Macroeconomics 2 Test Questions – Flashcards
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By making exchange easier, money allows for a. a double coincidence of wants. b. the possible risk of inflation. c. specialization and higher productivity. d. all of the above.
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c
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Which of the following conditions make a good suitable for use as a medium of exchange? a. The good must be acceptable to (that is, usable by) most buyers and sellers. b. The good should be of standardized quality, so that any two units are identical. c. The good should be durable, valuable relative to its weight, and divisible. d. All of the above conditions must be met.
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d
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Which of the following statements is correct? a. Today, most governments in the world issue paper currency that is backed by gold and can be redeemed for gold. b. Paper currency has no value unless it is used as money. c. Paper money is a commodity money. d. All of the above are true
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b
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What of the following statements is true about money? a. Money is only those assets that serve as a medium of exchange. b. Money is only currency, checking account deposits, or traveler's checks. c. Money can be narrowly or broadly defined, depending on the types of assets included. d. None of the above. There is no official definition or measurement of the money supply today.
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c
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Which of the following statements is true? a. Today, U.S. law prohibits banks from paying interest on checking account deposits. b. Today, people are not allowed to write checks against their savings account balances. c. Today, the difference between checking accounts and savings accounts is greater than it was before the banking reform in 1980. d. All of the above are true.
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b
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The key role that banks play in the economy is to a. provide a market for stocks and bonds. b. manage the money supply. c. accept deposits and make loans. d. serve as lenders of last resort.
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c
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Which of the following is an asset to a bank? a. reserves b. checking account deposits c. savings account deposits d. certificates of deposit
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a
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Which of the following is the largest asset of a typical bank? a. loans b. buildings c. vault cash d. checking account deposits
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a
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Which of the following is the largest liability of a typical bank? a. deposits b. loans c. reserves d. treasury bills
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a
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The simple deposit multiplier equals a. the inverse, or reciprocal, of the required reserve ratio. b. the ratio of the amount of deposits created by banks to the amount of new reserves. c. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. d. all of the above
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d
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If American Bank has $500 in deposits and $200 in reserves and the required reserve ratio is 10 percent, then American Bank has a. $200 in excess reserves. b. $50 in required reserves. c. $50 in excess reserves. d. $200 in required reserves.
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b
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To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to a. buy U.S. Treasury securities from the public. b. sell U.S. Treasury securities to the public. c. print U.S. Treasury securities and put them out in circulation. d. buy U.S. dollars in the foreign exchange market.
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a
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The Fed conducts monetary policy primarily through a. open market operations. b. discount policy. c. reserve requirements. d. none of the above.
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a
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Which of the following is not a factor that helped lead to the financial panic of 2008? a. deposit insurance for all commercial banks b. falling housing prices c. high leverages of financial firms that purchased mortgage-backed securities d. none of the above
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a
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Which two policy goals can be pursued simultaneously without being at odds with each other? a. high employment and inflation reduction b. economic growth and inflation reduction c. high employment and economic growth d. Any of the combinations above can be pursued simultaneously without being at odds with each other.
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c
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When is the opportunity cost of holding money higher? a. when interest rates are high b. when interest rates are low c. when the inflation rate is lower d. when the money supply increases
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a
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When the interest rate decreases, a. the money demand curve shifts to the right. b. the money demand curve shifts to the left. c. there is a movement down along a stationary money demand curve. d. there is a movement up along a stationary money demand curve.
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c
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Fill in the blanks. When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________. a. low; low b. high; high c. low; high d. high; low
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c
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If the FOMC orders the trading desk to sell Treasury securities, a. the money supply curve will shift to the left, and the equilibrium interest rate will fall. b. the money supply curve will shift to the left, and the equilibrium interest rate will rise. c. the money supply curve will shift to the right, and the equilibrium interest rate will rise. d. the money supply curve will shift to the right, and the equilibrium interest rate will fall.
