Practice Exam

Question 1

1. Suppose the money supply tripled, but at the same time velocity doubled and real GDP was unchanged. According to the quantity equation the price level
   a. is 1.5 times its old value. b. is 6 times its old value.
   c. is the same as its old value. d. is 3 times its old value.

Answer 1

B

Question 2

2. Other things the same, if the exchange rate changes from .8 euros per dollar to .9 euros per dollar, the dollar
   a. appreciates so U.S. goods become more expensive relative to foreign goods. b. depreciates so U.S. goods become more expensive relative to foreign goods. c. depreciates so U.S. goods become less expensive relative to foreign goods. d. appreciates so U.S. goods become less expensive relative to foreign goods.

Answer 2

A

Question 3

3. Which of the following equations is always correct in an open economy?
   a. NX = S - I
   b. All of the answers are correct.
   c. NX = NCO
   d. NX = Y - C - G - I

Answer 3

B

Question 4

4. Other things the same, a decrease in the price level makes the dollars people hold worth a. more, so they can buy more.
   b. less, so they can buy more.
   c. more, so they can buy less.
   d. less, so they can buy less.

Answer 4

A

Question 5

5. Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory,
   a. inflation averaged 5% per year and the real rate of return was 4%.
   b. inflation averaged 11% per year and the real rate of return was 17%. c. inflation averaged 8% per year and the real rate of return was 9%.
   d. inflation averaged 1% per year and the real rate of return was 6%.

Answer 5

A

Question 6

6. Suppose that the U.S. imposes an import quota on lumber. The quota makes the real exchange rate of the U.S. dollar
   a. depreciate but does not change the real interest rate in the United States. b. appreciate but does not change the real interest rate in the United States. c. appreciate and the real interest rate in the United States increase.
   d. depreciate and the real interest rate in the United States decrease.

Answer 6

B

Question 7

7. If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?
   a. e = P/P
   b. P = e/P
   c. 1 = e/P*
   d. None of the above is correct.

Answer 7

A

Question 8

8. The interest rate effect of a decrease in the price level makes _____ goods relatively more attractive compared to _____ goods.
   a. foreign; domestic b. domestic; foreign c. current; future
   d. future; current

Answer 8

C

Question 9

9. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply creates an excess
   a. supply of money, causing people to spend more. b. supply of money, causing people to spend less.
   c. demand for money, causing people to spend more. d. demand for money, causing people to spend less.

Answer 9

A

Question 10

10. You put money into an account and earn an after-tax real interest rate of 2.5 percent. If the nominal interest rate on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate?
    a. 28.00 percent b. 36.25 percent c. 43.75 percent d. 67.50 percent

Answer 10

C

Question 11

11. Shawn puts money into an account. One year later he sees that he has 6 percent more dollars and that his money will buy 5 percent more goods.
    a. The nominal interest rate was 11 percent and the inflation rate was 5 percent. b. The nominal interest rate was 6 percent and the inflation rate was 5 percent. c. The nominal interest rate was 5 percent and the inflation rate was -1 percent. d. The nominal interest rate was 6 percent and the inflation rate was 1 percent.

Answer 11

D

Question 12

12. If P denotes the price of goods and services measured in terms of money, then
    a. 1/P represents the value of money measured in terms of goods and services.
    b. P can be interpreted as the inflation rate.
    c. the supply of money influences the value of P, but the demand for money does not. d. All of the above are correct.

Answer 12

A

Question 13

13. The classical dichotomy refers to the idea that the supply of money
    a. is irrelevant for understanding the determinants of nominal and real variables. b. determines nominal variables, but not real variables.
    c. determines real variables, but not nominal variables.
    d. is a determinant of both real and nominal variables.

Answer 13

B

Question 14

14. If M = 12,000, P = 3, and Y = 32,000, then velocity =
    a. 1.125. Velocity will rise if money changes hands more frequently. b. 1.125. Velocity will rise if money changes hands less frequently. c. 8. Velocity will rise if money changes hands more frequently.
    d. 8. Velocity will rise if money changes hands less frequently.

