Q&A Hero

Q: All of the following are flow variables EXCEPTA) consumption. B) saving. C) investment. D) capital goods.

Q: According to classical economists, when aggregate demand decreases,A) unemployment is reduced, the price level increases, and equilibrium real GDP is reached. B) unemployment is reduced, the price level decreases, and equilibrium real GDP is reached. C) unemployment temporarily increases, the price level increases, and equilibrium real GDP is reached.D) unemployment temporarily increases, the price level decreases, and equilibrium real GDP is reached.

Q: Which of the following will occur when an economyʹs price level increases?A) Aggregate demand will increase.B) The purchasing power of money will increase.C) The purchasing power of money will decrease. D) The real value of wealth will increase.

Q: According to Romer,A) capital drives economic growth. B) invention drives economic growth.C) ideas drive economic growth. D) government drives economic growth.

Q: The difference between nominal and real values is that real values take into accountA) depreciation. B) changes in the composition of output. C) changes in prices between years. D) the presence of durable goods.

Q: Which of the following is included in GDP?A) A computer manufacturer produces and sells a computer. B) A woman mows her own yard and trims her own hedges.C) An individual smuggles illegal drugs into the country and sells them. D) An illegal gambling operation profits from secret betting activities.

Q: In the base year the price index A) will be between 1 and 100. B) will always equal 100.C) equals 100 times the cost of the market basket in the base year. D) will equal the year.

Q: With respect to economic freedom, which is true?A) Three out of four people live in nations with governments that grant residents high degrees of economic freedom.B) Where governments do not grant residents a high degree of economic freedom, economic growth rates tend to be above the annual average for the worldʹs nations.C) About three dozen nations with governments unwilling to grant much in the way of economic freedom are home to two-thirds of the worldʹs population. Even so, these countries produce over 50 percent of the worldʹs output.D) As economic freedom increases, so does a nationʹs prospects for economic growth.

Q: Which of the following is NOT a possible cause of structural unemployment? A) individuals take the time to search for the best job opportunities B) a mismatch of worker training and skills with requirements of employers C) government-imposed minimum wage laws D) union activity that sets wages above the equilibrium level

Q: Suppose the Fed increases the money supply. As a result of this, people go out and spend more money on consumer goods, increasing aggregate spending. This is known as a(n)A) direct effect of monetary policy. B) indirect effect of monetary policy. C) direct effect of fiscal policy. D) indirect effect of fiscal policy.

Q: To contract the money supply, the Fed shouldA) reduce the differential between the discount rate and the federal funds rate. B) increase government spending and cut taxes.C) lower the required reserve ratio. D) sell U.S. government securities.

Q: Travelerʹs check areA) part of M1 only. B) part of M2 only.C) part of M1 and M2. D) not part of M1 or M2.

Q: YearExpendituresTax RevenuesGDP14003755,00022903305,30034303205,60044703506,000Suppose that initially there is no public debt. Using the above table, what is the public debt as a percentage of GDP in Year 3?A) 1.7 percent B) 2.0 percent C) 7.7 percent D) 5.9 percent

Q: When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP), the reason is that the policy generatesA) a decrease in aggregate demand. B) an increase in aggregate supply. C) a decrease in employment. D) a decrease in saving.

Q: Based on historical data, which of the following tended to be most variable over time?A) real consumption spending B) real savingC) real investment spending D) the average propensity to consume

Q: Which of the following is a flow variable?A) Savings B) Wealth C) Consumption D) Population

Q: According to classical economists, the credit market reaches an equilibrium whenA) planned investment equals government expenditures. B) desired investment equals planned investment.C) desired investment equals planned changes in aggregate supply. D) desired investment equals desired saving.

Q: The real-balance effect indicates that at higher price levelsA) the real value of money holdings fall, resulting in decreased spending.B) the real value of money holdings increase, resulting in increased saving.C) the purchasing power of money will increase. D) the value of the dollar will increase.

