 5percent.
E) 6percent.
Answer: A
Status: Old
111) Theabovetablehasthedemandandsupplyschedulesformoney.RealGDPincreasesand,as
aresult,thedemandformoneyincreasesby$0.1trillionateachlevelofthenominalinterest
rate.Thenewequilibriuminterestrateis
A) 3percent.
B) 7percent.
C) 10percent.
D) 5percent.
E) 2percent.
Answer: C
Status: Revised
Page1120
112) Thequantityofmoneydemanded
A) isinfinite.
B) hasnoopportunitycost.
C) isthequantitythatbalancesthebenefitofholdinganadditionaldollarofmoneyagainst
theopportunitycostofdoingso.
D) isdirectlycontrolledbytheFed.
E) changesveryinfrequently.
Answer: C
Topic: Realmoney
Status: Old
A) Nominalinterestrate=Realinterestrate- Inflationrate
B) Nominalinterestrate=Realinterestrate+ Inflationrate
C) Nominalinterestrate=Inflationrate- Realinterestrate
D) Nominalinterestrate=Inflationrate+ Priceindex
E) Nominalinterestrate=Inflationrate Realinterestrate
Answer: B
Topic: Realmoney
Status: Old
114) Thedemandformoney________whenthe________.
A) increases;pricelevelincreases
B) decreases;pricelevelincreases
C) remainsconstant;pricelevelincreases
D) increases;nominalinterestrateincreases
E) increases;supplyofmoneydecreases
Answer: A
Status: Old
Page1121
115) Ifthenominalinterestrateisaboveitsequilibriumvalue,then
A) peoplesellfinancialassetsandtheinterestratefalls.
B) peoplebuyfinancialassetsandtheinterestratefalls.
C) thedemandcurveformoneyshiftsrightwardandtheinterestraterises.
D) thesupplycurveofmoneyshiftsleftwardandtheinterestraterises.
E) thedemandcurveformoneyshiftsleftwardandtheinterestratefalls.
Answer: B
Status: Old
116) WhentheFedincreasesthequantityofmoney,the
A) equilibriumnominalinterestratefalls.
B) equilibriumnominalinterestraterises.
C) demandformoneycurveshiftsrightward.
D) supplyofmoneycurveshiftsleftward.
E) demandformoneycurveshiftsleftward.
Answer: A
Status: Old
12.2 Money,thePriceLevel,andInflation
1) Inthelong-run,moneymarketequilibriumdetermines
A) thevalueofmoney.
B) thenominalinterestrate
C) therealinterestrate.
D) realGDP.
E) velocity.
Answer: A
Topic: Moneymarketinthelongrun
Status: Old
Page1122
2) Thevalueofmoney
A) isthequantityofgoodsandservicesthataunitofmoneycanbuy.
B) isdeterminedbyFedregulations.
C) increasesduringinflationaryperiods.
D) increasesduringeconomicexpansions.
E) isdirectlyrelatedtothepricelevel.
Answer: A
Topic: Valueofmoney
Status: Old
3) Whichofthefollowingappliestothevalueofmoney?
i. Itistheinverseofthepricelevel.
ii. Thevalueofmoneyfallsduringeconomicexpansions.
iii. Itisthequantityofgoodsandservicesthataunitofmoneywillbuy.
A) iandiii
B) i,iiandiii
C) iiionly
D) iiandiii
E) iandii
Answer: A
Topic: Valueofmoney
Status: Old
4) Inthelongrun,whatdeterminesthevalueofmoney?
A) thegovernmentbudgetbalance
B) internationaltrade
C) moneymarketequilibrium
D) equilibriumintheloanablefundsmarket
E) realGDP
Answer: C
Topic: Valueofmoney
Status: Old
Page1123
5) Ifthequantityofmoneysupplied________thequantitydemanded,inthelongrunthevalue
ofmoney________.
A) exceeds;fallsaspeoplespendtheirsurplusmoney
B) exceeds;risesaspeoplebuybonds
C) islessthan;fallsaspeoplespendtheirsurplusmoney
D) islessthan;doesnotchangeunlesstheFedincreasesthemoneysupply
E) equals;equalszero
Answer: A
Topic: Valueofmoney
Status: Old
6) Thelong-runmoneydemandcurveshows
A) thatthevalueofmoneyinfluencesthequantityofmoneythathouseholdsandfirmsplan
tohold.
B) thatthevalueofmoneyisdirectlyrelatedtothequantityofmoneydemanded.
C) therelationshipbetweenrealGDPandmoneydemand.
D) therelationshipbetweenpotentialGDPandmoneydemand.
E) howtheFeddeterminestheappropriateinterestrate.
Answer: A
Topic: Long-runmoneydemand
Status: Old
7) IftheFedincreasesthequantityofmoney,intheshortrunthe________andinthelongrun
the________.
A) pricelevelrises;thenominalinterestratefalls
B) nominalinterestratefalls;thepricelevelfalls
C) nominalinterestraterises;thepricelevelfalls
D) nominalinterestratefalls;thepricelevelrises
E) nominalinterestraterises;thepricelevelrises
Answer: D
Status: Old
Page1124
8) Inthefigureabove,inthelongrunwhathappensiftheFedincreasesthequantityofmoney
by5percent?
A) Thevalueofmoneyfallsby5percentandtherewillbeamovementdownalongthe
LRMDcurve.
B) TherealinterestratefallsandtheLRMD curveshiftsrightward.
C) Thenominalinterestraterisesby5percent.
D) Thepricelevelrisesby5percentandtheLRMD shiftsleftward.
E) Thevalueofmoneyrisesby5percent.
Answer: A
Status: Old
9) Inthefigureabove,whathappensiftheFedincreasesthequantityofmoneyby8percent?
A) TheLRMDcurveshiftsrightwardtorestoreequilibrium.
B) Thevalueofmoneyfallsto0.92andthereisamovementdownwardalongthe LRMD.
C) Thepricelevelfallsto1.08.
D) Theinterestraterisesto1.08.
E) Thevalueofmoneyrisesto1.08.
Answer: B
Status: Old
Page1125
10) Inthelongrun,anincreaseinthequantityofmoney________thevalueofmoneyand
________thepricelevel.
A) raises;raises
B) raises;doesnotchange
C) lowers;lowers
D) lowers;doesnotchange
E) lowers;raises
Answer: E
Topic: Moneymarketinthelongrun
Status: Old
11) Inthelongrun,whentheFedincreasesthequantityofmoney,the
A) pricelevelrises.
C) demandformoneydecreases.
D) pricelevelfalls.
E) realinterestraterises.
Answer: A
Topic: Moneyandthepricelevel
Status: Old
12) Inthelongrun,anincreaseinthequantityofmoneyleadsto
A) anequalpercentageincreaseintherealinterestrate.
B) asmallerpercentageincreaseintherealinterestrate.
C) anequalpercentageincreaseinthepricelevel.
D) asmallerpercentageincreaseinthepricelevel.
E) noeffectonthepriceleveloronrealGDP.
Answer: C
Status: Old
Page1126
13) Inthelongrun,anincreaseinthequantityofmoney,otherthingsremainingthesame,
A) increasesthepricelevel.
B) decreasesthepricelevel.
C) increasesrealGDP.
D) decreasesrealGDP.
E) hasnoeffectonthepricelevelorrealGDP.
Answer: A
Status: Old
14) Otherthingsremainingthesame,inthelongrun________inthequantityofmoneybringsan
equalpercentage________.
A) anincrease;decreaseinthepricelevel
B) adecrease;decreaseinthepricelevel
C) adecrease;increaseinthepricelevel
D) adecrease;increaseinthenominalinterestrate
E) anincrease;increaseintherealinterestrate
Answer: B
Status: Old
15) ThepropositionthatinthelongrunwhenrealGDPequalspotentialGDP,anincreaseinthe
quantityofmoneyleadstoanequalpercentageincreaseinthepricelevelisthecalledthe
quantitytheoryof
A) constantvelocity.
B) inflation.
C) money.
D) equalchange.
E) thelongrun.
Answer: C
Topic: Quantitytheoryofmoney
Status: Old
Page1127
16) WhenrealGDPequalspotentialGDP,thequantitytheoryofmoneysaysthatanincreasein
thequantityofmoneybringsanequalpercentage
A) increaseinthepricelevel.
B) increaseinrealGDP.
C) decreaseinthepricelevel.
D) decreaseinvelocity.
E) decreaseinrealGDP.
Answer: A
Status: Old
17) Usingthequantitytheoryofmoney,inthelongruna3percentincreaseinthequantityof
moneyleadstoa3percent
A) increaseinthepricelevel.
B) increaseintherealinterestrate.
C) decreaseinthepricelevel.
D) decreaseintherealinterestrate.
E) increaseinrealGDP.
Answer: A
Status: Old
18) Theaveragenumberoftimesinayeareachdollarisusedtobuygoodsandserviceiscalled
A) velocityofcirculation.
B) inflation.
C) circulationrate.
D) nominalGDP.
E) rateofcirculationspeed.
Answer: A
Topic: Equationofexchange
Status: Old
Page1128
19) Thevelocityofcirculationreferstothe
A) ratiobetweenthequantityofmoneyandthepricelevel.
B) averagenumberoftimesinayeareachdollarisusedtobuygoodsandservices.
C) averagenumberoftimesadollarisdepositedandwithdrawnfromabankaccount.
D) averagespeedwithwhichtheFedincreasesordecreasesthequantityofmoney.
E) averagespeedwithwhichthenominalinterestratechangeswhentheinflationrate
changes.
Answer: B
Status: Old
20) Thevelocityofcirculationisdefinedasthe
A) averagenumberoftimesinayearthateachdollarisusedtobuygoodsandservices.
B) quantityofmoneysuppliedbytheFed.
C) quantityofmoneydemandedatequilibrium.
D) pricelevelobtainedwhenthemoneymarketisatitsequilibrium.
E) speedwithwhichchangesintheinterestratespreadthroughouttheeconomy.
Answer: A
Status: Old
21) Thevelocityofcirculationisequalto
A) thepriceleveldividedbyrealGDP.
B) thepricelevelmultipliedbythequantityofmoney.
C) nominalGDPdividedbythequantityofmoney.
D) thequantityofmoneydividedbythepricelevelandthenmultipliedbyrealGDP.
E) thequantityofmoneydividedbynominalGDP.
Answer: C
Status: Old
Page1129
22) Accordingtotheequationofexchange,the
A) quantityofmoneymultipliedbytheinflationrateequalsnominalGDP.
B) velocityofcirculationisalwayssmallerthantheinflationrate.
C) quantityofmoneydividedbytheinflationrateequalsrealGDP.
D) quantityofmoneymultipliedbythevelocityofcirculationequalsnominalGDP.
E) quantityofmoneyminusthevelocityofcirculationequalsrealGDPminustheprice
level.
Answer: D
Status: Old
23) Theequationofexchangeshowsthat
A) P=(MV)Y.
B) P=(MY)V.
C) P=(VM)Y.
D) P=(MV)Y.
E) P-Y=M+V.
Answer: D
Status: Old
24) VelocityisV,thequantityofmoneyisM, thepricelevelisP, andrealGDPisY.Whichofthe

followingformulasiscorrect?
A) V=(PY)M
B) V=(P+Y)M
C) Y=VM
D) Y=(PM)V
E) Y=(P+M)-V
Answer: A
Status: Old
25) Ifthequantityofmoneyis$6billionandnominalGDPis$9billion,thevelocityofcirculation
is
A) 0.67.
B) 3.
C) 1.5.
D) 36.
E) 54.
Answer: C
Status: Old
Page1130
26) IfnominalGDPis$6.0trillionandthequantityofmoneyis$1.5trillion,thenthe
A) pricelevelis110.
B) pricelevelis120.
C) velocityofcirculationis4.
D) velocityofcirculationis10.
E) pricelevelis4.00.
Answer: C
Status: Old
27) IfrealGDPis$200,thepricelevelis2.5,andvelocityis5,thenthequantityofmoneyis
A) $200.
B) $100.
C) $750.
D) $1,000.
E) $500.
Answer: B
Status: Old
28) SupposethequantityofmoneyandrealGDPdonotchange.Ifvelocityincreases,thenthe
A) pricelevelwillrise.
B) pricelevelwillfall.
C) realinterestratewillrise.
D) realinterestratewillfall.
E) inflationratewillfall.
Answer: A
Status: Old
29) Accordingtotheequationofexchange,ifvelocityandrealGDPdonotchange,a3percent
increaseinthequantityofmoney
A) raisesthepricelevelby3percent.
B) raisesthepricelevelby3 (velocity).
C) lowersthepricelevelby3 (realGDP).
D) lowersthepricelevelby3percent.
E) raisesthepricelevelbylessthan3percent.
Answer: A
Status: Old
Page1131
30) Accordingtotheequationofexchange,ifthequantityofmoneyis$20billion,velocity3,and
realGDPis$6billion,thenthepricelevelis
A) 10.
B) 40.
C) 1.6.
D) 1.1.
E) 2.
Answer: A
Status: Old
31) Supposethequantityofmoneyis$1,000,thevelocityofcirculationis6,andrealGDPis
$4,000.Thenthepricelevelis
A) 2.5.
B) 2.0.
C) 1.5.
D) 1.1.
E) 6.0.
Answer: C
Status: Old
32) SupposenominalGDPis$2,000ayearandthequantityofmoneyis$400.Thenthevelocityof
circulationequals
A) 5.
B) 1/5.
C) 10.
D) 2.
E) 8.
Answer: A
Status: Old
33) Ifthepricelevelis2,realGDPis$50billion,andthequantityofmoneyis$4billion,then
velocityis
A) 4.
B) 10.
C) 25.
D) 12.5.
E) 8.
Answer: C
Status: Old
Page1132
34) Accordingtotheequationofexchange,ifthequantityofmoneyis$4billionandthevelocity
ofcirculationis3,nominalGDPis
A) $12billion.
B) $7billion.
C) $1.3billion.
D) $0.75billion.
E) $8billion.
Answer: A
Status: Old
35) Ifvelocityisequalto6,andthequantityofmoneyis$50billion,accordingtotheequationof
exchange,nominalGDPisequalto
A) $18billion.
B) $8.3billion.
C) $300billion.
D) $56billion.
E) $150billion.
Answer: C
Status: Old
36) NominalGDPis$9.6milliondollars,realGDPis$9million,andvelocityis1.2.Thequantityof
moneyis________million.
A) $8
B) $11.52
C) $7.5
D) $10.8
E) $12
Answer: A
Status: Old
37) Ifvelocitydoesnotchangeandthequantityofmoneygrowsatthesamerateasdoesreal
GDP,theninthelongrun
A) theinflationrateequalsthegrowthrateofthequantityofmoney.
B) thenominalinterestrateislessthantherealinterestrate.
C) therealinterestrateislessthanthenominalinterestrate.
D) theinflationrateequalszero.
E) thenominalinterestrateequalszero.
Answer: D
Topic: Moneygrowthandinflation
Status: Old
Page1133
38) IfvelocitydoesnotchangeandifrealGDPandthequantityofmoneygrowatthesamerate,
thenthepricelevel
A) risesandtheinflationrateisnegative.
B) fallsandtheinflationrateisnegative.
C) doesnotchangeandtheinflationrateiszero.
D) risesandtheinflationrateispositive.
E) fallsandtheinflationrateispositive.
Answer: C
Status: Old
39) IfrealGDPandthevelocityofcirculationdonotchangeandthequantityofmoneygrowsby
3percent,theninthelongtheinflationrateis
A) 3percent.
B) 0percent.
C) -3percent.
D) largerthan3percent.
E) Moreinformationisneededtoanswerthequestion.
Answer: A
Status: Old
40) IfrealGDPgrowsby3percent,thevelocityofcirculationdoesnotchange,andthequantityof
moneygrowsby3percent,theninthelongruntheinflationrateis
A) 3percent.
B) 0percent.
C) -3percent.
D) -6percent.
E) 6percent.
Answer: B
Status: Old
Page1134
41) Thevelocityofcirculationgrowsat1percentandrealGDPgrowsat3percent.Ifthequantity
ofmoneygrowsat2percent,theinflationrateis
A) 2percent.
B) 4percent.
C) 8percent.
D) zero.
E) 10percent.
Answer: D
Status: Old
42) Thevelocityofcirculationgrowsat1percentandrealGDPgrowsat3percent.Ifthequantity
ofmoneygrowsat4percent,theinflationrateis
A) 2percent.
B) 4percent.
C) 8percent.
D) zero.
E) 10percent.
Answer: A
Status: Old
43) IfrealGDPgrowsby3percent,thevelocityofcirculationgrowsby4percent,andthequantity
ofmoneygrowsby3percent,theninthelongruntheinflationrateis
A) 4percent.
B) 0percent.
C) -4percent.
D) 10percent.
E) 7percent.
Answer: A
Status: Old
Page1135
44) IfrealGDPgrowsby3percent,thevelocityofcirculationgrowsby-4percent,andthe
quantityofmoneygrowsby3percent,theninthelongruntheinflationrateis
A) 4percent.
B) -4percent.
C) -1percent.
D) 10percent.
E) 1percent.
Answer: B
Status: Revised
45) IfrealGDPgrowsby3percent,thevelocityofcirculationdoesnotchange,andthequantityof
moneygrowsby5percent,theninthelongruntheinflationrateis
A) 3percent.
B) -5percent.
C) -2percent.
D) 8percent.
E) 2percent.
Answer: E
Status: Old
46) IfrealGDPgrowsat4percent,thequantityofmoneygrowsat6percent,andvelocitydoes
notchange,theninthelongruntheinflationrateis
A) 4percent.
B) 6percent.
C) 10percent.
D) 2percent.
E) 1.5percent.
Answer: D
Status: Old
Page1136
47) SupposethatrealGDPgrowsby3percentayear,thequantityofmoneygrows6percenta
year,andvelocitygrowsby1percent.Inthelongrun,theinflationrateequals
A) 9percent.
B) 4percent.
C) 5percent.
D) 12percent.
E) 10percent.
Answer: B
Status: Old
48) SupposethatrealGDPgrowsby3percentayear,thequantityofmoneygrows5percenta
year,andvelocitydoesnotchange.Inthelongrun,theinflationrateequals
A) 8percent.
B) 3percent.
C) 5percent.
D) 2percent.
E) 10percent.
Answer: D
Status: Old
49) IfrealGDPgrowsat3percentayear,thequantityofmoneygrowsat5percentayear,andthe
velocityofcirculationisconstant,thenthepricelevelmustbe
A) increasingat8percentayear.
B) decreasingat8percentayear.
C) increasingat2percentayear.
D) decreasingat2percentayear.
E) increasingat15percentayear.
Answer: C
Status: Old
Page1137
50) IfthequantityofmoneystartstogrowmorerapidlythanrealGDPandvelocitydoesnot
change,theresultis
A) morerapidgrowthinpotentialGDP.
B) theinflationraterises.
C) anincreaseininvestment.
D) aneventualslowinginthegrowthrateofthequantityofmoney.
E) slowergrowthinthepricelevel.
Answer: B
Status: Old
51) Iftheinflationrateincreases,
A) thevelocityofcirculationincreases.
B) potentialGDPincreases.
C) realGDPgrowthincreases.
D) thenominalinterestratefalls.
E) therealinterestraterises.
Answer: A
Status: Old
52) Hyperinflationisdefinedasperiodsof
A) negativepricechanges.
B) lowinflation.
C) inflationover50percentpermonth.
D) inflationunder10percentperyear.
E) inflationover25percentperyear
Answer: C
Topic: Hyperinflation
Status: Old
Page1138
53) Inflationataratethatexceeds50percentpermonthiscalled
A) extremeinflation.
B) superinflation.
C) hyperinflation.
D) megainflation.
E) skyflation.
Answer: C
Status: Old
54) Hyperinflation
A) occursintheUnitedStatesduringeachbusinesscycle.
B) occursonlyintheory,neverinreality.
C) hasneveroccurredintheUnitedStates.
D) happensinallcountriesatsometimeduringtheirbusinesscycle.
E) isaperiodoftimewheninflationexceeds20percentperyear.
Answer: C
Status: Old
55) Intheearly1920s,GermanyexperiencedhyperinflationbecauseGermanys
A) economywasgrowingveryrapidly.
B) populationwasgrowingveryrapidly.
C) quantityofmoneywasgrowingveryrapidly.
D) realGDPwasgrowingfasterthannominalGDP.
E) demandformoneyskyrocketed.
Answer: C
Topic: Eyeonthepast,hyperinflationinGermanyinthe1920s
Status: Old
56) Duringtheearly1920s,Germanyexperienced
A) negativeinflationasaresultofhighmoneycreation.
B) hyperinflationasaresultoflowmoneycreation.
C) moderatepricechangesasaresultofarecession.
D) hyperinflationasaresultofhighmoneycreation.
E) hyperinflationasaresultofrapidlyincreasingdemandformoney.
Answer: D
Topic: Eyeonthepast,hyperinflationinGermanyinthe1920s
Status: Old
Page1139
57) In2008and2009,thequantitytheoryofmoneydida________jobofpredictingyear -to-year