Answer 14

C

Question 15

15. High and unexpected inflation has a greater cost
    a. for those who borrow than for those who save.
    b. for those who hold a little money than for those who hold a lot of money.
    c. for those who have fixed nominal wages than for those who have nominal wages that adjust
    with inflation.
    d. All of the above are correct.

Answer 15

C

Question 16

16. When money is neutral, which of the following increases when the money supply growth rate increases?
    a. real output growth
    b. real interest rates
    c. nominal interest rates
    d. the money supply divided by the price level

Answer 16

C

Question 17

17. The shoeleather cost of inflation refers to
    a. the redistributional effects of unexpected inflation.
    b. the time spent searching for low prices when inflation rises.
    c. the waste of resources used to maintain lower money holdings. d. the increased cost to the government of printing more money.

Answer 17

C

Question 18

18. In a particular open economy government spending is $30 billion, consumption was $70 billion, taxes were $20 billion, investment was $10 billion, and GDP was $100 billion. As a result, there was:
    a. a net capital inflow of $10 billion
    b. capital inflows of $10 billion and capital outflows of $20 billion c. a trade surplus of $20 billion and a financial deficit of $20 billion d. a net capital outflow of $10 billion

Answer 18

A

Question 19

19. If there are sticky wages, and the price level is greater than what was expected, then
    a. the quantity of aggregate goods and services supplied rises, as shown by a movement to the
    right along the short-run aggregate supply curve.
    b. the quantity of aggregate goods and services supplied falls, which is shown by a shift of the
    short-run aggregate supply curve to the left.
    c. the quantity of aggregate goods and services supplied rises, as shown by a shift of the short-
    run aggregate supply curve to the right.
    d. the quantity of aggregate goods and services supplied falls, as shown by a movement to the
    left along the short-run aggregate supply curve.

Answer 19

A

Question 20

20. Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
    a. by $20 billion b. by $30 billion c. by $90 billion d. by $60 billion

Answer 20

B

Question 21

21. For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate demand curve?
    a. the interest-rate effect b. the wealth effect
    c. the exchange-rate effect d. the real-wage effect

Answer 21

A

Question 22

22. Suppose that the economy is at long-run equilibrium. If there is a sharp rise in the stock market combined with a significant increase in the minimum wage, then in the short run
    a. the price level will rise, and real GDP might rise, fall, or stay the same. b. real GDP will fall and the price level might rise, fall, or stay the same. c. real GDP will rise and the price level might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same.

Answer 22

A

Question 23

23. Suppose the economy is in long-run equilibrium. If there is a sharp decline in government purchases combined with a significant increase in immigration of skilled workers, then in the short run,
    a. the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.
    b. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.
    c. real GDP will rise and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise and the price level might rise, fall, or stay the same.
    d. the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be unaffected.

Answer 23

B

Question 24

24. If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by
    a. $45 billion, but the effect would be smaller if there were an investment accelerator. b. $60 billion, but the effect would be larger if there were an investment accelerator. c. $60 billion, but the effect would be smaller if there were an investment accelerator. d. $45 billion, but the effect would be larger if there were an investment accelerator.

Answer 24

B

Question 25

25. Suppose that foreign citizens decide to purchase more U.S. pharmaceuticals and U.S. citizens decide to buy more stock in foreign corporations. Other things the same, these actions
    a. raise both U.S. net exports and U.S. net capital outflows. b. raise U.S. net exports and lower U.S. net capital outflows. c. lower both U.S. net exports and U.S. net capital outflows. d. lower U.S. net exports and raise U.S. net capital outflows.

Answer 25

A

Question 26

26. Suppose the economy is in long-run equilibrium. If there is an increase in government purchases at the same time there is a large increase in the price of oil, then in the short-run
    a. real GDP will rise and the price level might rise, fall, or stay the same. b. real GDP will fall and the price level might rise, fall, or stay the same. c. the price level will rise, and real GDP might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same.