Q: Paul Romerʹs theory of economic growth differs from traditional theories in that A) Romer argues that investment in capital goods is not important in encouraging growth while investment in human capital is, whereas traditional theorists emphasize both human and physical capital. B) Romer argues that investment in human capital always occurs before investment in physical capital, while traditional theories emphasize the priority of physical capital. C) Romer argues an investment -knowledge cycle can exist, but requires constant increases in investment rates, while traditional theories argue that investment rates can be constant. D) Romer argues an investment -knowledge cycle allows a one-time increase in investment to permanently increase a countryʹs growth rate, while traditional theory argued such an investment would have only a short-term effect.

Q: If nominal Gross Domestic Product (GDP) in 2011 was $3,000 billion, and the price level index was 330 (2005 = 100), then real Gross Domestic Product (GDP) in terms of the price level in 2011 was aboutA) $105 billion. B) $4,220 billion. C) $909 billion. D) $537 billion.

Q: Which of the following items are included in GDP?A) a used cars B) all transactions involving bondsC) all new homes D) all food stamps

Q: A price index is the A) cost of a market basket of goods today. B) cost of a market basket of goods and services a year ago expressed as a percentage of the cost of the same market basket today. C) cost of a market basket of goods and services today expressed as a percentage of the cost of the same market basket during a base year. D) year that is chosen as the point of reference for comparison of prices in other years.

Q: According to the text, the 17 countries with high degrees of economic freedomA) account for 81 percent of total world output.B) account for less than 25 percent of total world output. C) have the weakest economies.D) have low productivity.

Q: An important source of structural unemployment is A) seasonal variations in aggregate demand. B) unemployment insurance benefits. C) people looking for the right job decide to change jobs. D) recessions.

Q: An indirect effect of monetary policy is that as the money supplyA) increases, interest rates fall, and borrowing and spending increase. B) increases, interest rates rise, and borrowing and spending decrease. C) decreases, interest rates fall, and borrowing and spending increase. D) decreases, interest rates rise, and borrowing and spending increase.

Q: To expand the money supply, the Fed shouldA) buy U.S. government securities. B) sell U.S. government securities. C) raise the required reserve ration. D) cut taxes.

Q: Transaction depositsA) are deposits in a thrift institution or a commercial bank on which a check may be written. B) are only deposits that you can check on through the Internet.C) include savings accounts.D) are accounts that pay interest to the depositor.

Q: YearExpendituresTax RevenuesGDP14003755,00022903305,30034303205,60044703506,000Suppose that initially there is no public debt. Using the above table, what is the public debt as a percentage of GDP in Year 4?A) 5.8 percent B) 7.8 percent C) 3.6 percent D) 2.0 percent

Q: Supply-side economics focuses on tax cuts to stimulateA) aggregate demand by reducing saving.B) aggregate supply by increasing production.C) government spending. D) military research.

Q: The investment function tells us, at any given interest rate,A) how many funds people will invest in the stock market.B) how many funds people will earn on their stock market investments. C) how profitable it will be for firms to expand.D) how much businesses will spend on adding to the capital stock.

Q: The difference between savings and savingA) is nonexistent.B) is that savings occurs when consumption does not and saving is used to purchase consumption goods.C) is that savings is a stock concept and saving is a flow concept.D) is that savings is measured in real terms while saving is measured in nominal terms.

Q: According to the classical model, prices and wages A) are flexible. B) must be set by government. C) move downward easily, but are ʺstickyʺ upward. D) move upward easily, but are ʺstickyʺ downward.

Q: The aggregate demand curve isA) horizontal if full employment exists in the economy.B) vertical if full employment exists in the economy.C) downward sloping because of the real-balance, interest rate, and open economy effects. D) downward sloping because more goods are produced as per unit cost of producing each item falls.

Q: New growth theorists believe thatA) wealth creation comes from innovation.B) wealth creation comes from saving.C) wealth creation is due to capital spending and not research and development spending since much research and development spending fails to produce an invention.D) inventions spread very rapidly, thereby curtailing the need for more innovations.

