Q&A Hero

Q: Which of the following is NOT a flow variable?A) Consumption B) Investment C) Savings D) Saving

Q: Long-run aggregate supply curve in the classical model A) is the level of real GDP corresponding to 100 percent labor force participation. B) is the level of real GDP corresponding to the natural rate of unemployment. C) is a downward sloping line. D) is determined by the capital stock of the economy, not the labor force.

Q: Which of the following is NOT true about the aggregate demand curve? A) The production possibilities curve determines the slope of the aggregate demand curve. B) The aggregate demand curve shows total planned real expenditures at different price levels. C) Changes in the economic conditions in other countries will lead to a shift of the aggregate demand curve. D) The aggregate demand curve considers the entire circular flow of income.

Q: The development of new products through research and development in new growth theory is important becauseA) there can be a positive impact on future growth.B) societyʹs scarce resources are being used when they could be used for current consumption.C) it will lead to a reduction in the savings rate. D) new patents are created.

Q: National income isA) the total of factor payments to owners of resources.B) the dollar value of all final goods and services produced in a country in a year.C) the amount of monetary payments households actually receive before paying personal income taxes.D) the amount of monetary payments households actually receive after paying personal income taxes.

Q: The owner of an oil well in Texas sells 1000 barrels of oil to a refinery in Mexico for $12,000 for refining. This transactionA) will increase Gross Domestic Product (GDP) by $12,000.B) has no effect on Gross Domestic Product (GDP) because the refinery is in Mexico.C) decreases Gross Domestic Product (GDP) because oil reserves have fallen by 1000 barrels. D) has no effect on Gross Domestic Product (GDP) because this is the sale of an intermediate product.

Q: Market BasketQuantity2009 Price2010 PriceCDs10$32$24Gasoline200 gal$2.00$2.50If 2009 is the base year, what is the price index for a market basket of goods for 2010 in the above table?A) 97.3B) 102.8C) 128.0D) Zero, since the price of CDs fell and the price of gasoline increased

Q: Those who favor passive policy making argue that all of the following exist EXCEPT A) perfectly flexible wages and prices.B) the trade off between inflation and unemployment is not stable in the short run and is non-existent in the long run.C) pure competition is typical.D) aggregate demand shocks can influence real GDP and unemployment.

Q: In the above figure, if initial equilibrium is at point A and if there is an unanticipated increase in aggregate demand from AD 1 to AD2, thenA) in the short run real output will remain at Y1.B) in the short run real output will increase above Y1, but in the long run it will return to Y 1.C) in the long run real output will increase above Y1.D) real output will increase above Y1 in both the short run and in the long run.

Q: Suppose the economy currently has an inflationary gap. The Fed engages in contractionary monetary policy. The impact of contractionary monetary policy will be toA) increase short-run aggregate supply, decrease in prices and decrease in real GDP. B) increase short-run aggregate supply, decrease prices and increase real GDP.C) decrease aggregate demand, decrease prices, and increase real GDP. D) decrease aggregate demand, decrease prices, and decrease real GDP.

Q: When the Fed buys U.S. government securities on the open market, A) the reserves of the banking system expand.B) the reserves of the banking system contract. C) the money supply contracts.D) the total reserves of the banking system will fall below required reserves.

Q: Since 1982, banks and thrift institutions have offered a type of savings account that yields a market rate of interest with a minimum balance and a limit on transactions. These accounts, which have no minimum maturity, are known asA) certificates of deposit. B) money market mutual funds.C) mutual funds. D) repurchase agreements.

Q: Net public debt isA) all federal public debt irrespective of who owns it.B) gross public debt minus all government interagency borrowing.C) all public debt minus all money owed on the federal income tax. D) all public debt plus all government interagency borrowing.

Q: Explain how fiscal policy can correct a contractionary gap.

Q: Technological progress should lead toA) an outward (rightward) shift in the investment function. B) a downward movement of the investment function.C) an unchanged investment function. D) less saving.