changesintheinflationratebecause________.
A) poor;velocityofcirculationplunged
B) poor;theFedchangedthegrowthrateofthequantityofmoneytooquickly
C) good;realGDPremainedstable
D) good;interestratesbehavedpredictably
E) poor;thepricelevelandthevelocityofcirculationdidnotchange
Answer: A
Topic: Eyeonthecauseofinflation
Status: Old
58) Withalargeandgrowingdeficit,theFedmayfacepressurefromthegovernmentto
A) decreasetheinflationtax.
B) keepinterestrateslow,buttheFedrisksinflationbydoingso.
C) decreasethequantityofmoneytokeepthevalueofmoneyhigh.
D) increasethevelocityofcirculation.
E) increasethequantityofmoneytopreventinflation.
Answer: B
Topic: Eyeonthecauseofinflation
Status: Old
59) Inthelongrun,thepriceleveladjusts
A) sothattherealinterestrateequalsthenominalinterestrate.
B) sothattheinflationrateequalszero.
C) toachievemoneymarketequilibrium.
D) sothattheinflationrateequalsthegrowthrateofrealGDP.
E) sothattheinflationrateismoderate.
Answer: C
Status: Old
Page1140
60) Inthelongrun,anincreaseinthequantityofmoney________thevalueofmoneyand
________thepricelevel.
A) raises;raises
B) doesnotchange;raises
C) raises;lowers
D) lowers;raises
E) lowers;lowers
Answer: D
Status: Old
61) Otherthingsremainingthesame,ifthequantityofmoneyincreasesbyagivenpercentage,
theninthelongrunthe________bythesamepercentage.
A) pricelevelrises
B) pricelevelfalls
C) realinterestraterises
D) realinterestratefalls
E) nominalinterestratefalls
Answer: A
Status: Old
62) Thequantitytheoryofmoneyisapropositionabout
A) theFedsmethodsusedtochangethequantityofmoney.
B) nominalandrealinterestrates.
C) therelationshipbetweenachangeinthequantityofmoneyandthepricelevel.
D) therelationshipbetweenfinancialassetsandcurrencydemanded.
E) thenominalinterestrateandthequantityofmoneydemanded.
Answer: C
Status: Old
63) SupposethatPYis$5,000millionayearandthequantityofmoneyis$500million.Thenthe
velocityofcirculationis
A) 50.
B) 500.
C) 10.
D) 20.
E) 2,500,000.
Answer: C
Status: Old
Page1141
64) Ifthequantityofmoneygrowsat3percentperyear,velocitydoesnotgrow,andrealGDP
growsat2percentperyear,thentheinflationrateequals
A) 6percent.
B) 5percent.
C) 1percent.
D) -1percent.
E) 12percent.
Answer: C
Status: Old
65) Ifthequantityofmoneygrowsat4percentayear,velocitygrowsat2percent,andrealGDP
growsat2percentayear,thentheinflationrateequals
A) 6percent.
B) 2percent.
C) 0percent.
D) 8percent.
E) 4percent.
Answer: E
Status: Old
66) Hyperinflationis
A) inflationcausedbynegativegrowthinthequantityofmoney.
B) inflationataratethatexceeds50percentamonth.
C) inflationcausedbyexcessivegrowthinthedemandformoney.
D) inflationataratethatexceeds5percentamonth.
E) onlytheoreticalandhasneveroccurredintherealworld.
Answer: B
Status: Old
Page1142
12.3 TheCostofInflation
1) Highinflation
A) leadstoamorecorrectallocationofresources.
B) lowersthepricelevel.
C) decreasesuncertainty.
D) makesiteasiertousemoneyasastandardofaccount.
E) makesmoneyfunctionlesswellasastoreofvalue.
Answer: E
Topic: Costsofinflation
Status: Old
2) Highinflationmakesmoney________because________.
A) functionlesswellasastoreofvalue;itdecreasesthepricelevelandincreasesthebuying
powerofmoney
B) functionbetterasastoreofvalue;itleadstoamoreaccurateallocationofresources
C) functionbetterasaunitofaccount;moneyneverlosesvaluebutitdoesgainpurchasing
powerinsomeregions
D) functionbetterasastoreofvalue;themoneygainsvalueandthereforehasgreater
purchasingpower
E) functionlesswellasastoreofvalue;themoneylosesvalueandthereforehasless
purchasingpower
Answer: E
Status: New
3) Duringaninflationaryperiod,ahouseholdwithsavingsof$100,000
A) gainsbecauseinflationincreasesthevalueoftheirsavings.
B) losesbecausetheinflationincreasestheafter-taxrealinterestrate.
C) gainsbecausetheinflationgivessaversmoremoneyandsomorepurchasingpower.
D) losesbecauseinflationincreasestherealtaxontheinterestpaid.
E) neithergainsnorlosesbecauseinflationdoesnotaffectsavers.
Answer: D
Status: Revised
Page1143
4) Oneeffectofinflationisthatitisataxthatredistributesgoodsandservicesfrom
A) governmenttohouseholds.
B) investorstosavers.
C) governmenttobusinesses.
D) householdsandbusinessestothegovernment.
E) businessestohouseholds.
Answer: D
Topic: Inflationasatax
Status: Old
5) Inflationisknownasa________becauseit________.
A) revenue;istheonlysourceofbusinessincomeforthegovernment
B) badthing;allowspeopletoobtainthewrongkindofwealth
C) goodthing;keepsthevalueofgoodsandservicesincreasing
D) tax;redistributesgoodsandservicesfromhouseholdsandbusinessestothegovernment
E) tax;redistributesgoodsandservicesfromthegovernmenttohouseholdsandbusinesses
Answer: D
Status: New
6) Inflation________thecostofholdingmoneyand________theafter -taxrealinterestrate.
Answer: B
Topic: Costsofinflation,taxesandinterest
Status: Old
7) Assumeaneconomybeginswithzeroinflation,a25percentincometaxrate,andareal
interestrateof4percent.Ifinflationrisesto4percent,thenominalinterestratebecomes
________percentandtheafter-taxrealinterestbecomes________percent.
A) 0;1
B) 8;2
C) 8;4
D) 6;2
E) 8;6
Answer: B
Status: Old
Page1144
8) Theshoe-leathercostsofinflationarethecostsfrom
A) higherpricesforallgoods,includingnecessitiessuchasshoes.
B) thegovernmenttakingahigherpercentageofinterestincome.
C) confusionaspeoplelosetrackofrealcostsandbenefits.
D) timespenttryingtospendmoneyquickly.
E) highertaxesduetohigherinflation.
Answer: D
Topic: Costofinflation,shoe-leathercosts
Status: Old
9) The________costofinflationistheresultofa(n)________invelocityandisso -named
becauseof________.
A) tax;decrease;thegovernmentcollectingmoretaxrevenueonallgoodsandservices
includingbasicitemslikeshoes
B) shoeleather;increase;thehigherpricesforallgoodsandservicesincludingbasicitems
likeshoes
C) confusion;increase;theshoeleatherthatiswastedbypeoplerunningaroundtryingto
spendmoneyquickly
D) shoeleather;increase;theshoeleatherthatiswastedbypeoplerunningaroundtryingto
spendmoneyquickly
E) shoeleather;decrease;theshoeleatherthatiswastedinpeoplerunningaroundtryingto
spendmoneyquickly
Answer: D
Status: New
10) Shoe-leathercostsofinflationarisefromthe
A) increasingcostsofapparel(clothesandshoes)asinflationrises.
B) increaseofvelocityasinflationrises.
C) declineintheuseofmoneyasaunitofaccount.
D) increasingcostsofagriculturalproductsasinflationrises.
E) confusionthatresultsfromhigherinflation.
Answer: B
Status: Old
Page1145
11) BecausetheinflationrateissohighWandarefusestocarrycash.Eventhoughitisabother,
shenowgoestotheATMtwiceasoftentogetthecashsheneeds.Wandasactionsarean
exampleofthe
A) shoe-leathercostsofinflation.
B) taxcostsofinflation.
C) confusioncostsofinflation.
D) uncertaintycostsofinflation.
E) taxdistortingcostsofinflation.
Answer: A
Status: Old
12) Ifinflationismakingitdifficultforpeopletoestimatethetruemarginalbenefitsandtrue
marginalcostsofactivities,inflationisleadingto
A) taxcosts.
B) shoe-leathercosts.
C) confusioncosts.
D) uncertaintycosts.
E) increasedeconomicgrowth.
Answer: C
Topic: Costsofinflation,confusion
Status: Old
13) Uncertaintycostsarisefrominflationbecauseinflationmakeslong-termplanning________so
peoplerespondby________investment.
A) moredifficult;increasing
B) moredifficult;decreasing
C) lessdifficult;notchanging
D) moredifficult;notchanging
E) lessdifficult;increasing
Answer: B
Topic: Costsofinflation,uncertainty
Status: Old
Page1146
14) Inflationisataxbecauseasthegovernment________thequantityofmoney,thepricelevel
________,andthepurchasingpowerofhouseholdsmoney________.
A) increases;rises;increases
B) decreases;falls;decreases
C) increases;rises;decreases
D) decreases;rises;decreases
E) doesnotchange;rises;increases
Answer: C
Status: Old
15) WhichofthefollowingisNOT acostofinflation?

A) taxcost
B) confusioncost
C) uncertaintycost
D) unemploymentcost
E) shoe-leathercost
Answer: D
Status: Old
16) WhichofthefollowingisNOT acostofinflation?