Answer 26

C

Question 27

27. Imagine the U.S. economy is in long-run equilibrium. Then suppose the value of the U.S. dollar decreases. At the same time, people in the U.S. revise their expectations so that the expected price level rises. We would expect that in the short-run
    a. real GDP will rise and the price level might rise, fall, or stay the same. b. real GDP will fall and the price level might rise, fall, or stay the same. c. the price level will rise, and real GDP might rise, fall, or stay the same. d. the price level will fall, and real GDP might rise, fall, or stay the same.

Answer 27

C

Question 28

28. If the price level falls, the real value of a dollar
    a. rises, so people will want to buy more. This response helps explain the slope of the aggregate
    demand curve.
    b. rises, so people will want to buy more. This response shifts aggregate demand to the right. c. falls, so people will want to buy less. This response helps explain the slope of the aggregate
    demand curve.
    d. falls, so people will want to buy less. This response shifts aggregate demand to the left.

Answer 28

A

Question 29

29. Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,
    a. the smaller the MPC and the stronger the influence of income on money demand. b. the smaller the MPC and the weaker the influence of income on money demand. c. the larger the MPC and the stronger the influence of income on money demand. d. the larger the MPC and the weaker the influence of income on money demand.

Answer 29

D

Question 30

1. Which of the following is an example of menu costs? a. advertising new prices
   b. printing new price lists
   c. deciding on new prices
   d. All of the above are examples of menu costs.

Answer 30

D

Question 31

2. Inflation is problematic if
   a. it is less than the nominal return on saving.
   b. it equals the growth rate of real GDP in the long run.
   c. it distorts relative prices, causing a misallocation of resources. d. it is less than the percentage increase in nominal income.

Answer 31

C

Question 32

3. The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their land
   a. the demand for money decreases and the value of money falls. b. the supply of money decreases and the value of money rises. c. the supply of money increases and the value of money falls. d. the demand for money increases and the value of money rises.

Answer 32

C

Question 33

4. When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then
   a. the money supply and the price level increase.
   b. the money supply increases and the price level increases. c. the money supply and the price level decrease.
   d. the money supply increases and the price level decreases.

Answer 33

C

Question 34

5. If velocity = 5, the price level = 2, and the real value of output is 2,500, then the quantity of money is
   a. $1,000. b. $25,000. c. $250.
   d. $6,250.

Answer 34

A

Question 35

6. When the price level falls, the number of dollars needed to buy a representative basket of goods
   a. increases, so the value of money rises. b. decreases, so the value of money falls. c. decreases, so the value of money rises. d. increases, so the value of money falls.

Answer 35

C

Question 36

7. Wealth is redistributed from debtors to creditors when inflation was expected to be a. low and it turns out to be high.
   b. high and it turns out to be low.
   c. low and it turns out to be low.
   d. high and it turns out to be high.

Answer 36

B

Question 37

8. Banks advertise
   a. the real interest rate, which is how fast the dollar value of savings grows.
   b. the real interest rate, which is how fast the purchasing power of savings grows.
   c. the nominal interest rate, which is how fast the dollar value of savings grows.
   d. the nominal interest rate, which is how fast the purchasing power of savings grows.

Answer 37

C

Question 38

9. Norma receives an increase in her nominal income. She complains that the current inflation rate of six percent erodes the real purchasing power of her additional nominal income. This is true
   a. only if the increase in her nominal income is less than six percent. b. only if the increase in her nominal income is more than six percent. c. since inflation always reduces purchasing power.
   d. only if her real income increases.

Answer 38

A

Question 39

10. For a given real interest rate, a decrease in the inflation rate would a. decrease the after-tax real interest rate and so decrease saving.
    b. decrease the after-tax real interest rate and so increase saving.
    c. increase the after-tax real interest rate and so decrease saving.
    d. increase the after-tax real interest rate and so increase saving.

Answer 39

D

Question 40

11. The inflation tax
    a. is an alternative to income taxes and government borrowing. b. taxes most those who hold the most money.
    c. is the revenue created when the government prints money. d. All of the above are correct.

Answer 40

D

Question 41

12. When the money market is drawn with the value of money on the vertical axis, the value of money decreases if
    a. either money demand or money supply shifts right.
    b. either money demand or money supply shifts left.
    c. money demand shifts right or money supply shifts left. d. money demand shifts left or money supply shifts right.

