Question 1

which of the following will most likely occur in an economy if more money is demanded than is supplied?

Accepted Answer

interest rates will increase (If more money is demanded than supplied, this means we are to the right of the intersection of the supply and demand curves of money. Since people demand more money, they will sell bonds and such to obtain money. This causes us to move up along the demand curve until equilibrium is restored.)

Question 2

which of the following transactions would represent an addition to a nation\'s current GDP?

Accepted Answer

the government decreases its domestic purchases of food for use by the military (A nation\'s current domestic product includes final goods and services produced during that year. It does not include financial transactions like the purchase of stock simply because that is just a transfer of ownership (nothing has been produced). Second hand sales also aren\'t included since the product was originally counted when it was first produced (nothing has been added to our economy). If a retailer increases her stock of imported shoes (she is buying goods not produced in the U.S. and, therefore, they aren\'t counted in GDP). If the government increases its purchases, GDP will increase since production has obviously increased.)

Question 3

an increase in energy costs will most likely cause the price level and real GDP to change in which of the following ways?

Accepted Answer

price level: increase, real GDP: decrease (An increase in energy costs, increase the costs of production. This means the aggregate supply curve will shift to the left thereby causing prices to rise and real GDP to fall.)

Question 4

which of the following arguments is typically associated with classical economics?

Accepted Answer

a market economy is self-correcting and thus will not remain in a recession indefinitely (Classical economists are all about self-correction. They believe there is virtually no need for government involvement. In addition, they feel that prices and wages are flexible.)

Question 5

which of the following is true according to the circular flow model?

Accepted Answer

households are demanders in the product markets and suppliers in the factory markets (Households demand products produced by firms, yet at the same time, they supply their resources (labor) to firms.)

Question 6

which of the following will occur if the federal government runs a budget deficit?

Accepted Answer

the size of the national debt will increase (If we run on a budget deficit, that means our expenditures are greater than our revenues. If this happens the size of the national debt will increase (since it is the total accumulation of all deficits and surpluses).)

Question 7

according to the keynsian savings schedule, when aggregate income increases by a given amount, savings will

Accepted Answer

increase by less than the amount of the change in income (Remember, you can do two things with your income: spend or save it. Y = C + S. Thus, if income increases by a given amount, savings will increase, but not by the entire amount since you will consume some of that additional income.)

Question 8

if on receiving a checking deposit of $300 a bank\'s excess reserve increased by $255, the required reserve ratio must be

Accepted Answer

25% (If a $300 deposit increased excess reserves by $225, then $75 must be the required reserves from that deposit ($300 - $225). So, the reserve ratio (the % of reserves that can\'t be loaned out) is simply $75 / $300 = 25%.)

Question 9

the federal reserve can increase the money supply by

Accepted Answer

buying government bonds on the open market (The Fed can increase the money supply by buying government bonds on the open market, decreasing the discount rate, or decreasing the reserve ratio.)

Question 10

when consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for which of the following purposes?

Accepted Answer

speculation (If people hold money because they think interest rates are going to rise in the future, they are speculating that rates will increase so that they will benefit from holding the money. Thus, the purpose of money is that of speculation.)

Question 11

an increase in the money supply is most likely to have which of the following short-run effects on real interest rates and real output?

Accepted Answer

real interest rate: decrease, real output: increase (An increase in the money supply shifts the money supply curve to the right. This causes real interest rates to fall. As real interest rates fall, the level of investment demand increases (since the interest rate represents the cost of investing). And, since investment (I) is one of the components of aggregate demand (AD), it will cause AD to increase (shift to the right) thereby increasing real output.)

Question 12

in the keynesian model, an expansionary monetary policy will lead to

Accepted Answer

lower real interest rates and more investment (Expansionary monetary policy increases the money supply. This causes interest rates to fall and, thus, investment to increase.)

Question 13

an infaltionary gap can be eliminated by all of the following except

Accepted Answer

an increase in the money supply (An inflationary gap means that there is too much spending. An increase in the money supply would result in lower interest rates and more investment. This would not eliminate, but rather worsen our inflationary problem.)

Question 14

a contractionary supply shock will most likely result in

Accepted Answer

a decrease in employment (A contractionary supply shock is something that decreases aggregate supply. The result of this would be an increase in the general price level and a decrease in employment.)

Question 15

an increase in japan\'s demand for united states goods would cause the value of the dollar to

Accepted Answer

appreciate because japan would be buying more united states dollars (If Japan is demanding more U.S. goods, they will also be demanding more dollars so that they can buy our goods. This increased demand for dollars would cause the value of the dollar to appreciate (increase in value) since the demand curve for dollars is shifting to the right.)