A) taxcosts
B) confusioncosts
C) uncertaintycosts
D) governmentspendingcosts
E) shoe-leathercosts
Answer: D
Status: Old
17) Beckyholds$30,000asmoney.Afterayearduringwhichinflationwas5percentayear,the
inflationtaxoverthatyearwas
A) $500.
B) $1,000.
C) $1,500.
D) $3,000.
E) $5.
Answer: C
Status: Old
Page1147
18) Supposeacountryhasarealinterestrateof4percentandaninflationrateof3percent.Ifthe
incometaxrateis20percent,thentheafter-taxrealinterestrateis
A) 2.6percent.
B) 4.0percent.
C) 5.6percent.
D) 7.0percent.
E) 1.4percent.
Answer: A
Status: Old
19) Shoe-leathercostsarisefrominflationbecausethevelocityofcirculationofmoney________as
theinflationrate________.
A) increases;falls
B) decreases;rises
C) increases;rises
D) doesnotchange;rises
E) doesnotchange;falls
Answer: C
Status: Old
20) Aconsequenceofhyperinflationisthatpeople
A) whomakefixed-paymentloanstoothersreceivehigherpaymentsasinflationincreases.
B) spendtimetryingtokeeptheirmoneyholdingsnearzero.
C) receivehigherrealwagehikes,whichincreasestheirpurchasingpowerforgoodsand
services.
D) wanttolendfundsbecauseinterestratesaresohigh.
E) increasethequantityofmoneydemanded.
Answer: B
Status: Old
Page1148
21) Theuncertaintycostsofinflationcausepeopleto
A) increasetheirdemandformoney.
B) increaseinvestmentcausingeconomicgrowthtodecrease.
C) focusontheshortrun,whichdecreasesinvestmentandslowsgrowth.
D) focusonthelongrun,whichincreasesinvestmentandspeedsgrowth.
E) incurmoreshoeleathercosts.
Answer: C
Status: Old
22) Theuncertaintycostsofinflationcause________because________.
A) adecreaseininvestmentandslowergrowth;peopleincreasetheirdemandformoney
B) anincreaseininvestmentandfastergrowth;peopledecreasetheirdemandformoney
C) adecreaseininvestmentandslowergrowth;peoplefocusontheshortrunandnotthe
longrun
D) adecreaseininvestmentandslowergrowth;peoplefocusonthelongrunandnotthe
shortrun
E) anincreaseininvestmentandfastergrowth;peoplefocusontheshortrunandnotthe
longrun
Answer: C
Status: New
23) Thecostsofinflation________wheninflationismorerapidand________wheninflationis
moreunpredictable.
A) increase;increase
B) increase;decrease
C) decrease;increase
D) increase;donotchange
E) donotchange;increase
Answer: A
Topic: Costofinflation,predictability
Status: Old
Page1149
24) Itisestimatedthatiftheinflationrateisloweredfrom3percentayearto0percentayear,the
growthrateofrealGDPwillriseby________percentagepointsayear.
A) 0.06to0.09
B) 1to3
C) 2.3
D) 3.2
E) 0
Answer: A
Topic: Costsofinflation,amount
Status: Old
Page1150
12.4 ChapterFigures
1) Thedemandformoneycurveisshowninthefigureabove.Amovementfrompoint Btopoint
Ccouldbetheresultof
A) afallinthenominalinterestrate.
B) adecreaseinthetotalbenefitfromholdingmoney.
C) anincreaseinthequantityofmoneyheldbybanks.
D) ariseintherealinterestrate.
E) ariseintherealinterestratematchedbyanequalfallinthenominalinterestrate.
Answer: A
Status: Old
Page1151
2) Thedemandformoneycurveisshowninthefigureabove.Whatcouldshiftthedemandfor
moneycurverightwardfromthecurveillustratedinthefigureabove?
A) adecreaseinthesupplyofmoney
B) adecreaseinrealGDP
C) afallintherealinterestrate
D) afallinthenominalinterestrate.
E) anincreaseinthepricelevel
Answer: E
Status: Old
3) Thedemandformoneycurveisshowninthefigureabove.Whatcouldshiftthedemandfor
moneycurverightwardfromthecurveillustratedinthefigureabove?
A) adecreaseinthesupplyofmoney
B) anincreaseinthesupplyofmoney
C) afallintheinflationrate
D) afallinthenominalinterestrate
E) anincreaseinrealGDP
Answer: E
Status: Old
Page1152
4) Thefigureaboveshowsthemoneymarket.Atwhichinterestratearepeoplesellingbondsand
therebychangingtheinterestrate?
A) 6percent
B) 5percent
C) 4percent
D) 6percentand4percent
E) 6percent,5percent,and4percent
Answer: C
Status: Old
1) Thedominantfactorwhythenominalinterestratediffersamongnationsisthat________
differsamongnations.
A) potentialGDP
B) theunemploymentrate
C) inflationrate
D) thepricelevel
E) thequantityofmoney
Answer: C
Topic: Integrative
Status: Old
Page1153
2) Iftheinflationrateiszero,thenominalinterestrateis
A) greaterthantherealinterestrate.
B) lessthantherealinterestrate.
C) equaltotherealinterestrate.
D) equaltotheinflationrate.
E) positiveandtherealinterestrateisnegative.
Answer: C
Topic: Integrative
Status: Old
3) Thelong-runeffectofadecreaseinthegrowthrateofthequantityofmoneyisa
A) lowerrealinterestrate.
B) higherrealinterestrate.
C) lowernominalinterestrate.
D) highernominalinterestrate.
E) higherinflationrate.
Answer: C
Topic: Integrative
Status: Old
4) Thelong-runeffectofanincreaseinthegrowthrateofthequantityofmoneyisa
A) lowerrealinterestrate.
B) higherrealinterestrate.
C) lowernominalinterestrate.
D) highernominalinterestrate.
E) lowerinflationrate.
Answer: D
Topic: Integrative
Status: Old
Page1154
5) IftheFedwantstolowerthenominalinterestrateintheshortrun,theFed________the
growthrateofthequantityofmoney.
A) raises
B) lowers
C) doesnotchange
D) firstlowersandthenraises
E) Noneoftheaboveanswersiscorrectbecausethepremiseofthequestioniswrongsince
theFedcannotaffectthenominalinterestrate,onlytherealinterestrate.
Answer: A
Topic: Integrative
Status: Old
6) IftheFedwantstolowerthenominalinterestrateinthelongrun,theFed________the
growthrateofthequantityofmoney.
A) raises
B) lowers
C) doesnotchange
D) firstlowersandthenraises
E) Noneoftheaboveanswersiscorrectbecausethepremiseofthequestioniswrongsince
theFedcannotaffectthenominalinterestrate,onlytherealinterestrate.
Answer: B
Topic: Integrative
Status: Old
7) Inthelongrun,therealinterestrateis3percent,realGDPgrowsat4percent,velocityis
constant,andthequantityofmoneygrowsat8percent.Thenominalinterestrateis
A) 6percent.
B) 7percent.
C) 8percent.
D) 10percent.
E) 12percent.
Answer: B
Topic: Integrative
Status: Old
Page1155
8) Inthelongrun,therealinterestrateis3percent,realGDPgrowsat4percent,velocityis
constant,andthequantityofmoneygrowsat6percent.Thenominalinterestrateis
A) 3percent.
B) 4percent.
C) 5percent.
D) 10percent.
E) 6percent.
Answer: C
Topic: Integrative
Status: Old
9) Intheshortrun,anincreaseinthegrowthrateofthequantityofmoney________thenominal
interestrateandinthelongrunit________thenominalinterestrate.
A) raises;raises
B) raises;lowers
C) lowers;raises
D) lowers;lowers
E) doesnotchange;raises
Answer: C
Topic: Integrative
Status: Old
10) Inthelongrun,anincreaseinthegrowthrateofthequantityofmoney________theinflation
rateand________thenominalinterestrate.
A) raises;raises
B) raises;lowers
C) lowers;raises
D) lowers;lowers
E) raises;doesnotchange
Answer: A
Topic: Integrative
Status: Old
Page1156
11) Inthelongrun,whenaneconomyexperiencesinflation,thepricelevel________andthe
nominalinterestrate________.
A) rises;remainsconstant
B) remainsconstant;rises
C) rises;rises
D) falls;rises
E) rises;falls
Answer: C
Topic: Integrative
Status: Old
12) Duringthe1990s,Canadahadanaverageinflationrateof1.5percentwhileColumbiahadan
averageinflationrateof21.5percent.YouwouldexpectthatnominalinterestratesinCanada
are
A) lessthannominalinterestratesinColumbia.
B) equaltonominalinterestratesinColumbia.
C) greaterthannominalinterestratesinColumbia.
D) unpredictablydifferentfromnominalinterestratesinColumbia.
E) notcomparabletonominalinterestratesinColumbia.
Answer: A
Topic: Integrative
Status: Old
13) Inflationdecreasesthegrowthofcapitalbecause
i. whentheafter-taxrealinterestratefalls,savingsdecreases.
ii. velocityincreaseswheninflationincreases.
iii. thehighertheinflationrate,thehigheristhetrueincometaxrateonincomefromcapital.
A) ionly
B) iionly
C) iiionly
D) iandiii
E) i,ii,andiii
Answer: D
Topic: Integrative
Status: Old
Page1157
14) Inaperiodofhyperinflation,thevelocityofcirculationincreasesbecause
A) householdsandfirmsspendmoneyassoonastheyreceivepayment.
B) thenominalinterestratedecreases.
C) potentialGDPincreases.
D) therealinterestraterises.
E) moneyisvaluableeveryonewantsit.
Answer: A
Topic: Integrative
Status: Old
15) Duringaperiodofhyperinflation,ashouseholdsandfirmsavoidholdingmoney,
A) potentialGDPincreases.
B) longtermsavingsaccountsbecomemorepopular.
C) barterbecomesmorecommon.
D) capitalinvestmentincreases.
E) thecostsofinflationdecrease.
Answer: C
Topic: Integrative
Status: Old
12.6 Essay:MoneyandtheInterestRate
1) Whatistheopportunitycostofholdingmoney?
Answer: Theopportunitycostofholdingmoneyisthenominalinterestrate.
Status: Old
2) Whyisthenominalinterestratetheopportunitycostofholdingmoney?
Answer: Thenominalinterestrateistheopportunitycostofholdingmoneybecausethenominal
interestistheincomeforgonebyholdingmoney.Forinstance,anindividualwith
$1,000canholdthefundseitherasmoneyorasafinancialassetwithaninterestrateof,
say,7percent.Ifthefundsareheldasmoney,theinterestpaidis$0;iftheyareheldasa
financialasset,theinterestpaidis$70.Choosingtoholdthefundsasmoneytherefore
hasanopportunitycostoftheinterestincomeforgone,whichis$70or7percentper
dollar.So,theopportunitycostofeachdollarheldasmoneyis7percent.
Status: Old
Page1158
3) Whateffectdoesanincreaseinthenominalinterestratehaveontheopportunitycostof
holdingmoneyandonthedemandformoneycurve?
Answer: Anincreaseinthenominalinterestrateincreasestheopportunitycostofholding
money.Thereisamovementupwardalongthedemandformoneycurve.
Status: Old
4) Iftheinflationrateis3percentandtherealinterestrateis3percent,thenwhatisthenominal
interestrate?
Answer: Thenominalinterestrateequalstherealinterestrateplustheinflationrate,or
(3percent)+(3percent)=6percent.
Status: Old
5) Iftherealinterestrateis3percentandtheinflationrateis2percent,whatisthenominal
interestrate?
Answer: Thenominalinterestrateequalstherealinterestrateplustheinflationrate,or
(3percent)+(2percent)=5percent.
Status: Old
6) Whatfactorsleadtochangesinthequantitydemandedofmoneyandwhatfactorsleadto
changesinthedemandformoney?
Answer: Changesinthenominalrateofinterestchangethequantityofmoneydemanded.
Changesinthepricelevel,realGDP,andfinancialtechnologychangethedemandfor
money.
Status: Old
7) Whateffectdoesanincreaseinthepricelevelhaveonthedemandformoneyandthedemand
formoneycurve?
Answer: Anincreaseinthepricelevelincreasesthedemandformoneyandshiftsthedemand
formoneycurverightward.
Status: Old
Page1159
8) WhateffectdoesanincreaseinrealGDPhaveonthedemandformoney?
Answer: AnincreaseinrealGDPincreasesthedemandformoneyandshiftsthedemandfor
moneycurverightward.
Status: Old
9) Howwouldawidespreadadoptionofcreditcardsaffectthedemandformoneyandthe
demandformoneycurve?
Answer: Thewidespreadadoptionofcreditcardsdecreasesthedemandformoneyandshiftsthe
demandformoneycurveleftward.
Status: Old
10) IntheUnitedStatessince1970,howhastheuseofcreditcardsaffectedthedemandforM1as
apercentageofGDP?
Answer: Since1970,creditcardshavebecomemorewidespread.Asaresult,thedemandforM1
asapercentageofrealGDPhasdecreased.
Status: Old
11) Becausethenominalinterestrateistheopportunitycostofholdingmoney,thesupplycurve
ofmoneyslopesdownward.Isthepreviousstatementcorrectorincorrect?
Answer: Thestatementisincorrect.Becausethenominalinterestrateistheopportunitycostof
holdingmoney,thedemandformoneycurveslopesdownwardbutthesupplycurveof
moneydoesnotslopedownward.
Status: Old
12) Howisthepriceofafinancialasset,suchasgovernmentbonds,relatedtotheinterestrate?
Answer: Thepriceoffinancialassets,suchasgovernmentbonds,isnegativelyrelatedtothe
interestrate.Iftheinterestraterises,thepriceofgovernmentbondsfallsandifthe
interestratefalls,thepriceofgovernmentbondsrises.
Topic: Interestrateandassetprice
Status: Old
Page1160
13) Jeremypurchasesabondthatpays$600ininterest.IfJeremypaid$9,000forthebond,whatis
theinterestrate?IfJeremypaid$10,000forthebond,whatistheinterestrate?Howdidarise
inthepriceofthebondaffecttheinterestrate?
Answer: WhenJeremypaid$9,000forthebond,theinterestrateis($600 $9,000)100= 6.67
percent.WhenJeremypaid$10,000forthebond,theinterestrateis($600 $10,000)
100=6.00percent.Theriseinthepriceofthebondbroughtaboutafallinitsinterest
rate.
Status: Old
14) Ifabondpays$50ayeartoitsholderandyoubuyitfor$200,whatisyourinterestrate?
Answer: Theinterestrateis($50 $200) 100= 25.0percent.
Status: Old
15) Supposethequantityofmoneyisgreaterthanthequantityofmoneydemanded.Intheshort
run,whatoccurstosetthequantityofmoneyequaltothequantityofmoneydemanded?
Answer: Inthemoneymarket,theinteractionbetweenthesupplyofmoneyandthedemandfor
moneydeterminestheequilibriumnominalinterestrate.Thequantityofmoney
availableisgreaterthanthequantityofthemoneydemandedwhenthenominal
interestrateisabovetheequilibriuminterestrate.Whenthisoccurs,inaneffortto
decreasetheamountofmoneytothequantitypeoplewanttohold,peoplebuybonds
withtheexcess.Asaresult,thedemandforbondsincreases.Thepriceofbondsrises
andtheinterestratefalls.Whenthenominalinterestratereachesitsequilibrium,there
isnolongeranexcesssupplyofmoneybecauseattheequilibriumnominalinterestrate,
thequantityofmoneysuppliedequalsthequantitydemanded.
Topic: Equilibriuminterestrate
Status: Old
16) Intheshortrun,howdoestheFedchangethenominalinterestrate?
Answer: TheFedchangesthenominalinterestratebychangingthequantityofmoney.IftheFed
increasesthequantityofmoney,thesupplyofmoneycurveshiftsrightwardandthe
equilibriumnominalinterestratefalls.IftheFeddecreasesthequantityofmoney,the
supplyofmoneycurveshiftsleftwardandtheequilibriumnominalinterestraterises.
Status: Old
Page1161
17) Supposeinthemoneymarkettheequilibriumnominalinterestrateis5percent.IftheFed
increasesthequantityofmoney,whatistheeffectonthenominalinterestrate?
Answer: IftheFedincreasesthequantityofmoney,thesupplyofmoneycurveshiftsrightward
andthenominalinterestratefalls.
Status: Old
18) Intheshortrun,howisthenominalinterestratedetermined?Ifthenominalinterestrateis
lessthantheequilibriumnominalinterestrate,whatoccurs?
Answer: Thenominalinterestrateisdeterminedinthemoneymarketbytheinteractionofthe
demandformoneyandthesupplyofmoney.Ifthenominalinterestrateislessthanthe
equilibrium,thereisanexcessdemandformoney.Inordertoincreasethequantityof
moneytheyhold,peoplesellbondsandotherfinancialassets.Asaresult,thepriceof
financialassetsfallsandtheinterestraterises.Peoplecontinuetosellassetsandthe
interestratecontinuestoriseuntilitreachesitsequilibrium.
Status: Old
19) AssumetheFedwantstolowertheinterestrate.HowdoestheFedlowertheinterestratein
theshortrun?
Answer: Inordertolowertheinterestrate,theFedincreasesthequantityofmoney.Intheshort
run,whenthequantityofmoneyincreases,theinterestratefalls.
Status: Old
Page1162
20) Inthefigurebelow,labeltheaxesandthendrawademandformoneycurve.Illustratean
increaseinthedemandformoney.
Answer:
Acompletedfigureisabove.Anincreaseinthedemandformoneyisreflectedina
rightwardshiftofthedemandformoneycurve,asinthefigurewiththeshiftfrom MD1
toMD2 .
Status: Old
Page1163
Quantityof
Nominalinterestrate moneydemanded
(percentperyear) (trillionsofdollars)
8
0.7
6
0.9
4
1.1
2
1.3
21) Theabovetablehasthedemandformoneyschedule.
a. IftheFedsupplies$1.1trilliondollars,whatistheequilibriumnominalinterestrate?
b. Discusshowequilibriumisrestorediftheinterestrateisgreaterthantheequilibriumrate
foundinpart(a).
Answer: a. Theequilibriumnominalinterestrateis4percent.
b. Iftheinterestrateisgreaterthan4percent,thereisanexcesssupplyofmoney.In
thiscase,toberidoftheirextramoney,peoplebuybonds.Thepriceofbondsrises
andsotheinterestratefallsuntilitreachesitsequilibriumvalue,4percent.Atthis
interestrate,thereisnolongeranexcesssupplyofmoneybecausethequantity
demandedequalsthequantitysupplied.
Status: Old
Quantityof
Nominalinterestrate moneydemanded
(percentperyear) (trillionsofdollars)
3
2.0
4
1.5
5
1.0
6
0.5
22) Theabovetablehasthedemandformoneyschedule.
a. IftheFedsetsthequantityofmoneyequalto$1.0trillion,whatistheequilibriumnominal
interestrate?
b. IftheFedwantstheinterestratetobe4percent,whatmustitdo?
Answer: a. IftheFedsetsthequantityofmoneyequalto$1.0trillion,theequilibriumnominal
interestrateis5percent.
b. IftheFedwantstheinterestratetobe4percent,itmustsetthequantityofmoney
equalto$1.5trillion.
Status: Old
Page1164
23) Theabovediagramhasademandformoneycurve.SupposetheFedinitiallysetsthequantity
ofmoneyequalto$0.6trillion.Drawthesupplyofmoneycurveinthefigure.Whatisthe
equilibriuminterestrate?NowsupposetheFedincreasesthequantityofmoneyto
$0.9trillion.Drawthenewsupplycurve.Whatisthenewequilibriuminterestrate?
Answer:
TheinitialsupplyofmoneycurveisMS 1 andtheequilibriuminterestrateis6percent.
WhentheFedincreasesthequantityofmoney,thesupplyofmoneycurveshiftsto MS 2
andtheequilibriuminterestratefallsto4percent.
Status: Old
Page1165
12.7 Essay:Money,thePriceLevel,andInflation
1) AgovernmentpolicymakersuggestsDoublethemoneysupplyandU.S.citizensreal
incomeswilldouble.Inthelongrun,isthispolicyadvicecorrect?
Answer: Thisstatementisincorrectbecauseinthelongrunanincreaseinthequantityofmoney
increasesonlythepricelevel.Indeed,itincreasesthepricelevelbythesamepercentage.
SoiftheFedfollowedtheadviceandincreasedthequantityofmoneyby100percent
(whichdoublesit),theninthelongruntheonlyeffectistoincreasethepricelevelby
100percent.
Status: Old
2) Inthemoneymarket,howistheadjustmenttoequilibriumbroughtaboutintheshortrunand
inthelongrun?
Answer: Intheshortrun,thenominalinterestrateadjuststorestoreequilibriuminthemoney
market.Inthelongrun,however,thenominalinterestrateequalstherealinterestplus
theinflationrate,soitcannotfreelyadjusttorestoreequilibriuminthemoneymarket.
Inthelongrunwhentheeconomyisatfullemployment,thepricelevelchangesto
restoreequilibriuminthemoneymarket.
Topic: Moneymarketequilibriumintheshortrunandthelongrun
Status: Old
3) Whatistheshort-runandlong-runeffectonthenominalinterestratefromanincreaseinthe
growthrateofthequantityofmoney?
Answer: Intheshortrun,theincreaseinthegrowthrateofthequantityofmoneylowersthe
nominalinterestrate.Howeverinthelongruntheincreaseinthegrowthrateofthe
quantityofmoneycreateshigherinflationandthehigherinflationleadstoariseinthe
nominalinterestrate.
Topic: Moneygrowthandthenominalinterestrate
Status: Old
4) IftheFedmakesthequantityofmoneygrowatthesamerateasthegrowthrateofrealGDP
andvelocitydoesnotchange,inthelongrunwhathappenstothepricelevelandtheinflation
rate?
Answer: IfthequantityofmoneyisgrowingatthesamerateasrealGDPandvelocitydoesnot
change,thenthepriceleveldoesnotchange.Inthiscase,theinflationrateequals0
percent.
Status: Old
Page1166
5) Supposevelocitydoesnotchange.Then,inthelongrun,agrowthrateofthequantityof
moneythatexceedsgrowthinrealGDPhaswhateffect?
Answer: Inthelongrun,growthinthequantityofmoneythatexceedsgrowthinrealGDP
bringsinflation.Withvelocityconstant,theinflationrateequalsthegrowthrateofthe
moneysupplyminusthegrowthrateofrealGDP.
Status: Old
6) Iftheinflationrateispositive,thentherealinterestrateisgreaterthanthenominalinterest
rate.Isthepreviousstatementcorrectorincorrect?Explainyouranswer.
Answer: Thestatementisincorrect.Thenominalinterestrateequalstherealinterestrateplusthe
inflationrate.Therefore,iftheinflationrateispositive,thenominalinterestrateis
greaterthantherealinterestrate.
Topic: Nominalinterestrateandinflationrate
Status: Old
7) Accordingtothequantitytheoryofmoney,whatistheeffectofanincreaseinthequantityof
money?
Answer: Accordingtothequantitytheory,inthelongrunanincreaseinthequantityofmoney
bringsanequalpercentageincreaseinthepricelevel.
Status: Old
8) Definethequantitytheoryofmoneyandshowhowitisrelatedtotheequationofexchange.
Answer: Thequantitytheoryofmoneyisthepropositionthatinthelongrun,anincreaseinthe
quantityofmoneybringsanequalpercentageincreaseinthepricelevel(otherthings
remainingthesame).Theequationofexchangestatesthatthequantityofmoney
multipliedbyvelocityofcirculationequalsthepriceleveltimesrealGDP,or
MV=PY.DividebothsidesofthisformulabyVtoobtainP=(MV)Y.This
formulashowsthatwhenMincreases,aslongasVandYdonotchange,Pincreasesby
thesamepercentage,whichistheconclusionofthequantitytheoryofmoney.
Status: Old
Page1167
9) Whatistheequationofexchange?SupposethatrealGDPandvelocityareconstant.Inthis
case,whateffectwillanincreaseinthequantityofmoneyhave?
Answer: TheequationofexchangeisthatM V = P Y,whereM isthequantityofmoney,V is
thevelocityofcirculation,Pisthepricelevel,andYisrealGDP.IfrealGDPand
velocityareconstant,thenanincreaseinthequantityofmoneywillincreasetheprice
level.
Status: Old
10) Thevelocityofcirculationistheaveragespeedwithwhichmoneyisloanedtobusinessesand
households.Isthepreviousstatementcorrectorincorrect?
Answer: Thestatementisincorrect.Thevelocityofcirculationistheaveragenumberoftimesin
ayearthateachdollarofmoneyisusedtopurchasefinalgoodsandservices.
Status: Old
11) Ifthegrowthrateofthequantityofmoneyis4percentperyear,potentialGDPandrealGDP
growat3percentperyear,andvelocitydoesnotchange,inthelongrunwhatistheinflation
rate?
Answer: Withvelocityconstant,inthelongrun,theinflationrateequalsthegrowthinthe
quantityofmoneyminusthegrowthinpotentialGDP,or
(4percent)-(3percent)=1percent.
Status: Old
12) Ifthegrowthofthequantityofmoneyis5percentperyear,potentialandrealGDPgrowat3
percentperyear,andvelocitydoesnotchange,inthelongrunwhatistheinflationrate?
Answer: Withvelocityconstant,inthelongrun,theinflationrateequalsthegrowthinthe
quantityofmoneyminusthegrowthinpotentialGDP,or
(5percent)-(3percent)=2percent.
Status: Old
Page1168
13) Thequantityofmoneyis$1billion,thepricelevelis1.10,andrealGDPis$10billion.Whatis
thevelocityofmoney?
Answer: Thevelocityofmoneyequals11.
Status: Old
12.8 Essay:TheCostofInflation
1) Inflationactsasataxbecausethegovernmentgainspurchasingpower.Istheprevious
statementcorrectorincorrect?
Answer: Thestatementiscorrect.Inflationdecreasesthepurchasingpowerofpeoplesmoney
andthegovernmentessentiallygainsthepurchasingpower.
Status: Old
2) Explainhowthegovernmentgainsrevenueduringinflation.
Answer: Thegovernmentissuessecuritiesandbuysgoodsandserviceswiththefundsitraises.
WhenthesecuritiesareboughtbytheFed,moneyiscreatedandtheresultisinflation.
ThegovernmentownstheFed,sowhenthegovernmentpaysinteresttotheFed,the
Fedreturnstheinteresttothegovernmentandthereisnooverallcosttothe
governmentfromissuingthesecurities.Asaresult,thegovernmentgetstherevenue
fromsellingthesecurities.
Furthermore,astheincomesofhouseholdsandfirmsincreaseduringinflation,they
moveintoahighermarginaltaxbracketsandconsequentlypayhighertaxes.Thehigher
taxesareanothersourceofgovernmentrevenuefrominflation.
Status: Old
Page1169
3) Whatarethecostsofinflation?Brieflyexplaineach.
Answer: Thecostsofinflationarethetaxcosts,theshoe-leathercosts,theconfusioncosts,and
theuncertaintycosts.Thetaxcostsrefertothepointthatthehighertheinflationrate,
thelowertheafter-taxrealinterestrate.Asaresult,peopledecreasetheirsavingandso
investmentdecreases.Shoe-leathercostsreflectthecostsincurredbypeopletospend
moneyasrapidlyaspossiblewheninflationishighbecausehighinflationmeansthat
thevalueofmoneyisdecreasingrapidly.Confusioncostsaretheresultofinflation
makingitmoredifficulttousemoneytocomparethecostsandbenefitsofactions,such
assavingorinvesting.Finally,uncertaintycostsoccurbecausepeopleareuncertain
aboutthelong-terminflationrate.Whenmakinganinvestmentorsavingdecision,
peoplemusttrytofactorinwhattheinflationratewillbethroughoutthelifeofthe
investmentorsaving,whichisadifficultendeavor.
Status: Old
4) Explaintheshoe-leathercostsofinflation.
Answer: Whenpricesriserapidlyduringanticipatedinflation,peoplewithmoneyspendtime
findinggoodstopurchasetogetridofmoney.Householdsandfirmsalsospendtime
findingotherstobartergoodsforgoodsandspendtimewatchingforeignexchange
ratestobeabletotradefallingvaluedomesticcurrencyforconstantvalueforeign
currencies.Theseactivitiesarecostly,inpartbecausetheyforcepeopletospendtime
dealingwiththerapidlyfallingvalueofmoney.Thecoststhatpeopleincurfrom
runningaroundtogetridofmoneyaretheshoe-leathercosts.
Status: Old
5) Inflationreducesthevelocityofmoneybecausepeoplereducetheirmoneyholdings.Isthe
previousstatementcorrectorincorrect?Explainyouranswer.
Answer: Thestatementisincorrect.Astheinflationraterises,peoplereducetheirmoney
holdingsbyspendingmoneymorerapidly.Asaresult,thevelocityrisesratherthan
falls.
Status: Old
Page1170
6) Georgepurchaseda$10,000bondthatpaysanominalinterestrateof8percentperyear.
Georgesmarginalincometaxrateis28percent.Overthelastyear,inflationwas3percent.
FindGeorgesbefore-taxrealinterestrateandhisafter-taxrealinterestrate.
Answer: Thebefore-taxinterestrateequalsthenominalinterestrateminustheinflationrate,or
8percent-3percent=5percent.Fortheafter-taxrealinterestrate,notethatGeorge
mustpaytaxontheentire8percent(nominal)interest.HenceGeorgepays
(8percentinterestrate28percenttaxrate)=2.24percentastaxes.Thereforehis
after-taxrealinterestrateequalshisbefore-taxrealinterestrate,5percent,minuswhat
hepaysintaxes,or5percent-2.24percent=2.76percentashisafter-taxrealinterest
rate.
Topic: Costofinflation,savingandinvestment
Status: Old
Page1171
Chapter13 AggregateSupplyandAggregateDemand
13.1 AggregateSupply
1) Overthebusinesscycle,factorssuchasthequantityofcapital,humancapitalandtechnology
A) growbutdonotfluctuateasmuchasthequantityoflaboremployed.
B) changedrastically,fluctuatingmorethanthequantityoflaboremployed.
C) fluctuateaboutthesameamountasthequantityoflaboremployed.
D) donotgrowandarethereforenotthesourceofeconomicgrowth.
E) changerandomly,sometimesgrowing,sometimesfalling.
Answer: A
Topic: Aggregatesupplybasics
Status: Old
2) Overabusinesscycle,thequantitiesofcapital,humancapital,andentrepreneurialtalent
A) changegraduallyanddonotfluctuatemuch.
B) cyclealongsiderealGDP.
C) arecompletelyunpredictableandcannotbeforecast.
D) cyclemorethanrealGDP.
E) areconstantanddonotchange.
Answer: A
Topic: Aggregatesupplybasics
Status: Old
3) WhichofthefollowingdoesNOT affectpotentialGDP?
A) thequantityofmoney
B) thequantityoflaboremployed
C) thequantityofcapitalandhumancapital
D) theamountofentrepreneurialtalentavailable
E) thequantityoflandandnaturalresources
Answer: A
Topic: PotentialGDP
Status: Old
Page1172
4) PotentialGDP
A) increasesasthepricelevelincreasesbecausefirmssupplymoregoodsandservices.
B) decreasesasthepricelevelincreasesbecausepeopledemandfewergoodsandservices.
C) mighteitherincreaseordecreaseasthepricelevelincreases,dependingonwhether
aggregatedemandincreasesordecreases.
D) isindependentofthepricelevel.
E) neverchanges.
Answer: D
Topic: PotentialGDP
Status: Old
5) ThelineshowingpotentialGDPisaverticalstraightlinebecause
A) thereisonlyoneleveloffullemploymentatanypointintime.
B) economistsareunsureabouthowtodeterminepotentialGDP.
C) itrepresentstheminimumlevelofrealGDPinarecession.
D) whennothingelsechanges,ahigherpricelevelhasnoeffectonrealGDP.
E) theaggregatesupplycurveisupwardsloping.
Answer: A
Topic: PotentialGDP
Status: Old
6) Ariseinthepricelevelproduces________thepotentialGDPline.
A) arightwardshiftof
B) amovementdownwardalong
C) aleftwardshiftof
D) amovementupwardalong
E) neitherashiftofthepotentialGDPlinenoramovementalong
Answer: D
Topic: PotentialGDP
Status: Old
Page1173
7) Whichofthefollowingistrue?
A) AggregatesupplyisanothernameforpotentialGDP.
B) PotentialGDPincreasesasthepricelevelincreases.
C) Atfullemployment,aggregatesupplyisequaltopotentialGDP.
D) PotentialGDPdecreasesasthepricelevelincreases.
E) ThepotentialGDPlinehasanegativeslope.
Answer: C
Topic: PotentialGDP
Status: Old
8) MovingalongthepotentialGDPline,whenthepricelevelchanges,the
i. realwageratestaysatthefull-employmentequilibriumlevel.
ii. moneywageratechangesbythesamepercentage.
iii. moneypricesofnon-laborresourceschangebythesamepercentage.
A) ionly
B) iionly
C) iiionly
D) iandii
E) i,ii,andiii
Answer: E
Topic: PotentialGDP
Status: Old
9) Therealwageratedefinitelyfallsifthemoneywagerate________andthepricelevel________.
A) remainsconstant;rises
B) remainsconstant;falls
C) rises;falls
D) rises;rises
E) falls;falls
Answer: A
Topic: Realwagerate
Status: Old
Page1174
10) Afallintherealwagerate________firmsprofitsandleadsto________inthequantity
supplied.
A) raises;anincrease
B) raises;adecrease
C) lowers;anincrease
D) lowers;adecrease
E) doesnotchange;nochange
Answer: A
Topic: Realwagerate
Status: Old
11) Theaggregatesupplycurveshowstherelationshipbetween
A) potentialGDPandthepricelevel.
B) potentialGDPandrealGDP.
C) thequantityofrealGDPsuppliedandthepricelevel.
D) thequantityofrealGDPsuppliedandtheinterestrate.
E) potentialGDPandtheaggregatedemandcurve.
Answer: C
Topic: Aggregatesupply,pricelevel
Status: Old
12) Theslopeoftheaggregatesupplycurveshowsthat,allelsethesame,the
A) quantityofrealGDPsuppliedincreasesasthepricelevelincreases.
B) quantityofrealGDPsupplieddecreasesasthepricelevelincreases.
C) quantityofrealGDPsuppliedremainsconstantasthepricelevelincreases.
D) pricelevelremainsconstantasrealGDPincreases.
E) pricelevelremainsconstantaspotentialGDPincreases.
Answer: A
Status: Old
Page1175
13) Otherthingsremainingthesame,anincreaseinthepricelevel
A) increasesaggregatesupply.
B) decreasesaggregatesupply.
C) increasesthequantityofrealGDPsupplied.
D) decreasesthequantityofrealGDPsupplied.
E) neitherchangesaggregatesupplynorchangesthequantityofrealGDPsupplied.
Answer: C
Status: Old
14) MovingalongtheAScurve,whenthepricelevelincreases,the
A) realwageratefalls,andthereisanincreaseinthequantityofrealGDPsupplied.
B) realwageraterises,andthereisanincreaseinthequantityofrealGDPsupplied.
C) nominalwageratefalls,andthereisanincreaseinthequantityofrealGDPsupplied.
D) nominalwageraterises,andthereisadecreaseinthequantityofrealGDPsupplied.
E) realwageraterises,andthereisadecreaseinthequantityofrealGDPsupplied.
Answer: A
Status: Old
15) Movingalongtheaggregatesupplycurve,whenthepricelevelrises,
A) thequantitysupplieddoesnotchangebecausetheaggregatesupplycurveisavertical
line.
B) thequantitysuppliedincreases.
C) thequantitysupplieddecreases.
D) theaggregatedemandcurveshiftsrightward.
E) theaggregatedemandcurveshiftsleftward.
Answer: B
Status: Old
Page1176
16) Anincreaseinthepricelevelleadsto
A) anupwardmovementalongtheaggregatesupplycurve.
B) adownwardmovementalongtheaggregatesupplycurve.
C) aleftwardshiftoftheaggregatesupplycurve.
D) arightwardshiftoftheaggregatesupplycurve.
E) neitheramovementalongtheaggregatesupplycurvenorashiftoftheaggregatesupply
curve.
Answer: A
Status: Old
17) The________,the________isthequantityofrealGDPsupplied.
A) lowerthepricelevel;greater
B) higherthepricelevel;greater
C) greaterthedemandforlabor;smaller
D) lowerthesupplyoflabor;greater
E) loweraggregatedemand;greater
Answer: B
Status: Old
18) Theslopeoftheaggregatesupplycurveshowsthatthe________thepricelevel,the________.
A) higher;greateristhequantityofrealGDPsupplied
B) higher;smalleristhequantityofrealGDPsupplied
C) lower;greateristhequantityofrealGDPsupplied
D) higher;isthequantityofpotentialGDPsupplied
E) lower;isthequantityofpotentialGDPsupplied
Answer: A
Status: Old
Page1177
19) ________increasesthequantityofrealGDPsuppliedandisshownasamovementalongthe
AScurve.
A) Adecreaseinthequantityofmoney
B) Adecreaseinconsumptionexpenditure
C) Afallintheexpectedrateofprofit
D) Ariseinthepricelevel
E) AnincreaseinpotentialGDP
Answer: D
Topic: Aggregatesupplycurve
Status: Old
20) Theaggregatesupplycurveillustratesthatthe
A) higherthepricelevel,thegreaterthequantityofrealGDPsupplied.
B) higherthepricelevel,thesmallerthequantityofrealGDPsupplied.
C) aggregatedemandcurveisnotneededtodeterminetheaggregatepricelevel.
D) priceleveldoesnotaffectthequantityofrealGDPsupplied.
E) amountofpotentialGDPincreaseswhenthepricelevelrises.
Answer: A
Status: Old
21) Becausethereisa________relationshipbetweenthepricelevelandthequantityofrealGDP
supplied,theaggregatesupplycurveis________curve.
A) negative;anupward-sloping
B) positive;adownward-sloping
C) positive;anupward-sloping
D) negative;adownward-sloping
E) positive;avertical
Answer: C
Status: Old
Page1178
22) Theaggregatesupplycurveisa(n)________curvebecauseitrepresentstherelationship
betweenpricelevelandthequantityofrealGDPsupplied,twoitemsthatare________
correlated.
A) upward-sloping;negatively
B) downward-sloping;positively
C) upward-sloping;positively
D) downward-sloping;negatively
E) vertical;not
Answer: C
Status: New
23) Ifthereisariseinthepricelevel,thereis________inthequantityofrealGDPsuppliedanda
movement________alongtheAScurve.
A) adecrease;downward
B) anincrease;upward
C) anincrease;downward
D) adecrease;upward
E) nochange;upward
Answer: B
Status: Old
24) Ifthereisariseinthepricelevel,thereisa(n)________movementalongthe AScurvebecause