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b
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The prices of financial assets and the interest rates on these assets a. move in the same direction. b. move in opposite directions. c. are identical. d. are unrelated
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b
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Fill in the blanks. Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will _________ Treasury bills and other financial assets, thereby _________ their prices, and _________ their interest rates. a. buy; increasing; decreasing b. sell; increasing; decreasing c. buy; decreasing; decreasing d. sell; decreasing; increasing
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a
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Fill in the blanks. As interest rates decline, stocks become a __________ attractive investment relative to bonds, and this causes the demand for stocks and their prices to __________. a. more; rise b. more; fall c. less; rise d. less; fall
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a
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Fill in the blanks. If interest rates in the United States rise relative to interest rates in other countries, the demand for dollars will __________, which will __________ the value of the dollar and cause net exports to _________. a. fall; lower; fall b. rise; increase; rise c. fall; lower; rise d. rise; increase; fall
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d
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An increase in the money supply will a. shift the money demand curve to the right and reduce the interest rate. b. shift the money supply curve to the right and increase the interest rate. c. shift the money demand curve to the left and increase the interest rate. d. shift the money supply curve to the right and reduce the interest rate.
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d
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Which of the following is a consequence of deflation? a. an increase in real interest rates b. an increase in the real value of debts c. consumers may postpone their purchases in the hope of facing even lower prices in the future d. all of the above
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d
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All of the following will most likely increase as a result of expansionary monetary policy except a. consumption. b. government purchases. c. investment. d. net exports
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b
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If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then a. inflation will be higher than if the Fed had not acted. b. the unemployment rate will be higher than if the Fed had not acted. c. the real GDP will be lower than if the Fed had not acted. d. the economy will be more stable than if the Fed had not acted.
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a
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According to the Taylor Rule, if the Fed reduces its target for the inflation rate, this will result in a. a higher target federal funds rate. b. no change in the target federal funds rate. c. a lower target federal funds rate. d. a higher target output growth rate.
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a
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Which of the following countries has not officially adopted an inflation target? a. United States b. Canada c. New Zealand d. the United Kingdom
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b
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The Federal Reserve System's four monetary policy goals are 1) _______ A) low rate of bank failures, high reserve ratios, price stability, and economic growth. B) price stability, high employment, economic growth, and stability of financial markets and institutions. C) price stability, low government budget deficits, low current account deficits, and low rate of bank failures. D) low government budget deficits, low current account deficits, high employment, and a high foreign exchange value of the dollar.
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b
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The top policy goal for Paul Volcker when he became chairman of the Federal Reserve's Board of Governors in 1979 was 2) _______ A) fighting inflation. B) a low current account deficit. C) increasing employment. D) increasing regulation of commercial banks. E) increasing economic growth.
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a
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The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, it also can achieve the goal of ________ simultaneously. 3) _______ A) economic growth; a low current account deficit B) high employment; lowering government spending C) stability of financial markets; a low current account deficit D) high employment; economic growth
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d
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The Federal Reserve's two main ________ are the money supply and the interest rate. 4) _______ A) monetary policy targets B) policy tools C) fiscal tools D) fiscal policy targets
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a
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The money demand curve has a 5) _______ A) negative slope because an increase in the price level decreases the quantity of money demanded. B) positive slope because an increase in the price level increases the quantity of money demanded. C) negative slope because an increase in the interest rate decreases the quantity of money demanded. D) positive slope because an increase in the interest rate increases the quantity of money demanded.
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c
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An increase in the interest rate 6) _______ A) increases the opportunity cost of holding money. B) decreases the opportunity cost of holding money. C) decreases the percentage yield of holding money. D) increases the percentage yield of holding money.
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a
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An increase in the interest rate causes 7) _______ A) the money demand curve to shift to the left. B) a movement down along the money demand curve. C) a movement up along the money demand curve. D) the money demand curve to shift to the right.
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c
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Which of the following would cause the money demand curve to shift to the left? 8) _______ A) an increase in the price level B) an increase in the interest rate C) an open market purchase of Treasury securities by the Federal Reserve D) a decrease in real GDP
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d
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An increase in the price level causes 9) _______ A) a movement down along the money demand curve. B) a movement up along the money demand curve. C) the money demand curve to shift to the right. D) the money demand curve to shift to the left.