Q: The difference between ʺsavingʺ and ʺsavingsʺ is thatA) saving is done by households and savings by businesses.B) saving is undertaken as a precaution against unemployment and savings are undertaken to increase investment spending.C) savings are the result of past and current saving.D) saving is placed in financial institutions such as banks, while savings are kept at home by people.

Q: What is true of the aggregate supply curve in the classical model?A) The aggregate supply curve is downward sloping. B) The aggregate supply curve is horizontal.C) The aggregate supply curve is vertical.D) The aggregate supply curve is not determined by the level of employment.

Q: The aggregate demand curveA) is like individual demand curves in that prices of other goods are held constant. B) is like individual demand curves in that income is constant.C) differs from individual demand curves in that the aggregate demand curve is not downward sloping.D) differs from individual demand curves in that the aggregate demand curve looks at the entire circular flow of income and product while the individual demand curve looks at only one good.

Q: Which of the following will tend to cause an increase in technology?A) an increase in research and development expenditures. B) the development of new ideas.C) increases in human capital. D) all of the above.

Q: Social Security payments received by your grandmotherA) are excluded from GDP, but are included in personal income. B) are included in both GDP and personal income.C) are included in GDP , but are excluded from personal income. D) are excluded in both GDP and personal income.

Q: The term ʺvalue addedʺ refers to the dollar value of A) an industryʹs sales plus profits. B) the intermediate goods and services purchased by an industry. C) an industryʹs sales less the dollar value of the intermediate goods purchased by the industry. D) the intermediate goods purchased by an industry plus the profits of the industry.

Q: The consumer price index (CPI) is a measure of inflation forA) farmers.B) an elderly couple recently retired to Yuma, Arizona. C) Apple Computer.D) a typical consumer of the market basket used to calculate the index.

Q: Those who favor active policy making argue that all of the following exist EXCEPT A) perfectly flexible wages and prices.B) inflation and unemployment are stable in the short run and predictable in the long run. C) pure competition is not typical.D) aggregate demand shocks can influence real GDP and unemployment.

Q: In the above figure, if A is the initial equilibrium point and there is an unanticipated rise in aggregate demand from AD 1 to AD2, thenA) the new short-run equilibrium will be at point B. B) the new long-run equilibrium will be at point B. C) the new short-run equilibrium will be at point D.D) real Gross Domestic Product (GDP) per year will fall below Y1.

Q: Suppose the economy currently has a recessionary gap. The Fed engages in expansionary monetary policy. The impact of expansionary monetary policy will be toA) increase aggregate demand, increase prices and increase real GDP. B) increase aggregate demand, increase prices and decrease real GDP.C) increase short-run aggregate supply, decrease in prices and decrease in real GDP. D) increase short-run aggregate supply, decrease prices and increase real GDP.

Q: Open market operations areA) the procedures for approving loans at commercial banks.B) the procedures of applying for loans at commercial banks.C) the Federal Reserveʹs purchase and sale of existing U.S. government securities.D) steps a bank must complete before it can invest in stocks on the open market.

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

Q: The difference between the gross public debt and the net public debt isA) the sum of all previously accumulated government budget deficits and surpluses.B) the sum of all previously issued U.S. government securities that have been purchased by foreign residents.C) all private-sector borrowing from private sources. D) all government interagency borrowing.

Q: What is discretionary fiscal policy and what is its purpose?

Q: The planned investment function will shift downward ifA) real disposable income increases. B) the interest rate falls.C) business expectations become more pessimistic. D) the existing stock of capital decreases.

Q: When you purchase Nautica clothing and tickets to see the Eminem concertA) you are buying consumption goods. B) you are buying capital goods.C) you are consuming intermediate goods. D) you are buying physical capital.

Q: What is true when the credit market is in equilibrium?A) Desired saving equals desired investment.B) Desired employment equals the number of jobs available.C) Desired consumption spending equals the total of saving plus investment. D) The legal minimum wage equals the actual wage.