thereis________inthequantityofrealGDPsupplied.
A) downward;adecrease
B) upward;anincrease
C) downward;anincrease
D) upward;adecrease
E) upward;nochange
Answer: B
Status: New
Page1179
25) Ifthepricelevelincreasesfrom110.0to115.0,thequantityof
A) realGDPsuppliedwillincrease.
B) realGDPsuppliedwilldecrease.
C) potentialGDPwilldecrease.
D) realGDPdemandedwillincrease.
E) potentialGDPwillincrease.
Answer: A
Status: Old
26) Achangeinthepricelevel
A) shiftstheaggregatesupplycurverightward.
B) shiftsthepotentialGDPline.
C) shiftstheaggregatesupplycurveleftward.
D) changesthequantityofrealGDPsupplied.
E) shiftstheaggregatedemandcurveleftward.
Answer: D
Status: Old
27) ThequantityofrealGDPsuppliedincreaseswhenthepricelevelincreasesbecause
A) investmentincreases.
B) thequantityofmoneyincreases.
C) therealwageratefalls.
D) therealwageraterises.
E) aggregatedemandincreases.
Answer: C
Status: Old
28) ThequantityofrealGDPsupplied________whenthepricelevelincreasesbecause________.
A) decreases;investmentincreases
B) increases;thequantityofmoneyincreases
C) increases;therealwageratefalls
D) decreases;therealwageraterises
E) increases;aggregatedemandincreases
Answer: C
Status: New
Page1180
29) During2010,acountryreportsthatitspricelevelfellandthemoneywageratedidnotchange.
Thesechangesledto
A) ahigherrealwagerate,lowerprofits,andadecreaseinthequantityofrealGDP
supplied.
B) ahigherrealwagerate,higherprofits,andanincreaseinthequantityofrealGDP
supplied.
C) alowerrealwagerate,lowerprofits,andadecreaseinthequantityofrealGDP
supplied.
D) alowerrealwagerate,higherprofits,andanincreaseinthequantityofrealGDP
supplied.
E) nochangeintherealwagerateandanincreaseinaggregatedemand.
Answer: A
Status: Old
30) During2012,acountryreportsthatitspricelevelfellandthemoneywageratedidnotchange.
Thesechangesledtoa(n)________becausetheircountryexperienceda(n)________.
A) decreaseinthequantityofrealGDPsupplied;higherrealwagerateandlowerprofitsfor
firms
B) increaseinthequantityofrealGDPsupplied;higherrealwagerateandlowerprofitsfor
firms
C) decreaseinthequantityofrealGDPsupplied;lowerrealwagerateandlowerprofitsfor
firms
D) increaseinthequantityofrealGDPsupplied;lowerrealwagerateandhigherprofitsfor
firms
E) decreaseinaggregatedemand;economicexpansion
Answer: A
Status: New
31) ThequantityofrealGDPsupplieddecreasesifthepricelevel________becauseit________
profits.
A) rises;increases
B) rises;decreases
C) falls;increases
D) falls;decreases
E) NoneoftheaboveanswersiscorrectbecausetheAS curveisverticalsothatthequantity
ofrealGDPsupplieddoesnotchangewhenthepricelevelchanges.
Answer: D
Status: Old
Page1181
32) Ifprofitsarehighbecausethepricelevelrose,
A) itislikelytheresultofanincreaseintherealwagerate.
B) newbusinessesopenandthequantityofrealGDPsuppliedincreases.
C) businessfailuresriseandthequantityofrealGDPsuppliedincreases.
D) potentialGDPmustbedecreasing.
E) theAScurveshiftsleftward.
Answer: B
Status: Old
33) Whenthepricelevelrises,thequantityofrealGDPsupplied________because________.
A) decreases;newbusinessesopen
B) increases;newbusinessesopen
C) decreases;businessesfailandhavetoshuttheirdoors
D) increases;AScurveshiftsrightward
E) increases;businessesfailandhavetoshuttheirdoors
Answer: B
Status: New
34) Ifthepricelevelrisesbutthemoneywageratedoesnot,thenfirmswillhire________labor
andthequantityofrealGDPsuppliedwill________.
A) more;increase
B) thesameamountof;notchange
C) less;decrease
D) more;notchange
E) less;increase
Answer: A
Status: Old
Page1182
35) Itisprofitabletohiremorelaborifthepricelevel________andthemoneywagerate________.
A) rises;falls
B) falls;rises
C) falls;doesnotchange
D) doesnotchange;rises
E) rises;risesbythesamepercentage
Answer: A
Status: Old
36) Ifthepricelevelfallsandthemoneywageratedoesnotchange,somefirms________and
thereis________.
A) shutdown;aleftwardshiftoftheaggregatesupplycurve
B) startup;arightwardshiftoftheaggregatesupplycurve
C) shutdown;adecreaseinthequantityofrealGDPsupplied
D) shutdown;adecreaseinpotentialGDP
E) startup;anincreaseinpotentialGDP
Answer: C
Status: Old
37) Whenthepricelevelrisesandthemoneywageratedoesnotchange,
A) thequantityofrealGDPsuppliedincreasesasmorebusinessesstartupandpotential
GDPdoesnotchange.
B) thequantityofrealGDPsupplieddecreasesasmorebusinessesfailandpotentialGDP
doesnotchange.
C) profitsfallandmorebusinessesfail.
D) existingbusinessesdonotchangetheirlevelofoutput.
E) thequantityofpotentialGDPincreasesbecausethequantityofrealGDPsupplied
increases.
Answer: A
Status: Old
Page1183
38) Movingalongtheaggregatesupplycurve,
A) thequantityofcapitalusedincreases.
B) onlythepricelevelchanges.
C) technologyadvances.
D) thestockofhumancapitalincreases.
E) therealwagerateisconstant.
Answer: B
Status: Old
39) Ariseinthepricelevelproducesa________theaggregatesupplycurve.
A) rightwardshiftof
B) movementdownwardalong
C) leftwardshiftof
D) movementupwardalong
E) rightwardshiftoftheaggregatesupplycurveandamovementdownwardalong
Answer: D
Status: Old
40) Afallinthepricelevelproducesa________theaggregatesupplycurve.
A) rightwardshiftof
C) leftwardshiftof
E) rightwardshiftoftheaggregatesupplycurveandamovementdownwardalong
Answer: B
Status: Old
Page1184
41) Ifthemoneywageratedoesnotchange,adecreaseinthepricelevelwill________thereal
wagerateand________firmsprofit.
A) raise;decrease
B) raise;increase
C) lower;decrease
D) lower;increase
E) lower;notchange
Answer: A
Topic: Aggregatesupply,realwagerate
Status: Old
42) Themoneywagerateisconstantwhenmovingalong
A) onlytheaggregatesupplycurve.
B) onlytheaggregatesupplycurveandthepotentialGDPline.
C) onlythepotentialGDPline.
D) neithertheaggregatesupplycurvenorthepotentialGDPline.
E) theaggregatesupplycurve,thepotentialGDPline,andtheaggregatedemandcurve.
Answer: A
Status: Old
43) Theaggregatesupplycurveslopes________becausea________inthepricelevelbringsa
________intherealwagerate.
A) upward;rise;rise
B) downward;fall;rise
C) upward;rise;fall
D) upward;fall;fall
E) downward;rise;rise
Answer: C
Status: Old
Page1185
44) Alongtheaggregatesupplycurve,thequantityofrealGDPsuppliedincreaseswhentheprice
levelrisesbecause
A) profitsdecrease.
B) therealwageratefalls.
C) therealwageraterises.
D) therealwagerateandprofitsbothfall.
E) thedemandforthegoodsandservicesincreases.
Answer: B
Status: Old
45) Afallinthepricelevelbringsa________intherealwageratethat________profitsandcan
leadto________.
A) rise;reduces;firmsgoingoutofbusiness
B) rise;reduces;newfirmsenteringbusiness
C) fall;increases;firmsgoingoutofbusiness
D) rise;increases;newfirmsenteringbusiness
E) fall;decreases;newfirmsenteringbusiness
Answer: A
Status: Old
46) Ariseinthepricelevelbringsa________intherealwageratethat________profitswhich
leadsto________production.
A) rise;reduces;decreasing
B) rise;reduces;increasing
C) fall;increases;increasing
D) rise;increases;decreasing
E) fall;decreases;decreasing
Answer: C
Status: Old
Page1186
47) Afallinthepricelevelbringsa________intherealwageratethat________profitswhich
leadsto________.
A) rise;reduces;firmsrestartingproduction
B) rise;reduces;firmstemporarilyshuttingdown
C) fall;increases;firmstemporarilyshuttingdown
D) rise;increases;firmsrestartingproduction
E) rise;increases;firmstemporarilyshuttingdown
Answer: B
Status: Old
48) Whichofthefollowingchangesaggregatesupplyandshiftstheaggregatesupplycurve?
i. changeinthepricelevel
ii. changeinpotentialGDP
iii. changeinthemoneywagerate
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: D
Topic: Changesinaggregatesupply
Status: Old
49) Changesinwhichofthefollowingshiftstheaggregatesupplycurve?
i. thepricelevel
ii. themoneywagerate
iii. potentialGDP
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: D
Status: Old
Page1187
50) Anincreaseinthemoneywagerate________andanincreaseinthemoneypricesofraw
materials________.
A) shiftstheAScurverightward;shiftstheAS curverightward
B) shiftstheAScurveleftward;shiftstheAS curveleftward
C) shiftstheAScurverightward;shiftstheAS curveleftward
D) shiftstheAScurveleftward;shiftstheAS curverightward
E) shiftstheAScurveleftward;doesnotshifttheAS curve
Answer: B
Status: Old
51) ChangesinwhichofthefollowingdoNOT shifttheAS curve?

i. thepricelevel
ii. potentialGDP
iii. themoneywagerate
A) ionly
B) iionly
C) iiionly
D) iandii
E) i,ii,andiii
Answer: A
Status: Old
52) Achangeinthepricelevelbringsa________theaggregatesupplycurve,NOTa________the
aggregatesupplycurve.
A) shiftin;movementalong
B) verticaldisplacementof;changeintheslopeof
C) movementalong;shiftin
D) changeintheslopeof;horizontaldisplacementof
E) shiftin;changeintheslopeof
Answer: C
Status: Old
Page1188
53) WhichofthefollowingchangesaggregatesupplyandshiftstheAS curve?

i. achangeinthepriceofamajorresource
ii. increasesintheamountofcapital
iii. achangeinthemoneyincomeofconsumers
A) ionly
B) iionly
C) iiionly
D) iandii
E) i,ii,andiii
Answer: D
Status: Old
54) Ifthecostsofproductiondecrease,thereis
A) anincreaseinaggregatesupplyandtheAS curveshiftsrightward.
B) adecreaseinaggregatesupplyandthe AS curveshiftsleftward.
C) anincreaseinthequantityofrealGDPsuppliedandamovementupalongthe AS curve.
D) adecreaseinthequantityofrealGDPsuppliedandamovementdownalongthe AS
curve.
E) anincreaseinaggregatesupplyandtheAS curveshiftsleftward.
Answer: A
Topic: Shiftsintheaggregatesupplycurve
Status: Old
55) Ifthecostsofproductionincrease,thereis
A) anincreaseinaggregatesupplyandtheAS curveshiftsrightward.
B) adecreaseinaggregatesupplyandthe AS curveshiftsleftward.
C) anincreaseinthequantityofrealGDPsuppliedandamovementupalongthe AS curve.
D) adecreaseinthequantityofrealGDPsuppliedandamovementdownalongthe AS
curve.
E) adecreaseinaggregatesupplyandthe AS curveshiftsrightward.
Answer: B
Status: Old
Page1189
56) Whichofthefollowingshiftstheaggregatesupplycurverightward?
i. Themoneywageraterises.
ii. PotentialGDPincreases.
iii. Governmentexpenditureongoodsandservicesincreases.
A) ionly
B) iionly
C) iiionly
D) iiandiii
E) i,ii,andiii
Answer: B
Status: Old
57) Whichofthefollowingbestdescribestheeffectontheaggregatesupplycurveifpolitical
negotiationsresultinasubstantialdecreaseinthepriceofoil?
A) TheAScurveshiftsrightward.
B) ThereisnochangetotheAS curve.
C) TheAScurvedoesnotshiftbutthereisanupwardmovementalongit.
D) TheAScurvedoesnotshiftbutthereisadownwardmovementalongit.
E) TheAScurveshiftsleftward.
Answer: A
Topic: Changesinaggregatesupply,moneypricesofresources
Status: Old
58) Theaggregatesupplycurveshiftsrightwardwhen
A) potentialGDPdecreases.
B) themoneywageratefalls.
C) incometaxesincrease.
D) governmentpurchasesincrease.
E) themoneywageraterises.
Answer: B
Topic: Changesinaggregatesupply,moneywagerate
Status: Old
Page1190
59) Theaggregatesupplycurveshifts
A) rightwardifpotentialGDPdecreases.
B) rightwardifthemoneywageratefalls.
C) rightwardifthemoneywageraterises.
D) leftwardifpotentialGDPincreases.
E) leftwardiftheaggregatedemandcurveshiftsleftward.
Answer: B
Status: Old
60) Afallinthemoneywagerate________aggregatesupplyand________.
A) decreases;shiftstheAScurverightward
B) increases;shiftstheAScurveleftward
C) increases;shiftstheAScurverightward
D) decreases;shiftstheAScurveleftward
E) doesnotchange;doesnotshifttheAS curve
Answer: C
Status: Old
61) Anincreaseinthemoneywagerateleadsto
A) anupwardmovementalongtheaggregatesupplycurve.
B) adownwardmovementalongtheaggregatesupplycurve.
C) aleftwardshiftoftheaggregatesupplycurve.
D) arightwardshiftoftheaggregatesupplycurve.
E) aleftwardshiftoftheaggregatedemandcurve.
Answer: C
Status: Old
62) Ariseinthemoneywagerateshiftsthe
A) ADcurverightward.
B) ADcurveleftward.
C) AScurverightward.
D) AScurveleftward.
E) potentialGDPcurverightward.
Answer: D
Status: Old
Page1191
63) Ifthemoneywagerateincreases,thenthe
A) aggregatesupplycurveshiftsrightward.
C) potentialGDPdecreases.
D) aggregatesupplycurveshiftsleftward.
E) aggregatedemandcurveshiftsleftward.
Answer: D
Status: Old
64) ________decreasesaggregatesupply.
A) AnincreaseinpotentialGDP
B) Anincreasethequantityofcapital
C) Ariseinthepricelevel
D) Ariseinthemoneywagerate
E) Afallinthemoneywagerate
Answer: D
Status: Old
65) Whichofthefollowingshiftstheaggregatesupplycurveleftward?
A) increaseinpotentialGDP
B) increaseinthemoneywagerate
C) increaseinrealGDP
D) decreaseinthemoneypriceofoil
E) afallinthepricelevel
Answer: B
Status: Old
Page1192
66) Whichofthefollowingstatementsistrue?
A) AnincreaseinpotentialGDPincreasesaggregatesupplyandshiftsthe AScurve
leftward.
B) AdecreaseinpotentialGDPdecreasesaggregatesupplyandshiftsthe AScurve
leftward.
C) AnincreaseinthemoneywagerateshiftstheAS curverightward.
D) AfallinthepricelevelshiftstheAS curveleftward.
E) AnincreaseinthemoneywagerateincreasespotentialGDP.
Answer: B
Topic: Changesinaggregatesupply,potentialGDP
Status: Old
67) Whichofthefollowingshiftstheaggregatesupplycurveleftward?
A) adecreaseinpotentialGDP
B) afallinthemoneywagerate
C) adecreaseinthepricelevel
D) afallintherealwagerate
E) anincreaseinpotentialGDP
Answer: A
Status: Old
68) AnincreaseinpotentialGDP________aggregatesupplyand________.
A) decreases;shiftstheAScurverightward
B) increases;shiftstheAScurveleftward
C) increases;shiftstheAScurverightward
D) decreases;shiftstheAScurveleftward
E) hasnoeffecton;doesnotshifttheAS curve
Answer: C
Status: Old
Page1193
69) IfpotentialGDPincreases,thenthe
A) aggregatesupplycurveshiftsleftward.
B) aggregatesupplycurveshiftsrightward.
C) realwagerateincreases.
D) realwageratefalls.
E) aggregatedemandcurveshiftsrightward.
Answer: B
Status: Old
70) Whichofthefollowingshiftstheaggregatesupplycurverightward?
A) increaseinpotentialGDP
B) increaseinthemoneywagerate
C) increaseinrealGDP
D) increaseinthemoneypriceofoil
E) increaseinconsumersincomes
Answer: A
Status: Old
71) IfpotentialGDPincreases,
A) aggregatesupplydoesnotchange.
B) thequantityofaggregatesupplydecreases.
C) aggregatesupplyincreases.
D) thepricelevelrises.
E) themoneywageratemusthavefallen.
Answer: C
Status: Old
Page1194
72) WhenpotentialGDPincreases,thepotentialGDPline________,andtheaggregatesupply
curve________.
A) shiftsrightward;shiftsrightward
B) shiftsrightward;shiftsleftward
C) shiftsleftward;shiftsrightward
D) shiftsleftward;shiftsleftward
E) shiftsrightward;doesnotshift
Answer: A
Topic: Changesinaggregatesupply,technology
Status: Old
73) Anincreasein________increasespotentialGDPand________aggregatesupply.
A) technology;increases
B) technology;decreases
C) themoneywagerate;increases
D) themoneypriceofoil;decreases
E) themoneywagerate;decreases
Answer: A
Status: Old
74) Anincreaseintechnology________potentialGDPand________aggregatesupply.
Answer: A
Status: Old
Page1195
75) Atechnologicaladvance________potentialGDP,________aggregatesupply,andshiftsthe
aggregatesupplycurve________.
A) increases;increases;leftward
B) decreases;decreases;leftward
C) increases;increases;rightward
D) decreases;increases;rightward
E) increases;decreases;leftward
Answer: C
Status: Old
76) ThechangeinpotentialrealGDPandaggregatesupplyshowninthegraphabovecanbea
resultof
A) anincreaseintherealwagerate.
B) anincreaseinthequantityofcapital.
C) adecreaseinthemoneywagerate.
D) adecreaseinthemoneypriceofoil.
E) afallinthepricelevel.
Answer: B
Status: Old
Page1196
77) Asthemoneywagerateincreases,
B) potentialGDPdecreases.
C) aggregatesupplyincreases.
D) aggregatesupplydecreases.
E) aggregatesupplyandpotentialGDPdonotchange.
Answer: D
Status: Old
78) Thechangereflectedintheabovefiguremightbearesultof
A) adecreaseinthemoneywagerate.
B) adecreaseintherealwagerate.
C) anincreaseinthemoneywagerate.
D) anincreaseintherealwagerate.
E) ariseinthepricelevel.
Answer: A
Status: Old
Page1197
79) Thechangereflectedintheabovefiguremightbearesultof
A) adecreaseinthequantityofcapital.
B) anincreaseinthequantityoflabor.
C) ariseinthemoneywagerate.
D) adecreaseinthemoneypricesofresourcesotherthanlabor.
E) afallinthepricelevel.
Answer: C
Status: Old
80) MovingalongthepotentialGDPline,themoneywageratechangesbythesamepercentageas
thechangeinthepricelevelsothattherealwagerate
A) increases.
B) decreases.
C) staysatthefull-employmentequilibriumlevel.
D) mighteitherincreaseordecrease.
E) staysthesame,thoughnotnecessarilyatthefull-employmentequilibriumlevel.
Answer: C
Topic: PotentialGDP
Status: Old
Page1198
81) Theaggregatesupplycurveis
A) upwardsloping.
B) downwardsloping.
C) averticalline.
D) ahorizontalline.
E) U-shaped.
Answer: A
Status: Old
82) Whenthepricelevelfalls,
A) theAScurveshiftsrightwardbutthepotentialGDPlinedoesnotshift.
B) thereisamovementupwardalongtheAS curve.
C) theAScurveshiftsleftwardbutthepotentialGDPlinedoesnotshift.
D) thereisamovementdownwardalongtheAS curve.
E) boththepotentialGDPlineandtheAS curveshiftleftward.
Answer: D
Status: Old
83) Asthepricelevelrisesrelativetocostsandtherealwageratefalls,profits________andthe
numberoffirmsinbusiness________.
A) increase;increases
B) increase;decreases
C) decrease;increases
D) decrease;decreases
E) donotchange;donotchange
Answer: A
Status: Old
Page1199
84) WhenpotentialGDPincreases,
A) theAScurveshiftsrightward.
B) thereisamovementupalongtheAS curve.
C) theAScurveshiftsleftward.
D) thereisamovementdownalongtheAS curve.
E) thereisneitheramovementalongnorashiftinthe AS curve.
Answer: A
Status: Old
85) Ifthemoneywageraterises,
A) theAScurveshiftsrightward.
B) thereisamovementupalongtheAS curve.
C) theAScurveshiftsleftward.
D) thereisamovementdownalongtheAS curve.
E) thereisneitheramovementalongorashiftintheAS curve.
Answer: C
Status: Old
13.2 AggregateDemand
1) Ariseinthepricelevel
A) decreasesaggregatedemand.
B) increasesaggregatedemand.
C) decreasesthequantityofrealGDPdemanded.
D) increasesthequantityofrealGDPdemanded.
E) hasnoeffectonaggregatedemandoronthequantityofrealGDPdemanded.
Answer: C
Topic: Aggregatedemand
Status: Old
Page1200
A) ThepriceleveldoesnotaffectthelevelofrealGDPdemanded.
B) Thelowerthepricelevel,thegreaterthequantityofrealGDPdemanded.
C) Thelowerthepricelevel,themoretheaggregatedemandcurveshiftsrightward.
D) Thelowerthepricelevel,themoretheaggregatedemandcurveshiftsleftward.
E) Thehigherthepricelevel,themoretheaggregatedemandcurveshiftsrightward.
Answer: B
Topic: Aggregatedemand
Status: Old
3) TheADcurveisagraphdepictingthe
A) relationshipbetweenthepricelevelandthequantityofrealGDPsupplied.
B) businesscycleduringexpansionsandrecessions.
C) relationshipbetweenthepricelevelandthequantityofrealGDPdemanded.
D) relationshipbetweenthepricelevelandpotentialGDP.
E) relationshipbetweentheaggregatequantityofrealGDPdemandedandtheaggregate
quantityofrealGDPsupplied.
Answer: C
Topic: Aggregatedemandcurve
Status: Old
4) Theaggregatedemandcurveillustratestherelationshipbetween
A) thepricelevelandthequantityofgoodsdemandedbyhouseholds,firms,government,
andforeigners.
B) therealwagerateandthehoursoflabordemandedbyfirms.
C) thepricelevelandthepotentialquantitydemandedofrealGDP.
D) thepricelevelandthequantityofgoodssuppliedbyfirms.
E) thepricelevelandthepotentialdemandforrealGDP.
Answer: A
Status: Old
Page1201
5) Whichofthefollowingproducesamovementalongtheaggregatedemandcurveanddoesnot
shifttheaggregatedemandcurve?
A) achangeinforeignincomes
B) achangeinthepricelevel
C) achangeinmonetarypolicy
D) achangeinexpectationsaboutthefuture
E) achangeingovernmentexpendituresongoodsandservices
Answer: B
Status: Old
6) Achangeinthepricelevelproducesa________theaggregatedemandcurve.
i. shiftin
ii. changeintheslopeof
iii. movementalong
A) ionly
B) iionly
C) iiionly
D) iandiii
Answer: C
Status: Old
7) Afallinthepricelevelproducesa________theaggregatedemandcurve.
A) rightwardshiftof
C) leftwardshiftof
E) changeintheslopeof
Answer: B
Status: Old
8) Anincreaseinthepricelevelleadsto
A) arightwardshiftoftheaggregatedemandcurve.
B) aleftwardshiftoftheaggregatedemandcurve.
C) amovementupwardalongtheaggregatedemandcurve.
D) amovementdownwardalongtheaggregatedemandcurve.
E) neitherashiftintheaggregatedemandcurvenoramovementalongit.
Answer: C
Status: Old
Page1202
E) iandii
9) Ifthepricelevelincreases,thereis________theAD curveandthequantityofrealGDP
demanded________.
A) amovementupwardalong;increases
B) amovementdownwardalong;increases
C) amovementupwardalong;decreases
D) aleftwardshiftin;decreases
E) nochangein;doesnotchange
Answer: C
Status: Old
10) Ariseinthepricelevel________thebuyingpowerofmoneyand________thequantityofreal
GDPdemanded.
A) doesnotaffect;increases
B) lowers;increases
C) raises;decreases
D) lowers;decreases
E) doesnotaffect;doesnotchange
Answer: D
Topic: Buyingpowerofmoney
Status: Old
11) Ariseinthepricelevelbringsa________inthebuyingpowerofmoneythat________
consumptionexpendituresandcausesthequantityofrealGDPdemandedto________.
A) rise;decreases;decrease
B) fall;decreases;decrease
C) fall;increases;increase
D) rise;increases;increase
E) fall;decreases;increase
Answer: B
Status: Old
Page1203
12) Whenthepricelevelincreasesthereis________movementalongtheaggregatedemandcurve
becausethebuyingpowerofmoney________.
A) anupward;decreases
B) adownward;decreases
C) anupward;increases
D) adownward;increases
E) no;doesnotchange
Answer: A
Status: Old
13) Lastyearthepricelevelincreasedfrom118to122.Theincreaseinthepricelevelleadstoa
decreasein
A) thebuyingpowerofmoney.
B) therealinterestrate.
C) themoneywagerate.
D) thepriceofdomesticgoodsandservicesrelativetoforeigngoodsandservices.
E) potentialGDP.
Answer: A
Status: Old
14) Atapricelevelof100,Johnhassavingsequalto$20,000.Ifthepricelevelincreasesto130,the
buyingpowerofJohnssavingsisapproximately
A) $12,780.
B) $15,400.
C) $20,000.
D) $26,000.
E) $30,000.
Answer: B
Status: Old
15) Ayearoveryear________inthebuyingpowerofmoneymeansthat definitely________from

