Q&A Hero

Q: If you buy stocks and bonds, the dollar value of those stocks and bonds is A) included in Gross Domestic Product (GDP) under investment. B) included in Gross Domestic Product (GDP) under consumer expenditures. C) not included in calculating Gross Domestic Product (GDP) for they merely represent a transfer of ownership. D) included in Gross Domestic Product (GDP) if the stocks and bonds were issued by business firms but not if they were issued by governments.

Q: An increase in the price of electricity, ceteris paribus, indicates that A) the purchasing power of money is decreasing. B) the purchasing power of money is increasing. C) electricity is relatively more scarce than it was before. D) inflation is increasing.

Q: Suppose a nationʹs rate of growth of per capita real Gross Domestic Product (GDP) is 3 percent and its rate of growth in real GDP is 4 percent. Given this information, the nationʹs population growth rate is approximately equal toA) 1 percent B) 2 percent C) 3 percent D) 7 percent

Q: Suppose that the inflation rate has been 3 percent per year for several years, and the unemployment rate has been stable at 5 percent. Unanticipated changes in government policy cause the inflation rate to increase to 6 percent. In the short run, we would expect the unemployment rate to A) remain constant. B) increase to 10 percent. C) increase, but the exact amount cannot be known for sure. D) decrease.

Q: In the real world, contractionary monetary policy would be used toA) combat a recession. B) reduce the rate of inflation.C) increase nominal GDP. D) increase long-run aggregate supply.

Q: The Fed buys $1 million in bonds from a bond dealer. The bond dealerʹs bank experiencesA) an increase in assets of $1 million as its reserves increase and a decrease in liabilities as its transactions deposits fall.B) no change in assets or liabilities. Assets both increased and decreased by the amount of the check.C) a decrease in assets of $1 million as the checking account of the bond dealer increased, and a decrease in liabilities as the bankʹs deposits with the Fed increased by $1 million.D) an increase in assets of $1 million as its reserves increase and an increase in liabilities of $1 million as the deposits in the bond dealerʹs transactions account increases by $1 million.

Q: A method of measuring the money supply by looking at money as a temporary store of value is theA) fiduciary monetary system. B) capital control.C) transactions approach. D) liquidity approach.

Q: An increase in the public debt would most likely indicate thatA) the budget deficit has increased. B) the budget deficit has decreased. C) the trade deficit has decreased. D) national saving has increased.

Q: One part of the supply -side argument is that A) lower marginal tax rates are required to induce Congress to reduce government spending. B) lower marginal tax rates can increase total tax revenues. C) the marginal tax rate should be set at 50 percent. D) the relevant aggregate supply curve is close to horizontal.

Q: Changes in real planned investment spending haveA) a direct relationship to changes in interest rates.B) an inverse relationship to changes in the interest rate.C) no identifiable relationship to changes in the interest rate.D) a direct relationship to changes in the level of household savings.

Q: Saving isA) the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving.B) the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time.C) the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending.D) the difference between disposable income and spending on goods and services while savings is the difference between real GDP and disposable income.

Q: The idea that ʺsupply creates its own demandʺ is attributed to which of the following economists?A) Adam Smith B) David Ricardo C) J. B. Say D) A. C. Pigou

Q: What is one implication of the real-balance effect?A) The part of your wealth that you hold in the form of cash loses some of its value as theprice level rises.B) When the price level rises, people have an incentive to work harder in order to earn a higher income.C) When the price level falls, most consumers reallocate their spending so as to have an equal balance between necessities and luxuries.D) Aggregate demand and aggregate supply can never reach long -run equilibrium.

Q: According to the text, the relationship between economic growth and the degree of how closed an economy isA) positive. B) negative. C) constant. D) unstable.

Q: When economists discuss the nominal value of an economic variable, the variable is A) expressed in current dollars. B) expressed as an index figure. C) adjusted for a changing price level. D) expressed as a percentage.