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c
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Using the money demand and money supply model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to 10) ______ A) decrease. B) increase. C) not change. D) increase, then decrease.
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b
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Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should 11) ______ A) not change. B) increase, then decrease. C) increase. D) decrease.
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c
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Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to 12) ______ A) increase, then decrease. B) increase. C) not change. D) decrease.
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b
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An increase in real GDP can shift 13) ______ A) money demand to the right and increase the equilibrium interest rate. B) money demand to the left and decrease the equilibrium interest rate. C) money demand to the right and decrease the equilibrium interest rate. D) money demand to the left and increase the equilibrium interest rate.
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a
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Which of the following is true? 14) ______ A) The loanable funds model is essentially a model that determines the short-term real rate of interest. B) The money market model is essentially a model that determines the short-term nominal rate of interest. C) The loanable funds model is essentially a model that determines the long-term nominal rate of interest. D) The money market model is essentially a model that determines the short-term real rate of interest.
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b
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For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the 15) ______ A) Treasury bill rate. B) prime rate. C) discount rate. D) federal funds rate
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d
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The monetary policy target the Federal Reserve focuses primarily on today is 16) ______ A) M1. B) the inflation rate. C) the unemployment rate. D) the interest rate. E) M2.
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d
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The interest rate that banks charge other banks for overnight loans is the 17) ______ A) Treasury bill rate. B) prime rate. C) discount rate. D) federal funds rate.
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d
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The Fed can increase the federal funds rate by 18) ______ A) selling Treasury bills, which decreases bank reserves. B) buying Treasury bills, which decreases bank reserves. C) buying Treasury bills, which increases bank reserves. D) selling Treasury bills, which increases bank reserves.
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a
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The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect 19) ______ A) foreign exchange rates. B) real interest rates. C) nominal interest rates. D) tax rates.
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b
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An increase in interest rates 20) ______ A) decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. B) decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports. C) increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. D) decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.
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d
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The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as 21) ______ A) an interest rate panic. B) a liquidity trap. C) the Taylor rule. D) a zero-sum game.
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b
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In response to already low interest rates doing little to stimulate the economy, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as 22) ______ A) quantitative easing. B) inflation targeting. C) securities-bubble deflating. D) contractionary monetary policy.
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a
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Expansionary monetary policy refers to the ________ to increase real GDP. 23) ______ A) government's decreasing spending and raising taxes B) government's increasing spending and lowering taxes C) Federal Reserve's increasing the money supply and decreasing interest rates D) Federal Reserve's decreasing the money supply and increasing interest rates
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c
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Which of the following describes what the Fed would do to pursue an expansionary monetary policy? 29) ______ A) use open market operations to buy Treasury bills B) use discount policy to raise the discount rate C) use open market operations to sell Treasury bills D) raise the reserve requirement
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a
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Contractionary monetary policy on the part of the Fed results in 30) ______ A) a decrease in the money supply, an increase in interest rates, and a decrease in GDP. B) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP. C) an increase in the money supply, a decrease in interest rates, and an increase in GDP. D) an increase in the money supply, an increase in interest rates, and an increase in GDP.
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a
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The economy suffered a mild recession in 2001. Despite the recession, home sales and durable goods sales remained high. Which of the following is a plausible explanation? 31) ______ A) The Fed's pursuit of contractionary policy stimulated these markets. B) The Fed caused a reduction in the federal funds rate to its lowest level in 40 years. C) Home building and consumer durable purchases are always high during a recession. D) Rising inflation encouraged many to invest in the real estate market.
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b
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The Federal Reserve cannot target both the money supply and the interest rate because it does not control 32) ______ A) bank reserves. B) open market operations. C) money demand. D) the discount rate.
