Q&A Hero

Q: The faster the drop in the purchasing power of money, the faster theA) drop in the inflation rate. B) drop in the deflation rate.C) increase in the deflation rate. D) increase in the inflation rate.

Q: According to Friedman and Phelps, which of the following statements is a correct characterization of unemployment and inflation in the United States since the 1950s? A) A trade-off between inflation and unemployment as pictured in the Phillips curve existed over the entire time period. B) A trade-off between inflation and unemployment as pictured in the Phillips curve existed in the 1970s and 1980s, but not over the entire period. C) The relationship between inflation and unemployment is very different from the Phillips curve. A positive relationship is evident rather than an inverse relationship. D) There is no clear relationship between unemployment and inflation.

Q: Your friend recently graduated from college and is actively looking for employment. The economy has completely recovered from the last recession and your friend is taking her time, looking for the ʺperfectʺ job. In the meantime, the unemployment she is experiencing is categorized asA) cyclical. B) structural. C) seasonal. D) frictional.

Q: To close a recessionary gap, the Fed wouldA) decrease the money supply. B) increase interest rates.C) sell bonds. D) increase the money supply.

Q: The level of reserves in the monetary system is determined byA) the Federal Open Market Committee. B) the Treasury Department.C) Congress. D) the President of the United States.

Q: Which approach to measuring money focuses on the value of currency, transaction deposits, and travelers checks?A) The transactions approach B) The liquidity approachC) Near moneysD) M2

Q: Explain the differences between the public debt and the government budget deficit.

Q: Which of the following conditions describes a recessionary gap?A) The short-run equilibrium level of real GDP is above the long-run level of real GDP. B) The short-run equilibrium level of real GDP is below the long-run level of real GDP. C) The actual interest rate is above the equilibrium interest rate.D) The actual interest rate is below the equilibrium interest rate.

Q: Use the above table. At an income of $50,A) real saving is $20. B) real dissaving is $10.C) real saving is $10. D) real dissaving is $50.

Q: In the original Austin Powers, Dr. Evil is cryogenically frozen for thirty years (from the late 1960s to the late 1990s). Upon his return he hatches a plan to extort one million dollars from various world governments. His henchmen are unimpressed. What type(s) of inflation have made Dr. Evilʹs proposed blackmail amount seem too small?A) cost-push inflationB) demand-pull inflationC) both cost-price and price-pull inflationD) both cost-push and demand-pull inflation

Q: The classical model makes little distinction between the long run and short run because A) the model has not been fully developed yet. B) the classical economists knew that we are always operating in the short run. C) current changes influence the long run, so it is not possible to plan for the future. D) wages and prices adjust so fast that the economy is quickly moving towards the long run.

Q: Which of the following explains why the aggregate demand curve is downward sloping?A) the interest rate effect B) the real-balance effectC) the open economy effect D) all of the above

Q: The development of a strain of wheat that will yield two crops per year rather than one crop per year is an example of economic growth resulting fromA) capital accumulation. B) increased gross investment.C) technological progress. D) an increase in per capita real income.

Q: One difference between net domestic product and national income is thatA) net domestic product includes depreciation.B) national income includes government and business transfer payments. C) net domestic product includes indirect business taxes and transfers.D) net domestic product doesnʹt include Social Security taxes or corporate retained earnings.

Q: The dollar value of total outputA) equals the value of all physical goods sold in the United States.B) equals the market value of all final goods and services produced in the United States. C) equals only the value of stocks on the New York Stock Exchange.D) equals only the value of new services in the economy.

Q: The rate of inflation and the purchasing power of money areA) positively related. B) totally unrelated.C) inversely related. D) randomly related.

Q: More recent studies of new Keynesian inflation dynamics indicated that the average price-adjustment intervals in the United States areA) are one year or less. B) two years or less.C) four years or less. D) more than four years.

Q: Structural unemployment may result from all of the following factors EXCEPT A) union wage contracts.B) government-imposed licensing arrangements that restrict entry into certain professions. C) improved elementary and secondary education.D) welfare and unemployment benefits.

Q: In the long run, the effect of a reduction in the money supply is toA) decrease the price level only.B) decrease real Gross Domestic Product (GDP) only.C) decrease both the price level and real Gross Domestic Product (GDP).D) decrease the price level and increase real Gross Domestic Product (GDP).

Q: The Federal Reserve will engage in open market operations whenA) it wants to punish private banks because they are not keeping the required level of reserves.B) it wants to change the money supply. C) it wants to change the reserve ratio.D) it wants to increase the total amount of reserves since government securities are considered a reserve.