oneyeartothenext.
A) decrease;thepricelevelincreased
B) increase;thepricelevelincreased
C) decrease;inflationincreased
D) increase;inflationincreased
E) BothanswersAandCarecorrect.
Answer: A
Status: Old
Page1204
16) Ifthepriceleveldoubles,itwill
A) increasethequantityofmoney.
B) havenoeffectonthebuyingpowerofmoney.
C) decreasethebuyingpowerofmoney.
D) increasepotentialGDP.
E) decreasepotentialGDP.
Answer: C
Status: Old
17) Whenthepricelevelrisesandincreasesthedemandformoney,thenominalinterestrate
________andtherealinterestrate________.
A) rises;rises
B) rises;falls
C) falls;rises
D) falls;falls
Answer: A
Status: Revised
18) Intheshortrun,ariseinthepricelevelbringsa________intherealinterestratethat________
investment,bringing________inthequantityofrealGDPdemanded.
A) rise;decreases;adecrease
B) fall;decreases;adecrease
C) fall;increases;anincrease
D) rise;increases;anincrease
E) rise;decreases;anincrease
Answer: A
Status: Old
Page1205
19) AreasonwhyanincreaseinthepriceleveldecreasesthequantityofrealGDPdemandedis
that
A) thebuyingpowerofmoneyincreases.
C) thepriceofdomesticgoodsandservicesincreasesrelativetoforeigngoodsandservices.
D) theinflationratedecreases.
E) potentialGDPdecreases.
Answer: C
Topic: Relativepriceofdomesticandforeigngoods
Status: Old
20) AriseintheU.S.pricelevelbringsa________inthepriceofU.S.exportsrelativetoimports
that________exportsofU.S.goods,bringing________inthequantityofU.S.realGDP
demanded.
A) rise;decreases;adecrease
B) fall;decreases;adecrease
C) fall;increases;anincrease
D) rise;increases;anincrease
E) rise;increases;adecrease
Answer: A
Status: Old
21) WhentheU.S.pricelevelrisesrelativetoothernationspricelevels,then
A) U.S.firmsprofitsincreaseandtheaggregatedemandcurveshiftsrightward.
B) U.S.exportsincreaseandtheaggregatedemandcurveshiftsrightward.
C) U.S.exportsdecrease,U.S.importsincrease,andtheaggregatedemandcurveshifts
leftward.
D) U.S.exportsdecrease,U.S.importsincrease,andthereisamovementupwardalongthe
aggregatedemandcurve.
E) U.S.exportsdecrease,U.S.importsincrease,andtheaggregatedemandcurveshifts
rightward.
Answer: D
Status: Old
Page1206
22) SherrilivesinCanadaandisconsideringbuyinganewsofa.IfthepricelevelinCanadafalls
andthepricelevelintheUnitedStatesdoesnotchange,Canadianmanufacturedsofasare
relatively
A) moreexpensive,soSherriwilllikelypurchaseaU.S.manufacturedsofa.
B) moreexpensive,soSherriwilllikelypurchaseaCanadianmanufacturedsofa.
C) lessexpensive,soSherriwilllikelypurchaseaU.S.manufacturedsofa.
D) lessexpensive,soSherriwilllikelypurchaseaCanadianmanufacturedsofa.
E) BothanswersBandDcouldbecorrectdependingonwhetherU.S.manufacturedsofas
wereinitiallymoreexpensiveorlessexpensivethanCanadiansofas.
Answer: D
Status: Old
23) Whenthedomesticpricelevelincreases,exportsdecreaseandimportsincrease.Otherthings
thesame,thischangeisillustratedbya
A) movementupwardalongtheaggregatedemandcurve.
B) movementdownwardalongtheaggregatedemandcurve.
C) rightwardshiftoftheaggregatedemandcurve.
D) leftwardshiftoftheaggregatedemandcurve.
E) rightwardshiftoftheaggregatesupplycurve.
Answer: A
Status: Old
24) Theaggregatedemandcurveshiftswhenanyofthefollowingfactorschange EXCEPT

A) foreignincome.
B) thepricelevel.
C) monetarypolicy.
D) expectationsaboutthefuture.
E) fiscalpolicy.
Answer: B
Topic: Changesinaggregatedemand
Status: Old
Page1207
25) WhichofthefollowingdoesNOT shifttheaggregatedemandcurve?

A) achangeinthemoneywage
B) achangeinexpectationsaboutthefuture
C) achangeinmonetarypolicy
D) achangeinfiscalpolicy
E) achangeinforeignincome
Answer: A
Status: Old
26) AllofthefollowingshifttheaggregatedemandcurvetotherightEXCEPT
A) anincreaseintaxes.
B) anexpansionoftheglobaleconomy.
C) anincreaseinforeignincome.
D) anincreaseingovernmentexpenditure.
E) anincreaseinexpectedfutureprofit.
Answer: A
Status: Old
27) Allofthefollowingactionsshifttheaggregatedemandcurvetotheright EXCEPT

A) theFedraisestheinterestrate.
B) anincreaseingovernmenttransferpayments.
C) inflationisexpectedtorisenextyear.
D) anincreaseinexpectedfutureprofit.
E) adecreaseintaxes.
Answer: A
Status: Old
28) Ifthereisanincreaseinexpectedfutureincome,then
A) theaggregatedemandcurveshiftsrightward.
B) theaggregatedemandcurveshiftsleftward.
C) thereisanupwardmovementalongtheaggregatedemandcurve.
D) thereisadownwardmovementalongtheaggregatedemandcurve.
E) theaggregatedemandcurvebecomessteeper.
Answer: A
Topic: Changesinaggregatedemand,expectations
Status: Old
Page1208
29) Aggregatedemand
A) decreasesifexpectedfutureincomerises.
B) increasesiftheexchangeraterises.
C) increasesifgovernmentexpendituresdecrease.
D) increasesiftheexpectedinflationrateincreases.
E) increasesifaggregatesupplyincreases.
Answer: D
Status: Old
30) Aggregatedemand________iftheexpectedinflationrateincreasesbecause________.
A) increases;peopleexpecttoreceivecostoflivingraisesastheinflationbegins
B) decreases;peoplewaitfortheexchangeratestochangebeforemakingpurchases
C) doesnotchange;inflationdoesnotaffecttheaggregatedemandcurve
D) increases;peoplewanttomakepurchasesnowbeforethepriceofgoodsandservices
begintoincrease
E) decreases;peoplewanttowaitforthepriceofgoodsandservicesbegintodecrease
Answer: D
Status: New
31) Ifpeoplesexpectationsaboutfutureincomeimprovesotheythinktheirfutureincomewillbe
higherthanpreviouslybelieved,thentheADcurve
A) willnotchangeuntilincomeactuallyrises.
B) willshiftleftwardbecausepeoplewillspendlessnow.
C) willshiftrightwardbecausepeoplewillincreasespendingnow.
D) andtheAScurvewillbothshiftleftwardbecausepeoplewillincreasetheirsaving.
E) willnotshift,butpotentialGDPwillincrease.
Answer: C
Status: Old
Page1209
32) Iffirmsexpectationsaboutthefuturebecomepessimisticsothattheythinkfutureprofitswill
belower,then
A) aggregatedemanddecreasesandthe AD curveshiftsleftward.
B) aggregatedemandincreasesandthe AD curveshiftsrightward.
C) thequantityofrealGDPdemandeddecreases,andthereisamovementupalongthe AD
curve.
D) thequantityofrealGDPdemandedincreases,andthereisamovementdownalongthe
ADcurve.
E) theaggregatedemandcurvedoesnotshift,butpotentialGDPdecreases.
Answer: A
Status: Old
33) Whichofthefollowingdecreasesaggregatedemandandshiftsthe AD curveleftward?

A) ataxcut
B) adecreaseinpricelevel
C) adecreaseingovernmentexpenditures
D) adecreaseinthepriceofexportedgoodsandservices
E) adecreaseinpotentialGDP
Answer: C
Topic: Changesinaggregatedemand,fiscalpolicy
Status: Old
34) Anincreaseingovernmentexpenditureongoodsandservicesleadstothe
A) aggregatesupplycurveshiftingrightward.
B) aggregatesupplycurveshiftingleftward.
C) aggregatedemandcurveshiftingrightward.
D) aggregatedemandcurveshiftingleftward.
E) potentialGDPincreasing.
Answer: C
Status: Old
Page1210
35) Aggregatedemand________andshiftsthe AD curve________when________.

A) increases;rightward;governmentexpenditureincreases
B) increases;rightward;taxesincrease
C) increases;rightward;futureexpectedprofitdecreases
D) decreases;leftward;foreignincomeincreases
E) increases;leftward;governmentexpenditureincreases
Answer: A
Status: Old
36) Ataxincrease
A) decreasesaggregatedemandandthe AD curveshiftsleftward.
B) increasesaggregatedemandandthe AD curveshiftsrightward.
C) decreasesthequantityofrealGDPdemandedandthereisamovementupalongthe AD
curve.
D) increasesthequantityofrealGDPdemandedandthereisamovementdownalongthe
ADcurve.
E) doesnotshiftorleadtoamovementalongtheaggregatedemandcurve.
Answer: A
Status: Old
37) Whichofthefollowingshiftstheaggregatedemandcurverightward?
A) adecreaseinexpectedfutureincome
B) adecreaseinthepricelevel
C) ataxcut
D) adecreaseinthequantityofmoney
E) adecreaseingovernmentexpendituresongoodsandservices
Answer: C
Status: Old
Page1211
38) Ataxcut________aggregatedemandand________.
A) decreases;shiftstheADcurverightward
B) increases;shiftstheADcurveleftward
C) increases;shiftstheADcurverightward
D) decreases;shiftstheADcurveleftward
E) doesnotchange;doesnotshifttheAD curve
Answer: C
Status: Old
A) Anincreaseinpeoplesexpectedfutureincomeshiftstheaggregatedemandcurve
leftward.
B) Ataxincreaseshiftstheaggregatedemandcurveleftward.
C) AnincreaseinpotentialGDPshiftstheaggregatedemandcurverightward.
D) Anincreaseinexportsshiftstheaggregatedemandcurveleftward.
E) Thehigherthepricelevel,thelargeristhequantityofrealGDPdemanded.
Answer: B
Status: Old
40) Iftaxesarecut,thereis
A) anincreaseinaggregatedemandandtheAD curveshiftsrightward.
B) adecreaseinaggregatedemandandthe AD curveshiftsleftward.
C) anincreaseinthequantityofrealGDPdemandedandamovementupalongthe AD
curve.
D) adecreaseinthequantityofrealGDPdemandedandamovementdownalongthe AD
curve.
E) nochangeinaggregatedemand,onlyachangeinpotentialGDP.
Answer: A
Status: Old
Page1212
41) Whichofthefollowingdecreasesaggregatedemandandshiftsthe AD curveleftward?

A) ataxcut
B) aninterestratehike
C) anincreaseinquantityofmoney
D) anincreaseingovernmentexpendituresongoodsandservices
E) adecreaseinpotentialGDP
Answer: B
Topic: Changesinaggregatedemand,monetarypolicy
Status: Old
42) Ifacountryistryingtorecoverfromarecentrecession,itisunlikelytheirgovernmentofficials
willdecideto________becauseitwould________.
A) lowerinterestrates;decreaseaggregatedemand
B) raiseinterestrates;decreaseaggregatedemand
C) raiseinterestrates;increaseaggregatedemand
D) instituteataxcut;increaseaggregatedemand
E) increasetaxes;increaseaggregatedemand
Answer: B
Status: New
43) IftheFedincreasesthequantityofmoney,then
A) aggregatedemanddecreasesandthe AD curveshiftsleftward.
B) aggregatedemandincreasesandthe AD curveshiftsrightward.
C) thequantityofrealGDPdemandeddecreasesandthereisamovementupalongthe AD
curve.
D) thequantityofrealGDPdemandedincreasesandthereisamovementdownalongthe
ADcurve.
E) boththeaggregatedemandcurveandtheaggregatesupplycurveshiftleftward.
Answer: B
Status: Old
Page1213
44) Anincreaseinthequantityofmoney________aggregatedemandand________.
A) increases;shiftstheaggregatedemandcurverightward
B) increases;shiftstheaggregatedemandcurveleftward
C) decreases;shiftstheaggregatedemandcurverightward
D) decreases;shiftstheaggregatedemandcurveleftward
E) increases;rotatestheaggregatedemandcurvesoitissteeper
Answer: A
Status: Old
A) Anincreaseinthepricelevelshiftstheaggregatedemandcurverightward.
B) Anincreaseinthepricelevelshiftstheaggregatedemandcurveleftward.
C) Anincreaseinthequantityofthemoneyshiftstheaggregatedemandcurverightward.
D) Anincreaseintherealinterestrateshiftstheaggregatedemandcurverightward.
E) Anincreaseinthemoneywagerateshiftstheaggregatedemandcurveleftward.
Answer: C
Status: Old

A) decreases;leftward;governmentexpenditureincreases
B) increases;rightward;taxesincrease
C) decreases;leftward;foreignincomesdecrease
D) decreases;rightward;governmentexpenditureincreases
E) increases;leftward;taxesdecrease
Answer: C
Topic: Changesinaggregatedemand,foreignincome
Status: Old

A) decreases;leftward;thepricelevelrises
B) increases;leftward;taxesincrease
C) increases;rightward;foreignincomesincrease
D) decreases;rightward;governmentexpenditureincreases
E) increases;rightward;taxesincrease
Answer: C
Status: Old
Page1214
48) OneoftheinfluencesthattheworldeconomyhasonU.S.aggregatedemandcomesfrom
changesin
A) worldopinion.
B) foreignincome.
C) foreigngovernments.
D) worldpollution.
E) foreignaid.
Answer: B
Status: Old
49) IfEuropeaneconomiesenterarecession,
A) U.S.aggregatedemanddecreasesandtheU.S.AD curveshiftsleftward.
B) U.S.aggregatedemandincreasesandtheU.S.AD curveshiftsrightward.
C) thequantityofrealGDPdemandedintheUnitedStatesdecreasesandthereisa
movementdownalongtheU.S.ADcurve.
D) thequantityofrealGDPdemandedintheUnitedStatesincreasesandthereisa
movementupalongtheU.S.ADcurve.
E) U.S.aggregatedemanddecreasesandtheU.S.AD curveshiftsrightward.
Answer: A
Status: Old
50) Adecreaseinforeignincome________exportsofU.S.-madegoods,soaggregatedemand
________andtheaggregatedemandcurveshifts________.
A) increases;increases;rightward
B) decreases;decreases;leftward
C) decreases;increases;rightward
D) increases;increases;leftward
E) decreases;decreases;rightward
Answer: B
Status: Old
Page1215
51) Supposetheexchangerateintheyear2010was4yuanperdollarandin2011theexchange
ratefellto3yuanperdollar.IfthepriceofaChinesesweaterwas120yuaninbothyears,the
newdollarpricein2011wouldbe________andimportsofChinesesweaterswould________.
A) $40;increase
B) $30;decrease
C) $40;decrease
D) $30;increase
E) $40;staythesamebecausethepricestayedthesameat120yuan
Answer: C
Topic: Changesinaggregatedemand,foreignexchangerate
Status: Old
52) Inthefigureabove,asthepricelevelincreases,theaggregatedemandcurvewill
A) shiftfromAD 1 toAD 3 .
B) shiftfromAD 1 toAD 2 .
C) notshift,buttheaggregatedemandcurvewillchangesothatitispositivelysloped.
D) notshift.
E) shiftfromAD 1 toAD 3 andthenbacktoAD 1 .
Answer: D
Status: Old
Page1216
53) Inthefigureabove,theshiftintheaggregatedemandcurvefrom AD 1 toAD 2 couldberesult

of
A) afallinthepricelevel.
B) adecreaseinthequantityofmoney.
C) anincreaseingovernmentexpendituresongoodsandservices.
D) anincreaseintaxes.
Answer: C
Status: Old
54) Inthefigureabove,theshiftintheaggregatedemandcurvefrom AD 1 toAD 3 couldbethe

resultof
A) adecreaseintherealinterestrate.
B) adecreaseinthebuyingpowerofmoney.
C) anincreasedexpectationofarecessionthatlowerstheexpectedrateofprofitfrom
investment.
D) adecreaseintheforeignexchangerate.
E) anincreaseinthepricelevel.
Answer: C
Status: Old

resultof
A) afallinthepricelevel.
B) ataxcut.
C) anincreasedexpectationofarecessionthatlowerspeoplesexpectedfutureincomes.
D) adecreaseintheforeignexchangerate.
Answer: C
Status: Old
Page1217

resultofanincreasein
A) expectedfutureincome.
B) theforeignexchangerate.
C) foreignincomes.
D) thepricelevel.
E) aggregatesupply.
Answer: B
Status: Old
57) Achangeinanycomponentofaggregatedemandcreatesalargerchangeinoverallaggregate
demand.Thisisthe________effect,anditmeans,forexample,thata(n)________in
consumptionwillcauseanevenlarger________in AD.
A) multiplier;increase;increase
B) liquidity;decrease;decrease
C) growth;increase;decrease
D) multiplier;decrease;decrease
E) liquidity;increase;increase
Answer: D
Topic: Aggregatedemandmultiplier
Status: Old
58) Theaggregatedemandmultipliereffectsaysthataninitialincreaseinexpenditureplansleads
toaninduced
A) increaseinconsumptionexpenditure.
B) increaseinproductionexpenditure.
C) increaseingovernmentexpendituresongoodsandservices.
D) decreaseinthepricelevel.
E) increaseinexports.
Answer: A
Status: Old
Page1218
59) Becauseoftheexistenceoftheaggregatedemandmultiplier,a$10billionchangein
expenditure
A) shiftstheaggregatedemandcurvebymorethan$10billion.
B) shiftstheaggregatedemandcurveby$10billion.
C) shiftstheaggregatedemandcurvebylessthan$10billion.
D) changestheslopeoftheaggregatedemandcurvesoitislesssteep.
E) changestheslopeoftheaggregatedemandcurvesoitissteeper.
Answer: A
Status: Old
60) Ifinvestmentspendingincreasesby$1million,thentheaggregatedemandcurveshifts
A) rightwardby$1million.
B) rightwardbymorethan$1million.
C) rightwardbylessthan$1million.
D) leftwardbymorethan$1million.
E) leftwardbylessthan$1million.
Answer: B
Status: Old
61) Whenthepricelevelrisesthereisa________theaggregatedemandcurve.
A) rightwardshiftof
B) movementdownalong
C) leftwardshiftof
D) movementupalong
E) rotationof
Answer: D
Topic: Changesinthepricelevel
Status: Old
Page1219
62) Ariseinthepricelevel
A) raisesthebuyingpowerofmoney.
B) decreasesthepricesofexports.
C) lowersthebuyingpowerofmoney.
D) increasesaggregatedemand.
E) makestheaggregatedemandcurvesteeper.
Answer: C
Status: Old
63) Whenthepricelevelrises,therealinterestrate________andthequantityofrealGDP
demanded________.
A) rises;increases
B) rises;decreases
C) falls;increases
D) falls;decreases
Answer: B
Topic: Realinterestrate
Status: Old
64) AchangeinanyofthefollowingfactorsEXCEPT ________shiftstheaggregatedemandcurve.