Q: Which of the following transactions would be included in Gross Domestic Product (GDP)? A) The purchase of new tires by a family to replace worn out tires on the family car B) The purchase of a used car C) The purchase of 100 shares of General Motors stock D) The purchase of 2 grams of cocaine

Q: The greater the inflation rate, theA) faster the decrease in the purchasing power of money.B) slower the decrease in the purchasing power of money. C) better it is to hold money as cash.D) better it is to put money into savings accounts.

Q: If real per capita Gross Domestic Product (GDP) grows at a constant annual rate of 4 percent and the annual population growth rate increases from 1 percent to 2 percent, the annual rate of growth of per capita real GDP willA) increase. B) decrease.C) remain unchanged. D) increase or decrease depending.

Q: The Phillips curve trade-off relationship implies that A) the government can fine-tune the economy and generate both the natural rate of unemployment and zero inflation. B) the government can fine-tune the economy and pick the most preferred combination of unemployment and inflation. C) low unemployment can be obtained only by generating rapidly increasing inflation. D) there is no relationship between inflation and unemployment, at least in the long run.

Q: How is the effect of expansionary monetary policy depicted in an aggregate supply -aggregate demand graph?A) The aggregate supply curve shifts leftward. B) The aggregate supply curve shifts rightward. C) The aggregate demand curve shifts rightward.D) The equilibrium level of income increases, but neither curve shifts.

Q: Suppose that the reserve ratio is 5%. What is the value of the potential money multiplier?A) 2 B) 5 C) 10 D) 20

Q: A method of measuring the money supply by looking at money as a medium of exchange is theA) fiduciary monetary system. B) capital control.C) transactions approach. D) liquidity approach.

Q: The difference between gross public debt and net public debt is thatA) net public debt includes interagency borrowing while the gross domestic product debt does not.B) net public debt is expressed in real terms while gross public debt is expressed in nominal terms.C) gross public debt includes interagency borrowing while net public debt does not.D) gross public debt is held by individuals while net public debt is held by the government.

Q: According to supply -side economics, changes in marginal tax rates will have which of the following effects? A) change the incentive to work B) change the incentive to save C) change the incentive to invest D) all of the above

Q: Which one of the following statements is true?A) Over the years, real consumption spending has been more volatile than real investment spending.B) Over the years, real investment spending has been more volatile than real consumption spending.C) Domestic real investment in the United States was highest during the Great Depression. D) In the Keynesian model, changes in the volume of real investment spending are fully explained by changes in the real interest rate.

Q: Keynes thought that the key to determining the broader economic effects of investment fluctuationsA) was to examine how businesses react to flexible prices and wages. B) was to closely regulate the real interest rate.C) was to understand the relationship between how much people earn and their willingness to engage in personal consumption spending.D) was to understand how changes in the money supply influences consumption decisions.

Q: Long-run unemployment in the classical model is considered to be impossible becauseA) the government will intervene to aid the unemployed.B) job placement and training programs are rampant in the United States. C) flexible prices and wages keep workers fully employed.D) the labor supply is horizontal.

Q: The downward slope of the aggregate demand curve shows thatA) an increase in aggregate demand reduces the long -run aggregate supply. B) an increase in aggregate demand increases the long -run aggregate supply.C) a higher price level will cause planned purchase rates for final goods and services to be higher.D) a lower price level will cause planned purchase rates for final goods and services to be higher.

Q: Which of the following is NOT a reason that free trade stimulates economic growth?A) Free trade encourages a more rapid spread of technology. B) Industries have larger markets.C) The importation of technically advanced products enables the country to imitate the technology.D) Free trade keeps domestic prices up, enabling firms to make more profits that can be spent on research and development.

Q: Explain how disposable personal income is derived from Gross Domestic Product.

Q: The purchase of a share of stock is excluded in the calculation of Gross Domestic Product (GDP) because itA) is an intermediate good. B) produces value added.C) only represents the transfer of ownership rights. D) is a final service and not a good.

Q: Which of the following statements is true if your money income stays the same but the price of one good that you are buying goes up? A) Your effective purchasing power falls. B) Your nominal income has been decreased. C) You will have to reduce the quantities you purchase of all goods. D) Your real income has increased.

