CHAPTER 2: MEASURING MACROECONOMIC VARIABLES
1. Gross domestic product measures
A) the total spending of everyone in the economy
B) the value of all output in the economy
C) the total income of everyone in the economy
D) all of the above
2. Which of the following is a good or service counted in GDP?
A) tires Ford buys to put on a car intermediate
B) a used tire you buy for your personal car
C) a new tire you buy for your personal car
D) used tires bought by a used car dealer to put on a car on his lot
3. Double counting can be avoided by
A) including the value of intermediate goods in the current year.
B) not counting the value of intermediate goods in GDP.
C) including the value of intermediate goods in the GNP but not in the GDP.
D) including the value of intermediate goods in the production year but not in the selling year of those
goods.
4. The GDP includes
A) the value of all intermediate goods and services
B) the value of all final goods and services
C) the value of both intermediate and final goods and services
D) the value of all transactions
5. If the value of net exports is negative, then
A) exports exceed imports
B) imports exceed exports
C) exports equal imports
D) imports are zero
6. Assume that a tire company sells 5 tires to an automobile company for $500, another
company sells a compact disc player for $400, and the automobile company puts all of these items
in or on a car that it sells for $20,000. In this case, the amount from these transactions that should
be counted in GDP is
A) $20,000
B) $20,000 less the automobile company's profit on the car
C) $20,900
D) $20,900 less the profits of all three companies on the items that they sold
7. If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657,
investment is $741, and government purchases are $1,098, then net exports are
A) $131
B) –$131
C) $31
D) –$31
8. Nominal GDP measures the value of all goods and services
A) in constant dollars
B) in current dollars
C) in fixed dollars
D) without inflation
9. Gross domestic product measured in terms of the prices of a fixed, or base, year is
A) current GDP
B) base GDP
C) real GDP
D) nominal GDP
10. If real GDP in 2007 using 2006 prices is lower than nominal GDP of 2007, then
A) prices in 2007 are lower than prices in 2006
B) nominal GDP in 2007 equals nominal GDP in 2006
C) prices in 2007 are higher than prices in 2006
D) real GDP in 2007 is larger than real GDP in 2006
Refer to the information provided in Table 1 below to answer the questions that follow.
Table 1
11. Refer to Table 1. Assume that this economy produces only two goods Good X and Good Y. The
value for this economyʹs nominal GDP in year 1
A) is $110
B) is $160
C) is $180
D) is $200
12. Refer to Table 1. Assume that this economy produces only two goods Good X and Good Y. The
value for this economyʹs nominal GDP in year 3 is
A) $204
B) $222
C) $250
D) $270
13. Refer to Table 1. Assume that this economy produces only two goods Good X and Good Y. The
value for this economyʹs nominal GDP in year 2 is
A) $168
B) $150
C) $202
D) $214
14. Refer to Table 1. Assume that this economy produces only two goods Good X and Good Y. If
year 1 is the base year, the value for this economyʹs real GDP in year 2 is
A) $135
B) $179
C) $202
D) $214
15. Refer to Table 1. Assume that this economy produces only two goods Good X and Good Y. If
year 1 is the base year, the value for this economyʹs GDP deflator in year 1 is
A) 1
B) 100
C) 110
D) 111
16. Refer to Table 1. Assume that this economy produces only two goods Good X and Good Y. If
year 1 is the base year, the value for this economyʹs inflation rate between year 1 and year 2 is
A) -6.1%
B) -5.5%
C) 11.1%
D) 79%
17. The GDP deflator in year 2 is 110 and the GDP deflator in year 3 is 118. The rate of inflation
between years 2 and 3 is
A) 4.55%
B) 7.27%
C) 8%
D) 18%
18. Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002
and $0.50 in 2009. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and
10 oranges were purchased in 2009, the CPI for 2009, using 2002 as the base year, is
A) 125
B) 110
C) 130
D) None of the above
19. Unlike the GDP deflator, the CPI includes the prices of
A) goods purchased by firms
B) goods purchased by governments
C) exported goods
D) imported goods
20. The calculation of GDP excludes the value of
(I) A used economics textbook from the bookstore
(III) A car produced in a foreign country
(II) Homework help provided by a teacher to her own child
A) (I) and (II)
B) (I), (III) and (III)
(IV) New harvesting equipment for the farm
C) (I) and (III)
D) All of the above
CHAPTER 3: AGGREGATE DEMAND AND FISCAL POLICY
1. The aggregate demand curve shows
A) Total expenditures at different levels of national income.