A) expectationsaboutthefuture
B) themoneywagerate
C) monetaryandfiscalpolicy
D) foreignincome
E) theforeignexchangerate
Answer: B
Status: Old
Page1220
65) Whichofthefollowingshiftstheaggregatedemandcurveleftward?
A) adecreaseingovernmentexpenditureongoodsandservices
B) anincreaseinthepricelevel
C) ataxcut
D) anincreaseinforeignincome
E) adecreaseinthepricelevel
Answer: A
Status: Old
66) Wheninvestmentincreases,the________inaggregatedemandis________thechangein
investment.
A) increase;greaterthan
B) increase;smallerthan
C) increase;thesameas
D) decrease;thesameas
E) decrease;greaterthan
Answer: A
Status: Old
13.3 ExplainingEconomicTrendsandFluctuations
1) Macroeconomicequilibriumoccurswhen
A) thereisnoinflation.
B) realGDPisequaltopotentialGDP.
C) theaggregatequantitydemandedisequaltotheaggregatequantitysupplied.
D) theeconomyisfullyemployed.
E) thepricelevelequalsthepotentialpricelevel.
Answer: C
Topic: Macroeconomicequilibrium
Status: Old
Page1221
2) Amacroeconomicequilibriumoccurswhenthe
A) quantityofrealGDPdemandedisgreaterthanthequantityofrealGDPsupplied.
B) quantityofrealGDPdemandedislessthanthequantityofrealGDPsupplied.
C) quantityofrealGDPdemandedequalsthequantityofrealGDPsuppliedevenifthey
arenotequaltopotentialGDP.
D) quantityofrealGDPdemandedequalsthequantityofrealGDPsuppliedandbothequal
potentialGDP.
Answer: C
Status: Old
3) Iftheeconomyisatmacroeconomicequilibrium,thenrealGDP
A) mustequalpotentialGDP.
B) mustbelessthanpotentialGDP.
C) mustbegreatthanpotentialGDP.
D) mightbeequalto,greaterthan,orlessthanpotentialGDP
E) cannotbecomparedtopotentialGDP.
Answer: D
Status: Old
4) AccordingtotheAS-ADmodel,
A) theaggregatequantitysuppliedistypicallygreaterthantheaggregatequantity
demanded,therebyleadingtounemployment.
B) theequilibriumiswheretheAS curvecrossestheAD curve,buttheamountofrealGDP
atthispointisnotalwaysequaltopotentialGDP.
C) theaggregatequantitydemandedistypicallygreaterthantheaggregatequantity
supplied,therebyleadingtoinflation.
D) theAScurveisalwaysequaltopotentialGDP.
E) changesintheamountofpotentialGDPistheonlyfactorthatshiftsboththeaggregate
supplycurveandtheaggregatedemandcurve.
Answer: B
Status: Old
Page1222
5) Initsmacroeconomicequilibrium,theeconomycanbeproducingat
i. belowfullemployment.
ii. fullemployment.
iii. abovefullemployment.
A) ionly
B) iionly
C) iiionly
D) iorii
E) i,ii,oriii
Answer: E
Status: Old
6) WhenthequantityofrealGDPdemandedexceedsthequantityofrealGDPsupplied,firms
A) increaseproductionandprices.
B) decreaseproductionandprices.
C) increaseproductionandlowerprices.
D) decreaseproductionandincreaseprices.
E) donotchangeproductionbecauseaggregatedemandandpotentialGDPwilladjust.
Answer: A
Status: Old
7) IfthequantityofrealGDPdemandedislessthanthequantityofrealGDPsupplied,then
A) theeconomymustbeproducingatpotentialGDP.
B) thepricelevelfallsandfirmsdecreaseproduction.
C) thepricelevelfallsandfirmsincreaseproduction.
D) thepricelevelrisestorestorethemacroeconomicequilibrium.
E) aggregatedemandchangestorestoretheequilibrium.
Answer: B
Status: Old
8) IfthequantityofrealGDPdemandedisgreaterthanthequantityofrealGDPsupplied,then
A) theeconomymustbeproducingatpotentialGDP.
B) thepricelevelfallsandfirmsdecreaseproduction.
C) thepricelevelrisesandfirmsincreaseproduction.
D) thepricelevelfallstorestorethemacroeconomicequilibrium.
E) aggregatedemandchangestorestoreequilibrium.
Answer: C
Status: Old
Page1223
9) IfrealGDPisgreaterthanpotentialGDP,thentorestoreequilibrium,________andtheprice
level________.
A) theaggregatedemandcurveshiftsleftward;rises
B) theaggregatedemandcurveshiftsrightward;falls
C) theaggregatesupplycurveshiftsleftward;rises
D) theaggregatesupplycurveshiftsrightward;falls
E) potentialGDPincreases;falls
Answer: C
Topic: Inflationarygap
Status: Old
10) IftheaggregatedemandcurveandtheaggregatesupplycurveintersectatalevelofrealGDP
morethanpotentialGDP,thereis
A) arecessionarygap.
B) aninflationarygap.
C) afallingpricelevel.
D) arisingrealGDP.
E) abelow-fullemploymentequilibrium.
Answer: B
Status: Old
11) Duringaninflationarygap,
A) realGDPislessthanpotentialGDP.
B) theaggregatedemandcurveandtheaggregatesupplycurveintersectatpotentialGDP.
C) theaggregatedemandcurveandtheaggregatesupplycurveintersectatalevelofreal
GDPthatexceedspotentialGDP.
D) theaggregatedemandcurveandtheaggregatesupplycurvedonotintersect.
E) thepricelevelwillfalltorestorethelong-runequilibrium.
Answer: C
Status: Old
Page1224
12) Startingfromasituationoffullemployment,anincreaseinaggregatedemandcreates
________and________thepricelevel.
A) aninflationarygap;raises
B) arecessionarygap;lowers
C) arecessionarygap;raises
D) aninflationarygap;lowers
E) arecessionarygap;doesnotchange
Answer: A
Status: Old
13) IfrealGDPislessthanpotentialGDP,thenthemoneywagerate________,andaggregate
supply________sothatthepricelevel________.
A) rises;decreases;rises
B) falls;increases;falls
C) rises;increases;falls
D) falls;decreases;rises
E) doesnotchange;increases;falls
Answer: B
Topic: Recessionarygap
Status: Old
14) IfrealGDPislessthanpotentialGDP,thenthe________andthepricelevel________.
A) aggregatedemandcurveshiftsleftward;rises
B) aggregatedemandcurveshiftsrightward;falls
C) aggregatesupplycurveshiftsleftward;rises
D) aggregatesupplycurveshiftsrightward;falls
E) amountofpotentialGDPincreases;falls
Answer: D
Status: Old
Page1225
15) Arecessionarygapoccurswhen________sothatrealGDPis________potentialGDP.
A) aggregatesupplyincreases;lessthan
B) aggregatesupplydecreases;lessthan
C) aggregatedemandincreases;greaterthan
D) aggregatedemanddecreases;lessthan
E) potentialGDPdecreases;greaterthan
Answer: D
Status: Old
16) IftheaggregatedemandcurveandtheaggregatesupplycurveintersectatalevelofrealGDP
lessthanpotentialGDP,thereis
C) arisingpricelevel.
D) afallingrealGDP.
E) anabovefull-employmentequilibrium.
Answer: A
Status: Old
17) Iftheequilibriumpricelevelis135buttheactualpricelevelis150,then
A) firmsincreasetheirproductionbecausetheyareabletoselltheiroutputatahigherthan
expectedprice.
B) thequantityofrealGDPdemandedislessthanthequantityofrealGDPsupplied.
C) thequantityofrealGDPdemandedisgreaterthanthequantityofrealGDPsupplied.
D) aggregatedemandwillincreasetorestoreequilibrium.
E) aggregatedemandwilldecreasetorestoreequilibrium.
Answer: B
Status: Old
Page1226
18) Iftheequilibriumpricelevelis135buttheactualpricelevelis120,then
A) firmsdecreasetheirproductionbecausetheycannotselltheoutputtheyproduce.
B) thequantityofrealGDPdemandedislessthanthequantityofrealGDPsupplied.
C) thequantityofrealGDPdemandedisgreaterthanthequantityofrealGDPsupplied.
D) aggregatedemandwillincreasetorestoreequilibrium.
E) aggregatedemandwilldecreasetorestoreequilibrium.
Answer: C
Status: Old
19) Atapeakinthebusinesscycle,themacroeconomicequilibriumis________thelevelof
potentialrealGDP.
A) greaterthan
B) equalto
C) lessthan
D) fallingbelow
E) Noneoftheaboveanswersisalwayscorrectbecausetherelationshipdependson
whetherthepreviousphaseofthebusinesscyclehadbeenarecessionoranexpansion.
Answer: A
Status: Old
20) Atatroughinthebusinesscycle,themacroeconomicequilibriumis________thelevelof
potentialrealGDP.
A) greaterthan
B) risingabove
C) equalto
D) lessthan
E) Noneoftheaboveanswersisalwayscorrectbecausetherelationshipdependson
whetherthepreviousphaseofthebusinesscyclehadbeenarecessionoranexpansion.
Answer: D
Status: Old
Page1227
Pricelevel
(GDPdeflator)
80
90
100
110
120
130
RealGDPdemanded
(trillionsof2009
dollars)
10
9
8
7
6
4
RealGDPsupplied
(trillionsof2009
dollars)
2
4
6
7
8
9
Thetablegivestheaggregatedemandandaggregatesupplyschedulesforanation.
21) Basedonthetableabove,equilibriumrealGDPis
A) $10trillion.
B) $9trillion.
C) $8trillion.
D) $7trillion.
E) $6trillion.
Answer: D
Topic: EquilibriumADandAS
Status: Old
22) Basedonthetableabove,theequilibriumpricelevelis
A) 130.
B) 120.
C) 110.
D) 100.
E) 90.
Answer: C
Status: Old
23) Refertothetableabove.Ifthepricelevelis120,thentheaggregatequantitydemandedis
________thantheaggregatequantitysuppliedandthepricelevel________.
A) greater;rises
B) greater;falls
C) less;rises
D) less;falls
E) less;mightfall,riseornotchangedependingonwhetherrealGDPismorethan,less
than,orequaltopotentialGDP.
Answer: D
Status: Old
Page1228
24) Ifthepricelevelis90,thenthepricelevelwill________because________.
A) eitherfallorrise;marketsareunstableandmacroeconomicequilibriumisdifficultto
predict
B) fall;theaggregatequantitydemandedislessthantheaggregatequantitysupplied
C) rise;theaggregatequantitydemandedislessthantheaggregatequantitysupplied
D) rise;theaggregatequantitydemandedisgreaterthantheaggregatequantitysupplied
E) fall;theaggregatequantitydemandedisgreaterthantheaggregatequantitysupplied
Answer: D
Status: New
Pricelevel
PotentialGDP
RealGDPsupplied
RealGDPdemanded
(GDPdeflator) (billionsof2009dollars) (billionsof2009dollars) (billionsof2009dollars)
150
25
34
16
140
25
31
19
130
25
28
22
120
25
25
25
110
25
23
28
25) ThetableabovegivesdataforthenationofPearl,asmallislandintheSouthPacific.The
economyisatfullemploymentwhenrealGDPis
A) $25billion.
B) $28billion.
C) $22billion.
D) $31billion.
E) $34billion.
Answer: A
Status: Old
26) ThetableabovegivesdataforthenationofPearl,asmallislandintheSouthPacific.Whenthe
economyisatfullemploymentthepricelevelis
A) 130.
B) 120.
C) 110.
D) 140.
E) 150.
Answer: B
Status: Old
Page1229
27) ThetableabovegivesdataforthenationofPearl,asmallislandintheSouthPacific.Ifa
supplyshockdecreasesthequantityofrealGDPsuppliedby$6billionateachpricelevel,the
newequilibriumrealGDPis
A) $16billion.
B) $19billion.
C) $22billion.
D) $23billion.
E) $17billion.
Answer: C
Status: Old
28) ThetableabovegivesdataforthenationofPearl,asmallislandintheSouthPacific.If
aggregatedemandincreasessothatthequantityofrealGDPdemandedis$6billionmoreat
eachpricelevel,thenewequilibriumrealGDPis
A) $34billion.
B) $31billion.
C) $28billion.
D) $25billion.
E) $23billion.
Answer: C
Status: Old
29) ThetableabovegivesdataforthenationofPearl,asmallislandintheSouthPacific.If
aggregatedemandincreasessothatthequantityofrealGDPdemandedis$6billionmoreat
eachpricelevel,thenewequilibriumrealGDPis________,andthenationisnowexperiencing
a(n)________.
A) $22billion;inflationarygap
B) $22billion;recessionarygap
C) $28billion;inflationarygap
D) $28billion;recessionarygap
E) $25billion;equilibrium
Answer: C
Status: New
Page1230
30) Accordingtothefigureabove,whichpointorpointscorrespondtofullemployment?
A) onlypointa
B) onlypointb
C) onlypointc
D) pointsaandb
E) pointsa,b,andc
Answer: D
Topic: Adjustmenttofullemployment
Status: Old
Page1231
31) Inthefigureabove,theeconomyisatanequilibriumwithrealGDPof$16trillionandaprice
levelof110.Atthispointthereis
A) aninflationarygap.
B) arecessionarygap.
C) pricestability.
D) afull-employmentequilibrium.
E) anabovefull-employmentequilibrium.
Answer: B
Status: Old
levelof110.Astheeconomymovestowarditsultimateequilibrium,the________curveshifts
________.
A) aggregatesupply;leftward
B) aggregatesupply;rightward
C) aggregatedemand;rightward
D) aggregatedemand;leftward
E) potentialGDP;leftward
Answer: B
Status: Old
Page1232
levelof110.Astheeconomymovestowarditsultimateequilibrium,the________curveshifts
________because________.
A) aggregatesupply;leftward;themoneywageraterises
B) aggregatesupply;rightward;themoneywageratefalls
C) aggregatedemand;rightward;themoneywageratefalls
D) aggregatedemand;leftward;themoneywageraterises
E) potentialGDP;leftward;themoneywageratefalls
Answer: B
Status: New
34) Aneconomyexperiencesarecessionarygap.Astheeconomyadjuststofullemployment,the
moneywagerate
A) falls,shiftingtheaggregatesupplycurverightward.
B) rises,shiftingtheaggregatesupplycurveleftward.
C) rises,shiftingtheaggregatedemandcurverightward.
D) falls,shiftingtheaggregatedemandcurveleftward.
E) falls,increasingpotentialGDP.
Answer: A
Status: Old
35) Iftheeconomyisabovefullemployment,thereis________gap,andastheeconomyadjusts
towardfullemployment,thepricelevel________.
A) aninflationary;rises
B) aninflationary;falls
C) arecessionary;rises
D) arecessionary;falls
E) aninflationary;doesnotchange
Answer: A
Status: Old
Page1233
36) Whichofthefollowingcanstartaninflation?
A) anincreaseinaggregatedemand
B) anincreaseinaggregatesupply
C) adecreaseinaggregatesupply
D) BothanswersAandCarecorrect.
E) AnswersA,B,andCarecorrect.
Answer: D
Topic: Inflation
Status: Old
37) Inflationcanbestartedby
A) adecreaseinaggregatesupplyoradecreaseinaggregatedemand.
B) adecreaseinaggregatesupplyoranincreaseinaggregatedemand.
C) anincreaseinaggregatesupplyoranincreaseinaggregatedemand.
D) anincreaseinaggregatesupplyoradecreaseinaggregatedemand.
E) anincreaseinaggregatedemandoranincreaseinpotentialGDP.
Answer: B
Topic: Inflation
Status: Old
38) Demand-pullinflationstartswith
A) anincreaseinaggregatedemand.
B) adecreaseinaggregatedemand.
C) anincreaseinpotentialGDP.
D) anincreaseinaggregatesupply.
E) adecreaseinaggregatesupply.
Answer: A
Topic: Demand-pullinflation,start
Status: Old
39) Demand-pullinflationstartswithashiftofthe
A) AScurverightward.
B) ADcurverightward.
C) AScurveleftward.
D) ADcurveleftward.
E) potentialGDPlineleftward.
Answer: B
Status: Old
Page1234
40) Demandpullinflationcanbestartedby
A) adecreaseinthequantityofmoney.
B) anincreaseingovernmentexpenditure.
C) adecreaseinnetexports.
D) anincreaseinthepriceofoil.
E) adecreaseinthemoneypriceofresources.
Answer: B
Status: Old
41) Whichofthefollowingfactorscouldstartademand-pullinflation?
A) anincreaseintaxrates
B) adecreaseingovernmentexpenditure
C) adecreaseinthemoneywagerate
D) anincreaseinthemoneywagerate
E) anincreaseinthequantityofmoney
Answer: E
Status: Old
42) Increasesinthequantityofmoneycanstarta________inflationandanincreasein
governmentexpenditurecanstarta________inflation.
A) demand-pull;demand-pull
B) demand-pull;cost-push
C) cost-push;cost-push
D) cost-push;demand-pull
E) Noneoftheaboveiscorrectbecauseincreasesinthequantityofmoneyarenecessaryto
continueaninflationbutcannotstartaninflation.
Answer: A
Status: Old
Page1235
43) Initially,demand-pullinflationwill
A) increasethepricelevelandnotchangerealGDP.
B) increaseboththepricelevelandincreaserealGDP.
C) increasethepricelevelanddecreaserealGDP.
D) shifttheaggregatesupplycurverightward.
E) decreasepotentialGDP.
Answer: B
Topic: Demand-pullinflation
Status: Old
44) Ademand-pullinflationinitiallyischaracterizedby
A) increasingrealoutputandalaborshortage.
B) increasingrealoutputandalaborsurplus.
C) decreasingrealoutputandalaborshortage.
D) decreasingrealoutputandalaborsurplus.
E) nochangeinrealoutputandalaborshortage.
Answer: A
Status: Old
45) IfdemandpullinflationoccurswhentheeconomyisalreadyatpotentialGDP,thenfollowing
theinitialincreaseinaggregatedemand,the
A) AScurveshiftsrightward.
B) potentialGDPlineshiftsrightward.
C) AScurveshiftsleftward.
D) potentialGDPlineshiftsleftward.
E) Noneoftheaboveiscorrectbecausedemand-pullinflationshiftsonlytheaggregate
demandcurve.
Answer: C
Status: Old
Page1236
46) Comparedtotheinitialequilibrium,aninitialincreaseinaggregatedemandthatis NOT

followedbyanincreaseinthequantityofmoneyresultsinnewlong -runequilibriumwith
A) ahigherpricelevelbutthesamerealGDP.
B) ahigherpricelevelandanincreasedlevelofrealGDP.
C) thesamepricelevelandalowerlevelofrealGDP.
D) thesamepricelevelandthesamerealGDP.
Answer: A
Status: Old
47) Ademand-pullinflationconsistsof________shiftsinthe AD curveand________shiftsinthe

AScurve.
A) rightward;rightward
B) rightward;leftward
C) right;no
D) leftward;rightward
E) leftward;leftward
Answer: B
Status: Old
48) Inapersistingdemand-pullinflation
A) aggregatesupplydecreasesandaggregatedemandincreases.
B) aggregatedemanddecreasesandaggregatesupplydecreases.
C) aggregatedemandincreasesandpotentialGDPdecreases.
D) aggregatesupplyincreasesandaggregatedemandincreases.
Answer: A
Status: Old
Page1237
49) Demand-pullinflationresultsfromcontinuallyincreasingthequantityofmoney,whichleads
tocontinually
A) decreasingpotentialGDP.
B) increasingpotentialGDP.
C) increasingaggregatesupply.
D) decreasingaggregatedemand.
E) increasingaggregatedemand.
Answer: E
Status: Old
50) Demand-pullinflationpersistsbecauseof
A) continuingincreasesingovernmentexpenditures.
B) continuingincreasesinthequantityofmoney.
C) continuingincreasesintherealwagerate.
D) continuingdecreasesinthemoneywagerate.
E) continuingincreasesinaggregatesupply.
Answer: B
Status: Old
51) Forademand-pullinflationtopersistrequirespersistentincreasesin
A) taxrates.
B) therealwagerate.
C) realGDP.
D) thequantityofmoney.
E) governmentexpenditures.
Answer: D
Status: Old
Page1238
52) Duringademand-pullinflation,iftheFedtriestomaintainalevelofrealGDPabovepotential
GDP,theADcurvewill________andtheAScurvewill________.
A) shiftrightwardonce;shiftrightwardcontinuously
B) shiftrightwardcontinuously;shiftrightwardcontinuously
C) shiftrightwardcontinuously;notshift
D) notshift;shiftrightwardcontinuously
E) shiftrightwardcontinuously;shiftleftwardcontinuously
Answer: E
Status: Old
53) Inademand-pullinflation,moneywageratesrisebecause
A) adecreaseinaggregatedemandcreatesalaborshortage.
B) anincreaseinaggregatedemandcreatesalaborsurplus.
C) anincreaseinaggregatedemandcreatesalaborshortage.
D) adecreaseinaggregatedemandcreatesalaborsurplus.
E) anincreaseinaggregatesupplycreatesalaborshortage.
Answer: C
Status: Old
54) Topreventdemand-pullinflation,
A) firmsmustrefusetoincreasethemoneywagerate.
B) firmsmustrefusetoincreasetherealwagerate.
C) theFedmustnotletthequantityofmoneypersistentlyrise.
D) thenaturalunemploymentratemustincrease.
E) realGDPmustincrease.
Answer: C
Status: Old
Page1239
55) Inademand-pullinflation,iftheFedstopsexpandingthequantityofmoney,
A) acost-pushinflationwilloccur.
B) governmentexpenditurewillcausethedemand-pullinflationtocontinue.
C) adeflationwilloccur.
D) thedemand-pullinflationends.
Answer: D
Status: Old
56) Themainsourcesofcost-pushinflationareincreasesin
A) themoneywagerateandthepriceofrawmaterials.
B) therealwagerateandthepriceofrawmaterials.
C) themoneywagerateandaggregatedemand.
D) thequantityofmoneyandtherealwagerate.
E) governmentexpenditureandthequantityofmoney.
Answer: A
Topic: Cost-pushinflation
Status: Old
57) Cost-pushinflationcanbestartedby
A) adecreaseinthemoneywagerate.
B) anincreaseinthemoneypricesofrawmaterials.
C) anincreaseinthequantityofmoney.
D) anincreaseingovernmentexpenditureongoodsandservices.
E) adecreaseingovernmentexpenditureongoodsandservices.
Answer: B
Status: Old
58) Cost-pushinflationcanstartwith
A) adecreaseininvestment.
B) anincreaseinoilprices.
C) anincreaseingovernmentexpenditure.
D) adecreaseingovernmentexpenditure.
E) adecreaseinthequantityofmoney.
Answer: B
Status: Old
Page1240
59) Cost-pushinflationmightinitiallyresultfrom
A) anincreaseinthequantityofmoney.
B) adecreaseinthequantityofmoney.
C) theuseofnewtechnology.
D) anincreaseingovernmentexpenditure.
E) anincreaseinthecostofresources.
Answer: E
Status: Old
60) Cost-pushinflationstartswith
A) anincreaseinaggregatedemand.
B) adecreaseinaggregatedemand.
C) anincreaseinaggregatesupply.
D) adecreaseinaggregatesupply.
E) anincreaseinpotentialGDP.
Answer: D
Status: Old
61) Whencost-pushinflationstarts,realGDP________andtheunemploymentrate________.
A) decreases;falls
B) doesnotchange;falls
C) decreases;rises
D) doesnotchange;doesnotchange
E) increases;falls
Answer: C
Status: Old
62) Whencost-pushinflationstarts,realGDP________andthepricelevel________.
A) decreases;falls
B) doesnotchange;falls
C) decreases;rises
D) doesnotchange;doesnotchange
E) increases;falls
Answer: C
Status: Old
Page1241
63) Atthestartofacost-pushinflation,
A) thepricelevelremainsconstantandrealGDPdecreases.
B) thepricelevelandrealGDPbothincrease.
C) thepricelevelremainsconstantandrealGDPincreases.
D) thepricelevelrisesandrealGDPdecreases.
E) thepricelevelrisesandrealGDPdoesnotchange.
Answer: D
Status: Old
64) Supposethatthemoneypricesofrawmaterialsincreasesothatshort-runaggregatesupply
decreases.IftheFederalReservedoesnotrespond,thehighermoneypriceofrawmaterials
will
i. repeatedlyshifttheaggregatedemandcurverightwardandraisethepricelevel.
ii. shifttheaggregatedemandcurverightwardandtheaggregatesupplycurveleftward,
raisingprices.
iii. resultinitiallyinloweremploymentandahigherpricelevel.
A) ionly
B) bothiandii
C) bothiiandiii
D) iandiii
E) iiionly
Answer: E
Status: Old
65) Byitself,anincreaseinthepriceofoilshiftsthe
A) aggregatesupplycurveleftwardanddoesnotshifttheaggregatedemandcurve.
B) aggregatesupplycurverightwardanddoesnotshifttheaggregatedemandcurve.
C) aggregatedemandcurveleftwardanddoesnotshifttheaggregatesupplycurve.
D) aggregatedemandcurverightwardanddoesnotshifttheaggregatesupplycurve.
E) aggregatedemandcurverightwardandshiftsthepotentialGDPlinerightward.
Answer: A
Status: Old
Page1242
66) TheAScurveshiftsleftwardif
A) goodweatherincreasesagriculturalharvests.
B) OPECreducesworldoilprices.
C) taxcutsstimulatelaborsupply.
D) themoneywagerateincreases.
E) governmentexpenditureincreases.
Answer: D
Status: Old
67) Ifoilpricesincrease,thenintheshortrun,realGDPwill________andthepricelevelwill
________.
A) increase;rise
B) increase;fall
C) decrease;rise
D) decrease;fall
E) notchange;rise
Answer: C
Status: Old
68) Intheshort-run,anincreaseinthepriceofrawmaterialswill________thepriceleveland
________realGDP.
A) raise;increase
B) raise;decrease
C) raise;notchange
D) lower;increase
E) lower;decrease
Answer: B
Status: Old
Page1243
69) Byitself,asupplyshock,suchasahikeinthepriceofoil,can
A) causerealGDPtopermanentlydecreaseyearafteryear.
B) notresultinpersistinginflation.
C) beinflationaryaslongasthereisnopolicyresponse.
D) resultinpersistinginflationifaggregatesupplypersistentlyincreases.
E) resultinapersistingwage-pricespiral.
Answer: B
Status: Old
70) Acombinationofrecessionandinflationiscalled
A) anexpansion.
B) stagflation.
C) abusinesscycle.
D) depression.
E) arecession.
Answer: B
Topic: Stagflation
Status: Old
71) StagflationisdefinedasaperiodwhenrealGDP________andthepricelevel________.
E) isconstant;risesrapidly
Answer: C
Topic: Stagflation
Status: Old
72) AcombinationofdecliningrealGDPandrisingpricelevelisreferredtoas
A) anexpansion.
B) atrough.
C) stagflation.
D) deflation.
E) adepression.
Answer: C
Topic: Stagflation
Status: Old
Page1244
73) Reasonsthattherecessionof2008-2009didnotbecomeadepressioninclude:
i. TheFedbailedouttroubledfinancialinstitutions.
ii. Thegovernmentaggressivelybalanceditsbudget.
iii. Thegovernmentincreaseditsexpenditures,whichincreasedaggregatedemand.
A) ionly
B) iionly
C) iiionly
D) iandiii
E) iandii
Answer: D
Topic: 2008-2009recession
Status: Old
74) AsaresultofOPEC________oilpricesin1973and1980,realGDPinUnitedStates________.
A) increasing;increased
B) increasing;decreased
C) decreasing;increased
D) decreasing;decreased
E) increasing;didnotchange
Answer: B
Topic: Eyeonthepast,oilpricecyclesinU.S.&globaleconomies
Status: Old
75) Oilpricehikes
A) increaseaggregatesupply.
B) decreaseaggregatesupply.
C) increaseaggregatedemand.
D) decreaseaggregatedemand.
E) increasepotentialGDP.
Answer: B
Status: Old
76) WhenOPECnearlytripledthepriceofoilinlate1973,
A) U.S.realGDPincreasedasprofitsbyoilproducersincreased.
B) U.S.realGDPdidnotchangealthoughthepricelevelrose.
C) theU.S.pricelevelfellbecauseproductionbecametooexpensive.
D) theU.S.pricelevelroseandrealGDPdecreased.
E) bothU.S.realGDPandthepricelevelincreased.
Answer: D
Status: Old
Page1245
77) Atthebeginningof2015,acountryisatfull -employment.During2015,oil-producing