Question 16

#16 refer to google doc

Accepted Answer

i, ii, and iii (Opportunity cost is a measure of what must be forgone in order to have more of something else. When moving from point P to R we must give up units of Y (10 units) to have more X, and when moving from point R to P we must give up units of X (8 units) to have more Y. The opportunity cost of moving from Q to R is nothing simply because at Q some of our resources were underemployed. This means that we won\'t have to give up anything to produce more of X or Y.)

Question 17

if real GDP is increasing at 3% per year and nominal GDP is increasing at 7% per year, which of the following is necessarily true?

Accepted Answer

the price level is increasing (Real = Nominal - Inflation. Thus, if real GDP is increasing at 3% and nominal GDP is increasing at 7%, inflation must be 7% - 3% = 4%. Therefore, price levels are increasing. Remember, inflation is a general increase in the price level.)

Question 18

the official unemployment rate is not an actual indicator of actual unemployment in the economy because

Accepted Answer

the official rate does not include persons who have given up for work (First off, the full employment rate of unemployment equals the natural rate of unemployment. Second, the official unemployment rate underestimates the actual level of unemployment since it does not include discouraged workers as part of the labor force. Discouraged workers are those who have simply given up looking for work.)

Question 19

#19 refer to google doc

Accepted Answer

recession (Since our income is currently $1000 while the full employment level is $2000, we are experiencing a recession.)

Question 20

#20 refer to google doc

Accepted Answer

the money supply (Since we want to stimulate the economy so that we reach full employment, the appropriate monetary policy would be to increase the money supply. The ways the Fed can increase the money supply include buying bonds, lowering the discount rate, or lowering the reserve requirement.)

Question 21

#21 refer to google doc

Accepted Answer

$500 (To determine the minimum increase in government spending necessary to reach full employment, we must first calculate the spending multiplier. The spending multiplier (m) = [1 / (1 - MPC)], where MPC is the marginal propensity to consume. MPC (b) is simply the slope of the expenditures function. The slope of the line above is (1000 - 500) / (1000 - 0) = 500/1000 = 1/2. Thus, the spending multiplier (m) = [1 / (1 - Â½)] = [1 / (1/2)] = 2. Now that we know the multiplier and know that we want to increase income by 1000 (2000 -1000), we can simply solve for the change in government spending. 1000 = 2 x (Change in government spending). Therefore, the change in government spending to eliminate this recessionary gap must be 1000 / 2 = $500)

Question 22

if the economy is operating in the intermediate range of the aggregate supply curve and if aggregate demand increases due to an increase in net exports, then the price level, output, and the unemployment rate are most likely to change in which of the following ways?

Accepted Answer

price level: increase, output: increase, unemployment rate: decrease (If aggregate demand increases, the AD curve shifts to the right. Since we know that we are on the upward sloping portion of the AS curve (intermediate range), we know that prices and output will increase while unemployment will decrease (because we are producing more).)

Question 23

the value of the spending multiplier decreases when

Accepted Answer

the MPS increases (The spending multiplier (m) = [1 / (1 - MPC)], where MPC = marginal propensity to consume. In addition, since 1 - MPC = MPS (marginal propensity to save), the spending multiplier can be re-written as m = 1 / MPS. So, if MPS â, the value of the spending multiplier must decrease.)

Question 24

which of the following best explains why equilibrium income will rise by more than $100 in response to a $100 increase in government spending?

Accepted Answer

incomes will rise, resulting in higher consumption (The $100 increase in government spending will increase AD and, thus, incomes will increase. As incomes rise, consumers will spend more on consumption thereby causing equilibrium income to rise by more than the initial $100 increase in government spending. This process is known as the consumer re-spending effect.)

Question 25

the money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when

Accepted Answer

people hold a portion of their money in the form of currency (The money-creating ability of the banking system is based on the money multiplier and the fact that banks will lend out all of their excess reserves and that people will deposit all of their money into a bank. If people hold a portion of their money in the form of currency, the banks\' lending potential has been reduced (they don\'t have as much excess reserves to loan out) and, therefore, the money creating ability of the banking system will be less than the maximum amount indicated by the money multiplier.)

Question 26

which of the following constitutes the largest component of the united states money supply? (m1)

Accepted Answer

checkable deposits (demand deposits) (M1 consists of currency (coins and paper money) and checkable (demand) deposits. Out of these two components, checkable (demand) deposits constitute the largest component of the United States money supply.)