Q: Which of the following institutions has responsibility for producing the coins that are distributed in the United States? A) The Office of the Comptroller of the Currency B) The Federal Reserve System C) The U.S Bureau of Engraving and Printing D) The U.S. Mint

Q: If the government has no debt initially, but then has annual revenues of $10 billion per year for 4 years and annual expenditures of $10.5 billion per year for 4 years, then the government has A) a budget surplus of $0.5 billion per year and a debt of $2 billion at the end of the 4 years. B) a budget deficit of $0.5 billion per year and a budget surplus of $2 billion at the end of the 4 years.C) a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years. D) a budget surplus of $0.5 billion per year and a surplus of $2 billion at the end of the 4 years.

Q: Which one of the following is true about the effects of fiscal policy?A) A decrease government spending will increase aggregate supply.B) A tax change does not have any direct or indirect effects on aggregate demand. C) A decrease in government spending will decrease aggregate demand.D) An increase in government spending will reduce aggregate demand.

Q: Use the above table. The MPS isA) 0.91. B) 0.80. C) 0.20. D) 0.09.

Q: Demand-pull inflation is caused byA) aggregate demand increasing along a horizontal aggregate supply curve.B) aggregate demand decreasing along a horizontal aggregate supply curve.C) aggregate demand decreasing along an upward sloping or a vertical aggregate supply curve.D) aggregate demand increasing along an upward sloping or a vertical aggregate supply curve.

Q: Which of the following statements is true about the long -run and short-run aggregate supply curve in the classical model?A) The long-run aggregate supply curve is vertical, and the short-run curve is horizontal. B) The long-run aggregate supply curve is not defined, and the short run curve is vertical. C) The long-run and short-run curves start out horizontal and eventually become vertical.D) The long-run curve is vertical, and there is no short -run curve since all adjustments occur quickly.

Q: The aggregate demand curve hasA) no relationship between the price level and real GDP.B) a negative relationship between the price level and real GDP. C) a positive relationship between the price level and real GDP.D) a positive relationship between the price level and nominal GDP.

Q: Innovation typically increases whenA) market incentives and private property rights are encouraged. B) government controls the resource base.C) high taxes are present.D) the legal system is weak.

Q: Which of the following will have the smallest dollar value?A) Personal income. B) Disposable personal income. C) National income. D) Net domestic product.

Q: Where does profit enter in the circular flow? Why?

Q: Deflation refers to a situation in whichA) the inflation rate decreases. B) the average of all prices is falling.C) there is a recession and inflation. D) prices are not changing.

Q: Initial studies of new Keynesian inflation dynamics indicated that the average price -adjustment intervals in the United States was as long asA) 6 months. B) 12 months. C) 2 years. D) 4 years.

Q: The Phillips curve shows the relationship between A) the price level and real Gross Domestic Product (GDP). B) the tax rate and tax revenues. C) the unemployment rate and inflation rate. D) the interest rate and exchange rate.

Q: Look at the above figure. Suppose the economy was initially in equilibrium at point A. What point would represent the short-run equilibrium if the Fed makes an open market purchase of bonds?A) A B) B C) C D) D

Q: Assuming a reserve ratio of 10 percent, if a bank receives $100,000 in deposits how much can the bank loan out?A) $90,000 B) $100,000 C) $110,000 D) $10,000

Q: Which of the following institutions has responsibility for distributing currency and coins to the U.S. banking system?A) The Office of the Comptroller of the CurrencyB) The Federal Reserve SystemC) The U.S Bureau of Engraving and PrintingD) The U.S. Mint

Q: Suppose that the federal government had a budget deficit of $80 billion in year 1 and $10 billion in year 2, but it had budget surpluses of $140 billion in year 3 and $20 billion in year 4. Also assume that the government uses any budget surpluses to pay down the public debt. At the end of these four years, the Federal governmentʹs public debt would haveA) decreased by $70 billion. B) increased by $250 billion. C) increased by $70 billion. D) decreased by $62.5 billion.

Q: Which of the following is NOT related to fiscal policy?A) passage of new securities laws B) decreasing marginal tax ratesC) reducing the budget deficit D) increasing government expenditures

Q: Use the above table. The MPC isA) 0.91. B) 0.80. C) 0.20. D) 0.09.