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c
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If the Federal Reserve targets the money supply, and the money demand curve shifts to the left, then the Fed 33) ______ A) cannot maintain the money supply target. B) can maintain the money supply target with no change in the interest rate. C) can maintain the money supply target, but at a lower interest rate. D) can maintain the money supply target, but at a higher interest rate.
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c
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Crowding out refers to a decline in ________ as a result of an increase in ________. 34) ______ A) tax revenues; unemployment B) private expenditures; government purchases C) government purchases; private expenditures D) government purchases; tax rates
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b
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The use of fiscal policy to stabilize the economy is limited because 35) ______ A) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. B) changes in government spending and tax rates have a small effect on aggregate demand. C) changes in government spending and tax rates have a small effect on interest rates. D) the Internal Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code.
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a
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The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because 36) ______ A) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. B) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time. C) the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy. D) the Federal Reserve can immediately recognize when real GDP is below or above potential GDP.
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c
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Expansionary fiscal policy 37) ______ A) causes complete crowding out in the short run. B) is never effective because of crowding out. C) can be effective in the short run. D) can be effective in the long run.
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c?
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n the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending. 38) ______ A) more than complete B) complete C) no D) partial
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b
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To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the 39) ______ A) budget deficit or surplus as a percentage of government spending. B) budget deficit or surplus as a percentage of tax revenues. C) absolute size of the budget deficit or surplus. D) budget deficit or surplus as a percentage of GDP.
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d
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A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. 40) ______ A) increase; fall; rises B) decrease; rise; falls C) increase; rise; falls D) decrease; fall; rises
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a
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An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. 41) ______ A) decrease; rise; falls B) increase; rise; falls C) decrease; fall; rises D) increase; fall; rises
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a
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Which of the following is a reason why we should consider the federal national debt a problem? 42) ______ A) If the debt drives up interest rates, crowding out will occur. B) If the debt was incurred to finance improvements in infrastructure, crowding out will occur. C) The federal government is in danger of defaulting on its debt. D) If the debt was incurred to finance research and development, crowding out will occur.
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a
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Which of the following best describes supply-side economics? 43) ______ A) Education affects the incentive to work, save, and invest and, therefore, aggregate supply. B) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply. C) Education affects labor productivity which affects aggregate supply. D) Labor productivity affects aggregate supply.
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b
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Economists who believe the supply-side effects of tax cuts are small essentially believe that 44) ______ A) tax cuts will increase the quantity of labor supplied. B) tax cuts will result in relatively small changes in the price level. C) tax cuts mainly affect aggregate demand. D) tax cuts mainly affect aggregate supply.
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c
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Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to increase ________ and real GDP to increase ________. 45) ______ A) less; more B) more; less C) more; more D) less; less
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a
question
Tax simplification and reductions in tax rates will result in a. additional shifts to the right in LRAS leading to a higher price level and lower real GDP. b. additional shifts to the right in LRAS leading to a lower price level and lower real GDP. c. additional shifts to the right in LRAS leading to a lower price level and higher real GDP. d. additional shifts to the right in LRAS leading to a higher price level and higher real GDP.
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c
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The effect on the economy of tax reduction and simplification is a. a change in the costs and expectations of producers, as shown by an upward shift in the short-run aggregate supply curve. b. an increase in consumption and investment spending, and a rightward shift of the aggregate demand curve. c. an increase in the quantity of real GDP supplied at every price level, or a shift in the long-run aggregate supply curve. d. higher employment and real GDP but also a higher price level.
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c
question
Economists believe that the smaller the tax wedge for any economic activity, such as working, saving, investing, or starting a business, a. the lower the equilibrium interest rate. b. the greater the difference between the pretax and posttax return to those activities. c. the more of that economic activity that will occur. d. the greater the marginal tax rate
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c
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If a tax cut has supply-side effects, then a. it will affect only aggregate demand. b. it will affect only aggregate supply. c. it will affect both aggregate demand and aggregate supply. d. it will definitely not increase the federal budget deficit.
