Chapter 12
1.
An increase in the interest rate reduces the opportunity cost of holding money.
a. True
b. False
2.
The opportunity cost of holding money is
a. the dollar cost necessary to change other assets into money
b. the time cost of accessing funds
c. the value of the goods and services a person is able to obtain with the money
d. the interest a person could have earned by holding other forms of wealth instead
e. zero, because opportunity costs only apply to real assets, goods and services
3.
The amount of wealth that an individual wishes to hold as money is determined by
a. the price level
b. the price level and real income
c. real income
d. real income and the interest rate
e. the price level, real income, and the interest rate
4.
An individual would be most likely to increase the amount of money he wants to hold if
a. the price level declines
b. the price level declines and the interest rates rises
c. his real income increases
d. the interest rate increases
e. the interest rate and his real income decrease
5.
The money demand curve indicates the total quantity of money demanded in the economy at
each
a. price level
b. level of GDP
c. quantity of money supplied
d. level of income
e. interest rate
6.
A decrease in the interest rate shifts the money demand curve to the right.
a. True
b. False
7.
The money supply curve is vertical because
a. real income does not influence the quantity of money supplied
b. the price level does not influence the level of spending
c. only the interest rate influences the quantity of money supplied
d. the Federal Reserve sets the money supply
e. nominal income does not influence the quantity of money supplied
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8.
An open market purchase of bonds by the Fed
a. drains reserves from the banking system and decreases the money supply
b. injects reserves into the banking system and increases money demand
c. injects reserves into the banking system and increases the money supply
d. drains reserves from the banking system and increases the money supply
e. injects reserves into the banking system and decreases the money supply
9.
The money market is in equilibrium when there is no excess supply of or excess demand for
bonds.
a. True
b. False
10. Refer to Figure 12-4. If the interest rate is currently 8 percent, we would expect the
a. interest rate to rise to 10 percent
b. interest rate to rise to 12 percent
c. interest rate to fall to 6 percent
d. quantity of money held to decrease to $500 billion
e. money supply to increase to $700 billion
11. If there is an excess supply of money in the economy,
a. there is also an excess demand for money
b. there is also an excess demand for bonds
c. there is also an excess supply of bonds
d. the interest rate will rise
e. the Fed must intervene to restore equilibrium
2
12. If the actual interest rate is below the equilibrium interest rate, the
a. Fed must intervene in financial markets to restore the interest rate to its equilibrium
value
b. price of bonds will increase
c. price of bonds will decrease
d. money supply will increase until the interest rate rises
e. money supply will decrease until the interest rate rises
13. If the interest rate is above its equilibrium value, the price of
a. bonds will fall
b. Treasury securities will fall
c. bonds will rise
d. stocks will fall because of fluctuations in the bond market
e. money will rise
14. If Pat pays $500 for a one-year bond that carries an interest rate of 10 percent per year, how
much will she be repaid at the end of the year?
a. $1,000
b. $510
c. $620
d. $550
e. $500
15. The secondary market for bonds is a market for
a. bonds that is smaller than the primary market
b. bonds that are not first-class
c. previously issued bonds
d. bonds that are not substitutes for bonds found in the primary market
e. newly issued bonds
16. If the price of bonds falls, the
a. demand for bonds will rise
b. supply of bonds will fall
c. supply of bonds will rise
d. interest rate will rise
e. interest rate will fall
3
17. If the quantity of money demanded is less than the quantity supplied at a given interest rate,
what will happen to restore the market to equilibrium?
a. The public will try to buy bonds, the price of bonds will increase, and the interest rate
will fall until the equilibrium is attained where the money demand and supply curves
intersect.
b. The public will try to sell bonds, the price of bonds will decrease, and the interest rate
will rise until equilibrium is attained where the money demand and supply curves
intersect.
c. The public will try to sell bonds, the price of bonds will increase, and the interest rate
will fall until equilibrium is attained where the money demand and supply curves
intersect.
d. The public will try to buy bonds, the price of bonds will increase, and the interest rate
will rise until equilibrium is attained where the money demand and supply curves
intersect.
e. The public will try to buy bonds, the price of bonds will decrease, and the interest rate
will fall until equilibrium is attained where the money demand and supply curves
intersect.
18. If the Fed wishes to raise the interest rate, it will
a. increase the money supply
b. decrease the money supply
c. increase money demand
d. decrease money demand
e. simply set a higher market interest rate
19. If the Fed conducted an open market sale of bonds, what would most likely happen in the
bond market?
a. The excess demand for bonds would cause the price of bonds to fall.
b. The excess supply of bonds could cause the price of bonds to rise.
c. There would be no effect in the bond market.
d. The excess supply of bonds would cause the price of bonds to fall.
e. The excess demand for bonds would cause the price of bonds to rise.