Answer 41

D

Question 42

13. In which case below does a person’s purchasing power from saving increase the most? a. the nominal interest rate = 10% and inflation = 8%
    b. the nominal interest rate = 9% and inflation = 6%
    c. the nominal interest rate = 8% and inflation = 4%
    d. the nominal interest rate = 7% and inflation = 2%

Answer 42

D

Question 43

14. According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also
    a. either a rise in output or a rise in the rate at which money changes hands. b. either a rise in output or a fall in the rate at which money changes hands. c. either a fall in output or a rise in the rate at which money changes hands. d. either a fall in output or a fall in the rate at which money changes hands.

Answer 43

B

Question 44

15. When the money market is drawn with the value of money on the vertical axis, as the price level increases which of the following increases?
    a. the quantity of money demanded and the quantity of money supplied
    b. the quantity of money demanded but not the quantity of money supplied
    c. the quantity of money supplied but not the quantity of money demanded
    d. neither the quantity of money supplied nor the quantity of money demanded

Answer 44

B

Question 45

16. If a country raises its budget deficit, then its a. net capital outflow and net exports rise.
    b. net capital outflow falls and net exports rise. c. net capital outflow rises and net exports fall. d. net capital outflow and net exports fall.

Answer 45

D

Question 46

17. In 2009 Greece’s budget deficit rose and people became worried about the ability of the Greek government to continue to make payments on its debt. Which of these events raise a country’s interest rates?
    a. an increase in the budget deficit and increased concerns about the ability of the government to pay back its debt
    b. increased concerns about the ability of the government to pay back its debt, but not an increase in the budget deficit
    c. an increase in the budget deficit, but not increased concerns about the ability of the government to pay back its debt
    d. neither an increase in the budget deficit nor increased concerns about the ability of the government to pay back its debt

Answer 46

A

Question 47

18. The term inflation is used to describe a situation in which a. the economy is growing rapidly.
    b. stock-market prices are rising.
    c. the overall level of prices in the economy is increasing. d. incomes in the economy are increasing.

Answer 47

C

Question 48

19. In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold
    a. lowered both the price level and the value of gold in Cairo.
    b. raised both the price level and the value of gold in Cairo.
    c. lowered the price level, but increased the value of gold in Cairo. d. raised the price level, but decreased the value of gold in Cairo.

Answer 48

D

Question 49

20. If domestic residents of France purchase 1.2 trillion euros of foreign assets and foreigners purchase 1.5 trillion euros of French assets, then France’s net capital outflow is
    a. .3 trillion euros, so it must have a trade surplus. b. .3 trillion euros, so it must have a trade deficit. c. -.3 trillion euros, so it must have a trade surplus. d. -.3 trillion euros, so it must have a trade deficit.

Answer 49

D

Question 50

21. When the economy goes into a recession, real GDP ___ and unemployment ___. a. rises, rises
    b. rises, falls
    c. falls, rises
    d. falls, falls

Answer 50

C

Question 51

22. A sudden crash in the stock market shifts
    a. the aggregate-demand curve
    b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve d. both the short-run and the long-run aggregate supply curves

Answer 51

A

Question 52

23. A change in the expected price level shifts
    a. the aggregate-demand curve
    b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve d. both the short-run and the long-run aggregate supply curves

Answer 52

B

Question 53

24. An increase in the aggregate demand for goods and services has a larger impact on output ____ and a larger impact on the price level ___.
    a. in the short run, in the long run
    b. in the long run, in the short run
    c. in the short run, also in the short run d. in the long run, also in the long run

Answer 53

A

Question 54

25. If the central bank wants to expand aggregate demand, it can ___ the money supply, which would ____ the interest rate.
    a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

Answer 54

B

Question 55

26. If the government wants to contract aggregate demand, it can ____ government purchases or ____ taxes.
    a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

Answer 55

C

Question 56

27. With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending is fixed, and the marginal propensity to consume is 2/3. How large is the increase in aggregate demand?
    a. $400
    b. $800
    c. $1,800 d. $3, 600

Answer 56

D