Q: If nominal Gross Domestic Product (GDP) in 2001 was $1 trillion, nominal Gross Domestic Product (GDP) in 2010 was $2 trillion, and the 2001 and 2010 price indexes were 100 and 250 respectively,A) real Gross Domestic Product (GDP) increased between 2001 and 2010. B) real Gross Domestic Product (GDP) decreased between 2001 and 2010. C) real Gross Domestic Product (GDP) remained constant.D) we cannot draw any conclusions about changes in real Gross Domestic Product (GDP).

Q: National income accounting isA) how the amount of unemployment in the system is measured. B) used only to determine the government deficit.C) an approach to measuring an economyʹs aggregate performance. D) the system that measures the value of the Dow Jones average.

Q: Robert received a $100 gift certificate to a bookstore a year ago. The economy has been in an inflationary period for the last year. This gift certificate is A) expressed in real terms and is worth more. B) expressed in nominal terms and is worth less. C) not expressed in either real or nominal terms since it is not money. D) adjusted in terms of the CPI.

Q: The term ʺeconomic freedomʺ meansA) the right to own private property. B) the right to trade goods and services.C) the right to own financial assets. D) all the above.

Q: Assume that the government decides to use fiscal or monetary policy to stimulate the economy and that this action comes as a surprise to most individuals and businesses. In the short run, the result will beA) a decrease in the average duration of unemployment and a decrease in the unemployment rate.B) an increase in the average duration of unemployment and an increase in the unemployment rate.C) a decrease in aggregated demand and a rise in the price level.D) an increase in aggregate demand and a fall in the price level.

Q: The direct effect of an increase in the money supply isA) people will spend the extra money, causing the aggregate demand curve to shift to the right and prices to rise, and causing the economy to go into recession.B) people will save the money, causing an increase in bank deposits, causing interest rates to fall, and loans to expand.C) people will save more money, causing a decrease in economic activity and a fall in prices.D) people will spend the extra money, causing the aggregate demand curve to shift to the right, creating an increase in economic activity.

Q: The reserve ratio is 10 percent. Depositors regularly keep 10 percent of their deposits as cash. If the Fed buys $1 million of U.S. government securities, excess reservesA) increase by $800,000. B) increase by $810,000. C) increase by $900,000. D) increase by $1 million.

Q: The money supply that consists of currency, transaction deposits, and travelerʹs checks isA) M1. B) M2.C) the fiduciary monetary system. D) the liquidity approach.

Q: YearExpendituresTax RevenuesGDP14003755,00022903305,30034303205,60044703506,000Suppose that initially there is no public debt. Using the above table, the public debt over this four year period would haveA) increased by $215. B) decreased by $100. C) increased by $1,375. D) decreased by $1,590.

Q: According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because A) the crowding out effect does not apply to taxes. B) lower tax rates have no effect on the opportunity cost of labor. C) the aggregate supply curve will shift inward to the left if the tax rates are lowered. D) the lower marginal tax rates will be applied to a growing tax base due to economic growth.

Q: Aging baby-boomers, predisposed to hearing loss because of years of listening to loud music, are now approaching the age range in which hearing loss starts to become apparent. What effect does this have on investment spending within the hearing aid industry?A) There will no longer be an opportunity cost associated with investment spending.B) There will be no change in real investment spending, because hearing aid manufacturers will look only at the interest rate in determining whether to expand production.C) The investment function relating planned real investment spending to the interest rate can be expected to shift rightward.D) The investment function relating planned real investment spending to the interest rate can be expected to shift leftward.

Q: The difference between a stock and a flow isA) a stock is something measured at one point in time while a flow is something that is expressed per unit of time.B) a stock is something measured at one point in time while a flow is something that is fixed.C) a stock is expressed per unit of time while a flow is measured at one point in time.D) a stock refers to the solid inventory firms have on hand while a flow refers to the liquid inventory firms have on hand.

Q: According to the classical model, A) long-term unemployment is unavoidable. B) unemployment is a temporary phenomenon. C) unemployment only exists during periods of war. D) the natural rate of unemployment is zero.

Q: The aggregate demand curve isA) downward sloping. B) vertical.C) horizontal. D) U shaped.