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c
question
Which of the following is true of any permanent increase in government purchases in the long run? a. Any permanent increase in government purchases can be accommodated by the economy in the long run so as to maintain a steady level of private expenditures. b. In the long run, any permanent increase in government purchases must come at the expense of private expenditures. c. In the long run, a permanent increase in government purchases does not affect private expenditures in any way. d. In the long run, any permanent increase in government purchases is usually accompanied by an increase in private expenditures of the same amount.
answer
b
question
What is the long-run effect of a permanent increase in government spending? a. Investment, consumption, and net exports decline but less than the increase in government purchases; therefore, aggregate demand increases. b. Investment, consumption, and net exports decline but more than the increase in government purchases; therefore, aggregate demand decreases. c. The decline in investment, consumption, and net exports exactly offsets the increase in government purchases; therefore, aggregate demand remains unchanged. d. Investment, consumption, and net exports remain unchanged; therefore, there is no change in aggregate demand.
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c
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Fill in the blanks. According to the crowding-out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will ___________, which will cause some consumption, investment, and net exports to ___________. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase
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b
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Assume that the absolute size of the government purchases multiplier is larger than the absolute size of the tax multiplier. What happens to equilibrium real GDP if the government increases both government purchases and taxes by the same amount? a. Real GDP will increase. b. Real GDP will decrease. c. Real GDP will remain unchanged. d. Real GDP will increase or decrease, depending on the size of the difference between the government purchases multiplier and the tax multiplier in absolute terms.
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a
question
Fill in the blanks. Increases in government purchases and decreases in taxes have a __________ multiplier effect on equilibrium real GDP, and decreases in government purchases and increases in taxes have a __________ multiplier effect on equilibrium real GDP. a. positive; negative b. negative; positive c. positive; positive d. negative; negative
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a
question
When the tax rate increases, the size of the multiplier effect ___________. a. increases b. decreases c. remains the same d. increases for small increases in the tax rate and decreases for large increases in the tax rate
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b
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How would you decompose the total effect of an increase in government purchases on the aggregate demand curve? (Note: the magnitudes of the shifts do not have to be the same.) a. The aggregate demand curve shifts once to the right and then back to the left. b. The aggregate demand curve shifts as a result of two distinct effects, twice to the right. c. The aggregate demand curve shifts as a result of two distinct effects, twice to the left. d. The aggregate demand curve does not shift, but there are two movements, one downward and one upward, along the curve.
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b
question
The multiplier effect consists of a. a series of autonomous expenditures that result from an initial increase in government expenditures. b. a series of autonomous expenditure increases that result from an initial increase in induced expenditures. c. a series of induced increases in consumption spending that result from an initial increase in autonomous expenditures. d. a change in government spending resulting from a change in equilibrium income
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c
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By how much will equilibrium real GDP increase as a result of a $100 billion increase in government purchases? a. by more than $100 billion b. by less than $100 billion c. by exactly $100 billion d. None of the above; equilibrium real GDP will not change as a result of an increase in government purchases.
answer
a
question
Fill in the blanks. An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________. a. expansionary; rise; rise b. expansionary; rise; fall c. contractionary; rise; fall d. contractionary; fall; fall
answer
d
question
Which of the following will reduce the inflation rate? a. increasing the money supply b. increasing government purchases c. reducing government purchases or increasing taxes d. none of the above
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c
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When the government takes actions to change taxes and spending, the type of policy involved is called a. discretionary fiscal policy. b. automatic stabilizers. c. transfer payments. d. autonomous fiscal expenditures.
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a
question
Which of the following is identified in the textbook as an action by the Fed during Greenspan's term that possibly contributed to the financial crisis of 2007-2009? a. The Fed's decision not to save the failing hedge fund Long-Term Capital Management in 1998 b. The Fed's decision to keep the target for the federal funds rate at 1 percent for more than 18 months after the end of the 2001 recession c. The Fed's decision to announce at the end of each FOMC meeting about its future economic outlook d. The Fed's decision to disclose any change to its target for the federal funds rate immediately each FOMC meeting
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b
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In order to drive down the inflation rate, the unemployment rate will have to rise more if the short-run Phillips curve is a. flatter. b. steeper. c. vertical. d. upward sloping.