20. If the interest rate dropped, what would be the effect on spending?
a. Spending on automobiles would decrease.
b. Business spending on new capital would decrease.
c. Spending on consumer durables would decrease.
d. Business spending on new factories would increase.
e. Spending on new homes would decrease.
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21. If the Fed decreases the money supply, we should expect the interest rate
a. to fall, spending on automobiles and business investment spending to rise, and the price
of bonds to increase
b. to rise, spending on automobiles and business investment spending to fall, and the price
of bonds to decrease
c. to rise, spending on automobiles and business investment spending to fall, and the price
of bonds to increase
d. to fall, spending on automobiles and business investment spending to fall, and the price
of bonds to decrease
e. to rise, spending on automobiles to fall, business investment to rise, and the price of
bonds to decrease
22. In the short-run macro model, an open-market purchase of bonds by the Fed will
a. raise the interest rate, reduce spending, and increase output
b. raise the interest rate, reduce spending, and decrease output
c. lower the interest rate, reduce spending, and decrease output
d. lower the interest rate, increase spending, and decrease output
e. lower the interest rate, increase spending, and increase output
23. If the Fed changes the interest rate, there will be
a. a movement along the aggregate expenditure line followed by a shift in the line
b. no movement along the aggregate expenditure line because the effect is on investment
c. a shift in the aggregate supply curve
d. an increase in the money supply
e. a shift in the aggregate expenditure line
24. The federal funds rate is the rate at which
a. banks loan money to the Fed
b. the Fed loans money to banks
d. one bank loans money to another.
e. regional Federal Reserve banks loan
money to a local bank
c. one regional Federal Reserve bank loans
money to another regional Federal
Reserve bank
25. The federal funds rate is
a. determined in a market but targeted by
d. chosen by Congress and enforced on the
the Fed.
banks.
b. chosen by the Fed and enforced on the
e. determined in the market and beyond the
banks.
control of the Fed.
c. chosen by Congress and enforced on the
Fed.
5
Questions from Appendix Chapter 12
26. Refer to Figure 12-7. If the aggregate expenditure line shifts from AE1(r = 8%) to AE2(r =
10%), which of the following is the most likely cause of that shift?
a. an increase in the money supply
b. a decrease in the money supply
c. an increase in government purchases
d. a decrease in government purchases
e. an increase in taxes
27. Which of the following dampens the effect on GDP of a change in government spending?
a. The money supply changes when real income changes.
b. Taxes change when government spending changes.
c. Money demand changes when real income changes.
d. People do not expect much from the government.
e. Aggregate spending does not respond to changes in the interest rate.
28. A change in the interest rate
a. reduces the money supply following an increase in government purchases
b. decreases government purchases by increasing the cost of borrowing
c. moderates the decline in equilibrium GDP following a decrease in government spending
d. strengthens the impact on GDP of changes in government spending
e. helps us focus on the economic effects of economic shocks
6
29. Which of the following statements about the effects of an increase in government purchases
is most accurate?
a. In the classical model, it will cause complete crowding out. In the short-run macro
model, crowding out will be incomplete.
b. In the classical model, it will cause incomplete crowding out. In the short-run macro
model, crowding out will be complete.
c. Crowding out will be complete in both the classical and short-run macro model.
d. Crowding out will be incomplete in both the classical and short-run macro model.
e. In the classical model, the increase in government spending will lead to a decrease in
investment spending and autonomous consumption. In the short-run macro model, it
will not.
30. If money supply increases, which of the following is the most likely effect in the short run?
a. a decrease in interest rate, a decrease in output, and an increase in money demand
b. an increase in interest rate, a decrease in output, and an increase in money demand
c. a decrease in interest rate, a decrease in output, and a decrease in money demand
d. an increase in interest rate, a decrease in output, and a decrease in money demand
e. a decrease in interest rate, an increase in output, and an increase in money demand
Chapter 13
1.
The aggregate demand curve
a. represents the relationship between prices and quantities of all goods produced in an
economy
b. is derived from equilibrium conditions in the labor and money markets
c. gives the equilibrium level of real GDP corresponding to a given price level
d. is the sum of an economy's individual demand curves
e. plots the interest rate as a function of output
2.