Q: Which of the following statements is NOT consistent with new growth theoristsʹ beliefs? A) Innovation can lead to lower productivity costs. B) Inventions are much more important than innovation. C) Technology must be understood in terms of what drives it. D) Rewards lead to technological advances.

Q: If nominal Gross Domestic Product (GDP) in 2005 was $500 billion with a price index of 100, what would be the real Gross Domestic Product (GDP) in 2010 if the 2010 nominal Gross Domestic Product (GDP) was $900 billion and the 2010 price index was 140?A) $900 billion B) $540 billion C) $800 billion D) $643 billion

Q: Which of the following would NOT be included in a nationʹs Gross Domestic Product (GDP)?A) The government purchases 100 new trucks for the Army. B) The inventory of paper towels goes up.C) A landlord rents an apartment.D) In a poker game a student wins $500 that he does not report as income.

Q: The value of an item expressed in todayʹs dollars is known asA) inflation. B) deflation.C) the nominal value. D) the real value.

Q: Over the past decade, a nationʹs real Gross Domestic Product (GDP) grew at a constant rate of 10 percent per year while its population grew 8 percent annually. Forecasters predict that during the coming decade, real GDP will continue to grow 10 percent annually, but the population growth rate is expected to drop to 6 percent annually. If the forecasters are correct, which of the following will be true?A) The annual rate of growth of per capita real GDP will decline from 4 percent to 2 percent. B) The annual rate of growth of per capita real GDP will decline from 2 percent to 1 percent. C) The annual rate of growth of per capita real GDP will increase from 2 percent to 4 percent. D) The annual rate of growth of per capita real GDP will increase from 2 percent to 6 percent.

Q: When the actual unemployment rate is greater than the NAIRU, the inflation rateA) tends to increase. B) tends to decrease.C) remains unchanged. D) falls to zero.

Q: The appropriate monetary policy in the event of a recessionary gap would be to A) increase the difference between the discount rate and the federal funds rate. B) engage in an open market purchase of U.S. government securities.C) increase the difference between the federal funds rate and the required reserve ratio.D) raise the required reserve ratio.

Q: A purchase of U.S. government securities by the Fed causesA) a multiple contraction of the money supply because deposits fall by more than the amount of the securities purchased.B) a contraction of the money supply equal to the amount of the securities because all other transactions occur within the banking system.C) a multiple expansion of the money supply because the reserve ratio is less than one.D) an expansion of the money supply equal to the amount of the securities because all other transactions occur within the banking system.

Q: The key official definition of the money supply is A) only coins and paper currency in circulation. B) only transactions deposits at banks.C) MZM. D) M2.

Q: Media reports often suggest that the increasing public debt is a burden on future generations. What they mean is that A) it reduces the current level of investment. B) it makes predicting future unemployment levels unpredictable. C) it causes deflation. D) it reduces both nominal and real interest rates.

Q: Supply-side economists argue that A) lower tax rates sometimes lead to increased tax revenues. B) higher tax rates lead to increased productivity. C) lower tax rates lead to a drop in real Gross Domestic Product (GDP). D) lower tax rates always lead to lower tax revenues.

Q: Which one of the following statements is true?A) The investment function is positively sloped to reflect the fact that higher interest rates cause more people to invest their funds.B) The investment function is positively sloped to reflect the fact that lower interest rates cause more firms to expand their operations.C) Along a given investment function, higher interest rates result in more investment projects being undertaken.D) Along a given investment function, higher interest rates result in fewer investment projects being undertaken.

Q: Consumption goods areA) a form of investment.B) goods purchased from savings. C) a form of capital goods.D) goods purchased by households to be used immediately.

Q: According to Sayʹs law, A) supply creates its own demand. B) demand creates supply. C) changes in supply create supply-side inflation. D) changes in demand create demand -side inflation.

Q: The aggregate demand curve shows theA) total amount of planned expenditures on goods and services at each possible price level.B) total amount of nominal goods that the participants in the economy want to purchase. C) total amount of real goods that foreigners want to purchase.D) amount of goods producers will produce as production costs fall.