Q: Cost-push inflation can be shown on an aggregate supply aggregate demand diagram asA) a rightward shift of the aggregate supply curve with no change in aggregate demand.B) a rightward shift in the aggregate demand curve with no change in aggregate supply.C) a leftward shift in the aggregate demand curve with no change in aggregate supply. D) a leftward shift in the aggregate supply curve with no change in aggregate demand.

Q: The aggregate supply curve in the classical model isA) horizontal. B) vertical.C) upward sloping. D) downward sloping.

Q: The aggregate demand curveA) is vertical at the full-employment level of output.B) is horizontal at the full-employment level of output. C) is downward sloping.D) is upward sloping.

Q: All of the following are factors that raise economic development EXCEPT A) establishing a legal system.B) an educated work force.C) reducing trade barriers.D) government control of the countryʹs resources.

Q: Suppose gross domestic product is $5 billion, government transfer payments are $1 billion, indirect business taxes and transfers are $0.5 billion, and depreciation is $0.5 billion. Then national income equalsA) $5 billion. B) $4 billion. C) $3 billion. D) $2.7 billion.

Q: Why must total income be identical to the dollar value of total output?

Q: Inflation is best defined as A) a sustained increase in the price of ALL goods and services in an economy. B) a relative price increase. C) a sustained increase in the average of all prices of goods and services in an economy. D) a sustained increase in the price of a single good or service.

Q: The shorter is the interval between firmsʹ price adjustments,A) the greater is the scope for activist policies to stabilize the economy. B) the smaller is the scope for activist policies to stabilize the economy.C) a given unexpected increase in aggregate demand will cause a larger increase in output.D) a given unexpected increase in aggregate demand will cause a smaller increase in the price level in the short run.

Q: What types of unemployment will still exist when the economy is at the natural rate of unemployment? A) frictional and cyclical unemployment only B) frictional and structural unemployment only C) structural and cyclical unemployment only D) frictional, structural, and cyclical unemployment

Q: The indirect effect of an increase in the money supply is toA) raise interest rates so people will save more.B) lower interest rates, which stimulates both investment and consumption spending.C) put more cash in peopleʹs pockets, thereby increasing aggregate demand. D) pay off a portion of the public debt.

Q: Assuming a reserve ratio of 10 percent, if a bank sells $100,000 in securities how much can the bank loan out?A) $90,000 B) $100,000 C) $110,000 D) $10,000

Q: The two basic ways to define money areA) the transactions approach and the fiduciary approach. B) the transactions approach and the M1 approach.C) the transactions approach and the liquidity approach. D) the liquidity approach and the store of value approach.

Q: Suppose that the federal government had a budget deficit of $80 billion in year 1 and $90 billion in year 2, but that it experiences budget surpluses of $40 billion in year 3 and $20 billion in year 4. Also assume that the government uses any budget surpluses to pay down the public debt. At the end of these four years, the Federal governmentʹs public debt would haveA) decreased by $110 billion. B) increased by $230 billion.C) increased by $110 billion. D) decreased by $57.5 billion.

Q: When the government cuts taxes or increases government spendingA) the long-run aggregate supply curve shifts to the left. B) the short-run aggregate supply curve shifts to the left. C) the aggregate demand curve shifts to the left.D) the aggregate demand curve shifts to the right.

Q: Use the above table. We can infer from the table that when real disposable income is $175,A) APC = 0.91. B) APC = 0.80. C) APC = 0.20. D) APC = 0.09.

Q: Oil prices increased significantly in 2008. According to the Keynesian model, this increase in oil prices should have caused which of the following to occur?A) demand-pull inflation B) demand-push inflationC) cost-push inflation D) cost-pull inflation

Q: In the classical model, high unemployment due to a change in aggregate demand A) can persist for an indefinite period of time. B) will return to its normal level quickly as wages adjust. C) will persist if due to a supply shock but not if due to a demand shock. D) never exists because unemployment can never deviate from its normal level.

Q: All of the following are components of aggregate demand EXCEPT A) consumption spending.B) government purchases. C) the level of technology.D) net foreign spending on domestic production.

Q: According to the new growth theory, economic growth will continue withA) the development of new ideas.B) increases in population growth. C) increases in interest rates.D) an increased focus on labor-intensive jobs.

Q: The difference between personal income and disposable personal income isA) disposable personal income is what is left after personal income taxes have been paid while personal income includes personal income taxes.B) personal income is what is left after personal income taxes have been paid while disposable income includes personal income taxes.C) personal income includes transfer payments while disposable personal income does not.D) personal income includes indirect business taxes while disposable income does not.

Q: Explain the concept of the circular flow.