countriesdecreaseoilproductionleadingtomuchhigheroilprices.Thehigheroilpricescan
A) increaseaggregatedemandandleadtoanexpansion.
B) increaseaggregatesupplyandleadtoanexpansion.
C) decreaseaggregatedemandandleadtoastagflation.
D) decreaseaggregatesupplyandleadtoastagflation.
E) decreaseaggregatedemandandleadtoahigherpricelevel.
Answer: D
Status: Old
78) PotentialGDPincreasedfrom4.7trillionto16.6trillionbetween1970and2013resultingin
economicgrowth.Also,duringthistime________occurredbecause________.
A) inflation;aggregatedemanddecreasedbymorethanpotentialGDP
B) stagflation;aggregatedemandincreasedbymorethanpotentialGDP
C) deflation;aggregatedemandincreasedbymorethanpotentialGDP
D) inflation;aggregatedemandincreasedbymorethanpotentialGDP
E) inflation;aggregatedemandincreasedbylessthanpotentialGDP
Answer: D
Status: New
79) Inreality,ADrarely________;however,theeconomyperformsasthoughitdoeswhenit
________.
A) decreases;fluctuateswithpotentialGDP
B) increases;decreasesatapacemuchslowerthanpotentialGDP
C) stagnates;increasesatapacemuchfasterthanpotentialGDP
D) decreases;increasesatapacemuchslowerthanpotentialGDP
E) decreases;increasesatapacemuchfasterthanpotentialGDP
Answer: D
Status: New
Page1246
80) The2008-2009recessionmusthavebeenaresultof________becauseotherwisethe
combinationofthe________cannotbeexplained.
A) adecreaseinADandanincreaseinAS;fallinthepricelevelandthedecreaseinreal
GDP
B) adecreaseinADandanincreaseinAS;riseinthepricelevelandthedecreaseinreal
GDP
C) anincreaseinADandAS;riseinthepricelevelandthedecreaseinrealGDP
D) adecreaseinADandAS;riseinthepricelevelandthedecreaseinrealGDP
E) adecreaseinADandAS;decreaseinthepricelevelandthedecreaseinrealGDP
Answer: D
Status: New
81) IfthequantityofrealGDPsuppliedequalsthequantityofrealGDPdemanded,then
A) nominalGDPmustequalrealGDP.
B) realGDPmustequalpotentialGDP.
C) realGDPmustbegreaterthanpotentialGDP.
D) realGDPmightbegreaterthan,equalto,orlessthanpotentialGDP.
E) realGDPmustbelessthanpotentialGDP.
Answer: D
Status: Old
82) Anincreaseininvestment________aggregatedemand,theaggregatedemandcurveshifts
________andtheeconomyisinthe________phaseofthebusinesscycle.
A) decreases;rightward;expansion
B) increases;rightward;expansion
C) decreases;leftward;recession
D) increases;rightward;recession
E) increases;leftward;recession
Answer: B
Topic: Aggregatedemandfluctuations
Status: Old
Page1247
83) Ifthepriceofoilrises,the
A) ADcurveshiftsrightward,realGDPincreases,andthepricelevelrises.
B) AScurveshiftsleftward,thepricelevelrises,andrealGDPdecreases.
C) ADcurveandtheAScurveshiftleftward,realGDPdecreases,andthepricelevelrises.
D) ADcurveandtheAScurveshiftrightward,thepricelevelrises,andrealGDPdecreases.
E) AScurveshiftsleftward,thepricelevelrises,andrealGDPincreases.
Answer: B
Topic: Aggregatesupplyfluctuations
Status: Old
84) Stagflationisacombinationof________realGDPanda________pricelevel.
A) increasing;rising
B) increasing;falling
C) decreasing;rising
D) decreasing;falling
E) nochangein;rising
Answer: C
Topic: Stagflation
Status: Old
85) Aninflationarygapiscreatedwhen
A) realGDPisgreaterthanpotentialGDP.
B) realGDPequaltopotentialGDP.
C) theinflationrateislessthanpotentialinflation.
D) thepricelevelexceedstheequilibriumpricelevel.
E) potentialGDPisgreaterthanrealGDP.
Answer: A
Status: Old
Page1248
86) Theeconomyisatfullemployment.Ifaggregatedemandincreases,
A) aninflationarygapiscreatedandtheAS curveshiftsleftwardasthemoneywagerate
rises.
B) aninflationarygapiscreatedandtheAD curveshiftsleftward.
C) aninflationarygapiscreatedandpotentialGDPincreasestoclosethegap.
D) arecessionarygapiscreatedandtheAS curveshiftsleftwardasthemoneywagerate
falls.
E) arecessionarygapiscreatedandtheAS curveshiftsleftwardasthemoneywagerate
rises.
Answer: A
Status: Old
Page1249
13.4 ChapterFigures
ThefigureaboveshowstheaggregatesupplycurveandpotentialGDP.
1) Basedonthefigureabove,theaggregatesupplycurveshiftsrightwardandthepotentialGDP
linedoesnotchangewhen
A) themoneywageraterises.
B) thepricelevelrises.
C) themoneywageratefalls.
D) thepricelevelfalls.
E) boththepricelevelandmoneywageraterisebythesameproportion.
Answer: C
Status: Old
Page1250
2) IfpotentialGDPincreases,theninthefigureabovethepotentialGDPline________,andthe
aggregatesupplycurve________.
A) shiftsrightward;doesnotshift
B) doesnotshift;shiftsrightward
C) shiftsrightward;shiftsrightward
D) shiftsrightward;shiftsleftward
E) doesnotshift;doesnotshift
Answer: C
Status: Old
3) Ifthemoneywagerateandthepricelevelbothrisebythesameproportion,theninthefigure
abovethepotentialGDPline________,andtheaggregatesupplycurve________.
A) shiftsrightward;doesnotshift
B) doesnotshift;shiftsrightward
C) shiftsrightward;shiftsrightward
D) shiftsrightward;shiftsleftward
E) doesnotshift;shiftsleftward
Answer: E
Status: Old
Page1251
Thefigureaboveshowstheaggregatedemandcurve.
4) Theaggregatedemandcurveinthefigureaboveshiftsrightwardif
C) taxesarehiked.
D) governmentexpendituredecreases.
E) theexpectedfutureprofitincreasessothatinvestmentincreases.
Answer: E
Topic: Shiftsintheaggregatedemandcurve
Status: Old
C) taxesarecut.
E) theFederalReserveraisestheinterestrate.
Answer: C
Status: Old
Page1252
C) taxesareraised.
D) governmentexpenditureincreases.
Answer: D
Status: Old
C) taxesareraised.
E) theFederalReservelowerstheinterestrate.
Answer: E
Status: Old
Page1253
Thefigureaboveshowsaggregatedemandcurves.
8) Basedonthefigureabove,theaggregatedemandcurvewillshiftfrom AD 0 toAD 1 when
B) thepricelevelfalls.
C) thepricelevelrises.
Answer: E
Status: Old

Answer: D
Status: Old
Page1254

C) taxesarelowered.
D) governmentexpenditureincreases.
Answer: E
Status: Old

E) taxesarelowered.
Answer: E
Status: Old
1) Anincreaseinthepricelevel________theaggregatequantitysuppliedand________the
aggregatequantitydemanded.
E) doesnotchange;decreases
Answer: B
Topic: Integrative
Status: Old
Page1255
2) The________,the________isthequantityofrealGDPsuppliedandthe________isthe
quantityofrealGDPdemanded.
A) lowerthepricelevel;greater;smaller
B) higherthepricelevel;greater;smaller
C) greaterthedemandforlabor;smaller;greater
D) lowerthesupplyoflabor;greater;smaller
E) loweraggregatedemand;greater;smaller
Answer: B
Topic: Integrative
Status: Old
3) Theaggregatesupplycurveshifts
A) rightwardifpotentialGDPdecreases.
B) rightwardifthemoneywageratefalls.
C) rightwardifthemoneywageraterises.
D) leftwardifpotentialGDPincreases.
E) leftwardiftheaggregatedemandcurveshiftsleftward.
Answer: B
Topic: Integrative
Status: Old
4) Duringthelate1960s,U.S.defensespendingincreasedastheUnitedStatesfoughtinVietnam.
Thisincreaseingovernmentexpenditureongoodsandservicesmostlikelycreated
C) adecreaseinaggregatesupply.
D) adecreaseinaggregatedemandbecauseconsumersexpendituresdecreased.
E) anincreaseinpotentialGDP.
Answer: B
Topic: Integrative
Status: Old
Page1256
5) ArecessionintherestoftheworldmeansU.S.
A) aggregatesupplydecreases.
B) aggregatedemanddecreases.
C) potentialGDPdecreases.
D) exportsincrease.
E) potentialGDPincreases.
Answer: B
Topic: Integrative
Status: Old
6) ________increasespotentialGDP.
A) Adecreaseinthemoneywagerate
B) Arecessionarygap
C) Arecession
D) Anincreaseintheamountofhumancapital
E) Anincreaseinaggregatedemand
Answer: D
Topic: Integrative
Status: Old
7) Unemploymentincreaseswhen
A) aninflationarygapiscreated.
C) thegovernmentdecreasesitsexpenditureongoodsandservices.
D) aggregatedemandincreases.
E) aggregatesupplyincreases.
Answer: C
Topic: Integrative
Status: Old
Page1257
8) Inthelate1920s,theU.S.economyexperiencedadecreaseininvestment,whichperhaps
triggeredtheGreatDepression.Thedecreaseininvestment
A) increasedaggregatesupply.
B) decreasedaggregatesupply.
C) increasedaggregatedemand.
D) decreasedaggregatedemand.
E) increasedpotentialGDP.
Answer: D
Topic: Integrative
Status: Old
9) WhenthemacroeconomicequilibriumissuchthatrealGDPexceedspotentialrealGDP,the
economyissufferingfrom________,andthegovernmentpolicytoeliminatethisgapwill
________realGDPand________thepricelevel.
A) aninflationarygap;increase;increase
B) arecessionarygap;decrease;decrease
C) aninflationarygap;increase;decrease
D) arecessionarygap;increase;decrease
E) aninflationarygap;decrease;decrease
Answer: E
Topic: Integrative
Status: Old
10) WhenthemacroeconomicequilibriumissuchthatrealGDPislessthanpotentialrealGDP,
theeconomyissufferingfrom________,andthegovernmentpolicytoeliminatethisgapwill
________realGDPand________thepricelevel.
A) arecessionarygap;decrease;decrease
B) aninflationarygap;increase;decrease
C) arecessionarygap;increase;increase
D) aninflationarygap;decrease;increase
E) arecessionarygap;decrease;increase
Answer: C
Topic: Integrative
Status: Old
Page1258
11) Adecreaseininvestmentleadsto________inaggregatedemandand________inrealGDP.
E) nochange;adecrease
Answer: D
Topic: Integrative
Status: Old
12) Adeeprecessionhitstheworldeconomy,andrealGDPintherestoftheworlddecreases.In
theUnitedStates,
A) aggregatesupplyandaggregatedemandbothincrease,andthepricelevelrises.
B) aggregatesupplydecreaseswhileaggregatedemanddoesnotchange,andthepricelevel
rises.
C) aggregatedemanddecreaseswhileaggregatesupplydoesnotchange,andthepricelevel
falls.
D) aggregatesupplyincreasesandaggregatedemanddecreases,sotheeffectontheprice
levelisuncertain.
E) aggregatesupplyandaggregatedemandbothdecrease,andthepricelevelrises.
Answer: C
Topic: Integrative
Status: Old
13) IftheADcurveshiftsrightward,then
A) boththepricelevelandrealGDPwillincrease.
B) thepricelevelwillincrease,butnochangewilloccurinrealGDP.
C) thepricelevelwillnotchange,butrealGDPwillincrease.
D) boththepricelevelandrealGDPwilldecrease.
E) potentialGDPincreases.
Answer: A
Topic: Integrative
Status: Old
Page1259
14) Aneconomyisatafull-employmentequilibrium,andthentheaggregatedemandcurveshifts
leftward.Asaresult,thepricelevel________andrealGDP________.
A) rises;increases
B) rises;decreases
C) falls;increases
D) falls;decreases
E) falls;doesnotchange
Answer: D
Topic: Integrative
Status: Old
15) Anincreaseingovernmentexpenditureongoodsandservices________aggregatedemand,
shiftingtheaggregatedemandcurve________andpotentiallybringingthe________phaseof
thebusinesscycle.
B) increases;rightward;recession
C) decreases;leftward;recession
D) increases;rightward;expansion
E) increases;leftward;recession
Answer: D
Topic: Integrative
Status: Old
16) Thethegovernmentincreasesthelevelofgovernmentexpenditure.Ifthereisnochangeinthe
aggregatesupplycurve,thenaggregatedemandwill________,realGDPwill________,and
thepricelevelwill________.
A) increase;remainthesame;increase
B) remainthesame;increase;increase
C) increase;increase;increase
D) decrease;increase;increase
E) decrease;remainthesame;decrease
Answer: C
Topic: Integrative
Status: Old
Page1260
17) IftheADcurveshiftsrightwardwhiletheAS curveandpotentialGDPdontchange,then

A) theeconomywillmovefromapeakintorecession.
B) theexpansionphaseofthebusinesscycleoccurs.
C) therewillbenochangeinrealGDP,sotheeconomyisatthepeakofthecycle.
D) therewillbenochangeinrealGDP,sotheeconomyisatthetroughofthecycle.
E) realGDPdoesnotchange.
Answer: B
Topic: Integrative
Status: Old
18) Theglobaleconomyentersarecession,therebydecreasingthelevelofU.S.exports.Ifthe
aggregatesupplycurvedoesnotshift,thenaggregatedemandwill________,realGDPwill
________,andthepricelevelwill________.
B) remainthesame;increase;increase
C) increase;increase;remainthesame
D) decrease;increase;increase
E) decrease;decrease;decrease
Answer: E
Topic: Integrative
Status: Old
19) Thegovernmentpassesalawwhichdoublesthewagesofallworkers.Aggregatesupplywill
________,andrealGDPwill________,andthepricelevelwill________.
A) increase;remainthesame;increase.
B) remainthesame;increase;increase.
C) increase;increase;remainthesame.
D) decrease;increase;increase.
E) decrease;decrease;increase.
Answer: E
Topic: Integrative
Status: Old
Page1261
20) Atechnologicaladvance________aggregatesupply,shiftingtheaggregatesupplycurve
________andpotentiallybringingthe________phaseofthebusinesscycle.
B) decreases;leftwardrecession
C) increases;rightward;expansion
D) increases;rightward;recession
E) increases;leftward;expansion
Answer: C
Topic: Integrative
Status: Old
21) Anincreaseinthepriceofoil________aggregatesupply,shiftingtheaggregatesupplycurve
________andpotentiallybringingthe________phaseofthebusinesscycle.
B) increases;rightward;recession
C) increases;rightward;expansion
D) decreases;leftward;recession
E) decreases;rightward;recession
Answer: D
Topic: Integrative
Status: Old
22) AcrisisintheMiddleEastdrasticallyraisesthepriceofpetroleum.Iftheaggregatedemand
curvedoesnotshift,thenaggregatesupplywill________,realGDPwill________,andthe
pricelevelwill________.
B) decrease;decrease;increase
C) increase;increase;increase
D) remainthesame;increase;increase
E) decrease;remainthesame;decrease
Answer: B
Topic: Integrative
Status: Old
Page1262
23) Whichofthefollowingcouldresultinarecession?
A) ariseinthepriceofoil
B) anincreaseininvestment
C) ataxcut
D) anincreaseinthequantityofmoney
E) anincreaseingovernmentexpendituresongoodsandservices
Answer: A
Topic: Integrative
Status: Old
24) ________couldresultinarecessionbecauseitwould________.
A) Ariseinthepriceofoil;shifttheAS curvetotheleft.
B) Anincreaseininvestment;shifttheAD curvetotheright.
C) Ataxcut;shifttheAScurvetotheleft.
D) Anincreaseinthequantityofmoney;shifttheAS curvetotheright.
E) Anincreaseingovernmentexpendituresongoodsandservices;shiftthe ADcurvetothe
right.
Answer: A
Topic: Integrative
Status: New
25) RealGDPdefinitelyincreasesif
A) boththeADcurveandtheAS curveshiftrightward.
B) boththeADcurveandAS curveshiftleftward.
C) theADcurveshiftsleftwardandtheAS curveshiftsrightward.
D) theAScurveshiftsleftwardandtheAD curvedoesnotshift.
E) potentialGDPdecreasessothatrealGDPexceedspotentialGDP.
Answer: A
Topic: Integrative
Status: Old
Page1263
13.6 Essay:AggregateSupply
1) NamethefourfactorsofproductionthatdeterminethequantityofrealGDPsupplied.Which
onefluctuatesthemostoverthecourseofthebusinesscycle?
Answer: Thefactorsarethequantityoflaboremployed,thequantitiesofcapitalandhuman
capitalandthetechnologiestheyemploy,thequantitiesoflandandnaturalresources,
andtheamountofentrepreneurialtalentavailable.Overthecourseofabusinesscycle,
thequantityoflaboremployedfluctuatesthemost.
Topic: Aggregatesupply
Status: Old
2) WhatfactorchangesthequantityofrealGDPsuppliedandresultsinamovementalongthe
AScurve?
Answer: ChangesinthepricelevelchangethequantityofrealGDPsuppliedandresultina
movementalongtheAScurve.
Status: Old
3) Doesariseinthepricelevelbringamovementalongtheaggregatesupplycurveordoesit
shifttheaggregatesupplycurve?
Answer: Ariseinthepricelevelresultsinanupwardmovementalongtheaggregatesupply
curve.Itdoesnotshifttheaggregatesupplycurve.
Status: Old
4) Ifthemoneywagerateisconstantandthepricelevelincreases,whathappenstotherealwage
rate,firmsprofits,andtheaggregatequantitysupplied?
Answer: Therealwageratefalls.Becausethepricelevelhasincreasedandmoneywageratesare
constantwhilerealwageratesarelower,firmsprofitsincrease.Asaresult,the
aggregatequantityofgoodsandservicessuppliedincreases.
Status: Old
Page1264
5) Listthreechangesthatleadtoashiftoftheaggregatesupplycurve.Discusswhyeachchange
shiftstheaggregatesupplycurveandinwhichdirectionthecurveshifts.
Answer: AchangeinpotentialGDP,achangeinthemoneywagerate,andachangeinthe
moneypricesofotherresourcesshifttheaggregatesupplycurve.IfpotentialGDP
increases(decreases)orthemoneywageratedecreases(increases)orthemoneyprices
ofotherresourcesdecrease(increase),aggregatesupplyincreases(decreases)andthe
AScurveshiftsrightward(leftward).
Status: Old
6) Howdoesafallinthemoneywagerateaffecttheaggregatesupplycurve?
Answer: Afallinthemoneywageratelowersfirmscostsandshiftstheaggregatesupplycurve
rightward.
Status: Old
7) Giveexamplesoffactorsthatdecreaseaggregatesupply.Whichwaydoesthe AScurveshift?
Answer: AggregatesupplydecreasesifpotentialGDPdecreases.Ariseinthemoneywagerate
orthemoneypriceofotherresourcessuchasthepriceofoilraisesfirmscostsand
decreasesaggregatesupply.TheAScurveshiftsleftward.
Status: Old
8) WhatistheeffectonaggregatesupplyandpotentialGDPofanincreaseinthemoneywage
rate?
Answer: Anincreaseinthemoneywageratedecreasesaggregatesupplyandshiftsthe
aggregatesupplycurveleftward.IthasnoeffectonpotentialGDP.
Status: Old
Page1265
9) MovingalongtheAScurve,therealwagerateisconstantwhilemovingalongthepotential
GDPline,therealwageratechanges.Explainwhetherthepreviousstatementiscorrector
incorrect.
Answer: Thestatementisincorrect.Itreversesthesituation.MovingalongtheAScurve,the
moneywagerateisconstantandsotherealwageratechanges.Movingalongthe
potentialGDPline,moneywagerateshaveadjustedtothechangeinthepriceleveland
sotherealwagerateisconstant.
Status: Old
10) Whatcanleadtotheshiftillustratedinthefigureabove?
Answer: Adecreaseinthemoneywagerateorinthemoneypricesofotherresources,suchas
thepriceofoil,increaseaggregatesupplyandshifttheAScurverightwardwhilenot
changingpotentialGDP.
Status: Old
Page1266
11) Intheabovefigure,illustratetheeffectontheAS curvefromanincreaseinthemoneypriceof