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a
question
How did the Federal Reserve respond to the effects of the oil supply shock in the mid-1970s that led to rising unemployment and rising inflation? a. The Fed used a contractionary monetary policy to fight the high inflation rate. b. The Fed used an expansionary monetary policy to fight the high unemployment rate. c. The Fed used a combination of expansionary monetary policy and contractionary monetary policy to fight both the high unemployment rate and the high inflation rate. d. The Fed did not take any action in response to the oil supply shock.
answer
b
question
Fill in the blanks. A negative supply shock, such as the OPEC oil price increases of the early 1970s, can be illustrated by a ______________ shift of the short-run aggregate supply curve and a _________________ shift of the short-run Phillips curve. a. leftward; upward b. leftward; downward c. rightward; upward d. rightward; downward
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a
question
A negative supply shock will a. shift the short-run Phillips curve up. b. shift the long-run Phillips curve to the right. c. shift the long-run Phillips curve down. d. shift the short-run Phillips curve up and the long-run Phillips curve to the right.
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a
question
If workers ignore inflation in calculating the real wage rate, what is the effect of an expansionary monetary policy? a. a move downward along the short-run Phillips curve b. a move upward along the short-run Phillips curve c. a move upward along the long-run Phillips curve d. a move downward along the long-run Phillips curve
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d
question
If workers and firms have rational expectations and wages and prices adjust quickly, an expansionary monetary policy will a. increase the inflation rate, but lower the unemployment rate. b. increase the inflation rate, but not change the unemployment rate. c. increase both the inflation and unemployment rates. d. change neither the inflation nor the unemployment rates.
answer
b
question
Fill in the blanks. If the unemployment rate is below the natural rate, the inflation rate tends to ___________, and eventually, the short-run Phillips curve will shift _______. a. increase; up b. increase; down c. decrease; up d. decrease; down
answer
a
question
If workers and firms revise their expectations of inflation upward, a. there will be a movement downward along the short-run Phillips curve. b. there will be a movement upward along the short-run Phillips curve. c. the short-run Phillips curve will shift up. d. the short-run Phillips curve will shift down.
answer
c
question
Fill in the blanks. If expected inflation is higher than actual inflation, actual real wages in the economy will turn out to be _________ than expected real wages; consequently, firms will hire _________ workers than they had planned. a. higher; more b. higher; fewer c. lower; more d. lower; fewer
answer
b
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If the long-run aggregate supply curve is vertical, then the Phillips curve a. must be horizontal in the short run. b. must be vertical in the short run. c. cannot be downward sloping in the long run. d. must be downward sloping in the long run.
answer
c
question
Fill in the blanks. In an open economy, a contractionary fiscal policy will have a ________ impact on aggregate demand and, therefore, will be ________ effective in slowing down an economy. a. larger; more b. larger; less c. smaller; more d. smaller; less
answer
d
question
What impact does the additional policy channel available in an open economy have? a. It increases the ability of an expansionary monetary policy to affect aggregate demand. b. It decreases the ability of an expansionary monetary policy to affect aggregate demand. c. It does not have any impact on the ability of an expansionary monetary policy to affect aggregate demand. d. It has an indeterminate effect, sometimes increasing and sometimes decreasing the ability of an expansionary monetary policy to affect aggregate demand.
answer
a
question
A country experiences twin deficits when a government budget deficit causes a. a capital account deficit. b. a service exports deficit. c. a current account deficit. d. a financial account deficit
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c
question
Budget deficits may reduce a. domestic investment but not net foreign investment. b. net foreign investment but not domestic investment. c. both domestic investment and net foreign investment. d. neither domestic investment nor net foreign investment.