Q: If the level of aggregate real Gross Domestic Product (GDP) remains constant, a reduction in the populationA) directly increases per capita real GDP. B) directly reduces per capita real GDP.C) indirectly reduces per capita real GDP.D) has no effect on real per capita real GDP.

Q: The Phillips curve showsA) the relationship between the rate of interest and planned investment. B) the relationship between the money supply and the price level.C) that an increase in government spending will decrease real national income. D) that an increase in inflation may be associated with a decrease in the rate of unemployment.

Q: As a result of an increase in the money supply, some banks may end up with excess reserves.What is the likely result?A) Banks will make more loans, thereby contributing to an increase in aggregate demand.B) Banks will make more loans, thereby contributing to a decrease in aggregate demand. C) Banks will raise interest rates.D) Banks will spend the excess reserves by paying their employees more.

Q: If the money multiplier is 2.4 and the Fed buys $8 million in securities on the open market, transaction deposits could potentiallyA) increase by $19.2 million. B) increase by $8 million.C) decrease by $19.2 million. D) decrease by $16.5 million.

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

Q: Which of the following statements is true about the public debt and future generations?A) Future generations will always be worse off because they will have to pay off the public debt.B) Increased consumption today will lead to increases in the capital stock in the future.C) Future generations may be better off if the rate of return on the borrowed funds is higher than the interest rate paid to foreign residents.D) The public debt cannot be held by foreign residents therefore we really owe the debt to ourselves.

Q: The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option? A) A new cruise missile for the military B) Expanding the school lunch program C) Constructing more low income housing D) Providing textbooks for college students

Q: Which of the following will NOT lead to a shift in the investment function?A) A firm downgrades its future profitability.B) A new discovery leads to a technological advancement.C) The government just lowered business taxes. D) The cost of borrowing has just decreased.

Q: Consumption goodsA) include goods such as DVDs that firms hold in inventory.B) are only the goods bought by households for immediate satisfaction.C) include spending on machines and buildings so that goods can be produced in the future. D) are goods that are used to make other goods.

Q: If your income and the price level both rise by 5 percent, and you think you now have more real income, you are suffering fromA) diminishing marginal expectations. B) leakages.C) injections. D) money illusion.

Q: Which of the following is NOT an explanation for the shape of the aggregate demand curve?A) real balance effect B) interest rate effectC) open economy effect D) investment effect

Q: One reason that economists encourage free trade is that A) it encourages a more rapid spread of technology. B) it allows us to exploit the workers of less developed countries. C) we can sell more goods. D) it increases our capital stock.

Q: (amounts in billions of dollars)Exports 233Dividends 81Consumption expenditures 9163Gross private domestic investment 2163Business income adjustments net of 106indirect business taxes and transfersU.S. net income earned abroad 51Undistributed corporate profits 148Personal income taxes 1386Imports 720Federal government expenditures 2520Changes in business inventories 16Corporate taxes 103Depreciation 1806State and local government expenditures 258Social Security govt. contribution 250According to the above table, national income isA) $12,637 billion. B) $11,968 billion. C) $11,943 billion. D) $11,866 billion.

Q: Which of the following is NOT included in the calculation of Gross Domestic Product (GDP)? A) The purchase of a raincoat by Mr. Z B) Mrs. Tʹs use of a lawyer C) Mr. Jʹs purchase of a share of General Motors stock D) All of these would be included

Q: The value of money for buying goods and services is known asA) inflation. B) nomination.C) nominal income. D) purchasing power.

Q: If population growth occurs while jobs are difficult to obtain or labor force participation does not increase,A) there may be little or no increase in a nationʹs labor resources.B) a nationʹs labor resources will still continue to increase in both quality and quantity.C) economic growth will be robust because any population gain is a plus. D) per capita GDP is likely to increase sharply.

Q: Critics of the Phillips curve argue that in the long run,A) there is a trade-off between unemployment and inflation.B) for any given unemployment level there is a corresponding inflation rate to which the economy will automatically revert.C) employees are not able to anticipate future rates of inflation, and therefore unemployment can always be reduced by inflating the economy.D) there is no trade-off between inflation and unemployment because workersʹ expectations adjust to any systematic attempts to reduce unemployment below the natural rate.