akeyresourcesuchasoil.
Answer:
Anincreaseinthemoneypriceofakeyresourcesuchasoilsqueezesfirmsprofitsand
decreasesaggregatesupply.Asillustratedinthefigureabove,the AScurveshifts
leftward,inthefigurefromAS 1 toAS 2 .
Topic: Changesinaggregatesupply,moneypricesofresources
Status: Old
Page1267
13.7 Essay:AggregateDemand
1) Whatistheeffectontheaggregatedemandcurvefromanincreaseinthepricelevel?In
particular,doestheaggregatedemandcurveshiftleftwardorrightward?
Answer: Whenthepricelevelincreases,thereisamovementalongtheaggregatedemandcurve.
ThequantityofrealGDPdemandeddecreasesinresponsetoanincreaseintheprice
level.However,theaggregatedemandcurvedoes notshift.
Status: Old
2) Howdoesanincreaseinthepricelevelaffecttheaggregatequantityofgoodsandservices
demanded?
Answer: Anincreaseinthepriceleveldecreasestheaggregatequantityofgoodsandservices
demandedforthreereasons.First,itdecreasesthebuyingpowerofmoney.Asaresult,
peopledecreasetheirdemandforgoodsandservices.Second,itraisestherealinterest
rate.Therealinterestraterisesbecauseanincreaseinthepricelevelincreasesthe
demandformoney,whichraisesthenominalinterestrate,which,intheshortrun,
raisestherealinterestrate.Whentherealinterestraterises,peopleandbusinesses
delayplansforinvestmentandpurchasesofbig-ticketitems.Finally,anincreaseinthe
pricelevelmakesdomesticallyproducedgoodsandservicesmoreexpensiverelativeto
foreign-producedgoodsandservices.Asaresult,peopleandfirmsbuymoreforeign
producedandfewerdomesticallyproducedgoodsandservices,whichdecreasesthe
quantitydemandedofdomesticallyproducedgoodsandservices.
Status: Old
3) Explainthedifferencebetweenamovementalongtheaggregatedemandcurveandashiftof
theaggregatedemandcurve.
Answer: Thereisamovementalongtheaggregatedemandcurveifthereisachangeintheprice
level.Ifsomefactorthataffectsaggregatedemandotherthanthepricelevelchanges,
suchasmonetaryorfiscalpolicy,incomeintherestoftheworld,orexpectations,there
isashiftintheaggregatedemandcurve.
Status: Old
Page1268
4) Howdoestheaggregatedemandcurvereflectanincreaseinaggregatedemand?
Answer: Anincreaseinaggregatedemandmeansthattheaggregatedemandcurveshifts
rightward.
Status: Old
5) Statehoweachofthefollowingaffecttheaggregatedemandcurve.
a. Thepricelevelincreases.
b. Consumersexpecthigherinflationinthefuture.
c. Theexchangeraterises.
d. Foreignincomedecreases.
Answer: a. Thereisamovementupwardalongtheaggregatedemandcurve.Theaggregate
demandcurvedoesnotshift.
b. Theaggregatedemandcurveshiftsrightward.
c. Theaggregatedemandcurveshiftsleftward.
d. Theaggregatedemandcurveshiftsleftward.
Status: Old
6) Giveexamplesoffactorsthatdecreaseaggregatedemand.Whichwaydoestheaggregate
demandcurveshift?
Answer: Anythingthatdecreasesspendingdecreasesaggregatedemand.Ariseintheinterest
rate,adecreaseinthequantityofmoney,adecreaseingovernmentexpendituresora
taxhike,andadecreaseinrealGDPintherestoftheworldalldecreasespendingand
decreaseaggregatedemand.Theaggregatedemandcurveshiftsleftward.
Status: Old
Page1269
7) HowdoesariseintheforeignexchangerateaffectaggregatedemandintheUnitedStates?
Explainyouranswer.
Answer: AnincreaseintheforeignexchangeratedecreasesU.S.aggregatedemand.Theforeign
exchangerateistheamountofaforeigncurrencythatadollarcanbuy.Iftheexchange
raterises,adollarbuysmoreforeigncurrency.Asaresult,foreigngoodsandservices
becomecheapertoU.S.citizensbecauseU.S.citizensneedtospendfewerdollarstobuy
foreign-producedgoodsandservices.Simultaneously,U.S.-producedgoodsand
servicesbecomemoreexpensivetoforeignersbecausetheymustspendmoreoftheir
currencyinordertobuythedollarsnecessarytobuytheU.S. -producedgoodsand
services.Asaresult,U.S.importsincreaseandU.S.exportsdecrease,bothofwhich
decreaseU.S.aggregatedemand.
Status: Old
8) HowdoesarecessioninAsiaaffectU.S.aggregatedemandandtheU.S.aggregatedemand
curve?
Answer: ArecessioninAsiameansthatAsianspurchasefewerU.S.-madegoodsandservices.
Asaresult,U.S.exportsdecreasesothatU.S.aggregatedemanddecreasesandtheU.S.
aggregatedemandcurveshiftsleftward.
Topic: Changesinaggregatedemand,worldincome
Status: Old
9) AnincreaseinMexicanincomedecreasesaggregatedemandintheUnitedStates.Isthe
precedingstatementcorrectorincorrect?Brieflyexplainyouranswer.
Answer: Thestatementisincorrect.AnincreaseinMexicanincomemeansthatMexicancitizens
buymoregoodsandservicesexportedfromtheUnitedStates.TheincreaseinU.S.
exportsincreasesU.S.aggregatedemand.
Topic: Changesinaggregatedemand,worldincome
Status: Old
Page1270
10) WhatarethetwochannelsthroughwhichtheworldeconomycanaffectU.S.aggregate
demand?StatewhatchangesintheworldeconomycanincreaseU.S.aggregatedemand.
Answer: Theworldeconomycanaffectaggregatedemandthroughtheforeignexchangerateand
foreignincome.Iftheforeignexchangeratefalls,thenU.S.aggregatedemandincreases
becauseU.S.exportsbecomecheapertoforeignresidentswhileU.S.importsbecome
moreexpensivetoU.S.citizens.Ifforeignincomeincreases,thenU.S.aggregate
demandincreasesbecauseforeigncitizenswillspendsomeoftheirincreasedincomeon
U.S.-producedgoodsandservices.
Topic: Changesinaggregatedemand,worldeconomy
Status: Old
11) Theaggregatedemandmultiplierresultsintheaggregatedemandcurveshiftingbymore
thananygiveninitialchangeinexpenditure.Isthepreviousstatementcorrectorincorrect?
Answer: Thestatementiscorrect.Theimplicationisthata,say$10billionincreaseininvestment
shiftstheaggregatedemandcurverightwardbymorethan$10billion.
Status: Old
12) Whatistheaggregatedemandmultiplierandwhydoesitoccur?
Answer: Theaggregatedemandmultiplierisaneffectthatmagnifieschangesinexpenditure
plans.So,forexample,ifsomecomponentofexpendituresuchasinvestmentincreases,
aggregatedemandincreasesbymorethantheincreaseininvestment.Theaggregate
demandmultiplierexistsbecausewhenaggregatedemandincreases,households
incomesincrease.Thentheincreaseinincomeresultsinanincreaseinconsumption
expenditure,whichaddstotheinitialincreaseinaggregatedemand.
Status: Old
Page1271
13.8 Essay:ExplainingEconomicTrendsandFluctuations
1) Whattwovariablesaredeterminedinanaggregatesupply-aggregatedemandfigure?Isthe
slopeoftheaggregatesupplycurvepositiveornegative?Istheslopeoftheaggregatedemand
curvepositiveornegative?
Answer: Theaggregatesupply-aggregatedemandframeworkdeterminestheequilibriumprice
levelandequilibriumrealGDP.Theaggregatesupplycurveispositivelysloped,
indicatingthatanincreaseinthepricelevelincreasestheaggregatequantityofgoods
andservicessupplied.Theaggregatedemandcurveisnegativelysloped,indicatingthat
anincreaseinthepriceleveldecreasestheaggregatequantityofgoodsandservices
demanded.
Topic: Aggregatesupplyandaggregatedemandmodel
Status: Old
2) CanactualrealGDPexceedpotentialGDP?
Answer: Yes,actualrealGDPtemporarilycanexceedpotentialGDPastheeconomynearsa
businesscyclepeak.
Topic: Businesscycle
Status: Old
3) DefinepotentialGDP.UnderwhatcircumstancesdoesactualrealGDPfallshortofpotential
GDP,equalpotentialGDP,andexceedpotentialGDP?
Answer: PotentialGDPisthelevelofrealGDPthattheeconomyproduceswhenitisatfull
employment.PotentialGDPcanbecontrastedwithactualrealGDP,theamountofreal
GDPthecountryactuallyproduces.ActualrealGDPcanbelessthanpotentialGDP
whentheeconomyisproducingatlessthanfullemployment,thatis,whenthereisless
thanfullemploymentinthelabormarket.ActualrealGDPequalspotentialGDPwhen
theeconomyisproducingatfullemployment.ActualrealGDPcanexceedpotential
GDPtemporarilyastheeconomyapproachesandthenrecedesfromabusinesscycle
peak.
Topic: Businesscycle
Status: Old
Page1272
Quantityofreal
Pricelevel GDPdemanded
(GDPdeflator,
(trillionsof
2009=100)
2009dollars)
115
6.8
110
9.4
105
10.0
100
10.6
95
11.2
90
11.8
Quantityofreal
GDPsupplied
(trillionsof
2009dollars)
12.0
11.0
10.0
9.0
8.0
7.0
4) Basedonthetableabove,
a. WhatistheequilibriumpricelevelandrealGDP?
b. IfpotentialGDPis$11.0trillion,whatdoesthatimplyabouttheeconomyslevelof
employment?
c. IfpotentialGDPis$9.0trillion,whatdoesthatimplyabouttheeconomyslevelof
employment?
Answer: a. Theequilibriumpricelevelis105;theequilibriumrealGDPis$10.0trillion.
b. IfpotentialGDPis$11.0trillion,thentheeconomyisatanequilibriumthatisa
belowfull-employmentequilibriumwitharecessionarygap.
c. IfpotentialGDPis$9.0trillion,thentheeconomyisatanequilibriumthatisan
abovefull-employmentequilibriumwithaninflationarygap.
Topic: Inflationarygapandrecessionarygap
Status: Old
5) Supposethatduring2005,theactualrealGDPofChilewas3.5billionpesosatthesametime
thepotentialGDPwas3.4billionpesos.WhatsortofequilibriumexistedinChile?
Answer: ChilesactualrealGDPexceededitspotentialGDP,soChilewasinanabove
full-employmentequilibriumwithaninflationarygap.
Status: Old
6) WhentheaggregatesupplycurveintersectstheaggregatedemandcurveatalevelofrealGDP
thatexceedspotentialGDP,isthereaninflationarygaporadeflationarygap?What
adjustmentswilltakeplace?
Answer: ThereisaninflationarygapbecauserealGDPexceedspotentialGDP.Inthissituation,
themoneywageratewillrise,shiftingtheaggregatesupplycurveleftwardandraising
thepricelevel.EventuallytheeconomywillreturntopotentialGDP.Atthistime,real
GDPislowerthanwhentheinflationarygapexistedbutthepricelevelishigher.
Status: Old
Page1273
7) Theeconomyisatfullemploymentandthenaggregatedemandincreases.Describewhat
happensasanimmediateresultoftheincreaseinaggregatedemand.Describehowthe
economyadjustsbacktofullemployment.
Answer: Theimmediateeffectofanincreaseinaggregatedemandistoincreaseboththeprice
levelandrealGDP.Themoneywageratedoesnotchange,sowiththehigherprice
leveltherealwageratefalls.Eventually,however,workersdemandahigher(money)
wageratetocompensateforthehigherpricelevel.Asfirmspaythehighermoneywage
rate,aggregatesupplydecreases.Thedecreaseinaggregatesupplymeansthattheprice
levelrisesandrealGDPdecreases.Workerscontinuetodemandahighermoneywage
rateandaggregatesupplycontinuestodecreaseuntilfinallytheeconomyreturnstofull
employment.Atthatpoint,themoneywageratehasincreasedenoughsothatthereal
wagerateisbacktoitsinitiallevel.RealGDPonceagainequalspotentialGDP,sothe
changesinrealGDPwereonlytemporary.Thepricelevel,though,ishigherthanits
initiallevel,sotheincreaseinthepricelevelispermanent.
Status: Old
Page1274
8) WhatisthecurrentequilibriumpricelevelandrealGDPfortheeconomyillustratedinthe
figureabove?Doesthiseconomyhaveaninflationarygap,arecessionarygap,orneither?Asit
adjuststowardfullemployment,whichcurveshifts?WhatistheequilibriumrealGDPand
pricelevelthattheeconomywillultimatelyreach?
Answer: Theequilibriumiswheretheaggregatedemandandaggregatesupplycurvesintersect.
Thustheequilibriumpricelevelis110andequilibriumrealGDPis$16.5trillion.Real
GDPexceedspotentialGDP,sotheeconomyhasaninflationarygap.Theaggregate
supplycurvewillshiftleftwardastheeconomyadjuststofullemployment.Ultimately
theaggregatesupplycurvewillshiftsothatitintersectstheaggregatedemandcurve
wheretheaggregatedemandcurvecrossesthepotentialGDPline.Thusultimately
equilibriumrealGDPequalspotentialGDP,$16.0trillion,andthepricelevelis120.
Status: Old
9) ExplainhowchangesinforeignincomecanimpactrealGDPinacountry.
Answer: Changesintheincomeofanynationimpactthelevelofexportsandimportsofallother
nationstradingwithit.Forexample,intheUnitedStatesaggregatedemandincreasesif
theincomeofourtradingpartners,suchasMexicoandCanada,increasesbecausesome
oftheincreaseinMexicanandCanadianincometranslatesintobuyinggoodsand
servicesimportedfromtheUnitedStates.Asaresult,U.S.aggregatedemandincreases,
whichmeansthatU.S.realGDPincreases.Thusincreasesinforeignincomeincrease
domesticrealGDPwhiledecreasesinforeignincomedecreasedomesticrealGDP.
Status: Old
Page1275
10) HowdoesacutininterestratesthatincreasesinvestmentaffectthequantityofrealGDP
demanded,theaggregatedemandcurve,realGDP,andthepricelevel?
Answer: Theincreaseininvestmentincreasestheaggregatequantitydemandedandshiftsthe
ADcurverightward.Asaresult,theequilibriumpricelevelrisesandtheequilibrium
realGDPincreases.
Status: Old
11) StatehowshiftsintheaggregatedemandcurvecanexplainthemovementofrealGDParound
potentialGDP.
Answer: Whentheaggregatedemandcurveandtheaggregatesupplycurveintersectatthelevel
ofpotentialGDP,thenrealGDPisequaltopotentialGDP.Whensomethingshiftsthe
aggregatedemandcurverightward,thentheaggregatedemandcurveandthe
aggregatesupplycurvewillintersectatalevelofrealGDPthatisabovepotentialGDP.
Theeconomywillbeinanexpansion.Whensomethingshiftstheaggregatedemand
curveleftward,thentheaggregatedemandcurveandtheaggregatesupplycurvewill
intersectatalevelofrealGDPthatisbelowpotentialGDP.Theeconomywillbeina
recession.
Status: Old
12) Whatisdemand-pullinflation?
Answer: Aninflationthatstartsfromaninitialincreaseinaggregatedemandisademand -pull
inflation.
Status: Old
Page1276
13) Whataresourcesthatcanstartademand-pullinflation?
Answer: Demand-pullinflationstartswithanincreaseinaggregatedemand.Thisincreasecan
arisebyincreasesinthequantityofmoney,increasesingovernmentexpenditure,or
increasesinnetexportsbecauseanyofthesethreeshiftincreaseaggregatedemandand
shifttheADcurverightward.Theincreaseinaggregatedemandleadstoahigherprice
leveland,temporarily,ahigherlevelofrealGDP.Iftheeconomybeganatfull
employment,thentemporarilythelevelofrealGDPwillbeabovepotential.Inthelong
run,however,themoneywageraterisestooffsettheincreaseinthepricelevel,so
aggregatesupplydecreasesandtheAScurveshiftsleftward.Thedecreaseinaggregate
supplyalsoraisesthepricelevel.Sotheonlywaytheinflationcancontinueisif
aggregatedemandcontinuestoincrease.
Status: Old
14) Describehowademand-pullinflationcanoccur.
Answer: Demand-pullinflationstartsfromaninitialincreaseinaggregatedemand.Butifthis
increaseisaone-timeonlyevent,theresultisahigherpricelevelbutnotinflation.For
inflationtooccur,aggregatedemandneedstocontinuetoincrease.Continuing
increasesinthequantityofmoneyresultincontinuingincreasesinaggregatedemand,
somonetarygrowthisnecessaryforademand -pullinflation.
Status: Old
15) Whatisacost-pushinflation?
Answer: Acost-pushinflationisaninflationthatstartsasaresultofanincreaseincosts.Money
wageratesandthecostofrawmaterialsarethemainsourcesofcost-pushinflation.
Status: Old
Page1277
16) Whatfactorscanstartacost-pushinflation?WhatmusttheFedsresponsebefortheinflation
tocontinue?
Answer: Costpushinflationstartswithadecreaseinaggregatesupply,thatis,aleftwardshiftof
theAScurve.Thedecreaseinaggregatesupplycanbetheresultofanincreaseinthe
moneywagerateoranincreaseinthemoneypriceofotherrawmaterials.Ineither
instancefirmscostshaverisenandtheyrespondbydecreasingproduction,which
decreasesaggregatesupply.ThedilemmafortheFedisthatthedecreasesinaggregate
supplymeansthatrealGDPfallsbelowpotentialGDPandthepricelevelrises.Ifthe
Fedrespondsbyincreasingthequantityofmoneyinordertoincreaseaggregate
demandandmoverealGDPbacktopotentialGDP,thepricelevelwillrisestillhigher.
Andiftheinitialagentthatraisedcostsrespondstothehigherpricelevelbyagain
raisingitscosts,thenacost-pushinflationmightwelloccur.
Status: Old
17) Definestagflationandexplainhowitcanbecreated.
Answer: Stagflationisacombinationoftwowords:stagnationandinflation.Stagnationmeans
realGDPisbelowthefullemploymentlevelandfalling,thatis,theeconomyisin
recessionwhileatthesametimethepricelevelisrising,thatis,theeconomyis
experiencinginflation.Anincreaseinthepriceofamajorresourcethatdecreases
aggregatesupplycantriggerstagflation.
Topic: Stagflation
Status: Old
Page1278

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Potential GDP and the Natural Unemployment Rate ................................................ 723

Economic Growth ............................................................................................................ 799

Finance, Saving, and Investment ................................................................................... 877

The Monetary System ..................................................................................................... 973

Money, Interest, and Inflation ..................................................................................... 1085

Aggregate Supply and Aggregate Demand ............................................................... 1172

32) Atanygiventime,whichfactorofproductionisNOT fixed?

Realwagerate Quantityoflabordemanded Quantityoflaborsupplied

51) TheFairLaborStandardsActoriginally settheminimumwageat

26) Thefollowinggovernmentpolicieswillhelpachievefastereconomicgrowth EXCEPT

41) WhichofthefollowingisNOT anecessarypreconditionforeconomicgrowth?

58) WhichofthefollowingisNOT anexampleofphysicalcapital?

64) WhichofthefollowingisNOT afinancialinstitution?

37) Inthefigureabove,therightwardshiftfromthedemandforloanablefundscurveDLF 1 tothe

38) Inthefigureabove,theshiftfromDLF 1 toDLF 2 couldresultfrom

39) Inthefigureabove,theleftwardshiftfromthedemandforloanablefundscurve DLF 1 tothe

40) Inthefigureabove,theleftwardshiftfromthedemandforloanablefundscurve DLF 1 tothe

66) WhichofthefollowingfactorsdoesNOT shiftthesupplyofloanablefundscurve?

76) SupposethattheinitialsupplyofloanablefundscurveisSLF1 .Inthefigureabove,anincrease

77) Inthefigureabove,theshiftinthesupplyofloanablefundscurvefromSLF1 toSLF2 couldbe

11) Supposethegovernmenthasabudgetsurplusof$2billion.IfthereisnoRicardo -Barroeffect,

13) Indiasgovernmentrunsagovernmentbudgetsurplus.IfthereisnoRicardo -Barroeffect,the

26) Inthefigureabove,theDLFcurveisthedemandforloanablefundscurveandthePDLF curve

27) Inthefigureabove,theDLFcurveisthedemandforloanablefundscurveandthePDLF curve

34) Supposethegovernmentsbudgetdeficitincreasesby$500billion.IfthereisnoRicardo -Barro

36) Supposethegovernmenthasabudgetdeficitof$2billion.IfthereisnoRicardo -Barroeffect,

44) Supposethegovernmenthasabudgetdeficitof$2billion.IftheRicardo -Barroeffectis

57) WhentheU.S.governmentlaunchedamassiverescueplaninresponsetothe2008 -2009

58) WhentheU.S.governmentlaunchedamassiverescueplaninresponsetothe2008 -2009

Realinterestrate Demandforloanablefunds Supplyofloanablefunds

Realinterestrate Demandforloanablefunds Supplyofloanablefunds

13) WhichofthefollowingisNOT amongtheprimaryfunctionsofmoney?

14) MoneyperformsallofthefollowingfunctionsEXCEPT servingasa

64) WhichofthefollowingisNOT acomponentofM1?

81) Physicalcurrencyis________popularthane -cash,________.

84) WhichofthefollowingisNOT afunctionofmoney?

13) AllofthefollowingareelementsinthestructureoftheFedEXCEPT the

24) WhichofthefollowingisNOT oneoftheFedsmonetarypolicytools?

76) C/DisthecurrencydrainratioandR/D isthedesiredreserveratio.Themoneymultiplier

71) Intheabovefigure,amovementfrompointA topointB represents

72) Intheabovefigure,amovementfrompointB topointC represents

24) VelocityisV,thequantityofmoneyisM, thepricelevelisP, andrealGDPisY.Whichofthe

57) In2008and2009,thequantitytheoryofmoneydida________jobofpredictingyear -to-year

15) WhichofthefollowingisNOT acostofinflation?

16) WhichofthefollowingisNOT acostofinflation?

24) Ifthereisariseinthepricelevel,thereisa(n)________movementalongthe AScurvebecause

51) ChangesinwhichofthefollowingdoNOT shifttheAS curve?

53) WhichofthefollowingchangesaggregatesupplyandshiftstheAS curve?

15) Ayearoveryear________inthebuyingpowerofmoneymeansthat definitely________from

24) Theaggregatedemandcurveshiftswhenanyofthefollowingfactorschange EXCEPT

25) WhichofthefollowingdoesNOT shifttheaggregatedemandcurve?

27) Allofthefollowingactionsshifttheaggregatedemandcurvetotheright EXCEPT

33) Whichofthefollowingdecreasesaggregatedemandandshiftsthe AD curveleftward?

35) Aggregatedemand________andshiftsthe AD curve________when________.

41) Whichofthefollowingdecreasesaggregatedemandandshiftsthe AD curveleftward?

46) Aggregatedemand________andshiftsthe AD curve________when________.

47) Aggregatedemand________andshiftsthe AD curve________when________.

53) Inthefigureabove,theshiftintheaggregatedemandcurvefrom AD 1 toAD 2 couldberesult

54) Inthefigureabove,theshiftintheaggregatedemandcurvefrom AD 1 toAD 3 couldbethe

55) Inthefigureabove,theshiftintheaggregatedemandcurvefrom AD 1 toAD 3 couldbethe

56) Inthefigureabove,theshiftintheaggregatedemandcurvefrom AD 1 toAD 3 couldbethe

64) AchangeinanyofthefollowingfactorsEXCEPT ________shiftstheaggregatedemandcurve.

46) Comparedtotheinitialequilibrium,aninitialincreaseinaggregatedemandthatis NOT

81) Physicalcurrencyispopularthane -cash,.

15) Ayearoveryearinthebuyingpowerofmoneymeansthat definitelyfrom

35) Aggregatedemandandshiftsthe AD curvewhen.

46) Aggregatedemandandshiftsthe AD curvewhen.

47) Aggregatedemandandshiftsthe AD curvewhen.

47) Ademand-pullinflationconsistsofshiftsinthe AD curveandshiftsinthe