B) The quantity of goods and services demanded at different price levels.
C) That real income is directly (positively) related to the price level.
D) All of the above answers are correct.
2. The aggregate demand curve
A) Has a negative slope.
B) Has a positive slope.
C) is vertical.
D) is horizontal
3. Moving along the aggregate demand curve, a decrease in the quantity of goods and
services demanded is a result of
A) An increase in the price level.
B) A decrease in the price level.
C) An increase in income.
D) A decrease in income.
4. Which of the following changes would NOT shift the aggregate demand curve?
A) A change in fiscal policy
B) A change in monetary policy
C) A change in expectations about future income
D) An increase in technology
5. Which of the following shifts the aggregate demand curve rightward?
A) A decrease in consumption
B) An increase in investment
C) A decrease in net exports
D) A decrease in government expenditure on goods and services
6. According to the Keynesians, a decrease in government spending, other things equal,
shifts the aggregate _____ curve to the _____.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
7. The aggregate demand curve shifts to the right when
A) taxes are cut
B) government spending is reduced.
C) the money supply is reduced.
D) all of the above.
8. Which of the following does not cause the aggregate demand curve to shift to the right?
A) An increase in net exports
B) An increase in government spending
C) An increase in taxes
D) An increase in consumer optimism
9. “Crowding out” refers to a decrease in
A) the price level caused by a beneficial supply shock.
B) investment spending caused by an increase in the interest rate.
C) excess reserves caused by a currency drain.
D) excess reserves caused by an increase in reserve requirements.
10. Which one of the following is not a component of aggregate demand in the economy?
A) Consumption spending by households.
B) Investment spending by firms.
C) Spending on our exports by foreigners.
D) The productivity of the factors of production.
11. Which one of the following is an example of an expansionary fiscal policy?
A) A decrease in interest rates.
B) An increase in taxes
C) An increase in government spending.
D) A decrease in government spending
12. China is one of the worldʹs largest exporters. As the worldʹs economies slipped into a
worldwide recession in 2008, there was a ________ Chinaʹs aggregate demand curve as
Chinaʹs exports ________.
A) rightward shift of; decreased
B) movement upward along; increased
C) leftward shift of; decreased
D) movement upward along; decreased
13. If the marginal propensity to consume MPC is 0.75, the value of the multiplier is
A) 4
B) 7.5
C) 5
D) 0.75
14. If government purchases of goods and services increase by $10 billion when the MPC is
0.8 and there is no crowding-out effect,
A) real GDP will increase by $16 billion.
B) real GDP will increase by $20 billion.
C) real GDP will increase by $40 billion.
D) real GDP will increase by $50 billion.
15. The size of the shift in AD resulting from a tax change is also affected by the multiplier
and crowding – out effects.
A) True
B) False
16. Which of the following is an example of fiscal policy?
A) The Federal Reserve Board reduces interest rates.
B) The local school board raises teachers’ salaries.
C) General Electronics Corp. borrows $100 million to build a new factory.
D) The federal government reduces personal income tax rates.
17. Which of the following is the best example of an automatic stabilizer in fiscal policy?
A) Spending more on national highways.
B) Increasing the supply of money.
C) Paying unemployment insurance benefits.
D) Decreasing the supply of money.
18. If the MPC is 0.75 and there is no crowding-out effect , if gross investment increases by
$6 billion, equilibrium level of real GDP will increase by
A) $6 billion.
B) $8 billion.
C) $12 billion.
D) $24 billion.
19. The crowding-out effect implies that an increase in G (holding taxes constant) would
lead to all of the following EXCEPT:
A) a decrease (leftward shift) in money demand.
B) an increase in the interest rate.
C) a decrease in investment spending.
D) a leftward shift of aggregate demand
20. As income level increases from $500 to $1,000, consumption increases from $700 to
$1,100. The marginal propensity to consume is equal to
(A) 1.10
(B) 0.80
(C) 0.70
(D) 0.50
CHAPTER 4: MONEY AND MONETARY POLICY
1. Keynes's liquidity preference theory of the interest rate suggests that the interest rate is
determined by
A) aggregate supply and aggregate demand
B) the supply and demand for loanable funds.
C) the supply and demand for money.
D) the supply and demand for labour.
2. When money demand is expressed in a graph with the interest rate on the vertical
axis and the quantity of money on the horizontal axis, an increase in the interest
rate
A) decreases the quantity demanded of money.
B) increases the quantity demanded of money.
C) does not affect the quantity demanded of money.