Which of the following will cause a movement along the aggregate demand curve?
a. a decrease in the price level
b. an increase in government purchases
c. a decrease in taxes
d. an increase in investment spending
e. an increase in the interest rate
3.
If a change in investment spending is due to a change in the price level, then the aggregate
demand curve will shift.
a. True
b. False
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4.
If autonomous consumption decreases, which of the following combinations of events
would be most likely to occur?
a. an upward shift of the aggregate expenditure line, a rightward shift of the money
demand curve, and a leftward shift of the aggregate demand curve
b. a downward shift of the aggregate expenditure line, a leftward shift of the money
demand curve, and a leftward shift of the aggregate demand curve
c. a downward shift of the aggregate expenditure line, a leftward shift of the money
demand curve, and a rightward shift of the aggregate demand curve
d. a downward shift of the aggregate expenditure line, a rightward shift of the money
demand curve, and a rightward shift of the aggregate demand curve
e. an upward shift of the aggregate expenditure line, a rightward shift of the money
demand curve, and a rightward shift of the aggregate demand curve
8
5. Refer to Figure 13-3. Which of the following most likely caused the shifts from AE1 to AE2,
and from AD1 to AD2?
a. a decrease in the money supply
b. an increase in government purchases
c. an increase in investment spending
d. an increase in autonomous consumption
e. an increase in taxes
6.
If the Fed sells bonds in an open market operation, which of the following is most likely to
occur?
a. the equilibrium level of GDP decreases
b. the money supply increases
c. the interest rate falls
d. the aggregate expenditure line shifts upward
e. the open market operation is said to be expansionary
7.
As output increases, a typical firm's unit costs
a. decrease because the firm buys its inputs in large quantities
b. increase because the supply of inputs increases
c. remain constant
d. increase due to the increasing scarcity of resources
e. decrease as firms take advantage of diseconomies of scale
8.
Refer to Figure 13-4. If the economy is currently at point X, an increase in output will
a. move the economy to point A
b. move the economy to point B
c. shift the aggregate supply curve up to curve AS2
d. shift the aggregate supply curve down to curve AS3
e. have no effect on the price level and there will be no movement away from point X
9
9.
Which of the following most accurately describes the aggregate supply curve?
a. It shows the price level associated with firms' unit costs and markups for any level of
GDP.
b. It is the sum of all individual firms' supply curves.
c. It is determined by the federal government.
d. It shows firms' unit costs for each level of GDP.
e. It shows the equilibrium level of GDP corresponding to each price level.
10. If output increases, which of the following would occur?
a. Prices of non-labor inputs, input requirements per unit of output, and unit costs would
all increase, and the economy would move downward along the aggregate supply curve.
b. Prices of non-labor inputs, input requirements per unit of output, and unit costs would
all decrease, and the economy would move downward along the aggregate supply curve.
c. Prices of non-labor inputs, input requirements per unit of output, and unit costs would
all decrease, and the economy would move upward along the aggregate supply curve.
d. Prices of non-labor inputs, input requirements per unit of output, and unit costs would
all increase, and the economy would move upward along the aggregate supply curve.
e. Prices of non-labor inputs and input requirements per unit of output would increase, unit
costs would decrease, and the economy would move downward along the aggregate
supply curve.
11. Refer to Figure 13-6. Short-run macroeconomic equilibrium occurs at a price level of
a. 120 and real GDP of $5.5 trillion
b. 140 and real GDP of $5.5 trillion
c. 120 and real GDP of $6.5 trillion
d. 120 and real GDP of $7.5 trillion
e. 140 and real GDP of $7.5 trillion
10
12. Refer to Figure 13-6. If the price level is currently at 140, what would we expect to occur in
the short run?
a. The price level will remain at 140 and businesses will cut production to $5.5 trillion.
b. The price level will remain at 140 and the extra $2 trillion in real GDP will be saved for
future use.
c. The aggregate supply curve will shift upward until it intersects the aggregate demand
curve at a price level of 140 and real GDP of $5.5 trillion.
d. The aggregate demand curve will shift right until it intersects the aggregate supply curve
at a price level of 140 and real GDP of $7.5 trillion.
e. Inventories will accumulate and businesses will cut production until equilibrium is
reached at a price level of 120 and real GDP of $6.5 trillion.