Question 27

under which of the following conditions would a restrictive monetary policy be most appropriate?

Accepted Answer

high inflation (A restrictive monetary policy is used to slow down an economy that is growing too fast. Thus, it would be most appropriate if we were experiencing high inflation.)

Question 28

a major advantage in automatic stabilizers in fiscal policy is that they

Accepted Answer

go into effect without passage of new legislation (Automatic stabilizers don\'t require any action in order to take effect. They are automatically built into the economy and, thus, work without the passage of new legislation.)

Question 29

which of the following would best explain a decline in potential GDP?

Accepted Answer

negative net investment (A discovery of vast new oil deposits, a decrease in the infant mortality rate, or a decrease in wages would result in an increase in AS (and, therefore, an increase in GDP). If net investment is negative, then our supply of capital stock is decreasing thereby explaining a decline in potential GDP (our ability to produce more in the future).)

Question 30

which of the following changes will occur to the demand for the united states dollars and the international value of the dollar in the short run if investors in the united states and abroad increase their purchases of united states government bonds?

Accepted Answer

demand for dollars: increase, international value of the dollar: increase (If investors increase their purchases of United States government bonds, they are going to be demanding more dollars. As the demand for dollars increases (demand curves shifts to the right), the international value of the dollar also increases.)

Question 31

as nations specialize in production and trade in international markets, they can expect which of the following domestic improvement? i: allocation of domestic resources, ii: standard of living, iii: self-sufficiency

Accepted Answer

i and ii (Trade results in specialization and, thus, an improved allocation of domestic resources and an increased standard of living (since more can be produced as a result of trade). Trade means that you are depending on someone else for a good or service. Therefore, trade does not result in self-sufficiency.)

Question 32

as a measure of economic welfare, GDP underestimates a country\'s production of goods and services when there is an increase in

Accepted Answer

household production (GDP underestimates a country\'s production of goods and services when there is an increase in household production since these goods and services produced within a house are excluded from GDP (because they don\'t involve a market transaction).)

Question 33

unexpected increases in inventories usually precede

Accepted Answer

decreases in production (As businesses produce too much, inventories begin to pile up. When these increases are unexpected, we can predict that there will soon be a decrease in production since there will no longer be the need to produce as much.)

Question 34

the short-run aggregate supply curve is likely to shift to the left when there is an increase in

Accepted Answer

the cost of productive resources (An increase in the cost of productive resources would likely shift the SRAS curve to the left. An increase in productivity would shift the SRAS curve to the right. An increase in the money supply would result in the AD curve shifting to the right. Also, if we are running on a budget deficit, chances are that AD is shifting to the right (increasing). In addition, if the number of imports increases, AD would shift to the left, as Net Exports would be declining (Exports - Imports).)

Question 35

in the simple keynesian aggregate expenditure model of an economy, changes in investment of government spending will lead to a change in which of the following?

Accepted Answer

the level of output and employment (Investment spending is one of the components of aggregate demand. Thus, a change in investment will result in a change in the level of output and employment since the AD curve will be shifting)

Question 36

in a closed economy with no taxes in which the average propensity to consume is .75, which of the following is actually true?

Accepted Answer

if income is $200, then saving is $50 (If APC = 0.75, APS = 1 - 0.75 = 0.25. Remember, APC = Consumption / Income. And, APS = Savings / Income. By trial and error, you\'ll find that the correct choice is \"c.\" If income is $200 and APS = 0.25, simply solve for the amount of savings. 0.25 = Savings / $200. Savings = 0.25 x $200 = $50.)

Question 37

in the short run, a restrictive fiscal policy will cause aggregate demand, output, and the price level to change in which of the following ways?

Accepted Answer

AD: decrease, output: decrease, price level: decrease (A restrictive fiscal policy entails decreasing government spending and/or increasing taxes. The result of these policies is a decrease in aggregate demand. As AD shifts to the left (decreases), output and price level both decrease.)

Question 38

one way in which the federal reserve works to change the united states money supply is by changing the

Accepted Answer

discount rate (The tools of the Fed consist of buying/selling government securities on the open market, lowering/raising the discount rate (the interest rate the Fed charges banks for loans), or lowering/raising the reserve requirement (the % of reserves that banks can\'t loan out).)

Question 39

assume that the reserve requirement is 20%. if a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is

Accepted Answer

$8,000 (The bank may increase its loans by the amount of its excess reserves. Since the reserve requirement is 20%, this bank must keep 20% x $10,000 = $2000 on hand as required reserves. Thus, it can loan out $10,000 - $2,000 = $8,000.)