D) None of the above
3. Which of the following best describes how an increase in the money supply shifts
the aggregate demand curve?
. A) The money supply curve shifts right, the interest rate rises, investment
increases, and the aggregate demand curve shifts right.
B) The money supply curve shifts right, the interest rate rises, investment
decreases, and the aggregate demand curve shifts left.
C) The money supply curve shifts right, the interest rate falls, investment
increases, and the aggregate demand curve shifts right.
D) The money supply curve shifts right, prices rise, spending falls, and the
aggregate demand curve shifts left.
4. Which of the following is NOT a function of money?
A)
B)
C)
D)
a hedge against inflation.
a unit of account.
a store of value.
a medium of exchange.
5. When a central bank sells securities in the open market, which of the following set of
events is most likely to follow?
A) An increase in the money supply, a decrease in interest rates, and an increase in aggregate
demand
B) An increase in the money supply, an increase in interest rates, and a decrease in aggregate
demand
C) A decrease in the money supply, an decrease in interest rates, and a decrease in aggregate
demand
D) A decrease in the money supply, an increase in interest rates, and a decrease in aggregate
demand
6. If businesses and consumers become pessimistic, the Federal Reserve can attempt
to reduce the impact on real GDP by
A) increasing the money supply which raises interest rates.
B) increasing the money supply which lowers interest rates.
C) decreasing the money supply which raises interest rates.
D) decreasing the money supply which lowers interest rates.
7. According to the theory of liquidity preference, the money supply
A) and money demand are positively related to the interest rate.
B) and money demand are negatively related to the interest rate.
C) is negatively related to the interest rate while money demand is positively related
to the interest rate.
D) is independent of the interest rate, while money demand is negatively related to
the interest rate.
8. To counteract a recession, the Fed could
A) buy government bonds on the open market and raise the reserve requirement
B) buy government bonds on the open market and lower the reserve requirement
C) buy government bonds on the open market and raise the discount rate
D) sell government bonds on the open market and raise the discount rate
9. Which of the following is NOT true of the Central Bank?
A) It serves as a lender of last resort for member banks.
B) It supervises member banks.
C) It issues debit cards.
D) It controls the money supply.
10. An expansionary monetary policy will lead to
A) Lower interest rates and more investment
B) Lower interest rates and lower investment
C) Higher interest rates and higher income
D) Higher interest rates and higher income
11. Which of the following would cause the money supply in the United States to expand?
A) an increase in reserve requirements
B) an increase in the discount rate
C) a purchase of stock and bonds by the Federal Reserve
D) a sale of stock and bonds by the Federal Reserve
12. If cr=23%, rr=7%, MS = 820, then
A) m = 4.1, B =200
B) m = 4 , B =205
C) m =10, B =82
D) m =5 , B =164
(financial assets becomes more attractive)
13. The opportunity cost of holding money balances increases when
A) the purchasing power of money rises.
B) the interest rate increases.
C) the price of goods and services falls.
D) consumer income expands.
14. Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits €1,000
of currency in a bank,
A) the money supply increases by more than €1,000.
B) the money supply increases by less than €1,000.
C) the money supply decreases by less than €1,000.
D) the money supply is unaffected
15. Suppose the Bank of England purchases a £1,000 government bond from you. If you
deposit the entire £1,000 in your bank, what is the total potential change in the money
supply as a result of the Bank of England’s action if your bank’s reserve ratio is 25 per
cent and the public holds no currency?
A)£4,000
B) £5,000
C) £1,000
D)None of the above
16. If at some interest rate the quantity of money supplied is greater than the quantity of
money demanded, people will desire to
A) sell interest-bearing assets causing the interest rate to decrease.
B) sell interest-bearing assets causing the interest rate to increase.
C) buy interest-bearing assets causing the interest rate to decrease.
D) buy interest-bearing assets causing the interest rate to increase
17. If households hold more of their money as currency, banks make fewer loans, and
money supply falls.
A) True
B) False
18. When the reserve requirement shrinks, the money multiplier expands.
A) True
B) False
19.
A)
B)
C)
D)
Which of the following is not one of the Central Bank’s monetary policy tools?
Buying bonds on the open market
Selling bonds on the open market
Raising or lowering taxes
Raising or lowering the reserve requirement ratio
20. Suppose the Fed makes an open market purchase of $3 million. Assume that
the money multiplier equals 2. What is the change in the money supply?
A) The money supply has increased by $1.5 million.
B) The money supply has increased by $6 million.
C) The money supply had decreased by $1.5 million.
D) The money supply has decreased by $6 million