Q: A fall in the price levelA) increases the real value of money balances, which causes borrowing to decrease, leading to a decrease in investment and total planned real expenditures.B) causes exports to rise and imports to fall, leading to an increase in total planned real expenditures.C) leads to an increase in total planned real expenditures because of the indirect effect.D) causes total planned real expenditures to increase as long as the fall is less than the fall in the price level in other countries.

Q: An important foundation of the new growth theory is thatA) we will get more technological advances the more the government is involved.B) we will get more technological advances when the rewards for producing them aregreater.C) the growth rate of the capital stock is more important than the growth rate of new knowledge in generating economic growth.D) improvements in labor productivity are poor measures of technological growth.

Q: Which one of the following accounting identities is true?A) Disposable personal income plus indirect business taxes equals personal income.B) Disposable personal income plus non -income expense items equals personal income. C) Disposable personal income plus personal income taxes equals personal income.D) National income plus profit equals personal income.

Q: A farmer buys seed for 20 cents that is used to grow wheat. The farmer sells the wheat to the miller for 35 cents, and the miller makes flour, which is then sold to the baker for 55 cents. The baker makes bread and sells it to the grocer for 80 cents, and the grocer sells the bread to a family for $1. What is the value added of the baker and what is the sum of the value added at each stage of production?A) 80 cents; $1 B) 80 cents; $2.90 C) 25 cents; $2.90D) 25 cents; $1

Q: The price index that measures the changes in prices of ALL goods and services produced by the economy is theA) CPI. B) PPI.C) Gross Domestic Product (GDP) deflator.D) Personal Consumption Expenditure Index.

Q: Those who favor passive policy making do so because they conclude thatA) price and wage flexibility is a common and speedy occurrence. B) price and wage flexibility is an uncommon occurrence.C) pure competition is not typical in most markets.D) there is a stable trade-off between inflation and unemployment in the short run.

Q: On average, the greater the unexpected decline in aggregate demand,A) the weaker is the resulting deflation. B) the greater is the resulting deflation.C) the greater is the resulting inflation. D) the greater is the rise in the price level.

Q: An expansionary monetary policy is one thatA) stimulates aggregate supply.B) reduces aggregate supply and aggregate demand. C) stimulates aggregate demand.D) reduces aggregate demand while stimulating aggregate supply.

Q: For the money expansion process to produce the maximum potential multiplier effect, A) all loans of a given bank have to be deposited in that bank.B) the required reserve ratio has to be 100 percent.C) the Fed has to sell government bonds to back up the loans.D) all loans from banks have to be redeposited throughout the banking system.

Q: Which of the following is true of M2?A) It is larger than M1.B) It excludes savings deposits.C) It does not include highly liquid components of the money supply. D) It is less than M1.

Q: Gross public debt isA) an excess of government spending over government revenues during a given time period. B) a situation in which the governmentʹs spending is exactly equal to the total taxes and other revenues it collects during a given time period.C) the total value of budget deficits plus budget surpluses over the past five years.D) all federal government debt irrespective of who owns it.

Q: Which one of the following is an example of discretionary fiscal policy used to correct an inflationary gap? A) a tax increase passed into law by Congress B) decrease in the money supply by the Federal Reserve C) an increase in government expenditures approved by Congress D) an agreement among major banks to lower interest rates

Q: All of the following will cause an outward shift of the investment function EXCEPT A) innovation that improves production efficiency at every level of output.B) a reduction in business taxes.C) business people becoming optimistic about the future. D) a decrease in the interest rate.

Q: The terms ʺsavingʺ and ʺsavingsʺ differ in that A) saving is a stock, and savings are a flow. B) saving always exceeds savings.C) savings are a stock, and saving is a flow.D) savings can be negative, but saving cannot.

Q: Which one of the following statements is NOT true?A) The classical model assumes that people suffer from money illusion.B) The classical model assumes that people are motivated by self -interest. C) The classical model assumes that pure competition exists.D) The classical model assumes that no single seller of a commodity can affect its price.