Q: During a period of expansionary monetary policy,A) the price level is increased, which leads to an increase in the money supply.B) the price level is decreased, which leads to a decrease in the money supply.C) the rate of growth of the money supply is increased, leading to an increase in the price level.D) the rate of growth of the money supply is reduced, leading to a decrease in the price level.

Q: If the FOMC decides that the Fed should buy bonds itA) instructs the New York Federal Reserve Bankʹs trading desk to buy them.B) asks the Congress for permission to buy them.C) requires the Presidentʹs signature on the buy order.D) requires the permission of the Financial Oversight Committee.

Q: The best measure of money isA) coins and currency.B) the one based on the transactions approach. C) the one based on the liquidity approach.D) something economists have never agreed on.

Q: Some economists believe that deficit spending can impose a burden on future generations.Which of the following does NOT explain the burden?A) Investment will be crowded out by an increase in current consumption.B) Deficit spending that is allocated to purchases leads to long -term increases in real GDP. C) Future generations will have a smaller capital stock that will reduce their wealth.D) Future generations will have to be taxed at a higher rate.

Q: If the government increases spending and there is a complete direct expenditure offset, then A) aggregate demand and real Gross Domestic Product (GDP) will not change. B) aggregate demand and real Gross Domestic Product (GDP) will increase by the amount of the spending increase. C) the price level will drop. D) the government spending multiplier will be greater than zero.

Q: The investment function will shift when there is a change inA) the interest rate.B) firmsʹ profit expectations.C) the cost of borrowing.D) the opportunity cost of retained earnings.

Q: Consumption expenditures include all of the following EXCEPT A) buying a pizza.B) going to a concert.C) having your house cleaned by Klean Maids. D) purchasing a share of stock.

Q: The classical model indicates that at the equilibrium interest rate , saving isA) equal to investment. B) greater than investment. C) unnecessary for investment. D) less than investment.

Q: The aggregate demand curve showsA) a direct relationship between changes in the price level and changes in real GDP. B) real GDP does not change as the price level changes.C) an inverse relationship between the price level and real GDP.D) an inverse relationship between changes in the price level and changes in nominal GDP.

Q: Foreign residents can benefit from U.S. research and development activity becauseA) they ignore U.S. patent laws and steal the technology.B) they can import the goods, obtaining inputs at lower cost than they would otherwise. C) countries usually share patented ideas.D) patents do a poor job of protecting the inventor.

Q: (amounts in billions of dollars)Exports 233Dividends 81Consumption expenditures 9163Gross private domestic investment 2163Business income adjustments net of 106indirect business taxes and transfersU.S. net income earned abroad 51Undistributed corporate profits 148Personal income taxes 1386Imports 720Federal government expenditures 2520Changes in business inventories 16Corporate taxes 103Depreciation 1806State and local government expenditures 258Social Security govt. contribution 250According to the above table, net domestic product isA) $12,531 billion. B) $11,998 billion. C) $11,892 billion. D) $11,811 billion.

Q: A valid rationale for the decision NOT to include non-compensated housework in Gross Domestic Product (GDP) calculations is thatA) it would decrease the employment rate for domestic work.B) there is some difficulty in measuring quality and quantity. C) it is not a product or service.D) it would understate the value of production in the economy.

Q: The purchasing power of money increases whenA) the inflation rate increases. B) there is inflation.C) there is deflation. D) there are more dollars in the economy.

Q: Suppose that the real Gross Domestic Product (GDP) growth rate for a country was 4 percent and the population growth rate was 7 percent. What would the per capital real Gross Domestic Product (GDP) growth rate be for this country?A) -3 percent B) -4 percent C) 3 percent D) 4 percent

Q: The short-run Phillips curve suggests what policy making implications?A) Active policy making does not yield any predictable results.B) Passive policy making is more effective than active policy making.C) Using discretionary policies, it may be possible to achieve just the right unemployment and inflation mix.D) Maintaining both the inflation and unemployment rates at low levels is possible if policy makers will rely solely on nondiscretionary policy making.