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c
question
Given the definition of net foreign investment, a country such as the United States that has negative net foreign investment must be a. investing less than it is saving domestically. b. saving less than it is investing domestically. c. experiencing positive net exports. d. a net lender, not a borrower.
answer
b
question
An increase in income in both the United States and the United Kingdom income will a. increase both the demand and supply for pounds and cause the dollar to appreciate. b. increase the demand for pounds and cause the dollar to appreciate. c. increase the supply of pounds and cause the dollar to appreciate. d. increase the supply and demand for pounds and have an uncertain effect on the exchange rate.
answer
d
question
When imports are greater than exports, as is usually the case for the United States, which of the following must be true? a. There will be a net capital inflow as people in the United States sell assets and borrow to pay for the surplus of imports over exports. b. The United States must be a net borrower from abroad. c. U.S. net foreign investment must be negative. d. All of the above are true.
answer
d
question
Which of the following statements is correct? a. Net exports is roughly equal to the current account balance. b. The financial account balance is roughly equal to net capital flows. c. Net capital flows are roughly equal to net foreign investment, but with the opposite sign. d. All of the above are correct.
answer
d
question
In which of the following situations does a country experience a net capital inflow and a financial account surplus? a. when the country sells more assets to foreigners than it buys from foreigners b. when the country borrows more from foreigners than it lends to foreigners c. when the country runs a current account deficit d. all of the above
answer
d
question
A depreciation in the domestic currency will a. increase exports and decrease imports, thereby increasing net exports. b. increase exports and imports, thereby increasing net exports. c. decrease exports and increase imports, thereby decreasing net exports. d. decrease exports and imports, thereby decreasing net exports.
answer
a
question
In the foreign exchange market for dollars, which of the following will cause the equilibrium exchange rate to rise? a. a shift right in supply that is greater than an increase in demand b. a decrease in demand that is greater than a shift right in supply c. a shift left in supply that is greater than a decrease in demand d. a decrease in demand accompanied by a shift right in supply
answer
c
question
A recession in the United States will a. leave the supply curve of dollars unchanged. b. shift the supply curve of dollars to the right. c. shift the supply curve of dollars to the left. d. shift the demand curve for dollars to the right.
answer
c
question
Fill in the blanks. If the exchange rate changes from ¥100 = $1 to ¥85 = $1, the dollar has ___________, and the yen has ___________. a. appreciated; depreciated b. depreciated; appreciated c. revalued; devalued d. devalued; revalued
answer
b
question
Fill in the blanks. When the exchange rate (measured as foreign currency per dollar) is above the equilibrium exchange rate, there is a ___________ of dollars and, consequently, ____________ pressure on the exchange rate. a. surplus; upward b. surplus; downward c. shortage; upward d. shortage; downward
answer
b
question
Which of the following determines how many units of a foreign currency you can purchase with one dollar? a. the real exchange rate b. the nominal exchange rate c. the inflation rate d. the purchasing power parity of one dollar
answer
b
question
Which of the following statements about the accounts in the balance of payment is correct? a. A country that runs a current account surplus must also run a financial account surplus. b. A country that runs a current account surplus must run a financial account deficit. c. A country that runs a current account surplus may run a financial account surplus or deficit. d. None of the above statements are correct.
answer
b
question
Suppose the net capital flows of the United States equaled $20 billion in one year, what do you know about the net foreign investment of the United States in that year? a. -$20 billion b. $20 billion c. more than $20 billion d. None of the above. We cannot calculate net foreign investment from net capital flows.
answer
a
question
Which of the following measures are closely associated with the concept of net foreign investment? a. net capital flows b. capital outflows and capital inflows c. net foreign direct investment and net foreign portfolio investment d. all of the above
answer
d
question
When a foreign investor buys a bond issued by either a U.S. firm or the federal government, or when a foreign firm builds a factory in the United States, the transaction is recorded in the balance of payments as a. only a capital inflow. b. only a capital outflow. c. both a capital outflow and a capital inflow. d. neither a capital outflow nor a capital inflow.