Q: Suppose a country has no trade with other countries and people can borrow as many funds as they want at the current interest rate. An increase in the price level will generateA) a decrease in total planned real expenditures because of the real -balance effect.B) a decrease in total planned real expenditures because of the open -economy effect and the indirect effect.C) a decrease in total planned real expenditures because the real -balance effect will be stronger than the indirect effect and the open -economy effect.D) a decrease in total planned real expenditures because the indirect effect will be stronger than the real-balance effect.

Q: New growth theory argues that A) growth is due to the proper government policies concerning interest rates. B) growth relies on maintaining lower growth rates of population, especially in less developed countries. C) technology cannot be looked at as an outside factor without an explanation of what drives it. D) technology is the key factor that explains growth but technology is beyond economic explanation itself.

Q: GDP minus depreciation equalsA) national income. B) aggregate spending. C) personal income. D) net domestic product.

Q: The farmer pays 20 cents for the seed that is sold to the miller for 35 cents; the miller makes flour and sells it to the baker for 55 cents. The baker makes bread and sells it to the grocery store for 80 cents and the store sells it to consumers for $1.00. The contribution to Gross Domestic Product (GDP) isA) $2.90. B) $1.90. C) $1. D) 20 cents.

Q: In computing a price index,A) the most recent year is always set equal to 100.B) both the quantities in the market basket and the prices change from year to year.C) the quantities in the market basket stay the same while the prices differ. D) the base year must be one for which the inflation rate was zero.

Q: When it comes to active policy making most economists agree thatA) active policy making should be used over passive policy making.B) it is unlikely that active policy making will have any long term effects on the economy.C) it is likely that active policy making will have long term effects on the economy. D) it will lead to long term shocks in the system.

Q: One result of an unanticipated reduction in aggregate demand would be thatA) fewer firms would be hiring. B) more firms would be hiring. C) there would be no change in hiring. D) the price level would rise.

Q: The long-run effect of an increase in the money supply when starting from full employment is to A) increase real GDP only. B) increase the price level only. C) increase both real GDP and the price level. D) increase real GDP as the price level increases too.

Q: If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10 percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by, and the money supply can increase by as much as .A) $80,000; $800,000 B) $10,000; $100,000C) $90,000; $1,000,000 D) $90,000; $900,000

Q: Which of the following could least reasonably be included in the liquidity approach to defining the money supply?A) Savings deposits B) Money market mutual fund accountsC) Corporate bonds D) Travelerʹs checks

Q: Ceteris paribus, deficit spending results in higher interest rates, which canA) accelerate growth in investment spending.B) ultimately have a positive impact on productivity gains and societyʹs standard of living.C) increase the wealth of future generations. D) crowd out private investment.

Q: Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap? A) a tax decrease passed into law by Congress B) an increase in the money supply by the Federal Reserve C) a decrease in government expenditures approved by Congress D) an agreement among major banks to raise interest rates

Q: An increase in the interest rate results inA) a smaller opportunity cost of investment and so planned investment spending increases.B) a smaller opportunity cost of investment and so planned investment spending decreases. C) a greater opportunity cost of investment and so planned investment spending decreases. D) a greater opportunity cost of investment and so planned investment spending increases.

Q: Which of the following would NOT be considered a consumption good? A) A new sweater B) Tools used to cut metal on an auto production line C) A jar of Skippy peanut butter D) A bottle of Scotch whiskey

Q: Why is wage and price flexibility an important assumption of the classical model? A) Flexible wages and prices guarantee that there will be no scarcity. B) Flexible wages and prices allow business firms to fool their workers through the money illusion. C) Flexible wages and prices allow business firms to fool their customers through the money illusion. D) Flexible wages and prices allow markets to reach equilibrium.

Q: A shift away from expenditures on domestic goods and a shift toward expenditures on foreign goods when the domestic price level increases is known asA) the real-balance effect. B) the interest rate effect. C) the open economy effect. D) demand side inflation.