Question 40

if the money stock decreases but nominal GDP remains constant, which of the following has occured?

Accepted Answer

income velocity of money has increased (MV = PQ. Since PQ does not change and M â, V must â in order for the equation to remain balanced.)

Question 41

which of the following best explains how an economy could simultaneously experience high inflation and high unemployment?

Accepted Answer

negative supply shocks cause factor prices to increase (High inflation and high unemployment is known as stagflation. An economy could experience stagflation if aggregate supply (AS) decreased. Negative supply shocks that cause factor prices to increase would result in AS decreasing.)

Question 42

crowding out due to government borrowing occurs when

Accepted Answer

higher interest rates decrease private sector investment (Government borrowing causes the demand for loanable funds to increase. It is this increase in demand that causes interest rates to rise. Higher interest rates, in turn, decrease private sector investment. This decrease in private investment is known as crowding out.)

Question 43

policymakers concerned about fostering long-run growth in an economy that is currently in a recession which would most likely recommend which of the following combinations of monetary and fiscal policy actions?

Accepted Answer

monetary policy: buy bonds, fiscal policy: no change (If we are in a recession, we are going to want to implement expansionary policies. Thus, we would want to buy bonds and do nothing with regards to fiscal policy. The effects of expansionary fiscal policy are partially negated due to the crowding-out effect. In addition, since fiscal policy results in higher interest rates, our long-run growth would actually be slowed since investment would decrease.)

Question 44

which of the following would be most likely to occur if the united states placed high tarriffs on imported goods?

Accepted Answer

the united states economy would become less efficient (High tariffs on imported goods would result in increased domestic production. An indirect effect of this tariff is simply the fact that inefficient industries are expanding while efficient industries abroad are being forced to contract. Thus, the United States economy would become less efficient. The number of job in the U.S. may increase, but only temporarily since our trading partners will be weakened (since their exports will be down) and, thus, they will be unable to buy our products causing our exports to decrease. This would result in less production and employment in the long run.)

Question 45

mary jane is a lawyer who can earn $150 per hour in her law practice. she is also an excellent carpenter who can build cabinets 3x as fast as the best carpenter, whose hourly wage is $20 per hour. which of the following is the correct economic statement?

Accepted Answer

mary jane has a comparative advantage in law so she should specialize in law and hire a carpenter to make her cabinets ( If Mary Jane were to build the cabinets herself, she would save $60/hr on carpenter fees, but she would give up her lawyer salary of $150/hr during that time. Thus, it would actually cost her $150 - $60 = $90/hr to build the cabinets herself. Since it only costs her $20/hr to hire a carpenter, she should specialize in law and hire a carpenter (despite the fact that she has an absolute advantage in both).)

Question 46

the intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy\'s equillibrium level of

Accepted Answer

real national output and the price level (In other words, what are the axes on the AD/AS model? On the vertical axis, we have price level. And, on the horizontal axis, we have real national output (real GDP).)

Question 47

if purchases of education and medical care were counted as investment rather than consumption, GDP would

Accepted Answer

not change, because there is no change in total expenditures (It would not change because investment and consumption are both components of aggregate demand. Thus, in the end, it wouldn\'t matter how you classify them.)

Question 48

which of the following would most likely cause the united states to fall into a recession?

Accepted Answer

an open market sale by the federal reserve (An open market sale by the Fed would decrease the money supply and cause interest rates to increase. As interest rates rise, investment decreases thereby decreasing aggregate demand. And, if aggregate demand decreases, chances are the economy will fall into a recession. All of the other choices would result in aggregate demand increasing. If aggregate demand increases, we may experience an inflationary period.)

Question 49

which of the following would most likely cause a rightward shift in an economy;s aggregate supply curve?

Accepted Answer

an across-the-board reduction of wages in the manufacturing sector (Since wages represent a cost of production, if wage are reduced then aggregate supply will increase (shift to the right). Increased taxes or mandates would result in a decrease in aggregate supply (shift to the left). Likewise, if plants shutdown the aggregate supply curve would decrease (shift to the left).)

Question 50

suppose that disposable income is $1000, consumption is $700, and MPC is .6. if disposable income then increases by $100, consumption and savings will equal which of the following?

Accepted Answer

consumption: $760, savings: $340 (Remember, you can either save or consume your income. Y = C + S. Thus, $1,000 = $700 + S. So, S = $1,000 - $700 = $300. If the MPC = 0.6 and income increases by $100, you would consume .60 x $100 = $60 of the $100 increase. Since you are consuming $60, you must be saving the other $40. Therefore, consumption now equals $700 + $60 = $760 and savings now equals $300 + $40 = $340.)