Q: Innovation isA) another term for something new.B) the transformation of an invention into something that is useful to humans. C) the term for invention when a firm obtains a patent.D) the term for inventions in the electronic and computer industries.

Q: Which of the following statements does NOT describe the real value of an economic variable?A) It is adjusted for changes in the price level.B) It is expressed in constant dollars.C) It is a measure of the purchasing power of the variable.D) It is the variableʹs nominal value adjusted for unemployment.

Q: Gross Domestic Product (GDP) figures may understate the value of goods and services due toA) the exclusion of the underground economy. B) the inclusion of household production.C) the inclusion of legal non-reported, non-taxed income. D) the exclusion of the value of stocks.

Q: The value of an item expressed in purchasing power that varies with the overall price level is known asA) inflation. B) deflation.C) the nominal value. D) the real value.

Q: Suppose a nationʹs real Gross Domestic Product (GDP) grows at a constant rate of 5 percent per year while its population grows 2 percent annually. Given this information, this nationʹs annual rate of per capita real GDP growth is approximately equal toA) 1 percent B) 2 percent C) 3 percent D) 5 percent

Q: In the short run, unanticipated inflation typically leads toA) higher rates of unemployment.B) decreases in aggregate demand. C) lower rates of unemployment.D) workersʹ thinking the real wage has been reduced.

Q: How would expansionary monetary policy affect the AD curve?A) It would shift to the right. B) It would shift to the left.C) It would become more static. D) It would fall.

Q: Other things being equal, when the Fed buys U.S. government securities,A) the U.S. Treasury must immediately issue new securities to replace the securities that the Fed has removed from the market.B) the Fedʹs total assets and total liabilities immediately expand by exactly the amount of the Fedʹs purchase.C) the quantity of deposits in the U.S. banking system expands by less than the amount of the Fedʹs purchase.D) the quantity of paper currency and coins in circulation expands by more than the amount of the Fedʹs purchase.

Q: The liquidity approach to measuring money stresses the role of money as aA) medium of exchange. B) unit of account.C) temporary store of value. D) standard of deferred payment.

Q: The share of net public debt owed to foreign residents today is close toA) 100 percent. B) 80 percent. C) 50 percent. D) 10 percent.

Q: The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply -side economist would argue that the actual revenue raised will be A) less than $100 billion because some people will respond by working less. B) exactly $100 billion because there are no offsetting factors to a tax increase. C) more than $100 billion, because lower income people will work harder when they perceive the tax system to be fairer. D) more than $100 billion because interest rates will also be affected.

Q: When the investment is graphed as a function of real GDP, A) it graphs as a vertical straight line.B) it graphs as a 45-degree line starting at the indicated level of investment.C) it graphs as a negatively sloped line indicating the inverse relationship between interest rates and investment.D) it graphs as a horizontal straight line at the level of investment.

Q: Spending on new goods and services out of a householdʹs current income isA) consumption. B) the capital consumption allowance.C) savings. D) investment.

Q: Which of the following is NOT an assumption of the classical model?A) Pure competition exists.B) Wages and prices are flexible.C) Government spending is necessary to achieve economic stability.D) People are motivated by self-interest.

Q: The open economy effect and interest rate effect are two of the reasons whyA) higher price levels increase long-run aggregate supply. B) the aggregate demand curve slopes downward.C) capital formation does not contribute to economic growth in poor countries.D) growth of the labor force does not contribute to economic growth in wealthy countries.

Q: According to the text, an open economy is likely to have all the following EXCEPTA) high economic growth. B) relatively more trade barriers.C) high technological progress. D) relatively more rapid spread of ideas.

Q: Suppose that in 2011, nominal Gross Domestic Product (GDP) for the economy of Chiconia was $10 trillion and the Gross Domestic Product (GDP) price index was 200.0. What is Chiconiaʹs real Gross Domestic Product (GDP) in 2011?A) $5 trillion B) $10 trillion C) $20 trillion D) $200 trillion