Q: Deflation is defined as a situation in whichA) the rate of inflation is below 2 percent.B) the average of all prices of goods and services in an economy is falling.C) the value of the dollar is rising relative to other currencies.D) the Gross Domestic Productʹs growth rate is less for a given quarter than it was for the prior quarter.

Q: According to New Keynesians, an increase in which of the following will tend to cause the inflation rate to increase? A) anticipated future inflation B) firmsʹ average inflation adjusted per -unit costs of production C) an unexpected increase in aggregate demand D) all of the above

Q: Which of the following is the rate of unemployment that occurs after all adjustments in the labor market have occurred?A) the frictional rate of unemployment. B) the natural rate of unemployment.C) the NAIRU rate of unemployment. D) the structural rate of unemployment.

Q: The short-run effect of an increase in the supply of money isA) an increase in both real Gross Domestic Product (GDP) and the price level.B) an increase in the price level but not in real Gross Domestic Product (GDP). C) an increase in real Gross Domestic Product (GDP) but not in the price level.D) an increase in the price level, a decrease in real Gross Domestic Product (GDP), but an increase in nominal national income.

Q: Open market operations areA) the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply.B) the buying and selling of existing U.S. government securities in open private markets by citizens.C) the selling of new government securities by banks in order to increase the money supply.D) the selling of new government securities in open private markets by banks in order to finance the deficit.

Q: Why might people in a country refuse to accept the fiduciary money in the country?

Q: When government expenditures are greater than tax revenuesA) there will be budget deficit. B) there will be budget surplus.C) automatic stabilizers do not kick in. D) the public debt will be reduced.

Q: Which of the following fiscal policy actions would definitely cause a reduction in the size of an inflationary gap? A) cuts in taxes and increases in government spending B) increases in government spending C) increases in taxes D) cuts in taxes

Q: Use the above table. When real disposable income is $125,A) APC = 0.96. B) APC = 0.80. C) APS = 0.20. D) MPS = 0.96.

Q: Inflation caused by continually decreasing short-run aggregate supply isA) cost-pull inflation. B) cost-push inflation.C) demand-pull inflation. D) demand-push inflation.

Q: Higher unemployment tends to be associated withA) the classical model. B) higher real GDP. C) higher nominal GDP. D) lower real GDP.

Q: The aggregate demand curve givesA) the total amount of real domestic output that will be purchased at each price level.B) the total amount of nominal domestic income that will be purchased at each price level.C) the total value of nominal GDP in an economy for a year, holding income and technology constant.D) the total value of output produced by workers in both foreign and domestic markets at each price level.

Q: New growth theory supports the idea thatI. economic growth can continue as long as we keep finding new ideas.II. increases in human capital can lead to greater rates of economic growth.A) I only B) II only C) Both I and II D) Neither I nor II

Q: Individuals receive income and pay taxes over the course of a year. The difference between the income they receive and the taxes they pay is referred to asA) net national income. B) net domestic product.C) per capita real GDP. D) disposable personal income.

Q: Profits are part of theA) total income. B) monetary value of output. C) final consumer goods. D) factor services.

Q: Inflation is best described as a situation in whichA) relative prices are changing.B) some prices are rising faster than others.C) relative prices are changing, but the purchasing power of the dollar is unchanged. D) the average of all prices are on a sustained rise over a period of time.

Q: New Keynesians conclude that A) appropriate activist policies can dampen cyclical fluctuations. B) appropriate activist policies will increase the length of cyclical fluctuations. C) appropriate activist policies will have an known effect on the length of cyclical fluctuations. D) none of the above.

Q: Structural unemployment is likely to be affected by A) recessions and expansions. B) the reservation wage curves of people. C) minimum wage laws and other ʺrigiditiesʺ in the economy. D) the amount of the money supply.

Q: The direct effect of an increase in the money supply is to A) raise interest rates as people increase their saving. B) increase interest rates as people anticipate higher inflation in the future. C) increase aggregate demand as people try to spend their excess money balances. D) decrease aggregate demand as people anticipate future economic problems.

Q: When the Fed buys U.S. government securities, the money supplyA) increases because there is an increase in transaction deposits at the bank of the bond dealer but there is no decrease in transaction deposits at any other bank.B) decreases because there is an increase in the reserves of the bond dealerʹs bank.C) remains unchanged because the increase in transaction deposits at the bond dealerʹs bank is offset by a reduction in transaction deposits at the Fed.D) remains unchanged because the increase in transaction deposits at the bond dealerʹs bank is offset by a fall in transaction deposits at another bank.