Question 51

if at full employment, the government wants to increase its spending by $100 billion without increase inflation in the short-run, it must do which of the following?

Accepted Answer

raise taxes by more than $100 billion (If the government does not want to increase inflation, it must increase taxes so that the policies are completely offset. Remember, changes in government spending have a direct effect, whereas changes in taxes have an indirect effect. Changes in taxes affect aggregate demand by changing incomes and, thus, consumer spending. However, people don\'t spend all of their income (they do save some portion of it). Thus, the actual change in consumption is equal to the marginal propensity to consumer (MPC) times the change in taxes. So, in order for no inflation to occur, the government is going to have to raise taxes by more than the $100 billion (which is the amount that they increased government spending by).)

Question 52

assume that the reserve requirement is 15% and that a bank receives a new checking deposit of $200. which of the following will most likely occur in the bank\'s balance sheet.

Accepted Answer

liabilities: increase by $200, required reserves: increase by $30 (With a 15% reserve requirement and a deposit of $200, a bank\'s required reserves will increase by 15% x $200 = $30. And, the bank\'s liabilities have increased by $200 since that is the amount of the new demand deposit.)

Question 53

open market operations refer to which of the following activities?

Accepted Answer

the buying and selling of government securities by the federal reserve (Open market operations are the buying and selling of government securities (bonds) by the Fed.)

Question 54

compared to expansionary monetary policies adopted to counteract a recession, expansionary policies tend to result in

Accepted Answer

higher interest rates (Expansionary fiscal policies result in the government running on a budget deficit since G > T. As the government borrows money to finance their budget, the demand for loanable funds increases (shift to the right). This increased demand causes interest rates to rise (thereby crowding out some private investors). So, while expansionary monetary policy results in lower interest rates due to an increase in the money supply, expansionary fiscal policy results in higher interest rates (thereby negating some of the intended effect of the policy).)

Question 55

according to monetarists, which of the following is true of expansionary fiscal policy?

Accepted Answer

it will cause interest rates to rise and crowd out private investment spending (Monetarists dislike expansionary fiscal policy because of crowding out. In addition, they dislike fiscal policy in general because it is too slow!)

Question 56

which of the following policies would a keynesian recommend during a period of high unemployment and low inflation?

Accepted Answer

decrease taxes to stimulate aggregate demand (If unemployment is high, a Keynesian is going to want to stimulate the economy with some form of expansionary fiscal policy. Thus, they would decrease taxes and/or increase government spending. They would run on a budget deficit during this time.)

Question 57

an important assumption in keynesian theory is that

Accepted Answer

prices are rigid downward and decreases in aggergate demand will lead to an increase in unemployment (Keynesians believe that prices and wages are not flexible downwards due to minimum wage laws, unions, and the nature of our businesses in general. In addition, since prices are rigid downward, the economy will not be capable of self-correction.)

Question 58

which of the following changes in the aggregate demand and aggregate supply curves is likely to result in stagflation?

Accepted Answer

the aggregate supply curve shifts to the left (Stagflation occurs when there are simultaneous increases in price level and unemployment. This occurs when there is a decrease (shift left) in aggregate supply.)

Question 59

in a flexible system of exchange rates, an open market sale of bonds by the federal reserve will most likely change the money supply, the interest rate, and the value of the united states dollar in which of the following ways?

Accepted Answer

money supply: decrease, interest rate: increase, value of the dollar: increase (An open market sale of bonds by the Fed will decrease the money supply. As the money supply decreases (shifts left), interest rates will increase. Higher interest rates in the U.S. entice foreigners to invest in our markets. In order to invest, foreigners will need to have dollars. Thus, there will be an increase in the demand for dollars. It is this increased demand for dollars that results in the value of the dollar increasing.)

Question 60

A country\'s government runs a budget deficit when which of the following occurs in a given year?

Accepted Answer

Government spending exceeds tax revenues.

Question 61

A high marginal propensity to consume implies which of the following?

Accepted Answer

A low marginal propensity to save

Question 62

The transaction demand for money is very closely associated with money\'s use as a

Accepted Answer

medium of exchange

Question 63

Unlike a market economy, a command economy uses

Accepted Answer

more centralized planning in economic decision making

Question 64

The value of a country\'s currency will tend to appreciate if

Accepted Answer

demand for the country\'s exports increases

Interest Rates Increase with More Money Demanded

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