answer
a
question
In the financial account, a. there is a capital outflow from the United States when an investor in the United States buys a foreign bond. b. there is a capital inflow into the United States when a U.S. firm builds a factory abroad. c. foreign direct investment is always equal to the government budget deficit. d. capital inflows and outflows are always equal
answer
a
question
Purchases of assets a country has made abroad and foreign purchases of assets in the country are recorded in a. the current account. b. the financial account. c. the capital account. d. all of the above.
answer
b
question
From a balance of payments point of view, the net exports component of aggregate expenditures equals a. the capital account balance. b. net income on investments. c. net transfers. d. the balance of trade and services.
answer
d
question
In the balance of payments, the net exports component of aggregate expenditures can be obtained by a. subtracting the balance of trade from the balance of services. b. adding together exports and imports. c. subtracting exports from imports. d. adding together the balance of trade and the balance of services.
answer
d
question
The part of the balance of payments that records a country's exports and imports of goods and services is a. the financial account. b. the capital account. c. the current account. d. the international account.
answer
c
question
The balance of payments is a. a record of the assets and liabilities of one country relative to the assets and liabilities of other countries. b. a record of a country's trade with other countries in goods, services, and assets. c. a record of the payments made to other countries when a country engages in trade. d. the difference between a country's exports and its imports
answer
b
question
Which of the following statements about foreign purchases of U.S. stocks and bonds is correct? a. Since 1995, there has been a large rise in foreign purchases of bonds issued by U.S. corporations and by the federal government. b. Falling stock prices in the United States caused a fall in foreign ownership of corporate stocks between 2001 and 2010. c. Foreign investment in stocks and bonds in 2010 was more than twice as great as it was in 1995. d. All of the above are correct.
answer
d
question
Shares of stock and long-term debt, including corporate and government bonds and bank loans, are bought and sold in a. capital markets. b. money markets. c. investment markets. d. foreign exchange markets.
answer
a
question
Fill in the blanks. Like other countries that underwent an exchange rate crisis, South Korea had attempted to maintain the value of the won by __________ domestic interest rates. The result was a sharp ___________ in aggregate demand and a severe __________. a. lowering; increase; inflation b. raising; decline; recession c. lowering; decrease; deflation d. raising; increase; recession
answer
b
question
China has pegged its exchange rate with the U.S. dollar at a rate (in terms of yuan per dollar) above the equilibrium exchange rate. We can conclude that a. the Chinese Central bank must sell dollars to maintain this rate. b. the yuan is undervalued. c. Chinese exports to the United States and imports from the United States will be equal. d. the Chinese Central bank must buy yuan to maintain this rate.
answer
b
question
Fill in the blanks. When the value of a currency falls, the prices of imports _________. If imports are a significant fraction of the goods consumers buy, this fall in the value of the currency may significantly ___________ the inflation rate. a. rise; increase b. rise; decrease c. fall; increase d. fall; decrease
answer
a
question
Fill in the blanks. If prices in Mexico have risen faster on average than prices in the United States, while prices in Canada have risen more slowly, it must be true that in the long run the U.S. dollar has _________ value against the Mexican peso and _________ value against the Canadian dollar. a. gained; lost b. lost; gained c. maintained; gained d. gained; maintained
answer
a
question
Suppose in July 2010, a Big Mac sold for £2.59 in the United Kingdom and $3.59 in the United States. The exchange rate at that time was £0.65 per dollar. So based on Big Mac purchasing power parity, the British pound of the United Kingdom was a. undervalued against the dollar. b. overvalued against the dollar. c. neither overvalued nor undervalued. Purchasing power parity between the British pound and the dollar held. d. devalued against the dollar.
answer
b
question
A country that allows demand and supply to determine the value of its currency is said to have a. a pegged exchange rate. b. a fixed exchange rate system. c. a managed float exchange rate system. d. a floating currency.
answer
d
question
An agreement among countries on how exchange rates should be determined is called a. an exchange rate system. b. a fixed exchange rate mechanism. c. an integrated exchange rate approach. d. a Bretton Woods solution
answer
a