Q: During a period of contractionary monetary policy,A) the price level is increased, which leads to an increase in the money supply. B) the price level is decreased ,which leads to a decrease in the money supply.C) the rate of growth of the money supply is increased, leading to an increase in the price level.D) the rate of growth of the money supply is reduced, leading to a decrease in the price level.

Q: When a bank buys a bond from the Fed,A) its liabilities decrease. B) its liabilities increase.C) its reserves initially decrease. D) its reserves initially increase.

Q: The largest component of M1 isA) currency and coins. B) travelerʹs checks.C) transaction deposits. D) time deposit.

Q: Assume the economy is closed and that it is operating at full employment. Which statement is true when the size of the budget deficit decreases?A) The interest rate will decrease, leading to an increase in investment and capital formation. B) Demand and supply of credit will increase.C) A reduction in the growth of productivity, and a reduction in societyʹs standard of living will occur.D) The increased amount of public goods will crowd out privately produced goods.

Q: If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the governmentʹs action would result in A) an increase in real Gross Domestic Product (GDP). B) a direct expenditure offset. C) a Ricardian dilemma. D) a reduction of the government deficit.

Q: Which of the following is a true statement relative to retained earnings and investment?A) Lower interest rates stimulate borrowing for investment, but have no effect on the use of retained earnings for investment spending.B) Lower interest rates stimulate borrowing for investment, but discourage the use of retained earnings for investment.C) Lower interest rates reduce the opportunity cost of retained earnings, stimulating the use of these funds in investment.D) Lower interest rates have no effect on investment spending at all because investment spending is autonomous.

Q: Saving differs from savings in thatA) saving is a flow while savings is a stock. B) saving is a stock while savings is a flow.C) saving is both a flow and a stock while savings is a stock. D) saving is a stock while savings is a flow.

Q: According to the classical model, investment A) is a function of real GDP. B) is a function of the nominal GDP. C) is inversely related to the interest rate. D) is influenced by the money illusion at low income levels.

Q: The aggregate demand curve shows the relationship between planned purchases ofA) all final goods and services and interest rates.B) all final goods and services and the price level. C) all final goods and services and nominal GDP.D) all final goods and services and total planned production.

Q: The benefits from research and development activitiesA) are limited to the firm winning a patent.B) are limited to the firms investing in similar research and development projects. C) are limited to the nation in which the research and development is taking place.D) spill over to others, including foreign residents.

Q: (amounts in billions of dollars)Exports 233Dividends 81Consumption expenditures 9163Gross private domestic investment 2163Business income adjustments net of 106indirect business taxes and transfersU.S. net income earned abroad 51Undistributed corporate profits 148Personal income taxes 1386Imports 720Federal government expenditures 2520Changes in business inventories 16Corporate taxes 103Depreciation 1806State and local government expenditures 258Social Security govt. contribution 250According to the above table, Gross Domestic Product as calculated by the expenditure approach isA) $14,337 billion. B) $13,617 billion. C) $13,384 billion. D) $13,278 billion.

Q: Which of the following is included in Gross Domestic Product (GDP)? A) The buying and selling of securities B) Government transfer payments C) Private transfer payments D) The sale of used goods E) None of the above

Q: Which of the following statements is NOT true about inflation?A) Inflation is a sustained increase in the average prices of goods in the economy.B) During an inflationary period, the prices of some goods will increase while the price of some goods will decrease.C) When there is inflation, the purchasing power of a dollar decreases.D) During an inflationary period, the prices of all goods will increase.

Q: According to the text, population growth in many poor countries does not generally result in increased labor resources becauseA) many people do not join the labor force. B) many people join the labor force.C) many people work two jobs. D) most jobs are for middle-age workers.

Q: What happens to the Phillips curve when the expected rate of inflation rises?A) The curve shifts to the right B) The curve shifts to the leftC) The curve becomes horizontal D) The Phillips curve is unaffected

Q: An inflationary gap currently exists. The Fed wants to bring the economy to a full employment level by using open market operations. The Fed shouldA) sell government securities. B) buy government securities.C) increase the differential between the discount rate and the federal funds rate. D) decrease the differential between the discount rate and the federal funds rate.