Q: Recently economists have added what factor as a major explanation of economic growth? A) The growth rate of labor B) The growth rate of capital C) The growth rate in labor and capital productivity D) Technology

Q: Billions of DollarsConsumption6,500Gross private domestic investment1,900Government spending less transfer payments1,200Imports600Exports500Depreciation1,500Indirect business taxes and transfers750Using the above table, the national income is (in billions of dollars)A) 8,950. B) 7,250. C) 6,850. D) 8,050.

Q: Which of the following is a final good? A) Seed used for corn B) Wheat used for bread C) Electricity used for producing automobiles D) A lawn mower purchased by a household

Q: Last year you purchased 20 CDs at $12 a piece, 10 shirts at $15 each, and 5 sweaters at $30 each (total spending equals $540). This year you buy 18 CDs at $15 each, 10 shirts at $16 each, and 6 sweaters at $36 each (total spending equals $640). If last yearʹs index was 100, this yearʹs indexA) is 119.6. B) is 118.5. C) is 83.6. D) is 30.

Q: There is greater support for passive policymaking whenA) pure competition is widespread. B) price flexibility is common.C) wage flexibility is common. D) all of the above

Q: Suppose the economy is initially operating at point A in the above figure. Which of the following statements is true?A) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the long run.B) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the short run.C) An unexpected reduction in aggregate demand will cause the economy to move from point A to point C in the short run. D) none of the above

Q: Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by pointA) A. B) B. C) C. D) D.

Q: When the Fed buys a $10,000 bond from a bond dealer,A) reserves of the banking system increase by $10,000, but the money supply will only be able to increase by something less than this amount.B) reserves of the banking system increase by $10,000, but the money supply can increase by more than $10,000.C) reserves of the banking system remain unchanged, but the money supply increases by $10,000.D) reserves of the banking system remain unchanged, but the money supply decreases by $10,000.

Q: Which of the following is included in M2?I. money market mutual fundsII. small-denomination certificates of depositA) I only B) II only C) Both I and II D) Neither I nor II

Q: Other things being equal, what is the effect of deficit spending on interest rates?A) Interest rates decline. B) Interest rates rise.C) Interest rates hold constant because the demand for credit decreases.D) There is no impact unless the Federal Reserve decides to alter the money supply.

Q: Which of the following statements about fiscal policy is true?A) Real Gross Domestic Product (GDP) can be increased above its long -run equilibrium only in the short run.B) Real Gross Domestic Product (GDP) can never be increased above its long -run equilibrium, even for a brief period of time.C) Government can shift the aggregate demand curve inward by increasing spending. D) Government can shift the aggregate demand curve outward by reducing spending.

Q: The investment function would shift inward to the left ifA) real disposable income decreased.B) interest rates increased.C) there was an increase in business taxes.D) there was a positive change in productive technology.

Q: Which of the following is a simplifying assumption associated with the short -run Keynesian model of equilibrium real Gross Domestic Product (GDP) determination?A) Gross private domestic investment exceeds net private domestic investment. B) Most business profits are distributed to shareholders.C) Businesses pay indirect taxes. D) There is no depreciation.

Q: In the classical model, a rightward shift in the aggregate demand curve will, in the long run, A) increase real GDP and the price level.B) increase real GDP and will not change the price level. C) decrease real GDP and will not change the price level. D) not change real GDP and will increase the price level.

Q: The open economy effect refers to the fact thatA) the position and shape of the long run aggregate supply curve is partially due to the fact that we import goods.B) the aggregate supply curve shifts when the economy grows.C) the slope of the aggregate demand curve is partially explained by the reduction in the desire to buy fewer U.S. goods by U.S. residents and foreign residents as a result of a higher price level.D) the immigration policies of the United States are disruptive to labor markets.

Q: New growth theory is concerned with A) finding a good way to measure economic growth. B) increasing the savings rate in the U.S. C) understanding the forces that increase productivity. D) understanding how compounding works.

Q: Billions of DollarsConsumption6,500Gross private domestic investment1,900Government spending less transfer payments1,200Imports600Exports500Depreciation1,500Indirect business taxes and transfers750Using the above table, the net domestic product is (in billions of dollars)A) 8,000. B) 9,700. C) 8,300. D) 6,500.