13. In the short run, a contractionary fiscal policy would cause
a. the AD curve to shift to the right
b. equilibrium real GDP to decrease and the price level to increase
c. the AS curve to shift left
d. the economy to slide along the AD curve
e. equilibrium GDP and the price level to fall
14. In the short run, an increase in the money supply will
a. decrease the interest rate, increase real GDP, and decrease the price level
b. increase the interest rate, decrease real GDP, and decrease the price level
c. result in decreases in the interest rate and real GDP, which are then followed by
increases in the interest rate which offset some of the change in real GDP
d. result in decreases in the interest rate and increases in real GDP, which are then
followed by increases in the interest rate which offset some of the increase in real GDP
e. result in an increase in the interest rate and a decrease in real GDP, which are then
followed by decreases in the interest rate which offset some of the decrease in real GDP
15. If investment spending increases due to increased optimism in the business sector, which of
the following would occur?
a. an increase in GDP, an increase in the price level, an increase in money demand, and an
increase in the interest rate
b. an increase in GDP, a decrease in the price level, an increase in money demand, and a
decrease in the interest rate
c. a decrease in GDP, a decrease in the price level, a decrease in money demand, and a
decrease in the interest rate
d. a decrease in GDP, a decrease in the price level, an increase in money demand, and an
increase in the interest rate
e. an increase in GDP, an increase in the price level, a decrease in money demand, and a
decrease in the interest rate
16. If actual output is greater than the full-employment level of output, we should expect wages
to increase over time.
a. True
b. False
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17. Refer to Figure 13-8. Suppose that the economy is at the full-employment level of output of
$6 trillion when a demand shock increases real GDP to $6.5 trillion. In the long run, we
would expect the
a. economy to remain at the new level of output of $6.5 trillion
b. aggregate demand curve to shift leftward until the economy returns to full employment
at the original price level
c. aggregate supply curve to shift upward until the economy returns to full employment,
but at a higher price level
d. aggregate supply curve to shift downward until the price level returns to its original
level
e. aggregate demand curve to shift further to right as the multiplier effect occurs
18. The economy's self-correcting mechanism
a. prevents the economy from ever being in disequilibrium
b. guides the economy to full employment in the long run
c. maintains a steady long-run price level
d. is a short-run adjustment process
e. is controlled by the Fed
19. In the long run, unusually high unemployment
a. indicates that an economy is operating above potential GDP
b. forces the wage rate down
c. eventually causes the aggregate supply curve to shift upward
d. pushes the price level upward
e. causes the aggregate demand curve to shift rightward
12
20. Refer to Figure 13-10. Suppose that output in the economy is currently below full
employment. If real GDP is $6.8 trillion and a demand shock lowers real GDP to $6.5
trillion, what would we expect to occur in the long run?
a. The aggregate supply curve will shift upward as wages fall.
b. The aggregate supply curve will shift downward as wages fall.
c. The aggregate demand curve will shift rightward as wages fall.
d. The aggregate demand curve will shift leftward as wages fall.
e. No further changes in aggregate supply or aggregate demand without government
intervention.
21. If government spending increases, which of the following would be most likely in the short
and in the long run? (Both comparisons are with regard to the original price level/output
combination.)
a. short-run increases in the price level, no change in output; long-run increases in output
and in the price level
b. short-run increases in output and in the price level; long-run increase in output, decrease
in the price level
c. short-run decreases in output and in the price level; long-run increase in the price level,
no change in output
d. short-run increases in output and in the price level; long-run increase in the price level,
no change in output
e. short-run decreases in output and in the price level; long-run decreases in output and in
the price level
13
22. The AD-AS model implies that, in the long run,
a. the economy adjusts very quickly to demand shocks
b. changes in government spending have no effect on GDP
c. the price level never changes
d. a mixture of fiscal and monetary policy is necessary to achieve full employment
e. the Fed controls output
23. A positive supply shock causes stagflation in the short run.
a. True
b. False
24. Refer to Figure 13-13. Beginning at point A, suppose a supply shock shifts the aggregate
supply curve to AS2. In the long run, we would expect
a. an increase in the price level and a decrease in real GDP
b. an increase in the price level and a return of real GDP to its full-employment level
c. a decrease in the price level to below its level at point A, and a return of real GDP to its
full-employment level
d. the price level and real GDP to return to their original levels at point A
e. aggregate demand to increase until full employment is restored
14
25. Refer to Figure 13-14. Suppose a supply shock moves the economy from point A to point
B. In the long run, we would expect
a. the increase in real GDP to increase wages and shift the aggregate demand curve to the
right
b. the increase in real GDP to increase wages and shift the aggregate supply curve back to
AS1
c. the decrease in the price level to encourage buying and shift the aggregate demand curve
to the right
d. wages to fall, causing the aggregate supply curve to shift rightward until full
employment is restored
e. the economy to remain at point B
Questions from Chapter 14:
1.
The Fed's objectives have remained the same since its inception.
a. True
b. False
2.
A fluctuating rate of inflation
a. will cause a downturn in the housing sector
b. redistributes income from creditors to debtors
c. redistributes income from the employed to the unemployed
d. was the problem that originally led to the creation of the Federal Reserve System
e. interferes with long-run planning
3.
If unemployment is below the natural rate, GDP is below potential output.
a. True
b. False
15
4.
Which of the following are equivalent terms?
a. the absence of structural unemployment and the absence of cyclical unemployment
b. normal employment and the absence of structural unemployment
c. full employment and the absence of cyclical unemployment
d. normal employment and the absence of frictional unemployment
e. full employment and the absence of frictional unemployment
5.
At present, what is the approximate natural rate of unemployment in the United States?
a. 4.5 percent
b. 5.5 percent
c. 7 percent
d. 8.5 percent
e. 2.5 percent
6.
If the Fed has a goal of stable real GDP and government spending increased, which of the
following would occur?
a. The money demand would not change, real GDP would not change, the interest rate
would decrease, and there would be partial crowding out.
b. Money demand would not change, real GDP would not change, the interest rate would
increase, and there would be complete crowding out.
c. Money demand would increase, real GDP would not change, the interest rate would
increase, and there would be partial crowding out.
d. Money demand would not change, real GDP would increase, the interest rate would
decrease, and there would be complete crowding out.
e. Money demand would increase, real GDP would not change, the interest rate would
decrease, and there would be complete crowding out.
7.
To stabilize real GDP, the Fed must increase the money supply in response to a
a. positive demand shock
b. low level of unemployment
c. sudden upsurge in inflation
d. rise in the interest rate
e. negative demand shock
8.
If there is a sudden increase in government spending, which of the following should the Fed
do if it wants to keep the price level steady?
a. do nothing, since the self-correcting mechanism will adjust the economy
b. sell bonds in the open market
c. wait, since the price level usually does not change when government spending increases
d. decrease the required reserve ratio
e. buy bonds in the open market
9.
Those who prefer that the Fed react to negative supply shocks by tolerating higher rates of
inflation as a means of moderating a recession are called
a. inflation doves
b. inflation hawks
c. monetarists
d. Keynesians
e. hard headed and soft hearted
16
10. Refer to Figure 14-6. Suppose a supply shock shifts aggregate supply from AS1 to AS2 and
decreases output below full employment. Which of the following statements is most
accurate?
a. By increasing the money supply, the Fed can stabilize the interest rate and price level
and return output to its full-employment level.
b. By decreasing the money supply, the Fed can stabilize the interest rate and price level
and return output to its full-employment level.
c. By increasing the money supply, the Fed can stabilize the price level but output will
remain below the full-employment level.
d. By increasing the money supply, the Fed can return output to its full-employment level
but at the expense of a further increase in the price level.
e. By increasing the money supply, the Fed can stabilize the price level and return output
to its full-employment level but must sacrifice its interest rate target.
11. The choice between hawk and dove positions depends on
a. the extent of cyclical unemployment at the time of the decision
b. relative importance of short-run and long-run monetary considerations
c. cooperation between Congress and the monetary authorities
d. the frequency of negative supply shocks
e. the Fed's relative concern for price and employment stability
12. If the Fed increases the money supply in response to positive demand shocks, it
a. lowers the interest rate
b. reduces each type of unemployment
c. adds its own positive demand shock
d. creates financial stability
e. crowds out private investment
17
13. If people come to expect ongoing inflation, what will happen over time independent of the
Fed's response?
a. The long-run aggregate supply curve will shift to the right.
b. The aggregate supply curve will continue to shift upward.
c. The aggregate demand curve will continue to shift to the right.
d. The aggregate supply curve will continue to shift downward.
e. The aggregate demand curve will continue to shift to the left.
14. To eliminate built-in inflation from the economy, the Fed must
a. announce its intention to have a single policy objective
b. create a recession
c. maintain a constant rate of inflation
d. resist the temptation to change its interest rate targets
e. work closely with Congress and the President
15. What short-run choice does the Phillips curve illustrate?
a. the choice between higher real wages and higher output
b. the choice between cyclical unemployment and frictional unemployment
c. the choice between a higher capital stock and inflation
d. the choice between higher output per capita and maintaining the natural rate of
unemployment
e. the choice between unemployment and inflation
18